Finance litigation briefing February 2015: report and review on the latest cases and issues

15 minute read
24 February 2015

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

Right to vary interest rate not inconsistent with contract terms

The court had to determine whether terms included in a mortgage offer conflicted with the mortgage conditions, thereby affecting the lender's ability to increase the interest rate and call in the loan.

In Alexander (as representative of the "Property 118 Action Group") v West Bromwich Mortgage Company Ltd, the loans in question were buy-to-let mortgages. The provisions in issue were:

  • a clause in the offer which provided for an initial two-year fixed interest rate after which the rate of interest would revert to being a variable rate (the Bank of England base rate with a premium of 1.99%); and
  • clause 5 of the mortgage conditions which provided that the lender could vary interest for a number of reasons, including to reflect market conditions.

In addition, clause 14 of the mortgage conditions provided that the borrower might be obliged to repay the loan in full in a number of circumstances including if the lender gave one month's notice requiring such payment whereas the offer said the term was 25 years.

The mortgage conditions also contained a priority clause that provided that the terms in the offer of loan would prevail in the case of inconsistency.

After the end of the initial fixed term, the defendant notified the claimant and other "non-consumer" borrowers that it was to increase the margin over base rate to 3.99%.

The claimant argued this increase was inconsistent with the terms of the offer and that the terms of the offer prevailed so the margin could not be increased over 1.99%. The claimant also argued that the right to request repayment on one month's notice was inconsistent with the 25-year term.

The Commercial Court held that there was no conflict between the offer letter and clause 5. It was implicit that the rate could change in line with the change in base rate and there was nothing in the offer to preclude variation for any other reason or in line with clause 5. The provisions should be read together. Effect could be given to both clauses if clause 5 was read as qualifying or modifying the offer rather than being in conflict with it. The offer provided for the rate that would apply after the fixed term expired, unless modified by clause 5. There was no clear or irreconcilable discrepancy or contradiction. As there was no inconsistency, the priority clause did not operate.

The court also found that the offer, read as a whole, envisaged early termination and made provision for the charges payable in that event. Again, the termination provisions in clause 14 did not contradict the offer, but complemented it. It was unrealistic to suggest that the lender had no right to terminate the mortgage for 25 years.

Things to consider

The court will consider the contract documents as a whole to identify a clear and sensible commercial interpretation which does not produce an ambiguity. It is only if there is a clear and irreconcilable discrepancy that it will be necessary to resort to an agreed order of precedence.

Employee liable for unauthorised banking facilities

Where an employee breaches his or her equitable and contractual duties as an employee, the court can and will find him liable for losses sustained.

This was the position in Clydesdale Bank Plc v Stoke Place Hotel Ltd and others and Seavers. The bank had made substantial loans to the first defendant company prior to it going into administration. Seavers had been the relationship manager at the bank for the defendant company and its directors.

The bank claimed Seavers had breached his equitable and contractual duties as an employee by granting unauthorised banking facilities to the company, permitting borrowing in the aggregate of £18.29 million, nearly all of which had been drawn down, with little, if any, prospects of recovery. It sought summary judgment against him.

In its written demand to the defendant company calling in the debt, the bank had referred to a final facility letter sent by Seavers to the company granting further facilities to it. Seavers argued that by referring to that facility letter, the bank had ratified it and his authority to write it, so waiving any rights against him. He also argued the bank's losses had been caused by its own conduct.

The High Court held that the letter of demand condoned nothing. All it had recognised was the indebtedness of the company. It was sent as a means of recovering the bank's money. There was nothing in the wording of the demand or the conduct of the bank that warranted a conclusion that the bank released Seavers from his obligations and liabilities to the bank.

The court found that Seavers' defence that he should be excused his breaches of duty because the bank either knew of them or should have found out about them, to be wholly without merit. The evidence indicated that Seavers was the effective or dominant cause of the bank's losses. The bank was entitled to judgment.

Things to consider

The facilities authorised by Seavers hugely exceeded his authorised ceiling and he had failed to seek or obtain sanction for the incremental facilities he had granted over and above that level. The letter of demand to the defendant company did not waive the bank's rights against its employee - it would make no commercial sense. Had it done, lenders would need to be far more cautious in how they write such letters of demand.

Gordon Ramsay bound by signature machine and wide ambit of authority given to his business manager

A principal's knowledge that his agent was undertaking business transactions on his behalf, without necessarily keeping him informed of the detail, and using a signature machine to execute his signature on legal documents provided the agent with sufficient authority to commit the principal to the contract.

This was the position in Ramsay v Love. The claimant was the well-known celebrity chef, Mr Gordon Ramsay. His father-in-law and agent (H) had looked after his business affairs for more than 20 years. The claimant left all business management to H and did not expect to be kept informed of the details of business transactions undertaken in his name and was aware that he was not kept informed.

H had used a signature machine to insert the claimant's signature on a personal guarantee in the claimant's name in relation to a lease which the defendant sought to enforce. The claimant alleged H had had no authority to place his apparent signature on the guarantee of which he knew nothing. He sought a declaration that he was not liable under the guarantee.

The High Court held that, on the evidence, H had had extensive authority to bind the claimant contractually in commercial matters and that the claimant often did not know the detail of transactions entered into by his group of companies or of transactions executed on his personal behalf.

The claimant had trusted H and the evidence indicated the claimant had been aware of the frequent and routine use of the signature machine on legal documents, including guarantees given in similar circumstances to the current one. There was no evidence of an express or specific limitation as to the business or contractual matters which H was expected to deal with on the claimant's behalf.

