Damages that flow from the failure to make payment timeously have recently been the subject of debates in the Supreme Court of Appeal (SCA). As a result, a number of principles emanating from a creditor’s right to claim interest have been formulated in a number of reported cases.
Certain of the principles include the following:
- If a debtor is late with 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.
- The creditor is entitled to claim this interest even without a specific contractual provision to pay interest.
- 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.
In Land Agricultural Development Bank of South Africa v Ryton Estates (Pty) Ltd and Others  4 All SA 385 (SCA), the appellant (the bank) advanced and lent monies to several commercial farmers (the respondents or borrowers). The loans were all secured by mortgage bonds. Each loan agreement provided that interest at a stipulated annual rate would be calculated on the balance of the capital outstanding from time to time.
In terms of each loan agreement, the loan and interest were repayable in equal instalments annually in arrears. The date on which each instalment was due and payable was fixed by agreement. It was a common cause that, in many instances, the respondents did not pay their instalments on the due dates.
After all the loans were repaid, the respondents instituted action against the bank on a number of grounds. In this article, we will focus only on whether the bank was entitled to levy mora interest on unpaid but due and payable interest. The High Court found that ‘in the absence of an agreement to that effect, the appellant was not entitled to interest on unpaid interest’ and gave judgment for the respondent.
On appeal, the SCA held that mora interest constitutes a form of damages for breach of contract and ‘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’.
Due to the fact that interest is the ‘life-blood of finance’ and that tardy payment of monetary obligations will almost invariably deprive the creditor of the productive use of the money and thereby cause him or her loss. Accordingly, it is in the public interest that creditors be compensated when debtors fail to make payment of agreed interest on the due date.
Unless specifically excluded in a contract, mora interest automatically flows from the breach of contract.
Because mora interest represents damages, the rate thereof is not determined nor governed by an agreement or in any other manner. Mora interest is payable at the prescribed rate, in terms of s 1(2) of the Prescribed Rate of Interest Act 55 of 1975, as amended.
The court found in favour of the bank, determining that in the absence of a clear and unambiguous agreement to the contrary, mora interest is payable at the prescribed rate on any unpaid interest that is due and payable.
In an earlier judgment, Crookes Brothers Limited v Regional Land Claims Commission for the Province of Mpumalanga and Others  2 All SA 1 (SCA), the SCA held: ‘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’.
A party who has been deprived of the use of capital for a period of time suffers a loss and must be compensated by an award of interest. 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. If the contract does not include an express or tacit statement of the date when payment is due, a demand for payment within a reasonable time must be sent before interest starts accumulating.
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. 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. The same principles apply equally to a debtor who is in default in respect of a contractual obligation to pay interest.