KGOLOLESEGO FINANCIAL COMPANY (PTY) LTD v KETSHOTSENG 2008 (2) BLR 269 (HC)

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Citation: 2008 (2) BLR 269 (HC)
Court: High Court, Lobatse
Case No: Misca No 1866 of 2007
Judge: Dow J
Judgment Date: 18 August 2008
Counsel:
O O Itumeleng for the plaintiff. D Leburu for the defendant.
Flynote

Contract - Proof of - Written contract - Parol evidence rule - Evidence of antecedent oral contract inadmissible to contradict, alter or vary written contract.

Practice and procedure - Summary judgment - When to be granted - Application for summary judgment based on acknowledgement of debt - Defence that  E  unconscionably high administration fee charged in terms of acknowledgement - Administration fees quintupling capital amount loaned - Administration fee possibly contra bonos mores and unenforceable - Summary judgment refused.

Practice and procedure - Summary judgment - When to be granted - Application for summary judgment based on acknowledgement of debt - Defence that  F  creditor depositing cheque tendered by debtor in settlement of indebtedness, thereby novating loan agreement - Creditor possibly demonstrating intention to novate - Summary judgment refused.

Headnote

The plaintiff sought summary judgment on an acknowledgement of debt in the total amount of P66 820, comprising capital P13 000, interest of P12 999 and a compounded daily administration fee of P53 820. Because  G  the acknowledgement was silent as to interest, the plaintiff claimed to be entitled to the maximum interest permissible at law, namely double the capital  -  hence the claim for interest of P12 999. The defendant tendered payment by way of cheque in the amount of P13 000, in settlement of her indebtedness to the plaintiff. The plaintiff deposited the cheque but the defendant then stopped payment on the cheque and the cheque was  H  returned unpaid. The defendant opposed summary judgment on several bases: first, that she had borrowed only P10 000 from the plaintiff and that the P13 000 reflected on the acknowledgement of debt included an interest component; second, that the administration fee was unconscionable, contra bonos mores and grossly exploitative; and third, that, in depositing the defendant's cheque, the plaintiff accepted the total terms of P13 000, thereby evidencing an intention to novate the loan agreement and to waive its rights thereunder.


Held: (1) Applying the parol evidence rule, the court could not take  A  cognizance of the antecedent oral agreement alleged by the defendant to the effect that the loan was for P10 000 and not for P13 000, as reflected on the acknowledgement of debt.

(2) The daily administration fee might well be unconscionable or contra bonos mores. In terms of the loan agreement, there was no provision for the payment of a daily administration fee. The administration fee seemed to be  B  a ploy to circumvent the in duplum requirement that interest was not to accumulate to a larger amount than the principle of the loan.

(3) The fact that the administration fees had quintupled the capital amount loaned indicated that they constituted a penalty, rather than reasonable compensation for breach of contract. Damages could be liquidated in an agreement but only in a reasonable amount. A term fixing unreasonably large liquidated damages might be unenforceable on grounds of public  C  policy or contra bonos mores, as constituting a penalty.

(4) The defendant was required to prove specific facts to support her defence that the administration fees were contra bonos mores. National Development Bank v Estate Construction (Pty) Ltd and Others [2004] 2 B.L.R. 492, applied.

(5) The present case a proper one in which to give the defendant an  D  opportunity to place evidence before the court to show that the demanded administration fees were based on extraordinary rates, regard being had to the commercial environment in the country. That could only be done at trial.

(6) The plaintiff's argument as to interest was misconceived. There was a dispute as to whether interest was recoverable at all which could not be resolved on the papers.  E  

(7) In the result, the defendant had shown a bona fide defence to the plaintiff's claims that interest was due and payable at all and that it was to be calculated on the capital amount of P13 000.  F  

(8) Further, the defendant had averred sufficient facts to support her defence of novation. If the facts averred by the defendant were true, it might support a finding that the loan agreement had been novated. That was a matter that could only be determined at trial.

