Interest and the in duplum rule

9 November 2005

Written by Maria Philippides of Deneys Reitz Attorneys

The in duplum rule as developed in our law, provides inter alia that interest due in respect of certain debts ceases to run when it reaches the amount of the unpaid capital sum.

Ethekwini Municipality v Verulam Medicentre (Pty) Limited(SCA)

The calculation of interest on a debt in respect of which no provision is otherwise made for interest, is provided for in our law in the Prescribed Rate of Interest Act, 1975.

That Act makes provision for the calculation of interest on two types of debts namely judgment debts and unliquidated debts, both of which may be of particular “interest” to insurers.

In the context of the Act, a “judgment debt” is an amount of money which becomes due by virtue of a judgment or an order (including an order as to costs) of a court of law.

In terms of the Prescribed Rate of Interest Act, a judgment debt bears interest from the date on which it is payable and ordinarily (especially in a delictual claim) that would be the date upon which judgment is given.

Accordingly therefore, this interest would begin to run from the date upon which the trial court judgment is given, irrespective of any appeal that may be lodged against the judgment, unless that appeal overturns the original judgment.

Interest on unliquidated debts, namely debts which are not readily determinable in amount, runs from the date on which payment of the debt is claimed by the service on the debtor of a demand or a summons, whichever date is the earlier. A demand in this context means a written demand setting out the creditor’s claim in such a manner as to enable the debtor reasonably to assess the quantum.

The judgment which I am examining today is that of the Supreme Court of Appeal in EthekwiniMunicipality v Verulam Medicentre (Pty) Limited, delivered at the end of September 2005.

The judgment specifically deals with the in duplum rule and its applicability.

The in duplum rule as developed in our law, provides inter alia that interest due in respect of certain debts ceases to run when it reaches the amount of the unpaid capital sum.

This rule is based on public policy and is meant to protect debtors from exploitation by creditors by forcing them to pay unregulated charges, and seeks to enforce sound fiscal discipline on creditors. It cannot be waived in advance or during the period of the loan.

According to the judgment of the WLD in the matter of Sanlam Life Insurance Ltd v South African Breweries Ltd 2000 (2) SA 647, the rule does not relate only to money lending transactions but applies to all contracts where a capital amount that is subject to interest at a fixed rate is owing. This rule does not relate to debts of a delictual nature.

The question in the Ethekwini Municipality case was whether the in duplum rule would be applicable to the circumstances which made up the contractual dealings between the parties.

In December 1993, the parties concluded a written agreement of sale in terms of which the Appellant town council sold to the Respondent an immovable property for approximately R1.5 million. The purchase price was payable by way of a 10% deposit and thereafter, quarterly instalments which would bear interest at an agreed rate on the balance over a period of two years. Transfer of the property would be effected upon payment of the full capital and interest.

By October 1996, the Respondent had paid a sum of approximately R1.1 million and wished to pay the outstanding balance to take transfer. It was however discovered at that stage that the Appellant had failed to comply with certain provisions of the Local Authorities Ordinance Act 1974 when the agreement was concluded and the agreement was therefore invalid. The Appellant consequently became liable to repay the amount of R1.1 million to the Respondent.

However, the parties entered into further negotiations and in April 1999 concluded a second agreement in terms of which the Appellant would retain the amount that the Respondent had paid under the initial agreement as part payment of the re-negotiated purchase price of R3.5 million. The balance of the purchase price would then be paid in cash against registration of transfer.

The Respondent was required to apply for a re-zoning of the property and transfer of ownership of the property would pass only if that application was successful.

In terms of the agreement, if the property was not re-zoned to the reasonable satisfaction of the Respondent, the Respondent would be entitled to cancel the agreement and all the amounts that had been paid to the Appellant were to be immediately refunded to the Respondent “together with interest thereon calculated from the date of payment by the purchaser to the date of repayment by the seller to the purchaser at the rate of 15.5% per annum compounded monthly in arrears …”.

The re-zoning application was unsuccessful and in September 2002, the Respondent opted to cancel the agreement and claimed payment of the sum of approximately R4 million from the Appellant.

This sum of R4 million, which significantly exceeded the original capital payments, was constituted by the capital sum of R1.1 million and accumulated interest calculated at the rate of 15.5%, compounded monthly in arrears, from the various dates of payment to the Appellant.

