The Legal Approach Towards Time Barring Clauses in Insurance Contracts

The Constitutional Court, in the case of Barkhuizen v Napier 2007 (5) SA 323 (CC), dealt with the issue of “time-barring clauses” in contracts entered into between private persons.

The salient facts of the case are as follows:

The Applicant had entered into a short-term insurance contract with the Respondent for insurance of his motor vehicle. On 24 November 1999 the motor vehicle was involved in an accident which caused the vehicle damages beyond economic repair. The Applicant thus claimed the insured sum, i.e. R181 000 from the Respondent. The respondent repudiated the claim on the grounds that the Applicant had used the vehicle for business purposes despite the insurance agreement providing that the vehicle must be used for private purposes only.

On 8 January 2002, two years later, the Applicant instituted legal proceedings against the Respondent claiming payment of the insured sum together with interest thereon. The Respondent responded to the action with a special plea, claiming that they were released from liability due to the Applicant’s failure to adhere to the time-limitation clause which formed part of the contract. The relevant clause read as follows: “if we reject liability for any claim made under this policy we will be released from liability unless summons is served… within 90 days of repudiation”. In essence the Applicant was time barred from instituting proceedings to pursue his claim.

The Applicant argued that the time-limitation clause was unconstitutional as it was contrary to public policy and thus invalid. The basis of the Applicant’s contentions in this regard was that the clause sought to prescribe an unreasonably short period of time within which to institute legal proceedings and as a result it infringed on the right to seek redress from the Court and the right to access the Court.

The Court, inter alia, considered whether public policy tolerates time-limitation clauses. The Court held that it did, subject to the considerations of reasonableness and fairness. Furthermore, the Court reiterated that the Constitution recognises that the right to seek legal redress may be limited in certain instances.

Relying on the Mohlomi decision the Court held further that the general test for enforceability is whether the provision affords the Applicant an “adequate and fair opportunity to seek judicial redress. Notions of fairness, justice and equity, and reasonableness cannot be separated from public policy”. The Court also formulated a test for fairness viz, firstly, whether the clause itself is unreasonable and secondly, if the clause is reasonable whether it should be enforced in the circumstances.

The Court found that in respect of the first leg of the test two considerations would need to be weighed up against one another. One being the maxim, pacta sunt servanda and the other being the right to seek legal redress. The Court found that clauses of this type are reasonable and thus operational within our law. The Court thereafter moved on to examine the circumstances in which the clause would operate, in order to assess whether same should be enforced.

The Court ultimately found that the clause should be enforced in this matter because the Appellant failed to show why he had failed to act in accordance with the provisions of the time-bar clause. The Court explained that had the Applicant been unaware of the time limitation clause or the consequences thereof, or failed to act in accordance with same due to factors outside of his control then the clause would operate unfairly and the Court would not enforce same. However, the appellant seemed to be fully aware of the clause and the effect of same. Thus, in the circumstances, the Court found that the clause operated reasonably.

This decision opened the door for the Courts to refuse enforcement of certain, unfair clauses in contracts between private persons and laid the foundation of the grounds on which to do so.

 

The Policyholder Protection Rules

On 01 January 2018 the amended policyholder protection rules came into force. Various Rules have been in place regarding time barring since 2011, which the new Rules amplify. The rules build on the position laid down by the Court in Barkhuizen v Napier.

The Rules firstly provide that insurers must accept, repudiate or dispute a claim or the quantum thereof within a reasonable period of time. Thereafter, insurers must give written notice of their decision to the claimant within 10 days of making same.

In the event that an insurance claim is rejected or disputed by the insurer, the Rules provide for a rather stringent set of disclosure obligations which the insurer must fulfil. This ensures that claimants are equipped with the necessary information to properly pursue claims which they feel have been wrongly rejected. Insurers are required to inform the insured of the following:

 

  • The reasons for the decision “in sufficient detail to enable the claimant to dispute such reasons if the claimant so chooses”;
  • That the insured party may within 90 days make further representations in respect of its claim;
  • Details of the internal claim escalation and review process required by Rule 17.5. Rule 17.5 provides that an insurer must establish and maintain an appropriate internal process for claim decision escalation and/or review and for resolution of claim related disputes;
  • That the insured party has a right to lodge a complaint against the insurer with the relevant Ombudsman, together with the relevant contact details of same, any applicable time limitations, and other relevant legislative provisions relating to the lodging of such a complaint; and
  • Of any time limitation provision for the institution of legal actions contained in the policy, as well as the implications thereof or, in the absence of same, of the operation of the Prescription Act, the prescription period applicable and the implications of the Act.

