Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others [2020] ZACC 13

The case involves four close corporations (the applicants) that entered into franchise agreements with Sale’s Hire CC (the second respondent) to operate Sale’s Hire franchised businesses for a period of 10 years. These businesses were operated from premises leased from the Trustees for the time being of the Oregon Trust (the first respondent). Mr. Shaun Sale, one of the trustees of the Trust, was also the sole member of Sale’s Hire. The members of the applicant corporations were former senior employees of Sale’s Hire who acquired their businesses as part of a black economic empowerment initiative financed by the National Empowerment Fund (the third respondent).

The lease agreements had an initial period of five years with an option to renew for a further five years, which corresponded with the 10-year period of the franchise agreements. The applicants failed to exercise their renewal options within the required notice period stipulated in the lease agreements. After the notice period had elapsed, the applicants attempted to renew their leases, but the Trust demanded that they vacate the premises.

The franchise agreements allowed Sale’s Hire to terminate the agreements if the applicants were ejected from the approved locations or if the lease agreements were terminated. The applicants brought an urgent application in the High Court seeking an order declaring that the renewal options had been validly exercised and prohibiting the Trust from taking steps to evict them. They contended that the strict enforcement of the renewal clauses would be contrary to public policy, or unconscionable, given the failure of the black economic empowerment initiative if the leases were not renewed.

The High Court found in favor of the applicants, but the Supreme Court of Appeal reversed the High Court's decision, emphasising the importance of the principle of pacta sunt servanda (agreements must be honored) and the need for certainty in contract law. The Supreme Court of Appeal held that there were no considerations of public policy that rendered the renewal clauses unenforceable and ordered the eviction of the applicants from the leased premises.

The ratio decidendi of the Constitutional Court is that the enforcement of contractual terms, including those related to the renewal of lease agreements, must align with public policy as informed by the Constitution and its underlying values. However, the principle of pacta sunt servanda (agreements must be honoured) remains crucial, and courts should exercise their power to refuse to enforce a contract on the basis of public policy "sparingly, and only in the clearest of cases."

The Constitutional Court's majority judgment, delivered by Theron J, emphasised the importance of the constitutional approach to contract enforcement, highlighting that public policy, deeply rooted in the Constitution and its values, plays a crucial role. The judgment clarified that while fairness, reasonableness, and good faith are fundamental to South African contract law, they do not provide an independent basis for courts to refuse enforcement of contractual terms. Instead, these values inform the substantive law of contract and perform creative, informative, and controlling functions. The Court held that a contractual term or its enforcement could only be refused if it is so unfair, unreasonable, or unjust that it is contrary to public policy.

The Court held that a party seeking to avoid the enforcement of a contractual term on public policy grounds must demonstrate why its enforcement would be unfair and unreasonable in the given circumstances. The onus is on the party challenging the contract to provide an adequate explanation for their failure to comply with the contractual term. Without such an explanation, the Court cannot conclude that enforcement of the term would be contrary to public policy.

In this case, the applicants failed to discharge the onus of demonstrating that the enforcement of the lease renewal clauses would be contrary to public policy. They did not provide a sufficient explanation for their failure to exercise the renewal options within the stipulated notice period. Consequently, the appeal was dismissed, and the decision of the Supreme Court of Appeal, which emphasised the importance of honoring contractual agreements and the need for certainty in contract law, was upheld.

This quote encapsulates the Court's approach to assessing the enforceability of contractual terms against the backdrop of constitutional values and public policy. It underscores the primacy of the Constitution in determining what constitutes public policy and affirms that contractual terms that conflict with constitutional values cannot be upheld. This principle is central to the Court's reasoning and decision-making process in the case.

In its reasoning process, the Constitutional Court of South Africa in Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others [2020] ZACC 13 referred to several cases. One of the key cases relied upon was Barkhuizen v Napier [2007] ZACC 5; 2007 (5) SA 323 (CC); 2007 (7) BCLR 691 (CC). This case was particularly significant as it established the approach to constitutional challenges to contractual terms, emphasising that public policy, as informed by the Constitution and its values, is the measure against which the enforceability of contractual terms should be assessed. The Court in Barkhuizen set out a two-stage enquiry for determining the fairness of a contractual clause, which involves assessing whether the clause itself is unreasonable and, if not, whether its enforcement in the particular circumstances would be contrary to public policy.

Other cases that may have been referenced for various legal principles and context include:
Sasfin (Pty) Ltd v Beukes [1988] ZASCA 94; 1989 (1) SA 1 (A)
Brisley v Drotsky [2002] ZASCA 35; 2002 (4) SA 1 (SCA)
Afrox Healthcare Bpk v Strydom [2002] ZASCA 73; 2002 (6) SA 21 (SCA)
South African Forestry Co Ltd v York Timbers Ltd [2004] ZASCA 72; 2005 (3) SA 323 (SCA)
Bredenkamp v Standard Bank of SA Ltd [2010] ZASCA 75; 2010 (4) SA 468 (SCA)

Justice Froneman, in his dissenting judgment, argues for the appeal to be upheld, diverging from the majority's decision to dismiss the appeal. He emphasises the importance of integrating the values of fairness, reasonableness, and ubuntu into the South African law of contract, particularly in light of the country's transformative constitutional mandate. Froneman J. critiques the perceived divergence between the Constitutional Court and the Supreme Court of Appeal regarding the enforcement of contractual terms and the role of abstract values like fairness and ubuntu. He advocates for a nuanced approach that balances contractual freedom with constitutional values, ensuring substantive equality and justice in contractual relations.

Justice Froneman highlights the significance of ubuntu as a constitutional value that should inform the adjudication of contracts, especially in cases involving historically disadvantaged individuals. He points out the necessity of reevaluating the principle of pacta sunt servanda (agreements must be kept) within the context of South Africa's constitutional values, arguing that the Constitution requires a more equitable approach to contract law that takes into account the dignity and equality of all parties.

The minority judgment references several key cases and legal principles to support its arguments:

Barkhuizen v Napier [2007] ZACC 5; 2007 (5) SA 323 (CC); 2007 (7) BCLR 691 (CC): Froneman J. draws on this case to argue that the Constitutional Court has previously recognized the need to infuse contract law with constitutional values, including fairness and ubuntu, and that contractual terms or their enforcement may be invalidated if they conflict with these values.

Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd [2011] ZACC 30; 2012 (1) SA 256 (CC); 2012 (3) BCLR 219 (CC): He cites this case to emphasize the Constitutional Court's stance on the importance of integrating ubuntu into the law of contract.

Botha v Rich N.O. [2014] ZACC 11; 2014 (4) SA 124 (CC); 2014 (7) BCLR 741 (CC): Froneman J. discusses this case to illustrate how the Constitutional Court has applied principles of fairness and good faith in contract law, suggesting a more flexible approach to contractual obligations.

Du Plessis v De Klerk [1996] ZACC 10; 1996 (3) SA 850 (CC); 1996 (5) BCLR 658 (CC): He references this case to support the argument that the common law, including contract law, must be developed in line with the Constitution's values.

Froneman J.'s dissent advocates for a legal framework that recognizes the inherent dignity and equality of all contracting parties, urging for a contract law that is both just and equitable, in line with South Africa's constitutional values and transformative goals.