Opposed
application – Special Case
MAFUSIRE
J:
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$50,000-00 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$20-00 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 [Cap
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 [Prescribed Rate
of Interest Notice, 2009] (“SI
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, 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 [Cap
14:14].
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, 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 [Cap
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
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 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 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 Act, 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 this 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
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 synthesise Mr Hove's
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-hyper-inflation 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.
(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,
GUBBAY CJ said
(McNALLY and MANYARARA JJA 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, Mr Mutero,
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, Mr Mutero
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.
Mr
Mutero
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,
Mr Mutero
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,
Unabridged 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,
(quoted with approval by CHINHENGO J in Mawere
v Mukuna)
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.
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:
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, 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,
quoted with approval by BLIEDEN J in Sanlam
Life Insurance Limited v
South
African Breweries Limited,
the concept of interest was conceived and practised 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, (supra),
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;
Commercial
Bank of Zimbabwe Limited v MM Builders and Suppliers (Private)
Limited & Ors,
Mawere
v Mukuna, (supra),
and Conforce
(Private) Limited v City of Harare
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
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 jurist 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)
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 p 834F 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 the MM
Builders and Suppliers' case,
(supra),
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,
rejected GILLESPIE J's approach and restored the position by ZULMAN
J.
(iv)
It became a see-saw. After Ehlers'
case, CHINHENGO J, in Conforce,
(supra), 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.
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.
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.
(f)
Usury
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 the Africa
Dawn
case in 2011.
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 money lender. 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 and MAJIEDT JA concurring, reversed
the High Court's decision. He criticised it for, among other
things, calling in aid an inapposite 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.
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
inasmuch 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.”(my
emphasis)
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
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.”
(my emphasis)
I
respectfully associate myself with the above remarks.
(g)
Defendants' case
In
casu,
Mr Hove
argued that a rate of interest of 50% per annum is usurious and
contrary to public policy. During argument I repeatedly asked him
whether there was a cut-off point at which one could draw the line.
If so, what would inform that cut-off point?
If
I were to declare 50% per annum usurious, would 45% be alright with
public policy? What about 46%? 48%? 49.9%? And so on.
At
that time I was unaware of the remarks of WESSELS J in SA
Securities Ltd v
Greyling,
quoted in Africa
Dawn,
cases which none of the parties herein made reference to. At p 356
WESSELS J said:
“From
the fact that there is no standard rate it follows that the amount of
interest is in itself no criterion.
It may, however, be an element in considering whether a transaction
is or is not usurious. The Court has allowed as much laxity as sixty
per cent, and in his judgment in Reuter
v Yates,
Mason, J., saw no reason why an amount of ninety per cent should not
be allowed. It seems difficult to see how or where a limit can be
fixed. If ninety per cent can be allowed, why not ninety-one? If
ninety-one, why not ninety-two; and so on to 120 per cent. Therefore,
the mere fact that the amount of interest seems high is not
sufficient to make the transaction usurious.
What then is there in a transaction which makes it usurious? If it is
not the mere amount of interest, what other circumstances are there?
A great deal has been said by various judges with regard to
'circumstances'. It is very difficult for me to find any definite
principle upon which a case of usury has been or can be decided. I
think the most you can say is that the
transaction must show that there has been either extortion or
oppression, or something which is akin to fraud.
I do not think we can put the principle any higher than that.
Therefore
in each case we have to decide whether there has been extortion,
oppression, or any actions akin to fraud.”(emphasis
added)
Ordinarily
usury
refers to the practice of lending money to people at unfairly high
rates of interest.
But in commerce the term has a technical meaning. A usurious
transaction is one where there is either
extortion or oppression or something akin to fraud.
However,
despite the fact that to prove that a particular rate of interest is
usurious, one must show either
extortion or oppression or something akin to fraud,
and despite that the mere fact that the amount of interest seems high
is not of itself sufficient to make the transaction usurious, the
situation is somewhat made more complex by the provisions of the
Consumer Contracts Act and the Contractual Penalties Act.
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
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.” (my emphasis).
That
ultimately was the basis of the decision of the Appeal Court in
African
Dawn.
