Getting clever in devastating times


The recession has had a devastating effect on business; with less money circulating in our economy many borrowers have struggled to repay their loans. The in duplum rule aims to protect borrowers by preventing lenders from claiming an amount in arrear interest that exceeds the amount of the original loan. Over long periods of time it is common place for a borrower to pay more in interest then the capital amount that he borrowed. However, if payments are not made the accumulated arrear interest that is owed becomes capped once it equals the amount that was first loaned.

Credit providers have been faced with an unprecedented number of borrowers defaulting on their loans. In order to avoid the effect of the in duplum rule many lenders have initiated litigation proceeding against those in default. However this approach is costly for all parties involved; many borrowers are forced into liquidation and creditors are left with only a small percentage of the amount owed to them. It may be better for both parties to weather the current economic storm, and avoid the costs of litigation, by circumventing the operation of the rule via novation.

In addition to the value of freedom of contract, this article examines a number of public policy reasons for upholding novated agreements.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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