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https://www.journalofcommonwealthlaw.org/feedVol. 1, 2019 May 03, 2019 EDT Good Faith In Contract: A Uniquely South African Perspective Photo by Benjamin Child on Unsplash
Andrew Hutchison, Good Faith In Contract: A Uniquely South African Perspective, 1 Journal of Commonwealth Law (2019).
While the doctrine of good faith has always played a role in South African contract law, it is currently being reshaped by the courts under a banner of “transformative constitutionalism”. Of particular interest in this development is the role of an indigenous value of fair dealing, captured by the vernacular term “ubuntu”. The article will (1) compare the Canadian findings in Bhasin with the current South African status quo, and (2) comment on the evolving legal culture of contract in South Africa. In this regard, the role and meaning of ubuntu will be contextually evaluated using social science materials. In combination, this will provide a uniquely South African perspective on an area of contract law which is evolving in the Commonwealth.
What standard of behaviour is expected of contracting parties when interacting in the market-place? Is there a notional (business) community, whose values frame the setting of this standard? If so, how do we define that community and against whose set of values are we going to establish this frame of reference? In comparative law, legal culture is often determinative of the answer to this type of question. [1] In modern diverse societies, legal cultures may vary within a particular country – giving rise to the notion of legal pluralism. [2] This article has a twofold aim: first, to outline in broad terms an answer to the initial question posed as to the prevailing legal standard of contractual conduct with regard to positive law in South African courts; secondly, to discuss this question from a plural point of view, including the South African indigenous law perspective. Aim one will involve setting out the familiar concepts of comparative contract law; aim two will encompass a more law and society account of contract practice in South Africa’s “popular economy”. [3]
The question as to whether there is a duty of good faith in a given system of contract law is an ideological question, which can be used in many cases as a defining characteristic of different legal families in comparative contract law. As the cliché goes: in Germany (as a Civil law example at one end of the spectrum) all contracts are based on good faith – this is so trite that it goes without saying; [4] in English law (to take the Common law [5] archetype at the other end of the range) good faith is exceptionally controversial – there is no default rule or standard against which to judge contractual conduct, fair dealing is ensured through other technical rules, such as those on misrepresentation. [6] In between, one might place a mixed legal system like South African law, which (arguably) under English law influence has historically maintained a fairly conservative line on the role of a positive duty of good faith in contract law, while still claiming that all contracts were based on an underlying requirement of good faith conduct which was not independently actionable. [7] Thus for a South African interested in comparative contract law, the finding by the Canadian Supreme Court in Bhasin v Hrynew that good faith was an organising principle of the Canadian law of contract and that it encompassed a minimum core of honesty in performance of contractual duties, was an extremely interesting one. [8] This is both because Canada belongs to the Common law family, making this finding a departure from tradition, and because in making that finding, the Canadian Supreme Court engaged in a useful and detailed discussion of what the standard of good faith in contract law involves.
For the comparative lawyer, perhaps the most interesting and unusual part of contemporary South African contract law is the synthesis being crafted here between indigenous values and the common law of contract. [9] A perfect study of this is the ongoing process of judicial development of norms of fair dealing in contract. Value laden open norms in contract law provide the ideal vehicle for a discussion of what values should go into setting this standard. We have several open norm contenders, however: from public policy, to good faith, to (much more recently) ubuntu. So-called “transformative constitutionalism” [10] rests on these open norms, particularly public policy. What role can there be for good faith as a separate standard, largely side-lined by the Constitutional Court thus far? And what is the difference between good faith and ubuntu – is this the indigenous law functional equivalent of the good faith concept?
In my view, an appropriate method of pegging a minimum standard of good faith should be a contextual one, residing in the study of contract practice. It can also implicate community mores at the micro-level. Given the emphasis on indigenous values present in modern South African contract law, an appropriate standard of fair dealing could be sought in both the refined interior of a plush Johannesburg boardroom, as well as the more vibrant setting of the popular economy of one of South Africa’s many urban “townships”. [11] Here we may refine our approach to fair dealing, from one termed “good faith” to a new concept of “ubuntu”. Whether the same standard should apply to boardroom conduct dealing with transactions between companies as applies to transactions between natural persons, is an important element of this standard setting exercise in my view.
The article will proceed as follows: In the next part II, I will set out the relevant black letter law on good faith and other standard-setting open norms in South African contract law. I will unpack the relevant concepts very briefly and give a picture of the historical context and development of the law. In part III, there will be a sharp turn to a different South African business context: I will draw on social science materials from various disciplines to set out an argument as to the nature of ubuntu in the popular economy. In part IV, I will return to positive law, building on parts II and III on South Africa to inform a comparative engagement with the Canadian Bhasin case. I will argue that commercial practice from all business contexts should inform commercial law, and in different context-sensitive ways. I will also attack the utopian idealism which South African courts are developing around the concept of ubuntu in contract. My aim is to argue against a blunt and reductive judicial discretion to intervene in contractual relations. In part V, I will conclude.
