15 May 2019 by and Corporate & Commercial Alert

The pursuit of certainty, in good faith

In Trustees for the time being of the Oregon Trust (Oregon Trust) v BEADICA 231 CC and Others (74/2018) [2019] ZASCA 29 (28 March 2019) (Oregon Trust Case), the Supreme Court of Appeal (SCA) again grappled with the competing concepts of fairness, reasonableness and good faith (Good Faith) on the one hand and legal certainty on the other. Good Faith as a value playing a role in our law is well established, however, the interpretation and limitation of the application of Good Faith has a somewhat inconsistent history.

One such example is the Oregon Trust Case. As part of a black empowerment initiative by the National Empowerment Fund (NEF), a number of franchise arrangements were established between Sales Hire CC (Sales Hire) and four close corporations, the members of which were former employees of Sales Hire (Lessees) and which arrangements were for a period of 10 years. Connected to the franchise arrangement, the Oregon Trust (one of the trustees of which was also the only member of Sales Hire), entered into leases with the Lessees for a period of five years (Initial Period). In addition, a co-operation agreement was entered into between Sales Hire and the NEF, in terms of which, amongst others, Sales Hire undertook to assist and support the Lessees in their franchise operations.

The leases contained options for the Lessees to extend the Initial Period by another five years, provided that the option was exercised by providing notice within a particular time period and that the new rental was agreed to per the mechanism in the leases. The Lessees purported to exercise their option to renew but did not do so in accordance with the requirements set out in the leases and as such the Oregon Trust sought to evict the Lessees on the basis that the leases had expired.

When brought before the Western Cape Division of the High Court (HC), the HC ordered that the option was validly exercised and that the rentals were to be determined in accordance with the agreed upon mechanism. The argument before the HC was that despite the strict terms of the leases, considerations of Good Faith should be taken into account as well as the context of all the agreements as read together, which indicates that the intention was clear that the leases should endure for 10 years.

As for the arguments regarding Good Faith, the Oregon Trust Case records that the HC based its decision on (a) that terminating the leases was disproportionate to the breach and (b) that arguments regarding legal certainty should not, on their own, be a restraint on a finding that the clear intention of the parties was to advance historically disadvantaged persons (without requisite business knowledge to comply strictly with the renewal terms).

The SCA, however, once again cautioned that “the parties [must] know what their contract means and that they are entitled to rely on its terms, unless they are against public policy or their enforcement would be unconscionable”.

The SCA further found that while “fairness and reasonableness, inform policy they are not self-standing principles…and the need for certainty in commerce” is also of importance. However, the HC did not rule on the basis of public policy but rather on the apparent rule of “disproportionality” of sanction versus breach, which is a principle, according to the SCA, that is not in itself a policy consideration.

On a review of the leases the SCA held that, amongst others, the renewal clause was not inherently offensive, the notice period was reasonable, if agreement was not reached on the renewal the Oregon Trust would need to find new tenants and while the Lessees may not be “sophisticated business people” they “were not ignorant individuals”. In addition to this, no reason for the failure to comply with the renewal requirements were advanced by the Lessees and therefore the SCA had no ability to assess whether its enforcement was unconscionable.

An argument was raised by the Lessees that the termination of the lease was against public policy as the result, with apparently no benefit to the Oregon Trust, would cause the franchise business of the Lessees to fall apart and thus “derail an empowerment initiative”. It was also alleged that the Oregon Trust (or its trustee) had an improper motive in enforcing the leases.

The SCA, however, did not uphold these arguments. Firstly, it was stated that the franchise business was put at risk by the actions of the Lessees themselves, without explanation. Secondly, there was no facts to support that the Oregon Trust (or its trustee) had an improper motive and that, in any event, the motive was irrelevant. Based on its interpretation of the law of contract regarding Good Faith values, the SCA upheld the enforcement of the leases.

The Oregon Trust Case confirms that the abstract values of Good Faith, while important values tempering the law of contract, are not standalone rules. It further acknowledges the need for commercial certainty and ensuring that disproportionality and adverse consequences (however extreme) for one party alone, are not necessarily violations of public policy. 

Contracting parties, wishing to avoid unfavourable results, shall still need to consider public policy when not only agreeing to terms but also enforcing same. However, the Oregon Trust Case will hopefully provide comfort that without violations of public policy a claim of Good Faith should not be sufficient to overrule consensus.

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