Most commercial disputes do not arise because parties act in bad faith. They arise because the contract they signed was poorly drafted. Ambiguous payment terms, vague termination provisions, and misunderstood penalty clauses routinely turn straightforward business relationships into costly litigation.
In South Africa, contract law is grounded in the principles of freedom of contract, good faith, and public policy, but the courts will not rescue a party from a clause it freely agreed to, even if that clause turns out to be commercially devastating. This article examines the five most dispute-prone contract clauses, the legal framework that governs each one, and what South African courts have said about them in practice.
1. Payment Terms Ambiguity
Payment disputes are the most common source of commercial litigation in South Africa. They almost always trace back to the same root cause: a payment clause that each party reads differently.
Consider the phrase “payment due within 30 days.” Does that mean 30 days from invoice date, from delivery of goods, from acceptance of the works, or from the end of the calendar month? Each interpretation is legally defensible, and each leads to a different payment date. When a supplier expects payment on day 30 from the invoice, and a client calculates from month-end, the result is a dispute that could have been avoided with eight additional words.
Common drafting failures
- No reference date specified for the 30-day (or other) period
- No mechanism for disputing an invoice, leaving it unclear whether a dispute suspends the obligation to pay
- Milestone payments defined by subjective terms such as “completion” or “satisfactory performance” without objective criteria
- Foreign currency contracts with no agreed conversion date or rate mechanism, creating exposure to exchange rate fluctuations
- No provision for interest on late payment, or an interest clause that conflicts with the National Credit Act 34 of 2005 in consumer contexts
How to avoid it
Specify the exact triggering event for each payment obligation, the date from which the payment period runs, a clear dispute-notice mechanism that does not automatically suspend payment, the applicable interest rate (ensuring compliance with the National Credit Act where applicable), and a VAT clause confirming whether quoted amounts are inclusive or exclusive.
2. Termination Clauses
A termination clause that is clear in settled times becomes bitterly contested the moment the relationship sours. South African courts have had to grapple repeatedly with agreements that were silent on how, when, or why a party could exit.
The De Rebus law journal has highlighted that indefinite-term contracts present particular risks: if no termination mechanism is agreed, the courts may imply a tacit term that the contract is terminable on “reasonable notice”. What is “reasonable” is a factual question that will be determined at the time of the dispute, and may produce an answer neither party anticipated.
Fixed-term contracts: a recent development
In 2025, the Labour Court handed down judgment in Solidarity obo Nel RH v Paramount Aerospace Systems (Pty) Ltd (JS72/2024) [2025] ZALCJHB 423, confirming the general rule that a fixed-term contract may not be terminated before its agreed expiry date unless there is a material breach or repudiation, or the contract expressly provides an early-exit mechanism. The court drew a sharp distinction between what is contractually lawful and what the Labour Relations Act 66 of 1995 requires in terms of substantive and procedural fairness. An employer who terminates on contractual notice alone, without a fair reason, remains exposed to an unfair dismissal claim.
While that case arose in an employment context, the underlying principle applies more broadly: a contractual right to terminate is not always sufficient. Parties must understand the full legal landscape, including the Consumer Protection Act 68 of 2008, which gives consumers additional cancellation rights that a contract cannot simply override.
The notice period trap
Commercial contracts routinely specify notice periods (30, 60, or 90 days) without specifying how that notice must be given, to whom, and when it takes effect. A termination notice sent by email on a Friday afternoon may or may not constitute a valid notice, depending on what the agreement says about service of notices. If the agreement is silent, a dispute about whether valid notice was given will precede any dispute about whether termination was justified.
3. Penalties vs Damages: A Critical Distinction
Few areas of contract drafting cause more confusion in South Africa than the relationship between penalty clauses and claims for damages. The two are legally distinct, and conflating them can leave the injured party with far less than expected.
The Conventional Penalties Act 15 of 1962
South Africa’s Conventional Penalties Act 15 of 1962 (the Act) governs all penalty stipulations in contracts. It does three things of immediate practical importance:
- It confirms that penalty clauses are enforceable in any competent court, whether framed as “penalties” or as “liquidated damages”.
