In Duplum rule: Another view of Paulsen v Slip Knot

May 1st, 2017
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By Tertius Maree

A slip knot is a simple-seeming knot, joining two rope-ends. It does not actually slip when tension is applied.

The in duplum rule is a simple-seeming rule inherited from our Roman-Dutch legal history, but it gives rise to many thorny questions.

Is the in duplum rule suspended by summons or only by the (eventual) judgment?

How can a commonplace question such as ‘do I owe the interest’ give rise to so many important questions, including some of constitutional relevance?

Should, and how should, the in duplum rule be weighed up against the dictates of pactum sunt servanda?

Should the protective cap of the in duplum rule itself be ‘capped’?

If the in duplum rule is suspended by judgment, does post-judgment interest run on the whole of the judgment debt or only the original capital amount of the loan?

If the in duplum rule is suspended by judgment, does post-judgment interest run from the date of the judgment of the court of first instance, or from the date of the judgment of the apex court?

Can the Constitutional Court (CC) set aside an earlier decision of the Supreme Court of Appeal (SCA), which is not before it on appeal?

How is it possible that a ruling, including diverging views of 15 judges, nine of whom of the highest rank, expressing opposing views on exactly the same issues, are so persuasive as to oblige agreement in two different directions?

How is it possible that a long-standing, well-known, often used and seemingly simple common law norm such as the in duplum rule can invite such divergence between so many judges and can even be labelled as a ‘polycentric morass’ in the majority ruling of the Highest Court?

Would a matter such as this have proceeded to the CC, and would the result have been the same if the applicable interest rate had been more in line with what may be regarded as ‘normal’ or ‘reasonable’?

Would the approach and ruling of the majority judgment in the CC have been the same if the debt had been of a different kind, such as sectional title levies, and if not, how can this judgment be held to serve as a general principle as to how the in duplum rule should be applied?

What role does ‘public policy’ play in our common law and to what extent may the judiciary intervene to achieve public policy objectives?

To what extent are our courts allowed to develop our common law and may such expansion then be reversed by another court?

These questions and more arise from the judgment of the CC in Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd 2015 (3) SA 479 (CC). In fact, this is a tale so complex that I have reservations about adding my own views.

The case has in fact been discussed previously in De Rebus, but without dealing fully or convincingly with the double-edged nature of the in duplum problem, seen from a public interest, and from a legal viewpoint.

The Paulsens, husband and wife, signed as sureties on behalf of Winskor 139 (Pty) Ltd (Winskor) in respect of a ‘bridging finance’ loan agreement for R 12 million for a property venture. The agreed rate of interest was 3% per month, compounded monthly. As it turned out, Winskor did not make much ‘wins’ (profit), defaulted in payment of capital and interest and was in fact in the process of being liquidated at the time that proceedings were instituted by the creditor (Slip Knot), not against the principal debtor (Winskor), but against the sureties (the Paulsens) in the Western Cape Division of the High Court. The Paulsens defence relied on three arguments, namely that –

  • in terms of the National Credit Act 34 of 2005 (NCA), which requires creditors to be registered, which Slip Knot was not, the loan agreement was invalid;
  • if the agreement was held to be valid, the interest due was subject to an absolute limit of R 12 million in terms of the in duplum rule; and
  • if the operation of the in duplum rule was suspended by the commencement of proceedings, the Paulsens’ liability as sureties could in any event not exceed R 12 million as no proceedings had been instituted against Winskor, the principal debtor.

Judgment having been granted against them for R 72 million, made up of the capital amount and accrued interest. The Paulsens appealed to the full Bench, which upheld the judgment, but found the third defence to be valid in that whereas the in duplum rule applied uninterruptedly in respect of the principal debtor against whom no action had been instituted, the sureties could not be held liable for more than the principal debtor, and that interest due by the sureties was accordingly also capped at R 12 million.

Not satisfied with this partial success, the Paulsens then appealed to the SCA, against which a cross-appeal was made by Slip Knot in respect of the capping of interest in the court a quo. In terms of a majority decision at the SCA, the Paulsens’ appeal was dismissed, with costs.

The majority at the SCA ruled that the loan agreement was not subject to the provisions of the NCA and, therefore, it was not necessary to consider whether Slip Knot was required to register as a credit provider in terms of the Act.

Slip Knot’s cross-appeal was upheld by the majority, and the Paulsens’ second defence was accordingly dismissed, the finding being that the operation of the in duplum rule is suspended by the institution of proceedings, with interest accruing afresh from that date. The minority disagreed with this view.

The majority at the SCA furthermore dismissed the Paulsens’ third defence and ruled that they, as sureties, had become liable for further interest as from the date of summons and could not rely on the fact that the principal debtor had not been sued.

The Paulsens then applied for leave to appeal to the CC, founding their application, not on the constitutional relevance of the matter, but averring that it raised ‘arguable points of law of general public importance which ought to be considered by that Court’ as provided for in the amended s 167 of the Constitution.

In a majority ruling the CC judges found that although it had not been pleaded, the matter did in fact raise a constitutional issue regarding the interpretation of the NCA, which issue, however, could be disregarded for the purposes of the current matter. The court nevertheless also had jurisdiction beyond constitutional matters, holding that it did so because on the pleadings, not necessarily on the merits, the matter was indeed concerned with ‘arguable points of law of general public importance which ought to be considered by that Court.’

