England and Wales High Court (Chancery Division) Decisions

Director General of Fair Trading v. First National Bank Plc [1999] EWHC Ch 206 (30th July, 1999)

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JUDGMENT

1. In these proceedings commenced by originating summons dated the 8^th march 1999 the Director General of Fair Trading, to whom I will refer as "The Director" brings proceedings against First National Bank Plc to which I will refer as "The Bank" pursuant to the Unfair Terms in Consumer Contract Regulations 1994 ("the 1994 Regulations"). By these proceedings the Director claims against the Bank:-

   An injunction, pursuant to regulation 8(2) of the 1994 Regulations, restraining the defendant, whether by itself it's servants or agents or otherwise howsoever from;

   including in any agreement with a consumer any contractual term or provision having the object or effect of:

   making interest payable on the amount of any judgment obtained by the respondent for sums owing by a consumer under an agreement regulated by the Consumer Credit Act 1974; or

   making interest payable upon interest;

   enforcing or seeking to enforce any such term which has already been included in an existing agreement with a consumer to which the regulations apply;

   otherwise using or seeking to use any similar term, or having like effect

   recommending the use of any similar term, or term having like effect."

2. The Bank was certified under section 123 of the Companies Act 1967 by the Board of Trade as bona fide carrying on the business of banking. Since the introduction of licensing under the Consumer Credit Act 1974 ("the 1974 Act") the Bank has been licensed by the Director to carry on consumer credit business. By 1995 the Bank was the largest independent grantor of consumer finance and the largest provider of home loan improvement finance in the United Kingdom. The Bank's figures for 1998 show that in that year the bank made secured loans totalling £114,754,322 and home improvement loans totalling £320,578,786. Since 1995 the Bank has been one of the subsidiaries of Abbey National Plc.
3. The complaint of the Director against the Bank centres on the inclusion in the Bank's common form loan agreement with borrowers of a provision appearing at clause 8 as follows:-

   " 8 Time is of the essence of making all repayments to FNB (the Bank) as they fall due. If any repayment instalment is unpaid for more than seven days after it became due, FNB may serve a notice on the Customer requiring payment before a specified date not less than 7 days later. If the repayment instalment is not paid in full by that date, FNB will be entitled to demand payment of the balance on the Customer's account and interest then outstanding together with all reasonable legal and other costs charges and expenses claimed or incurred by FNB in trying to obtain the repayment of the unpaid instalment or of such balance and interest. Interest on the amount which becomes payable shall be charged in accordance with Condition 3, at the rate stated in paragraph D overleaf (subject to variation) until payment after as well as before any judgment (such obligation to be independent of and not to merge with the judgment). "

4. Clause 3 of the Bank's common form agreement provides:

   " 3 The rate of interest will be charged on a day to day basis on the outstanding balance and will be debited to the Customer's account monthly in arrears. Payments made by the Customer may be credited first to capital or interest outstanding under this agreement at the discretion of FNB... ."

5. At paragraph D of the form of agreement appears the monthly rate of interest chargeable on the loan ("the contractual rate") which rate is variable in accordance with changes in the Bank's Base Lending rate.
6. It is common ground that the effect of these provisions is to make interest payable, at the contractual rate on the amount of principal advanced outstanding together with accrued unpaid interest existing at the date of judgment, during the period after judgment until the judgment is discharged by payment. Agreements containing such a clause as clause 8 are referred to as "simple rate" agreements and are to be contrasted with "flat rate" agreements where the default provisions have the effect of accelerating payment of the whole of the remaining unpaid instalments and which accordingly make payable future interest not yet due being the element of interest in each instalment of which payment is accelerated. Flat rate agreements are subject to the statutory rebate provided for in sections 94 and 95 of the 1974 Act. The Director accepts that a simple rate agreement containing a clause such as clause 8 is, without more, enforceable. It is not unconscionable at common law nor subject to being reopened under section 137 of the 1974 Act.
7. It is also common ground that at common law where a judgment is obtained under a contract of loan for a principal sum owing then, once judgment is entered, the principal is owing on the judgment, not under the contract. The contract merges in the judgment. If the contract contains a provision making interest payable on any principal sum due under it, then, in the absence of express provision to the contrary, the covenant to pay interest will be regarded as ancillary to the covenant to pay the principal with the result that, if judgment is obtained for the principal, the covenant to pay interest will merge in the judgment. Accordingly, unless the contract contains a provision excluding the operation of a merger in respect of the covenant to pay interest, the entitlement of the judgment creditor to claim interest on the judgment will be governed by statute. It is open to the parties to a contract expressly to agree that a covenant to pay interest shall not merge in any judgment for the principal sum due. Where they so agree, interest may be charged under the contract on the principal sum due, even after judgment for that sum. See Economic Life Assurance Society v Usborne 190 2 AC page 147.
8. By Council Directive 93/13/EEC of the 5^th April 1993, the Council of the European Communities promulgated a directive "On unfair terms in Consumer contracts."
9. By article 3 of that directive it was provided :-

