Enforcement Of An Agreement Not To Sue

Apactum de non petendo ("pactum") is an agreement between parties whereby one party agrees not to institute legal proceedings against the other party, either temporarily or permanently. A pactum usually suspends the enforcement of a commercial contract for a specific period or until the occurrence of some contingency.

In the recent decision in Coral Lagoon Investments 194 (Pty) Ltd and another v Capitec Bank Holdings Limited¹ ("Coral Lagoon") the Supreme Court of Appeal ("SCA") grappled with the interpretation of a consent agreement entered into between the parties to the dispute, and the question as to whether a pactum in perpetuity was contrary to public policy.

In Coral Lagoon, Ash Brook Investments 15 (Pty) Ltd and Coral Lagoon Investments 194 (Pty) Ltd ("Coral") (together, the "Appellants") and Capitec Bank Holdings Limited ("Capitec") concluded a subscription and shareholders' agreement (the "Subscription Agreement") in terms of which Capitec allotted and issued shares to one of the Appellants, Coral, who subscribed for shares in Capitec. In terms of the Subscription Agreement, the Appellants were subject to certain selling restrictions which later became the source of contention between the parties. It was the parties' understanding that those restrictions contained in the Subscription Agreement meant that Capitec's consent was required for the sale of Coral's share in Capitec.

Background

In 2017, Coral sought Capitec's consent for the intended sale of a portion of its shares, which was granted subject to certain restrictions ("2017 Sale"). As part of the suite of documents for concluding the 2017 Sale, a consent agreement was concluded between Capitec and the Appellants which contained a pactum.

In 2019, Coral sought to dispose of another portion of its shares, and just as before, it sought Capitec's consent. However, Capitec refused, and this led to the Appellants launching proceedings against Capitec to declare Capitec's refusal to be in breach of its duty of good faith to the Appellants. The Appellants claimed that, but for Capitec's conduct, Coral would not have concluded the 2017 Sale at a discount amounting to a loss of R1,225 billion.

Clause 7.1.6.2 of the consent agreement specifically provided that, each of the Appellants warranted that, "it shall not and shall procure that its related and inter-related persons (as defined in the Companies Act) do not directly or indirectly institute legal proceedings against Capitec Holdings ...whether as a plaintiff, applicant, defendant, respondent or otherwise, wherein it seeks to use or rely upon the 2017 Sale (or any part thereof)".

Nature of a pactum

The SCA described a pactum as an agreement like any other and confirmed that although a pactum usually suspends the enforcement of a contract for a specific period, the limitation of the right not to sue in the present matter was not linked to time.

The SCA further confirmed that a formulation which emphasises a time limit or contingency cannot therefore be said to be a requirement for a pactum to be valid. In the SCA's view the pactum in the present matter was one in perpetuity.

Public policy and the enforceability of a pactum

In the present case, the SCA had to determine whether the right to have any dispute decided by a court or another independent body had been waived. In doing so the SCA referred to the decision in Lufuno Mphaphuli and Associates (Pty) Ltd v Andrews² ("Lufuno") where the Constitutional Court held that when parties agree to arbitrate, they arguably do not waive their rights in terms of section 34 of the Constitution, but agree not to exercise them. The SCA in this matter applied the Lufuno principle and found that the Appellants had voluntarily elected to consent to the pactum.

The SCA also had to determine whether the enforcement of the consent agreement was contrary to public policy. It found that in Beadica 231 CC and others v Trustees for the time being of the Oregon Trust and others³ it was held that public policy generally requires that parties should comply with obligations that they have freely and voluntarily undertaken. In determining what public policy requires, a court must conduct a careful balancing exercise in which it has to "employ [the constitutional] values to achieve a balance that strikes down unacceptable excess of "freedom of contract" while seeking to permit individuals the dignity and autonomy of regulating their lives".

The SCA found that each party was legally represented during the negotiation of the consent agreement and, as such, there was no indication that the parties did not have equal bargaining power.

The important takeaway from this judgment is that parties must ensure they understand the agreement they are entering into and its consequences. Therefore, when a party has agreed not to institute legal proceedings and subsequently does so, that party may be in breach of the underlying agreement limiting their right to sue. The court's powers to invalidate a contractual provision of this nature is limited, as demonstrated in this case.

This case is a reminder that South African courts endorse the principle that contracts that are freely and voluntarily entered into must be honoured.

Footnotes

1. [2023] 1 All SA 1 (SCA).

2. 2009 (4) SA 529 (CC).

3. 2020 (5) SA 247 (CC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Daniel Hart
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