THE SIGNIFICANCE OF THE PRINCIPLE OF PACTA SUNT SERVANDA IN RELATION TO THE COMPETING

VALUES OF FAIRNESS IN CONTRACTS

WHAT IS A CONTRACT ??• A contract is an agreement entered into by 2 or more persons with the intention of creating a legal

obligation or obligations.

• The requirements for a valid contract include :

1. Consensus (Meeting of minds)

2. capacity (must legally able to enter into a contractual relationship)

3. formalities (, if necessary, must be in a required specific format)

4. Certainty (Content must be definite or determinable, so that the obligations can be ascertained and enforced)

5. Possibility (parties must be able to perform their obligations) and

6. Legality (must be lawful and comply with statute or common law)

THE PRINCIPLES OF A CONTRACT IN PARTICULAR PACTA SUNT SERVANDA

• This is one of the cornerstones of a contract, which implies that a contract freely & seriously entered into must be honoured & enforced.

• The principle of pacta sunt servanda, states that contracts and clauses are laws with binding force between parties.

• It thus requires that every contracting party ,keep his promise and fulfil his obligation.

CONTENTIOUS ISSUES WITH RESPECT TO THE SANCTITY OF A CONTRACT• Commercial practice demonstrates to us that the

existence of change in events may result in performance being impossible, pointless or be a breach in the economic balance between parties.

• In such situations, the rigid application of the principle of pacta sunt servanda will lead to the opposite of justice & generate unfairness.

• Examples of cases in which such situations occurred include :

• In Bank of Lisbon & South Africa v Ornelas and Another (53/85) [1988] ZASCA 35 the court held that the twin concepts of freedom of contract and P.P.S have, during this century, increasingly come under assault as a result of rampant inflation, monopolistic practices ,giving rise to unequal bargaining power, and the large-scale use of standard form contracts.

BARKHUIZEN V NAPIER (CCT72/05) [2007] ZACC 5• The applicant (the insured) instituted action in a High Court against the respondent (the insurer) on a

short-term insurance contract, the insurer raised a special plea that it had been released from liability under the contract, since the applicant had failed to institute the action within the time period specified in the contract, namely ninety days from the date of repudiation of the claim.

• The applicant argued that the time-limitation clause was unconstitutional and unenforceable because it violated his right under the Constitution of the Republic of South Africa to have the matter determined by a court.

• The High Court upheld the applicant's contention, and made an order declaring that the time-limitation clause was inconsistent with the Constitution and dismissed the special plea.

• On appeal to the Supreme Court of Appeal (SCA), it was found that section 34 of the Constitution did not prevent time-bar provisions in contracts that were entered into freely and voluntarily, however it could not be determined on the evidence whether the clause under consideration had been entered into freely and voluntarily. The SCA accordingly upheld the appeal (and the special plea).

• The applicant then approached the Constitutional Court (CC) for leave to appeal against the decision of the SCA. Before the CC, the respondent contended inter alia that the provisions of section 34 had no application to constitutional challenges to contractual terms

BREDENKAMP AND OTHERS V STANDARD BANK OF SA LTD 2010 (9) BCLR 892 (SCA) • applicants sought an order against the respondent Bank, to prevent the Bank from cancelling the contract

which subsisted between the two on the ground that the clause which permitted the Bank to terminate the contract was against public policy.

• it was the applicant’s contention that the Bank’s implementation of the clause violated the constitutional standard of fairness.

• Bank, believing that its relationship with the applicant might bring its name into disrepute and that it may be prohibited from dealing with American citizens and financial institutions, decided to terminate the customer-banker relationship with the applicant.

• Contractually, the Bank was entitled to terminate the banking relationship for any reason on reasonable notice. It was common cause that a reasonable time had been extended to the applicant. The crux of the matter then rested on whether there was any limitation on the right of the Bank to exercise its volition to terminate the contract.

COURT TOOK INTO ACCOUNT:

• The court first looked at the respective bargaining powers of the contracting parties and whether the parties had equal bargaining power to freely and voluntarily negotiate the terms of the contract.

• The court then examined the issue of fairness

• Furthermore,it considered whether unilateral cancellation of the contract would prevent the applicant from seeking banking facilities elsewhere.

JUDGEMENT WITH REFERENCE TO THE BARKHUIZEN CASE:• The Constitutional Court's judgment in Barkhuizen v Napier, interpreted and explained the concepts of

Contract , enforceability and fairness, therefore deduced that no over reaching requirement of fairness should be used in determining the enforceability of a contract.

• The court was, on the view that the applicant was not at a bargaining disadvantage to the Bank and freely exercised it rights to enter into the contract and was skilled enough to appreciate the terms of the contract. The court found that the termination of the contract would not result in the applicant being “unbanked” and thus found that the exercise of the Bank’s volition in cancelling the contract was not contrary to the constitutional standard of fairness.

• The court found that the Bank was well within in rights to exercise its right to terminate the customer-bank relationship and that such exercise did not violate constitutional values. It accordingly dismissed the application.

THE CONCEPT OF “FAIRNESS” IN CONTRACTS

Contract has been criticized in the past, for the following reasons:

• Firstly, for the classical libertarian basis ,

• secondly, because it did not fully enclose the constitutional values

• and lastly , because it failed to give justice and fairness reflected in the application of the relevant legal rules.

• The issue of whether the courts properly strike a balance between pacta sunt servanda on one hand, and fairness on the other remains one of the problems that modern contracts face.

• Several case law suggests that courts give priority to pacta sunt servanda over fairness as courts seek to ensure legal and commercial certainty for the enforcement of contracts, freely entered into by the parties.

If these contracts are sometimes unfair then the CPA applies :

• The Consumer Protection Act 68 of 2008 (SDA) aims to, amoung other things , to promote social and economic interests of South African consumers, fair business practices to encourage and consumers from unscrupulous, protect unfair and improper business practices .

• Section 4(2) of the CPA provides that the court must develop the common law as necessary to improve the realisation and enjoyment of consumer rights generally, and in particular by persons contemplated in section 3 (1) (b)

S 3(1)(B) OF CONSUMER PROTECTION ACT(b) reducing and ameliorating any disadvantages experienced in accessing any

supply of goods or services by consumers—

• (i) who are low-income persons or persons comprising low-income

• communities;

• (ii) who live in remote, isolated or low-density population areas or

• communities;

• (iii) who are minors, seniors or other similarly vulnerable consumers; or

• (iv) whose ability to read and comprehend any advertisement, agreement,

• mark, instruction, label, warning, notice or other visual representation is

• limited by reason of low literacy, vision impairment or limited fluency in

• the language in which the representation is produced, published or presented

ALTHOUGH…

• It seems that the CPA, and the principles of fairness and equity in contract apply where there is generally not equal bargaining powers between parties,the concern however is that the principles of fairness and equity are also eroding those areas of contract where there is no inequality between contracting parties.