The Supreme Court of Appeal (SCA) has clarified that the collection costs incurred by a credit provider to enforce a credit agreement do not include legal fees.
The appeal was brought by Bayport Securitization and the Law Society of South Africa against a judgment of the Western Cape High Court in favour of the University of Stellenbosch Law Clinic, Summit Financial Partners and 10 others.
The SCA had to deal with the proper interpretation of “collection costs” as defined in section 1 of the National Credit Act (NCA) and whether collection costs referred to in section 101(1)(g) of the NCA, read with section 103(5), included legal fees.
Section 101(1) limits a credit provider to the collection of the following: principal debt, initiation fee, service fee, interest, cost of credit insurance, default administration charges, and collection costs.
Section 103(5) provides that the aggregate interest, fees and charges, including collection costs, which accrue during the time that the consumer is in default may not exceed the unpaid balance of the principal debt at the time of default.
The High Court held that:
- Collection costs included all legal fees incurred by the credit provider to enforce the monetary obligation of a consumer under a credit agreement charged before, during and after litigation. In other words, collection costs include all legal fees incurred through the employment of attorneys and advocates, as well as the execution of the judgment.
- Section 103(5) applied for as long as the consumer remained in default of his or her credit obligations, from the date of default to the date of collection of the final payment owing, irrespective of whether or not the judgment in respect of the default had been granted.
The SCA did not agree with this and highlighted that the courts have over many years drawn a distinction between collection costs and litigation costs.
It held that:
- The rule of interpretation is that unless the intention to do so is clearly reflected in a statute, whether expressly or by necessary implication, a statute should not be interpreted to alter the common law more than is necessary.
- The Superior Courts Act, the Magistrates’ Court Act and the Debt Collectors Act prescribed maximum tariffs. This supported its view that a distinction needs to be drawn between collection costs and legal fees.
- In terms of the tariff applied by taxing masters, legal costs were regarded as starting with a summons and did not, as a general rule, allow for pre-litigation costs to be recovered from the losing litigant.
- The respondents’ submission that the NCA placed a limit on the amount of legal costs that could be recovered from a consumer would lead to some “glaring absurdities”.
- To hold that collection costs included legal costs would be to oust or severely fetter the discretion of a court to make appropriate costs orders, including punitive costs orders. If the legislature intended collection costs to include legal costs, it could easily have said as much.
The respondents alleged that excessive costs were being charged in the context of micro loans and emoluments attachment orders, and this supported the High Court’s interpretation.
The SCA held that even if it is true that excessive costs were being charged, this cannot be addressed by “a strained interpretation” of section 103(5). Instead, it would be for the legislature to deal with this by way of an amendment to the NCA.
The SCA also held that after a judgment has been granted against a consumer, usually only interest accrues on the judgment debt, except for the disbursements and charges allowed in terms of the relevant tariff. Section 103(5) does not apply post-judgment.
The SCA upheld the appeal, but no cost order was made.