In response to this claim, the Appellant raised a contention that the claim was subject to the in duplum rule and that the Respondent was therefore only entitled to the capital sum and interest not exceeding such capital sum. In other words, a total of R2.2 million.

The trial court held that in light of the cancellation of the agreement, proper restitution should be made. In this regard, the property was to be returned to the Appellant and the Appellant had to make proper restitution to the Respondent. The court held that the parties had intended that the Respondent would receive proper restitution being the full present day value of the capital that it had paid all those years earlier, a consideration which the parties obviously considered fair in light of the circumstances.

It was concluded that the in duplum rule did not apply as the Respondent did not require the protection that the rule was designed to provide. The interest stipulation was not of the type which public policy would regard as improper and was intended to fulfil a purpose other than one for which interest is usually intended.

The Appeal court agreed with this reasoning.

It referred particularly to the judgment in the case of Sanlam Life Insurance Limited v South African Breweries Limited 2000 (2) SA 647 (W), where it was stated that the in duplum rule is confined to arrear interest only.

The Supreme Court of Appeal concluded that the intention of the parties was that when they were confronted with the problem of the invalidity of the initial agreement they were still keen to contract with each other and therefore sought to find a solution. They therefore renegotiated another sale agreement and in that exercise, compromised any claims they might have had against each other under the initial agreement.

As far as the interest stipulation was concerned, the court found that it was significant that when the parties concluded the agreement they agreed that only the sum of R1.1 million would be credited to the re-negotiated purchase price which by that stage was more than double the original amount.

The parties fixed interest to run only if the sale transaction did not come to pass. It was therefore meant to serve as a compensation only in that event.

They agreed that interest would run from the date of payment. Nothing precluded the parties from stipulating that it would run for example from the date of cancellation of the agreement, bearing in mind that if the rule was applicable, interest would already have exceeded the capital payments when the agreement was concluded.

The interest agreed on was clearly not conventional interest. The parties unambiguously meant it as a means of formulating a fair and proper restitution for what had been paid and received.

No debt was owing and no interest accrued until the re-zoning application was refused and the Respondent elected to cancel the agreement. The interest in issue was therefore not arrear interest.
The Court found therefore that the in duplum rule was not applicable in this
case.

The Court also stated that whilst it may be so that the in duplum rule is founded on public policy considerations, it now forms part of our positive law and accordingly public policy is not the criterion in deciding whether or not the rule applies.

The Court accordingly dismissed the Appeal with costs.

The applicability of the rule to the insurance industry is of interest.

There are various instances where you as insurers will be faced with the question of whether an amount which you are to pay or receive is to attract interest, and if so, how that interest is to be calculated or limited. For example:

– when a claim is settled by agreement;

– when payment is due as a result of a judgment; or

– when you enter into commercial agreements where a certain amount is to be paid, such as in an acknowledgement of debt.

In the first example, where a claim is settled, the question of whether the interest on that settlement amount is subject to the in duplum rule becomes relevant in circumstances where liability is only assumed or agreed some time after the loss has occurred or the demand was made (in respect of an unliquidated debt), and where the interest could, by that stage, have exceeded the capital amount. If this interest is in arrears, the rule would apply. Settlement agreements should therefore be drafted to avoid the interest being arrear interest.

When payment of a contractual debt is due as a result of a judgment, that debt may have accrued interest; if it was a liquidated amount, from the date of default. It is common knowledge that litigation can extend over a long period of time, during which interest on the capital may well exceed the original debt. In these circumstances, the Supreme Court of Appeal (in Standard Bank of South Africa Ltd v Orneate Investments (Pty) Ltd (In Liquidation) 1998 (1) SA 811), has held that the in duplum rule would be suspended during the litigation. But once judgment has been granted, interest may run until it reaches the double of the capital amount. Accordingly the in duplum rule would not apply during the litigation process.

In the last example when one enters into commercial agreements where a certain amount is to be paid, such as in an acknowledgement of debt, and the calculation of interest on a future amount is agreed in order to calculate the present day value of a future amount, arrear interest will be subject to the in duplum rule.

And as a last resort, if the thought of considering or calculating interest does not “interest” you, you could always leave it to us, to find the appropriate solution.