   "Article 3

   A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirements of good faith, it caused a significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer.

   A term shall always be regarded as not individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term particularly in the context of a pre-formulated standard contract. ... ."

   By Article 4 of that directive it was provided:-

   " Article 4

   Without prejudice to Article 7, the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all other terms of the contract or of another contract on which it is dependent.

   Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, insofar as these terms are in plain intelligible language."

10. In order to put the provisions of Council Directive 93/13 into effect in this country the Secretary of State for Trade and Industry promulgated the Unfair Terms In Consumer Contracts regulations 1994, 1994 No 3159. Those regulations so far as material to this judgment provide:-

"3(1) Subject to the provisions of schedule 1, these regulations apply to any term in a contract concluded between a seller or supplier and a consumer where the said term has not been individually negotiated.

In so far as it is in plain intelligible language, no assessment shall be made of the fairness of any term which –

Defines the main subject matter of the contract, or

Concerns the adequacy of the price or remuneration, as against the goods or services sold or supplied.

For the purposes of these regulations, a term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has not been able to influence the substance of the term...

4(1) In these regulations subject to paragraph (2) and (3) below, "unfair term" means any term which contrary to the requirement of good faith causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer.

An assessment of the unfair nature of a term shall be made taking into account the nature of the goods or services for which the contract was concluded and referring, as at the time of the conclusion of the contract, to all circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.

In determining whether a term satisfies the requirement of good faith, regard shall be had in particular to the matters specified in schedule 2 to these regulations.

Schedule 3 to these regulations contains an indicative and non-exhaustive list of the terms which may be regarded as unfair.

(1)An unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer. ...

(1)It shall be the duty of the Director to consider any complaint made to him that any contract term drawn up for general use is unfair, unless the complaint appears to the Director to be frivolous or vexatious.

(2)If having considered a complaint about any contract term pursuant to paragraph (1) above the Director considers that the contract term is unfair he may, if he considers it appropriate to do so bring proceedings for an injunction ... against any person appearing to him to be using or recommending use of such a term in contracts concluded with consumers... .

(5)The Court on an application by the Director may grant an injunction on such terms as it thinks fit."

11. These proceedings are brought pursuant to regulation 8(2).
12. It is common ground that the 1994 Regulations apply to consumer credit agreements and that the loan agreements in question were not individually negotiated for the purposes of regulation 3(1)(3). Accordingly if clause 8 is not to be treated as a "core" term within regulation 3(2) it must pass the fairness test proscribed by regulation 4.
13. The burden of the Director's complaint in relation to clause 8 of the Bank's loan agreement is that the provisions of that clause are unlikely to be noticed by the average consumer/borrower. Where proceedings are brought by the Bank to enforce a loan agreement on default in payment of an instalment it is likely that the borrower will consent to judgment for the balance due payable by instalments having the effect of extending, sometimes for a substantial period, the time within which the loan is to be repaid. However during that extended period of repayment, because interest at the contractual rate remains chargeable on the outstanding balance the borrower discovers, to his surprise, that when he has discharged all the instalments due under the judgment there remains a substantial bill for interest, sometimes exceeding the instalments which he has repaid, to be paid to the Bank. In evidence sworn on behalf of the Director were examples of loan agreements where the addition of interest chargeable under clause 8 had the effect of actually increasing the net balance due to the Bank from the borrower, notwithstanding the instalments paid under the judgment, so that having paid those instalments, he was still left with a larger sum to pay than the total of those instalments. Whether this effect is produced will depend, of course, on the balance between the length of the period covered by the instalments and the amount of each instalment relative, to the total indebtedness, ordered by the Court, and the contractual rate of interest.
14. The loan agreements which contain the clause objected to by the Director are "regulated agreements" under the 1974 Act. Section 141(1) of the 1974 Act provides that proceedings to enforce regulated agreements have to be brought in the County Court. Section 71 of the County Courts Act 1984 empowers the County Court when giving judgment for a sum of money to order it to be paid "by such instalments payable at such times as the Court may fix."
15. Prior to 1991 the County Court had no power to order interest on a judgment debt. By section 74 of the County Courts Act the Lord Chancellor was empowered, by order made with the concurrence of the Treasury to make provision for the payment of interest on County Court judgments. He did so by the County Court (Interest on Judgment Debts) order 1991 SI1991/1184 which was subsequently amended in 1996 and 1998 ("the 1991 order"). That order provides "every judgment debt under a relevant judgment shall, to the extent that it remains unsatisfied, carry interest under this order... ." a "relevant judgment" must be for a sum not less than £5,000. By sub regulation (3) of regulation 2:-

