When should a court interfere in a contractual relationship? Pacta sunt servanda & public policy

When should a court interfere in a contractual relationship? Pacta sunt servanda & public policy
05 Feb 2018

The principle of pacta sunt servanda translates literally as “agreements must be kept” and forms the basis of the common law of contracts. When two parties willingly and knowingly enter into a contract, the terms of that contract should be upheld by both parties. In the case of Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd (183/17) [2017] ZASCA 176 (1 December 2017) the principles of reasonableness, good faith and fairness were weighed against the principles of pacta sunt servanda and privity of contract.

Background Facts

The Appellant in this case was Mohamed’s Leisure Holdings (Pty) Ltd (“Mohamed”). Mohamed was the owner of certain immovable property. The Respondent was Southern Sun Hotel Interests (Pty) Ltd (“Southern Sun”), which had leased immovable property from the Appellant in terms of a written lease agreement entered into in 1982 (“the lease”).

During October 2014 the Respondent breached the lease by failing to make payment of the rental on the due date. It was a material term of the lease that should the Respondent fail to pay the rental on the due date, the Appellant would be entitled to, immediately and without further notice, cancel the lease and retake possession of the property (“the cancellation clause”). The Appellant approached the court a quo for an eviction on the basis of the Respondent’s breach.

In the court a quo, the Respondent argued that it was not at fault for the breach of the lease. The Respondent explained that Nedbank had made an error in paying the rental amount into the incorrect bank account. The Respondent argued that the cancellation clause was unreasonable and unfair, and should not be upheld.

The court a quo held that, although the Respondent had breached the lease, the implementation of the cancellation clause in the circumstances would be manifestly unreasonable, unfair and offensive to public policy. While the court a quo conceded that the Respondent had agreed to the cancellation clause, the court held that the common law principle of pacta sunt servanda should be developed by importing or infusing the principles of ubuntu and fairness into the law of contract. For these reasons, the court a quo declined to grant an order for eviction. Mohammed took the matter on appeal to the Supreme Court of Appeal.

The Decision of the Supreme Court of Appeal

The Supreme Court of Appeal performed a balancing and weighing-up of two considerations, namely the principle of pacta sunt servanda and the considerations of public policy.

The Appellant argued that, when the Respondent defaulted in paying rental on the due date, it committed a material breach of the lease, giving the Appellant the right to cancel the lease. The Appellant pointed out that it did not immediately cancel the lease when the Respondent first breached it. The Appellant cautioned the Respondent that a breach would result in the cancellation of the agreement, and further provided the Respondent with 12 days in which to pay, before the lease was eventually cancelled.

The Respondent contended that, even though the payment was late, the Appellant was not entitled to cancel the agreement and seek an eviction order, as the Respondent had acted in good faith, and the breach of the lease was as a result of factors beyond its control. The Respondent argued that the Court is obliged, in interpreting the cancellation clause, to promote the spirit, purport and objects of the Bill of Rights as contemplated in s 39(2) of the Constitution. The Respondent argued that the principle of pacta sunt servanda is not absolute, and its application should be determined on a case by case basis.

The Supreme Court of Appeal held that, when developing the common law principle of pacta sunt servanda, regard must be had to the ruling of Cameron JA in Brisley v Drotsky [2002] ZASCA 35, 2002 (4) SA 1 (SCA), that judges must exercise ‘perceptive restraint’ to avoid the common law of contract becoming unacceptably uncertain. The principle of pacta sunt servanda, and privity of contract entails that contractual obligations must be honoured when the contract was entered into freely and voluntarily. This notion goes hand in hand with the freedom to contract, which denotes that parties are free to enter into contracts and decide on the terms of those contracts.

The court held that the terms of the contract are not, prima facie, inconsistent with public policy. The parties, having equal bargaining power when entering into the lease, could have negotiated that the Respondent be given notice to remedy a breach before the lease was cancelled. It was not objectively impossible for the Respondent to make payment of the rental on the due date, as, upon becoming aware of an issue with Nedbank, the Respondent could have effected other means of payment such as an EFT. Against this background, it cannot be against public policy to apply the principle of pacta sunt servanda in this case.

Conclusion

The fact that a term in a lease may operate harshly does not on its own mean that it offends the values of the Constitution or is against public policy. The court a quo erred when it undertook to develop the common law of contract by infusing the spirit of ubuntu and good faith, as the effect of this was to invalidate a material term of the lease. The relaxation of the principle of pacta sunt servanda in this case would have had the effect of the court making the agreement for the parties. A court will not lightly interfere with a parties right to freedom of contract.

The appeal was upheld with costs, the order of the High Court was set aside and the Respondents were ordered to vacate the premises.

For more on the principle of pacta sunt servanda, read: Property Law and contract: Contractual unfairness and the Constitution 

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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