UCHENA
JA: This
is an appeal against the decision of the High Court.
The appellant borrowed
US$40 000-00 from the respondent. The loan agreement was reduced to writing in
the form of a promissory note dated 1 December 2010. They agreed on an interest
rate of 7 percent per month on the unpaid balance. The appellant as borrower
agreed to stand surety for his own debt in his “own personal capacity”. He
signed the loan agreement as the borrower.
The appellant made some payments but failed to pay back
the loan by 31 January 2011 as had been agreed. The parties entered into
an extension of payment agreement. The appellant was to pay by the end of
August 2011. The appellant again signed as the borrower. He again made some
payments but failed to fully repay the loan.
The appellant and third parties who later got involved
unsuccessfully negotiated with the respondent for a settlement. Part of the
loan therefore remained unpaid.
The respondent issued summons against the appellant in
the High Court claiming payment of the sum of US$80, 000-00 which included the
agreed interest at the rate of 7 per cent per month up to the limit of the in duplum rule. The court a quo, relying on the parole evidence
rule, and the evidence in the two agreements,
found the appellant liable and ordered him to pay US$80,000-00 to the
respondent. The appellant now appeals against the court a quo's decision to this court.
The appellant raised a
point of law for the first time in his Heads of Argument. He alleged that the
agreement between him and the respondent was illegal because the respondent
charged interest at a rate above the prescribed interest rate. The respondent did not object to the point of
law being raised for the first time on appeal and instead made detailed
submissions in heads of argument on the provisions of the Money lending and
Rates of Interest Act [Chapter 14:14].
It is trite that a point
of law can be raised at any stage even on appeal if it will cause no prejudice
to the other party. See the cases of Austerlands
(Pvt) Ltd v Trade & Investment Bank & Others 2006 (1) ZLR 372 (S) @
378 B-F, Gazi v NRZ SC 60/15, Muchakata v Netherburn Mine 1996 (1) ZLR
153 (SC), Nissan Zimbabwe (Pvt) Ltd v Hopitt (Pvt) Ltd 1997 (1)
ZLR 569 (SC) @ 571 D- 572 E and Zesa v
Bopoto 1997 (1) ZLR 126 (SC) @ 131 E – 132 C. The respondent, who has not
opposed the raising of the point of law on appeal, will not suffer any
prejudice as both parties have presented argument on the effect of the rate of
interest charged.
The
appellant's grounds of appeal raise the following issues for determination: -
1. Whether the court a quo misdirected itself on the facts?
2. Whether the court a quo misdirected itself in applying the parole evidence rule?
3. The effect of the appellant contracting as
borrower and surety of his own debt.
4. Whether or not the interest rate charged
renders the whole loan agreement a nullity?
5. Whether the court a quo erred in awarding punitive costs against the appellant?
Whether
the court a quo misdirected itself on
the facts?
The factual dispute
between the appellant and the respondent was narrowed down to whether or not
the appellant was the principal debtor. In his pleadings the appellant pleaded
that he was a surety for a loan advanced to a third party. He argued that the
respondent should first recover from the principal debtor before he seeks
payment from him in his capacity as the surety.
In evidence he admitted
that he signed the two promissory notes as the borrower after agreeing to be
the borrower and surety of his own debt in his personal capacity. The appellant
later admitted under cross examination that the loan would not have been
granted if he had not presented himself as the borrower. The following exchange
took place between him and Mr Stewart
who represented the respondent in the court a
quo:
“Q. Mr Ellse you indicated that you had
requested that the loan be in Kapp Jack's name' but this was not possible
correct?
A. Correct.
Q. Notwithstanding that fact and the
fact that the agreement was put in your name, you still went ahead with the
transaction, correct?
A. Correct.
Q. I reiterate that you therefore signed
the promissory note as the borrower?
A. Correct that was the only avenue I had to access the funds because there
was a mutual agreement between
myself, (sic) so it was borrower surety as per what I signed, it was not just for
borrower, it was also to do with surety.”