 

It is also clear that mere notification of the clauses and processes is insufficient. Insurers must also ensure that claimants are made aware of the relevant details and implications thereof in order for them to be well equipped to deal with such clauses and/or to pursue such processes successfully. It is thus the obligation of the insurer to provide information regarding the protection provided by the rules available and accessible to their clients – which provides some redress to the unequal positions private persons find themselves in when dealing with insurance companies.

   

   The Rules further state:

“ 17.6.8      Any time limitation provision for the institution of legal action that may be provided for in a policy entered into on or after 1 January 2011-

(a)   may not include the period referred to in rule 17.6.3(b) in the calculation of the time limitation period; and

(b)   must provide for a period of not less than 6 months after the expiry of the period referred to in rule 17.6.3(b) for the institution of legal action.

 17.6.9   Despite the expiry of the period allowed for the institution of legal action in a time limitation clause provided for in a policy entered into before or after 1 January 2011, a claimant may request the court to condone non-compliance with the clause if the court is satisfied, among other things, that good cause exists for the failure to institute legal proceedings and that the clause is unfair to the claimant.

 17.6.10 For the purposes of section 12(1) of the Prescription Act, 1969 (Act 68 of 1969) a debt is due after the expiry of the period referred to in rule 17.6.3(b).”

 

The Rules confirm the Court’s power to condone non-compliance with time-limitations should they operate unfairly, as well as in circumstances where the policyholder can show their failure to institute legal proceedings timeously was due to a good cause. It is submitted that the test for fair operation of such a clause remains as decided by the Court in Barkhuizen. It must also be noted that the above requirements must be fulfilled in conjunction with one another. However, what exactly “among other things” refers to in this provision is currently unclear.

Insurers are also precluded from imposing unreasonably short time-limitations, as the Rules state that any time-limitation imposed in a policy entered into after 2011 may not be shorter than six months.

The Rules now require insurers to ensure that the policyholder is well aware of the existence of the time-limitation clause, as well as the implications thereof. This protects policyholders from being prejudiced by clauses which they previously would not have been made aware of, or fully understood. It also provides the policyholder with ample opportunity to dispute repudiated claims and follow the correct processes in order to have their claims reconsidered.

Should an Insurer fail to act in accordance with the Rules, a policyholder may lay a formal complaint against the insurer. As a result, the Rules have created a more onerous position for the Insurer and this should ensure that they act in accordance therewith.

The Rules provide some welcome redress to the unequal power that insurance companies hold over policyholders. Furthermore, the new amendments to the Rules obligate Insurers to inform policyholders of the protection in place which makes it more accessible to the policyholder and easier to follow.

 

Claire Wolmarans

Fairness and the FIDIC Silver Book

The FIDIC General Conditions of Contract, contained in the Silver Book version, requires the Employer to act in the “traditional” role of the Engineer. The purpose of this article is to examine the Employer’s power to make determinations in respect of the Contractor’s claims in terms of Clause 3.5 of the Silver Book Contract, and the manner in which he/she is to make same.

The clause in question reads as follows:

“Whenever these Conditions provide that the Employer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Employer shall consult with the Contractor in an endeavour to reach agreement. If agreement is not achieved, the Employer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.

The Employer shall give notice to the Contractor of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination, unless the Contractor gives notice, to the Employer, of his dissatisfaction with a determination within 14 days of receiving it. Either Party may then refer the dispute to the DAB in accordance with Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision].”

The Employer is thus required to consult with the Contractor, hear the Contractor’s side and attempt to come to an agreement with same regarding the Contractor’s claim against him or her. At this stage it is abundantly clear that this process may cause some tension between parties. Should such an agreement not be reached the Employer must proceed to make a “fair determination” regarding the Contractor’s claim. However, in doing so he/she becomes the judge of his/her own case.

E Baker et al in FIDIC Contracts: Law and Practice 2009 at page 292 alludes to the fact that the duty of the Employer to act fairly may not be a “meaningful duty” as the position is clearly conflicting. However, it is concluded that whilst it may be difficult for the Employer to act fairly in these circumstances it is still, in fact, possible. They rely on English authority (the Sheldebouw BV v St James Homes (Grosvernor Dock) Ltd 2006 BLR 124) to reach this conclusion. In the aforementioned matter counsel argued that it was impossible for the Employer to act fairly as a contract administrator, however, the Court found that this was not the case, but conceded that it would be more difficult for him/her to do so.

