South African Constitutional Court Changes Application of In Duplum Rule

On 24 March 2015, the South African Constitutional Court (“CC”) altered the established common law position relating to the “in duplum rule” by way of its judgment in Paulsen and Another v Slip Knot Investments 777 (Pty) Limited 2015 (3) SA 479 (CC) (“Slip Knot”). As a consequence, the legal position is now (again) that the in duplum rule continues to operate after the commencement of litigation. What exactly this means, and what effects it has on lenders and borrowers respectively, is discussed in this article.

The “In Duplum Rule”

The in duplum rule is a South African common law rule that provides that arrear interest on an outstanding debt ceases to accrue once the sum of the unpaid interest equals the amount of the outstanding capital. It was developed in response to considerations of public interest, and seeks to protect borrowers from exploitation by lenders, by making it unlawful for the latter to recover from borrowers interest that is in excess of the capital sum upon which the interest has accrued. The in duplum rule has been applied through South African case law from as early as 1830 onwards.

The (Supreme Court of Appeals’) Exception to the In Duplum Rule in Cases of Litigation

In the case of Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation) 1998 (1) SA 811 (SCA) (“Oneanate”), the South African Supreme Court of Appeal (“SCoA”) was faced with the question, whether the in duplum rule should also operate pendente lite – i.e. from the date of service of the process initiating legal proceedings until the date of judgment aimed at recovering the debt owing.

In its decision, the SCoA established an exception to the in duplum rule, being that the prohibition against claiming interest in excess of the capital amount does not apply when a creditor institutes proceedings to recover the debt and the interest from a debtor. This allowed a creditor to recover interest in excess of the amount of the capital, if the creditor had to resort to instituting litigation to recover a debt.

The decision in Oneanate was based on the fact that the purpose of the in duplum rule (besides public policy interests) was to protect borrowers from exploitation by lenders who permit interest to accumulate indefinitely. However, in Oneanate, the SCoA found that it was unreasonable that a creditor who had instituted action could be said to exploit a debtor who, with the assistance of delays inherent in legal proceedings, purposely keeps the creditor out of its money.

The SCoA found that there was no principle of public policy involved in providing the debtor with protection pendente lite against interest in excess of the double. It stated that “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.”

Consequently, pursuant to the decision in Oneanate, if litigation was initiated, interest would begin to run again on the capital outstanding for as long as the litigation persisted with no limitation on the amount.

Constitutional Court Overturns Supreme Court of Appeals’ Decision

In Slip Knot, the CC abolished the SCoA’s exception to the in duplum rule while litigation persists. It held that the SCoA had erred when it had held that the operation of the in duplum rule was suspended from the date of service of process initiating legal proceedings until the date of judgment.

The CC found that the exception to the in duplum rule was out of touch with socio-economic realities, contrary to public policy and offended the right of access to courts, enshrined in s34 of the South African Constitution.

Madlanga J, delivering the main judgment, held that by suspending the application of the in duplum rule pendente lite, Oneanate had indiscriminately targeted all debtors – regardless of whether they were defending the claim in good faith or not. In his view, the suspension of the in duplum rule pendente lite served as a significant impediment to debtors seeking assistance from courts. On the other hand, applying the in duplum rule pendente lite would not inhibit creditors’ access to courts nearly to the same extent that lifting the rule inhibits debtors’ access to courts. He found that the SCoA had incorrectly developed the in duplum rule by focusing “only on the effect of the rule on creditors (or “finance”) rather than weighing the interests of creditors and debtors equally”.

Madlanga J. consequently proceeded to overrule Oneanate insofar as it held that the in duplum rule was suspended pendente lite. However, he emphasized that this decision was not a rejection of the Oneanate development in totality. As he could not decide which policy considerations should prevail – having noted that there were public policy considerations both for and against the suspension of the operation of the in duplum rule during the course of litigation -, he found that a corresponding decision should best be taken by parliament, stating that in decisions “so heavily laden with polycentricism […] the court ought not to make a choice on what considerations best advance the public interest”.

Comment

In Slip Knot, the CC came to the conclusion that Oneanate’s development of the common law had been incorrect. In its view, the in duplum rule should never have been held not to apply pendente lite. Consequently, the South African law is now again that the in duplum rule continues to operate after the commencement of litigation.

This development will presumably have a substantial detrimental effect on banks and other lenders, and the way these entities may consequently now have to conduct their business. To them, it will be of little consolation that Madlanga J - while finding it necessary to change the applicable law so that the in duplum rule continues to operate after the commencement of litigation -, stated that “if the credit market or financial sector feel that there is a case to be made for the suspension of in duplum rule or, indeed for its entire scrapping, it is at liberty to lobby parliament” for such legislative form.

Lastly, it may also be pointed out that, in his dissenting CC judgment, Cameron J., was of the view that the SCoA’s decision in Oneanate was correct. He agreed that it could not be right “to make a lender incur this loss, rather than to require a debtor, who holds the power to forestall or end litigation by repaying the debt, to incur liability for the interest accruing during litigation.”

We will be following the further developments and consequences of Slip Knot with interest.