If parties are reluctant to agree all the terms and wish to ensure flexibility they may enter into a side letter which anticipates that a more detailed contractual document will eventually be entered into.  This does not, by itself, prevent it taking effect as a contract, but it runs the risk of it being held as a mere agreement to agree and too uncertain to be enforceable. If crucial terms are not included a court may decide that it is unworkable and void for uncertainty. 

Background

The background to this case was that the claimant, Mr Barbudev had built up a successful Bulgarian cable television and internet business. He intended to sell this business, but wished to purchase a 10% stake in a newly merged business, which was an important issue for him.  A side letter had been signed, the purpose of which was to protect Mr Barbudev’s right to invest in the combined business. Ultimately, however, the deal did not proceed and Mr Barbudev issued proceedings claiming the loss he had sustained as a result of the failure to honour the terms of the side letter.

As a starting point, the Court of Appeal had to consider the objective conduct of the parties as a whole.  As the Court explained, the onus of demonstrating that there was a lack of intention to create legal relations lies on the party asserting it and it is a heavy one. The Court of Appeal considering the terms of the side letter pointed out that it was necessary to ascertain what a reasonable person (i.e. one with all the background knowledge reasonably available to the parties in the situation that they were in) would have understood the parties to have meant.   The court must have regard to all the relevant circumstances and, in a business context it should prefer the construction that is more consistent with business common sense.  It is for the parties to decide at what stage they wish to be contractually bound.  They can agree to be bound contractually, even if there are further terms to be agreed between them.  The question is whether the agreement is unworkable or fails for uncertainty.

Since the court at first instance had held that the agreement was to be found in writing rather than based on any oral assurance and this was a decision of primary fact, the Court of Appeal was very reluctant to overturn that finding. In any event it was clear from the terms of the side letter that the parties intended to created legal relations.  This was based on the fact that it was drafted by solicitors and contained terms consistent with this intention. 

However, this did not necessarily assist Mr Barbudev as it did not follow that it created a legally enforceable contract as the court had to examine the nature of the legal relations that were actually created.  Although it was Mr Barbudev intention to have a binding agreement to safeguard his right to purchase a 10% stake, the side letter was no more than an agreement to agree.  It was an agreement to offer Mr Barbudev an opportunity to invest, but it was not a binding commitment and as an agreement to agree it was an unenforceable agreement.  Furthermore, the essential terms which the parties contemplated such as the investment and shareholder agreement were not dealt with and so even if the agreement was more than an agreement to agree it was not sufficiently certain to be an enforceable agreement.

Comment

This is an interesting example which demonstrates that although parties may intend to create legal relations it does not necessarily follow that a legally enforceable agreement is created: 

• First of all the court will examine the position from an objective perspective.  An intention to create legal relations can be demonstrated by the fact that it was drafted by solicitors and by looking at the language of the document and the terms of the letter.  In the side letter there were a number of general legal provisions such as the agreement relating to third party rights, an English law provision and the fact that it was intended to be confidential whatever the status of the other parts of the letter. These factors meant that there was an intention to create legal relations.
• However, a mere agreement to agree is not sufficient to form a binding agreement.  A party’s intention is not sufficient to form such a binding agreement where the terms of the actual agreement are to still to be negotiated.  Following the House of Lord’s case of Walford v Miles [1992] 2 AC 128 an agreement to agree does not constitute an enforceable agreement
• An agreement which does not contain the essential certain terms will also not be enforceable. The details of the critical matters were not included such as when and how Mr Barbudev could be bought out or get out of his investment.  There remained a number of crucial matters that needed to be agreed before a sufficiently certain contract could be made.

Where a party wishes to create a legally enforceable agreement then it is important that as many of the critical terms are agreed as possible in order to avoid the risk that it is void for uncertainty.  If terms are still to be negotiated despite an intention to create legal relations, the courts may be reluctant to enforce the side letter if it amounts merely to an agreement to agree only or if its terms are uncertain. Even where terms are not complete, it may be possible to resolve any difficulty if it is possible to apply a standard of reasonableness or the matters to be negotiated are of a minor nature.  However, if not, the courts cannot enforce an agreement with uncertain terms since it would be unworkable and it is not the job for the court to draft contracts.

Barbudev v Eurocom Cable Management Bulgaria Eood & Ors [2012] EWCA Civ 548

In this case, the Court of Appeal was prepared to interfere with the Judge’s decision on the question whether the defendant had behaved reasonably in deciding whether to refuse mediation. When faced with a request for mediation, the decision will remain an important one to exercise with care, but there may be good reasons that a party can rely on to justifiably refuse such a request as indicated in this Court of Appeal decision.

Background

The case itself centred on a claim for professional negligence, which had not succeeded at first instance nor on appeal. 

However, there remained the cross-appeal concerning the defendant’s unwillingness to mediate. The defendant declined to participate in mediation taking the stance that the claim was entirely without merit.  The defendant had offered to “walk away” shortly prior to the proceedings and had only responded to a Part 36 offer made shortly before the first trial by offering only to negotiate over its own costs if the proceedings were withdrawn. The Judge at first instance had considered the case of Halsey v Milton Keynes General NHS Trust [2004] in which the Court of Appeal identified the factors that could be relevant including:

• The nature of the dispute;
• The merits of the case;
• The extent to which other settlement methods had been attempted;
• Whether the costs of alternative dispute resolution would have been unreasonably high;
• Whether delay would have been prejudicial;
• Whether the alternate dispute resolution would have had a reasonable prospect of success.

The Judge had decided that there was a real possibility that had there been mediation, both parties would have gained a “better understanding of the weaknesses in their own case”.  The Judge also considered that the potential reputational damage to the defendant was a relevant factor. The Court of Appeal considered that the fundamental question was whether it had been shown by the unsuccessful party (the claimant) that the successful party (the defendant) had acted unreasonably in refusing to agree to a mediation.  In the Court of Appeal’s view that could not be shown and the Judge was wrong to bring into account, adversely to the defendant, the defendant’s attitude to mediation in deciding what costs overall should be awarded.  It was difficult to see quite what weaknesses would have been revealed by the mediation nor the relevance of reputational concerns.  Nothing changed in this case (unlike many cases) to necessitate a re-evaluation on the question of liability.  A reasonable refusal to mediate does not become unreasonable simply by being steadfastly maintained. It is important to make clear that parties are not to be compelled to mediate otherwise there is a risk that the threat of a costs sanction can be used to extract a settlement even where the claim is without merit.  Given the Judge’s decision on the core of issue of breach of duty the defendant’s assessment of the strengths and weaknesses had resonance. Accordingly his discretion was flawed and therefore the court decided to substitute a figure of 60% payable by the claimant to the defendant.

Comment

This case demonstrates that although it is unusual for an appeal court to interfere with a Judge’s discretion there may be circumstances which justify such an approach.  This case will bring some comfort to litigants who feel that they are being pressured into a mediation in order to avoid an adverse costs order.  When deciding whether to mediate, however, care must be exercised taking into account all the circumstances of the case, a party should take careful note of the approach as set out in the previous case of Halsey when making its decision and it may be necessary for this decision to be re-evaluated if new issues should come to light.

Swain Mason & Ors v Mills & Reeve [2012] EWCA Civ 498

The background

The claim alleged against Mr Jaffery was that, as an employee of the claimant, the Governor and Company of the Bank of Ireland (“the Bank”) Mr Jaffery had made secret profits and put himself in a position of conflict of interest and failed to disclose his wrongdoing and also accepted bribes.  The allegation centred on Mr Jaffery’s relationship with the second defendant, Mr Gill who was involved with the Berkeley group of companies to which the Bank had lent millions of pounds.

Mr Jaffery and Mr Gill had made a request for an adjournment initially in January this year, but Mr Justice Mann had refused this application on the basis that they were the authors of their own misfortune although he did move the trial back for a month.  Subsequently, the second defendant made a request for a further adjournment on the basis of his wife’s pregnancy and Mr Justice Mann put the trial back to March although refusing the substantive application on the basis that the Bank had agreed to pay for professional care of Mr Gill’s young children. 

Mr Jaffery now wished to adjourn the trial scheduled in March on the basis that he was in hospital. In order to decide whether to adjourn, the court made an order stating that it was not appropriate for the court to order Mr Jaffery to submit to a medical examination, but it could direct that the application be adjourned for the court to direct that unless Mr Jaffery submitted to an examination in hospital or elsewhere by one or two of the independent doctors instructed by the Bank then his application for an adjournment was likely to be rejected.  The court was concerned to ascertain whether Mr Jaffery was truly ill or simply delaying matters.

The decision

As Judge Vos explained, the question of whether to agree to an adjournment is one for the discretion of the court and requires the need for proper evidence upon which that discretion can be exercised and in particular proper medical evidence. He relied on two recent authorities.  In the case of Mark Levy (Trustee in Bankruptcy of Ellis-Carr) v Ellis-Carr, the Judge had noted that those parties that fail to attend in the hope of securing an adjournment are deeply mistaken.   It is necessary to have regard to the overriding objective.  The evidence should:

• Identify the party’s medical attendant and give details of his familiarity with the patient’s medical condition; and
• Give an opinion concerning the participation in the trial process, provide a reasoned prognosis and give the court some confidence that it is an independent opinion. 

The court can then decide how much weight to give to that opinion and what (short of an adjournment) arrangements might be made to accommodate a party’s difficulties arrangement.

In the second case of Forrester Ketley v Brent, the Court of Appeal noted that an adjournment is not simply there for the asking.  The litigant in person in that case was suffering from stress related to the litigation.  The stress was genuine, he was physically fit to attend the hearing, but emotionally vulnerable to stress.  In the case where the applicant complains of stress related illness an adjournment, it is unlikely to serve any useful purpose because the stress will simply recur on an adjourned basis.

In this case, the Judge noted that Mr Jaffery has been communicating with the court and with the Bank over a lengthy period of time in the most coherent of fashion.  He was plainly capable of expressing this point of view, taking decisions and advancing his case.  The Judge therefore concluded that there was no medical reason apart from stress preventing him from participating in the trial and it was unlikely to abate by adjourning the trial.

For the purposes of the application the Judge assumed that Mr Jaffery had a properly arguable defence.  He also considered the balance of justice and the overriding objective.  It was clear that massive costs had already been expended, the witnesses were ready, counsel’s availability was assured only for the 12 day estimated length of the trial and the trial had already been adjourned on two occasions.

It may be that Mr Jaffery was an inpatient but he could have been examined by a psychiatrist that afternoon and be out of hospital that night.  He was not incarcerated. Bearing in mind the trial was listed for 12 days, Mr Jaffery could come to court to present his defence and even to give his evidence.  These procedures would enable Mr Jaffery to participate in the trial even bearing in mind his medical condition and the stress caused by the litigation.  As such the application for the adjournment was refused.

Comment

This case confirms that where a party alleges that he has a medical condition the court will consider the application based on the overriding objective and the medical evidence.  A decision not to turn up in the hope that it will secure an adjournment is not enough and any party that does this will take the risk that the trial will proceed in their absence.  A court may require an independent medical expert (not merely an expert appointed by the party), who can attest to the party’s specific medical condition and enlighten the court about the reason why the party is prevented from attending trial. All too often a party may hope to delay matters and try to do this by claiming an adjournment on medical grounds.  This case along with the two authorities referred now should assist the court in deciding whether to accede to a request, how to accommodate the parties and filter out those genuine cases of need from those incalcitrant parties determined to delay matters without reason.

The Governor and Company of the Bank of Ireland v Jaffery & Gill [2012] EWHC 734

http://www.judiciary.gov.uk/media/media-releases/2012/news-release-mediation-pilot-court-of-appeal

The solicitors admitted negligence, but the question the court had to consider was how much could AIB recover.  When the property was sold following a possession order, £300,000 was paid to Barclays in respect of the amount outstanding to them and the balance of £867,700 approximately was paid to AIB.  However, the advance had been for £3.3 million and so AIB faced a significant loss.  Was AIB’s claim limited to £300,000 (the amount paid to Barclays) or were the solicitors liable for all of AIB’s loss?

As the court noted the common sense view was that the loss AIB claimed was the result of the fact that either the property was never worth the amount it lent against or because of the fall in the market. AIB’s counsel considered, however, that because of the application of equitable principles, the bank would be able to recover all of its loss.

The court analysed the relationship between the solicitor and the bank in relation to the remortgage. The terms on which a solicitor is authorised to pay out monies held in his client account are to be determined by construction of his contract of retainer.  However, equally a payment out of monies in breach of those terms of the retainer that govern the authority to pay would amount to a breach of trust.  The court’s task, therefore, was to construe the terms of the retainer in order to ascertain what authority they confer on a solicitor to pay out of money that he holds on trust for his client.

In this case the written terms of the retainer did not deal explicitly with the precise circumstances in which the solicitor could pay out the money, so that it was necessary to fill in any gaps arising on the ordinary basis of construction.  Analysing the transaction, the Judge considered that the solicitors’ instructions authorised them to pay to Barclays sufficient sums to procure a release of its charge and to pay the balance to the borrower or to their order.  Had they complied with the instructions they would have paid £1.5 million to Barclays and £1.8 million to the borrower.  In the event they paid £1.2 m to Barclays and £2.1 million to the borrowers.  In so doing they committed a breach of trust, but it did not follow that the whole of the payment was made in breach of trust.  The extent of the breach was the amount they should have retained and not the whole payment.

As a result the bank was entitled to reconstitution of the trust fund by repayment of the amount wrongly paid away.  In addition, the bank was entitled to equitable compensation for the additional amounts accruing due to Barclays which had increased the amount secured in priority to the AIB’S interest, but it was ordered to give credit for the amounts paid by the borrowers to the Barclays account since these had had the effect of reducing the loss caused by the defendant’s breach of trust.

This case confirms that where there has been a breach of trust a claimant will only be entitled to claim for the amount relating to the extent of that breach rather than the whole of its loss.

