Millar judgment should give borrowers cause for concern

Borrowers who are banking on a judicial Fifth Cavalry riding to the rescue may have to think again, if a recent decision of the new Court of Appeal is anything to go by.

The Court of Appeal, as reported in this newspaper on June 25, overturned a High Court award in favour of a couple, Kenneth and Donna Millar, who had taken out multiple loans with National Irish Bank (later acquired by Danske Bank).

The couple had complained to the then financial services ombudsman, Bill Prasifka, because their bank had hiked up the interest rates on these loans in late 2011, when interest rates, generally, were falling. The decision has sparked debate on social media.

One contributor to the ‘Askabout Money’ discussion forum condemned this “brutal judgment” by the court, while another suggested that the judges had adopted a “deferential approach” towards financial institutions.

For many people coping with huge debts from the bubble years, the courts have been a last line of defence and judges have frequently adopted a robust approach to banks and insurance companies.

The judges on the Court of Appeal — Peter Kelly and Mary Finlay Geoghegan — are both independent-minded. One curious aspect about the decision is that they have struck down a ruling delivered by Mr Justice Hogan, who has since been promoted to the Court of Appeal.

The Millars entered into seven loan agreements with a total value of €1.5m, back in 2005, with NIB. Not long after, Danske swallowed up NIB, as it expanded into an Irish market that was enjoying boom-time conditions.

Their troubles began when Danske increased the cost of each of the loans from 3.4% to 4.35%, a hike of almost 1%, or €15,000 per year. The Millars contended that they were “induced” to enter into the loan agreement, in the expectation that the variable rate would be adjusted in line with the central ECB rate.

There was no suggestion, in 2005, that the bank would adjust the rates upward in response to its own funding difficulties. The Millars contented that the bank was only entitled to alter its rates in line with “general market” interest rates.

The ombudsman, however, concluded that nowhere was the term ‘in line with general market interest rates’ included in any clause of the contract. He said the bank was not restricted by reference to the ECB rate when assessing the appropriate variable interest.

However, the Millars succeeded at the High Court, where Judge Gerard Hogan ruled that there was a mandatory obligation on the ombudsman, imposed by legislation, to consider whether the bank had acted fairly and reasonably in relying on the terms of the contract.

One interesting aspect of the judgments is the level of respect that judges should display towards an expert body — such as that of the ombudsman.

In Judge Hogan’s view, the ombudsman had made a decision on a pure point of contract law and, as a result, the courts should not adopt a deferential attitude to that decision.

On appeal, Justice Mary Finlay Geoghegan agreed with that point of view.

“With respect to the ombudsman, he does not have an expertise in dealing with questions of law (as opposed to questions of fact). In her view, the High Court is entitled to examine, afresh, questions of legal construction.”

However, she added the construction of a contract is not a pure question of law, but rather is a mixture of law and fact. She added that Judge Hogan “erred in law” in deciding that the plaintiffs — the Millars — had established that the ombudsman was “in serious error” in failing to consider their complaint that the bank was in breach of contract.

The second Court of Appeal judge hearing the case, Judge Kelly, concurred. He expressed surprise at the “rather drastic” remedies sought by the couple.

These included: cancellation of each agreement; payment of compensation for hardship; refund of all loan repayments made since October, 2011; contribution towards expenses incurred in their legal action; a commitment from the bank to “desist from damaging conduct towards them.”

Judge Kelly then turned to the detailed responses provided by Danske to questions submitted by the ombudsman.

The bank argued that it had “full governance procedures” in place with regard to pricing decisions, with both a pricing committee and change-control committee to review such decisions. Interestingly, decisions on mortgage rates are not covered by consumer credit law.

It conceded that the rate hike was mainly, but not solely, due to the hike in Danske’s funding costs. Critically, as Judge Kelly observed, the Millars had already been given a discount of 0.4% on-the-then prevailing standard variable rate at the time they took out their loans and, in his view, they were, in effect, seeking a discount off a previously discounted rate. Danske has offered a discount to customers prepared to increase their level of business with the bank, but it is stated as not applying to those already benefiting from discounts.

In Kelly’s view, the Millars failed to prove that the decision reached by the bank, in respect of their loans, was “vitiated by a serious error, or series of such errors”.

The judgment is a blow to the Millars and to other customers, particularly those on variable rates, seeking to challenge agreements. Lenders will breathe a sigh of relief.

A decision to uphold the High Court ruling could well have opened a Pandora’s Box, sparking a host of legal claims.

It would not have assisted the Government in its efforts to privatise State-controlled banks, as legal uncertainty is the last thing one wants when putting financial institutions up for sale.

Some comfort for customers may be gleaned from a decision of the European Court of Justice, involving a central European telco, Pannon.

There, the ECJ ruled that the EU national courts are obliged to examine the issue of unfairness in contractual terms.

Moreover, it should do so even if the consumer has not, themselves, raised the issue. In the Pannon case, the plaintiff, Ms Gyorfi, was an elderly lady living in a remote rural location.