The defendants' defence was a frontal attack on the propriety of the penalty rate of interest levied and claimed by the plaintiff on the monies loaned and advanced to the first defendant.
The plaintiff was a registered commercial bank. The first defendant, undoubtedly the alter ego of the second and third defendants - themselves husband and wife - obtained from the plaintiff, a revolving credit facility in the sum of US$50,000= to boost working capital. Repayments would be made in instalments over twelve months. Interest would be charged at a flat rate of 30% per annum. In the event of a default the penalty rate of interest was pegged at 50% per annum. It would change from time to time.
The second and third defendants bound themselves as sureties and co-principal debtors with the first defendant for the due repayment of the loan.
According to the Statement of Agreed Facts, the plaintiff duly disbursed the loan. The first defendant duly utilised the proceeds. However, it failed to repay as per agreement. From time to time the loan would be “rolled over”. The effect of those “roll overs” was such that the total lending to the first defendant was in the sum of US$264,371=25, being the capital sum; US$209,082=49 being the interest accrued; and US$3,475=76 being the bank charges. Against that, the first defendant had paid a total of US$236,272=44. The balance outstanding was said to be in the sum of US$51,657=06 of which US$45,966=07 was the capital; US$5,670=99 the interest; and US$20= the bank charges. Eventually, the plaintiff issued summons. The parties were agreed that if the defendants' defence did not succeed then those amounts would be the extent of their liability.
The defendants' defence was that the plaintiff's penalty rate of interest at 50% per annum was usurious, contrary to public policy and therefore unlawful. They referred to a number of statutes. The first was the Prescribed Rate of Interest Act [Chapter 8:10]. This Act empowers the Minister of Justice, with the approval of the Minister of Finance, to prescribe or fix the rate of interest on certain debts. By statutory instrument 164 of 2009, S.I.164 of 2009 (Prescribed Rate of Interest Notice, 2009) (“S.I. 164/09”), the prescribed rate at the time of this case was 5%.
However, it is not understood why the defendants ever made reference to this Act. It does not apply. By section 4 of the Prescribed Rate of Interest Act [Chapter 8:10], the prescribed rate of interest only applies to interest-bearing debts the rates of which are not governed by any other law or an agreement or a trade custom or in any other manner. In casu the rate was governed by the loan agreement.
The next statute referred to by the defendants was the Moneylending and Rates of Interest Act [Chapter14:14]. By section 8, no lender can stipulate, demand or receive from the borrower, interest (on money lent and advanced) at a rate greater than the prescribed rate.
Again, it is not understood why the defendants made reference to this Act either. In terms of section 20 of the Moneylending and Rates of Interest Act [Chapter14:14], the Act does not apply to money lending by Banks. The plaintiff was a Bank.
The third piece of legislation referred to by the defendants was the Consumer Contracts Act [Chapter 8:03]. By its preamble, the purpose of the Act 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. The defendants argued that a loan agreement was a contract for the supply of services, namely, banking services.
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 [Chapter 8:03], the rights conferred by it cannot be waived by agreement unless such waiver is made during the proceedings.
The last legislation referred to by the defendants was the Contractual Penalties Act [Chapter 8:04]. The preamble to this Act says, inter alia, it is an Act to provide for the enforcement of penalty clauses in contracts. A “penalty” is defined to include any money which a person is liable to pay, or any money which a person is liable to forfeit under a penalty stipulation. A “penalty stipulation” is defined to include a contractual provision under which a person is liable to pay any money as a result, or in respect of, an act or omission in conflict with a contractual obligation.
Section 4 of the Contractual Penalties Act starts by saying that a penalty stipulation is enforceable. However, it goes on to empower the court to reduce a penalty stipulation that may appear to be out of proportion to any prejudice suffered by the creditor as a result of the act or omission under a penalty stipulation. The court may grant any other relief as it may consider fair and just to the parties.
The Contractual Penalties Act ends by outlawing any purported waiver of any rights or benefits conferred under it.
As I understood him, and in my own words, I synthesize counsel for the defendants argument as follows:
(1)The plaintiff's penalty rate of interest was excessive, burdensome, oppressive and out of proportion to any prejudice that it may have suffered by reason of the defendants' failure to pay the rest of the debt on time.
(2) An interest rate of 50% per annum was usurious, contrary to public policy and therefore illegal. The empirical evidence necessary to show this was self-evident and the court could take judicial notice of certain economic aspects such as the annual rate of inflation obtaining in the country.
(3) The annual rate of inflation in Zimbabwe was no more than 5%. Even though the Zimbabwean economy had adopted the multi-currency system, the United States dollar was predominate. It was the currency against which all the other currencies of the world are bench-marked. In the United States of America, the source country for the currency in use in Zimbabwe, interest rates are no more than 3% per annum.
