The Western Cape High Court recently heard the matter of Combined Developers v Arun Holdings & 2 Others.

Arun Holdings had borrowed money from Combined Developers and in terms of the agreement concluded between the parties Arun Holdings would repay the loan in monthly instalments.

In addition to this the agreement contained an acceleration clause in terms of which Combined Developers were entitled to reclaim the entire outstanding loan amount, should Arun Holdings default on the agreement.

Arun Holdings was late on one of their monthly instalment payments and received an email from Combined Developers reminding them that the payment was late.

The email failed to inform Arun Holdings of the amount due, nor the applicable default interest. Arun Holdings made payment of the instalment amount but not the default interest in the amount of R86.00.

Combined Developers then invoked the acceleration clause in an attempt to claim the full loan amount.

The court refused to enforce the acceleration provision, partly on the grounds of public policy, as the outstanding debt was a “measly amount”. The court held further that accelerating the entire loan was “draconian and unfair”.

Acceleration clauses are fairly common in loan agreements and serve to protect lenders. Traditionally courts uphold the contractual terms agreed to between parties, however in this instance the court assessed the fairness and equity thereof. This could result in some inconsistency in the interpretation of agreements.

The court did not determine acceleration clauses to be unenforceable in general, lenders should however exercise caution in invoking these provisions.