“If thou wilt lend this money… lend it rather to thine enemy, who, if he break, thou mayst with better face exact the penalty”
Antonio, Merchant of Venice, Act 1 Scene 3
Antonio is the title character in Shakespeare’s Merchant of Venice. As an influential and wealthy nobleman, he proffers practical advice: if one is to lend at all be it to an enemy because – if you need to enforce repayment – the prospect may be less unpleasant, than if the borrower were your friend.
If the loan agreement is silent, in what circumstances might it be proper to infer that interest is payable?
A reported case on this topic is Al Jaber v.Al Ibrahim and Another (CA, 18/07/2018). This was a Court of Appeal case.
The First Claimant, Sheikh Mohamed Bin Issa al Jaber: C1
The Second Claimant, MBI & Partners UK Limited: C2
Sheikh Walid bin Ibrahim Al Ibrahim and Sheikh Majid bin
Ibrahim Al Ibrahim, the Defendants: D1/D2
A loan of US$30 million made by D1/D2 to C1/C2.: the Loan
An Arabic language 24-hour satellite news broadcasting service
which D1/D2 intended to create: Al-Arabiya
- The brief facts:
It was not in dispute that C1 (Chairman, CEO and beneficial owner of C2) under an oral agreement had made the Loan to D1/D2. Its purpose was to fund the creation of Al-Arabiya. However, nothing was said or agreed as to whether the Loan would carry interest. The Loan was made in or about 2001
- Legal proceedings:
In September 2015 C1 and C2 sued D1 and D2 for the repayment of the loan with interest. They served D1 within England. D2 however, lived in Saudi Arabia.
- The questions for the Court of first instance
An intermediate application was made to the Court. D1 and D2 applied to set aside service of the legal proceedings.
The questions for the Court were these:
- What, between England and Saudi Arabia, was the correct forum to decide this dispute? [Q1] and
- Whether D2 could be served outside of the English jurisdiction [Q2].
- The Judge’s Order
The Court decided as follows:-
In relation to [Q1] C1 and C2 needed to show a good arguable case and that there were serious questions to be tried. In other words, the Claimants needed to satisfy the Court that they had a good case for an oral agreement in relation to the Loan and interest and that this agreement had been made within the English jurisdiction. In this regard, the Claimants succeeded. The Court decided that England was the more appropriate forum for trial.
In relation to [Q2] the Court also found that D2 was a necessary and proper party to the claim. Accordingly, it directed that he could be served outside the jurisdiction. However, the Court restricted service outside to the principal loan and excluded any right to serve abroad in relation to any claims for interest.
D2 consequently appealed the Court’s Order on [Q2] . He argued that service upon him are proceedings in Saudi Arabia would be improper..
In turn C1 and C2 argued that they should be able to sue D2 outside of the jurisdiction in relation to both the loan and interest.
- The Test
In order to persuade the Court that it was proper to sue D2 for interest outside the jurisdiction, C1 and C2 had to show a good arguable case first of all.
An analysis of earlier reported cases (that is, precedent) and legal textbooks supported the proposition that (absent of an express agreement) an implied term for the payment of interest on a loan might only arise by custom or a course of dealing.
- Calton v Bragg (1812) 15 East 223:
The case of Calton (heard on Monday 10 February 1812) decided that interest was not allowable by law upon money lent unless it was an express term of the contract or could be implied from trade usage or special circumstances.
Calton in turn affirmed an earlier authority dating back to 1812.
The decision in Calton related to a question of law.
- The Court of Appeal agreed to examine whether, in view of various changes, there might be a case to contend for an implied term on interest as a question of fact.
- The Judge in the Court below had decided that – as a matter of law – there was no basis to imply a term for interest.
Because the Claimants had failed to overcome that hurdle, they were unable to establish a jurisdictional gateway (ie. to serve D2 outside of England).
The Court below had said that there was a distinction between principal (ie. the Loan) and interest. This approach was termed bifurcation.
It followed that the claims for interest – which needed to be served on D2 in Saudi Arabia – should only be confined to the Loan and interest should be excluded.
- An Implied Term
The Court of Appeal examined Calton.
The leading judgment in that case – in the Court of King’s Bench – was given by Chief Justice Lord Ellenborough who stated thus:
“It is not only from decided cases, where the point has been raised in argument, but also from the long continued practice of the Courts, without objection made, that we collect rules of law.
Lord Mansfield sat here for upwards of 30 years, Lord Kenyon for above 13 years and I have now sat here for more than 9 years; and during this long course of time, no case has occurred where, upon a mere simple contract of lending, without an agreement for payment of the principal at a certain time, or for interest to run immediately, or under special circumstances from whence a contract for interest was to be inferred, has interest ever been given..”
Mr Justice Grose added the following:-
“During all my experience I have never known interest given upon money lent, or upon money due for goods sold, or in any other case but upon a contract interest expressed or implied. It is the lender’s own fault if he do not contract for interest when he advances the money; but the law has long been settled as I have stated. Why should interest be paid at all without a contract for it?”
It was clear that as the law stood in 1812 interest on a loan could not be recovered unless there were an express provision – or the obligation could be inferred from trade usage, custom or special circumstances.
- Marks & Spencer Plc v BNP Paribas Security Services Co (Jersey) Limited  AC 742.
However, the Court of Appeal went on to consider whether matters might have changed as a result of developments in the law which had led to the implication of contractual terms as a matter of fact.
Regard was had to the leading case of Marks and Spencer. The upshot of this case is this:- for a term to be implied (as to payment of interest) it must either be necessary to give business efficacy the contract – or it must be obvious in the sense that it “goes without saying”.
- C1’s evidence
C1 gave frank and credible evidence. He said that he expected some benefit from the transaction. The Court of Appeal found that C1 would have been as content to have been given a share of the equity in Al-Arabiya as he would have been by the payment of interest.
The fact that there was alternative explanation militated strongly against an implied term for the payment of interest.
On the facts an implied term for the payment of interest was not needed to give business effect in the agreement. The absence of an express agreement on interest did not render the loan lacking in either commercial or practical consequence.
The Court of Appeal decided that C1 and C2 had no realistic prospect of succeeding upon their claims to interest at trial.
By way of corollary the Superior Court decided that the lower Court had been wrong to separate the interest claim from the principal. If – as the Lower Court had found – there was a good arguable case that the primary claim fell within at least one of the jurisdictional gateways then the accessory claim for interest did so too.
However, on the facts, there was no realistic prospect of the Claimants succeeding on interest at trial.
In many respects and as a matter of law the age old case of Calton remains good law today.
If there is to be a merit in a claim for interest as a matter of fact, (outside of an express agreement or reliant upon custom and usage) then the claim must fall squarely within those criteria laid down in Marks and Spencer.