About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2011
>>
[2011] ZASCA 45
|
|
African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC and Others (2011 (3) SA 511 (SCA); [2011] 3 All SA 345 (SCA)) [2011] ZASCA 45; 234/10 (30 March 2011)
Links to summary
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no: 234/10
AFRICAN
DAWN PROPERTY FINANCE 2 (PTY) LIMITED
..................
Appellant
and
DREAMS
TRAVEL AND TOURS CC
........................................
First
Respondent
ISMAIL
HASSEN AMOD
.......................................................
Second
Respondent
MOHAMMED
AMOD NO
..........................................................
Third
Respondent
FAATIMA
MIA NO
..................................................................
Fourth
Respondent
____________________________________________________________
Neutral
citation:
African Dawn Property Finance 2 (Pty) Ltd v Dreams
Travel and Tours CC
(234/10)
[2011] ZASCA 45
(30 March 2011)
BENCH:
PONNAN, TSHIQI and MAJIEDT JJA
HEARD: 14 MARCH 2011
DELIVERED: 30 MARCH 2011
SUMMARY:
Interest – rate of - in terms of the
common law must amount to extortion or oppression or something akin
to fraud to constitute
usury – common law rule not inconsistent
with the spirit, purport and objects of the Constitution.
______________________________________________________________________
ORDER
______________________________________________________________________
On appeal from
:
South Gauteng High Court
(Johannesburg) (Saldulker J sitting as court of first instance).
1 The appeal succeeds with costs, including those consequent upon the
employment of two counsel.
2 The order of the court below is set aside and in its stead is
substituted the following:
‘
a. The application is dismissed with costs.
b. The counter application succeeds with costs.
c. It is ordered:
1 That the First Applicant, the Second Applicant, and the Ismail Amod
Family Trust (No. IT8815/04) represented by the Second, Third
and
Fourth Applicants in their capacities as the duly appointed trustees
(“
the Trust
”), jointly and severally, the one
paying the other(s) to be absolved, but subject to 2 hereunder, pay
to the Respondent:
1.1 the sum of R3,900,247.50;
1.2 interest on the aforesaid sum of R3,900,247.50 calculated at the
rate of 6.5% per month
a tempore morae
from 1 July 2009 to
date of payment;
1.3 costs of suit on the attorney and client scale.
2 That the liability of the Trust in terms of 1 above is limited to
the security held by the Respondent under:
2.1 covering mortgage bond B038860/08 registered over Erf 12018
Lenasia Extension 13 Township, Registration Division IQ, the Province
of Gauteng, in extent 680 square metres, held under deed of transfer
T49903/2005; and
2.2 covering mortgage bond B037987.08 registered over Erf 11954
Lenasia Extension 13 Township, Registration Division IQ, the Province
of Gauteng, in extent 800 square metres, held under deed of transfer
T50215/2005.
3 That the following immovable properties registered in the name of
the Trust are declared specially executable for the liability
of the
Trust in terms of 2 above:
3.1 Erf 12018 Lenasia Extension 13 Township, Registration Division
IQ, the Province of Gauteng, in extent 680 square metres, held
under
deed of transfer T49903/2005;
3.2 Erf 11954 Lenasia Extension 13 Township, Registration Division
IQ, the Province of Gauteng, in extent 800 square metres, held
under
deed of transfer T50215/2005.’
______________________________________________________________________
JUDGMENT
______________________________________________________________________
PONNAN JA (TSHIQI and MAJIEDT JJA concurring):
[1] Over a century ago Innes CJ stated in
Reuter
v Yates
.
1
‘
The law of Holland prohibited
excessive usury; and the courts of this country, administering that
law, will refuse to enforce contracts
shown on due inquiry to be
usurious and extortionate in their nature. But our law does not in my
opinion define any particular
rate of interest as being necessarily
usurious; it does not fix a limit up to which interest is legitimate
and proper, and beyond
which it becomes illegal and excessive. That
must depend upon the circumstances of each case. Usury is a good
defence; the difficulty
arises in deciding when a contract is
usurious and when it is not. And that difficulty is not to be solved
by a mere reference
to the rate of interest agreed upon; it requires
a careful inquiry into all the circumstances surrounding the
transaction which
is challenged. And the onus in my opinion is upon
the person who sets up the defence, to satisfy the court upon the
facts that
it is applicable and sufficient.’
The difficulty that the learned Chief Justice alluded to arises in
this appeal, which involves the question as to whether the rate
of
interest levied in respect of a money lending agreement is usurious.
The South Gauteng High Court (per Saldulker J) held that
it was. The
high court accordingly declared the relevant provisions of the
written agreement pertaining to interest to be ‘unlawful
and
contrary to public policy’ and substituted in its stead a rate
of interest that it thought ‘fair’ and ordered
each party
to pay its own costs. The present appeal serves before this court
with the leave of Boruchowitz J.
