Finance litigation briefing October 2014: report and review on the latest cases and issues

23 October 2014

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

Merger of cause of action with judgment affects subsequent possession proceedings

Obtaining separate possession orders and separate money judgments against borrowers in relation to two loans secured on two different properties precluded the lender from relying on an all monies clause to obtain possession of one property due to arrears on the other.

In Commercial First Business Ltd v Munday and Munday, the parties entered into two separate loan agreements made at the same time, one secured against a farmhouse and the other secured against some farm cottages. Both legal charges contained a standard all monies clause.

Following default, Commercial commenced separate proceedings and obtained possession orders and money judgments in respect of each loan. The warrants were suspended on terms but possession of the cottages was subsequently obtained.

Commercial then sought possession of the farmhouse due to the sums outstanding on the cottages judgment. The repayments on the farmhouse judgment were being maintained. Commercial relied on its all monies clause as entitling it to do so.

The Court of Appeal held that Commercial's causes of action for the recovery of the loans and accrued interest had merged into the respective judgments when they were obtained. Once a judgment is obtained for the amount due under a loan agreement, the contract merges in the judgment so that the lender no longer has a cause of action in contract for either the principal or continuing interest (unless there is a non-merger provision for the continuing interest in the loan agreement, as there was in this case).

The lender's remedy following judgment is to enforce the judgment. Commercial could not now seek to recover the balance on the cottages loan by seeking possession of the farmhouse. In any such possession proceedings, the court could only take into account the amount of the money judgment obtained in respect of that property.

Things to consider

Had Commercial obtained orders for possession but not money judgments for the sums outstanding on the mortgages, it could have exercised its power of sale as a mortgagee in possession to recover what was in fact contractually due under the charge.

The question arose of whether the continuing interest on the cottages loan that had accrued post-judgment might be taken into account when opposing the grant of relief under a s36 Administration of Justice Act 1970 application relating to the warrant of possession on the farmhouse. This was not determined, however, as the matter was remitted back to the county court for determination of other issues.

No unfairness in realising security

The Court of Appeal has held that it would only be in an exceptional case that a mortgagee would be treated as having exercised its power of sale unfairly when the right to do so arises due to non-payment of instalments.

In Graves v Capital Home Loans Ltd, Graves had a long history of arrears with his buy-to-let mortgage before being hospitalised and temporarily lacking capacity to manage his financial affairs. On being notified of this, Capital sent a letter before action to Graves' home address, rather than the hospital, advising that due to his lack of capacity, it was appointing a Law of Property Act receiver to collect the rent from the property, as per the mortgage conditions.

Capital was then advised Graves had regained capacity, but it proceeded to sell the property relying on a clause in the mortgage deed conferring a power of sale if the borrower lacked capacity to manage his affairs. Capital had notified Graves of its intention to do this.

Graves claimed Capital was a trespasser and sought possession of his property. He claimed he had never lacked capacity, that the receivers' appointment was invalid and that his account had not been in arrears.

Graves' claim was dismissed but, on appeal to the Court of Appeal, he alleged that the manner in which Capital had exercised its power of sale meant the relationship between the parties was unfair under the Consumer Credit Act 1974, s140A and s140B. It also breached the "Irresponsible lending" guidance published by the Office of Fair Trading, as well as other good practice guidelines for dealing with consumers with mental health issues. These require 'reasonable adjustments' to be made to recovery policies for people lacking capacity.

The Court of Appeal held that the lending was of a commercial nature and the inclusion of a power to appoint a receiver in the circumstances provided for was fairly commonplace and not unfair. Despite Capital having failed to engage with Graves in any meaningful sense before the appointment of the receivers, that did not make their appointment invalid, neither did sending the notice of appointment to Graves' home rather than the hospital. The appointment of the receivers did not lead to Graves' loss. The loss was caused by the exercise of the power of sale.

Capital had substantially complied with the good practice guidelines. Capital's commercial stance, in the light of the history of arrears on the account, was understandable. The evidence showed that Capital had done all it could to help Graves with his arrears over the years and its actions had to be considered in this wider context.

