Bank of New South Wales v Brown

Bank of New South Wales v Brown - [1983] HCA 1 - HCA 1976 case summary — Zoe

[13]

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. The case was one between a bank and a person who had given a guarantee to secure the overdraft of a customer, and the dictum of Vaughan Williams L.J. cannot be regarded as intended to suggest that the interest becomes part of the principal for all purposes and against all persons. Yourell v. Hibernian Bank [8] was an action by a bank for an account of money due upon the security of a mortgage, which contained a proviso that no greater principal sum than £5,700 should be recoverable on the security. In keeping the mortgagor's current account the bank capitalized interest every half year. Subsequently the bank appointed a receiver of the mortgaged premises and paid to the credit of the current account all sums received from the receiver out of rents and profits and also the proceeds of sale of part of the mortgage security sold in exercise of the powers under the mortgage, with the result that more than £5,000 was appropriated to principal. It was contended on behalf of the bank, inter alia, than s. 24 of the Conveyancing and Law of Property Act 1881 U.K. required the surplus on the receiver's account to be paid in reduction of interest and that the application of any part of the surplus as against principal was illegal. It was held by the House of Lords that s. 24 imposed on the receiver a duty which was owed only to the parties interested, and not to the Crown or to the general public [9] and that the bank could not object to the appropriation which it had itself made. It was held that the principal sum secured by the mortgage was represented by the debit balance of the current account (which included accrued interest) [10] and that for that reason every credit to the account reduced the principal sum secured. The decision, depending as it does on the words of the mortgage and the conduct of the parties, is of very limited importance, and it certainly affords no support to the proposition that a banker and customer who treat interest as principal may affect third persons by their actions. 1. [1898] 2 Q.B. 460. 2. [1898] 2 Q.B., at p. 467. 3. [1918] A.C. 372. 4. [1918] A.C., at p. 387. 5. [1918] A.C., at pp. 381, 384, 393.

[16]

when these sums of interest come to be paid at the end of the time when payment is made, although interest has been charged upon them, and although, as a matter of bookkeeping, they have from time to time been added to capital, they do not cease to be interest of money - that is to say, they are overdue interest upon which interest has been paid. Some of their Lordships in Inland Revenue Commissioners v. Oswald [15] repeated for themselves the same view. Lord Macmillan said [16] : The unpaid interest never ceases to retain its character as interest, although it has from time to time been added to the capital indebtedness and has carried interest in turn. Lord Porter said [17] : Capitalization means no more than that interest, which continues to be interest, shall be treated together with the capital sum due as itself interest-bearing but does not alter its quality as interest. The remarks made by their Lordships as to the effect of capitalization were not mere dicta. They were essential to the reasoning which led them to conclude that the act of capitalization did not amount to a payment of interest, and that the actual payment, when made, was a payment of interest. The fact that their Lordships were concerned with a mortgage, and not with the case of banker and customer, does not in my opinion provide any ground of distinction, as indeed they themselves recognized by applying, as they did, Paton v. Inland Revenue Commissioners [18] , which was a case of banker and customer. Although, as between the parties, the right to treat interest as capital may be affected by the terms of the mortgage, there can be no reason to distinguish the result of a capitalization effected by a banker from that effected by a mortgagee. The decision in Inland Revenue Commissioners v. Oswald [19] is a clear and strong persuasive authority against the appellant's contentions. 1. [1945] A.C., at pp. 370, 372, 373, 378-379, 381. 2. [1922] 1 Ch. 126, at p. 133. 3. [1945] A.C. 360. 4. [1945] A.C., at p. 373. 5. [1945] A.C., at p. 379. 6. [1938] A.C. 341. 7. [1945] A.C. 360.

[24]

at the rate or respective rates agreed upon in writing if any and in the absence of any such agreement then without prior or other notice to the Mortgagor or to the Debtor at such rate or rates as the Bank from time to time determines: except as otherwise provided by the terms of any agreement in writing relating to the whole or part of such moneys such interest shall accrue from day to day and shall be computed from the day or respective days of such moneys being paid or disbursed or becoming owing and at the end of every half year ending on the last days of March and September in each year or on such other days as the Bank may from time to time determine in respect of the whole or any part of such moneys the interest accrued due to such day in respect of such half year (if not paid) shall commence and thereafter so long as the whole or any part thereof shall remain unpaid shall continue to carry interest at the rate aforesaid and such accrued but unpaid interest may at the option of the Bank be debited against the Debtor or in the case of interest upon moneys lent paid or advanced to for or on account of the Mortgagor or to for or on account of any other person as aforesaid at the request of the Mortgagor or for the payment of which the Mortgagor is liable to the Bank as hereinbefore stated then against the Mortgagor provided always that such unpaid interest upon which interest shall have become so payable shall not be deemed thereby or by reason of any such debiting as aforesaid or by the inclusion of interest with principal in any balance carried forward or account stated or otherwise than as hereinafter provided to have become capitalised or added to principal but the Bank by express entry to that effect in its books and without the necessity of giving notice to the Debtor or the Mortgagor may at any time and from time to time and as from such date as the Bank shall determine capitalise and add to the principal all or any such unpaid interest upon which interest shall have become so payable and whether such unpaid interest shall have been debited as aforesaid or not and such debitings of interest and additions to principal may be continued and made and the provisions herein contained as to the moneys on which interest is payable shall continue to be applicable so long as any of such moneys remain unpaid It is common ground that since the day on which the account became secured by the mortgage it was maintained consistently with and in accordance with its terms. It is not the fact that "the Bank by express entry to that effect in its books" had exercised its power to "capitalise and add to the principal all or any such unpaid interest".