[2] The issue arises for determination against the following
backdrop: According to the second respondent, Mr Ismail Hassen Amod
(Amod), the sole member of the first respondent, Dreams Travel and
Tours CC (the CC), he approached a number of registered banks
on
behalf of the CC during 2008 for ‘bridging finance’.
Those applications were declined because of, as he put it,
‘the
credit crunch under the present economic climate’. He then
turned to a private financier Gateway Capital Ltd (Gateway)
for a
loan of R5 million. Gateway declined the application but with the
approval of Amod forwarded the loan application to the
appellant,
African Dawn Property Transfer Finance 2 (Pty) Ltd (African Dawn).
[3] African Dawn conducts business as a short term financier and is a
registered credit provider in terms of s 40 of the National
Credit
Act 34 of 2005 (the NCA). The main business of African Dawn,
according to its director, Pierre Bezuidenhout (Bezuidenhout)
‘comprises short term secured finance, including bridging
finance’. He describes bridging finance as ‘a form
of
short term secured finance, the distinguishing feature thereof being
that the repayment of the loan facility is effected from
a specific
source of funds’.
[4] Bezuidenhout states that following upon the referral of the loan
application to African Dawn, he discussed the application
with Amod,
who informed him that the moneys were urgently required by the CC to
fund the importation into South Africa of a consignment
of branded
jeans. The market for such jeans, according to Amod, was seasonal and
it was therefore important for the CC to place
the order for those
jeans as soon as possible. Indeed, in the loan application itself,
the loan is stated to be for an ‘import
and export deal to be
done’ and three to four months is reflected as the period for
which the loan is required. Further,
various immovable properties
were listed as ‘security available for required facility’.
Those properties included Amod’s
own residential property in
Glenvista, Johannesburg and certain trust properties. The trust in
question is the Ismail Amod Family
Trust. The beneficiaries of the
trust are the children born of the marriage between Amod and Faatima
Mia. The trust is represented
in these proceedings by its trustees Mr
Mohammed Amod NO (the third respondent) and Ms Faatima Mia NO (the
fourth respondent).
[5] To properly consider the loan application, African Dawn sought
and obtained certain additional information from Amod including
a
copy of the trust deed, letters of authority of the trustees of the
trust and a copy of the most recent annual financial statements
of
the CC. On 6 June 2008 African Dawn wrote to Amod informing him that
it had approved the CC’s loan application in the
amount of R5
million plus costs and stipulated the security that it required. Amod
was asked to confirm whether the loan terms
were acceptable to the
CC. Certain discussions then ensued and on 11 June 2008 draft
documents including the loan agreement and
suretyships (to be signed
by Amod in his personal capacity and the trustees on behalf of the
trust) were dispatched to Amod by
African Dawn. After considering the
draft documentation, Amod requested that the suretyships to be
furnished on behalf of the trust
be amended so as to limit its
liability to R9 million. Moreover, he requested that such liability
be restricted to mortgage bonds
to be registered over two - instead
of three (as had originally been mooted by African Dawn) - of the
trust’s immovable properties.
African Dawn acceded to those
requests and duly amended the suretyship agreements, which were then
dispatched to Amod on 12 June
2008.
[6] Amod, on behalf of the CC, confirmed his acceptance of the terms
of the loan as negotiated and on 17 June 2008 the CC (as borrower)
and African Dawn (as lender) concluded a written loan agreement. In
terms of that agreement African Dawn lent and advanced the
sum of R5
175 162.80 (inclusive of a raising fee, an agent’s commission,
the costs of the drafting of the loan agreement
and other documents
and the bond registration costs) to the CC. Clause 3 of the loan
agreement provided:
’
3.1 This loan plus interest
thereon would be repaid by the Borrower to the Lender upon the
following date and in the following amounts:
3.1.1 30 June 2008 - R112,128.53
3.1.2 31 July 2008 - R258,758.14
3.1.3 31 August 2008 - R258,758.14
3.1.4 30 September 2008 - R258,758.14
3.1.5 31 October 2008 - R258,758.14
3.1.6 30 November 2008 - R258,758.14
3.1.7 17 December 2008 - R5, 321, 792.41’
The CC sought to discharge that obligation by furnishing African Dawn
with seven post-dated cheques.
[7] Clause 4 of the agreement headed ‘Interest’ provided:
‘
4.1 The parties agree that
interest will be charged on the loan and calculated at the rate of 5%
per month from the date that the
loan was advanced.
4.2 In the event of the loan amount plus interest not
being repaid within the required time period and on the dates as per
3.1 above,
the Borrower shall become liable to pay interest on the
loan amount at a rate of 6,5%, calculated from the date that any
payment
due as per 3.1 and is not paid on the required date.
4.3 In the event of the Borrower paying an amount
greater than the amount recorded in paragraph 3.1 above, the Borrower
shall remain
obliged to make any and all payments thereafter in the
same amounts as recorded in paragraph 3.1 and shall only be entitled
to
reduce the amount after obtaining the Lender’s prior written
consent.’
