Interested about the interest in debt? The in duplum rule revisited

July 23rd, 2015

By Kerron Edmunson

Feature Article_Edmunson_August_2015The pronouncements of Madlanga J in the recent Constitutional Court case of Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd 2015 (3) SA 479 (CC) got me thinking about the in duplum rule, which is largely what the case was about, but also about what happens if a court can no longer pass judgments on the facts but only on the law? And what if, as in this case, it is not the debtor who is impoverished by the conduct of the debtor, but the creditor? If a court can only consider the law and not the facts, then how does the court distinguish cases from one another and make the most proportionate and reasonable finding – and this despite the clear statement by the presiding judge that: ‘In any given case this court has to make a value judgment on whether the point of law is indeed “arguable”’ (Paulsen at para 23).

Is this where the courts are going? Are the principles established on in duplum, which underpinned the previous law on the matter in Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation) 1998 (1) SA 811 (SCA) rendered invalid by the stroke of a pen, removing the role that courts have had in creating common law for decades? The extremely sensible statement in that case, which has been in force since 1997, sums the position as follows: ‘It appears as previously pointed out that the rule is concerned with public interest and protects borrowers from exploitation by lenders who permit interest to accumulate. If that is so, I fail to see how a creditor, who has instituted action can be said to exploit a debtor who, with the assistance of delays inherent in legal proceedings, keeps the creditor out of his money. No principle of public policy is involved in providing the debtor with protection pendente lite against interest in excess of the double. Since the rule as formulated by Huber does not serve the public interest, I do not believe that we should consider ourselves bound by it. A creditor can control the institution of litigation and can, by timeously instituting action, prevent the prejudice to the debtor and the application of the rule. The creditor, however, has no control over delays caused by the litigation process’ (Oneanate at 834 B – F).

Does the lender now have to carefully measure interest and time, to ensure that he sues just before the in duplum rule kicks in, an archaic rule that no ordinary consumer will know about but which is ostensibly designed to protect us all from Shylocks, from William Shakespeare’s Merchant of Venice, even when we ourselves, having borrowed the money on terms that we agreed to, have made no attempt to repay? Do we now have to rely on courts to pursue debts that are due, owing and payable when recalcitrant debtors fail to pay even when the value of their assets exceeds the value of their debt by some orders of magnitude? Forcing the creditor to spend almost as much of the debt to enforce his right to repayment of his loan? When did our Constitution make our right to the courts apply only for the perceived weak and ‘un-stoutboned’ debtor – a perception, which in and of itself, must necessarily require the exercise of discretion or assumption by the court? (Cameron, J in his dissenting judgement, appears to have coined the phrase ‘stout-boned’ to describe two parties evenly matched in commercial strength, exercising their rights to contract on terms that they are agreed on, in pursuit of what he called ‘big profits’. The phrase took the fancy of Madlanga, J, who repeated it several times in the majority judgement.)

According to Madlanga J, who wrote the majority judgment in Paulsen, ‘… there are persuasive competing public interest considerations that are at the opposite end of those on which Oneanate relied. And I am going to conclude that Oneanate was wrong in developing the common law in these circumstances. Why do I say it was wrong? 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. To do otherwise, courts may find themselves straying into terrain that may well be legislative in nature. That would be at variance with the separation-of-powers doctrine’ (Paulsen at para 56 – 57).

The application of the court’s interpretation of the separation-of-powers doctrine in Paulsen does not entirely reflect that of other courts, including De Lange v Smuts NO and Others 1998 (7) BCLR 779 (CC) (at 804 para 60), where the court said in a constitutional dispensation, the doctrine of separation of powers is not fixed or rigid. ‘The courts are duty bound to develop a distinctively South African model of separation of powers, one that fits the particular system of government provided for in the Constitution and that reflects a delicate balancing, informed both by South Africa’s history and its new dispensation, between the need, on the one hand, to control government by separating powers and enforcing checks and balances, and, on the other, to avoid diffusing power so completely that the government is unable to take timely measures in the public interest.’

