Mohamed's Leisure Holdings v Southern Sun Hotel Interests (Pty) Ltd (10109/2015) [2016] ZAGPJHC 303; 2017 (4) SA 243 (GJ) (4 November 2016)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

(GAUTENG LOCAL DIVISION, JOHANNESBURG)

CASE NO: 10109/2015

REPORTABLE: YES

OF INTEREST TO OTHER JUDGES: YES

REVISED.

4 NOVEMBER 2016

In the matter between

MOHAMED’S LEISURE HOLDINGS (PTY) LTD

APPLICANT

and

SOUTHERN SUN HOTEL INTERESTS (PTY) LTD

RESPONDENT

Contract - pacta servanda sunt - post constitutional development in relaxation of maxim - application for ejectment of tenant following upon cancellation of lease agreement resulting from non-payment of one month’s rental - whether the constitutional values of the concepts of ubuntu and fairness dictate that the maxim ought to be relaxed - all circumstances relevant - disproportionate prejudice the respondent will suffer if ejectment ordered – unfairness - held that implementation of the cancellation clause in ordering the eviction of the respondent would offend the values of the Constitution - application dismissed with no costs order.

JUDGMENT

VAN OOSTEN J:

Introduction

[1] The Roman law maxim pacta servanda sunt (etiam Codex 2.3.7; 4.54.8) also expressed as pacta conventa…omnimodo observanda sunt (Codex 2.3.29.1) is a universally recognised basic principle of civil law, canon law, and international law (Van der Merwe et al Contact General Principles 3 ed p19-21). In regard to the law of contract the maxim is described in Everfresh Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd [2011] ZACC 30; 2012 (1) SA 256 (CC); 2012 (3) BCLR 219, para 70, as ‘the age-old contractual doctrine that agreements solemnly made should be honoured and enforced…’ and further, although not a holy cow (Bredenkamp v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA) para 37) as ‘a universally recognised legal principle’ encompassing ‘a moral principle, on which the coherence of any society relies’ (Barkhuizen v Napier [2007] ZACC 5; 2007 (5) SA 323 (CC); 2007 (7) BCLR 691 (CC)). The rationale for the maxim is that parties must know that should either of them fail to honour their promise the other might invoke the assistance of the law to hold them to the agreement. Except for relaxation on grounds of public policy, the maxim was inflexibly applied, at least pre-constitution. The advent of our Constitutional dispensation also spread its wings to the law of contract: the desirability and necessity of infusing the law of contract with constitutional values was recently firmly established

by the Constitutional Court. Further developments necessitating the relaxation of pacta sunt servanda in specific areas of the law of contact occurred and predictably may well continue in future. These developments caused an eminent retired justice of the Constitutional Court to ponder whether the time has not perhaps arrived to bid the maxim farewell or, as he posed the hypothetical question, R.I.P. Pacta Sunt Servanda? (Constitutionally Speaking, 13 April 2007) The issue this case is concerned with, in a nutshell, is whether, in the circumstances of this case, and in further developing the common law in accordance with s 39(2) of the Constitution, the constitutional values of the concepts of ubuntu and fairness dictate that the maxim pacta sunt servanda ought to be relaxed.

[2] The issue requires determination in the context of the contractual setting, broadly stated, of the landlord’s right to and exercise of a contractual entitlement to cancel a lease agreement and as a corollary thereto, to be restored into possession of the property, where the lessee has defaulted in paying the rent on due date. The constitutionality of the contractual provision relating to cancellation and its consequences remain unchallenged: the constitutional challenge in this case is directed at the consequences arising from the cancellation and the landlord seeking an order for the ejectment of the lessee, which is the application now before me.

The relief sought and the respondent’s defences

[3] The applicant, following upon its cancellation of the lease agreement on 21 October 2014, applies for an order for the eviction of the respondent from the property, situated in Walmer Estate, Cape Town, being the premises from which the respondent conducts the hotel business known as Garden Court, Nelson Mandela Boulevard, Cape Town. The respondent forms part of greater Tsogo Sun Hotel Group brand of hotels.

