A matter of interpretation 
Acknowledgments of debt and the National Credit Act

By Ariana Omar

The National Credit Act 34 of 2005 (NCA) was introduced to create a fair, transparent, accessible and responsible credit market in South Africa, aimed at protecting  con­sumers (s 3 of the Act). 

The NCA places the onus on credit providers to ensure that its substantive and procedural requirements are met, failing which, the credit provider could be subject to civil and/or criminal liability.  

One aspect of the NCA that remains unsettled is its application to acknowledgments of debt (AODs). In the past the courts have decided matters on a case-by-case basis. However, recent case law suggests that the nature of the debt evidenced by the AOD is the determining factor when deciding if the AOD is governed by the NCA.  

Acknowledgments of debt

An AOD is a written contract between a debtor and a creditor in terms of which they agree that the debtor will undertake unconditionally to pay an existing debt to the creditor on the terms set out in such AOD (Adams v SA Motor Industry Employers 1981 (3) SA 1189 (A)). 

AODs provide for efficient enforcement of debts by creditors, in accordance with public policy in South Africa. 

Section 8(1) of the NCA provides that an agreement constitutes a ‘credit agreement’ if it is, inter alia, a ‘credit transaction’. A ‘credit transaction’ includes an agreement 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 the agreement, or the amount that has been deferred (s 8(4)(f)). 

If an AOD constitutes a credit agreement for purposes of the NCA, it would need to meet various additional procedural requirements. Failure by the creditor to meet these requirements may lead to a court declaring such AOD void and could possibly lead to the imposition of administrative and civil penalties on the creditor, as well as criminal liability. 

Case law

In the High Court case of Carter Trading (Pty) Ltd v Blignaut 2010 (2) SA 46 (ECP) the plaintiff and the defendant had entered into a sale of goods agreement in terms of which a sum of money was owed by the defendant to the plaintiff in respect of the goods sold. As an amount of money was owed by the defendant to the plaintiff on the due date for payment, the two parties concluded a written AOD. In the AOD the defendant acknowledged that she was indebted to the plaintiff for the unpaid amount under the sale of goods agreement concluded between them and undertook to pay the debt on the due date stipulated in the AOD. 

In terms of the AOD, the defendant undertook to pay the principal debt under the sale of goods agreement, plus the costs of negotiating and preparing the AOD, to the plaintiff on the due date. If the defendant failed to pay the debt on this date, she was liable to pay the amount under the AOD plus collection commission and the plaintiff’s legal fees in enforcing the AOD. 

The defendant failed to pay the debt on the date and, accordingly, the plaintiff applied to court to sue on the AOD. The defendant argued that the AOD constituted a credit agreement in terms of 
s 8(4)(f) of the NCA and that the plaintiff had failed to comply with the procedural requirements of the Act. 

The court applied the definition of a ‘credit transaction’ in terms of s 8(4)(f) to the AOD and held that the AOD provided for deferment of payment to the due date, plus ‘at least a fee or charge’ (the costs of preparing the AOD) in terms of the AOD (the Carter Trading case at para 17). Accordingly, the AOD fell within the definition of a credit transaction and was subject to the NCA.  

In the High Court case of Rodel Financial Service (Pty) Ltd v Naidoo and Another [2011] JOL 26799 (KZP) the court had to decide whether an AOD in relation to a written discounting agreement constituted a credit agreement in terms of the NCA. The written discounting agreement between the applicant and the respondents provided that the respondents were obliged to pay certain amounts to the applicant on the due dates. The parties had concluded an AOD in terms of which the respondents acknowledged that they were indebted to the applicant for the amounts owing under the discounting agreement and for discounting fees in respect of the amount owed. When the applicant tried to enforce the AOD in court, the respondents argued that the AOD was subject to the NCA and the applicant had failed to comply with the procedural requirements of the Act. 

In the Rodel case the court relied on case law to conclude that a discounting agreement did not constitute a credit agreement and, accordingly, a discounting fee was not interest for purposes of the NCA. Applying the definition of a credit transaction to the AOD, the court concluded that the AOD did not meet the definition as there was no interest charged. The court supported its conclusion by stating that the AOD could not constitute a credit transaction as it evidenced a discounting agreement, which was not a credit agreement (the Rodel case at para 11.6).

In both the Carter and Rodel cases the courts adopted a definitional approach to the interpretation of AODs for purposes of the NCA. If an AOD met the requirements of a credit transaction in terms of s 8(4)(f), it would be subject to the NCA. In the Rodel case, however, the court looked not only to the definition of a credit transaction, but also to the underlying debt evidenced by the AOD. In the 2012 case of Grainco (Pty) Ltd v Broodryk NO en Andere 2012 (4) SA 517 (FB), however, there was a significant shift in the approach to AODs. 

