The in duplum rule is a common law rule, designed to reduce the harsh effects of continued compounding of outstanding interest payable by a borrower to a creditor on a debt or loan. The primary object of the rule is to protect debtors from being crushed by the never-ending accumulation of interest on an outstanding debt or loan.
As the in duplum rule is premised on common law, this means that there is no specific Statutory Act or provision that governs or guides the principles of interest. The principle of in duplum is derived from custom and judicial precedent rather than statute.
The most recent consideration and clarification of this rule was formulated in the recent Court of Appeal Decision of AFRITEC (PTY) LTD v LETLHOGONOLO BAKAE CACGB-009-20.
The Court pointed out that the in duplum rule should be applied in the following manner:
- Interest stops running whenever unpaid interest is equal to unpaid capital;
- In the absence of an agreement to the contrary, repayments go first in reduction of outstanding interest, then in reduction of capital;
- As soon as the outstanding interest falls below the outstanding capital, interest commences to run again;
- Once judgment is given for capital plus interest, those sums are combined, and interest commences to run afresh on the total, again subject to the in duplum rule;
- The burden is on the creditor to prove that the sum claimed is calculated in accordance with this principle; and
- Interest never loses its true character as such, notwithstanding that a bank, or others may refer to it having been capitalised from time to time
In simple terms, the in duplum rule stops the running of interest on a debt or loan once the sum of the unpaid interest equals the amount of the outstanding debt or loan.
For the debtor the rule affords them protection for so long as the accrued interest is equal to capital. However once the sum of accrued interest is reduced to an amount below that of the outstanding debt or loan amount, then interest starts to accrue afresh. In this respect it should be noted that payments made by the debtor are apportioned first to reduction of interest then to the reduction of capital.
For the creditor, the rule provides an element of protection from issues relating to inflation that come into play where a debt has been owing over a significant period of time. Furthermore, it is our considered view that the rule continues to aid creditors by ensuring that they make a profit from the capital or credit advanced to a debtor. It further is in line with the concept the freedom of contract as debtors out of their own volition agree to the terms of the agreement. The debtors were aware of the interest they were going to incur from the capital they lent or the credit they received.
In light of the above, it is recommended that debtors and creditors be extremely vigilant in respect of debts owing and outstanding debts. Creditors and debtors should consult a legal advisor to recover the capital debt or resolve the capital owing to avoid the risk of considerable losses. The General Commercial Litigation and Recoveries department at Akheel Jinabhai and Associates (in Association with Mckee Commercial Law) headed by partner Pusetso Olsen, is highly skilled and experienced in such matters and can assist and advise accordingly.