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Home / LEX SCRIPTA with Fedden Mainga Mukwata - Difference between compound interest, simple interest and mora interest

LEX SCRIPTA with Fedden Mainga Mukwata - Difference between compound interest, simple interest and mora interest

2023-03-17  Correspondent

LEX SCRIPTA with Fedden Mainga Mukwata - Difference between compound interest, simple interest and mora interest

Natural Namibia Meat Producers (Pty) Ltd v Council for the Town of Aranos NAHCMD (13 December 2022) 

 

Whereas the plaintiff, a private company, alleged that the defendant, a Local Authority empowered to provide electricity to the residents in its area, breached the material terms of the oral agreement, in that during the period of October 2004 to April 2017, the defendant charged the plaintiff for electricity it supplied to the plaintiff in excess of the applicable approved rates
 and agreed tariffs, referred a complaint to the Electricity Control Board (ECB), and the ECB made certain findings of overcharging on the part of the defendant, the plaintiff alleged that it suffered
damages as a result and instituted action proceedings for the repayment of the monies overpaid. The defendant counter-claimed that the plaintiff underpaid, or did not pay for the actual cost of the electricity it consumed. 

The High Court had to decide on a stated case basis in terms of rule 63 whether the plaintiff and the defendant agreed that the defendant owed the plaintiff the amount of N$ 1 084 273,31 plus VAT on that amount. The parties were, however, in disagreement as to whether or not the plaintiff was entitled to interest on the amount of N$ 1 084 273,31 plus VAT (referred to as the ‘capital sum’). As a result of their disagreement, the parties in terms of rule 63(9) requested the court to, as a matter of law, determine whether or not the plaintiff was entitled to interest on the amount of N$ 1 084 273,31 plus VAT, which the defendant had admitted it owed the plaintiff.

 

Having considered the legal principles, it was held that:

 

The Local Authorities Act 23 of 1992 empowers the defendant to supply electricity or gas to residents in its area. The supply of the electricity must be regulated by an agreement, and the defendant being a juristic person, had the capacity to conclude contracts in respect of its obligation to supply electricity.

If a debtor was late with payment of a monetary obligation under a contract, the creditor is entitled to claim mora interest on the outstanding debt due to the debtor’s failure to make payment on the due date, and mora interest is a common law right.

At common law, the plaintiff is entitled to mora interest. Mora interest in a case like the present constitutes a form of damages for breach of contract. As a result, the plaintiff is entitled to payment of interest at the prescribed rate on the outstanding credit, the rate being prescribed in terms of the Prescribed Rate of Interest Act, 55 of 1975. 

 

As a result, the defendant was ordered to pay to the plaintiff the amount of N$ 1 084 273,31 plus VAT, and interest on the amount of N$ 1 084 273, 31 at the prescribed rate of interest reckoned from 10 January 2019 to the date of final payment. 

 

In arriving at that decision, the learned judge discussed the applicable legal principles regarding payment of interest: 

 

‘[12] ... In the matter of Land Agricultural Development Bank of South Africa v Ryton Estates (Pty) Ltd and Other [2013] 4 All SA 385 (SCA),the South African Supreme Court of Appeal held that interest remains interest, and no method of accounting (such as capitalisation) can change its nature. It further stated that contractual interest may be compound interest or simple interest. Compound interest is interest on capital plus accrued interest. If compound interest is not provided for in an agreement, only simple interest on the capital will be payable in terms of the agreement. 

 

[13] The court proceeded and stated that mora interest, on the other hand, … is not payable in terms of an agreement, but constitutes compensation for loss or damage resulting from a breach of contract, specifically mora debitoris. [In] Crookes Brothers Limited v Regional Land Claims Commission for the Province of Mpumalanga and Others [2013] 2 All SA 1 (SCA), the Supreme Court of Appeal held that even in the absence of a contractual obligation to pay interest, where a debtor is in mora in regard to the payment of a monetary obligation under a contract, his creditor is entitled to be compensated by an award of interest for the loss or damage that he has suffered as a result of not having received his money on the due date.

 

[14] The matter of Bellairs v Hodnett and Another 1978 (1) SA 1109 (A) at 1145D-G and 1146H-1147A, explains the nature of mora interest as follows: 

 

‘It may be accepted that the award of interest to a creditor, where his debtor is in mora in regard to the payment of a monetary obligation under a contract, is, in the absence of a contractual obligation to pay interest, based upon the principle that the creditor is entitled to be compensated for the loss or damage that he has suffered as a result of not receiving his money on due date (Becker v Stusser, 1910 CPD 289 at p 294). 

