Unlawful credit agreements – What are the consequences?

To avoid unlawful credit agreements, it is imperative for both credit providers and consumers to be aware of the National Credit Act (NCA) and the effects thereof. “The NCA intends to achieve a healthy and balanced credit market in South Africa by seeking to effectively address the unequal bargaining power of consumers, to curb malpractice in the commercial world and to curb the exercise of certain contractual remedies amongst other intentions,” Petrus Khumalo of Schoemanlaw Inc. explains in a recent article that defines unlawful credit agreements as well as highlights the consequences thereof.

In terms of Section 89(2) of the NCA, a credit agreement is unlawful in the following circumstances:

Agreements which entail negative option marketing;
Agreements concluded by an unregistered credit provider;
Agreements where an unassisted minor (who is not emancipated) is the consumer;
Agreements where the consumer is mentally unfit or does not have the mental capacity to conclude such an agreement;
Agreements where the consumer’s estate is under administration and the consumer has not obtained the consent of the administrator to conclude the agreement;
Agreements concluded by a credit provider who is subject to final notice from the National Credit Regulator to withdraw from the credit market.

Any credit agreement which a Tribunal or the Court finds to be unlawful, that Tribunal or Court can make the following orders:

The agreement can be declared void;
No party may claim performance;
The performance which has already been delivered cannot be reclaimed on grounds of unjustified enrichment; the person in possession has a stronger right over the performance if both parties are equally guilty to the unlawfulness of the agreement (par delictum);
The court can relax the par delictum rule in order to avoid injustice between the parties in accordance with the common law rule;
The consumer’s money is to be refunded;

The rights of the credit provider to recover funds from the consumer are to be cancelled.

In terms of Section 89(2) of the NCA, a credit agreement is unlawful in the following circumstances:

Agreements which entail negative option marketing;
Agreements concluded by an unregistered credit provider;
Agreements where an unassisted minor (who is not emancipated) is the consumer;
Agreements where the consumer is mentally unfit or does not have the mental capacity to conclude such an agreement;
Agreements where the consumer’s estate is under administration and the consumer has not obtained the consent of the administrator to conclude the agreement;
Agreements concluded by a credit provider who is subject to final notice from the National Credit Regulator to withdraw from the credit market.

Any credit agreement which a Tribunal or the Court finds to be unlawful, that Tribunal or Court can make the following orders:

The agreement can be declared void;
No party may claim performance;
The performance which has already been delivered cannot be reclaimed on grounds of unjustified enrichment; the person in possession has a stronger right over the performance if both parties are equally guilty to the unlawfulness of the agreement (par delictum);
The court can relax the par delictum rule in order to avoid injustice between the parties in accordance with the common law rule;
The consumer’s money is to be refunded;

The rights of the credit provider to recover funds from the consumer are to be cancelled.