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

The purpose of the loan was to provide the claimant solicitor with funds to enable him to pay disbursements including the premiums due under after-the-event (ATE) insurance in respect of up to 6,000 claims in which he proposed to act , pursuant to conditional fee arrangements (“CFAs”) for debtors under regulated consumer credit agreements against banks and other financial institutions.

The issue which the court had to consider was whether the defendant was entitled to decline to make the first advance under the loan agreement when requested to do so:

Was the defendant entitled to decline to make the advance in the exercise of discretion under clause 1.1 (a) of the agreement?

• Was the defendant entitled to decline to make the advance on the ground of non-satisfaction of the conditions precedent in clause 1.7?

Clause 1.1 (a) provided that the “Lender’s obligation to make any Advance hereunder shall be in the Lender’s sole discretion.” The Judgment provided a very detailed discussion on the meaning of this clause.  Taken by itself the court decided that the clause is unclear when closely analysed.  However, on closer inspection the Judge considered it to mean that it is up to the lender whether or not to make an advance rather than it is up to the lender to judge whether or not its obligation to make an advance had arisen.

The court noted that when a contract confers on one of the contracting parties’ discretion, the exercise of that discretion is not entirely unconstrained.  The court can only interfere if the discretion has been exercised irrationally, capriciously or arbitrarily.  A decision is not “irrational” merely because it is in a looser sense unreasonable.

The defendant lender had decided not to make an advance in response to the claimant’s request because it was not satisfied with the ATE insurance being offered. It required that the insurer either have a substantial capital base or have reinsurance of its exposure. The claimant considered that having regard to the amount involved, the low degree of risk and the apparent soundness of the ATE insurer, that it was irrational and capricious to require reinsurance. 

The court held, however, that it was precisely this kind of assessment that was properly to be made by the lender and not by the court particularly given that the claimant was insolvent and was branching out in an unfamiliar area of business and was unable to obtain finance from mainstream lenders.

So the lender was entitled to decline to make the first advance when requested to do so.

The court also held that it had been entitled to decline to make the advance on the basis that the solicitor had failed to comply with the conditions precedent. At no time did the defendant give an unequivocal assurance that it would not require delivery of proof of insurance. 

Simon Mckay v Centurion Credit Resources LLC [2011] EWHC 3198

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.

In this case, Mr and Mrs Harrison took out PPI, the premium of which was £10,200.  Of that 87% was retained by the lender or 677% of the apparent cost of the insurance although, as the Court of Appeal acknowledged, this could be misleading as concealing a cross-subsidy between the cost of the PPI and the annual percentage rate or cost of the loan. The Court of Appeal made the following points:

• First, it is the relationship between the parties which must be determined to be unfair, not the agreement although it is envisaged that the terms of the agreement may themselves give rise to an unfair relationship.
• Although the s140 of the Act came into force from 6 April 2007, they are applicable from 6 April 2008 to a pre-existing agreement unless at that time the agreement was complete.  An agreement is complete if there is no longer any sums payable under the agreement.
• Although Mr and Mrs Harrison’s main appeal relied on s140 of the Act, they attempted to introduce arguments relating to alleged breaches of the ICOB Rules, but these were rejected by the Court of Appeal.
• The main argument was that in the absence of an explanation, the commission was so high that it gave rise to a conflict of interest which it was the lender’s duty to disclose.  Only disclosure could give the borrowers the opportunity to decide whether they wished to purchase a product in circumstances where the lender derived so significant a benefit from the purchase.  The Court of Appeal in rejecting this argument highlighted the following:
  • It is clear that the ICOB regime after due consultation and consideration does not require the disclosure of the receipt of commission.  It would be an anomalous result if the lender was obliged to disclose receipt of a commission in order to escape a finding of unfairness but yet not obliged to disclose it pursuant to the regulatory regime.
  • A seller is not ordinarily obliged to warn his buyer that his product is expensive when compared to other similar products. In any other context the suggestion that the charging of a high price for a product freely and readily available more cheaply elsewhere in the market is indicative of unfairness in the relationship between seller and buyer would be met with incomprehension.
  • There was no suggestion in the FSA publication of March 2007 on PPI, that commission rates similar to this case generated a duty of disclosure which if not discharged would give rise to an unfair relationship.  Again, the FSA policy statement of August 2010 which raised fifteen common failings resulting in detriment and poor outcomes for consumers did not raise non-disclosure of commission as a common failure.

