Default Interest Rate Clauses Are Not Unfair Terms

Jagjit Kaur Gill
Partner
E: jagjit@stwd.com.my

Joycelyn Keziah A/P Victor George
Associate
E: joycelyn@stwd.com.my

With the growing advent of commercial transactions, provisions in Loan Agreements with respect to default interest rates play a significant role, especially if one starts to default in his/her repayment scheme. In a recent decision in CIMB Bank Berhad v Rodwin V Bahadur [2023] 1 LNS 1264, the High Court was tasked with determining, inter alia: –

• Whether BNM’s Fair Treatment Guidelines issued on 6.11.2019 are public policies pursuant to s.24 (a) and/or (e) of the Contracts Act 1950; and
• Whether the Loan Agreement and/or unfair provisions of the Loan Agreement are void and unenforceable for being unlawful and/or contrary to public policy as expressed in BNM’s Fair Treatment Guidelines and/or the applicable guidelines at the material time pursuant to s.24 (a) and (e) of the Contracts Act 1950 and s.24C (1) of the Consumer Protection Act 1999 and/or the Financial Services Act 2013.

Both of the above questions were answered in the negative. Liza Chan Sow Keng J, after a 4 day trial found that there is no way of escaping the simple truth that once a Borrower has signed the Loan documents, the Borrower is bound by the terms even if he did not understand them. Reference was made to the dictum of Scrutton LJ in L’Estrange v F. Graucob Ltd [1934] 2 KB 394:- “When a document containing contractual terms is signed then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.”

1. The definition of “public policy”
   The High Court referred to the Federal Court decision in Merong Mahawangsa Sdn Bhd & Anor v Dato’ Shazryl Eskay bin Abdullah [2015] 5 MLJ 619 which endorsed the definition of “public policy” in Pollock and Mulla on Indian Contract and Specific Relief Acts (10th Ed) – “the principle which declares that no man can lawfully do that which has a tendency to be injurious to the public welfare”.

2. BNM’s Fair Treatment Guidelines are public policy, but do not have retrospective effect
   Though the Borrower in this case argued that Bank Negara Malaysia (“BNM”), being a regulatory authority, is empowered to specify standards on business conduct to a financial provider to ensure financial service providers are fair, responsible and professional, and that BNM Fair Treatment Guidelines are public policies as they are intended to protect the public interest and safeguard public welfare, the High Court was bound by the Court of Appeal case in Pan Northern Air Services Sdn Bhd v Maybank Islamic Bhd [2021] 2 MLJ 408 in that “The BNM Guideline does not override what had been contractually agreed upon earlier between the bank and the borrower…”.
   
   The High Court further held that the Loan Agreement was entered into before the issuance of BNM’s Fair Treatment Guideline and it was not binding as it does not have retrospective effect, as per the Court of Appeal decision in Maybank Islamic Bhd v M-10 Builders Sdn Bhd & Anor [2017] 2 MLJ 69.

3. BNM’s Fair Treatment Guidelines were not breached
   The High Court further held that “None of the clauses with regards to Default interest rate, Conclusive Evidence Clause and Capitalization of Interest or any other Clauses in the said Loan Agreement dated 03.08.2012 can be said to be unfair terms or injurious to public welfare or that BNM’s Fair Treatment Guidelines have been breached.”

4. Contractually agreed rates & no imbalance of rights
   The Court went on to state that the disputed clauses were contractually agreed upon and one is not barred from charging compound interest if it is agreed by all parties. Further, that the purportedly unfair clauses do not make the Loan Agreement void and cannot be said to be forbidden by law or have a tendency to be injurious to public welfare. Therefore s.24 (a) and (e) of the Contracts Act 1950 do not come into play.
   
   As the contractual right to impose the Default Rate only arises upon the Defendant’s failure to regularize his payments, there is no significant imbalance of rights. The bank cannot be held liable for the Defendant’s failure to service his loan.

5. Saving provision
   The High Court went on to state that even if it was wrong and that BNM’s Fair Treatment Guidelines were breached, there is a saving provision in s.270 of the Financial Services Act 2013 (“FSA”) and the maxim generalia specialibus non derogant applies – that where a special provision is made in a statute, that special provision excludes the operation of a general provision. As such, even if BNM’s Fair Treatment Guidelines is construed as subsidiary legislation under s.123 (1) and s.266 FSA, it must yield to and does not abrogate s.270 FSA.

6. 24C (1) of the Consumer Protection Act 1999 does not apply
   The Consumer Protection Act 1999 (“CPA”) was found to only apply to the provision of goods and services and the contractual relationship between the Bank and the Defendant arising from the Loan Transaction did not come within the CPA.

Finally, it is worth echoing the sound judgment of the High Court which held as follows: –

“The relationship between the Plaintiff as the lending bank and the Defendant as the borrower is a contractual one and is purely commercial in nature. It is one of debtor and creditor. The bank did no more than to lend the monies as requested. In return, the borrower promised to repay the monies lent. It would be odd and indeed unjust if the Defendant’s arguments are to succeed and be permitted to undermine the sanctity of the agreement reached with the bank. The court must be alive to a defaulting borrower’s proclivity to raise disingenuous arguments to avoid its liability to make payment contractually agreed. The flow of banking business and commerce will be thrown into chaos and impeded particularly when such Clauses alleged to be unfair are common place.”

In a nutshell, it is of utmost importance that each clause in any agreement prior to consenting to the same is fully understood in its entirety because parties are bound by the four corners of their contract.