The main judgment is also in this regard at odds with the concurring judgment of Moseneke DCJ in which he says, ‘Developing the in duplum rule, a common-law norm that has always been under the oversight of the courts, will not encroach on any exclusive terrain of Parliament’ (Paulsen at para 115).

The in duplum rule is not cast in stone, it is part of the common law. The courts have in the past, required amendment to legislation by imputing meaning or applying it in certain circumstances in a particular way to give effect to the required outcome – one that promotes equity and fairness. The long list of cases in this regard need not be cited. The Constitutional Court is the very place we all go to find fairness and proportionate treatment.

The judge in Paulsen acknowledges this duty on the court by reference to ss 34 and 39 of the Constitution in saying: ‘I am not suggesting that this court should be servile and not do its duty in accordance with s 39(2) of the Constitution. Where it is appropriate for it to develop the common law, it must,’ (Paulsen at para 58). But the judge then proceeded to decline the opportunity to do so, by overturning Oneanate and claiming to do so, namely, to refuse to allow interest on a debt to run pendente lite when it might exceed the double, on the basis that: ‘To hit all debtors in this manner would surely have an undesirable, chilling effect’ (Paulsen at para 63). Having considered the possibility that a recalcitrant debtor may in fact reduce the debt he owes to the creditor to almost nothing by the passing of time and the application of inflation, the judge continues to defend the debtor who is not ‘stout-boned’.

He does so to such a degree that he casts all debtors as weak, impoverished, set on, and bullied by giant-like and financially strong creditors, ‘[t]o allow for uncapped, and possibly exorbitant, interest to run pendente lite grants a powerful tool to creditors to bully and possibly annihilate debtors using the litigation process to their best advantage. And this is made possible by the sheer imbalance in financial muscle. By allowing uncapped interest to run as a result of a debtor exercising her right of access to courts by suspending the in duplum rule pendente lite we risk rendering the debtors’ right of access to courts tenuous, if not illusory’(Paulsen at para 68).

In so doing, the judge takes no account of the number of situations in which loans are made by one person to another or one entity to another outside the framework of legislation, because that is what friends and family do for one another, or that is what smaller enterprises without audited balance sheets and vast asset registers are able to access reasonably easily. The judge ignores even those instances where those financial institutions have taken risk, sought security, put forward a contract for consideration, and still come off second best. In this, he differs greatly in his judgment from that of dissenting judge Cameron J.

Interestingly and by contrast with this position, Madlanga J does believe that while courts should not interrogate the common law, it behoves the courts to determine how financial institutions can be controlled in tough economic times, as he sternly remarks: ‘Another purpose of the in duplum rule was to enforce sound fiscal discipline upon creditors by serving to disincentivise lending money to a bad risk. Given that the recent global financial crisis (which has affected South Africa no less than many other countries) arose in large part from a failure of fiscal discipline, this concern is still quite relevant. As with the larger purpose of protecting debtors, Oneanate’s suspension of the in duplum rule pendente lite serves to weaken the effectiveness of the rule in incentivising fiscal discipline among creditors,’ (Paulsen at para 82).

The in duplum rule sought, in its original form, to prevent the greedy creditor from taking not only his pound of flesh, but any blood, muscle or other body parts – to prevent the greedy Shylock from punishing Antonio by death when he failed to repay his lender. This rule dates back so long ago that it is hard for most of us to read it in its original form, let alone understand it in the electronic marketplace, and in the global village. The fact is that not all debtors are ‘stout-boned’, and not all creditors are financial institutions; not all debtors are ignorant, naïve and preyed on; and not all creditors are wealthy.

The Paulsen case has, however, ensured that courts will in future, be reluctant to delve too deeply into the facts and circumstances, which lie behind the masks of pitiful debtor and grasping creditor, and must now paint all creditors with the same brush, as Shylocks.

This article is borne out of the frustrations experienced in an actual case which has proceeded since 1995 in the High Court, KwaZulu-Natal Division, and which will now reduce the creditor’s ability to recoup a twenty-year old debt (in essence a loan by one friend to another made possible by cashing in his pension fund), by half.

Kerron Edmunson BA LLB (Wits) is a legal and regulatory consultant in Johannesburg.

This article was first published in De Rebus in 2015 (Aug) DR 38.