[4] The respondent’s opposition to the relief claimed is premised on, firstly, a challenge to the applicant’s entitlement to cancel the lease agreement, secondly, a denial that the respondent was in arrears with payment of rental in respect of which it is contended that the rental in terms of the lease agreement was payable in arrears, and thirdly, the contention that an irresolubale dispute of fact exists. In the alternative and in the event of the main defences not succeeding, the respondent, with reliance on ss 34 and 39 of the Constitution, and in particular the concepts of ubuntu and fairness, contends for a relaxation of pacta sunt servanda on the ground that the implementation of the cancellation clause contained in the agreement, in the circumstances of this case, would manifestly cause irreparable harm and offend against public policy.

[5] In argument before me the respondent’s main defences were not seriously persisted with. Those defences, in any event, in my view, are without merit and I do not consider it necessary to deal with them any further. Suffice to say that the arguments by counsel for both parties were directed exclusively at the alternative defence, which is the respondent’s plea to this court for relaxation of pacta sunt servanda in the particular circumstances of this case, to which I shall revert.

Factual background

[6] The original lease agreement concerning the property was concluded in January 1982, between Cape Town Holiday Inn (Pty) Ltd, as lessor, and Rennies Hotel and Liquor Holdings (Pty) Ltd, as lessee. That agreement, amplified and amended by subsequent addendums thereto, remained extant, in particular, as for the parties thereto, between the applicant, as lessor, and the respondent as lessee, both successors in title, from the beginning of 2013 (the agreement).

[7] Only two clauses of the agreement are relevant for present purposes. Clause 4.5 deals with the lessee’s obligation to pay rent and provides ‘the lessee shall make monthly provisional rent payments to the lessor by not later than the seventh day of each month…’ The landlord’s right to terminate the lease and take possession of the property resulting from the lessee’s failure to pay rent on due date (in terms of clause 4.5 ‘by not later than the seventh day of each month’), is provided for in clause 20.

[8] In June 2014 the respondent defaulted in paying rental on due date. The respondent states ‘the moment’ the non-payment by its bank, Nedbank, came to its notice, and on 12 June 2014, a written instruction to transfer the amount due to the applicant’s bank account was delivered to the St Georges Mall branch of Nedbank in Cape Town. On 20 June 2014 the applicant, in a letter to the respondent, demanded payment of the amount due within 5 days, failing which the respondent was advised, the agreement would be cancelled. In addition the respondent was notified that in the event of future failures to pay rental on due date, no notice to remedy would be given and cancellation of the agreement would follow instantly.

[9] The respondent blames Nedbank for the non-payment of the June rental, in omitting to process the rental payment to the applicant on 1 June 2014, as it was instructed to do in terms of the respondent’s stop order instruction to Nedbank, dated 19 November 2013. In a letter addressed to the applicant, dated 20 June 2014, in response to the applicant’s letter of demand, Nedbank accepted responsibility for mishandling the respondent’s stop order instruction, as follows:

‘We wish to confirm that non-payment of the rental amount stated herein (R566 988.38) was caused as a result of a change in Nedbank processes which impacted the payment run for 1 June 2014 and by no omission of the client. We apologise for this inconvenience caused.’

[10] On 20 June 2014 the June rental was duly transferred into the applicant’s bank account and the respondent accordingly

complied with the applicant’s demand.

[11] In order to avoid a recurrence of the July late-payment, the respondent states that it punctually perused its bank statements to ensure that payments were debited from its bank account by the seventh day of each month. It seemingly derived some comfort from the payments made by Nedbank in respect of the July, August and September 2014 rentals, which were all debited before the due date.

[12] The October 2014 rental was debited from the respondent’s bank account on 6 October 2014, as is reflected on the respondent’s

bank account statement. The respondent states that it therefore was under the impression that Nedbank had processed payment to the applicant before 7 October 2014. The contrary however soon emerged. By letter addressed to the respondent, dated 20 October 2014, the applicant’s attorneys informed the respondent of its breach of the agreement in failing to pay the October rental and further advised that the applicant ‘has elected to exercise its right in accordance with the provisions of clause 20 of the lease agreement to cancel the lease agreement with immediate effect. The respondent was however, granted until 31 October 2014 to vacate the premises.