(4) A penalty rate of interest of 50% per annum betrayed a hang-over from a by-gone era in Zimbabwe, before the advent of the multi-currency in 2009, when exploitive trade practices ran rampant owing to super-hyperinflation that obtained in the economy.
(5) Other commercial banks, such as Stanbic Bank and the Standard Chartered Bank, have pegged their interest rates at no more than 15% per annum. The plaintiff's rate, at 50%, was so way out of range as to stifle economic growth.
(6) The plaintiff was the defendants' Bank for a long time. The defendants could not have been expected to start another relationship with another Bank which might have been offering cheaper money.
(7) By the Acts of Parliament referred to above, the Legislature had given the courts the green light to close up the gap in the law as far as fixing appropriate rates of interest under the common law was concerned. It was time for judicial activism. The courts should put a cap on the maximum rates of interest charged on loans and put a stop to the mischief brewed by greedy moneylenders (counsel for the defendants called them Shylocks, after a character in the Shakespearian play: Merchant of Venice, who was a ruthless moneylender).
(8) The courts should not shirk from their responsibility to legislate. It is part of their judicial function. The Supreme Court has given the green light. In Zimnat Insurance Company Limited v Chawanda 1990 (2) ZLR 143 (SC), GUBBAY CJ said…, (McNALLY JA and MANYARARA JA concurring):
“Law in a developing country cannot afford to remain static. It must undoubtedly be stable, for otherwise reliance upon it would be rendered impossible. But, at the same time, if the law is to be a living force it must be dynamic and accommodating to change. It must adapt itself to fluid economic and social norms and values and to altering views of justice. If it fails to respond to these needs and is not based on human necessities and experience of the actual affairs of men rather than on philosophical notions, it will one day be cast off by people because it will cease to serve any useful purpose. Therefore, the law must be constantly on the move, vigilant and flexible to current economic and social conditions….,.
Today, the expectations amongst people all over the world, and particularly in developing countries, are rising, and the judicial process has a vital role to play in moulding and developing the process of social change. The Judiciary can and must operate the law so as to fulfil the necessary role of effecting such development.
It sometimes happens that the goal of social and economic change is reached more quickly through legal development by the Judiciary than by the Legislature. This is because judges have a certain amount of freedom or latitude in the process of interpretation and application of the law. It is now acknowledged that Judges do not merely discover the law, but they also make law. They take part in the process of creation. Law-making is an inherent and inevitable part of the judicial process.
The opportunity to play a meaningful and constructive role in development and moulding the law to make it accord with the interests of the country may present itself where a judge is concerned with the application of the common law, even though there is a spate of judicial precedents which obstructs the taking of such a course. If judges hold their precedents too closely, they may well sacrifice the fundamental principles of justice and fairness for which they stand. In a famous passage, LORD ATKIN, referring to judicial precedents, said:
'When these ghosts of the past stand in the path of justice clanking their medieval chains the proper course is for the judge to pass through them undeterred.'”
In counter, counsel for the plaintiff stressed the principle that where parties have entered into a contract freely and voluntarily its validity ought to be preserved. He submitted that other than the Contractual Penalties Act, none of the other pieces of legislation referred to by the defendants was applicable. With regards the Consumer Contracts Act in particular, counsel for the plaintiff said it applies only to contracts for the sale or supply of goods or services. Banks lend money. To offer loans is not to sell or supply goods or services.
Counsel for the plaintiff further submitted that while the Contractual Penalties Act did apply, nonetheless the onus had been on the defendants to provide empirical evidence to show that a penalty rate of 50% per annum was disproportionate to the cost incurred by the plaintiff in procuring the money that it had lent to the defendants. Without that evidence, the court could not possibly grant relief. The plaintiff did not agree with the defendants' statistics.
Finally, counsel for the plaintiff submitted that the defendants' call for judicial activism to fix the interest rates was misplaced. Interest rates on loans are influenced by a number of factors, not least, the state of the economy, the risk associated with the loan, the cost of funds to the lender and the international markets.
That was the case before me. I then wondered what interest is.
(a) Interest in general
It appears that since the beginning of time the question of interest has vexed lenders, borrowers, princes, emperors, rulers and virtually every other society. Even God seemed apprehensive about the practice of charging interest by Israelites on fellow Israelites. It seems the basic question has been to find the right balance between the competing interests of lenders and borrowers. In my view, since time immemorial, interest ceased to be a private concern of the individual parties to the transaction. It became very much a public policy issue. So what really is interest? What is its purpose?
(b) What is interest? What is its purpose?
WEBSTER's New Twentieth Dictionary, Un-abridged Series, 2nd ed. and the Concise Oxford Dictionary define interest as money paid for the use of money lent or for not exacting repayment of a debt. FA MANN, The Legal Aspect of Money, 4th ed. (quoted with approval by CHINHENGO J in Mawere v Mukuna 1997 (2) ZLR 361 (H)) says…,:
“…, interest is awarded to compensate for the deprivation of the use of money due until payment.”
