On 24 March 2015 the Constitutional Court, the apex Court in South Africa’s judicial hierarchy, handed down judgement in the case of Paulsen and Another v Slip Knot Investments 777 Proprietary Limited [2015] ZACC 5. The effect of the Constitutional Court’s judgement is the rejection of the Supreme Court of Appeal’s previous development of the common law in duplum rule in the matter of Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation) (Oneanate).

The in duplum rule provides that interest, whether accruing as simple or compound interest, ceases to accumulate upon any amount of capital owing once the accrued interest equals the amount of capital outstanding. The rule has its origins in classical Roman law which then extended into Roman-Dutch law. It has the overarching purpose of protecting debtors from being financially crippled by the never-ending accumulation of interest on an outstanding debt.

A distinction must be made between the common law in duplum rule and statutory in duplum rule as governed by section 103(5) of the National Credit Act 34 of 2005 (NCA). The NCA applies to all credit agreements between persons dealing at arms length and within the Republic of South Africa. It has limited application to juristic persons with an asset value or annual turnover of more than R1 million. Although s.103(5) of the NCA was developed from the common law, it is not an exact replication as this section offers greater consumer protection than that of the common law in duplum rule. In addition, initiation fees, service fees, interest, administration charges and collection costs are defined by the Act. These amounts cease to accrue when their sum total reaches the outstanding balance of the consumer’s principle debt at the time of default. The case of Nedbank Ltd v National Credit Regulator 2011 (3) SA 581 (SCA) brought much clarity to the application of section 103 and the categorization of these fees when determining the nature and extent of the charges.

Although Slipknot does not expand on the statutory in duplum rule, it is worth noting the legislative development and its possible influence in future cases.

The facts of the Slip Knot matter can be summarised as follows. A company concluded a loan agreement of R12 million with Slip Knot having a commencement date of 10 July 2006. The R12 million was payable within 12 months from the commencement date. The company was liable to pay interest at 3% per month on the outstanding capital amount from the seventh month after the commencement date to the date of final payment. As security for the loan, the company’s shareholders, acting in their personal capacities and as trustees of the trust in which the company’s shares were held, bound themselves jointly and severally as sureties and co-principal debtors for the company’s indebtedness to Slip Knot under the loan agreement. The company defaulted on its obligation to settle its indebtedness in terms of the loan agreement and on 10 January 2010 Slip Knot instituted an application against the sureties and the trust in order to recover what was owed to it.

For the past 17 years, and as a result of the Oneanate judgement, the in duplum rule has not operated pendent lite – meaning from the date of service of the process initiating the legal proceedings until the date of judgement. The position was thus that outstanding arrear interest was permitted to run during the course of litigation to an amount in excess of double the amount of the capital debt.

Even in the context of the statutory rule there is a lack of clarity as to whether outstanding arrear interest is permitted to run during the course of litigation. Such an interpretation would hinge on the definition of the term “default” which the NCA does not define. In the Slip Knot matter however, the main judgement delivered by Madlanga J (Jafta J and Nkabinde J concurring) found that the in duplum rule continues to apply during the pendency of litigation. Five of the remaining six judges (Moseneke DCJ with Mogoeng CJ, Khampepe J, Leeuw AJ and Van der Westhuizen J concurring), although for different reasons, supported this order with their concurring judgement.

The main judgement overruled Oneanate by reason that the SCA had failed to weigh the interests of creditors and debtors equally. They failed to do so by focusing only on the effect of the rule on creditors, and relying on a principle which it had incorrectly ascribed to certain old Roman-Dutch law authorities. The main judgement accepted that public policy may dictate that courts develop the common law in appropriate circumstances but qualified this notion with the submission that the judiciary, when faced with cogent public policy considerations pointing in opposite directions, should not impose its preference. In so doing, the judiciary would be overreaching into the legislative arm, which is not in line with the ‘separation of powers’ doctrine.

Evidently, and as identified by the main judgement, both the dissenting and concurring judgements based their respective conclusions on competing policy considerations. In this regard, it would be improper not to quote the main judgement’s reflection on this occurrence: “I must pause here and make this observation. The very fact that two esteemed, eminent colleagues make – each with conviction – diametrically opposed choices on the true path shown to us by public policy underscores the very point I am making. That is, each of the choices they make is but a personal preference.” Both the concurring and dissenting (Cameron J) judgements disagreed with the view that to develop the common law would be encroaching on parliamentary function. Opposed to the main judgement, they find that section 39(2) of our Constitution instructs the courts to develop the common law in line with the objects of the Bill of Rights.Two of the competing policy considerations founded on constitutional values, namely, the right of access to courts and Pacta Sunt Servanda, were elaborated on in the main judgement.

With regard to the right of access to courts it was highlighted that some debtors, despite a genuinely held belief that they have a valid defence, may sooner opt to settle a claim than face the potentially, financially ruinous interests that would again commence to pile up once the court process was served. In his dissenting judgement Cameron J sets out the reasons why, in his view, the rule should not apply once proceedings are instituted. He submits that the main judgment understates the importance of contractual autonomy, that it overstates the implications for a debtor’s access to courts and that it fails to consider the effect of inflation, which is that the cap on agreed interest unjustly erodes the creditor’s money. His summation of the main judgement’s implications is “Lenders who choose to pursue a claim must now bear the inflationary costs imposed by dilatory debtors who may extend legal processes as long as possible, to avoid paying a debt that is becoming less valuable every day.” Those implications also “disincentivise sound deals that enable our economy to function and flourish.”

Returning now to the main judgement. Their opinion was that the policy considerations in favour of the continued application of the in duplum rule outweigh those that are not. They does not however justify their decision to reinstate the in duplum rule pending litigation on this preference because to do so would have made them “guilty of exactly that which I have cautioned against”. In the result, the main judgement avoids that which is explained to be judicial function and reinstates the position prior to the Oneanate judgement in 1998 which was, and now is, that the in duplum rule, even pending litigation, is left intact.

In summary, a creditor is now entitled to the following: - repayment of the unpaid capital sum; - interest on the unpaid capital sum at the contractual rate up to an amount equal to the unpaid capital sum; and - interest on the aggregate of the above amounts at the contract rate from the date of judgement of the court to the date of payment by the debtor.

As a consequence of this judgement, creditors, especially those with agreements entitling them to high rates of interest, are encouraged to institute court proceedings expeditiously to ensure that they avoid a period in which no interest is earned as a result of duplum having been achieved and judgment not yet having been obtained.