Absa Bank Limited v Lombard

In January 1988 the respondent, Dr J J I S Lombard, concluded a written loan agreement with the Trust Bank of Africa Ltd, Absa Bank Limited being its successor in title. Lombard borrowed R260 000 repayable over 120 months at an initial interest rate of 15.55% per annum, subject to increase or decrease at the bank’s exclusive discretion. The bank repeatedly increased the interest rate when the prime lending rate rose, but largely failed to decrease it when prime later fell, resulting in the respondent paying substantially more than he would have paid had the original margin above prime been maintained. Lombard paid a total of R701 055.71 by July 1997. Absa alleged that Lombard still owed R51 796.60 under the loan as varied, while Lombard contended that the discretion to vary interest had been exercised unreasonably. After Lombard withdrew his initial condictio indebiti claim, the dispute proceeded on Absa’s claim in reconvention.

The appeal was dismissed with costs, and Absa Bank’s claim in reconvention failed.

This case confirms and applies the principle that contractual discretions to vary interest rates, although valid, must be exercised reasonably. It clarifies that banks cannot rely on the fact that interest has already been paid to avoid scrutiny of whether interest rate increases were reasonable, and it distinguishes loan agreements from current account disputes in this context. The decision strengthens debtor protection against arbitrary or one-sided interest rate adjustments.