- In these proceedings
commenced by originating summons dated the 8th march 1999 the Director
General of Fair Trading, to whom I will refer as "The Director" brings
proceedings against First National Bank Plc to which I will refer as "The
Bank" pursuant to the Unfair Terms in Consumer Contract Regulations 1994
("the 1994 Regulations"). By these proceedings the Director claims
against the Bank:-
An injunction, pursuant
to regulation 8(2) of the 1994 Regulations, restraining the defendant, whether
by itself it's servants or agents or otherwise howsoever from;
including in any
agreement with a consumer any contractual term or provision having the object
or effect of:
making interest
payable on the amount of any judgment obtained by the respondent for sums
owing by a consumer under an agreement regulated by the Consumer Credit
Act 1974; or
making interest
payable upon interest;
enforcing or seeking
to enforce any such term which has already been included in an existing
agreement with a consumer to which the regulations apply;
otherwise using
or seeking to use any similar term, or having like effect
recommending the
use of any similar term, or term having like effect."
- The Bank was certified
under section 123 of the Companies Act 1967 by the Board of Trade as bona
fide carrying on the business of banking. Since the introduction of licensing
under the Consumer Credit Act 1974 ("the 1974 Act") the Bank has been
licensed by the Director to carry on consumer credit business. By 1995 the
Bank was the largest independent grantor of consumer finance and the largest
provider of home loan improvement finance in the United Kingdom. The Bank's
figures for 1998 show that in that year the bank made secured loans totalling
£114,754,322 and home improvement loans totalling £320,578,786. Since 1995
the Bank has been one of the subsidiaries of Abbey National Plc.
- The complaint of the
Director against the Bank centres on the inclusion in the Bank's common form
loan agreement with borrowers of a provision appearing at clause 8 as follows:-
" 8 Time is of
the essence of making all repayments to FNB (the Bank) as they fall
due. If any repayment instalment is unpaid for more than seven days after
it became due, FNB may serve a notice on the Customer requiring payment
before a specified date not less than 7 days later. If the repayment instalment
is not paid in full by that date, FNB will be entitled to demand payment
of the balance on the Customer's account and interest then outstanding together
with all reasonable legal and other costs charges and expenses claimed or
incurred by FNB in trying to obtain the repayment of the unpaid instalment
or of such balance and interest. Interest on the amount which becomes payable
shall be charged in accordance with Condition 3, at the rate stated in paragraph
D overleaf (subject to variation) until payment after as well as before
any judgment (such obligation to be independent of and not to merge with
the judgment). "
- Clause 3 of the Bank's
common form agreement provides:
" 3 The rate
of interest will be charged on a day to day basis on the outstanding balance
and will be debited to the Customer's account monthly in arrears. Payments
made by the Customer may be credited first to capital or interest outstanding
under this agreement at the discretion of FNB... ."
- At paragraph D of the
form of agreement appears the monthly rate of interest chargeable on the loan
("the contractual rate") which rate is variable in accordance with
changes in the Bank's Base Lending rate.
- It is common ground
that the effect of these provisions is to make interest payable, at the contractual
rate on the amount of principal advanced outstanding together with accrued
unpaid interest existing at the date of judgment, during the period after
judgment until the judgment is discharged by payment. Agreements containing
such a clause as clause 8 are referred to as "simple rate" agreements
and are to be contrasted with "flat rate" agreements where the default
provisions have the effect of accelerating payment of the whole of the remaining
unpaid instalments and which accordingly make payable future interest not
yet due being the element of interest in each instalment of which payment
is accelerated. Flat rate agreements are subject to the statutory rebate provided
for in sections 94 and 95 of the 1974 Act. The Director accepts that a simple
rate agreement containing a clause such as clause 8 is, without more, enforceable.
It is not unconscionable at common law nor subject to being reopened under
section 137 of the 1974 Act.
- It is also common ground
that at common law where a judgment is obtained under a contract of loan for
a principal sum owing then, once judgment is entered, the principal is owing
on the judgment, not under the contract. The contract merges in the judgment.