Under further
cross-examination the appellant conceded that no other party besides him and
the respondent signed the agreement on the two promissory notes. He further
conceded that the borrowed money was paid into his Bank account. Mr Sibanda, for the appellant, in spite of
the appellant's concessions submitted that the appellant was not the principal
debtor. Mr Stewart for the respondent
submitted that he was.
The
appellant's admission that he had no option but to sign as borrower for him to be
granted the loan settles the factual dispute. He twice signed for the loan as
the borrower. This means he borrowed the
money and then stood as surety for his own debt. In his own evidence he admitted
that his request for the debt to be in the name of Kapp Jack was rejected by the
respondent. The loan could only be granted to him personally. The court a quo therefore correctly found that he
was the principal debtor.
Whether
the court a quo misdirected itself in
applying the parole evidence rule?
The
appellant signed the two promissory notes as the borrower. The loan amount was
deposited into his personal account in Mauritius. His attempt to bring in
evidence of the subsequent involvement of third parties is against the parole
evidence rule.
Subject
to the exceptions to the parole evidence rule, which are not applicable in this
case, where an agreement, has been reduced to writing, whether as required by
the law or at the instance of the parties, the only admissible evidence about
the terms of the agreement is the written document. No evidence of other
agreements may be adduced to indicate that the agreement was different, or to
explain precisely what the parties intended.
In
the case of Union Government v Vianini
Fero Concrete Pipes (Pty) Ltd 1941 AD 43 at page 47 Watermayer JA said:
“-this court has
accepted the rule that when a contract has been reduced to writing, the writing
is, in general, regarded as the exclusive memorial of the transaction and in a
suit between the parties no evidence to prove its terms may be given save the
document or secondary evidence of its contents nor may the contents of such a
document be contradicted, altered, added to or varied by parole evidence.”
The
court a quo therefore correctly found
the appellant was bound by the contents of the promissory notes. In his own
words the appellant said he had to sign as the borrower for him to get the
loan.
The emails tending to show that the respondent
subsequently got to know and communicated with persons the appellant had,
subsequent to their agreement, further loaned the borrowed money to, does, not affect
the original agreement. The respondent remained entitled to sue the appellant
for the recovery of the money the latter borrowed from him.
It
is trite that when a borrower borrows money for onward lending to a third party
he remains the original lender's principal debtor even if the original lender
subsequently gets to know about the third party to whom the borrower lends the
money. The third party would not be privy to the agreement between the
appellant and the respondent.
The
effect of the appellant, contracting as the borrower and surety of his own
debt.
Mr
Sibanda, for the appellant, submitted
that the agreement was senseless and invalid because the appellant contracted
as the borrower and surety of his own debt in his personal capacity.
Mr
Stewart for the respondent submitted
that the appellant could not be a surety for his own debt but argued that this
does not invalidate the loan agreement.
A
suretyship is an accessory agreement between the surety and the creditor of the
principal debtor in terms of which the surety makes himself liable to the creditor
for the proper discharge by the debtor of his duties to the creditor. In the
case of Orkin Lingerie Co. (Pty) Ltd v
Melamed & Hurwitz 1963 (1) SA 324 (W) at 326 G-H Trollip J commenting
on the definition of a suretyship agreement said:
“Various definitions of suretyship have
from time to time been given. They are collected in Wessels on Contract 2nd
ed, paras, 3774, 3785 to 3793, and Caney on Suretyship, pp 11, 17 and 18. I
think that, having regard to them, a contract of suretyship in relation to a
money debt can be said to be one whereby a person (the surety) agrees with the
creditor that, as accessory to the debtor's primary liability, he too will be liable
for that debt.
The essence of
suretyship is the existence of the principal obligation of the debtor to which
that of the surety becomes accessory.”
This
means a suretyship agreement can only be entered into if there is an agreement
between the creditor and principal debtor. It is therefore an additional
agreement to the one between the creditor and principal debtor. They are two
separate agreements entered into between the creditor and principal debtor and
between the creditor and the surety.
