Unlawful credit

Unlawful credit is dealt with in Chapter 5 Part A section 89 to section 91 of the National Credit Act.

Unlawful credit agreements

Unlawful credit agreements are dealt with under section 89. There are a number of conditions that make a credit agreement unlawful.

It should be noted that section 89 does not apply to pawn transactions.

Status of consumer

A credit agreement is unlawful if the consumer is:

• An unemancipated minor unassisted by a guardian
• Subject to an order of a competent court holding that person to be mentally unfit
• Subject to an administration order referred to in section 74(1) of the Magistrates' Courts Act, and the administrator concerned did not consent to the agreement, and the credit provider knew, or could reasonably have determined, that the consumer was the subject of such an order.

The above points do not apply to a credit agreement if the consumer, or any person acting on behalf of the consumer, directly or indirectly, by an act or omission-

(a) induced the credit provider to believe that the consumer had the legal capacity to contract; or

(b) attempted to obscure or suppress the fact that the consumer was subject to

(i) an order holding the consumer to be mentally unfit, or

(ii) an administration order.

Status of credit provider

A credit agreement is unlawful if:

• at the time the agreement was made, the credit provider was unregistered and this Act requires that credit provider to be registered.

The above point does not apply to a credit provider if-

(a) at the time the credit agreement was made, or within 30 days after that time, the credit provider had applied for registration in terms of section 40, and was awaiting a determination of that application; or

(b) at the time the credit agreement was made, the credit provider held a valid clearance certificate issued by the National Credit Regulator in terms of section 42(3)(b).

• the credit provider was subject to a notice by the National Credit Regulator or a provincial credit regulator - covered further under section 89(2)(e).

Nature of agreement

A credit agreement is unlawful if the agreement:

• Results from an offer prohibited in terms of section 74(1). Specifically: A credit provider must not make an offer to enter into a credit agreement, or induce a person to enter into a credit agreement, on the basis that the agreement will automatically come into existence unless the consumer declines the offer.
• Is a supplementary agreement or document prohibited by section 91(a).

Consequences of an unlawful credt agreement

(5) If a credit agreement is unlawful in terms of section 89, despite any provision of common law, any other legislation or any provision of an agreement to the contrary, a court must order that-

(a) the credit agreement is void as from the date the agreement was entered into;

(b) the credit provider must refund to the consumer any money paid by the consumer under that agreement to the credit provider, with interest calculated-

(i) at the rate set out in that agreement; and

(ii) for the period from the date on which the consumer paid the money to the credit provider, until the date the money is refunded to the consumer;

and

(c) all the purported rights of the credit provider under that credit agreement to recover any money paid or goods delivered to, or on behalf of, the consumer in terms of that agreement are either-

(i) cancelled, unless the court concludes that doing so in the circumstances would unjustly enrich the consumer; or

(ii) forfeit to the State, if the court concludes that cancelling those rights in the circumstances would unjustly enrich the consumer.

Unlawful provisions of credit agreement

Unlawful provisions of a credit agreement are dealt with under section 90. The contents of this section are of such import that each provision of every credit agreement should be tested against the contents of this section. Accordingly, what constitutes an unlawful provision is set out below in its entirety.

Definition of an unlawful provision

A provision of a credit agreement is unlawful if:

(a) its general purpose or effect is to-

(i) defeat the purposes or policies of this Act;

(ii) deceive the consumer; or

(iii) subject the consumer to fraudulent conduct;

(b) it directly or indirectly purports to-

(i) waive or deprive a consumer of a right set out in this Act;

(ii) avoid a credit provider's obligation or duty in terms of this Act;

(iii) set aside or override the effect of any provision of this Act;

(iv) authorise the credit provider to-

(aa) do anything that is unlawful in terms of this Act; or

(bb) fail to do anything that is required in terms of this Act;

(c) it purports to waive any common law rights that-

(i) may be applicable to the credit agreement; and

(ii) have been prescribed in terms of subsection (5); (Note: The Minister may prescribe particular common law rights that may not be waived in a credit agreement on the grounds that the waiver of those rights would be inconsistent with the purposes of this Act).

(d) the provision results from an offer prohibited in terms of section 74(2) or (3);

(e) it purports to make the agreement subject to a supplementary agreement prohibited by section 91(a);

(f) it requires the consumer to enter into a supplementary agreement, or sign a document, prohibited by section 91(a); or

(g) it purports to exempt the credit provider from liability, or limit such liability, for-

(i) any act, omission or representation by a person acting on behalf of the credit provider; or

(ii) any guarantee or warranty that would, in the absence of such a provision, be implied in a credit agreement;

(h) it expresses an acknowledgement by the consumer that-

(i) before the agreement was made, no representations or warranties were made in connection with the agreement by the credit provider or a person on behalf of the credit provider; or

(ii) the consumer has received goods or services, or a document that is required by this Act to be delivered to the consumer, which have or has not in fact been delivered or rendered to the consumer;

(i) it expresses an agreement by the consumer to forfeit any money to the credit provider if the consumer-

(i) exercises the right of rescission in terms of section 121, except to the extent contemplated in section 121(3)(b); or

(ii) fails to comply with a provision of the agreement before the consumer receives any goods or services in terms of the agreement;

(j) it purports to appoint the credit provider, or any employee or agent of the credit provider, as an agent of the consumer for any purpose other than those contemplated in section 102 or deems such an appointment to have been made;

(k) it expresses, on behalf of the consumer-

(i) an authorisation for any person acting on behalf of the credit provider to enter any premises for the purposes of taking possession of goods to which the credit agreement relates; or

(ii) a grant of a power of attorney in advance to the credit provider in respect of any matter related to the granting of credit in terms of this Act;

(iii) an undertaking to sign in advance any documentation relating to enforcement of the agreement, irrespective of whether such documentation is complete or incomplete at the time it is signed;

(iv) a consent to a pre-determined value of costs relating to enforcement of the agreement except to the extent that is consistent with Chapter 6;

(v) a limitation of the credit provider's liability for an action contemplated in subparagraph (iv); or

(vi) a consent to the jurisdiction of-

(aa) the High Court, if the magistrates' court has concurrent jurisdiction; or

(bb) any court seated outside the area of jurisdiction of a court having concurrent jurisdiction and in which the consumer resides or works or where the goods in question (if any) are ordinarily kept;

(l) it expresses an agreement by the consumer to-

(i) deposit with the credit provider, or with any other person at the direction of the credit provider, an identity document, credit or debit card, bank account or automatic teller machine access card, or any similar identifying document or device; or

(ii) provide a personal identification code or number to be used to access an account;

(m) it purports to direct or authorise any person engaged in processing payments to give priority to payments for the credit provider over any other credit provider;

(n) it purports to authorise or permit the credit provider to satisfy an obligation of the consumer by making a charge against an asset, account, or amount deposited by or for the benefit of the consumer and held by the credit provider or a third party, except by way of a standing debt arrangement, or to the extent permitted by section 124; or

(o) it states or implies that the rate of interest is variable, except to the extent permitted by section 103(4).

Consequences of an unlawful provision

In any credit agreement, a provision that is unlawful in terms of this section is void as from the date that the provision purported to take effect.

In considering an unlawful provision, a court may:

• sever the unlawful provision from the rest of the agreement
• alter the unlawful provision if it is reasonable to do so
• declare the entire agreement unlawful as from the date that the agreement, or amended agreement, took effect
• make any further order that is just and reasonable in the circumstances