The claimant had previously given similar guarantees or undertakings and was bound by the guarantee as he had not been able to demonstrate that he had not known about it. The signing of the guarantee came within the wide ambit of authority conferred upon H and the claimant was bound by it.

Things to consider

This judgment confirms that the use of a signature machine does constitute a valid signature sufficient to bind a party to an agreement. It also acts as a reminder that a course of dealing over a long period can be enough to confer a wide authority on an agent sufficient to bind a principal and a lack of knowledge of a particular transaction will not mean an agent has exceeded its authority.

Present, not future, value relevant in determining if debt is secured - or not

In National Asset Loan Management Ltd v Cahillane, the claimant had served a statutory demand on the defendant in relation to loans secured on properties. The defendant had unsuccessfully sought to set the demand aside on the basis that the value of the securities equalled or exceeded the amount of the debt (r6.5(4)(c) of the Insolvency Rules 1986 (r6.5(4)(c)).

Expert valuation evidence had been adduced by both parties. At first instance and then on appeal, the courts had held that the evidence did not confirm that the debt was fully secured. It was held that the relevant value of the security was at the date when the demand was presented and not some future value.

The claimant issued a bankruptcy petition but the debtor further appealed to rescind or vary the judge's earlier order under s375 of the Insolvency Act (s375). The defendant applied to adjourn the petition pending his s375 application. The Chief Registrar adjourned the petition to enable the defendant to put in further expert valuation evidence.

The claimant appealed that decision, arguing s375 did not confer jurisdiction to review, rescind or vary an order made on appeal (which the refusal to set aside order was) and also on the basis it was bound to fail on its merits.

The High Court held that the court did have jurisdiction under s375 to review, vary or rescind appellate orders and not just first instance decisions. However, it allowed the appeal on the basis the application was bound to fail on it merits.

The court confirmed that under r6.5(4)(c), a debtor seeking to set aside a statutory demand has to prove on a balance of probabilities that the value of the security, determined on a forced sale basis at the time of the statutory demand or possibly the hearing of the demand, equals or exceeds the full amount of the debt. This is irrespective of the identity, status, function, objectives or policy of the creditor. The further evidence to be adduced could not realistically or arguably support the contention that the present value of the properties equalled or exceeded the debt. A bankruptcy order would be made.

Things to consider

The prediction of future increases in value cannot be relied on to demonstrate that the sum outstanding is covered by the present value of the security. Here, despite the lender being a statutory body with specific functions and objectives, and which was expected to take a long term view of the value of the properties in question, that long term view did not apply to valuing the security for r6.5(4)(c) purposes.

Substantial fee not a penalty

Where a fee was payable in a number of circumstances, and not just in the event of a breach, the court held that the payment was not a penalty and so the rule against penalties did not apply.

In a nutshell, a penalty clause is one that is intended to act as a deterrent to discourage a party from breaching the contract and is not a genuine pre-estimate of damage that would be incurred as a result of the breach. Whether or not a clause is a penalty is a matter of construction of the terms of the particular contract.

In Edgeworth Capital (Luxembourg) S.A.R.L. and another v Ramblas Investments B.V., the claimant was the assignee (from a bank) of various financing agreements including a junior loan agreement, a personal loan agreement and an upside fee agreement (UFA).

The UFA contained a clause providing that the defendant would, upon each occurrence of a "payment event", pay a fee to the bank. The individual borrowers under the personal loan agreements failed to make payment which triggered cross default provisions in the junior loan which then became repayable. The claimant sought payment under the UFA of approximately Euro 105 million.

The issues before the High Court were:

  • whether the early repayment of the junior loan due to the default under the personal loan was a "repayment event" so making the defendant liable to make payment under the UFA; and
  • if so, whether that payment provision amounted to a penalty, or a disguised penalty, which would be unenforceable?

Applying established principles of contract interpretation, the court found in favour of the claimant.

The UFA provided that the fee was payable for the provision of services i.e. procuring the junior loan. The definition of "payment event" was expressed in general and unqualified terms and covered any repayment of the junior loan (mandatory or voluntary) which was made or fell to be made, including any accelerated payment. Payment was not limited to repayment following disposal, refinancing or other exit but included default under the personal loan triggering repayment of the junior loan.

The fee would have been payable at some point - even had repayment of the junior loan been made at the end of the relevant term. Had that occurred, there could be no question that the payment was a penalty. The early triggering did not increase the defendant's overall obligation and it would be perverse if the borrower was placed in an advantageous position by breaching rather than performing the junior loan.

The payment was not a penalty. The early triggering of the payment clause had not been caused by the defendant's breach of contract but by the third parties' under the personal loans. The rule against penalties only applies if the clause was triggered by a breach of duty owed by one party to the relevant contract to the other. The breach of the personal loan was not a breach of the junior loan - they were two separate contracts.

Although the fee was substantial, the UFA had been entered into during the credit crunch in challenging commercial circumstances. The junior loan was, in effect, a bridging loan and the substantial fee was commercially justified given the circumstances. Even if the court had found that the rule against penalties did apply, it would have held that the fee was not a penalty, despite being substantial and that the clause and fee were commercially justifiable with the predominant purpose not being deterrence.

Things to consider

The expression used in a contract i.e. penalty or liquidated damages, will not be conclusive and the court will look at the contract as a whole in the circumstances and context in which it was made to determine if a payment is in fact a penalty or not.

Appropriate drafting of a clause that provides for payment in circumstances other than following a breach of contract, may well save the clause, even if the payment is substantial - as here. The commercial reality of the transaction will be considered.

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