"(3) Interest shall not be payable under this order where the relevant judgment -

is given in proceedings to recover money due under an agreement regulated by the Consumer Credit Act 1974;... ."

16. The 1974 Act is mainly concerned with the procedural requirements for entering into an enforceable consumer bargain. However it does contain provisions empowering the Court to vary the terms of such credit bargains. Most notably sections 137 to 140 empower the Court to "reopen" a credit bargain deemed to be "extortionate" within section 138. Materially to this judgment section 129 of the 1974 Act empowers the Court to make "time orders" as follows:-

"129(1)if it appears to the Court just to do so -

on an application for an enforcement order [under section 128] or

on an application made by a debtor or hirer under this paragraph after service on him of –

a default notice or

a notice under section 76(1) or 98(1); or

in an action brought by a creditor or owner to enforce a regulated agreement or any security, or recover possession of any goods or land to which a regulated agreement relates, the Court may make an order under this section (a "time order").

a time order shall provide one or both of the following as the Court considers just -

the payment by the debtor or hirer or any surety of any sum owed under a regulated agreement or a security by such instalments, payable at such times, as the Court, having regard to the means of the debtor or hirer and any surety, considers reasonable;

... "

17. Where therefore a claim is made in the County Court to enforce the provisions of a regulated agreement under the 1974 Act the Court may make an instalment order either under section 71 of the County Courts Act or under section 129(2)(a) of the 1974 Act. However in respect of orders made under section 129 the Court is given the additional power under section 136 of the 1974 Act to vary the provisions of the regulated agreement. That section provides:-

"136 The Court may in an order made by it under this Act include such provision as it considers just for amending any agreement or security in consequence of a term of the order."

18. In three conjoined appeals under the name Southern and District Finance Plc v Barnes 1995 CCLR p 62 the Court of Appeal was considering whether section 129(1) of the 1974 Act empowered the Court to make orders under that section in relation to sums becoming due under a regulated agreement other than arrears and secondly to what extent when making a time order did the Court have power to amend the relevant agreement under section 136 so as to vary the rate of interest payable. It was held that when a creditor brings a possession action, that is a calling in of the loan and therefore once that has been done, the whole outstanding balance of the loan is a sum owing. Thus the Court has power in such circumstances to make a time order in respect of future instalments as well as of accrued arrears. It was further held that unless the contemplated amending order under section 136 is truly a consequence of the time order, and the making of it is also just, there is no power to make such an amending order. The leading judgment was given by Lord Justice Leggatt who is reported as saying this at page 67 of the report:-

"It is also to be noted that section 136 does not stand alone: the Court cannot amend an agreement unless it has been persuaded to make a time order. In my judgment the key phrase in section 136 is "in consequence of the term". Unless the contemplated amendment is truly a consequence of a term of the time order, and the making of it is also just, there is no power to make it. It is a provision of limited scope.