AIB Group (UK) Plc v Mark Redler & Co (a firm) [2012] EWHC 35 (Ch)

The main issue was whether the Vendors could claim that they had a right of occupation which was an overriding interest within paragraph 2 of Schedule 3 to the Land Registration Act 2002 (“the Act”) binding on the lenders by virtue of s29(2)(a)(ii)? The following issues were considered:

• First of all the Court of Appeal considered the transaction generally.  The correct approach was that there were two transactions, one for the sale of the freehold and one for the leaseback to the Vendors upon completion.  No reference was made in any of the contracts for sale to the grant of a leaseback to the Vendors.  The clear impression created by the contracts was that the Vendors would be selling without reserving any beneficial interest or other rights in the property.  There was nothing to alert the lenders to the possibility that the Vendors expected to remain in possession after completion or that the Purchasers would obtain anything less than the entire legal and beneficial interest in the properties.
• Reference was made to the House of Lords case of Abbey National Building Society v Cann.  Mrs Cann had contributed to the purchase price of a property from money she received on the sale of her previous property.  She was given an assurance by her son that she would always have a roof over her head.  She claimed that she had an equitable interest in the property by virtue of her actual occupation. The House of Lords held that to acquire an overriding interest against a lender by virtue of occupation, the person claiming the interest had to have been in actual occupation at the time of the creation of the legal charge. Where a purchaser relied on a bank or building society loan to complete his purchase, the transaction – that is the transfer of the property and the completion of the mortgage – were one indivisible transaction, and that there was no moment in time (scintilla temporis) during which the property vested free of the mortgage. The House of Lords had held that a purchaser who can only complete the transaction by borrowing money cannot in reality ever be said to have acquired even for a moment of time an interest in land whereby he could grant interests having priority over the mortgage.  Accordingly Mrs Cann took subject to the lender’s charge.
• The Vendors sought to distinguish Cann.  They asserted that Mrs Cann’s beneficial interest arose from the proceeds of sale of her previous house whereas the Vendors in the present case were already in occupation of the properties.  This transaction reflected a change in social and economic conditions created by the fact that people live longer and many have a need to release equity from their property to meet the debts and living expenses to enable them to continue to live in their homes.  The driver of this economic activity was the need or desire of people usually of modest means advancing age and limited legal knowledge and experience to stay in possession of their homes. Lenders could easily protect themselves by making direct enquiry of occupying vendors as to what right they thought they would have on or after completion in relation to the property.
• The Court of Appeal decided that it was not possible to distinguish Cann.  Mrs Cann gave up occupation of her former home in which she had a beneficial interest.  The driver of these transactions was the Vendors’ need or desire to sell the properties.  Without such a sale the charges on the Vendor’s properties would not be discharged.  There was no reason to suppose that the purchase price would not be funded in the usual way by secured loans.  Finally, it would not be appropriate to place on the lenders the risk of carelessness or fraud in the carrying out of the promises or representation made to the Vendors because the lenders could have and should have made direct enquiries to the Vendors.  If persons intend to retain any interest in their property after completion they should make that clear in the contractual and associated documents, the inspection of which will form the basis of the report on title.  There is, therefore, no point in a lender making direct enquires of a vendor as opposed to the other occupier.  It would be difficult to envisage that it would be appropriate or proper for the lender to by-pass the vendor’s solicitors and communicate directly with the vendor.
• The Vendors also argued that between the sale of registered land and the registration of the transfer, the purchaser was by, virtue of the Act, entitled to exercise the owner’s powers in relation to a registered estate including the power to make a lease. A lease of 7 years does not have to be registered.  It followed that the Vendor’s rights under a lease for 7 years or less had priority over the lender’s right under a subsequently registered charge even though the charge was executed before the grant of the lease.
• The Court of Appeal held that any leases of 7 years would have expired and therefore it was hard to see its relevance. In any event, prior to registration of the transfer, the grant of any lease takes effect in equity only and does not fall within the Act at all.  The Court of Appeal did not accept that a lease of 7 years or less granted by the purchaser pending his registration acquired priority even where the lease is granted and the charge is executed within the priority period conferred by the mortgagee’s official search. Prior to registration the purchaser’s interest in the property can only subsist in equity.  As a matter of basic land law, an equitable owner of land cannot grant a legal interest. 

Accordingly the appeals were dismissed and the lenders were entitled to the possession orders the right to obtain vacant possession of the properties.  The Vendors had not acquired any interest which the lenders were subject to and the lender’s charge took priority.  The problem had arisen because the contracts for sale had not given details of the contractual deal.  If this had been clearly stated and recorded then it would have alerted the lenders.  As the Court of Appeal noted, this omission seems, on the face of it, plainly inconsistent with proper conveyancing practice. The Vendors may now consider whether to make an appeal to the Supreme Court.

Denise Cook v Mortgage Business PLC and other related cases [2012] EWCA Civ 17

“…we are instructed to put forward the following offer, this offer is made pursuant to Part 36 of the CPR and remains open for acceptance for a period of 21 days, from your receipt of this offer letter, thereafter it can only be accepted if we agree the liability for costs or the Court gives permission..”

The court in this matter analysed some of the very many cases on Part 36.  In particular they drew attention to the Gibbon authority where the court held that:

• Part 36 is a self-contained code.  Parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer, in relation to which the court’s discretion is much more confined, they must follow its requirements.
• Although basic concepts of offer and acceptance clearly underpin Part 36, it did not follow that Part 36 should be understood as incorporating all the rules of law governing the formation of contracts, some of which are very technical.
• As such the rejection of an offer did not make it incapable of subsequent acceptance.  Part 36 allows a defendant or a claimant to decide whether to leave an offer open for acceptance or to withdraw it and make another offer later.

In the case of C v D, the court were concerned with a letter where the offer was open for 21 days from the date of that letter and the question was whether the offer lapsed after 21 days.  In that case the court decided that:

• If a claimant wishes to make a time limited offer, in the sense that the offer is to lapse of its own accord at the end of a stipulated period, then such an offer cannot be a Part 36 offer.
• An offer presented as a Part 36 offer and otherwise complying with its form will not readily be interpreted in a way which would prevent it from being a Part 36 offer.
• If an offeror wishes to bring his Part 36 offer to an end, so that it cannot be accepted then he must serve a formal notice of withdrawal.
• A time limited offer does not comply with Part 36 and so when interpreting such an offer, it should be approached on the basis that the party making the offer and the party receiving it, appreciated that fact.

In the Huntley case, which was a claim for personal injuries, the offer was defective because it did not state the added requirement for personal injuries that any damages would take the form of periodical payments.  The court held that it did not comply with Part 36, but awarded the same consequences under Part 44.3.4 (c) instead.

In Carillon the offer contained no time limits, but invited the offeree to respond within the next 7 days.  The failure to spell out a 21 day period was an important omission because the time limits within Part 36 provide a time-table and also point out to the offeree the cost consequences of not complying.

In Shah the offer was open for acceptance for 21 days after receipt of the letter.  Following C v D the Judge held that this did not prevent it from being a Part 36 offer, but since the letter offered predictive costs in line with the Road Traffic regime which were less generous than the costs which he would have been entitled under Part 36, the Judge held that it was not a Part 36 offer.

On the facts of this case, the court considered two questions concerning the offer letter:

• Whether it failed to comply with Part 36 (2) (b) because it did not on its face that it was intended to have the consequences of Part 36.
• Whether it was inconsistent with Part 36 because after 21 days it can only be accepted “if we agree the liability for costs or the court gives permission”.

Although the letter referred to Part 36 in two places including one in bold type, the court did not accept that it was a Part 36 offer because the provisions of Part 36. 2 state that if an offer is intended to have the costs consequences of Part 36 it must state on its face that it was intended to have the consequence of Part 36, which it did not do so. In addition, it was not clear that the claimant intended the letter to have the consequences of the new Part 36 as the offer was inconsistent with Part 36 and further the letter did not refer to all the consequences of Part 36.

Having decided that the offer letter was not compliant with Part 36.2 it was not strictly necessary to consider the second issue, but having heard arguments, the Judge decided that the offer did not remain open for acceptance after 21 days unless one of the conditions in specified were satisfied and therefore as a matter of construction the offer was not open for acceptance after 21 days and therefore was not a Part 36 offer.

It seems that the claimant intended to rely on Part 36, but because Part 36 was not followed strictly, the offer was held not to be compliant.  This is another case which demonstrates how careful you must be when preparing Part 36 offers and how by breaching a technicality despite  sometimes the very best of intentions a court may decide that the offer is not compliant. Part 36 featured as part of Lord Jackson’s review and led to a further CPR amendment to make it clear that in relation to any money claim or money element of a claim, when considering whether a judgment obtained is ‘more advantageous’ or ‘at least as advantageous’ this means better in money terms by any amount, however small. The other issue relating to Part 36 which is to be considered is where a defendant rejects a claimant’s offer, but fails to do better at trial, whether the claimant’s recovery should be enhanced by 10%. This could be the subject of further consultation. Clearly we have not reached the end of considering the impact of Part 36.

Norma Lee Thewlis v Groupama Insurance Company Limited [2012] EWCH 3 (TCC)

On 19 June 2007, Amex issued a Default Notice asserting a breach of the agreement requiring remedial action in accordance with section 87(1) of the Consumer Credit Act 1974 (“the Act”).  Mr Brandon did not make the minimum payment and so on 11 July 2007, Amex sent Mr Brandon a Notice of Cancellation.

Amex then issued proceedings and Amex applied for summary judgment.  For Amex to succeed, Mr Brandon must have no real prospect of successfully defending the claim or issue in accordance with CPR Part 24.2(a)(ii).

Before the District Judge, Mr Brandon argued that the default notice required payment within 14 calendar days from the date of this Default Notice, but no allowance was made for the fact that he would not receive this notice on the same day and so he was given less than 14 days before the agreement was cancelled.  Applying the usual Civil Procedure Rules on service the District Judge gave summary judgment for Amex regarding the default as de minimis (minimal) and something he was prepared to overlook. Subsequently, on appeal, the Judge held that as no enforcement action was taken within the 14 days, the argument was not relevant because Mr Brandon had not suffered “any prejudice at all by virtue of that technical breach…” At the appeal stage, Amex also sought to rely on the contractual agreement which entitled Amex to terminate as an alternative to the Default Notice.  The Judge considered that this argument had not “simply been sprung” on Mr Brandon as it had been flagged previously.

The Court of Appeal noted that Mr Brandon’s stance was devoid of merit, but it could not conclude that there was no real prospect of a successful defence.

• On the first issue of the validity of the Default Notice the court was of the view that Amex was not entitled to summary judgment.  Mr Brandon’s defence could not be dismissed “as being unreal”.
• As a matter of construction, the Court of Appeal could not accept that the 14 day period ran from service of the Default Notice as opposed to the date of the Default Notice. It could not be presumed that the Default Notice would have been served less than two days after being posted.
• As a matter of construction, the Default Notice had not or may not have allowed the minimum statutory period for Mr Brandon to remedy the breach and so the defect could not be overlooked as de minimis.
• As regards the arguments on contractual termination, the Court of Appeal considered whether it could rely on a clause in the agreement and proceed on the basis of non-default termination.  The court was in broad agreement that sections 76 and 98 did not apply to this agreement.  However, there had been no mention of this before the District Judge and the point was only mentioned in the skeleton argument before the Judge.  The Court of Appeal considered that this was too significant a change of case and therefore it would not be fair to permit summary judgment on the basis of contractual determination without proper arguments.

Accordingly, Amex was not entitled to summary judgment and this matter would proceed to trial.  As the Court of Appeal noted “regardless of the outcome of the appeal, Mr Brandon is a bad credit risk; for this conclusion, he has only himself to blame.”

Ian Karl Robert Brandon v American Express Services Europe Ltd [2011] EWCA Civ 1187

In this case, the borrower which was a limited company borrowed money from the Bank of Ireland (“the Bank”) on the security of mortgages over properties and of guarantees given by two directors.  The borrower then defaulted and the Bank took steps to recover possession of the properties.  The Bank’s legal costs came to £123,984, which the Bank paid.  Subsequently the mortgages were transferred to another party and soon afterwards the borrower repaid the sums owed including the legal costs and in that way the borrower had paid the sums demanded including the legal costs. 

The borrower applied for the assessment of the costs under s71 of the Solicitors Act 1974.  S 71 (1) entitles the borrower, although a third party, to obtain an assessment of a bill as if he were the client.  The Court of Appeal held that under s71 the court is only entitled to interfere with the hourly rate agreed between the solicitor and the client to the extent that it could have interfered with it at the behest of the client.  He can eliminate items that are not within the scope of the mortgage and items which are only allowable as between the client and the solicitor on a special arrangement basis under the terms of the Civil Procedure Rules, but generally this is quite limited.

The Court of Appeal, therefore, considered that in a mortgage case an account should be taken of what was due under the mortgage rather than bringing proceedings under s71.  Such proceedings would enable the court to determine the correct issue as between the correct parties and if, appropriate, to order repayment by the Bank to the borrower.  In those proceedings it would be possible to disallow part of an amount claimed on the basis that something was due, but not as much as is claimed – for example by substituting a lower hourly rate.

Instead of seeking an assessment under s71, therefore, in almost all cases a borrower or other party seeking to challenge the costs claimed should bring a claim for an account of the sums due under the mortgage.

In the light of this judgment, it may be anticipated that third party assessments will become rare where the real issue is as to the reasonableness of legal costs.  It seemed to the court that the appropriate procedure for a dispute of this kind is a subject worthy of the attention of the Civil Procedure Rules Committee.