[8] Further, in terms of the agreement the closed corporation
warranted that:
‘
10.1 . . . it has an annual
income in excess of one million rand and/or assets in excess of one
million rand and furthermore that
its nett monthly income is
sufficient to repay the loan upon the terms contained herein.
10.2 . . . it has obtained independent financial and
legal advice prior to entering into this agreement and that it
understands
the contents and consequences thereof.’
[9] The CC’s obligations were secured by way of an unlimited
suretyship by Amod personally and a limited suretyship by the
trust.
In terms of those deeds of suretyship each of Amod and the trust
bound and interposed themselves as a surety and co-principal
debtor
in solidum
for the CC’s indebtedness to African Dawn.
And pursuant to the agreement, mortgage bonds were registered in
favour of African
Dawn over two of the trust’s properties in
the amounts of R5 million and R4 million, respectively.
[10] On the instructions of Amod, African Dawn paid the net value of
the loan to the CC, 1 Time Import and Export and LCG in the
amounts
of R1 410 000, R2 277 305 and R1 312 695, respectively. Although
fairly substantial payments were effected by the CC to
African Dawn,
all too frequently they were not effected timeously. Since August
2008 interest in the higher amount of 6.5% per
month has been
applicable to the loan and as at 30 June 2009 the former was indebted
to the latter in the sum of R3 900 247.50
together with interest
thereon at the rate of 6.5% per month.
[11] On 26 June 2009 the respondents caused an application to be
issued out of the South Gauteng High Court. They sought an order:
‘
1 Declaring that the agreement
. . .
alternatively
,
clauses 4.1 to 4.3 and 6.1 thereof to be unlawful and contrary to
public policy.
2
Alternatively to paragraph 1
above
, declaring that interest payable on all
outstanding amounts arising from the agreement to be 15,5% per annum,
alternatively, the
maximum rate permissible in terms of the
National
Credit Act.
3 Costs
of this application only in the event of the
Respondent opposing this application.
4 Granting to the Applicants further and alternative
relief as may seem just to this Honourable Court.’
[12] Amod who deposed to the affidavit in support of the application
stated:
’
38 This is usurious and
against public policy. It is unlawful. I submit that the Court should
sever these provisions from the contract.
39 As such the provisions are void.
THE
NATIONAL CREDIT ACT 34 OF 2005
. . .
41 I point out further that in terms of the
National
Credit Act 34 of 2005
specifically
regulation 42
, a copy of which is
attached marked F, 5% interest per month may only be levied on short
term credit transactions which are transactions
where a deferred
amount is under R8 000-00 (Eight Thousand Rand) (see
regulation
39(2)).
0i
n; line-height: 150%">
42 The Respondent was not in law therefore entitled to
charge 5 to 6.5% in respect of the contract in issue.
43 Interest may not exceed the rates provided for in the
Usury Act 73 of 1968. In this regard it must be pointed out that the
Usury
Act was repealed by s 172(4)(a) of the National Credit Act 34
of 2005 (the NCA), with effect from 1 June 2006. Item 5 of s 3 of
the
NCA provides that a maximum annual finance rate set in terms of the
Usury Act and in effect immediately before the effective
date (ie, 1
June 2006) continues in force despite the repeal of the Usury Act,
until the Minister (ie, the Member of the Cabinet
responsible for
consumer credit matters) first prescribes a maximum rate of interest
in terms of s 105. Section 105 of the NCA
came into operation on 1
June 2007. My calculation is that the maximum rate of interest is 28%
in terms of the formulae for calculation.
THE COMMON LAW
44 In any event I am advised and so submit that the
court has a discretion to reduce the interest rate under the common
law. The
rate of interest charged by the Respondent is excessive,
unconscionable and against public interest.
45 I submit that the Court should exercise its
discretion in the Applicants’ favour.
46 The trust property is designed for the benefit of my
minor child. It will all but be lost if the Respondent is allowed to
enforce
the agreement.
47 The Respondent took advantage of the vulnerable
position the Applicants found themselves in. The loan was designed to
pay staff
and to rescue the business. Staff of the First Applicant
may lose their jobs as it is impossible to retain them. The First
Applicant
has staff members who all are married and have dependants
to support.’
[13] In addition to opposing the application, African Dawn caused a
counter application to be filed, seeking an order:
‘
1 That the First Applicant,
the Second Applicant, and the Ismail Amod Family Trust (No.
IT8815/04) represented by the Second, Third
and Fourth Applicants in
their capacities as the duly appointed trustees (“
the
Trust
”
),
be and are hereby ordered, jointly and severally, the one paying the
other(s) to be absolved, but subject to 2 hereunder, to
pay the
Respondent:
1.1 the sum of R3,900,247.50;
1.2 interest on the aforesaid sum of R3,900,247.50
calculated at the rate of 6.5% per month
a
tempore morae
from 1 July 2009 to date of
payment;
1.3 costs of suit on the attorney and client scale.