Case Information

Cases referred to:

Barclays Bank of Botswana v Mokopotsa t/a Boikhutso Small General Dealer [2002] 1 B.L.R. 419

Citizen Entrepreneurial Development Agency v O'Hagan (Botswana) (Pty) Ltd and Others [2005] 2 B.L.R. 406  G  

Du Setto (Sunnyside II) (Pty) Ltd and Others v Financial Services Company of Botswana Ltd [1994] B.L.R. 274, CA

Fleet Services Botswana (Pty) Ltd v Devon (Pty) Ltd and Others [2006] 2 B.L.R. 417

Graham Holdings (Pty) Ltd v Spur Group (Pty) Ltd and Others [2004] 2 B.L.R. 11, CA  H  

Hinton v Fair Deal Wooden Windows (Pty) Ltd [2006] 1 B.L.R. 142

Makuluba v National Development Bank and Others In re: National Development Bank v Masunga Meat Market (Pty) Ltd and Others [2006] 2 B.L.R. 240 (HC)

National Development Bank v Estate Construction (Pty) Ltd and Others [2004] 2 B.L.R. 492

  A  Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (In Liquidation) 1998 (1) SA 811 (A)

ACTION for judgment on a loan. The facts are sufficiently stated in the judgment.

  B  O O Itumeleng for the plaintiff.

D Leburu for the defendant.

Judgment

DOW J:

Introduction

  C  These are reasons for the grant of the following order:

1.       The defendant having tendered payment in the sum of P13 000, judgment is granted to the plaintiff in that amount.

2.       The balance of the claim is referred to trial.

3.       Reasons for the decision and directions for the future conduct of the matter reserved to 27 May 2008.

  D  The facts

This dispute concerns a loan taken by the defendant, Bame Ketshotseng, from the plaintiff, Kgololesogo Financial Company (Pty) Ltd. In January 2007 the defendant met an old acquaintance, Lesego Masitara, who was at  E  the time employed by the plaintiff company. The defendant says that she negotiated with Masitara for a loan, which was obtained by the defendant from the plaintiff company. The amount obtained was, she says, the amount of P10 000.

The defendant then signed a document titled 'Acknowledgment of Debt and Payment Undertaking' in terms of which the amount owed was  F  reflected as P13 000; the defendant claims that this sum included the P10 000 loaned to her plus P3 000 in interest. In addition, the said acknowledgment of debt provided that:

1.       The loan is to be repaid on or by 27 February 2007;

2.       If the defendant defaults on payment, the outstanding sum at the date  G  of default will accrue an administration fee of 1.5 per cent of the principal to be compounded and credited daily till debt is paid in full.

3.       In the event of default, sums paid in respect of the agreement are to be apportioned first to administrative fee, interest, any legal costs on the legal practitioner to client scale, collection cost, and lastly capital.

On 27 February 2007, the defendant defaulted on the loan agreement. Per  H  the terms of the agreement, the loan began accruing 1.5 per cent daily administrative fees, which amounted to P195 per day. As of 30 November 2007, the total loan due plus administrative fees amounted to P66 820. The plaintiff seeks summary judgment in this amount, a daily administration fee on the outstanding amount, interest, collection commission and costs of suit at attorney and client scale.

In defence, the defendant claims first that payment on the loan was to be made in April 2007. It is common cause that a cheque was written by the  A  defendant to the plaintiff in the amount of P13 000 and deposited by the plaintiff on 25 April 2007, but returned unpaid. The defendant claims that the failure of the cheque to go through is due to advice given by Lesego Masitara in May of 2007 not to allow payment of the cheque to go through. But for this advice, the defendant alleges she would have repaid the plaintiff P13 000 by April 2007. The defendant admits to owing P13 000, and is  B  willing to tender that amount. The plaintiff is demanding payment of P13 000 plus accrued administrative fees, interest, and collection costs. The plaintiff argued for the grant of summary judgment on the ground that the defendant has not placed before the court sufficient facts upon with the court can hold that she has a bona fide defence.  C  

The issues to be determined

1.       Whether the plaintiff is entitled to administration fees as spelled out in the Acknowledgement and payment undertaking.

