Chancery law

Unfair terms and post judgment interestDirector General of Fair Trading v First National Bank, House of Lords, 25 October 2001, [2001] UKHL 52In considering the enforceability of First National Bank's standard term that contractual rates of interest would be payable after as well as before any judgment, the House of Lords provided a useful analysis of how to approach key provisions of the Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994/ 3159).The regulations provide that an unfair term in a consumer contract is not binding on the consumer save that 'In so far as [the contract] 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'.Accordingly, the issues raised were: l Was the bank's term subject to the fairness provisions in the regulations; and, l If so, was the term unfair?It was argued on behalf of the bank that the regulations expressly exclude consideration of terms concerning the adequacy of the remuneration for services supplied.

Under a credit agreement the service supplied was the loan of money and the bank's remuneration was the receipt of interest.

Therefore, it was submitted that the term entitling the bank to post judgment interest concerned the quantum and thus the adequacy of remuneration which is expressly excluded from the scope of the regulations.

This argument was unanimously rejected by the Lords.The Lords treated the interest term as merely an ancillary provision since it would only take effect upon default by the borrower.

The term was held to be not the 'substance of the bargain' but merely 'incidental'.

This classification appears to be influenced by policy considerations since, said Lord Steyn, 'It would be a gaping hole in the system if such clauses were not subject to the fairness requirement'.

The fairness of the term then had to be judged as at the date the contract was made.

Lord Bingham held that 'the requirement of good faith in this context is one of fair and open dealing.

Openness requires that the terms should be expressed fully, clearly, and legibly, containing no concealed pitfalls or traps.

Appropriate prominence should be given to terms which might operate unconsciously, take advantage of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor...'The Court of Appeal had held ([2000] QB 672, 688) that the term created an 'unfair surprise' to the defaulting borrower which causes 'a significant imbalance in the rights and obligations of the parties...

and it operates to the detriment of that consumer who has to pay the interest'.The surprise arose because, upon default by a borrower, standard practice in the county court is for the court to give judgment for the amount of principal and interest outstanding at the date of the judgment, without reference to the borrower's continuing liability to pay interest on the outstanding balance of the principal sum after judgment.

This has the consequence that a debtor who complies with the terms of the county court order will still be left with a separate obligation to pay substantial additional sums.The House of Lords overturned the decision of the Court of Appeal and held that the term that a lender ought to be able to recover interest at the contractual rate until the date of payment was fair.

It was noted that such a term was usually also part of freely negotiated commercial loans.

Also, as the trial judge had pointed out ([2000] 1 WLR 98 at 111) a secured lender who does not obtain a money judgment but instead proceeds for possession and sale under a mortgage may obtain interest at the contract rate until the date of actual repayment.

Any unfairness arose from the limited nature of county court judgments which do not cover the whole of the borrower's indebtedness.

That unfairness could be corrected by a change in county court procedure and/or alterations to the prescribed consumer credit forms.In the light of this decision, courts will be reluctant to allow suppliers to allege that contractual provisions in consumer contracts need not be subject to the fairness test.

However, in applying the test the courts will tend to take a robust approach, particularly where consumers have knowingly agreed to particular terms.

By Dov Ohrenstein, Barrister, 11 New Square, London