Helmsley Acceptances Ltd v Lambert Smith Hampton Group Ltd [2010] EWCA Civ 356

The Court of Appeal has recently allowed an appeal against a summary judgement by Helmsley Acceptances Ltd (“Helmsley”). Essentially, the matter concerned whether a claim against a valuer arising out a valuation report (commissioned by Helmsley) of a property that was used as security for a loan could be pursued by Helmsley, notwithstanding the fact that Helmsley had syndicated the majority of its loan to other investors.

Background Facts

In 2007 Red Lion 80 Ltd (“Red Lion”) entered into negotiations with Helmsley for a loan to purchase, among other things, a property in Berkshire (the “Property”). Before advancing monies to Red Lion, Helmsley instructed Lambert Smith Hampton Group Ltd (“LSH”) to value the Property and provide them with a valuation report (the “Report”). In the instructions to LSH, Helmsley expressly stated that:

“[Helmsley] is in the business of granting mortgages, but it also ‘sells’ these mortgages to other interested parties. These parties assess the viability of such purchases on a number of factors, one of which is the valuation that [Helmsley] has obtained….”

LSH duly valued the Property at £2.5 million, or if only 9 months were available for disposal, a value of £2.25 million. The Report also contained a clause purporting to limit LSH’s liability to Helmsley only and not to “…any other person.” Further, the valuation report went on to state that:

“Neither the whole or any part of this [Report] nor any reference hereto may be included in any published documents, circular, or statement, or published in any way, without [LSH’s] written approval…”

Further to the receipt of the Report Helmsley advanced a loan to Red Lion of £1.25 Million (the “Loan”), to enable Red Lion to purchase the Property on 9 March 2007. Prior to the drawdown of the Loan, Helmsley syndicated the Loan to a number of investors. The effect of the syndication was that Helmsley only actually lent £10,000 of the Loan to Red Lion. The Loan was due to be repaid on 6 September 2007. Red Lion subsequently defaulted and the Property was sold for £264,069.97, thus leaving a considerable shortfall.

The Claim

Helmsley claimed that the entire loss was attributable to LSH due to its breach of contract and/or duty of care. This was countered by LSH who argued that, as Helmsley had only lent £10,000 following the syndication of the Loan, LSH was effectively capped from claiming any further monies; the remainder of the loss related to the syndicate members and not Helmsley. Helmsley put forward the following arguments:

(1) Helmsley’s contract with LSH was made as agent on behalf of the syndicated members; or

(2) Helmsley were trustees of the cause of action against LSH, which intimately related to the securities of which they were express trustees; or

(3) Helmsley could rely on the “Albazero exception” to the general rule that a claimant can only recover his own loss, not loss suffered by others.

The “Albazero exception” applies where it can be said that it was in the contemplation of the parties that an owner may transfer proprietary interests after a contract had been entered into. In such a case, the original party to the contract is treated as having entered into the contract for all persons who had or may acquire a proprietary interest and is therefore entitled to recover damages for the actual loss suffered by those for whose benefit the contract was entered into.

LSH disagreed with Helmsley’s submissions, as they believed them not to be correct in law, and applied for summary judgement. At the hearing, the judge, HHJ Langan agreed with LSH and granted summary judgement, effectively holding that Helmsley could only sue for that part of the loss for which it suffered and not the remainder.

The Appeal

Helmsley appealed HHJ Langan’s decision, this time joining the other syndicate members as co-claimants and dropping the agency argument as noted above.  Lord Justice Longmore, giving the leading judgement in the Court of Appeal, noted that as matters stood following the successful summary judgement application, Helmsley would not be able to advance the trust and “Albazero exception” arguments at trial. The question in the Appeal to be considered then was “…whether [Helmsley] should be entitled to advance those arguments as an alternative to the claim in tort now pursued by the syndicate members in their own right.”

