IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Case no: 457/2004
Reportable
In the matter between:
ETHEKWINI MUNICIPALITY Appellant
and
VERULAM MEDICENTRE (PTY) LTD Respondent
CORAM: HOWIE P, ZULMAN, BRAND, LEWIS JJA et MAYA AJA
HEARD: 12 SEPTEMBER 2005
DELIVERED: 29 SEPTEMBER 2005
Summary: In duplum rule: not applicable u nless int erest is payab le on debt in
arrear.
_____________________________________________________________
JUDGMENT
MAYA AJA/
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MAYA AJA
[1] The sole issue that this court is called upon to determine in this appeal
(before us with the leave of the court a quo) is whether the in duplum rule
applies to the respondent’s claim against the appellant. The judgment of the
court a quo (Durban High Court) is now reported as Verulam Medicentre
(Pty) Ltd v Ethekwini Municipality 2005 (2) SA 451 (D).
[2] The facts, whic h are common cause, are as follows. In December 1993
the parties concluded a written agreemen t of sale in terms of which the
appellant town council sold the res pondent an immovable property for the
sum of R1 592 000. The purchase price was payable by way of a 10 per cent
deposit in the sum of R159 000 and, thereafter, quarterly instalments which
would bear interest at an agreed ra te on the balance ove r a period of two
years. Transfer of the property woul d be effected upon payment of the
capital and interest.
[3] By October 1996 the respondent had paid a sum of R1 141 153, 48
and wished to pay the outstanding balan ce to take transfer. It was, however,
discovered at that stage that the appella nt had failed to comply with certain
provisions of the Local Authorities Ordinance Act 25 of 1974 when the
agreement was concluded, thus re ndering the agreement invalid. The
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appellant consequently became liable to repay the amount of R1 141 153, 48
to the respondent.
[4] However, the parties engage d in further negotiations which
culminated in the conclusion of a second agreement (‘the agreement’) on 1
April 1999. The terms of the agreement were, inter alia, that the appellant
would retain the amount that the re spondent had paid under the initial
agreement as part payment of the renegotiated purchase price of R3 500 000.
The balance of the purchase price w ould then be paid in cash against
registration of transfer. The respondent was required to apply for a rezoning
of the property. Transfer of ownershi p of the property would pass only if
that application was successful.
[5] In the event that the rezoning app lication was refused, clause 12 of the
agreement provided as follows:
‘…
12.6 If the property ha s not been re-zoned in accordance with 12.3 above to the
reasonable satisfaction of the Purchaser within one year after the date of si gnature by
both parties of this agreement, or within su ch longer period as the Purchaser and Seller
may in writing agree, the Purchaser shall be entitled, at the entire election of the
Purchaser, by notice in writing to the Seller to
12.6.1 cancel this agreement, or
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12.6.2 elect to proceed with this sale.
12.7 If the Purchaser cancels this agreem ent in terms of 12.6.1 above all amounts of
money that have been retained by or pa id to the Seller in terms of the FIRST
AGREEMENT and or this agreement shall be immediately refunded by the Seller to the
Purchaser together with interest thereon ca lculated from the date of payment by the
Purchaser to the date of repayment by the Seller to the Purchaser at the rate of 15, 5% per
annum compounded monthly in arrears…’
[6] The respondent did not lodge the rezoning application within the
period stipulated in clause 12.6 but did so only in July 2001, pursuant to
pressure being brought to bear upon it by the appellant. The respondent was
subsequently notified in August 2002 th at the rezoning application had been
unsuccessful. In September 2002, it op ted to cancel the agreement in the
exercise of its rights in terms of clause 12.6.1 and simultaneously invoked
the provisions of clause 12.7 by claiming payment of a sum of R4 049
369,96 from the appellant. This sum of R4 049 369,96, which significantly
exceeded the original capital paymen ts, was constituted by the capital sum
of R1 141 153, 48 and accumulated intere st calculated at the rate of 15,5 per
cent, compounded monthly in arrears, from the various dates of payment to
the appellant.
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[7] In response to this claim the appe llant raised as a legal contention in
terms of Uniform rule 6(5)(d)(iii), that the claim was subject to the in
duplum rule and that the respondent was, therefore, only entitled to the
capital sum and interest not exceeding such capital sum.