[13] The respondent received the letter of cancellation on 20 October 2014 at 13h55. A copy of the respondent’s bank statement was obtained and at 14h22 electronically transmitted to the applicant’s attorneys. The respondent furthermore by electronic mail requested Nedbank to contact Ms Noakes of the respondent regarding the non-payment. Nedbank responded that the matter would be investigated urgently and that they would revert as soon as possible. The next morning Nedbank advised the respondent that ‘the debit order ran successfully on the 6th [October] and funds transferred to Absa’. Some 20 minutes later a further email from Nedbank arrived only to inform the respondent that the confirmation in the earlier email was based on ‘wrong information’. Later that afternoon confirmation by Nedbank was sought that payment had been processed to the applicant’s Absa bank account in accordance with the respondent’s debit order instruction, a copy of which was attached thereto. In Nedbank’s response, dated 21 October 2014, the respondent was advised that an investigation into the non-payment had been initiated and ‘that non-payment occurred as a result of a technical administrative error’.

[14] On 21 October 2014 the respondent transferred the amount of the October rental into the applicant’s bank account and the next day, ‘in order to show the bona fides of the respondent’ a further amount of R3 844.655, as interest on the amount in regard to late payment of the October rental.

[15] On 28 October 2014 the respondent’s attorneys, in response to the applicant’s letter of cancellation, inter alia informed the applicant’s attorneys that the respondent had taken the non-payment up with its banker that they were awaiting the outcome thereof, that the respondent was not in remiss in payment of rental and further expressed the view that the agreement was still alive.

[16] In a further letter received by the respondent on 6 November 2014, Nedbank reported on ‘the time line events’ leading up to the October non-payment. The report reveals a disturbing and astounding plethora of blunders and inadvertences in administering

the respondent’s stop order instruction, resulting from Nedbank’s introduction and implementation of a seemingly dysfunctional and admittedly incompatible ‘corporate payment system’ on 26 May 2014, which replaced the then existing stop order system.

[17] On 31 October 2014 a meeting was held between ‘high ranking’ representatives of the parties and Nedbank, at which the respondent’s attorney was present. The late payment of the October 2014 rental was explained by Nedbank to have occurred due to a ‘processing error’ in depositing the amount into a wrong Absa bank account. The outcome of the meeting has not been disclosed but was ostensibly unfavourable to the respondent as the present application followed on 17 March 2015.

Discussion

[18] The facts I have thus far alluded to are either common cause or unchallenged. Counsel for the respondent, correctly in my view,

conceded that, in accordance with the Plascon-Evans-rule [1984] ZASCA 51; (1984 (3) SA 623 (A)), the respondent’s version concerning the reasons for the late payment of the June and October rentals, must be accepted.

[19] I propose to proceed from the premise that the applicant was entitled, in terms of clause 20 of the agreement, to cancel the

agreement on the ground of non-payment of the October rental on due date, which of course triggered the right to be restored into

possession of the leased premises. It is necessary, at this stage, for the sake of completeness, to swiftly and briefly dispose of a contention obliquely raised in the respondent’s heads of argument. The operation of clause 20, so it was argued, is

constitutionally unfair and can easily be ameliorated by a requirement that in the event of non-payment of rental on due date,

the lessor should notify the lessee thereof with an option to rectify before exercising the right of cancellation. It will be remembered

that, in regard to the June 2014 rental, the applicant did address a letter of demand to the respondent. That however, did not create a contractual obligation for the applicant to do so. In any event, the demand specifically states that no further notices would be given in regard to future non-payment of rentals. Lastly and finally, clause 20 of the agreement fixes a time for performance (dies certus an) and the well-established principle of the law of contact, which has consistently been confirmed in our courts, applies: ‘[W]hen a debtor undertakes to discharge an obligation on a specified date; the creditor need make no demand: dies interpellat pro homine, and the debtor is in mora if he fails to pay on the appointed day.’ (per Innes CJ in Laws v Rutherford 1924 AD 261 262). No hardship is caused by clause 20: the respondent agreed to the specified time for payment of monthly rentals which on its own version, the respondent with no difficulty complied with.

