The recent High Court decision of National Credit Regulator v Standard Bank of South Africa Limited [2019] 3 All SA 846 (GJ), has found that the right to set-off is no longer applicable to a credit agreement subject to the National Credit Act 34 of 2005 (‘the NCA’). The judgment has had far-reaching implications for consumer banking as well as raising interesting questions about how our courts go about amending common law and interpreting legislation.

The National Credit Regulator (‘the Applicant’) brought the application by way of certain empowering provisions of the NCA on behalf of consumers. The Applicant had received various complaints relating to the Banks practice of applying set-off to accounts held by consumers without their consent. The Applicants argued that by virtue of s90(2)(n) as read with s124, the common law right to set-off was inapplicable to credit agreements subject to the NCA.

The South African Human Rights Commission (‘the SAHRC’), joined as amicus curiae, argued that use of the common law right to set-off infringed upon a variety of consumer rights. The SAHRC’s concern was that common-law set-off had the immediate consequence of reducing the income upon which consumers would ordinarily rely. In addition, the common law deviated substantially from the legislative framework put in place by the NCA. The common law allowed banks to apply set-off without any notice to a consumer, affecting consumer livelihood and creating further over-indebtedness.

Compared with the bulk of South Africa’s consumer-friendly jurisprudence, this practice certainly comes across as unfair. Although the court ultimately agreed with the Applicant, the practical application of the common law right of set-off is rooted in more innocuous practices. Set-off, in terms of the common-law, allows for one debt to be cancelled by another debt in circumstances where two parties owe each other money. In practical terms the principle has the effect of automatically extinguishing a debt as if payment had been made, without the need to transfer whatever debt is owed.  

The relevant provisions of the NCA, namely s90(2)(n) and s124 create a legislative scheme of operation for set-off which regulates the practice in such a way that the consumer has control over when a credit provider may apply set-off to the consumers’ accounts. In short, the NCA permits the use of the practice but only with the consumers’ consent.

The complicating factor lies in the way the Bank had interpreted the NCA. The Banks argument was that the wording of s90(2)(n) and s124 meant that these provisions only applied to rights provided ex contractu and could not be said to regulate the use of a common-law practice not expressly written in a credit agreement.  In simple terms – the bank argued that set-off as pe the NCA only applied to written provisions of credit agreements and not common law practices. In other words, it was evident that the common-law principle of set-off existed in conflict with the version of set-off allowed for and regulated by the NCA.  

Although the Bank applied set-off lawfully within the prescripts of the common law, it was evident that the practice was inherently prejudicial. The danger, or prejudice, was the bank could apply the principal to the consumers' accounts and the consumer would then have to pursue a remedy against the bank after the set-off had taken place. The Bank has no obligation to provide any notice to a consumer meaning that it could take some time for a consumer to take notice and have dire consequence to a consumer under debt review.

The court found that the banks' argument was inherently irrational. On the banks' interpretation, it would be unlawful for a credit provider to inform a consumer that it would rely on common-law set-off, but it would be lawful to keep the consumer in the dark. The NCA is geared towards protecting consumers from unfair practices, by promoting transparency and correcting power imbalances between consumers and credit providers. The Banks interpretation was premised on withholding information from the consumer, which the court found was inherently flawed and foul of the NCA.  

The Court found that s90(2)(n) could be interpreted to refer to both express and implied terms. In other words, if a Bank was applying the common-law practice of set-off to a credit agreement, then it could be said that set-off was an implied term of that agreement, and thus would have to be compliant with the legislative requires for set-off to be valid. Although neither party made submissions in this regard, the implication was that the NCA could be interpreted to extend the NCA to the commons law without the difficulty argued by the Bank.

The Court's ultimate task was to determine whether the provisions of s90(2)(n) and s124 applied to a common-law application of set-off. The complicating feature was that s90(2)(n) stated that it applied to the written terms of a credit agreement only and did not clarify whether the provision applied to the common law. In other words, the Court was asked to read into the NCA an interpretation which favoured the application of the NCA to common-law set-off not expressly written in an agreement.

The court found that to interpret the NCA in a way which allowed for credit providers to deduct monies from a consumer without the need to give notice would be an absurd deviation from the purpose of the NCA. The court found that s124 did not make the practice of set-off unlawful for so long as the consumer was given notice and was able to give their consent. The court noted that set-off was a useful tool for both consumer and credit providers but only to the extent that neither party would be unduly prejudiced.

The socio-economic effects of common law set-off are such that debtors are entirely vulnerable to the possibility of being “... deprived of their own income to see to their basic needs before satisfying their creditor obligations to the credit provider.” The consequences could be devastating to the status of a consumer, as their ability to satisfy other debts is prejudiced. Of concern was the effect set-off had on consumers placed under debt review as they were rendered unable to satisfy the terms of the debt-review agreement.

The court went on to note that the Banks’ interpretation allowed them the freedom to choose between set-off as per the NCA or as per the common law. The court found that the Banks would only ever choose to make use of the common law version. As such, the entire purpose of including provisions which regulated set-off would have been entirely redundant. The legislators could not have intended for this to be the case. An interpretation that renders a statutory provision meaningless should be avoided.

The court found that the provisions of s90(2)(n) and s124 were designed to alter the common law position. These provisions provided that the conditions laid out in s124 were the only circumstances in which set-off would be permitted and applied equally to written or unwritten terms of a credit agreement.

The result of this judgment is that banks are no longer permitted to apply their so-called ‘right’ to set-off without first obtaining consent from the consumer as well as providing due notice. The practical result will hopefully see the Banks either refraining from making use of the now exclusively statutory right to set-off or applying the rule with the strict confines of the NCA. It is important to bear in mind that the right to set-off is still permitted, and consumers should continue to exercise proper caution and restraint when entering into credit agreements.

From a jurisprudential point of view, this judgment has far-reaching implications. In the first instance an entire body of common law has been effectively relegated to the ever-growing list of principles now mostly long forgotten. In reading this judgment one is reminded that the law must constantly evolve in order to remain relevant. Whether adapting in response to societies changing boni mores, or in response to rapidly advancing technologies. It is concerning, however, that it required 14 years for an antiquated and prejudicial common law practice to be duly relegated.

How many other harmful practices are hiding in plain sight, waiting to receive a similar judicial relegation to the history books?

Written by Reenen Lombard, Professional Assistant, Attorney, Schoeman Law