Judicial control

when a time order is applied for or a possession order sought of land to which a regulated agreement applies, the Court must first consider whether it is just to make a time order. That will involve consideration of all the circumstances of the case, and the position of the creditor as well as the debtor.

when a time order is made it should normally be made for a stipulated period on account of temporary financial difficulty. If, despite the giving of time, the debtor is unlikely to be able to resume repayment of the indebtedness by at least the amount of the contractual instalments, no time order should be made. In such circumstances it would be more equitable to allow the regulated agreement to be enforced.

When a time order is made relating to the non payment of money

the "sum owed" means every sum which is due and owing under the agreement, but where possession proceedings have been brought by the creditor that will normally comprise the total indebtedness; and

the Court must consider what instalments would be reasonable both as to amount and time, having regard to the debtor's means.

the Court may include in a time order any amendment of the agreement which it considers just to both parties, and which is a consequence of a term of the order. If the rate of interest is amended, it is relevant that smaller instalments will result both in a liability to pay interest on accumulated arrears and, on the other hand, in an extended period of repayment. But to some extent the high rate of interest usually payable under regulated agreements already takes account of the risk that difficulties in repayment may occur.

if a time order is made when the sum owed is the whole of the outstanding balance due under the loan, there will inevitably be consequences for the term of the loan and for the rate of interest or both.

if justice requires the making of a time order the Court should suspend any possession order that it also makes, so long as the terms of the time order are complied with."

19. In applying these principles to one of the judgments appealed from Lord Justice Leggatt said this at page 71:-

"When the Judge re-scheduled the instalments under the agreement he did so over a fresh period of fifteen years. Since nearly three had passed since the agreement was made, this had the effect of extending the total of the agreement to nearly eighteen years. The Judge reduced the rate of interest to nil, since otherwise throughout the extended period of the loan interest would have been payable on the arrears at the exorbitant rate prescribed, and that would have defeated the purpose of giving time. In effect as a sanction for non payment of instalments a suspended possession order was substituted for a penal rate of interest. The Court gave the plaintiff leave to appeal against his order, though the Judge's methods were robust and his reasoning economical, his instincts were sound and his order just. I would dismiss the appeal."

