England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM READING COUNTY COURT
(HIS HONOUR JUDGE MORTON-JACK)

		Royal Courts of Justice Strand London WC2A 2LL Friday 1 February 2002

1. LORD JUSTICE RIX: This is an application for permission to appeal by Mr Stephen Kerr. It arises out of the claim which he brought against the Nationwide Building Society.
2. The background to the claim was that in 1990 he obtained a mortgage of £250,000 and a top-up loan of £15,000 from the Nationwide in respect of the purchase of his home. They were on the same standard terms for such mortgages. They required repayment over a period of 25 years and payment of interest at a variable mortgage rate which, at the outset of the mortgage, was 14.75 per cent, but it varied in accordance with changes in the cost of money.
3. The terms of the mortgage provided that interest was charged on the total debt until repayment. The provisions permitted compounding of arrears at the end of each year. Thus there was a rather modest term for compounding once a year. Mr Kerr claimed a sum of some £10,000 which was calculated on the following basis. He submitted that, first, there should have been no compounding at all, and, secondly, that he should not have paid interest on his arrears at the mortgage rate but at some lower rate which represented the Nationwide's costs of borrowing. He submitted that to continue to charge the mortgage rate on the loan and on the arrears of interest, to the extent that there were such arrears, at the mortgage rate rather than at the lower cost of borrowing to the Nationwide, was in effect to impose an unlawful penalty. Alternatively, Mr Kerr submitted that the £10,000 increase over the cost of replacing the arrears in the market represented extortionate terms on a credit bargain and could be reopened under sections 137 to 139 of the Consumer Credit Act 1974, in which respect the burden of proving that the bargain was not extortionate was placed upon the Nationwide under section 171(7) of that Act.
4. In a short and trenchant judgment, the judge dismissed the claim holding that there was no penalty provision and that the appropriate rate to look at was not the rate at which the Nationwide borrowed but the rate at which the Nationwide lent. As for the Consumer Credit Act, the evidence which Mr Kerr sought to bring to bear, by reference to what was described as an expert report of Mr Bolderson, was of no value since Mr Bolderson was, on his own admission, not an expert in this field: he was merely an expert in formulating the consequences of inputting financial data. Although the Nationwide had relied upon no specific evidence for itself, the judge was satisfied that the burden resting upon the Nationwide had been met and that the bargain was not extortionate. It was common ground in this connection that the mortgage rate applied to the loan was not in itself an extortionate rate. Indeed it was a standard variable mortgage rate about which there was no dispute.
5. Mr Broatch, in his succinct and attractively made submissions, has pursued these two points, but it seems to me that there is no merit in them and that there is no realistic prospect of success on any appeal. There is no dispute that the Nationwide, like any creditor, is entitled to interest on monies lent until repayment. There is no dispute that the creditor is entitled to stipulate that the agreed interest rate continues to be payable until payment. If it is disputed that a building society is entitled to stipulate for a modest compounding provision of once a year in the case of arrears of interest, that, it seems to me, is an unsustainable submission. It is one wholly unsupported by any authority. On the contrary, it is accepted as an implied part of any banking transaction that a banker may compound interest, certainly at annual stops (see The National Bank of Greece SA v Pinios Shipping Co No 1 & Anor [1990] 1 AC 637). If the interest remains at the same rate both before and after any breach involved in the non-payment of interest or instalments, I cannot see how that same continuing rate, which it is accepted is not extortionate, can be regarded as a penalty. The price of the borrowing experienced by the agreed interest rate, does not vary because of any breach.
6. It is established that even if interest rates rise after breach, that will not be a penalty if the rise is merely to take account of increased rates applicable to a borrower in default: see Lordsvake Finance plc v Bank of Zambia [1996] QB 752 in particular at page 767D where Colman J said:

"I say nothing about exceptionally large increases. In such cases it may be possible to deduce that the dominant function is in terrorem the borrower. But nobody could seriously suggest that a 1 per cent rate increase could be such. It is in my judgment consistent only with an increase in the consideration for the loan by reason of the increased credit risk represented by a borrower in default."

7. I agree with that passage. In this case there is no increase in rate upon any default or arrears; the rate remains exactly what it had always been.
8. As for the submission that the true loss to the Nationwide is to be calculated at the cost at which it could borrow money to replace the unpaid instalment, that submission is entirely misconceived. The stipulation for a payment of interest until repayment is a stipulation for the price of the loan. That price remains the price of the loan until the loan is repaid. It is also the price of any accumulated arrears, which are simply added to the loan. Even if this situation could potentially fall within the law of penalties as involving a sum stipulated for payment in default, which in my judgment it does not, it seems to me that Mr Broatch is wrong in principle, however inadequate is the evidence upon which he seeks to quantify this submission, to argue by reference to the cost of the building society's borrowings. The building society borrows in a wholly different market from the mortgage market.
9. The price of the mortgage to a borrower such as Mr Kerr represents the costs, not only of the money which the building society must borrow from whatever source it borrows (and it borrows from many different sources), but also the costs of all its business arrangements through which it provides the service by which it turns wholesale borrowings of monies by it, as an institutional borrower, into a retail and personalised system of mortgage lending to its members through its branches.
10. To seek to categorise the bank's loss by reference simply to the cost of its borrowing in an entirely different market from that in which the transaction between Mr Kerr and the Nationwide must be categorised, is to misconceive the business situation entirely. If, as he does, Mr Kerr accepts that the mortgage rate is a perfectly satisfactory mortgage rate in itself, he has absolutely no complaint, either by reference to the law of penalties or by reference to the Consumer Credit Act 1996, if he continues to pay that rate until he has repaid his loan including any arrears of interest on that loan. The same applies to a modest provision for compounding, to which he has agreed.
11. Albeit the burden under the Act is upon the Nationwide to prove that its credit transaction was not extortionate, in circumstances where the mortgage rate itself was accepted as not extortionate, I am satisfied that the judge below was fully entitled to take into account his knowledge of ordinary business affairs to find that the Nationwide had discharged its burden of proof.
12. Finally, Mr Broatch submits that the judge's judgment was insufficiently reasoned and did not do justice to the argument raised. In my judgment, brief as the judgment was, it dealt adequately, albeit succinctly, with the various points raised and I see no prospect of any success on appeal in this case.
13. Permission is therefore refused.
Permission to appeal refused.