(back to preceding text)

    47. There is however an underlying problem, and it is not difficult to identify. It is not possible for a lender who seeks to enforce a regulated agreement in England and Wales to obtain from the court an order for interest to be paid on the judgment debt. Section 141 of the 1974 Act provides that the county court is to have jurisdiction to hear and determine such actions and that they shall not be brought in any other court. The County Courts (Interest on Judgment Debts) Order 1991 (SI 1991/1184) enables the county court to award statutory interest, but it excludes regulated agreements from that power. It also provides that where payment of a judgment debt is to be made by instalments interest is not to accrue under that Order on the amount of any instalment until it falls due. Where there is an independent covenant to pay interest which does not merge in the judgment, contractual interest will continue nevertheless to accrue and remain payable. It is not unreasonable to think that the problem would be greatly reduced, and perhaps removed entirely, if it were possible for the lender to obtain an order from the county court which included post-judgment contractual interest when judgment was being given for the principal. If that were possible, separate proceedings to recover post-judgment contractual interest would be unnecessary. It would also enable the court to take account of the borrower's liability for post-judgment contractual interest when it is considering whether to make an order for the amount due to be paid by instalments.

    48. This is an English appeal, so the practice of the Scottish courts as regards the making of orders for the payment of contractual interest is not directly relevant. But the 1974 Act extends to the whole of the United Kingdom, and the bank uses the same standard form when it is entering into transactions with Scottish borrowers. In Scotland, actions to enforce regulated agreements must be brought in the sheriff court: section 141(3) of the 1974 Act. It appears never to have been doubted that post-judgment interest may be awarded on a money claim in the sheriff court, although a sheriff does not have power to order the payment of interest on the sum awarded in any decree unless it has been asked for expressly in the sum sued for: Dobie, Sheriff Court Practice (1952), p 104; Macphail, Sheriff Court Practice (2nd ed, 1998), para 9.93. The rate at which interest may be recovered on a judgment in that court is regulated by section 9 of the Sheriff Courts (Scotland) Extracts Act 1892 (55 & 56 Vict (c17)) as amended from time to time by various Acts of Sederunt. It provides that where interest is included in a decree or extract it shall be deemed to be at the prescribed rate (currently 8 per cent) "unless otherwise stated."

    49. The question whether it was competent for post-judgment interest to be ordered at the contractual rate was the subject of competing decisions in the sheriff court. But doubts on this point were removed by the decision of the Inner House in Bank of Scotland v Davis 1982 SLT 20. It was held in that case that there was no good reason why the court should refuse to grant a decree for payment of interest in terms of the parties' contract. The Lord Justice-Clerk (Wheatley) referred with approval to observations by Sheriff Sir Allan G Walker QC in Bank of Scotland v Forsyth 1969 SLT (Sh Ct) 15. I think that it is worth quoting the following passage from the sheriff's note in that case:

"When an obligation to pay is created for the first time by a decree of court, as in an action of damages for negligence, it is clearly desirable that interest from the date of the decree until payment should be at the customary rate which at present is 5 per cent. No doubt this customary rate is susceptible of change, but until it is deliberately changed by the courts, it will be allowed automatically on all such decrees. I can see no reason, however, why this customary rate should be applied when the parties themselves have, by their own contract, fixed the rate of interest which is to be paid….It seems clearly inequitable that the bank should be denied the right to obtain the agreed interest on the money lent because, from the date of the decree onwards, the court absolves the defender from paying interest in excess of 5 per cent. The view has been expressed that when pursuers obtain the advantages and sanctions of the law by constituting their debt by action, they must be content with interest at the rate of 5 per cent. I cannot myself understand, however, why it should be regarded as just that a contracting party must be denied the aid of the court in enforcing a contract, unless he is prepared, as the price of obtaining that aid, to surrender his right to receive the rate of interest which the other party contracted to pay."

    50. As the sheriff's use of the phrase "constituting their debt by action" indicates, a similar rule is followed in Scotland to that which applies in England under the merger rule. When the court pronounces decree for a principal sum due under a contract, the obligation to pay that sum is then owed under the court's decree and not under the contract. This principle has been recognised by the Prescription and Limitation (Scotland) Act 1973, which provides that the five year prescription which applies to any obligation to pay a sum of money does not apply to an obligation to obtemper a decree of court: Schedule 1, para 2 (a). The sheriff's discussion of the application of the principle appears also to assume - consistent with the merger rule - that, if the court is unable to award post-judgment interest on the principal sum at the rate provided for in the contract, the right to recover interest thereafter at the contractual rate would be lost.

    51. The question whether the court will enforce a term that interest at the contractual rate may be charged on the principal sum due after as well as before any judgment does not seem to have been tested in Scotland. But it has been rendered academic by the decision in Bank of Scotland v Davis that post-judgment interest at the contractual rate may be awarded in the sheriff court. In contrast to the position which applies in England under the County Courts (Interest on Judgment Debts) Order 1991, section 1(7) of the Debtors (Scotland) Act 1987 provides that interest may be recovered on a time to pay order pronounced in the sheriff court if the creditor has given notice to the debtor of his intention to claim interest: see also the Act of Sederunt (Summary Applications, Statutory Applications and Appeals etc Rules) 1999 (SI 1999/929) which prescribes the form of notice which is to be used. There is no provision which excludes regulated agreements from this power.