20. Provisions similar to clause 8 appear in the standard loan agreement of a number of other financial institutions. Exhibited to the affidavit of Nicola Chard sworn on behalf of the Bank are examples of a number of such forms of agreement with a list of 32 lenders who use a similar form including a number of well known financial institutions. I am informed on behalf of the Director that very few complaints have been received in respect of post judgment interest clauses other than those used by the Bank.
21. It is therefore my task to decide whether the 1994 regulations apply to clause 8 of the Bank's form of agreement and if so whether the clause is "unfair" within the meaning of those regulations. I am told that not withstanding that the regulations have been in force since July 1995 this is the first case in which it has fallen to a Court to construe that effect. Hitherto the Director has been able to procure the removal or amendment of terms complained of in consumer contracts, including regulated agreements under the 1974 Act by agreement after negotiation with the institutions concerned.
22. The Director's complaint as to the effect of clause 8 of the Bank's form of agreement only arises where the Court has extended the time for repayment of the amount lent by making an instalment order. It is plain from the passages from the judgment of Lord Justice Leggatt in the Barnes case which I have set out above, and in particular from his approval of the order made under one of the judgments being considered, that any County Court being called upon to enforce one of the Bank's loan agreements containing clause 8 would have power, if it thought just to do so, to negate any harsh effect of that clause by reducing the rate of interest payable under it, if necessary, to nil. I am told however, by the Solicitor General who appeared on behalf of the Director supported by evidence sworn on his behalf that, in the vast majority of cases in which an agreement regulated under the 1974 Act is being enforced there is no real hearing in the course of which the terms of the agreement are brought to the attention of the Court and submissions made in respect of them. In practice in most cases the borrower will consent in writing to an instalment order which will be accepted by the lender and the Court will automatically make an order without such consideration. The borrower will remain unaware of the provisions of clause 8, notwithstanding that it appears to be the current practice of the Bank to draw attention to the provisions of clause 8 on its claim forms, and the presence in the "notes for defendant on replying to the claim form" of a sentence "in a County Court, if judgment is for £5,000 or more, or is in respect of a debt which attracts contractual or statutory interest for late payment, the claimant may be entitled to further interest." Whereas it was conceded on behalf of the Director that the only method of enforcing payment of interest after judgment would be by fresh proceedings in the County Court to which section 129 and section 136 would similarly apply, in practice this does not happen. The debtor usually pays or the lender waives the further interest in whole or in part. It is the submission of the Director that as clause 8 of the Bank's form of agreement operates in practice it causes uncertainty and confusion amongst judgment debtors.
23. The Director accepts that clause 3 of the Bank's form of agreement cannot be assessed as unfair because, being the provision which fixes the contractual rate of interest, it concerns "the adequacy of the... remuneration as against the ... services... supplied" within Regulation 3(2)(b). It was first submitted by Lord Goodhart on behalf of the Bank that clause 8 did not fall to be assessed as to its fairness under the 1994 regulations because it was a "core" term within article 3(2) of the 1994 Regulations.
24. In support of this contention Lord Goodhart cited the decision of the House of Lords in the Economic Life case to which I have already referred. In that case their Lordships were considering whether the amount due under a covenant to repay contained in a mortgage in respect of which judgment had been entered, merged with the judgment and so carried statutory interest of 4% or was separately due under a covenant contained in the mortgage which did not so merge. By the covenant in question the mortgagors covenanted to pay the principal on a day named with interest at 5% and if the principal was not then paid, to pay interest at that rate half yearly on so much of the principal as should remain unpaid. Their Lordships concluded that the amount due under this covenant did not merge with the judgment and carried the contractual rate of 5% until payment was actually made.
25. It does not seem to me that the reasons given by the House of Lords for arriving at the conclusion which they did in the Economic Life case assist me in construing the meaning of regulation 3(2)(b) of he 1994 regulations. That must turn on whether the subject matter of clause 8 concerns the "adequacy" of the "remuneration" received by the Bank as consideration for making advances under these agreements.
26. It was submitted, and I accept, that "adequacy" in sub Regulation (2)(b) must be read as meaning the equivalent of "the extent of ... the remuneration." It was submitted that provisions for the payment of interest consequent on default are therefore provisions which govern the extent of the interest payable under the agreement in the circumstances of default and so for fall within regulation 3(2)(b).
27. I am unable to accept that submission because I do not think that the average borrower seeking a home improvement loan from the Bank would consider default provisions as one of the important terms of the agreement which he would have under consideration in deciding whether or not to accept an offer of advance. He would be considering the cost to him of the loan which would be the interest calculable under clause 3 on the basis that he repaid the advance by paying the instalments required on the due date. It seems to me that it would be on that basis also that the Bank would arrive at the rate of interest chargeable. This would be the rate which the Bank's experience of similar agreements over a period of time would determine was necessary to give the Bank an acceptable return. The figures shown in the Bank's evidence reveal that agreements where there has been default are a small percentage of the Bank's total agreements of this type entered into in any year.
28. It follows that in my judgment the 1994 regulations apply to clause 8.
29. Regulation 4(3) of the 1994 regulations directs the Court to have regard to schedule 2 to the regulations in determining whether a term satisfies the requirement of good faith in regulation 4(1). That schedule provides:-

"In making an assessment of good faith, regard shall be had in particular to

the strength of the bargaining positions of the parties;

whether the consumer had an inducement to agree to the term;

whether the goods or services were sold or supplied to the special order of the consumer, and

the extent to which the seller or supplier has dealt fairly and equitably with the consumer."

