Scottish Court of Session Decisions

The Money Lenders Act 1900 (63 and 64 Vict. c. 51) enacts—Section 1 (1)—“Where proceedings are taken in any Court by a money lender for the recovery of any money lent after the commencement of this Act, or the enforcement of any agreement or security made or taken after the commencement of this Act, in respect of money lent either before or after the commencement of this

Page: 332↓

Act, and there is evidence which satisfies the Court that the interest charged in respect of the sum actually lent is excessive,.… and that.… the transaction is harsh and unconscionable, or is otherwise such that a court of equity would give relief, the court may reopen the transaction and take an account between the money lender and the person sued.… and relieve the person sued from any sum in excess of the sum adjudged by the Court to be fairly due in respect of.… principal, interest, and charges, as the Court, having regard to the risk and all the circumstances, may adjudge to be reasonable ”

The Midland Discount Company, Limited, 1 Chancery Street, Leicester, brought an action against Donald Macdonald, farmer, Ballinluig, in which they craved decree for £30, the balance alleged to be due on a promissory—note for £65 granted by the defender.

The facts are given in the interlocutor ( infra) of the Sheriff-Substitute.

The defender pleaded, inter alia—“(3) The amount claimed by the pursuers in name of interest or bonus … being excessive and unconscionable, the proper sum due should be adjudged and determined by the Court. 4. The transaction between the pursuers and the defender being harsh and unconscionable quoad the defender's interests, the Court should reopen the same and fix the sum to be paid by the defender to the pursuers in terms of the Money Lenders Act 1900 (63 and 64 Vict. cap. 51).”

On 8th April 1908 the Sheriff-Substitute ( Sym) pronounced the following interlocutor—“Finds in fact (1) that the pursuers are registered money lenders at Leicester, and have an office in Glasgow, which is managed by the witness Stanhope; (2) that the defender is a crofter or small farmer near Guay Station, and has some experience of contracting work in the way of wood-cutting contracts; (3) that he is about forty-eight years of age; (4) that in 1907 he was desirous for some reason of obtaining a loan without anyone knowing of it for some purpose which is not ascertained; (5) that he had a bank account which does not seem to have showed a balance in his favour or any serious balance against him, but that he was unwilling to go to a local banker; (6) that he saw in a newspaper the advertisement of the pursuers, which sets forth that they were willing to lend cash ‘by post’ on promissory notes alone, ‘no security or bonds required,’ ‘objectionable formalities and inquiries dispensed with,’ ‘strictly private’; (7) that he called at the pursuers' office in Glasgow on or about 18th July, and there filled up a form of application for a loan, and there wrote the letter (dated from his home address)—‘I have filled the accompanying form, trusting it is to your satisfaction. My stock and wood-working plant will amount to about £700. I have no heavy debt, but short of cash to keep my work going”; (8) that on 24th July 1907 he had an interview at Guay by appointment with the pursuers' manager, the witness Stanhope—who charged him £2 for the expenses of his visit to Guay; (9) that it is not proved that at this visit the witness Stanhope put upon him any undue pressure or cozened him in any way; (10) that what happened was this, viz.—that the defender was unwilling to take Stanhope to his house but showed him part of his farm and some stock, and that the interview consisted of a walk and a talk of about an hour's duration, before the close of which, the defender, on the footing that £50 was to be sent on to him, granted the following promissory note’ £65, Leicester, 24th July 1907.—I promise to pay to the Midland Discount Company, Ltd., … the sum of £65, for value received, by instalments in manner following, that is to say, the sum of £10 on 1st September 1907, and the sum of £10 on the first day of every succeeding month until the 1st day of December 1907, upon which date the whole balance then owing shall be paid, and in case default is made in payment of any one of the said instalments, the whole amount remaining unpaid shall become due and payable forthwith”; (11) that the witness Stanhope then left, and that the defender received £50 within a day or two thereafter; (12) that on 30th September the defender, who had paid £10 on 2nd September, sent £5 to the pursuers, saying in his letter—‘I will remit the balance of £5 on Saturday first. I would like if you would allow me to forward my remittances on the 4th of each month instead of 1st, as I receive my monthly accounts then;” (13) that it is admitted that the defender sent £5 on 14th October, £5 on 9th November, £5 on 19th November, and £5 on 3rd December 1907—in all £35; (14) that on November 26th the pursuers sent to him a demand for £35 payable on the following Saturday, 1st December 1907, which demand is, according to the defender, the thing which led him to consider that he was being unfairly treated; (15) that the pursuers now sue for £30 as the amount due on his contract with them with ‘legal’ interest, by which they mean 5 per cent. from the date of citation till payment: With these findings of fact finds that the interest charged in respect of the sum actually lent is excessive, and that the transaction was in the circumstances harsh and unconscionable: Finds in law that the defender is entitled to relief: Finds that the defender is liable to repay to the pursuers the balance of the said sum of £50 now remaining due and unpaid after crediting all sums already remitted to them: Finds that the reasonable rate of interest which ought to be paid upon the sum of £50 actually lent to the defender is, having regard to the circumstances and the risk, 20 per cent. on £50 for four months, and that the defender is liable in interest on said balance of principal £15 at 5 per cent. from the date of citation till payment.”

