IpsofactoJ.com: International Cases [2002] Part 14 Case 13 [CAEW]


COURT OF APPEAL, ENGLAND & WALES

Coram

Emerald Meats (London) Ltd

- vs -

AIB Group (UK) Plc

LORD JUSTICE PILL

LORD JUSTICE LONGMORE

SIR MARTIN NOURSE

12 APRIL 2002


Judgment

Lord Justice Pill

  1. This is an appeal against the judgment of His Honour Judge Stow QC, sitting in the Croydon County Court, on 21 March 2001. The judge dismissed the claim of Emerald Meats (London) Ltd (“the customer”) that it had been overcharged interest by AIB Group (UK) plc (“the bank”) to the extent of £4,136.65p during the period December 1992 to December 1995. There is a pending claim, made on the same basis as the present claim, for overcharging on the same account for a much longer period.

  2. The customer had a current account with the bank between 1987 and 1999. For much of the time the account was overdrawn. There was an agreed overdraft facility, the terms, or at any rate some of them, being set out in facility letters issued from time to time. The customer’s claim is that on the many occasions when a cheque drawn on a different bank was paid into its account, when the account was overdrawn, it was charged interest on the sum representing the value of the cheque for a day longer than they should have been. The complaint is put in this way:

    It was common ground at trial that throughout the period the Bank’s treatment of movements on overdrawn accounts (including Emerald’s) was as follows:

    (1)

    If £1,000 was withdrawn (either in cash or on presentation of a cheque drawn on the account) on a Wednesday, the balance on the account was adjusted to reflect that withdrawal at the end of the day, and the interest to be charged for that day was calculated on the balance produced. The effect was that the customer paid interest on the £1,000 for the Wednesday.

    (2)

    If, on the following Monday, £1,000 was deposited to the credit of the account in cash or by means of a cheque drawn on AIB, the balance was adjusted on the same day to reflect that deposit, and the interest to be charged for that day was calculated on the balance produced. The effect was that the customer did not pay interest on the £1,000 for the Monday.

    (3)

    If the Monday deposit to the account was of a £1,000 cheque drawn on a bank other than AIB:

    (a)

    the overdrawn balance shown on the customer’s statement would be adjusted on the Monday, and would therefore be reduced by £1,000 at the end of the day;

    (b)

    as a result of passing the cheque through the clearing system, the Bank would receive value from the bank upon which the cheque was drawn on the Wednesday; but

    (c)

    the balance on the customer’s account at the Bank would not be adjusted ‘for interest purposes’ until the Thursday.

    This had the effect that the customer paid interest for the Wednesday (‘the extra day’) ....

    The time taken to clear a cheque in the example at (3)(b) is known as the clearing or clearance cycle. The complaint is that the customer is charged interest for a day, Wednesday in the example given, even though the bank has received value from the paying bank on that day and for that day. It is common ground that a whole day is the relevant unit for interest calculations and charges. Neither party contends that the time of the business day at which a transaction occurs is relevant for present purposes. Parts of a day are to be ignored.

  3. On behalf of the customer, Mr. Hapgood QC submits that interest for a day can be charged only if there is a contractual right to do so. The facility letters set out the applicable rate of interest but did not expressly address, by reference to the clearing cycle, the question of the period in respect of which that interest would be charged. That was a matter of implication and the term to be implied is the obvious one that the bank could charge interest during the period when money borrowed on an overdraft was outstanding. On the example given, the bank received value from the paying bank on and for Wednesday and interest could not, in the absence of agreement, be charged to the customer for that day. Interest would be charged on the Wednesday in the example at paragraph (1). It was inconsistent with that also to charge interest for the Wednesday in the example at paragraph (3)(b). In the absence of agreement to the contrary, interest should be charged on the basis of a two business day clearing cycle.

  4. There was before the judge the report of a single joint expert, Mr. F B Fleet, dated 31 October 2000, and a supplementary report dated 11 December 2000.

  5. The report included the following paragraphs, which were cited by the judge:

    2.1.7

    My opinions reflect my understanding of the conditions and the policies generally adopted by the major clearing banks at the relevant time. With the exception of package lending, terms always have been negotiable. Both banker and borrower were entitled to negotiate the most beneficial rates deemed appropriate to the circumstances ....

    3.3.4

    Cheques paid in at the account holding branch, drawn on another bank branch, take two business days to physically present to the appropriate branch of the paying bank. Credit is not given by A.I.B. for interest purposes until the third business day after paying in, ostensibly because cheques could be returned unpaid. Thus the fate of cheques is not truly known until business day three. Other London clearing banks operated similar clearing cycles to A.I.B., prior to 1994. Most major banks now operate a two business day clearing cycle.