30. Paragraph (c) of schedule 2 plainly does not apply. I have no evidence of any "inducement" such as a reduction in the rate of interest or other benefit to the borrower mentioned in sub paragraph (b). The rates of interest charged by the Bank were high which indicates that the Bank was finding the bulk of its customers for these loans at the bottom end of the lending market. I have no evidence of what competitors the Bank had in this market and the rates of interest being charged by such competitors. If clause 8 was an "onerous" term then a failure to draw attention to it at the time the loan agreement was entered into might fall within paragraph (d) as a failure to deal "fairly and equitably with the consumer". I have no evidence either way on the point save for the fact of the complaints to the Director which appear to spring from the complaining borrowers lack of awareness of the provisions of clause 8 and its effect.
31. Regulation 4(4) draws attention to schedule 3 to the regulations as containing "an indicative and non-exhaustive list of terms which may be regarded as unfair." It is common ground that non of the examples (a) to (q) contained in paragraph 1 of schedule 3 are applicable as being similar to the provisions of clause 8 save possibly for sub paragraph (e). That sub paragraph makes it prima facie unfair to include a term "requiring any consumer who fails to fulfil his obligation, to pay a disproportionately high sum in compensation;" the question disproportionately to what? is not answered by the regulations or the schedules. It seems difficult to apply sub-paragraph (e) to the provisions of clause 8 because those provisions only require interest at the contractual rate to be paid on the outstanding balance of the loan at the same rate after judgment as that being charged before judgment until repayment is actually made. As I have said it is accepted that the contractual interest provisions are a core term and so not assessable for fairness.
32. As a first step in answering the question whether the provisions of clause 8 are unfair it seems to me to be appropriate to stand back, and without reference to statute or authority, consider whether, had a potential borrower had the effect of the provisions of clause 8 drawn to his attention immediately after entering into a loan agreement containing that clause, he would reasonably have replied to the question that they were unfair. It seems to me that if a borrower in those circumstances were informed that the provisions of clause 8 required him to pay to the Bank the contractual rate of interest on so much of the sum advanced as remained outstanding for so long as it remained outstanding he would not have regarded that as unfair. Equally, it seems to me, that if he was informed that, but for the provisions of clause 8 if he defaulted in making the payments required by the agreement, and judgment was obtained against him, he would either not have to pay interest at all if the judgment were for less than £5,000 or only interest at the reduced statutory rate if more than £5,000, he would have been surprised that his financial obligations would become less onerous as a result of a judgment. It seems to me that if he were told that if he defaulted and the matter came to Court and the Court was persuaded to give him extra time to repay the amount outstanding by ordering him to pay by instalments extending over a substantial period and he was told that in addition he would have to pay interest at the same rate as before default on so much of the amount advanced which, after deduction of the payments under the Courts order, remained outstanding for so long as it so remained unpaid, he would have been driven to concede that this was not unfair because otherwise his answer would be inconsistent with the answer which I have presumed to the first question. These sort of considerations are plainly envisaged by Regulation 4(2). Again it must be emphasised that the rate of interest, which may produce a harsh effect, cannot be pronounced unfair.
33. It seems to me, therefore, that it is not possible to categorise the provisions of clause 8 as inherently unfair. That however does not conclude the matter because of the provisions of regulation 4(1) and because of the submission on behalf of the Director that the provisions of clause 8 must be treated as unfair because the average borrower who has defaulted and who has obtained an instalment order from the Court will not have anticipated a further charge to interest over and above the instalments which he is required to pay.
34. The material words of regulation 4(1) are "unfair term means any term which contrary to the requirement of good faith causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer." It is necessary therefore to define what is meant in this regulation by the words "good faith" and by the words "causes a significant imbalance in the parties rights".
35. The origin of the 1994 regulations is European Council Directive 1993/13. It is clear, therefore, that the words "good faith" are not to be construed in the English law sense of absence of dishonesty but rather in the continental "Civil law" sense. In Interfoto Library Ltd v Stiletto Ltd 1989 1 QB p 433 the Court of Appeal were considering a case where the plaintiffs ran a photographic transparency lending library in which they hired out transparencies in accordance with printed terms and conditions. One of the conditions stipulated that all transparencies had to be returned within fourteen days of delivery otherwise a holding fee of £5 a day with VAT would be charged for each transparency retained thereafter. The defendants hired a number of the plaintiff's transparencies without reading the conditions, and retained them for a month before returning them thereby incurring a charge of nearly £4,000. The Court of Appeal allowing the appeal held that the condition imposing retention charges could not be enforced. At page 439 of the report Lord Justice Bingham says this:-

"In many Civil Law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most ably conveyed by such metaphorical colloquialisms as "playing fair", "coming clean" or "putting one's cards face upwards on the table." It is in essence a principle of fair and open dealing. In such a forum it might, I think, be held on the facts of this case that the plaintiffs were under a duty in all fairness to draw the defendants attention specifically to the high price payable if the transparencies where not returned in time and, when the fourteen days had expired to point out to the defendants the high cost of continued failure to return them."