In the Grainco case the parties agreed to settle a claim for damages and, accordingly, agreed to conclude an AOD in terms of which the defendants acknowledged their obligation to pay agreed damages (plus interest) to the plaintiff on a future date stipulated in the AOD. When the plaintiff approached the court to enforce the AOD, the defendants argued, inter alia, that the AOD constituted a credit agreement in terms of the NCA and that the plaintiff had not complied with the procedural requirements of the Act. The plaintiff, in response, argued that it could never have been the intention of the legislature for an agreement with a claim in damages as its causa to be regulated by the provisions of the NCA. 

The court agreed with the plaintiff and stated that the AOD did not fall within the business of money-lending and credit in the ordinary sense of the word. The court stated that the preamble of the NCA, which emphasises the importance of regulating consumer credit, made it clear that an AOD providing for an agreed deferral of damages could not have been contemplated by the NCA, as an interpretation that allowed for the inclusion of such an AOD would lead to an ‘absurdity so glaring that it could never have been contemplated by the legislature’ (at paras 7.2 – 7.4).

In the Grainco case the court looked first to the debt evidenced by the AOD to determine whether it was a credit agreement for purposes of the NCA. Only if such underlying debt constituted a credit agreement would the court have proceeded to apply the definition of a credit agreement to the AOD. 

Discussion

While the approaches by the courts in the Carter and Rodel cases were definitionally dependent, the court adopted a more purposive approach to statutory interpretation in the Grainco case, emphasising the purpose of the NCA. 

It might be argued that the court in this matter ought to have justified how interpreting the AOD as a credit transaction could lead to absurdity, injustice or inequity. In my view, a more rigorous jurisprudential analysis would have strengthened the reasoning in this case. 

One way the court could have strengthened its reasoning would have been to rely on reasoning by analogy. In particular, the court could have looked to the provisions in the NCA dealing with credit guarantees – agreements that are, arguably, similar in nature and purpose to AODs. 

A credit guarantee in terms of s 8(5) of the NCA is a type of credit agreement whereby a person guarantees the obligations of another consumer arising under a credit facility or credit transaction. In terms of s 4(2)(c) of the NCA, a credit guarantee will be subject to the provisions of the NCA only if the credit facility or credit transaction to which such credit guarantee relates is governed by the NCA. As the existence of the credit guarantee is dependent on the existence of the debt under the credit facility or credit transaction, it follows that a credit guarantee should not be subject to the provisions of the NCA if the debt to which it relates is not subject to the Act.  

Broadly speaking, both credit guarantees and AODs provide the creditor with a form of security in relation to the debt due. In the case of a credit guarantee, the security is the ability by the creditor to hold the provider of the credit guarantee liable for the payment of the debt; with an AOD, the creditor may sue in court for payment of an existing debt, evidenced by an unconditional AOD, without resort to extrinsic evidence as it is a liquid document. I suggest that, had the court in the Grainco case adopted reasoning by analogy and likened the treatment of credit guarantees to AODs, its purposive argument would have been grounded in the text of the NCA. 

Setting aside the difficulties in the reasoning in the Grainco case, the court in this matter appears to have adopted a two-step approach to the determination of whether an AOD is subject to the provisions of the NCA, namely – 
• whether the AOD evidences the existence of a debt that is a credit agreement for purposes of the NCA and, if it does, 
• whether the AOD meets the definition of a credit transaction, in which case it will constitute a credit agreement for purposes of the NCA. 

Moving away from the case law, a more fundamental problem remains with regard to the application of the NCA to AODs in general. One of the primary aims of the Act is to prevent the provision of ‘reckless credit’ by credit providers. A credit agreement is reckless if, inter alia, at the time the agreement was concluded, despite the preponderance of information available to the credit provider indicating that the conclusion of the credit agreement would make the consumer over-indebted, the credit provider proceeded to conclude the agreement with the consumer. 

In my view, almost invariably, parties conclude AODs because of the debtor’s high likelihood of not paying a debt on the due date. Accordingly, at the time when the parties conclude an AOD, the debtor is likely to be over-indebted. If the court considers an AOD to be a credit agreement, it is possible for such AOD in these circumstances to constitute reckless credit. This could lead to a court always suspending the force and effect of AODs on the ground of reckless credit. 

Conclusion

The shift in approach by the courts, as seen in the Grainco case, is a welcome change in the law. It is, arguably, in accordance with South African public policy as it serves to provide clarity and certainty in the law of contract, which is important for commercial transactions. 

However, it is contended that the success of this approach, as opposed to the definitionally dependent one in the older cases of Carter and Rodel, depends on the ability of the courts to base their purposive reasoning in the provisions of the NCA. A possible solution might be reasoning by analogy. 

A broader problem that remains is the application of the NCA to AODs in circumstances where the AOD constitutes reckless credit. This problem casts doubt on whether the legislature intended AODs to be subject to the provisions of the NCA in the first place. 

Ariana Omar BBusSci LLB (UCT) is an attorney at ENS in Cape Town.