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

16 September 2013

Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Conditional guarantee; bill of sale survives bankruptcy; letter of credit; no annulment of bankruptcy order; full redress under ADR scheme defeats court proceedings; file your costs budget or take the consequences; relief for error of little consequence.

Wragge & Co's finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Conditional guarantee

Where a guarantee is joint and several and intended to be signed by all the intended guarantors, it will not be enforceable where one of the signatures to the guarantee has been forged.

This was the finding of the Court of Appeal in Harvey v Dunbar Assets PLC in which the defendant had served a statutory demand upon the claimant. The demand was founded upon the claimant's liability under a joint and several guarantee which the defendant had called upon.

There were four guarantors. One of the guarantors alleged his signature on the guarantee had been forged. The claimant argued that as one of the intended guarantors had not signed the instrument, it was not enforceable against him. The Court of Appeal agreed.

On its true construction, the guarantee was a single composite document, prepared for signature by four people as joint and several guarantors. There was nothing in the guarantee to displace the starting point in the construction exercise that it was a condition that the guarantee be signed by all four intended guarantors and that liability as a guarantor would only be imposed on an individual guarantor when all the named guarantors had in fact signed it.

On the assumption that one signature had been forged, the four intended guarantors had not all signed the guarantee and the condition had not therefore been fulfilled. The defendant was not entitled to rely upon the guarantee as the basis of the statutory demand which would therefore be set aside.

Things to consider

There is no absolute rule or enshrined principle that in all circumstances, if an intended surety does not sign, the other intended sureties are not bound. Whether a surety is bound will depend upon the proper construction of the guarantee itself. There may be a clause saying one guarantor will be bound regardless of whether the other guarantor(s) sign.

Bill of sale survives bankruptcy

A finance company retained its right to enforce its security over a car under a bill of sale following the bankruptcies of the borrowers under the loan agreement.

In Evans and Evans v Finance-U-Ltd (FUL), the Evans entered into a regulated loan agreement with FUL for the purchase of a car. They were jointly and severally liable under the agreement. FUL could demand early repayment of the entire outstanding amount upon certain events happening. These included overdue payment and bankruptcy of one or both of the Evans. A bill of sale had also been entered into, giving FUL security over the car.

Mr Evans became bankrupt. Mrs Evans continued to pay the instalments on the loan. FUL proved in Mr Evans' bankruptcy for the full amount and received a small dividend for which it gave credit.

Mrs Evans was subsequently declared bankrupt and FUL served a default notice under the Consumer Credit Act 1974. The Evans argued that the car was now their property as they had been discharged from their contractual liabilities due to their bankruptcies. FUL sought to enforce the bill of sale.

At first instance, the court held that the entire debt became due on Mr Evans' bankruptcy and the loan agreement did not continue to bind Mrs Evans. FUL's failure to enforce its security following Mr Evans' bankruptcy disentitled it from seeking to enforce it subsequently on the basis that the loan agreement continued to exist.

The Court of Appeal allowed FUL's appeal. Although the bankruptcies released the Evans from any personal claim by FUL, FUL did not lose its right to enforce its security. FUL did not have to renounce its security to prove in Mr Evans' bankruptcy. Further, Mrs Evans had remained liable for the balance of the loan following Mr Evans' bankruptcy as they were jointly and severally liable under the loan agreement.

Although FUL may not be able to rely upon the failure to pay the instalments as a right to recover the car under the bill of sale, it could enforce that right based upon either of the Evans' bankruptcies. An order for delivery up was made.

Things to consider

Had the Court of Appeal's finding been otherwise, the bill of sale would not have been worth the paper it was written on.

Letter of credit

The lack of an ampersand or "and" in the name of the beneficiary in documents presented under a letter of credit entitled the bank to reject the presentation. This was the finding of the High Court in Bulgrains & Co Ltd v Shinhan Bank.

In a letter of credit issued by the bank, the beneficiary was identified as "Bulgrains Co Ltd" and a detailed description of the goods, the subject matter of the letter of credit, was given. The claimant presented documents pursuant to the letter of credit but the bank gave notice rejecting them as discrepant. The documents presented referred to Bulgrains & Co Ltd and the description of the goods did not match the description in the letter of credit. The claimant issued proceedings.