It would be an exceptional case for the court to find that a mortgagee whose power of sale had arisen due to non-payment of instalments had acted unfairly in deciding to realise its security. There was also no evidence that more formal consultations between the parties would have made any difference to the outcome.

Things to consider

Had Graves not had a history of arrears from the start, and had Capital exercised its power of sale solely on the basis of the arrears that had accrued while Graves was in hospital and lacked capacity, the court's view may well have been different.

A bailee's duties

An involuntary bailee's legal obligation is to do what is right and reasonable in the circumstances of the case. So held the High Court in Campbell v Redstone Mortgages Ltd, in which Campbell brought proceedings against Redstone for, among other things, disposing of the belongings she had left in her property following repossession.

Redstone had obtained an order for possession and warrants of execution, which were stayed or suspended on numerous occasions while Campbell paid off some of the arrears. The warrant was finally executed and, on the day of eviction, notices were placed on the property notifying Campbell to collect her remaining possessions within the following seven days, failing which they would be disposed of.

Three orders were made extending the time for collection, and on the final occasion, Campbell barricaded herself into the property for six days. When she left, she failed to take her possessions with her and Redstone cleared the property, disposing of the possessions at the tip. Campbell sought damages for their destruction.

The High Court held that Redstone became an involuntary bailee of Campbell's possessions when she failed to clear them from the property. Its obligation as involuntary bailee was to do what was right and reasonable in the circumstances of the case.

Campbell's actions had been deliberate in an attempt to impede a sale of the property. Redstone had made every attempt to facilitate Campbell's clearance of her assets. Its decision to dispose of the possessions, rather than store or sell them, was entirely appropriate given they had little value.

Things to consider

So long as a borrower has sufficient notice of the lender's intention to remove and dispose of possessions, the lender will have acted reasonably in so removing them. What is sufficient will depend on the circumstances of the case, as will whether it is reasonable for the lender to immediately dispose of those possessions. If they have no intrinsic value, and the borrower has been given ample opportunity to collect them, as here, disposal is likely to be reasonable.

Don't delay in applying to set aside judgment

In Dexia Crediop SpA v Regione Piemonte, the claimant commenced proceedings in August 2011 seeking declarations as to the validity of certain derivative transactions entered into by the Italian defendant (the declaratory actions).

The underlying agreements for the transactions provided that they were governed by English law and jurisdiction. The defendant failed to acknowledge service of the proceedings and, in July 2012, the claimant obtained judgment in default and the declarations sought were made. The claimant then commenced proceedings in February 2013 for substantial sums based upon those transactions (the money actions).

The defendant acknowledged service but did not serve a defence. The claimant sought summary judgment. In June 2013, the defendant applied to set-aside the judgments and declarations in the declaratory actions. At first instance the court refused and judgment was entered for the claimant in the money actions in July 2013. The defendant appealed.

On the evidence, the defendant's failure to acknowledge the proceedings in the declaratory actions was neither careless nor accidental. It had decided not to engage in the English litigation, preferring to seek relief from the Italian court. The July 2012 judgment had been served on the defendant. The Italian court determined it had no jurisdiction and the matter should be determined by the English courts. It was following that decision and after the money actions had been commenced that the defendant decided to engage with the English proceedings.

The Court of Appeal refused to set aside the default judgment. The Civil Procedure Rules (CPR) Part 13 provides that the court may set aside or vary a judgment entered in default if the defendant has a real prospect of successfully defending the claim, or it appears to the court that there is some other good reason why the judgment should be set aside or varied or the defendant should be allowed to defend the claim.

The matters to which the court should have regard in exercising its discretion include whether the application to set aside has been made promptly. Promptness must be weighed against the merits of the defence. In recent times, the issue of promptness has become more relevant.

