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A non-variation clause in a contract is not binding where it is invoked in circumstances which amount to an abuse of the legal process.

Is a non-variation clause in a contract absolutely binding in all circumstances, even where it is not invoked in good faith?

One of the most important clauses in a commercial contract - and almost invariably inserted in such contracts - is a non-variation clause, that is to say, a clause stating that no amendment to the contract will be legally valid unless it is reduced to writing and signed by all the parties.

It is easy to see the desirability of such a clause.

In the absence of a non-variation clause, it would be tempting for a party who enters into a contract and then decides that the terms are disadvantageous, to aver that, after the contract was entered into, it was orally amended (or perhaps cancelled altogether) by the joint agreement of the parties.

There would then have to be a long and expensive trial to determine whether such an oral amendment or cancellation had in fact occurred.

If the contract contains a non-variation clause, then any subsequent oral variation or cancellation - even if it did occur - has no legal validity and a court will just ignore it.

In 1964, in the case of SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren the Appellate Division ruled that such non-variation clauses are valid and binding on the parties. This principle has since been affirmed by the courts on many occasions.

The Shifren principle is based on two cornerstone principles of contract law: firstly, freedom of contract (in other words, persons are free to enter into any lawful contract they wish) and, secondly, that contracts must be honoured.

The Shifren principle recognises that parties can (paradoxically) use their freedom of contract to enter into a contract that restricts their future freedom of contract - in this instance, by agreeing that any future amending agreement will be invalid unless it is in writing and signed.

However, the Shifren principle is capable of being abused.

A person who has entered into a contract that incorporates a non-variation clause could later - seriously and deliberately - enter into an oral contract that amends the first contract and then, later, turn around and claim not to be bound by the second amending contract because it was not in writing and signed.

Is such conduct unconscionable?

Hitherto, the courts have taken a firm stance that, unconscionable or not, there are no exceptions to the Shifren principle. (See Nyandeni Local Municipality v Hlazo 2010 (4) SA 261 at 263E.) In other words, a non-variation clause in a contract is absolutely binding.

The first chink in this hitherto impregnable principle has come with the decision of the Eastern Cape High Court in Nyandeni's case, noted above, handed down in November 2009.

In this case the court held that, on the facts of this particular matter, the Shifren principle must be relaxed so as to prohibit a party to the contract from invoking a non-variation clause for purposes other than the bona fide vindication of his legal rights.

In Nyandeni's case, the facts were that a municipality had hired a municipal manager. The employment contract stated that any dispute in relation to the contract had to be resolved by arbitration and that any disciplinary proceedings against the manager had to be resolved "through pre-dismissal arbitration".

The contract contained a non-variation clause which stated that no amendment would be valid unless it was in writing and signed.

Disciplinary proceedings were later taken against the manager in question on the grounds of serious misconduct. He was later called on to attend a disciplinary hearing involving three charges. He was found guilty and was dismissed with immediate effect.

The municipal manager did not thereafter attack the lawfulness or the outcome of those disciplinary proceedings, and apparently accepted that he was correctly found guilty. (See the judgement at 266D.)

However, no arbitration had been held as required in the employment contract, and there had been no written and signed variation of this contractual requirement, as required by the non-variation clause.

The manager therefore claimed that the procedure followed in his dismissal had been improper and it must be set aside.

The manager had orally consented to the variation of his employment contract

The court found that (see the judgement at 268E) that, on the facts of this particular matter, the municipal manager had consented to the variation of the clause that required disciplinary disputes to be determined by arbitration.

If the Shifren principle were to be rigidly applied, such an unwritten and unsigned consent to the variation of the employment contract would be ignored by the court.

In that event, the manager's dismissal would have been invalid because the arbitration clause of the agreement had not been complied with.

Public policy can trump a contractual provision

The court took as its starting point (see the judgement at 275D) that there are circumstances in which a contract will not be enforced because it offends against public policy.

Consequently, said the court (at 276D) public policy may in certain circumstances "trump" a provision of a contract.

This raised the question - in the present case, involving a disciplinary hearing leading to the dismissal of the municipal manager, would the enforcement of the contractual non-variation clause offend against public policy?

The court answered this question in the affirmative.

The court said (at 283B) that in its view the municipal manager did not have a bona fide defence to the charges on which he had been dismissed. He had invoked the Shifren principle, not for the legitimate purpose of asserting his legal rights, but for the ulterior purpose of delaying his dismissal to secure a financial benefit.

The court said that it would serve no useful purpose to have a rehearing before another tribunal (eg an arbitrator) and would be an abuse of the process of law.

The court ruled that the circumstances of this case warranted a departure from the Shifren principle.

Consequently, the dismissal of the municipal manager stood, despite the dismissal having taken place by a process not authorised in the contract of employment, and despite the non-variation clause in that contract.

It remains to be seen whether, in due course, the Supreme Court of Appeal will endorse this judgement, and confirm that a non-variation clause may be ignored when it is invoked in circumstances which amount to an abuse of the legal process.

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