  6. In the supplementary report it was stated:

    3.2.3

    It must be emphasised that the cheque clearance cycle utilised by banks was an area for negotiation. Several banks have openly declared that larger company customers negotiated and enjoyed a two business day clearance cycle before 1994.

    3.2.4

    There is no cartel between the banks; they compete to provide similar services. A two business day clearance has been standard in Barclays Bank PLC for all customers since the 1970s, but only in other major clearing banks since 1994. A minimum three business day cycle for interest purposes is still common in those banks which were formerly building societies, but converted to PLC’s ....

    5.2.5

    The motives, or otherwise, of adopting a three day cycle, when settlement was actually made by customers of the banks after two days, must be a subject for debate. Although the same clearing system was used by all U.K. banks, the cheque clearance cycle implemented differed, not only between the banks, but internally within some banks from time to time.

    (AIB is not a clearing bank, it clears through Barclays.)

  7. In written submissions, the bank has sought to justify its use of the three day clearing cycle. Whether, in terms of commercial morality, it needs to, I will consider later. It is submitted that the customer’s argument overlooks the distinction between a collecting bank receiving value and receiving payment for the cheque. Under the clearing system, the paying bank will give value to the collecting bank on the Wednesday in the example at paragraph (3)(b), but may give notice of dishonour to the collecting bank on the following day. If it does so, the collecting bank is obliged to repay the value received. Value is transferred on the Wednesday in anticipation of the cheque being cleared and discharged by payment. The transfer is subject to a condition that the sum be refunded in the event of later dishonour. The cheque is not discharged by payment until the Thursday. (Prof R.M. Goode: When is a cheque paid? [1983] JBL 164 at 166-167).

  8. The submission of Mr. Sumption QC, for the bank, is that the arrangements made by the bank with other banks for the treatment of the clearing cycle are irrelevant to the arrangement between the bank and its customer, as principals. It is in the nature of the banking business that the terms obtained by a bank in the financial market are more favourable to it than the terms of its arrangement with a customer. A bank is in business to make profit from financial transactions and, for example, customarily lends to a customer at a higher rate of interest than it borrows from a customer. Subject to what Mr. Sumption describes as the “bounds of reasonableness”, a customer will ordinarily expect to be treated in the same way as every other customer of the bank in a like situation.

  9. In reply, it is submitted on behalf of the customer that the possibility of dishonour is irrelevant to a decision as to what term should be implied. In the absence of agreement to the contrary, the bank cannot charge interest for a day on which it has received value for the relevant sum. The term to be implied is that the bank will charge interest only for those days on which it does not have value for the relevant amount.

  10. The judge decided, in the customer’s favour, that neither “an established usage amongst bankers” nor a “universal practice of banks” to operate a three day cycle had been made out. An implied term to that effect could not be established on the basis of the custom and practice of the trade. The judge also held that the bank was not doing “anything unlawful in charging the customer interest” for the third day though I do not understand the reference to “unlawful” to mean anything other than “in breach of contract”. The judge held that the bank had not expressly made clear to the customer what its practice was but that neither had it misled the customer as to the three day clearance cycle.

  11. The judge found for the bank on the following basis:

    In my view, when a customer, particularly a business customer, enters into a business relationship with a bank, they must be accepted as doing so on the basis of the bank’s standard terms, practices and conditions. If they are not prepared to do so, they can make enquiries as to the position, and they can, if they want to, negotiate different terms or decline to form any relationship with the bank.

    ....

    I find that when the parties entered into a relationship, they did so on the basis that, in so far as the terms and conditions were not expressly spelt out in the facility letters, they were on the bank’s usual terms, conditions and practices, and one of those was the operation of the three day clearance cycle.

  12. Reliance was placed by the judge on the decision of this Court in Lloyds Bank plc v Voller [2000] 2 All ER (Comm) 978. A regular customer with a bank went into overdraft on his personal account. There was no express agreement as to the rate of interest and the customer contended that the appropriate rate was not the standard interest rate but the lower rate which had been applied to his loan account. It was held (Potter LJ and Wall J) that when a customer drew a cheque on his account which caused the account to go into overdraft, the customer had by necessary implication requested the bank to grant an overdraft of the necessary amount on its usual terms as to interest and other charges and, in deciding to honour the cheque, the bank had by implication accepted that offer. Indeed, the Court held that the bank would have been entitled to charge at the unauthorised overdraft rate and not at the lower rate for an authorised overdraft rate it in fact applied.