Longmore LJ went on to note that for the purposes of LSH’s application for summary judgement, the court had to assume that they had been negligent and may have caused substantial loss; which LSH maintained was capped at £10,000. He further noted that as LSH are also arguing that they are not liable to the syndicated members in contract or tort, the claim could be said to disappear down a legal “black hole”.  Longmore LJ commented that the previous case law in this area demonstrated the courts’ willingness to ensure that wrongdoers do not escape from their liabilities by reference to the general principle that a person can only recover for his own loss because the cause of action lies in the hands of someone other than the person who had suffered loss; the courts are concerned to see that justice is done between the parties (Technotrade Ltd v Larkstore Ltd [2006] EWCA Civ 1079).

Longmore LJ further noted that it was also arguable that even if the investors, now joined to the action, fail for any reason to recover damages in respect of their loss, that loss could still be recoverable either because Helmsley constituted themselves as trustees of the securities (i.e. as security trustee) and by implication, the rights associated with those securities, or because Helmsley could also rely on the “Albazero exception”. It was therefore held by the Court of Appeal that Helmsley had an arguable case which should be allowed to go to trial.

Comment

The Court of Appeal’s judgement is welcome news for syndicated lenders and investors in securitised loans. Although the case will now proceed to trial and the outcome is therefore still in issue, Longmore LJ’s comments will provide comfort to participants and investors in syndicated and securitised loans. As defendants and their insurers continue to raise questions concerning the ability of lenders, servicers and issuers to bring claims on behalf of other investors and syndicated lenders, the willingness of the Courts to see justice done between the parties is good news for claimants and bad news for defendants and their insurers.

For further information please contact James Walton or the Partner with whom you usually deal

Summary

In the recent case of Muschett v HM Prison Service, the Court of Appeal was asked to decide whether a temporary agency worker was an employee as defined by discrimination legislation and, therefore, entitled to bring a claim for race, sex and religious discrimination.

Background

In order for an individual to say that they are employed, they must satisfy Section 230 of the Employment Rights Act 1996 (the “ERA ‘96”), which states that an employee is an individual who has entered into, or works under a contract of employment. For the purposes of the ERA ’96, a contract of employment is an express (whether written or oral) or implied contract of service (or apprenticeship).

The definition of an employee is given a wider interpretation under discrimination. Section 78 (1) of the Race Relations Act 1976 (the “RRA ’76) defines employment as being any “employment under a contract of service or of apprenticeship or a contract to personally execute any work or labour”. Section 7 of the RRA ’76 provides protection for contract workers who are employed by an agent who supplies them to a principal. Agency workers are usually considered to be contract workers and are afforded protection from discrimination by the agency and the principal.

The Facts

Mr Muschett signed a contract with Brook Street Agency (“Brook Street”) and was supplied to HM Prison Service (“HMPS”) to work as a cleaner at Feltham Young Offenders Institute. Under the terms of Mr Muschett’s contract with Brook Street, the assignment could be terminated at any time by Brook Street, HMPS or Mr Muschett himself, without prior notice or liability.

After four months, HMPS terminated the assignment. Mr Muschett brought a claim against HMPS for unfair dismissal, wrongful dismissal, race, sex and religious discrimination. At a pre-hearing review the Employment Tribunal decided that Mr Muschett was not an employee under Section 230 of the ERA ’96 because he could terminate the assignment at anytime without giving notice, as could HMPS. Since the terms of the agreements between Mr Muschett and Brook Street and HMPS and Brook Street were clear and had been followed, the Employment Tribunal refused to imply a contract of employment existed between Mr Muschett and HMPS. Mr Muschett was therefore unable to pursue his claims for unfair and wrongful dismissal.   

The Employment Tribunal also found that Mr Muschett was not an employee for the purposes of discrimination legislation. The tribunal found that because the agreement could be terminated by Mr Muschett or HMPS, at any time, Mr Muschett was not employed by HMPS and so could not claim for discrimination. Finally, the Employment Tribunal found that Mr Muschett was not employed by Brook Street and so could not seek protection from discrimination under Section 7 of the RRA ’76.

