Three separate appeals were heard together, all concerning mortgage bond clauses that conferred upon mortgagees the unilateral right to increase interest rates. In appeal (1), Southwood J in the Witwatersrand Local Division held the clause invalid as void for vagueness. In appeal (2), Thirion J in the Natal Provincial Division held that such power could only be exercised in accordance with general market increases and in the ordinary course of business. In appeal (3), Gihwala AJ in the Cape Provincial Division held the power was not unfettered and could only be exercised in accordance with prevailing banking practices, but granted summary judgment against the mortgagor on other grounds. The mortgagors challenged the validity of these clauses, arguing they were void for vagueness because they allowed one party to unilaterally determine the extent of prestations.
Appeal (1) was allowed with costs, including costs of two counsel. The order of the court a quo was substituted with a declaration that clause 14 of the mortgage bonds was valid, and the defendants were ordered to pay costs jointly and severally. Appeals (2) and (3) were dismissed with costs, including costs of two counsel.
A clause in a mortgage bond (or analogous contract) conferring upon one party the right to unilaterally vary the interest rate is valid and not void for vagueness. Interest is not an essentialé of a contract of loan, and the common law rule that renders certain sales and leases void where one party may fix the price or rental does not extend to discretionary powers in other types of contracts or to non-essential terms. Unless a contractual discretionary power is clearly intended to be completely unfettered, it must be exercised arbitrio boni viri (according to the judgment of a good man). While the clause conferring the discretion is valid, any specific exercise of that discretion may be challenged and set aside if it does not comply with this inherent limitation of good faith and equity. The validity of the clause itself is separate from the question of whether any particular exercise of the discretion is lawful.
The court observed that the common law rule rendering sales and leases void where one party may fix the price or rental is illogical and out of step with modern legal systems in England, Scotland, Germany, Switzerland, the Netherlands and the United States. However, as this specific rule was not in issue and not argued, the court declined to decide whether it should be abandoned. The court noted that the test for challenging a discretionary determination (whether it must be merely unjust or manifestly unjust) need not be decided as no mortgagor had actually challenged the exercise of the power. The court suggested that modern concepts of public policy, bona fides and contractual equity might lead to an analogous conclusion. The court observed it was conceivable, though unlikely, that a stipulation might confer an absolute unfettered discretion, but expressed no view on whether such a clause would be invalid as contrary to public policy or whether it could only be challenged for bad faith. The court noted that the Usury Act had no bearing on the appeals.
This is a landmark decision in South African banking and contract law that definitively settled the validity of variable interest rate clauses in mortgage bonds and loan agreements. The judgment represents a modernization of South African contract law, declining to extend outdated Roman-Dutch law rules beyond their historical scope. It established the important principle that contractual discretions are valid but subject to inherent limitations requiring exercise in good faith (arbitrio boni viri). The decision provided legal certainty to the banking industry regarding variable rate lending instruments while protecting consumers through the requirement that discretionary powers be exercised equitably. The judgment also contains important dicta questioning whether the old common law rules regarding price and rental should be maintained, though it expressly did not decide that question. The case has been widely cited in subsequent contract law disputes involving unilateral variation clauses.