2 That the liability of the Trust in terms of 1 above is
limited to the security held by the Respondent under:
2.1 covering mortgage bond B038860/08 registered over
Erf 12018 Lenasia Extension 13 Township, Registration Division IQ,
the Province
of Gauteng, in extent 680 square metres, held under deed
of transfer T49903/2005; and
2.2 covering mortgage bond B037987.08 registered over
Erf 11954 Lenasia Extension 13 Township, Registration Division IQ,
the Province
of Gauteng, in extent 800 square metres, held under deed
of transfer T50215/2005.
3 That the following immovable properties registered in
the name of the Trust are declared specially executable for the
liability
of the Trust in terms of 2 above:
3.1 Erf 12018 Lenasia Extension 13 township,
Registration Division IQ, the Province of Gauteng, in extent 680
square metres, held
under deed of transfer T49903/2005;
3.2 Erf 11954 Lenasia Extension 13 Township,
Registration Division IQ, the Province of Gauteng, in extent 800
square metres, held
under deed of transfer T50215/2005.
4 Granting to the Respondent further and/or alternative
relief.’
[14] The high court concluded:
‘
In the result I make the
following order:
1 Clauses 4.1 to 4.3 and 6.1 of the agreement, marked
annexure “A” to the founding affidavit of Ismail Hassen
Amod,
is declared to be unlawful and contrary to public policy.
2 The first applicant is ordered to pay to the
respondent the capital loan plus interest at the rate of 28% per
annum, provided
that the payments already made by the first applicant
to the respondent, be first appropriated to interest and then to
capital.
3 In the event of the first applicant failing to pay the
outstanding balance due and owing to the respondent within 30 days
from
the date of this order, the respondent shall be entitled to
approach the court on these papers for further relief.
4 Each party is to pay its own costs.’
[15] Contracts valid in form are prima facie
enforceable in South African law and effect will be given to them
unless grounds for
their avoidance are proved (per Didcott J in
Roffey v Catterall, Edwards & Goudré
(Pty) Ltd
2
).
But, as Cameron JA correctly observed, our Constitution ‘requires
us to employ its values to achieve a balance that strikes
down the
unacceptable excesses of freedom of contract, while seeking to permit
individuals the dignity and autonomy of regulating
their own lives’.
3
Indeed, on appeal to it (
Barkhuizen
v Napier
)
4
the majority of the Constitutional Court (per
Ngcobo J)
made that much clear in these
terms (para 57):
‘
On the one hand public policy,
as informed by the Constitution, requires in general that parties
should comply with contractual
obligations freely and voluntarily
undertaken. This consideration is expressed in the maxim
pacta
sunt servanda,
which,
as the
Supreme
Court of Appeal has repeatedly noted, gives effect to the central
constitutional values of freedom and dignity. 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.’
[16] Our courts have however recognised that
pactum sunt servanda
is
not a holy cow (
Bredenkamp v Standard
Bank).
5
As Ngcobo J observed in
Barkhuizen
(para 87):
‘
Pacta
sunt servanda
is a
profoundly moral principle, on which the coherence of any society
relies. It is also a universally recognised legal principle.
But the
general rule that agreements must be honoured cannot apply to immoral
agreements which violate public policy. As indicated
above, courts
have recognised this and our Constitution re-enforces it.’
And, thereafter Harms JA in
Bredenkamp
(para 38):
‘
This court in
Sasfin
consequently restated the
obvious, namely that our common law does not recognise agreements
that are contrary to public policy.
Our courts have always been fully
prepared to reassess public policy and declare contracts invalid on
that ground. Determining
whether or not an agreement was contrary to
public policy requires a balancing of competing values. That
contractual promises should
be kept is but one of the values.’
[17] Here the CC is a juristic entity whose asset value and annual
turnover at the time of the loan agreement exceeded the threshold
value determined by the Minister in terms of s 7(1) of the National
Credit Act (NCA). The NCA therefore does not apply to the loan
agreement (s 4(1)). The effect of the loan agreement not being
governed by the NCA is that there is no statutory limitation on
the
interest payable in terms of the agreement. Moreover, as the
principal debt under the loan agreement exceeds R500 000, the
loan
agreement was not subject to the Usury Act (s 15(g)). It follows that
the maximum annual finance rate set in terms of the
Usury Act
likewise does not apply. That notwithstanding the high court held:
‘
Having regard to all of the
aforegoing, I find that the rate of interest charged by the
respondent is usurious given the reality
of the situation the first
applicant found itself in, the inherent inequality in the bargaining
power. It is harsh, excessive and
against public policy. The
respondent was not entitled to charge 5 to 6.5% interest per month in
respect of the loan it advanced
to the first applicant. 60% per annum
is
per se
gross and unreasonable being
more than twice that of the last declared maximum permissible
interest rate chargeable to a debtor
or borrower and four times more
than the permissible prevailing legal interest rate. 78% is for the
same reasons excessive.’
Having considered the applicants’ proposition with
regard to the rate of interest, in my view, the rate of 28% per annum
is
fair and clearly ameliorates the harshness of the interest rate as
set out in clause 4.1 to 4.3 read with 6.1, in favour of an interest
rate that does justice to both parties. Consequently the rate of
interest at 28% per annum is just and equitable in the circumstances.