If the contract contains a provision making interest payable on any principal
sum due under it, then, in the absence of express provision to the contrary,
the covenant to pay interest will be regarded as ancillary to the covenant
to pay the principal with the result that, if judgment is obtained for the
principal, the covenant to pay interest will merge in the judgment. Accordingly,
unless the contract contains a provision excluding the operation of a merger
in respect of the covenant to pay interest, the entitlement of the judgment
creditor to claim interest on the judgment will be governed by statute. It
is open to the parties to a contract expressly to agree that a covenant to
pay interest shall not merge in any judgment for the principal sum due. Where
they so agree, interest may be charged under the contract on the principal
sum due, even after judgment for that sum. See Economic Life Assurance
Society v Usborne 190 2 AC page 147.
- By Council Directive
93/13/EEC of the 5th April 1993, the Council of the European Communities
promulgated a directive "On unfair terms in Consumer contracts."
- By article 3 of that
directive it was provided :-
"Article 3
A contractual term
which has not been individually negotiated shall be regarded as unfair if,
contrary to the requirements of good faith, it caused a significant imbalance
in the parties rights and obligations arising under the contract, to the
detriment of the consumer.
A term shall always
be regarded as not individually negotiated where it has been drafted in
advance and the consumer has therefore not been able to influence the substance
of the term particularly in the context of a pre-formulated standard contract.
... ."
By Article 4 of that
directive it was provided:-
" Article 4
Without prejudice
to Article 7, the unfairness of a contractual term shall be assessed, taking
into account the nature of the goods or services for which the contract
was concluded and by referring, at the time of conclusion of the contract,
to all the circumstances attending the conclusion of the contract and to
all other terms of the contract or of another contract on which it is dependent.
Assessment of the
unfair nature of the terms shall relate neither to the definition of the
main subject matter of the contract nor to the adequacy of the price and
remuneration, on the one hand, as against the services or goods supplied
in exchange, on the other, insofar as these terms are in plain intelligible
language."
- In order to put the
provisions of Council Directive 93/13 into effect in this country the Secretary
of State for Trade and Industry promulgated the Unfair Terms In Consumer Contracts
regulations 1994, 1994 No 3159. Those regulations so far as material to this
judgment provide:-
"3(1) Subject to the
provisions of schedule 1, these regulations apply to any term in a contract
concluded between a seller or supplier and a consumer where the said term
has not been individually negotiated.
In so far as it is in
plain intelligible language, no assessment shall be made of the fairness of
any term which –
Defines the main subject
matter of the contract, or
Concerns the adequacy
of the price or remuneration, as against the goods or services sold or supplied.
For the purposes of these
regulations, a term shall always be regarded as not having been individually
negotiated where it has been drafted in advance and the consumer has not been
able to influence the substance of the term...
4(1) In these regulations
subject to paragraph (2) and (3) below, "unfair term" means any term which
contrary to the requirement of good faith causes a significant imbalance in
the parties rights and obligations under the contract to the detriment of
the consumer.
An assessment of the
unfair nature of a term shall be made taking into account the nature of the
goods or services for which the contract was concluded and referring, as at
the time of the conclusion of the contract, to all circumstances attending
the conclusion of the contract and to all the other terms of the contract
or of another contract on which it is dependent.
In determining whether
a term satisfies the requirement of good faith, regard shall be had in particular
to the matters specified in schedule 2 to these regulations.
Schedule 3 to these regulations
contains an indicative and non-exhaustive list of the terms which may be regarded
as unfair.
(1)An unfair term in
a contract concluded with a consumer by a seller or supplier shall not be
binding on the consumer. ...
(1)It shall be the duty
of the Director to consider any complaint made to him that any contract
term drawn up for general use is unfair, unless the complaint appears
to the Director to be frivolous or vexatious.
