Post-judgment interest: Director General of Fair Trading -v- First National Bank plc

Post-judgment interest: Director General of Fair Trading -v- First National Bank plc

On 25th October 2001 the House of Lords resolved an issue which has been a cause for concern for consumer lenders for over 2 years. Their Lordships held that a standard term in a credit agreement requiring the borrower to pay interest at the contractual rate after judgment had been given was not an unfair term under the Unfair Terms in Consumer Contracts Regulations 1994.

This case concerned the provisions of the Unfair Terms in Consumer Contracts Regulations 1994 ("the 1994 Regulations"). The 1994 Regulations were revoked and replaced by 1999 regulations. Although this case applied the 1994 Regulations, the issue would have been decided in the same way had the 1999 regulations been applied.

Under the 1994 Regulations, the Director General of Fair Trading ("the DGFT") has pre-emptive powers to obtain an injunction preventing the continued use of an unfair term. In the first case brought under the 1994 Regulations, the DGFT sought an injunction preventing First National from relying on one of its standard terms in a credit agreement regulated by the Consumer Credit Act 1974 ("the CCA"). The term in question provided that: "Interest on the amount which becomes payable shall be charged ...until payment after as well as before any judgement (such obligation to be independent of and not to merge with the judgement)"

At first instance, the High Court refused to grant the requested injunction. The DGFT appealed that decision. The Court of Appeal allowed the appeal but stopped short of ordering injunctive relief when First National provided undertakings that the term would be drawn to borrowers’ attention and that borrowers would be notified of the court's power under the CCA first, to make a time order (an order for instalment payments) under section 129 CCA, and secondly to amend the terms of an agreement regulated by the Act under section 136 CCA.

First National appealed this decision and the DGFT cross-appealed contending that the term was fundamentally more unfair than the Court of Appeal had found

The House of Lords rejected First National's first ground of appeal that the standard term in question was a term which went to "...the adequacy of the price or remuneration..." - regulation 3(2)(b) of the 1994 Regulations. Their Lordships found that the term did not go to the adequacy of the rate of interest but was an ancillary provision dealing with the consequences of default by a borrower. Therefore the term was subject to the test of unfairness under regulation 4(1) of the 1994 Regulations.

Under regulation 4(1) an . "..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". Their Lordships found that the standard term was not an unfair term. The consumer would not expect First National to forego interest on a loan therefore there was nothing unbalanced or detrimental to the consumer in the obligation to pay interest after judgment. Their Lordships found that it was the working of the term rather than the term itself that could cause unfairness and any disadvantage a consumer suffered was the result of the County Courts (Interest on Judgement Debts) Order 1991 which prevents a claimant from recovering statutory interest on a county court judgment in relation to agreements regulated by the CCA. Their Lordships noted that sections 129 and 136 CCA allow the court adequate means to deal with any disadvantage a consumer may suffer by a strict application of a post judgment interest clause.

Post-judgment interest clauses are common in mortgage deeds, credit card agreements and overdraft terms. This decision means lenders can include such a term safe in the knowledge that it will not be open to challenge as an unfair term.

Their Lordships suggested that one way in which the unfairness in the application of the term could be tackled would be for the DGFT to use his power under the CCA to introduce legislation which would require lenders to draw borrowers’ attention to these types of term and to the reliefs available to them in sections 129 and 136 CCA. It remains to be seen whether the DGFT will rise to this challenge.

This decision is clearly good news for UK lending institutions, but lenders should be aware that it affects only those agreements with UK law and jurisdiction. The position in Scotland is different because courts there are permitted to grant decrees for the payment of contractual interest.

For further information on this issue, please contact Mayoor Patel at [email protected] or on +44 (0)20 7367 2984.