Online Reporter
Trust Maanda
Legal Position
ON a daily basis people enter into agreements.
Usually, the creditors demand that the debtor deposits some form of security with them.
Let us say John lends money to Peter. John may ask that Peter gives him his car as a pledge for security for him to get repaid.
Sometimes the agreement of pledge may state that if Peter does not pay the money on the agreed date, John is entitled to own the motor vehicle.
Peter undertakes to pay John the sum owed on or before a certain date, failure of which John shall be entitled to sell the property pledged.
That agreement is what is called a pactum commisorium.
A pactum commissorium has been defined as “a pact by which the parties agree that if the debtor does not within a certain time release the thing given in pledge by paying the entire debt, after the lapse of the time fixed, the full ownership in the thing will invariably pass to the creditor in payment of the debt.”
Is that agreement legal? The answer is NO.
The reasons why a pactum commissorium should not be enforced in our law are discussed in Mapenduka v Ashington 1919 AD 343 at 351.
In short, the authorities say that a pactum commissorium is not enforceable in our law.
That agreement is what is forbidden at common law and by operation of the Contractual Penalties Act.
Section 4(1) of 3 HH 31–2004 HC 9274/03 the Contractual Penalties Act [Chapter 8:04] seeks to protect gullible members of the public from unfair terms of a contract.
The section gives the court very wide powers to intervene where it deems that the penalty stipulated in a contract is out of proportion to any prejudice suffered by the creditor as a result of the omission or withdrawal giving rise to liability.
It is only South African authorities that now seem to accept exceptions to the rule that a pactum commissorium is invalid, but can be held to be valid where the creditor gives the debtor a fair value for the mortgaged or pledged property. In Zimbabwe the rule has not been relaxed.
Accordingly, the courts in Zimbabwe are reluctant to hold the agreement valid and enforceable.
While South Africa may have moved towards accepting exceptions to the rule that a pactum commissorium is invalid and unenforceable, such exceptions have not become part of our law in Zimbabwe.
In the case of T Kufandirori v M.G. Chipuriro & Two Others HH 13- 04, the court remarked on the reasons why our law seeks to protect vulnerable or gullible members of the public from unjust and unfair contractual penalties.
The court said that: “The unfortunate part of life is that due to the unequal distribution of wealth, grinding poverty and greedy, the world will always have its fair share of “Shylocks” who are prepared to pounce and make capital out of other people’s misfortunes. They will demand their pound of flesh regardless of the cost and effect to the victim.”
Due to financial hardship, some people are forced to accept exploitative and oppressive contractual terms.
The courts protect such persons from the harmful effects of the unfair contractual penalties.
An important point made in Mapenduka’s case, is that an exception can be made provided the arrangement meets the requirement that the fair price is agreed at the time that the debt is due, not at the time the property or thing is pledged.
The debtor should be in a position to take back his property pledged when the time for payment arrives.
In Mapenduka’s case, the creditor advised the debtor when the debt was due. The debtor said he had no money to pay. The creditor then advised the debtor that in that case the debtor would keep the pledged oxen as his.
The courts may be tempted to relax the rule where the value of the thing pledged is determined at the time the debt is due and not at the time the pledge is made.
This is because by the time the debt is due, the value of the thing may be in dispute, and therefore there will be no agreement on the fair value which by then could have appreciated.
There is a possibility that the debtor would be prejudiced by the unsatisfactory evaluation of the property.
Pactum commissorium is illegal because it is an oppressive and exploitative agreement that allows a creditor to automatically appropriate a debtor’s pledged goods upon default, without due process like foreclosure.
This prohibition protects vulnerable borrowers from losing property that could be worth more than their debt, and to prevent unjust enrichment.
It is steeped in public policy to stop members of the public from resorting to self-help.
TRUST MAANDA is a legal practitioner and a partner at Maunga Maanda And Associates. He writes in his personal capacity. He can be contacted on +263772432646