Tim Martin Interiors Ltd v Akin Gump LLP [2011] EWCA Civ 1574

Mr McGuiness appealed that decision.  The Court of Appeal considered the different types of guarantees and the type of liability that arose as a result.  The differing types of guarantees are as follows:

• A “see to it” obligation i.e. an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor.  This gives rise to a liability in damages.  The obligation undertaken by the guarantor is not one to pay, but consists of a promise that the debt will be paid by the principal debtor.
• A conditional payment obligation i.e. a promise by the guarantor to pay the instalments of principal and interest which fall due if the principal and interest which fall due if the principal.  This creates a liability in debt.
• An indemnity.  This gives rise to a claim that is enforceable by way of action for unliquidated damages.
• A concurrent liability with the debtor for what is due under the contract of the loan.  This creates a liability in debt.

The Court of Appeal held that where the guarantee, on its proper construction, contained a promise by the guarantor to pay the principal sum due and interest in the event of the debtor failing to pay, no difficulty arises.  The claim is one in debt.  However, guarantees with a “see to” it liability are not the same as an obligation to pay a sum of money under the contract whether as a debt or agreed damages although the measure of the guarantor’s liability is the amount of the debt.

The court looked at clause 2.2 of the guarantee which stated that:

“You guarantee that all money and liabilities owing, or becoming owing to us in the future, by the Borrower (whether actual or contingent, whether incurred alone or jointly with another and whether as principal or surety) will be paid and satisfied when due.”

Mr McGuiness argued that this clause created a promise to “see to it” that the borrower would perform his own obligations under the mortgage. It was not a promise to pay the mortgage liabilities if the borrower failed to do so.  The court held that the language of this clause taken by itself was ambiguous, but looking at the other clauses in the guarantee it should be read as a direct promise to pay the mortgage liabilities as they fell due and created a liability in debt which it could petition in bankruptcy. 

This decision is useful as it sets out the different types of guarantees and when a creditor can pursue a guarantor for bankruptcy.  However, if a guarantee is merely a “see to it” obligation then the creditor would need first to obtain a judgment for the payment of a specific sum and then commence bankruptcy proceedings.

McGuinness v Norwich and Peterborough Building Society  [2011] EWCA 1286

The Guidance, which should be referred to by all businesses engaged in the recovery of consumer credit debts (e.g. debt collectors, banks and law firms), sets out the standards that the OFT expects all parties engaging in the recovery of such debts to adhere to.

The Guidance is divided into the following chapters:

1. Introduction. This sets out how the ‘fitness test’ under section 25 of the Consumer Credit Act 1974 applies to debt recovery activities;

2. Overarching principles of fair business practice. This sets out the FSA’s overarching principles of consumer protection and fair business practice that apply to all debt recovery activities. This chapter explains that businesses should treat debtors fairly, be transparent, exercise forbearance and consideration, and act proportionately. They should also establish and implement clear, effective and appropriate policies and procedures (especially for dealing with vulnerable debtors);

3. Unfair or improper business practices. This sets out the behaviours that the OFT considers to be unfair or improper business practices for the purposes of section 25(2A)(2) of the Consumer Credit Act 1974 (e.g. using Facebook or Twitter to contact debtors.) If these are engaged in, they may call into question a person’s fitness to retain, or be granted, a consumer credit licence;

4. Regulatory compliance and enforcement. This outlines the OFT’s approach to securing compliance and provides information on the regulatory options available to the OFT.

The OFT has said that it will shortly update its Irresponsible Lending Guidance to reflect this revised version of Debt Collection Guidance.

Unusually there was no statutory insolvency scheme applicable because the defendants although insolvent were not domiciled or incorporated within the English jurisdiction and so the English statutory insolvency regimes had no application.  Although a bankruptcy process was theoretically available in Saudi Arabia, (the relevant jurisdiction), it was at best an imperfect one which would not result in a pari passu distribution of assets.

The court concluded that where there was no statutory insolvency regime, the general rule was that the “first past the post” principle applies so that whoever obtained the charging order first would be entitled to enforce first.  However, it is only a general rule and there may be exceptions when it is appropriate in the exercise of the court’s discretion not to make a charging order final.  There may, therefore, be exceptional cases where even though no statutory insolvency regime applies, it is appropriate to conclude that a judgment creditor should not have the benefit of a final charging order on the basis that the Charging Orders Act 1979 and the terms of CPR 73.8 recognise the existence of a discretion as to whether to make an order final.

Although a charging order will prejudice other creditors if granted because it gives the creditor security against which to enforce his judgment which the other creditors would not have, it is only where that prejudice is “undue” that the court should consider not making a final charging order.

The prejudice to the other creditors was only undue if there was something about the judgment creditor’s conduct which would cause undue prejudice if the order was made final or if there was some other exceptional circumstance.

Although the judgment creditor had attended meetings with the other claimants there was nothing inequitable for them to have the charging order made final.  Overall the court did not consider the judgment creditor’s conduct could be said to be such as to make it inequitable to refuse to make the order final.

This was quite an unusual situation as mostly when dealing with an insolvent judgment debtor there will be a statutory regime applicable such that the judgment creditor is not entitled to have its interim order made final.  However, this decision is an interesting analysis of the court’s approach where there is no such insolvency regime.

British Arab Commercial Bank PLC and others v Ahmad Hamad Algosaibi and Brothers Company and others [2011] EWHC 2444

At first instance, the Judge decided that the employees should be identified by function although not by name as he thought that would maintain the anonymity of the individuals and at the same time ensuring all relevant information was available to the court.  However, it was now common ground that it would not maintain anonymity.  The claimant Mr Shah and his wife appealed against the Judge’s decision not to reveal the employees’ names and the bank cross appealed against the Judge’s decision to make standard disclosure of the names to be revealed in the first place.

The claimants claim was for damages of over $300 million against the defendant bank arising from the defendant’s delay in executing four transactions between September 2006 and February 2007. In January 2009, summary judgment was granted for the bank, but the claimants successfully appealed and the Court of Appeal held that it was for the bank to prove that it held the suspicion that it alleged.

As part of its disclosure exercise to prove that it held the suspicion, the bank had disclosed a series of memos, internal reports and similar documents, but with the exception of one employee, the identities of the writers and recipients of those documents, and the employees referred to in those texts had been redacted. 

The Court of Appeal concluded that was necessary to consider whether this information should be disclosed by reference to the disclosure obligations under the Civil Procedure Rules (CPR”). 

The Court of Appeal was not convinced that there was a good explanation as to why the claimants wanted to know the names of the employees.  The claimants had identified potentially two employees who could be motivated by ill-well.  One of the bank’s employees had unusually asked the claimant to borrow funds of £1.5 million for a week, but the Court of Appeal decided that there was no evidential basis for a positive assertion that either of the employees had been motivated by ill-well.  It was all speculation and surmise.

The Court of Appeal highlighted that prior to the introduction of the CPR, disclosure of this information may have been appropriate as leading to a train of inquiry that might adversely affect the bank’s case, but CPR 31.16 has more stringent requirements and the disclosure of that information did not meet the test of CPR 31.16, which requires a party to disclose documents which “adversely affect his own case” and “support another party’s case”.

Accordingly, the bank was not required to disclose the names and their appeal was successful and so it was not necessary to consider the other question of public interest immunity.  Despite the fact that the bank employee had acted in an unusual way and in the event the suspicions were not justified, analysis under CPR 31.16 did not require disclosure.

As I concluded when considering this decision at first instance, the Judge had been trying to balance the interests of justice to ensure that all relevant information was available to the court, but meanwhile protecting the bank employees.  Ultimately this compromise of identifying by function rather than name would not have achieved its desired effect because the identity of the employees would have been revealed.  As such this decision had to be revisited and a more sensible approach has prevailed, which will protect bank employees.

Shah v HSBC Private Bank (UK) Limited [2011] EWCA Civ 1154

China is an important growth market for the UK, with its worldwide food and drink imports having continued in a positive trend in July to just under £5bn, up from £4.4bn in June. With 2010 figures for UK food and drink exports to China up 28.5% on 2009 figures, manufacturers are increasingly looking at opportunities in this market.

In a joint initiative with the Food & Drink Exporters Association (FDEA) and UK Trade & Investment (UKTI), FDF’s support will ensure companies benefit from an enhanced and strongly branded UK presence at the show; a specially organised trade development visit for non-exhibiting companies to give them a taste of the market; and a meet the buyer initiative enabling companies to meet key customers from the retail and food service sectors.

Charlotte Lawson, Director of Member Services at FDF, said, “The UK manufactures many of the world’s best loved food and drink brands, and demand for our products abroad continues to grow. China, with its growing middle class, has turned from an export country to an import destination. As a growth market for the UK, China cannot be ignored.

“Working with FDEA and UKTI, FDF wants to help UK food and drink manufacturers take the Chinese market by storm by significantly enhancing the UK presence at the FHC exhibition in Shanghai. We aim to support Britain in her endeavour to double trade with China by 2015 to some 62 billion pounds, by supporting business building initiatives which enable UK food and drink manufacturers to gain access to this market.”

So, the message from the FDF seems clear – the Eastern markets are full of promise – maybe we have heard that said somewhere before? Let’s hope UK businesses can achieve something great in these troubled times.

Court of Appeal decision

On 24 October 2005, a possession order was made against Mr Zinda, which was not to be enforced as long as he paid £96.02 per month towards the unpaid instalments in addition to the current instalments under the mortgage. The order was made by virtue of the Administration of Justice Act 1970 section 36 which gives a court the power to stay or suspend possession orders if it appears to the court that the borrower is likely to be able to pay any sums due under the mortgage within a reasonable period.

On 20 March 2008, the bank agreed to consolidate Mr Zinda’s remaining arrears and add it to the outstanding balance of the loan.  Mr Zinda fell into arrears again and the bank applied for a warrant of possession.  Mr Zinda alleged that because of the arrangement with the bank, the effect of the consolidation was not only to clear the arrears, but to extinguish the possession order.  The bank conceded that the effect of the consolidation was to clear the arrears. The Court of Appeal therefore considered the effect and meaning of the possession order.

Mr Zinda’s challenge was to the order made in September 2010 in relation to a warrant for possession based on the possession order. The Court of Appeal noted that the possession order itself had never been challenged on appeal and therefore it remained a valid and effective order, properly made and binding on the parties.  The question the Court of Appeal considered was what was the meaning and effect of the words requiring Mr Zinda to pay “in addition” “the current instalments under the mortgage”?

The Court of Appeal pointed out that these words are used in contradistinction to the arrears.  This referred to the future instalments payable under the mortgage.  The effect of this limb of the order was to require Mr Zinda to pay his existing contractual obligations, namely to pay the instalments.  These extended to the end of the mortgage term.

Mr Zinda complained that this led to an unfair result since it would lead to an indefinite death sentence.  However, the Court of Appeal held that the effect of the possession order did not vary the terms of the contract .  His liability was the consequence of entering into the contract, his own default and of his support under the Administration of Justice Act which provides for terms when a possession order can be stayed or suspended. In any event he could still apply to vary or revoke any of the conditions, he could seek an order suspending any warrant for possession and if six years have elapsed since the possession order was suspended it could not be enforced without the permission of the court.

Comment

Accordingly, where a suspended possession order has been granted there is no need to incur the expense of issuing new proceedings following any subsequent default and the bank can rely on the original possession order. The order will remain valid and binding.  As the Court of Appeal explained if six years have passed, it will be necessary to obtain permission of the court and it is open to the defendant to apply to suspend the warrant on the basis of s36 (4) of the Administration of Justice Act 1970, which provides that the court may from time to time vary or revoke any condition imposed. 

There are already signs, however, that the courts themselves may be unhappy with the outcome of this case and the implication for borrowers that once they have paid off the arrears, the possession order still hangs over their heads.  A number of District Judges recently have specifically ordered that once the arrears have been cleared that the order is discharged.

Lenders themselves have concerns whether this decision sits comfortably with their TCF principles.  Many prefer to treat the order as discharged once the arrears have been cleared.  Starting fresh proceedings affords the borrowers a much longer period of time in which to hopefully address the arrears or find alternative means to resolve the position rather than issuing  a warrant based on the original possession order.  The counter argument, however, would be the additional cost to the borrower of commencing fresh proceedings which would not necessarily satisfy TCF principles.

The solution would appear to be an assessment on a case by case basis to include an analysis of the account history since the arrears were cleared and the amount of time that has elapsed since the original possession order and/or the arrears were paid in full.

Justin Zinda v Bank of Scotland Plc [2011] EWCA Civ 706

The first issue to be decided was whether the individuals’ evidence was relevant.  The court decided that the claimants were entitled to explore the detail of the case, namely that suspicion existed at each of the three tiers of reporting.  For such a case to be made out, the bank would have to identify at least three individuals who allegedly formed that suspicion.  This made the identity of the individuals relevant. 

The next issue to consider was whether bank employees who reported their suspicions were covered by public interest immunity.  The court concluded that as a general rule there is a need for anonymity for bank employees raising and reporting suspicions under the Proceeds of Crime Act otherwise the flow of information would be adversely affected if confidentiality was not the norm.

So, the court had to determine on the facts of this case whether carrying out a balancing exercise the individuals were entitled to anonymity.  The court took into account that it was not suggested that the claimants were involved in money laundering and nor was it suggested that the bank’s employees were at risk of reprisals or physical harm from the claimants.  Further, the reality of the matter was that given the relationship between the claimants and the bank it was likely that the claimants had a good idea of the identity of the individuals involved already.

The court therefore concluded that on the particular facts of this case, the balancing act entitled the claimants to a level of further disclosure, but because of the public interest in confidentiality, the court was most reluctant to order the complete disclosure of the names of the individuals.  Instead it was ordered that the bank should provide a schedule of each employee identifying the department where they worked.  In that way the identities of the employee would continue to be protected, but the claimant could then see whether any one or two individuals were repeatedly and closely involved in the writing or receipt of relevant report and then the claimants could make an application to seek the identity of those closely involved individuals.

