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Common Law right to set-off not applicable to credit agreements subject to the National Credit Act

On the 27th of June 2019 the High Court sitting in Johannesburg handed down an interesting judgement on the correct interpretation of the National Credit Act 34 of 2005 (Hereon referred to as the NCA).

The core question to be decided by the Court was whether Sections 90(n) and 124 of the NCA render the Common Law right of set-off non applicable to credit agreements subject to the NCA.

The case was brought by the National Credit Regulator (hereon referred to as the Regulator) as the credit industry regulator which acts on behalf of all credit consumers in terms of the NCA. The matter was brought against Standard Bank and the South African Human Rights Commission intervened in the matter as amicus curiae – National Credit Regulator v Standard Bank (South African Human Rights Commission intervening as amicus curiae).

The Landlord can set the terms of the lease agreement without any measurement in law of their reasonableness and fairness to the Tenant.

The respondent in this matter, Standard Bank, argued that where the set-off is not addressed in the credit agreement, the common law principles of set-off continue to apply to many of the credit agreements concluded between the bank and its client.

Objects and Purpose of the NCA.

Before proceeding further, it is important to establish the purpose and objects of the NCA.  Section 3 of the NCA states that the purpose of this Act is to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers. The NCA was designed to achieve several objectives most of which are to benefit and protect the consumer.

What do Sections 90(2)(n) & 124 say?

Section 90(2)(n) of the NCA prohibits an automatic set-off without compliance with s124 of the NCA. That section sets out the conditions for set-off in terms of a credit agreement incorporating a clause authorizing the appropriation of funds from a debtor’s account in set-off of a consumer’s obligation in terms of a credit agreement. Section 124 says that a creditor must secure the customer’s authorization, specifying:

Prior to the Amendment Act, it was not a formality for a lease agreement to be reduced to writing however the Amendment Act requires a lease agreement to be reduced to writing, failing which no valid lease agreement exists (Section 8(1)(a)). This is mainly to overcome the number of disputes based on oral agreements which are difficult to prove.

Another major introduction to the Amendment Act is section 4B which requires the landlord to invest the deposit amount into an interest-bearing account. The deposit plus accrued interest will be refunded to the tenant upon termination of the lease, after having considered any damages caused by the tenant to the property. The tenant is entitled to request for information on the deposit and interest accruing during the course of the lease.

-the account from which the funds can be withdrawn;

-the debt which is to be paid;

-the amount which may be transferred; and

-the date of the transfer.

Common Law Set-Off

Common Law set-off allows a creditor, like Standard Bank in this matter, who is owed money by its customer, to immediately debit that customer’s account when funds are credited to it. The Bank can do so without notice to the customer, without the customer’s authorization, and in any amount that the bank considers to be validly due to it. In short and simple terms, under the Common Law, set-off gives a creditor full control of the set-off process without any input or authorization from the customer.

Submissions of the Parties

The Regulator sought an order declaring that, in light of Sections 90(2)(n) and 124 of the NCA, the Common Law right to set-off is not applicable in respect of credit agreements which are subject to the NCA. For the Regulator, the context of the provisions and the underlying of the NCA are important. The Regulator does not dispute the importance, for interpretational purposes, of the of the ordinary meaning of the words used in a legislative provision. The Regulator is however, of the view that the general principles of interpretation require more than a consideration of the ordinary grammatical meaning of words.

The Regulator submitted that what Section 124 does is to depart significantly from the Common Law by permitting set-off, but subject to stringent safeguards that are designed to protect the consumer. None of the above-mentioned safeguards exist under Common Law principles, instead it is left to the consumer to identify any set-off that may be unlawful and to pursue a remedy, such as prescription, at the consumer’s own cost.

Further, the Regulator submitted that if the Banks interpretation is accepted it would completely undermine the importance of the NCA’s purpose. They further provided that this would effectively render Section 124 nothing but a meaningless dead letter. The Regulator provided that the reason for this is because the Banks’s interpretation provided a credit does not contain an express provision permitting set-off, falls outside the regulatory ambit of Section 90(2)(n) and Section 124, rendering the Common Law application of set-off acceptable. They are of the view that it would be absurd if credit providers could simply avoid the consumer safeguard provided in Section 124 by not saying anything in their credit agreements about set-off.

The South African Human Rights Commission (hereinafter referred to as the SAHRC), similarly submitted that the Banks interpretation of the NCA undermined the debt review scheme established under the NCA. Further, the SAHRC submitted that the Banks interpretation was inconsistent with several constitutional rights, in particular the socio-economic rights of consumers as well as their fundamental right to dignity. The SAHRC was of the view that the Regulators interpretation is to be preferred.

In its approach to the interpretation of the NCA, the Respondent (the Bank) focused on the language of the provisions, in particular that of Section 90(2)(n). The Bank accepted that that interpretation is holistic in nature and involves taking into account the context and purpose of the legislation in question. The Bank, however placed emphasis on the fact that courts cannot lose sight of the actual words used by the lawmakers. In particular, the courts cannot, under the guise of interpreting words, impose a view of what the policy or object of a statute is or should be.

The Bank argued that with their interpretation, the Regulator and SAHRC ignored the actual and plain wording of the provisions, leapfrogging over the words themselves to get a meaning that in their view represented a better policy outcome for consumers. According to the Bank. Section 90(2)(n) cannot be interpreted to apply to a Common Law set-off because common-law set-off is not dependent on any contractual nexus between the parties, as it applies ex lege. They accordingly provided that, is only if the Bank wishes to depart from the Common Law and apply a different form of set-off, that it must make provision for this agreement itself.

The bank further argued that had it been the intention of the lawmaker to oust the application of Common Law set-off to credit agreements under the NCA, this would have been made clear. They also argued that their interpretation of the NCA is compatible with the objects and purposes of the NCA.

Decision of the Court

The court was not prepared to accept the interpretation of Sections 90(2)(n) and 124 as contended for by the Bank. The court was of the view that the interpretation is not plainly indicated by the wording of the Sections, nor is it consistent with the underlying purposes of the NCA, or the context within which the NCA was adopted. It is also provided that this interpretation does not promote the basic constitutional rights of consumers – the right to socio economic welfare, dignity and possibly property are concerned. It was further provided that to accept the Banks interpretation would amount to ignoring the fact that the NCA was specifically adopted to break with the past regulation of consumer credit that rendered a few safeguards to consumers.

Keightley is of the view that the purpose of Section 124 was precisely to effect that break from Common Law passed that was necessary in order to achieve the underlying objects of the NCA. Further Keightley provided that even though it does not expressly oust the continued application of Common Law set-off in parallel with Section 124, its meaning and effect is to do so.

Having regard to the above, Keightley therefore concluded that, in light of Sections 90(2)(n) of the NCA, the Common Law right to set-off is not applicable in respect of credit agreements that are subject to the NCA.

This judgment has and will continue to provide much needed clarity on the position in law and marks the end of a practice where set-off is applied without any notice to or authorization by the consumer.

Mihlali Mzileni – 10/07/19

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