E Baker et al further argues that the protective measures provided in the Silver Book safeguards the Contractor’s interests from the Employer’s potential failure to act fairly. They refer to the portion of Clause 3.5 which provides that the Employer’s determination shall not be enforceable if the Contractor notifies the Employer of his/her dissatisfaction with the determination within 14 days of same being made. While this safeguard does allow the Contractor an easy mechanism to escape the enforceability of an unfair determination, this safeguard does not cure the internal conflict that arises when the Employer is empowered to make such determinations.

The interpretations of the word “fair” requires that a determination must be bona fide, professional, honest and arguably impartial. Whether the Employer will be able to act in such a manner when determining a claim which affects his/her own rights and position is almost unimaginable. Even where the Employer acts honestly, his/her position as Employer alone jeopardizes his ability to act bona fide toward the Contractor and to take all relevant considerations into account. There is also risk that he/she will naturally treat his/her own circumstances with more gravitas simply because he/she views same from his/her own perspective. As stated by the Court in Sheldebouw: “it is more difficult for the organisation itself to make a decision which is contrary to its own interests”.

Furthermore, the likelihood of the Contractor ever accepting the Employer’s determinations as satisfactory where it is negative towards him/her seems slim. The process of making determinations in terms of the Silver Book is thus inherently somewhat flawed. It is submitted that negative determinations by the Employer will be submitted for endless review by way of adjudication– rendering the process inefficient, time-consuming and potentially costly.

In practice, the removal of the “independent” Engineer creates a contract where the Employer holds the power and the Contractor stands to be prejudiced. It also creates a determination process wrought with potential inefficiency and which may prove difficult to navigate.

That being said, the Silver Book does allow for contract administration without the “middle man” (the Engineer) which in some circumstances may allow for the parties to work together more efficiently and directly. In some circumstances the conduct of the Engineer may hinder the progress of a project or complicate the channel of communication. In circumstances where the Employer and Contractor are comfortable with the Silver Book determination procedure, the Silver Book is certainly workable. Thus with the right parties – it could work.

In conclusion, Contractors should give due consideration to the impact of the Silver Book and whether it is comfortable with the Employer taking on the role of the Engineer before entering into such a contract. All parties should be aware of the pitfalls contained therein in order to ensure that the Silver Book Agreement is the appropriate contract choice.

Claire Roux

Defective works and succeeding contractor’s liability.

When a contractor is replaced by a new contractor it is of the utmost importance that the succeeding (new) contractor must understand the provisions of his/her appointment agreement, as well as the liabilities imposed in terms of the agreement. Depending on the intention of the parties to the contract, the contractor’s liability regarding defective works could be exempted.

In the recent unreported case of Trencon Construction (Pty) Ltd v South African Airways (Pty) Ltd 2015 JDR 0090 (GJ) the court had to determine whether the replacement contractor was liable for the defective works caused by the former contractor on the project.

In this case, Trencon Construction (“Trencon”) was appointed as the contractor for the construction of a departure lounge at OR Tambo International Airport, subsequent to the liquidation of the initial contractor. The parties concluded a written agreement and the general conditions applicable were the Joint Building Contract Committee: Principal Building Agreement (“JBCC”). When Trencon issued an invoice to South African Airways (“SAA”) for work done in terms of the appointment, the principal agent contended that there was defective works which had to be remedied before a certificate of final completion could be issued. It should be noted that when the Applicant was appointed as contractor the design, manufacture and installation of the shop fronts, which were alleged to be defective by the principal agent and SAA, was done by the previous contractor.

SAA and the project manager relied on clause 8.2 of the JBCC which provides that: “The contractor shall make good any physical loss and repair damage to the works, including clearing away and removing from site, all debris resulting therefrom, which occurs after the date on which the possession of the site is given and up to date of issue of the deemed certificate of final completion…” [my own emphasis]

The court held that clause 8.2 implies that the contractor shall make good the physical loss and repair and damage to works which occurs after the date on which possession of the site is given. It is common cause that the loss or damage occurred after the date on which possession was given to Trencon, and accordingly they were therefore not obliged to make good the loss or repair the damage.

Furthermore, the principal agent never issued a defects list, despite Trencon’s notification that same was outstanding. Accordingly in terms of clause 26.4 of the JBCC, the certificate of final completion is deemed to be issued, and as a result final completion is deemed to have been achieved.