A
surety, therefore, agrees to make himself liable to the creditor for the
principal debtor's debt. He cannot stand surety for a debt in which he is the
principal debtor. It does not make sense that a borrower can be both the
borrower and the surety. One cannot say if I fail to pay you as the principal
debtor I will pay you as a surety. Failure to pay as the principal debtor will
result in failure to pay as surety because the resources of the same person will
be used to satisfy the debt. I am therefore satisfied that a borrower cannot
secure his own debt as a surety. It is not legally possible for a borrower to
stand as the surety of his own debt. See the cases of Standard Bank of SA Ltd v Lombard and Anor 1977 (2) SA 808 (W) at
813 F-H and Litecor Voltex (Natal) (Pty)
v Jason 1988 (2) SA 78 D.
In
the case of Standard Bank (supra) doubt was raised on the propriety of a
partner standing surety for a partnership's debt. In my view that situation can
be arguable. It is different from that of a debtor being the surety of his own
debt.
In
the case of Litecor Voltex (Natal) (Pty)
v Jason (supra), Didcot J, at page
81 B, commented on a debtor standing surety for his own debt as follows:
“To guarantee the payment of your own debt
is a futile exercise, to say the least, neither underwriting nor reinforcing
the obligation to pay it rests on you in any event. Failing the basic test for
a suretyship, it does not amount to such. Nor does it accomplish anything else.
It is not worth, in short, the paper on which it is written.”
Mr
Sibanda for the appellant argued that
the fact that the appellant was both the borrower and surety renders the loan
agreement and surety agreement nullities. Mr Stewart for the respondent submitted that the suretyship agreement
is a nullity but the loan agreement is valid. I agree.
As
already said a suretyship agreement is entered into to secure the debt of the
principal debtor in an agreement already entered into. In this case the
appellant borrowed US$40 000-00 from the respondent. He received the money
and used it.
The
appellant cannot benefit from having promised to be the surety of his own indebtedness
to the respondent. He cannot be allowed to benefit from his wrong doing by
arguing that they entered into a single agreement for both the loan and the
suretyship agreements.
The
fact that the suretyship agreement is a nullity does not affect the loan
agreement. The loan agreement was perfected by the payment of the money into
the appellant's Bank account. The suretyship agreement is a subsequent
agreement. The fact that the two agreements were rolled into one document does
not affect their separate existence.
Whether
or not the interest rate charged renders the whole loan agreement a nullity?
Mr Sibanda for the appellant submitted that the loan agreement was
invalidated by the interest rate of 7 per cent per month which is above the
prescribed rate of interest. He submitted that the interest rate of 7 per cent
per month contravenes statute law. He further submitted that the interest rate
is far above the interest rate of 5 per cent per annum prescribed by the
Minister of Justice in terms of Statutory Instrument 164/2009.
Mr Stewart for the respondent agreed that the interest rate of 7 per
cent per month is above the prescribed rate of interest, but argued that the
respondent was, in terms of Statutory Instrument 53 of 1985, entitled to charge
an interest rate of 17 per cent per annum. He argued that the charging of an
interest rate above the prescribed rate does not invalidate the whole
agreement.
The parties entered into
the agreement in dispute on 20 November 2010. This was after S. I. 164 of
2009 had come into force. S. I. 53 of 1985 had been replaced by S. I. 164
of 2009. The interest rate which was applicable at the time of the agreement is
therefore 5 per cent per annum.
The identity of the
respondent in terms of the Money Lending
and Rates of Interest Act [Chapter 14:14]
(“The Act”), and the provisions of the Act will determine whether or not the
agreement is valid.
In terms of s 2 of the Act a lender is defined as:
“any person making a loan of money, the
cessionary of any right arising under any contract of loan of money and the
holder of any instrument of debt, and includes a moneylender;”
A money lender is
defined as:
“any person who carries on a business of
moneylending or who advertises or announces himself or holds himself out in any
way as carrying on such business, but does not include —
(a) any person engaged in any
transaction exempted by section twenty or by regulations made in terms
of section twenty-two, in so far as any such transaction is concerned;
or
(b) any person exempted by section twenty
or by regulations made in terms of section twenty-two, to the extent
that he has been so exempted.”