The High Court held that the correct approach with letters of credit is that any discrepancy other than obviously typographical errors, will entitle the issuing bank to reject. The letter of credit had been sent by the SWIFT system which does not transmit ampersands. However, the omission of the ampersand or the word "and" between "Bulgrains" and the word "Co" made the documentation discrepant given how significant the name of the recipient is.

The bank did not have to assume the risk and responsibility of determining whether the discrepancy was material. The material discrepancy in the name together with the discrepancy as to description in the invoice gave the bank the right to reject the documents. Notice of rejection had been sufficient and could be relied upon. The claim was therefore dismissed.

Things to consider

This case confirms that banks can seek strict compliance with the operation of documentary credits. The only exceptions will be where the discrepancy is insignificant or trivial (or unmistakeably typographical) such that it cannot be regarded as material. What is material is determined by reference to the letter of credit alone.

No annulment of bankruptcy order

In Webster v Mackay, the Websters entered into a promissory note to pay Mackay £200,000 on 31 October 2011. Mackay could seek early repayment by giving notice whereupon payment was due 12 months after the notice had been given. It was also a condition of the loan agreement that the Websters provide their trading accounts no later than 90 days after their accounting year end so that Mackay could calculate his loan profit.

Mackay gave notice on 4 August 2008. The Websters then failed to provide their trading accounts and Mackay gave notice of his acceptance of their repudiatory breach of the agreement, without prejudice to his right to repayment.

Statutory demands were issued in February 2010 and bankruptcy orders made in March 2012. The Websters applied for an order annulling the bankruptcy orders pursuant to s 282(1)(a) of the Insolvency Act 1986 (s282) in February 2013.

S282 allows annulment if the order ought not to have been made on any grounds existing at the time it was made. They argued that the petition debt was not a liquidated debt but, following the purported acceptance of their alleged repudiatory breach Mackay's claim had become one for unliquidated damages which could not form the basis of a petition.

The High Court, on appeal, held the failure to provide accounts was not a repudiatory breach which meant that the debt remained a liquidated debt. Even if there had been a repudiatory breach, Mackay had a vested right to repayment 12 months following the date of the notice on 4 August 2008 and no repudiation could take that vested right away.

A present right to future payment is not transformed into a claim for damages upon acceptance of a repudiatory breach. This was not a compensation claim but had always been a debt claim. The Websters' appeal was therefore dismissed and the court did not have to go on to deal with any wider discretion to review, vary or rescind the orders.

Things to consider

The court was clearly of the view that a debt, including one payable at a future date (including at the end of the original term) remains a debt following repudiation.

Full redress under ADR scheme defeats court proceedings

Where a claim had succeeded in every way under an appropriate ADR scheme, the court refused to allow a claim to proceed through the court so that, in effect, legal costs could also be recovered.

In Binns v Firstplus Financial Group Plc, the claimants claimed under the Financial Services Authority's alternate dispute resolution (ADR) scheme in relation to their PPI mis-selling claim. Under the ADR scheme they were awarded full monetary compensation for the losses incurred, but not their legal costs.

The claimants did not accept the award, instead commencing county court proceedings asserting that additional damages would be awarded in court. They would also be able to claim their legal costs.

The defendant applied to strike out the claim, contending the claimants had already received an award under the ADR scheme for all the compensation they could claim and at a fraction of the cost of litigation. It argued this claim was an abuse of court process and urged the court to encourage ADR rather than expensive and unnecessary litigation.

On appeal, the High Court agreed with the defendant and struck out the claim. The judge held that it was highly likely the claimants would achieve no greater measure of damages in court and the only advantage in pressing on with the claim was the possible award of costs.

It was also likely that if the matter were allowed to proceed, and no greater damages were awarded, the court would say the claimants should have used the ADR scheme and disallow them their costs of the proceedings in any event. It was not reasonable to bring a claim where the claim has succeeded in every way via ADR. There was no material advantage to the court proceedings and the claim was struck out.

