Steinberg v Lazard

On 6 June 2001, the appellant (Steinberg) sold to the respondent (Lazard) his members' interest in a close corporation (Portion 1/8 Erf 11 Sandhurst CC) for R1,365,000. The sale agreement contained a penalty clause requiring each party to complete construction of a dwelling house on their respective properties by 30 June 2002. The penalty for breach was R50,000 per month or part thereof for the period of delay. Both parties failed to meet the deadline. The respondent completed his house on 30 September 2002, while the appellant only completed his house on 15 June 2004. The respondent sued for the penalty calculated from 1 October 2002. After set-off for the first three months and waiver of half the penalty for June 2004, the respondent claimed R1,075,000. The High Court (Willis J) granted judgment for the full amount claimed with interest.

• Whether the penalty stipulated in the contract was payable
• Whether the penalty should be reduced under section 3 of the Conventional Penalties Act 15 of 1962
• Whether a creditor claiming a penalty must allege and prove prejudice suffered
• Where the onus lies in proving that a penalty is disproportionate to prejudice suffered
• Whether prejudice must be suffered by the contracting party personally or can be suffered by a close corporation in which they hold an interest

The appeal was dismissed with costs, including the costs of two counsel.

When a creditor seeks to enforce a penalty stipulation, there is no requirement for the creditor to allege or prove prejudice. The full legal onus rests on the debtor to establish, in terms of section 3 of the Conventional Penalties Act 15 of 1962, that the penalty is out of proportion to the prejudice suffered by the creditor. This onus includes both the evidential burden and the legal burden of proof. A penalty clause will be enforced in full unless the debtor discharges this onus. The reciprocal nature of penalty obligations and the substantiality of the penalty amount can support an inference that the parties intended to protect against prejudice in the event of breach.

The Court observed that to the extent the statement in Western Credit Bank v Kajee 1967 (4) SA 386 (N) at 394E suggested that a creditor must produce evidence to establish prejudice in a wider sense than damages, it is incompatible with the Supreme Court of Appeal's jurisprudence establishing that the onus rests on the debtor, and must be regarded as having been overruled. The Court also noted (obiter) that the High Court incorrectly described the onus on the debtor as merely an evidential burden ('weerleggingslas') when it was in fact the full legal onus.

This case is significant in South African contract law for clarifying the operation of section 3 of the Conventional Penalties Act 15 of 1962. It authoritatively establishes that: (1) a creditor claiming a penalty has no obligation to allege or prove prejudice; (2) the full legal onus (not merely an evidential burden) rests on the debtor to prove that the penalty is disproportionate to the prejudice suffered by the creditor; and (3) the debtor must adduce evidence to establish at least prima facie that the creditor suffered no or minimal prejudice. The judgment provides important guidance on the enforcement of penalty clauses and overrules earlier suggestions that creditors bear any burden regarding proof of prejudice. It confirms the strong protection afforded to penalty clauses in South African law, with debtors facing a high threshold to obtain reduction.