Trustees for the Time Being of the Oregon Trust v BEADICA 231 CC and Others

On 28 March 2019, the Supreme Court of Appeal of South Africa (“SCA”) handed down a seminal decision in Trustees for the Time Being of the Oregon Trust v BEADICA 231 CC and Others (“Oregon Trust Decision”) relating to the impact of The Constitution of the Republic of South Africa (“Constitution”) on the law of contract.

Why is this decision important?

In 2016, Judge Malcolm Wallis (currently a Judge of the Supreme Court of Appeal of South Africa) said, in a private speech, “There is a view abroad, among both academics and legal practitioners, that certain decisions by the Constitutional Court of South Africa  impacting commercial life of the country have introduced uncertainty in our commercial law.” He sounded a warning that the effect of such uncertainty will be to drive commercial litigation away from the Courts into arbitral forums that are seen as more predictable in their outcomes and therefore deprive the country the much-needed constitutional-contractual law jurisprudence.

Since then, academics, sitting and retired Judges have written extensively on the impact of the Constitution on the law of contract. Whilst the SCA have been trenchantly criticised for its conservatism and reticence to infuse contract law with the principles in the Constitution, The Constitutional Court of South Africa (“Constitutional Court“) have been criticised for introducing uncertainty in the law of contract.

What happened leading to the Oregon Trust Decision?

Sale Hire Close Corporation (“Sale Hire”) operated a business in Cape Town selling tools and building equipment in various outlets. The buildings occupied by Sale Hire were owned by the Oregon Trust (“Oregon Trust”).

In 2011, and as part of a Broad-Based Black Economic Empowerment transaction (“BEE Transaction”) initiated together with the National Empowerment Fund (“NEF”), the Sale Hire outlets were converted by Sale Hire to franchises. Franchise agreements were concluded between Sale Hire and Beadica 231 Close Corporation, Beadica 232 Close Corporation, Beadica 233 Close Corporation and Beadica 234 Close Corporation, close corporations formed by former employees of Sale Hire who were beneficiaries of the BEE Transaction (“Beadica CCs”). These franchise agreements were to endure for 10 (ten) years.

Further, in March 2011, the Beadica CCs concluded lease agreements with the Oregon Trust. The lease agreements were for a period of 5 (five) years, commencing on 1 August 2011 and terminating on 31 July 2016. The Beadica CCs had an option to renew the lease agreements within 6 (six) months prior to their expiry on 31 July 2016. The Beadica CCs did not send notices extending the lease agreements timeously; that is, by 31 January 2016. The notices were only sent on 29 March 2016 but not in the terms required by the lease agreement since 2 (two) of the Beadica CCs also made enquiries about purchasing the leased premises. The Oregon Trust did not respond to any of the letters from the Beadica CCs, save for indicating that Mr Sale, a trustee of the Oregon Trust, was out of town. The lease agreements terminated through the effluxion of time on 31 July 2016 without any response from the Oregon Trust. In July 2016, the Oregon Trust, through its attorneys, demanded that the Beadica CCs vacate the leased premises before 1 August 2016 since the lease agreements had lapsed.

On 1 August 2016, the Beadica CCs brought an urgent application in the Western Cape Division of the High Court (“High Court”) for an order that they be permitted to remain in occupation of the leased premises and that the Oregon Trust be prohibited from taking steps to evict them, in each case pending the determination of the question whether the options to renew the lease agreements had been validly exercised.

Oregon Trust brought a counter application for the eviction of the Beadica CCs on the basis that the lease agreements had expired through the effluxion of time. The application and counter application came before Judge Dennis Davis.

What was the decision of the High Court?

In the High Court, the Beadica CCs conceded that if the High Court were to enforce the strict terms of the lease agreements, they would have no case and Oregon Trust would be entitled to evict them from the leased premises. Their argument was that the law of contract was now infused with Constitutional values which, for the determination of the case, not only were predicated on the strict terms of the lease agreements but had to be examined further within the broader context of the purpose behind both the lease and franchise agreements read together with the doctrine of good faith and fairness.

On 16 November 2016, Judge Davis decided that the belated exercise of the extension option by the Beadica CCs was valid and that the Oregon Trust be prohibited from evicting the Beadica CCs until the date of the termination of the franchise agreements, save in respect of breach of the lease agreements.

In making his decision, Judge Davis said “[T]his case goes to the heart of the debate as to what now constitutes the law of contract in constitutional South Africa” and asked a rhetorical question as follows “How does the South African law of contract post the Republic of South Africa Constitution Act 108 of 1996 deal with this dispute?” He answered the question as follows:

The Constitution demands an audit of all law and that demand cannot be defended by the idea that legal certainty will be compromised. The journey to legal change may cause understandable anxiety but if honestly managed it will introduce a rule of law for the protection of fifty five million South Africans without the detrimental consequences suggested, often as if they required no justification.” [Emphasis added]

Judge Davis considered the following factors in deciding that the ‘sanction’ of terminating the lease agreements and eviction was disproportionate to the failure by the lessees to properly and timeously renew the lease agreements–

  • The Beadica CCs were unsophisticated businesspeople who did not understand the contractual provisions and their niceties and implications;
  • The lease agreements were concluded as part of the BEE Transaction to promote Broad-Black Economic Empowerment and the full participation by previously disadvantaged individuals in the economy. The application of the strict terms of the lease agreements would have been inimical to the empowerment project;
  • The NEF had supported the Beadica CCs and had provided supporting affidavits that the Beadica CCs had complied with their obligations under the franchise agreements and had timeously repaid all loans provided by the NEF to facilitate the BEE Transaction. The franchisees would inevitably lose their businesses if they were to be evicted; and
  • The lease agreements and the franchise agreements were inextricably linked and the termination of the lease agreements would cause the Beadica CCs to breach the franchise agreements.