Leave to appeal to the CC was accordingly granted.

In the majority ruling, delivered by Madlanga, J, it was pointed out in the majority decision that it was a long-standing and well-established part of our law with origins in classical Roman law, carried through to Roman-Dutch law, and confirmed by our courts to remain of current relevance, its purpose being to ‘protect debtors from being crushed by the never ending accumulation of interest on an outstanding debt.’

The problem to be considered stemmed from the 1998 decision of the SCA in Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (In Liquidation) 1998 (1) SA 811 (SCA) in which it had been held that the in duplum rule was suspended by the commencement of litigation, accrual of further interest, therefore, resuming from that date onwards. This ruling had reversed the prevailing position at the time as expressed in the then leading case, Stroebel v Stroebel 1973 (2) SA 137 (T).

Madlanga J held that Oneanate had been wrongly decided both as far as the interpretation of Roman-Dutch authorities were concerned and in terms of public interest considerations.

In respect of public interest, the Oneanate approach whereby protection of the debtor was suspended on the institution of proceedings, was based on an acceptance of the view that ‘interest and indeed compound interest is the life-blood of finance’ and that it required a different approach in our ‘modern conditions where finance plays an entirely different role’ than in the times of two authoritative sources on Roman-Dutch law Ulrik Huber and DG van der Keessel.

Madlanga, J pointed out that while public policy requirements in an issue such as the protection of women as vulnerable members of society is beyond argument and points in one direction only, the same does not apply in respect of the issue at hand, being the application of the in duplum rule in which public policy points in two directions. The judge added:

‘Where public policy considerations do not chart the path of desired common-law development with sufficient clarity, courts are not suitably placed to take the leap and make a judgment call one way or the other’ (para 57).

‘The question at stake in Oneanate (and here) is so heavily laden with polycentricism that a court ought not make a choice on what considerations best advance public interest’ (para 58).

And:

‘[In] Oneanate the Supreme Court of Appeal ought not to have taken the quantum leap of grafting into the long-established rule a suspension of the in duplum rule pendente lite’ (para 93).

Accordingly, argued Madlanga J, the attempt in Oneanate to develop the common law cannot be supported. The problem facing this court was of course the fact that Oneanate was not before it on appeal:

‘The question now is; are we prevented from setting right a wrong policy choice, because of the passage of years and the fact that Oneanate did not come on appeal?’

The judge pointed out that the CC had never before been faced with the in duplum question, but that:

‘An incorrect decision cannot be allowed to bed down and become part of our common law purely because of the fortuitous nature of what lands on our plate for adjudication. Not being able to upset Oneanate just because it did not come before us on appeal would be inimical to this court’s status as the apex court in the judicial hierarchy.’

For these reasons the Oneanate judgment was overruled by the majority, with the result that the law reverted to what it had been before Oneanate, namely, that the in duplum rule is not suspended but continued pendente lite and interest is not permitted to run during the course of litigation. The judge denied that this finding amounted to a development of the common law, but that it merely amounted to a rejection of the Oneanate development.

As far as the calculation of interest was concerned, this was limited in the current instance to R 12 million, being the amount equal to the capital due interest to resume at the agreed rate as from the date of the judgment of the CC.

This judgment of course favoured the Paulsens. Madlanga J pointed out that it would similarly favour other debtors, except in concluded matters where no possibility of appeal remained.

Different to what Madlanga J had held, Moseneke DCJ did not find that the opposite public policy considerations were many-sided and equally positioned, but in fact found that Oneanate was so clearly wrong that its precedent should be set aside.

The error of the latter view is demonstrated not only by the dissenting ruling of Cameron J, but by the clear and well-considered ruling by Madlanga J in the main judgment itself.

In the single dissenting judgment Cameron J argued that Oneanate had been correctly decided.

My own views on the chief issue debated in this vital judgment are as follows:

  • the original object of and basis for the rule, namely, to prevent a defaulting debtor from being financially destroyed by the overwhelming accrual of interest, remains and should remain in our modern South African law; but –
  • the in duplum rule has always been and remains a radical intrusion into the freedom to enter into contractual relationships, and particularly the rights of the creditor; and accordingly –
  • the rule must be interpreted and applied conservatively in order to preserve the freedom of parties to conduct their financial affairs by means of valid contracts; leading to a conclusion that –
  • the application of the in duplum rule should be limited to apply in respect of interest accruing up to the date of institution of proceedings by the creditor for recovery of the debt – the punitive consequence, to the creditor, of holding the opposite being clearly demonstrated by this very case; and –
  • as well-considered, carefully positioned and eloquently expressed as the judgment of Madlanga J had been, it seems that it may itself have been influenced, if not driven, by sectorial public interest considerations; and lastly
  • the majority ruling crucially lacks consideration of classes of financial relationships falling outside the model considered by the court at the time of this judgment, and should at least not have been held to serve as the norm for all types of interest-bearing debts.

See also:

Tertius Maree BA LLM (Stell) is an attorney at Tertius Maree Associates in Stellenbosch.

This article was first published in De Rebus in 2017 (May) DR 39.

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