Director General of Fair Trading v. First National Bank

The exclusion from fairness review for plain terms defining the main subject matter or concerning the adequacy of price or remuneration must be construed restrictively. A default term preserving contractual interest after judgment is ancillary, even though interest is the lender’s remuneration.

Under the Unfair Terms in Consumer Contracts Regulations 1994, unfairness requires a significant imbalance detrimental to the consumer and contrary to good faith. Good faith requires open and fair dealing. Fairness is assessed at formation and by examining the contract as a whole. A term continuing contractual interest until payment was fair where it preserved the essential repayment bargain and was not prohibited by statute. Hardship caused by inadequate procedures for addressing post-judgment interest does not make an otherwise fair term unfair.

The Director General of Fair Trading sought an injunction under regulation 8 of the Unfair Terms in Consumer Contracts Regulations 1994 restraining First National Bank from using a standard term in regulated consumer credit agreements. The term preserved the borrower’s obligation to pay contractual interest after judgment and prevented that obligation from merging in the judgment.

Evans-Lombe J, in [2000] 1 WLR 98, held that the fairness provisions applied but that the term was not unfair. The Court of Appeal, in [2000] QB 672, held the term unfair to the extent that the bank could obtain an instalment order without consideration of the court’s powers to make a time order and amend the agreement. It accepted undertakings from the bank.

On the bank’s appeal in Director General of Fair Trading v. First National Bank, the House considered whether the term was excluded from fairness review as a term concerning remuneration and, if not, whether it was unfair.

1. Disposition. The House unanimously allowed the bank’s appeal, restored the order of Evans-Lombe J and awarded the bank its costs in the House and the Court of Appeal. Lord Bingham delivered the leading speech. Lord Steyn, Lord Hope, Lord Millett and Lord Rodger each concluded that the term was not unfair.

2. Scope of fairness review. Per Lord Bingham, with materially concordant reasoning from Lord Steyn, Lord Hope and Lord Rodger, regulation 3(2) of the Unfair Terms in Consumer Contracts Regulations 1994 must not be interpreted so broadly that it frustrates consumer protection. It excludes plain terms expressing the substance of the bargain or directly addressing the price-quality relationship. The challenged term was a subsidiary default provision governing the consequences of breach. It did not determine the adequacy of the price charged for the loan and was therefore reviewable.

3. The unfairness test. Per Lord Bingham, regulation 4(1) imposes a composite test. A term is unfair where it causes a significant imbalance in the contractual rights and obligations, to the consumer’s detriment, in a manner or to an extent contrary to good faith. Significant imbalance asks whether the term materially tilts the contract in the supplier’s favour. Good faith requires open and fair dealing. Terms must be clear, legible and free from concealed traps, with appropriate prominence for disadvantageous provisions. A supplier must not exploit the consumer’s necessity, inexperience or weak bargaining position. Lord Steyn emphasised that good faith has substantive as well as procedural content.

4. Application. Per Lord Bingham, the essential bargain was repayment of the principal with contractual interest until payment. The impugned term preserved that bargain after judgment and imposed no extraneous liability. Neither the Consumer Credit Act 1974 nor the statutory interest regime prohibited such a covenant. Regulation 4 addresses the fairness of the term itself, rather than an unfair use of a fair term. The practical hardship arose principally because borrowers and courts often failed to consider statutory powers governing time orders and amendment of agreements. It did not arise from a significant contractual imbalance contrary to good faith. Lord Millett added that relevant considerations may include comparison with and without the term, its relationship to the transaction’s core, likely consumer surprise and its acceptance in freely negotiated commercial contracts.

5. Time orders. In observations adopted through Lord Bingham’s leading speech, the broad language of section 129 of the Consumer Credit Act 1974 permits whatever time order is just in all the circumstances, although very long orders should usually be avoided. Under section 136, the court should be ready to amend the agreement where the amendment follows from a term of the time order and is just to both parties. The reasoning in Southern and District Finance plc v Barnes and Barnes [1995] CCLR 62 was approved subject to that qualification.

6. Systemic problem. Lord Hope and Lord Millett separately observed that the English procedure could leave a borrower liable for contractual interest after satisfying every judgment instalment. They considered that the underlying procedural arrangements, rather than the contractual term, required attention. Lord Hope suggested consideration of powers permitting an award of contractual post-judgment interest together with safeguards informing borrowers of available relief.

1. House of Lords: In Director General of Fair Trading v. First National Bank [2001] UKHL 52, the House unanimously allowed the bank’s appeal, rejected the Director’s broader challenge and restored the first-instance order.
2. Court of Appeal: In [2000] QB 672, the court held that the term was unfair to a limited extent and accepted undertakings intended to ensure consideration of sections 129 and 136 of the Consumer Credit Act 1974.
3. High Court: Evans-Lombe J, in [2000] 1 WLR 98, held that the fairness provisions applied to the term but that the term was not unfair.