Kitchen v HSBC Bank Plc

A contractual provision requiring interest to accrue daily, but to be debited and compounded in accordance with the bank’s current practice, does not ordinarily require daily capitalisation. Accrual, debiting and compounding are distinct concepts. The contractual interest rate may apply to the daily outstanding balance, while the timing of debiting and capitalisation is governed by the identified banking practice. The agreement must be construed as a whole, including provisions dealing with immediate payment of accrued interest on prepayment or termination. Commercial transparency concerns cannot justify rewriting clear contractual language.

The claimants borrowed money from the defendant bank under a 14-year term loan agreement. They alleged that the bank had overcharged interest by calculating and capitalising it in a manner inconsistent with the agreement. The bank counterclaimed sums due under the loan.

A Master initially made an order in the claimants’ favour. On 27 March 1998, Colman J allowed the bank’s appeal, dismissed the claim and granted summary judgment on the counterclaim. The claimants appealed, contending that interest should be calculated and compounded daily by reference to a compound-interest formula. The central issue was the proper construction of clause 5.

1. Appeal dismissed. The bank’s construction of clause 5 was upheld, and the claimants were not given leave to defend the counterclaim.
2. Clause 5 required interest to accrue daily. It separately provided that interest was to be debited and compounded in accordance with the bank’s current practice from time to time. The wording therefore distinguished daily accrual from the periodic debiting and capitalisation of interest.
3. The bank’s practice of calculating interest daily, debiting it quarterly and then capitalising it was consistent with the agreement. The references to the bank’s usual interest-charging dates in clause 16 supported that construction.
4. The claimants’ proposed daily-compounding formula deprived the words referring to the bank’s current practice of meaningful content. It also failed to explain the separate provisions for immediate payment of accrued interest on prepayment or termination, and would require the agreement to be rewritten.
5. National Bank of Greece v Pinios Shipping Co No 1 [1990] AC 631 established the legal basis for bankers charging compound interest with regular rests. The agreement was not a mortgage agreement, for which different rules might apply.
6. Lord Justice Sedley agreed with Lord Justice Brooke’s reasons and the dismissal of the appeal, while expressing concern about the lack of transparency in loan agreements whose effect depended on undisclosed banking practices.
7. Order: appeal dismissed with costs. Leave to appeal to the House of Lords refused.

1. Court of Appeal (Civil Division) dismissed the appeal from Colman J’s order of 27 March 1998, which had allowed the bank’s appeal from the Master, dismissed the claim and granted summary judgment on the counterclaim.