In this case, the Judge was trying to balance the interests of justice to ensure that all relevant information was available to the court, but meanwhile protecting the bank employees.  When determining whether a party is entitled to know who has reported him and on what basis, each case will have to be scrutinised taking into account the individual circumstances, but bearing in mind the factors highlighted in this case. 

Shah v HSBC Private Bank (UK) Limited [2011] EWHC 1713

Perhaps unsurprisingly, this case was appealed.  The Court of Appeal has now delivered its Judgment. 

The first issue to be determined was whether the buy-to-let purchaser, Mr Scullion had relied on the valuation report.  The Court of Appeal decided that the Judge at the first hearing had asked the right question and therefore this issue could not be challenged.

The second more fundamental question was whether the valuers, Colleys owed the purchaser, Mr Scullion a duty of care.  Much reliance at first instance was placed on the case of Smith v Eric S Bush [1990] 1 A C 831 where the court concluded that as valuers know that 90 per cent of purchasers rely on a mortgage valuation and do not commission their own valuation since many purchasers cannot afford another second valuation the valuer owed the purchaser a duty of care.  

The Court of Appeal concluded that Colleys did not owe the purchaser a duty of care.  There was no inherent likelihood that a purchaser buying a buy-to-let flat would rely on a valuation.  The Court took into account the following factors:

• The valuation was to purchase a residential unit not as the purchaser’s residence, but for the purpose of an investment. People who buy to let are likely to be richer and more commercially astute than people who buy to occupy and can be regarded as more likely to obtain and more able to afford an independent valuation.   
• There was no evidence to support the proposition that anything like 90% of the people who bought to let in 2002 relied on valuations prepared by a valuer instructed by their mortgagees rather than obtaining their own valuation.
• A purchaser buying a property to let is at least just as interested in its rental value as in its capital value.   A valuer valuing a property for a prospective lender for a buy-to-let purchaser would expect the purchaser if he is prudent to obtain his own advice.  A rental value can be a tricky and sensitive issue. 
• A valuer instructed by the prospective lender would appreciate that the lender is primarily interested in its capital value because a mortgagee’s principal concern is that any loan is properly secured.

The Court of Appeal also considered how much Mr Scullion could claim in respect of the rental value.  Although this analysis did not assist Mr Scullion it will be of benefit to others who are entitled to claim against a valuer. 

• Since Colleys had suggested that it would take a month to find a tenant, the first month of rent would not be allowed. 
• Whilst the flat was not let because of the unrealistic rent, then damages for that period could be awarded less the first month.  Once a tenant had been found at a lower price, then the recoverable loss would be the amount estimated by the rental valuation less the amount actually paid by the tenant. 
• Once the tenant left the property, Mr Scullion then made a decision to keep the property empty so as to try and sell it so there was a powerful case for saying that no damages would be attributed as he would have received no rental income whatever the valuation.  However, he may well have been entitled to some damages and so could claim the difference between what a correct valuation would have been and what it was valued at. 

This is a decision that recognises the realities of the buy-to-let market as compared to a purchaser of residential properties to live in.  It will be interesting to see whether this case will have an impact on purchasers of high end properties who may also be able to afford their own valuations.  It  provides a helpful way in which the rental loss could be determined and the question will be whether lenders will now be able to claim loss of rental value when pursing valuers.  Perhaps we have not heard the last of this case and it may be that this case will go to the Supreme Court.  Of course, this will not be of any comfort to Mr Scullions who as the Court of Appeal recognised was taken advantage of and misled by the sellers.

 Emmett Thomas Scullion v Bank of Scotland PLC [2011] EWCA Civ 693

The first development is the recent Court of Appeal decision C v D [2011] EWCA Civ 646.  The issue here was whether an offer made in accordance with Part 36 can be a time limited offer.  Part 36 does not contain an express exclusion of a time limited offer.  However, a Part 36 offer to have costs consequences, has to be an offer which has not been withdrawn, but has remained on the table.  The Court of Appeal held that the Part 36 regime does not accommodate a time limited offer.  The essence of a Part 36 offer is that it lies on the table unless formally withdrawn.  Therefore the scheme seeks to encourage offers which are not time limited.  Accordingly there is a necessary inconsistency between an offer being time limited and a Part 36 offer. 

It was common ground in this case that the offer was intended to be made as a Part 36 offer, but the offer itself stated that it was “open for 21 days”.  The precise meaning of “open for 21 days” was disputed.  The Claimant submitted that it meant that the offer lapsed after 21 days and it was not open for acceptance.  The Defendant submitted that the 21 days was an expression of the relevant period referred to in Part 36, but after 21 days could be withdrawn.

After considering various principles of construction, the Court of Appeal concluded that the words “open for 21 days” meant that the offer would not be withdrawn within those 21 days.  Such a construction meant that the offer would be a Part 36 offer and would leave the offeror entirely free to withdraw the offer immediately after the 21 day period. Ultimately the court noted that it was important for the security of the Part 36 scheme that it should be clearly understood that if a claimant wishes to make a time limited offer, in the sense that the offer should lapse after the end of a stipulated period, then this should not be made under the Part 36 regime. 

The second development is that the Civil Rules Committee will be amending the CPR to deal with the much criticised case of Carver v BAA [2008] EWCA Civ 412.  In that case, the Court of Appeal considered that whether other factors could be taken into account, such as the cost of litigation and stress where a judgment was greater than the defendant’s offer by £51.  In that case the Court of Appeal concluded that the defendant’s offer had not been beaten.  Many believed that this decision caused great uncertainty and made it difficult for parties to assess the risk of not accepting a Part 36 offer. It is likely that the rules will be amended later this year to implement a reversal of this case so that where a money offer is beaten at trial, by however small a margin, the costs sanction under Part 36 will apply.

Part 36 is an innovative regime with its own consequences and rules, which has led to the numerous decisions on its impact.  However,  these two developments will lead to greater certainty and therefore are to be welcomed.

This case is an interesting example of the type of claims a borrower with PPI can attempt to raise and the court’s approach to these claims. Borrowers are notorious for making numerous claims in relation to PPI, some of which may have substance, but the majority of which are, as the court here pointed out, “unnecessary embellishments”.  

This was an application by the claimants Mr and Mrs Barnes to re-amend their Particulars of Claim.  The claim related to PPI policies sold in relation to three different loans made by the defendant Black Horse Limited (“Black Horse”) to Mr and Mrs Barnes.  The first loan was made on 31 July 2002 for £2,000 with the PPI premium of £563.  This first loan was rolled up and discharged by the second loan made on 27 October 2003 for a further £4,500 and PPI of £2,021.48.  This in turn was then rolled up and discharged by a further written agreement dated 8 June 2004 for a further PPI policy of £2,694.48. Monies were still owing in respect of the third loan. 

Mr and Mrs Barnes wished to amend their Particulars of Claim to claim:

• Breach of Fiduciary Duty;
• Duty of Care;
• Breach of Contract;
• Unenforceability; and
• Unfair Relationship. 

Breach of Fiduciary Duty

As the court noted, it is exceptional for a creditor to have any fiduciary duty to the borrower at all.  The mere giving of advice does not itself import a fiduciary relationship and only exceptionally will the line be crossed from that of mere honesty care and skill and the like to a fiduciary obligation such that the adviser is held to be acting in the other party’s interests in terms of advice, information and so on. 

In order to establish a fiduciary duty, Mr and Mrs Barnes relied on the voluntary private customer code produced by the General Insurance Standards Council (the GISC) as evidence of the fiduciary relationship.  The GISC was abolished in 2004 and was replaced by ICOB, a FSA regulated scheme. 

Judge Waksman explained that the notion that you could infer a fiduciary relationship between the lender and the customer taking out a loan with PPI simply because the lender (or the insurers for whom it acted as agent in offering the policy) was a member of the GISC was absurd.

Mr and Mrs Barnes also relied on the OFT non-status lending guidelines for lenders and brokers.  These were guidelines which were specifically said to be operable where there is secured lending to non-status customers.  Mr and Mrs Barnes were not non-status nor was it secured lending.  Although the guidelines contained guidance in relation to all aspects of their business activity, none of this was sufficient to support a fiduciary obligation. 

Mr and Mrs Barnes also placed considerable reliance on the judicial review proceedings British Bankers Association v FSA, but again that did not assist a breach of fiduciary relationship.  The Judge found as a matter of law that there was no fiduciary relationship and explained that, in any event, he would have found it surprising for there to be a fiduciary relationship as it would have meant that every time a lender sold a single product PPI policy to accompany a loan agreement then without more (assuming the insurer was a member of GISC) fiduciary obligations would arise. 

Duty of care

The whole thrust of the Barnes case was that on the first occasion Black Horse sold the PPI insurance they said that in effect that the purchase of the PPI was mandatory and that this was then implicit on the second and third occasions. However, the court found there was no factual basis for pleading a duty of care.  It was not suggested that Black Horse had assumed a responsibility here to give particular advice on the facts of the case nor was it suggested that Black Horse was either asked to or was expected to or purported to give advice of any kind and therefore there was no arguable case presently pleaded in negligence.

Breach of contract

Mr and Mrs Barnes also claimed that the code produced by the GISC was incorporated into the loan agreement.  They alleged that by reason S75 of the Consumer Credit Act 1974 (“the Act”),  the creditor would be jointly and severally liable for any breach of contract.  However, there was no incorporation of the code and therefore any claim for breach of contract based upon it fell away.

Unenforceability

Mr and Mrs Barnes alleged that when the first PPI was taken out they were told that it was “needed”. If that statement was made, it is arguable that taking the PPI policy was a condition of taking the principal loan and if so, the premiums should have comprised part of the total charge for credit.  As this was not done in the first agreement then it would be improperly executed.

As there were issues of fact and inferences this would be matters for a trial to consider. Full particulars of the factual allegation in relation to what exactly was said on the occasion of the first agreement and what was said and/or understood in relation to the second and third agreements about the necessity or otherwise of the PPI policy must be given and also as to how precisely the claim that there has been a failure to state the credit should be provided. Accordingly this claim could be made.

Unfair relationship

Under Section 140A of the Act the court can make an order in relation to the credit agreement if there is an unfair relationship between the creditor and borrower. Black Horse contended that the court had no jurisdiction to entertain a claim for unfair relationship because the relevant statutory provisions exclude the ability to make such a claim where one or both of the borrowers had the opportunity to make that claim in the context of prior proceedings.  The court found that Mr Barnes was not able to mount his own unfair relationship claim because this could have been raised by him in previous proceedings between Black Horse and Mr Barnes, but Mrs Barnes could raise this argument since she was not a party to those prior proceedings.

Black Horse also attempted to argue that the court was excluded from considering the two earlier agreements as they ceased to operate before 6 April 2007 when the relevant statutory provisions came into force.  The Judge disagreed with Black Horse and said that the court was entitled to take into account two earlier completed, but related agreements and therefore the Particulars of Claim could be amended to refer to the first and second agreements.

The court also looked at the factual matters raised to support the claim of unfair relationship. Their complaint was that:

a.  They were sold benefits when they already had such benefit;

b.  The policies were very expensive;

c.  Black Horse did not advise them to shop around for PPI policies;

d.  They were told the policies were compulsory when they were not;

e.  Black Horse did not establish that the policies were in their interests; and

f.  Black Horse failed to follow the terms of certain documents.

The court pointed out that the unfair relationship jurisdiction is very wide and although there may be matters which were not sufficient to found a fiduciary relationship, they may be sufficient for an unfair relationship.  Accordingly the court was not prepared to rule out the claim in respect of point a. above.  The Barnes claimed that the policies were very expensive.  However, they never produced an appendix which they had indicated they would do and so no permission was granted at this stage to include this factual matter although permission may be granted in the future.

The Judge was prepared to allow the amendment in relation to the claim under point d.. As to points c. and f. the Judge stated that that these were not particularly strong allegations, but he allowed these claim to be made because the unfair relationship jurisdiction is quite wide. He also allowed the claim to be made in relation to the documents.

 Conclusion

Despite Mr and Mrs Barnes’ attempts to raise numerous claims, the court concluded that the only viable claim was for an unfair relationship alongside the narrow unenforceability claim.  All the rest were “unnecessary embellishments”.  Even in respect of the claims that has been allowed to go forward, the court pointed out that this should not give the Barnes any particular encouragement in terms of their prospects of success.

Comment

This is a useful decision as it demonstrates that the “kitchen sink” approach of alleging numerous claims in an attempt to attack PPI cannot be sustained.  Where, however, an allegation is made that the borrowers were told that PPI was compulsory, the court will need to look at all the evidence and the circumstances of the case in order to evaluate this allegation.  It is clear that the scope of unfair relationship claims under section 140A of the Act can be wide although as the Judge hinted in this decision, this will not necessarily mean that the borrowers will ultimately succeed.

Shelley Barnes and Darren Barnes v Black Horse Limited [2011] EWHC 1416

The Court accepted that it may be the position to dispense with cross undertakings in relation to respondents but not innocent third parties.  The Court therefore ordered that when a law enforcement body is seeking through the civil Courts to enforce the law by way of a freezing injunction, which may have adverse financial implications for third parties who are innocent then as a matter of course, the usual third party undertaking as to damages should be given.

This should be dealt with at the hearing for the injunction and should not be for a third party to have to come along to court later and seek the protection. 

The Court would not enforce that third party undertaking, however, if the third party was not entirely innocent. If there were special reasons as to why the cross-undertaking in damages should not be enforced, then those can be considered when the third party seeks to enforce the undertaking.  The better approach is to require the undertaking in the first instance and then to consider whether there is or is not reason to enforce it in an appropriate case. 

Accordingly the Court ordered the usual cross-undertaking in damages in the standard form in favour of third parties and this extended to the Bank.

This is positive news for banks facing freezing injunctions made by law enforcement regulators or public enforcement authorities.