This court is therefore entitled in the interest of public policy to
declare paragraphs 4.1 to 4.3 and 6.1 of the loan agreement
to be
unlawful and contrary to public policy. The first applicant has
proposed that each party pay its own costs. In the circumstances
of
this case it appears to be a fair proposition.’
The rate of 28 percent per annum was fixed by the high court with
reference to ‘the maximum annual finance rate set in terms
of
the Usury Act prior to its repeal’. In that the high court may
have misdirected itself, for as it had earlier observed:
‘
The Usury Act 73 of 1968 was
repealed and replaced with the National Credit Act (NCA) with effect
from 1 June 2007. The loan agreement
is not governed by the NCA nor
would it have been subject to the Usury Act.’
[18] Moreover, although the agreement falls
outside the scope of the NCA, it is instructive to note that for
‘short term credit
transactions’
6
–
being a transaction in respect of a
deferred amount at the inception of the agreement not exceeding R8
000 and in terms of which
the whole amount is repayable within a
period not exceeding six months – the maximum rate of interest
fixed by the legislature
is five percent per month. Thus even if one
were to assume in the high court’s favour that it was justified
in its resort
to the NCA and the Usury Act as aids in the
determination of public policy it should not have lost from sight the
provisions relating
to short term credit transactions. Those
provisions, most notably the loan period of six months and the
interest rate of five percent
per month, resonate more strongly with
the transaction encountered here than the provisions relied upon by
the high court.
[19] In this case whether or not the transaction
was usurious fell to be determined in terms of the common law, which
does not fix
a rate of interest beyond which a transaction becomes
usurious. In
SA Securities, Ltd v
Greyling
,
7
Wessels J held:
‘
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 as
sixty per cent., and
in his judgment in
Reuter vs 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 “the 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 that that. Therefore in
each case we have to decide whether there has been extortion,
oppression, or any actions
akin to fraud.’
[20] In arriving at that conclusion Wessels J
stated that it was not necessary for the court to inquire minutely
into what the Roman
Dutch law was in respect of usury for that had
been done in
Dyason v Ruthven.
8
In
Dyason
,
the judges after elaborately tracing its history, held that usury to
be a good defence to an action founded on an agreement to
pay
interest, must involve extortion amounting to fraud. Indeed, in
Merry
v Natal Society of Accountant
s,
9
De Villiers JA affirmed that principle in these
terms:
‘
In South Africa the common law
has always been that in order to render a transaction usurious, it
must be shown that it is tainted
with oppression, or extortion, or
something akin to fraud (
Dyason
v Ruthven
(3
Searle 282)
;
Reuter
v Yates
(1904,
T.S. 855)
;
South
African Securities v Greyling
(1911, T.P.D. 352).
’
[21] In this case the high court observed:
‘
The applicants do not contend
that there is anything present in the loan agreement and/or the
circumstances under which it was concluded
which amounts to extortion
or oppression akin to fraud. The applicant’s case is that the
“rate of interest charged
by the respondent is excessive,
unconscionable and against public interest”.’
That one would have thought would have been the
end of the enquiry. But, it was urged upon this court and the one
below that the
common law rule is inconsistent with our Constitution
and that we consequently are under a duty to develop the common law
to reflect
the changing, social, moral and economic fabric of the
country.
10
[22] The common law derives its force from the
Constitution. It is thus only valid to the extent that it complies or
is congruent
with the Constitution. Every rule has to pass
constitutional muster. Public policy and the boni mores are now
deeply rooted in
the Constitution and its underlying values. And our
courts are indeed enjoined to develop the common law, if this is
necessary.
11
As it was put in
City
of Tshwane Metropolitan Municipality v RPM Bricks
12
‘
That power is derived from ss
8(3) and 173 of the Constitution. Section 39(2) of the Constitution
makes it plain that, when a court
embarks upon a course of developing
the common law, it is obliged to ‘promote the spirit, purport
and objects of the Bill
of Rights’ (
S
v Thebus
[2003] ZACC 12
;
2003
(6) SA 505
(CC) para 25). This ensures that the common law will
evolve, within the framework of the Constitution, consistently with
the basic
norms of the legal order that it establishes
(
Pharmaceutical
Manufacturers Association of South Africa
;
In re Ex parte
President of the Republic of South Africa
[2000] ZACC 1
;
2000
(2) SA 674
(CC) para 49). The Constitutional Court has already
cautioned against overzealous judicial reform. Thus, if the common
law is to
be developed, it must occur not only in a way that meets
the s 39(2) objectives, but also in a way most appropriate for the
development
of the common law within its own paradigm (
Carmichele
v Minister of Safety and Security
[2001] ZACC 22
;
2001 (4) SA 938
(CC) para
55).’