[20] It remains to consider whether in the circumstances of this case the implementation of the cancellation clause contained in the lease agreement will be manifestly unreasonable and offend against public policy.

The law

Pre-Constitution

[21] The instances of relaxation of pacta sunt servanda on the ground of public policy dates back to 1925 and finds expression in the judgments of the then Appellate Division in Robinson v Randfontein Estates GM Co Ltd 1925 AD 173 at 204-206 and Schierhout v Minister of Justice 1925 AD 417 at 423-424. More recent examples of the recognition of public policy in determining the enforcement of contracts are Magna Alloys and Research SA (Pty) Ltd v Ellis [1984] ZASCA 116; 1984 (4) SA 874 (A) 891G, where an invasion of the right to freedom of trade was held to offend public policy which may result in the voidness of trade agreements, and Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) where it was held that agreements which are clearly inimical to the interests of the community, whether they are contrary to law or morality, or run counter to social or economic expedience, will accordingly, on the grounds of public policy, not be enforced. But, it was emphasised, the power to declare contacts contrary to public policy should be exercised sparingly and only the clearest of cases.

[22] In Venter v Venter 1949 (1) SA 768 (A) the then Appellate Division dealt with facts and an issue analogous to the present matter: the landlord’s cancellation of the lease agreement was held to have been valid where the late payment of annual rental by the lessee resulted from an error by the bank. The facts of the matter were that the tenant paid the annual rental before due date by way of a bank deposit at Standard Bank in Petrusville for the account of the landlord at Standard Bank in Cape Town. The deposit was received in good time by Standard Bank in Cape Town, for transfer into the landlord’s account before due date. However, owing to an error by the bank, the money was only transferred into the landlord’s bank account after both the due date and the landlord’s cancellation of the lease agreement soon thereafter. Having dealt with the tenant’s arguments advanced in support of the appeal against the order of the Full Bench of the Cape Provincial Division, which are not relevant for present purposes, Watermeyer CJ, writing for the majority of the court, approved the ratio of the court a quo, where Ogilvie Thomson AJ (as he then was) held that payment of rental timeously was an obligation of the tenant ‘under penalty of forfeiture’; that the bank was the tenant’s

agent to implement the mandate conferred upon it by the tenant and that there was no legal obligation on the landlord to issue an ultimatum prior to cancelling the lease. In a separate concurring judgment, Van Den Heever JA remarked as follows (at 784-785):

‘Moreover payment implies a dare that the money paid becomes the property of the creditor. Where the lessee has assumed an obligation sounding in dare, therefore, action on his part is implied, namely conduct which would lead to the satisfaction and extinction of the debt. It is clear that in this case the debtor never managed to effect such an oblatio realis. If the creditor must bear the consequences of mora where his health or the weather fails him, it seems to me not unreasonable that the debtor should bear the consequences where the

bank fails him.’

Post-Constitution

[23] In Juglal NO v Shoprite Checkers (Pty) Ltd 2004 (5) SA 248 (SCA) para 12, Heher JA, writing for the court, expanded upon contacts contrary to public policy as follows:

‘Because the courts will conclude that contractual provisions are contrary to public policy only when that is their clear effect (see the authorities cited in Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) at 8C-9G) it follows that the tendency of a proposed transaction towards such a conflict (Eastwood v Shepstone 1902 TS 294 at 302) can only be found to exist if there is a probability that unconscionable, immoral or illegal conduct will result from the

implementation of the provisions according to their tenor. (It may be that the cumulative effect of implementation of provisions not individually objectionable may disclose such a tendency.) If, however, a contractual provision is capable of implementation in a manner that is against public policy but the tenor of the provision is neutral then the offending tendency is absent. In such event the creditor who implements the contract in a manner which is unconscionable, illegal or immoral will find that a court refuses to give effect to his conduct but the contract itself will stand.’ [emphasis added]

In Combined Developers v Arun Holdings and Others 2015 (3) SA 215 (WCC) para [36], Davis J ‘drilled down’ into the core of the dictum in Juglal which the learned judge understood to mean ‘that a contractual provision may not itself run counter to public policy but that the implementation may be so objectionable that it is sufficiently oppressive, unconscionable of immoral to constitute a breach of public policy’ in regard to which ‘public policy can be invoked in justification of a refusal to enforce a provision’

requiring the finding of some objective standard within the normative framework of the Constitution.

