Interpretation of “Collection Costs” and Application of the “in duplum rule” in terms of the National Credit Act

The Western Cape High Court recently handed down an interesting judgement in the case of University of Stellenbosch Law Clinic and Others v National Credit Regulator and Others, where the applicants sought a declaratory order to determine the interpretation of the term “collection costs” in section 1 and the application of the provisions in section 101(1)(g) and section 103(5) of the National Credit Act, 34 of 2005 (“the NCA”), respectively.
Section 1 of the NCA defines “collection costs” as an amount that may be charged by a credit provider in respect of enforcement of a consumer’s monetary obligations under a credit agreement, but this amount does not include a default administrative charge.
Section 101(1) of the NCA provides that a credit agreement must not require payment by the consumer of any money or other consideration, except:

  • The principal debt, being the amount deferred in terms of the agreement, plus the value of any item contemplated in section 102;
  • An initiation fee, which may not exceed the prescribed amount relative to the principal debt; and must not be applied unless the application results in the establishment of a credit agreement with that consumer;
  • A service fee which may be payable monthly, annually or as per transaction basis and must not exceed the prescribed amount relative to the principle debt;
  • Interest expressed in percentage terms as an annual rate as an annual rate calculated in the prescribed manner and must not exceed the maximum prescribed rate determined in accordance with section 105;
  • Costs of any credit insurance;
  • Default administration charges, may not exceed the prescribed maximum for the category of credit agreement concerned; and may be imposed only if the consumer has defaulted on a payment obligation under the credit agreement, and only to the extent permitted by Part C of Chapter 6; and
  • Collection costs as permitted by Part C of Chapter 6.

Further, section 103(5) provides that, despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in section 101 (1)(b) to (g) that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs.
Submissions by the Applicants
The applicants sought three declaratory orders. In summary form, firstly an order declaring that the collections costs, as defined in the NCA, must be read to include legal fees incurred to enforce the monetary obligation under the credit agreement, regardless of whether such fees are charged before, during or after litigation. Secondly, that the limitation in terms of section 103(5) that all amounts (bar the capital) cannot exceed the balance of the debt, must apply at all times regardless of whether a judgment has been granted. Thirdly, that legal fees may not be claimed until they are agreed upon or taxed.
The applicants contented that this interpretation of the NCA will give true effect to the provisions of the NCA whereas at present the exclusion of legal fees is undermining the protection which the NCA was intended to afford consumers. The contention being that credit providers, while having their recovery of costs curtailed in terms of the NCA, are nevertheless enjoying the protection of recovering legal fees resulting in a failure to prevent the exploitation of the consumer.
The applicants submitted that the language used to define collection costs is clear and unambiguous and accordingly, the interpretation which the applicant sought is consistent with the words used in the NCA. The applicants submit that collection costs include legal costs as part of enforcing the consumer’s monetary obligation. The applicants and respondents had differing stances in regard to the words “enforce”. The applicant stated that it applies to all possible procedures up until payment. The respondents who opposed the relief provided that the word “enforce” is limited up to the commencement of litigation. They averred that once litigation commences, the credit agreement is cancelled and there is no longer the enforcement of the agreement but rather proceedings (an action or application) for a judgment against the consumer in favour of the credit provider and then thereafter the recovery of a judgement debt.
The applicants raised the following reasons why they say the NCA must be read to include all legal costs up to final recovery after judgment:

  1. The first reason why the applicants submitted that collection costs include legal costs is because the definition clause is particularly broad and refers to any charge levied in terms of the agreement where the creditor provider is attempting to enforce the consumer’s monetary obligation except for default administration charges.
  2. Secondly, the applicants provided that the provision of Part C of Chapter 6 governs enforcement by means of legal proceedings. The section refers to the definition of collection costs to the process of debt enforcement in a court and therefore the NCA includes legal fees in its definition of collection costs. The applicants averred therefore that collection costs are synonymous with legal costs or that legal costs fall within the definition of costs incurred in the enforcing of the monetary obligations under the credit agreement.
  3. Thirdly, the applicants contended that the term enforcement of monetary obligations refers to all measures taken by the credit provider to enforce payment in part or whole of a consumer’s obligations under the credit agreement. The contention being that when a credit provider invokes an acceleration clause in the agreement and proceeds to court to recover the entire debt as a result of a default, the agreement is not cancelled but what is sought is specific performance of the accelerated indebtedness.

Submissions by the respondents
The respondents contended that the view of the applicants meant that orders can be made that are ineffective and this undermines the administration of justice. In this regard, the court was of view that the legislature has always imposed significant limitations on courts when it comes to an order as to costs.
The respondents submitted that the interpretation sought by the applicants would result in consumers ceasing to make any payments once the cap is reached in fear of triggering further liability. The applicants responded that this is applying principles applicable to the common law in duplum rule which are not applicable in terms of the NCA.
The respondents provided that the common-law definition of collection costs supports their contentions. They further contended that one of the rules of interpretation is that the legislature does not intend to amend the common law. The applicants’ response was that the legislature clearly did intend, in this instance, to amend the common law and include legal fees in collection costs for the reasons they have submitted set out above.
The respondents raised the further point that the legislature would have been aware of the issue of legal costs and expressly excluded them from the definition. As stated, the applicants say that the definition is intentionally broad as all possible costs could not necessarily be anticipated. The opposing respondents made the point that costs could include various costs and amongst others, give the example of the costs of tracing a debtor.
The respondents averred further that disallowing a party the opportunity to recover even taxed costs would affect a litigant’s constitutional right of access to court. They further submitted that there will be unanticipated consequences as the same interpretation would have to apply to all credit agreements including those of significant sums not falling within the realm of micro-lending.
Finally, and the most significant ground proffered by the respondents, was that when a judgement is granted after a summons or application is issued and served it constitutes a new cause of action against the defendant or respondent and therefore all further costs incurred are not collection charges. A distinction is drawn between collection costs recoverable in terms of the NCA and costs arising from the judicial process. It is then argued that legal fees are not part of collections costs for this reason. The suggestion is made that the judgment is a novation. The applicants pointed out that what the opposing respondents are relaying on would be a voluntary novation. The applicants further submitted that a voluntary novation can never be used as a way to escape the consequences of section 103(5) of the NCA.
The Court’s Ruling
After much consideration of the above-mentioned provisions of the NCA and submissions of both the applicants and respondents, the applicants were wholly successful in their application. By ruling in favour of the applicants, the court provided much needed clarity in relation to the aspects of costs in the following terms:

  • Firstly, it was declared that collection costs, as defined in the NCA, must be read to include legal fees incurred to enforce the monetary obligation under the credit agreement, regardless of whether such fees are charged before, during or after litigation.
  • Secondly, the limitation in terms of the NCA that all amounts – for example, interest, fees and collection costs, except the capital amount – cannot exceed the balance of the debt must apply at all times regardless of whether a judgment had been granted.
  • Thirdly, legal fees may not be claimed until these had been agreed upon or taxed.

If equality requires all persons an equal right to access to credit but consumers are not equal in their ability to pay, then it must equally mean that the cost of credit must be adapted accordingly. In reality the converse has happened and the cost of credit for small loans is disproportionately higher than for large loans.” – Judge Hack.
Author: Mihlali Mzileni