This loss is assessed on the basis of allowing interest on the capital sum owing over the period of mora (see Koch v Panovka 1933 NPD 776) ... Nevertheless, as emphasised by CENTLIVRES, CJ, in Linton v Corser 1952 (3) SA 685 (AD) at p 695, interest is today the “lifeblood of finance” and under modern conditions, a debtor who is [late] in the due payment of a monetary obligation will almost invariably deprive his creditor of the productive use of the money and thereby cause him loss. It is for this loss that the award of mora interest seeks to compensate the creditor.

 

… As previously pointed out, mora interest in a case like the present constitutes a form of damages for breach of contract. The general principle in the assessment of such damages is that the sufferer by the breach should be placed in the position he would have occupied had the contract been performed, so far as this can be done by the payment of money and without undue hardship to the defaulting party. 

Accordingly, such damages only are awarded as flow naturally from the breach, or as may reasonably be supposed to have been in the contemplation of the contracting parties as likely to result therefrom (Victoria Falls and Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd 1915 AD 1 at p 22). In awarding mora interest to a creditor who has not received due payment of a monetary debt owed under contract, the Court seeks to place him in the position he would have occupied had due payment been made. The Court acts on the assumption that, had due payment been made, the capital sum would have been productively employed by the creditor during the period of mora, and the interest consequently represents the damages flowing naturally from the breach of contract.’

 

[15] In the matter of West Rand Estates Ltd v New Zealand Insurance Co Ltd 1926 AD 173 at 195-196, the court held that:

 

‘In connection with a claim for interest, we have to consider the question of mora, and the distinction between an action for liquidated and unliquidated damages. Liability for the payment of interest through delay in the performance of his obligation or duty by the defendant may arise in one of two ways. Interest may be due from the nature of the case, where, for instance, the time for performance is fixed either by agreement or the law (mora ex re); or where, in the absence of such agreement, the defendant has been called upon to perform his obligation (mora ex persona). In the former case, no interpellation is necessary; in the latter, the debtor must be formally called upon for performance. But we must bear in mind that a defendant cannot be said to be in mora unless he knows the nature of his duty or obligation; that is to say, when and how much he has to pay. Hence, a claim for unliquidated damages, which have to be investigated and ascertained, does not bear interest. But, as certum est quod certum reddi potest, circumstances may occur to take a case out of the operation of this rule.

 

The parties may, for instance, investigate and agree as to the amount of damage sustained, and from that moment, the liability of the debtor for interest upon the agreed amount may well be considered to have commenced. It seems fair and reasonable that the defendant should indemnify the plaintiff for the full loss suffered, and this admits of the payment of interest as well, once the damage has been ascertained and agreed upon between them (cf. Grotius, 3.24.19).’

 

[16] This principle is succinctly stated in Christie: The Law of Contract in South Africa, 6 ed (2011) at 530, as follows: ‘When a debtor’s contractual obligation is to pay money, and he is in mora, the general damages that flow naturally from the breach will be interest a tempore morae’.

 

[17] I accept that parties may by agreement exclude liability for mora interest. The effect of an agreement of that kind is to exempt a party from common law liability for damages for breach of contract. Such agreement must be clear and unambiguous. As Marais JA said in First National Bank of SA Ltd v Rosenblum & Another 2001 (4) SA 189 (SCA) at 195H:

‘In matters of contract, the parties are taken to have intended their legal rights and obligations to be governed by the common law, unless they have plainly and unambiguously indicated the contrary. Where one of the parties wishes to be absolved either wholly or partially from an obligation or liability which would or could arise at common law under a contract of the kind which the parties intend to conclude, it is for that party to ensure that the extent to which he, she or it is to be absolved is plainly spelt out.’

 

[18] From the cases that I have referred to in the preceding paragraphs, a number of principles emanating from a creditor’s right to claim interest may be formulated as follows:

 

(a) If a debtor is late with the payment of a money obligation under a contract, the creditor is entitled to claim mora interest on the outstanding debt due to the debtor’s failure to make payment on the due date.

(b) The creditor is entitled to claim this interest even without a specific contractual provision to pay interest. Mora interest constitutes compensation for loss resulting from a breach of contract, and is not governed nor dependent on an agreement. Mora interest is a common law right, meaning that it automatically applies to contracts unless it is expressly, plainly and unambiguously excluded by agreement between the parties.

(c) If the contract fixes the time for payment, no demand is necessary to place the debtor in default, and interest is payable from the date on which payment was due.

(d) If the claim is for unliquidated damages, the defendant cannot be in mora until the quantum of damages has been fixed by a judgement of the court, or by agreement between the parties.

(e) Where the parties have fixed the amount of damages by agreement, the damages are no longer unliquidated, and interest on the agreed amount is payable from the date of the agreement or the date of demand, whichever is later. 

(f) If a contract or agreement is silent on the rate of interest, then interest can be claimed at the prescribed rate. Mora interest can only be claimed at the prescribed rate. 

 

Visit https://consultfasz.com/ for more Concise Law Reports (CLRs). 


2023-03-17  Correspondent

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