[23] In
S v Thebus &
another,
13
Moseneke J stated:
‘
It seems to me that the need
to develop the common law under s 39(2) could arise in at least two
instances. The first would be when
a rule of the common law is
inconsistent with a constitutional provision. Repugnancy of this kind
would compel an adaptation of
the common law to resolve the
inconsistency. The second possibility arises even when a rule of the
common law is not inconsistent
with a specific constitutional
provision but may fall short of its spirit, purport and objects.
Then, the common law must be adapted
so that it grows in harmony with
the “objective normative value system’ found in the
Constitution.’
[24] In this case there is no suggestion that the common law rule in
question is inconsistent with a specific constitutional provision.
Rather, as best as I can discern the argument, it is that the common
law rule falls short of the spirit, purport and objects of
the
Constitution. Faced with such a task, a court is obliged to undertake
a two-stage enquiry. First, it should ask itself whether,
given the
objectives of s 39(2) of the Constitution, the common law should be
developed beyond existing precedent. If the answer
to that question
is a negative one, that should be the end of the enquiry. If not, the
next enquiry should be how the development
should occur and which
court should embark on that exercise. (See
S v Thebus
para
26.) Had that exercise been undertaken by the high court, the first
enquiry would, in my view, have yielded a negative response.
[25] Notwithstanding the authority of
Merry v Natal Society of
Accountants
, which was clearly binding on it, the high court
ignored the ‘oppression or extortion or something akin to
fraud’ requirement.
It simply jettisoned that requirement
without embarking upon the first enquiry postulated by
Thebus
,
namely, whether the common law should be developed beyond existing
precedent. Nor did it interrogate what yardstick should be
substituted in its stead. The high court’s point of departure
appeared to be that a rate of interest of either 60 or 78 percent
per
annum was, without more, per se usurious and thus contra bonos mores.
With respect to the high court that approach cannot be
endorsed.
[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,
that
the loan was worth the rate of interest fixed to the borrower. One
looks in vain for a declaration by a 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.
[27] The CC’s attack invites us to
reconsider the correctness of the common law principle endorsed by
Merry
. We
are obliged to do so in terms of Constitution. To that end we have to
undertake the first enquiry postulated by
Thebus.
I do not believe that the attack by the
CC can succeed. Weighty considerations of commercial and social
certainty render the common
law principle
as
sound today as it was when first articulated over a century ago.
Constitutional considerations far from detracting from it appear
to
enhance it. For as I have attempted to show, what comes to be branded
with the opprobrious appellation ‘usurious’
may well
depend on the whim of a particular judge. That, I daresay, would run
counter to the spirit, purport and objects of our
Constitution. Harms
JA made precisely that point in
Bredenkamp
(para 39) when he said:
‘
A constitutional principle
that tends to be overlooked, when generalised resort to
constitutional values is made, is the principle
of legality. Making
rules of law discretionary or subject to value judgments may be
destructive of the rule of law.’
[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
perceptions of fairness or on grounds of imprecise notions of good
faith.
14
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.
15
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.
[29] I therefore conclude that the common law rule
is not inimical to the values that underlie our constitutional
democracy and
that if any stipulation for interest be attacked as
being liable to reduction on the ground of usury, it can only be done
by offering
proof of extortion or oppression or something akin to
fraud. It is indeed so that what amounts to extortion or oppression
or something
akin to fraud may not be capable of easy or exact
definition. The same holds true of our attempts to define that
expression of
‘vague import’
16
- public policy. Those difficulties
notwithstanding our courts have not shrunk from the duty of declaring
a contract contrary to
public policy when the occasion has demanded
it.
17
[30] I turn now to consider – as the high court should have
done - whether the CC has discharged the onus resting upon it
of
showing that the applicable interest rate was usurious, in the sense
that it amounted to extortion or oppression or something
akin to
fraud. To once again borrow from Innes CJ (
Reuter v Yates
at
858):
‘
It comes then to this —
in deciding whether the defence of usury has been sustained, and
whether the lender has taken such
an undue advantage of the borrower,
has so practised extortion and oppression, that his conduct, being
akin to fraud, disentitles
him to relief, the Court will examine all
the circumstances of the case. It will not only look at the scale at
which interest has
been stipulated for, but will have regard to the
ordinary rate prevalent in similar transactions, to the security
offered and the
risk run, to the length of time for which the loan
was given, the amount lent, and the relative positions and
circumstances of
the parties.’
[31] In arriving at its conclusion that the interest levied was
usurious, the high court reasoned:
‘
All of the aforegoing,
clearly, in my view demonstrates that the first applicant was
subjected to the dictates of the respondent.
In this way, the
respondent was able to unilaterally dictate the terms of the loan
agreement. The respondent was prepared to lend
and advance to the
first applicant the amount of R5 million at the interest rate as set
out in clause 4.1, to 4.3 (as read with
clause 6.1), a rate that was
not negotiable, a rate of interest that was 5% per month (60% per
annum) and 6.5% per month on default
(78% per annum.)
. . .
The applicants have confined their case to an attack on
the interest rate provided in these clauses. No other terms of the
loan
agreement have been subjected to scrutiny. The applicants have
established an inequality of bargaining power between the first
applicant and the respondent justifying an interference by this court
in the “contractual bargain” struck by the parties.