Having regard to the issues involved and the developing constitutional-contractual law jurisprudence, Judge Davis granted the Oregon Trust leave to appeal to the SCA.

What did the SCA decide?

Judge Carole Lewis wrote the unanimous decision of the SCA. The SCA overturned the decision of the High Court for the following reasons –

  • Judge Davis should have (because the High Court is compelled to follow the previous decisions of the SCA) followed the decision of the SCA in Bredenkamp & others v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA), in which Harm DJP (as he then was) confirmed the veracity of the principle that, notwithstanding the advent of the Constitution, contracts freely concluded must be honoured and, if necessary, enforced by the Courts (pactum sunt servandum);
  • The notion that a sanction for breach of contract, or failure to comply with the terms of a contract, agreed to by the parties is disproportionate and therefore unenforceable, is alien to South African contract law. To recognize it would be to undermine the principle of legality;
  • The reason for the continued application of the principle embodied in the maxim pacta servanda sunt (contracts freely concluded must be honoured and, if necessary, enforced by the Courts) is the need for certainty in commerce;
  • Certainty does not mean that there is a risk that a Court will interpret a contract differently from a party, but that the parties will know what their contract means and that they are entitled to rely on its terms, unless they are against public policy or their enforcement would be unconscionable;
  • The pacta servanda sunt principle (contracts freely concluded be honoured and, if necessary, enforced by the Courts) was enforced by the SCA in –
    • Mohamed’s Leisure Holdings (Pty) Ltd v Southern Sun Hotel Interests (Pty) Ltd 2018 (2) SA 314 (SCA) – where the SCA overruled the decision of the High Court of South Africa, Gauteng Local Division, Johannesburg dismissing an application by Mohamed’s Leisure Holdings Proprietary Limited on the basis that the termination of the lease agreement and eviction would offend the values in the Constitution, including ubuntu. The SCA decided that “The fact that a term in a contract is unfair or may operate harshly does not by itself lead to the conclusion that it offends the values of the Constitution or is against public policy.” [Emphasis added]; and
    • Roazar CC v The Falls Supermarket CC 2018 (3) SA 76 (SCA) – The Falls Supermarket had argued for the development of the common law in accordance with the Constitution to recognise an agreement to negotiate the extension of the lease. In rejecting this argument, the SCA said “…it would be against public policy for a court to coerce a lessor to conclude an agreement with a tenant whom it does not want to have as a tenant any longer” and that “[I]t is difficult to conceive how a court, in a purely business transaction, can rely on ‘ubuntu’ to import a term that was not intended by the parties, to deny the other party the right to rely on the terms of the contract to terminate it.”; and
  • The following principles (recently reaffirmed in A B v Pridwin Preparatory School 2019 (1) SA 327 (SCA)) mediate between the relationship between private contracts (law of contract) and their control by the Courts through the instrument of public policy, underpinned by the Constitution–
    • the public policy demands that contracts freely and consciously concluded must be honoured;
    • a Court will declare invalid a contract that is prima facie (on the first impression) inimical to a Constitutional value or principle, or otherwise contrary to public policy;
    • where a contract is not prima facie contrary to public policy, but its enforcement in particular circumstances is, a Court will not enforce it;
    • the party who attacks the contract or its enforcement bears the onus to establish the facts;
    • a Court will use the power to invalidate a contract or not to enforce it, sparingly, and only in the clearest of cases in which harm to the public is substantially incontestable and does not depend on the idiosyncratic (individual) inferences of a few judicial minds; and
    • a Court will decline to use this power where a party relies directly on abstract values of fairness and reasonableness (including ubuntu) to escape the consequences of a contract because they are not substantive rules that may be used for this purpose.

How does the Oregon Trust Decision affect business?

To business law advisors, legal certainty means the law should be predictable and should treat similar cases consistently. Predictability enables business people to, with advice, judge the potential reaction of the law to their conduct. Consistency focuses on the outcomes of the application of the same legal principles following adjudication.

The Oregon Trust Decision is a reminder that notwithstanding that the Constitution is almost 25 years old–

  • South African Courts are still grappling with the effect that the Constitution is supposed to have on the law of contract;
  • The SCA is trying to draw the line and affirm the importance of legal certainty and have been consistent in this regard, notwithstanding the dissatisfaction raised by academics; and
  • However, the consistency of the SCA is built on quicksand. This is so because with every case involving the law of contract that comes before the Constitutional Court, the principles set by the SCA will be changed because the Constitutional Court is an apex Court in all legal matters.

On 16 May 2019, the Constitutional Court heard an appeal relating to the SCA decision in A B v Pridwin Preparatory School 2019 (1) SA 327 (SCA), (“Pridwin SCA Decision”). Judge Lewis relied on, among other cases, the principles in the Pridwin SCA Decision to overturn the decision of Judge Davis in the Oregon Trust Decision. The Pridwin SCA Decision concerned the right of a private school to terminate contracts between the school and the parents of 2 (two) children. Whilst the majority of the SCA judges decided the matter in favour of the school and affirmed its right to terminate the contract between the school and the parents for any reason, Judge Baratang Mocumie dissented and decided that the right of the school to terminate the contract contravened section 28(2) of the Constitution (which require that in every matter that affects the child, the best interests of the child must be taken into consideration) and section 29 of the Constitution (which guarantees the right of everyone to a basic education). When it hands down its decision, the Constitutional Court may reverse the Pridwin SCA Decision and the quicksand (on which the SCA consistency is built) will shift again.

The inconsistency in the decisions involving the Constitution and the law of contract makes the work of business law advisors more delicate; however, it is, in our view, the price that we all have to pay to lay the foundation for the constitutional democracy and create the law of contract bristling with constitutional principles.