A warning regarding charging interest on deferred payments – the recent SCA judgment in Vesagie NO & others v Erwee NO & another (734/2013) [2014] ZASCA 121 (19 September 2014) confirms that the sale contract will be void ab initio if the seller is not a registered credit provider in terms of the National Credit Act (34 of 2005).

The SCA judgment in Vesagie NO & others v Erwee NO & another (734/2013) [2014] ZASCA 121 (19 September 2014) (“Vesagie Case”) sounds another warning call to commercial lawyers to be aware of the implications of the National Credit Act No. 34 of 2005 (“NCA”) when drafting their clients’ contracts. In this case the simple act of levying interest on the deferred payments of the purchase price for shares had the unintended consequences of rendering the sale of shares contract null and void ab initio.

Facts of the Vesagie Case

On 24 October 2008, the parties entered into a sale of shares agreement (“agreement”) in terms of which, inter alia, the respondent (the plaintiff in the court a quo), Paul Erwee Trust, sold its shareholding in various companies to the appellant (the defendant in the court a quo), Ben Trust, for the total purchase price of R15 million. The first payment in respect of the purchase price in an amount of R5 million was payable 12 months after the conclusion of the agreement and the balance, in an amount of R10 million, was payable 18 months after the conclusion of the agreement. The purchase price clause in the agreement provided, inter alia, that interest would be levied at the prime rate minus 1% as well as that interest would be charged on late payments.

The defendant paid only a total amount of R750 000 to the plaintiff (over 10 installments) and thereafter no further payments were made. Accordingly the defendant breached the agreement. The plaintiff subsequently instituted action in the court a quo for recovery of the balance of the purchase price (R14 250 000), interest and costs.

Section 8(4)(f)

Section 8(4)(f) of the NCA provides:

(4)      An agreement, irrespective of its form but not including an agreement contemplated in subsection (2), constitutes a credit transaction if it is-

(a)   …

(f)   any other agreement, other than a credit facility, or credit guarantee, in terms of which payment of an amount owed by one person to another is deferred, and any charge, fee or interest is payable to the credit provider in respect of-

(i) the agreement; or

(ii) the amount that has been deferred.”

 

Legal question

In the Vesagie Case, the issues between the parties were reduced to a single legal question: “Whether the agreement, on a proper interpretation thereof, constitutes a credit transaction as provided for in terms of section 8(4)(f) of the NCA.”

Findings

Court a quo:

In light of the fact that the provisions in the agreement which dealt with interest were not very well drafted (they could have been more clearly worded), an element of doubt was created as to whether or not the parties had intended for interest to be levied on the deferred payments, or only in the event of a default.

In terms of section 8(4) of the NCA, the agreement would have constituted a credit transaction if interest was found to be levied on the deferred payments with the resulting consequence that the agreement would be struck by the provisions of sections 89(2)(d) read with 89(5) of the NCA which would render the agreement unlawful and void ab initio. In terms of section 89(2)(d), a credit agreement is unlawful if at the time the agreement was made, the credit provider was unregistered because the NCA requires the credit provider to be registered, in terms of section 40. It was common cause that the plaintiff was not registered as a credit provider. If the court held that the parties did not properly intend for interest to be levied on the deferred payments, the agreement would constitute a valid and binding agreement and the defendants would be obliged to pay the plaintiff the remaining balance of the purchase price (R14 250 000) in terms of the agreement.

In the light of an incorrect interpretation (so says the SCA) by the court a quo in regards the unclear wording of the interest clauses in the agreement, the court a quo found that the agreement is not struck by the provisions of section 8(4)(f) of the NCA as contended for by the defendant and therefore the agreement was fully binding between the parties. The defendant was ordered to pay the plaintiff the amount claimed, plus interest and costs.

SCA:

Having come to the conclusion that the court a quo erred in the manner in which it interpreted the agreement, the SCA held that the agreement is clearly a credit transaction as envisaged by section 8(4)(f) of the NCA and is accordingly void ab initio. The parties were required to make restitution of any performance which took place pursuant to the agreement. It reiterated that, in terms of section 89(5), the NCA required the court to order that an agreement is void as from the date it was concluded if it is rendered unlawful by the NCA

Conclusion

An interesting contention made by the court a quo was that to interpret the agreement ‘in such a manner that it would be rendered invalid due to the fact that it is struck by the provisions of section 8(4)(f) of the NCA, will lead to unbusinesslike or oppressive consequences’. The SCA retorted in its judgment that “Far from leading to unbusinesslike consequences, the payment of interest on a deferred payment is a routine provision in business agreements”.

It is therefore of paramount importance that commercial lawyers constantly keep in mind all the implications of the NCA when drafting contracts (especially business agreements). If interest, or any charge or fee for that matter, is levied on deferred payments, it is likely that the agreement is a credit transaction in terms of section 8(4)(f) of the NCA and unless the seller is registered as a credit provider in terms of section 40 of the NCA, the agreement will be rendered null and void ab initio. This area of law applies equally in respect of any other agreement where credit is extended, or payments are deferred, and interest or any charge or fee is levied on the deferred payments or the agreement, for example, in terms of a subscription agreement.

The Vesagie Case reminds us that even the small matter of levying interest can lead to dire unintended consequences for the parties to a transaction.