. . .
The first respondent was not indigent but needy. A
situation that many South Africans sometimes find themselves in,
because of the
prevailing socio-economic climate. Because they are
cash-strapped, they are desperate and in such circumstances have no
freedom
to negotiate the interest terms of the loan advanced to them
and may be taken advantage of by moneylending institutions. Borrowers
must be protected from lenders who exploit them by charging interest
at exorbitant rates.’
[32] With respect to the learned judge none of those key factual
findings survive scrutiny. First, no case was established on the
papers that the CC was ‘subjected to the dictates of [African
Dawn]’. If anything the evidence establishes, as I have
shown
earlier, that Amod did indeed negotiate terms with African Dawn and
further warranted that the CC had sought and obtained
independent
legal and financial advice. Amod is deliberately cagey and evasive in
his founding affidavit as to precisely why each
of the registered
banks that were approached declined the loan application. He states
that it was on account of the ‘credit
crunch’. Whether
that is something that he surmised or was told by the relevant bank
officials he does not divulge. If the
latter, no corroboration is
offered. Second, the CC was not an uninformed and vulnerable
borrower. It chose, unsolicited by African
Dawn, to approach the
latter and did so without any inducement or compulsion. There was
full disclosure by African Dawn at the
outset of the terms of the
loan including the securities required and the interest payable. This
was not a trap for the unsuspecting
or the unwary. The CC was thus
free to walk away or to turn to some other lender if it considered
the terms offered by African
Dawn oppressive. Third, the CC was not
as the high court put it ‘needy’. As appears from its
annual financial statements
for the year ending 28 February 2007 its
turnover was R49.9 million, its retained income was R9.3 million and
it was possessed
of total assets of R13.1 million. The reference to
‘cash-strapped’, ‘desperate’ South Africans
who may
be taken advantage of, is thus plainly inapposite. Those
borrowers find protection in the NCA. Although it bears emphasising
that
for some borrowers, who are usually the most vulnerable of this
country’s citizenry, the NCA has fixed a rate of interest
that
is not dissimilar to that encountered here – five percent per
month. No doubt what influences that rate of interest
is probably the
heightened risk and increased administrative burden to lenders.
[33] In this case the CC sought and obtained a
sizeable loan to exploit a commercial opportunity available to it.
Once again Amod
is evasive. He does not make full and frank
disclosure as to precisely why the loan was sought. Counsel for the
CC submitted that
the purpose of the loan was irrelevant. I do not
agree. If it was to turn a profit, as appears to be the case, that
would be a
relevant consideration. No doubt from the CC’s
perspective the anticipated profit may have caused the interest rate
to pale
into insignificance. Insofar as that aspect is concerned we
are left to speculate. Why that should be so, is not explained, for
all of that information was peculiarly within Amod’s knowledge
and had he chosen to play open cards with the court (which
he plainly
did not) he ought to have divulged. Nor was any evidence adduced as
to what rates of interest are being levied by other
similarly placed
short term financiers for loans of that magnitude. We are thus left
in the dark as to what the prevailing industry
norm is for a loan of
the kind encountered here. The effect of such failure is that the
high court called in aid an inapposite
yardstick, namely the rate
fixed by the legislature, in its determination of the matter. After
all, as is evident from the judgment
of the Constitutional Court in
Barkhuizen v Napier,
18
if evidence is required to determine whether a
contract is in conflict with public policy or whether its enforcement
would be so,
the party who attacks the clause at either stage must
establish the facts.
[34] What we do know from the papers is that the money was required
urgently and what Bezuidenhout does tell us in his answering
affidavit is that African Dawn was willing to and did in fact advance
the moneys to the CC prior to the mortgage bonds being registered.
Further, according to Bezuidenhout:
‘
[I]n the event of a bridging
financier, such as [African Dawn], granting a loan facility to a
borrower whose application to a bank
has been declined, the risk
associated with such loan (i.e. the risk of such loan being
irrecoverable) is invariably high. The
cost of such loan, in the form
of the interest rate charged, in order to justify the high risk
assumed by the bridging financier,
is accordingly also high.
. . .
[T]he cost to the bridging financier of funding is also
high. Unlike banks, due to the prohibition contained in the Banks
Act, 1990
short-term financiers are not permitted to engage in
deposit taking activities and accordingly are unable to utilise funds
received
from depositors in the provision of loan funding. Bridging
financiers are accordingly required to fund the loans through equity
and loan capital, the cost of which is high.
. . .
. . . An important factor impacting on the nature and
scope of the security required by the Respondent, as well as the
interest
rate at which it was prepared to grant the loan, was that
the Respondent had not previously conducted business with the First
Applicant
and/or Amod. From a risk assessment perspective the fact
that the First Applicant was a first time borrower increased the risk
of the loan as there was no prior trading history between the
Respondent and the First Applicant whereby the Respondent was able
to
assess the credit worthiness, performance and general risk profile of
the First Applicant.’