In my view the use of the words “any person making a
loan of money” in the definition of a “lender”, includes the respondent. He is
therefore a lender.
Mr
Stewart for the respondent in
paragraph 8 of his Heads of Argument conceded that the respondent is not a
money lender. In view of the definition of a “money lender” under (a) and (b)
of the definition section of the Act, the concession was properly made as the
respondent is not in the business of money lending. According to the facts of
this case he is an occasional lender.
Therefore
s 20 which exempts money lenders from the provisions of the Act does not apply
to occasional lenders like the respondent.
Mr Sibanda
for the appellant submitted that the provisions of ss 8, 9, and 11 invalidate
the parties' agreement. Mr Stewart
for the respondent submitted that these sections do not invalidate the parties'
agreement as the prohibition is only against charging interest above the
prescribed rate of interest.
Section 8 of the Act provides for the maximum rates of
interest as follows:
“8(1) No lender
shall stipulate for, demand or receive from the borrower, interest at a rate
greater than the prescribed rate of interest.
(2) Any lender who contravenes subsection
(1) shall be guilty of an offence and liable to a fine not exceeding level
seven or to imprisonment for a period not exceeding one year or to both such
fine and such imprisonment”.
It is apparent that the appellant contravened s 8 of
the Moneylending and Rates of Interest Act. He charged interest of 7 per cent
per month which is far above the prescribed rate of 5 per cent per annum. He,
in terms of s 8 (2), committed a criminal offence. What remains to be
determined is the effect of s 8 on the parties' loan agreement.
Section 9 provides for the prohibition of the recovery
of interest above the prescribed rate of interest through the courts as follows:
“9(1) No lender
shall, under any contract of loan of money, obtain judgment for or recover from
the borrower an amount which exceeds a capital amount which, added to any sum
already paid in respect of the capital debt, equals the sum actually advanced
to and received by the borrower under the contract plus—
(a) interest at a rate not exceeding
the prescribed rate of interest; and
(b)-----
c) ----- and
(d) any costs which have actually been
incurred by the lender in the recovery of his debt or any interest payable
thereon and which would be recoverable at law from the borrower.
(2) No lender shall in any proceedings
against a borrower recover, as for loss, damage or expense alleged to have been
incurred in connection with any loan of money, any sum not included in an
amount recoverable in respect of such loan under subsection (1).
(3) No lender shall in any proceedings in
insolvency, assignment or liquidation be allowed to prove, in respect of any
loan of money, for any sum for which he could not in terms of this section have
obtained judgment”.
In summary s 9 (1) to (3) prohibits the court from
granting a lender judgment for the recovery from the borrower an amount which
exceeds a capital amount which, when added to any sum already paid in respect
of the capital debt, equals the sum actually advanced to and received by the
borrower under the contract, plus interest at a rate exceeding the prescribed
rate of interest. This means where interest has been charged at a rate above
the prescribed interest rate, the court should not allow the lender to recover
such interest but limit him to interest not exceeding the prescribed rate. This
in my view means the court can grant to the lender a judgment which does not offend
against the in duplum rule and the
prescribed interest rate.
Section 11 provides for the borrower's right to sue
for the recovery of excess payments as follows:
“11 Any person who, under or in
connection with any contract of loan of money, has paid to the lender an amount
which exceeds the amount which could upon such contract have been recovered
from such person under any provision of this Act shall be entitled, at
any time within two years after the date of the payment, to recover from the
person to whom he made it a sum equal to the amount of the excess”.
Section 11 entitles the borrower, to within two years
of the date of payment, recover any excess payment he would have made to the
lender. The excess payment can be in respect of interest above the prescribed
rate of interest.