2.       Whether the plaintiff is entitled to interest in this matter as per the acknowledgement and payment undertaking.

3.       Whether the depositing of the cheque novated any terms of the contract.  D  

Analysis of the issues

In resisting summary judgment, the defendant must satisfy the court that she has a defence, which if proved would constitute an answer to the claim that she is advancing in honesty. The defendant is required to disclose her  E  defence and set out the facts upon which it was based with sufficient particularity to enable the court to decide whether the affidavit disclosed a bona fide response. See Du Setto (Sunnyside II) (Pty) Ltd and Others v Financial Services Company of Botswana Ltd [1994] B.L.R. 274, CA.

However, summary judgment is an extraordinary remedy as it allows judgment to be given without a trial and closes the door in a final fashion  F  to a defendant. It is therefore necessary for this court to '... tread that path with the greatest care and caution for the proper administration of justice.' See Citizen Entrepreneurial Development Agency v O'Hagan (Botswana) (Pty) Ltd and Others [2005] 2 B.L.R. 406 at p 411B.

It is a principle of contract law that a person, when signing a document, is taken to be bound by the ordinary meaning and effect of the words which  G  appear over the signature. The parol evidence rule, which has its roots in English common law, has been adopted into the law of Botswana. See Hinton v Fair Deal Wooden Windows (Pty) Ltd [2006] 1 B.L.R. 142.

The parol evidence rule is to the effect that when a transaction has been reduced into writing, the writing is regarded as the exclusive memorial of the transaction and no evidence may be given to contradict, alter, add or vary  H  its terms. This court, therefore, cannot accept the defendant's claims in regard to her negotiations with Lesego Masitara prior to 27 January 2007: that P13 000 was allocated in the total amount of the loan for interest, that the date of repayment was set in April instead of February, and that the terms of the agreement were not clear as of May 2007. The defendant is assumed to have carefully read the terms of the loan agreement, the document which she signed and gave her assent to, in order to ensure that the full agreement is correctly represented.

Whether the plaintiff is entitled to administrative fees as spelled out in the acknowledgement and payment undertaking

The defendant's defence for failure to repay the loan timely is that the  B  administrative fee term is unconscionable, contra bonos mores, and grossly exploitive.

A court can, in certain situations, be persuaded to set aside a whole contract or a clause in it on grounds of public policy. This court has the power to treat as void and to refuse in any way to recognise contracts and transactions which are against policy or contrary to good morals. See  C  National Development Bank v Estate Construction (Pty) Ltd and Others [2004] 2 B.L.R. 492.

It may be correct that the daily administrative fee of 1.5 per cent accumulating on the amount due is in fact unconscionable and/or contra bonos mores. Under the terms of the agreement, there is no specific provision for interest beyond the original P13 000 (assuming the defendant's version can  D  be proven at trial), and it seems as if the administrative fee is a ploy to circumvent the in duplum requirement that interest not accumulate to a larger amount than the principal of the loan.

If the administrative fees represent predetermined damages for breach of contract, the fact that the fees have quintupled the modest amount loaned by the defendant seems by itself to indicate that the fees constitute a penalty  E  and not reasonable compensation for a breach of the agreement. Indeed damages for breach by either party may be liquidated in an agreement but only in an amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages may be unenforceable on grounds of public policy or contra bono mores, as a penalty.

  F  However, the power to void and refuse to enforce contracts based on public policy is not to be hastily or rashly exercised; it should be exercised sparingly and only in the clearest of cases. If parties enter into an onerous or one-sided or unreasonable or even grossly inequitable contract, it is not for a court to amend it out of sympathy for one party or to refuse to enforce its terms. See Gradam Holdings (Pty) Ltd v Spur Group (Pty) Ltd and Others  G  [2004] 2 B.L.R. 11, CA.

The fact that parties are not in an equal bargaining position does not necessarily render a contract unenforceable as being contra bonos mores, it is a well-founded principle of contract law that contracts freely and seriously entered into by parties able to do so should be enforced.

