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Case No: CHANF/99/0974/A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
Mr. Justice Evans-Lombe
Royal Courts of Justice
Strand, London, WC2A 2LL
Thursday, 3 February 2000
B e f o r e :
LORD JUSTICE PETER GIBSON
LORD JUSTICE WALLER
and
LORD JUSTICE BUXTON
|
DIRECTOR
GENERAL OF FAIR TRADING
|
Appellant
|
|
-
and -
|
|
|
FIRST
NATIONAL BANK PLC
|
Respondent
|
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
Mr Ross Cranston Q.C. S.-G., Mr. Jonathan Crow and Mr. John McCaughran
(instructed by Treasury Solicitor for the Appellant)
Lord Goodhart Q.C. and Mr. Frederick Philpott (instructed by Messrs.
Davis & Co. of Harrow for the Respondent)
Judgment
As Approved by the Court
Crown Copyright ©
Thursday, 3 February 2000
JUDGMENT
LORD JUSTICE PETER GIBSON: This is the judgment of the court.
1. 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 WLR 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.
2. 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.
3. 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.
4. 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.
5. 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).
6. 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.
7. 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.
8. 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."
9. 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):
"1. A contractual term which has not been individually negotiated shall be
regarded as unfair if, contrary to the requirement of good faith, it causes a
significant imbalance in the parties' rights and obligations arising under the
contract, to the detriment of the consumer.
2. 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."
10. Para. 3 of Art. 3 introduces an Annex which contains an indicative and
non-exhaustive list of the terms which may be regarded as unfair. We need only
mention para. 1 (e):
"Terms which have the object or effect of:
requiring any consumer who fails to fulfil his obligation to pay a
disproportionately high sum in compensation".
11. Art. 4 is in these terms:
"1. 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 the other terms of the contract or of another contract on which it
is dependent.
2. 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
supplies [sic] in exchange, on the other, in so far as these terms are in plain
intelligible language."
12. Art. 7 requires Member States to ensure that in the interests of consumers
and competitors adequate and effective means exist to prevent the continued use
of unfair terms and that such means should include provision whereby those with
a legitimate interest might take action before the courts.
13. The Regulations implemented the Directive with effect from 1 July 1995.
They include the following provisions (so far as material):
"Terms to which these Regulations apply
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.
(2) In so far as it is in plain, intelligible language, no assessment shall
be made of the fairness of any term which -
(a) defines the main subject matter of the contract, or
(b) concerns the adequacy of the price or remuneration, as against the goods
or services sold or supplied.
(3) 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.
Unfair Terms
4. (1) In these Regulations, subject to paragraphs (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.
(2) 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.
(3) 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.
(4) Schedule 3 to these Regulations contains an indicative and non-exhaustive
list of the terms which may be regarded as unfair.
Consequence of inclusion of unfair terms in contracts
5. (1) An unfair term in a contract concluded with a consumer by a seller or
supplier shall not be binding on the consumer.
(2)The contract shall continue to bind the parties if it is capable of
continuing in existence without the unfair term.
Prevention of Continued Use of Unfair Terms
8. (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 (in which proceedings he may also apply for an interlocutory
injunction) against any person appearing to him to be using or recommending use
of such a term in contracts concluded with consumers.
(3) The Director may, if he considers it appropriate to do so, have regard
to any undertakings given to him by or on behalf of any person as to the
continued use of such a term in contracts concluded with consumers.
(4) The Director shall give reasons for his decision to apply or not to
apply, as the case may be, for an injunction in relation to any complaint which
these regulations require him to consider.
(5) The court on an application by the Director may grant an injunction on
such terms as it thinks fit.
(6) An injunction may relate not only to use of a particular contract term
drawn up for general use but to any similar term, or a term having like effect,
used or recommended for use by any party to the proceedings.
SCHEDULE 2
ASSESSMENT OF GOOD FAITH
In making an assessment of good faith, regard shall be had in particular to -
(a) the strength of the bargaining positions of the parties;
(b) whether the consumer had an inducement to agree to the term;
(c) whether the goods or services were sold or supplied to the special order
of the consumer, and
(d) the extent to which the seller or supplier has dealt fairly and equitably
with the consumer."
14. Sch. 3 follows the Annex to the Directive and includes para.1 (e) of the
Annex. The court to which the DG can apply for an injunction is by reg. 2(1)
the High Court.
15. The Regulations have now been replaced by the Unfair Terms in Consumer
Contracts Regulations 1999 from 1 October 1999, but the new regulations do not
govern the present dispute.