The development of our economy and contract law has thus far predominantly been shaped by colonial legal tradition represented by English law, Roman law and Roman Dutch law. [12]
The South African common law of contract is a blend of uncodified Roman Dutch law and English law. [13] This is the historical legacy of two successive colonial powers. When one refers to the “common law of contract” in South Africa, one refers not just to the branch of the law made by the courts, but also to the underlying sources of the old Roman Dutch authorities, which remain a binding source of law. [14] The common law edifice built during the twentieth century in South Africa has increasingly come under attack in contemporary times. Some scholars view the common law as a repository of antiquated values, crafted through a process of formalism to entrench inequalities in society, including those based on race. [15] Many South African university students hold even more radical views, with “decolonisation” being the current catchword in vogue. [16] Klare’s view [17] that the South African legal system is a product of a conservative legal culture is undoubtedly true, but adherence to the conservative mould is fast going out of fashion in this jurisdiction, including in the courts. [18] Under the banner of “transformative constitutionalism”, another catch-phrase of the democratic era, the Constitutional Court has moved away from formalism to a more substantive, particularist approach to adjudication. [19] This process is supported by a large amount of statute law, which sets up a parallel regime of contracting for consumers, employees, residential tenants, and other weaker parties. [20] Through the interpretation of these statutes on the one hand, and the development of the common law of contract itself on the other, the Constitutional Court has begun the process of remodelling South African contract law along grounds perceived to be more just and equitable. [21]
An excellent legal history of the sources on good faith in South African contract law has been provided by Zimmermann, who traces the development of the doctrine over time in the South African courts up to the date of his publication in 1996. [22] As is customary in a South African common law doctrinal history, this narrative begins with Roman law, particularly the procedural device of the exceptio doli generalis, which was a defence against fraud under the verbal formulary contracts of classical Roman law. [23] The need for this device died out in the later development of the Roman law of contract by medieval European scholars, however, since with the demise of the strict formulary procedures of Roman contract formation, all contracts were said to rest on a doctrine of good faith. [24] This was equally true of historic Roman Dutch law, as a particular national blend of the received Roman law and contemporary Dutch custom. [25]
This historical background is relevant to South Africa, since during the formative twentieth century period, the prevailing technique of legal development was to search for rules through the study of the Roman Dutch sources. [26] As a quirk of South African legal history, the procedural device of the exceptio doli generalis was employed occasionally to provide a defence based on equitable grounds – essentially one of “good faith”. [27] The device served on several occasions as a doctrinal peg on which to hang a more detailed equitable rule (such as estoppel by representation). [28] In only a very limited number of cases, however, was the device itself decisive of the matter at hand, rather than used indirectly to support a more specific rule of contract law. [29] In the last case in this line, Bank of Lisbon v De Ornelas, the then apex Appellate Division cut short this development by pointing out that the use of the exceptio doli generalis in South Africa was not based on historically sound credentials, and then went on to excise this defence from South African law as a “defunct anachronism”. [30]
One year later in 1989, the Appellate Division retreated slightly on the question of fair dealing, however, to develop the public policy rule to allow for the control of contract terms deemed “unconscionable” in Sasfin v Beukes. [31] There the court struck down a deed of cession of an individual’s book debts to a bank, since certain unseverable terms therein were found to be contrary to public policy and hence invalid. [32] The widely worded powers conferred on the bank were interpreted as effectively turning the debtor into the slave of the financier. [33] Since Sasfin, good faith has largely been side-lined in the leading judgments, with public policy being developed as the relevant equitable rule instead. [34] This meant, however, that the law focused on illegality/unconscionability to control contracting ex post, however, rather than through enforcing an ex ante and continuing standard of good faith conduct at all stages in the contracting process.
Support for a separate doctrine of good faith lived on in South Africa despite the Appellate Division’s conservative position and this term began to creep back into the law reports in the late 1990s and early 2000s. [35] Once again, the Supreme Court of Appeal halted this development in Brisley v Drotsky in 2002. [36] The court stressed there that good faith was not an independent cause of action on which to attack contractual behaviour and that at most it was an underlying value, given effect to in other more technical doctrines:
What emerges quite clearly from recent academic writing and from some of the leading cases, is that good faith may be regarded as an ethical value or controlling principle based on community standards of decency and fairness that underlies and informs the substantive law of contract. It finds expression in various technical rules and doctrines, defines their form, content and field of application and provides them with a moral and theoretical foundation. Good faith thus has a creative, a controlling and a legitimating or explanatory function. It is not, however, the only value or principle that underlies the law of contract; nor, perhaps, even the most important one. [37]
The Brisley case concerned a non-variation clause in a contract of residential lease. One of the terms entrenched thereby was a right of the landlord to terminate the contract for late payment of the rent. In the subsequent eviction proceedings, the defendant tenant alleged that the plaintiff landlord had orally agreed to a variation of the due date for payment and that he was as a result acting in bad faith in relying on the non-variation clause in the contract (which required all variations to be in writing and signed by both parties). This argument was dismissed by the SCA and an eviction order was made: [38] the argument based on good faith, as quoted above, proved unsuccessful. [39] A string of conservative decisions followed from the Supreme Court of Appeal, confirming that good faith was only an underlying value and not a ground on which to attack contractual conduct. [40] At the time, the Supreme Court of Appeal was the apex court in commercial (that is, non-constitutional) matters. [41]
