April 11, 2019

Settlement agreements do not trigger obligations under the National Credit Act

In the recent decision of Ratlou v MAN Financial Services SA (Pty) Ltd [2019] ZASCA 49, the Supreme Court of Appeal (“SCA”) had to adopt a purposive approach to the interpretation of the term “credit transaction”, contained in the National Credit Act (“NCA”), in order to avoid triggering its application in the context of a settlement agreement.

The facts giving rise to the case were relatively uncontroversial: During 2013, Raltlou acquired a business called PNT and in 2014 provided MAN with a general covering security in respect of PNT’s debt to MAN (at the time, it was given to cover PNT’s lease obligations to MAN who had leased heavy duty trucks to PNT). This surety remained in place in December 2014 when PNT leased seven new trucks from MAN. Shortly thereafter, PNT defaulted on the monthly rentals. In September 2015, the parties, including Mr Ratlou, concluded a settlement agreement to cover the monies outstanding under these lease agreements which made provision for payment terms, including payment of interest. When PNT and Ratlou defaulted on the settlement agreement, MAN instituted proceedings against them.

In defending these proceedings, Ratlou argued (1) that the new lease agreements were subject to a resolutive condition which had not been met and (2) that the settlement agreement constituted a credit transaction which attracts the procedural protections contained in the NCA (in particular the right to notice before the commencement of proceedings). The High Court agreed with Ratlou in relation to the interpretation of the settlement agreement.

The main issue before the SCA was therefore in relation to whether the settlement agreement constituted a credit transaction as defined.

In its submissions, MAN conceded that on a literal interpretation of section 8(4)(f) of the NCA, the settlement agreement did indeed constitute a credit transaction. However, it argued that because the underlying basis for the settlement agreement did not constitute a credit transaction, the agreement itself also did not qualify as such. In addition, it argued that the settlement agreement constituted a credit guarantee which did not qualify as a credit transaction as contemplated by the NCA. Ratlou’s response was that the original basis for the debt had been extinguished and that because Ratlou was a co-principal debtor under the settlement agreement, it qualified as a credit transaction.

In reversing the decision of the High Court, Dambuza JA, for a unanimous court, dispensed with Ratlou’s argument by noting that his argument was artificial and that, as a matter of logic, if the underlying agreement did not qualify as a credit transaction, the settlement agreement upon which it was based could not be so converted. However, the thrust of the decision turned around the interpretive approach that had to be adopted in relation to section 8(4)(f) of the NCA. In this regard, Dambuza JA pointed out that:

[21] A purposive interpretation and not a literal interpretation…is required because it is quite clear that the NCA was not aimed at settlement agreements. Its application to them will have devastating effect [sic] on the efficacy and the willingness of parties to conclude settlement agreements and thereby curtail litigation…

[22]…Further, on a literal interpretation…a settlement agreement concluded in relation to a delictual claim would immediately fall within the ambit of the NCA. As submitted on behalf of MAN this could never have been the intention of the legislature. The consequence would be absurd for agreements of settlement in respect of non-contractual claims.

The decision of the High Court was therefore set aside and MAN was exempted from having to comply with the notice provisions contained in the NCA. Whilst the interpretive analysis was not exhaustive, the rationale of the court and its conclusion appears to be unimpeachable and avoids all the impractical pitfalls of unwitting parties having to register as credit providers.