(2)If having considered
a complaint about any contract term pursuant to paragraph (1) above the Director
considers that the contract term is unfair he may, if he considers it appropriate
to do so bring proceedings for an injunction ... against any person appearing
to him to be using or recommending use of such a term in contracts concluded
with consumers... .
(5)The Court on an application
by the Director may grant an injunction on such terms as it thinks fit."
- These proceedings are
brought pursuant to regulation 8(2).
- It is common ground
that the 1994 Regulations apply to consumer credit agreements and that the
loan agreements in question were not individually negotiated for the purposes
of regulation 3(1)(3). Accordingly if clause 8 is not to be treated as a "core"
term within regulation 3(2) it must pass the fairness test proscribed by regulation
4.
- The burden of the Director's
complaint in relation to clause 8 of the Bank's loan agreement is that the
provisions of that clause are unlikely to be noticed by the average consumer/borrower.
Where proceedings are brought by the Bank to enforce a loan agreement on default
in payment of an instalment it is likely that the borrower will consent to
judgment for the balance due payable by instalments having the effect of extending,
sometimes for a substantial period, the time within which the loan is to be
repaid. However during that extended period of repayment, because interest
at the contractual rate remains chargeable on the outstanding balance the
borrower discovers, to his surprise, that when he has discharged all the instalments
due under the judgment there remains a substantial bill for interest, sometimes
exceeding the instalments which he has repaid, to be paid to the Bank. In
evidence sworn on behalf of the Director were examples of loan agreements
where the addition of interest chargeable under clause 8 had the effect of
actually increasing the net balance due to the Bank from the borrower, notwithstanding
the instalments paid under the judgment, so that having paid those instalments,
he was still left with a larger sum to pay than the total of those instalments.
Whether this effect is produced will depend, of course, on the balance between
the length of the period covered by the instalments and the amount of each
instalment relative, to the total indebtedness, ordered by the Court, and
the contractual rate of interest.
- The loan agreements
which contain the clause objected to by the Director are "regulated agreements"
under the 1974 Act. Section 141(1) of the 1974 Act provides that proceedings
to enforce regulated agreements have to be brought in the County Court. Section
71 of the County Courts Act 1984 empowers the County Court when giving judgment
for a sum of money to order it to be paid "by such instalments payable
at such times as the Court may fix."
- Prior to 1991 the County
Court had no power to order interest on a judgment debt. By section 74 of
the County Courts Act the Lord Chancellor was empowered, by order made with
the concurrence of the Treasury to make provision for the payment of interest
on County Court judgments. He did so by the County Court (Interest on Judgment
Debts) order 1991 SI1991/1184 which was subsequently amended in 1996 and 1998
("the 1991 order"). That order provides "every judgment debt under
a relevant judgment shall, to the extent that it remains unsatisfied, carry
interest under this order... ." a "relevant judgment" must be for
a sum not less than £5,000. By sub regulation (3) of regulation 2:-
"(3) Interest shall
not be payable under this order where the relevant judgment -
is given in proceedings
to recover money due under an agreement regulated by the Consumer Credit Act
1974;... ."
- The 1974 Act is mainly
concerned with the procedural requirements for entering into an enforceable
consumer bargain. However it does contain provisions empowering the Court
to vary the terms of such credit bargains. Most notably sections 137 to 140
empower the Court to "reopen" a credit bargain deemed to be "extortionate"
within section 138. Materially to this judgment section 129 of the
1974 Act empowers the Court to make "time orders" as follows:-
"129(1)if it appears
to the Court just to do so -
on an application
for an enforcement order [under section 128] or
on an application made
by a debtor or hirer under this paragraph after service on him of –
a default notice or
a notice under section
76(1) or 98(1); or
in an action brought
by a creditor or owner to enforce a regulated agreement or any security, or
recover possession of any goods or land to which a regulated agreement relates,
the Court may make an order under this section (a "time order").
a time order shall provide
one or both of the following as the Court considers just -
the payment by the debtor
or hirer or any surety of any sum owed under a regulated agreement or a security
by such instalments, payable at such times, as the Court, having regard to
the means of the debtor or hirer and any surety, considers reasonable;
... "
- Where therefore a claim
is made in the County Court to enforce the provisions of a regulated agreement
under the 1974 Act the Court may make an instalment order either under section
71 of the County Courts Act or under section 129(2)(a) of the 1974 Act. However
in respect of orders made under section 129 the Court is given the additional
power under section 136 of the 1974 Act to vary the provisions of the regulated
agreement. That section provides:-
"136 The Court may
in an order made by it under this Act include such provision as it considers
just for amending any agreement or security in consequence of a term of the
order."
