Finance litigation briefing - July 2013: report and review on the latest cases and issues

18 July 2013

Acceptance of payment doesn't automatically create a tenancy.

Where a tenant is in occupation of a property in breach of the mortgage terms and pays rent direct to the mortgagee, a tenancy will not be created if the tenant has not identified him/herself as such to the mortgagee.

So held the Court of Appeal in Paratus AMC ltd v Fosuhene (which we first reported on in October 2012). Paratus had advanced a loan secured against a property. The mortgage appeared to have been obtained by mortgage fraud as the named mortgagee claimed identity theft.

The defendant had rented the property from 2009 under a residential tenancy agreement with an unidentified landlord. Paratus had no knowledge of this tenancy agreement until its agent visited the property after it became aware of the mortgage fraud. The defendant produced evidence indicating direct payments had been made to Paratus. She argued that Paratus knew, following the visit, that the property was rented, that the mortgagee was not in possession and that the person paying money into the account was the person in occupation. She argued that on that basis, Paratus had waived the right to treat her and her family as trespassers and the possession order it had obtained should be set aside.

The Court of Appeal held that the defendant had to arguably demonstrate that Paratus consented to treat her as a tenant, or had precluded itself from denying her status as a tenant. It was for the defendant to adduce evidence from which it could be inferred Paratus knew the money was coming from her as an occupier. Paratus' payment records would not give any such indication.

There was no evidence that the defendant had identified herself as an occupier, rather than as someone speaking on behalf of the mortgagor, when speaking to Paratus about the level of the payments or arrears. There was no evidence to support the defendant's contention that Paratus had waived its right to treat her and her family as trespassers.

Things to consider

It was up to the defendant to prove her case. Simply paying the mortgage without making it known that she was doing so as a tenant, so giving the lender the ability to accept the payment on that basis, or not, was not sufficient. To have found otherwise would have placed lenders in an impossible position.

Subrogation requires a transfer of value

A lender can be subrogated to an unpaid vendor's lien over property where there has been a transfer of value, even if the lender did not advance the specific funds to buy the property. This was the finding of the Court of Appeal in Menelaou v Bank of Cyprus UK Ltd, overturning the judgment at first instance.

Menelaou's (M's) parents owned a property (the Hall) which was subject to two legal charges in favour of the bank. It was agreed that the Hall would be sold with part of the sale proceeds repaying part of the sum outstanding to the bank with the rest going to purchase a new property (Great Oak). The bank was to release its existing charges on the Hall and take a new charge (for the balance) on Great Oak. Great Oak was bought in M's name, not the parents'. The charge was not signed by M as required and so was unenforceable. This meant the bank had no charge over Great Oak for the debts of the parents. M sought to have the charge removed from the register of title. The bank argued M had been unjustly enriched and sought an equitable charge by way of subrogation to an unpaid vendor's lien over Great Oak.

At first instance the bank's claim was unsuccessful. The court held that the fact that the money used to buy Great Oak had not been paid by, and had not belonged to, the bank was fatal. M had been unjustly enriched but not at the expense of the bank as the purchase price for Great Oak had not been paid by the bank. There had been no transfer of value between M and the bank which was fatal to the bank's subrogation claim.

The Court of Appeal disagreed. There had been a transfer of value which had started with the agreement by the bank to release its charges on the Hall. Without that release the Hall would not have been sold and the money made available to purchase Great Oak. There was a sufficiently close causal connection between the bank agreeing to part with its charges over the Hall and the enrichment of M to hold that that enrichment had been at the bank's expense.

The court held that it could be said that the bank was the provider of the money used to buy the property as it was the provider of the money as a matter of economic reality. There was no reason why the bank should not be entitled to be subrogated.

Things to consider

Subrogation is an equitable remedy to prevent one party being unjustly enriched. Unjust enrichment would have clearly happened here had a narrow approach been upheld as to whether specific funds needed to have been advanced. Thankfully for the bank, economic reality prevailed.

A litigation receiver's limited power

Being appointed as a litigation receiver to defend an action does not necessarily extend the litigation receiver's powers to pursue an appeal.

So held the court in JSC Bank V Usarel Investments Ltd (by its litigation receiver David Rubin). An order was made appointing Rubin who was given the power to defend the action in the name of the defendant. Rubin subsequently applied to court for an order confirming, or extending, his powers to enable him to pursue an appeal. He argued that the power to defend an action should also extend to the power to appeal from a decision at first instance.

