By SIYANDA MAKUNGA, Attorney, Rhodes University Law Clinic
Our previous article provided the different types of credit agreements as defined in the National Credit Act (NCA). This article will discuss unlawful credit agreements and unlawful provisions of credit agreements.
The NCA in section 89 declares the following credit agreements to be unlawful:
- Agreements where the consumer is a minor and was not assisted by a guardian when the consumer signed the agreement.
- Agreements entered with a consumer who has been declared mentally unfit.
- Agreements entered with a consumer who is subject to an administration order, where the administrator did not consent to the agreement.
- Agreements that are the result of negative option marketing. (“Negative option marketing” refers to a situation where a credit provider offers a consumer credit which automatically becomes a credit agreement unless the consumer rejects the offer or, in other words, where a credit provider tries to claim that the consumer’s failure to respond to its offer constitutes an acceptance of the offer.)
- Agreements where the credit provider is not registered with the NCR, despite being legally required to do so. A registered credit provider is required to display a registration certificate and a notice or label issued by the NCR.
One exception to the first three bullet points listed above is that a consumer misleads a credit provider into believing that at the time of the agreement, they had the legal capacity to enter into a credit agreement, then the agreement will be enforceable.
When a credit agreement is deemed unlawful, a court must make a just and equitable order to remedy the situation. This empowers a court specifically to order the credit agreement to be declared void from the date it was entered into.
Unlawful provisions in credit agreements
The NCA does not allow certain provisions to be included in credit agreements. The prohibition of these terms and conditions protects the consumer against certain practices by credit providers. Section 90 of the NCA provides a list of unlawful provisions. All consumers are encouraged to take note of these unlawful terms as they continue to appear in some credit agreements.
Some of the more significant unlawful provisions are as follows:
- A provision that sets aside or overrides the effect of any provision of the NCA (e.g. a provision that credit costs/interest will be higher than that permitted by the NCA).
- A provision that misleads the consumer or subjects the consumer to potential fraud.
- Provisions that determine that the consumer has waived certain of their rights that apply as a matter of law to credit agreements. The rights that cannot be waived include a consumer’s right to have their debt restructured, the right to have repossessed goods sold at a fair, market-related price, and the right to dispute any debits that pass through a consumer’s account.
- Provisions that would require the consumer to leave items such as identity documents, bank cards or PINs of bank cards in the possession of the credit provider.
A consumer who alleges that a credit agreement contains an unlawful provision may bring an application to court. The court may declare a provision invalid and make an order either that the unlawful provision must be deleted from the agreement or amend the provision in such a way that renders it lawful. Lastly, the court may declare that the entire agreement is unlawful because of the impact of the unlawful provision.
Thus, for example, if a credit agreement for the sale of furniture provides for interest or fees over the maximum amounts permissible, a court must declare the offending provisions to be void and enforce the remainder of the agreement. Furthermore, the court may declare the entire agreement void, order the furniture shop to refund all amounts paid, and order that the furniture sold be retained by the borrower or forfeited to the State.
The provisions of the NCA on unlawful credit agreements and unlawful provisions of credit agreements serve an essential purpose of preventing credit providers from abusing their bargaining power to exploit consumers who need credit, ensuring greater fairness of treatment in the supply of consumer credit.