The court also referred to clause 8.5 of the JBCC which provides that: “The contractor shall not be liable for the cost of making good any physical loss or repairing any damage of works where this resulted from the following circumstances: …

8.5.9. design of the works where the contractor is not responsible in terms of clause 4.0…”

It was common cause that Trencon was not responsible for the design of the works which the principal agent and SAA contends to be defective. This is therefore another reason why Trencon cannot be held liable for the loss or damages.

To conclude, due to the provisions of the JBCC and due to the fact that the loss or damage did not occur after the date of possession of the site, Trencon was not responsible for the loss or damaged works that occurred. Should an employer therefore require the succeeding contractor to take responsibility for remedying defects or damages caused by the preceding contractor, the employer must expressly state its intention and ensure that it is included in the agreement.

It should be noted that the JBCC applicable in the Trencon case was the JBCC published in 2007, and in the latest edition of the JBCC published in 2014, clause 8.2 is amended.

It terms of the 2014 JBCC version, clause 8.2 states that: “The contractor shall make good physical loss and repair damage to the works caused by or arising from:

8.2.1.  any cause before the date of practical completion;

8.2.2. any act or omission of the contractor, in the course of any work carried out in pursuance of the contractor’s obligations after the date of practical completion.”

It is clear that the words “which occurs after the date on which the possession of the site is given” has been omitted and accordingly this could have an influence on the liability of the contractor. Clause 8.5 of the 2014 JBCC, however, still excludes the contractor’s liability for the loss or repair of damages caused by the design works for which the contractor is not responsible, and this could ultimately still be a defence for the contractor, should the preceding contractor’s works include design.

In light of the aforementioned it is therefore evident that depending on the type of JBCC edition applicable, the contractor will have a valid defence in these circumstances. However, every situation will have to be determined on its own merits and facts.

 

Anjo Rheeders

Contract Law – Our Courts’ approach to exemption clauses and the potential impact of the Consumer Protection Act thereon

Introduction:

1. Exemption clauses are provisions in a contract in terms of which a party is protected from certain claims in respect of damages, loss, negligence, non-performance etc. An example of an exemption clause is the following:

“The buyer shall not have or acquire any claim against the seller, nor shall the seller be liable in contract or delict for any general, special or consequential damages sustained by the buyer or any third party flowing directly or indirectly from this contract whether due to acts, omissions or otherwise of the seller or its employees or agents or any other person for whom the seller may be held liable, and the buyer hereby indemnifies the seller and holds it harmless against any such claim as aforesaid.”

2. Such clauses can obviously have onerous implications for the non-benefitting party as they have the effect of excluding or limiting liability on the part of one of the contracting parties. Our Courts have, on a number of occasions, been tasked with assessing whether or not such clauses can be enforced. Recent cases in this regard will be discussed below, in order that our Courts’ historic approach to exemption clauses may be illustrated.

3. Since these decisions were handed down, the Consumer Protection Act, Act 68 of 2008, (hereinafter referred to as “the Act”) has come into force. This Act deals extensively with exemption clauses and the relevant provisions thereof will also be discussed below as this will have an impact on how our Courts approach such exemption clauses in future.

Case law dealing with enforcement of exemption clauses prior to the Act coming into force:

4. The matter of Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA) may be considered as one of the most well-known and controversial decisions dealing with the enforcement of exemption clauses.

The facts of the matter are briefly as follows:

4.1 The respondent was admitted for an operation and post-operative medical treatment at the appellant’s hospital facilities.

4.2 After the respondent had undergone the operation, a nurse in the employ of the appellant negligently caused him injury by applying a bandage too tightly, cutting off the blood supply to a part of his body.

4.3 The respondent then instituted a claim against the appellant, who denied liability based on an exemption clause contained in the admission agreement. The court a quo held that the exemption clause could not be enforced and the matter was taken on appeal.

4.4 The exemption clause which the appellant sought to have enforced read as follows:

“I absolve the hospital and / or its employees and / or agents from all responsibility and indemnify them from any claim instituted by any person (including a dependant of the patient) for damages or loss of whatever nature (including consequential damages or special damages of any nature) flowing directly or indirectly from any injury (including fatal injury) suffered by or damage caused to the patient or any illness (including terminal illness) contracted by the patient, whatever the causes are, except only with the exclusion of intentional omission by the hospital, its employees or agents.”

