How hard cases can make good law

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Pa­trick Bracher

OC­CA­SION­ALLY we get a clear re­minder from our courts that com­mer­cial law is likely to favour in­di­vid­u­als rather than cor­po­ra­tions be­cause of the im­bal­ance of fi­nan­cial mus­cle.

This hap­pened in March when the Con­sti­tu­tional Court ex­am­ined the in du­plum rule that pre­cludes the re­cov­ery of ar­rear in­ter­est in ex­cess of the cap­i­tal amount of the credit pro­vided. The court found that the rule must con­tinue to ap­ply while lit­i­ga­tion is pending.

The over­ar­ch­ing pur­pose of the rule since it was cre­ated as part of Ro­man law is to pro­tect debtors from be­ing crushed by the nev­erend­ing ac­cu­mu­la­tion of in­ter­est on an out­stand­ing debt.

Whether hard cases make bad law or good law de­pends on your per­spec­tive. Hard facts are of­ten the best route to legal cer­tainty. In the mat­ter be­fore the Con­sti­tu­tional Court, two in­di­vid­u­als had signed surety for a prop­erty deal that went wrong when the eco­nomic down­turn com­menced in 2007.

A de­fault in 2007 led to a court ac­tion that started in Jan­uary 2010 and ended with the con­sti­tu­tional judg­ment in March 2015. The cap­i­tal debt was R12m. The ques­tion was whether the in­ter­est was pegged at R12m (to­tal debt R24m) or whether it kept run­ning dur­ing the long pe­riod of lit­i­ga­tion re­sult­ing in a to­tal debt of R72m. A hard case in­deed.

An Ap­peal Court de­ci­sion in 1997 de­cided, with­out con­sid­er­ing the bill of rights, that in­ter­est should con­tinue to run dur­ing the course of lit­i­ga­tion be­cause the cred­i­tor had no con­trol over how long the lit­i­ga­tion would take. The Con­sti­tu­tional Court pointed out that the con­sumer, who could be drained dry by not ap­ply­ing the rule, had no more con­trol over the lit­i­ga­tion than the cred­i­tor.

It is a ques­tion of bal­anc­ing con­sti­tu­tional rights. The cred­i­tor is en­ti­tled to rely on free­dom of con­tract so that peo­ple are bound by agree­ment. But that rule is not ab­so­lute. The courts test that rule against the right of ac­cess to jus­tice. Hu­man rights have lit­tle con­tent with­out ac­cess to the courts to en­force them. A con­sumer faced with an ever-grow­ing debt may have a valid de­fence. The re­al­ity, said the court, is that a large per­cent­age of providers of credit are es­tab­lished and well-re­sourced cor­po­rates but many credit con­sumers fall on the wrong side of a coun­try’s vast cap­i­tal dis­par­i­ties. As­tro­nom­i­cal in­ter­est may be the dif­fer­ence be­tween eco­nomic sur­vival and fi­nan­cial ruin of the con­sumer.

Our com­mon law is in­fused with the val­ues of the Con­sti­tu­tion and, ap­plied to this case, the val­ues must favour the in­ter­ests of credit con­sumers.

The judg­ment will have a sig­nif­i­cant ef­fect on pending lit­i­ga­tion re­lat­ing to credit agree­ments. No mat­ter how long the lit­i­ga­tion takes, the providers of credit on in­ter­est will be limited to dou­ble the cap­i­tal un­til judg­ment is granted. A cred­i­tor who wants to mit­i­gate that ef­fect will have to get on with the lit­i­ga­tion early and their at­tor­neys will have to pur­sue the lit­i­ga­tion ef­fi­ciently.

The con­se­quences of jus­tice de­layed have yet an­other di­men­sion.

The con­sti­tu­tion favours credit users when it comes to in­ter­est on debt

Pa­trick Bracher (@PBracher1) is a direc­tor at Nor­ton Rose Ful­bright.

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