In the May/June edition of CLR Paul Esselaar wrote about a decision by the Western Cape High Court in which s 89(5)(c) of the National Credit Act was declared unconstitutional for being inconsistent with the right to property in s 25(1). In other words it was found that the section infringes the lender’s right not to be arbitrarily deprived of property; the property in this case being the right to reclaim the loan amount. This decision was confirmed by the Constitutional Court on 10 December 2012 (National Credit Regulator v Opperman and Others (CCT 34/12)  ZACC 29 (10 December 2012)). See ‘Section 89(5)(c): Breaking the NCA’s big stick’ by Paul Esselaar in the May/June edition of CLR.
It is not necessary to rehash the facts here. Suffice it to say that it involves a loan between two individuals and that the consumer reneged on the loan.
Section 89(5)(c) prescribes that a court must give a particular order in cases where a credit agreement was entered into by an unregistered credit provider; the court has no discretion in the matter. Firstly, the credit agreement must be declared void. Secondly, the credit provider must refund the consumer any money paid. Lastly (and the section says ‘and’), the court must order that ‘all the purported rights of the credit provider under that credit agreement to recover any money paid or delivered to, or on behalf of, the consumer in terms of that agreement are either (i) cancelled, unless the court concludes that doing so in the circumstances would unjustly enrich the consumer; or (ii) forfeit to the State, if the court concludes that cancelling those rights in the circumstances would unjustly enrich the consumer.’
There are many interpretive difficulties arising from the section which are discussed in detail in the judgment (see paras 25 to 56). In the end the court held the following (para 55):
[t]he most plausible meaning of s 89(5)(c) is the one the High Court gave it. The interpretation reflects what common sense tells one the aim of the provision is, in view of the NCA as a whole: consumers have to be protected against uncontrolled credit providers and therefore credit providers are required to register; credit providers who do not register in contravention of the NCA face severe consequences; courts must declare the agreement void and order either that all rights perceived to follow from the agreement (including restitution) are cancelled or forfeited to the state.
According to the credit provider the effect of this provision is to prevent the lender from recovering the money lent thereby limiting the common-law right to restitution. See paras 14 to 18 for a recap of the relevant private law principles, but in short, the right to restitution may already be limited under the common law when a party acted wrongly (the par delictum rule).
The question is whether depriving the lender of his right to claim restitution, in this case to claim the money lent, constitutes an ‘arbitrary deprivation of property’ in terms of s 25 of the Constitution. The court held that the right to claim restitution of the money lent is indeed a form of property (see paras 57 to 64). A deprivation of property is arbitrary ‘when the law does not provide sufficient reason for the particular regulatory deprivation in question, or when it is procedurally unfair’ (para 68). The fact that the court is denied any discretion ‘to decide on a just and equitable order’ due to the peremptory formulation (ie the court must…) results in an arbitrary deprivation of property (para 69). As a result s 89(5)(c) results in the arbitrary deprivation of property in breach of the right set out in s 25(1) of the Constitution (para 72).
Of course, the enquiry does not stop there. The section could have been saved had the court held that the limitation was reasonable and justifiable in terms of s 36(1) of the Constitution. When considering this, the court has to, amongst other things, take into account whether the section uses disproportionate means to achieve its purpose and whether less restrictive means to achieve its purpose are available. The purpose of s 89(5)(c) is obvious. It is a punitive measure which must serve as a deterrent and it must ‘protect the public against unscrupulous lenders’ (see para 70). The court held that s 89(5)(c) is disproportional because it fails ‘to allow a court a discretion to distinguish between credit providers who intentionally exploit consumers and those who fail to register because of ignorance and lend money to a friend on an ad hoc basis’ (para 76). The court pointed out that the common law allows a court a discretion in this regard.
Consequently, s 89(5)(c) was declared unconstitutional and therefore invalid with immediate effect. The court declined the opportunity to read a discretion into the provision as it held that ‘[i]t is preferable for the legislature to address the problematic content of the provision comprehensively, because it is part of an important piece of legislation with laudable objectives, rather than for a court to venture into patch-work legislating.’ (para 84)
So what is the position now? Credit agreements entered into by an unregistered credit provider are still void in terms of s 89(5)(a). In terms of s 89(5)(b), the credit provider must still refund any money paid by the consumer under that agreement with interest. Given that s 89(5)(c) is invalid, the credit provider would be able to claim the amount lent back from the consumer in cases where the requirements for a claim based on unjustified enrichment are met. The success of such a claim would depend, in part, on ‘the circumstances of each case and especially the degree of blameworthiness of the unregistered credit provider’ (see para 85 and the discussion of the common law principles in paras 14 to 18). See Van der Merwe et al Contract General Principles 4 ed (Juta 2012) at page 179 for a comprehensive discussion of the principles which are applied to determine whether a party is entitled to restitution.
This means that unscrupulous credit providers are not necessarily off the hook. A court may still find that the unregistered credit provider is not entitled to recover its performance based on common law principles. This case dealt with a loan between two (presumably now ‘ex’) friends and the lender in this case was not aware of the requirement to register as he was not in the business of lending money (see para 4 of the judgment). If one applies the common law, it is likely that Mr Opperman would be able to claim the loan amount back. The person who is completely bona fide in not knowing that his actions may lead to an illegal contract is not considered blameworthy and is therefore entitled to restitution (see Bhyat’s Departmental Stores (Pty) Ltd v Dorklerk Investments (Pty) Ltd 1975 (1) SA 267 (T) and Wylock v Milford Investments (Pty) Ltd 1962 (4) SA 298 (C) 319). It is likely that a court will be less forgiving in cases where the lender is a juristic person who engages in the business of lending money.
Whatever the case may be, s 89(5)(c) is no longer valid and any argument that a credit provider is not entitled to restitution will have to be based on the common law.
As an aside: Cameron J gave a dissenting judgment. He faults the majority judgment for ignoring the phrase ‘rights of the credit provider under that credit agreement’ and found that s 89(5)(c) cannot refer to the right to claim restitution as that right does not arise from the agreement. In fact, no rights can arise from the agreement in any event, as it is void and consequently there are no rights that can be forfeited to the state. Thus s 89(5)(c) has no ‘effective punitive force.’ He declined to declare the provision unconstitutional as it is preferable to ‘acknowledge the drafting error, and to leave Parliament to correct it.’ The effect of this decision is much the same as declaring the sub-section unconstitutional.
(This article was published in the January 2013 edition of the Consumer Law Review which is published by Juta & Co. You can subscribe by creating a profile at www.jutalaw.co.za. Back issues are available under ‘Newsletters’.)