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Contract law has been made a little more human

SARJEANT AT THE BAR

A major step in introducing the principle of good faith, and hence fairness, into our law has been established.

The Constitutional Court. (Madelene Cronjé)

The Constitutional Court has received sustained criticism of its treatment of private law in general and the law of contract in particular.

Its coyness about coming to the relief of parties who enjoy a weaker position in the process of bargaining has been disturbing. After all, ours is intended to be a transformative Constitution, to which all areas of law are supposed to comply.

Private power, as shown most recently in the mining strikes and their causes, was and still is as important a factor in shaping the social and economic fabric of society as is the power exercised by government.

But some pointers in a more progressive direction may now be gleaned from a recent decision of the Constitutional Court in Botha v Rich. In this case, the applicant had paid more than half the purchase price of a piece of immovable property. The purchaser then defaulted on further payments, prompting the seller to issue summons in the magistrate’s court. The seller was successful and the court ordered the cancellation of the contract, the purchaser’s eviction from the property and the forfeiture of the amount that had already been paid – about R180 000.

The purchaser then sprang into litigation mode. She obtained a court interdict enabling her to resume occupation of the premises pending a finalisation of her appeal against the magistrate’s court’s decision to cancel the contract and evict her.

For reasons that are unclear, the seller abandoned this judgment before the appeal was argued.

The purchaser then wrote to the seller, demanding transfer of the property in terms of section 27 of the Alienation of Land Act, stating that, simultaneous with the registration of the property, a bond would be registered in favour of the seller for the balance of the purchase price.

The seller did not respond to this letter but instead wrote to the purchaser notifying her of his intention to cancel the contract, asking her to vacate the property and to hand over the keys.

The legal chess game continued: the purchaser then tendered payment of the balance of the purchase price (R56 000), with interest. The seller was not interested and instituted further proceedings in the high court to declare the contract of sale cancelled and for the applicant to be evicted from the property.

The high court found for the seller and declared the contract of sale cancelled, ordering the purchaser’s vacation of the property.

Appeals were prosecuted against this decision until, finally, the matter reached the Constitutional Court. The essential argument of the purchaser before the court was that the enforcement of a cancellation clause, when she had paid more than 50% of the purchase price, and in the face of her demand for transfer, together with the legal commitment of registration of a bond in favour of the seller, was contrary to public policy.

The court was confronted with having to make a decision on that policy – a challenge it had previously sought to avoid. To what extent can a court interfere with a formal contract when the enforcement of it produces profound unfairness?

Justice Bess Nkabinde acknowledged that section 27 of the Alienation of Land Act recognised that it would be unfair for a purchaser to maintain rights in the property when she had fallen into arrears with her obligations to pay the purchase price. Fulfilment of reciprocal obligations imposed by the contract is a central component of contract law.

But the judge acknowledged, too, that the rigid application of the principle of reciprocity may in certain cases lead to injustice and be incongruent with a law of contract based, as it must be, on the principle of good faith.

This paragraph is of critical importance: “Bilateral contracts are almost invariably co-operative ventures where two parties have reached a deal involving performances by each in order to benefit both. Honouring that contract cannot therefore be a matter of each side pursuing his or her own self-interest without regard to the other party’s interests.”

It was not surprising, then, that the Constitutional Court found that to deprive the purchaser of the opportunity to have the property transferred in terms of section 27 (1), while she cured her breaches in regard to the arrear payments, would be “a disproportionate sanction in relation to the considerable portion of purchase price she had already paid”.

The court ordered the seller to sign all the documents to effect the registration and to transfer the property into the name of the purchaser, provided the latter paid all the arrear payments and registered a mortgage over the property in favour of the seller to secure the balance of the purchase price.

Fairness to both parties had been achieved – and a major step in introducing the principle of good faith, and hence fairness, into our law of contract has now been established.

The way in which this finding is extended to other contractual disputes will show the extent to which our law has moved away from the arid legal formalism of the past and is able, now, to concern itself with justice and fairness, particularly for the weaker parties in such cases.

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