    52. As Lord Millett has observed, the Scottish practice of awarding post- judgment interest at the contractual rate in the sheriff court avoids the uncertainty, confusion and hardship which would otherwise arise if the borrower were to be exposed to further proceedings to satisfy the bank's claim for interest at the contractual rate. Like him, I do not think that it would be right to express a view in this case as to whether the Scottish practice could be followed under existing law and practice in England in the county court. But I suggest that consideration should now be given to the question whether the present constraints on the awarding of interest in the county court should be relaxed to enable this to be done. Any such relaxation could be combined with the making of rules, similar to those in the 1999 Act of Sederunt, designed to ensure that a borrower against whom proceedings were brought is made fully aware at the outset of the powers which the county court has under the relevant statutes to prevent hardship.

LORD MILLETT

My Lords,

    53. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Bingham of Cornhill. I agree with it, and for the reasons he gives I too would allow the appeal. Because of the importance of the case, and because the real source of the problem remains to be tackled, I propose to add a few brief observations of my own.

    54. A contractual term in a consumer contract is unfair if "contrary to the requirement of good faith [it] causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer". There can be no one single test of this. It is obviously useful to assess the impact of an impugned term on the parties' rights and obligations by comparing the effect of the contract with the term and the effect it would have without it. But the inquiry cannot stop there. It may also be necessary to consider the effect of the inclusion of the term on the substance or core of the transaction; whether if it were drawn to his attention the consumer would be likely to be surprised by it; whether the term is a standard term, not merely in similar non-negotiable consumer contracts, but in commercial contracts freely negotiated between parties acting on level terms and at arms' length; and whether, in such cases, the party adversely affected by the inclusion of the term or his lawyer might reasonably be expected to object to its inclusion and press for its deletion. The list is not necessarily exhaustive; other approaches may sometimes be more appropriate.

    55. The substance of the transaction in the present case is self-evident. It is a loan repayable by instalments with interest on the balance from time to time outstanding until the whole of the principal is repaid. The borrower would have no difficulty in understanding this. Nor would he think it unfair. If his attention were drawn to the impugned term, ie that interest should continue to be paid on the outstanding balance after as well as before judgment, he might well be surprised at the need to spell this out, but he would surely not be at all surprised by the fact. It is what he would expect. The term does not affect the substance of the transaction, which is that the borrower should continue to pay interest on the principal from time to time outstanding, nor does it impose any further or unexpected liability upon him not inherent in the basic transaction. It is included only to protect the lender from the (to modern eyes artificial) meaning placed on a covenant to pay interest by the Court of Appeal in In re Sneyd, Ex p Fewings (1883) 25 Ch D 338, where a covenant to pay interest on the balance of the principal sum from time to time remaining unpaid was construed as meaning remaining due under the covenant, so that it fell when the covenant was subsumed in the judgment.

    56. The term is not only a standard term in non-negotiable loans to consumers, but in commercial loans freely negotiated between parties on equal terms and acting with professional advice. I venture to think that no lawyer advising a commercial borrower would dream of objecting to the inclusion of such a term, which merely reinforces and carries into effect what the parties themselves would regard as the essence of the transaction.

    57. I am satisfied, therefore, that the term is not unfair. It does not cause an imbalance in the parties' rights and obligations; and the lender did not act in bad faith by taking advantage of the borrower's weakness of bargaining power or lack of professional advice to insist upon a term which would otherwise have been omitted.

    58. This is not to say that the many complaints which the Director General has received from borrowers are without substance. These are borrowers who have failed to keep up the instalments and suffered a judgment in consequence. Asked to suggest terms on which they can satisfy the judgment, they offer to pay it off by instalments. They are advised to offer as much as they can afford. They do so; their offer is accepted; and they duly pay all the instalments required of them. Despite having done so, they find that they have not discharged their contractual obligations but are still liable in respect of interest which has accrued since judgment and which was not covered by the instalment agreement. Where the agreed instalments are insufficient to keep interest down, the amount still outstanding when all the instalments have been paid is greater than the amount for which judgment was given.

    59. Despite the fact that lenders draw attention to these consequences when inviting borrowers to agree terms of repayment, they must still come as a nasty shock to many of them. I think that they have a legitimate grievance. A man who breaks his contract, suffers a judgment, makes an offer which is accepted to satisfy the judgment by instalments, and duly pays all the instalments required of him, would expect to be discharged from all further liability. The reason that this is not the case is that the amount for which judgment is given is not co-extensive with the amount for which the borrower is contractually liable. The practice in England and Wales is for the court to give judgment for the amount of principal and interest outstanding at the date of 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 unfortunate (though not I think the inevitable) consequence that the parties subsequently agree terms of repayment of the judgment debt rather than of the borrower's greater contractual liability.

