Authors: Jonathan Ripley-Evans and Nandile Dube

In recent times, we have been led to question whether a bargain struck between two reasonable business people is at risk of being invalidated by the (often) last line of defence, public policy. If the concept was clearly defined, its application would at least be a bit more predictable. Unfortunately however, public policy is an elusive and ever changing concept, morphing as society develops.

South Africa is very much a developing nation and given the role that public policy, uBuntu1 and good faith play in our Constitutional democracy, any announcement that the Constitutional Court has handed down another judgment addressing the role of public policy in contracts, causes a degree of trepidation.

Generally the courts are reluctant to meddle in contracts voluntarily executed but where one party cries foul, uttering any of the (swear) words; bad faith, contra bonos mores, uBuntu or derivatives thereof, the courts are obliged to enquire as to whether the enforcement of such terms would be unfair, unreasonable or unduly harsh.

In Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others (Beadica) the Constitutional Court was again faced with this very issue and for a moment, the business community (again) held its breath.

The applicants in Beadica argued that the strict enforcement of the contractual terms relating to the option to renew of their leases (and the consequence of their failure to have properly exercised this option) would be contrary to public policy. According to them, the enforcement of those terms would lead to the termination of the lease agreements and this would be contrary to the values of the Constitution, in particular the right to equality as prescribed in section 9(2). They alleged that the termination of the lease agreements would end their franchise agreements, collapse their business and lead to the failure of a Black Economic Empowerment (BEE) initiative financed by the National Economic Fund (the Fund).

In opposing the proceedings, the respondents relied upon the Constitutional Court’s decision in Barkhuizen v Napier 2007 (5) SA 323 (CC) (Barkhuizen), which made clear that the onus rests upon the party seeking to avoid the enforcement of a contractual term on the basis of public policy, to adequately explain their failure to comply with the contractual stipulation under scrutiny. The respondents argued that the applicants had failed to adequately explain their failure.

The present case turned on the crucial question as to how public policy, as a basis upon which a court may refuse to enforce terms of a contract, should be characterised. The court acknowledged that the determination of public policy is rooted in the Constitution. Constitutional rights apply indirectly to contracts as well as the enforcement of contractual terms and a careful balancing act is required to determine whether a contractual term or its enforcement, would be contrary to public policy. With this in mind, as set out in Barkhuizen, a party seeking to avoid the enforcement of a contractual term is required to demonstrate a good reason for failing to comply with the term under scrutiny.

In this particular instance, the only reasons given by the applicants for their failure to exercise their renewal options were that they were not sophisticated business people and had not been fully informed of their rights and obligations with regard to their options to renew the leases. In assessing this argument, the court found that the terms had been drafted in simple, uncomplicated language, which an ordinary person could reasonably be expected to understand. There were no apparent circumstances which prevented the applicants from complying with the terms of the renewal clause. Instead it appeared that the applicants simply neglected to comply with their contractual obligations.

The court decided that wording of the clause was therefore not against public policy. But even if the wording did not offend public policy, the enforcement of such terms might, in certain circumstances, contravene public policy. This is where the Barkhiuzen test was applied.

In this regard the court found that the applicants had failed to discharge their onus to demonstrate a good reason for failing to comply with the clause under scrutiny. Because of this the court determined that the enforcement of the clause would not be contrary to public policy.

As the dust settles from another Constitutional Court decision touching on public policy, we will appreciate that slowly, the elusive concept of public policy is edging toward a more defined concept capable of confident application. There is always the risk that public policy will change over time but that change is more likely to be a product of evolution and not one brought about by radical legal transformation.

As the concept of public policy continues to narrow, so too will the ability to abuse this fundamental principle of South African law.

So for the time being, we can take comfort in knowing that contracts will generally be upheld and enforced but we cannot lose sight of the fact that good faith, uBuntu and public policy all play an important role in contractual dealings.

 

1 ubuntu “carries in it” the ideas of humaneness, social justice and fairness and emphasises respect for human dignity, marking a shift from confrontation to conciliation (S v Makwanyane [1995] ZACC 3; 1995 3 SA 391 (CC) para 307


For more information, please contact Jonathan Ripley-Evans and Nandile Dube or your usual Herbert Smith Freehills contact:

Jonathan Ripley-Evans
Jonathan Ripley-Evans
Director
+27 10 500 2690
Nandile Dube
Nandile Dube
Trainee
+27 10 500 2640