House of Lords
LORD BRIDGE OF HARWICH, LORD BRANDON OF OAKBROOK, LORD GRIFFITHS, LORD GOFF OF CHIEVELEY AND LORD JAUNCEY OF TULLICHETTLE
3, 4, 5 October, 30 November 1989
My Lords, this appeal is concerned with a claim by a bank to compound interest. The appellant, National Bank of Greece SA (the bank), sought to recover the balance owing on an account maintained by it for the first respondent, Pinios Shipping Co No 1 (Pinios). The amount so claimed included interest, capitalised with quarterly rests, up to the date of judgment. The issue on the appeal before your Lordships' House is whether the bank ceased to be entitled to capitalise interest from the date when it demanded repayment, with the effect that it was entitled only to simple interest from the date of the demand until the date of judgment.
The matter has arisen in the following way. Pinios agreed to purchase a ship, the mv Maira, under a shipbuilding contract dated 28 July 1975. The ship was delivered in February 1977, at which time 70% of the purchase price was outstanding. Pinios had agreed with the shipbuilders that the balance would be paid by 14 half-yearly instalments, secured by a first preferred mortgage on the ship. The bank provided a guarantee for the payment by Pinios of the first six of these instalments. The bank in its turn was secured by a second preferred mortgage on the ship and by a personal guarantee by the second respondent (Mr Tsitsilianis). In the event, Pinios was unable to pay any of the instalments due to the shipbuilders, and the bank was called on to pay two of the instalments under its guarantee, the first payment being made on 16 August 1972. The ship sank at sea on 10 April 1978. The insurance proceeds were insufficient to enable Pinios to repay the bank under the second preferred mortgage.
On 13 November 1978 the bank wrote to Pinios and Mr Tsitsilianis demanding repayment of the amount outstanding, including compound interest. These demands met with no response. In 1980 the bank commenced proceedings against Mr Tsitsilianis and, in 1981, against Pinios, claiming principal and interest. By that time, Pinios was pursuing a claim against the managers of the ship claiming damages arising from the under-insurance of the ship. The trial of the bank's action was delayed, mainly because the two respondents wished to postpone the hearing until after the arbitration proceedings against the managers had come to an end. Pinios obtained an award against the managers, but the managers failed to honour the award. The bank's action then came on for hearing before Leggatt J in January 1988. At the trial, Pinios denied liability on the basis of an alleged breach of duty by the bank, and raised a number of accounting issues. All but one of these accounting points were abandoned during the trial. Leggatt J held that the bank had committed no breach of duty and that one adjustment should be made to the account (see  2 Lloyd's Rep 126).
However, after the bank had closed its case at the trial, the two respondents raised a new issue relating to the entitlement of the bank to capitalise outstanding interest after the demand made on 13 November 1978. Despite objection from the bank, Leggatt J gave leave for the point to be argued 'in so far as it was capable of being taken as a point of law and not dependent on evidence'. After hearing argument, he rejected the submission of the two respondents, holding that the bank was entitled to continue to capitalise interest up to the date of judgment, either on the express words of the second preferred mortgage or because the relationship between the parties remained unchanged after November 1978. The two respondents then appealed to the Court of Appeal, both on the point relating to breach of duty and on the point on compound interest (see  1 All ER 213,  3 WLR 18 5). On the former point they again lost; but on the latter point they succeeded. As before Leggatt J, the two respondents accepted liability to pay
compound interest from August 1977 until the date of demand in November 1978. However, the Court of Appeal held that the bank's entitlement to capitalise interest came to an end on that date, with the effect that the bank was entitled only to simple interest from 13 November 1978 until the date of judgment, over nine years later, on 2 March 1988. It is against the decision of the Court of Appeal on the compound interest point that the bank now appeals to your Lordships' House.
Such is the slender line of authority which provides the basis for the reasoning of the Court of Appeal in the present case. Before I consider that reasoning further, however, I wish to return to the basis on which the original case of Ex p Bevan (1803) 9 Ves 223, 32 ER 588 was decided.