[24] In Barkhuizen the Constitutional Court held that a term in a contract that deprives a party of the right to seek judicial redress is contrary to public policy and confirmed the principle that ‘the general rule that agreements must be honoured cannot apply to immoral

agreements that violate public policy.’

[25] Having applied the above principles the Full Court of the Eastern Cape High Court, Mthatha, in Nyandeni Local Municipality v Hlazo 2010 (4) SA 261 (ECM), in considering the relaxation of the Shifren principle (1964 (4) SA 760 (A) 766B) in regard to the enforcement of an entrenchment clause in a contact of employment on the ground that it offends public policy, in alluding to the constitutional concept of ‘fairness’, observed (para 78):

‘The concept of ‘fairness’ runs like a golden thread through the Bill of Rights. However, even a superficial glance will reveal that it is used as an adverb or adjective (‘unfairly discriminate’ (s 9) or ‘fair public hearing’ (s 34), and it is not an independent or substantive constitutional right. Therefore, and subject to what follows, a contract does not necessarily offend public policy merely because it may operate unfairly. Like the concept of good faith (bona fide), fairness may be regarded as an ethical value ‘that underlies and informs the substantive law of contract’ (Prof Hutchison supra), but it is not an independent constitutional or contractual principle in terms of which contracting parties may escape their obligations

including obligations arising from the Shifren principle (Brisley (supra) [Brisley v Drotsky 2002 (4) SA 1 (SCA); [2002] 3 All SA 363; 2002 (12) BCLR 1229] in paras 12-22). It follows that a court does not have a general discretion to decide what is fair and equitable and then to determine

public policy with reference to his or her views on fairness. See also Sasfin (supra) at 8C-9A; Botha (now Griesel) and Another v Finanscredit (Pty) Ltd 1989 (3) SA 773 (A) at 782 I-J.’

The time for judging the concept of fairness, Alkema J, writing the unanimous judgment of the court, held, was when the court is asked to enforce the clause. The concept of fairness, in the context of that case, the learned judge further held (paras 89 and 90), must ‘be judged in the manner in which the implementation of the entrenchment clause finds expression in the entire spectrum of constitutional norms and values’ and concluded that if the clause is so ‘manifestly unreasonable that it offends public policy, then it is voidable on the ground of unfairness’.

[26] Finally, in Everfresh the majority judgment determinedly pronounced (para 71) that in the development of the common law it is ‘highly desirable and in fact necessary to infuse the law of contact with constitutional, including values of ubuntu, which inspire much of our constitutional compact.’ The concept of ubuntu the Constitutional Court held, 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’ (see also African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC (234/10) [2011] ZASCA 45 (30 March 2011); 2011 (3) SA 511 (SCA); [2011] 3 ALL SA 345 (SCA) para 15-16; FDJ Brand ‘The Role of Good Faith, Equity and Fairness in the South African Law of Contract: The Influence of the Common Law and the Constitution’ (2009) 126 SALJ 71 and MM Pillay ‘The Impact of Pacta Sunt Servanda in the Law of Contract’ 2016 LLM Mini Dissertation, University of Pretoria).

Evaluation

[27] The agreement we are here concerned with in itself, as I have alluded to, does not in any way offend public policy nor are the terms invoked by the respondent to effect the cancellation of the agreement unreasonable, unfair or objectionable on any other ground. It is the implementation of the cancellation clause, on the facts of this matter, now that this court is asked to give effect thereto, that must be subjected to constitutional scrutiny.

[28] In considering the issue the court is enjoined to make a value judgment based on the constitutional concepts and values as referred to in the authorities quoted above. In particular and adopting an objective approach, the concepts of fairness and ubuntu are paramount. All the facts and circumstances disclosed by the parties are relevant and fall to be weighed together with contractual

principles such as freedom of contract and pacta sunt servanda. The final test is whether the circumstances of this case constitute sufficient cause for the relaxation of pacta servanda sunt.

