“I received a warrant of execution from the Sheriff, in terms of this document, it appears that interest against the capital amount is being charged at mora interest What is this interest and when did I consent to this interest rate?”
To answer this question, it is necessary to explain the distinction between contractual interest and mora interest. A clear distinction exists between contractual interest and mora interest, as their nature and purpose varies.
Contractual interest arises out of an agreement between parties, and it is calculated on a basis agreed to between the parties. It can take two forms:
- Compound interest – interest levied on the capital amount together with accrued interest.
- Simple interest – interest levied on the capital amount only.
Furthermore, compound interest can be calculated in two different methods - Nominal Annual Compounded Monthly' ('NACM') and 'Nominal Annual Compounded Annually' ('NACA').
Mora interest is significantly different, as it is not payable in terms of any agreement. Its nature is that of being a mechanism to compensate a party for loss or damage resulting from a breach of contract, in particular mora debitoris.
It is based on the principle that “a debtor who is tardy in the due payment of a monetary obligation will almost invariably deprive his creditor of the productive use of the money and thereby cause him loss. It is for this loss that the award of mora interest seeks to compensate the creditor”.
Simply stated - ‘When a debtor’s contractual obligation is to pay money, and he is in mora, the general damages that flow naturally from the breach will be interest a tempore morae’
Because mora interest constitutes damages and is not governed by an agreement between the parties, it is therefore regulated in terms of the Prescribed Rate of Interest Act, 55 of 1975.
Section 1(1) of which reads as follows:
“If a debt bears interest and the rate at which the interest is to be calculated is not governed by any other law or by an agreement or a trade custom or in any other manner, such interest shall be calculated at the rate prescribed under subsection 2 as at the time when such interest begins to run, unless a court of law, on the ground of special circumstances relating to that debt, orders otherwise.”
Section (2)(a) of the aforementioned Act states:
“For the purposes of subsection (1), the rate of interest is the repurchase rate as determined from time to time by the South African Reserve Bank, plus 3,5 percent per annum.”
The prescribed interest rate is currently 10.75%.
Parties may agree to exclude liability for mora interest, but this agreement must be clear and unambiguous.
Accordingly, if there is no agreement on levying interest on unpaid interest, and the parties have not agreed to exempt reliance on a common law remedy, then a creditor may claim mora interest at the prescribed rate on any unpaid interest which is due and payable.
Reference List:
- Linton v Corser 1952 (3) SA 685 (AD) at 695
- H Christie - The Law of Contract in South Africa, 6 ed (2011) at 530
- First National Bank of SA Ltd v Rosenblum & another 2001 (4) SA 189 (SCA) at 195H