Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.
Ombudsman's decision will preclude subsequent litigation on the same matter
We first reported on the decision in Clark and another v In Focus Asset Management & Tax Solutions Ltd in January 2013. In essence, the claimants accepted the Financial Ombudsman's (the Ombudsman) decision arising out of their complaints against their financial advisers.
The losses were in excess of £500,000 and the Ombudsman found they were entitled to compensation. The maximum sum it could award was £100,000. The claimants accepted this sum, subject to their right to claim more in court proceedings. They then issued court proceedings which the defendant sought to strike out as an abuse of process, the matter already having been litigated or judged (the doctrine of res judicata).
The High Court held that the Ombudsman's decision, which was said to be 'binding and final', simply referred to the end of the Ombudsman's process and did not preclude court proceedings from subsequently being issued following the acceptance of a decision. As a result, the claimants were entitled to claim damages for an amount in excess of the sum they had accepted.
On appeal, the Court of Appeal held that an Ombudsman's decision could indeed preclude subsequent court proceedings if the cause of action before the Ombudsman was the same as that before the court. It was for the defendant to prove the causes of action were the same. If they were not, there would be no issue of res judicata. If it was the same, court proceedings would not be permitted to simply 'top up' the Ombudsman's award.
Parliament's intention had been that consumer protection did not go beyond the scheme. Complainants would therefore have to reject the Ombudsman's decision and bring court proceedings if they thought they could achieve a higher level of compensation than that considered appropriate by the Ombudsman.
Things to consider
The Court of Appeal's decision has put an end to the legal uncertainty as to whether claimants who had accepted the maximum amount that the Ombudsman can award could then sue in court for the balance of their losses. However, uncertainty will still surround the 'cause of action' point and whether the same case is being brought twice. Financial advisers should ensure that they cover all relevant issues when responding to complaints to reduce the risk of customers bringing subsequent court proceedings.
Credit card company bound by the fraudulent misrepresentations of its supplier
Finance companies are liable to the ultimate customer on the basis of joint and several liability with the supplier - and this includes in relation to fraudulent misrepresentations.
This was the finding of the County Court in Mal'ouf v MBNA Europe Bank Ltd (t/a Abbey Cards).The claimant had been induced to purchase two plots of land from two companies. The vendors had fraudulently misrepresented that it was very likely that the plots would get planning permission, significantly increasing their value.
The claimant paid the deposits for the plots using her credit card. The companies became insolvent and the claimant pursued her claim for return of the purchase prices against the defendant credit card company. The defendant had no knowledge of the frauds but the claimant claimed they were liable under s56 and s75 of the Consumer Credit Act 1974.
The combined effect of s56 and s75 is that any misrepresentation or breach of contract made by or on behalf of the supplier is deemed to have been made as agent for the credit card company and if the customer has a claim against the supplier, there is a like claim against the credit card company. There is joint and several liability. Although there was no direct Supreme Court or Court of Appeal authority on the point, the County Court held these provisions would include claims for fraudulent misrepresentation.
At common law, if an agent is guilty of fraud to a third party, the principal is liable for the actions of the agent even if he knows nothing about the fraud and was not a party to it. There was no reason why the statutory agency created by s56 should produce a different result.
The claimant here would succeed in her claim against the credit card company.
Things to consider
This judgment fulfils the aim of the Consumer Credit Act being to protect the consumer leaving the credit card company to pursue the supplier, including in relation to fraudulent misrepresentations.
Breach of MCOB does not affect underlying right to possession
This was the finding of the High Court in Thakker and another v Northern Rock (Asset Management) PLC in which the lender sought possession of Thakker's property following an accrual of arrears.
Thakker sought to defend (by way of counterclaim) the possession claim on the basis that the lender had breached the Mortgage Conduct of Business Rules (MCOB):
- by failing to treat him fairly and reasonably in respect of subsequent mortgage advances,
- in refusing to meet him, and
- in failing to take all other reasonable steps to find a resolution before commencing possession proceedings.
The court held this amounted to an equitable set-off which could not defeat a possession claim.
Thakker appealed, arguing that there was no right to possession if MCOB had not been complied with.
The High Court held that there were two stages in possession claims:
- First, did the mortgagee have a right to possession?
- Second, if so, should the court exercise its discretion to stay possession pending the hearing of a counterclaim?