16. It is not in dispute that the Regulations apply to the Bank's consumer
credit agreements containing the relevant term and that such agreements are not
individually negotiated for the purpose of reg. 3(1). It is trite law in
England that once a judgment is obtained under a loan agreement for a principal
sum and judgment is entered, the contract merges in the judgment and the
principal becomes owed under the judgment and not under the contract. If under
the contract interest on any principal sum is due, absent special provisions
the contract is considered ancillary to the covenant to pay the principal, with
the result that if judgment is obtained for the principal, the covenant to pay
interest merges in the judgment. Parties to a contract may agree that a
covenant to pay interest will not merge in any judgment for the principal sum
due, and in that event interest may be charged under the contract on the
principal sum due even after judgment for that sum. This is so notwithstanding
that judgment interest prescribed by statute is at a lower rate (see
Economic Life Assurance Society v Usborne [1902] AC 147 applying Re
Sneyd, Ex p. Fewings (1883) 25 Ch D 338). (For the sake of completeness
we should record that Lord Goodhart Q.C. for the Bank reserved the right to
challenge these decisions if this case goes further.) Merger does not apply
where there is an independent covenant to pay interest (Ealing L.B.C. v EI
Isaac [1980] 1 W.L.R. 932 at p. 937). Thus on the face of the Bank's
regulated agreements, the effect of the relevant term is to prevent the
independent obligation to pay interest merging in the judgment, the provision
for interest at the contractual rate continuing to apply after judgment.
17. It is clear from the decision of this court in Southern and District
Finance plc v Barnes [1995] C.C.L.R. 62 that where a creditor calls in a
loan (such as by bringing a possession action in a case where the loan is
secured on property), the outstanding balance of the loan is a sum owed and the
court has power to make a time order in respect of future instalments as well
as accrued arrears, but when such an order is made the court can under s. 136
of the 1974 Act amend the regulated agreement by reducing the rate of interest
payable under it, if necessary, to nil. But in practice in the vast majority
of cases in which a regulated agreement is being enforced and an instalment
order is made, there is no real hearing by the court, the lender and the
borrower usually agreeing on an instalment order and the court making the
consent order without more consideration. This occurs even though in some
County Court claim forms of the Bank, which were included in the evidence,
attention is drawn by the Bank to the fact that the agreement provides for
interest to be payable before and after judgment and it is stated that the
right to proceed for subsequent interest is reserved. There was no evidence
before us as to whether this is now the invariable practice of the Bank, nor in
any event was the debtor's attention drawn by the Bank to the powers of the
court under ss. 129 and 136.
18. The DG has received complaints from members of the public about the Bank's
standard terms. Although many other lenders incorporate in their agreements
terms similar to the relevant term, we are told that the DG has not received
complaints about those terms from consumers. For present purposes it is those
complaints relating to the impact of the relevant term when judgment has been
obtained against borrowers and an order for payment by instalments has been
made which raise the relevant issue. Borrowers complained of unfairness in
that they found themselves liable to the Bank for amounts beyond those provided
for in the judgments against them. They in particular complained that when an
order for payment by instalments is made, sometimes after offers for repayment
by instalments in accordance with what the borrowers could afford have been
accepted by the Bank, compliance with that order might nevertheless leave the
borrowers in debt. The accrual of interest at the contractual rate might mean
that the amount of what is owed to the Bank substantially increases, even if
the debtor duly pays the instalments fixed by the court. Borrowers were not
always aware of the effect of the relevant term when they entered the
agreements and the attention of the court, when the Bank obtained judgment and
the court was considering a time order, was not necessarily drawn to the
relevant term. That interest at the contractual rate should continue to be
payable after judgment is the more striking given that no statutory interest is
payable on a County Court judgment to recover money due under a regulated
agreement or on a judgment debt made payable by instalments when the
instalments are duly paid.
19. There was an exchange of views in correspondence between the Office of
Fair Trading and the Bank. The DG considered that the relevant term had the
potential to put consumers in a significantly worse position than they would be
under the legislative regime of the 1974 Act, the 1984 Act and the 1991 Order
and that it was unfair within the meaning of the Regulations. He also regarded
the requirement of the relevant term that interest be paid upon interest as
falling within para. 1 (e) of Sch. 3 to the Regulations as requiring a consumer
to pay a disproportionately high sum in compensation. On 8 March 1999 the DG
commenced proceedings against the Bank by Originating Summons, seeking
injunctions restraining the Bank from including in any agreement with a
consumer any contractual term or provision having the object or effect of (i)
making interest payable on the amount of any judgment obtained by the Bank for
sums owing under a regulated agreement or (ii) making interest payable upon
interest, and enforcing any such term already included in any existing
agreement. The DG did not pursue the "interest upon interest" point. The
generality of the injunctions sought is to be noted: they are not confined to
the particular circumstances giving rise to the complaints made to the DG.