Financial Services Authority and Sinaloa Gold Plc and two others [2011] EWHC 144

In addition, an agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party. However, section 28 (3) provides that if the court is satisfied that it is just and equitable in the circumstances of the case it may allow the agreement to be enforced.  Section 28 (5) states that the issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement.

On the facts of this case, it was held that the making of the loan and charge to Mr Helden by Strathmore Ltd (Strathmore) was a regulated mortgage.  At first instance, the Judge held that it would be just and equitable to permit Strathmore to enforce the charge and the obligation to repay the loan together with two increases in the rate of interest agreed in 2007.  In reaching his decision the Judge took into account that Strathmore employed solicitors to represent them in connection with the loan for the purchase of the land and those solicitors did not inform them that FSMA was applicable.  The financial services legislation had not until quite recently extended to any mortgages.  They did not usually enter into transactions where FSMA applied.  Other factors the court took into account were as follow: 

• The mortgagor, Mr Helden had had the use of the property since 2006 without making any rent or interest payments;
• The property had increased substantially in value.  It was bought for £1 million and it was suggested that it should be marketed at £1.8 million.  The loan from Strathmore thus enabled Mr Helden to achieve a large profit;
• Strathmore would not have been willing to make the loan on an unsecured basis;
• Strathmore could be expected to have generated a return on the £1 million by investing it elsewhere had it not been lent to Mr Helden;
• There was no question of Mr Helden having been taken advantage of.  He had considerable experience in property matters including as a mortgage broker.  The rates of interest were agreed with Mr Helden and were not exorbitant;
• Mr Helden preferred not to pursue alternative funding because of his concern that he should be able to make lump sum repayments without penalty;
• Mr Helden did not identify respects in which he would have been better placed if Strathmore had been an authorised person;
• Strathmore did not realise that FSMA could apply and it was reasonable for them not to do so.

There was some debate in the Court of Appeal over whether a person could rely on section 28 (5) and contend that they reasonably believed that they were not contravening the general prohibition by making an agreement if they were wholly unaware of the existence of the prohibition at the time of the agreement. However, the Court of Appeal concluded that it was unnecessary to decide this issue.  Strathmore could rely on section 28 (3) even though it had contravened FSMA by entering into the charge because it was nonetheless just and equitable to permit Strathmore to enforce its charge.

This case provides a useful example of the sort of circumstances and the factors the court will consider when deciding whether it would be just and equitable to enforce a charge despite a contravention of FSMA.

Charles Helden v Strathmore Ltd [2011] EWCA Civ 542

The FSA has a statutory power to make rules and to issue guidance. The FSA has issued rules which it calls Principles. These are contained in the Handbook which also contains its guidance. 

The first ground of objection raised by the BBA was that this policy statement treated the Principles as giving rise to obligations leading to compensation being payable for their breach, when those Principles are not actionable in law. S150 of the Financial Services and Markets Act 2000 (“FSMA”) deals with contraventions of the rules making them actionable as a breach of statutory duty. Actionable means giving rise to a cause of action. S150 (2) removes that actionability. The FSA have confirmed that s150 does not apply to the Principles so they are non-actionable. The court held that although the Principles are non-actionable they are still relevant for the Financial Ombudsman in deciding what is fair and reasonable in all the circumstances. As the Court held, the purpose of the exclusion does not assist the BBA in showing that the rules excluded from the operation of s150 (1) were also intended to give rise to no obligations between firms and customers. 

The second ground of objection was that it was unlawful for the FSA to provide in its policy statement that a customer might be entitled to redress by reference to Principles which conflicted with or augmented the specific rules. The Court explained that the Principles “stand over” the specific rules. The Handbook amendments and Open Letter did not require something to be omitted or done which the rules required or forbade. As such this ground was also rejected. 

Thirdly, it was argued that s404 of FSMA provided a remedy where it is believed that there has been widespread mis-selling which has caused loss. That remedy is provided by the combination of a review of past business and the payment of compensation. The FSA contended that the changes were a logical extension of the existing provisions albeit widespread in effect and acknowledged to be expensive for firms. Again the Court agreed with the FSA. The changes are a logical extension of the existing provisions or a more emphatic, impatient and specific use of them. This objection was therefore also rejected. 

British Bankers Association v The Financial Services Authority, The Financial Ombudsman Service and Nemo Personal Finance Limited [2011] EWHC 999 

The proposal covers all loans to consumers to buy a home as well as certain loans to consumers to renovate a home. It also covers credit intermediaries. 

The proposed directive includes measures relating to:

•  Advertising and marketing.
• Pre-contractual information.
• Advice.
• Credit worthiness and suitability assessments.
• Early repayment.
• Regulation of credit intermediaries and non-credit institutions providing mortgage credit.

There will be a European Standard Information Sheet to assess consumers’ ability to repay the loans. Creditors will be required to refuse to grant credit if the creditworthiness assessment determines that the credit would be unsuitable for the consumer.  Equally however borrowers must provide all necessary and correct information to enable the creditworthiness assessment to be carried out.

The proposal has been submitted to the EU Parliament and Council but will need to be adopted and then need national measures to come into force.

The Commission at the same time published a working paper outlining national measures and practices to avoid foreclosure procedures for residential mortgage loans.  Please see link. http://ec.europa.eu/internal_market/finservices-retail/docs/credit/mortgage/sec_2011_357_en.pdf

 In the recent Court of Appeal case of Sousa –v- Waltham Forest London Borough Council [2011] EWCA Civ 194, the Court considered whether a claimant was entitled to recover a success fee under a conditional fee agreement with his legal advisers despite being fully indemnified under an insurance policy.

 Conditional Fee Agreements

 A conditional fee agreement (“CFA”) is an agreement between a client and his solicitor whereby the solicitor agrees not to be paid unless they win the case.  Hence their more common name, ‘no win, no fee’.  The CFA usually incorporates a success fee, which is an uplift on the amount of costs the client would have paid had he engaged his solicitor on a usual retainer basis.

 It is also possible to enter into a collective CFA (“CCFA”).  This is a CFA made between a law firm and a purchaser of legal services, such as a bank, trade union or company.  A CCFA provides for fees to be payable on a common ground relating to a number of cases in a similar class.

 There is no longer a statutory reference to CCFAs as the Collective Conditional Fee Agreements Regulations 2000 (SI 2000/2988) were revoked on 1 November 2005.  This revocation was not retrospective so these regulations still apply to any cases brought under a CCFA that that pre-dates 1 November 2005.

 The Solicitor’s Code of Conduct 2007 refers to CCFAs and hence they are still a valid form of CFA.  There is therefore, no reason for parties not to enter into CCFAs where such a agreement of payment is deemed acceptable.

 Guidance on the recovery of costs

 A court has certain parameters it must give consideration to when making decisions about costs:

 -         it must regard all the circumstances (CPR 44.3(4))

-         it must not allow unreasonably incurred costs or those which are unreasonable in amount to be assessed (CPR 44.4(1))

-         when assessing costs on the standard basis only costs proportionate to the matters under consideration will be allowed.  The court will resolve any argument over reasonableness or proportionality in favour of the paying party (CPR 44.4(2))

-         the court must consider whether there were any other methods of funding available when deciding if a CFA’s success fee was reasonable (section 11.8(1), Practice Direction 44.5 (Costs Practice Direction)

 Background

In the case of Sousa –v- Waltham Forest London Borough Council, Sousa (“S”) incurred damage to his house as a result of the roots of a tree in the street.  S claimed on his own household insurance to repair the damage.

S’s insurance company brought a claim against Waltham Forest London Borough Council (“the Council”) as the trees that caused the damage were their responsibility.  S’s insurers instructed solicitors who acted for them under a CCFA with a success fee of 100%.

The claim was settled and the Council agreed to pay S’s costs on the standard basis.  Costs were agreed, save for whether the success fee was recoverable.

When conducting the assessment, the district judge decided that S was never at risk of having to pay costs, because he was covered by insurance, and therefore he refused to allow any success fee.

An appeal was allowed by Judge Behrens, he considered that the subrogation arrangement (that of the insurers to sue on S’s behalf) was irrelevant.

 The Council appealed.  Their position was that S was indemnified for costs and in accordance with section 11.8(c) of the Costs Practice Direction, this fact should be taken into consideration.  S was to be in no different a position from someone who had before the event insurance – they would not be entitled to a success fee.

S’s insurers position was that the court should disregard the insurance as it was “res inter alios acta” (behind the curtain).

Decision

The appeal was dismissed.  Its position was that S was entitled to recover his costs, including the success fee.  S’s insurers had the same right to enter into a CCFA and recover a success fee as S would have done, notwithstanding the subrogation arrangement.

The decision surrounding the recoverability of the success fee centred on whether the costs had been unreasonably incurred, or were unreasonable in amount.  If the indemnity was ignored then there was no reason why S should not be able to enter into a CFS with a success fee.

However, as already stated, the court had to consider all the circumstances.  As a result the indemnity was relevant.

Bearing in mind the case was as a result of a subrogated arrangement; S had no option by to do whatever his insurers requested in order to pursue the claim.  S could not remove the CCFA arrangement that his insurers had in place as he was not in control of the proceedings. 

The court held that it was reasonable for the insurers to enter into a CCFA.  The Council had also accepted this in accordance with the House of Lord’s earlier decision in Campbell –v- MGN (No 2) [2005] UKHL 61:

‘…the mere fact that a person is able to fund litigation without resorting to a conditional fee agreement does not make it unreasonable for him to do so.’

This decision stood, despite the later decision of the European Court of Human Rights (ECtHR) in MGN Ltd –v United Kingdom [2011] ECHR 66, that the order for MGN to pay the success fee was disproportionate bearing in mind the aims of the government and Article 10 of the European Convention on Human Rights.  The interference in this case was found to be part of a legitimate aim intended to widen the access to justice.

The Council made submissions to the Court that they should bear in mind the ECtHR result even though Article 10 did not feature in the case in question.  Their submissions were rejected as the Court found that it would be illogical if the means of a CFA party were taken into account on a reasonableness question in an Article 10 case only.

The Council put forward a second argument that success fees amounted to a denial of justice and had an impact on the freedom of access to the court.  The Court however was not convinced by this argument either.

Impact

This decision will have obvious benefits to those who use CCFA’s. The decision also enforces the court’s belief that MGN –v- United Kingdom has no immediate effect when it comes to the challenge to success fees.

The decision also demonstrates the court’s support for the Jackson reforms, and sanctioned Jackson LJ’s view that of the flaws in the current regime of recoverability, namely that any individual, rich or poor, human or corporate, may enter into a CFA, regardless of their means to fund litigation without it.

The lender – North Shore Ventures Ltd (“North Shore”) agreed to provide Anstead Holdings Inc (“Anstead”) with a loan facility for $50m.  North Shore was owned by Mr Boris Berezovsky and or his daughter Ms Ekaterina Berezovskaya.

 This facility was guaranteed by a Mr Fomichev and a Mr Peganov. Mr Peganov was a business associate of Mr Berezovsky. The guarantee included a term that a certificate signed by the lender North Shore for the amount of the indebtedness would be conclusive evidence for all purposes unless manifestly incorrect.

 North Shore obtained a judgment in default against Anstead for over $35m.  Proceedings were also brought against the guarantors who raised the following defences:

• The guarantee was unenforceable because North Shore, the lender failed to disclose to them that Mr Berezovsky was being investigated by the Swiss authorities for embezzlement of money due to Aereflot and as a consequence money paid to an associate in Switzerland would be frozen.
• North Shore and Anstead had varied the terms of the interest rate and therefore the certificate of indebtedness was incorrect.

 The Court of Appeal considered a number of previous cases.  The main one dating back to 1845 – Hamilton v Watson, where the House of Lords concluded that if it was necessary for a banker to disclose everything that is material for a surety to know, no banker could ever be satisfied that they had proper security.  Disclosure ought to be made voluntarily where there is anything that might not naturally be expected to take place between the parties, but the lender is not obliged to disclose other matters which might be material for the guarantor to know.  A guarantee is not like an insurance contract which is uberrimae fidei, where the insured is required to disclose all material facts to the risk.

In Royal Bank of Scotland v Etridge [2002], the House of Lords stated that it is well-established principle that a creditor is obliged to disclose to a guarantor any unusual features of the contract which makes it materially different in a potentially disadvantageous respect from what the guarantor might naturally expect.

The Court of Appeal concluded having reviewed all the previous cases that there is no duty of disclosure to disclose facts which are not unusual features.

In this case, it was agreed that the matters on which the guarantors relied were not unusual features and therefore it followed that there was no duty to disclose them. However, the lender had argued that where a lender knows that a guarantor is aware of unusual features, then a duty does not arise.  The Court decided that a lender is not absolved from his duty to disclose merely because he believes the guarantors may know these facts already.   In any event, the Court explained that if a guarantor knows of the relevant unusual facts normally the point would not arise because the failure to disclose the material fact does not constitute a misrepresentation on which the guarantor relied.

The lender also argued that the guarantors could not rely on an agreement to change the interest rates payable because a certificate had been issued which was conclusive evidence of the amount outstanding.  The court at first instance considered there was no consideration for the change and so was not enforceable.  The Court of Appeal disagreed and held that there was a variation, which was enforceable in law, which then meant that has been a manifest error and so the certificate was not conclusive evidence of the amount due.  This meant that the guarantors were obliged to pay sums owing to North Shore, but for a lesser sum.

This case is a useful reminder of the duty of disclosure owed to a guarantor.  The law takes a pragmatic approach to the extent of the duty. It is not sensible to disclose everything to a guarantor, but if a lender knows of unusual features then a lender is obliged to disclose this to the guarantor even if the lender believes the guarantor is aware of these unusual facts already.

North Shore Ventures Ltd v Anstead Holdings Inc and others [2011] EWCA Civ 230

Corporate insolvencies across the board were down on the same period last year: compulsory liquidations and creditors’ voluntary liquidations decreased by 11.3% (seasonally adjusted), corporate receiverships by 23.9%, administrations by 24.4% and company voluntary arrangements by 22.4%.