In a similar case, National Development Bank v Estate Construction (Pty)  H  Ltd (supra), the defendant, after defaulting on a loan, alleged that the penalty interest rates of 18.75 and 19.25 per cent were unconscionably high and were contra bonos mores. The High Court granted summary judgment to the plaintiff on grounds that insufficient evidence was placed before the court to show that the rates or security taken were out of the ordinary. Although the defendants in the case were established commercial entities and business persons, like the defendant in this case, they voluntarily entered into the agreements and there was no question of being coerced into  A  the agreement. Therefore, the High Court held that they could not be heard to seek to bailout of their obligations because they did not wish to keep their side of the bargain.

This case can be distinguished from National Development Bank (supra) by the fact that the defendant is not a commercial entity or an experienced business person, however, the precedent still requires the defendant to prove  B  specific facts to support her defence that the administrative fees are contra bonos mores.

On the above reasoning, it is found that this is a proper case to give the defendant an opportunity to place before the court evidence to show that the demanded administrative fees are based on extraordinary rates, regard being had to the commercial environment in the country. This is an issue  C  that can only be determined at trial, for it can not be for this court to employ its own idea of what is fair or not, without the benefit of relevant evidence on the point being decided on.

Whether the plaintiff is entitled to interest in this matter as per the acknowledgement and payment undertaking  D  

The in duplum rule serves to aid debtors in financial difficulties by holding that it is unlawful to recover interest equal to or more than the capital sum upon which interest had accrued. See Barclays Bank of Botswana v Mokopotsa t/a Boikhutso Small General Dealer [2002] 1 B.L.R. 419 at p 424. The rule serves an important social function by protecting debtors  E  and providing that any clause in a contract that seeks to deprive a person of the protection afforded to them by the law is unenforceable by reason of its illegality or on the basis that it offends public policy. Furthermore, the application of the in duplum rule cannot be waived and circumvention of the rule cannot be tolerated by courts. Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (In Liquidation) [1998] 1 SA 811 (A) at  F  p 828C-D.

The plaintiff argues that because the loan agreement in this matter does not prescribe the rate of interest at all, therefore the interest should take the form of the maximum interest prescribed by law. Further, the plaintiff argues, that in denying any interest owed to the plaintiff, the defendant is delving 'into a desperate attempt ... to amend an agreement as an afterthought  G  of her bad bargaining (para ii(13) of the plaintiff's written submissions.) Therefore, in addition to the loan amount of P13 000 and P53 820 in accumulated administrative fees, the plaintiff presumably seeks up to P12 999 in interest. The plaintiff's reasoning is attenuated at best and therefore the court cannot accept the plaintiff's argument on this matter. The plaintiff fundamentally misunderstands the provision and the purpose of the  H  in duplum rule.

According to the High Court in Barclays Bank of Botswana v Mokopotsa (supra) at p 424H '... where sums are claimed for moneys loaned and advanced ... the capital component and the interest component should be clearly distinguished, so that the rule can be properly applied.' Therefore, if the plaintiff wishes to charge interest on the loan agreement in this case, the  A  plaintiff is required by law to clearly distinguish the capital and the interest charged.

There is a dispute as to whether the interest was pre-determined as P13 000 and that issue can not be resolved on the papers as they stand. Otherwise, there is no provision for interest in the loan agreement; not even an interest rate by which such an award could be calculated. In order to  B  grant the plaintiff's prayer on this point, this court would have to determine a reasonable interest rate, and perhaps employ the provisions of s 3 of the Prescribed Rate of Interest Act (Cap 11:05).

However, it is well established that when a party signs a contract, it is taken to be bound by the ordinary meaning and effect of the words which appear over the signature and it is not for the courts to insert obligations  C  into a contract when there were none originally.

Furthermore, the parol evidence rule states that when a transaction has been reduced to writing, the writing is regarded as the exclusive memorial of the transaction and no evidence may be given to contradict, alter, or vary its terms. See Hinton v Fair Deal Wooden Windows (Pty) Ltd (supra).

