Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.
Credit broker liable to account to its consumer clients for commission received without their informed consent
This was the finding of the Court of Appeal in the first appellate decision on the disclosure of commission since the Supreme Court decision in Plevin v Paragon Finance Ltd.
In McWilliam and another v Norton Finance (UK) Ltd (t/a Norton Finance (in liquidation), the defendant credit broker arranged a £25,000 loan for the claimants. In doing so, the defendant earned a broker's fee of £750, a completion fee of £500, a commission paid by the lender of £2,675 and commission on PPI insurance taken out of £1,685 (being 45% of the premium). The claimants claimed that the defendant was in breach of its fiduciary duty and should account for the commissions it had received without their informed consent.
The Court of Appeal found in the claimants' favour and held that the fact the claimants were unsophisticated borrowers of relatively modest means with a history of credit problems was a critical factor.
Although it was found at first instance that the defendant had provided its services on an information only basis and had offered no advice or recommendations, the Court of Appeal held this was not conclusive of whether a fiduciary duty arose. The defendant was acting in a capacity which involved a relationship of trust and confidence thereby creating a fiduciary relationship.
The defendant should not have placed itself in a position where its duty and its interests might conflict, nor profit out of the trust the claimants placed in it to get the best deal for them, nor act in its own best interests without the claimants' informed consent.
The information supplied to the claimants prior to entering into the loan contained a statement in general terms that commission would be paid and that the claimants consented to this. The court held this was not enough.
The claimants were not told how much would be paid and so had not given their informed consent. The amount of commission should have been disclosed. The defendant was therefore in breach of its fiduciary duty and should account to the claimants for the commission received together with interest at the rate of 5% since the date of completion of the loan.
Things to consider
This judgment confirms that the scope of fiduciary duties extends to cover insurance and credit brokers who have an obligation not to exploit or take advantage of borrowers.
Where a commission has been paid, there should be informed consent beforehand from borrowers for the brokers to retain it. For that consent to be informed, the borrowers will have to know the amount of the commission involved. Without informed consent, the commission is repayable.
No need to imply term to exercise reasonable care to obtain best price
In Rosserlane Consultants Ltd and another v Credit Suisse International, the claimants entered into a short-term funding agreement with the defendant in relation to a limited partnership (C) to enable C to realise its 51% stake in an oil company.
The defendant took security over C's assets and entered into a participation agreement relating to the sale of C or its assets. No purchaser could be found for C's interest in the oil field and the defendant, pursuant to the participation agreement, sent a letter to the claimants triggering its right to force a sale of C.
C did not consent to that sale and was sold by the defendant for $245 million. The claimants claimed that in agreeing the sale, the defendant was in breach of a term implied into the participation agreement to take reasonable care to obtain the best price reasonably obtainable for C.
The High Court dismissed the claim. It restated the position that a term could be implied into an agreement where it is necessary to give business efficacy to the contract or where the term to be implied represents the obvious but unexpressed intention of the parties.
The participation agreement had been varied to impose a duty on C to use all reasonable endeavours to procure a sale at the best price to maximise the payment to the defendant. No like duty had been imposed on the defendant. Imposing such a duty on the defendant was not necessary for the purposes of the agreement.
The defendant had deliberately differentiated between its obligations when enforcing its security and forcing a sale without enforcing its security. The participation agreement was a self-standing commercial agreement freely negotiated between the parties and worked without the need to imply the suggested term.
The defendant was not the claimants' agent for the purposes of selling C and no wide ranging agency/fiduciary duties were owed to the claimants.
The defendant had not breached any contractual duty.
Things to consider
Where an agreement has been freely negotiated between commercial parties with the assistance of experienced commercial lawyers, the court, as here, will be reluctant to step in and imply terms.
Winding-up petition restrained where debt is disputed
In In the matter of a Company 0254/2015, the underlying dispute related to sums allegedly due between an insurance company (C) and an independent insurance intermediary (X) in relation to insurance premiums.
The petitioner alleged that an investigation of X's accounting records showed that X owed C various sums. A statutory demand was presented. X argued that the statutory demand was based on old and incomplete accounting documents and that C actually owed X money. The petitioner refused to agree not to present a petition and X obtained an interim injunction to prevent its presentation.
The High Court held that the statutory demand was a 'remarkable document' running to four pages of documents and 20 pages of exhibits alleging financial irregularities, fraud and misappropriation. It calculated the sums allegedly due and acknowledged that X denied that any sums were due.
The court held that that was not a promising basis for an argument that the debt was not disputed and neither was the extensive evidence submitted by both sides. The evidence used by the petitioner was historical and the evidence produced by X was consistent with its case that C owed it money rather than the other way round.
The court found that following further investigation, disclosure and forensic accounting the petitioner may be able to show at trial that sums were due to C. However, it was clear that there was a dispute on substantial grounds and it was not possible to say what part, if any, of the debt covered by the demand was due. The grounds for restraint were made out.
Things to consider
Presenting a petition where the debt is genuinely disputed on substantial grounds or where there is a genuine right of set-off or cross appeal is a high risk strategy by a creditor. If unsuccessful, it can lead to an order that the would be debtor's costs be paid on an indemnity basis by the petitioning creditor. Pre-petition communication with the debtor to provide it with the opportunity to pay up, or say why the debt is disputed, is essential in trying to avoid such an indemnity order.
Make sure you sue the correct party
When issuing a claim, particularly when a relevant limitation period is about to expire, it is essential to ensure the correct party is named.
In American Leisure Group Ltd v Olswang LLP, the claimant brought proceedings against the defendant alleging negligence and/or breach of contract. It subsequently sought to amend the name of the defendant to Olswang (a Firm) as Olswang LLP had not been formed until after the work for the claimant had been undertaken and paid for. The limitation period had expired and the issue fell to be dealt with under Civil Procedure Rule (CPR) 19.5. The point at issue was whether the mistake in naming Olswang LLP had been as to the name of the party or the identity of the party.
The High Court held it could grant relief and permit a substitution of a party where a claimant sued an LLP in the mistaken belief that the LLP provided the services, having failed to recognise that the services had actually been provided by the former partnership, not the LLP (category 1). It could not grant relief, however, where a claimant knew the services had been provided by the former partnership but mistakenly believed the LLP was legally liable for the negligence of the earlier firm (category 2).
The court, upholding the Master's earlier decision, agreed that the evidence in this case indicated the mistake fell within category 1. There had been a mistake as to name and not as to liability for the alleged negligence/breach of contract so the court did have the jurisdiction to substitute a party.
The Master had, however declined to exercise his discretion to permit the substitution to be made. He held that the claimant's delays in bringing the application for substitution, its failure to engage in pre-action contact with Olswang LLP, and the deprivation of a limitation defence all caused substantial prejudice to Olswang.
The High Court held that the Master had not fallen outside the generous ambit of his discretion by refusing to allow the substitution. It therefore refused the claimant's appeal - there would be no substitution.
Things to consider
It was telling in this case that in exercising its discretion not to permit substitution, the court took into account the fact that the claim form was issued only days before the expiration of the limitation period, the particulars of claim served only days before the expiry of the relevant four-month period after the issue of the claim form and no pre-action correspondence had been entered into.
Where matters are continually left until the last possible moment, the court has little sympathy with a party that then makes an error.
Deliberate decision to flout court orders and procedures will not be tolerated
Lenders are often faced with defendants who decide, tactically, to ignore proceedings and only instigate a defence once enforcement of a judgment obtained looks imminent. In Avanesov v Too Shymkentpivo, this tactic backfired on the defendant who sought to set aside a default judgment and assessment of damages.
The underlying claim related to a share purchase agreement. The defendant failed to pay all sums due under the agreement. In July 2013 the claimant obtained a default judgment for the balance owing and damages, the defendant having failed to acknowledge service of the claim form. The order giving judgment in default provided that any set aside application had to be made within 21 days of service of the order.
No application was made and in April 2014, following a hearing, damages were assessed at about $11 million. In May 2014, the defendant applied to set aside both judgments (under CPR 13.3) alleging it was entitled to rescind the share purchase agreement due to misrepresentations by the claimant.
The High Court held that the defendant had real prospects of successfully establishing a defence at trial. However, this on its own was not enough to set aside the judgments. The court also had to determine whether the application to set aside had been made promptly (CPR 13.3(2)). In determining promptness, the court held that not only does it look at the length of the delay, but also the reasons for it. As the application to set aside is also an application for relief from sanction, the requirements of CPR3.9 have to be considered.
The delay had been as a result of the defendant's conscious decision to ignore the proceedings until faced with the risk of enforcement despite having been aware of the deadline imposed in July 2013. The delays of eight months in applying to set aside the default judgment and six weeks in relation to the assessment of damages were lengthy, serious and highly culpable. The considerations set out in CPR3.9 - the need for efficient conduct of litigation and ensuring compliance with court orders - and the three stage test set out in Denton v TH White Ltd all had to be considered.
The applications had not been made promptly, there was no good reason for the delay and it was not in the interest of justice to set aside the judgments. The establishment of a realistic defence was not sufficient to justify setting aside the judgments notwithstanding the large sums involved.
Things to consider
The court will not indulge defendants who deliberately flout the court's orders and procedures. The court, in exercising its discretion to set aside a default judgment, will consider not only promptness but also the reasons for the delay. Tactical silence may no longer be such a good tactic. This will be a useful case for lenders to refer to in such situations.