[29] Some information as to the nature of the hotel business conducted by the respondent is apposite. The five storey building in which the hotel is housed, comprises 292 rooms, a restaurant, a bar, 5 meeting rooms, a ‘team’ room, an outdoor pool, a gymnasium and parking. The premises have been utilised for the conducting of the business as a hotel since 1982. The nature of the business primarily, is hotel accommodation across all market segments, including corporate, government, leisure, standard tour operators, conferencing and food and beverage services. Guests from abroad are primarily from Europe, especially France and Germany.

[30] The respondent’s hotel is operated and managed as part of a total of 18 Garden Court branded hotels, which is a well-known,

established brand in the hospitality industry. Employment is provided to 91 permanent members of staff, additional casual staff as well as indirectly to secondary staff and service providers. The annual turnover of the respondent’s hotel division in South Africa runs into millions of Rands.

[31] The prejudice either party will suffer resulting from an order for eviction, in my view, is of crucial importance. Counsel for the applicant submitted that such prejudice as the respondent may suffer, is of no relevance, as each cancellation of a lease agreement resulting from non-payment of rental, inevitably pre-supposes prejudice. I am unable to agree. In the objective assessment of the facts and circumstances of this case, prejudice is but one of the factors the court must take into account.

[32] The respondent states that its ejectment will cause ‘untold damages, both patrimonial and reputational’ and, further, will effectively sound the death knell for this hotel, which it will not be able to replace in Cape Town. The relocation of a business of this kind not only involves substantial costs, it requires long term planning and may well have a dire impact on its reputation in the market place. It accordingly has been established that an order to vacate the premises would cause the respondent irreparable harm.

[33] No prejudice has been shown to have been suffered by the applicant. The speculative undisclosed motives attributed to the applicant in the papers before me are without substance and should best be disregarded.

[34] Although fault in regard to the non-payment of rent is not a requirement for an entitlement to cancellation, it is of relevance in the consideration of this case that the respondent’s bank is wholly responsible for the predicament the respondent now finds itself in. It is true, as counsel for the applicant was at pains to emphasise, that the bank acted as the respondent’s agent (cf in regard to the neglect of an attorney acting as his client’s agent: Saloojee and Another v Minister of Community Development 1965 (2) SA 135 (A) 140H-141H). But, I am unable to find that the respondent placed unjustified trust in, and reliance on, its banker: in regard to the June non-payment of rental the respondent took steps to avoid a repetition thereof. For the next three months the bank processed the payments within time. As for the October payment the respondent was entitled to rest assured that payment was in time once the debit entry, dated 6 October 2014, appeared on its bank statement.

[35] In a nutshell the court is required to balance the late payment of the October rental, on the one hand, juxtaposed to the bank solely having to bear the blame for the late payment and the prospect of the respondent suffering disproportionate prejudice in the event of eviction. The determinant criterion is the demonstrable unfairness in the implementation of clause 20, in granting an order for eviction as sought by the applicant. I am accordingly bound to find that the judicial precedent set in Venter, considered against the normative framework of the Constitution in developing the common law, no longer applies. 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 I have alluded to, and that the application accordingly must fail.

Costs

[36] Although both parties in the event of being successful, sought an order for costs, this in my view is not a case where an order for costs should be made. The applicant, as it was entitled to do, asserted a contractual right for the relief sought. The respondent

has raised a constitutional issue of importance. The matter is decided on constitutional grounds. I accordingly consider it just and fair that the parties should bear their own costs (Barkhuizen para 90).

[37] For all the above reasons I make the following order:

1. The application is dismissed

_________________________

FHD VAN OOSTEN

JUDGE OF THE HIGH COURT

COUNSEL FOR APPLICANT

ADV JJ BRETT SC

ADV D MAHON

APPLICANT’S ATTORNEYS

SCHINDLERS ATTORNEYS

COUNSEL FOR RESPONDENT

ADV MC ERASMUS SC

ADV WTB RIDGARD

RESPONDENT’S ATTORNEYS

GIDEON PRETORIUS INC

DATE OF HEARING

19 OCTOBER 2016

DATE OF JUDGMENT

4 NOVEMBER 2016