  13. Mr. Hapgood submits that the principle that the bank could apply its normal practice did not arise in a situation in which there was a facility letter which did not specify the three day cycle and where the term sought to be implied was not obvious and conflicted with the date on which the bank had received value. There should not be an obligation upon a customer to ask about the clearance cycle.

  14. The basis on which a bank may charge for an overdraft is a matter for negotiation, as to the rate of interest, the length of the clearance cycle and any other terms. A bank can however be expected to have standard terms of trading on such matters as the length of the clearance cycle, which apply in the absence of specific negotiation. A customer who seeks and obtains an overdraft facility can be taken to have agreed those standard terms unless a different agreement is made or unless the term so implied is extortionate or contrary to all approved banking practice.

  15. It is necessary to consider the commercial morality of the three day clearing period only to decide whether the term to be implied falls into either or both of these categories. It is clear from the expert evidence that, while there had been a move in banking to a two day cycle, the three day cycle was widely used at the material time. Moreover, on the basis of Mr. Fleet’s report, with its references to the clearing procedure and its risks, implication of the term cannot be excluded on the basis that it is extortionate or contrary to what is a widely adopted business practice.

  16. In the absence of the agreement of a different term, the judge was in my judgment correct to hold that a term should be implied that the bank’s standard terms would apply. The judge was correct to conclude that the customer entering into an arrangement could expect to pay interest on the basis of the standard practice adopted by the bank, that is the three day clearing cycle. In Voller, Wall J stated, at 982G:

    The only proper conclusion which can be drawn, in the absence of any evidence that there was a different agreement between Mr. Voller and the bank, is that the bank was granting him overdraft facilities at the standard rate for overdrafts.

    Voller does, rightly in my view, assert the principle that, in the absence of express agreement, the bank’s standard terms as to interest are incorporated into the contract. The length of the clearance cycle was not in issue in Voller but, as between two days and three days, the principle that standard terms apply is relevant in the present case. The position would be likely to be different if the term in question was extortionate or contrary to all acknowledged and approved banking practice.

  17. While I do not decide the case on this ground, the customer in the present case cannot have been unaware of the general effect of the clearing cycle. The customer relies on the bank’s document entitled “Business Banking Charges” (May 1992) for its statement to customers that “when your loan or overdraft has been agreed we will confirm the details of the agreement and the cost of borrowing in writing”. That is clearly a reference to facility letters and the clearing cycle is not specified in those letters. However, the guide does include “a simple guide to our charges” and the customer is advised to “remember when you are paying in cheques to your account to allow at least four working days, excluding the date of lodgement, for those cheques to be cleared”. A short explanation is given of the “clearing cycle”. The guide continues:

    Even though they may appear immediately on your statement, you may incur interest charges and fees if you draw against uncleared cheques.

  18. While I accept that the guidance does not deal precisely with the situation now in question, it does introduce the customer to the concept of the clearing cycle and the incurring of interest charges during that cycle. Moreover, as to acceptance of standard terms, the customer’s witness, Mr. I D Marshall, when it was put to him that, “at the time that you opened the account, you were happy to accept the bank’s usual service because you didn’t ask the bank anything about it”, replied in the affirmative.

  19. I would dismiss this appeal.

    Lord Justice Longmore

  20. This appeal raises a short point on the correct formulation of a contract for an overdraft as made between a bank and its customer. No question arises as to the rate properly chargeable, only as to the period for which interest is correctly chargeable in relation to a debit balance which is subsequently reduced by presentation of cheques payable to the customer. The cheque needs to be cleared and until it is cleared the money is not “available” to the customer. By the arrangement in place between the bank and its customer at the relevant time, the clearing cycle (as between themselves) was 4 days so that the customer could not regard the money payable, pursuant to a cheque in his favour, as available to him until 4 days had elapsed viz a Friday for a cheque presented to the bank by the customer on a Monday.

