On 5 November 2019, Beadica 231 CC and Others v Trustees for the time being of Oregon Trust and Others (CCT109/2019) was before the Constitutional Court.

This case made its way up, starting in the Western Cape High Court, then to the Supreme Court of Appeal (“SCA”), and finally, to the Constitutional Court.  The judgment serves as an important turning-point in our law around contracts and specifically the freedom of persons to enter into any contract on terms to which the parties agree.

Before we look at how the Constitutional Court handled these principles in its judgment, let’s pause to consider what contractual autonomy and the freedom to contract means, and specifically, why we should be so concerned that the Western Cape High Court sought to limit these rights somewhat.

 

Freedom to contract

Think about it: you want to conclude a contract. You would think that the parties could include any term in that contract they wish, as long as these terms are fully understood by all the parties, and thus consensus is reached, and, of course, are not illegal.

These rights form part of our common law and the principle of pacta sunt servanda – literally translating to “agreements must be kept”.

In a constitutional democracy, the relationship between the parties to a contract is, ultimately, always subject to the Constitution, and specifically, the Bill of Rights. No party can contract out of the provision and rights entrenched in the Constitution, or considerations of public policy.

The right to conclude a contract with another on any terms (subject to the Constitution) protects and encourages business autonomy as well as certainty in contracts. Too much judicial intervention would mean that the terms of the contract are no longer certain – a judge, who is not party to the contract, could decide that a specific clause is no longer valid (even if it is in line with the Constitution).

A precedent that the fate of agreed terms in contracts could arbitrarily be subject to change by an outside party (through judicial interference) would be devastating to commercial realities in our country.

The crux of the debate around upholding and protecting the principle of pacta sunt servanda, and encouraging interference by our courts, is the extent of a court’s interference. If our courts have too much power and too wide a discretion, it could result in a chilling effect where courts are allowed to make new agreements for parties. A court should not lightly interfere with the rights of parties to contract freely.

 

Principles of fairness and Ubuntu

We have considered the Oregan Trust judgment in a previous article and so will not repeat it here; save to recap that the High Court ruled against a landlord’s express contractual right on the basis of the principles of fairness and Ubuntu.

This specific case involved a franchise agreement and a separate lease agreement with the Oregon Trust (as lessor). The parties specifically agreed that should the lessee fail to exercise their option to renew the lease agreement within a six-months before the termination of the lease, then the lessor may consider the agreement to have been terminated. A term not so unique in the commercial sector.

What was so controversial about the Western Cape High Court judgment was Davis J’s support of the idea that a sanction for breach imposed in a contract can be disproportionate and, as a consequence, that such sanction should be unenforceable.

Fortunately, in the SCA, Judge of Appeal Lewis disagreed with the High Court’s judgment and sought to place the law of contract back on track.

The SCA highlighted that our courts are required to assess whether the enforcement of a specific clause in a contract (or indeed, the contract as a whole) would be unconscionable under the specific circumstances of each case. This would not completely deprive contracting parties the right to approach our courts for assistance, but rather the onus is placed on the party attacking the clause, or contract, to show the court specific facts which would warrant the court stepping in to assist and essentially bringing into being (and enforcing) a new contract between the parties.

 

The Constitutional Court

The SCA decision was taken up on appeal, which was heard on 5 November 2019. Fortunately, the Constitutional Court (in its judgment delivered on 17 June 2020) agreed and upheld the decision of the SCA.

Legal practitioners and academics would benefit from reading the Constitutional Court judgment. It covers the historical development of judicial enforcement of contracts from pre-constitutional jurisprudence to post-constitutional (pre- and post- Barkhuizen judgement).

Briefly, and for purposes of this article, the Constitutional Court agreed that a court may only refuse to enforce a term, or contract, where the enforcement of such term, or contract, would be so unfair, unreasonable and / or so unjust that it would clearly be contrary to public policy.

Judge Theron stated in her judgment:

Indeed, this Court has recognised the necessity of infusing our law of contract with constitutional values.  This requires courts to exercise both resourcefulness and restraint. In line with this Court’s repeated warnings against overzealous judicial reform, the power held by the courts to develop the common law must be exercised in an incremental fashion as the facts of each case require. The development of new doctrines must also be capable of finding certain, generalised application beyond the particular factual matrix of the case in which a court is called upon to develop the common law. While abstract values provide a normative basis for the development of new doctrines, prudent and disciplined reasoning is required to ensure certainty of the law.”[para 76]

In other words, Judge Theron held that while our courts should be creative in their use of our constitutional values when assessing contracts, in doing so, our courts should also be “prudent and disciplined” in their reasoning for any developments in our law so as to ensure that “certainty of the law” is maintained. This is underpinned by the concept of the rule of law which requires the law to be clear and ascertainable.

Judicial intervention which is not arbitrary and uncertain would seemingly protect autonomy of contracts without disregarding the Constitution and parties’ rights to approach a competent court for assistance.

Judge Theron concluded in that matter that the applicants had “failed to discharge the onus of demonstrating that the enforcement of the impugned contractual terms would be contrary to public policy.”

The decision of the Constitutional Court should leave businessmen, and even legal practitioners, exhaling a sigh of relief as autonomy and certainty in contracts has somewhat been restored.