How hard cases can make good law
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.