Common law set-off in credit agreements given the boot?

Section 90(2)(n) of the Act stipulates that a provision in a credit agreement is unlawful if it permits the credit provider to satisfy an obligation of a consumer by making a charge against an asset or amount deposited for the consumer, unless s124 of the Act permits this. Section 124 basically allows the charge against the asset if specific authorisation is given by the consumer in the credit agreement.

It would seem that, pending an appeal of the recent judgment in the matter of the National Credit Regulator v Standard Bank of South Africa Limited (44415/16) [2019] ZAGPJHC 182 (27 June 2019), which ruled in favour of the National Credit Regulator, common law set-off in circumstances where the National Credit Act is applicable, has been se(n)t off packing.

It must be pointed out that this judgment once again highlighted that the Act’s drafting imperfections are nothing new and that the Supreme Court of Appeal has already held that the Act is not a model of clarity.

Set-off allows the termination of obligations without an exchange of performance. Where parties are indebted to one another, set-off operates automatically under the common law when the requirements for set-off are satisfied.

Set-off is an important revenue-generating option for a bank. By way of an example, customer A has an overdrawn current account, but a credit balance in a savings account or any other account for that matter. By operation of the common law, the credit balance in the savings or other account can automatically be set-off against the overdrawn current account.

However, s90(2)(n)of the Act requires a number of stringent factors to be present in order for set-off to be possible. The customer must give prior authorisation that set-off can be applied against a specific amount in a specific account to satisfy a specific obligation. This presents a significant departure from the common law.

The continued application of the common law principle of set-off is not expressly excluded by s124 of the Act.

The real issue that the court grappled with is whether banks could dodge s124’s stringent requirements by not making any reference to set-off in their credit agreements, continuing instead to apply the common law principle of set-off.

Quite understandably, the Regulator’s position was that the Act displaced the common law principle of set-off and described the only set-off regime permissible under the Act. On the other hand, the bank favoured the interpretation that if the credit agreement is silent on set-off, the common law principle applies. These two positions cater for the two different sides of the divide and understandably so – consumers on the one hand and financial institutions on the other hand.

On a careful analysis of the arguments presented, the Regulator, supported by the South African Human Rights Commission, was certainly aware of the fundamental rules to be applied when interpreting specific words used in statutes, but seemed to draw substantial support from the main objective of the Act, namely to protect consumers. The bank on the other hand argued valiantly that the court could not lose sight of the actual words used in the statute. It argued further that, like other sections of the Act, if the lawmakers wanted to exclude the common law principle of set-off in credit agreements, they would have said as much.

The Court held that s124 is not aimed only at regulating set-off when a set-off clause is incorporated in the credit agreement itself. Where a credit agreement does not make provision for set-off, a charge to a consumer’s account can only be lawful if the consumer has authorised it. Until such authorisation is granted, set-off, whether by way of contract or common-law, is unlawful. The current position is that the common law right to set-off is not applicable in respect of credit agreements which are subject to the Act.