Finance litigation briefing - March 2014

15 minute read
28 March 2014

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

  • Regulated Consumer Credit Act agreement can be concluded electronically;
  • Unfair relationship;
  • Is a facility fee for a loan a penalty?
  • Genuine demands of PPI customer must be ascertained;
  • Mortgagee not liable for conversion of mortgagors' personal belongings;
  • Wrongful winding-up petition and unreasonable refusal to mediate - the costs consequences.

Regulated Consumer Credit Act agreement can be concluded electronically

This was one of the findings of the High Court in Bassano v (1) Toft, (2) Biddulph and (3) Borro Loan Ltd. Bassano was a professional musician who took out a series of loans secured against her valuable viola. The first loan with Toft, a dealer in musical instruments, was for £100,000 and was secured by a chattel mortgage deed which contained a covenant to repay the principal and interest. The deed was not registered as a bill of sale, did not comply with the Bill of Sale Act (1878) Amendment Act 1882 and so was void and unenforceable. Bassano paid some of the interest under the loan but none of the principal.

Bassano then obtained a loan of £130,000 from Borro which was secured on the viola by way of a pledge. That loan agreement was completed online. Bassano made no repayments. Borro took possession of the viola. It was subsequently sold through a dealer to Biddulph for £230,000. That sum was paid into court. Toft and Borro sought repayment of the loans, plus interest. Borro claimed a priority security interest by reason of the pledge.

Bassano argued the loan with Toft was void and unenforceable as it was a regulated loan agreement and Toft was not licensed to make such loans. She also argued the on-line loan agreement was unenforceable as she had not signed it and that Borro had lost its security as pledgee by parting with possession.

The court held that as to the first loan, Toft did not need to be licensed as he did not make the loan in the course of a consumer credit business. It was a one-off loan. There had to be a degree of regularity in the making of such loans to make them part of the normal practice of a business. The fact that the chattel mortgage was void and unenforceable did not entitle Bassano to keep the money. Bassano had impliedly agreed to make repayments of the loan, as evidenced by her repayment of part of the interest.

As to the second loan, Regulation 5 of the Consumer Credit (Agreements) Regulations 2010 recognised that a regulated agreement could be concluded electronically and there was no reason why a signature could not be affixed electronically. By Bassano clicking the "I Accept" button which generated a document bearing her name, that constituted signing it so as to fulfil the requirements of s61 of the Consumer Credit Act 1974. The words "I Accept" appeared in the designated space on the form and were sufficient. Borro's claim for repayment of the loan succeeded.

Further, a pledgee did not lose his interest simply by parting with physical possession of the chattel unless that constituted a voluntary surrender of his interest. Borro had not surrendered possession in the legal sense when giving the viola to the dealer and retained priority for repayment of the loan over Toft.

Things to consider

This is a good decision for lenders, particularly in relation to the online signature point.

Unfair relationship

An unfair relationship arose between a creditor and debtor where the timeshare purchase agreement to which the loan related provided that the whole capital asset would be forfeited for non-payment of management charges.

So held the High Court in Link Financial Ltd v Teresa North Wilson. Wilson entered into a fixed sum loan agreement with Link Financial Ltd (Link) to fund the purchase of a holiday timeshare. The purchase price was just over £20,000. Wilson had falsely provided details of her income despite being unemployed at the time. The timeshare agreement provided that if Wilson failed to make any payment due under the agreement within 14 days' notice to do so, the vendor could rescind the agreement and forfeit all money paid by Wilson.

Wilson failed to pay management charges and loan instalments. The agreement was rescinded and Link sought to recover the sums due under the loan. Wilson claimed there was an unfair relationship under s140 of the Consumer Credit Act 1974 (s140) because of the forfeiture provision in the related purchase agreement.

At first instance the court held there was no unfair relationship. This was because there had been no high-pressure selling, no contravention of the Timeshare Act 1992, Wilson was an educated woman who had understood the agreement and she had lied about her income. Judgment was given against Wilson for £41,000 (which included interest and costs).

