Director General of Fair Trading v First National Bank plc
Encyclopedia
Director General of Fair Trading v First National Bank plc [2001] UKHL 52 is the leading case on the Unfair Terms in Consumer Contracts Regulations 1999
. It was an action to test the fairness of clauses in loan agreements which secured a bank commercial interest rates after a debtor that had defaulted and they had been to court to determine their repayment scheme. The House of Lords held that although the clause fell within the Regulations (r 6(2)) it was fair (r 5(1)) and valid. The case was brought by the Director General of Fair Trading (now the Office of Fair Trading
) on behalf of consumers.
. So the bank wanted condition 8 to get the money it would have in interest even after someone had been unable to pay. Under r 8 of the 1994 Reg’s (now r 12) the DG sought an injunction to stop the bank using the term, because it was unfair. Lord Goodhart submitted that the term merely concerned the adequacy of the bank’s remuneration, therefore fell under r 3(2) (now r 6(2)). The DG submitted it was a core term and unfair because complaints were made and the 1991 Order had excluded interest.
The 1991 Order and the 1974 Act’s interaction, whereby interest had been excluded, did not make the term an unfair way of circumventing legislation, because the Act had not prohibited post-judgment interest being payable.
Lord Steyn said,
He added that he was initially persuaded by the idea that because the legislation had excluded interest, the court could not, but had then decided that because the legislation did not exclude expressly or by necessary implication that interest can accrue, the contract term was fair.
Lord Hope, Millett and Rodger concurred.
Unfair Terms in Consumer Contracts Regulations 1999
The Unfair Terms in Consumer Contracts Regulations 1999 is a UK statutory instrument, which implements the EU Unfair Consumer Contract Terms Directive into domestic law.Implemented under the European Communities Act 1972. See also, L95 OJ 29...
. It was an action to test the fairness of clauses in loan agreements which secured a bank commercial interest rates after a debtor that had defaulted and they had been to court to determine their repayment scheme. The House of Lords held that although the clause fell within the Regulations (r 6(2)) it was fair (r 5(1)) and valid. The case was brought by the Director General of Fair Trading (now the Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
) on behalf of consumers.
Facts
Condition 8 of the bank’s standard loan contract allowed the bank to get its standard interest rate after a judgment on repayment when a customer defaulted. Usually lower statutory interest rates apply under the County Court (Interest on Judgment Debts) Order 1991, but this it excluded judgment debts on consumer credit agreements under the Consumer Credit Act 1974Consumer Credit Act 1974
The Consumer Credit Act 1974 is an Act of the Parliament of the United Kingdom that significantly reformed the law relating to consumer credit within the United Kingdom....
. So the bank wanted condition 8 to get the money it would have in interest even after someone had been unable to pay. Under r 8 of the 1994 Reg’s (now r 12) the DG sought an injunction to stop the bank using the term, because it was unfair. Lord Goodhart submitted that the term merely concerned the adequacy of the bank’s remuneration, therefore fell under r 3(2) (now r 6(2)). The DG submitted it was a core term and unfair because complaints were made and the 1991 Order had excluded interest.
Judgment
Lord Bingham, held that it was not a core term (i.e. the adequacy of the bank’s remuneration) but ‘an ancillary provision’. [12] He said the concept of good faith under r 5(1) had an old (if hidden) English tradition, it was championed by Lord Mansfield and ‘looks to good standards of commercial morality and practice’ It is fair and open dealing, preventing unfair surprise and the absence of real choice. [17] Despite that the clause was fair.
‘There is noting unbalanced or detrimental to the consumer in that obligation [to repay with interest]; the absence of such a term would unbalance the contract to the detriment of the lender.’
The 1991 Order and the 1974 Act’s interaction, whereby interest had been excluded, did not make the term an unfair way of circumventing legislation, because the Act had not prohibited post-judgment interest being payable.
Lord Steyn said,
‘The system of pre-emptive challenges is a more effective way of preventing the continuing use of unfair terms and changing contraccting practice than ex casu actions: see Susan Bright, ‘Winning the battle against unfair contract terms’ (2000) 20 LS 331, 333-8.’
He added that he was initially persuaded by the idea that because the legislation had excluded interest, the court could not, but had then decided that because the legislation did not exclude expressly or by necessary implication that interest can accrue, the contract term was fair.
Lord Hope, Millett and Rodger concurred.
Significance
Andrew Burrows writes that because good faith was said to mean ‘fair and open dealing’ and ‘significant imbalance’ meant ‘substantive unfairness’, both procedural and substantive unfairness is encompassed within the meaning of regulation 5(1). He also asks whether the court should have deferred to the Director General’s view of what was unfair, recognising respective institutional competence.See also
- Bairstow Eves London Central Ltd v Smith [2004] EWHC 263
- Walford v Miles [1992] 2 AC 128, Bingham LJ dissented in the Court of Appeal. The majority held that an agreement to negotiate in good faith was too uncertain, and there is no general duty of disclosure.
- OFT v Abbey [2009] UKSC 90
- Principles of European Contract LawPrinciples of European Contract Law-Definition:The Principles of European Contract Law is a set of model rules drawn up by leading contract law academics in Europe. It attempts to elucidate basic rules of contract law and more generally the law of obligations which most legal systems of the member states of the European Union hold...
Art.1:201 say ‘each party must act in accordance with good faith and fair dealing’.