20. On the hearing of the Originating Summons the judge considered two issues.
One was whether in the light of reg. 3(2) of the Regulations the relevant term
fell to be assessed for fairness at all. The Bank argued that it did not as
the provision for the payment of interest consequent on default was a core term
falling within reg. 3(2). The judge rejected that submission because he did
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 an advance. The other issue was whether the relevant term
was unfair. The judge's approach was to consider apart from statute or
authority whether a potential borrower would have thought the relevant term
unfair if its effects were drawn to his attention. The judge said that the
borrower would not have considered the term unfair. The judge then considered
the requirement of good faith, which, he said, took two forms: substantive
unfairness and procedural unfairness. He accepted that if the relevant term
deprived a borrower of an advantage which he might reasonably expect to receive
or which by statute or as a result of public policy he was entitled to receive,
there would be substantive unfairness. The judge found that the only
substantive advantage of which the borrower was deprived was the exemption from
having to pay interest on a judgment obtained against him on his default under
the agreement. But he held that there was no statutory or other prohibition
against the Bank's use of the relevant term. On procedural unfairness, the
judge accepted that it would be better practice for the Bank to draw the
relevant term to the attention of borrowers before entering the agreement. But
he held that there was no procedural unfairness. He pointed out that the DG
had not sought a mandatory injunction to compel the Bank to draw the relevant
term to the attention of borrowers. The judge concluded that the DG failed to
discharge the onus on him of proving that the relevant term was unfair or
operated unfairly. He accordingly refused the relief sought by the DG.
21. The same two issues arise before this court.
22. The first issue, whether by reason of reg. 3 (2) the fairness of the
relevant term does not fall to be assessed, is raised by way of a Respondent's
Notice by the Bank. Lord Goodhart Q.C. argues that the "core terms" of a
consumer credit agreement or any other contract for a loan bearing interest
extend beyond the mere rate of interest. He says that the period over which
interest is payable (whether payable before or after judgment) and the sum on
which it is payable are also core terms falling within para. (a) and (b) of
reg. 3(2) or both, being terms which define the main subject matter of the
contract and/or the price or remuneration for the loan. He contends that such
status cannot be changed simply because the creditor has entered judgment,
because after any judgment the creditor is as much out of his money (till he is
paid) as before and the character of the quid pro quo for being out of his
money, the interest, is exactly the same. He draws our attention to the
position in Scotland as established by the decision of the Court of Session in
Bank of Scotland v Davis [1982] S.L.T. 20. In that case an appeal was
allowed from the order of the sheriff in an undefended action for repayment of
a loan, the sheriff having ordered payment of interest from the date of
judgment at a rate lower than the contractual rate until payment. The court
saw no reason why the contractual rate should not apply after judgment. Lord
Goodhart argues that in Scotland the contractual rate of interest is a core
term and so the fairness of it cannot be assessed. He submits that the
Regulations should be read, if possible, in a way which avoids an anomaly
between the position in England and that in Scotland and that the obvious way
to do this is to treat the relevant term as conferring a single unbroken right
to interest at the contractual rate and so as a core term.
23. Lord Goodhart sought leave to adduce further evidence of the position in
three other jurisdictions, Ireland, France and Germany. This was not opposed
by the Solicitor-General appearing for the DG and we allowed it. It appears
that the position in France is the same as in Scotland. In Ireland and Germany
there is a statutory right to interest at a prescribed rate. Lord Goodhart
argued that an aim of the Directive was to harmonise the position in Member
States of the European Union and he suggested that harmonisation towards the
Scottish and French position by recognising a provision for post-judgment
interest as a core term was desirable. We do not know what the laws of other
Member States provide. On the material before us we find it impossible to say
that the Directive encourages harmonisation to accord with the Scottish and
French model rather than the English or some other model.