Mr Muschett appealed to the Employment Appeals Tribunal, however, his appeal was dismissed.

The Court of Appeal Decision

Mr Muschett appealed to the Court of Appeal on two points. Firstly, that the Employment Appeals Tribunal had failed to consider whether a contract of employment should have been implied and secondly, that the Employment Appeals Tribunal had failed to consider whether his work fell within the wider definition of employment under discrimination legislation.

The Court of Appeal dismissed the appeal stating that there was no evidence of an employment contract between Mr Muschett and HMPS and no basis on which to imply one. The Court of Appeal also found that there was no contract for services between Mr Muschett and HMPS or Brook Street and so Mr Muschett was afforded no protection under discrimination legislation.

Conclusion

The decision appears to expose a loophole which is that agency workers who do not have an employment contract with their agency or with the principal will not be afforded protection under current discrimination legislation. Commentators have been surprised that the Employment Tribunal did not find Mr Muschett to be an employee under the wider definition of employment and was not a contract worker for the purposes of Section 7 RRA ’76. Little reasoning was given for this decision by the Employment Tribunal or by the Employment Appeals Tribunal who refused permission to appeal the point. It may be that since this is a first instance decision and is not binding, the point will be clarified by future caselaw.

The Agency Workers Regulations 2010 are due to come into force in October 2011, however, the new legislation is unlikely to close the loophole exposed by this case since the new regulations will require an agency worker to have a contract of employment with the agency to perform work and services personally for that agency, in order to be protected.

For further information please contact Niki Avraam or the Partner with whom you usually deal

Summary

In the recent case of Good Harvest Partnership LLP v Centaur Services Limited, the High Court considered whether, upon an assignment of a lease, the guarantor of an original tenant can be made to enter into an Authorised Guarantee Agreement (“AGA”) along with the original tenant. The High Court found that any direct guarantee of an assignee’s obligations, given by the guarantor of the original tenant, would be void and unenforceable by virtue of Section 25 of the Landlord and Tenant (Covenants) Act 1995 (“LTCA 1995”).  

Background

The LTCA 1995 radically changed the law in relation to the enforceability of covenants against former tenants and former guarantors. But for a few exceptions, the LTCA 1995 provides that for a lease granted after 1 January 1996 a tenant and its guarantor will automatically be released from all tenant covenants under the lease on an authorised assignment. Notwithstanding this the LTCA 1995 stipulates various circumstances in which the Landlord can require the tenant to guarantee the performance by the assignee of the tenant’s covenants, by the giving of an AGA.

The terms of an AGA are governed by the provisions of Section 16 of the LTCA 1995. The LTCA 1995 does not actually define an AGA. Instead it sets out what an AGA must do, what it may do, what it must not do and the circumstances when it can be entered into. An AGA becomes effective when the assignee becomes bound by the tenant’s covenants in the lease as set out in Sections 16(1) and Sections 3 and 5 of LTCA 1995.

When is an AGA Void?

Section 25(1)(a) of the LTCA 1995 confirms that any agreement which excludes, modifies or otherwise frustrates the operation of the LTCA 1995 will be void. As stated above AGAs are an exception to this, however, they must satisfy all the requirements of Section 16 of the LTCA 1995 if they are to benefit from the exception. For instance, if an agreement tries to impose on an outgoing tenant any requirement to guarantee liability of anyone other than the assignee, or it provides for any requirements in relation to any time after the assignee is released by virtue of the LTCA 1995, it will be void as it would not comply with the requirements of Section 16(4) of the LTCA 1995.  

The Facts

The tenant (“Gladman Homes”) granted a sublease of the property to the subtenant. The subtenant (“Chiron CS Limited”) provided a guarantor (“Centaur Services Limited”). The sublease contained a provision giving the tenant the right (as a condition of granting consent to assign the sublease) to require the subtenant and the guarantor to enter into an AGA. The subtenant assigned the sublease. The formal licence to assign included a guarantee agreement under which the subtenant and the guarantor covenanted that the assignee would pay the rent and perform the other tenant’s covenants in the sublease from the date of the assignment.  