In the light of the Supreme Court of Appeal’s conservative stance in the early to mid- 2000s, it remained to be seen how the Constitutional Court would approach the common law of contract, given its mandate of transformative constitutionalism. The Barkhuizen v Napier decision handed down in 2007 was the first Constitutional Court pronouncement on this issue. [43] The case dealt with a challenge to a contract term perceived to be an infringement of a constitutional right. This term reflected a 90-day time bar clause in an indemnity insurance contract entered into between an insurer and a natural person. The challenge rested on the constitutionally enshrined right of access to a court. After much discussion, the majority dismissed the challenge on the basis of insufficient evidence. [44] Barkhuizen remains fundamental in modern South African contract law, however, since it set the blueprint as to how to test the validity of contract terms, or the enforcement thereof, against the Constitution. [45]
Following Barkhuizen, constitutional rights in South Africa apply through a process of indirect horizontality to contracts: public policy is the vehicle which intermediates the application of the Bill of Rights, setting up a doctrine akin to unconscionability:
Ordinarily, constitutional challenges to contractual terms will give rise to the question of whether the disputed provision is contrary to public policy. Public policy represents the legal convictions of the community; it represents those values that are held most dear by the society. …Since the advent of our constitutional democracy, public policy is now deeply rooted in our Constitution and the values which underlie it. [46]
This role for an unconscionability (or even just fairness) rule on the basis of which to determine contractual disputes adds another layer of complexity to the question of good faith in contract law: the constitutionally informed notion of public policy takes up most of the available space in the standard-setting process for contractual behaviour. What additional role good faith can play remains a little uncertain, outside of the limited default position described above. [47] With some circumspection, the majority judgment held as follows on the question of good faith:
The requirement of good faith is not unknown in our common law of contract. It underlies contractual relations in our law. …As the law currently stands, good faith is not a self-standing rule, but an underlying value that is given expression through existing rules of law. In this instance, good faith is given effect to by the existing common law rule that contractual clauses that are impossible to comply with should not be enforced. To put it differently: “Good faith . . . has a creative, a controlling and a legitimating or explanatory function. It is not, however, the only value or principle that underlies the law of contracts.” Whether, under the Constitution, this limited role for good faith is appropriate …to give effect to the value of good faith are, fortunately, not questions that need be answered on the facts of this case and I refrain from doing so. [48]
Several other cases from the Constitutional Court have followed, establishing a line of constitutional contract law decisions. [49] Most of these concerned statutes protecting weaker parties, [50] or specific areas of contracting, such as commercial credit agreements [51] and agency. [52] There has been a great deal of transformative emphasis in this line of cases, but the exact status of the common law duty of good faith remains clouded.
Another detailed discussion of good faith in contract from this subsequent line of cases is the decision in Botha v Rich NO. [53] The case concerned an action for transfer of immovable property by a plaintiff who had entered into an agreement to purchase that property on instalments. This was a situation which the Alienation of Land Act [54] expressly addressed. [55] The plaintiff buyer had paid enough instalments to demand transfer in terms of the statute, but the defendant trust alleged that it had validly cancelled the contract at a prior date. The Constitutional Court ordered transfer of the property, thereby overturning the cancellation, but also granted a reciprocal remedy to the seller to withhold transfer until a mortgage had been registered over the land in its favour. [56] In discussing reciprocity and its links to good faith, the court said the following:
[T]he concepts of justice, reasonableness and fairness historically constituted good faith in contract. The principle of reciprocity originated in these notions. …Bilateral contracts are almost invariably cooperative 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. Good faith is the lens through which we come to understand contracts in that way. In this case, good faith is given expression through the principle of reciprocity… [57]
As to diversity and the role of indigenous law and values, the original Barkhuizen decision included reference to indigenous law by employing the South African value of ubuntu, but as part of the definition of public policy, rather than good faith:
Notions of fairness, justice and equity, and reasonableness cannot be separated from public policy. Public policy takes into account the necessity to do simple justice between individuals. Public policy is informed by the concept of ubuntu. [58]
Ubuntu was listed as a constitutional value in the interim Constitution, which was in force during the transition to democracy in South Africa, prior to the final Constitution coming into force. [59] Reference to the concept was omitted from the “final” Constitution, however. [60] Nevertheless, ubuntu crops up time and again in Constitutional Court judgments and has been used in several different areas of the law, such as: criminal law (outlawing the death penalty), [61] defamation (in a dissenting judgment, arguing for an apology to serve as a remedy), [62] and (as above) in contract. [63] A general definition of the concept has been offered at various times by both scholars and the judiciary. [64] Emeritus Constitutional Court justice Mokoro defined the concept in an often quoted article (written in her personal capacity) with reference to a traditional South African saying, “ubuntu ngumuntu ngabantu”, which she translates as “a human being is a human being through other human beings”. [65] Mokgoro adds further: “the individual’s existence and well-being are relative to the group”. [66]
Ubuntu in contract law was controversially discussed by the Constitutional Court in Everfresh in 2011. [67] There a landlord sought the eviction of a tenant from commercial premises. The original contract of lease had included a right of renewal for a further term, subject to agreement on the appropriate rental. The tenant argued that this clause imposed a duty on the landlord to negotiate the rental amount with it, and that this duty was based in good faith and required a constitutionally informed development of the common law. [68] The tenant was unsuccessful in the High Court with this argument, and leave to appeal to the Supreme Court of Appeal was denied. [69] The Constitutional Court agreed to hear the matter, but leave to appeal was in the end denied there by the majority too, on the basis that a defence based on the constitutional development of the common law was raised in that court for the first time. [70] Despite dismissing the appeal, the majority made several strong obiter statements that they felt that there may indeed be a duty to negotiate here and that this would be based on ubuntu. [71] They offered the following definition of ubuntu to serve in this contractual context:
