Courts’ Discretion in Enforcing Contracts: Understanding the Impact on Public Policy

The recent case of Ethekwini Municipality v Cooperativa Muratori & Cementisti – CMC di Ravenna Societa Cooperativa [2023] ZASCA 95 (12 June 2023) marks a significant shift in contract law, emphasizing the principle of pacta sunt servanda (contracts must be honoured). In this article, we explore the implications of this case on the courts’ discretion to refuse the enforcement of contractual terms based on public policy grounds.

Case Background:

In 2015, the Ethekwini Municipality entered into an R300 million construction contract with a local subsidiary of an Italian construction company. Following a dispute, the parties sought adjudication in August 2019. The adjudicator ruled in favour of the contractor, ordering the municipality to pay the awarded sums along with interest as stipulated in the contract.

The Municipality’s Argument:

When the municipality failed to make the payment, the contractor sought a court order to enforce the debt. The municipality argued that the high court had the discretion to deny the order on two grounds: (i) specific performance would be requested, and (ii) enforcing the adjudication would be against public policy due to the contractor’s distressed financial position.

The Supreme Court of Appeal’s Decision:

The Supreme Court of Appeal (SCA) rejected the municipality’s arguments and clarified the legal position. Regarding public policy, the SCA affirmed that it is for the court to determine if enforcing the obligation would contravene public policy. However, in this case, since it involved the payment of a presently due, unconditional debt, there was no room for judicial discretion based on public policy grounds.

Regarding specific performance, the municipality claimed that it should be refused if it caused undue hardship to either party. The SCA disagreed, explaining that payment of a debt is distinct from specific performance, as the latter allows for alternative remedies like damages. In this scenario, where damages were not a viable option, the court upheld the contract and ordered payment.

Closing Thoughts:

By upholding the principle of pacta sunt servanda and rejecting the notion that enforcement depends on judicial discretion, the SCA highlighted the importance of consistency and fairness in enforcing contractual terms. It clarified its position in contrast to the Constitutional Court’s ruling in Beadica 231 CC and Others v Trustees of the Oregon Trust and Others [2020] ZACC 13, which allowed for discretion in cases where a contractual term is deemed unjust and contrary to public policy. The SCA’s stance sets the stage for potential conflict and future clarification by the Constitutional Court.