By
its preamble, the purpose of the Consumer Contracts Act [Chapter
8:03] is to provide relief to parties to consumer contracts which are
unfair or contain unfair provisions. In terms of section 2, a
“consumer
contract”
is defined to mean a contract for the sale or supply of goods or
services or both….,.
In
terms of section 4 of ...
By
its preamble, the purpose of the Consumer Contracts Act [Chapter
8:03] is to provide relief to parties to consumer contracts which are
unfair or contain unfair provisions. In terms of section 2, a
“consumer
contract”
is defined to mean a contract for the sale or supply of goods or
services or both….,.
In
terms of section 4 of the Consumer Contracts Act, the court is
empowered to grant any of the specified reliefs if it is satisfied
that a consumer contract is unfair. These include:
(i)
Cancelling
the whole or any part of the contract;
(ii)
Varying the contract;
(iii)
Enforcing only part of the contract;
(iv)
Declaring the contract unenforceable for a particular purpose only;
(v)
Ordering restitution or compensation or reducing the amount payable
under the contract.
The
court is not confined to the specified remedies. It can make any such
other order upon any such conditions as it may fix.
The
Consumer Contracts Act does not exactly define unfairness. However,
in section 5, it lists instances when a consumer contract may be
deemed unfair. These are:
(i)
Where the contract, as a whole, results in an unreasonably unequal
exchange of values or benefits.
(ii)
Where the contract is unreasonably oppressive in all the
circumstances.
(iii)
Where the contract imposes obligations or liabilities on a party
which are not reasonably necessary to protect the interests of any
other party.
(iv)
Where the contract is contrary to commonly accepted standards of fair
dealing.
(v)
Where the contract is expressed in language not readily understood by
a party.
Subsection
(2) of section 5 of the Consumer Contracts Act says that a court
shall not find a consumer contract to be unfair solely because, inter
alia,
it imposes onerous obligations on a party or that a party may have
been able to conclude a similar contract with another person on more
favourable terms or conditions.
Subsection
(3) of section 5 of the Consumer Contracts Act says that in
determining whether or not a consumer contract is unfair the court
shall have regard to the interests of both parties. In particular, it
shall take into account, where appropriate, any prices, charges,
costs or other expenses that might reasonably be expected to have
been incurred if the contract had been concluded on terms and
conditions other than those on which it was concluded.
Finally,
in terms of the Consumer Contracts Act, the rights conferred by it
cannot be waived by agreement unless such waiver is made during the
proceedings….,.
Disagreements
have extended to the question whether under the common law the courts
can fix a rate of interest above which it becomes usurious. Perhaps
this is best illustrated by African
Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Towers CC
2011 ZASCA 45.
The
facts of that case are remarkably similar to those of the present
matter.
The
first defendant, undoubtedly the alter
ego
of the second defendant, sought bridging finance, or a short term
loan of R5 million from the plaintiff, a moneylender. The second
defendant stood as guarantor and co-principal debtor. So did a Trust
named after the second defendant, the beneficiaries of which were his
children with his wife. The wife, the fourth defendant, also stood as
guarantor. Collateral security was in the form of two mortgage bonds
registered over two properties owned by the Trust.
When
the draft loan agreement was ready it was forwarded to the second
defendant for confirmation. The second defendant managed to talk down
the lender into capping the upper limit of the Trust's total
liability at a certain amount, marginally lower than that for the
rest of the defendants, in the event of default. Eventually, the
final loan terms were agreed upon. The loan document was signed.
Among other things, the rate of interest would be 5% per month. In
the event of a default of payment, a penalty rate would apply. It was
pegged at 6.5% per month.
The
first defendant required the loan to stock up its business. It failed
to re-pay as per agreement. The plaintiff called up the loan. It
foreclosed on the Trust's two properties. The defendants applied to
court for an order declaring, inter
alia,
that both the average and the penalty rates of interest were
unlawful. They also sought that all interest on the loan be pegged
and re-calculated at the rate prescribed by the statute regulating,
inter
alia,
short term credit transactions.
The
second defendant's detailed argument was that the plaintiff's
rates of interest were usurious, excessive, unconscionable and
against public policy. He said the Trust property had been designed
for the benefit of his minor child and that it would all but be lost
if the plaintiff were to be allowed to enforce the agreement.