4.5 The respondent argued that he should not be bound by the exemption clause as the same was against public policy for the following reasons:

4.5.1 There was an unequal position between the parties concluding the agreement, with the hospital being in a stronger bargaining position;

4.5.2 The exemption clause had the effect of exempting the hospital and its employees from properly carrying out their duties;

4.5.3 The clause exempted hospital personnel from gross negligence; and

4.5.4 The exemption clause conflicted with the constitutional right of access to healthcare.

4.6 In the alternative to his argument that the exemption clause was contrary to public policy, the respondent argued that the clause was unenforceable for being unreasonable, unfair and contrary to the principles of good faith which underlie our law of contract.

4.7 In the further alternative, the respondent argued that his attention should have been drawn to the clause and the appellant’s failure to do so constituted a breach of a legal duty owed to the respondent.

4.8 In its consideration of the matter, the Supreme Court of Appeal expressed the view that an exemption clause excluding the appellant from gross negligence would indeed be contrary to public policy. In this case, however, the Court found that gross negligence had not been alleged by the respondent and, as such, this consideration did not find application in the matter.

4.9 The Court held that:

4.9.1 Clauses of this nature are the norm not the exception, are sound business practice and not contrary to public policy.

4.9.2 There was no evidence that the respondent was in a weaker bargaining position than the appellant.

4.9.3 There are sufficient sanctions by professional bodies and legislation to ensure that medical professionals perform their duties properly in compliance with their professional rules.

4.9.4 The clause does not conflict with the Constitution as contractual freedom is also a constitutionally enshrined right.

4.9.5 While the principle of good faith is one of the foundations of our law of contract, it is not a rule of law based on which the exemption clause can be set aside.

4.9.6 There was no duty on the appellant’s clerk to explain the clause to the respondent nor could the respondent allege that he did not expect such a clause bearing in mind that such clauses have become the norm instead of the exception.

4.10 The exemption clause was, accordingly, upheld by the Supreme Court of Appeal.

5. In the matter of Mercurius Motors v Lopez 2008 (3) SA 572 (SCA) the Court dealt with exemption clauses that undermine the very essence of a contract The facts of the matter are briefly as follows:

5.1 The respondent delivered a vehicle that he was leasing to the appellant for a service and certain minor repairs. The vehicle was stolen while on the premises.

5.2 The respondent instituted action based on his contract of deposit with the appellant. The appellant denied that the loss of the vehicle was due to any negligence on its part and relied on exemption clauses in the contract of deposit, one of which appeared on the reverse side of the repair order form (under a carbon copy which had to be detached to reveal the terms and conditions) and read as follows:

“I/we acknowledge that Mercurius shall not be liable in any way whatsoever or be responsible for any loss or damages sustained from fire and / or burglary and / or unlawful acts (including gross negligence) of their representatives, agents or employees.”

5.3 The court a quo held that the exemption clauses were printed in such a manner so as not to draw the reader’s attention thereto and, as such, the respondent had been misled and the clauses could not be upheld. The Court a quo further found that the appellant had not taken reasonable steps to secure the vehicle as there were inter alia not adequate processes in place to ensure that the keys were not left in the vehicle overnight.

5.4 The respondent’s claim was awarded with costs.

5.5 On appeal, the Supreme Court of Appeal held that a person delivering a motor vehicle to be serviced or repaired would ordinarily rightly expect that the depositary would take reasonable care in relation to the safekeeping of the vehicle entrusted to him or her. An exemption clause such as the one relied upon by the appellant, that undermines the very essence of the contract of deposit, should be clearly and pertinently brought to the attention of the customer who signed a standard-form contract, not by way of an inconspicuous and barely legible clause that referred to the conditions on the reverse side of the page in question. The exemption clause was thus not upheld.

5.6 The Supreme Court of Appeal further held that, by not safeguarding the keys to the vehicle, the employees of the appellant did not act as a reasonable person in their circumstances would have acted.

5.7 The appeal was thus dismissed with costs.

6. In the more recent matter of Naidoo v Birchwood Hotel 2012 (6) SA 170 (GSJ), the Court held a different view on the enforcement of an exemption clause.  The facts of the matter are briefly as follows:

6.1 The plaintiff was a guest at the Birchwood Hotel (hereinafter referred to as “the hotel” and wanted to exit the hotel premises.

6.2 He found that the gate to one of the entrances of the hotel was closed and waited for a security guard to open the gate. When realising that the gate was still not opening, the plaintiff alighted from his vehicle and walked towards the gate himself.

6.3 The gate had jammed and the wheels had come off the rails. The gate fell on the plaintiff as he approached and caused serious bodily injuries.