[8] Galgut AJP held that restituti on should be made to the appellant on
cancellation of the agreement as the respondent had not acquired possession
of the property and thus derived no benefit from it, whereas the appellant
had held the capital sum for a considerable period of time. He interpreted the
interest stipulation in Clause 12.7 (at 455H–I) to mean that the parties
intended that the respondent would ‘receive proper restitution…the full
present day value of the capital it had paid all those years earlier, a
consideration which the parties obviously considered fair in the light of the
abovesaid circumstances’. He concluded that in any event the in duplum rule
did not apply as the respondent did not require the protection that the rule
was designed to provide and that the interest stipulation was not of the type
which public policy would regard as improper and was intended to fulfil a
purpose other than the one for which interest is usually intended.
[9] The effect of the in duplum rule is that interest due in respect of a debt
ceases to run when it reaches the amount of the unpaid capital sum: Union
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Government v Jordaan’s Executor 1916 TPD 411 at p 413. The rule is based
on public policy and is meant to pr otect debtors from exploitation by
creditors by forcing them to pay unre gulated charges, and enforce sound
fiscal discipline on creditors. It cannot be waived in advance or during the
period of the loan: Standard Bank of SA Ltd v Oneanate Investments (Pty)
Ltd (In Liquidation) 1998 (1) SA 811 (SCA). It does not relate only to
money lending transactions but applies to all contracts where a capital
amount that is subject to interest at a fixed rate is owing: LTA Construction
Bpk v Administrateur, Transvaal 1992 (1) SA 473 (A) at 482I-483A.
[10] The scope of application of the rule is succinctly set out in Sanlam Life
Insurance Ltd v South African Breweries Ltd 2000 (2) SA 647 (W) where
Blieden J said at 655D-I:
‘[T]he in duplum rule is confined to arrear interest and to arrear interest alone. In my
judgment the reason for this is plain: it is to protect debtors from having to pay more than
double the capital owed by them at the date on which the debt is claimed…
Counsel’s reliance on the LTA Construction case … for the submission that interest does
not have to be in arrear for the in duplum rule to apply is, in my view, unfounded. The
fact that the capital amount in each of thes e cases had either not been ascertained or
agreed to at the date interest started to run does not detract from the fact that the interest
claimed was in fact arrear interest. This is wholly different from the present case, where
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interest was at no time in arrear, but was to be calculated as future interest in the relevant
time period involved.’
[11] The parties, although they did not contend that the agreement was
ambiguous in any respect, differed in their interpretation of the nature of the
agreement and the true purpose of the in terest stipulation. It was contended
on the appellant’s behalf, firstly, that in determining th e nature of the
agreement it had to be considered th at there were two sale contracts
embodied in the agreement; alternatively, it was dual and conditional (on the
rezoning application) in nature. Reliance for this submission was placed on
clause 18 of the agreement which deal s with the rights and claims of the
parties arising from the initial agreement. Secondly, so the argument went,
the interest clause agreed upon by th e parties was accumulated or unpaid
interest, similar to that applicable to a bank overdraft facility, intended to
make good the amount paid under the initial agreement. The interest was not
due as long as no demand for payment of the ‘debt’ was made, but once such
demand was made it ran for the entire period thus rendering the ‘debt’
subject to the in duplum rule.
[12] It is well established that the a pproach to be adopted in ascertaining
the common intention of parties to a contract is first to determine the
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ordinary grammatical meaning of the words employed in the agreement,
having regard to the context in which the relevant word or phrase is used
with its interrelation to the contract as a whole, including the nature and
purpose of the contract: P G Bison Ltd v The Master 2000 (1) SA 859 (SCA)
para 7; Coopers & Lybrand and Others v Bryant 1995 (3) SA 761 (A) at
768A-B and Metcash Trading Ltd v Credit Guarantee Insurance Corp of
Africa Ltd 2004 (5) SA 520 (SCA) para 10. What the nature of the
agreement and the objective of the inte rest clause are in the instant case
must, accordingly, be ascertained by an alysing the relevant words in the
context of the contract as a whole and the common intention of the parties.