Finally, he argued that the plaintiff had taken advantage of the
vulnerable position that the defendants had found themselves in given
that the loan had been designed to pay staff and to rescue the first
defendant's business. It was said the employees stood to lose their
employment. Some of them were married and had dependants to look
after.
The
defendants' argument found favour with the High Court, the court of
first instance.
Despite
noting that the statutes prescribing the rates of interest in certain
circumstances did not apply, the High Court nonetheless, held that
the plaintiff's rates of interest were usurious given the reality
of the defendants' situation and the inequality in the bargaining
power of the parties. It found the rate of interest to be harsh,
excessive, gross, unreasonable and contrary to public policy. It
adopted the statutory rate of interest which it considered fair,
just, equitable and consonant with public policy.
On
appeal, PONNAN JA, with TSHIQI JA and MAJIEDT JA concurring, reversed
the High Court's decision. He criticised it for, among other
things, calling in aid an in-apposite yardstick, namely, the
statutory rate of interest. He noted that the nature of the loan
sought and obtained by the defendants would necessarily be expensive
and that certain conclusions reached by the High Court had no
foundation in facts. The court of appeal upheld the freedom of
contract and adopted the definition of usury
that had stood the test of time, namely, that a party claiming
rescission of contract on the basis of usury, must show extortion
or oppression or something akin to fraud.
See
Dyason
v Ruthven
3 Searle 282; Reuter
v Yates
1904 TS 855…,; South
African Securities v Greyling
1911 TPD 352; and Merry
v Natal Society of Accountants
1937 AD 331…,.
In
the course of his judgment, PONNAN JA said:
“[26]
At common law, there is no fixed customary rate that can be described
as a standard rate beyond which it can be said that a transaction
becomes usurious. Rates of interest vary with the nature of the
financial transaction, the social and economic standing of the
parties, the risks, and so on. In
the absence of any proof or allegation to the contrary, it must be
assumed, I would imagine, the loan was worth the rate of interest
fixed to the borrower.
One looks in vain for a declaration by the court that at common law
any particular rate of interest is the only legal rate. For, the rate
of interest levied depends upon various factors, not least the risk
to the lender, which, in turn, is usually dependent upon whether the
creditor is well or ill-secured. And, it can hardly be disputed that
in as much as profit varies and fluctuates, so too must interest,
which, by its very nature, is representative of profit. I
thus hesitate to say that a court, by a mere decision or a series of
mere decisions, can authoritatively declare what shall be the rate of
interest which, without more, upon being exceeded, shall amount to
usury. To declare to be usurious a bargained interest beyond a
certain rate may well amount to a court legislating by judicial
decree.”…,.
Two
paragraphs down the line the learned judge of appeal also said this:
“[28]
It
bears restating that our Constitution and its value system does not
confer on judges a general jurisdiction to declare contracts invalid
on the basis of their subjective perception of fairness or on grounds
of impressive notions of good faith.
Nor does the fact that a term is unfair or that it may operate
harshly, of itself, lead to the conclusion that it offends against
constitutional principles. In
my view, it is essential that the law which makes a transaction
usurious should be clear and explicit.
The general rule endorsed by Merry
v Natal Society of Accountants
1937 AD 331 does precisely that. It,
moreover, restrains over-zealous judicial intrusion in the sphere of
contractual autonomy – a real and meaningful incident of freedom.
It permits coercive interference by a court only
in circumstances where a party to a contract can show either
extortion or oppression or something akin to fraud.
That, I daresay, is consistent with the balance that has to be struck
between, on the one hand, the liberty to regulate one's life by
freely engaged contracts, and, on the other, the striking down of the
unacceptable excesses of freedom of contract. It
also accords with the notion that judges should approach, with
restraint, the task of intruding upon the domain of the private
powers of citizens.”…,.
I
respectfully associate myself with the above remarks….,.
As
a matter of public policy, our common law attaches importance to the
need to uphold the sanctity of contracts made by equal contracting
parties. The freedom to contract encompasses the freedom to make both
a good bargain and a bad one. In Barkhuizen
v Napier
2007
(5) SA 323 (CC)
the Constitutional Court of South Africa said…;
“Self-autonomy,
or the ability to regulate one's own affairs, even
to one's own detriment, is the very essence of freedom and a vital
part of dignity.