36. Applying such an approach to the construction of the words "good faith" in regulation 4(1), in the context of dealings between the Bank and its consumer borrowers, regulation 4(1) imposes on the Bank a duty to deal with them fairly and openly.
37. As several academic commentators on this area of the law have pointed out, breach of the requirement of good faith, "unfairness", takes two forms: "substantive unfairness", namely the imposition of an onerous term out of proportion to a reasonable assessment of the obligations of the parties under the contract by the supplier on the consumer, here the Bank on its borrowers. The second form of unfairness is "procedural unfairness". This may occur where a consumer/borrower becomes unwittingly subject to an onerous term, which need not necessarily be substantively unfair, but which materially affects the balance of advantage of the consumer in entering into the contract. Academic commentators have referred to this unfairness as "unfair surprise".
38. Given such construction of the words "good faith" as they appear in regulation 4(1) it may be thought that the words "causes a significant imbalance in the parties rights" adds little. If the term complained of, either substantively, or as a result of the procedure by which the consumer becomes subject to it, causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer, it will be in breach of the requirement of good faith. In practice a court considering whether a given term of a contract is an "unfair term" will look at all the circumstances of the case and its judgment will be based on an amalgam of perceived substantive and procedural unfairness.
39. I have already come to the conclusion that clause 8 is not, by its effect, inherently unfair. It seems to me that a term not inherently unfair can still constitute a breach of the requirement of good faith if it unfairly deprives consumers of a benefit or advantage which they may reasonably expect to receive. Such benefits or advantages may arise in any number of ways under the common law or under statute law or by reason of public policy. Thus particular provisions of statute law may expressly confer an advantage on a particular group. Alternatively the policy behind a statutory provision or public policy generally may be seen to intend to confer such an advantage. A term of a contract which deprives a member of that group of such an advantage albeit that, applying the strict law, it may lawfully do so may be construed as being unfair particularly where the imposition of the term has been brought about or maybe brought about in circumstances of procedural unfairness.
40. I turn to consider, therefore, whether clause 8 can be said to deprive borrowers from the Bank of an advantage which they might reasonably expect to receive or which particular statutes or aspects of public policy can be construed as intending them to receive.
41. The only "substantive" advantage of which clause 8 deprives borrowers is their exemption from having to pay interest on the amount of any judgment obtained against them consequent on their default in making payments pursuant to their loan agreements with the Bank. This exemption results from the provisions of rule 2(3)(a) of the 1991 order excluding regulated agreements under the 1974 Act from the statutory scheme for the imposition of interest on judgment debts in the County Court. The "procedural" advantage is the expectation of borrowers that they would have the provisions of their loan agreements governing what happens in the event that they, for whatever reason, make default, drawn to their attention, either, at the time they enter into the loan agreement, or, thereafter and in particular at the time that they are considering whether to offer payment by instalments to the Bank after proceedings have been commenced against them.
42. So far as the substantive advantage is concerned, the relevant statutory provisions are the 1974 Act and the 1991 order. Neither of these expressly invalidate contract terms allowing a creditor to charge interest after judgment. This litigation would not be taking place if they did. It does not seem to me that it is possible to read into the 1974 Act an overall statutory purpose, albeit not express, against the use of such a term. It was submitted by the Solicitor General that such an overall statutory purpose could be read into the 1991 order. I am not able to accept that submission.
43. It was submitted by Lord Goodhart that the exception in paragraph 2(3)(a) of the 1991 order resulted from the decision of the Court of Appeal in Forward Trust v Whymark 1990 2 QB p690. In that case the Court of Appeal was considering a flat rate agreement in respect of which the payment of the remaining instalments in the agreement had been accelerated as a result of the default of the borrower. The issue was whether judgment should be entered for the full amount or whether it should be entered for the amount due after deduction of a credit for early settlement under sections 94 and 95 of the Act and the Consumer Credit (Rebate on Early Settlement) Regulations 1983. The Court of Appeal allowing the creditors appeal concluded that judgment should be entered for the full amount but with an addendum indicating that the judgment debt could be discharged by payment of the amount less the statutory rebate. In giving judgment at page 681 of the report Lord Donaldson said:-

"If and when the Lord Chancellor makes any order under section 74 of the County Courts Act 1984 whereby County Court judgments would bear interest, an exception should be made for judgments in respect of sums due in respect of consumer credit agreements to which the rebate provisions apply although there would be no injustice in such a judgment bearing interest as from the expiry date of the original period for which credit was given and paid for."

