Fuel for Thought: The Legal Effects of Inflation

Inflation is one of the leading socio-economic issues in our nation, and one that receives a considerable amount of attention. While the effects of inflation may be easy to understand (for example, (a) lower purchasing power as the value of money decreases and (b) the increase of prices and interest rates), unpacking the causes of inflation would make for a drawn-out article. Be that as it may, three causes of inflation are: currency volatility caused by high demand of import goods and low supply of export goods; war, for instance, the Ukraine-Russia war caused the supply of import goods and services to decrease; and fuel supply. Of particular importance is the ever-increasing price of fuel. The price of fuel affects almost all markets in the economy. The energy crises extend from the low supply, yet high prices of electricity, to the underacknowledged effects it has on the legal field. The question then is how does inflation (the increase in the general prices of all goods and services) affect the law?

The legal system was not historically designed with the decreasing value of money in mind,[1] as a result, inflation caused many unexpected legal issues. Nowadays, the legal system is an ever-evolving creature which adapts to change much quicker and simpler, with statutes, policies and regulations created frequently. Insomuch as such adaptability is tenable, the threat of inflation to our legal system is reduced. But South Africa is a developing country, much of its regions remain underdeveloped and large groups of people remain underprivileged. Therefore, the legal system is still susceptible to fuel price hike as it affects both law pundits and laypersons.

Contractual issues

An increase in prices results in a change in circumstances, which may subsequently lead to a revision of contractual terms and conditions. Lawyers and contracting parties who received legal advice often appreciate the effect economic fluctuations have on contracts. The contracts they enter are formulated with this appreciation in mind. For example, parties can insert terms and conditions (contingencies) which stipulates performance change in the case of general price increase (such as a variation clause) or use insurance to protect their contracts. Furthermore, certain legal agreements give contractors’ rights and responsibilities economic value, wherefore default of performance will result in the contractual debtor compensating the contractual creditor. On the other hand, unadvised laypersons are at higher risk.

Laypersons and underprivileged groups often lead with the assumption that the economy will remain relatively stable and that if not, they will adapt to the change as it presents itself. Contracts entered with this assumption have the likelihood of causing conflicts while attempting to adapt performance to inflation. As concerns the legal profession, conflict is good for business. But through the economic lens, one can perceive that conflict hinders production, as performance in terms of the contract concluded with the assumption will often halt until the conflict is resolved. Furthermore, failure to resolve the conflict may result in the termination of the contract, either unilaterally by one party, through agreement by the parties or automatically because of default on performance. In such cases, the contractors may seek relief from the courts. Whether courts should intervene on or rescind contracts that are burdened by inflation making performance unprofitable depends largely on the courts’ willingness or reluctance to adjudicate on contractual issues, taking into account the parties’ freedom to contract.

Justice

The judicial process of resolving disputes often takes time. It could take as long as a year for a small-claim case to come to an end. While the entire process is unfolding, costs are incurred, payable either to the court or to the legal practitioner. An inevitable effect of inflation is the increase of legal practitioners’ fees. Fortunately, most legal costs and rates will remain the same (for a time) because changing them may require the promulgation of new statutes, policies and directives, which takes time. Nonetheless, they will still be as burdensome to the parties as all other costs of living and legal practitioners’ fees. This spells injustice to the poor and marginalised as they may avoid the judicial process due to its high expenses.

Over and above the costs of justice, there remains the issue of what happens after judgement has been granted. The Court may impose legal costs on either party. Upon granting judgement in favour of one party, the Court may further order monetary compensation, including maintenance, against the other party. Inflation deteriorates the value of any future income, be it from a liability for the contravention of a statute, a breach of contract, delict, or sui generis (of its own kind). Additionally, it may cause the judgment debtor, in no fault of his/her own, to default payment in contravention of the Court Order. For this reason, Courts are obliged to consider the effects of inflation when passing judgment, and in many instances the Consumer Price Index is used to determine how much more or less the judgment debtor would have to pay in the case of economic fluctuations.

Were all legal actors to correctly anticipate and take into account inflation, fewer problems will arise.

[1] Keith S. Rosenn Law and Inflation (1982): University of Pennsylvania Press accessed 01 July 2022 <https://www.jstor.org/stable/j.ctt173zmbk>

Written by Martin Mhlarhi

This article is provided for informational purposes only and should not be substituted for legal advice on any specific matter. Any opinions expressed herein are subject to the law as at the time of writing and will change in accordance with any change in the law. We recommend that you contact HJW ATTORNEYS at info@hjw.co.za directly for advice applicable to your specific matter.