24. The Solicitor-General submits that the relevant term is not a core term
for two reasons. First, he says, that condition 8 consists of default
provisions dealing with the situation where there is a breach of contract; it
is not there that one finds defined the main subject matter of the contract nor
does it concern the adequacy of the price or remuneration. Terms concerned
with the adequacy of the price or remuneration are, he says, those which define
the parties' rights and obligations in the due performance of the contract.
Second, he says that the condition defines the circumstances in which interest
is and continues to be payable; it is not a provision stipulating the rate at
which interest is payable. No point is taken on the requirement of plain and
intelligible language.
25. We agree with the Solicitor-General. The test in respect of the relevant
term is not whether it can be called a "core term" but whether it falls within
one or both of paras. (a) and (b) of reg. 3(2). Neither paragraph is in our
opinion apt to cover the relevant term, which certainly does not define the
main subject matter of the contract and which cannot, in our view,
realistically be said to concern the adequacy of the remuneration, relating as
it does only to a case where the borrower is in default and then merely
providing for the continuation of the contractual rate after judgment. As the
Solicitor-General pointed out, if the Bank was right almost any provision
containing any part of the bargain would be capable of falling within the reach
of reg. 3(2). There is nothing in the Directive to require so wide an
interpretation. We would therefore uphold the decision of the judge on the
first issue.
26. We turn to the second issue: is the relevant term unfair? Three elements
in the test in the Regulations of unfairness of a contractual term may be
noted, viz.
(1) an absence of good faith;
(2) a significant imbalance in the parties' rights and obligations under the
contract; and
(3) detriment to the consumer.
27. "Good faith" has a special meaning in the Regulations, having its
conceptual roots in civil law systems. The German Standard Contract Terms Act,
providing for the avoidance of a term which is unreasonably disadvantageous to
a party "contrary to the requirements of good faith" (see Markesinis: The
German Law of Obligations Vol. 1 (1997) p. 908), appears to have had a
significant influence on the Directive (see Chitty on Contracts, 28th ed.
(1999) para. 15-034). Bingham L.J. said in Interfoto Library Ltd. v
Stiletto Ltd. [1989] 1 Q.B. 433 at p. 439:
"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
aptly 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."
28. Professor Beale, in his chapter "Legislative Control of Fairness: The
Directive on Unfair Terms in Consumer Contracts" in Beatson and Friedmann:
Good Faith and Fault in Contract Law (1995), said at p. 245:
"I suspect that good faith has a double operation. First, it has a procedural
aspect. It will require the supplier to consider the consumer's interests.
However, a clause which might be unfair if it came as a surprise may be upheld
if the business took steps to bring it to the consumer's attention and to
explain it. Secondly, it has a substantive content: some clauses may cause
such an imbalance that they should always be treated as unfair."
29. As is aptly said in Anson's Law of Contracts, 27th ed. (1999), p. 293, the
"good faith" element seeks to promote fair and open dealing, and to prevent
unfair surprise and the absence of real choice. A term to which the consumer's
attention is not specifically drawn but which may operate in a way which the
consumer might reasonably not expect and to his disadvantage may offend the
requirement of good faith. Terms must be reasonably transparent and should not
operate to defeat the reasonable expectations of the consumer. The consumer in
choosing whether to enter into a contract should be put in a position where he
can make an informed choice.
30. The element of significant imbalance would appear to overlap substantially
with that of the absence of good faith. A term which gives a significant
advantage to the seller or supplier without a countervailing benefit to the
consumer (such as a price reduction) might fail to satisfy this part of the
test of an unfair term.
31. Finally the element of detriment to the consumer must be present for the
term to be found to be unfair.
32. The Solicitor-General submits that the relevant term is unfair. His
complaint is that it operates unfairly in the particular circumstances that (1)
judgment is obtained against a borrower under a regulated agreement, (2) an
order is made to pay the debt by instalments, whether under s. 71 of the 1984
Act or a time order under s. 129 of the 1974 Act, but (3) no order is made
under s. 136 of the 1974 Act is considered or made to amend the agreement, with
the result that interest continues to accrue notwithstanding the due payment of
the instalments ordered.
33. Lord Goodhart submitted that the judge was right for the reasons which he
gave. But as we understood him, Lord Goodhart accepted that the relevant term
could cause hardship. He expressly accepted that it was "plainly desirable"
that every debtor should have his attention drawn to the availability of time
orders and orders under s. 136. But he argued that that should be done in a
way other than by putting the burden on the Bank to amend the agreement. Thus
he said that it could be done by amending the court forms so that when a
creditor sues on the default of the borrower attention is drawn to that point.