Section 8 of the Act, as read with s 7 of the
Prescribed Rate of Interest Act, prohibits a lender other than a moneylender
exempted by s 20 of the Act from charging any interest rate above the prescribed
rate of interest. It is therefore clear that the prohibition under s 8 is
restricted to interest above the prescribed rate of interest.
In the case of Funding
Initiatives International (Pvt) Ltd v C. Mabaudi HH 20-07 Patel J (as he
then was) commented on ss 8 and 9 as follows:
“The established principle of our law is
that anything done contrary to a direct statutory prohibition is generally void
and of no legal effect. The mere prohibition operates to nullify the act,
particularly where it is visited with criminal sanction. See Schierhout V Minister of Justice 1926 AD
99 at 109; Metro Western Cape (Pvt) v
Ross 1986 (3) SA 181 (AD) at 188-189 ---.
Having regard to the direct and
unambiguous prohibition spelt out in s 8 of the Act, I am in no doubt that its
provisions cannot be waived by agreement and that any contractual stipulation
to the contrary must be treated as being null and void ab initio. Moreover, as
is made crystal clear in s 9, any interest charged or agreed in excess of the
prescribed minimum is unenforceable and irrecoverable, whether through civil
proceedings or otherwise.”
I agree with the above observations of Patel J (as he
then was).
I must however examine the effect of ss 8, 9, and 11
on the recoverability of the amount loaned and interest not exceeding the
prescribed rate of interest. What s 9 prohibits is the granting of a judgement
exceeding the in duplum rule and
awarding interest exceeding the prescribed interest rate. It seems to me that
the court can award judgment within the in duplum
rule and interest within the prescribed interest rate. The prohibitions in
ss 8 and 9 are against granting interest above the prescribed interest rate.
This view is supported by s 11 which allows the borrower to only recover
payments he would have made in excess of what is permissible under the Act.
This means the courts can only help the borrower to
recover interest above the prescribed rate of interest, leaving the lender with
what the borrower borrowed plus interest within the prescribed rate of
interest. The court a quo therefore can
only do what the law permits and not what the law prohibits. It could therefore
have lawfully ordered the appellant to pay to the respondent the borrowed
amount plus interest within the prescribed rate of interest subject to the in duplum rule.
The appellant's appeal therefore succeeds to the
extent that the payment of interest above the prescribed rate of interest must
be set aside. He must however pay back the loan and interest at the prescribed
rate of interest subject to the in duplum
rule.
The appellant had already paid various amounts and
interest at the prohibited rate of interest. These payments must be taken into
account in determining what he still has to pay. That cannot be determined by
this court. The case must be remitted to the court a quo for it to determine how much the appellant should be ordered
to pay.
Costs
The court a quo justified
its order of costs on a legal practitioner and client scale on the prejudice
the appellant caused to the respondent by refusing to pay back a loan he had
received. The refusal to pay and the delay in paying back the borrowed money
must have appeared to the court a quo to
be an abuse of process by the appellant. The appellant's resistance to the
respondent's claim is however now partially justified by the illegal interest
the respondent had charged. Had the court a
quo been aware that the interest charged was illegal, it would obviously
not have taken the view that the appellant's refusal to pay was not justified.
In the result I am satisfied that while an order of costs on the ordinary scale
was within the court a quo's
discretion, an order of costs on the higher scale was not justified.
In view of the appellant's partial success on appeal
and the respondent's success in recovering the borrowed amount and interest at
the prescribed rate, each party should bear his own costs.
In the result it is ordered as follows:
1. The appeal succeeds in part with no order
as to costs.
2. The judgment of the court a quo is set aside and its order of
costs is substituted by the following:
“The
defendant shall pay the plaintiff's costs”.
3. The case is remitted to the court a quo for the quantification of the appellant's outstanding debt to
the respondent, originally the sum of US$40 000-00 taking into consideration
payments already made, plus interest at the rate of five percent per annum
subject to the in duplum rule.
GARWE JA: I agree
GUVAVA JA: I agree
Chinawa Law Chambers,
appellant's legal practitioners.
Wintertons, respondent's legal practitioners.
