ZB BANK LTD V ERIC ROSEN (PVT) LTD & ORS 2015 (1) ZLR 314 (H)

ZB BANK LTD v ERIC ROSEN (PVT) LTD & ORS 2015 (1) ZLR 314 (H)

Flynote

Interest — rate of — when interest charged can be said to be usurious — when interest rate charged in contract can be said to be unfair in terms of Consumer Contracts Act or a penalty out of proportion to prejudice suffered by creditor — need for evidence to be led c

Headnote

The plaintiff was a registered commercial bank. The first defendant, undoubtedly the alter ego of the second and third defendants — themselves husband and wife — obtained from the plaintiff a revolving credit facility to boost working capital. Repayments would be made in instalments over twelve months. Interest would be charged at a flat rate of 30 per cent per annum. In the event of a default, the penalty rate of interest was pegged at 50 per cent per annum. It would change from time to time. The second and third defendants bound themselves as sureties and co-principal debtors with the first defendant for the due repayment of the loan. The plaintiff duly disbursed the loan and the first defendant duly utilised the proceeds. However, it failed to repay as per the agreement and eventually the plaintiff issued summons.

The defendants' defence was that the plaintiff's penalty rate of interest at 50 per cent per annum was usurious, contrary to public policy and therefore unlawful. They referred to a number of statutes. The first was the Prescribed Rate of Interest Act [Chapter 8:10], which empowersthe Minister of Justice, with the approval of the Minister of Finance, to prescribe or fix the rate of interest on certain debts. The rate at the time of this case was 5 per cent. The next statute was the Moneylending and Rates of Interest Act [Chapter 14:14]. By s 8, no lender can stipulate, demand or receive from the borrower, interest (on money lent and advanced) at a rate greater than the prescribed rate. The third was the Consumer Contracts Act [Chapter 8:03]. By its preamble, the purpose of the Act is to provide relief to parties to consumer contracts which are unfair or contain unfair provisions. In terms of s 2 a "consumer contract" is defined to mean a contract for the sale or supply of goods or services or both. The defendants argued that a loan agreement was a contract for the supply of services, namely banking services. The court may grant various forms of relief if satisfied that a consumer contract is "unfair". The final statute was the Contractual Penalties Act [Chapter 8:04]. The preamble to this Act says, inter alia, it is an Act to provide for the enforcement of penalty clauses in contracts. "penalty" is defined to include any money which a person is liable to pay, or any money which a person is liable to forfeit under a penalty stipulation. "penalty stipulation" is defined to include a contractual provision under which a person is liable to pay any money as a result, or in respect of, an act or omission in conflict with a contractual obligation.

The defendants' argument was that the penalty rate of interest was excessive, burdensome, oppressive and out of proportion to any prejudice that it may have suffered by reason of the defendants' failure to pay the rest of the debt on time; that an interest rate of 50 per cent was usurious and contrary to public policy, particularly as the inflation rate was no more than 5 per cent. The rate charged by the plaintiff was far higher than that charged by other commercial banks. The court should put a cap on the maximum rates of interest.

The plaintiff argued that where parties have entered into a contract freely and voluntarily its validity ought to be preserved. It was submitted that, other than the Contractual Penalties Act, none of the other pieces of legislation referred to by the defendants was applicable. With regards the Consumer Contracts Act in particular, that applied only to contracts for the sale or supply of goods or services. Banks lend money. To offer loans is not to sell or supply goods or services. The onus had been on the defendants to provide empirical evidence to show that a penalty rate of 50 per cent per annum was disproportionate to the cost incurred by the plaintiff in procuring the money that it had lent to the defendants. Without that evidence, the court could not possibly grant relief.

Held, that the Prescribed Rate of Interest Act was not applicable, as the prescribed rate does not apply to interest-bearing debts governed by an agreement. The Moneylending and Rates of Interest Act did not apply to money-lending by a bank. The definition of "consumer contract" in the Consumer Contracts Act was wide enough to encompass a contract of loan, so that Act had to be considered as well.

Held, further, that it was necessary for the defendants to show, whether under the Consumer Contracts Act or the Contractual Penalties Act, that the penalty rate of 50 per cent was excessive and oppressive.

Held, further, that since the beginning of time the question of interest has vexed lenders, borrowers, rulers and virtually every society. The basic question has been to find the right balance between the competing interests of lenders and borrowers. Since time immemorial, interest ceased to be a private concern of the individual parties to the transaction. It became very much a public policy issue. In the field of commerce, interest is to the lender the profit on the loan. To the borrower, it is the cost on the loan. It is not the purpose of interest to preserve the real value of the sum due or to provide protection against inflation. A number of factors are taken into account in arriving at the rate of interest in any given situation. These include the cost of the funds to the lender; the risk associated with the borrower, taking into account his creditworthiness, or lack of it; the lenders' overheads and the margin of profit desired; the country risk, and so on.

Held, further, that in Roman and Roman-Dutch times the question of interest, as in Biblical times, continued to be a cause for concern amongst the authorities. The charging of interest on monies lent was permissible, but with some restrictions, such as prohibiting the levying of interest on interest and the prohibition against interest in duplum. Although there is a general acceptance that in some situations there may be a need to intervene and protect the borrower, eminent judges and jurist have sometimes differed sharply and contradicted one another in the process.

Held, further, that at common law there is no fixed customary rate that can be described as a standard rate beyond which it can be said that a transaction becomes usurious. Rates of interest vary with the nature of the financial transaction, the social and economic standing of the parties, the risks and so on. The mere fact that the amount of interest seems high is not sufficient to make the transaction usurious. What, then, is there in a transaction which makes it usurious? If it is not the mere amount of interest, what other circumstances are there? A party claiming rescission of contract on the basis of usury must show extortion or oppression or something akin to fraud. That approach is consistent with the balance that has to be struck between, on the one hand, the liberty to regulate one's life by freely engaged contracts and, on the other, the striking down of the unacceptable excesses of freedom of contract. It also accords with the notion that judges should approach with restraint the task of intruding upon the domain of the private powers of citizens.

Held, further, that the situation was somewhat made more complex by the provisions of the Consumer Contracts Act and the Contractual Penalties Act. As a matter of public policy our common law attaches importance to the need to uphold the sanctity of contracts made by equal contracting parties. The freedom to contract encompasses the freedom to make both a good bargain and a bad one. The Acts urge the courts, despite the freedom of contract exercised by the individuals, nonetheless to intervene and interfere if in their discretion the contract, or some terms in it, are unfair, or if the penalty is out of proportion to the prejudice suffered by the creditor. For a court to make a decision on the matter required evidence on matters such as the cost borne by the plaintiff in procuring the money for on-lending to the defendants; the risk associated with the creditworthiness of the defendants; the use to which the loan was put by the defendants; the rates of interest charged by comparative institutions in similar circumstances; the unreasonableness of the margin of profit desired by the plaintiff on the loan; the inequalities, if any, in the economic strengths of the parties, and so on.

Held, further, that the plaintiff's rate needed proper interrogation and that the matter should be referred to trial.