This blog was co-authored by Saajidah Patel, candidate attorney at Norton Rose Fulbright South Africa.
In February 2024, the High Court in Standard Bank of South Africa v Dikeledi Mogapi & 19 Others underscored the importance of providing courts with persuasive evidence where a party relies on abstract values such as good faith and Ubuntu (humanity towards others) to interpret contracts.
Our courts are no strangers to litigation where questions of fairness, reasonableness, and justice in the law of contract need to be decided. In this case, the court had to determine whether the enforcement of a guarantee would be contrary to public policy, where the guarantee was allegedly sought solely to comply with a Broad-Based Black Economic Empowerment initiative.
Guarantees are agreements where the guarantor independently promises to pay or effect the performance of specified obligations of a third party.
The bank made various banking facilities available to Force Fuel (Pty) Ltd. Guarantees were issued by the shareholders of Force Fuel in favour of the bank in respect of its indebtedness to the bank. The bank sought to enforce the guarantees and issued an application against the shareholder guarantors.
The shareholders opposed the application and alleged that, prior to signing the guarantees, the bank had said the guarantees “were sought merely for administrative purposes and would not be enforced”. Based on the bank’s alleged undertaking, the shareholders were of the view that if they were ordered to comply with the guarantees, it would be contrary to public policy because enforcement would not align with the principles of good faith and Ubuntu.
The bank denied that it undertook to not enforce the guarantees and contended that the shareholders lacked evidence to prove that it made such an undertaking.
The court referred to Beadica 231 CC and Others v Trustees, Oregon Trust and Others 9 2020 (5) SA 247 (CC) which dealt with questions of fairness and reasonableness and how these values impact justice in our law of contract. The Constitutional Court highlighted that a careful balancing act is required to determine whether a contractual term, or its enforcement, is contrary to public policy. Good faith does not form an independent basis upon which a court subjectively can refuse to enforce a contractual provision. Although good faith, reasonableness and fairness form the basis of our legal rules, they are not themselves legal rules.
The court confirmed the position in Beadica and concluded that the guarantees were enforceable, and that the defences raised by the guarantors failed due to the lack of compelling documentary evidence that the bank never intended on enforcing the guarantees.
The court emphasised that the judiciary is tasked with balancing “freedom of contract, constitutional rights, and protecting commercial interests”. Although the right of parties to freely enter into contracts is an important consideration, it must be considered whilst having regard to the constitutional rights of the contracting parties. This requires a careful balancing act by the judiciary.
Standard Bank of South Africa Limited v Mogapi and Others (23784/2021) [2024] ZAGPJHC 133 (15 February 2024) (saflii.org)