6.4 The plaintiff sought to recover damages from the hotel based on his assertions that the hotel had been negligent and could have prevented the harm from occurring had it:

6.4.1 Properly maintained the gate;

6.4.2 Ensured that the gate was safe for public usage; and

6.4.3 Warned the public of the potential danger created by the state of disrepair of the gate.

6.5 The hotel denied negligence and relied on an exemption clause on the back of the hotel registration card, which stated that:

“The guest hereby agrees on behalf of himself and the members of his party that it is a condition of his / their occupation of the Hotel that the Hotel shall not be responsible for any injury to, or death of any person or the loss or destruction of or damage to any property on the premises, whether arising from fire, theft, or any cause and by whomsoever caused or arising from the negligence (gross or otherwise) or wrongful acts of any person in the employment of the Hotel.”

6.6 Guests were directed to the exemption clause by an instruction on the registration card which read “Please read terms and conditions on reverse!”

6.7 The Court found that the security guard had failed to take reasonable steps to prevent the accident by warning the plaintiff to keep at a distance. The Court further found that reasonable steps on the part of the hotel would entail regular checks to ensure that every gate was well maintained and functioning properly at all times. If a gate was not functioning well, the hotel should have warned the public of the potential danger posed by the gate.

6.8 Turning to deal with whether or not the exemption clause was binding on the plaintiff and if it was not against public policy the Court applied the test formulated in Barkhuizen v Napier 2007 (5) SA 323 (CC) in which it was stated that, when challenging a contractual term, the question of public policy inevitably arises. But that this was no longer difficult to determine because:

“Public policy represents the legal convictions of the community; it represents those values that are held most dear by the society. Determining the content of public policy was once fraught with difficulties. That is no longer the case. Since the advent of our constitutional democracy, public policy is now deeply rooted in our Constitution and the values that underlie it. Indeed, the founding provisions of our Constitution make it plain, our Constitutional democracy is founded on, among other values, the values of human dignity, the achievement of equality and the advancement of human rights and freedoms, and the rule of law. And the Bill of Rights, as the Constitution proclaims, is a cornerstone of that democracy, it enshrines the rights of all people in our country and affirms the democratic [founding] values of human dignity, equality and freedom.

… Thus a term in a contract that is inimical to the values enshrined in our Constitution is contrary to public policy and is, therefore, unenforceable.”

6.9 The Court stated that, according to the two-stage enquiry espoused in the Barkhuizen case, it may first examine whether a term in a contract is objectively reasonable. If it finds that it is, the next enquiry is whether it should be enforced in the particular circumstances. The Court expressed the view that exemption clauses that exclude liability for bodily harm in hotels and other public places have the effect, generally, of denying a claimant judicial redress.

6.10 The Court thus held that a guest in a hotel does not take his life in his hands when he exits through the hotel gates. To deny him judicial redress for injuries he suffered in doing so, which came about as a result of the negligent conduct of the hotel, offends against notions of justice and fairness.

6.11 The plaintiff’s claim thus succeeded.

The provisions of the Act which may impact the enforcement of exemption clauses

7. The above decisions are somewhat divergent when it comes to upholding exemption clauses.

8. The position has, however, been clarified to a certain extent by the Act, which came into effect on 01 April 2011 and which sets the promotion and advancement of the economic welfare of consumers in South Africa as its primary purpose. The Act seeks to protect vulnerable consumers and, at present, the Act applies to consumers with an annual turnover not exceeding R2 000 000.00 (two million rand), subject to further exemptions / exclusions which may apply (as set out in section 5 of the Act).

9. The Act prescribes certain fundamental “consumer rights” of which the right to “fair, just and reasonable contract terms” may significantly impact the validity and enforceability of exemption clauses as terms that do not comply with the requirements of the Act may be declared unlawful and set aside by the Court.

10. Section 48 of the Act contains a general prohibition on unfair, unreasonable and unjust contract terms and also prohibits any agreement that requires a consumer to waive any rights, assume any obligations or waive any liability of a supplier on terms that are unfair, unreasonable or unjust or if such terms are imposed as a condition of entering into an agreement. The section also lists criteria in order to determine whether a condition of a contract is unfair, unreasonable or unjust terms, which include the following:

10.1 Terms that are “excessively one-sided in favour of any person other than the consumer or other person to whom goods or services are to be supplied”.

10.2 Terms which are “so adverse to the consumer as to be inequitable”.

10.3 If the consumer relied upon a false, misleading or deceptive representation or statement of opinion provided by or on behalf of the supplier, to the detriment of the consumer.