Indeed, it is highly desirable and in fact necessary to infuse the law of contract with constitutional values, including values of ubuntu, which inspire much of our constitutional compact. On a number of occasions in the past this Court has had regard to the meaning and content of the concept of ubuntu. It emphasises the communal nature of society and “carries in it the ideas of humaneness, social justice and fairness” and envelopes “the key values of group solidarity, compassion, respect, human dignity, conformity to basic norms and collective unity”. [72]
This decision caused much angst in commercial circles, as it seemed to undermine settled practice that agreements to agree were unenforceable on the ground that they lacked certainty (unless a deadlock-breaking mechanism such as an arbitration clause was inserted). [73] To compound this angst, the term “ubuntu” seemed to many commercial practitioners to be too broad and vague to allow for clients to be advised ex ante. [74]
Where does that leave the notional concept of fair dealing and appropriate contractual behaviour in positive South African law? The answer is in a state of flux. There appear to be varying judicial interpretations of the current law, possibly due to the seemingly broad powers of judicial discretion created by the Constitutional Court’s pronouncements thus far. [75] At High Court level, there are several instances reported in the last two years of the Constitutional Court’s position being interpreted as a licence to exercise a blanket judicial discretion on equitable grounds. In the 2017-2018 period, I have been able to source four such reported decisions, [76] of which I will discuss one in particular: Mohamed’s Leisure Holdings. [77]
In Mohamed’s Leisure Holdings, the applicant landlord had exercised a contractual right to cancel a commercial lease due to the late payment of rent and sought eviction of the tenant as a consequence thereof. In brief, the facts were that the tenant, Southern Sun, was operating an hotel business in a building owned by the landlord, Mohamed’s Leisure Holdings. Rent was due by the seventh day of each month and the contract contained an express cancellation clause permitting the landlord to terminate the contract in the event of late payment of the rent. The tenant paid late in June 2014, through an error of its bank alone and in circumstances where there was no shortage of available funds. As soon as the error was discovered, the tenant immediately instructed its bank to pay the landlord. The landlord accepted the late payment, but advised the tenant in writing that a future late payment would be met with immediate cancellation of the contract. In July, August, and September, the tenant monitored its account closely and payment was in each case made on time. In October, however, rent was again not paid by the due date, a fact which went undetected by the tenant. The landlord thereafter gave notice in writing to the tenant that it had cancelled the contract. The tenant immediately tendered payment in full plus interest, but this was rejected by the landlord.
In the High Court it was held that this was a situation of “demonstrable unfairness” [78] to the tenant and that as a result, the principle of sanctity of contract should be relaxed:
Applying the value of ubuntu, “carrying with it the ideas of humaneness, social justice and fairness” (Everfresh para 71), to the facts of this matter, finally leads me to conclude that an order for the eviction of the respondent, as sought by the applicant, would offend the values of the Constitution…, and that the application must accordingly fail. [79]
On appeal to the Supreme Court of Appeal this decision was overturned. [80] The Supreme Court of Appeal began by noting that the Barkhuizen public policy test evaluated not only the term of the contract itself, but also the effect thereof, which facilitated a more purposive approach to ensure a substantively fair outcome. [81] Immediately thereafter the court discussed the importance of the principle of sanctity of contract, however. [82] It also stressed the facts that: (a) the contract terms themselves were not unreasonable; (b) there was more or less an equality of bargaining power between the parties; and (c) that performance on time was not impossible: the tenant could easily have monitored its own bank. [83] In sum, contractual sanctity had to outweigh a public policy-based fairness argument. [84] An order of eviction was granted. [85]
The Supreme Court of Appeal’s decision, handed down by a fresh and representative bench of judges, reflects the old conservatism of 2002 and indeed of 1988. [86] This finding will now bind lower court decisions unless and until the Constitutional Court rules otherwise and should inject a measure of legal certainty into an otherwise murky area. Will the Constitutional Court adhere to this conservative interpretation of its judgment in Barkhuizen? The previous track record of this court suggests that a legal commentator must navigate with caution in answering this question: a clear ruling by the Constitutional Court is needed and preferably sooner rather than later. If the Supreme Court of Appeal’s interpretation is confirmed, this will considerably reduce the scope for arguments based on fairness, ubuntu, or good faith in future cases.
Regardless of the ultimate role determined for such open norms, however, these need to be clearly defined. In the following part III I argue for a tighter and more commercially sensitive understanding of ubuntu in contract. A broader approach to defining both ubuntu and good faith will be discussed further in part IV.
Legal development is an especially political process in South Africa and in contract there are different views on the correct path to follow going forward. This is true not only of the academic discourse, but also of reported judgments. As discussed above, however, the ideological trajectory of transformative constitutionalism in the Constitutional Court has been towards protecting weaker parties. One way of doing this is by imposing a duty of social responsibility onto contracting parties. This could also be phrased as a role for community. From an African perspective specifically, there is a detailed published discourse on the role of community in framing social norms. [87] Discussion topics include so-called African socialism, which can be contrasted with a more moderate notion of community as argued for by Gyekye for example. [88] In South Africa, the governing norm is ubuntu.
