The High Court, in Millar & anor -v- Financial Services Ombudsman [2014] IEHC, Hogan J 30 September 2014, concluded, that where the decision of the Financial Services Ombudsman (the Ombudsman) deals with the construction of a contract, the court will not defer to the decision of the Ombudsman on this issue and is entitled to consider the matter afresh. 

Facts

Mr and Mrs Millar had a number of mortgage accounts with Danske Bank (Danske) each of which had a Clause 3 which stated:

‘Rates of interest are altered in response to market conditions and may change at any time without prior notice and with immediate effect.’

The Millars complained to the Ombudsman that, having regard to Clause 3 (and other extrinsic evidence), Danske acted wrongly in increasing their variable interest rates at a time when interest rates were falling. They pointed out that prior to October 2011 there was a very high correlation between the interest rates applicable to their loans and ECB rates. However, since then, the rate gap between the ECB rate and their variable rate had widened from 1.5% to a just over 4%.

The Millars also referred to a description of the term “variable rate mortgage” on the Bank’s website:-

“As the name suggests, the interest rate you pay on a National Irish Bank variable rate home loan changes in line with any fluctuations in general interest rates. When interest rates go down your monthly payments do likewise. However, when interest rates rise, your monthly payments will increase too.”

They contended that this statement (or something similar) was in existence when they entered into their mortgage agreements.

The Millars further contended that they had received assurances from the Bank’s staff at the time of entering into the loan agreements that the variable rate would be in line with general market interest rates.

The Millars' complaint was rejected by the Ombudsman who stated:

"Clause 3 of each of the loan agreements is clear in its wording and permits the Bank to increase the interest rate ‘in response to market conditions’. Under the terms and conditions of each of the loan agreements the Bank is not restricted by reference to the ECB rate when it is assessing the appropriate rate of variable interest. The Bank’s obligation under each of the agreements is to alter the rate in response to ‘market conditions’ and not ‘in line with general market interest rates’. The Bank is acting in accordance with the terms and conditions of each of the loan agreements in altering the variable rate of interest in accordance with market conditions and there are no grounds for establishing that the Bank is obliged to disclose the basis on which this assessment is calculated.”

The Millars appealed the Ombudsman's ruling to the High Court which considered whether it should defer to the Ombudsman on a question of contract law or whether it should scrutinise the decision as if it were a decision of a lower court dealing with a contract issue?

Decision

The court had regard to the fact that the Ombudsman is under the legislation entitled to consider general principles which would not ordinarily apply to a purely private contract such as “improper motive”“unjust”“unreasonable” and “discriminatory”.  The court was of the view that it was these powers which called for the application of the specialist skill and judgment of the Ombudsman and it was in this respect that the courts should show deference to the decision of the Ombudsman.  

However, this deference did not apply to the ordinary application or interpretation of contract law.  A critical consideration for the court was the fact that the decision of the Ombudsman was a binding adjudication and the court was of the view that where a complaint could have been brought either before the Ombudsman or to a court the parties were entitled to expect that the ordinary principles of contract law would be correctly applied in the resolution of the dispute. 

Accordingly the court considered afresh the terms of the mortgage deeds and particularly the phrase “…in response to market conditions…” contained in Clause 3. 

The court held that the Ombudsman erred in concluding that the words at issue 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 Ombudsman 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 Ombudsman 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 court found that the decision reached by the Ombudsman “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 Ombudsman and remitting it for a fresh determination in a manner not inconsistent with the judgment.

It should be noted that this decision turns on its own particular facts and the extrinsic evidence argued for by the complainants.