The Equitable Doctrine by Lord Mersey - Essay Example

HAS THE EQUITABLE DOCTRINE OUTLIVED ITS SIGNIFICANCE HAS THE EQUITABLE DOCTRINE OUTLIVED ITS SIGNIFICANCE? The equitable doctrine prohibiting the imposition of a clog on the mortgagors right to redeem was described by Lord Mersey in Kreglinger v New Pattagonia Meat and Cold Storage Co Ltd [1914] AC 25 at 46 as "like an unruly dog, which, if not securely chained to its own kennel, is prone to wander into places where it ought not to be". This landmark judgment has raised stout defenders and protagonists ever since it was proclaimed. Throughout the last century and up to now there have been unending arguments and pros and cons on the issue. Significantly, this is likely to continue in the foreseeable future as well. The reason for this issue being, and remaining, alive is embedded in the fact that Human Behavior is incorrigible. From time immemorial the strong have prevailed over the weak in more ways than one can conceive. Putting it mildly it has been called “persuasion”, while the advocated of downtrodden have declared it to be “oppression”. But in all cases the manipulation continues as a manifestation of our nature. No doubt the Ontologists will gleefully wring their hands at the opportunity to explain it, but let it rest for now, as this is not a philosophical discourse. The root of this ailment lies in “need”. There always has been, and always will be a need by someone to borrow and a lender is always at hand to do the needful. This builds a case to be persuasive or oppressive, as the case maybe, and a clogging clause is gently forced in the agreement. Normally suspicion does not enter the mind at this stage, as the mind is already clogged with the urgency of the need, So far so good, as the good old saying goes. But the situation takes a dramatic turn, when by a stroke of fortune, or misfortune as some may say, the borrower wishes to shed the shackles he has been wearing for some time. Suddenly he is faced with an unbelievable situation that he has already surrendered his right to freedom. That he has chosen to remain a slave to his master’s wishes dawns on him as rude shock, that there is a clause that prohibits the recovery of his security without penalties. It is a moot question that the legal profession in all its wisdom now takes over. The ever-eager legal beagles find their bread and butter, overlooking the fact that it was indeed someone from their brotherhood that had earlier patronized the introduction of the clog and gave it a legal status. The question that arises, has the doctrine outlived its significance or does the borrower still need protection from the risks presented by an avaricious lender? In this age of the informed consumer, with an explosion of information available to him, the theory of lassaise faire or customer beware should be redundant. So much is known through education, print media and the internet that the borrower should not require anyone to point out that he is putting his neck in the noose by accepting a clog in the agreement or contract. It is not that in all cases the borrower is unaware of the clog, although it must be conceded that sometimes a clog is slipped through while he accepts the agreement in good faith. It also happens that he fails to recognize the consequences of his acceptance. Why then should he not be penalized for his ignorance or simple mindedness? Surely he is expected to be aware in this age. Why then the need of a law that takes upon itself the responsibility of setting aside a situation that has been earlier agreed to by the borrower himself. Before we attempt to judge the statement and draw conclusions, let us set down the facts that eventually lead to this doctrine. Borrowing, lending and securitizing this kind of transactions by way of a mortgage is a historical fact. The methods have changed over a period of time and been largely influenced by the advances that civilization has made over the centuries. We see that in the earlier stages of our culture mortgage was a token of pressure on the borrower to return the loan. Justice, more widely recognized as Moral Code, was comparatively simple and was omnipresent. It was understood by our ancient fathers that fairness was the basis of transaction as well as relationships. Traveling down time we find that in the last century this concept of Moral Law was fine-tuned to be termed as Equity. Equity has been defined as Natural Justice. Like the previous concept of satisfying need through the system of borrowing and lending, equity too is an associated concept that such a transaction should be based on natural justice, which is the progression of the earlier moral code. It is not out of place to mention that the Church gave this Moral Code or Equity a very high pedestal to rest upon. Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.  (Lev. 25:37) 1 This gave equity a sanction that was later recognized by the judiciary and resulted in the doctrine, which is now being questioned. The Church has grown to be the largest institution today. In terms of numbers, it has the largest following and growing, yet it is the usually the last to be resorted for decisions in any matter of economical or political significance. Indeed in the sphere of social needs too it has lost much of its relevance in this age of liberalization. However, the one area that the Church’s dictat has been able to hold its high is Equity. The civilized world, in one voice, holds that Truth and Justice are paramount. That practice differs from declarations is evident from the fact that we have the need of the doctrine to rein in those who go astray. In our attempt to find an answer to the question of relevance of the doctrine in modern times, let us view the law, as it is prevalent in a number of European Countries. Europe has been chosen for this research as this represents both the old civilization as well as the new one and represents a variety of views on the subject. (Dr. Joahannes Kondgen, Bonn) Germany The German law on early repayment features three peculiarities. • Early repayment is not a specific consumer privilege, but instead is a legal right available to every borrower. • There is no clear distinction between early repayments based on an event of hardship and those based on financial motives. Instead, German law requires that the borrower have good cause, which is broadly defined and includes at least some financial motives. Under no circumstances, however, will the debtors desire to obtain more favorable refinancing be deemed good cause. • What is rather unique about the German law is that, although early repayment charges fully compensate the lender’s expectation interest, the law still requires good cause for an early exit. It would seem that the borrower’s liability for damages alone would provide an effective disincentive against early repayments. Nevertheless, a duty to provide full compensation cannot entirely prevent systemic effects on a funding technique conditioned on matching maturities, a principle which is strictly observed in Pfandbrief-funded loans. (Flessner, Axel et.al.) France The French doctrine and case law largely qualify early repayments as a legal right to rescind the loan contract (faculté conventionelle de rupture d’un contrat) on the part of the consumer; however, in the event of repayment driven by changes in the market environment, the consumer shall pay a price for this option, i.e. he is liable to pay an indemnity (indemnité) (Barret-Barnay, Marie Claude et.al.) Spain The recent Spanish legislation exclusively regulates early repayment for the purposes of simultaneous refinancing with another bank or with the existing lender. Early repayment due to hardship – where the borrower will regularly not request any refinancing – is, however, governed by negotiated contract only. Hence, early repayment on financial grounds is afforded privileged treatment. (European Commission) Denmark The Danish model also demonstrates that funding loans with non-callable mortgage bonds does not necessarily rule out an early repayment of loans, provided the borrower is enabled to return his or her loan at the current market value of the financial instrument. Having said that, Danish law goes only halfway toward reaching an effective market solution to the problem. Since as a rule a borrower is given the alternative of repaying 100% of the loan in cash and he or she usually takes advantage of this opportunity for purposes of refinancing specifically when interest rates are falling, borrowers in Denmark are living in what one might call the best of both worlds. What is most extraordinary is that even commercial borrowers are granted this benefit. This one-sided allocation of interest rate risk is possible only inasmuch as the underlying mortgage bonds are generally issued as callable bonds. To be sure, this relieves the lender (acting as intermediary between borrowers and mortgage bond holders) from having to bear the risk of falling interest rates (i.e., to bear the so-called reinvestment loss), which is known to produce heavy friction in the system. Equally difficult to ignore, however, is the fact that the large-scale passing through of the interest rate risk to the mortgage bond investors comes at a cost and is likely to increase the overall costs of funding long-term loans. (Gjede, T.Länderbericht et.al.) United Kingdom To date, both the funding side and the borrowing side of the UK mortgage market are marked by a striking absence of any long-term features. Case law on early repayment is predicated exclusively on the law of property, the development of which appears, rather than guided by deliberate policy decisions, to be conditioned by historical coincidence. The implementation of early repayment regimes in the standard terms tends to be opaque and is being increasingly criticized by the supervisory authorities. The calls for fundamental reforms of the system are becoming louder. A good example of changing times is the following evident from the following judgment. A clause giving the mortgagee a collateral advantage would be void as a clog if it were unfair and unconscionable. Both the Court of Appeal and House of Lords also later considered this ground in Knightsbridge Estates Trust Ltd v Byrne.2 In that case; a company mortgaged a number of properties in London to secure an advance from a Friendly Society. Clause 1 of the mortgage provided for repayment by eighty half-yearly installments. The mortgage further provided that if the mortgagor paid the installments on the due dates and otherwise complied with the mortgage terms, the mortgagee would not require repayment at a date earlier than the scheduled forty year redemption date. Six years after entering the mortgage, the mortgagor wanted to redeem, and claimed that Clause 1, which postponed their equitable right to redeem for forty years, was void as a clog on the equitable right to redeem. The Court of Appeal upheld the validity of