Does a Settlement Agreement Constitute a Credit Agreement?

In a recent legal dispute, the court’s ruling brought to the forefront a perplexing issue that has long plagued the legal landscape: the classification of settlement agreements under the National Credit Act (NCA). The court’s decision, which emphasised the importance of preserving the amicable resolution of disputes, shed light on the intricate interplay between settlement agreements and credit agreements within the framework of the NCA.

Settlement agreements, as pivotal instruments for resolving disputes and defining clear obligations among parties, have become an indispensable part of legal proceedings. On the other hand, credit agreements, which govern the postponement of payments in exchange for fees or interest, have been subject to regulatory oversight since the enactment of the NCA in 2005. The crux of the matter lies in determining whether settlement agreements and debt acknowledgements should fall within the purview of the NCA, thereby obliging creditors to register as credit providers.

In the recent matter between Blacher v Josephson, on appeal, the court found that:

“Had the matter come before the court on the credit agreements, in addition to declaring them unlawful and setting them aside, it would have had the power in terms of the NCA, to make an order that was ‘just and equitable’. Such an order is unfortunately not open to a court which deals with a settlement agreement which constitutes a compromise arising from earlier credit agreements, but which is not itself a credit agreement. In Ratlou v Man Financial Services SA (Pty) Ltd, the SCA warned that it was never intended that the NCA would be applicable to all settlement agreements, simply because in form they comply with the definition of a credit agreement in terms of the NCA.”

A settlement agreement records the terms of a compromise, which has been agreed between the parties to a dispute. It is a useful tool to conclude a dispute, set clear obligations for everyone involved, and reduce the risk of future disputes and litigation arising between the parties. A credit agreement is a contract that permits one party to postpone or delay making a payment to another party in exchange for payment of a fee or interest. Since the NCA was passed in 2005 (referred to as “the Act”), there has been significant ambiguity and conflicting rulings regarding whether settlement agreements and/or debt acknowledgements qualify as credit agreements under the Act, necessitating a creditor’s registration as a credit provider. According to the SCA’s ruling in the Ratlou matter, the settlement agreement itself is not subject to the Act’s jurisdiction if the underlying contract that gave rise to it is not.  In this situation, it is illogical to turn the settlement agreement into a credit agreement that necessitates NCR registration on the part of the credit provider.

The SCA argued that a settlement agreement would satisfy the requirements of a credit transaction if one were to base their conclusion on a literal reading of Section 8(4)(f) of the Act. But given how ludicrous this outcome would be, it is impossible that the lawmakers intended it.

As a result, the SCA took a purposeful stance and determined that classifying all settlement agreements as credit agreements would have a disastrous impact on a party’s inclination to resolve disputes amicably, hence reducing the need for litigation. If it weren’t for the requirement that creditors register as credit providers, they would be forced to file lawsuits in situations where a settlement could have been reached.

Reference list:

1. Blacher v Josephson (A15/22) [2023] ZAWCHC 27; 2023 (3) SA 555 (WCC) (14 February 2023)

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