The influence of Public Policy on Contracts

It is trite that contracts may be void for illegality for a variety of reasons. Usually, these illegalities are cited as grounds recognised in common law or statute, however, contracts may also be declared illegal due to certain moral and constitutional values. The concepts of good morals and public policy overlap since both relate to society’s view of morality.

Public policy has no fixed meaning because it represents the interests of a particular community at a particular time and can therefore vary in substance from society to society and evolves as time lapses.

In the context of construction contracts, an argument often proffered is that a penalty clause is contrary to public policy with regards to either the quantum of the penalty or the circumstances under which they are being enforced. 

Courts have the power to strike down a contract for being contrary to public policy, but such powers are exercised sparingly. The reasons for this are twofold:

The above was affirmed in Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others held in the Constitutional Court. The Court reaffirmed that the rule of law requires that the law be clear and ascertainable and provide reasonably predictable outcomes for contracting parties and that freedom to contract is based on constitutional values of freedom and dignity, and is vital for economic development to achieve the constitutional vision of society.  A person seeking to attack a contract based on it being contrary to public policy bears the onus of proof in this regard.  The Court in this case confirmed that a contract may be set aside if it is contrary to public policy, however, the Court encouraged and supported a “perceptive restraint” approach meaning that the Court will use this power sparingly in the clearest of cases.

As a general guiding principle, a court will look objectively at the relevant parties bargaining power, the disproportionality of the consequences versus an innocent party’s legitimate interests or whether the affected party had legal advice when entering into the contract. On the other hand, a court may even assume that commercial parties contracting on equal terms are capable of deciding the appropriate consequences to protect their legitimate interests. 

When a court declares a contract illegal, it looks at the tendency of the contract, not the actual result. This means that the tendency of the contract must be contrary to public policy to be declared illegal. A court will not declare a contract illegal simply because it offends the courts individual sense of propriety or fairness.

In addressing the aspect of penalties, the Conventional Penalties Act 15 of 1962 plays an important role in adding further clarity.

Please contact the Association for any further queries.

Bilaal Dawood | Head: Membership Services