Demand Loans

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By Nico Hudson (Candidate Attorney at Hayes Incorporated)

A VALID DEMAND LOAN HAS BECOME QUITE DEMANDING

In practice, demand loans have generally been utilised to postpone the date on which prescription starts to run. Whereas the Prescription Act 68 of 1969 dictates that a contractual debt will prescribe three years after the date when the debt became due and payable, a debt in terms of a demand loan will only prescribe three years after demand has been made by the creditor for payment in terms of that agreement.

A recent Constitutional Court ruling re-examined what constitutes a demand for payment and, as result, what threshold will have to be met to ensure that prescription will only run on the date of demand and not the date on which the loan agreement was concluded. The question therefore is, in light of the recent ruling, what exactly is the required threshold as set by the Court?

DEMAND LOANS

A demand loan is a type of loan agreement that contains a clause which enables the creditor to unilaterally determine when the debtor must perform. Only once the creditor has made his demand for payment will the debt become due and payable by the debtor. Therefore, prescription only start running from the date the demand was made, and not, as in the case of general loan agreements, on the date on which the agreement was concluded.

The recent decision by the Constitutional Court in Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd 2018 1 SA 94 (CC) (“Trinity Asset Management”), should serve as a caution to all practitioners who utilise demand loans thinking that it automatically postpones the date of prescription.

In Trinity Asset Management, the debtor (Grindstone Investments) and the creditor (Trinity) entered into a run of the mill loan agreement that contained a clause that read:

“The Loan Capital shall be due and repayable within 30 days from the date of delivery of the Lender’s written demand.”

The argument advanced by the creditor was that the inclusion of this clause had the effect of making the loan agreement between the parties a demand loan. In support of this argument, it was submitted that the intention of the parties should be ascertained by the express terms included in an agreement. Based on the facts, it was the creditor’s contention that by the inclusion of this clause, it was evident that it was the intention of the parties that a demand for payment was a condition for the enforcement of the claim. Therefore, according to the creditor, prescription only started to run on the date the demand for the repayment of the loan was given.  

The majority of the Constitutional Court were not in agreement with the argument raised by the creditor. The Constitutional Court focused their attention on what it means for a debt to be “due”. The Court referred to section 12(1) of the Prescription Act and relevant case law and held that in the context of a debt, “due” refers to the principle that the debt must be immediately claimable by the creditor. In laymen’s terms, prescription cannot begin to run before a creditor’s cause of action has fully accrued.

The question therefore was whether a clause that enables the creditor to make demand for payment, constituted a condition precedent for the debt to become due.

The Court held that including a clause in an agreement that empowers a creditor to demand payment does not affect the date at which the debt becomes due. Specifically referring to the facts of this case, the Court held that the demand could have been made at any time and thus was not a prerequisite for the debt to become claimable. Accordingly, since there was no condition precedent for the debt to become due, prescription started running from the date when the parties concluded the loan agreement.

THE TAKE-AWAY

The repercussions of the Trinity Asset Management judgment are that it will be incumbent on the contracting parties to be unambiguous in their intention that a demand for the repayment of a debt is a condition precedent for that debt to become due. The Court in Trinity Asset Management did not elaborate on what would constitute this clear intention and there is therefore still a degree of uncertainty on this point.

Things become even more uncertain if the contract between the parties is a standard form contract. The agreement between the parties in Trinity Asset Management was freely negotiated by the parties whereas with a standard form contract, the consumer does not have the power to amend the terms of the contract. It therefore remains to be seen whether these types of agreements would constitute a clear intention from both parties.

As it is not clear from the judgment what constitutes a “clear intention” this will have to be determined on a case-to-case basis. However, it is evident that the inclusion of a mere demand for payment is not always sufficient.

Although the judgment in Trinity Asset Management leaves much uncertainty in its wake, it still serves as a wake-up call to practitioners. Merely including a clause providing for demand for payment in a loan agreement may not always be sufficient to constitute the loan as a demand loan, thereby postponing the date on which prescription starts to run. The wording of a demand loan agreement should be drafted in a clear and unambiguous manner to stipulate that the loan amount only becomes due and payable on demand.

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