This blog is co-authored by William Hayne and Francisco Andrade Nobrega, candidate attorneys.
In April 2025 the Supreme Court of Appeal confirmed the application of the test for usurious interest rates set out in African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC [2011] 3 ALL SA 345 (SCA) (African Dawn).
The latest judgment highlights the importance of the free will of contracting parties and stands as an encouragement for the drafters of contracts to be mindful of the risk factors implicating each clause in their drafted contracts and the need to be forward-thinking when drafting sound and commercially viable contracts that can withstand litigation or other dispute.
The first applicant entered into various loan agreements, one of which was a short-term bridging loan, with the respondent. The second applicant stood as surety and co-principal debtor for the due performance of the first applicant.
The issue arising before the court was the contention by the Applicants that the interest rate charged at one percent per week, capitalised monthly was against public policy, unconstitutional and thus usurious. The SCA was tasked with determining whether the judgment of the High Court, ruling that the interest rate was not usurious, was to stand.
The SCA held that the test set in African Dawn should be followed on the principle of the doctrine of precedent (stare decisis) and applied contrary to the argument set out by the applicants. The test set out in the African Dawn case is that, in order for an interest rate to be considered usurious, it ought to amount to ‘extortion, or oppression or something akin to fraud.’ Therefore, there was an onus on the applicants to prove more than a seemingly high interest rate.
The applicants had not showed that the interest rate amounted to extortion, oppression nor something akin to fraud. The Applicants failed to put emphasis on the full set of facts and instead highlighted the one per cent interest rate charged per week and capitalised per month in the context of one year instead of the three months for which the short-term bridging loan was granted. They also failed to highlight the circumstantial facts that made the interest rate reasonable.
The court noted, firstly, that the interest rate was in keeping with the usual interest rates charged by lenders in the context of short-term bridging financing. Furthermore, the applicant decided out of free will to enter into the short-term bridging loan agreement with the respondent despite their supposed unhappiness with the interest rate and with the knowledge of having previously contracted with the respondent. The court moreover noted that an experienced commercial attorney negotiated the interest rate with the respondent where an agreement had then been reached for one percent per week to be charged.
Therefore, the court held that the principle that contracts should be observed pacta sunt servanda is an imperative contractual principle that needs to be upheld in the absence of any substantial conflicting constitutional rights or values. The applicants failed to display a case for non-adherence with public policy nor exceptional circumstances in terms of section 17(2)(f) of the Superior Courts Act, 2013. The interest rate was accordingly deemed not to be usurious.