How do the courts reconcile the right to freedom of contract and the right to freedom of trade?
Will the courts strike down a restraint of trade agreement on the grounds that it is against public policy as impeding freedom of trade?
Bedford Square Properties (Pty) Ltd was the owner of a certain commercial property in Gauteng on which a shopping complex had been erected.
The Liberty Group Ltd was the owner of an adjacent property on which another shopping complex had been erected.
In 2001, the two companies, as owners of these adjacent commercial properties, entered into an agreement in which Bedford Square Gardens (Pty) Ltd undertook that it would not, for a period of eleven years, lease any of its shopping complex to Woolworths or Mica Stores, two well-known retailers.
By 2009, Bedford Square Properties (Pty) Ltd had had a change of heart, and now wanted to lease part of its shopping complex to Woolworths and Mica Stores. But it could not do so whilst it remained bound by the restraint in its agreement with the Liberty Group.
It is a cardinal principle of contract law that contracts, freely and seriously entered into, must be observed. On what grounds could Bedford Square Properties (Pty) Ltd contend that its contractual undertaking not to lease shopping space to Woolworths or Mica Stores was not binding?
The courts will not uphold contracts that are contrary to public policy
Only one argument was available to Bedford Square Properties (Pty) Ltd in this regard, namely, that the contractual restraint in question was "contrary to public policy" and was therefore void, and consequently not binding.
With only this single card to play, the company embarked on High Court proceedings to try to have the contractual restraint struck down.
Our law does, in general, support the right of freedom to trade and regards agreements that have no other purpose than to stifle competition as being against public policy.
However, our law also recognises the sanctity of contracts, and the principle that a contract, freely and seriously entered into, must be observed.
These principles can - as in the present case - come into conflict. And this particular case has been watched with intense interest by all commercial property owners in South Africa, for the scenario in question is not uncommon.
Did the agreement deny the public their freedom of choice?
Bedford Square Properties (Pty) Ltd argued that the restraint of trade agreement was against public policy because it denied the public the freedom of choice, and that the restraint of trade agreement had no other purpose than to protect the "monopolistic interest" of the Liberty Group.
Although the judgement does not say so, it is reasonable to infer that Bedford Square Properties (Pty) Ltd would find it easier to attract tenants to its shopping complex and would be able to charge higher rentals if the complex housed quality tenants such as Woolworths or Mica Stores who would attract customers to the complex, and that this was the reason it wanted to have the restraint of trade clause struck down.
The arguments advanced by Bedford Square Gardens as to why the restraint clause in the agreement was contrary to public policy did not find favour with the South Gauteng High Court. The court pointed out that -
It is indeed well known that it is a regular feature of commercial life that, when it comes to shopping centres, there are restrictions on who may or may not be tenants in particular buildings. It is also well known that certain tenants are attracted by the presence or absence of other tenants.
The court pointed out that Bedford Square Gardens (Pty) Ltd was not, in general terms, restricted in its business of leasing premises. It was merely restrained, for a limited period of time, from leasing premises to two particular concerns, Woolworths and Mica Stores.
The court cited earlier judgements to the effect that the power of the judiciary to declare contracts void as being contrary to public policy -
should be exercised sparingly and only in the clearest of cases, lest uncertainty as to the validity of contracts result from an arbitrary and indiscriminate use of the power. ... It must be borne in mind that public policy generally favours the utmost freedom of contract and requires that commercial transactions should not be unduly trammelled by restrictions on that freedom.
In other words, there are strong reasons for public policy to favour the principle that contracts, freely entered into, should be observed. The binding force of contracts is a foundation-stone of commerce.
Although the court did not say so, it is significant that this was not a case where the two contracting parties were of unequal bargaining power and one had abused his bargaining power to impose an unconscionable contractual restraint on the other. In such circumstances, the courts will more readily regard the restraint as against public policy.
The court accordingly ruled that the restraint of trade agreed on by the parties was valid and enforceable and not contrary to public policy.