A court ruling by Cape Town Judge Dennis Davis in the case of
Combined Developers v Arun Holdings & Others
(6105/2013)  ZAWCHC 132 has raised concern for financial
lenders across the country as to the validity of acceleration
clauses in loan agreements.
Acceleration clauses provide comfort to lenders, affording them
the right to call for repayment of an entire outstanding loan
amount if a borrower defaults in paying his instalments.
Traditionally, courts do not lightly interfere with contracts and
ordinarily give effect to the intentions of the parties when
LETTER OF DEMAND
In the Combined Developers case, the debtor borrowed
money from the lender and failed to pay an instalment on the due
date. The lender sent an email to the debtor, which when translated
into English, read along the following lines:
"See below and attached, we have not yet received
payment. Can you please make payment, or if payment has already
been made, forward to us the proof of payment. Thank you, Renier
This email formed part of a string of emails and was preceded by
an email sent internally from an employee of the lender to Renier
Kerk confirming that payment had not been made by the debtor and
asking Mr Kerk how much time they should give the debtor to make
the payment. Although separate emails, Judge Davis found that the
second email formed part of the totality which was presented to the
The clause in the loan agreement dealing with "events of
default" specifically provided that the borrower would commit
an event of default if it failed to pay the amount outstanding
together with interest within three business days after receipt of
written demand from the lender requiring the borrower to pay the
amount to the lender.
The debtor paid the overdue instalment but made no payment in
respect of penalty interest.
The lender, despite having received the overdue instalment,
demanded that the borrower pay the full outstanding loan because it
had failed to pay the penalty interest.
It must be pointed out that the penalty interest was an amount
of R86,57 and the entire loan amount which was called up by the
lender was in the region of R7.5 million.
The lender's email, according to the debtor, constituted an
enquiry or a request that, if payment had not been made, it should
be made, as opposed to a written demand as contemplated by the
provisions of the loan agreement. The lender, on the other hand,
relied on the email as being the written demand for payment which,
when not complied with, constituted an event of default and
triggered the acceleration clause.
The email failed to set out the exact amount owing and in
particular, failed to set out the precise amount of interest which
was due and payable. Judge Davis held that the email did not
constitute proper demand as contemplated in the loan agreement. He
came to this finding by examining the wording of the loan agreement
which made a distinction between a written demand and a written
notice and found that some form of communication to pay a
"measly sum of R86,57 immediately following payment of the
large principal sum should surely have been
The judgment goes on to state that "it cannot be in
line with public policy that a demand, in an ambiguous form as that
which was included in the email by the lender, can first be met
with silence because R86,57 has not been paid and then a week
later, the full weight of the acceleration clause is applied by the
lender to gain massive commercial advantage to the significant
disadvantage of the debtor."
Because the acceleration clause has draconian implications,
Judge Davis found that at the very least, the debtor could have
expected a proper demand to be made which would inform the debtor
of the entire amount, as was the case in Chatrooghoon v Desai
and Others 1951 (4) SA 122 (N) which had been heavily relied
on by the lender. In the Chatrooghoon case, both the
principal and interest amounts were set out in the letter of
Some commentators have suggested that Judge Davis has ruled
against acceleration clauses in totality. We feel that the effect
of this judgment is more focused on the manner in which lenders
implement an acceleration clause.
Lenders must consider the clauses of their loan agreements in
detail and comply with each and every provision and time period of
the agreement when demanding payment from a debtor. Judge Davis has
made it clear that if written demand is required before an
acceleration clause is triggered; the lender must then strictly
comply with the provisions of the loan agreement.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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