Contract Law in the Banking Sector - Case Study Example

The Director General of Fair Trading v. First National Bank [2001 AC 481, was a test case, which has garnered a considerable amount of attention and controversy on the issues of fairness (equality) and reasonableness. Albeit the case is a local one, before the test is completed it will have far reaching implications and impact throughout the entire European Union. The issue of fairness is one which we are all compelled to deal with on a daily basis. Consequently, we are all familiar with its challenges, even for the most reasonable of men, we are perplexed by the paradigm of how does one be fair to one, and without being unfair to the other. The issues in this case gives it a special flavor, as it is spiced with social dimensions, economic ramifications as well as psychological overtones. It is not to be taken lightly, that there are elements present in this legal montage, which will take quite sometime (if ever) to untangle. Because it involves reasonableness, it is my contention that the initial remedy which will be presented by the court on these legal principles will be remedial, and the absolute relief will evolve over time. Given the fact that large financial institutions and the human element are at the forefront of these issues, the battle will be waged on the economic necessity battlefield of persuasion and influence. Nonetheless, I am convinced that the judiciary is prepared to serve the public good and preserve the human element. 1 2 Director General of Fair Trading v. First National Bank PLC The law is practiced in a continuum. With the inherent predications being at least two fold; one is fact and the other is reasonableness. The facts which are particular to any given case or situation dictates that it be grouped or classified into a specific category, with all of the similar occurrences within the annals of jurisprudence. Thus it either becomes a case in contract law, criminal law, consumer law, commercial law etc. When making a determination on a particular case, one must find those cases which have similar substantive facts or circumstances and align them with the existing statutes which are applicable to the surrounding facts of the case. These facts are aligned with the pertinent statutes in an attempt to determine whether the defendant has committed a breach or to determine the level or severity of the alleged breach. In that the determination of a breach is referenced against the existing statute and aligned with the cases which are similar within this continuum, it is not often that a standing opinion is overturned. This is particularly true in a judicial climate where the bench is dominated by a number of strict constructionist judges; these persons interpret the constitution and statutes exactly as they are written and allow little or no room for expanding interpretations. Nonetheless, the expansion of interpretations or a broad reading of the statute can and does result, albeit rarely; there has to be at least two critical variables present to bring about the change of existing law; (1) The plaintiff must be able to show convincing and corrabarated proof to the court, documented history of a particular breach or number of breaches by a particular or specific group of defendants against a specific person or class of persons, and (2) reasonableness; the most intangible and transitional 3 variable attached to the court or judges decisions. There is no question that this variable. Is intangible and the transitional state of reasonableness on an issue can be one thing today, yet another tomorrow; there are any number of situations or reasons which could influence the reasonableness of the court, i.e., the ideological, political, or social composition sometimes weighs heavy on the level of the courts reasonable posture. When we view Baird Textile Holdings Ltd. V. Marks & Spencer PLC, Royal Courts of Justice Strand, London, WC2A 2LL, [2001], we experience the changing tide of the courts reasonableness; due to a dispute over supply arrangements the court was approached, which decided in favor of Marks and Spencer PLC. The court dismissed the claim of Baird Textiles Holdings Ltd., as it was based on contract and that these claims based on contract and estoppel had no real prospect of success. The appeal was therefore dismissed with respect to the claim based on contract but cross appeal based on estoppel claim was allowed.1 The issue of what is reasonable pitted against what is unconscionable is arguable legally unreasonable to one, yet legally conscionable to another. This is obviously not a win, win argument, but for the time being, one of either or. In the case of the Director General of Fair Trading v. First National Bank PLC, 2 the