In that case, as I have said, it was decided that the usury laws might be circumvented by the fiction of a series of staccato agreements whereby, at each rest, it was presumed to have been agreed that the interest then due could `become principal and carry interest'. The practical effect was, of course, that bankers did indeed capitalise interest in this way. After the repeal of the usury laws in 1854, they continued, as they had done in the past, to follow what had become a practice of bankers. In IRC v Lawrence Graham & Co  2 All ER 1 at 8,  2 KB 179 at 192 Romer LJ (delivering the judgment of the Court of Appeal) said that the practice was—
'an old one dating back to long before the repeal of the usury laws, and could not, therefore, have been legal unless it was consistent with those laws. Now before the repeal of those laws a contract to allow the charging of compound interest was illegal. The legality of the practice of bankers was, however, upheld by the courts by treating the bank as making a fresh advance to its customer at the end of each year or half-year as the case might be: see Lord Clancarty v. Latouche ((1810) 1 Ball & B 420). There is nothing contrary to the usury laws in such an arrangement: see Ex p. Bevan ((1803) 9 Ves 223, 32 ER 588). It is plain that upon the repeal of those laws an agreement to pay compound interest became lawful. In Holder's case (IRC v Holder  AC 624,  All ER Rep 265), however, there was no agreement to pay it. The bank had merely pursued an old practice of bankers upon which an interpretation had been put by the courts. The fact that this had been done at a time when the laws against usury were in force appeared to this court to be immaterial. The practice continued after the repeal of those laws and the repeal could not affect the nature of the practice.'
At first, after the repeal of the usury laws, there was a tendency to look for actual acquiescence by the customer in the practice as the ground for holding that the practice was binding on him. Thus, in Crosskill v Bower (1863) 32 Beav 86 at 100, 55 ER 34 at 39 Romilly MR looked for knowledge of the customer that accounts were so kept by his bankers, and acquiescence by him in their being so kept, as a basis for an implied agreement. Such a basis could never be very satisfactory. It does not presuppose an antecedent agreement governing the initial period of a banker/customer relationship. It apparently presupposes that the customer has examined the relevant accounts, which he is under no duty to examine (see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd  2 All ER 947,  AC 80), and may not in fact have examined. Presumably also the customer could unilaterally bring the arrangement to an end at any time. However, it was not long before the practice became recognised as a usage of bankers and as such implied into the relevant contract. The first case in which this appears to have been done was the Scottish case of Reddie v Williamson (1863) 1 M 228, decided in the same year as Crosskill v Bower. The Lord Justice Clerk (Inglis) expressed the matter as follows (at 236):
'The parties must of course have had in view that this account-current would be kept in the way, in which bankers always keep such accounts, balancing the account at the end of the year; and, in the event of the interest accruing during the past year not being otherwise paid or provided for, placing the amount of such interest as the last item to the debit of the account, and accumulating such interest along with the principal sum due on the account, and bringing down the balance thus ascertained, consisting partly of principal, and partly of interest, to the new account for the ensuing year, and placing the accumulated balance as the first article of debit in that new account. Where an account is kept in this way consistently throughout its whole course, the interest thus accumulated with principal, at the end of each year not only becomes principal, but never thereafter ceases to be dealt with as principal.'
He later said (at 237):
'The privilege of a banker to balance the account at the end of the year, and accumulate the interest with the principal, is founded on this plain ground of equity, that the interest ought then to be paid, and, because it is not paid, the debtor becomes thenceforth debtor in the amount, as a principal sum itself bearing interest.'
In 1898, in Parr's Banking Co Ltd v Yates  2 QB 460 at 467, a case concerned with compound interest being charged by bankers with half-yearly rests, Vaughan Williams LJ said:
'According to the ordinary practice of bankers the interest due is from time to time added to the principal, and becomes itself part of the principal due.'
Rigby LJ said (at 466-467) that the account in the case was made out—
'in the manner usual as between banker and customer. Such a mode of making out the account is so far usual that I do not think the customer, or a guarantor of the customer, could object to it. I think one must assume that the understanding of all parties was that the account would be kept as between the person guaranteed and the bank on the usual principle with regard to such accounts—that is to say, by treating moneys paid in from time to time by the customer as a deduction from the general amount due from the customer in respect of the loan and interest thereon, and at the end of each half-year carrying over the debit balance to the next half-year as principal.'
In Yourell v Hibernian Bank Ltd  AC 372 at 385 Lord Atkinson said:
'Interest was calculated from day to day on the mortgagor's overdraft on his
current account. On the balancing of this account each half-year the amount of this interest was entered on the debit side of the account, a balance was then struck, and interest was charged during the next half-year upon that balance. The bank, by taking the account with these half-yearly rests, secured for itself the benefit of compound interest. This is a usual and perfectly legitimate mode of dealing between banker and customer.'