Thakker had no defence to the claim and his argument in relation to breach of MCOB was inconsistent with the Financial Services and Markets Act 2000 s151(2) which provides that the contravention of a MCOB rule does not make any transaction void or unenforceable. Even if the breaches alleged were proven, they did not give rise to the counterclaim put forward by Thakker.
Things to consider
MCOB requires lenders to take reasonable steps to reach agreement over repayment of arrears and, in effect, to treat repossession as a last resort. Once those efforts have been exhausted, the lender is entitled to repossess. MCOB does not alter the mortgagees underlying rights.
Once due under an on demand bond, always due
We last reported on Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA in April 2013. The dispute related to a shipbuilding contract where the bank guaranteed the payment obligations of its customer, the buyer, to the claimant seller under the contract. There was a dispute as to whether a payment instalment was due and the claimant called for payment under the payment guarantee from the bank.
The Court of Appeal had determined that the payment guarantee was a performance bond and that payment was to be made under it on demand, whether or not there was an underlying dispute as to payment between the contracting parties.
In the latest foray before the Court of Appeal, the issue was whether when the bank released money under the bond to the claimant, the claimant held it on trust for the bank, or the bank's customer, as argued by the bank. By the time payment had been made by the bank, it had been conclusively determined by an arbitration award that the disputed instalment had not in fact fallen due. As the seller therefore knew it was not entitled to payment of the instalment, the bank argued that that knowledge meant the seller held the money on trust for the bank.
The Court of Appeal disagreed holding that the guarantee was an autonomous contract independent of disputes between the seller and buyer pursuant to the underlying shipbuilding contract The seller would, however, be subject to an implied term in the underlying contract to compensate the buyer to the extent it had been over-compensated by the guarantor.
These principles were the basis upon which international trade was routinely financed. As between the beneficiary and the bank, the position crystallised at the time of presentation of the demand and the bank could only resist payment if there was a fraudulent demand by the beneficiary.
When the seller made its demand it had acquired a complete and immediately enforceable cause of action against the bank. It was irrelevant that it was subsequently determined that the demand, although made in good faith, had been made upon an incorrect premise (that payment was due).
The bank's failure to pay on demand had led to the circumstance where it could be said at the time of actual payment that the money was not in fact due. If payment had been made by the bank when it was due, that position would not have arisen. Payment from the bank fell due when demand was made following the purchaser's default. Once due, it remained due.
Things to consider
Although some may consider this a somewhat harsh judgment given the finding of the arbitrator before payment was actually made, that finding was not known at the time the demand was called upon. Certainty is crucial in international trade and this decision brings that certainty. Sellers can be certain they will get paid if a compliant on demand bond is in place and demand is properly made. Unfortunately, if over compensation is made under the demand, the bank and its customer may not have such certain of repayment if a seller has insolvency issues.
Cavalier attitude leads to civil restraint order
Where a party's behaviour indicates an intention to re-litigate matters previously struck out and to frustrate the other party's rights, the court will step in to avoid further costs and court time being wasted and grant a civil restraint order.
In JL Homes Ltd v Mortgage Express, Diakiw and Heap (acting as LPA receivers) the court did just that. The claimant owned six buy-to-let properties mortgaged to Mortgage Express. Arrears accrued, LPA receivers were appointed and possession orders were made in relation to five of the properties.
The claimant had alleged the LPA receivers had been wrongly appointed (despite the mortgage arrears and the fact the tenants in the properties had not been consented to) and made a number of other claims which the court also held were without foundation.
The court had previously struck out the claim holding that the claimant was attempting to re-litigate hopeless allegations which had previously been struck out and that this and his previous three claims or applications were totally without merit. The claimant's actions had put Mortgage Express to unnecessary expense and frustrated the LPA receivers' function. The fact that the tenants were paying rent to the claimant but that it was in arrears with its mortgages was evidence of its cavalier attitude towards Mortgage Express.
The court then went on to consider whether a civil restraint order was appropriate. The jurisdiction to make such an order is engaged where a party "persistently" issues claims or makes applications which are totally without merit. It was common ground between the parties here that "persistently" meant a minimum of three claims or applications. The jurisdiction was engaged in this case and the court made an extended civil restraint order, awarding costs against the claimant on the indemnity basis.
Things to consider
In cases such as this, it is worth asking the judge hearing unmeritorious applications to include in the wording dismissing the claim or application that it is "without merit". By doing so, any argument that previous claims or applications may have been ill founded but not "without merit" can be met head on and the process of obtaining a civil restraint order made easier and swifter.