The Court of Appeal in the case of Kenneth Millar and Donna Millar v The Financial Services Ombudsman and Danske Bank A/S has upheld the contractual right of the bank to increase its variable interest rate in accordance with “market conditions” without being constrained by general market interest rates.
The Court of Appeal agreed with the High Court that the courts should not defer to the Financial Services Ombudsman ("FSO") on matters of pure law. However, it was held that the issue of the construction of a contract was not a pure question of law, but rather a mixed question of both law and fact. Accordingly, due deference was required to be shown to the expertise of the FSO, save where on the balance of probabilities, and on the materials before the FSO, the FSO’s construction of the contract contained a serious error.
Kenneth and Donna Millar had entered into several variable rate mortgages with Danske Bank A/S in November 2011. They made a complaint to the FSO that the bank had increased its variable interest rate during a period when the European Central Bank ("ECB") rate was falling and that this was in breach of the terms of the relevant loan agreements. They argued the bank had acted in breach of the loan agreement by increasing the applicable variable interest rate as a result of the bank's increased funding costs as opposed to an increase in line with general market interest rates.
The relevant general terms and conditions provided at clause 3 that: "Rates of interest are altered in response to market conditions and may change at any time without prior notice and with immediate effect."
In December 2013, the FSO determined on the evidence before him that the Millars’ complaint was not substantiated. In making this determination, the FSO found that clause 3 is clear in its wording and permits the bank to increase the interest rate “in response to market conditions” and this term did not restrict the bank by reference to the ECB rate.
The Millars successfully appealed the FSO’s determination before the High Court. The High Court was of the view that, whilst the court must show deference to the FSO regarding matters in which he has expertise and specialist knowledge, this did not apply to purely legal matters, including the ordinary application or interpretation of contract law.
The High Court held that the FSO erred in concluding that the words at issue "market conditions", were clear and unambiguous and he had further erred in not having regard to extrinsic evidence which might inform the meaning of those words. The court also found that the FSO failed to give consideration to whether the complainants could successfully establish a "collateral contract" regarding the meaning of these words having regard to the promotional and other material supplied by the bank at the relevant time. The court went on to state that, even if the bank's interpretation of the clause were correct, the FSO was nonetheless in error in failing to examine whether it would be broadly fair and reasonable to the complainants, given his enhanced statutory powers.
Accordingly, the High Court found that the decision reached by the FSO “was vitiated by a serious and significant error or a series of such errors” and it made an order setting aside the decision of the FSO and remitting for a fresh determination in a manner not inconsistent with the judgment.
Court of Appeal
The Court of Appeal, in a judgment of Kelly J and a judgment of Finlay Geoghegan J (with both of whom Peart J concurred), agreed that the Court should not have to defer to the FSO on purely legal questions.
However, they held that the issue of the construction of a contract was not a pure question of law, but rather a mixed question of both law and fact. Accordingly, a deferential approach should be taken to the decision of the FSO on such matters and it was therefore not appropriate for the High Court to examine afresh the contractual construction placed by the FSO on a relevant term of the contract. It should have confined its consideration to whether the decision reached was “vitiated by a serious and significant error or a series of such errors”.
The Court of Appeal held that no such error existed and that the FSO was justified in deciding that the wording of clause 3 was clear and unambiguous and in his decision to reject the contrived construction which the Millars sought to place on it.
Insofar as the High Court had raised an issue of a “collateral contract”, the Court of Appeal did not agree that there were specific facts or evidence before the FSO as would oblige him to consider the complaint from any wider perspective than the alleged breach of clause 3.
Ms Justice Finlay Geoghegan held that, insofar as the High Court found that the FSO was statutorily obliged to consider whether reliance by a bank on contractual terms was “broadly fair and reasonable”, she did not agree that this was mandatory in circumstances where the complaint before the FSO had not been made on that basis.
The appeals were allowed and the Millars' appeal of the FSO's decision was dismissed.