Pacta sunt servanda is a longstanding principle under South African law. This principle recognises that parties are free to contract and must be bound by the terms of an agreement. However, pacta sunt servanda is not without limitation. By way of example, a term of an agreement is not enforceable if it is against public policy.
Since becoming a democratic state, the principle of pacta sunt servanda has been affected by the enactment of various pieces of legislation. The Constitution of the Republic of South Africa, 1996 is both vertically and horizontally applicable. Accordingly, a term of an agreement is not enforceable if it infringes one of the parties’ constitutional rights. In addition, the South African legislature has passed various pieces of legislation requiring terms of agreements to be fair and, in some instances, conduct between parties to be fair. By way of example:
- in 2004, the Petroleum Products Act, 1977 was amended to provide for unfair or unreasonable contractual practices to be referred to arbitration;
- in 2008, the Consumer Protection Act, 2008 was enacted to provide for courts to declare transactions or agreements as unfair and making the appropriate order to require a person to compensate the consumer or require the supplier to cease the practice;
- in 2014, the Labour Relations Act, 1996 was amended to prohibit unfair labour practices by employers; and
- in 2014, the Rental Housing Act, 1999 was amended to deal with unfair practices. Through the abovementioned pieces of legislation, Parliament is attempting to address the unequal relationship between parties in employment relations, consumer transactions, residential leases and the downstream petroleum sector.
The Business Zone Case
In this article, we discuss a recent Constitutional Court judgment, Business Zone 1010 CC t/a Emmarentia Convenience Centre v Engen Petroleum Limited and Others (2017) ZACC 2 (the Business Zone Case), where the court considered the referral of unfair or unreasonable contractual practices to arbitration.
Section 12B of the Petroleum Products Act provides for retailers to request that the Controller of Petroleum Products refer alleged unfair or unreasonable contractual conduct to arbitration. Though this provision of the Petroleum Products Act has been in place for over 10 years, it has had a somewhat muted impact on the downstream petroleum sector as it was not clear what constituted ‘unfair contractual practice.’
In the Business Zone Case, the Constitutional Court made the following findings regarding the meaning of ‘unfair contractual practice’ under the Petroleum Products Act:
- the standard of fairness required under the Petroleum Products Act is the same as the standard of fairness required under the Labour Relations Act, 1996;
- a single unfair act could constitute an unfair contractual practice; and
- section 12B of the Petroleum Products Act is not limited to unfair contractual practices relating to the supply of petroleum products.
Accordingly, in terms of this judgment, the one-off implementation of a term in an agreement between an oil company and a retailer could be regarded as an ‘unfair practice’.
The Business Zone Case showcases how the standard of fairness continues to evolve in South African law. Of particular importance, is the fact that our courts require the same standard of fairness, irrespective of the sector to which the legislation requiring fairness relates. The standard of fairness to be practised by an employer in respect of its employee, by a landlord in respect of its residential tenant and by an oil company in respect of its retailer is the same.