Clause 1 (the decision being affirmed on appeal by the House of Lords). The Court accepted that equity would grant relief against contractual terms that were oppressive or unconscionable, but held that the mortgage could not be so regarded in that case. In assessing whether relief should be granted, all circumstances of the case should be considered, including the degree of mutuality. Although the contractual right to redeem had been postponed for forty years, the mortgagee also covenanted not to require payment of the sum for that time. It was also relevant that it was an arms length commercial transaction upon which each party had received legal advice. (Fisher & Lightwoodet.al.) Yet again, although not exactly relevant to the above study, is the latest addition to laws in the UK, which points to the growing awareness by the law for protection required for equity. Consumer Credit Act 2006 is the most significant change since Consumer Credit Act 1976 is the right beginning towards formulating the policy for continuation of the doctrine. Conclusion In the modern era, with liberal views, expanding financial outlooks, global concept of the world, multiplicity of cultures and total media convergence, one thing stands out as a remarkable rallying point. It is the age-old concept, cemented with great perseverance by the Church - Equity. This, together with the right of individual as paramount and freedom from shackles of all kinds, leads to the objective that the individual borrower still needs protection from the risks presented by an avaricious lender. Some countries like Germany are already way ahead in this respect and concern for the borrower, while others like UK, being more traditional, are working their way towards it. Other countries of the world too are feeling the heat of this changing environment and in the increasing inclination to uphold this doctrine. The doctrines lives, survives and, despite some opposition from dictatorial nations, is well on the way to universal acceptance that after all Justice consists in doing no injury to men2, intentionally or otherwise. References General Dr. Joahannes Kondgen, Bonn. Early repayment of Long-Term Fixed-Rate Mortgages in Europe. European Commission, GREEN PAPER Mortgage Credit in the EU, COM (2005) 327 final (19.07.2005) Germany Flessner, Axel Die Bemessung des Schadensersatzes im europäischen Vertragsrecht, in: R. Schulze/G. Ajani (eds.), Gemeinsame Prinzipien des Europäischen Privatrechts, 2003 Jansen, Niels Konturen eines europäischen Schadensrechts, Juristenzeitung 2005, 160-173 Köndgen, Johannes Darlehen, Kredit und finanzierte Geschäfte nach neuem Schuldrecht – Fortschritt oder Rückschritt? WM 2001, 1637-1648 Mankowsi, Peter Das außerordentliche Kündigungsrecht in § 490 Absatz 2 BGB des Regierungsentwurfs zur Schuldrechtsreform – eine gelungene Konstruktion? ZBB 2001, 335 Rösler/Wimmer/Lang Vorzeitige Beendigung von Darlehensverträgen Begründung und Berechnung von Vorfälligkeitsentschädigung und Nichtabnahmeentschädigung aus juristischer und finanzmathematischer Sicht, 2002 Säcker/Rebmann (eds.) Münchener Kommentar zum Bürgerlichen Gesetzbuch, 4. Aufl., Bd. 3, 2004., bearbeitet von Klaus-Peter Berger (zitiert als BERGER) Schuster, Gunnar/Sester, Peter Zum Entwurf eines Pfandbriefgesetzes, ZBB 2004, 481 France Barret-Barnay, Marie Claude L’appréciation de la régularité de la clause d’indemnité en cas de remboursement par anticipation, après renégotiation du contrat de prêt immobilier, Le Dalloz chroniques 2002, 2178 Gourio, Alain L’indemnité de remboursement anticipé des prêts au logement: une demi-réforme, Revue de droit bancaire et de la bourse 1999, 160 Le Son, Marc L’indemnité de remboursement anticipé d’un prêt immobilier de consommation, Revue de droit bancaire et de la bourse 1991, 213 Malaurie, Philippe Baisse des taux d’intérêt, prêts à long-terme et renégotiation, Recueil Dalloz Chr. 1998, 317 United Kingdom Fisher & Lightwoods Law of Mortgage, 11th ed. by E.L.G. Tyler, London 2002 McGregor, Harvey On Damages, 17th ed. 2003 Miles, David The UK Mortgage Market: Taking a Longer-Term View. Final Report and Recommendations, March 2004 Skinner, Frank Mortgage Redemption Fees: Modelling Redemption Fees and Incentives on UK Home Mortgages and Modelling Variable and Fixed-rate Lending. Research paper 18, prepared for the Office of Fair Trading, November 1999 6 Denmark Gjede, T.Länderbericht Dänemark, in: Hypothekenverband bei der EG (eds.), Die Hypothekenbanken und der Pfandbrief in Europa, 2d ed. 1996, V. 2 Realkreditradet (ed.) Mortgage Financing in Denmark, 1996 (cited as: REALKREDITRADET I) Realkreditradet (ed.), Danish Mortgage Bonds, 1996 cited as: R EALKREDITRADET II) Unibank Securities Danish mortgage bonds after 1 January 1996, Mortgage Research, Trading recommendation, 4 December 1995 Footnotes 1 Usuary is the fundamental idea that gave birth to clogging. The very basis of a clog is to safeguard the undue profit of the lender and to keep the borrower from getting any justice. The Bible had attacked this principle by going directly to the root cause of the evil that later blossomed into, among others, the clog. 2 Opposite of Usuary is the principle of Justice. The underlying concept behind this is to safeguard the weaker of two parties from being oppressed by the stronger. The resulting justice prevents harm or injury to the oppressed.“ Justice consists in doing no injury to men; decency in giving them no offense." -Marcus Tullius Cicero De Officiis Read More