Director (plaintiff) was confident that he had a substantative legal breach of the Unfair 1Baird Textile Holdings Ltd v. Marks & Spencer PLC. Royal Courts of Justice Strand, London, WC2A 2LL, [1922] 2Director General of Fair Trading v. First National Bank PLC [2002] 1 AC 481 4 Terms in Consumer Regulations Act 1994 S3 (a) (b) against the First National Bank (defendant). The plaintiff felt that the defendant did not provide the consumer with the privilege of negotiating the term, therefore the bank was in violation of the consumers rights, by precluding consumers input on the inclusion of the term; 3 the Director contended this was a breach because the defendant was unable to show that the term in question had been negotiated and was therefore in violation of the 1994 Act. Moreover, since the contract in question was a preformatted instrument, generated solely by the defendant, then the entire contract was suspect. He further challenged the defendant to show that the terms had been negotiated. In that the bank admitted that the term under scrutiny (condition 8) was a term which was drawn for general use, and non negotiable. The Director felt he was then compelled to adhere to his mandated duty and challenge the fairness of the contract and the process under (S8-Prevention of continued use of unfair terms) s (2) (3) and (4). 4 He further alleged the following: For the bank to require the consumer to face a continuing liability to the bank regarding a post-judgment interest contract was inherently unfair and contrary to the 3Terms in Consumer Regulations Act 1994 S3 4op.cit. 5 judgment of good faith, which caused a significant imbalance in the parties rights and obligations under the contract and were to the detriment of the consumer.5 On this point we find the Consumer Credit Code 1994 S21-Prohibited monetary obligations- s (a) and (b), precludes the creditor from placing an undue financial burden on the debtor. That all charges and fees must be charged consistently.6 Thus, the provisional term in the contract under condition 8, would not qualify as a consistent charge, but would qualify when and if imposed as a monetary liability on the debtor. When we view the case of Frostfresh Corp. v. Reynoso, 52 MSC 2d 26, 274 N.Y.S. 2d 757 (Sup. Ct. 1966), where a home freezer was sold to a welfare recipient at a higher price than the seller charged customers from a different socio-economic station. After including time price differential the Appellate Court upheld that there was unconscionability and set the price at a reasonable level benefiting both parties to the suit.7 Also in Planet Securities Unit Trust v. Dalrymple, QSC 204 [1999], the Dalrymples borrowed at a very high interest from Planet Securities for a bridging loan, on being unable to repay the loan, the Dalrymples approached the court, which decided the loan interest rate, being very high 5ibid 6Consumer Credit Code 1994 S21 7Frostfresh Corp. v. Reynoso, 52 MSC 2d 26, 274 N.Y.S. 2d 757 (Sup.Ct. 1966) 6 was in effect unconscionable.8 Additionally, if a contract or term is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or so limit the application of any unconscionable term as to avoid any unconscionable result. In Interfoto Picture Library v. Stiletto Ltd. 1 ALL ER 348 [1988], the delivery note contained a number of conditions, one of which provided that a holding fee of 5 pounds per day was payable in respect of each transparency retained after 14 days. The defendants did not return the transparencies in time and the plaintiff sued for the holding fee payable. The Court of Appeal held that this had not been incorporated into the contract and Interfoto had not taken reasonable steps to bring such an unusual, unreasonable and onerous term to Stiletto's notice. Therefore, the defendants were awarded a reduced amount if 3.50 pounds per transparency per week on a quantum merit basis.9 The Director general interpreted the statute from a broad breadth when he contended that the bank provision was unfair on a ground wider than that found by the Court of Appeal, because in his opinion, it denied the consumer the protection afforded in the County Courts (Interest on Judgment debts) Order 1991 S231 and 233.10 8Planet Securities Unit Trust v. Darlympe, QSC 204, [1999] 9Interfoto Picture Library v. Stiletto Ltd., 1 ALL ER 348, [1988] 10County Courts (Interest on Judgment debts) Order 1991 S129 and 136 7 Whether a contract is unconscionable or conscionable is determined by tangible factors i.e., setting, purpose, weaknesses and effect surrounding the process of negotiating the actual contract. On the basis of rule-of-thumb reasoning the projection that, 'no reasonable man with a total command of his facilities and not delusional would accept on one hand, and no honest