Property law, contracts and the Constitution

pacta sunt servanda 1
03 May 2017

In the recent as yet unreported case of Bondev Holdings Midrand (Pty) vs Mulatedzi Alton Madzhieand others delivered by Acting Judge CR Jansen on 19 December 2016  in the Gauteng High Court, important contractual issues in a constitutional perspective were addressed in an insightful and ground-breaking judgement.

The applicant, a property developer, sold a vacant residential plot to the first respondent in January 2012. The first respondent paid the purchase price from loan finance raised, but failed to commence with construction of a dwelling on the property as required in terms of the deed of sale.

The applicant sought the retransfer of the property as the deed of sale entitled it to.

The court considered whether the law of contract concerns itself with unfairness in the context of a developer demanding re-transfer of a property as a result of the owner failing to construct a dwelling on the property within a specified time limit.

Further consideration was afforded to whether this type of clause can be brought within any of the grounds on which the common law, as developed by the Constitution, would refuse to enforce a contract, or would allow a party to resile from a contract, because it offends public policy, or is inconsistent with the norms and values of the constitution.

A brief extract of the judgment follows:

It is trite law that all things honourable and possible can be the subject of a contract. The principle expressed in the maxim pacta sunt servanda remains the bedrock of the law of contract. At the same time, the legislature has made radical incursions into the law of contract and through various measures aimed at the protection of consumers. Contractual freedom no longer means what it used to mean in previous times. In fact, statutory measures such as contained in chapter 2 of the Alienation of Land Act 68 of 1981 and the Conventional Penalties Act 15 of 1962 predate the present era of consumer protection and much of it was specifically aimed at protecting purchasers of property against oppressive contractual clauses and rouwkoop forfeitures.

The question that arises is what is the role of the courts in strengthening the protection that consumers enjoy.

The legislature has not been alone in developing rules for the protection of ordinary consumers. The courts have bolstered legislative provisions by the application of rules of interpretation that infuse legislative provisions with the spirit, purport and objects of the Bill of Rights, as they are required to do by section 39(2) of the Constitution.

Our courts have repeatedly stated that the law of contract, and contractual provisions, must yield to the provisions and values of the Constitution.

The law of contract still stands strong on most of its common law footing. Challenges to the so-called “schiffren” rule as well as time bar periods in insurance claims have not been successful. These judgments, being Brisley v Drotsky (supra) and Barkhuizen v Napier (supra) illustrate the strong survival of principles underlying the doctrine of pacta sunt servanda. To quote from Barkhuizen v Napier (supra) at para 30 (per Ngcobo J):

“The proper approach to the Constitutional challenges to contractual terms is to determine whether the term is contrary to public policy, in particular those found in the bill of rights. This approach leaves space for the doctrine of pacta sunt servanda to operate, but at the same time allows Courts to decline to enforce contractual terms that are in conflict with the values even though the parties may have consented to them.”

 The “schiffren” rule in the law of contract, as well as time bar clauses in insurance law, are central to the general law of contract and insurance law respectively. That cannot be denied.

A repurchase clause such as the present one, is respectfully not central to the business of a developer or the operations of a homeowners association. I accept that a developer and homeowners associations have strong interests in seeing that a development comes to a conclusion in the sense that the erven are sold and ultimately developed. Only then is the final community established and is the community life settled. There may even be certain interests relating to aesthetics and security in this regard.

On the other hand, there are very real and important interests of purchasers such as the first respondent to bear in mind. These interests are constitutionally protected. As such, public policy would tend to protect such purchasers against unfair terms, especially ones that are grossly unfair. As a result, the conflicts between the comparative interests must be answered in favour of the purchaser of the residential stand.

This case involves a constitutionally protected socio-economic right. Professor Sandra Liebenberg, in her textbook on socio-economic rights, cautions against the extension of the reasoning in Brisley v Drotsky (supra) to contracts involving the procurement of basic needs:

“The bargains which the majority of people make are seldom an expression of private freedom in a context of systemic, intertwined class, race and gendered power disparities. The judgment does not consider the implications of constitutional values for the weaker party in a contractual relationship, particularly where their economic survival and basic needs are at stake. …… In developing the content and role of these doctrines in the constitutional era, a more rigorous engagement with constitutional values such as social justice and the other values underpinning socio-economic rights is required than occurred in the Brisley judgment.”

In addition, one cannot be blind to certain phenomenon in the built environment and in the development of suburbs such as what is referred to as “residential class segregation”.

As with so many other things in life, one must probably accept that the rich and the super-rich segregate themselves simply by making stands in their favourite estates completely unaffordable to the ordinary man or woman. However, this cannot be countenanced under all circumstances simply on the basis that the phenomenon must be accepted to some extent as a result of purblind deference to the doctrine of pacta sunt servanda.

The planning authorities are obviously the primary institutions that must ensure a more class and race integrated built environment, but that does not mean that the courts have no role to play. The contrary is true.

In appropriate circumstances, our courts have not hesitated to interfere with contractual or trust provisions which it considered inimical to public policy.

I believe that the present type of repurchase clause represents an instance where a court should refuse enforcement.

The position may be different if the facts show that the purchaser is a speculator or is in some way involved in the business of the purchase and sale of residential properties. It may also be different if the time allowed were considerably more than provided for in the present clause.

If a longer period might save such a clause, it should give the full benefit of any capital growth to the purchaser. In other words, it should operate no differently than a pre-emption clause where the purchase price is determined by market value.

The full judgment is available here.

(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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