Wilson appealed, arguing that the agreement was unfair because the effect of rescission and forfeiture meant she could not rely on the capital value of the timeshare to reduce the loan debt.

The High Court allowed the appeal. The relevant clause in the timeshare agreement was unfair and gave rise to an unfair relationship, despite the findings made by the judge as referred to above. Wilson should have been able to use the capital value of the timeshare to part repay the loan. As there was no expert evidence available as to the capital value, it was ordered that no further sums should be paid by Wilson.

Things to consider

The onus was on Link to prove that the agreement was fair, not on Wilson, and it had failed to do so. Although Wilson's dishonesty as to her income was relevant, that was not the basis upon which the agreement was rescinded and therefore, its causative weight and relevance was much lower than it might otherwise have been. It was only one of the factors taken into account.

Is a facility fee for a loan a penalty?

This was one of the issues that the High Court had to deal with in Aodhcon LLP v Bridgeco Ltd in which the claimant entered into a bridging loan with the defendant in relation to its property development business. When the term of the bridging loan expired, the property had to be sold by the defendant as mortgagee in possession.

The claimant issued proceedings claiming, among other things, that the facility fee for arranging the loan was a penalty. The relevant provision of the offer provided that a facility fee of 1.25% per month calculated on the balance outstanding as at each month anniversary of the draw down would be debited from the account and would be payable on redemption. However, it further provided that the defendant would waive its rights to collect the facility fee if there were no arrears of interest or any other breaches of the terms and conditions of the offer including the claimant's failure to repay the loan at the end of the term.

The facility fee amounted to some £49,991.98 for the period between December 2010 and May 2011.

The court held this was not a penalty. The claimant had a contractual obligation at all times to pay the facility fee but an indulgence was granted by the defendant in the absence of default. The facility fee did not impose an additional liability in the event of default.

The court held that whether a provision is a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. There was nothing in this case to suggest that the predominant contractual function of the facility fee provision was to deter the claimant from breaking the bridging loan agreement.

Things to consider

The facility fee was not a penalty clause but an indulgence for prompt and full payment. The fact that the sum involved was a large one did not affect the proper construction of the clause.

Genuine demands of PPI customer must be ascertained

Insurance intermediaries should ask open and fair questions of customers to ensure they understand their genuine demands.

This was the finding of the Court of Appeal in Saville and Saville v Central Capital Ltd, in which the claimants took out a five year payment protection insurance (PPI) contract when they entered into a 25 year loan. The claimants argued that it had been implied by the defendant insurance intermediary that the PPI policy was compulsory, that they had not wanted the policy at all, but if they had, it would have been for 25 years, not five, to cover the period of the loan.

At first instance the court held the defendant to be in breach of the then in force Insurance: Conduct of Business (ICOB) Rules which imposed a general duty to ensure that any policy recommended met the demands and needs of the customer and a duty to seek out and assess relevant information about the customer's requirements.

However, although there was a breach, the claimants had entered into the PPI contract knowing its term and there was no rational explanation for them doing so otherwise than they had wanted to. The defendant had not therefore caused them any loss.

The Court of Appeal disagreed and upheld the claimants' appeal. In breach of Rule 4 of ICOB, the defendant had failed to enquire as to the claimants' desired term of cover. The fact that the claimants knew the term of the policy did not indicate conclusively the term of the policy that they would have wanted. Knowing a particular characteristic of a policy or contract was a different thing from wanting that characteristic if given a free choice.

The claimants had been told that a five year term had been chosen to keep the costs down. Because of that, it was unsafe to place weight on the fact the policy had been purchased when determining what the claimants' answer to the open and fair question of what the desired term of cover might have been. The judge at first instance had not considered whether the policy actually met the claimants' needs so as to be suitable for them. Knowing what they were getting fell far short of a finding that the policy was suitable. If they had been asked and had confirmed they required a 25 year term, it was likely that no PPI policy would have been taken.

The breach of the ICOB Rules was therefore causative of the claimants' loss as the PPI policy would not have been purchased had the defendant complied with the Rules.