This Court of Appeal case should now prevent similar complaints from being pursued which relate solely to the size of the commission payable in respect of PPI.  Similarly, it should also discourage the use of unfair relationship arguments where the regulatory regime itself does not impose any corresponding duty.

Harrison and Another v Black Horse Limited [2011] EWCA Civ 1128

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

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

Mr White gave a guarantee to secure the liabilities of SGPS of which he was a director.  SGPS also gave a charge on land as well as a fixed and floating charge on its assets generally. SGPS went into administration.

As Lord Justice Lloyd in the Court of Appeal explained, a creditor who wishes to recover his debt can issue court proceedings and then enforce any judgment it obtains.  Alternatively, it can take bankruptcy proceedings immediately.  However, in order to take bankruptcy proceedings, the debt must be unsecured. A creditor who is fully secured over assets does not need take bankruptcy proceedings and should not do so, unless it is willing to give up that security because the asset over which the security exists will not be part of the estate divisible for the benefit of the creditors generally. 

A creditor which has several remedies can choose which to enforce, at what time, in which order, being limited only by the proposition that the creditor cannot recover more than it is due.

It is not open to a guarantor to argue that the creditor should pursue the principal debtor first or should realise security given by the principal debtor first.  

If the security is over the assets of a different person, then the existence of that security does not constitute any reason why the particular creditor should not proceed against this other debtor, who has given no security for his assets.

The facts of this case itself illustrated the reason why a creditor should be allowed to proceed against a guarantor.  DTL would not have been able to enforce its security against the principal debtor without the agreement of the administrators of SGPS or the leave of the court because of the requirements of the Insolvency Act.  It was not clear whether DTL would have obtained consent or leave particularly in the light of the fact that Mr White had attempted to have the administrators removed from office.

Accordingly the fact that DTL had security from the principal debtor did not prevent it from proceeding by way of bankruptcy against the guarantor, Mr White.

It is common for guarantors to allege that a bank should proceed against the principal debtor prior to commencing its claim against the guarantor.  It is helpful to have this Judgment from the Court of Appeal confirming not only that a creditor can choose who it wishes to proceed against and when it wants to proceed, but also confirming that security from the principal debtor does not impact upon its ability to seek a bankruptcy order against the guarantor.

Mark Eugene White v Davenham Trust Ltd [2011] EWCA Civ 747

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 Claimant wished to obtain a Norwich Pharmacal order in order to obtain disclosure of information which would lead to the identification of those responsible for the defamatory postings.  The Claimant sought to serve the proceedings by email in order to avoid delay as there was a risk that the data might not be kept for the period of time in question.

As the Court noted, there are differing views on whether it is possible to serve by an alternative method outside the jurisdiction. In the case of Brown v Innovatorone Plc [2009] EWHC 1376, it was held that CPR 6.15 which provides for alternative service is only relevant to cases within the jurisdiction.  In Bayat Telephone Systems International Inc v Lord Michael Cecil & Ors [2011], the Court of Appeal held that CPR 6.15 did give the Court the power to order service out of the jurisdiction by alternative method.  Service by alternative means may be justified by facts specific to the Defendant, as where there are grounds for believing that he has or will seek to avoid personal service and where that is the only method permitted by the foreign law.  Alternatively by facts relating to the proceedings as where an injunction has been obtained without notice or where an urgent application on notice for injunctive relief is required to be made after the issue of proceedings. 

In this case, the facts specific to the First and Second Defendant was that they had expressly consented to the service of the order by email and it could be inferred that if they had been asked they would have consented to service of the Claim Form.  In the case of the Third Defendant their website invites service by email. The Court was, therefore, prepared to order service by email.  In future, the Claimant should put before the Court evidence that the method of service is permitted by the law of the country in which the Claim Form is to be served and expressly seek consent to serve by this method.

