The recent decision of the Supreme Court of Appeal (“SCA”) in SPAR Group Limited and Others v
Twelve Gods Supermarket (Pty) Ltd and Others ([2025] ZASCA 07), serves as an indication of our
courts’ continued inclination, if not concrete commitment, to apply standards of good faith, fairness
and reasonableness when called upon to enforce contractual terms which appear unduly weighted in
one party’s favour. This has been evident from previous decisions such as Beadica 231 CC which
was cited and analysed by the SCA in the present case. In the matter under consideration, the
agreement afforded one party a wide discretion to unilaterally change the terms of the contract.
The first applicant, the SPAR Group, operates its model through a non-profit company, the SPAR
Guild of Southern Africa NPC (“the Guild”), claimed to be a voluntary trading group, but essentially
equivalent to a franchise model. Members of the Guild are granted the right, subject to the specific
terms of their membership agreements, to use SPAR’s intellectual property such as trademarks, but
also receive the benefit of favourable pricing (due to SPAR being able to procure goods at optimal
prices) and a streamlined distribution and logistics system.
The respondents in the matter each form part of the Giannacopolous Group (“the Respondent
Group”) which operates a large number of stores under the SPAR and TOPS brands and trademarks.
Each store within the Respondent Group had entered into a membership agreement and and credit
facilities agreement with the Guild which granted them the ability to purchase goods from the SPAR
warehouse on credit and to utilise a so-called “drop shipment” service. Through the drop shipment
service, the Guild member is authorised to place orders directly on SPAR’s various suppliers, the
supplier debits SPAR in turn and SPAR then effects payment to the supplier and recovers the money
from the Guild member. SPAR therefore effectively serves as a guarantor of the transactions between
the Guild member and the supplier.
Of particular relevance in the court’s consideration was the construction to be given to a clause in the
credit facilities agreement which conferred a unilateral discretionary power on SPAR Group to, at its
discretion and without notice, at any time vary or terminate the credit facilities granted to a Guild
member.
The relationship between the SPAR Group, the Guild (these two entities hereinafter collectively
referred to as “SPAR”) and the Respondent Group dates back more than 20 years but had been
deteriorating progressively from around 2019. Various actions of the Respondent Group were claimed
by SPAR to violate the terms of the Respondent Group’s Guild memberships. Suffice it to say, the
Respondent Group had put SPAR’s nose out of joint. In the context of this animosity, SPAR brought
two ex parte applications against stores operated by the Respondent Group and attempted to assume control over these stores as a way of perfecting security SPAR held under various notarial bonds. These orders were ultimately set aside.
On the day before the ex parte applications were launched, the Guild held what was ostensibly a
disciplinary hearing, without any representative of the Respondent Group being present, despite
having agreed to afford the Respondent Group an opportunity to state their case. At this hearing the
Guild resolved to terminate the Guild memberships of every store in the Respondent Group.
Having failed in their attempted takeover of the stores under the notarial bonds, SPAR proceeded to
amend the terms of the credit facilities agreement and the drop shipment terms. They notified the
Respondent Group that periods for payment in the credit terms would be reduced on all of their
accounts and a limit on supplier credits was to be imposed on these accounts (effectively placing a
limit on the quantity of goods the relevant stores in the Respondent Group could purchase through
the drop shipment system).
As justification, SPAR cited alleged concerns about the Respondent Group’s liquidity and ability to
fulfil its short-term financial obligations as well as concerns about compliance orders issued by the
Department of Labour against stores in the Respondent Group. The Respondent Group in turn filed
two urgent applications in the High Court, one dealing with the termination of the memberships and
the variation of the credit terms and the other with the imposition of limits on the quantity of goods
which could be purchased. These applications were heard together in the KZN Division of the High
Court, Pietermaritzburg (“court a quo”) and both were upheld. This led to the matter being taken on
appeal by SPAR to a full bench of the KZN Provincial Division. The full bench dismissed the appeal.
SPAR persisted and sought leave from the SCA to appeal. When the SCA declined, SPAR
approached the President of the SCA to reconsider this decision. At this point, SPAR had elected not
to pursue the termination issue and to focus only on the credit related issues.