Finding a role for community in contracting seems a far cry from the more individualist attitudes of the average liberal market economy based on the protection of private property. [89] Although both contract law and economic theory have come a long way since the zenith of freedom of contract and laissez-faire market regulation, it is still a long shot to say that contract practice is characterised by communal solidarity in most parts of the world. [90] Indeed, as Bhasin put it with regard to Canada, good faith does not comprise a duty of “fiduciary loyalty” to an opposing party. [91] One way to resolve this perceived gap between “Western” and “African” norms, would be to consult indigenous business law to see how it reconciles the notion of community with the commercial needs of the marketplace. No such legal discourse exists, however, at least not in South Africa’s written sources of law. [92] Chanock’s alternative history of South African law suggests that the reason for this lacuna was the deliberate strategy by past colonial and white minority administrations to undermine the participation of indigenous Africans in the economy; except in subordinate roles, such as labourers, debtors, and consumers. [93] The political position of indigenous South Africans has changed in South Africa, but economically, society still remains largely stratified by race, with the legacy of the policies Chanock describes still very much present today. [94] Ideologically then, there is a desire to transform the law to a synthesis more reflective of the heritage of broader South African society. [95] What I will do in the rest of this part III is to defend a view that despite this necessary political process towards developing a greater role for indigenous law and values, including in the commercial sphere, the development of contract law and other areas concerned with business activity should not deviate from the needs of sound commercial practice. I will do this by unpacking the role of community in a common type of indigenous commercial structure: the popular economy financial mutual known here as a “stokvel”. There the operation of the mutual (hereafter I will use the vernacular term stokvel) is based on contract, but is largely unregulated by the formal law. First, however, I will describe a context for this argument.
On the periphery of South Africa’s urban centres there is usually an indigenous African township (itself often a legacy of “spatial Apartheid”). This type of locus has been described as possessing a “popular economy”: a marketplace at the intersection of the formal and informal economies. [96] Much commercial activity goes on here, largely of the informal variety. From a commercial point of view, the formal sector penetrates the popular economy too, however, through (for example) interaction with formal sector retail businesses, with banks, with formal sector micro-lenders, with insurers, and through the social assistance measures provided by the State. [97] That is not the full financial picture, however, since the informal economy is also home to illegal loan sharks, [98] various types of savings and credit stokvels, [99] burial societies, [100] spaza shops and other informal traders. [101] Sometimes the formal and informal are mixed, such as when a salary earned in the formal sector is used as capital in an informal venture. [102]
The formal sector may bring with it a set of legal norms and regulations laid out in a sophisticated myriad of financial and consumer statutes, but the legal system does not always completely reach into the informal economy. [103] Sometimes, the informal financial sector is formally excluded from legislation. [104] Then, because of issues of access to justice and distrust of the legal system, it is also here that indigenous business is carried on in a largely privately ordered system of norms, rather than (necessarily) according to the positive legal norms of the central state. [105]
The South African popular economy has been the subject of many excellent empirical studies by social scientists and hence there is a good deal of data from which to hypothesise about the content of ubuntu in modern indigenous commercial practice. This allows for the development of a grounded theory [106] of ubuntu, which is in my view more accurately pitched than the individual worldview portrayed in a curial judgment. Of course, a full grounded theory would require a comprehensive dedicated survey, which I have not done. [107] Still the available materials of both a qualitative [108] and quantitative [109] nature provide enough data to allow for saturation of the accounts: indeed certain features of these studies are recurrent, a trend which immediately strikes the reader thereof. One of the predominant such features is the role of community in popular economy business practice.
First, however, we need a theory of contracting which is able to operate as a normative process without reference to the courts. The socio-legal literature on contracting is extensive and provides a readily available terminology for this exercise. Relational contract theory has shown that the actual terms of a given contract, whether written or oral, are only part of the picture. [110] A full account of a contractual relationship must also explain the nature and extent of the human connectivity between the parties, as well as their underlying economic wants and needs. [111] Both contracts in the popular economy and in the formal economy are concluded through human agency; and economics is the driver of commercial activity. Together these two additional dimensions of a contractual relation add to the formal terms of the contract and allow for non-legal sanctions [112] to be brought to bear on a recalcitrant opposing party. These may be of the social variety (such as reputational impairment) or of the economic kind (such as refusing to do repeat business, or using market leverage to force compliance). [113] In the informal economy there is also the possibility of self-help of various sorts, particularly if formal sector law enforcement does not fully penetrate the community to prevent this. [114] Through human interaction, underpinned by non-legal sanctions, it is thus possible to create a privately ordered [115] system of contracting.
While there might be informal community tribunals dispensing summary justice, [116] it is largely through peer pressure and non-legal sanctions that compliance is achieved in the popular economy business realm. [117] I have discussed these features at length in a separate article co-written with Sibanda. [118] What I will expand upon here, however, is the role which community (or ubuntu) can play in this matrix. I will do this through an anecdotal process, using as my example a common form of popular economy commercial activity, namely the stokvel.
