What happens when terms of a contract are found to be “unfair, unreasonable or unduly harsh”?

Introduction

The Constitutional Court in Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others, recently had occasion to consider whether a renewal clause in a lease agreement was against public policy because of the fact that enforcement of a specific term would result in substantive inequality, in terms of section 9(2) of the Constitution.

In its judgement the Court found that courts have the power to refuse to enforce a contract on the basis of public policy but only in the clearest of cases. This case did not meet those standards and was therefore dismissed, highlighting the fact that in our law of contract, pacta sunt servanda, meaning “contracts freely entered into should be honoured” is still the most important principle.

“The extent to which a court may refuse to enforce valid contractual terms on the basis that it considers that enforcement would be unfair, unreasonable or unduly harsh is a burning issue in the law of contract in our new constitutional era.”

Facts of the matter

In this case the franchisor and trust set up a black economic empowerment initiative financed by the National Empowerment Fund. The businessmen would enter into a franchise agreement with the franchisor and a lease agreement with the trust. The businessmen, in terms of the lease agreement had an option to renew their lease 6 months prior to termination of the lease. They did not exercise this option. They then claimed that their business would collapse if the lease agreement were terminated, however, they were still able to continue their business at other approved premises thereby preserving the franchise agreement.

The Court had to consider the proper constitutional approach to the enforcement of contractual terms and, in particular the public policy grounds upon which a Court may refuse to enforce these terms.

In previous cases decided upon by the Court, it was stated that public policy, as informed by the Constitution, imports “notions of fairness, justice, and reasonableness”, and takes into account the need to do “simple justice between individuals” and is informed by the concept of ubuntu.

Public policy in general, requires parties to honour contractual obligations that have been freely and voluntarily entered into. Pacta sunt servanda is a profound moral principal on which the coherence of any society relies.

Courts should exercise their power to refuse to enforce a contract on the basis of public policy “sparingly and only in the clearest of cases”.

The Constitution requires that Courts employ the Constitution and its values “to achieve a balance that strikes down unacceptable excesses of ‘freedom of contract’, while seeking to permit individuals the dignity and autonomy of regulating their own lives”.

In this case, it was found that the Court had to consider the fact that the businessmen did not exercise their option to renew. The onus is on them to prove that the renewal clause would be contrary to public policy in the particular circumstances of this case.

The businessmen failed in their endeavour to demonstrate that the renewal clause was against public policy and did not adequately explained why they did not comply with the option to renew.

Conclusion

The principle that contracts freely entered into should be honoured (pacta sunt servanda) is an important constitutional value however, there is no basis for privileging it over other constitutional rights and values and a Court must exercise ‘perceptive restraint’ when approaching the task of invalidating, or refusing to enforce, contractual terms.

Thus, objective, substantial and valid reason must be given for not complying with terms of a contract and why such term would therefore be against public policy.

While the success of a B-BBEE transaction was at stake, this was not in itself a sufficient reason for a court to decline to enforce the contract’s terms.

It is noteworthy that this case came to a different conclusion than the one in A B and Another v Pridwin Preparatory School and Others, where the Court let public policy reign over pacta sunt servanda, and this is illustrative of the fact that no two cases are the same and each must be judged on its specific merits.

For more information relating to contracts kindly email us on info@hjw.co.za.

Written by Meegan Reddy – 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.