The sole issue that the SCA was called upon to determine in Ethekwini Municipality v Verulam Medicentre SCA 457/04 was whether the in duplum rule** applies to the respondent’s (Verulam Medicentre (Pty) Ltd) claim against the appellant (Ethekwini Municipality).

In December 1993 the parties concluded a written agreement of sale in terms of which the appellant town council sold the respondent an immovable property for the sum of R1 592 000. Transfer of the property would be effected upon payment of the capital and interest. Approximately October 1996 it was discovered that the appellant had failed to comply with certain provisions of the Local Authorities Ordinance Act 25 of 1974 when the agreement was concluded, thus rendering the agreement invalid. The appellant consequently became liable to repay the amount of R1 141 153, 48 to the respondent.

The parties entered into a second agreement (‘the agreement’) on 1 April 1999. The terms of the agreement were, inter alia, that the appellant would retain the amount that the respondent had paid under the initial agreement as part payment of the renegotiated purchase price of R3 500 000. The balance of the purchase price would then be paid in cash against registration of transfer. The respondent was required to apply for a rezoning of the property and transfer of ownership of the property would pass only if that application was successful.

In the event that the rezoning application was refused, the agreement provided that the Purchaser shall be entitled, at the entire election of the Purchaser, by notice in writing to the Seller to cancel this agreement, or elect to proceed with this sale.

The agreement also stated that if the Purchaser cancels this agreement due to the refusal of the rezoning application, all amounts of money that have been retained by or paid to the Seller in terms of the FIRST AGREEMENT and or this agreement shall be immediately refunded by the Seller to the Purchaser 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 respondent lodged the rezoning application in July 2001 and was subsequently notified in August 2002 that the rezoning application had been unsuccessful. In September 2002, he opted to cancel the agreement and claimed payment of a sum of R4 049 369,96 from the appellant. This sum of R4 049 369,96, which significantly exceeded the original capital payments, was constituted by the capital sum of R1 141 153, 48 and accumulated interest calculated at the rate of 15,5 per cent, compounded monthly in arrears, from the various dates of payment to the appellant.

In response to this claim the appellant raised as a legal contention in terms of Uniform rule 6(5)(d)(iii), 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.

The parties, although they did not contend that the agreement was ambiguous in any respect, differed in their interpretation of the nature of the agreement and the true purpose of the interest stipulation.
It is well established that the approach to be adopted in ascertaining the common intention of parties to a contract is first to determine the ordinary grammatical meaning of the words employed in the agreement, having regard to the context in which the relevant word or phrase is used with its interrelation to the contract as a whole, including the nature and purpose of the contract. What the nature of the agreement and the objective of the interest clause are in the instant case must, accordingly, be ascertained by analysing the relevant words in the context of the contract as a whole and the common intention of the parties.

Clause 18 of the agreement reads: ‘Provided that
18.1 the property is duly transferred into the name of the Purchaser in accordance with the provisions of the agreement, or
18.2 failing such transfer, the sums referred to in 2.3 of this agreement together with interest thereon calculated from the date of payment to the Seller to the date of repayment to the Purchaser at the rate of 15,5% per annum, are duly repaid by the Seller to the Purchaser, The Purchaser hereby waives any claim which it may have against the Seller under the FIRST AGREEMENT for damages and any rights or claims which either party may have against the other arising from the FIRST AGREEMENT shall be deemed to be extinguished.’

In the SCA’s view “the words in the clause, read in their ordinary sense, do no more than make provision for the parties’ rights arising out of the initial agreement in the event that the intended transaction did not come to fruition. It is plain from the terms of the agreement that the parties, confronted with the problem of the invalidity of the initial agreement and still keen to contract with each other, 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. There is only one agreement and the waiver clause cannot be understood to indicate the existence of two contracts.”

Regarding the true nature of the interest stipulation in clause 12.7, the court went on to say that “it is significant that when the parties concluded the agreement they agreed that only the sum of R1 141 153,48 would be credited to the renegotiated purchase price which, by that stage, was more than double the original amount. The appellant argued that if the parties intended the interest clause to achieve ‘full restitution’ as the court a quo found, then both the capital amount and interest would have been credited to the new purchase price. I have difficulty understanding this submission. This, to my mind, is precisely one of the facts which show that the parties did not intend the interest clause to be interest in the ordinary sense. They fixed interest to run only if the sale transaction did not come to pass. It was therefore meant to serve as compensation only in that event. Agreeing that interest would run from the date of payment was, undoubtedly, a deliberate choice. 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. This clearly is 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.”

The court also referred to other cases that makes it clear that the in duplum rule applies only to arrear interest. In the present matter no debt was owing and no interest accrued until the rezoning application was refused and the respondent elected to cancel the agreement. The interest in issue is, therefore, not arrear interest. It was not the appellant’s case, in any event that it is arrear interest. The in duplum rule is thus not applicable in the instant case.

** The effect of the in duplum rule is that interest due in respect of a debt ceases to run when it reaches the amount of the unpaid capital sum. The rule is based on public policy and is meant to protect debtors from exploitation by creditors by forcing them to pay unregulated charges, and enforce sound fiscal discipline on creditors. It cannot be waived in advance or during the period of the loan. It 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.

(Jaco Bekker)