and fair man would offer on the other'. Obviously in today's business climate, the rules have changed and even the reasonable man has become jaded, but is susceptible in his quest for a bargain and the ostensibly honest man is driven by monetary savings or gains. The prevailing hallmark of today's' consumer is that one must be vigilant and scrutinizing consumers. The disparity in a contract may also corroborate indications of defects in the bargaining process, or may affect the remedy to be granted when there is a violation of a more specific rule. In Khushal Kamar Singla-claimant v. Abdul Bashir Defendant (Ch) In the Supreme Court of Judicature Chancery Division, Abdul Bashir had an opportunity to purchase a flat from Camden at a discount and he entered into an agreement with Dr. Singla where by the purchase price and further sums of money were provided by Dr. Singla. Bashir entered a declaration of trust drafted by a solicitor, Mr. Wade, whereby he declared that he held the flat on trust for Dr, Singla who would own the flat after three years. However, Bashir continued to occupy the flat and refused to transfer the legal title to Dr. Singla. The principle relief's claimed by Dr. Singla are that there should be a declaration that Mr. Bashir holds the legal title to the flat on trust for him absolutely, and an order from the court instructing Mr. Bashir to transfer legal title to him. A very strong 8 case is required before the courts will intervene on this ground. It must be proved unconsciousable in the sense that one of the parties has imposed the bargain in a morally reprehensible, culpable or improper manner. Hence the court agreed to Singlas' claims.11 Theoretically, it is possible for a contract to be oppressive as a whole, even though there is no weakness in the bargaining process and no single term, which is in itself unconscionable. Ordinarily, however, an unconscionable contract involves other factors as well as overall imbalance.12 When a creditor or merchant adds terms which in effect does not exercise full disclosure of any elements of the agreement or panders the attitude of take-it-or-leave it, he is committing a serious breach. The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation or risks because of superior bargaining power. A contract or clause of a contract will be enforced unless it is both procedurally and substantively unconscionable. Procedural unconscionability arises from an inequality of bargaining power that results in no real negotiation and in the absence of meaningful choice.13 11Khushal Kamar Singla - Claimant v. Abdul Bashir - Defendant [2002] EWCH 883 (Ch) In The Supreme Court of Judicature Chancery Division 12Uniform Commercial Code S 302 13Hour fitness, Inc. v. Superior Court 66 Cal.App.4th 1199, 1212-1213 [1998] 9 Also, we find in Sharon V. Pickens et.al., Plaintiffs and Appelants v. Blockbuster Inc., defendant and Respondent. 2004 WL 339594 (Cal. App. 1 Dist.) [2004], Sharon C. Pickens did not attempt to demonstrate that the late fee was hidden from her. She argued that the late fee was offered as a take-it-or-leave-it basis, and that she had no choice but to accept the provision. Blockbuster did not dispute that its standard membership agreement was not open to negotiation. A contract presented on a take it or leave it basis is adhesive and procedurally unconscionable. The court decided to declare Blockbusters' late fee substantively unconscionable.14 The Consumer Credit Code 1994, Part 2 - Credit Contracts, S14 and 15, calls for a mandatory full disclosure meeting which will comprehensively detail every aspect and detail of the contractual agreement. This process is to be scheduled prior to the official signing date, in effect, this is the time for the consumer to either negotiate or express his concern or displeasure with certain contract terms.15 In the Director General of fair Trading, the bank adhered to the stipulated requirement of exhibiting good faith, in keeping with the concept of fair and open dealing. At this time, all of the terms of the contract were explained fully, and showed to 14Sharon C. Pickens et al., Plaintiffs and Appellants, v. Blockbuster, Inc., defendant and Respondent, [2004] WL 339594 (Cal.App.1 Dist.) 15Consumer Credit Code 1994, Part 2 Credit Contracts S14 and S15 10 be legibly written. During the course of this meeting with the prospective borrower, prior to signing the agreement, the bank representative duly pointed out to the prospective borrower and elaborated on those terms, which given certain negative circumstances in the future, could operate in the borrower's disfavor. In spite of this the prospective borrower did not challenge the fitness or fairness of any contractual terms. In the case of George J, Meyer Mfg. Co. v. Howard