- It prohibits a party from claiming both a penalty and damages for the same act or omission, unless the contract expressly provides otherwise. This is the “cumulation prohibition”.
- It empowers a court to reduce a penalty that appears disproportionate to the prejudice actually suffered.
In practice, the cumulation prohibition catches many parties off guard. A creditor who has a penalty clause and wishes to also claim damages, because the actual loss exceeds the penalty, will find that it cannot do so unless the contract explicitly permits it. Drafters who wish to preserve a right to both remedies must say so in plain language.
On the other side, a debtor who believes a penalty is grossly excessive may apply to the court for a reduction. The court will assess whether the penalty is out of proportion to the prejudice suffered by the creditor. The onus of proving that the penalty is disproportionate rests on the debtor.
The rouwkoop distinction
Contracts sometimes also include rouwkoop clauses, particularly in property transactions. A rouwkoop clause, derived from Dutch common law, allows a party to withdraw from a contract by paying an agreed sum, without that withdrawal constituting a breach. This is fundamentally different from a penalty clause, which only operates on breach. Agreements that conflate the two create ambiguity about whether a payment is compensation for breach or a price for voluntary withdrawal, with different legal consequences flowing from each.
4. Jurisdiction Clauses
A jurisdiction clause determines which court or legal system will resolve disputes arising from a contract. It may appear to be a formality, tucked away at the end of a standard terms document. In practice, it can determine whether a judgment is enforceable, how much litigation costs, and how long a dispute takes to resolve.
South African courts and jurisdiction clauses
South African courts generally respect the parties’ choice of jurisdiction. As confirmed in the Global Legal Insights publication on South African litigation and dispute resolution (2025), local courts will honour a contractual choice of governing law and a contractual choice of jurisdiction, subject to ordinary jurisdictional rules. However, courts retain a discretion to adjudicate despite an exclusive jurisdiction clause, and they will not apply a foreign governing law where this conflicts with mandatory South African law.
A foreign judgment cannot be automatically enforced in South Africa. It must first be recognised and enforced by order of a South African court. This means that a contract specifying foreign jurisdiction, without a corresponding enforcement mechanism, may result in the winning party obtaining a foreign judgment that it then has to litigate again in South Africa to enforce.
Common jurisdiction clause problems
- Specifying a foreign court without considering whether the other party has assets in that jurisdiction, or whether a South African court would recognise the resulting judgment
- Exclusive versus non-exclusive clauses – a non-exclusive clause means both parties retain the right to approach other competent courts, defeating the purpose of the clause
- Asymmetric clauses that favour one party, which may be challenged under the Consumer Protection Act 68 of 2008 in consumer contracts as an unfair term
- Clauses that attempt to oust the jurisdiction of South African courts entirely, which risk being found contrary to section 34 of the Constitution, which guarantees access to courts
Arbitration as an alternative
For cross-border contracts, an international arbitration clause specifying that disputes be resolved by arbitration in South Africa under internationally recognised rules is often preferable. Awards made under the Arbitration Act 42 of 1965, and under the International Arbitration Act 15 of 2017 (which gives effect to the UNCITRAL Model Law), are more readily enforceable across jurisdictions than foreign court judgments.
Conclusion: Draft for the Dispute, Not for the Deal
When commercial negotiations are going well, it is tempting to treat contract drafting as an afterthought. The disputes that end up in South African courts tell a different story. The clauses that parties skip over (the notice provisions, the payment triggers, the penalty-versus-damages interaction) are precisely the clauses that define the outcome when the relationship fails.
South African law provides a sophisticated framework for resolving contract disputes, but it cannot rewrite a bad contract. Courts will enforce what parties agreed to, subject to constitutional and statutory limits. The best protection remains a well-drafted agreement that anticipates the most likely points of failure and resolves them in advance.
If you are entering into a significant commercial agreement, whether a service level agreement, a lease, a supply contract, or a joint venture, we recommend engaging qualified legal counsel to review your payment, termination, penalty, and jurisdiction clauses before signature.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.