IS THE ROUWKOOP CLAUSE THE EQUIVALENT OF A PENALTY CLAUSE?

Rouwkoop is a common law concept that can be directly translated as “rue bargain”. If a rouwkoop clause is included in a contract the parties agree that either party or one of them may resile (right to withdraw) from the contract by payment of an agreed amount, as rougeld (forfeit-money).

A rouwkoop clause creates reciprocal contractual obligations to be exercised by the parties and the rougeld is not a substitute for damages but rather a reciprocal obligation emanating from the aforesaid contractual right. Due to its reciprocal nature rouwkoop clauses are often inserted into reciprocal agreements such as lease or sale agreements.

Should the rouwkoop clause be exercised it has the effect of a resolutive condition. The contract then ceases to exist and is void from the beginning. The money forfeited by a party is in exchange for the right to withdraw from the contract without committing breach of contract in doing so. The parties are thus released from their contractual obligations against payment of the forfeiture amount. The retroactive nature of the clause is subject to the time when it is exercised and certain consequences which have already arisen, such as the payment of occupational interest or rent, will thus not be affected by restitution.

A penalty clause provides for an agreed amount of money to be paid should a party to an agreement breach their contractual obligations. This penalty is inserted into agreements to bypass the complicated task of quantifying damages and often an aggrieved party’s damages claim is then forfeited. A penalty clause may be invoked upon breach of contract by one of the parties.

The concept of rouwkoop is founded on the exercising of a contractual right and is not conditional upon a party committing a breach or default, however, this distinction between a penalty and rouwkoop is often blurred in practice.

Penalty clauses are subject to the Conventional Penalties Act 15 of 1962 (the Act). The Act stipulates that a party may not claim both the penalty and quantified damages and the court is granted judicial discretion to reduce an excessive penalty.

There is also an argument to be made that the Act does find some application when dealing with rouwkoop. Following the dictum of Custom Credit Corporation (Pty) Ltd v Shembe 1972 3 All SA 489 (A); 1972 3 SA 462 (A) 474 the Act may be interpreted to also relate to a forfeiture of something as roukoop. If the circumstances allow this interpretation, a roukoop amount may be reduced if the court is persuaded that it is out of proportion to the “prejudice” which a party’s lawful withdrawal from the contract may have caused the other party.

If there is not a clear distinction between a penalty and rouwkoop clause in an agreement, the courts have held that such a clause, regardless of the use of the word “rouwkoop”, would constitute a penalty stipulation as envisaged in the Act. See De Lange v Deeb (1970) 1 All SA 234 (O). This can significantly limit the ability of a party to withdraw from an agreement.

Due to above interpretation it is advisable that the true intentions of the parties are correctly stipulated when drafting an agreement. The parties must distinguish between a rouwkoop provision and any rights or consequences which may flow from a breach of contract by either party.

If the parties require a clause that will free them from their contractual obligations against payment of the rougeld, then a rouwkoop clause is advisable. But if they require a penalty to be payable upon breach by either party, then the agreement must be drafted to reflect the nature of the penalty bearing in mind the legislative provisions of the Act.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Reference list:

• Law of South Africa Volume 9 -Third Edition Volume; Property Law Digest March 2018 Rouwkoop – a common misconception