Brass & Copper Co., we encounter the concept of conscious ignorance. The judge in his discussion of this term conveyed; even though the mistaken party did not agree to bear the risk, he may have been aware when he made the contract that his knowledge with respect to the facts to which the mistake relates was limited. It is sometimes said in such a situation that, in a sense, there was not a mistake but conscious ignorance.16 Further in S28 (2) of the Consumer Credit Bill the effects of default interest is presented and it states; that the contract of a creditor may contain a higher rate, but the rate can only be imposed in the event of a default in payment and while the default continues. As in the Director General of Fair Trading v. First National, due to the interest provision, a judgment debtor who had fully complied with an order to pay the debt by installments under s 71a of the County Courts Act 1984, he would still encounter a continuing liability to the bank in respect of post-judgmental contractual interest. Albeit 16George J, Meyer Mfg. Co, v. Howard Brass & Copper Co. 246 Wis. 558, 568-69, 18 N. W. 2d 468 (1945) 11 the Director General felt that post-judgment payments of interest was unfair, the court did not agree. The banks application to the Court relied on reg. 3 (2) (b), which requires that a contract (terms) be understood by the consumer. Moreover, the bank stated that their term concerned adequacy of price or remuneration (not goods or services sold or supplied) and was not to be assessed as to its fairness. Nonetheless, the judge rejected the banks contention that the interest provision fell within reg 3 (2) (b), and the judge concluded that it was within the meaning of reg. 4 (1).17 Also on the Director General's appeal, the Court agreed with the trial judge that the interest provision fell outside of reg. 3(2) (b) and while the Director General was unable to savor total victory, he was granted some procedural recourse; The Court of Appeal differed on the question of unfairness, holding that the provision was unfair to the extent that it enabled the bank to obtain an order for payments by installments under s 71 of the 1974 Act. The appeal was allowed but the Director General's injunction was not granted. The court permitted the bank an opportunity to take care of some administrative and statutory retrofitting. When the court accepted an undertaking from the bank (subject to appeal) that it would inform the borrowers regarding the courts' powers un ss129 and 136 of the act of 1974.18 18Director General of Fair Trading v. First National Bank PLC [2002] AC 481 12 The court acknowledged the fact that the bank has a distinct advantage in its bargaining position and because of this advantage, buttressed against the weal position of the consumer, it not only presents the bank with undue advantage, it can and has resulted in the bank being insensitive towards the consumer. That the rights of the consumer is compromised and the obligations of the bank are minimized when the bank is allowed to receive post-judgment interest in spite of the stipulations in the statutes of the Act of 1984 and the order of 1991. 19 Moreover, when the bank is permitted to include unfettered terms in its contract agreements it is then faced with a disproportionate win, win situation, while the borrower due to his absence of power, lack of technical financial knowledge, perhaps his indigent state, is placed in an even deeper burden. It is clear that the banks cannot be permitted to continue to have a discretionary hand with the presentation of general terms in contracts. Additionally the Courts must stress vigilance in guaranteeing that banks will be monitored on their adherence to the Parliamentary statutes, which are mandated for the public safety and well being. As it was belatedly noticed in this instance that the bank had not adhered to its statutory requirements of notification. Moreover, it appears that the bank has the tendency in view of its recently challenged preformatted contractual terms, to ignore (by-pass) the courts jurisdiction. Which in effect is denying the consumer the right to relief and the protection of their consumer rights. Lending by banks and the prevailing interest rates are very important issues. Just as the flow and availability of consumer borrowing is vital to the economic health of an economy. Whenever lending flows openly the economy remains robust and the 13 consumer appreciates higher levels of prosperity. The symbiotic relationship which exist between lender and consumer drives the mini and macro market place. And whenever there is an imbalance in either lending or borrowing, the economy's elasticity is constrained. Consequently the case of the Director General is critically important, not