The extent to which the contract was freely and voluntarily concluded
is clearly a vital factor as it will determine the weight that should
be afforded to the values of freedom and dignity.”…,.
That,
ultimately, was the basis of the decision of the Appeal Court in
African
Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Towers CC
2011 ZASCA 45. It cautioned against whimsical declarations by judges
to the effect that a bargained rate of interest may be said to be
usurious as that might amount to a court legislating by decree.
But,
I consider that the Consumer Contracts Act [Chapter
8:03]
and the Contractual Contracts Act [Chapter
8:04]
do urge the courts, despite the freedom of contract exercised by the
individuals, to nonetheless intervene and interfere if, in their
discretion, the contract, or some terms in it, are unfair, or if the
penalty is out of proportion to the prejudice suffered by the
creditor.
I
do not agree with counsel for the defendants that the Consumer
Contracts Act does not apply to lending by Banks. I consider that the
definition of “consumer
contract”
is wide enough to encompass a loan contract. Banks do supply banking
services. Therefore, a borrower who can satisfy any of the
requirements in section 5 of the Consumer Contracts Act may be
entitled to relief. In particular, if the defendants in this case had
shown that a penalty rate of interest of 50% per annum resulted in
making the loan contract, as a whole, an unreasonable exchange of
values; or made it unreasonably oppressive; or was such that it made
the loan contract impose obligations or liabilities that were not
reasonably necessary to protect the interests of the plaintiff; or
that it made the loan contract violate commonly accepted standards of
fair dealing, then they would have been entitled to relief under
section 4 of the Consumer Contracts Act. The fact that they might
have signed the loan contract freely and voluntarily would not be
decisive of the matter. It is a matter of public policy.
Similarly,
in terms of the Contractual Penalties Act, if the defendants had
shown that a penalty rate of interest of 50% per annum was out of
proportion to any prejudice suffered by the plaintiff as a result of
their failure to pay back the loan timeously, then they might have
been entitled to relief under section 4 of the Contractual Penalties
Act. In particular, the court could reduce the rate to what it would
consider equitable, notwithstanding that the defendants might have
freely and voluntarily signed the loan contract which had stipulated
such a rate.
Unfortunately,
there was virtually nothing placed before me in this matter to help
decide whether or not a penalty rate of interest of 50% per annum was
usurious or contrary to public policy; or so excessive as to
contaminate the entire loan contract to enable relief to be given
under the Consumer Contracts Act [Chapter 8:03], or that such a rate
was a penalty that was so disproportionate to any prejudice suffered
by the plaintiff by reason of the defendants' default to warrant
relief under the Contractual Penalties Act [Chapter 8:04]….,.
Under
the common law, the onus is on him who alleges usury to show either
extortion or oppression or something akin to fraud.
Similarly, under the Consumer Contracts Act and the Contractual
Penalties Act, the onus is also on him who alleges that a particular
consumer contract is unfair or that a particular penalty is out of
proportion to any prejudice suffered….,.
However,
given the provisions of the Consumer Contracts Act and the
Contractual Penalties Act, it would be remiss of me to leave matters
at the classical level that says that where the borrower has failed
to show extortion
or oppression or something akin to fraud,
then he is not deserving of relief. The hallmark of the Consumer
Contracts Act and the Contractual Penalties Act
is fairness and justice….,.
My
view of this case is that a rate of interest of 50% per annum, albeit
designed as a penalty for default, is, on the face of it, too high,
given that the dominant functional currency in the economy is the
United States dollar. On the face of it, such a rate induces a sense
of shock. It stifles economic growth. But nothing tangible has been
placed before me to use as a yardstick to assess whether such a rate
is indeed usurious, or excessive, or unconscionable, or contrary to
public policy, or unfair, or disproportionate to any prejudice
suffered by the plaintiff by reason of the defendants' default on
the loan agreement.
The
plaintiff's rate needs proper interrogation. This is possible only
through a trial action….,.
The
matter is referred back to trial for evidence to be led on whether or
not the plaintiff's penalty rate of interest at 50% per annum on
the loan advanced to the first defendant was usurious, or excessive,
or unconscionable, or contrary to public policy, or unfair or
disproportionate to any prejudice that it may have suffered by reason
of the defendants' default. The overall onus shall rest on the
plaintiff….,.
Either
of the parties is free to take steps to have the matter re-enrolled
for the trial.