- In three conjoined appeals
under the name Southern and District Finance Plc v Barnes 1995 CCLR
p 62 the Court of Appeal was considering whether section 129(1) of
the 1974 Act empowered the Court to make orders under that section in relation
to sums becoming due under a regulated agreement other than arrears and secondly
to what extent when making a time order did the Court have power to amend
the relevant agreement under section 136 so as to vary the rate of interest
payable. It was held that when a creditor brings a possession action, that
is a calling in of the loan and therefore once that has been done, the whole
outstanding balance of the loan is a sum owing. Thus the Court has power in
such circumstances to make a time order in respect of future instalments as
well as of accrued arrears. It was further held that unless the contemplated
amending order under section 136 is truly a consequence of the time order,
and the making of it is also just, there is no power to make such an amending
order. The leading judgment was given by Lord Justice Leggatt who is reported
as saying this at page 67 of the report:-
"It is also to be noted
that section 136 does not stand alone: the Court cannot amend an agreement
unless it has been persuaded to make a time order. In my judgment the key
phrase in section 136 is "in consequence of the term". Unless the contemplated
amendment is truly a consequence of a term of the time order, and the making
of it is also just, there is no power to make it. It is a provision of limited
scope.
Judicial control
when a time order is
applied for or a possession order sought of land to which a regulated agreement
applies, the Court must first consider whether it is just to make a time order.
That will involve consideration of all the circumstances of the case, and
the position of the creditor as well as the debtor.
when a time order is
made it should normally be made for a stipulated period on account of temporary
financial difficulty. If, despite the giving of time, the debtor is unlikely
to be able to resume repayment of the indebtedness by at least the amount
of the contractual instalments, no time order should be made. In such circumstances
it would be more equitable to allow the regulated agreement to be enforced.
When a time order is
made relating to the non payment of money
the "sum owed" means
every sum which is due and owing under the agreement, but where possession
proceedings have been brought by the creditor that will normally comprise
the total indebtedness; and
the Court must consider
what instalments would be reasonable both as to amount and time, having regard
to the debtor's means.
the Court may include
in a time order any amendment of the agreement which it considers just to
both parties, and which is a consequence of a term of the order. If the rate
of interest is amended, it is relevant that smaller instalments will result
both in a liability to pay interest on accumulated arrears and, on the other
hand, in an extended period of repayment. But to some extent the high rate
of interest usually payable under regulated agreements already takes account
of the risk that difficulties in repayment may occur.
if a time order is made
when the sum owed is the whole of the outstanding balance due under the loan,
there will inevitably be consequences for the term of the loan and for the
rate of interest or both.
if justice requires the
making of a time order the Court should suspend any possession order that
it also makes, so long as the terms of the time order are complied with."
- In applying
these principles to one of the judgments appealed from Lord Justice Leggatt
said this at page 71:-
"When the Judge re-scheduled
the instalments under the agreement he did so over a fresh period of fifteen
years. Since nearly three had passed since the agreement was made, this had
the effect of extending the total of the agreement to nearly eighteen years.
The Judge reduced the rate of interest to nil, since otherwise throughout
the extended period of the loan interest would have been payable on the arrears
at the exorbitant rate prescribed, and that would have defeated the purpose
of giving time. In effect as a sanction for non payment of instalments a suspended
possession order was substituted for a penal rate of interest. The Court gave
the plaintiff leave to appeal against his order, though the Judge's methods
were robust and his reasoning economical, his instincts were sound and his
order just. I would dismiss the appeal."
