The power of a court when a settlement agreement is not preceded by litigation

An issue that often arises is whether a settlement agreement may be made an order of court when the parties reach agreement without commencing litigation. In Avnet South Africa (Pty) Limited v Lesira Manufacturing (Pty) Limited and Another (18/38649) [2019] ZAGPJHC 72 (4 March 2019), Budlender AJ recently faced this question. The facts were crisp and straightforward: In terms of an agreement between the parties, the applicant supplied the first respondent with goods to the value of R23,59 million. The parties signed a settlement agreement in terms of which, amongst others, the debt would be paid in monthly instalments and the settlement agreement would be made an order of court and the respondent would not oppose it.

The court considered the divergent High Court judgments on the issue to conclude that where litigation has not yet commenced, a settlement agreement may not be made an order of court. This issue was first considered by Van der Byl AJ in Growthpoint Properties Ltd v Makhonyana Technologies (Pty) Ltd and others NGHC Case No. 67029/2011 (12 February 2013). In this judgment the court reasoned that there was at one stage a dispute between the parties, albeit before any litigation was commenced between them, relating to the amount payable in respect of arrears rental. That dispute was settled via a settlement agreement which the parties agreed could be made an order of court. Therefore, as soon as a party may institute legal action against another party, the former may apply to court to have a settlement agreement made an order of court without incurring the costs associated with litigation. The court further reasoned that having jurisdiction to grant such an order only after the parties have instituted legal proceedings was akin to a duplication of legal proceedings. The court made the settlement agreement an order of court absent any preceding legal proceedings between the parties.

The issue was further dealt with by Van der Linde J in Lodestone Investments (Pty) Ltd v Muhammad Ebrahim t/a Ndimoyo Transport GLD Case No. 5716/2016 (29 April 2016) and National Youth Development Agency v Dual Point Consulting (Pty) Ltd and Another (06982/2016) [2016] ZAGPJHC 114 (19 May 2016). In both matters, the court declined to decide on the issue. In Dual Point Consulting, the court, however, set out important considerations, namely:

• “If the legislature was prepared to lend the enforcement arm of the law no matter what the underlying process; no matter how the settlement came about; no matter whether there was a fair underlying process; one would have expected explicit legislation to that effect.” There is no such provision in legislation;
• The primary function of the courts is to determine disputes between parties; and
• The concern about the notion of a court assuming the role of a debt collector without its processes previously being engaged; a settlement agreement sought to be made an order of court would principally have the sword of Damocles hang over the debtor’s head.

As stated above, the court in Avnet declined to make the settlement agreement an order of court on the basis that no litigation had commenced between the parties and therefore it did not have jurisdiction. The court relied on a dictum in Eke v Parsons 2016 (3) SA 37 (CC) that “parties contracting outside the context of litigation may not approach a court and ask that their agreement be made an order of court”. First, it was held that the primary function of the courts was defined as adjudicating disputes between parties. From this the court could not adjudicate or grant an order where a dispute was not before it. Drawing from PL v YL 2013 (6) SA 28 (ECG) the court held that it may only make orders that are “competent and proper” with the antithesis that a court may not be mechanical in granting orders. For an order to be proper and competent, a relationship between the order and a dispute between the parties must exist.

Second, if courts were deemed to have the jurisdiction to make settlement agreements court orders before the institution of any related legal proceedings between the parties, the role of the courts would expand to functions like debt collection and registration of a superfluous and undefined number of agreements. The scope of the court’s jurisdiction would expand beyond any issues the parties may bring before the court. Another consequence is the severity attached to non-compliance with a court order would similarly be attached to any settlement agreement (or any agreement) made a court order before the parties to the agreement instituted any related legal proceedings. This implies that any breach of the agreement would trigger contempt proceedings, with consequences such as imprisonment and breach of the Constitution over and above the common law remedies already available for breach of contract before the parties instituted any dispute resolution proceedings.

The court was therefore of the view that it did not seem permissible or appropriate for parties to be free to clothe their agreement with these consequences, if the agreement is not resolving a matter already before the court. Even though the above legal position has not been directly confirmed by the Supreme Court or the Constitutional Court and seems correct in principle, it remains to been seen whether it will lead to unnecessary duplication of legal proceedings and have an impact on the rather crowded court rolls in the various divisions.