  21. Nothing was agreed in express terms about the period for which interest on any sum due to the Bank was to be charged. The practice of Allied Irish Bank (shared by a number of other banks at the time) was to charge interest on the overdrawn amount for a period of 3 days after presentation of the cheque to it by its customer. They were able to do this because Allied Irish Bank (which is not itself a clearing bank) was able to arrange with its clearing bank, Barclays Bank Plc, for a 2 day clearing cycle. If, therefore, Allied Irish Bank started a clearing cycle for one of its customer’s cheques on a Monday it could expect to be credited with the value of the cheque on a Wednesday, subject to the risk of the cheque being dishonoured and the transaction having, therefore, to be reversed. The crediting would happen at any time up to 3.30 pm on the Wednesday and Allied’s own account with Barclays would then be credited with the value for the whole of that day. It would thus, if it was in debit to Barclays, pay interest on that debit, in respect of the Wednesday, only on the balance shown at the end of the day. If it was in credit to Barclays, it would receive interest on the balance as shown at the end of the day. The customer would, however, be charged interest for the 3 days Monday, Tuesday and Wednesday; no interest would be charged for the first full day for which the funds represented by the cheque were available to Allied Irish Bank, viz Thursday.

  22. The question is whether the appellant customer is bound to pay interest for a 3 day period rather than a two day period as he contends. Mr. Sumption QC for Allied Irish Bank contends the contract for the overdraft is on the terms of the Bank’s usual practice as to the period for which interest is charged; Mr. Hapgood QC for the customer submits that the contract was not (and could not have been) on terms that the Bank could charge interest once it had the benefit, in its own account, of the sums represented by the cheque. Since nothing was expressed, some implication must be made.

  23. His Honour Judge Timothy Stow held that there was nothing unlawful in the charging of interest for 3 days and that the customer had agreed to what was the Bank’s practice in relation to the charging of interest. He relied on Lloyds Bank v Voller [2000] 2 All ER (Comm) 978 where this court held that if a rate was not stipulated for an overdraft it was the Bank’s usual rate for an overdraft; either the rate for authorised or for unauthorised overdrafts, depending on the facts.

  24. I agree with the judge. Mr. Hapgood submitted that the question to be asked was “What term as to the period for which interest is to be chargeable is the customer to be fairly taken to have agreed?”. He answered that by saying that the customer cannot be taken to have agreed that his bank “should take an extra day’s interest”. He bolstered that submission by saying that the agreement could not have been that the bank could make a profit of its own from the interest charging arrangement since that would be a secret profit.

  25. This latter submission is not to my mind correct. Although Allied Irish Bank acts as the customer’s agent to present and collect on its customer’s behalf the amounts of the cheques paid to the customer by the customer’s clients, that is the limit of its agency. Any secret profit made from that operation would, no doubt, be recoverable by the customer. But arrangements for an overdraft are made between one principal and another and the terms as to accounting or interest charges made between Allied Irish Bank and its own clearing bank are also made between principals. The fact that as between Allied and Barclays, Allied are credited with the value of the cleared cheque for the whole of Wednesday has no legal relevance to the terms of the contract made between Allied Irish Bank and its customer as to its overdraft arrangements. Allied are perfectly entitled to make what profits they can from their own banking arrangements without being accountable to their customers for such profit.

  26. If that conclusion is correct it must also follow that Mr. Hapgood’s answer to his own question is not the correct one. The bank must be able “to take an extra day’s interest” if that can fairly be part of its own contractual arrangements. The only correct answer to the question “What term is the customer to be fairly taken to have agreed” is then that interest will be chargeable over such period as conforms to the Bank’s usual practice provided such practice is a reasonable one. Since, on the notional example with which we have been working, the customer has borrowed the money for part of Monday, the whole of Tuesday and for that part of Wednesday which occurs before payment is made to Allied via the clearing system, I cannot bring myself to hold that it is unreasonable for the practice to be that interest is charged for 3 days. This is so even though it is the usual practice of bankers to ignore parts of a day. The expert evidence, recited by my Lord, was to the effect that major clearing banks have operated a two day clearance cycle since 1994 and now charge interest on that basis to their customers. But it was also to the effect that a 3-day cycle is still common in some banks for the charging of interest. Undoubtedly, it would be more reasonable to charge interest only for 2 days; but I do not think it can be said, on the evidence, to be an unreasonable practice to charge interest for 3 days. With some reluctance, I would dismiss the appeal.

    Sir Martin Nourse

  27. I agree.


Cases

Lloyds Bank plc v Voller [2000] 2 All ER (Comm) 978

Authors and other references

Prof R.M. Goode: "When is a cheque paid?" [1983] JBL 164

Representations

Mark Hapgood QC and Cyril Kinsky (instructed by Kimbell & Co) for the Appellants

Jonathan Sumption QC and Miss Helen Davies (instructed by CMS Cameron McKenna) for the Respondents


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