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Director General of Fair Trading v. First National Bank
Factual and Procedural Background
Company A, a major consumer credit lender, included a standard-form clause (“the term”) in its regulated loan agreements stating that contractual interest would continue to accrue “after as well as before any judgment” and would not merge with the judgment. The Regulator, exercising powers under regulation 8 of the Unfair Terms in Consumer Contracts Regulations 1994, sought an injunction restraining Company A from relying on the term, contending that it was unfair.
At first instance, Judge Evans-Lombe rejected Company A’s argument that the fairness regime did not apply but held the term was not unfair. The Court of Appeal affirmed applicability, found the term partially unfair, and accepted undertakings in lieu of an injunction. Company A appealed to the House of Lords; the Regulator cross-appealed, arguing for a broader finding of unfairness.
Legal Issues Presented
- Does regulation 3(2) exclude the term from any fairness assessment on the ground that it concerns the adequacy of remuneration?
- If the regulations do apply, does the term, judged under regulation 4(1), cause a significant imbalance contrary to the requirement of good faith?
Arguments of the Parties
Appellant’s Arguments (Company A)
- Regulation 3(2)(b) bars scrutiny because the term concerns the “adequacy” of remuneration (interest is Company A’s consideration for the loan).
- The traditional “merger” doctrine is misconceived; even without an express term, contractual interest survives judgment, so the clause merely clarifies an existing right.
- Even if assessable, the term is not unfair: it simply ensures full recovery of principal and interest and avoids prejudice caused by statutory limits on post-judgment interest in county courts.
Respondent’s Arguments (Regulator)
- The term is part of a default remedy, not a core price provision; therefore regulation 3(2) does not shield it.
- By allowing interest to accrue despite a court-ordered instalment plan, the term overrides statutory protections (e.g., the County Courts (Interest on Judgment Debts) Order 1991) and creates unfair surprise.
- The imbalance is aggravated because consumers are generally unaware of, and not alerted to, relief available under sections 129 and 136 of the Consumer Credit Act 1974.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| In re Sneyd; Ex p Fewings (1883) 25 Ch D 338 | Classic statement of the merger doctrine (interest covenant merges in the judgment) | Discussed as historical background; House noted modern lenders include clauses like the term to avoid merger consequences. |
| Economic Life Assurance Society v Usborne [1902] AC 147 | House of Lords acceptance of the Sneyd doctrine | Confirmed historic understanding of merger, reinforcing the need for express post-judgment interest clauses. |
| Ealing LBC v El Isaac [1980] 1 WLR 932 | Judicial doubt about strict merger; interest covenant may survive judgment | Cited by Company A to argue that merger is a rule of construction, not of law. |
| Bank of Scotland v Davis 1982 SLT 20 | Scottish practice: contractual interest can continue post-judgment | Used to illustrate that merger difficulties are jurisdiction-specific and to support Company A’s position. |
| Forward Trust Ltd v Whymark [1990] 2 QB 670 | Reason for excluding regulated agreements from statutory post-judgment interest | Referenced in assessing legislative context but found not decisive on fairness. |
| Southern & District Finance plc v Barnes [1995] CCLR 62 | Interpretation of sections 129 and 136 of the Consumer Credit Act 1974 | House endorsed guidance on flexible use of time orders and contract amendment powers. |
| Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 | Requirement of fair and prominent notice for onerous terms | Cited as illustration of the wider concept of good faith and open dealing. |
| Arnott v Redfern (1826) 3 Bing 353 | Historic English authority suggesting courts can award contractual post-judgment interest | Mentioned by Judge Millett to question whether current county-court practice could change. |
Court's Reasoning and Analysis
Applicability of Regulation 3(2). The House held that regulation 3(2) must be narrowly construed to preserve consumer protection. The term is a default remedy, not a clause fixing the price of the loan; consequently, the fairness regime applies.
Framework for Assessing Fairness. Drawing on regulation 4(1) and Schedule 2, the House stressed that “good faith” combines open, clear drafting with fair dealing, and that a term is unfair only if it creates a significant imbalance to the consumer’s detriment.
Substantive Analysis. The Lords reasoned that:
- The essence of the bargain is that interest is payable on outstanding principal until full repayment; the term merely preserves that outcome after judgment.
- Any consumer entering the loan would expect to pay interest until repayment; therefore, the clause does not impose an unforeseen burden.
- The perceived hardship stems from county-court procedural limits (no statutory post-judgment interest and frequent instalment orders), not from the substantive term.
- While borrowers may be surprised in practice, Company A notifies them post-judgment, and statutory mechanisms (sections 129 and 136) allow judicial adjustment.
- Accordingly, the clause neither offends good faith nor causes a significant imbalance.
The House rejected calls for a reference to the European Court of Justice, considering the directive’s wording clear.
Holding and Implications
Holding: The appeal was ALLOWED; the order of the trial judge—rejecting the injunction and upholding the term—was restored. Costs were awarded to Company A in the House of Lords and Court of Appeal.
Implications: The decision confirms that post-judgment interest clauses in regulated consumer credit agreements are not per se unfair, provided they are clearly drafted and form part of default provisions. Lenders may continue to rely on such terms, but the Lords highlighted procedural shortcomings in county-court practice, suggesting that legislative or rule changes, rather than contract clauses, should address consumer hardship. No new precedent on the merger doctrine was created, but the judgment clarifies the narrow scope of regulation 3(2) and the composite test for unfairness.
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