Two cases decided in the last few weeks in England & Wales have shed light on the attitude of the courts to claims by customers that their agreements amount to unfair relationships under section 140A of the Consumer Credit Act 1974. This is always a challenging area for lenders because section 140B(9) of the Act puts the burden on lenders to prove that a relationship is not unfair.

In Pontearso v Greenlands Trading Ltd, the customer claimed that a 6-month bridging loan secured on residential property was unfair because the default interest rate was 3% per month. The judge at first instance disagreed and the High Court dismissed an appeal, finding that the decision on the interest rate was a factual one which was open to the judge to make and difficult to overturn on appeal.

An important observation by the High Court on the law was that the exercise for determining whether a relationship was unfair was to look at the wide breadth of relevant considerations in section 140A (as the Supreme Court had confirmed in Plevin v Paragon, a case in which Irwin Mitchell acted for the lender) which was different from the specific list set down in the Unfair Terms in Consumers Contracts Regulations 1999 (now largely replaced by the Consumer Rights Act 2015).

Under the 1974 Act, the key question is whether the relationship is unfair, rather than whether any particular term is unfair.

By contrast, in Pilgrim Rock Ltd v Iwaniuk, a court found that the lender had not been able to prove the loan was not unfair. In this case, the loan provided for a contractual rate of interest of 6% which was compounded quarterly and which rose to 9% on default.

A particular problem for the lender was that it had done nothing to enforce the loan or even tell the customer of the amount of the debt, but rather had simply allowed interest to accrue, for fully four years. The lender also failed to show that its rates and approach were consistent with wider market practice.

The court found the relationship to be unfair, giving it wide powers under section 140B of the 1974 Act to make a range of orders, including changing the agreement terms. The first instance judge exercised those powers, extending the term of the loan, reducing the interest rate and replacing quarterly compounding of interest with annual compounding.

On appeal by the lender, the High Court found that these variations were not unreasonable and were within the scope of the judge’s discretion. The lender’s appeal was therefore dismissed.

These decisions give food for thought about how to approach unfair relationship cases:

1 High interest rates may be defensible and not unfair where there are appropriate factual circumstances to justify them.

2 It is important for lenders always to keep in mind the difference between claims pled against lenders under the Consumer Rights Act 2015 and those seeking to rely on section 140A of the 1974 Act.

3 Lenders should be wary of terms which provide for escalating rates of interest or which are far from market practice.

4 As most lenders are already well aware from discussions about forbearance, sitting back and letting the interest roll up is unlikely to be met with favour by the courts or indeed by regulators.

contact information: For further information or to discuss any aspect of the legal summary above, please contact Mark Higgins at mark.higgins@irwinmitchell.com or on 07795 504476