[13] Clause 18 reads:
‘Provided that
18.1 the property is duly transferred into th e name of the Purchaser in accordance with
the provisions of the agreement, or
18.2 failing such transfer, the sums referred to in 2.3 of this agreement together with
interest thereon calculated from the date of payment to the Seller to the date of repayment
to the Purchaser at the rate of 15, 5% per annum, are duly repaid by the Seller to the
Purchaser,
The Purchaser hereby waives any claim whic h it may have against the Seller under the
FIRST AGREEMENT for damages and any rights or claims which either party may have
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against the other arising from the FIRS T AGREEMENT shall be deemed to be
extinguished.’
[14] In my view, the word s in the clause, read in their ordinary sense, do
no more than make provision for the pa rties’ rights arising out of the initial
agreement in the event that the intended transaction did not come to fruition.
It is plain from the terms of the agreem ent that the parties, confronted with
the problem of the invalidity of the initial agreement and still keen to
contract with each other, sought to find a solution. They therefore
renegotiated another sale agreement and, in that exercise, compromised any
claims they might have had against eac h other under the in itial agreement.
There is only one agreement and the wa iver clause cannot be understood to
indicate the existence of two contracts.
[15] Regarding the true nature of the inte rest stipulation in clause 12.7, it is
significant that when the parties concl uded the agreement they agreed that
only the sum of R1 141 153,48 would be credited to the renegotiated
purchase price which, by that stage, was more than double the original
amount. The appellant argued that if the parties intended the interest clause
to achieve ‘full restitution’ as the court a quo found, then both the capital
amount and interest would have been credited to the new purchase price. I
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have difficulty understanding this submission. This, to my mind, is precisely
one of the facts which show that the pa rties did not intend the interest clause
to be interest in the ordinary sense. Th ey fixed interest to run only if the sale
transaction did not come to pass. It was therefore meant to serve as
compensation only in that event. Agreeing that interest would run from the
date of payment was, undoubtedly, a deliberate choice. Nothing precluded
the parties from stipulating that it would run, for example, from the date of
cancellation of the agreement, bearing in mind that if the rule was applicable
interest would already have exceeded the capital payments when the
agreement was concluded. This clearly is not conventional interest. The
parties unambiguously meant it as a mean s of formulating a fair and proper
restitution for what had been paid and received.
[16] Another submission made on th e appellant’s behalf was that the
Sanlam case is distinguishable from the present one. There the parties
concluded a contract which provided that if the 25 year lease in issue were to
be terminated before its expiry by e ffluxion of time, the respondent would
take transfer of the leased property against payment to the applicant of a
specified capital sum together with inte rest thereon, calculated from the date
of commencement of the lease to the da te of transfer of the property. The
court held, inter alia, that the in duplum rule did not apply to the interest
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claimed because it was not interest in the sense intended in the rule, but was
agreed upon by the parties to fix what they considered to be a fair price for
the property if the lease was cancelled within the 25 year period.
[17] The appellant’s contention was th at in the present case the interest
clause is not stipulated in a way which shows, as in the Sanlam case, that it
is merely a component of a formula de signed to determine the quantum of a
capital obligation, but describes a capital debt which must be repaid upon the
happening of one of a number of even ts, and that the language used then
indicates expressly that interest will be added to that debt. I do not agree.
The determinant feature present in both matters is that the parties fixed an
interest rate which was to be applied over a period of time to achieve a fair
and proper restitution.
[18] The authorities to which refere nce is made in paragraph 10 above
make it abundantly clear that the rule a pplies only to arrear interest. In the
present matter no debt was owing and no interest accrued until the rezoning
application was refused a nd the respondent elected to cancel the agreement.
The interest in issue is, therefore, not arrear interest. It was not the
appellant’s case, in any event, as in dicated previously, that it is arrear
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interest. The in duplum rule is, in the circumstan ces, not applicable in the
instant case.
