Law Report: Pawnbroker liable for interest: Mathew v T M Sutton Ltd, Chancery Division (Mr Justice Chadwick), 17 June 1994

In the absence of contractual terms regulating the position, a pawnbroker is liable in equity to pay interest on surplus monies remaining after the discharge of debts out of the proceeds of sale of pawned articles.

Mr Justice Chadwick declared that the defendant was liable to pay to the plaintiff interest on surplus monies from the proceeds of sale of pawned articles and directed an inquiry as to what rate of interest ought to be paid.

The plaintiff, using loan facilities provided by the defendant who carried on the business of pawn broker, delivered silver articles and jewellery in pawn as security for loans. He did not redeem the articles by the redemption date and in May and June 1989 the defendant sold the articles in accordance with the terms of the loan agreements which were regulated by the Consumer Credit Act 1974. The surplus, after deducting the amounts payable by the plaintiff, was not paid to the plaintiff until May 1993 because of a third party claim to the ownership of the articles pawned. The plaintiff brought proceedings claiming interest on the surplus moneys.

Thomas Mathew in person; the defendant did not appear and was not represented.

MR JUSTICE CHADWICK said that the obligation on the pawnee to pay to the pawnor the surplus monies remaining in his hands after the discharge of the debt out of the sale of the pawned articles was not in doubt.

However, there was no basis on which it could be held that interest was payable at common law. There was no express agreement; there was no course of dealing from which an agreement could be implied; it had not been suggested that interest was payable by custom or usage of the trade.

There was also no basis for a claim to interest under the Consumer Credit Act 1974 either at section 121 or at all. There could be no entitlement to statutory interest under section 35A of the Supreme Court Act 1981 because the principal amounts of the surplus had been paid before the plaintiff issued his writ.

The principles on which interest might be awarded in equity were considered in Wallersteiner v Moir (No 2) (1975) QB 373, p388 where Lord Denning MR said 'Equity awards (interest) whenever money is misused by an executor or trustee or anyone else in a fiduciary position - who has misapplied the money and made use of it himself for his own benefit.

It was necessary to consider whether a pawnbroker was in a fiduciary position in relation to the pawnor in respect of surplus monies after the discharge of the debt out of the proceeds of sale of the pawned articles.

There was a fiduciary relationship: the pawnee held the surplus on trust for the pawnor. That followed from the nature of a pawn or pledge of personal property.

A pawn or pledge involved a transfer of the possession of personal property from the pawnor to the pawnee by way of security; the ownership in the property remained in the pawnor subject only to the 'special interest' to which the pawnee was entitled for the purpose of protecting and realising his security.

When the pawned articles were sold by the pawnee the property in those articles passed to the purchaser. The proceeds of sale were paid to the pawnee. But there was no reason why the beneficial interest of the pawnor in the pawned articles should be extinguished to any greater extent than was necessary to give effect to the pawnee's right to realise his security. There was no reason why the beneficial interest of the pawnee should not be transferred from the articles which had been sold to the proceeds of sale and so remain attached to the surplus in the hands of the pawnee after he had discharged the debt out of the proceeds of sale.

Therefore the fiduciary relationship necessary to found jurisdiction to award interest in equity did exist between pawnee and pawnor in relation to the surplus, if any, arising on the sale of pawned articles.

The question then arose whether interest should be awarded at a rate linked to some independent commerical rate - the bank rate or the rate on the short term investment account - or whether an inquiry should be ordered for the purpose of ascertaining what use was made by the defendant of the money and what return was earned by the defendant.

It would have been open to the defendant to place the surplus proceeds of sale on an interest bearing account and if that had been done the defendant would be accountable for the interest earned on that account. If that was not done and the defendant used the surplus in its business which included lending at rates equal to or in excess of three per cent, there was no reason why the plaintiff should accept a lesser return.

This was an appropriate case to direct an inquiry as to what use was made by the defendant of the monies, what return, if any, was obtained by the defendant by its use of the monies and what rate of interest ought to be paid.