Things to consider

The Court of Appeal found that knowing what they were getting fell far short of a finding that the policy was suitable for the customers' demands and needs. If such knowledge was an adequate basis for a finding that a policy was suitable, the responsibility for assessing whether the policy is suitable would be shifted from the intermediary, where it belongs, to the customer, where it does not.

Mortgagee not liable for conversion of mortgagors' personal belongings

This was the finding of the Court of Appeal in Da Rocha-Afodu and another v Mortgage Express Ltd. Mortgage Express had taken possession of the claimants' property. The claimants had attended on three occasions in the month following eviction to collect some of their possessions but others were left in the property. Mortgage Express had placed notices on the property to the effect that any remaining possessions would be disposed of after 14 days. When the claimants subsequently returned, the remainder of their possessions had been disposed of.

The relevant mortgage condition provided that seven days following eviction, or the giving of notice at any new address provided by the borrower, Mortgage Express might remove any remaining possessions and either store them, dispose of them or return them to their rightful owner if that was not the mortgagor. Mortgage Express would not have a charge over those goods and could not keep any income from their sale but could add the costs of disposal to its security or seek them from the claimants. The claimants had not provided a new address.

The claimants sought damages for conversion of their chattels. They argued that the mortgage conditions were incremental so that Mortgage Express had to remove and store their possessions before disposing of them.

The Court of Appeal disagreed, upholding the first instance judgment. The purpose of the condition had to be considered. The purpose had been to give mortgagors a seven day grace period within which to remove their possessions. The fact that the condition provided that Mortgage Express "might" take those steps meant it could choose what to do and the steps did not need to be sequential. The possessions did not need to be removed and stored before they could be disposed of so long as the correct notice was given, which it had been. As involuntary bailee, Mortgage Express had to take right and reasonable steps. Having given the claimants access to remove their possessions following eviction and having provided clear notices, the court found that it had done so.

Things to consider

The specific terms of the mortgage condition need to be considered to determine what a mortgagee can do with possessions remaining in a property following eviction, and when. Here, the wording was quite clear and there was no requirement for the possessions to be stored for a specified period of time prior to disposal.

Wrongful winding-up petition and unreasonable refusal to mediate - the costs consequences

The court has re-affirmed the danger of using a winding-up petition as a means of debt collection where the underlying debt is disputed and of refusing to mediate.

In Lakehouse Contracts Ltd v UPR Services Ltd, there was a dispute between the parties over the value of scaffolding work invoiced to Lakehouse by UPR. Lakehouse set out details of why UPR's valuation of the works was disputed and paid the sum it agreed was due. UPR issued a winding up petition for the balance but gave an undertaking not to advertise the petition without giving 14 days' notice. UPR also asked Lakehouse to mediate the disputed sum so as to avoid further costs being incurred. Lakehouse refused to do so unless the petition was withdrawn and its costs paid.

At the hearing of the petition, UPR agreed to it being struck out on the basis there would be a mediation of the underlying dispute. Lakehouse refused to mediate the costs of the petition.

The High Court reaffirmed the well know position that the presentation of a petition where the debt is genuinely disputed is an abuse of process as it applied improper pressure on a company to pay a disputed debt. The earlier practice of staying a petition while the issue of liability was determined in separate proceedings had been abandoned in favour of such petitions being struck out. An order for indemnity costs against the petitioner is the usual order following such a strike out.

The evidence in this case indicated there was a genuine dispute on substantial grounds of the entirety of the sum petitioned. The presentation of the petition was an abuse of process. However, the court also held that Lakehouse had acted unreasonably in refusing mediation of the underlying dispute and then in respect of the costs of the petition. Lakehouse would only get its costs of the petition up until the time its behaviour became unreasonable and there would be no order as to costs thereafter.

Things to consider

One might have some sympathy for Lakehouse in this case. It is an abuse of process to issue a petition where the debt is genuinely disputed and Lakehouse was put to unnecessary costs in having to deal with it. Why shouldn't it recover those costs in such circumstances? However, the courts are also very keen to ensure that parties mediate disputes, rather than take up court time. This judgment is yet another warning to litigants of the risk of refusing to agree to mediate.


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