Louis Bacon v Automattic Inc, Wikimedia Foundation and Denver Post LLC [2011] EWHC 1072

Mr Binney asserted that:

• The alleged agreement was a term of the agreement or a condition subsequent.  Mere production of a written agreement does not render inadmissible evidence of other terms not included expressly or by reference in the document.
• The agreement was a collateral warranty so that if a person gives a promise and the other party relies on that promise, it is binding.
• The Bank was estopped from enforcing its strict rights under the guarantee.

The Bank in turn submitted that:

• Where the Court is satisfied that the terms of the parties’ agreement are wholly contained in a written document then oral evidence adding or qualifying to that document is not admissible.
• The Court should be satisfied that the agreement was wholly contained in the written document.  The alleged agreement should not be permitted to override the clear terms of the guarantee.
• Any alleged warranty is unenforceable where it contradicts or is inconsistent with the terms of a written guarantee.
• Estoppel by representation only arises where there is a representation of existing fact.

The Court examined the central issue, which was what was said or represented at the meeting on 17 November 2006 so as to give rise to a binding agreement, collateral warranty or representation as alleged by Mr Binney. The Court decided that there was no agreement, warranty or representation giving rise to any estoppel as Mr Binney alleged.

Accordingly it was unnecessary to consider the legal arguments.  It took into account:

• The burden of proof was on Mr Binney to establish any such agreement. 
• Although the relationship manager, Mr Thomson could not recall what was said in the meeting, the Judge was prepared to accept  that the overwhelming likelihood is that any specific request would have been so unusual that Mr Thomson would have remembered it and it would have necessitated both a review of the Bank’s lending and some authority higher to authorise the review if it had happened.
• Mr Binney was a highly articulate business man.  He had trained as an accountant and qualified as an economist.  A person of Mr Binney’s considerable financial experience would have made sure that he notified the Bank and confirmed what he now says was the position with regard to the guarantee. 
• Mr Binney had a propensity to lie or was willing to deceive or to mislead.  Although a witness may lie or give unsatisfactory evidence in regard to certain matters, this does not mean that their evidence is untruthful with regard to other matters.  However, these were matters that the court was entitled to take into account.
• The events both at the time and subsequent did not support Mr Binney’s assertions.

Accordingly the Bank was able to recover the sum of £100,000 from Mr Binney.

This case serves as a useful reminder of the legal issues involved, but ultimately the case came down to whether the Court believed Mr Binney’s assertions.  Even where a manager cannot recall what happened at a particular meeting, this is not fatal to a claim and the Court can look at a variety of circumstances in determining whether the oral agreement was made. Here, the court considered the burden of proof, whether what was said was unusual, the type of person making the assertion, whether the witness was truthful and the events surrounding the alleged statement.

National Westminster Bank plc v Binney [2011] EWHC 694

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

The difficulty many of the banks faced was that they could not locate the original agreement although they could provide information from their records.  On 23 December 2009, His Honour Judge Waksman QC after selecting a number of test cases held that a creditor was not obliged by section 78 to provide the debtor with a copy of the original agreement, but could meet its obligations by providing the information contained in that agreement drawn from other records.  As a result of this decision many of the cases were simply discontinued. 

In March 2010, seven cases including the two under appeal here, were brought before Judge Waksman on an application by the claimants that despite the orders against them, they should be entitled to their costs from the banks. The Judge summarised the principles relating to discontinuance as follows: 

• When a claimant discontinues the proceedings, there is a presumption by reason of CPR 38.6 that the defendant should recover his costs, the burden is on the claimant to show a good reason for departing from that position;
• The fact that the claimant would or might well have succeeded at trial is not a sufficient reason for departing from the presumption;
• However, if it is plain that the claim would have failed, that is an additional factor in favour of applying the presumption;
• The mere fact that the claimant’s decision to discontinue may have been motivated by practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of the case will not suffice to displace the presumption;
• If the claimant is to succeed in displacing the presumption he will usually need to show a change of circumstances to which he has not himself contributed;
• However, no change in circumstances is likely to suffice unless it has been brought about by some form of unreasonable conduct on the part of the defendant which in all the circumstances provides a good reason for departing from the rule. 

