Revisiting the in duplum rule

On June 24, 2022, the Reserve Bank Zimbabwe (RBZ) amended the bank’s policy rate from 80 percent per annum to 200 percent per annum for Zimbabwe dollar loan facilities.

The increase in the bank’s policy rate was part of a cocktail of measures to enhance the circulation of foreign currency and control the rise in month-on-month inflation which had at that time risen to 30,7 percent for June 2022.

The impact of the increase in the bank’s policy rate meant that overnight the bank’s policy rate became the minimum lending rate for banks much to the distress of customers who had borrowed funds in local currency.

The bank’s tight monetary policy measures were maintained for the remainder of 2022 until February 2, 2023 when, amongst other things, the bank policy rate was adjusted from 200 percent per annum to 150 percent per annum.

On October 24, 2023 the bank’s policy rate was further reduced from 150 percent per annum to 130 percent per annum.

The monetary measures introduced by the bank to align interest rates with developments in the rate of inflation brought to the fore the in duplum rule which is a well-known common law legal principle that initially caught the attention of the post-independent business community in Zimbabwe in 1996 when the courts made various pronouncements on the application of the principle to Zimbabwe’s legal system.

What is the in duplum rule?

The in duplum rule is part of the common law of Zimbabwe’s plural legal system as defined in the Constitution of Zimbabwe.

It is a principle of public policy emanating from Roman-Dutch law that was approved and applied by the courts in Zimbabwe as far back as 1911.

It is a principle that was introduced to protect debtors and which in essence provides that interest may never exceed the capital sum of a debt, such that a creditor who tolerates a debtor who does not service a debt as contractually agreed cannot recover burdensome amounts of interest after an inordinate delay in recovering the debt.

In other words when interest reaches the amount of the principal sum of the debt, it ceases to accumulate beyond the principal sum.

What is the significance of the in duplum rule?

The in duplum rule does not prescribe rates of interest on borrowings and nor does it prohibit the compounding or capitalisation of interest where that is a trade custom or governed by agreement.

It is applicable to all debts whether arising from a financial loan or any contract whereby a principal sum is payable with interest thereon and enshrines the rule that the compounding of interest can never alter the character of accrual interest into a capital sum.

Unless the loan agreement or the contract stipulates otherwise, a creditor may apply periodic payments first to accrued interest and then to the capital sum.

As a consequence, a debtor who makes periodic payments may over time in fact make several payments that exceed the capital sum, and this is not prohibited.

In circumstances where interest has run to the double of the capital amount, piecemeal payments that do not clear the debt or reduce the capital amount will result in interest running afresh on the capital amount until double of the capital sum is reached.

Where payments result in the amount of the capital sum being reduced, further interest on the debt cannot exceed the reduced outstanding capital amount.

Effect of legal proceedings

In circumstances where court action is instituted for the recovery of a debt sounding in money, the creditor may claim the capital sum and accrued interest.

In the event that interest runs to the double during the litigation process, judgment is granted for the capital sum, plus interest equivalent to the double of the capital amount.

In terms of section 5(2) of the Prescribed Rate of Interest Act (Chapter 08:10) further interest at the rate prescribed in the judgement is recoverable on execution of a judgement debt arising out of a financial loan or a contract whereby the capital sum is payable with interest at the determined rate.

A judgement debt is defined as any sum of money or part thereof due in terms of any judgment or order of a court of law and includes any interest that forms part of the principal sum of a judgment debt.

Interest on a judgement debt is recoverable on the full aggregate amount of the capital sum and interest from the date of judgment to the date of payment in full.

The operation of the in duplum rule means therefore that the judgment debt becomes the new principal sum and any interest that accrues on thereon may not exceed the double of the judgement debt.

This article was prepared by the Zimbabwe National Chamber of Commerce for Business Weekly.-businessweek