Personal insolvencies followed the same trend, save for debt relief orders. Bankruptcies decreased by 29.2% and individual voluntary arrangements by 5.4%. Debt relief orders increased by 15.4%.

Further analysis of these statistics by the Corporate Recovery and Insolvency Team follows shortly.

The first question the court was asked to determine was whether with reference to section 29 of the Land Registration Act 2002 were any of the interests sufficient to be overriding interests?

The court had much sympathy for the occupiers. However, based on the previous case of Abbey National v Cann [1991], the court held that the purchaser of land who relies upon a building society or bank loan for completion of his purchase in fact never acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. On this basis the mortgagees’ rights under the charges had priority over any equitable rights that the occupiers may have acquired.

The second question the court determined was whether any of the tenancy agreements obtained priority. The leases were of a short duration and were non-registrable and in almost all the cases the registration of the mortgagee’s charge was made within the period of a priority period. The court held that these agreements did not obtain priority. Prior to registration the grant of the leasehold interests was not made out of a registered estate and only takes effect in equity.

Various mortgagors v various mortgagees and various occupiers [2010] EWHC 2991

The Solicitors’ Code of Conduct 2007 provides that where a lender asks for a conveyancing file, the solicitor cannot, without the consent of the borrower, send the whole of the file to the lender unless the lender can  show that there is a prima facie case of fraud.

The lender accepted the code, but relied on declarations which the borrower had signed when applying for the loan.

These declarations provided an authorisation from the borrower to their conveyancer to send to the lender the entire file relating to the whole transaction (not just the loan) at the lender’s request.

The court held that these declarations were clear, unambiguous, irrevocable and binding on both the borrower and the lender.  The clause had to be looked at in the context of the transaction.  It enabled the lender to police the transaction.  Four of the six files involved a transaction funded by different lender and a subsequent re-mortgage of the same property on the same day to the lender.  The lender argued that this was precisely the kind of information the solicitors should have given to them.

The court held that the clause must be construed as a clear waiver of privilege and was not unduly onerous or unfair.   Accordingly the lender was entitled to the entire files relating to its mortgage transaction.

Where a clause is a matter of commercial commonsense and is essential to make the transaction work, if it expressly provides for a waiver of privilege, the court will uphold it notwithstanding the implied default position in law.

Mortgage Express v Sawali [2010]  EWHC 3054

The company (now in administration) claimed that the charging order should be set aside. First, they claimed that when the company failed to make the payment into court in the sum of £30,000, the claimant should have applied to enter judgment, but as they failed to take this next step the charging order for the full amount should not have been granted. The court agreed and held that there was no jurisdiction to grant the charging order for the full sums claimed as the claimant had failed to take the next relevant step and it should be varied to limit it to the sum of £11,500. Secondly, the company claimed that in any event when the charging order was made, the company was in fact insolvent. The court also agreed with this argument and held that, on a balance sheet basis, the company was insolvent and so the whole of the charging order should be set aside as there was a real risk that it would operate to the disadvantage of creditors as a whole, as it appeared that there was a shortfall of assets over liabilities.

This case demonstrates that a charging order cannot be obtained in respect of an order which requires a party to take a next step such as entering a judgment until that next step is taken. Further, where a judgment debtor is insolvent at the time a charging order is made, the court will exercise its discretion and refuse the charging order so as to prevent a judgment creditor from gaining an advantage over other unsecured creditors.

Monte Developments Limited (In Administration) v Court Management Consultants Limited and others [2010] EWHC 3071

In this case , the question the court asked was whether a guarantee liability, is a liability for a liquidated sum within the meaning of section 267 (2) (b) of the Insolvency Act 1986 or only a liability to pay unliquidated damages. 

In accordance with 267(2) of the Insolvency Act 1986, a bankruptcy petition must be founded on a liquidated sum.

So was the guarantee liability a liquidated sum?  If it was not then the creditor would need first to obtain a judgment for the payment of a specific sum and then commence bankruptcy proceedings.  This would be the case even if the guarantor’s liability was identical to the amount of the principal’s debtor’s unpaid debt.

The court held, having considered the construction of the guarantee, that it included a debt obligation by reason of the principal debtor provision and therefore the creditor was entitled to bring bankruptcy proceedings. 

By comparison, in respect of “a see to it” obligation where the guarantor’s liability is to see that another person does something, the creditor’s remedy against the guarantor lies in damages for a breach of contract. 

The court accepted that there is a valid distinction between claims on the one hand where the sum needs to be quantified and an account taken and those, on the other, where a specific sum can be identified. Although not in issue, the court here expressed doubt whether distinctions based on different causes of action satisfactorily addressed  the purpose behind section 267 (2). 

In this case, this was not a “see to it” guarantee and so included a liquidated debt but, in any event as the Judge noted there was likely to have been other “see to it” guarantees where bankruptcy has been granted without the need to first obtain judgment.

This is a useful decision for lenders as it confirms that where there is a principal debtor obligation that this amounts to a liquidated debt sufficient to bring bankruptcy proceedings.  It is also interesting as it may enable more bankruptcy proceedings to be issued if the claim is in damages but can be quantified.  Previously this may have been regarded as not suitable for bankruptcy. It will be interesting to see how this issue develops.

McGuiness v Norwich and Peterborough Building Society  [2010] EWHC 2989

HMRC v Airtours Holiday Transport Ltd [2010] UKUT 404 (TCC)

A large holiday company (My Travel Group) suffered financial difficulties, and arranged for PwC to liaise on its behalf with its banks, bondholders and other creditors.  The company reclaimed input VAT in respect of these services.

HMRC issued assessments to recover the tax, on the basis that the supplies had actually been made to the company’s creditors, rather than to the company itself.   Their contention was that since the company had not recevied the supplies (even though they had paid for them) the company would not not be able to recover VAT.  Since the creditors had not paid for the supplies they also could not recover the VAT.

The First-Tier Tribunal allowed the company’s appeal but the Upper Tribunal reversed this decision and found in favour of HMRC.

Comment

This case seems to be a victory for the taxman but a loss for professional advisers and struggling businesses.  Since VAT will be paid but not recovered this will make professional fees that much more expensive.

In light of this decision, professional advisers should assess their letters of engagement and billing arrangements to determine who, in truth their client is.

If you would like to discuss this with anyone please contact me or Carolyn Jones (in our Banking and Finance team) on 01923 202020.

Problems uncovered by the OFT’s investigation were specific to each business, as set out in the individual requirements.  However, across the sector the problems include:

• A failure to consider the customer’s circumstances or proportionality before asking the court to put a charging order in place;
• Not building adequate checks into the lender’s decision-making process; and
• Applying substantial charges for referring cases to a debt collection agency.

In a minority of cases, lenders sent oppressive and/or misleading correspondence.

The requirements imposed on some of the lenders included:

• providing a case file note seting out in reasonable detail why it was appropriate and reasonable to seek a charging order taking into account:
  • the extent to which a customer had responded to reasonable requests made by the lender;
  • such information about the personal and financial circumstances of the customer as the lender was able to obtain through its reasonable endeavours;
  • the amount of the sum owed;
  • the length of time that the sum has been owed;
  • whether it is reasonable for the lender to take steps other than those proposed.
• a requirement that the lender should consider whether the steps it proposed to take were proportionate having regard to the amount of the sum owed;
• a requirement that the lender should not state that it will seek a court order or judgment where the lender has no intention of seeking a court order or judgment;
• a requirement for new terms to be put in place where the lender wished to impose charges for default or impose charges to recover the costs of third parties and that any proposed new terms should be given to the OFT.

As part of the review of consumer credit and personal insolvency call for evidence, the Coalition is consulting on the impact of a £25,000 threshold before being able to enforce by means of a charging order and an order for sale.

Mrs Qutb had suffered from Alzheimer’s disease for a number of years.  In 2001, she sold her property to Mr Hussain. Mr Hussain entered into a charge in favour of the Bank of Scotland (“the Bank”) as security for the loan to fund his purchase of the property.  In 2005, Warren J  held that the sale to Mr Hussain should be set aside as it was at an under value, it had been procured by Mr Hussain’s undue influence and it was an unconscionable bargain.  The Court ordered that the property should be transferred back to Mrs Qutb, but should be subject to the legal charge in favour of the Bank.  Mrs Qutb was granted an indemnity from Mr Hussain in respect of the sums payable under the charge.

The Bank commenced possession proceedings and Mrs Qutb now sought to deny that she was bound by it.

As a first  point, the Court considered whether Mrs Qutb could challenge the charge in the light of the previous proceedings.  

The Bank sought to argue that in the light of the previous decision, Mrs Qutb was now prevented from disputing the Bank’s charge.  The Court decided that the cause of action which she now asserted against the Bank was not the same as the cause of action in the previous action.  The basis of her claim against the Bank was different to that of her claim in the previous proceedings.  Findings had been made in relation to allegations which were advanced only against Mr Hussain and, therefore,  this did not prevent her from raising these different issues against the Bank.

The Bank also claimed that her defence and counterclaim represented an abuse of process as the defence she now raised, which was that she had an overriding interest could have been brought in the previous action.  Previously, the Bank had applied,  but without success, to strike out the claim on this basis.  As the Court had previously refused to grant this application, the Court here decided to bar the Bank from asserting the abuse of process argument once again.

 Section 70(1)(g)

The Court could now consider the claim that she had an overriding interest which took priority to the Bank.  Mrs Qutb relied on section 70(1)(g) of the Land Registration Act 1925, which was the relevant provision in force when the charge was taken.  In essence, the effect of section 70(1)(g) was that if Mrs Qutb was in actual occupation of the property and the Bank had not made enquiry of her then it would be bound by any right that she had.

The first question the Court had to consider was whether she was in actual occupation. There was no doubt that Mrs Qutb had occupied the property in the past, but the question was whether she was still in occupation when the charge was granted on 29 January 2001.  It was accepted that a person can be in “actual occupation” of more than one property.  On the evidence there was evidence that Mrs Qutb had occasionally stayed at the property and although the mere presence of her furniture would not usually count as actual occupation, it appeared that she was not intending to leave the property and so in the circumstances the Court found that she was in actual occupation.

The Court then looked at the position where persons with overriding interests have been taken to have authorised the charge and so are bound by it.  The Court held that a person claiming not to bound by the charge can be held to have given the legal owner actual authority to enter into it or to have ratified it.  As such, the charge will be binding on ordinary agency principles or it could be explained as a form of proprietary estoppel. Proprietary estoppel arises where one party represents that he is transferring an interest in land to another, but what is done has no legal effect, or knows that the other party will spend money or otherwise act to his detriment in reliance on the supposed or promised transfer.

In the case of Paddington Building Society v Mendelsohn (1985), the court decided that the mother knew and intended that the charge was to be granted to the society and that without the charge, the flat which she claimed to have an interest could not have been acquired.  The only possible intention was to impute to the parties an intention that the mother’s rights were to be subject to the rights of the society.

In this case, the Court held that:

•  Mrs Qutb will have (or ought reasonably to have) appreciated that Mr Hussain was going to charge the property. 
• Mrs Qutb represented to Mr Hussain’s solicitors who were also the Bank’s solicitors that the property would be sold with vacant possession and that she would not retain any rights to it.  In the contract for the sale of the property and in the replies to the requisitions on title she confirmed that vacant possession would be given on completion. The transfer stated that the property was being transferred with full title guarantee.
• The Bank relied on these representations by proceeding with the loan.  It was reasonable to do so as it had no notice of Mrs Qutb’s incapacity or undue influence or unconscionable bargain.
• Almost all the money advance by the Bank found its way into her bank account.  It accrued to her benefit regardless of whether Mr Hussain then misappropriated it.

The Court also considered whether her lack of capacity meant that there could be no estoppel.  The Judge held that as the Bank had no notice of her lack of capacity it could not be affected by it.  

Mrs Qutb also sought to argue that the Bank should have been alerted to the fraud by the fact that the property price was reduced and the size of the gift fluctuated in accordance with Mr Hussain’s requirements.  However, the Bank had no reason to doubt that vacant possession would be given since it is not unusual for properties to be transferred at less than market value when being transferred to a friend or family member. 

Accordingly the Bank was entitled to possession.

This case is very helpful to lenders as it confirms that even though a person may have been in actual occupation of the property when the charge is taken, they may still be bound by it.  If faced with a claim that an occupier has an overriding interest, which takes priority to a bank’s charge, consideration should be given to the following factors:

• Whether the occupier should (or ought reasonably to have) appreciated that the property was going to be charged.
• Whether the occupier made any representations to the lender.  The court will look at the contract of sale, the requisitions on title and the transfer documentation.
• Whether the lender relied on any representations and if so, whether it is reasonable to rely on those representations.
• Whether the occupier received any benefit from the transaction.

In these circumstances, despite the existence of an overriding interest, it may not be possible for the occupier to deny that they are bound by the charge.

 The Governor And Company Of The Bank Of Scotland v Afzaal Hussain and Mona Qutub (by her litigation friend) [2010] EWHC 2812

In this case, Chelsea Building Society had repossessed and then sold a property, but then wished to pursue the mortgagors for the shortfall. The mortgagors were a husband and wife who had subsequently got divorced.  The Building Society reached an agreement with the ex-husband only that it would settle the matter on payment of £5000 in full and final settlement, but then still wished to pursue the ex-wife. 

The ex-wife claimed that the full and final settlement with the ex-husband released her from her liabilities. 

In a multi-party situation if a creditor is settling with one party, but wishes to pursue the other parties, it should expressly reserve that right in an agreement.

If that term is not expressly reserved, the court will need to determine whether a term is necessarily to be implied from the circumstances which existed at the time of the agreement.

