Msizi Mhlongo | SchoemanLaw Inc   

Category: Law of Contract and Litigation   

Introduction: 

The Constitutional Court made a judgment relating to the exploration of rules governing courts' power to set aside or refuse to enforce contractual terms. The majority judgment, led by Theron J, in Beadica 231 CC and Others v Trustees, Oregon Trust and Others, supports the Supreme Court of Appeal's approach, emphasizing that there's no independent rule mandating fairness, reasonableness, or justice in contracts. Instead, abstract values like fairness inform the substantive law of contracts and play a role in public policy considerations. 

However, Froneman J's minority judgment raises challenges and calls for greater clarity on normative justifications for not enforcing apparently freely concluded contracts. Froneman J suggests that 'equality in exchange' is a suitable normative justification, but the majority argues for a focus on the constitutional value of good faith, seen as a standard of altruism or a minimum degree of concern for the contracting partner's interests. 

The judgment further discusses the need for more detailed rules or principles in fairness control when determining the enforcement of valid terms. It questions the adequacy of the 'equality of exchange' concept and proposes guidance from good faith, which has proven productive in developing rules related to factors influencing enforceability. 

Fairness and good faith: 

The Court delved into the subjective and objective meanings of good faith, emphasizing its normative dimension and its role as a measure. The judgment discusses two broad approaches to the objective meaning of good faith: altruism or displaying concern for others' interests and good faith as fairness. The judgment evaluated these meanings within the South African legal context, considering historical perspectives and contemporary interpretations. It concludes with the challenge of defining good faith and its role in relation to broader concepts like fairness, reasonableness, and justice. 

The judgment explores the need for normative justifications to regulate unfairness in South African contract law, particularly focusing on the concept of equality in exchange. The court acknowledged that good faith is constituted by the abstract values of fairness and reasonableness, guiding the public policy rule. However, the abstract nature of these values presents a challenge in regulating unfairness effectively. 

Justification for regulating unfairness in contracts: 

Justice Froneman raises a crucial question regarding the normative justification for regulating unfairness and not enforcing apparently freely agreed-upon contracts. He suggests that the standard reflecting expectations in good commercial practice, specifically the notion of 'equality in exchange,' could serve as a suitable justification. 'Equality in exchange' is an ancient concept rooted in Aristotle's idea that the value of what each party gives should be equal to what they receive. The judgment explores its historical evolution and recent resurgence, questioning its applicability in modern contract law. 

The discussion then delves into the general and South African perspectives on 'equality in exchange.' The judgment emphasizes the distinction between substantive and procedural unfairness, exploring situations where procedural weaknesses may warrant relief, even in the absence of apparent substantive unfairness. Examples include agreements providing security and situations of exploiting weakness without an unequal exchange. 

Substantive and procedural fairness: 

In the context of South African law, substantive and procedural unfairness, coupled with considerations of constitutional values, influence the formation and enforcement of contracts. The judgment highlights that courts may take personal circumstances and power imbalances into account when applying the public policy rule, demonstrating a nuanced approach to fairness in contract law. 

The judgment also scrutinizes the three requirements proposed by Froneman J for determining the enforceability of a term in contracts. These requirements include proving a clearly disproportionate exchange, demonstrating substantial prejudice, and establishing a lesser ability to protect oneself. The judgment critically examines these requirements in the context of the second stage of applying the public policy rule. 

A comparative perspective is introduced, drawing on the German Civil Code law's influence on Froneman J's preference for 'inequality in exchange' as a justification for refusing enforcement. The judgment suggests that a broader understanding of good faith, involving mutual concern for each other's protectable interests, could provide a more effective normative justification for regulating unfairness in contracts. 

The judgment concludes by acknowledging the challenges in implementing these broad factors or considerations to determine enforceability in South African law. It suggests that South African law may need to further explore the constructive role that good faith, with a specific meaning emphasizing mutual concern, could play in addressing these challenges. 

Application of Public Policy Rule 

Beadica primarily dealt with the practical application of the public policy rule in the context of lease renewals. The main issue was whether valid terms governing lease renewals were enforceable, and the majority in Beadica applied the open-ended public policy rule to determine this. The judgment considered factors such as the party's ability to explain non-compliance with a term, potential harm to the party seeking to avoid enforcement, and the interests and motives of the party seeking enforcement. 

Explanation for Non-compliance: 

The majority in Beadica emphasized the importance of providing an explanation for a failure to comply with a contractual term. Personal weakness, such as inexperience and ignorance, was considered, but the majority did not automatically excuse non-compliance based on such factors. The challenge lies in determining what constitutes an "adequate explanation." 

Significance of Harm: 

The potential harm to the party seeking to avoid enforcement was another factor considered. However, mere potential harm was not sufficient grounds to deny enforcement. The focus was on whether the enforcing party had protectable interests and motives and how these weighed against potential harm. 

Interests and Motives of the Party Seeking Enforcement: 

The interests and motives of the party seeking enforcement played a role in the application of the public policy rule. The court considered whether the enforcing party had protectable interests, similar to the application of the rule in restraint of trade cases. The motives of the enforcing party were also scrutinized, and a link between motives and interests was highlighted. 

Constitutional Rights and Values: 

The tenants in Beadica appealed to constitutional rights, specifically equality, as a basis to argue against the enforcement of terms. The court acknowledged the potential relevance of specific rights and values in applying the public policy rule. However, broad appeals to equality were not automatically accepted, and the practical commercial implications of the rulings were carefully considered. 

The Onus: 

The onus rested on the party seeking to avoid enforcement to prove the violation of public policy. While the enforcing party did not bear the onus, it was wise for them to present evidence justifying the term's enforceability. The party objecting to enforcement could benefit from showing factors like weakness, potential harm, and opportunistic motives on the part of the enforcing party. 

The judgment reflects a nuanced approach to the public policy rule, considering various factors and interrelationships. The potential impact of the decision is highlighted in the need for parties seeking enforcement to be aware of the other party's position, especially in cases involving weaker contracting parties. The judgment also points to the relevance of good faith in justifying the denial or adjustment of enforceable terms, emphasizing a standard of concern for the interests of contracting partners. 

Conclusion: 

Beadica represents a significant development in South African contract law, emphasizing a detailed and nuanced analysis of factors in determining the enforceability of valid terms under the public policy rule. The judgment underscores the importance of considering specific circumstances, interests, and motives, rather than relying on broad and abstract appeals to public policy. Contact an Attorney at SchoemanLaw to ensure your contractual terms are enforceable.   

Msizi Mhlongo | SchoemanLaw Inc   

Attorney

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