Supreme Court of Appeal dismisses challenge to agreement not to sue

​​​​​​​​​​​​The Supreme Court of Appeal recently dismissed a challenge to a contractual undertaking not to institute legal proceedings (known as a pactum de non petendo), finding that the undertaking was not against public policy.​

The recent case of ​​Coral Lagoon Investments 194 (Pty) Ltd and Another v Capitec Bank Holdings Ltd​ ​¹​​​ involved an appeal to the Supreme Court of Appeal (SCA) against a High Court order that directed the appellants to withdraw an action for damages against the respondent, Capitec Bank Holdings Ltd (Capitec).

Background

The appellants, ​Coral Lagoon Investments 194 (Pty) Ltd and its holding company, Ash Brook Investments 15 (Pty) Ltd​, had concluded a consent agreement with Capitec. This agreement formed part of a 2017 transaction in terms of which Coral sold a portion of its Capitec shares to Petratouch (Pty) Ltd (2017 Petratouch Transaction).

Under the consent agreement, Capitec waived various rights related to selling restrictions imposed on the appellants in terms of a subscription for shares and shareholders agreement concluded between the parties in 2006 so that the 2017 Petratouch Transaction could proceed.

Due to certain concerns, Capitec proposed, and the appellants agreed to, the inclusion of a clause in the consent agreement in terms of which the appellants undertook not to institute any legal proceedings against Capitec in which they sought to use or rely on the 2017 Petratouch Transaction or any part of it (pactum). ²

The High Court's findings

The High Court (Western Cape Division, Cape Town) found that:

• the appellants had breached the pactum by instituting an action against Capitec in 2020 that sought to use or rely on the 2017 Petratouch Transaction;
• Capitec was entitled to specific performance of the consent agreement; and
• Capitec's use of motion proceedings to compel the appellants to withdraw the action was permissible.

The High Court also dismissed the appellants' counter application contending that the pactum​  was contrary to public policy.

The SCA's findings

The SCA dismissed the appeal, finding that the High Court was correct to dismiss the appellants' counter application.

It ruled that agreements not to litigate are not necessarily unreasonable and that each case must be assessed on its own terms.

It found, on the facts of the case, that the ​pactum was consistent with public policy for the following reasons:

• the parties were free to secure independent legal and other professional advice on the nature and effect of all of the provisions of the consent agreement, and they did secure such advice;
• the parties to the consent agreement were all experienced business people who engaged in detailed and complex negotiations. There was no indication that the parties did not have equal bargaining power;
• per the Constitutional Court's ruling in Beadica 231 CC and Others v Trustees for the time being of the Oregon Trust and Others [2020]  ZACC 13; 2020 (5) SA 247 CC, there are no special rules that apply to contracts designed to promote black economic empowerment (BEE);
• the appellants' status as BEE shareholders was irrelevant – the appellants were fully advised, fully informed, believed that the terms were reasonable and freely relinquished the right not to institute legal proceedings in which they sought to use or rely on the 2017 Petratouch Transaction in return for Capitec's consent to the 2017 Petratouch Transaction;
• the pactum was concluded in a particular context for a specific legitimate reason;
• the appellants failed to establish a basis for the duty they alleged Capitec owed to them (a duty to protect the value of the appellants' Capitec shares); and
• although operating in perpetuity, the pactum went no further than was necessary to prevent very specific litigation. It was therefore a limited and reasonable restriction on the appellants' ability to litigate.

Key takeaway

While this judgment turned on its specific facts, it serves as a reminder to unhappy counterparties and would-be litigants that public policy generally requires parties to comply with contractual obligations that have been freely and voluntarily undertaken, and that the courts will use the power to invalidate a contract or not to enforce it sparingly and only in the clearest of cases. Parties should therefore bear in mind that, in the ordinary course, they will be held to their bargain.