11. Section 48(2) of the Act also requires that, if the agreement is subject to a term, condition or notice that may be unfair, unreasonable, unjust or unconscionable in terms of the criteria listed above, the fact, nature and effect of that term, condition or notice must specifically be drawn to the attention of the consumer in a manner and form that satisfies the formal requirements set out by the Act. If this provision is not complied with the Court may set aside the specific terms and conditions that were not drawn to the attention of the consumer.

12. Section 49(1) of the Act states that provisions in consumer agreements must be drawn to the consumers’ attention if such provisions:

12.1 In any way limit the risk or liability of the supplier or any other person.

12.2 Constitute an assumption of risk or liability by the consumer.

12.3 Impose an obligation on the consumer to indemnify the supplier or any other person for any cause.

12.4 Are an acknowledgement of any fact by the consumer.

13. In addition to the above, section 49(2) states that, if a provision or notice concerns any activity or facility which is subject to risks, the supplier must specifically draw the fact, nature and potential effect of those risks to the consumer’s attention. The consumer must agree thereto by signing or initialling or otherwise indicating acknowledgment thereof. This is required for any risks:

13.1 That are of an unusual character or nature.

13.2 The presence of which the consumer could not reasonably be expected to be aware of or notice, which an ordinarily alert consumer could not reasonably be expected to notice or contemplate in the circumstances.

13.3 That could result in serious injury or death.

14. Section 49(3) and 49(4), read together with section 22, states that any such provisions, conditions or notices must be written in plain language and must be drawn to the attention of the consumer in a conspicuous manner and form likely to attract the attention of an ordinarily alert consumer having regard to the circumstances. Furthermore, this must be done before the consumer:

14.1 Enters into the agreement,

14.2 Begins to engage in the activity;

14.3 Enters or gains access to the facility; or

14.4 Is required or expected to pay for the transaction.

15. In terms of section 49(5), the consumer must be given adequate opportunity in the circumstances to receive and comprehend the provision or notice.

16. Section 51 of the Act further contains certain outright prohibitions on the terms that can appear in contracts and states inter alia the following:

“A supplier must not make a transaction or agreement subject to any term or condition if –

(b) it directly or indirectly purports to –
(i) waive or deprive a consumer of a right in terms of this Act;
 (ii) avoid a supplier’s obligation or duty in terms of this Act;
 (iii) set aside or override the effect of any provision of this Act; or
 (iv) authorise the supplier to –
  (aa) do anything that is unlawful in terms of this Act; or
  (bb) fail to do anything that is required in terms of this Act …”

17. Section 51(1)(c)(i) of the Act further specifically prohibits terms that purport to “limit or exempt a supplier of goods or services from any liability for a loss directly or indirectly attributable to the gross negligence of the supplier or any person action for or controlled by the supplier …”.

18. Section 51(1)(c)(i) accords with the Court’s decision in the Afrox case in which it was held that the exclusion of gross negligence in an exemption clause is contrary to public policy.

19. In terms of section 52 of the Act, if the Court determines that provision was (in whole or in part) unconscionable, unjust, unreasonable or unfair, the Court may make a declaration to that effect and make any order that it deems just and reasonable in the circumstances. This includes an order to compensate the consumer for losses and expenses.

Conclusion

20. It is clear that the Act does not preclude a party form including an exemption clause in an agreement. The Act does, however, offer a more clear recourse to a non-benefitting party who seeks to impugn the enforceability of such a clause.

21. There seems to be an argument to be made that, had the Act been in force when the Afrox matter was decided, the outcome may have been different, specifically with regard to the obligation to draw the patient’s attention to the exemption clause. The decisions in the Mercurius Motors and Naidoo matters seems to be more in line with the provisions of the Act.

22. The Act does, however, not have retrospective effect and the provisions can only be relied on in respect of agreements entered into after 01 April 2011. The manner in which our Courts will approach the provisions of the Act remains to be seen as there has not been reported case law on the subject as yet.

23. It will be of particular interest how the Court will approach the question whether or not an exemption clause is so adverse as to be inequitable. It may well be that the test laid down in the Naidoo matter may find application, i.e. that a clause will be found to be inequitable if it has the effect of denying judicial redress to such an extent that it offends against notions of justice and fairness.

24. For a further discussion on the effect of the Act on product liability claims, please refer to an article by the same author titled “Our Courts’ approach to product liability claims and the impact of the Consumer Protection Act thereon, with specific reference to manufacturers’ and suppliers’ liability”.

Contract Law – Suspensive Conditions – Fulfullment or Waiver?