- Provisions similar to
clause 8 appear in the standard loan agreement of a number of other financial
institutions. Exhibited to the affidavit of Nicola Chard sworn on behalf of
the Bank are examples of a number of such forms of agreement with a list of
32 lenders who use a similar form including a number of well known financial
institutions. I am informed on behalf of the Director that very few complaints
have been received in respect of post judgment interest clauses other than
those used by the Bank.
- It is therefore my task
to decide whether the 1994 regulations apply to clause 8 of the Bank's form
of agreement and if so whether the clause is "unfair" within the meaning
of those regulations. I am told that not withstanding that the regulations
have been in force since July 1995 this is the first case in which it has
fallen to a Court to construe that effect. Hitherto the Director has been
able to procure the removal or amendment of terms complained of in consumer
contracts, including regulated agreements under the 1974 Act by agreement
after negotiation with the institutions concerned.
- The Director's complaint
as to the effect of clause 8 of the Bank's form of agreement only arises where
the Court has extended the time for repayment of the amount lent by making
an instalment order. It is plain from the passages from the judgment of Lord
Justice Leggatt in the Barnes case which I have set out above,
and in particular from his approval of the order made under one of the judgments
being considered, that any County Court being called upon to enforce one of
the Bank's loan agreements containing clause 8 would have power, if it thought
just to do so, to negate any harsh effect of that clause by reducing the rate
of interest payable under it, if necessary, to nil. I am told however, by
the Solicitor General who appeared on behalf of the Director supported by
evidence sworn on his behalf that, in the vast majority of cases in which
an agreement regulated under the 1974 Act is being enforced there is no real
hearing in the course of which the terms of the agreement are brought to the
attention of the Court and submissions made in respect of them. In practice
in most cases the borrower will consent in writing to an instalment order
which will be accepted by the lender and the Court will automatically make
an order without such consideration. The borrower will remain unaware of the
provisions of clause 8, notwithstanding that it appears to be the current
practice of the Bank to draw attention to the provisions of clause 8 on its
claim forms, and the presence in the "notes for defendant on replying to
the claim form" of a sentence "in a County Court, if judgment is for
£5,000 or more, or is in respect of a debt which attracts contractual or statutory
interest for late payment, the claimant may be entitled to further interest."
Whereas it was conceded on behalf of the Director that the only method of
enforcing payment of interest after judgment would be by fresh proceedings
in the County Court to which section 129 and section 136 would similarly apply,
in practice this does not happen. The debtor usually pays or the lender waives
the further interest in whole or in part. It is the submission of the Director
that as clause 8 of the Bank's form of agreement operates in practice it causes
uncertainty and confusion amongst judgment debtors.
- The Director accepts
that clause 3 of the Bank's form of agreement cannot be assessed as unfair
because, being the provision which fixes the contractual rate of interest,
it concerns "the adequacy of the... remuneration as against the ... services...
supplied" within Regulation 3(2)(b). It was first submitted by Lord Goodhart
on behalf of the Bank that clause 8 did not fall to be assessed as to its
fairness under the 1994 regulations because it was a "core" term within
article 3(2) of the 1994 Regulations.
- In support of this contention
Lord Goodhart cited the decision of the House of Lords in the Economic
Life case to which I have already referred. In that case their Lordships
were considering whether the amount due under a covenant to repay contained
in a mortgage in respect of which judgment had been entered, merged with the
judgment and so carried statutory interest of 4% or was separately due under
a covenant contained in the mortgage which did not so merge. By the covenant
in question the mortgagors covenanted to pay the principal on a day named
with interest at 5% and if the principal was not then paid, to pay interest
at that rate half yearly on so much of the principal as should remain unpaid.
Their Lordships concluded that the amount due under this covenant did not
merge with the judgment and carried the contractual rate of 5% until payment
was actually made.