There are various types of stokvel: the literature distinguishes “rotating savings and credit associations” (“ROSCAs”) (which have primarily a savings function, where regular contributions are made to a communal pool, which is then taken in turns by a member of the group according to a predetermined roster) [119] from “accumulated savings and credit associations” (“ASCRAs”). (In an ASCRA, the periodical individual contributions to a joint pool by each member are simultaneously paid out at a pre-specified maturity date. This format involves saving through individual member contributions, along with the growth of the pool of communal resources. The communal pool may be increased through the lending of this capital to outsiders at interest). [120] The quantitative sources on stokvels describe a vast amount of financial resources being held and managed through this process, usually with a bank acting as a repository for safety reasons. [121] The qualitative sources paint a picture of regular meetings, which are social events for participants and which allow for a public monitoring process to ensure payment of contributions and to police compliance with the rules of the association. [122]
A transaction between a stokvel and a member of that stokvel is expressly exempted from the National Credit Act, hence the practices of these associations remain largely unregulated. [123] This means that compliance with the rules of the stokvel must be ensured through non-legal means. Here the sources speak to the heavy weight attached to reputation in a group whose members are screened before joining by existing participants, and who are usually well known to one another as members of the same community. [124] Default will lead to a loss of face in the community; an end to a line of available credit; and possibly also (illegal) forms of self-help debt execution by the group. [125]
What role does community play here then? The advantage of membership of a stokvel is that a stokvel will extend credit to a community member when she needs it – for school fees, funeral costs, or other unanticipated expenditures. [126] This services a need for micro-loans for those who may have an impaired credit record in the formal sector, or insufficient resources to obtain a loan from a formal sector bank restrained by the rules of the National Credit Act, which prohibit reckless lending. [127] This is a very important role for community, and indeed one could possibly label this ubuntu if one was of an ideological slant. Bähre speaks strongly against using the term ubuntu, however: his anthropological study found that compliance was achieved through communal mechanisms, which rested on monitoring and social pressure. [128] A concept of ubuntu in the sense of altruistic permissiveness or trust was not supported by his empirical findings. [129] His account, supported by the omission of the term “ubuntu” in other similar anthropological studies, speaks to the fact that contracts are expected to be upheld, despite the communal setting. The community will help you in your time of need with a loan when no one else will offer you this, but default on the loan will have personal consequences for you as debtor, since this impacts on the financial position of other group members. [130]
Is this moderate community as per Gyekye: private property backed individualism, but tempered by social responsibility? [131] Perhaps, but it is also a survivalist account of a largely self-sustaining group which cannot afford to write off debts. In the same sense of community, sometimes the financial well-being of the majority of the group must outweigh the personal misfortunes of an individual debtor. [132] Also we are laying the foundations for profit-maximising individualist behaviour, although within the confines of a collective enterprise. In short, we are seeing that the community supplies resources to fill in for the failures of the state-sanctioned system, and self-regulates the allocation thereof. In my view, the stokvel provides an illustration of Gyekye’s theory of moderate community through its example of individualism within a collective structure. We also see here a form of ubuntu which fits the business mould, rather than a utopian ideology which has largely been abstracted from the conventional market forces of commercial reality.
I return now to a question posed in the introduction above: do the same business norms apply in the Johannesburg boardroom as apply at the Khayelitsha [133] stokvel’s monthly gathering? Does fair dealing and appropriate business conduct transpose seamlessly from one setting to the next? Again, I will draw on relational contract theory to answer this question. Campbell argued in 2014, after good faith in contract was firmly raised in the English jurisdiction, that if there was to be a duty of good faith, it should be given content with regard to the context of the parties’ own business dealings, rather than with reference to an exogenous standard. [134] I myself have argued separately that the Constitutional Court’s approach to contract dispute resolution is best analysed through a contextual approach: this allows for a sufficiently nuanced interpretation of an often seemingly ad hoc and particularist decision making record. [135] Contextual reasoning also goes to the heart of the substance over form debate, which has long animated discussions of the protection of weaker parties in contract. [136] In the same way that studying ubuntu in context allows us to define accurately what this notion means for business conduct in the South African popular economy, one should not forget that ubuntu is also at heart about community, and abstracted from a community setting, ubuntu loses much of its meaning.
If ubuntu informs public policy, itself a conception of notional community standards, then we are simply redefining who the notional South African community is, or rebranding the concept under an indigenous label. [137] If, however, ubuntu is intended to convey a positive standard of fair dealing beyond this, to which a party’s conduct at all stages of the contracting process must conform and on which grounds an independent challenge not just to the contract terms, but also to the conduct of a party or the process of contracting, then it should not be forgotten that contracting happens in different contexts between different types of parties. Indeed, this is the founding philosophy behind statutes protecting weaker parties in specific contexts, namely that different kinds of contract law are needed. Perhaps as I suggested with Sibanda, we need an additional contract regime dealing specifically with indigenous contract forms, [138] or perhaps such a system of norms could be included in the existing statutory matrix. [139]
In the Johannesburg boardroom, however, we are likely to find an arms-length transaction between corporates: probably negotiated with legal representation and possibly backed by insurance or collateral of various kinds. If there is a dispute here, it will probably be resolved with reference to the central State-sanctioned legal regime. Should the same standards of market conduct apply as in a system of contracting resting on community-backed private ordering for its existence? One might add the question: who is your notional indigenous “African”? There are many different types of people in South Africa, a fact long recognised in constitutional indigenous law. [140] To ascribe one universal “African worldview” to all members of the business community in South Africa sounds a lot like a generalisation, perhaps even cultural relativism.
In the following part IV, I will address the question as to what a market conduct norm should entail.
