When a party institutes legal action against another party, the plaintiff is entitled to claim interest over and above the capital amount. The prescribed rate of interest is governed by section 1 of the Prescribed Rate of Interest Act 55 of 1975. The prescribed rate of interest changes from time to time by way of a notice published in the Government Gazette.
Prior to the commencement of the Act on 16 July 1976, the common law governed the interest rates to be applied in litigious matters. Shortly after the commencement of the Act, the Appellate Division held, in the case of Katzenellenbogen Ltd v Mullin (1977) 4 All SA 818 (A), that the common law interest rate would apply up until 16 July 1976 when the new rate, as provided for in the Act, came into effect.
According to the Act, interest is payable on:
- a judgment debt from the date on which such debt is payable, unless the judgment or order provides otherwise; and
- an unliquidated debt determined by a court or arbitrator from the date on which the debt is claimed by service of a demand or summons, whichever is the earlier date.
The prescribed rate of interest in recent years has been set as follows:
- 15.5% with effect from 1 October 1993;
- 9% with effect from 1 August 2014; and
- 10.25% with effect from 1 March 2016.
Any legal practitioner, person or entity which has been involved in litigation knows that legal actions take years to resolve. The more inefficient the court, the longer matters drag on for. Let us consider the following example for illustrative purposes:
A business institutes legal action against another entity for breach of contract and damages in 2013. The trial is eventually scheduled for hearing and judgment is handed down by the High Court in September 2016. In the judgment, the successful party is awarded damages, legal costs and interest at the legal rate (as opposed to interest provided for in an agreement). The following changes to the prescribed rate of interest occurred since the action was instituted:
- when the action was instituted in 2013, the prevailing rate of interest was set at 15.5%;
- during the years, before the matter went to trial, the interest rate changed from 15.5% to 9%; and
- by the time that judgment is handed down, the prescribed rate of interest is 10.25%.
In light of the changing interest rates over the relevant period, which rate will be applicable to the calculation of interest? Will interest remain fixed at 15.5% when the matter commenced or do you break up your calculation according to the periods for when the specific rates applied?
In the case of Davehill (Pty) Ltd & Others v Community Development Board 1988 (1) SA 290 (A), the Appellate Division held that:
"The rate prescribed under ss (2) at the time when interest begins to run governs the calculation of interest. The rate is fixed at that time and remains constant. Subsection (1) does not provide for the rate to vary from time to time in accordance with adjustments made to the prescribed rate by the Minister of Justice in terms of ss (2). The fact that the Minister may from time to time prescribe different rates of interest therefore has no effect on the rate applicable to interest which has already begun to run."
The only exception to the above method of calculation is where 'a court of law, on the ground of special circumstances relating to that debt, orders otherwise'... Special circumstances' are not defined in the Act. It is not necessary for the purposes of the present appeal to consider what circumstances in any given case must needs [sic] depends upon the facts and circumstances of that case. What is clear is that the special circumstances must relate to a particular debt, not to debts in general. The mere fact that the Minister may from time to time vary the prescribed rate of interest in terms of ss (2), a matter affecting debts in general, cannot per se constitute a special circumstance relating to a particular debt."
The position is therefore that unless special circumstances exist which would compel the court to apply a different interest rate, the rate which applied at the commencement of the matter applies irrespective of any changes to interest rate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.