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Contractual certainty vs good faith and fairness

Publish date: 15 March 2019
Issue Number: 62
Diary: CompliNEWS
Category: General

By Lee Rossini

All businesses enter into contracts of one sort or another. The question is: How often do we stop to think about some of the legal concepts and the possible negative consequences they may have on the operation of a contract? Two of the legal concepts, certainty and fairness, have long been in battle in the arena of contract law.  The concept of certainty is fundamental to the rule of law and is therefore important for both the law and society. It provides for a transparent and predictable system of laws which enables people to regulate their conduct with certainty. The concept of good faith has acquired a wider meaning than mere honesty, it includes other abstract values such as justice, reasonableness, fairness and equity (AM Louw, 2013).  In contract law, there is a presumption that both parties will contract with each other honestly, fairly and in good faith.

The first victory in favour of certainty came in the case of Bank of Lisbon and SA Ltd v De Ornelas and another 1988 3 SA 580 (A), where the court decided that the exceptio doli generalis was never accepted into Roman-Dutch law, and therefore was not available in South Africa.  The exceptio was a defence that was available to contracting parties in cases where a contractual term was regarded as being in bad faith.

The next relevant case was that of Sasfin (Pty) Ltd v Beukes 1989 1 SA 1 (A), where the courts concluded that a contract would be unenforceable if the terms contained in it did not align with the principles of simple justice (good faith) between person and person because it is contrary to public policy. In the subsequent case of Eerste Nasionale Bank van Suidelike Afrika Bpk v Saayman NO 1997 4 SA 302 (SCA), the courts again required that the contractual terms be agreed upon in good faith, arguing that public policy requires this.

Crucially, in the case of Brisley v Drotsky 2002 (4) SA 1 (SCA), the court found that the concept of good faith is not a free-floating principle that can be called upon to get out of contracts as a last resort when a party is unable to perform as required by the contract. The case of Barkhuizen v Napier 2007 (5) SA 323 (CC) later supported the finding that the concept of good faith is not a free-standing principle, but that clauses in contracts, and the enforcement of those clauses should be reasonable.  It was agreed that the courts could overrule certain contractual clauses if they were counter to public policy, and that reasonableness is a public policy requirement.

Not long after, the Supreme Court of Appeal in Bredenkamp and others v Standard Bank of South Africa Ltd 2010 4 SA 468 (SCA), ruled that cancellation with reasonable notice should always be allowed even if the outcome seems harsh. The judgement was decided on the basis that the alternative would stray too far from contractual certainty. This was a big victory for the proponents of the principle of that agreements must be kept (pacta sunt servanda).

However, this victory was short-lived. In 2014, the Constitutional Court judgment in the case of Botha v Rich NO and others 2014 (4) SA 124 (CC), refused to enforce a clause in a contract because it would be unfair. Instead of relying on the principle of fairness alone, they referred to principles of reciprocity and good faith to make a judgement that they believed to be equitable.

A similar judgement was decided in the recent case of Mahomed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd 2018 (2) SA 314 (SCA), in which the Gauteng Local Division court found that a cancellation clause could not be enforced because it would be contrary to the values of good faith and ubuntu as enshrined in the constitution.  On appeal to the Supreme Court of Appeal in 2018, the ruling was overturned, and the cancellation clause was allowed. This case was appealed again, this time to the Constitutional Court. However, the appeal was refused and the SCA judgment stands. A victory for contractual certainty.

Although the scales currently seem to be tilted in the favour of certainty, with good faith and fairness up in the air, the outcome of future fairness cases is inconclusive. What is certain is that fairness is not a freestanding principle, and that contractual clauses or the enforcement of those clauses may not be counter to public policy. More than that appears to still be up for debate.

For businesses entering into contracts with consumers, both the Consumer Protection Act 68 of 2008 (CPA) and the National Credit Act 34 of 2005 (NCA) provide guidelines on how to structure a contract to ensure that it will not be overruled based on uncertainty or unfairness. The CPA contains both a grey list of terms that are assumed to be unfair, and a black list of terms that are not allowed in contracts.  

The guidelines provided in the CPA can also be used as a guide when structuring contracts between businesses, even though the Act is not directly applicable. Although the last judgement on the matter leans in favour of contractual certainty, it is essential to pay attention to the issues of good faith and fairness when entering into business-to-business contracts. The courts have consistently been following what could be considered a reasonable standard of fairness, so unless the term is patently unfair, or enforced in bad faith it is unlikely to be overruled.

Reference:

Louw AM 'Yet another call for a greater role for good faith in the South African law of contract: can we banish the law of the jungle, while avoiding the elephant in the room?' Potchefstroom Electronic Law Journal http://www.saflii.org/za/journals/PER/2013/68.html (accessed on 7 March 2019).

Working Smart

By Lee Rossini

Most financial advice businesses start off small, usually with the founder playing the role of owner, manager and financial adviser. However, as the business grows, planning and implementing organisational structures becomes more of a priority as the need for specialised positions and departments arises. The organisational chart, job design and analysis form an important part of this process. The information gathered from these exercises, specifically the job analysis, is subsequently used to draw up the job descriptions (JD).    

CPD

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