- It does not seem to
me that the reasons given by the House of Lords for arriving at the conclusion
which they did in the Economic Life case assist me in construing
the meaning of regulation 3(2)(b) of he 1994 regulations. That must turn on
whether the subject matter of clause 8 concerns the "adequacy" of the
"remuneration" received by the Bank as consideration for making advances
under these agreements.
- It was submitted, and
I accept, that "adequacy" in sub Regulation (2)(b) must be read as
meaning the equivalent of "the extent of ... the remuneration."
It was submitted that provisions for the payment of interest consequent on
default are therefore provisions which govern the extent of the interest payable
under the agreement in the circumstances of default and so for fall within
regulation 3(2)(b).
- I am unable to accept
that submission because I do not think that the average borrower seeking a
home improvement loan from the Bank would consider default provisions as one
of the important terms of the agreement which he would have under consideration
in deciding whether or not to accept an offer of advance. He would be considering
the cost to him of the loan which would be the interest calculable under clause
3 on the basis that he repaid the advance by paying the instalments required
on the due date. It seems to me that it would be on that basis also that the
Bank would arrive at the rate of interest chargeable. This would be the rate
which the Bank's experience of similar agreements over a period of time would
determine was necessary to give the Bank an acceptable return. The figures
shown in the Bank's evidence reveal that agreements where there has been default
are a small percentage of the Bank's total agreements of this type entered
into in any year.
- It follows that in my
judgment the 1994 regulations apply to clause 8.
- Regulation 4(3) of the
1994 regulations directs the Court to have regard to schedule 2 to the regulations
in determining whether a term satisfies the requirement of good faith in regulation
4(1). That schedule provides:-
"In making an assessment
of good faith, regard shall be had in particular to
the strength of the bargaining
positions of the parties;
whether the consumer
had an inducement to agree to the term;
whether the goods or
services were sold or supplied to the special order of the consumer, and
the extent to which the
seller or supplier has dealt fairly and equitably with the consumer."
- Paragraph (c) of schedule
2 plainly does not apply. I have no evidence of any "inducement" such
as a reduction in the rate of interest or other benefit to the borrower mentioned
in sub paragraph (b). The rates of interest charged by the Bank were high
which indicates that the Bank was finding the bulk of its customers for these
loans at the bottom end of the lending market. I have no evidence of what
competitors the Bank had in this market and the rates of interest being charged
by such competitors. If clause 8 was an "onerous" term then a failure
to draw attention to it at the time the loan agreement was entered into might
fall within paragraph (d) as a failure to deal "fairly and equitably with
the consumer". I have no evidence either way on the point save for the
fact of the complaints to the Director which appear to spring from the complaining
borrowers lack of awareness of the provisions of clause 8 and its effect.
- Regulation 4(4) draws
attention to schedule 3 to the regulations as containing "an indicative
and non-exhaustive list of terms which may be regarded as unfair." It
is common ground that non of the examples (a) to (q) contained in paragraph
1 of schedule 3 are applicable as being similar to the provisions of clause
8 save possibly for sub paragraph (e). That sub paragraph makes it prima facie
unfair to include a term "requiring any consumer who fails to fulfil his
obligation, to pay a disproportionately high sum in compensation;" the
question disproportionately to what? is not answered by the regulations
or the schedules. It seems difficult to apply sub-paragraph (e) to the provisions
of clause 8 because those provisions only require interest at the contractual
rate to be paid on the outstanding balance of the loan at the same rate after
judgment as that being charged before judgment until repayment is actually
made. As I have said it is accepted that the contractual interest provisions
are a core term and so not assessable for fairness.
