The Spar Group Limited and Others v Twelve Gods Supermarket (Pty) Ltd and Others

The Spar Group Limited and affiliated entities (SPAR) operate a voluntary trading group system through the SPAR Guild, providing wholesale services, credit facilities, and drop shipment services to retail members. The Giannacopoulos Group, comprising 13 entities operating 23 SUPERSPAR/SPAR stores and 22 TOPS liquor stores, had been SPAR members for approximately 23 years. Their relationship was governed by membership agreements and Standard Form Credit Facilities Agreements containing clause 5, which permitted SPAR to unilaterally vary or terminate credit facilities "at the seller's discretion" "without notice, at any time". Credit terms provided 19 days for warehouse transactions and 31 days for drop shipment transactions. Between 2017-2019, the relationship deteriorated due to allegations including labour law violations, attempts to circumvent SPAR's trade model, operating competing stores, and conduct allegedly bringing the SPAR brand into disrepute. SPAR issued termination notices and obtained ex parte orders to assume control of the Giannacopoulos stores, which were subsequently set aside with punitive costs. In October 2019, SPAR altered credit terms from 19/31 days to 7 days for both accounts and imposed drop shipment supplier credit limits for top 10 suppliers. SPAR justified this based on: (1) cash flow difficulties showing R255 million shortfall in liquid assets versus current liabilities; (2) multiple returned payments; and (3) approximately R14 million in Department of Labour compliance orders. The Giannacopoulos Group challenged these alterations as unreasonable and not in good faith.

• Whether the arbitrio boni viri standard applies to unilateral contractual discretionary powers permitting alteration of contract terms
• Whether SPAR's exercise of discretion under clause 5 of the Credit Facilities Agreement was subject to requirements of reasonableness, good faith, and proper purpose
• Whether the alteration of credit and drop shipment terms constituted unilateral variation of an existing contract or merely discrete offers requiring acceptance
• Whether SPAR exercised its discretionary power arbitrio boni viri (reasonably, honestly, and for a proper purpose)
• Whether special circumstances existed warranting special leave to appeal to the Supreme Court of Appeal

The application for reconsideration of the application for special leave to appeal was dismissed with costs, including costs of two counsel where employed. This effectively upheld the full court's decision setting aside SPAR's variation of credit terms and restrictions on drop shipment supplies.

The binding legal principles established are: 1. Unless a contractual discretionary power is clearly intended to be completely unfettered, an exercise of such discretion must be made arbitrio boni viri (reasonably, honestly, in good faith, and for a proper purpose). 2. The arbitrio boni viri standard applies to unilateral discretionary powers permitting variation of contract terms where such exercise impacts on the other party's performance obligations under an existing contract. 3. Contractual discretionary powers to vary terms must be distinguished from rights to cancel contracts; variation powers that alter the original bargain are treated with presumptive scepticism and constrained by the arbitrio boni viri standard. 4. In determining whether discretion was exercised arbitrio boni viri, courts must consider: (a) whether the discretion was exercised reasonably in light of objective circumstances; (b) whether it was exercised in good faith and not from ulterior motives; (c) whether it was exercised for a legitimate purpose related to the contract's objectives; and (d) the broader context of the parties' ongoing commercial relationship. 5. A clause permitting variation "at any time" and "without notice" in a credit facilities agreement operates within an existing contractual framework and does not convert each extension of credit into a discrete new contract requiring fresh acceptance.

The Court made several non-binding observations: 1. It noted that the weight of authority establishing that contractual discretionary powers are ordinarily not subject to requirements of reasonableness or fairness deals with a distinct issue—that courts cannot refuse to enforce contractual terms merely because they view them as unreasonable or harsh. These considerations are not self-standing grounds to invalidate contracts at common law. 2. The Court observed that it was unnecessary to determine whether the NBS Boland rule applies only to cases concerning exercise of discretion where power has been given to one party to determine the prestation of the other party, as the facts clearly engaged the rule. 3. The Court noted in passing (following NBS Boland) that it saw "no logical rationale for drawing a distinction between such a stipulation [conferring power to fix purchase price or rental] with other similar stipulations conferring on a party to a contract a discretion to determine a prestation." 4. The Court observed that there may be situations, albeit unlikely, where a stipulation may be so worded that an absolute discretion to fix a prestation is conferred on one of the parties, but declined to express a view on whether such stipulation would be invalid as contrary to public policy. 5. The Court made observations about the broader context of SPAR's conduct, including the ex parte applications and attempts to terminate Guild membership, suggesting these formed part of a pattern of conduct aimed at forcing the Giannacopoulos Group out of business, though this was not strictly necessary for the decision.

This judgment is significant in South African contract law for clarifying the scope and application of the arbitrio boni viri standard to unilateral contractual discretionary powers. It establishes that: 1. Discretionary powers permitting unilateral variation of contract terms are subject to the arbitrio boni viri standard unless clearly intended to be completely unfettered. 2. The standard requires exercise of discretion in good faith, with reasonable judgment, without arbitrariness, and for a proper purpose. 3. Courts will distinguish between powers to cancel contracts (eliminating obligations) and powers to alter terms (changing the bargain), treating the latter with greater scrutiny. 4. The interpretation of discretionary clauses must consider the entire contractual framework, the nature of the ongoing relationship, and the broader context of rights and obligations between the parties. 5. In commercial relationships characterized by long-standing dealing, mutual dependence, and integrated trading systems, unilateral variations affecting one party's performance will be scrutinized for reasonableness and good faith. The judgment reinforces protections against abuse of superior bargaining power in commercial relationships and ensures that discretionary powers cannot be wielded arbitrarily to the detriment of the weaker contracting party. It provides important guidance for interpreting and applying NBS Boland Bank principles beyond interest rate variation clauses to broader commercial discretions affecting contract performance.