[19] For reasons which a ppear hereunder, I revert briefly to some of the
findings made by the court a quo. In arriving at his conclusion, Galgut AJP
considered various relevant decided cases and said at 454G-455C:
‘[In] the case of Sanlam Life Insurance Ltd v South African Breweries Ltd [supra]
…Blieden J held (at 655B-C) that the [ in duplum ] rule did not apply to the interest at
issue because on a proper construction of the contract between the parties the interest
provided for in the agreement was ‘not “interest” in the sense referred to in the in duplum
rule’ but that the parties had intended the interest ‘to fix what the parties considered to be
a fair price for the asset to be purchased if the lease was cancelled within the 25-year
period’.
It would appear from this that where on a proper construction the interest at issue serves a
purpose other than the ordinary function that interest fulfils, the in duplum rule will not
apply.
It may well be that the test is not as strict as that, however, because Blieden J went on to
refer (at 655E-F) to single capital annuities and similar investments, and pointed out that
concerns doing business of those kinds do not require protection a nd that public policy
would not require that the investors c oncerned be limited by the rule, and in
Commissioner, South African Revenue Service v Woulidge 2002 (1) SA 68 (SCA), which
admittedly turned on entirely different facts, Froneman AJA said (at 75B-C) that the in
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duplum rule can be applied only where it serves considerations of public policy in the
protection of borrowers against exploitation by lenders.
It appears therefore that the test might simp ly be whether in the particular case public
policy requires the debtor to be protected against exploitation by the creditor.
On either test, however, it is clear that the in duplum rule does not apply.’
[20] In view of the conclusion that I have reached, it is not strictly
necessary to decide the correctness or otherwise of the findings relating to
the two tests (which the learned judge coined the ‘strict’ and the ‘lenient’
tests, respectively). It must however be pointed out that his interpretation of
the Woulidge case, regarding the extent of the in duplum rule’s application,
appears to be based on an error. The judgment is reported both in the South
African Law Reports (the version indi cated in para 20 above on which the
court a quo relied) and the All South Afri can Law Reports. The relevant
portion is quoted as follows in the SALR at para 12:
‘It is clear that the in duplum rule can be applied in the real world of commerce and
economic activity only where it serves considerations of public policy in the protection of
borrowers against exploitation by lenders ( LTA Construction Bpk v Administrateur,
Transvaal 1992 (1) SA 473 (A) at 482F-G; Standard Bank of South Africa Ltd v
Oneanate Investments (Pty) Ltd (in Liquidation) 1998 (1) SA 811 (SCA) at 828D).
(My emphasis.)
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[21] The correct quotation is, howeve r, the one contained in the other
report, [2002] 2 All SA 199 (SCA) and it reads as follows at para 12:
‘It is clear that the in duplum rule can only be applied in the real world of commerce and
economic activity where it serves consideratio ns of public policy in the protection of
borrowers against exploitation by lenders…’
(My emphasis.)
[22] It is readily apparent, on a comp arison of the two quotations, that the
word ‘only’ is misplaced in the first version, thus giving the sentence a
meaning that is completely differe nt to what Froneman AJA obviously
intended to convey, which also does not tally with the dicta expressed in the
decided cases on which he relied in that regard. The court a quo ’s
conclusion about the so-called ‘lenient ’ test namely, that the enquiry is
merely ‘…whether in the particular cas e public policy requires the debtor to
be protected against exploitation by the creditor’, which invariably
necessitates an enquiry into the identity of the debtor instead of the nature of
the debt, is thus based on an incorrect premise.
[23] Furthermore, whilst it may be so that the in duplum rule is founded on
public policy considerations, it now forms part of positive law.
Consequently, public policy is not th e criterion in deciding whether or not
the rule applies. As was correctly s ubmitted on the appellant’s behalf, the
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rule is not qualified so th at it applies only where a debtor cannot cope with
the burden of interest exce eding the capital sum. The Woulidge case should
accordingly not be understood to mean that the identity of the debtor (ie
whether the debtor requires protec tion from exploitation) determines
whether or not the in duplum rule is to be applied.
[24] Having said that, the ultimate conclusion of the court a quo was
nevertheless correct. The appeal is acco rdingly dismissed with costs, such
costs to include the costs consequent upon the employment of two counsel.
____________________
MML MAYA
ACTING JUDGE OF APPEAL
Concur: Howie P
Zulman JA
Brand JA
Lewis JA