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 and the Contractual
Contracts Act 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 Mr Mutero
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 that 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 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 that 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, 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.
Mr
Hove
argued that the empirical evidence required to make a determination
was self-evident. He urged me to take judicial notice of his own bald
allegations from the Bar that the rate of annual inflation in this
country was 5% and that the average rates of interest in the United
States of America, the source country for the functional and dominant
currency in this country, was 3% per annum.
In
my view it was completely inappropriate for this kind of matter to
have gone by way of a special case where, among other things, the
statement of agreed facts said nothing more than what the pleadings
stated. This was a matter that cried out for detailed evidence on a
number of aspects; not least the cost borne by the plaintiff in
procuring the money for on-lending to the defendants; the risk
associated with the creditworthiness of the defendants; the use to
which the loan was put by the defendants; the rates of interest
charged by comparative institutions in similar circumstances; the
unreasonableness of the margin of profit desired by the plaintiff on
the loan; the inequalities, if any, in the economic strengths of the
parties, and so on. In other words, it was necessary to show the
factors that informed such a rate of interest and that influenced the
parties to agree to it.
The
plaintiff disputed the defendants' statistics on the rates of
annual inflation, the rate of interest prevailing in the United
States of America or the rates of interest said to be charged by
Stanbic Bank and Standard Chartered Bank.
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.
In
this case it was the defendants.
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 is fairness and justice.
In
my view, it is near impossible for the borrower to show conclusively
aspects that are manifestly within the knowledge and control of the
lender. For example, it is the lender that knows where he sourced and
procured the money for on-lending to the borrower. It is the lender
that knows the cost of that money. It is the lender that calculated
the risk of the borrower to him and how he translated that risk to a
bankable commodity. It is also the lender that knows what mark-up or
margin of profit he desired to earn on the loan, taking into account,
for example, its overheads and other costs. Under normal
circumstances, where, among other things, the Central Bank acts as
the lender of last resort, there should be, in my view, minimal
disparities in the rates of interest charged by the different
financial institutions. There has been no evidence what the situation
obtaining in this economy is like.
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. Proper evidence must be led in the normal
course. Order 29 Rule 203 reads:
“203.
Judgment and directions regarding other issues
When
giving its decision upon any question in terms of this Order, the
court may give such judgment as may upon such decision be appropriate
and may give any directions with regard to the hearing of any other
issues in the proceedings which may be necessary for the final
disposal thereof.”
DISPOSAL
The
decision of the parties to refer this matter to court by way of a
special case was incompetent. It is hereby set aside. 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.
The
costs shall be in the cause. Either of the parties is free to take
steps to have the matter re-enrolled for the trial.
25
February 2015
Sawyer
& Mkushi,
plaintiff's legal practitioners
T.K
Hove & Partners,
defendants' legal practitioners
1.
Mr
Hove
called them Shylocks,
after a character in the Shakespearian play: Merchant
of Venice,
who was a ruthless moneylender
2.
1990 (2) ZLR 143 (SC)
3.
At pp 153 – 154
4.
4th
ed.
5.
1997 (2) ZLR 361 (H)
6.
At p 110 (n 146)
7.
[1980] AC 136
8.
2011 ZASCA 45
9.
New
International Version [NIV]
10.
1992 (1) SA 473 (A)
11.
2000 (2) SA 628 (W)
12.
At p 1212
13.
1911 SR 154
14.
1996 (2) ZLR 420
15.
2000 (1) ZLR 445 (H)
16.
1952 (3) SA 689
17.
At p 695G – H
18.
1998 (1) SA 811 SA (A)
19.
2000 (1) ZLR 136 (H)
20.
2005 (2) SA 451 (D)
21.
African
Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Towers
CC
2011 ZASCA 45
22.
See Dyason
v Ruthven
3 Searle 282; Reuter
v Yates
1904 TS 855, @ p 858; South
African Securities v Greyling
1911 TPD 352 and Merry
v Natal Society of Accountants
1937 AD 331, @ p 336
23.
Merry
v Natal Society of Accountants
1937 AD 331
24.
1911 TPD 352
25.
Oxford Advanced Learner's Dictionary of Current English
26.
2007 (5) SA 323 (CC)
27.
Para 57