On this basis, the Judge held that the claimants should pay the defendant’s costs.  Two of the claimants appealed.  Following Judge Waksman’s decision, further guidance was given in the case of Messih v MacMillan Williams where it was decided that a claimant who seeks to persuade the court to depart from the normal position must provide cogent reasons for doing so and is unlikely to satisfy that requirement save in unusual circumstances. 

The appellants’ position was that they had both brought proceedings to obtain performance by the bank of its obligations under section 78 of the Act and had discontinued as soon as they had obtained what they were seeking and so should be entitled to their costs.  In substance they claimed that they had been successful. 

The Court of Appeal, held that the claimants may have had a legitimate interest in seeking a copy of the agreement, but it does no follow that the debtor has the right to bring proceedings at the creditor’s expense in order to obtain relief which goes beyond what he is entitled to obtain under the statute or relief by way of a declaration which has no practical utility.  

In the light of the way the proceedings were conducted, the Court of Appeal was unable to accept that the proceedings were brought simply to obtain a copy of the original credit agreement.  With respect to Ms Brookes, the bank was not unwilling to provide the information; it was unable to provide a copy of the original agreement that the claimant was seeking to establish as the basis for making good her contention that the agreement was unenforceable.  The real purpose of her claim had been to obtain a decision that the provision of a reconstituted agreement was not sufficient to comply with its duty under section 78.  Accordingly, the decision to order her to pay the bank’s costs was correct. 

In Mr Jemitus’ case, his real purpose was not to obtain a copy of the agreement, but to establish that in the absence of a copy of the agreement, the debt was unenforceable.  Once the bank produced a copy of the original agreement the case inevitably collapsed.  If the claimant had not sought more than the copy of the agreement it is unlikely that proceedings would have been issued at all.  He had asked for more extensive relief and accordingly he was liable to pay the costs. 

This case is good news for the banks.  Although the claimants asserted that they were successful, the Court of Appeal was able to see through this argument and to ascertain that the true purpose of the claims was to try to establish that the debts were unenforceable, which had been unsuccessful. 

Erica Brookes v HSBC Bank Plc and Jemitus v Bank of Scotland Plc [2011] EWCA Civ 354

The Act creates a new offence which can be committed by a commercial organisation which fails to prevent persons associated with them from committing bribery on their behalf. It is, however, a full defence for an organisation to prove that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing.

Bribery is defined as giving someone a financial advantage or other advantage to encourage that person to perform their functions or activities improperly or to reward that person for having already done so.

The guidance is formulated around six guiding principles each followed by commentary and examples. The onus will remain on the organisation, in any case where it seeks to rely on the defence to prove that it had adequate procedures in place to prevent bribery. The guidance suggest certain procedures, but they may not be applicable to any particular circumstance.

The six principles are:

1. Proportionality: The action taken should be proportionate to the risks faced and the size of the business. So if an organisation is a large one or a business is in operating in an overseas market where bribery is commonplace, more might need to be done.
2.  Top Level Commitment: Those at the top of the business will want to make sure that they have been active in making sure that staff and the key people who do business understand that you do not tolerate bribery.
3.  Risk Assessment: An assessment of the risks faced should be taken. If business is primarily in the UK, then there may be little or no risk of bribery. If business is conducted outside the UK, then the country or sector will be relevant.
4. Due Diligence: Knowing exactly who you are dealing with can help to protect organisations from taking on people who might be less than trustworthy. Due diligence will only need to be done on persons who actually perform services for the business. Someone who simply supplies goods to the business is unlikely to do that.
5.  Communications: Policies and procedures should be communicated to staff and to others who perform services for the business.
6. Monitoring and review: An eye should be kept on the anti-bribery steps taken to keep pace with any changes in the bribery risks faced.