In the recent matter of Aeterno Investments 216 (Pty) Ltd v Ramashala 2011 JDR 0657 (GNP), the applicant succeeded with an application for an order declaring an agreement of sale of immovable property to be valid and binding in circumstances where the respondent alleged that the agreement had lapsed.    A discussion of the judgement follows.

Ramashala (“the respondent”) sold a property for R 4 000 000,00 on 17 June 2007.  The signatory to the agreement (on behalf of the purchaser) signed “as trustee for a company to be formed or nominated” and subsequently nominated Aeterno Investments 216 (Pty) Ltd (“the applicant”) to take transfer of the property. 

The agreement was subject to the condition that the applicant “shall succeed in raising a loan” for the full purchase price within 30 days from 17 June 2007, failing which the agreement shall lapse.

The applicant showed that Standard Bank advised it in writing on 11 July 2007 that its application for a loan of R 2 800 000,00 had been approved. 

The directors of the applicant then passed a resolution accepting the nomination, authorising the signatory to act as its representative and waiving the benefit of the suspensive condition.

One of the directors of the applicant (“Pelser”), agreed to advance the shortfall of R 1 200 000,00 plus the costs of transfer to the applicant.   A letter was issued by Standard Bank on 25 October 2007 (well after any relevant date) confirming Pelser’s affordability to honour the loan to the applicant.

On 16 June 2007, one day before the date on which the suspensive condition had to be fulfilled, the applicant’s attorney (“Uys”) telephoned the respondent and they discussed the matter in some detail (it was, however, unclear whether Uys advised the respondent in clear terms that the applicant had waived the benefit of the suspensive condition).

Two days later the applicant’s attorney wrote a letter to the respondent recording that –

  • a loan of R 2 800 000,00 had been granted, that the applicant had waived the benefit of the suspensive condition and that the applicant was ready to proceed with the agreement, issue guarantees for the full purchase price and pay the costs 
  • the respondent advised Uys telephonically of his intention not to proceed with the sale and that the applicant regarded his statement as a repudiation which the applicant did not accept. 

In response to certain aspects raised by the respondent in his answering affidavit, Preller J commented as follows:

  • regard should be had to the fact that the wording of the suspensive condition did not require the loan to be granted by a bank – all that was required was that the applicant “should succeed in raising a loan”;
  • the applicant did not communicate its waiver or the fact that he had secured an additional loan to the respondent in writing,  but that this failure was of no import.  The agreement required any notice “referred to in this agreement” to be in writing, but neither of the two  absent notices were required contractually;
  • the fact that the letter confirming Pelser’s affordability was well out of time was, again, of no relevance.  The letter merely purported to confirm Pelser’s financial standing and had nothing to do with the fulfilment of the suspensive condition.

Preller J identified two issues on which the dispute turned:

  1. Whether the suspensive condition in the contract had been fulfilled; and if not,
  2. Whether the purchaser had waived the benefit thereof and whether it was entitled to do so.

In considering the first question, Preller J relied on the  rule of interpretation  that, when a suspensive condition with a time limit is included in a contract, the time limit is usually intended to be for the benefit of the seller, while a condition requiring a loan to be obtained is usually for the benefit of the purchaser.  He quoted Marais J in Van Jaarsveld v Coetzee, 1973 (3) SA 241 (A) as saying “… it seems to me that the respondents had no interest in from what source or against what security the money was obtained”.

In response to the second question, Preller J referred to the principle as spelled out by Innes CJ in Mutual Life Insurance of New York v Ingle, 1919 TPD 540 at 55, which, as far as he could tell, was still the current accepted position:  “When the intention to renounce is expressly communicated to the person affected he is entitled to act upon it, and the right is gone.  When the renunciation, though not communicated, is evidenced by conduct inconsistent with the enforcement of the right, or clearly showing an intention to surrender it, then also the intention may be acted upon, and the right perishes”.  The legal position was thus clearly that the applicant was entitled to waive the rights afforded to it unilaterally provided that it communicated its waiver (either expressly or by its conduct) prior to the expiry of the fulfilment period.

In casu it was common cause that:

  • The full purchase price had been secured by loans (one from Standard Bank and one from Pelser);
  • The respondent was advised verbally, and before the expiry of the fulfilment period, that a loan had been granted, that the purchase price and costs were available and that the required guarantees could be issued.

These facts all constituted conduct clearly indicating a surrender of the right to walk away from the agreement and the respondent was aware thereof.

The respondent was ordered to furnish such information and documents  and to sign all necessary documents required to effect transfer of the property to the applicant and was ordered to pay the costs of the application.

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