Case  CCT 109/19
[2020] ZACC 13

Hearing Date:      05 November  2019
Judgement Date:  17 June 2020

Post Judgment Media Summary  

The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.

On Wednesday, 17 June 2020 at 10h00, the Constitutional Court handed down judgment in an application concerning the proper constitutional approach to the judicial enforcement of contractual terms and, in particular, the public policy grounds upon which a court may refuse to enforce these terms. The application arises out of a decision of the Supreme Court of Appeal upholding an appeal against a decision of the High Court of South Africa, Western Cape Division, Cape Town (High Court).

The applicants are four close corporations that entered into franchise agreements with the second respondent (Sale’s Hire) to operate Sale’s Hire franchised businesses for a period of ten years. They acquired their businesses in terms of a black economic empowerment initiative financed by the third respondent (National Empowerment Fund) and coordinated by Sale’s Hire. The applicants operate their businesses from premises leased from the first respondent (Oregon Trust), as required in terms of their franchise agreements with Sale’s Hire. Mr Shaun Sale, one of three trustees of Oregon Trust, is also the sole member of Sale’s Hire.

The leases were intended to run for an initial period of five years, but conferred on the applicants an option to renew the leases for a further period of five years. The renewal clause in the lease agreements provides that the option to renew be exercised by giving notice six months before the termination of the lease. The applicants did not exercise their renewal options within the requisite time and purported to exercise them only after the time period for doing so had expired. Oregon Trust alleged that the options to renew had lapsed and the lease agreements had terminated.

The applicants instituted urgent proceedings in the High Court against Sale’s Hire and Oregon Trust seeking an order declaring that their renewal options had been validly exercised and prohibiting Oregon Trust from evicting them. Oregon Trust brought a counter-application for the applicants’ eviction. The High Court held that the strict terms of the lease agreement should not be enforced. The termination of the leases would result in the applicants losing their businesses as well as the failure of a black economic empowerment initiative. This, the High Court held, would constitute a disproportionate sanction for the failure of the applicants to comply with the renewal clause. The High Court granted the applicants the relief sought.

Aggrieved, the respondents appealed to the Supreme Court of Appeal. The Supreme Court of Appeal held that there were no considerations of public policy that rendered the renewal clause unenforceable. The Supreme Court of Appeal upheld the appeal and replaced the High Court’s order with an order dismissing the application and directing the eviction of the applicants from the leased premises.

The first judgment, penned by Theron J and concurred in by Khampepe ADCJ; Jafta J; Majiedt J; Mathopo J; Mhlantla J; Tshiqi J, held that contracting parties cannot escape the enforcement of contractual terms on the basis that enforcement would be disproportionate or unfair in the circumstances. Constitutional values do not provide a free-standing basis upon which a court may interfere in contractual relationships. Rather these values form important considerations in the balancing exercise required to determine whether a contractual term, or its enforcement, is contrary to public policy. It is only where the enforcement of contractual term would be so unfair, unreasonable or unjust so as to be contrary to public policy that a court may refuse to enforce it.

The first judgment held that the applicants had failed to discharge the onus of demonstrating that the enforcement of the strict terms of the renewal clause would be contrary to public policy in the particular circumstances of this case. It was fatal to the applicants’ case that they did not adequately explain why they did not comply with the terms that they sought to avoid. The only inference that could be drawn was that the applicants simply neglected to comply with the clause in circumstances where they could have complied with it. In any event, the applicants had not shown that the failure of their businesses, in these circumstances, would unjustifiably undermine substantive equality.

The first judgment further held that constitutional values should be used creatively by courts to develop new constitutionally-infused common law doctrines. This development must take place in an incremental fashion and yield clear and ascertainable doctrines that can provide predictable outcomes for contracting parties. However, the applicants had not sought the development of clear and specific doctrine to ameliorate a demonstrated problem of unfairness.

The second judgment, penned by Froneman J, agreed with the first judgment that leave to appeal should be granted, but would have upheld the appeal with costs. The second judgment held that the regulation of unfairness in contract law involves making an underlying moral or value choice within the objective value system of the Constitution. It held that further guidance should be provided on how these objective values can possibly be translated into practical application. It suggested that this should be done by delineating reasonably certain, practical and objective legal principles and rules to guide prospective contracting parties, in a manner in which the caricature of rogue judges imposing their own subjective and arbitrary opinions of what is fair and reasonable upon unsuspecting litigants is dispelled. The second judgment suggested that the approach is best achieved by recognising that the individualism of our law of contract is one that has always taken account of the reasonable expectations of the parties to the contract as well as those of the wider community. This can be done in a manner that ensures objective, reasonable practicality and certainty.

According to the second judgement, Barkhuizen is authoritative and binding precedent that the application of public policy in determining the unconscionableness of contractual terms and their enforcement must, where constitutional values or rights are implicated, be done directly in accordance with notions of fairness, justice and equity, and reasonableness cannot be separated from public policy. This is because public policy takes into consideration the necessity to do simple justice between individuals and is informed by the concept of ubuntu. This approach, according to the second judgment, leaves space for pacta sunt servanda to operate, but at the same time also allows courts to decline to enforce contractual terms that are in conflict with constitutional values even where the parties consented to them.

The second judgment further disagreed with the first judgment that the applicants failed to explain why they did not comply with the notice clause in the lease agreement. The applicants provided an explanation – they were unsophisticated and not versed in the niceties of the law. It found that this explanation was not contradicted by any direct evidence, but was supported by circumstantial evidence to back up their contention. Their lack of sophistication was illustrated by the content of the renewal notices, none of which were written by lawyers. Furthermore, it was common cause that applicants were not businesspeople, but former employees of Sale’s Hire. They acquired their businesses in terms of a black economic empowerment initiative that sought to facilitate “business ventures pioneered and run by historically disadvantaged persons” and their bargaining power as franchisees in terms of the franchise agreement was unequal to that of Mr Sale as the franchisor. Their prejudice in losing their businesses was obvious; against that of Mr Sale who stood to lose nothing.

The third judgment penned by Victor AJ, agreed with the second judgment that the adjudication of fairness in contract cannot be plucked from a set of neutral legal principles. The third judgment held that ubuntu is an important value which stands alongside other values such as good faith, fairness, justice, equity, and reasonableness. Characterising ubuntu as an adjudicative value in reaching substantive fairness between contracting parties, will achieve a constitutionally transformative result. Furthermore, the recognition of ubuntu in interpreting contracts will not undermine the concept of certainty and contractual autonomy.

 

The Full judgment  here