By
agreement, the parties referred this matter to court as a Special
Case in terms of Order 29 of the Rules of this Court. In my view,
this was a mistake. My reasons for saying this are towards the end of
this judgment.
The
defendants' defence was a frontal attack on the propriety of the
penalty rate ...
By
agreement, the parties referred this matter to court as a Special
Case in terms of Order 29 of the Rules of this Court. In my view,
this was a mistake. My reasons for saying this are towards the end of
this judgment.
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.
