• Seth Botes

Fairnes in Contract Law: Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust

Today the Constitutional Court delivered judgment on a matter which concerned the interpretation of an issue which has been the subject of debate for some time, namely the issue of fairness, reasonableness and good faith as it applies in the interpretation of contracts.

Important aspects of the judgment can be found from paragraphs 71 and onwards, where the court starts dealing with the role of the Consitution, fairness, reasonableness, ubuntu, and pacta sunt servanda.

The following key points were made:

"[71] There is only one system of law in our constitutional democracy. As recognised by this Court in Pharmaceutical Manufacturers, this system of law is shaped by the Constitution, which is the supreme law, and all law, including the common law, derives its force from the Constitution and is subject to constitutional control. The determination of public policy is now rooted in the Constitution and the objective, normative value system it embodies. Constitutional rights apply through a process of indirect horizontality to contracts. The impact of the Constitution on the enforcement of contractual terms through the determination of public policy is profound. A careful balancing exercise is required to determine whether a contractual term, or its enforcement, would be contrary to public policy."

"[83] The first is the principle that “[p]ublic policy demands that contracts freely and consciously entered into must be honoured”. This Court has emphasised that the principle of pacta sunt servanda gives effect to the “central constitutional values of freedom and dignity”. It has further recognised that in general public policy requires that contracting parties honour obligations that have been freely and voluntarily undertaken. Pacta sunt servanda is thus not a relic of our pre-constitutional common law. It continues to play a crucial role in the judicial control of contracts through the instrument of public policy, as it gives expression to central constitutional values.

[84] Moreover, contractual relations are the bedrock of economic activity and our economic development is dependent, to a large extent, on the willingness of parties to enter into contractual relationships. If parties are confident that contracts that they enter into will be upheld, then they will be incentivised to contract with other parties for their mutual gain. Without this confidence, the very motivation for social coordination is diminished. It is indeed crucial to economic development that individuals should be able to trust that all contracting parties will be bound by obligations willingly assumed.

[85] The fulfilment of many of the rights promises made by our Constitution depends on sound and continued economic development of our country. Certainty in contractual relations fosters a fertile environment for the advancement of constitutional rights. The protection of the sanctity of contracts is thus essential to the achievement of the constitutional vision of our society. Indeed, our constitutional project will be imperilled if courts denude the principle of pacta sunt servanda...

[87] In our new constitutional era, pacta sunt servanda is not the only, nor the most important principle informing the judicial control of contracts. The requirements of public policy are informed by a wide range of constitutional values. There is no basis for privileging pacta sunt servanda over other constitutional rights and values. Where a number of constitutional rights and values are implicated, a careful balancing exercise is required to determine whether enforcement of the contractual terms would be contrary to public policy in the circumstances.

[88] The second principle requiring elucidation is that of “perceptive restraint”, which has been repeatedly espoused by the Supreme Court of Appeal.201 According to this principle a court must exercise “perceptive restraint” when approaching the task of invalidating, or refusing to enforce, contractual terms. It is encapsulated in the phrase that a “court will use the power to invalidate a contract or not to enforce it, sparingly, and only in the clearest of cases”.

[89] This principle follows from the notion that contracts, freely and voluntarily entered into, should be honoured. This Court has recognised as sound the approach adopted by the Supreme Court of Appeal that the power to invalidate, or refuse to enforce, contractual terms should only be exercised in worthy cases.

[90] However, courts should not rely upon this principle of restraint to shrink from their constitutional duty to infuse public policy with constitutional values. Nor may it be used to shear public policy of the complexity of the value system created by the Constitution. Courts should not be so recalcitrant in their application of public policy considerations that they fail to give proper weight to the overarching mandate of the Constitution. The degree of restraint to be exercised must be balanced against the backdrop of our constitutional rights and values. Accordingly, the “perceptive restraint” principle should not be blithely invoked as a protective shield for contracts that undermine the very goals that our Constitution is designed to achieve. Moreover, the notion that there must be substantial and incontestable “harm to the public” before a court may decline to enforce a contract on public policy grounds is alien to our law of contract."

The full judgment can be accessed via the following link: