Judges open way for bank's loan victims

The court of appeal last month criticised the Bank of Scotland mortgage conditions in the strongest terms. Lord Justice Laws said of its Stabilised Mortgage Plan: "The bank's documentation is disgracefully sloppy. It is scandalous that a major lending institution should foist this jigsaw puzzle of a contract on the borrowing public." The court's eventual ruling could reduce many borrowers' payments under these mortgages.

Lamir Ladjadj of Acton took out a loan in 1990, but soon fell behind with his payments. In the 1990s the bank made several possession claims which were staved off by 11th-hour payments.

The idea behind the mortgage plan was that a fixed monthly amount was paid. If interest rates went up, the amount of the loan would increase; conversely, if rates went down it would decrease.

It seemed relatively simple, but the bank's documents created such confusion that it was unclear whether the arrears by 1999 were £81,000 or £40,000. The bank had decided it was entitled to compound interest although the terms did not seem to give it that right. While in the first instance the judge found for the bank, the appeal court held that the ambiguities arising from the bank's documentation needed further consideration.

Lord Justice Walker was equally unimpressed with the bank: "It is deplorable that the couple's right to their home should depend on the interpretation of four documents, which do not use a clear and consistent terminology," he said.

It wasn't just the bank's drafting that offended the court. Ladjadj said the bank had refused to negotiate with him. The court said such a refusal would be "lamentable".

The judges could not calculate how much was actually owing, but the bank's right to possession was suspended. The parties were told to use the court's alternative dispute resolution service. The bank was ordered to pay the legal costs of the appeal - with the implicit threat that there would be more such orders unless it negotiated reasonably. Ladjadj has to pay monthly instalments until matters are resolved.

The bank's spokeswoman said that this "product" was withdrawn in 1994. The bank's standard documentation has since been revised, but no one had identified these terms as being a particular problem until this decision.

Anyone holding one of these mortgages should ask the bank to show how it justifies its charges. If anything is unclear, the bank will probably give way. It is unlikely to risk running more judicial ire by going to court.

Those who have been charged compound interest will have the strongest claim for a refund. During periods of high interest rates in the early 90s the bank may have substantially overcharged many customers, even if few arguments will concern as much as Mr Ladjadj's £41,000 discrepancy.

• Richard Colbey is a barrister.