44. It seems clear that in saying this Lord Donaldson was concerned that any order for interest on a judgment would constitute interest on interest. That would be the effect of an order for interest on a sum becoming due under a flat rate agreement in respect of which, notwithstanding any statutory rebate, judgment would be being entered for a sum including an element of future interest. So any contractual provision which made interest continue to run after judgment under a flat rate agreement would, in all likelihood, be an unfair term. It would be providing interest on a balance which has become due which included interest for the whole period of the loan. Such would not be the case under a simple rate agreement such as those under consideration in this case.
45. Equally anomalous is the position of secured credit agreements. By not obtaining a money judgment but only proceeding for possession and sale under the mortgage a creditor is able to obtain interest at the contractual rate provided for in the mortgage down to the date when he is actually repaid.
46. Because of the differing effect on the three main types of consumer credit agreements which the exemption contained in paragraph 2(3)(a) of the 1991 order has, it does not seem to me to be possible to extract from the 1991 order a statutory purpose, not directly expressed, that creditors should not be entitled to include in their contracts a provision providing for interest after judgment.
47. There does not seem to me to be any identifiable public policy which requires a contrary conclusion. Contrary to the submissions on behalf of the Director there does not seem to me to be any overall policy behind the 1974 Act, the 1991 order or the 1994 regulations to promote the "rehabilitation of debtors". These are not statutes dealing with the consequences of insolvency.
48. For these reasons and for the reason that I have concluded that the provisions of clause 8 are not inherently unfair I conclude that there is no substantive unfairness in the Bank including clause 8 in its loan agreements. In any event as I shall shortly describe I take the view that if the provisions of sections 129 and 136 of the 1974 Act are correctly used by the Courts the inclusion of the provisions of clause 8 need not operate to impose on a borrower post judgment interest where it would not be appropriate and just to do so.
49. I turn to consider whether it can be said that borrowers from the Bank have been unfairly deprived of a procedural advantage by the inclusion of clause 8 in their loan agreements having regard to the evidence of the general practice by which those loan agreements are entered into and subsequently enforced in the event of default.
50. It would plainly be better practice if steps were taken, either in relevant documentation or by express communication, to draw the provisions of clause 8 to the attention of potential and actual borrowers before they enter into loan agreements with the Bank or at the time when, having defaulted, they are considering making an offer to the Bank of payment by instalments. If the latter were done then those provisions could be drawn attention to and the Court dealing with the claim would take into account the provisions of clause 8 and of sections 129 and 136 in deciding what form of instalment order to make and whether as part of the order the rate of interest chargeable under clause 8 should be reduced or extinguished. I have already mentioned the steps taken by the Bank in their pleading to draw attention to the provisions of clause 8 and to the reference to the ability to charge interest after judgment in the notes to the standard claim form.
51. In my judgment, having regard to the powers which the Court has under sections 129 and 136 of the 1974 Act and to the evidence before me it has not been established that there is any procedural unfairness which justifies the Court in granting the relief sought by the Director. It would be open to the Director to seek mandatory injunctions requiring the Bank to take steps to draw the attention of the provisions of clause 8 to borrowers and potential borrowers. The Director has not done so and I must not be taken as giving any indication whether such an application would succeed or not on the material before me. An important element which has led me to come to this conclusion is that any order as sought by the Director against the Bank would necessarily have a wide ranging effect on the agreements of the many other financial institutions which include provisions similar to clause 8 and which are used by those institutions in their dealings with consumer borrowers. It may well be that those institutions take more active steps than does the Bank to ensure that their borrowers are not subject to unfair surprise. It seems to me that the complaints of borrowers which have been the cause of the bringing of these proceedings by the Director might well be met if the judgment of the Court of Appeal in Southern District Finance Plc v Barnes and in particular the way in which one of the County Court Judges dealt with one of the cases under appeal and the Court of Appeal's reactions to his method, were more widely known to the professions and other advisory bodies.
52. In the course of his submissions on behalf of the Director the Solicitor General accepted that in order to obtain the relief which he sought the burden rested on the Director to establish that the provisions of clause 8 were unfair or operated unfairly. In my judgment he has failed to discharge that burden and I must refuse the relief sought in the originating summons.