One of the most controversial areas was the issue of how much hospitality, promotional or other business expenditure could be done. The guidance stresses that genuine hospitality or similar business expenditure that is reasonably and proportionate will not be caught by the Act. So, businesses can continue to provide tickets for sporting events, take clients to dinner, offer gifts to clients as a reflection of good relations or pay for reasonable travel expenses in order to demonstrate goods or services will be fine as long as it is reasonable and proportionate.

Facilitation payments, which are payments to induce officials to perform routine function which they are otherwise obligated to perform are bribes although legally required administrative fees or fast-track services are not facilitation payments.

The guidance will prove very helpful to business. The guidance demonstrates that legitimate and proportionate business hospitality will not be caught by the Act and well run businesses with adequate procedures to prevent bribery are protected.

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

In September 2001, Mrs Chandra gave  a guarantee in favour of Royal Bank of Scotland Plc limited to £700,000 and a legal charge to support company borrowings.  The company was involved in hotel development.  Although Mrs Chandra was a director of the company, her evidence was that at all material times she placed trust and confidence in her husband in relation to business matters.  Despite being a co-director she had no involvement in the business and had only visited the hotel once after the receivership had commenced.  A solicitor had been nominated to advise her on the meaning of executing the guarantee.

The Court of Appeal accepted that it was impossible to classify every type of situation in which improper or undue influence can be said to have been used to persuade a person to enter into the transaction under review.  However, clear examples are where there is a conscious deception, an abuse of confidence or a trusted adviser who prefers his own interest.

Undue influence is concerned with the abuse of relationship of trust and confidence between husband and wife.  At first instance there was no finding of undue pressure and this was not relied on in the appeal.  Mrs Chandra therefore had to rely on what was said by Mr Chandra as being a material misrepresentation which entitled her to have the guarantee set aside.

Mrs Chandra claimed that she had signed the guarantee as a result of her husband’s misrepresentation.  The misrepresentation was that the amount being borrowed would be enough to complete the development of the hotel.  Did this amount to a misrepresentation?  There was a lot of analysis in the judgment of the status of this statement.  However, the Court of Appeal concluded that this was not a misstatement.  It was an over-optimistic assessment of the chances of a future overspend.

As Lord Nicholls explained in the renowned House of Lords’ judgment of Royal Bank of Scotland Plc v Eteridge, which was delivered some 19 days before the execution of the guarantee: “when a husband is forecasting the future of his business and expressing his hopes or fears, a degree of hyperbole may only be natural and the courts should be slow to treat such exaggerations as misleading.”

Having decided that there was no misrepresentation, there was no need to consider the question of whether the bank was fixed with constructive notice of the undue influence or misrepresentation.

This case provides a good example of how a wife may attempt to set aside the guarantee that she has provided.  Mrs Chandra was unsuccessful as she was unable to establish that there had been undue influence nor could she establish a misrepresentation.  Where an allegation of misrepresentation is made, the courts will examine carefully the meaning and the impact of the alleged statement.  Merely because a statement is incorrect it does not automatically amount to a misrepresentation entitling a person to set aside the guarantee.

Royal Bank of Scotland Plc v Mr and Mrs Chandra [2011] EWCA Civ 191

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

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)

The growth in the letting of property and the effects of the recession have resulted in an increase in the number of evictions of unauthorised tenants. As a consequence, the previous Labour Government introduced the MRPTA 2010, which came fully into force on 1 October 2010, in order to protect residential tenants by ensuring that they are entitled to a reasonable period of notice to leave a property if their landlord is repossessed

In short, the MRPTA 2010:

1. Gives courts the power to postpone a possession order for up to two months (thus allowing tenants the opportunity to find alternative accommodation); and

2. Requires lenders to give notice of the proposed execution of the possession order.

Further comment on the Act is available here.

The Guidance aims to inform lenders, landlords and tenants of their rights and responsibilities under the MRPTA 2010.

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.

