'Unconscionable conduct’ defence gaining momentum in South Africa

Unconscionable conduct is commonly understood to be conduct that is so unfair or oppressive that it goes against good conscience and public policy. However, it is not a concept recognised in South African jurisprudence. This fact does not appear to be deterring a trend for litigants – particularly guarantors of on-demand guarantees – to continue attempts to invoke it as a defence to demands for payment.

Recently, both South Africa’s High Court and Supreme Court of Appeal (SCA) have rejected the defence. However, given the narrow application of the fraud exception – which would otherwise allow a guarantor to avoid making payment on receipt of a demand from the party in whose favour a guarantee was issued – it is likely that parties will continue to push to expand the law until the Constitutional Court finally rules on the issue.

This argument was raised during a High Court appeal in April 2023 in which an energy and construction consortium sought to restrain insurer Santam from paying out on an on-demand guarantee issued in favour of Ngodwana Energy. The court noted that unconscionable conduct may be a valid future ground to restrain a guarantee call and that the consortium had failed to raise this argument in its original application. It ruled that the argument failed on that basis.

Nonetheless, the issue continues to be revisited in our courts. In January this year, for instance, in Imvula Roads and Civils (Pty) Ltd and Others v Holland Insurance Co. Ltd and Another, the applicants attempted to invoke unconscionable conduct as a defence by relying on an earlier decision in the Singapore courts.

The High Court, however, rejected the application of unconscionability as a legal defence and confirmed that fraud is the only recognised defence in South African law to a call on a performance guarantee. The court held that in any event there was no need to develop common law to include unconscionability because, in a 2020 case known as Beadica, the Constitutional Court had already established that contracts contrary to public interest will not be enforced, and that this principle provided a sufficient safeguard against abusive or unfair conduct in contractual relationships.

More recently, in May this year, in Set Square Developments (Pty) Ltd v Power Guarantees (Pty) Ltd and Another, Power Guarantees as guarantor sought to raise unconscionable conduct as a defence to resist making payment under an on-demand guarantee. In this case, the SCA firmly rejected Power Guarantees’ defence on factual, procedural and legal grounds.

Specifically, the SCA held that there were no facts to demonstrate that the beneficiary had any intention to mislead or misrepresent any facts to claim payment under the guarantee. It said that even if there had been such grounds, unconscionability was neither raised on Power Guarantees’ pleaded case nor was there any legal precedent in South Africa recognising unconscionability as a valid exception to the enforcement of on-demand guarantees.

The SCA’s ruling reaffirms the independence principle – a cornerstone of the security that on-demand guarantees provide – which states that once a valid demand is presented, the guarantor is obliged to pay without interrogating the underlying contractual disputes.

The unconscionability defence internationally

The argument for unconscionability is also gaining ground further afield.

In Singapore, several recent cases have highlighted the scope of the unconscionability exception to resist calls on an on-demand performance bond.

In 2020, in the case referenced by the South African High Court in January, an application was pursued by Sulzer Pumps Spain in Singapore’s High Court to discharge an ‘ex parte’ injunction which the company had obtained to restrain Hyflux Membrane Manufacturing (S) Pty Ltd from making a demand on a bond issued by Deutsche Bank AG, in favour of Hyflux.

The injunction was grounded on Hyflux’s alleged unconscionable conduct. The court affirmed the high threshold for establishing unconscionability – namely that the applicant must consider the criteria set out in an earlier Singaporean case.

In that case, in 2012, the court ruled that the applicant bears the burden of proof of showing a strong prima facie case of unconscionability and said that the conduct must be reprehensible. In other words, it must be sufficiently egregious or unfair to justify judicial intervention. Mere commercial pressure or financial distress does not meet the threshold.

The court also ruled that calling on a bond where there is a genuine dispute does not amount to unconscionability and the mere fact that the respondent was in the midst of restructuring, or even hypothetically on the verge of insolvency, would not be a reason to grant an injunction, if unconscionability was not established.

