by Nicolene Schoeman-Louw | SchoemanLaw Inc | Specialist Technology, Commercial and Contract Law Attorney
Whether a loan agreement or acknowledgement of debt ("AOD") falls under the National Credit Act 34 of 2005 ("NCA") and specifically meets the criteria of being at arm's length could be the line between enforcement of an agreement and it all falling apart.
"4 Application of Act
(1) Subject to sections 5 and 6, this Act applies to every credit agreement between parties dealing at arm's length and made within, or having an effect within, the Republic, except-
(a) a credit agreement in terms of which the consumer is-
(i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister in terms of section 7 (1);
(ii) the state; or
(iii) an organ of state;
(b) a large agreement, as described in section 9 (4), in terms of which a consumer is a juristic person whose asset value or annual turnover is, at the time the agreement is made, below the threshold value determined by the Minister in terms of section 7 (1);
(c) a credit agreement in terms of which the credit provider is the Reserve Bank of South Africa or
(d) a credit agreement in respect of which the credit provider is located outside the Republic, approved by the Minister on application by the consumer in the prescribed manner and form."
At arms length?
In Allied Steelrode (Pty) Ltd v Dreyer and Another (1120/2022) [2023] ZASCA 181, it was not disputed that the terms of the loan differed from those in the AOD – to the extent that the loan was accepted by the first respondent and with no interest was charged. Furthermore, what was apparent from the evidence is that the parties had developed a friendship. They formed a close bond in personal matters outside the realms of business. The loan was offered as a gesture of friendship. It was not customary for the appellant to lend money, and this was a one-time occurrence. No interest was levied on the loan at all, and the AOD, save in the event of mora.
The court ultimately found that the parties were not dealing at arm's length, as provided for in section 4 (2)(b)(iii). There was no evidence that the appellant sought to obtain the utmost advantage from the transaction. The agreement lacked the character of a credit agreement.
Moreover, the facts in Fourie v Geyer [2019] ZANWHC 42 are distinguishable. While the parties were friends in Fourie, they engaged in occasional business transactions separate from their relationship. The court found that they were transacting at arm's length. The facts in this matter are also distinguished from Du Bruyn v Karstens [2018] ZASCA 143 since, in that judgment, the court found that the parties' relationship had soured, and Mr du Bruyn was clearly attempting to gain the utmost advantage from the transaction. In the current case, the loan agreement giving rise to the AOD was clearly not at arm's length.
In Forsyth v Heydenrych (2018) JDR 1937, where a loan agreement originated from a familial relationship, and the plaintiff did not strive to maximise the return on the loan, it was found that the NCA was not applicable. This was confirmed on appeal.
In Hicklin v Secretary of Inland Revenue 1980 (1) SA 481 A, the court articulated that:
'. . . "dealing at arm's length" is a useful and often easily determinable premise from which to start the inquiry. It connotes that each party should be independent and seek the utmost possible advantage out of the transaction. In an arm's length agreement, the rights and obligations created are more likely to be regarded as normal than abnormal. When considering the normality of the rights or obligations so created, due regard has to be paid to the surrounding circumstances. What may be normal in one case may be abnormal in another because of different circumstances. The determination of normality or abnormality is a factual one.'
Therefore, the case in point noted that in an agreement where the loan originated from an oral agreement, with no interest charged between parties who had a familial relationship, which was conducted outside the scope of arm's length dealings. Neither the loan nor the AOD were subject to the NCA.
Conclusion
It is, therefore, critical to examine our motives when contracting and to ensure that the intent is recorded appropriately. If not, we cannot change course later and enforce an agreement that was never intended to be transformed into a credit agreement.
Nicolene Schoeman-Louw founded SchoemanLaw Inc in 2007 in South Africa aged 24, and is now the Managing Director of the firm. She is an admitted Attorney of the High Court of South Africa, Conveyancer, Notary Public and Mediator; with a passion for entrepreneurs and helping them reach their most ambitious goals. She obtained her LLB degree cum laude and successfully completed her LLM degree (dissertation) in commercial law and B-BBEE, both at the University of the Free State. In addition, she obtained her postgraduate diploma in financial planning (CFP) at the University of Stellenbosch. She regularly contributes to various publications and shares her knowledge regularly on various radio stations. Nicolene has enjoyed the confidence of many successful entrepreneurs over the years and continues to do so. As a trusted advisor she has actively contributed to the successes of many businesses, helped and continues to help many entrepreneurs build lasting legacies.
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