Director General of Fair Trading v First National Bank Plc

Thursday, 3 February 2000

This is the judgment of the court.

The Director General of Fair Trading ("the DG") appeals with the leave of Evans-Lombe J. from the judge's order of 30 July 1999 refusing the DG the injunction which he had sought against First National Bank plc ("the Bank") pursuant to reg. 8(2) of the Unfair Terms in Consumer Contracts Regulations 1994 ("the Regulations"). The judge's judgment is now reported ( [2000] 1 W.L.R. 98). The DG alleged that a contractual term included in the standard conditions of business on which the Bank provides credit to consumers was unfair within the meaning of the Regulations. The case is of some general interest. It is the first case to have come to the High Court and the Court of Appeal on the Regulations. It is the first time that the DG has come to court to seek an injunction preventing the use of a term said to be unfair.

The Bank is licensed by the DG under the Consumer Credit Act 1974 ("the 1974 Act") to carry on consumer credit business. By 1995 the Bank, which that year became a subsidiary of Abbey National plc, was the largest independent provider of consumer finance and the largest provider of home loan improvement finance in the U.K. It lends money to borrowers under credit agreements regulated under the 1974 Act. Its standard form of agreement contains a "Customer Declaration" in which the customer declares that the conditions set out on the back of the form have been carefully read and that the customer is satisfied with the terms and conditions. He is told that it is a regulated credit agreement and that he should sign it only if he wants to be legally bound by its terms. It provides for monthly repayments and in para. D of a schedule on the front of the form the rate of interest per month is specified. But the customer is advised that the rate is variable in the event of change in the Bank's base lending rate and he is directed to condition 4 which sets out the details of how the interest is calculated and how changes in the rate affect the monthly instalments. Condition 8 is in this form:

"Time is of the essence for making all repayments to [the Bank] as they fall due. If any repayment instalment is unpaid for more than 7 days after it became due, [the Bank] 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, [the Bank] 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 [the Bank] in trying to obtain the repayment of the unpaid instalment of such balance and interest. Interest on the amount which becomes payable shall be charged in accordance with Condition 4, at the rate stated in Paragraph D overleaf (subject to variation) until payment after as well as before any judgement (such obligation to be independent of and not to merge with the judgement)."

It is the last sentence of that condition ("the relevant term") to which objection is taken by the DG.

The customer is told, by a section headed

"IMPORTANT —YOU SHOULD READ THIS CAREFULLY

YOUR RIGHTS",

that the 1974 Act covers the agreement and gives the consumer a number of rights, some of which are specified. Attention is not specifically drawn to the relevant term.

The effect of an agreement incorporating the relevant term is that where the Bank obtains judgment against a borrower, interest is payable by the borrower at the contractual rate on the outstanding principal plus accrued interest unpaid at the date of judgment until the judgment is discharged by payment. Such an agreement is known as a simple rate agreement, in contrast to an agreement where the default provisions accelerate payment of the whole of the unpaid instalments including interest, the latter agreement being known as a flat rate agreement. By ss. 94 and 95 of the 1974 Act flat rate agreements are subject to a statutory rebate on any settlement.

There are certain other provisions of the 1974 Act to which we should refer. By s. 93 interest under a regulated agreement is not to be increased on default. By s. 129 the court (and by s. 141 the County Court is the court in which proceedings to enforce a regulated agreement must be brought) is empowered to make time orders defined in s. 129(2) as follows:

"A time order shall provide for one or both of the following, as the court considers just -

(a) 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;

(b) the remedying by the debtor or hirer of any breach of a regulated agreement (other than non-payment of money) within such period as the court may specify."

Among other powers given to the court is one to include in its order such provision as it considers just for amending any agreement or security in consequence of a term of the order (s. 136).

If the court finds a credit bargain extortionate, and it may so find if, for example, the bargain grossly contravenes ordinary principles of fair dealing, the court may reopen the credit agreement to do justice between the parties (s. 137). In the present case the DG does not suggest that the Bank's agreements fall foul of s. 137.

We must also refer to the County Courts Act 1984 ("the 1984 Act"). By s. 71(1) where a judgment is given or an order made by a County Court under which a sum of money of any amount is payable, the court may order the money to be paid in one sum or by such instalments payable at such times as the court may fix. The 1984 Act contains no power, consequent on an order under s. 71(1) for payment by instalments, which corresponds to s. 136 of the 1974 Act. S. 74 of the 1984 Act confers on the Lord Chancellor power with the concurrence of the Treasury by order to make provision for payment of interest on sums payable under County Court judgments. The Lord Chancellor has made the County Courts (Interest on Judgment Debts) Order 1991, thereby causing interest to become payable on County Court judgments for the first time. By reg. 2(1) every County Court judgment debt of a sum of money not less than £5,000 is to carry interest at the rate for the time being specified under s. 17 Judgments Act 1838. But by reg. 2(3) interest is not to be payable under the Order where the judgment is given in proceedings to recover money due under a regulated agreement. Further by reg. 3 (so far as relevant) where under the terms of the relevant judgment payment of a judgment debt is to be made by instalments, interest is not to accrue under the Order on the amount of any instalment until it falls due. The due payment of the instalments will therefore avoid interest becoming payable under the Order. The exemption from interest is not limited to flat rate agreements, even though the exemption may have been prompted by a suggestion by Lord Donaldson M.R. in Forward Trust v Whymark [1990] 2 Q.B. 670 at p. 681 in which reference is made only to such agreements.

The Regulations were made in implementation of Council Directive 93/13/EEC (on unfair terms in contracts). The recitals to the Directive are extravagant in number. They make clear that a primary purpose of the Directive was to harmonise the rules in consumer contracts relating to unfair terms in the Member States, there being many disparities and marked divergences between the laws of Member States. The tenth recital states that " more effective protection of the consumer can be achieved by adopting uniform rules of law in the matter of unfair terms". The 16th recital is in this form:

"Whereas the assessment, according to the general criteria chosen, of the unfair character of terms, in particular in sale or supply activities of a public nature providing collective services which take account of solidarity among users, must be supplemented by means of making an overall evaluation of the different interests involved; whereas this constitutes the requirement of good faith; whereas, in making an assessment of good faith, particular regard shall be had to the strength of the bargaining positions of the parties, whether the consumer had an inducement to agree to the term and whether the goods and services were sold or supplied to the special order of the consumer; whereas the requirement of good faith may be satisfied by the seller or supplier where he deals fairly and equitably with the other party whose legitimate interests he has to take into account."

By Art. 1.1 the purpose of the Directive is expressed to be to approximate the laws, regulations and administrative provisions of the Member States relating to unfair terms in contracts concluded between a seller or supplier and a consumer. "Unfair terms" are defined in Art. 2(a) as the contractual terms defined in Art. 3, which provides (so far as is material):

"...