In late January 2025 the Supreme Court of Appeal held that, in circumstances where a contractual discretion is to be exercised impacting on the counterparty’s performance, the discretion must be exercised in good faith, with reasonable judgment, and without arbitrariness (known under the common law as the arbitrio bono viri standard). The court held that the sudden alteration by a major retailer group of the credit terms offered to independent companies operating under their brand was not, on the evidence, shown to have a reasonable basis nor to have been executed for a legitimate purpose.

The court distinguished its finding from the authorities according to which a court cannot refuse to enforce a contractual term because the court views it as unreasonable, unfair, not in good faith or unduly harsh. These are not self-standing grounds. Contractual discretionary powers to vary a term of a contract must also be distinguished from a right to cancel a contract. The exercise of a power to cancel a contract eliminates a parties’ reciprocal rights and obligations without creating new ones, whereas a discretionary power to unilaterally alter the obligations, of another party in a contract, alters the terms of the original bargain. Even if discretionary powers are provided for in a contract, the courts, instead of invalidating them, are allowed to constrain them with an obligation that they must be exercised arbitrio bono viri.

Against a long history of litigated disputes between the parties, and other evidence, the court looked at the contract and the amendments made to the credit facilities within the context and purpose of the document. The contract had been in place for some 20 years as an existing contract and was being amended. It was not a situation where the current credit terms that were being altered on a transaction-by-transaction basis.

The court left open the question raised in a previous judgment whether the arbitrio bono viri standard applies to a contractual discretionary power clearly intended to be completely unfettered. With reference to the previous decision, the court said:

“[The previous judgment] also recognised, that there may be a situation, albeit unlikely, where a stipulation may be so worded that an absolute discretion to fix [the performance of the other party] is conferred on one of the parties. The court, however, declined to express a view on whether such a stipulation would be invalid, as being in conflict with public policy, or whether the fixing of the performance may only be assailed when it is done in bad faith.”

To summarise:

  • A contractual discretion to alter terms affecting the performance of a contract by the other party must be exercised reasonably in the circumstances and in good faith.
  • The rule does not apply to the right of a party to cancel a contract without providing reasons.
  • An unfettered exercise discretion may be invalid when in conflict with public policy or when exercised in bad faith.

[The Spar Group Limited and Others v Twelve Gods Supermarket (Pty) Ltd and Others [2025] ZASCA 07 (30 January 2025)]