only in and for the UK, but to the entire European community. I am of the opinion that this decision is soon to be reversed. It is not possible for any relationship to sustain itself and grow when there is an absence of trust, harmony, mutual respect and balance. Of course, one partner will always have something either tangible or intangible which the other desires; this in and of itself creates the environment for the perpetuation of trust, harmony, mutual respect and balance. Moreover, these things level the play field for negotiation and compromise. Of course there will always be one partner, or one group who will have the advantage or the upper hand if you will, but even though this reality will, and if the truth be told, it must always exist, the side with the advantage will not approach the bargaining with an arrogant posture. The decision in The Director General has created a groundswell of both controversy, recitals and recommendations from all sectors within the European community. There is no doubt that the vested interest are lobbying for the status-quo, while consumer advocate groups are lobbying for change. The test in the days and weeks ahead will depend on how well we will adhere to the wisdom of John Locke when he stated; "free people need to agree on some ground rules in order to live together in harmony". We are slowly evolving into a society of maximums; every one seeks to maximize 14 their time, so the concept of multi-tasking is a desired working custom. We want to maximize our efforts so we diversify; chopping our affairs and relations into little pieces to enable ourselves to have our hands in as many pot as is humanly possible. And maximizing productivity; so that we can receive a higher yield. These maximums can all be viewed as positive attributes if one can maintain the rigors of the demand which either of these places on the body and mind over a sustained period of time. Point being, if we are so enamored with this narcissistic indulgence, then we are definitely ignoring some other aspect of our existence. We must be careful that that which is neglected or lost, is not our compassion and sensitivity towards all of those among us. I am mindful of a Theory of Justice and of course, that conjures up the thought of John Rawls as he dealt with the concept of all social primary goods; which are liberty and opportunity, income, and wealth, and the basis for self-respect-are to be distributed equally, unless an unequal distribution of any or all of these goods is to the advantage of the least favored. Rawls also spoke on a minimization of paid, which of course can be characterized as the utilitarian view. Rawls projected that; your actions are judged by good or bad depending on the consequences they have for you and for others. The greatest good for the greatest number, can be abused, leading to tyranny in the majority. What you might ask, does all of this have to do with the matter at hand The issues which are being addressed or tested are fairness and reasonableness. And my point is we can neither be, nor address any one of them, if we are so self-absorbed with our own personal little kingdoms; where we only get up off our apathy long enough to deal with our own selfish motivations. Everyone is a consumer, which means everyone is affected. 15 We must place pressure upon the inertia which feels compelled to sustain the Status quo. The banks will not change one term in their contacts to be more consumer friendly, nor reduce interest rates, not even one quarter of a percentage point, unless the are compelled to do so by law. Mindful I am, that this is an important and powerful industry, but so is the community at large. After all the only thing we are requesting is that they play by the rules and be fair and reasonable. Works Cited Baird Textile Holdings Ltd. V. Marks & Spencer plc. Royal Courts of Justice Strand, London, WcA 2A @LL, [2001] Consumer Credit Code 1994 County Courts (Interest on Judgment Debts) Order 1994 Director General of Fair Trading v. First National Bank PLC [2002] 1 AC 481 Frostfresh Corp. v. Reynoso, 52 Misc. 2s 26, 274 N.Y.S. 2d 757 (Sup. Ct.) [1966} George J, Meyer Mfg. Co, v. Howard B rass & Copper C.o. 246 Wis.558,568,18 N.W. 2d 468 [1945] Hour Fitness Inc. v. Superior Court 66 Cal. App. $th 1199 1212-121 Interfoto Picture Library v. Stiletto Ltd., 1 ALL ER 348 [1988] Khushal Kumar Singla - Claimant v. Abdul Bashir - Defendant [2002] EWCH 883 (CH) In the Supreme Court of Judicature Chancery Division Planet Securities Unit Trust v. Dalrymple,QSC 204 [1999] Sharon C. Pickens et al., Plantiffs and Appellants, v. Blockbuster, Inc., Defendannt and Respondent, [2004] WL 339594 (CaL. App. 1 Dist.) Terms in Consumer Regulations Act 1994 Uniform Commercial Code Read More