    60. This does not happen in Scotland, where I understand the courts give judgment for the arrears of principal and interest at the date of judgment together with interest at the contractual rate on the arrears of principal until payment. If the judgment were in that form, then the borrower's compliance with a repayment schedule designed to satisfy the judgment debt would automatically discharge his contractual obligations. This would avoid the unfairness that occurs where a borrower who could not afford the instalments necessary to discharge his contractual obligations is induced to offer the smaller or fewer instalments sufficient to satisfy the judgment, and (because he can afford them) refrains from applying for relief while leaving himself exposed to further proceedings.

    61. But this unfairness does not arise from any inherent unfairness of the term. It is due to the limited nature of the judgment and the fact that it does not cover the whole of the borrower's indebtedness to the lender. I am not myself convinced that an English court could not make an order in the same form as the Scottish courts do; and there is old authority that it could do so: Arnott v Redfern (1826), 3 Bing 353. Counsel were unable to identify any persuasive reason why it cannot. But we have heard no argument on the question, and it would be wrong to express any concluded view on so important a matter without full argument. In the meantime I would hope either (i) that lenders would invite borrowers to agree instalment terms to discharge the contractual indebtedness and not merely the judgment debt or (ii) that administrative arrangements could be made so that instalment agreements which left an outstanding contractual liability were automatically referred to the district judge for consideration.

LORD RODGER OF EARLSFERRY

My Lords,

    62. I have had the opportunity of reading the speech of my noble and learned friend Lord Bingham in draft and, for the reasons which he gives, I too would allow the appeal. I add two short observations.

    63. On behalf of the appellants Lord Goodhart submitted that the last sentence in condition 8 fell within regulation 3(2)(b) of the Unfair Terms in Consumer Contracts Regulations 1994 which provides:

"In so far as it is in plain, intelligible language, no assessment shall be made of the fairness of any term which -

(b) concerns the adequacy of the price or remuneration, as against the goods or services sold or supplied."

This is a transposition of part of article 4(2) of Directive 93/13/EEC:

"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, in so far as these terms are in plain intelligible language."

It is common ground, of course, that the domestic regulation requires to be read in conformity with the meaning of the directive.

    64. At first sight the language of both the regulation and the directive is somewhat strange since it might seem to suggest that the court is not to consider the fairness of a term which concerns "the adequacy", in its usual sense of "the sufficiency", of the price or remuneration as against the goods or services sold or supplied. But it is obvious from the context that this cannot be what is intended. In his opinion Evans-Lombe J accepted a submission to the effect that "adequacy" must be read "as meaning the equivalent of 'the extent of … the remuneration' ": Director General of Fair Trading v First National Bank PLC [2000] 1 WLR 98, at p. 107 B - C. That interpretation seems to me to risk watering down what the directive may have intended. While the point was not explored before us and I therefore express no concluded view on it, I note that the French text of the directive uses the word "adéquation" and the German text the word "Angemessenheit". Both may suggest that what is in issue is the "appropriateness" of the price or remuneration as compared with the services or goods - in other words whether there is an equivalence between the services or goods and the consideration for them. This would seem to be consistent with the reference to "the price/quality ratio" in the nineteenth recital. It may therefore be that "adequacy" in both the directive and the regulations should be interpreted in that spirit. Which is indeed how I understand your Lordships to have approached the matter.

    65. The appeal reveals that, under the system that prevails in England and Wales, a borrower may punctually pay all the instalments required of him under a time order and still find, to his dismay, that he owes money to the bank because post-judgment interest has been accruing and has not been factored into the instalments. I share the general view that this is a highly unsatisfactory state of affairs. Basing himself on this unsatisfactory position, in one part of his argument the Director General suggested that the final sentence of condition 8, which ensures that post-judgment interest is recoverable, is unfair because the bank do not draw attention to the borrower's rights under section 129 of the Consumer Credit Act 1974 to apply for a time order and, more particularly perhaps, under section 136 to ask the court making a time order to amend the loan agreement. The suggestion was that, if the borrower were made aware of the powers and drew attention to it, the county court judge might use section 136 to adjust the rate of post-judgment interest so as to ensure that the borrower who duly paid the required instalments thereby discharged the whole of his liability to the bank.

    66. I agree with your Lordships that condition 8 cannot be regarded as unfair simply because the bank do not draw the borrower's attention to the remedies that may be available under the 1974 Act. The Act itself does not require that the borrower should be alerted to the effect of sections 129 and 136. But if the Director General thinks that the borrower's attention should be drawn to this matter at the time when the agreement is made, then he has powers under the Act to deal with the situation. The form and content of documents embodying regulated agreements, such as the agreement in this case, are prescribed by regulations made by the Secretary of State under section 60(1) of the 1974 Act. In terms of paragraph (c) of that subsection the Secretary of State may make such provisions as appear to him appropriate with a view to ensuring that the debtor is made aware of the protection and remedies available to him under the Act. It would therefore be open to the Secretary of State to amend the relevant regulations so as to require the prescribed form of agreement to include a reference to the borrower's remedies under sections 129 and 136. This is a matter as to the working of the regulations on which the Director General could advise the Secretary of State, in the exercise of his general duty under section 1(2)(b) of the Act.