Alternatively, he said, it could be done by amending the Consumer Credit
(Enforcement, Default and Termination Notices) Regulations 1983, so that the
default notice draws attention to the point. No doubt the adoption of either
of these methods could improve the position. But they do not ensure that the
point to which objection is taken and which originates with the relevant term
will be met, and we do not see that these palliatives prevent the contractual
term from being unfair, if the relevant term can be so categorised.
34. We are not persuaded that the judge was correct in his approach. The test
of unfairness is not to be judged by personal concepts of inherent fairness
apart from the requirements of the Directive and Regulations, and we are far
from convinced that a borrower would think it fair that when he is taken to
court and an order for payment by instalments has been tailored to meet what he
could afford and he complied with that order, he should then be told that he
has to pay further sums by way of interest. The borrower's attention is not
specifically drawn to the point by the Bank at or before the conclusion of the
contract nor at any later time prior to the making of the order nor in the
order itself and the evidence shows that it comes as a disagreeable surprise to
the borrower to find that due compliance with the order for payment by
instalments, so far from eliminating the debt to the Bank, may leave him owing
substantial further sums to the Bank. It is not enough to say, as the judge
did, that if the provisions of ss. 129 and 136 of the 1974 Act are correctly
used by the courts the inclusion of the relevant term need not operate to
impose on a borrower post judgment interest when it would not be appropriate or
just to do so. That does not prevent the relevant term operating unfairly in
the majority of cases where instalment orders are made without the
consideration by the courts of those provisions.
35. In our judgment the relevant term is unfair within the meaning of the
Regulations to the extent that it enables the Bank to obtain judgment against a
debtor under a regulated agreement and an instalment order under s. 71 of the
1984 Act without the court considering whether to make a time order, or, if it
does and makes a time order, whether also to make an order under s. 136 to
reduce the contractual interest rate. The Bank, with its strong bargaining
position as against the relatively weak position of the consumer, has not
adequately considered the consumer's interests in this respect. In our view
the relevant term in that respect does create unfair surprise and so does not
satisfy the test of good faith, it does cause a significant imbalance in the
rights and obligations of the parties by allowing the Bank to obtain interest
after judgment in circumstances when it would not obtain interest under the
1984 Act and the 1991 Order and no specific benefit to compensate the borrower
is provided, and it operates to the detriment of that consumer who has to pay
the interest. We would therefore allow the appeal.
36. The question which then arises is as to the form of the appropriate
relief. The effect of holding the relevant term to be unfair, although only in
a limited respect, would appear to be that by reg. 5 (1) it is not binding on
the consumer. But the contract continues to bind the parties if it is capable
of continuing in existence without the unfair term (reg. 5(2)); plainly the
contract is so capable. An injunction against the use of the relevant term in
contracts concluded with consumers is at first blush the appropriate form of
relief by reason of reg. 8(2). But Lord Goodhart complained that the
injunction sought by the DG went too wide, going beyond what was needed to meet
the DG's objection. In this context it is pertinent to refer to para. 6 of the
Notice of Appeal:
"The Learned Judge ought to have held that clause 8 was unfair insofar as it
was not limited by a proviso to the effect that the Defendant would not seek to
rely on it after judgment (i) in any case where the Court made an order for
payment of the judgment debt by instalments, or (ii) alternatively, in any such
case unless a Judge has specifically considered whether to exercise the Court's
powers under sections 129 and 136 of the Consumer Credit Act 1974."
The DG thereby appeared to recognise that the unfairness could be cured if an
amendment were made to condition 8.
37. We have heard no argument on the wording of any such amendment, but if the
Bank were prepared to draft a suitable amendment to meet the DG's objection and
gave an undertaking to incorporate such amendment in its standard terms, we
would be minded to accept such undertaking, and the wider or any injunction
would be unnecessary. It goes without saying that it would be desirable for
the terms of any such amendment to be agreed between the parties.
38. In the circumstances we would hear further argument on the form of relief
after counsel and solicitors have had the opportunity to consider the judgment
with their clients. To this end we would authorise counsel and solicitors to
show the judgment to their clients, once the judgment has been released, but
the judgment will remain confidential to counsel, solicitors and their clients
until formally handed down in open court.
Order: Appeal allowed with costs here and below. Form of undertaking
offered by respondents to be agreed by Counsel and submitted to the Registrar.
Permission to appeal to the House of Lords refused.
(Order does not form part of the approved judgment.)
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