Likewise, in IRC v Holder [ 1931 ] 2 KB 81 at 96 Lord Hanworth MR referred to 'a practice which has been adopted by bankers for over a century'; and Romer LJ Said (at 98):
'. . . it is to be observed that the relations between the company and the bank were regulated, not by any special agreement, but by the ordinary usage prevailing between bankers and their customers as to the method of keeping accounts. In accordance with this usage the balance of principal and interest was struck at the end of each half-year and the aggregate sum was introduced as the first item in the subsequent half-yearly account and interest calculated upon it.'
I have yet to consider whether the usage to which I have referred ceases to apply where the banker makes a demand on his customer for repayment, as held by the Court of Appeal in the present case. The suggestion that a bank ceases on demand to be entitled to continue to capitalise interest rests entirely on the authority of Crosskill v Bower (1863) 32 Beav 86, 55 ER 34 and the dicta of Scrutton and Greer LJJ in the Deutsche Bank case. The reasoning of Romilly MR in Crosskill v Bower was undoubtedly affected by the fact that he understood the bank's entitlement to capitalise interest to be limited to an 'ordinary mercantile current account'; accordingly, in the case before him, he considered that, on the execution by the customer of deeds for the benefit of his creditors, his account ceased to be an ordinary mercantile current account, and the final balance due to his bank was then ascertained. On that basis, he reached the conclusion that, in the absence of any special agreement between the bank and its customer, the effect of the customer closing his account was that the bank ceased to be entitled to charge any interest. In my opinion this conclusion (which has no regard to any custom or usage of bankers) is inconsistent with the 'equity' on which the Lord Justice Clerk (Inglis) stated the banker's privilege to rest. Furthermore, if it be equitable that a banker should be entitled to capitalise interest at, for example, yearly or half-yearly rests because his customer has failed to pay interest on the due date, there appears to be no basis in justice or logic for terminating that right simply because the bank has demanded payment of the sum outstanding in a customer's account. There is no reason to suppose that such a demand should of itself bring to an end the relationship of banker and customer: See J Milnes Holden The Law and Practice of Banking (4th edn, 1986) vol I, pp 90-94. Indeed, the customer might then gradually pay off his debt by instalments, following on the demand during which period the relationship would surely continue. The inequity of the supposed rule is amply demonstrated by the facts of the present case, in which the bank has had to wait for over nine years alter its demand for payment until Leggatt J gave judgment in its favour. In my opinion, there is no such rule in English law.
For these reasons, I am, with all respect, unable to uphold the reasoning of the Court of Appeal in the present case; and I cannot help feeling that, if it had had the benefit of the citation of authority provided for the assistance of your Lordships, it would not have reached the conclusion which it felt driven to reach on the authorities cited to it.
I have already referred to the fact that no evidence was called (or indeed permitted to be called) in the present case on the scope of the usage. The cases which I have cited show the usage to be applicable to cases of both annual and half-yearly rests. There is, however, so far as I am aware, no case which shows it to be applicable to cases of quarterly rests, into which category the present case falls; though equally there is nothing to indicate that it does not so apply, and it may well do so. Again, the respondents' account with the appellant bank was not concerned with a simple borrowing, but with an amount outstanding in an account with the bank following a payment by the bank under its
guarantee to the shipbuilders. However, in view of the concession made by the respondents in the courts below, neither of these points need trouble your Lordships. That concession was that the bank was entitled to charge compound interest with quarterly rests during the banker/customer relationship. This is not a suitable case, in my opinion, for your Lordships' House to establish any general criteria for the circumstances in which such a relationship comes to an end. But I can see no reason why that relationship should not, in the present case, have continued until repayment of the debt, or judgment, whichever first occurred, with the effect that, so long as the contractual interest was payable, the bank continued to be entitled to capitalise it. The only earlier event relied on by the respondents as terminating the relationship was the bank's demand for payment; I have already expressed the opinion that that submission was not well founded. In Yourell v Hibernian Bank Ltd  AC 372 your Lordships' House appears to have approved of the bank continuing to capitalise interest after commencing proceedings against its customer. In the present case, the bank has claimed the principal sum due to it with interest thereon as agreed until payment or judgment, in the usual way. Such agreement included the term, implied by the usage of bankers, that the bank was entitled to capitalise interest, it being conceded that the bank was entitled so to do at quarterly rests. The sum for which Leggatt J entered judgment for the bank (viz $US 2,118,213.03) was so calculated. I would allow the bank's appeal from the decision of the Court of Appeal and direct that the order of Leggatt J be restored.