Construction Law – Time-Barring Clauses…What is Reasonable and Fair?

In the construction and engineering industry time-barring provisions are often included as part of the standard terms in construction agreements. These provisions often require “strict” compliance with time periods and hold significant sanction which may impact adversely on claims or other entitlements under such agreements.  Contracting parties often query the fairness and reasonableness of such provisions once they face the consequences of being time-barred.

Our Courts have clarified the legal position in respect of clauses of this nature in the case of Barkhuizen v Napier. The brief facts of the case are:

1. Two years after Napier rejected Barkhuizen’s insurance claim, Barkhuizen issued a summons for payment in respect of what he regarded as “an insured event”;

2. Napier stated in its defence that it was not liable as Barkhuizen had failed to issue the summons timeously. Napier argued that the contract contained a specific provision that required Barkhuizen to issue a summons within 90 days from the date on which Napier rejected Barkhuizen’s insurance claim and that his failure to do so effectively time-barred him from enforcing any perceived entitlements;

3. Barkhuizen’s counter argument was that the time-barring clause was unconstitutional and unenforceable because it violated his right under the Constitution of the Republic of South Africa to have the matter determined by a Court.

Initial Ruling

The High Court initially upheld Barkhuizen’s contention and declared the time-limitation clause to be inconsistent with the Constitution and dismissed the Napier’s defence.

Court of Appeal

However, the Supreme Court of Appeal ruled that Section 34 of the Constitution did not prevent time-limitation provisions in contracts that were entered into freely. Although it found that, on the evidence, it could not determine whether the clause under consideration had been entered into freely and voluntarily, the Court nevertheless upheld Napier’s argument and excused the insurer from all liability.

Constitutional Court

Barkhuizen then approached the Constitutional Court for leave to appeal against the decision of the Supreme Court of Appeal. In response, Napier’s arguments included that the provisions of Section 34 of the Constitution could not be applied to constitutional challenges launched against agreed contractual terms.

The Constitutional Court held that public policy considerations should be evaluated to decide whether or not a contractual term which violates the Constitution and, as such, is contrary to public policy and thus unenforceable.  The Court held that the correct approach to constitutional challenges of this nature was to determine whether the term itself was contrary to public policy and South Africa’s constitutional values, in particular, those found in the Bill of Rights.  The Court held that Section 34 not only reflected the basic values that underlie the constitutional order, but that it also constituted a manifestation of public policy. The proper approach to the present matter was therefore to determine whether the time-limitation clause violated Section 34 of the Constitution and was thus contrary to public policy.

The Court held that, as a matter of public policy (subject to considerations of reasonableness and fairness) time-limitation clauses in contracts are indeed constitutionally allowable. The Court held further that the right to seek judicial redress (as guaranteed by Section 34) may be limited in circumstances where:

1. It is allowable by a law of general application; and

2. Such a limitation would be reasonable and justifiable.

Reasonableness

The test for reasonableness, the Court found, was whether or not the clause afforded the claimant an adequate and fair opportunity to seek judicial redress. If a contractual term provides, for instance, for an impossibly short time for a dispute to be referred to forum where it may be resolved, it may be contrary to public policy and unenforceable.

Fairness

The Court set out a two-pronged test to be applied in order to evaluate such provisions in respect of fairness.  The first was whether the clause itself was unreasonable. This entails a weighing-up of the principle of pacta sunt servanda and the right of all persons to seek judicial redress. If the clause was found not to be unreasonable, then the further requirement is evaluated.

The second requirement was whether or not the circumstances that prevented compliance provided the defaulting party with a justified excuse for its non-compliance with the time-barring provision. Satisfaction of this requirement requires proof by the defaulting party that it has good reason for its failure to observe the requirements of the time-limitation clause. In that regard, the relative equality or inequality of the bargaining positions of the parties is a relevant consideration.

In Barkhuizen’s case, the Court found that the ninety-day time limitation was not manifestly unreasonable. It was also held not to be manifestly unfair. There was no evidence that the contract had not been concluded freely between parties in equal bargaining positions. There was also no evidence that the clause had not been drawn to the applicant’s attention. In the circumstances, enforcement of the clause would not be contrary to public policy.

One of the specific requirements that Barkhuizen failed to address (which the Court regarded as inexcusable) was his failure to explain and motivate his non-compliance with the requirements of the time-limitation clause. His failure to do so placed the Court in a position where it could not evaluate whether or not the application of the clause would be unfair and, consequently contrary to public policy.

While the Constitutional Court, in this specific instance, found that the time-limiting clause was not in conflict with public policy considerations and that it was necessary to recognise the doctrine of pacta sunt servanda, the Court acknowledged that it may decline the enforcement of a time-limitation clause if its implementation would result in unfairness or would be unreasonable for being contrary to public policy.

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