The pursuers appealed to the Sheriff ( Johnston), who on 13th May 1908 pronounced this interlocutor—“Sustains the appeal: Affirms the findings in fact in the Sheriff-Substitute's interlocutor of 8th April 1908: Quoad ultra recals said interlocutor: Finds further in fact that having regard to the nature and sources of the

Page: 333↓

pursuers' information with reference to defender's circumstances at the time when the loan was entered into, £15 was not an unreasonable sum to stipulate for in respect of the risk of loss involved in advancing defender £50: Finds in law that the transaction was not harsh and unconscionable: With these findings, repels the defences and decerns in terms of the conclusions of the petition.…”

Note.—“In this case the defender was a small farmer and wood merchant who desired a loan for purposes of his own. The pursuers were a company whose business it is to lend money in order to make profit thereby. The pursuers were not in a position to put any pressure upon the defender to borrow from them and they did not do so. There was nothing to forbid the pursuers making a loan to the defender, and the defender cannot and does not complain of their having done so. In these circumstances it appears to me that to render the transaction harsh and unconscionable, whatever other elements must be present, this element is essential, that the lenders should have exacted terms more favourable to themselves than reasonable business prudence rendered proper in the circumstances known to them at the time.

Now the circumstances were these. The defender was unknown to the pursuers. He came to them as a person desiring to borrow from money lenders anxious to get £50 and to keep the matter secret. A person who has recourse to such an expedient is generally very ‘hard up,’ and not a person in whose credit or ability to repay a prudent stranger would place much confidence. Defender showed the pursuers' representative a small farm with some stock upon it, but it is notorious that this does not go far in the way of showing solvency. He could offer no security. Otherwise pursuers were dependent entirely upon the defender's own statement as to his circumstances, and one does not need to be a money lender to know that statements as regards their circumstances by people short of money and anxious to borrow cannot be prudently relied upan.

To a stranger so circumstanced pursuers were asked to hand £50. Now I do not think as a matter of business any prudent person would have done so unless he saw the chance of a very handsome return. Upon the bargain as made the pursuers stood to gain £15—less ordinary interest for the money—if things turned out right, and to lose £50 if things turned out wrong.

Trying to put myself in their place I confess I would not, as a matter of business, have taken the risk for a penny less. It appears to me to be quite misleading in the case of a short risky loan of this kind to translate the premium into interest at so much per cent. per annum, and to compare it with ordinary interest. There are two elements in interest—a return to the lender for the use of his money and a payment to the lender for the risk of loss of his money. According to the nature of the loan one or other of these elements may predominate. The total amount of the former is proportionate to the endurance of the loan, but the latter need not be so. The use of money for twelve months is worth twelve times the use of a like sum for one month, but the risk of a loan for twelve months need not be twelve times or perhaps even twice greater than the risk of a loan for one month. It is misleading therefore to translate the return for a short hazardous loan into so much per centum per annum. A plausible American stranger may apply for £5 promising to pay £10 on the arrival of the mail to-morrow. That may be a perfectly reasonable transaction, but when translated into percentage per annum it works out 36,500 per cent.