The court considered all the evidence and held that the extent and character (deliberately not engaging with the English proceedings) of the delay alone afforded, in this case, good grounds to refuse to set the judgment aside even if the defence had a real prospect of success. In light of the character and extent of the delay, it would require a defence of some considerable cogency, based on pretty convincing evidence, to justify setting the default judgment aside.

Things to consider

The case confirms that the court can exercise its discretion to refuse to set aside a judgment even if the defendant shows a real prospect that it may or might succeed on the defence at trial.

There is no arbitrary time limit and each case is decided on its own facts, but the longer lapse of time before the application to set aside is made, the more difficulty the defendant will have in persuading the court to exercise its discretion in its favour.

No good reason for failure to attend trial

The court may set aside an award made at trial where a party fails to attend only if the applicant acted promptly in making the application, had good reason not to attend the trial and has a reasonable prospect of success at the trial. The court will not exercise its discretion readily.

This was evidenced in Mohun-Smith v TBO Investments Ltd, in which the defendant failed to attend on the first day of trial, having sent a letter to the court advising that its representative and key witness was unable to attend to represent the company due to stress brought on by the proceedings. A copy of a medical certificate was attached and a request to adjourn the trial was included in the letter.

The court refused to adjourn and granted judgment for the claimant. When the defendant discovered this, and after its representative returned from a business trip, it applied to restore the proceedings under CPR 39.3.

The court refused to do so. CPR 39.3(5) provides the court may exercise its discretion to set-aside the judgment where there has been a failure to attend trial when:

  • The application is made promptly once the party has found out that judgment has been entered against it;
  • There was a good reason for not attending the trial; and
  • The party has a reasonable prospect of success at the trial.

The court found that although there were reasonable prospects of success, the application had not been prompt. The defendant had waited until its representative's business trip had concluded before making the application. Further, the medical evidence submitted was wholly inadequate to determine the true extent of the representative's stress-related illness and did not amount to a good reason for not attending the trial.

Things to consider

All three of the conditions listed in CPR 39.3(5) must be satisfied before it can be invoked to enable the court to set aside an order. If they are not, the application must be refused. Parties, and especially litigants in person, need to be aware that adjournments, and subsequent set-asides, are not simply there for the asking.

Additional payment under Part 36 applies to monetary award only

Since April 2013, the courts have been able to award an additional amount of up to £75,000 where a claimant beats its own CPR Part 36 offer under CPR 36.14(3)(d). There have been relatively few judgments on the point to date. However, in Watchorn (Liquidator of Husky Group Limited) v Jupiter Industries Limited, the High Court has made such an award and provided some guidance on how the provision should be applied.

Part 36.14(3)(d) provides that the court can award an additional amount, not exceeding £75,000, calculated by applying the prescribed percentages (10% on awards up to £500,000 and 5% on any amount between £500,000 and £1 million) to the sum awarded to the claimant by the court.

The claimant was awarded £360,000 plus statutory interest at 3% above base rate, so beating its own Part 36 offer of £325,000. Having determined, in all the circumstances of the case, that it was just to award the additional amount, the court had to consider to what part of the award the percentages should be applied. Not only had there been an award of £360,000 in this case but the court had also awarded interest at 10% above base rate (pursuant also to Part 36.14) and costs on an indemnity basis.

The court held that the calculation of the additional amount should apply to the basic monetary award and not to any award of interest. It had been conceded by the parties that in this case, it should not apply to the award of costs that had been made.

The court was willing to make the orders for enhanced interest and the additional amount under Part 36 regardless of the fact that the claimant also sought recovery of an insurance premium in the sum of £213,000 and a 60% uplift on its costs under a CFA. The court found this to be of no or very little weight as all those costs were recoverable in principle and that it was not unjust for the Part 36 consequences to follow just because the amounts involved were very high.

Things to consider

The court applied all the Part 36 consequences in this case as it considered the claim should never have been defended. The judge reiterated that the whole purpose of those consequences was to encourage claimants to make, and defendants to consider very carefully, Part 36 offers so as to avoid the high level of costs that can be incurred - some £500,000 in this case.


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