- As a first step in answering
the question whether the provisions of clause 8 are unfair it seems to me
to be appropriate to stand back, and without reference to statute or authority,
consider whether, had a potential borrower had the effect of the provisions
of clause 8 drawn to his attention immediately after entering into a loan
agreement containing that clause, he would reasonably have replied to the
question that they were unfair. It seems to me that if a borrower in those
circumstances were informed that the provisions of clause 8 required him to
pay to the Bank the contractual rate of interest on so much of the sum advanced
as remained outstanding for so long as it remained outstanding he would not
have regarded that as unfair. Equally, it seems to me, that if he was informed
that, but for the provisions of clause 8 if he defaulted in making the payments
required by the agreement, and judgment was obtained against him, he would
either not have to pay interest at all if the judgment were for less than
£5,000 or only interest at the reduced statutory rate if more than £5,000,
he would have been surprised that his financial obligations would become less
onerous as a result of a judgment. It seems to me that if he were told that
if he defaulted and the matter came to Court and the Court was persuaded to
give him extra time to repay the amount outstanding by ordering him to pay
by instalments extending over a substantial period and he was told that in
addition he would have to pay interest at the same rate as before default
on so much of the amount advanced which, after deduction of the payments under
the Courts order, remained outstanding for so long as it so remained unpaid,
he would have been driven to concede that this was not unfair because otherwise
his answer would be inconsistent with the answer which I have presumed to
the first question. These sort of considerations are plainly envisaged by
Regulation 4(2). Again it must be emphasised that the rate of interest, which
may produce a harsh effect, cannot be pronounced unfair.
- It seems to me, therefore,
that it is not possible to categorise the provisions of clause 8 as inherently
unfair. That however does not conclude the matter because of the provisions
of regulation 4(1) and because of the submission on behalf of the Director
that the provisions of clause 8 must be treated as unfair because the average
borrower who has defaulted and who has obtained an instalment order from the
Court will not have anticipated a further charge to interest over and above
the instalments which he is required to pay.
- The material words of
regulation 4(1) are "unfair term means any term which contrary to the requirement
of good faith causes a significant imbalance in the parties rights and obligations
under the contract to the detriment of the consumer." It is necessary
therefore to define what is meant in this regulation by the words "good
faith" and by the words "causes a significant imbalance in the parties
rights".
- The origin of the 1994
regulations is European Council Directive 1993/13. It is clear, therefore,
that the words "good faith" are not to be construed in the English
law sense of absence of dishonesty but rather in the continental "Civil
law" sense. In Interfoto Library Ltd v Stiletto Ltd 1989 1 QB p
433 the Court of Appeal were considering a case where the plaintiffs
ran a photographic transparency lending library in which they hired out transparencies
in accordance with printed terms and conditions. One of the conditions stipulated
that all transparencies had to be returned within fourteen days of delivery
otherwise a holding fee of £5 a day with VAT would be charged for each transparency
retained thereafter. The defendants hired a number of the plaintiff's transparencies
without reading the conditions, and retained them for a month before returning
them thereby incurring a charge of nearly £4,000. The Court of Appeal allowing
the appeal held that the condition imposing retention charges could not be
enforced. At page 439 of the report Lord Justice Bingham says this:-
"In many Civil Law systems,
and perhaps in most legal systems outside the common law world, the law of
obligations recognises and enforces an overriding principle that in making
and carrying out contracts parties should act in good faith. This does not
simply mean that they should not deceive each other, a principle which any
legal system must recognise; its effect is perhaps most ably conveyed by such
metaphorical colloquialisms as "playing fair", "coming clean" or "putting
one's cards face upwards on the table." It is in essence a principle of fair
and open dealing. In such a forum it might, I think, be held on the facts
of this case that the plaintiffs were under a duty in all fairness to draw
the defendants attention specifically to the high price payable if the transparencies
where not returned in time and, when the fourteen days had expired to point
out to the defendants the high cost of continued failure to return them."
- Applying such an approach
to the construction of the words "good faith" in regulation 4(1),
in the context of dealings between the Bank and its consumer borrowers, regulation
4(1) imposes on the Bank a duty to deal with them fairly and openly.