[63]

The expression "account stated", as Mr. Jowitt pointed out in his able argument, has more than one meaning. It sometimes means a claim to payment made by one party and admitted by the other to be correct. An account stated in this sense is no more than an admission of a debt out of court; and while it is no doubt cogent evidence against the admitting party, and throws upon him the burden of proving that the debt is not due, it may, like any other admission, be shown to have been made in error. This is the plain result of the authorities, such as Perry v. Attwood [56] and Laycock v. Pickles [57] . Where the transaction is of this character, it makes no difference whether the account is said to be stated or to be "stated and agreed"; the so-called agreement is without consideration and amounts to no more than an admission. There is a second kind of account stated where the account contains items both of credit and debit, and the figures on both sides are adjusted between the parties and a balance struck. This is called by Mr. Justice Blackburn, in Laycock v. Pickles [58] , a "real account stated", and he describes it as follows: - "There is a real account stated, called in old law an insimul computassent, that is to say, when several items of claim are brought into account on either side, and, being set against one another, a balance is struck, and the consideration for the payment of the balance is the discharge of the items on each side. It is then the same as if each item was paid and a discharge given for each, and in consideration of that discharge the balance was agreed to be due." Mr. R. M. Jackson, in "The History of Quasi-Contract in English Law" (Cambridge (1936)) at p. 110 describes the former kind of account stated as admissions, the latter as contracts. "The latter," he observes, "should be discussed within the body of contract law, perhaps the most convenient place being in proximity to Accord and Satisfaction." 1. (1938) 38 S.R. (N.S.W.) 397, at p. 401. 2. (1921) 38 T.L.R. 134, at p. 143. 3. (1856) 6 El. & Bl. 691 [119 E.R. 1021]. 4. (1863) 4 B. & S. 497 [122 E.R. 546]. 5. (1863) 4 B. & S. 497, at p. 506 [122 E.R. 546, at p. 549].

[88]

the balance which on any account or accounts present or future between the mortgagor and the bank either alone or jointly with any other person or persons shall for the time being be owing by the mortgagor to the bank on foot of overdrafts, bills of exchange, promissory notes, loans, credits, advances, interest, commission, discount, premiums on policies of assurance, costs, customary charges or otherwise . There was a further covenant to pay the interest each half year upon the sum or sums remaining unpaid. In conformity with these covenants, the parties adopted a course of dealing, described by Lord Atkinson [80] in this way: 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. On these facts it was held that the entire balance including capitalized interest was the principal sum secured by the mortgage to a limit of £5700. Lord Finlay L.C. said [81] : The mortgage was to secure the balance of the account between the mortgagor and the bank, and the amount must be ascertained on the footing of the account as in fact kept. He agreed with Cherry C.J. (who had dissented in the Court of Appeal in Ireland) that the principal sum due upon the mortgage was the amount of the overdraft from time to time. [1] . The proposition was concisely stated by Lord Wrenbury [2] : The interest upon the overdraft was capitalized half-yearly. The mortgage was to secure (inter alia) the debit balance of that account. It follows that, as against the bank, the capitalized interest must be regarded as principal for the purpose of the proviso in the mortgage which limits the principal sum to be recovered to £5700. Thus it was held that capitalized interest became principal in the sense that it became part of the sum secured by the mortgage being a sum which itself bore interest under the mortgage. But the sum secured by the mortgage was itself defined to comprehend interest as well as overdrafts, bills of exchange and the other advances specified in the definition clause. To hold, then, that the capitalized interest was to be regarded as principal for the purposes of the proviso limiting the principal sum was not inconsistent with its retaining its character as interest. 1. [1918] A.C. 372. 2. [1918] A.C., at p. 385. 3. [1918] A.C., at p. 380 4. [1918] A.C., at p. 381. 5. [1918] A.C., at p. 400.

At a glance

Court

Decision date

Before

Source

Judgment (138 paragraphs)

Parties

Cited By (5)