CR144

Loans – loan against a policy –rate of interest left blank in application form – no subsequent agreement on rate of interest – validity of contract

Background

The complainant applied for a loan of R2500 by signing a document entitled “Acknowledgement of Interest Bearing Loan on Policy.” One of its terms read: “I will pay interest on the capital at the rate of —% per annum or such other rate as may be determined by [insurer] from time to time.” The space where the initial rate of interest was to be inserted, was left open. The document also did not make any provision for the term of the loan and neither did it provide for any instalments to be paid. The insurer over the years charged interest on the loan (at a rate varying from 6% to 22%) with the result that upon maturity of the policy the complainant owed some R14 000 in interest.

The complainant alleged that before she applied for the loan she had been informed by her broker that the insurer granted interest free loans, at least in certain cases. Since the space for the rate of interest was left open, her contention was that she neither intended nor undertook to pay any interest. She acknowledged that the amount of the loan was paid to her after she submitted the document referred to above, but, according to her, “I was never notified that it would be an interest bearing loan.” She added that she for the first time became aware that the insurer regarded the loan as interest bearing when she received statements to this effect. At that stage she protested and made ongoing enquiries but “no-one could explain” what the position was.

According to the insurer it was not the practice of its predecessor in title (which granted the loan) to grant interest free loans. It accordingly intended the loan to be interest bearing. It maintained that when the loan was granted a letter of confirmation was sent to the insured disclosing all costs and also the interest. However, the example of a confirming letter did not contain particulars of the rate of interest, the term of the loan or any instalments. The insured in any event denied that she ever received such a letter.

The insurer furthermore alleged that its predecessor would have sent out a letter pointing out the consequences of the loan. This letter contained a section which the insured was requested to complete and return. In this section the insured was asked to confirm whether he intended to repay the loan in a lump sum, whether he proposed to repay the loan in instalments, and if so, what the amount of the instalments would be, the starting date of the instalments and what method of payment he preferred, The complainant denied that she received such a letter and the insurer could not produce a copy of a returned form completed by her.

Discussion

It appeared to us that that the offer for the loan was inchoate in that the place where the initial rate of interest had to be filled in was left blank. There consequently was no agreement on a vital aspect of the proposed contract. Moreover, it could not be said that the term quoted above left the initial rate of interest to be determined by the insurer. It could only change an existing rate of interest. We pointed out that it is a well-known requirement for a contract that the parties must have agreed on all the material terms of the proposed contract and that this requirement had not been fulfilled in the present circumstances. There was furthermore nothing to prove that the original flaw had been cured by subsequent agreement.

Against this background we suggested that the contract of loan was abortive in that full agreement had not been achieved. Indeed, there was neither an actual contract nor a reliance on contract. The insurer could not prove a valid contract for an interest bearing loan and, on the other hand, the complainant could not maintain that she reasonably thought that the insurer granted her an interest free loan. Hence we suggested that the only remedy available to the insurer was a claim based on unjust enrichment.

Result

We made a provisional ruling that interest could not be claimed. The insurer then offered to put the insured in the position in which she would have been had an interest free loan been granted. This meant that the amount of the loan was deducted from the capital invested under the policy with effect from the date of the loan. In the result the amount so deducted could not contribute to the growth of the investment and this detrimentally affected the maturity value of the policy. The complainant accepted the insurer’s offer.

MFBR
April 06