The question as to whether a borrower remains liable for the accrual of interest on a loan, where the act of repayment has been directly impeded by a court-ordered injunction freezing the borrower’s assets, turns upon the legal principle that a party cannot be held in default for non-performance which is caused by an operation of law. In the circumstances presented, where the borrower possessed the necessary funds but was legally prohibited from accessing them for repayment for a period of three years, the borrower would likely not be held liable for interest accrued during this specific period. The core of this position rests on the distinction between a failure to pay and a default in payment.
The general position in contract law is that supervening illegality may frustrate a contract. A statement of high authority is that of Lord Macmillan in Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265, who considered that "it is plain that a contract to do what it has become illegal to do cannot be legally enforceable" (p. 272). He further stated that where the law prevents observance of a contract, no default can arise. While the injunction in the present case does not render the entire loan agreement illegal, it makes the specific act of repayment legally impossible for its duration. The borrower’s obligation to pay is not extinguished, but its observance is suspended by a legal barrier. Consequently, it can be argued that the borrower is not in default for the period of this legal impediment.
This line of reasoning finds direct support in authority concerning the payment of debts. The foundational case is Searle v Choat (1884) 25 Ch D 723, where a fund in court was subject to a 'stop order', which operated in a similar manner to a freezing injunction by preventing payment out. The Court of Appeal held that as the individual liable to pay was prevented from doing so by an order of the court, they could not be considered in default. Cotton LJ stated that "while the order of the Court is in force, which prevents a man from paying a sum of money, he is not in default by reason of his not paying it" (p. 727). It follows from this that if there is no default, the consequential liability to pay interest for that default does not arise. This principle is not concerned with the financial hardship on the borrower, but rather the legal impossibility of performance. The fact that the funds were available but frozen is the exact situation to which the rule in Searle v Choat applies.
The principle was more recently affirmed by the House of Lords in President of India v Lips Maritime Corporation (The Lips) [1988] AC 395. This case concerned a dispute where a party was prevented from making a payment by an injunction. Lord Brandon of Oakbrook, citing Searle v Choat with approval, held it to be a general principle that "where a debtor is prevented from paying a debt by a court order… he is not liable to pay interest on it for the period during which he is so prevented" (p. 425). This provides a definitive modern authority for the proposition that a legal restraint on payment suspends the obligation to pay interest, because interest is ordinarily damages for the wrongful detention of money, and there is no wrongful detention where it is legally prohibited.
Therefore, in applying these principles to the facts, the borrower was prevented from making repayment by a legal mechanism, the injunction. Although the contractual obligation to repay the principal loan and any interest accrued up to the date of the injunction remains, the accrual of further interest during the three-year period of the injunction would cease. The borrower was not wrongfully withholding payment; they were complying with an order of the court. Accordingly, the borrower would not be liable for interest for the period during which the injunction existed.
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References
Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 (HL)
President of India v Lips Maritime Corporation (The Lips) [1988] AC 395 (HL)
Searle v Choat (1884) 25 Ch D 723 (CA)