From a South African perspective, perhaps the most useful aspect of the Bhasin decision is the level of detail in which the role of good faith in contract was unpacked by the Supreme Court. Spanning just over 60 paragraphs of the judgment, good faith is explained in the light of previous Canadian decisions, comparative law, statute law, and academic writing. Proceeding from a summarised claim (which I will repeat) that good faith is an organising principle, which underlies other areas of contract law and which has as a minimum core a standard of honest conduct in the performance of contractual obligations, [141] the judgment goes on to explain the context of the operation of this doctrine in Canadian law fully. This bold decision will now aid the development of the law of good faith in contract moving forward. [142] The Bhasin findings on good faith may be summed up in a few broad propositions to facilitate comparison with South African law in framing a market conduct standard in contract:
Another appealing aspect of the Bhasin decision is its incrementalism, true to the Common law mould. The propositions above define a role for good faith conduct; yet do so largely with reference to certain particular contexts. A broad general duty of good faith outside of context-defined situations is kept to the bare minimum of honesty in performance. Honesty is an easily defensible minimum standard, in line with the phrase used elsewhere in the judgment of “appropriate regard for the other party’s interests”. [157] It is certainly not a duty of altruism, nor one of objective reasonableness. With regard to a role for community: this is given effect to through the use of context, including the relational aspect thereof. [158] It is also a standard of community which will underlie the rule prohibiting unconscionable conduct. [159] This role for community values leaves room for a given context to require more from a contracting party, while not imposing an unrealistic burden in adversarial commercial settings. One might indeed say that honesty is the minimum standard which the notion of community imparts in Canada, and that this standard cuts across different categories and contexts of contractual relation.
The South African analysis will deal with the two major propositions of Bhasin under separate headings, namely (IV.B.1) “Good faith as organising principle”; and then (IV.B.2) “Where to peg a standard of good faith?” By splitting these issues, I am able to provide a functionalist [160] comparative account, particularly with regard to heading two where South African law speaks with several voices.
The statement that good faith underlies the technical rules of contract law and is given effect to through their interpolation is equally true of South African law as it is of Canadian law, as reflected in the various dicta cited in part II above. Good faith is similarly used to interpret contracts [161] and in the implication of terms. [162] A related general role for good faith is as a doctrinal peg on which to hang new legal developments. [163] This reflects the Civilian technique of legal development, [164] and also indeed the Supreme Court’s approach in Bhasin. [165] The unconscionability rule in South African law has also been discussed in detail in part II above. The Constitutional Court has said that the public policy unconscionability test is informed by ubuntu, rather than good faith per se. There is a conceptual overlap between good faith and ubuntu here, which I will unpack in the following part IV.B.2 below.
With regard to specific contracts: here we enter the realm of various detailed statutory and common law regimes – there is a clear role for good faith here, not only in insurance law (as is universal), [166] but also in the detailed “fairness” regimes governing employment, [167] residential leases, [168] contracts between a business and a consumer, [169] or contracts between creditors and consumer debtors. [170] In these statutory regimes, fairness must be both substantive and procedural: there is thus a clearly defined ambit of acceptable market conduct, but this is different to a general duty of good faith in contracting.
Outside of specific classes of contract, as in Canadian law, there are general rules on certain types of contractual clause. Examples would be clauses creating agreements to agree over open terms (the Everfresh case discussed in part II above is an example of this). [171] Sometimes this type of clause expressly states that the open term is to be “negotiated in good faith” at a future date. [172] More puzzling are terms which expressly call for a duty of “co-operation” or “good faith” in the future performance of a contract: one High Court example dealing with a franchise relationship interpreted this clause as imposing a fiduciary duty on a franchisor not to infringe on the geographical radius of a franchisee. [173] This case may, however, be an outlier, as I have argued elsewhere. [174] A final example is the clause creating a discretionary contractual power, particularly the power to determine the performance of an opposing party during the subsequent course of a contractual relation. The prevailing common law position here is that the exercise of such a power must be exercised rationally, as is the case in English law. [175] This South African standard of rationality is derived from Roman law, and is reflected in the phrase: arbitrium boni viri. [176] This fetters, for example, the unilateral power of a bank to change an interest rate under a mortgage agreement. [177] More controversially, Price and I have argued that South Africa seems to be heading in a direction of fettering on the basis of objective reasonableness here. [178] An example we used was the overturning of an otherwise seemingly valid cancellation of a contract in Botha v Rich NO (discussed in part II above). [179]
The above sample are examples of the use of a good faith standard to underpin other technical rules of contract law in South Africa, which reinforces the statement to this effect by the Constitutional Court in Barkhuizen. [180] Thus to a South African reader, the concept of an organising principle as used by the Canadian Supreme Court came as no surprise and indeed made logical sense. What is more controversial in South Africa, however, is where to peg the good faith standard. I will discuss this normative question next.
Good faith is a concept usually best defined by example, as I have done in the previous part IV.B.1 above. The overview provided there also demonstrates that the functional equivalents of the concrete manifestations of a specific duty of good faith in the Canadian Common law are also to be found in the South African law of contract.
But what normative standard does good faith impart? In part II above, I quoted several examples of judicial dicta of recent times which suggest abstract answers to this question. The South African case law discussions of good faith are typically briefer and vaguer than that of Bhasin, or of the English case of Yam Seng. [181] Because of the Roman Dutch law origins of the South African system, all contracts are by historical definition based on good faith, so that the doctrine is much less controversial. But that does not answer the question of where to peg the normative standard. Does South African law go beyond a standard of honest performance alone into further realms of reasonableness, or perhaps even communal solidarity? Here we run into the difficulty of overlapping conceptual terminology.
