Director General of Fair Trading v First National Bank Plc
House of Lords
Citations:  UKHL 52;  1 AC 481;  3 WLR 1297;  1 All ER 97;  2 All ER (Comm) 1000;  1 Lloyd’s Rep 489;  ECC 22.
The defendant bank’s standard terms for loans included a term governing the consequences of borrower defaulting on their payments. It provided that interest would continue to be payable at a particular rate until the bank was able to discharge any judgment obtained against the debtor. This term would apply even if the court extended the time for repayment of the loan.
The Director General of Fair Trading considered this unfair under regulation 4 of the Unfair Terms in Consumer Contracts Regulations 1994.
This provision defines an unfair term as ‘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.’
Director General of Fair Trading thought that the average consumer would not notice the term. They would instead expect the debt to be cleared on payment of all the instalments under a court judgment. They also argued that the term deprived consumers or certain statutory advantages under the County Courts (Interest on Judgment Debts) Order 1991.
The defendant responded that its terms did not fall within the scope of regulation 4 because it was a ‘core’ term under regulation 3. Regulation 3 prevents the courts from assessing the fairness of any term which ‘defines the main subject matter of the contract’.
- Did the default term define the main subject matter of the contract?
- Was the term unfair?
The House of Lords held that:
- The core term of a loan agreement includes matters such as the adequacy of interest payments. It did not include the term in this case. This term was merely an incidental clause intended to ensure that the bank’s entitlement to interest did not end on the entry of judgment. The clause could therefore be subject to a fairness assessment.
- The default clause was unambiguously and clearly expressed. It only concerned contractual rather than statutory interest – meaning that it did not side-step the statutory benefits of the County Courts (Interest on Judgment Debts) Order 1991.
- While a consumer might be unaware of the term, it was not customary or a statutory requirement to make them aware. Any unfairness lay in the lack of procedural safeguards in consumer protection legislation concerning loans, not the term itself.
As such, the clause was fair.
This Case is Authority For…
Regulation 3 distinguishes between terms which express the substance of the parties’ bargain and those which are incidental. The scope of the former should be interpreted narrowly to avoid undermining statutory consumer protections.
A fairness assessment in the consumer rights context involves looking at both the fairness of the contract’s substance and the making of the contract. It is therefore both a substantive and a procedural assessment. The court explained the meaning of various terms in the Unfair Terms in Consumer Contracts Regulations 1994:
- There is a ‘significant imbalance’ where the term is so heavily weighted in favour of the business that it tilts the parties’ relationship in their favour. This is assessed by reference to the whole contract.
- ‘Good faith’ refers to ‘fair and open dealing’. It requires clauses to be expressed fully and clearly, stressing any elements which might be disadvantageous to the consumer. It also requires the business to avoid, deliberately or otherwise, taking advantage of the consumer’s weaker bargaining position.
The provisions of the Consumer Rights Act 2015 (enacted subsequent to this case) contains similar terminology to the Unfair Terms in Consumer Contracts Regulations 1994. This case therefore also provides guidance on the meaning of that statute.