The legal nature of settlement agreements concluded prior to litigation

It is no secret that litigating can be a very long and arduous process. One of the major causes for delay is the severe backlogs the Judiciary faces. On 9 March 2020, Rule 41A of the Uniform Rules of Court came into effect in an attempt to alleviate these backlogs by encouraging parties to settle their disputes, rather than to engage in expensive and protracted litigation proceedings. Even where litigation has already commenced, this option to settle is still available to the parties. Since the idea of entering into costly litigation does not appeal to many, many matters are becoming settled prior to litigation even starting.

Settlement agreements: a short introduction

A settlement agreement is a legally enforceable contract which should take the form of a written agreement. Whilst it is not a requirement that the agreement be reduced to writing, this does assist the parties to not only have certainty, but to prove the terms of the agreement in the event of a dispute. Where a settlement agreement is concluded prior to litigation, a question then arises as to whether or not that agreement can be made an order of court.

Can a settlement agreement be made an order of court?

The above issue has been canvassed in multiple cases before. In Avnet South Africa (Pty) Limited v Lesira Manufacturing (Pty) Limited and Another (4 March 2019), Budlender AJ considered the precedent set by Van der Byl AJ in the matter of Growthpoint Properties Ltd v Makhonyana Technologies (Pty) Ltd and others (12 February 2013).

In the Growthpoint judgment, the court reasoned that there was a dispute between the parties prior to litigation commencing between them, relating to the amount payable in respect of arrears rental. That dispute was settled via a settlement agreement which the parties agreed could be made an order of court. Therefore, as soon as a party may institute legal action against another party, the former may apply to court to have a settlement agreement made an order of court without incurring the costs associated with litigation. The court in Avnet declined to make the settlement agreement an order of court on the basis that no litigation had commenced between the parties and therefore it did not have jurisdiction. The dictum in Eke v Parsons 2016 (3) SA 37 (CC) held that “parties contracting outside the context of litigation may not approach a court and ask that their agreement be made an order of court”.

Arguably the most important of these cases was decided by the late Van der Linde J in Lodestone Investments (Pty) Ltd v Muhammad Ebrahim t/a Ndimoyo Transport (29 April 2016) and National Youth Development Agency v Dual Point Consulting (Pty) Ltd and Another (19 May 2016). In both matters, the court declined to decide on the issue. In Dual Point Consulting, the court, however, set out important considerations, namely:

• “If the legislature was prepared to lend the enforcement arm of the law no matter what the underlying process; no matter how the settlement came about; no matter whether there was a fair underlying process; one would have expected explicit legislation to that effect.” No provision exists in our legislature to this effect;

• Our courts primarily function as a medium for the resolution of disputes between parties; and

• Concerns exist about the notion of a court assuming the role of a debt collector without its processes previously being engaged; a settlement agreement sought to be made an order of court would principally have the possibility of debt collection hanging over a party’s head at all times and the resultant issues in being in default of a court order.

The court may only make orders which are both proper and appropriate and only in matters placed squarely before it. A court may not simply grant an order which is binding on both parties simply on the basis of an agreement. Courts have been of the view that parties are not free to burden their agreements with the consequences which can flow thereof.

Terms in an agreement which can render the agreement unlawful

Where a settlement agreement contains terms that are against public policy (contra bonos mores), it will make the settlement agreement unenforceable. For example, if a term or clause in a settlement agreement requires a party to perform an illegal act, or unreasonably goes against public policy, it cannot form part of the agreement. Depending on what the clause contains, it can in some instances amount to a criminal offence.

Parties concluding a settlement agreement must also be cautious to avoid the crime of compounding, which is where parties unlawfully and intentionally agree, for reward, not to report or prosecute a crime other than one which is punishable by fine only. This crime exists primarily to protect the interests of justice. Only the police and the state are charged with the duty of prosecuting a crime and proving the guilt of a person. Allowing persons to settle out of criminal liability could result in a surge of criminal activity in South Africa.

The next article in this series will explore the remedies available to persons where a breach of the settlement agreement occurs.

For more information relating to settlement agreements and any remedies available where such a breach may occur, please email us on info@hjw.co.za.

Written by Cameron Phillips – Candidate Attorney.

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.