Good faith in a basic sense of rationally defensible conduct which is not arbitrary and is not motivated by bad faith or fraud (or in the positive sense is “honest”), would impose a basic subjective standard on contracting parties. It would be possible to defend a standard of this nature with regard to the historic South African case law, although whether it would be independently actionable may be more controversial. [182] As we saw in part II, the Constitutional Court has in the past used the phrase good faith in its decisions, but this was usually in the sense of an underlying value. When it comes to public policy, unconscionability, and ubuntu, however, could a wider duty of objective reasonableness be imposed on parties? Recent High Court jurisprudence discussed in part II above would certainly suggest that this is one plausible interpretation of the trajectory of the law.
The South African legislature has already enacted many statutes to protect weaker parties, thereby extending constitutional-inspired rights and duties which relate to community norms and social justice into many areas of contracting. Beyond these statutes, the common law exists as the realm of largely commercial contracts. Here, given the heterogeneous nature of South African society, a standard of community in contracting should be defined in minimal terms with room for the parties to engage in a measure of private ordering. [183] If a duty of fair dealing is to go beyond a core of rationality, with community values intruding into a private contractual relationship, the specific business dealings of the immediate parties and their context should be used to define the notional community whose standards must be determinative. [184] This allows for the particularist style of adjudication favoured by the Constitutional Court, and is also one possible interpretation of the existing case law from this court. Indeed, it is typically egregious cases of exploitative conduct which reach this court, with more commercial cases like the lease in Everfresh, or the insurance contract in Barkhuizen, being slightly atypical. A general duty of ubuntu-based communal solidarity beyond this is best left to the private ordering devices of a given business community, or the policing of unconscionability ex post under the public policy rule. Ubuntu should not become an independent ground on which to attack contractual dealings, just as this strong role has never been permitted to the (narrower) concept of good faith in South Africa’s past.
Ubuntu is a broader standard than good faith – the literature and case law speak to a role for community, which implies an objective standard of conduct beyond mere honesty. There is scope here for a new epistemology [185] of contracting, which places indigenous social norms at its centre. Even here, however, ubuntu should continue to play the role of underlying value in contract law. The conceptual overlap between good faith and ubuntu should be expressly unpacked and clarified by the Constitutional Court. Commercial contracting in an indigenous setting relies largely on private ordering for its operation, and even there does not generally require a duty of altruism or fiduciary loyalty from a contracting party beyond the social responsibility of moderate community. Outside of the localised community setting, a healthy dose of minimalism should (in my view) be used in defining ubuntu (or good faith), with more detailed regulation being left to more context sensitive regulatory mechanisms.
To a South African reader, my argument thus far may have been read as equivocal: on the one hand, I have argued for a more inclusive view to be taken of South African contract law and practice, particularly with regard to the contexts in which business takes place. Thus, the articulation of ubuntu above located this motif in the setting of an indigenous African marketplace – as found in South Africa’s popular economies – and subject to the norms of the communities that reside there. On the other hand, I have argued for a stricter reading of this concept than that favoured by many leftist South African academics and indeed for one (in part) different from the vision of transformative constitutionalism stated in certain leading texts. My defence of this politics of contract law, is that it is one which is contextualised within the economic demands of the South African marketplace, particularly the need for increased business confidence in the political economy, investment, and economic growth. Certainty of contract law is typically a feature of legal systems which are popular among merchants, such as English law – indeed legal services are a key English export. [186] It is for this reason that I cite with approval the arguments of English theorists Campbell and Morgan above, despite the fact that the politics of their commercial contract law visions are vastly removed from what is currently fashionable in the South African academy. The incorporation of an indigenous norm of ubuntu, as a concept similar to, but in part as a replacement of, good faith, into South African contract law, is a positive development and a timely politico-legal intervention. This measure should not, however, ignore the fact that contracts must be upheld in the indigenous popular economy no less than in the context of large commercial transactions between blue chip South African companies.
What I am describing, however, are the norms of the commercial marketplace where contracts are concluded by parties of similar levels of bargaining power. This is indeed the realm which the common law of contract has been relegated to after the advent of a (consumer) statute law specifically designed to protect weaker parties. In consumer law there is a clear need for fairness jurisdiction to be given to courts (as well as to various lower level alternate dispute resolution tribunals) in order to prevent an abuse of market power against weaker parties. There is great scope here for indigenous norms, including (but not limited to) ubuntu, [187] to be reflected in the interpretation of these statutes to give effect to a transformed constitutional regime of contracting. My argument is that it is this key differentiation between contexts of contracting which leaves room for me to call for a more liberal market/privately ordered realm in which the common law can operate.
In conclusion, and on a comparative law note: the legal culture of South Africa is changing fast. It appears that a similar process is happening in other commonwealth jurisdictions: the findings of the Canadian Supreme Court in Bhasin speak to a movement away from the strictures of the traditional English law position. This reflects similar developments in certain parts of Australia, [188] and indeed at High Court level within the English jurisdiction itself. [189] It appears that a norm of good faith is no longer as controversial as it used to be, but also that the methodology of these legal developments remain decidedly within the English Common Law tradition and speak to the long-held sentiment there that commercial practice should govern commercial law. [190]
I would like to thank Dale Hutchison, Nkanyiso Sibanda, Deeksha Bhana, Hanri du Plessis, Sinikiwe Mzezewa, Kneo Mokgopa, and the anonymous reviewers for their comments on a draft of this article. Thanks also to my research assistant, Sebastian Daniels, who facilitated my access to many of Khayelitsha’s stokvels in 2018. This research is based on work supported in part by the National Research Foundation of South Africa (grant number 111748). Any opinion, finding and conclusion, or recommendation expressed in this material is that of the author and the NRF does not accept any liability in this regard.
