Contract terms, public policy and the Constitution – the Constitutional Court resolves the debate
On 17 June 2020 the Constitutional Court handed down a judgment in an application for leave to appeal against a judgement of the Supreme Court of Appeal. The Constitutional Court judgment attempts to resolve several questions regarding the constitutional approach to the judicial interpretation of contractual terms and, in particular, the public policy grounds upon which a court may refuse to enforce them. This has a been a controversial and intensely debated topic, with differing views having been expressed by judges in various courts over recent years.
The applicants were four close corporations that concluded franchise agreements with Sale’s Hire in terms of which the applicants were to operate Sale’s Hire franchised businesses for a period of ten years. The businesses were acquired by the applicants as a result of a black economic empowerment initiative financed by the National Empowerment Fund (“NEF”) and facilitated by Sale’s Hire. The applicants operated their businesses from premises leased from the Oregon Trust in terms of their franchise agreements with Sale’s Hire. Initially the leases were meant to operate for a period of five years. However, the lease gave the applicants an option to renew the leases for another five years. In terms of the renewal clause in the lease agreements, the option to renew had to be exercised by giving notice six months before the expiry of the lease. The applicants did not exercise their options within the stipulated time (six months) and sought to exercise them only after the time period for exercising the option had expired. The Oregon Trust submitted that the options to renew had lapsed and the lease agreements had terminated.
The applicants instituted urgent proceedings against Sale’s Hire and the Oregon Trust seeking an order declaring that their renewal options had been validly exercised and prohibiting Oregon Trust from evicting them. The High Court held that the strict terms of the lease agreement should not be enforced. The High Court went further and held that the termination of the leases would result in the applicants losing their businesses and the failure of the black economic empowerment initiative. According to the High Court, this would result in a disproportionate sanction for the failure of the applicants to comply with the renewal clause. The High Court granted the applicants the relief sought. The respondents appealed to the Supreme Court of Appeal (“SCA”). The SCA held that there were no public policy considerations that rendered the renewal clause unenforceable. The SCA upheld the appeal and replaced the High Court’s order with an order dismissing the application and directing the eviction of the applicants from the leased premises.
The applicants then approached the Constitutional Court, arguing that the strict enforcement of the contractual terms (and in particular the renewal clause, which required notice of renewal to have been given six months before expiry of the lease) was contrary to public policy, and inimical to the values of the Constitution. In particular they argued, strict enforcement of the renewal clause would result in the failure of the black economic empowerment initiative that had resulted in the acquisition of their businesses and conclusion of the franchise agreements, preventing them from realising the right to equality entrenched in section 9(2) of the Constitution.
The respondents (the Oregon Trust, Sales Hire and the NEF) argued that only in “the clearest of cases” should a court refuse to enforce a contractual term on the grounds of public policy. The majority of the Constitutional Court held that a contract that is prima facie inimical to a constitutional value or principle, or otherwise contrary to public policy, will be declared invalid. On the other hand, the Court held, public policy demands that contracts entered into freely and consciously must be honoured. Therefore, a contracting party cannot avoid the enforcement of contractual terms simply on the basis that enforcement would be disproportionate or unfair in the circumstances. It is only where the enforcement of contractual term would be so unfair, unreasonable or unjust that it is contrary to public policy that a court may refuse to enforce it.
The court held that the fact that the enforcement of the contractual term, in circumstances where the applicants had failed to explain their non-compliance with the term, would lead to the failure of the black economic empowerment initiative financed by the NEF. would not be contrary to the constitutional value of equality. On the basis of this test, the applicants had failed to prove that the enforcement of the strict terms of the renewal clause would be contrary to public policy and would trump the policy consideration that a contract freely and consciously entered into.
The judgment goes some way to resolving a longstanding debate on the role of constitutional values in determining the validity of contractual terms. It establishes the principle that, values entrenched in the Constitution are amongst the considerations to be taken into account, it is only where the enforcement of a contractual term would be so unfair, unreasonable or unjust such that it is contrary to public policy that a court may refuse to enforce it.