The way the court at first instance had considered the matter was by asking the question whether there was a positive agreement between the ex-husband and the Building Society to the effect that the ex-wife’s liability would be discharged.  In posing the question this way, the court at first instance had reversed the burden.  The burden of establishing whether a term could be implied lay with the Building Society.  The Court of Appeal looking at the evidence did not consider that it was a necessary implication of the agreement that it was reserving its rights and so the Building Society failed to meet the burden of proof of establishing the reservation either expressly or by implication. Accordingly it could not pursue the ex-wife.

At a late stage in the proceedings,  the Building Society also attempted to argue that it was not bound by the agreement because it is not bound by part payment of an undisputed debt and so no consideration moved from the ex-husband to the Building Society.  As the Court noted, this is a point which is of interest and it is not necessarily straightforward.  However, as the point was made at a stage when no evidence could be taken on the issue, it was too late to make this point.

This case is a salutary reminder that when settling with one party in a multi-party situation, a creditor should expressly reserve its rights to pursue the other parties.

Chelsea Building Society v Lorraine Nash [2010] EWCA Civ 1247

This case is useful as it is an interesting example of how marshalling is to be applied and it explains the legal basis for marshalling. 

Mrs Szepietowski owed debts to National Westminster Bank Plc (“the Bank”) and the Serious Organised Crime Agency (“SOCA”).  The Bank held charges over two separate properties known as Ashford House and the Claygate Properties. As a result of a compromise agreement, SOCA held a charge over the Claygate Properties.  The Claygate Properties were sold and the proceeds of sale were nearly exhausted in paying off the Bank, leaving only a small sum for SOCA.  SOCA wished to step into the shoes of the Bank in respect of the Ashford Property for the unsatisfied balance owed to it.

Counsel for Mrs Szepietowski argued that had the compromise agreement referred to the Ashford Property, it would have said so.  The Judge, however, decided that the compromise agreement neither explicitly or implicitly prevented SOCA from rely on the principle of marshalling. The Ashford Property had not been excluded from the compromise agreement nor was it contrary to the agreement and neither should SOCA be estopped from advancing the claim.

The Judge explained that marshalling is a doctrine of equity and like other equitable principles it should only be applied in order to do justice.  The right to marshall can be excluded or varied by contract and the equitable defences to an application should be available.  However, in this case there was no unfairness in allowing SOCA to rely on  the doctrine.

Counsel for Mrs Szepietowski argued that marshalling was a form of equitable subrogation, designed to prevent unjust enrichment and that it could not be invoked  by a lender who has obtained all the security for which he bargained or so as to put him in a better position than he would have been in if he had obtained all the rights for which he had bargained.  The Judge held that it was far from clear that the doctrine of marshalling was a species of subrogation and it was a doctrine with its own particular and distinct characteristics.

There were no obstacles to the claim and so SOCA could now steps into the shoes of the Bank in respect of Ashford House as security for the shortfall which was left following the sale of the Claygate Properties.

Serious Organised Crime Agency v Szepietowski [2010] EWHC 2570

In March, this year the court held that a valuer had breached duties owed to a buy-to-let investor where the valuation report had been provided to the mortgage lender Scullion v Bank of Scotland PLC [2010] EWHC 572.  The Judge found that the valuers had acted negligently both in over-stating the capital value of the property and the expected rental value.  The court has now ruled in the same case as to what damages could be claimed.

Applying the principles set out in the House of Lords case of SAAMCO, the court held that Mr Scullion, the buy-to-let investor, was only entitled to recover the difference between the price paid for the property and the true value of the property.  In this case because Mr Scullion had ended up paying £200 less than the true valuation, he had suffered no loss.

More interestingly was the court’s assessment of the damages owed in respect of the overstatement of the rental value.  The court noted that Colleys who were the valuers, knew that Mr Scullion was a buy-to-let purchaser and so should have appreciated that the statement of rental value was critical as Mr Scullion needed to ensure that when he committed himself to make periodic payments under the mortgage and to pay the normal outgoings, that he would receive sufficient rent to discharge those liabilities. 

Counsel for the valuers argued that the scope of the duty owed to Mr Scullion could not exceed the scope of the duty owed to the mortgage lender and the rental value was merely a further piece of information relevant to the decision whether to lend rather than a piece of information upon which the lender had placed, or was entitled to place any independent reliance.

The Judge disagreed.  First, he took the view that the scope of the duty owed to Mr Scullion could be wider than that owed to the lender.  He explained that the purpose for which reliance may be placed on the valuation may differ between lender and the borrower and that there may be a contractual limitation which will not apply to the borrower or which was not communicated to the borrower. 

Secondly, although the capital value was of great importance, “it was also very important to both lender and borrower in this buy-to-let transaction that the rental which could be achieved by letting the flat should exceed the mortgage payments by a specified margin, and that Colleys knew or ought to have appreciated this.”

In calculating the damages, the court excluded any items which were relevant to the market value of the property such as legal fees for the purchase of the property, stamp duty and carpets to furnish the property.  Mr Scullion was entitled to recover damages to compensate him for losses caused by the fact that he was unable to let the property to cover his mortgage payments.  On a year to year basis, the court calculated his mortgage payments and then deducted the rental obtained and added his costs incurred due to the cash flow difficulties he had encountered.

The valuer asserted that the claim for damages should be reduced because of contributory negligence.  However, the claim of contributory negligence failed because Mr Scullion did not do anything to cause or contribute to these losses.  The anticipated rental value was entirely of the valuer’s own making. 

It is believed that this may be the first case where a court has held a valuer liable in respect of its valuation of the rent to be obtained on a property.  It was significant in this case that the valuers knew that this was a buy-to-let mortgage and therefore the valuers knew or ought to have appreciated that the rental to be achieved was important to both the lender and the borrower.  There may now be the possibility that other cases can be brought where there has been a negligent overvaluation of the rent, where the valuer is aware or ought to be aware of the importance of its rental valuation and where the rental value has been relied on. 

The question remains as to whether such claims will be open to lenders as well as borrower landlords.  The Judge noted that the rental valuation was of importance to the lender and the borrower.  If it can be established that a lender had relied on the rental valuation when agreeing to lend and it had placed independent reliance on this valuation rather than it being merely a factor in deciding to whether the property was adequate security then this may give rise to potential claims by lenders.  Not surprisingly, however, the Judge gave permission to appeal on the legal issues of (1) whether the valuer owed a duty of care in tort to Mr Scullion at all; and (2) whether the scope of that duty extended to the losses in respect of the defective rental valuation.  No doubt how the Court of Appeal approach these two questions, will be followed with interest by all concerned.

Scullion v Bank of Scotland PLC [2010] EWHC 2253

It appeared that the whole transaction was a fraud.  The registered owners of the property had no knowledge of the transaction and the money disappeared. There was no allegation that the defendant was involved in the fraud. 

The claimant lender brought a claim for breach of trust.  Counsel for the lender argued that the solicitors did not have the authority to pay away the moneys except to achieve completion and completion was never achieved.  The solicitors’ counsel argued, however, that the authority was to pay away in connection with the purchase of the property and this is what the defendant did.

The court came down in the middle.  The authority entitled the defendant to pay away on receipt of the documents necessary to register title or if paying away before that stage, on receipt of a solicitor’s undertaking to provide such documents.  Here the solicitors paid away the money without receiving the requisite documents and without a solicitor’s undertaking to provide such documents.  As such, the solicitors were in breach of trust.

The solicitors then sought to rely on s61 of the Trustee Act 1925 which enables a trustee to claim relief for breach of trust if he has acted honestly and reasonably.  The solicitors submitted that the circumstances of the loan were unusual and the loan was approved by the lender in haste.  Even if that were the case, the court could not accept that the solicitors had acted reasonably having paid away the money to a firm of solicitors even though the necessary documentation had not been provided combined with the failure to investigate the firm of solicitors to whom they were sending the money.  

The solicitors also attempted to argue that any loss or damage suffered by the claimant was caused or contributed to by the lender because of its own fault. As the Trustee Act did not provide for this, the court were not prepared to extend the law in this way.

This case is a good example of when a claim for breach of trust can be brought.  By bringing such a claim, the lenders avoided having to show any negligence or fault by the solicitors and there was no issue of contributory negligence.

 Lloyds TSB v Markandan & Uddin [2010] EWHC 2517

Despite the certificate from the solicitors, the court found that Mr O’Sullivan had not received legal advice on the guarantee.

Mr O’Sullivan claimed that the certificate amounted to a fraudulent misrepresentation.  The court, however, found that this was without value as these representations were relied on by the bank and the bank alone.  The fact that, in consequence of the bank’s reliance, Mr O’Sullivan suffered a loss did not change the position.

Strangely, counsel for the firm of solicitors accepted that although no cause of action or argument had been advanced to this effect, the firm had assumed a duty in tort to Mr O’Sullivan to advise him to the extent required by the bank.  However, this could give rise to no liability as Mr O’Sullivan had suffered no loss. 

The court took the view that there was no legal basis for the existence of such a duty.  In circumstances where the guarantor did not seek advice, was not offered advice and was ignorant of the requirement of the bank that he should be advised, there was no basis for such a duty.  Counsel for the firm of solicitors opportunistically sought to build on this concession and the court found the approach of both counsel unhelpful.

In any event, the advice would have not added to Mr O’Sullivan’s understanding since it was improbable that it would have led Mr O’Sullivan to torpedo the project by refusing the guarantee, which was a condition of the finance from the bank.

This is an interesting judgment as it considered the legal relationship between the guarantor and the solicitor providing a certificate that independent legal advice has been given.  These are common issues raised by guarantors and this judgment clarifies the position. The case confirms that where no advice is given or sought, no duty can exist.  Also useful was the Judge’s comments that even if he had received advice, it would have made no difference as Mr O’Sullivan would not have wanted to jeopardise the project and it was most improbable that he would have refused to sign the guarantee. 

Ben O’Sullivan v Healys (a firm) 14 October 2010

On 30 June 2000, the borrower executed a legal charge over his property in favour of Halifax, which was registered with the Land Registry on 29 September 2000. On 1 September 2006, Bank of Scotland (“the Bank”) lent the borrower sums to discharge the Halifax debt. Although the borrower executed a charge in favour of the Bank, unfortunately it was not registered. Subsequently on 16 July 2007, London Scottish Finance Limited (“LSFL”)  registered a charge at the Land Registry. Further, on 4 October 2007, Anfield (UK) Limited (“Anfield”) registered a notice for a pending land action for a charging order and on 3 April 2008, Anfield’s equitable charge was registered. On 1 April 2009, the Bank sought to register their interest by way of a unilateral notice. 

The question for the High Court was whether or not the Bank could be subrogated to the Halifax charge and so step into its shoes notwithstanding the subsequent charges.  Would Anfield and LSFL be unjustly enriched in circumstances where the lender claiming subrogation expects to receive a first legal charge over the property but does not do so solely because of its failure to register the charge under the Land Registration Act 2002? 

Anfield sought to rely on the previous case of  Burston Finance v Speirway Ltd [1974] 1 WLR 1648.  In this case the lender had registered its charge at the Land Registry, but had failed to register it at Companies House.  Here the court ruled that in the case of non-registration of a company charge the charge was effective when made and therefore it had it obtained everything it bargained for and consequently, the lender would not be entitled to subrogation.

 The Bank, however,  relied on the case of Cheltenham & Gloucester plc v Appleyard [2004] EWCA 291 where the Court of Appeal took the view that a lender who is entitled to a legal charge which only obtains an equitable charge does not obtain all that he bargained for.  He bargained for a legal charge and so will be entitled to be subrogated to an earlier legal charge that was discharged with its advance.

 The court concluded that the Bank was entitled to be subrogated to the Halifax charge preferring the analysis in Cheltenham & Gloucester plc v Appleyard.  The lender’s carelessness in obtaining the desired security did not, by itself, defeat a claim for subrogation.

The court was influenced by the fact that the subsequent lenders would have been unjustly enriched because the Bank funded the repayment of the Halifax charge on the basis that it would obtain a legal charge.  It did not matter that the borrower had performed the terms of the bargain between the borrower and the lender.

This decision reinforces the position that where moneys are advanced by a lender and are used to discharge an earlier security, the lender is subrogated to the rights under that earlier security and will obtain priority over incumbrances subsequent to that security.

 Anfield (UK) Limited v Bank of Scotland (and others) [2010] EWCH 2374 (Ch)

Trading Standards Officers conducted onsite visits, a website sweep and a mystery shopping exercise.  They found that:

• Misleading advertising is the most significant area of non-compliance, in particular failing to disclose fees and misrepresenting debt management services as being free when they are not;
• Frontline advisers working for debt management companies are lacking in competence and are providing poor advice on inadequate information;
• There is low industry awareness of the Financial Ombudsman Service (FOS) for resolving consumer complaints.

 The OFT plan to update their Debt Management Guidance and will carry out robust enforcement action against licensees that fail, or refuse, to change advertising and/or behaviour.

 Attached is a link to the detailed report http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/OFT1274.pdf and the Debt Management Guidance  http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366.pdf.

 Set out below is the background to the Late Payments Directive together with a synopsis of the proposed agreed changes.

 Background

In November 1998, the UK Government introduced legislation to give businesses a statutory right to claim interest from other businesses for the late payment of commercial debts under the Late Payment of Commercial Debts (Interest) Act 1998.   The UK was one of the first countries in the EU to introduce late payment legislation to help promote a culture of prompt payment.

 In 2000, the European Union adopted Directive 2000/35/EC on combating late payment in commercial transactions (Late Payments Directive) and this Directive was duly implemented in the UK through the Late Payment of Commercial Debts Regulations 2002 (SI 2002/1674).

 Under the revised legislation, all business owners and managers could claim reasonable debt recovery costs and could benefit from the simplification of the calculation of Statutory Interest.  Additionally, small and medium sized enterprises were able to ask a representative body to challenge grossly unfair contract terms used by their customers which did not provide a substantial remedy for late payment of commercial debts.