The court though finds that, even if no extraneous facts are brought into  D  the interpretation of the document in issue, a few questions remain unanswered, suggesting that perhaps the defendant is correct that the sum of P13 000 included interest. It is reasonable to conclude that the defendant is telling the truth because the alternative conclusion would have to be that had the defendant repaid the amount within the month stipulated in the agreement, the loan would have been interest-free. It is also of some relevance  E  that the plaintiff, in its declaration, makes no assertion that the loan amount was P13 000; rather the issue is skirted by asserting that the 'Defendant acknowledged her indebtedness'.

In the final analysis, the difficulty facing the plaintiff on this point is that if the assertion is that the P13 000 did not include interest, is it asserted that the loan was to attract no interest for the first month of its issuance and if  F  so, what was the attraction to the plaintiff for such an arrangement? The associated difficulty becomes, if the loan attracted P3 000 as interest during the first month of its issuance, what was the rate beyond the one month? The question, already raised above, as to whether the 'administrative fee' was to be employed to circumvent the duplum rule, begs for an answer.

It is found that the defendant has demonstrated that she has a bona fide  G  defence to the plaintiff's claim that (a) interest is still due and payable and that (b) such interest is to be calculated on the basis that the capital sum is the amount of P13 000.

Whether the depositing of the cheque novated any terms of the contract

Novation, which refers to the extinguishing of a debt by substituting same  H  for another debt, founded on a new agreement between the parties, must be absolutely clear. There is a presumption against novation because it involves a waiver of existing rights. Therefore, a creditor who has rights under an existing contract and then enters into another connected contract will be presumed to intend rather to strengthen and confirm his existing rights than to waive them and accept rights under the new contract. The onus of proving novation therefore lies on the party who asserts that it has taken place and that party must specifically plead it. See Fleet Services Botswana (Pty) Ltd v Devon (Pty)  A  Ltd and Others [2006] 2 B.L.R. 417 at p 423.

An intention to novate an existing right is not readily inferred, and where such an intention is sought to be established by implication, the intention must be clear and unequivocal. Makuluba v National Development Bank and Others In re: National Development Bank v Masunga Meat Market (Pty) Ltd and Others [2006] 2 B.L.R. 240. It is otherwise well established principle  B  that clear and cogent proof of novation is required.

The defendant alleges that in May 2007 Lesego Masitara advised the defendant that there was a problem at the plaintiff company, that she had been removed from their employment, and that there was a dispute between the splitting of clientele. She further advised the defendant that until she communicated with the defendant, the defendant should not allow payment  C  of the cheque for P13 000 to go through, and the defendant then stopped payment of the cheque. Therefore, the defendant concludes that by accepting the terms of the total payment of P13 000 by way of cheque, the cheque and it's depositing by the plaintiff supplanted and novated any terms that may have pre-existed the contract. (Paragraph 6-8 of the defendant's affadavit resisting summary (judgment.)  D  

The defendant has clearly alleged an intention (or at least a perceived intention) on the part of the plaintiff to waive the existing rights under the loan agreement by the information provided to her by Lesego Masitara regarding the splitting of clientele and breakdown of the plaintiff company. Although it would have benefited the defendant to take initiative to clarify the information given to her, rather than to rely solely on the information  E  provided to her by Ms Masitara, given that the defendant took the loan with the plaintiff company and not with Ms Masitara, the defendant has nevertheless averred sufficiently specific facts to support her defence. If the facts averred by the defendant are true, it might support a finding that the terms of the loan agreement were novated and replaced with a new agreement. This is a matter that can only be determined at a trial.  F  

Order

1.       The costs of this application to be determined at the conclusion of the trial.

2.       The future conduct of this case will be under the following timelines:  G  

     (a)     Date of trial: To be determined after consultation with the parties and the judges' clerk.

     (b)     Filing of the next set of pleadings by the defendant: On or before noon on 1 September 2008.

     (c)     Pleadings to be closed and after which date no further pleadings may be filed, except for such pre-trial motions, if any, as shall be  H  raised by the pleadings: On or before 31 October 2008.

     (d)     Filing of pre-trial minutes, lists of witnesses and documents to be used at trial: On or before 28 November 2008.

Summary judgment refused. Matter referred to trial.


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