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

There is a concern that the FSA’s latest proposals are not proportionate. Moreover, the Industry itself has already done much to put its house in order and to ensure responsible lending. Self certification and interest only facilities have assisted many customers onto the housing ladder or to keep their homes. The majority used self certification for speed and convenience, to assist them through temporary financial difficulty, to repair their credit rating and return to the ‘high street’ or through necessity but not as a means to inflate income.

Regulation should protect the vulnerable while allowing the majority informed freedom of choice and the right to make their own decisions. In a recovering market where there are already limited choices and products, we do not want to regulate the market to the point where lenders may leave, leaving consumers with limited or even no choices.

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

It was accepted that the trustees had a right of indemnity against the trust assets, but the trustees claimed that clause 17.6.1 of the debenture ensured that any assets which were needed to satisfy the right of indemnity were not trust assets, but belonged to the trustees and therefore would not be affected by the debenture.  The judge could not agree with the trustees’ construction of the clause.  There was no reference in the debenture to the expenses incurred by the trustees and by clause 12 the trustees covenanted to indemnify the lender and any receiver against all costs, expenses and liabilities.

Further, the court was not satisfied that such a term could be implied:

•  A term is to be implied to give effect to the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available.
• It must be necessary to give effect to the presumed intentions of the parties. 
• It was not difficult to accept that the parties might have reasonably agreed that the trustees’ lien should rank ahead of the mortgage, but the circumstances were not such to require such a term to be implied.
• This was because it would contradict the terms of the debenture, which provided that at the point of sale, the receivers should apply the proceeds of sale after his own expenses and remuneration towards payment of the secured loan. 
• If there were to be protection, it was far from clear that it would be by giving priority to their lien. 
• The fact that there was no mention in the debenture for its priority was a significant factor against its implication.

This case provides a useful example of the court’s approach to (1) a claimant’s attempts to construe terms in a debenture which are not obvious and (2) the circumstances when it is possible to imply terms in a debenture.

 Dominion Corporate Trustees Ltd v Capmark Bank Europe Plc [2010] EWHC 1605

Mr Cowey and Ms Cowlam charged their property in favour of the claimant, Annulment Funding Company Ltd.  The claimant provided funds to bankrupts to obtain, as their name suggests, an annulment of their bankruptcy.  Following annulment, the intention was that the former bankrupt would obtain a mortgage from another lender to pay off any prior charges on the property.  The funds advanced by the claimant were short term at a level of interest to reflect the fact that the borrower was bankrupt and not in a position to borrow elsewhere. 

In August 2007, Mr Cowey and Ms Cowlam signed a mortgage deed in favour of the claimant over their house in order to obtain an annulment of Mr Cowey’s bankruptcy.  The annulment was obtained.  Efforts were made to find a mortgage lender to repay the claimant, but those efforts were unsuccessful.  As a result, the loan from claimant, which was meant to be short term was not repaid and claimant called in the loan.

At first instance, the court decided that Ms Cowlam entered into the charge as a result of the actual undue influence of Mr Cowey and the claimant was bound by that.   Mr Cowey had taken advantage of Ms Cowlam and caused her to enter into a transaction which was very much against her interests. They had both misunderstood the position and had not realised that they had agreed to enter into a charge over their house.

 The claimant appealed on the basis that the original defence had relied upon an inference of undue influence or presumed undue influence and it was not open to the judge to make a finding of actual undue influence.  Somewhat unsurprisingly this appeal did not succeed.  Secondly, the claimant argued that there was insufficient evidence to have made a finding of actual undue influence, but again the Court of Appeal rejected this ground of appeal. 

In addition, the claimant asserted that although the charge could be set aside, the loan should be allowed to stand as Ms Cowlam had understood that she was entering into a loan.  However, a finding that Ms Cowlam was liable to repay the loan and a judgment against her would mean that it would be open to the claimant to obtain a charging order. Although the claimant argued that it was possible to sever the part of the transaction which is not affected by the undue influence, the court held that both the loan and the charge were disadvantageous and both were affected by undue influence.  Accordingly no question arose of severing a part of this transaction. 

 Annulment Funding Company Limited v Cowey and Cowlam [2010] EWCA Civ 711