‘Courts should not simply rubberstamp punitive costs orders against defaulting consumers’

The courts have a duty to assess whether contracts do not offend against the principles of the Constitution and legislation such as the Consumer Protection Act (CPA) and the National Credit Act (NCA) when deciding whether it is appropriate to award punitive costs against a consumer. This is what can be concluded from a judgment handed down last month by the High Court in Pretoria.

FFS Finance South Africa, trading as Ford Credit, and BMW Financial Services South Africa (BMWFS) sought default judgments against two consumers who had fallen into arrears with their motor vehicle repayments.

The Court saw fit to deal with both matters in the same judgment because the orders sought were similar and raised the same concerns.

The Court did not much concern itself with the applications for default judgment, both of which were granted, but with the punitive costs orders sought by the plaintiffs against the defendants, neither of whom defended the claims against them.

Both instalment sale agreements entitled the credit providers to recover their legal costs on an attorney and client scale. But Acting Judge Clement Marumoagae instead ordered the defendants to pay the plaintiffs’ taxed party and party costs.

“While it is important that all the clauses of commercial agreements should be respected and where necessary enforced, it is also important to understand the circumstances under which these agreements are concluded. Indeed, courts do not have a leeway to unreasonably refuse to grant orders that would assist parties to enforce the terms of their contracts. However, courts also have a duty to carefully assess whether the contracts, the terms of which the parties seek to enforce, do not offend against not only public policy but also legislation such as [the] NCA and [the] CPA,” Marumoagae AJ said.

He expressed the view that punitive costs clauses in commercial agreements “offend against the spirit of the NCA because they create yet another avenue for continuous over-indebtedness of consumers whose payment default suggests that they are unable to pay their debts”.

But the matter was not argued, and there was no application to declare these clauses in the context of commercial agreements unlawful. Therefore, the judgment did not declare these clauses unlawful. “Without deciding the issue, I am, however, convinced that these clauses are potentially unlawful,” Marumoagae AJ said.

Are consumers aware of the implications?

With reference to the circumstances under which commercial agreements are concluded, the Court said it was unclear whether, when consumers sign standard (or pro forma) commercial agreements, the implications of the legal costs if litigation is instituted against them are explained to them or even highlighted. Marumoagae AJ said it was also unclear whether consumers were made alive to what is meant by a punitive costs order.

The judge agreed that the courts should exercise their power to declare contracts contrary to public policy sparingly and only in the clearest of cases. In his view, standard/pro forma commercial contracts that bind a consumer to pay punitive legal costs without any prior discussion or explanation of the implications of such clauses “present the clearest case that warrants judicial intervention”. This was particularly so where the courts are required to grant punitive costs orders in default judgments where the defendants did not participate in the proceedings.

The principles of freedom and sanctity of contract assume that parties generally have real freedom of choice to the extent that they enjoy equal bargaining power. But the available research indicates that one of the parties to the contract is usually in a more powerful position than the other, which can lead to the abuse of that power in certain instances, Marumoagae AJ said.

Unequal bargaining power has been recognised as one of the factors that play a role in determining whether a contractual term is against public policy. “This unequal bargaining power is clearly evident in pro forma/standard instalment sale contracts, which consumers sign without discussing most of their clauses. Consumers may well negotiate the price, but it is doubtful that clauses making provision for legal costs are discussed, despite their impact should consumers default on their payments,” he said.

Public policy is rooted in the Constitution and does not only endorse freedom and sanctity of contract but also precludes the enforcement of a contractual term in circumstances where such enforcement would be unjust and unreasonable, the judge said.

Grounds for the courts to interfere

Counsel for BMWFS submitted that the courts are normally bound to recognise the parties’ freedom to contract and give effect to any agreement reached by the parties with respect to costs.

Marumoagae AJ said he was not convinced that the Court can “ever” be bound by the parties’ agreement regarding costs. The Court cannot “religiously rubberstamp” a punitive costs clause in circumstances where it is “absolutely clear” that the defendant will not even be able to pay costs in the ordinary sense. To do so, will not be in line with what the legislature aims to achieve through legislation such as the NCA and the CPA.

The Court held that parties have the freedom to enter agreements and to choose with whom they wished to contract. By so doing, they can decide on the terms of their agreements. But this can justifiably be interfered with if any of the parties conduct themselves in a way that violates not only the spirit and purport of statutes such as the NCA and the CPA but also constitutional rights and values.

Inconsistent approach by the courts

Marumoagae AJ said that in different magistrates’ courts and various divisions of the High Court, judicial officers are seized with applications for default judgments wherein those who sell cars request punitive costs. In most instances, these orders are granted without any assessment of how they will affect similar-situated defendants who are already experiencing financial challenges.

That there may be judges who refuse to grant punitive costs orders will lead to a great deal of inconsistencies in the way the courts exercise their discretion with respect to these contracts. Punitive costs will be denied or granted depending on the presiding judicial officer who is considering these kinds of applications. “This situation is untenable, and there is a need for a consistent approach,” he said.

“I am of the view that courts have a duty to protect parties who are not before them by ensuring that they are not overburdened with extensive costs orders even though they did not participate in the court proceedings. The defendants are also protected by the Constitution, which is founded on the values of human dignity, equality, and freedom.”

He added that the courts are enjoined by section 39(1)(a) of the Constitution when interpreting the Bill of Rights to “promote the values that underlie an open and democratic society based on human dignity, equality and freedom”.

Marumoagae AJ said: “Rubberstamping punitive costs clauses that will unreasonably worsen the financial position of defendants who are brought to court due to their failure to pay their debts is clearly contrary to this constitutional ideal.

“Notwithstanding the fact that courts have discretion to make costs orders and are not bound by what parties include in their contracts, the fact that these punitive costs orders are granted by some judges is a matter of concern. In this context, I have no doubt that punitive costs clauses in commercial agreements are against public policy, potentially unlawful, and should not be granted.”

Click here to download the judgment.