The court ruled that the call had not been made in good faith, and further clarified that “… unconscionability is not a free ranging inquiry of fairness in a loose sense; such a position would go against the strictures on protection of the sanctity of the agreement entered into the parties.” It said that  “unconscionability refers to conduct lacking bona fides, and not unfairness in a loose sense”.

Notably, around the same time as the Sulzer Pumps case, in CEX v CEY, Singapore’s High Court summarised that unconscionability had manifested itself in a non-exhaustive list of forms, including:

• calls for excessive sums;
• calls based on contractual breaches that the beneficiary of the call itself is responsible for;
• calls tainted by unclean hands, e.g., supported by inflated estimates of damages or mounted on the back of selective and incomplete disclosures;
• calls made for ulterior motives; and
• calls based on a position which is inconsistent with the stance that the beneficiary took prior to calling on the performance bond.

Taking the above into account, the court held that CEY’s call on the bond was unconscionable on two grounds. Firstly, it held that CEY was itself responsible for at least part of the delays by failing to appoint a replacement architect as required under the relevant statute and, in such circumstances, it would have been illegal for CEX to continue with building works in the interim period without supervision from a replacement qualified person.

Secondly, the evidence showed clearly that CEY had relied on CEX’s failure to continue works during the interim period, which would have been illegal, in terminating CEX’s employment and calling on the bond. The above being the case, CEY’s call on the bond was rooted in illegality and, hence, unconscionable.

Public policy exception

The question then becomes, if unconscionability were to be imported into South African law, where it would fit in. The answer must surely be alongside the ordinary principles dictating the determination of public policy.

In the classic 2002 case of Brisley v Drotsky, the SCA established that public policy “nullifies agreements offensive in themselves”. 

Unconscionability is one concept which, in tandem with considerations of fairness, good faith and bona fides, might trigger the public policy exception. This has been tested in the Constitutional Court numerous times, including in the 1998 Sasfin case when the court clarified that good faith is “not a self-standing rule, but an underlying value that is given expression through existing rules of law”.

The SCA has since consistently held that fairness, reasonableness and good faith are not self-standing grounds upon which a court may refuse to enforce a contractual term on the basis of public policy. It has continued to espouse the “perceptive restraint” principle, derived from the Sasfin case, that a court should exercise its power to refuse to enforce a contract on the basis of public policy “sparingly and only in the clearest of cases”.

However, all law in South Africa, including common law, derives its force from the Constitution and is subject to constitutional control. The resulting impact of the Constitution on the enforcement of contractual terms through the determination of public policy is profound. It is likely for that reason that in the 2020 Beadica case, the Constitutional Court stated that, whilst a careful balancing exercise is required, it is clear that public policy imports values of fairness, reasonableness and justice. The South African philosophy of ‘ubuntu’ – a concept in which your sense of self is shaped by your relationships with others – encompasses these values and is now itself recognised as a constitutional value.

The courts’ direction of travel

The case law provides important considerations in assessing the terms and the enforcement of contracts at a public policy level. As seen in the Sasfin case, behaviour contrary to those concepts may amount to unconscionable conduct justifying the invocation of the public policy exception.

However, based on the independence principle that governs on-demand guarantees specifically, it is somewhat understandable that South African courts are reluctant to develop our law to recognise unconscionable conduct as a separate, self-standing ground to resist a call on an on-demand guarantee.

The public policy exception offers an alternative potential route for prospective litigants to anchor unconscionability to breaches of the constitutional values of fairness, equality, good faith and ‘ubuntu’. Based on current trends, it seems litigants agree.

South Africa’s courts have resisted recent attempts by claimants to invoke unconscionable conduct as a defence to avoid liabilities, but it cannot be ignored that the issue of unconscionability keeps re-emerging. Industry players will need to be mindful that behaviour leading to an unfair call on a bond could, eventually, be classed as unconscionable conduct.

Public policy is not static and requires constant reassessment. It may not be long before a compelling case truly tests these parameters and tempts the Constitutional Court to depart from the current status quo.

Co-written by Zenande Mngandi of Pinsent Masons.