The Constitutional Court, the highest Court in South Africa, which has now been given wider jurisdiction to hear matters of public importance has, due to an amendment to the Constitution of the Republic of South Africa, recently handed down a judgment which is expected to have a significant impact on the principles of the law of contract in South African law. In fact, the aim to uphold the principles of Ubuntu and to promote good faith and fairness in contracts is increasingly becoming a trend in judgments handed down by the Constitutional Court.
What is good faith in the law of contract?
The notion of good faith is not a new phenomenon; it has always been part of South African common law. Good faith has been regarded as the doing of simple justice between person-and-person. It involves a respect for the other party's interests in a contract. Because a contract is an agreement between two or more parties, and often involves the principle of reciprocity, parties should not enter into an agreement in bad faith, as doing so would destroy the trust between parties and create commercial chaos.
However, good faith is not a stand-alone requirement in a contract. This much was made clear in judgments handed down by the Supreme Court of Appeal and its predecessor, the Appellate Division. Nonetheless, the Constitutional Court has attempted to develop this notion of good faith and, on a related note, the concept of fairness. The Constitutional Court has attempted to give content and understanding to the notions of good faith and fairness through interpreting and attempting to apply the concept and constitutional value of 'Ubuntu'.
While Ubuntu is not expressly stated as a constitutional value in the Constitution, it was provided for in the Interim Constitution. The Courts have also continually stated over the years that it is a constitutional value and that it assists in giving content to the three express constitutional values of freedom, dignity and equality.
Determining fairness and good faith in contracts:Barkhuizen v Napier
In the case of Barkhuizen v Napier 2007 (5) 323 (CC), the Constitutional Court stated that two questions need to be asked in determining the fairness of a contractual term:
1. whether the clause itself is unreasonable / contrary to public policy;
2. if not, whether its enforcement in the particular circumstances would be unreasonable / contrary to public policy.
The Supreme Court of Appeal, in the case of Bredenkamp, reacted to the Barkhuizen judgment and held that there was no over-arching requirement of fairness in contract. It held that Barkhuizen was limited to constitutional issues.
The legal profession has been eagerly awaiting a judgment in which the Constitutional Court may react to the Bredenkamp judgment.
Fairness over certainty: Botha and another v Rich N.O.
The very recent case of Botha and another v Rich N.O. and others 2014 CCT 89/13 has given a further indication of the Constitutional Court's approach to this issue of good faith and fairness in contracts, but it did not seem to authoritatively express its stance on this point.
This case concerned an interpretation of s 27(1) of the Alienation of Land Act 69 of 1981 ("the Act"), which provides that if a person has paid 50% or more of the purchase price of property which is subject to an instalment sale agreement, that person can demand that the seller transfer the land into his / her name on condition that he / she registers a mortgage bond in favour of the seller over the said land.
In this case, the seller purported to cancel the agreement and to enforce the forfeiture of the purchaser's payments, because the purchaser had defaulted on her payments. One would have expected the Court to order the cancellation of the contract, due to the purchaser's default but not forfeiture, which is unlawful, according to s 19 of the Act. Therefore, upon cancellation the purchaser would be entitled to full restitution.
However, the Constitutional Court approached the issue in a different manner. In an attempt to develop the notion of good faith and fairness in contract, the Court subjected the enforcement of the cancellation clause to the fairness of doing so. One can see the Court's attempt to infuse constitutional norms and values into the general principles of the law of contract. In fact, it was stated in the Constitutional Court case of Everfresh, that Courts need to develop a new contractual order which is informed by constitutional and traditional African values.
The Court here dealt with s 27(1) of the Act, and interpreted that the purchaser is entitled to demand transfer of the land into his / her / its name, provided that the purchaser tenders payment of the arrears amount and, if applicable, any municipal charges and registers a mortgage bond over the property in favour of the seller. However, the seller had exercised its right to cancel the contract due to the purchaser's default and that the purchaser made no attempt to pay the arrears as contemplated by s 27(1) of the Act.
The Court, however, considered whether the enforcement of a cancellation clause is fair under the circumstances, where the seller exercised its rights in terms of the contract to cancel such contract due to default by the purchaser. The Court held that such enforcement of the cancellation clause would be unfair, and accordingly dismissed the cancellation application and ordered that the Respondents do all things necessary to effect transfer of the property to the Applicant, provided that payment of all arrears amounts are paid to the Respondents and a mortgage bond is registered over the property in favour of the Respondents.
It seems that the effect of this judgment is that the exercise of a contractual right may be subject to a standard of fairness.
Consequently, although certainty is a requirement of the law of contract, it may be pushed aside in favour of upholding a standard of fairness in contract. Thus, the enforcement of a cancellation clause may be subject to a fairness enquiry by a Court. Parties must enter into contracts in good faith and act fairly to one another. The Constitutional Court is adamant to develop the law of contract in line with constitutional values and it will continue to do so. While the law is developing as such, this particular point of law will remain in a state of flux.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.