A significant change to the in duplum rule

9 Jun 2015 6 min read Banking Alert Article

On 24 March 2015, the Constitutional Court developed the common law regarding the in duplum rule in its judgment in Paulsen and Another v Slip Knot Investments 777 (Pty) Limited2015 (3) SA 479 (CC). The development involves a fundamental change of critical importance to banks and any litigation they may currently be involved in.

Thein duplum rule has ancient roots in South African law and is so embedded that banking practice cannot alter it, nor can contracting parties waive its application. Simply put, the rule provides that arrear interest stops accruing when the sum of the unpaid interest equals the amount of the outstanding capital. At the time, the purpose of the introduction of the in duplum rule was to prevent lenders from exploiting borrowers and to cap the interest creditors could claim from them.

Until the judgment in Paulsen the in duplum rule had one exception, namely that the prohibition against claiming interest in excess of the capital fell away when a creditor instituted proceedings to recover the debt and the interest. This meant that once litigation was initiated, interest began to run again on the capital outstanding, which additional interest the creditor was entitled to recover from the debtor. In effect, interest would then run at the agreed, or mora, rate for as long as the litigation persisted. Once judgment was granted for those amounts, interest would also run on that 'judgment debt' until the date of payment thereof by the judgment debtor, subject again to the in duplum rule. This allowed creditors to recover interest in excess of the amount of the capital if the creditor had to resort to instituting litigation to recover a debt owing.

However, in what will no doubt be labelled a consumer friendly judgment, the Constitutional Court has now abolished the exception to the in duplum rule while litigation persists. In doing so, the Court ruled that the Supreme Court of Appeal was incorrect when it affirmed the exception in Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd 1998

(1) SA 811 (SCA). Madlanga J and Moseneke DCJ, in separate but concurring judgments, agreed that the exception to the

in duplum rule was out of touch with socio-economic realities, contrary to public policy and offended the right of access to courts, enshrined in s34 of the Constitution. However, in a third dissenting judgment, Cameron J strongly affirmed the exception to the in duplum rule, noting its strong legal heritage and the important role it played in deterring dilatory debtors from delaying payment of their debts.

The effect of the Paulsen judgment is thus that until judgment (after which interest will once again run on the 'judgment debt'), banks will only ever be able to recover 1) the capital advanced to a debtor and 2) the interest equal to that capital amount and no more.

Post-judgment interest

Our previous alert on Paulsen did not deal with additional post-judgment interest, which creditors may be able to recover (which interest will in turn be limited to an amount equal to the whole of the judgment debt).

As Madlanga J noted, it is settled law that the in duplum rule permits interest to run anew from the date that the judgment debt is due and payable [Para. 96]. In this regard, Madlanga J considered three practical questions regarding post-judgment interest, two of which were interlinked.

The first question was whether post-judgment interest runs on the whole of the judgment debt or only the original capital amount of the loan. The second was whether the induplum rule capped the running of such additional interest at double the sum of the whole of the judgment debt or at double the sum of the original capital amount of the loan. In this regard the Constitutional Court affirmed the Supreme Court of Appeal's reasoning that "…interest runs on – and is limited to an amount equal to – the whole of the judgment debt, including the portion which consists of previously accrued interest." [Para. 100]

Finally, the Constitutional Court considered the rate at which interest ran, that is, whether interest would run at a contractually agreed rate or at the statutorily prescribed rate of interest post-judgment? In keeping with previous case law on this point, the Constitutional Court affirmed that

post-judgment interest runs at the rate agreed upon and not the statutorily prescribed rate of interest (now 9%).

Crucially, the reprieve granted to debtors by the Constitutional Court in Paulsen will have an immediate effect on all current and pending litigation, except those matters that have been finalised with no possibility of appeal.

Leave to appeal to the Constitutional Court in non-constitutional matters

Prior to the enactment of the Constitution Seventeenth Amendment Act, 2012, the Constitutional Court's jurisdiction was constrained - in s167(3) of the Constitution of the Republic of South Africa, 1996 - to constitutional matters and issues connected with decisions on constitutional matters. However, the new s167(3)(b) has extended the jurisdiction of the Constitutional Court to include any other matter, "if the Constitutional Court grants leave to appeal on the grounds that the matter raises an arguable point of law of general public importance which ought to be considered" by the Constitutional Court [our emphasis added]. In other words, the Constitutional Court may now choose to decide matters that were previously regarded as 'non-constitutional'

[Para. 13 – 16].

Notably, in their application for leave to appeal, the Paulsens did not raise any constitutional matters, instead resting their case for leave to appeal solely on the assertion that the matter raised arguable points of law of general public importance which ought to be considered by the Constitutional Court. Paulsen was therefore an opportunity for the Constitutional Court to determine the scope of the new s167(3)(b)(ii).

In short, the Constitutional Court held that in determining whether a point of law is arguable, it must fulfil two criteria, namely a) the point must be one of law (and not fact) and b) that it must have some prospects of success. Ultimately, Madlanga J held that whether a point of law is arguable will depend on the circumstances of each case. Regarding what constitutes a matter of public importance, the Constitutional Court held that to fulfil the criterion the matter must "…transcend the narrow interests of the litigants and implicate the interest of a significant part of the general public."

[Para. 22-23 and 25-26]

Furthermore, in regard to the question of whether the interests of justice factor plays a role in the determination of whether leave to appeal should be granted in regard to 'non-constitutional' matters, Madlanga J, held that "[i]f – for whatever reason – it is not in the interest of justice for this Court to entertain what is otherwise an arguable point of law of general public importance, then that point is not one that 'ought to be considered by [this] Court.'" [Para. 30] It is evident then that it would serve an applicant for leave to appeal well to state - and to state clearly - that the interests of justice favour the hearing of the matter.

Madlanga J accordingly held that there were various arguable points of law raised by the Paulsens including inter aliawhether the in duplum rule applies during the pendency of litigation. To boot, a determination in this respect would have a significant impact on the general populace.

Notably, Madlanga J's comments regarding the interpretation of the National Credit Act, No 34 of 2005 in paragraph 27 seem to suggest that the Constitutional Court will entertain appeals regarding the interpretation of the NCA in future, premised on the fact that it "regulates commercial activity undertaken by many people and institutions on a daily basis."

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