In the field of commerce I would say, to the lender, interest is the profit on the loan that the lender receives. To the borrower, it is the cost on the loan that he pays. MANN says it is not the purpose of interest to preserve the real value of the sum due or to provide protection against inflation: see Pickett v British Rail Engineering Limited [1980] AC 136.
It seems there are a number of factors that are taken into account in arriving at the rate of interest in any given situation. These include the cost of the funds to the lender; the risk associated with the borrower, taking into account his creditworthiness, or lack of it; the lenders' overheads and the margin of profit desired; the country risk, and so on.
In African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC 2011 ZASCA 45: PONNAN JA said:
“…,. 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 inasmuch as profit varies and fluctuates, so too must interest, which, by its very nature, is representative of profit.”
(c) Interest in Biblical Times
In the Bible, God simply forbade the Jews from charging interest on monies lent to fellow Jews in need. In the Book of EXODUS, Chapter 22, verse 25 (New International Version [NIV]), God, through Moses, decreed:
“25If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest.”
In DEUTERONOMY 23, verses 19 and 20 God said:
“19Do not charge your brother interest, whether on money or food or anything else that may earn interest. 20You may charge a foreigner interest, but not a brother Israelite, so that the LORD your God may bless you in everything you put your hand to in the land you are entering to possess.”
In LEVITICUS 25, verses 35–36 God said:
“35If one of your countrymen becomes poor and is unable to support himself among you, help him as you would an alien or a temporary resident, so he can continue to live among you. 36Do not take interest of any kind from him, but fear God, so that your countryman may continue to live among you.”
Evidently, God did not ban the charging of interest per se. Nonetheless, He seemed concerned that the practice had the potential to cause social problems.
In Jesus' times it seems the charging of interest was permissible. In the parable of the talents, in MATTHEW Chapter 25, Jesus rapped the lazy servant who had failed to invest the gold coin given him. In verse 27 Jesus said:
“23Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.”
(d) Interest in Roman and Roman-Dutch times
It seems in Roman and Roman-Dutch times the question of interest, as in Biblical times, continued to be a cause for concern amongst the authorities. The charging of interest on monies lent was permissible but some restrictions were imposed. According to JOUBERT JA in LTA Construction BPK v Administrateur, Transvaal 1992 (1) SA 473 (A), quoted with approval by BLIEDEN J in Sanlam Life Insurance Limited v South African Breweries Limited 2000 (2) SA 628 (W), the concept of interest was conceived and practiced from about 150BC to 250AD during the times of the Roman Empire. The economy of the Roman Empire was flourishing. It had a well-developed monetary system. Moneylenders had emerged. They charged interest on the capital amount. The interest was money paid for the capital sum advanced. Then interest was known as usury. It was the proceeds of the monies lent. The person paying the interest was called the usurarius.
One of the restrictions placed on the charging of interest in Roman times was that it could only be claimed if it had expressly been included in a promise, called stipulatio. Furthermore, the ruling authorities, from time to time, employed various methods to limit the interest which could be claimed. The moneylenders had become greedy. Measures were deemed necessary to provide protection or relief to the borrowers. One such measure was to limit the rate at which interest could be charged. A Watchtower Bible and Tract Society publication that I once came across, titled Insight on the Scriptures, Volume one (1988), said…, that at Babylon, which had a well-developed loan system, the rate of interest, according to the CODE HAMMURABI, was, in the second millennium BCE, 20 percent on money and grain lent. A merchant charging a higher rate would forfeit the amount lent.
Another measure to protect borrowers from money lenders, according to JOUBERT JA, in LTA Construction BPK v Administrateur, Transvaal 1992 (1) SA 473 (A), was to prohibit the levying of interest on interest. Yet another measure was the prohibition against interest in duplum. The learned judge of appeal noted that as early as 529AD the Emperor Justinian issued the following decree:
“(i) We, by no means, permit more than double interest to be collected, not even where pledges have been given to the creditor to secure the debt, under which circumstances certain ancient laws authorised more than double interest to be collected.
(ii) We decree that this rule shall be observed in all bona fide contracts and all other cases in which interest can be collected.”
Today, the in duplum rule is part of our law.
According to cases such as Deggelen v Triggs 1911 SR 154; Commercial Bank of Zimbabwe Limited v MM Builders and Suppliers (Private) Limited & Ors 1996 (2) ZLR 420, Mawere v Mukuna 1997 (2) ZLR 361 (H), and Conforce (Private) Limited v City of Harare 2000 (1) ZLR 445 (H) interest ceases to accumulate upon any amount of capital owing once it equals the amount of the capital, whether the debt arises out of a financial loan or out of any contract whereby a capital sum is payable together with interest thereon. The in duplum rule is conceived in public policy to protect the borrower from avaricious moneylenders.