 However, in April 2009, due to the fact that late payment was still a general problem in the EU, with public authorities in Member States in particular displaying bad payment behaviour, the European Commission published a proposal for a Directive repealing and replacing the Late Payments Directive.  The Draft Directive was forwarded to the European Parliament and the Council of the European Union for consideration.

 At the time, the recast Directive proposed by the Commission (i) suggested that public authorities pay within 30 days or pay a flat-rate compensation of five per cent of the amount, plus interest; (ii) suggested business be entitled to claim both late payment interest and reimbursement of any recovery costs; (iii) suggested that the entitlement to exclude claims of interest for less than five euros be removed. 

 Agreed Changes

 The Agreed changes to the draft (Recast) Late Payments Directive updates the existing EU Late Payments Directive and secures important concessions for SMEs on the general payment and verification periods, the capping of payment periods by public authorities and the interest rate payable if payments are made late by public authorities or companies.

 A summary of the agreed changes is set out below:-

•  The standard deadline for both public and private sectors to pay a bill for goods of services will now be 30 days across the EU Member States.

 Previously, public authorities were not allowed to agree payment periods of more than 30 days with their suppliers (unless a longer payment period could be objectively justified) whereas private sector companies were free to agree whatever payment deadlines they liked.  The standardising of the 30 day deadline for both public and private sector companies can be seen as somewhat contentious given that the initial proposal was for a standard 60 day deadline for payments by private sector companies.

•  Proposed Statutory Interest rate of 8% over the reference rate (MEPs initially pushed for a 9% interest rate so the 8% surcharge is a compromise with the Council which wanted 7%)
•  Proposed fixed sum of €40 as compensation for recovery costs as opposed to the Commission’s initial proposal of a multi-level compensation payment system, believed by many to be too complicated and confusing
•  A proposed clear-cut verification period.

 The Commission has proposed a grace period of 30 days for verifying that the goods or services comply with the contract terms, during which interest will not start to run.  This period may be extended only if expressly agreed and provided it is not grossly unfair to the supplier.  Parliament also secured an undertaking that verification periods will not be used as a loophole to delay payment unnecessarily.

•  Public authorities and their suppliers may agree a payment period of more than 30 days if the circumstances objectively justify it but can never delay payment beyond 60 days.
•  60 days capping for public authorities: Public entities providing healthcare will be given payment deadlines of up to 60 days to take account of the special nature of bodies such as public hospitals which are largely funded through reimbursements under social security systems.

 Analysis of the proposed Changes

The agreed changes are likely to be welcomed by SMEs across Europe.  Figures revealed in a recent pan-European survey undertaken by the Swedish Credit Management Services company Intrum Justitia affirm that in 2009, the average delay in getting payment beyond the agreed terms rose 12 per cent to 19 days from 17 days in 2008.[1]

The Intrum Justitia survey reveals how many companies, organizations and public authorities pay late as a cheap source of financing, often exploiting their size to delay paying the SMEs. The net result is that the SMEs are then faced with serious liquidity crises, which in turn can lead to slower economic growth.  The survey highlights how Governments took on average 67 days to pay their debts, compared with 57 days for companies and 41 days for consumers. It appears the worst countries for late payment include Portugal and Greece, while the best appeared to be the Nordic countries.  The survey attests that European SMEs, responsible for contributing 56% of the EU’s GDP, are the hardest hit by the rise in non-payment.[2]

The proposed extension of the standard 30 day deadline for payments to apply to both public authorities and private sector companies alike is a surprise and likely to be met with some resistance from larger private sector organisations.

It is difficult to envisage how the standard 30 day deadline will work in practice and in particular, what exceptions to this rule will be provided.  It seems likely that the ability to agree to pay by instalments will be preserved and that parties will be able to agree longer deadlines where it can be objectively justified in the light of the nature of the contract.

It also remains to be seen whether the Commission’s proposal to impose an obligation on public authorities to pay lump-sum compensation to suppliers for overdue payments (over and above the interest on the late payment) will be dropped. Parliament’s draft report suggested this proposal would be deleted but the Parliament press release does not confirm this.

What next

It is expected that an amended draft Directive will be put forward to the European Parliament in plenary session to be held in October 2010.

We shall provide a further update once the revised draft Directive is published.

Tim Constable comments: “Statutory late payments interest claims are an effective weapon in the armoury of a business. Creditor controllers can and should use this legislation far more than they tend to do. See us for further advice on how and when to make a claim.”

Tim Constable is a Partner in the LitigationTeam of Matthew Arnold & Baldwin;  Justine Ash is an Assistant Solicitor in the Litigation Team of Matthew Arnold & Baldwin

[2] Figures taken from Intrum Jusitita website and 10.05.2010 press release “European written of debt reaches €300 billion”;

In this case, the contract was for the construction and sale by the claimant of a yacht costing €38 million. The buyer of the yacht failed to pay the first instalment and the claimant terminated the contract.  The claimant sought to rely on a clause in the contract which provided that upon lawful termination the claimant would be entitled to recover 20% of the contract price by way of liquidated damages as compensation for its estimated losses.

The claimant pursued the defendant under his personal guarantee and the defendant asserted that the clause entitling the claimant to 20% of the contract price was a penalty and therefore unenforceable.  The guarantee itself contained a provision that the liability of the guarantor was “not to be impaired, diminished, discharged or released by reason or in consequence of ……. the irregularity, unenforceable or invalidity in whole or in part” of the principal contract. Accordingly the claimant argued that liabilities of the guarantor and the principal debtor were not co-extensive and the defendant was liable even if the principal debtor was not.

The Judge stated that should the clause be a penalty, the claimant would not be able to recover the sum due from the guarantor as the reason for it being irrecoverable from the principal debtor was ultimately based on public policy.    Since a penalty clause does not bring into existence any obligation on the part of the debtor, there is no relevant liability covered by the guarantee and nothing in the guarantee upon which the  protective provisions could operate.

Ultimately the Judge decided that the clause was not a penalty as it was not a deterrent and was commercially justifiable as providing a commercial balance between the parties on lawful termination by the claimant.  The Judge also noted that both parties had the benefit of expert representation in the conclusion of the contract.

Although the Judge’s comments on the effect of the co-extensive provision in the guarantee were obiter and not binding, the case demonstrates that there are potential limitations to such a clause and it may not always be possible to rely on this provision where the principal contract is not enforceable.

Azimut-Benetti SpA v Darrell Healey [2010] EWHC 2234

The Independent Commission on Banking will consider the structure of the UK banking sector, and look at structural and non-structural measures to reform the banking system and promote competition.

It will formulate policy recommendations with a view to:

• Reducing systemic risk in the banking sector, exploring the risk posed by banks of different size, scale and function;
• Mitigating moral hazard in the banking system;
• Reducing both the likelihood and impact of firm failure; and
• Promoting competition in both retail and investment banking with a view to ensuring that the needs of banks’ customers and clients are efficiently served, and in particular considering the extent to which large banks gain competitive advantage from being perceived as too big to fail.

It aims to produce a final report by the end of September.

The claimants alleged that the APR stated in the agreement should be regarded as the primary figure and the monthly interest rate should be calculated from and should correspond (as closely as possible) to the APR.  They produced an expert report from a mathematician and computer expert who concluded that the APR rates on the monthly cash advance balance rate were incorrectly stated.

A regulated agreement is not properly executed unless the agreement contains all the prescribed terms.  If improperly executed, it is only enforceable by an order of the court.  The court cannot grant such an order in respect of agreements signed before 6 April 2007 and so those agreements which did not contain all of the prescribed terms are irredeemably unenforceable.  The claimants alleged that the APR was misstated and as a consequence the agreements were unenforceable.

The Judge explained that there is a very clear difference between the nature and function of the stated monthly (or annual) rate and the APR. The stated monthly or annual rate is (on its face) a contractual term.  The APR is designed to provide information to consumers and is arrived at by a complex formula designed to include not only interest rates but also other charges.  The APR is not a prescribed term.  Merely because the APR is included does not make it a prescribed term of the agreement.  The APR is not the driver of the figures and in any event,  if it were,  it would be unworkable as the APR figure only needs to be stated at the inception of the agreement.

Accordingly the claims that the agreements were irredeemably unenforceable because of an alleged mismatch between the APR and the stated rate of interest were struck out.

This case involved calculating the interest rates retrospectively, which as the Judge pointed out had “a surreal quality to it”. In the light of the series of cases which have resulted in a positive outcome for lenders, this is yet another nail in the coffin for those who seek to use the courts to bring consumer credit related claims on a very tentative and speculative basis.

Sternlight v Barclays Bank Plc and others [2010] EWHC 1865

Please see the link for guidance.  The regulations come into force on 1 February 2011. 

The existing Consumer Credit Act regime is unchanged in relation to agreements secured on land and consumer hire agreements (although lenders may choose to comply with the new requirements in respect of agreements secured on land).

In summary, the regulations make amendments to the following:

•  The right to withdraw from the credit agreement and the requirement to provide adequate explanations.  Creditors are required to assess the borrower’s creditworthiness before granting credit or significantly increasing the amount of credit.  The borrower can withdraw from an agreement within 14 days following conclusion of the agreement or (if later) once the borrower has received a copy of the executed agreement or notification of the credit limit on a credit card.
• How to set out and calculate the total charge for credit and the annual percentage rate of charge (APR) in advertising and consumer information.
• What information to provide consumers before they enter into a credit agreement and the way in which that information must be provided. They largely replace regulations on the disclosure of pre-contractual information. The information must be clear and easily legible, and the borrower must be able to take it away to consider and to shop around if he wishes.
• What information must be included in a credit agreement and how it must be presented and the requirements on the signing of a credit agreement.
• What information must be included in advertisements for consumer credit agreements and how that information must be presented.  If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example.
• The borrower is entitled to seek redress from the creditor in certain circumstances if he is unable to obtain satisfaction from the supplier of goods or services.  This applies where s75 of the Consumer Credit Act is not applicable.

• Introduce a corporate offence of failure to prevent bribery by persons working on behalf of a business. A business can avoid conviction if it can show that it has adequate procedures in place to prevent bribery.
• Make it a criminal offence to give, promise or offer a bribe and to request, agree to receive or accept a bribe either at home or abroad. The measures cover bribery of a foreign public official.
• Increase the maximum penalty for bribery from seven to 10 years imprisonment, with an unlimited fine.

In September, the Government will launch a short consultation exercise on the guidance about procedures which commercial organisations can put in place to prevent bribery on their behalf.

This will be published early in the New Year to allow businesses an adequate familiarisation period before the Act commences in April.

• How consumers enter into credit commitments, including the way in which credit is sold and the extent to which consumers understand what they are committing to;
• What issues arise during the lifetime of a loan from both the consumer and the lender perspectives; and
• What happens if things go wrong: are the current insolvency solutions fit for purpose?

A consultation on specific proposals is anticipated later this year or early 2011.

 The judge refused permission for the representative to act as advocate taking into account that:

•  the representative had “sailed very close to the wind” as regards conducting litigation on behalf of the claimants in the past without the necessary permission, contrary to the Legal Services Act 2007.  There was some concern as to whether the representative was charging for his services although the judge was prepared to proceed on the basis that he was not charging in this case;
• the claim was based on unparticularised but serious allegations including conspiracy to defraud, and the representative appeared to be encouraging the claimants to make these allegations when there was reason to doubt that he had given adequate thought to the proper basis (if any) for making these allegations.  The defendants had a legitimate interest to be protected by the safeguards that the law regarded as proper in such cases;
• there was conflict of interest between the claimants; and
• there had been many applications over a relatively short period with claimants losing application after application.  The lender had added their costs to the security so far.  These applications suggested that the representative did not have the necessary judgment and experience to decide which applications should be made and when, and how they should be best presented.

Following this case and in the light of the increase in the number of litigants in person, the Master of the Rolls and the President of the Family Division has now published helpful guidance on this issue:

 http://www.judiciary.gov.uk/docs/pub_media/mckenzie-friends-practice-guidance-july-2010.pdf

Francis & Ors v Barton Bridging Capital Ltd & Anor [2010] EWHC 152

The appeal raised the question of what is the meaning of “credit”, the “amount of credit” and the “charge for credit” as defined in the Consumer Credit Act 1974 (“the Act”)?

SPPL charged a broker’s fee of £875, which was described in the credit agreement in box D as “Broker Administration Fee”.  Interest was payable on the fee at the same rate as the sum advanced under the loan, which was for £17,500.  On the credit agreement in box C, the amount of the Credit was stated to be £17,500 and in box E the “Total Amount Financed” was shown to be £18,375, which was £17,500 plus £875.

The borrowers submitted that because the total amount of the loan was £18,375, it was wrong to describe the amount of credit as only £17,500 as SPPL lent the borrowers the total sum of £18,375 and charged interest on that total. If that was accepted then the agreement would be wholly unenforceable under the Act.  The borrowers submissions were based on the principle of “truth in lending”.

In a fairly short judgment, the Supreme Court concluded that based on the language of the Act and following the previous authorities (in particular Wilson v First County Trust Ltd [2001] QB 407), the fee of £875 was part of the total cost of, or charge for, credit and therefore could not be treated as part of the credit.  There was no infringement of the principle of truth in lending.

 As the court noted, if SPPL had described the broker’s fee as part of the credit, no doubt they would have raised the argument that the loan was unenforceable on the ground that the fee was part of the cost of the credit and should not be treated as part of the credit.  In order to succeed the borrowers would have needed to persuade the court that Wilson v First County was wrongly decided.

 This decision is obviously good news for lenders. If the borrowers had been successful, then lenders may have needed to reconsider their loan agreements.  It is yet another case (and this time at the highest level) which has gone against borrowers who raise technical arguments in order to avoid their obligations.

Southern Pacific 05-2 Plc (in substitution for Southern Pacific Personal Loans Limited) (Respondent) v Walker and another (Appellants)  [2010] UKSC 32