Things to consider

The courts should, and further to this case will, strike out cases where full redress is available through such a scheme. Full redress, according to the judge, relates to matters intrinsic to the case, not costs adjunctive to it.

File your costs budget or take the consequences

Since 1 April 2013, in most multi-track cases, parties are required to file and exchange costs budgets. They must do so by the date specified in the directions questionnaire or if no date is specified, seven days before the first case management conference (Civil Procedure Rules (CPR) 3.13).

Failure to do so will lead to the party in default being treated as having filed a budget comprising only the applicable court fees, (CPR 3.14).This is exactly the position the claimant found himself in in Andrew Mitchell MP v News Group Newspapers (NGN). The claim relates to The Sun's coverage of the 'Plebgate' scandal.

Mitchell (AM) failed to engage in budget discussions and only produced his budget the day before the hearing, and only after being prompted by the court. This was a breach of Practice Direction (PD) 51D (see below) and of the overriding objective. AM had also failed to apply for any additional time to submit the budget or to apply for relief when he realised there was a timing issue. NGN had complied with the PD.

As proceedings had been issued before 31 March 2013, the costs budgeting rules under the costs pilot in defamation proceedings as per PD 51D applied to the case, not the new costs management rules under CPR3. However, because the hearing took place after 1 April 2013, the revised overriding objective (contained in CPR 1.1) which requires the court to deal with cases justly and at proportionate cost, and to secure compliance with court rules, were considered.

The pilot costs rules and the new costs rules are nearly identical, with one exception: the mandatory sanction in CPR 3.14. This limits a costs budget to court fees where a party has failed to file the budget within the specified time. In PD 51D, the nature of the sanctions for failure to comply is not stipulated.

However, given that the circumstances of the breach in this case were identical to that envisaged by the new rules, and the court's stricter interpretation of the application of the rules, the Master considered that the correct approach in this case would be to apply the same sanction as that in CPR 3.14.

The Master refused to grant relief from sanctions applying the stricter approach courts are now required to take. The reasons AM's solicitors put forward to excuse the failure to comply included:

  • They were a small, two partner firm
  • They had a number of staffing issues
  • Other litigation they were involved in at the same time put them under considerable time constraints
  • Work had begun on the budget the week before the CMC but delay had occurred as counsel's input into the budget had been required.

The Master held these would not have been good reasons to grant relief prior to the new costs rules and were even less so now. However, the Master did grant leave to appeal of her own motion, given the lack of authority on how to interpret the new rules and how strict the courts should be.

Things to consider

This is a robust judgment from the Master. It is being appealed and it is understood that three of the five Court of Appeal judges charged with hearing appeals coming out of the Jackson reforms will hear the appeal. It will be interesting to see whether the Court of Appeal will follow through their earlier promises of a tougher, more robust approach to rule compliance and relief from sanctions. We will keep you posted.

Relief for error of little consequence

Contrast the above case with that of Rayyan Al Iraq Co Ltd v Trans Victory Marine Inc in which the claimant sought relief for a relatively minor error with very limited consequences. By reason of the solicitor's oversight, particulars of claim were served two days after the 28 day period allowed by the CPR. The claimant applied for an extension of time for service which the defendant opposed.

The High Court held that had the application for an extension of time been made during the 28 day period, it would almost certainly have been granted on a paper application. The court considered the new provisions for relief from sanctions under CPR 3.9.

All of the circumstances had to be taken into account to enable the court to deal justly with an application, bearing in mind the need to conduct litigation efficiently and at proportionate cost and the need to enforce compliance with the rules. Litigants who substantially disregarded court orders or CPRrequirements would receive significantly less indulgence than previously.

However, the court went on to hold that the change in the rules did not mean that relief would be withheld where it would be disproportionate to do so and would give the defendants an unjustified windfall.

The delay here had been slight and the application for an extension prompt. The failure to comply was not intentional and an explanation for it had been given. The administration of justice had not been affected and the extension should be granted. The court further held that the error was inconsequential, should have been dealt with on paper and the defendant's attempt to exploit the error was regrettable.

Things to consider

The decision may have been different had there been a history of missed time limits or failure to comply with court orders.


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