Director General of Fair Trading v First National Bank plc

The House of Lords considered whether the Unfair Terms in Consumer Contracts Regulations 1994 applied to a standard-form default provision in a regulated consumer credit agreement and, if so, whether that provision was unfair. The provision entitled the lender to charge contractual interest "after as well as before any judgment" and to keep that obligation independent of and not merged with the judgment.

The court held that regulation 3(2) (the exception for terms which define the main subject matter or concern the adequacy of price or remuneration) did not exclude the default provision from assessment under the regulations because the provision was ancillary to the main bargain and concerned the consequences of default rather than the adequacy of the bank's remuneration. Applying regulation 4(1) and the tests of good faith and significant imbalance (with reference to Schedules 2 and 3), the House concluded that, on the facts and as judged at the time the contract was made, the term was not unfair: it did not create a significant imbalance contrary to good faith, and the difficulties experienced by some borrowers derived from procedural and statutory arrangements (for example the County Courts (Interest on Judgment Debts) Order 1991 and the practice of entering limited judgments) rather than from the inherent unfairness of the contractual term.

Background and parties:

• The appellant bank used a standard form regulated credit agreement containing a condition (condition 8) providing that contractual interest would run after as well as before judgment and that the obligation would be independent of and not merge with any judgment. The Director General of Fair Trading sought, under regulation 8 of the Unfair Terms in Consumer Contracts Regulations 1994, an injunction restraining use of the term as unfair.

Procedural history:

• At first instance Evans-Lombe J rejected the bank's argument that the fairness provisions did not apply but accepted that the term was not unfair ([2000] 1 WLR 98). The Court of Appeal ([2000] QB 672) rejected the bank's first ground and held the term unfair in part, accepting undertakings from the bank rather than granting an injunction. The bank appealed to the House of Lords.

Issues framed:

• Whether regulation 3(2) of the 1994 Regulations excludes the term from assessment on the basis that it concerns the adequacy of price or remuneration.
• Whether the term is unfair under regulation 4(1) — i.e. whether it, contrary to the requirement of good faith, causes a significant imbalance in parties' rights and obligations to the detriment of the consumer.

Court's reasoning and decision:

• The House gave regulation 3(2) a restrictive interpretation: the exclusion applies only to core terms that define the main subject matter or directly relate to the adequacy of price/remuneration. The impugned clause was ancillary, a default provision dealing with consequences of breach, and not a price/ remuneration clause within regulation 3(2).
• Applying regulation 4(1) and the directive, the House described the requirement of good faith as open and fair dealing and the significant imbalance test as substantive; it considered the contract as a whole and the position of typical parties when the contract was made. Although evidence showed harsh consequences in particular cases (for example where instalment orders produced very long repayment periods while contractual interest continued to accrue), the House concluded that the term was not unfair when judged at contract formation: it protected the lender's legitimate expectation of contractual interest and did not in itself produce the requisite significant imbalance contrary to good faith.
• The court noted that the practical problems chiefly arose from statutory and procedural arrangements (notably the County Courts (Interest on Judgment Debts) Order 1991 and routine entry of limited judgments) and that remedies lay in procedural or regulatory change (for example making county court judgments reflect contractual indebtedness or drawing borrowers' attention to sections 129 and 136 of the Consumer Credit Act 1974), rather than by striking down the contractual clause under the unfair terms regime.
• The House therefore allowed the bank's appeal, restored the judge's order and declined to refer questions to the European Court of Justice.

Appeal allowed. The House held that regulation 3(2) is to be given a restrictive interpretation and does not exclude the bank's default clause from assessment; applying regulation 4(1) the clause did not, as a matter of law, cause a significant imbalance contrary to the requirement of good faith and was not unfair. The practical problems identified derive principally from statutory and procedural arrangements and should be addressed by procedural or regulatory reform rather than by invalidating the contractual term.

First instance: Evans-Lombe J ([2000] 1 WLR 98) — rejected bank's argument that fairness provisions did not apply and held term not unfair. Court of Appeal: Peter Gibson, Waller and Buxton LJJ ([2000] QB 672) — rejected bank's first ground and held the term unfair in part, accepting undertakings from the bank. House of Lords: allowed bank's appeal ([2001] UKHL 52).