All of those were weighty considerations. None received appropriate
recognition in the judgment of the high court. They ought to
have.
[35] If the CC could point to any particular circumstances which
showed that the transaction was not an ordinary one, those ought
to
have been given due weight. But it failed to do so. Under those
circumstances no facts were disclosed which ought to have induced
the
high court to afford the CC the relief that it sought. Courts should
not – as the high court did – interfere with
a bargain
deliberately entered into by two parties dealing at arms’
length with each other merely because it subjectively
believes that
the rate of interest stipulated was unfair. Amod is a man conversant
with business. The rate of interest no doubt
is high, but it may not
be incommensurate with the risk that African Dawn ran in advancing
its money to the CC. There are no circumstances
here that show either
extortion or oppression or anything akin to fraud, and, therefore I
do not believe that the high court was
entitled to say that the
transaction is a usurious one.It follows that the appeal must
succeed.
[36] In the result:
1 The appeal succeeds with costs, including those consequent upon the
employment of two counsel.
2 The order of the court below is set aside and in its stead is
substituted the following:
‘
a. The application is dismissed with costs.
b. The counter application succeeds with costs.
c. It is ordered:
1 That the First Applicant, the Second Applicant, and the Ismail Amod
Family Trust (No. IT8815/04) represented by the Second, Third
and
Fourth Applicants in their capacities as the duly appointed trustees
(“
the Trust
”), jointly and severally, the one
paying the other(s) to be absolved, but subject to 2 hereunder, pay
to the Respondent:
1.1 the sum of R3,900,247.50;
1.2 interest on the aforesaid sum of R3,900,247.50 calculated at the
rate of 6.5% per month
a tempore morae
from 1 July 2009 to
date of payment;
1.3 costs of suit on the attorney and client scale.
2 That the liability of the Trust in terms of 1 above is limited to
the security held by the Respondent under:
2.1 covering mortgage bond B038860/08 registered over Erf 12018
Lenasia Extension 13 Township, Registration Division IQ, the Province
of Gauteng, in extent 680 square metres, held under deed of transfer
T49903/2005; and
2.2 covering mortgage bond B037987.08 registered over Erf 11954
Lenasia Extension 13 Township, Registration Division IQ, the Province
of Gauteng, in extent 800 square metres, held under deed of transfer
T50215/2005.
3 That the following immovable properties registered in the name of
the Trust are declared specially executable for the liability
of the
Trust in terms of 2 above:
3.1 Erf 12018 Lenasia Extension 13 Township, Registration Division
IQ, the Province of Gauteng, in extent 680 square metres, held
under
deed of transfer T49903/2005;
3.2 Erf 11954 Lenasia Extension 13 Township, Registration Division
IQ, the Province of Gauteng, in extent 800 square metres, held
under
deed of transfer T50215/2005.’
_________________
V M PONNAN
JUDGE OF APPEAL
APPEARANCES:
For
Appellant: P T Rood SC
C
C Bester
Instructed
by:
Petersen
Hertog & Associates
Sandton
Matsepes
Attorneys
Bloemfontein
For
Respondent: N A Cassim SC
F
A Boda
Instructed
by:
Yousha
Tayob Attorney
Johannesburg
McIntyre
& v d Post
Bloemfontein
1
Reuter
v Yates
1904 TS 855
at 856.
2
Roffey
v Catterall, Edwards & Goudré (Pty) Ltd
1977
(4) SA 494
(N) at 503H.
3
Napier
v Barkhuizen
2006 (4) SA 1
(SCA) para 13.
4
Barkhuizen
v Napier
[2007] ZACC 5
;
2007 (5) SA 323
(CC).
5
Bredenkamp
v Standard Bank of South Africa Ltd
2010 (4)
SA 468
(SCA) para 37.
6
Regulation
39(2).
7
SA
Securities Ltd v Greyling
1911 TPD 352
at
356.
8
Dyason
v Ruthven
3 Searle 282.
9
Merry
v Natal Society of Accountants
1937 AD 331
at 336.
10
Carmichele
v Minister of Safety and Security & another (Centre for Applied
Legal Studies Intervening)
[2001] ZACC 22
;
2001 (4) SA 938
(CC).
11
Manong
& Associates (Pty) Ltd v Minister of Public Works & another
2010 (2) SA 167 (SCA).
12
City
of Tshwane Metropolitan Municipality v RPM Bricks
2008
(3) SA 1
(SCA) para 20.
13
S
v Thebus & another
[2003] ZACC 12
;
2003 (6) SA 505
(CC)
para 28.
14
Napier
v Barkhuizen
para 7.
15
Napier
v Barkhuizen
para 12 and 13.
16
Per
Innes CJ in
Law Union & Rock Insurance Co Ltd v Carmichael’s
Executor
1917 AD 593
at 598.
17
Sasfin
(Pty) Ltd v Beukes
1989 (1) SA 1
(A).
18
Paras
66, 84 - 85 and 93.