The crisp issue for decision by the SCA was whether SPAR’s unilateral discretionary power had to be
exercised subject to the arbitro boni viri standard and, if so, whether that standard had been met by
SPAR. The “arbitro boni viri standard” requires that a party to a contract which enjoys a discretion to
unilaterally amend or determine the performance of the other contracting party, must do so
reasonably, in good faith and without arbitrariness.
At the heart of the court a quo’s decision, and subsequently the decision of the full bench of the High
Court, was the judgment in NBS Boland Bank v One Berg River Drive CC and Others ([1999] ZASCA
60). The court in NBS Boland came to the view that: “…it is [I think] a rule of our common law, that
unless a contractual discretionary power was clearly intended to be completely unfettered, an
exercise of such a discretion must be made arbitrio boni viri”. The SCA considered whether the NBS
Boland rule finds application. SPAR attempted to argue that there was no ongoing contract in place
where SPAR had to determine the contractual performance required of the Respondent Group. The
argument raised by counsel for SPAR was effectively that each time a member of the Respondent
Group placed an order through the drop shipment system, it constituted a new contract and was
therefore subject each time to the granting and acceptance of a credit facility. Each time, so the
argument went, there was a fresh offer of credit and the Respondent Group could accept or decline.
Therefore, it argued, the NBS Boland rule did not come into play.
This argument the SCA was not prepared to accept, based on the facts. Some of the credit
applications completed by members of the Respondent Group go back 20 years and the terms had
remained unchanged until 2019. The court further took the view that the provisions of the relevant
clause in the credit facility agreement could not be interpreted in isolation from the rest of the terms
governing the relationship between the parties. The court referred to numerous other provisions in the
suite of agreements concluded between the parties and concluded that they were indicative of a fixed
arrangement once SPAR approved an application for credit.
In view of this conclusion, the court held that the variation of the credit terms constitutes a variation of
the existing terms of an ongoing agreement and hence is subject to the NBS Boland rule. Counsel for
SPAR attempted to persuade the court to lend weight to a number of decisions which, according to
SPAR, held that the exercise of a contractual discretionary power is ordinarily not subject to
requirements of reasonableness or fairness. The court considered the cited cases and concluded
that these dealt with a distinct issue, namely, that a court cannot refuse to enforce a contractual term
because the court may view it as unreasonable or unfair.
Furthermore, the court noted that a contractual discretionary power to vary a contract term affecting
the performance of the other party must be distinguished from a right to cancel a contract. The court
stated that a discretionary power such as the one in NBS Boland and the present case are treated by
the law “with presumptive scepticism. Instead of invalidating them, they are allowed by constraining
them with an obligation that they be exercised arbitrio boni viri.”
The court ultimately considered whether SPAR had exercised its unilateral discretionary power
arbitrio boni viri and, on the facts before it, concluded that SPAR had failed to do so.
This decision raises a number of practical implications for traders who grant their customers the use
of a credit facility or for buying groups and franchisors who provide to their members the benefit of
some form of arrangement akin to a drop shipment system.
Credit facilities and credit applications almost invariably contain language to the effect that the
extension of credit by the supplier in one instance shall not be construed as creating an obligation to extend credit in future; or that the credit terms may be varied by the creditor at any time in its sole
discretion. It is clear that where the relationship between the parties is one which on the facts
evidences an ongoing contractual relationship, the creditor would not be able to simply terminate
credit or vary the credit terms – it would need to apply its mind and make the decision on objectively
reasonable grounds, for example, the debtor is and remains in default of its payment obligations or it
has committed other acts which may reasonably and objectively be construed as indicative of
financial distress. The same rationale and standard would apply to the revocation of a drop shipment
type of arrangement or the imposition of supply limits in such a context.
Traders, buying groups and franchisors are cautioned to carefully consider the wording of their
standard terms of trade, credit applications and facilities as well as security documentation in this
regard. That said, even the most carefully crafted contract clause may still not avoid a factual context
which denotes an ongoing contract and hence would bring the NBS Boland rule into play.
It is therefore imperative that the party holding a unilateral discretionary power to vary a contract
exercises that power in a rational manner, on reasonable grounds and in good faith. Don’t be a bully!
Play nicely and be fair.