The High Court disagreed. The judge making the original order had not been asked to consider the possibility of an appeal. Read in isolation the power conferred by the order did not extend to the conduct of an appeal. It was not an ordinary use of language to describe an appeal as part of the defence of an action. For the purpose of the order made conferring the power, an appeal was a new proceeding having a new case number which would bear a Court of Appeal reference. Neither was it possible to imply a term that Rubin should have extended powers.

Things to consider

If faced with a similar scenario it is worth checking that the litigation receiver does have the power to do what he/she is purporting to do.

No judgment in default

Claims made under certain provisions of the Consumer Credit Act 1974 (CCA) must be dealt with under the Civil Procedure Rules (CPR) Practice Direction 7B (PD7B). One such claim relates to allegations of an unfair relationship.

In Chamberlain v Northern Rock, the claimant alleged the defendant had mis-sold payment protection insurance to him. The claimant alleged, among other things, that the relationship between the parties was unfair within the meaning of s140A CCA. The claimant sought to have judgment in default entered against the defendant as it had failed to acknowledge service of the proceedings or file a defence.

The defendant applied to have the judgment set aside on the basis that the proceedings, due to the claim of unfair relationship, fell to be dealt with by PD7B. PD7B provides that the defendant is not required to serve an acknowledgment or file a defence although it may choose to do so. Failure to do either could not therefore be a ground for default judgment to be entered.

The claimant argued that where a claim is put forward on a number of separate bases, including one of unfair relationship, the normal Part 7 procedure applies and the claimant was therefore entitled to enter judgment in default.

Finding that there was no previous authority on the point, the County Court judge agreed with the defendant. He held that if one element of the claim is caught by PD7B, the fact that there are other claims included does not mean that the claim is taken out of PD7B. The defendant was not obliged to serve an acknowledgement or defence.

Things to consider

The claimant could have applied for a default judgment under CPR (CPR12.4 (1)-(3)) but that would have required the unfair relationship allegations to have been specifically abandoned, which the claimant had not done.

Making demand under a performance bond

Where a demand is made under a performance bond (or performance guarantee) which prescribes the wording required to be used in the demand and the demand fails to follow those requirements, it will not be valid if it is ambiguous.

In Sea-Cargo Skips AS v State Bank of India, the bank issued two performance bonds to the claimant guaranteeing advance payments made under a shipbuilding contract. Under the bonds, the bank had an irrevocable and unconditional obligation to pay the buyer when the buyer made written demand. The bond set out how demand was to be made in certain specified circumstances. However, the demand made did not comply fully with those requirements. The bank denied it was liable to pay out under the demand.

The High Court held that the demand generated confusion as it was ambiguous as to which circumstances set out in the bond the demand was being made under. As the bank was not a party to the underlying contract, it could not tell by the terms of the demand itself that the buyer was entitled to cancel the contract and so trigger payment. On its true construction, the demand did not trigger the bank's liability to pay.

Things to consider

Whether making or being on the receiving end of a demand, it is prudent to ensure that the language set out in the performance bond is followed to ensure there is no ambiguity and the right to receive, or make, payment has arisen.

Service requirements

Service of a claim form means service of the original document, save where electronic service is being utilised.

In Hills Contractors and Construction Ltd v Struth and another, the claimant's solicitors sent a copy of the claim form by document exchange (DX) to the defendants' solicitors. The covering letter did not say it was sent by way of service but to show the claim had been issued.

The defendants successfully applied (without notice) to have the claim struck out on the basis the claimant had failed to serve its particulars of claim within 14 days after service of the claim form. The claimant applied to set that order aside on the basis the claim form had not yet been served. The defendants argued that the copy document sufficed for service purposes.

The High Court had to determine whether a photocopy of a sealed claim form is a 'claim form' for the purposes of service. As a general rule, it is the hard copy document as issued and sealed by the court that must be served. A photocopy is not sufficient. There are exceptions, being where service is by fax or email as necessarily there is not service of the original document issued and sealed by the court. In those circumstances, the hard or soft copy of the fax or the soft copy or print out of the attachment to an email is the document served but in each case the hard or soft copy represents a copy of the claim form issued and sealed by the court. To effect proper service by DX, an original claim form would have had to be enclosed, not a copy. As a result, the court held that service had not taken place and so the time limit for service of the particulars of claim had not started to run. The order striking out the claim was set aside.

Things to consider

Whether service has taken place in any given case will be fact-specific and dependent upon the method of service utilised, the actual words used and will be judged objectively. The party's unexpressed intention either way cannot alter the position.


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