INTRODUCTION

Have you ever read a contract (perhaps your lease agreement, your cell phone contract or maybe even the terms and conditions attached to a ticket which allows you admission to an event), and thought “that penalty term of the contract seems very harsh and unfair”?

In South Africa, contracts are governed by the common law, but they are also governed by a few pieces of national legislation, which limit the kinds of terms that can lawfully be included in contracts or alter the effect of these contract terms. Examples that might be well known include the National Credit Act and the Consumer Protection Act.

The Conventional Penalties Act¹ (hereinafter “the CPA”) is an entirely different piece of legislation to the Consumer Protection Act (which is also sometimes abbreviated as the “CPA”).

The Conventional Penalties Act governs the enforceability of penalty provisions in contracts. According to Courtis Rutherford v Sasfin (Pty) Ltd² there are two focal points of the CPA. The primary objective is to communicate to the world at large that penalty stipulations that are contained within a contract are enforceable in law. Its secondary objective it is to ensure that there are no excessive and unfair penalty stipulations enforced in the contract.

CUMULATION OF REMEDIES AND RECOVERY OF PENALTIES IN RESPECT OF DEFECTS OR DELAY

Section 2 of the CPA deals with prohibition on cumulation of remedies and limitations with regards to recovery of penalties. According to section 2(1), the creditor is prohibited from claiming both the penalty and damages with regards to an act or omission of a contractual obligation, except where the contract in question expressly provides that they can recover damages in lieu of the penalty.

According to the court in De Lange v Deeb³, the creditor is not deprived from claiming damages when there has been a breach of contract. Rather, the right to claim damages still stands but it is in the alternative. This is because he is not entitled to claim both the penalty and damages. He can either claim the penalty instead of damages or damages instead of the penalty. The right to claim damages is further qualified in section 2(2) of the CPA when it stipulates that the creditor can claim damages where the agreement expressly provides so.⁴

In the case of Botha (Now Griessel) v Finanscredit (Pty) Ltd⁵, the court held that the use of the word ‘expressly’ in the section does not mean that the contract between the parties should have the exact identical words of ‘lieu of damages’ for it to qualify the creditor to claim for damages. Therefore, there is no obligation to use the specific words ‘in lieu of the penalty’. Instead, it is sufficient that the contract expressly gives the creditor the choice to recover damages in any used words or language of the contract.⁶ If the contract provides so, the creditor has a choice to either claim damages or to recover a penalty.

LIMITATION ON RIGHT TO CLAIM DAMAGES WHEN CREDITOR ACCEPTS OR IS OBLIGED TO ACCEPT DELAY OR DEFECTIVE PERFORMANCE

Section 2(2) of the CPA stipulates that an individual is not entitled to recover a penalty in respect of the defect or delay when that person accepts or is obliged to accept defective or non-timeous performance.

THE PENALTY CAN BE REDUCED IF IT IS EXCESSIVE

As per section 3 of the CPA, there can be a reduction of any excessive penalty where in the court’s opinion, the penalty is excessive. The CPA in this section stipulates that if it appears to the court that the penalty being claimed is not in proportion to the prejudice suffered by the creditor as a result of an act or omission of the contractual obligation, the court may reduce such penalty and replace the penalty with one that it considers equitable in the circumstances.

In determining the prejudice that the stipulated penalty causes to the party, the court should not only consider the proprietary interest of the creditor, but it should take into consideration all other rightful interests that may be affected by an act or omission of the debtor.

According to Courtis Rutherford v Sasfin (Pty) Ltd⁷, the purpose of this section is to soften the blow for the debtor whilst not causing prejudice to the creditor. This means the courts have the power to consider an equitable reduction of penalty. If the penalty is found to be out of proportion to the prejudice suffered by the creditor and excessively unfair to the debtor, it will be reduced to what the court deems fit.⁸

To determine whether the penalty is out of proportion of the prejudice suffered by the creditor, the court considers things like harm or hurt a creditor suffers ‘in his property, his person, his reputation, his work, his activities, his convenience, his mind, or in any way whatever interferes with his rightful interests as a result of the act or omission of the debtor.⁹ These, however, must be plead in the court papers and specifically brought to the attention of the court.

The court further held that the onus is on the debtor to prove that the penalty is not proportionate to the prejudice suffered by the creditor.

FORFEITURE STIPULATIONS

In section 4 of the CPA, it is stated that a stipulation upon withdrawal shall still have effect to the extent and subject to conditions prescribed in sections 1 to section 3. Section 4 also prescribes that any other party, upon withdrawal, shall forfeit their right to claim restitution of anything that they had already performed per the contract and shall remain liable for the performance of anything under the agreement. This is if their contract provides for such forfeiture stipulation.¹⁰

When the court applied section 3 to section 4 in the case of Matthews v Pretorius¹¹ it noted that where a party has performed already in terms of the contract and the contract has a forfeiture stipulation enforced against them with regards to what they have already delivered or performed, it forms part of reduction in terms of section 3. This is because the forfeiture stipulations in section 4 have effect to the extent and subject to conditions prescribed in sections 1 to 3. What all this means is that; what the debtor has already performed in the contract forms part of the compensation due to the creditor by reason of forfeiture stipulations in their contract and as enforced by section 4 of the CPA. Section 4 of the CPA is, therefore, applied in similar form to section 1 and 2 of the CPA.

CONCLUSION

The CPA aims to ensure that the debtor is held accountable for its breach but also prevents the creditor from excessively punishing the debtor for the breach committed. In complex contract disputes, it is always best to consult an attorney for specific advice pertaining to your contract. The explanation of the law provided above is general in nature, and may not apply to your unique circumstances. Email the Public Law Department at HBGSchindlers for assistance at public@hbgschindlers.com.