Acceleration clauses – contra bonos mores?
By Nastascha Van Vuuren, Director and Khathu Neluheni, Candidate Attorney
LEGAL BRIEF | JUNE 2014
Introduction
When a party to a contract
defaults on one of their
payments, one of the questions
that arises is whether the
creditor to the transaction is
entitled to accelerate payment
for the entire amount. An
acceleration clause is typically
phrased in a manner that
makes the full amount of a
loan immediately due and
payable in the event that the
debtor defaults on payment.
Any security that the creditor
may hold also becomes
immediately executable.
In terms of the principles of the law of
contract, a breach by any party to a contract
affords the innocent party a right to either
cancel the contract or claim for specific
performance. This principle is well established
in our law. In the Combined Developers and
Arun Holdings & Two Others 2013 JDR 2017
(WCC) judgment, handed down by Davis J of
the Western Cape High Court, the abuse of
such clauses became apparent.
In this case, the debtor paid monthly
instalments of R42 133.15 for the repayment
of a loan. The debtor defaulted on payment of
one of the instalments. The creditor sent an
email to the debtor requesting payment of the
overdue amount, which the debtor subsequently
paid within three days of receipt of that email.
On the date on which payment was made,
the debtor neglected to pay the mora interest
of R86.57. The creditor used the unpaid mora
interest as a basis to trigger the acceleration
clause and demanded repayment of the full
loan amount, in the sum of R7 665 040.14.
The creditor was also upon default entitled to
enforce its right to execute the security which
it held.
The applicant relied heavily on the
unanimous decision of Chatrooghoon v
Desai 1951 (4) SA 122 (N). In this matter, the
applicant sought to enforce an acceleration
clause and did so successfully. However, the
facts of the two cases are distinguishable;
the applicant in the Chatrooghoon matter
clearly set out the principal amount and
interest due in their demand.
The respondent’s dominant
argument
Public policy was the dominant argument made
by the respondent. The amount of the monthly
instalment - relative to the interest payable was unreasonable in the circumstances. The
recurring theme of unequal bargaining power
between the debtor and the creditor came up, as
the applicant was the drafter of the agreement
and consequentially, drafted the agreement in
its own favour. Accordingly, the more vulnerable
party suffered when the drafter decided to
enforce the well-devised acceleration clause.
The respondent argued that the applicant
did not make a demand, but merely gave the
respondent notice. Counsel relied on the South
African Concise Oxford Dictionary that defined
demand as an ‘insistent and peremptory
request made as of right’ and that the word
peremptory was defined as ‘not open to appeal
or challenge’. Based on this definition, it was
said that the email the applicant sent to the
respondent amounted only to a formal request
or an enquiry. The email ought to have set out
the amount payable and the consequences
that would follow should the respondent fail to
comply with the demand. The applicant failed
to do so.
public policy. Alternatively, the underlying values
instilled in the supreme law should always take
precedence. The spirit, purport and objects of
the Constitution must be upheld alongside the
values of Ubuntu.
Further reference was made to the case of
Juglal v Shoprite Checkers (Pty) Ltd 2004 (5)
SA 248 (SCA), where it was held that no party
can give effect to the provisions of a contract
in a manner that the court deems to be
unconscionable, illegal or immoral. Any attempt
will find its enforcement being refused.
The court’s approach
The court looked at section 39(2) of the
Constitution of the Republic of South Africa
Nr. 108 of 1996, which places a duty on the
judiciary to develop the common law and
promote the spirit, purport and objects that the
Bill of Rights upholds. As the law of contract
forms a part of the common law, the court had
to decide whether the aforesaid provision of the
Constitution was applicable. The court focused
its judgment on issues of public policy and
whether those issues were in accordance with
the normative framework of the Constitution.
The court made reference to the Sasfin (Pty)
Ltd v Beukes 1989 (1) SA 1 (A) case, which
emphasised that determining whether a
contract is contrary to public policy must be
done sparingly and objectively. It further went
on to state that individual ideas of fairness
and proprietary should not be taken into
consideration when affirming questions of
Examining the Everfresh case
Another judgment the court made reference
to was the Everfresh Market Virginia (Pty)
Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA
256 (CC), which stated that when a party to
a contract acts mala fides, the far-reaching
effects have the potential to impact on the
lives of many laymen. Insofar as bargaining
power is concerned, the court places a
burden on the more powerful party to act in
good faith when enforcing a claim (C Lewis,
Bargaining Power 2013 (76) THRHR 80 at 94).
From the aforesaid, it is clear that the court
holds public policy as paramount.
Justice Davis J concluded that the application
could not be granted for two primary reasons.
Firstly, the Judge was not convinced that the
respondent would have refused to pay such a
small amount had the arrears been properly
brought to its attention. Secondly, the nature
of the acceleration clause and the manner in
which the applicant intended it to be strictly
constructed resulted in the clause being contrary
to public policy. The application was accordingly
dismissed. The decision is reportable.
Conclusion
The judgment aside, it begs the question
of what is to be made of the Roman Dutch
law principle of caveat subscriptor. Should
signatory beware be applied in the future? The
hand of the respondent was not forced in the
present case. It is undisputed that the contract
was drafted to favour the applicant, but all
banking institutions and bodies that advance
loans reserve such rights. Furthermore, if the
respondent believed the agreement was unfair
and unreasonable, it had the freedom to find
a loan elsewhere. The applicant in this matter
was simply enforcing a right that it had in
terms of an agreement, which had the needed
animus contrahendi and consensus.
About the authors
Nastascha van Vuuren
Title: Office:
Direct line: Email: Director
Johannesburg
+27 (0)11 535 8220
[email protected]
Nastascha van Vuuren is a director in Werksmans Attorneys Insolvency, Business Rescue and Restructuring Practice. She specialises
in insolvency matters and undertakes general litigation, in both the High and Magistrate’s Courts, on behalf of a variety of clients.
As a student, Nastascha tutored Introduction to Legal Studies at the University of Johannesburg; was secretary of the Law Students’
Counsel from 2005 to 2006; and was a member of the University of Johannesburg’s Chapter of the Golden Key Honour Society.
She holds a BSc (Hons) in Chemistry & Biochemistry from Rand Afrikaans University and an LLB, which she was awarded cum laude,
from the University of Johannesburg. She also received an award for best law clinic student at the University of Johannesburg’s
law clinic.
Khathu Neluheni
Title: Office:
Direct line: Email: Candidate attorney
Johannesburg
+27 (0)11 535 8361
[email protected]
Khathu Neluheni joined Werksmans Attorneys as a candidate attorney at the beginning of 2014, in the firm’s Litigation and Dispute
Resolution practice.
Her areas of specialty include insolvency, business rescue and business restructuring and general litigation.
Khathu Neluheni graduated with an LLB with distinction from the University of the Witwatersrand.
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