In re-forming a contract of this kind, if satisfied that it cannot stand, the Court, I presume, must allow the money lender such terms as he ought reasonably to have exacted when the contract was entered into. The amount proposed by the Sheriff-Substitute would have yielded the money lender, assuming punctual repayment to have been made, £3, 6s. 8d. on the transaction. If one pound thereof be attributed to ordinary interest for use of the money, that leaves forty-six shillings for the risk. This means that for the chance of forty-six shillings of profit the money lender is to lend without security £50 to a small farmer who is a stranger to him at a remote distance, and whose circumstances are such that he has recourse to money lenders to raise this sum, and who so far from suggesting appears to forbid any independent inquiry. I cannot think that any reasonable person, money lender or not, would as a matter of business have undertaken such a risk for such a return, and I believe that any company which did business on such lines would anticipate many even of their own clients in arrival at the Bankruptcy Court.

I understand that the learned Sheriff-Substitute proceeds solely upon the terms of the bargain as being harsh and unreasonable. I am unable to agree with him, because I think that in the circumstances the terms were not more onerous than a prudent money lender ought as a matter of business to have required having regard to the risks as they appeared at the time and to the consideration that in transactions of this kind there must be large profits where the thing comes off all right to counterbalance the many cases of default and bankruptcy.

As regards the evidence of the negotiations, I think that the defender fails to make out that he did not understand quite well that he was to get £50 and to pay back £65, and that monthly instalments were to be paid. So far as the evidence goes there was no constraint upon the defender to borrow this money on any terms to get him out of a pressing difficulty. On the contrary, he seems to suggest that he wanted the money for a speculation by which he expected to make a ‘good bit.’ I do not know what that speculation was, but the ‘good bit’ may have been a great deal more than the £15 and the risk no greater than that undertaken

Page: 334↓

by the money lender in making the advance.”

The defender appealed, and argued—The interest charged was excessive, it was equivalent to 118 per cent. per annum. Esto that the transaction was not fraudulent, it was harsh and unconscionable, and therefore should be reopened—Money Lenders Act 1900 (63 and 64 Vict. c. 51), sec. 1 (1); Samuel v. Newbold, [1906] AC 461, at pp. 466 and 475. There was no appreciable risk, and that made the bargain harsh and unconscionable— Exchange Loan Co. v. Torrance, February 16, 1904, 11 S.L.T. 678; Poncione v. Higgins, October 29, 1904, 21 T.L.R. 11; Carringtons v. Valerie, May 16, 1905, 119 L.T. at p.62.

Argued for respondents—The appellant had to establish (1) that the rate of interest was excessive looking to the risk run, and (2) that the transaction was harsh and unconscionable— per Lord Macnaghten in Samuel v. Newbold ( cit. sup.) at p. 469. This he had failed to do. In Samuel ( cit. supra) there was really no risk, so that the rate charged was clearly excessive. It was misleading to translate the rate charged into a rate per cent. per annum, for the rate charged was not strictly interest, but interest plus insurance. The lender was entitled to a bonus or premium to cover the risk run. The parties dealt on an equal footing; there was no pressure and no fraud. Further, no security was given for the advance. The borrower could not have got the money on more favourable terms from a bank or a solicitor. That being so, the Court would not re-form the contract. As to the rate of interest, which the Court had held not to be excessive, reference was made to Pall Mall Bank, Limited v. Philip, June 14, 1904, 41 S.L.R. 621; Davis & Sons, Limited v. M'Nally, July 12, 1904, 12 S.L.T. 234; Carringtons Limited v. Smith, [1906] 1 KB 79.

At advising—