M~ending-Interest-Debt secured by a mortgage-Power of .cO".rt to reduce
/tnterest-EfJect of security for debt on proper rate of interest-Allocation ,of,
'payments first to interest and then to capital

"Court: R. H. Dun C.J., Fleming and Williamson 11·

In 1916 respondent borrowed from the appellant £E300, the rate 01
interest being 12% per annum. The loan was secured by a mortgage of
the respondent's house.

Two sums totaling :£E.260 were paid at different dates in MUS in
respect of the principal sum and the interest thereon. In an action by
the appellant to recover principal debt and interest the respondent pleaded
the exorbitance of the interest, an9 contended that the amounts paid
should be used to reduce the principal and must not be appropriated at
all to the payment of interest. Judge Peacock held that the rate of
interest must be reduced to 8% and that an account must be taken. Against

                this decision the appellant appealed.                   

Held:

( i) That in such a case, unless otherwise' agreed, any sum
paid must first be appropriated to the interest due and then the surplus, if
any, may be deducted from the capital.

( ii) That if the sum paid does not extinguish all interest due, then
the balance of interest falling due cannot be added to the capital for that
would in effect permit compound interest.

(iii) That save where strong grounds are established, the court will
not interfere to cut down .: a 12% rate of .Werest voluntarily agreed upon
by the parties.

Legal Circwar 39, 1917.

Appeal

Advocates: Mr. Christodoulides .... for appellant.

M. Rusdi, agent of the respondent.

February 6, 1921. Dun, C.J.: This is an action to recover a
principal debt and interest secured by a mortgage of a house in
Khartoum.

The mortgage was made . by the respondent in favour of the
appellant on April 13, 1916, to secure the repayment of LE.300
with interest at 12ro per: annum on the ~piration of one year. The
mortgage is in common form and there is no need to refer further
to its provisions.

No sums of money were paid in respect of either principal 01'

      interest except as ,follows:                         

                       On June 14, 1918                 LE. 60

                        On July 23, 1918'               LE.200                      

The appellant instituted his action and -the above mentioned fads
were admitted, but the respondent contended that the interest was
excessive and that the above mentioned sums should be deducJe4

from capital and not appr~priate' at all to payment of -interest. His
Honour Judge Peacock gave judgment reducing' the rate of interest
to 8 % and ordering an action to be taken unless the parties could
agree on the amount due.

An account was made in the office on the basis of the respondent's
contention and the action came before judge Osborne in the vacation,
who signed a decree on the basis of the action so made.

             .      The appellant has appealed first on the ground that the learned

judge should not have reduced the rate of interest from LE.12% to
8 % per annum. Secondly, on the ground that the two sums paid
as above mentioned should have been appropriated first in satisfaction

. of the amounts due for interest on the respective dates of payment and
only the balances remaining after satisfaction of the interest should
have been appropriated to reduction of capital.

                    I deal with the second point first:                                        

In the absence of agreement to the contrary it seems to me that
a payment on account of an interest bearing debt must be allocated
first in or towards satisfaction of the amount of interest outstanding .
at the' date of payment and that only the surplus, if any, should go
in reduction of the principal, and further that the debtor cannot com-
pel the creditor to accept a payment in reduction of principal without
first or at the same time paying the amount due for interest then out-
standing. .

There is authority for this proposition in the French Civil Code,
section 1254. as well as in the case law and practice of England.
Therefore the sum of LE.60 paid on June 13, 1918, 'must be appro-
priated first of all to the interest and any balance may be used for
the reduction of capital.

If however the interest then outstanding exceeded the LE.60
this excess cannot be- added to the principal sum and made to. bear
interest for that would be to allow compound interest, but it must
be kept separate.

The sum of LE.200 paid on July 23, 1919, was ample to extin-
guish all interest down to that date and to discharge a considerable
part also of the principal debt.

The action will be worked out in my office under my supervision
and the parties will have an opportunity of seeing the .action before
the decree is drawn up.

As regards the first point I do not agree with the argument that,

because 120/0 is mentioned as a maximum allowable rate in two legal
circulars, no rate can be exorbitant which does not exceed 127Q
unless there is fraud or oppression. It seems to me that a rate which
would be exorbitant in the case of a wealthy man who could give
good security in goods or land for a loan might be regarded as very
moderate in the case of a man who' was notoriously insolvent and
could offer no security. Therefore I think the judge has a discretion
even in the absence of fraud or oppression to reduce a rate of 1270
or less to what he regards as a fair and equitable rate if sufficient
cause is shown. 'In this case there is sufficient security and it seems
to me that if 1270 is the absolute maximum in any case, it must be
exorbitant if the security is sufficient.

At the same time having regard to the rates which bankers ask
for loans on the security of goods, 8 % seems to me to be low, and
I should have been inclined to say 1070 was right, but as my
colleagues are both strongly of the view that the judge ought not to
have reduced the rate of interest below 12% I agree with them that
it should be restored to that rate. The borrower was not under
any disability and was capable of ascertaining whether he could ebtain
money from another quarter at a cheaper rate and there is': no sug-

        gestion of fraud or oppression. 

The appeal is therefore allowed with costs and the amount of
the judgment will carry interest at 470 per annum from the date of
the judgment in the High Court till payment.

Fleming J.: Courts are always reluctant to interfere with freedom
of contract, and where a certain rate of interest has been agreed
upon voluntarily, and with sufficient knowledge on the part of the
borrower of the engagement into which he is entering, it should only
I think be cut down on clearly defined, adequately proved, and
exceptionally strong grounds. Reference has been made to Legal
Circular 39¹, as to which I may say parenthetically that it was issued
in 1917 when economic conditions were somewhat different. All
that that Circular can in my opinion be taken indicating is (1) that
the court is entitled to assume that where the, rate is over 12% some
such grounds as those mentioned for cutting it down must exist, and
(2) that where the rate is not over 12% some 'such grounds may
be proved. I' agree with the Chief Justice that the fact that a debt