Fixed or flexible: Shifren ‘shackle’

By Anye Jansen van Rensburg

The Shifren principle came about in the Appellate decision of SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren en Andere 1964 (4) SA 760 (A). This principle is set out in Brisley v Drotsky 2002 (4) SA 1 (SCA) as follows: ‘contracting parties may validly agree in writing to an enumeration of their rights, duties and powers in relation to the subject matter of a contract, which they may alter only by again resorting to writing’. This principle more commonly known as the enforcement of non-variation clauses on parties namely, binding parties to non-variation clauses (entrenchment clauses).

There are various arguments for and against the Shifren principle. Arguments for the principle entails, that when parties have agreed to the terms of an agreement, they avoid further disputes by including a non-variation clause that entails that the parties will be bound to the written terms on the agreement and that any oral variations will not be valid, thus eliminating disputes caused by oral variations. Arguments against the principle are that freedom of contract of the paries to an agreement are hampered when parties included a non-variation clause, because parties should be allowed to change their minds and alter/vary the agreement orally.

Recent developments in the law has seen courts loosening the Shifren ‘shackle’ on some agreements through the application of public policy. Below are the three most recent cases where the courts have refused to enforce a non-variation clause on the basis that it was against public policy.

Nyandeni Local Municipality v Hlazo 2010 (4) SA 261 (ECM)

The facts of the matter are briefly as follows: Mr Hlazo was employed by the municipality. It was discovered through forensic accounting that Mr Hlazo was involved in fraudulent activities by pocketing certain funds. The municipality suspended him pending an investigation into the fraud.  A hearing was held and Mr Hlazo was found guilty. Mr Hlazo then tendered his resignation, which was denied by the municipality. He then tried to enforce his resignation (this would buy him more time and escaping the financial implications of being dismissed rather than resigning) by relying on a clause in the employment agreement that prescribed arbitration as mandatory procedure for resolution of disputes read with an entrenchment clause. This clause provided that no variation, modification or waiver of any provision of the agreement would be of force or effect unless confirmed in writing and signed by both parties. Thus he argued that the disciplinary procedure followed was defective as it did not comply with the agreement and that the parties tacitly agreed to a different procedure. This clause prevented them from doing so. Thus the Shifren principle was invoked. 

The court held that the general rule, that stems from the common law, is that an agreement may not be enforced if under the circumstances it offends public policy. This general rule has been applied throughout various court decisions.  The Constitutional Court case of Barkhuizen v Napier  2007 (5) SA 323 (CC) confirmed this: ‘But the general rule that agreements must be honoured cannot apply to immoral agreements that violate public policy’. The essential question that the court had to consider was ‘does the enforcement of the entrenchment clause, as required by Shifren, in the circumstances of this case offend public policy?’ To answer this question the court had to consider the concept of public policy. Alkema J, then went on to discuss the guidelines when looking at public policy that have developed through the years –
• it must be determined whether the contract or term challenged is per se contrary to public policy or whether its operation in the prevailing circumstances and facts of the case, which renders it contrary to public policy (para 81);
• determination of fairness under the constitutional setting is not dependent on the personal views of both the judge and parties to the contract (para 85);
• public policy requires parties to comply with contractual obligations that are freely and voluntarily entered. Pacta sunt servanda (para 91);
• identify the constitutional principle that informs public policy and which is said to be offended. This principle is then balanced and measured against the challenged contractual term (para 94).

Applying the abovementioned the court ruled that the entrenchment clause is per se contrary to public policy. The operation on the fact of the case does offend public policy. The contractual term is the entrenchment clause which is protected by pacta sunt servanda and right to freedom and dignity entrenched in the Constitution. 

The court moves on and does in actual fact not apply the abovementioned guidelines to the facts on hand, but holds that Hlazo does not have a bona fide defence as he is trying to use the Shifren principle not for a legitimate purpose, but for an ulterior purpose of delaying his dismissal to his financial benefit. Alkema J makes reference to s 34 of the Constitution, which deals with access to court. This right also includes the right to be protected against the abuse of the process of law. In the end the court rules that the: ‘Public policy, as expressed by the constitutional values and norms, does not tolerate the abuse of the process of law’ and thus the facts and circumstances of this case justifies the departure from the Shifren principle. 

GH v SH 2011 (3) SA 25 (GNP)

This case concerned a written maintenance settlement agreement. The parties made changes to the residency and maintenance arrangements after the agreement was made an order of court. S wanted to enforce the agreement with regards to the maintenance and G objected that the agreement had been varied by the parties. S then relied on the Shifren principle that there is a non-variation clause in the settlement agreement and thus the agreement could not be changed/varied. 

The court held that the agreement in question could be distinguished from other agreement where Shifren normally applies in that this agreement was not a commercial agreement, thus other considerations would have to be taken into account. In this instance the best interest of the child would play a paramount role in deciding whether the Shifren principle should be applied or not. The court held that in this instance public policy demanded that the Shifren principle not be applied. 

This case has been appealed and the Supreme Court of Appeal (see SH v GF 2013 (6) SA 621 (SCA)) has taken a different approach to the amendment made and rules that the parties never intended that the variation in fact be a variation of the agreement and thus Shifren would play no part. The court held that both parties were aware of the non-variation clause and that in order for the maintenance agreement to be varied it needed to be in writing and signed by both parties. Thus the arrangement made between the parties did not constitute a variation, but was merely a trial period. If the new arrangement was successful in this trial period then a formal variation of the agreement would take place. 

Steyn and Another v Karee Kloof Melkery (Pty) Ltd and Another (GSJ) (unreported case no 2009/45448, 30-11-2011) (Peter AJ)

In this case the agreement in question was a commercial agreement, a sale of a business agreement. The Steyns were farm owners and Karee Kloof wanted to buy the farm and the business on the farm. The agreement contained a non-variation clause. There were numerous complications with the transaction and in essence to resolve some of the disputes two settlement agreements were entered into. A year after the last settlement agreement was entered into the Steyns instituted an action for payment of an arrear amount for the sale of the business in terms of the sales of business agreement. Karee Kloof pleaded that the parties agreed to a settlement and the settlement agreement was adhered to and thus they owed nothing to the Steyns. The Steyns relied on Shifren and that the settlement agreements could not have been seen as variations of the original agreements. The question before the court was ‘whether or not the second settlement agreement should enjoy efficacy and primacy over the original agreement and defeat the claim’. Thus in short if the Shifren principle should be enforced. 

The court assessed what would occur if the settlement agreement was enforced. It would lead to a conclusion of the litigation process currently pending in the magistrate’s court and other disputes that could arise. The second settlement agreement was not confined only to the sale agreement, but dealt with other disputes between the parties too. The court ruled that three public policy considerations warranted that the Shifren principle be relaxed and not applied. First, that public interest demands that there be an end to litigation and thus the settlement agreement cannot be ignored, as this would bring an end to the pending litigation. Secondly, public policy demand that parties to a dispute avoid litigation and resolve their differences amicably. Thirdly, pacta sunt servanda would be violated if the settlement agreement was ignored as it related not only to the original agreement, but to the other collateral agreements/disputes. Thus the court held that upholding the Shifren principle would be against public policy.

Conclusion

Abovementioned case law displays the notion that when public policy demands the Shifren principle will not be applied and effectively a variation to an agreement done contrary to the requirements of the non-variation clause will be effective. A party will thus be able to escape from the shackles of Shifren when public policy demands.

Anye Jansen van Rensburg LLM (Stell) is an attorney at Schoeman Tshaka attorneys in Cape Town.