(e) Interest in modern times
The question of interest has continued to vex societies even in these modern times. The courts in this jurisdiction, and elsewhere, have, from time to time, advocated or taken measures to cushion borrowers from hardships that may be caused by the charging of excessive interest. They have sometimes agitated for the discarding of antiquated Roman-Dutch principles in an effort to bring the law at par with, or make it relevant to, the society governed by it. In Linton v Corser 1952 (3) SA 689 CENTLIVRES CJ said…,:
“Today, interest is the life-blood of finance…,. The question that now arises is whether we should apply the old Roman-Dutch Law to modern conditions where finance plays an entirely different role. I do not think we should. I think that we should take a more realistic view than in a matter such as this to have recourse to the old authorities.”
However, notwithstanding that there is a general acceptance that in some situations there may be a need to intervene and protect the borrower, eminent judges and jurists have sometimes differed sharply and contradicted one another in the process. I give a few examples:
(i) In South Africa, in Standard Bank of South Africa Limited v Oneanate Investments (Pty) Limited (In Liquidation) 1998 (1) SA 811 SA (A) ZULMAN J said legal action interrupted the running of the in duplum interest. He blasted the attempt to apply old Roman-Dutch concepts to modern conditions. At p834F he said:
“If one accepts that interest, and, indeed, compound interest, is the 'life-blood of finance' in modern times I am of the opinion that one should not apply all the old Roman-Dutch Law to modern conditions where finance plays an entirely different role…,.”
(ii) In Zimbabwe, two years earlier, i.e. in 1996, GILLEPSIE J, sitting with two other judges, in Commercial Bank of Zimbabwe Limited v MM Builders and Suppliers (Private) Limited & Ors 1996 (2) ZLR 420 had held that in duplum interest would be interrupted by the commencement of litigation.
(iii) Two years after ZULMAN's judgement, MALABA J, as he then was, and sitting as a single judge, in Ehlers v Standard Chartered Bank Zimbabwe Limited 2000 (1) ZLR 136 (H), rejected GILLESPIE J's approach and restored the position by ZULMAN J.
(iv) It became a see-saw. After Ehlers v Standard Chartered Bank Zimbabwe Limited 2000 (1) ZLR 136 (H), CHINHENGO J, in Conforce (Private) Limited v City of Harare 2000 (1) ZLR 445 (H) rejected the approach by MALABA J and went back to GILLESPIE J's position. He held that litis contestatio did not interrupt in duplum. Evidently realizing the futility of this trend and the resultant confusion to the public, CHINHENGO J exhorted the parties to appeal to the Supreme Court. At p 458F–G he said:
“I must respectfully express my dissent from those judgments. I appreciate that the law must be certain and that it is most undesirable for judges to differ on fundamental principles of law. There would appear to be a need for the difference of opinion on this point to be placed before the Supreme Court as soon as possible, either by way of an appeal or on a suitable case, as a reference point of law. Consistency in the law is paramount in the administration of justice.”
(v) Given that part of the public policy considerations that have led the authorities and/or the courts to conceive of measures such as the in duplum rule, to protect borrowers, it sounds logical, on the face of it, that the inquiry should be on the identity of the borrower so as to determine whether in any given case he is one deserving of protection. That seemed to have been the view of GALGUT J in the court of first instance in Verulam Medicentre (Pty) Limited v Ethekwini Municipality 2005 (2) SA 451 (D). He said:
“It appears therefore that the test might simply be whether in the particular case public policy requires the debtor to be protected against exploitation by the creditor.”
In that case, the learned judge had concluded that the in duplum rule did not apply as the respondent, Verulam Medicentre (Pty) Limited, did not require the protection that the rule was designed to provide. However, on appeal, the South African Supreme Court rejected that kind of approach. It held that the enquiry was not on the identity of the debtor, but rather on the nature of the debt. That exactly had been the approach of CHINHENGO J, five years earlier, in Conforce (Private) Limited v City of Harare 2000 (1) ZLR 445 (H). He had rejected an enquiry based on the identity of the debtor. At p 458A–B he had said:
“…,. I venture to say that the public interest served by the in duplum rule is not to be identified with sympathy for the debtor, so as to say that the rule is designed to protect him. I view the public interest involved as encompassing a wider spectrum of interests, from the protection of the debtor, to securing fiscal discipline on the part of lenders, to considerations of justification for charging interest in the first place i.e. to compensate the creditor for deprivation of use of the money due until payment (Mawere v Mukuna 1997 (2) ZLR 361 (H) at 364G) and to the interests of commerce generally and to perhaps many more interests. Thus, the public interest cannot be restricted to one or two considerations i.e. the protection of the debtor and the dictates of modern commerce.”
So much about that controversy.
