R.I.P. Pacta Sunt Servanda?

More and more I seem to find myself in sympathy with the minority judgments handed down by the Constitutional Court. Last week a divided Court handed down judgment in an extremely important case about the enforcement of contracts and once again I seem to agree with both the reasoning and the proposed outcome of the minority (Sachs and Moseneke in separate dissenting opinions), rather than with Ngcobo’s majority judgment.

In the case of Barkhuizen v Napier the majority found that a clause in a short term insurance contract which prohibits the insured person from legally challenging a decision on the part of the insurer not to pay unless he or she institutes action within 90 days from the rejection of the claim was not against public policy and was thus enforceable.

The case is a big deal because it changes the way in which our law balances the need to honour freedom of contract on the one hand and the need to protect those who contract from a weak position of power on the other. In the past, the Supreme Court of Appeal (some rhetorical flourishes notwithstanding) had endorse the notion that people should almost always be allowed to contract as they wished – regardless of whether the terms operated unfairly or harshly against one party.

The SCA also seemed eager to perpetuate the fiction that in most cases parties to contracts have equal bargaining power. Thus, it held that a patient who signed a contract with a hospital to conduct surgery had more or less equal bargaining power with that hospital – even though the contract excluded hospital liability in cases of gross negligence. (I always imagine what would happen if I arrived at the hospital half dead and nurses push papers under my bloody nose and order me to sign, just for me to call out, NO!, I refuse. Surely the nurses would laugh and politely order me to sign please.)

Of course, anyone who has ever signed a standard contract with, say, a cell phone company will know that it really is a fiction that one has equal bargaining power with Vodacom or MTN to bargain on the terms of the contract. The salesperson shows you a dotted line and you sign, finish en klaar.

Both the majority and the minority of the CC has now said in Barkhuizen that there is a need to strike down the unacceptable excesses of “freedom of contract” and that any clauses that were found to be against public policy (as informed by the values of the Constitution) should not be enforced by Courts. The majority even said that public policy “takes account the necessity for simple justice between individuals” and is “informed by the concept of ubuntu”.

This will upset traditional private law academics and perhaps lawyers, except the latter might realise that the majority view is a boon for lawyers. It seems they are saying that in each contract the Court will look at the context and the actual circumstances of each party and will then have to decide to enforce the various clauses of the contract or not. This means far less legal certainty and far more opportunities for lawyers to make money because they will be able to challenge individual clauses of a contract based on the circumstances and characteristics of their clients.

I think the solution put forward by in the minority judgements of Moseneke and Sachs is far more practical and less likely to lead to a orgy of litigation. They reject the subjective yardstick and say a court should not look at the individual circumstances and characteristics of a party to the contract, but more broadly ask whether a clause in a contract clashes with public norms and whether the contractual term is so unreasonable as to offend public policy. This, they say, is an objective enquiry informed of course by the values of the Constitution.

Justice Moseneke therefore looks at the 90 days clause and says it is not enforceable because it clearly offends public policy because it is manifestly unreasonable. He cannot see why an insurer wants to give an insured person only 90 days to sue, but hints that this really is to try and make it so difficult as to effectively prevent people who want to sue an insurer from doing so.

Whether one agrees with the minority or the majority, this case represents a decisive shift in the law of contract and substantially curtails “freedom of contract”. The case can also be read as a gentle but firm dressing down of the SCA for its reluctance to subject the law of contract to the discipline of the Constitution.

Of course, for private law academics and lawyers who have always been reluctant to acknowledge the subjection of the private law to the Constitution, this case also comes as a huge defeat.