- As several academic
commentators on this area of the law have pointed out, breach of the requirement
of good faith, "unfairness", takes two forms: "substantive unfairness",
namely the imposition of an onerous term out of proportion to a reasonable
assessment of the obligations of the parties under the contract by the supplier
on the consumer, here the Bank on its borrowers. The second form of unfairness
is "procedural unfairness". This may occur where a consumer/borrower
becomes unwittingly subject to an onerous term, which need not necessarily
be substantively unfair, but which materially affects the balance of advantage
of the consumer in entering into the contract. Academic commentators have
referred to this unfairness as "unfair surprise".
- Given such construction
of the words "good faith" as they appear in regulation 4(1) it may
be thought that the words "causes a significant imbalance in the parties
rights" adds little. If the term complained of, either substantively,
or as a result of the procedure by which the consumer becomes subject to it,
causes a significant imbalance in the parties rights and obligations under
the contract to the detriment of the consumer, it will be in breach of the
requirement of good faith. In practice a court considering whether a given
term of a contract is an "unfair term" will look at all the circumstances
of the case and its judgment will be based on an amalgam of perceived substantive
and procedural unfairness.
- I have already come
to the conclusion that clause 8 is not, by its effect, inherently unfair.
It seems to me that a term not inherently unfair can still constitute a breach
of the requirement of good faith if it unfairly deprives consumers of a benefit
or advantage which they may reasonably expect to receive. Such benefits or
advantages may arise in any number of ways under the common law or under statute
law or by reason of public policy. Thus particular provisions of statute law
may expressly confer an advantage on a particular group. Alternatively the
policy behind a statutory provision or public policy generally may be seen
to intend to confer such an advantage. A term of a contract which deprives
a member of that group of such an advantage albeit that, applying the strict
law, it may lawfully do so may be construed as being unfair particularly where
the imposition of the term has been brought about or maybe brought about in
circumstances of procedural unfairness.
- I turn to consider,
therefore, whether clause 8 can be said to deprive borrowers from the Bank
of an advantage which they might reasonably expect to receive or which particular
statutes or aspects of public policy can be construed as intending them to
receive.
- The only "substantive"
advantage of which clause 8 deprives borrowers is their exemption from having
to pay interest on the amount of any judgment obtained against them consequent
on their default in making payments pursuant to their loan agreements with
the Bank. This exemption results from the provisions of rule 2(3)(a) of the
1991 order excluding regulated agreements under the 1974 Act from the statutory
scheme for the imposition of interest on judgment debts in the County Court.
The "procedural" advantage is the expectation of borrowers that they
would have the provisions of their loan agreements governing what happens
in the event that they, for whatever reason, make default, drawn to their
attention, either, at the time they enter into the loan agreement, or, thereafter
and in particular at the time that they are considering whether to offer payment
by instalments to the Bank after proceedings have been commenced against them.
- So far as the substantive
advantage is concerned, the relevant statutory provisions are the 1974 Act
and the 1991 order. Neither of these expressly invalidate contract terms allowing
a creditor to charge interest after judgment. This litigation would not be
taking place if they did. It does not seem to me that it is possible to read
into the 1974 Act an overall statutory purpose, albeit not express, against
the use of such a term. It was submitted by the Solicitor General that such
an overall statutory purpose could be read into the 1991 order. I am not able
to accept that submission.
- It was submitted by
Lord Goodhart that the exception in paragraph 2(3)(a) of the 1991 order resulted
from the decision of the Court of Appeal in Forward Trust v Whymark
1990 2 QB p690. In that case the Court of Appeal was considering a
flat rate agreement in respect of which the payment of the remaining instalments
in the agreement had been accelerated as a result of the default of the borrower.
The issue was whether judgment should be entered for the full amount or whether
it should be entered for the amount due after deduction of a credit for early
settlement under sections 94 and 95 of the Act and the Consumer Credit (Rebate
on Early Settlement) Regulations 1983. The Court of Appeal allowing the creditors
appeal concluded that judgment should be entered for the full amount but with
an addendum indicating that the judgment debt could be discharged by payment
of the amount less the statutory rebate. In giving judgment at page 681 of
the report Lord Donaldson said:-
