An Agreement not to Sue?

Published on May 5, 2023

The requirement that agreements entered into must be honoured is an age-old international principle of law and is well-recognized in S.A. Law. The pacta sunt servanda principle dictates that obligations created in terms of agreements must be honoured. Parties who enter into contractual agreements with the required intent are obliged to respect these agreements. Courts are generally reluctant to deviate from this principle.

In the matter of CAPITEC BANK vs. LAGOON INVESTMENTS 2021 (6)121 (CC) the Court heard argument on behalf of LAGOON INVESTMENTS that a pactum de non petendo (an agreement not to sue) entered into was in breach of its constitutional right of access to court and that such pactum was also contrary to public policy.

Capitec Bank and Lagoon Investments entered into an agreement in terms of which Lagoon Investments bought certain shares from Capitec Bank. The agreement provided that in the event of re-selling of those shares by Lagoon Investments, the prior approval of Capitec Bank was required. The parties also agreed that in the event of a dispute between them concerning the selling or re-selling of the shares, such dispute was to be referred for arbitration and not subject to litigation. When Capitec Bank refused its consent to a re-selling of shares, Lagoon Investments approached the High Court for relief. Summons was issued by Lagoon Investments against Capitec Bank for damages as a result of, inter alia, a breach of duty of reasonableness and good faith. Capitec Bank responded to the action by applying for an order against Lagoon Investments enforcing the agreement not to sue, a pactum de non petendo. Lagoon Investments claimed that the pactum not to sue was contrary to public policy and that the action also breached their constitutional right of access to courts. Capitec Bank, by applying for an order as indicated, was in essence claiming specific performance-it seeked to compel Lagoon Investments to its contractual obligation not to sue.

Lagoon Investment’s argument that the pactum had breached its constitutional right of access to courts was rejected by the Court by reliance on LUFUNO MPHAPHULI AND ASSOCIATES vs. ANDREWS AND ANOTHER 2009 (4) S.A. 529 (CC), in which the Court remarked that where parties agree to arbitrate, they do no waive their rights of access to Court-they simply agree not to exercise them.

In referring to Lagoon Investment’s pactum de non petendo argument, the Court relied on the pacta sunt servanda principle (“agreements must be kept”) to reject same.

The Court referred to the matter of BEADICA 231 vs. TRUSTEES, OREGON TRUST 2020 (5) SA (CC) in which it was stated that in establishing whether a clause should be enforced includes a consideration of whether the parties negotiated with equal bargaining power and whether they understood what they were agreeing to. The court found that in this matter “it is clear that the parties were possessed of equal bargaining power, and they must have understood what they were agreeing to”.

A Court may refuse to enforce certain contractual terms of an agreement where that term or the enforcement thereof would be contrary to public policy. This refusal by a Court must however be used sparingly. The subject clause (the pactum de non petendo) should however not prohibit all litigation for any breach of the agreement, which would be a violation of public policy considerations.

C.M. Weiss
Practicing Consultant