The tenant surrendered its lease and the landlord became the direct landlord of the assignee. The assignee failed to pay the rent due and the landlord claimed the money from the guarantor under the guarantee agreement.

The Decision

Newey J held that the guarantee agreement was void and, therefore, unenforceable by reason of Section 25 of the LTCA 1995. Section 24 of the LTCA 1995 was meant to ensure that any obligations undertaken by a person as guarantor for a tenant should come to an end on the assignment of the lease.

If the guarantor was required to enter into a further guarantee when the lease was assigned the guarantee could, as a matter of language, fairly be said to “frustrate the operation of any provision of [the] Act” as per Section 25(1)(a). This was because, if valid, it would impose on the guarantor obligations equivalent to those from which Section 24 was designed to secure the release.

It was thought that had Parliament intended for a tenant’s guarantor to be able to guarantee the obligations of an assignee, it would have been expected to say so explicitly. This was thought to be particularly relevant since guarantors were mentioned expressly in the LTCA 1995 more than once. Section 16 of the LTCA 1995 addressed the circumstances in which a tenant could give a guarantee for an assignee, but there was no equivalent provision dealing with guarantors.

Comment 

This is a decision of major importance as the belief that the LTCA 1995 imposes a restriction on the freedom of contract by preventing a tenant’s guarantor from providing a guarantee for an assignee voluntarily is worrying.

However, a distinction must be drawn between a guarantor guaranteeing the period during which the tenant is bound by an AGA and a guarantor guaranteeing the performance of the assignee.  

This case concerns circumstances under which the guarantor entered into a lease which required it to guarantee the performance of the tenant’s assignee in the case of an assignment of the lease. This was held to be void. However, the perhaps more common circumstances of a guarantor continuing to guarantee the tenant for the period during which the tenant is bound to guarantee the assignee under the terms of an AGA, is a distinctly different situation which the Court was not required to consider in this case.   

The facts of this case will be of concern to landlords on the basis that even in circumstances where a guarantor voluntarily contracts to provide a guarantee for a tenant’s assignee, this will be void. This decision will most likely be appealed with the main point of contention likely to be the difference (if any) between a guarantee (for an assignee) given under a binding obligation and one given voluntarily.  

Undoubtedly there will be more litigation as guarantors try to evade liability, but until a case directly concerned with a guarantor’s guarantee of the outgoing tenant’s obligations under an AGA is decided it is advisable for landlords to continue to seek protection from a tenant’s guarantor for the period of the AGA.

In the meantime, this case is likely to have a negative impact for both landlords and tenants as the case limits what can be agreed between fully advised contracting parties and will no doubt make it harder for deals to be agreed. Landlords will only be able to rely on guarantees which are given by the current tenant’s guarantor, or the former tenant, which will have implications for the common situation of a chain of parent company guarantees which a Landlord will now be hard pushed to rely on.  

For further information please contact Simon Geoghegan or the Partner with whom you usually deal

[2010] All ER (D) 171

This case is important in the field of solicitor professional negligence. It addresses when an insurer can deprive a solicitor firm of insurance cover for a claim by exercising a dishonesty exclusion.

Background Facts

Joshua & Usman Legal Services Limited (“JULS”), trading as Joshua & Usman Solicitors had two directors, Mr Atikpakpa and Ms Usman. Travelers Insurance Company Ltd (“Travelers”) provided professional indemnity insurance to JULS, subject to an exclusion clause in respect of fraudulent or dishonest acts committed or condoned by all directors of the company.  

In November 2001, Mr Atikpakpa applied for a loan to fund the purchase of a property. Goldsmith Williams were instructed to act on behalf of the lender. Mr Atikpakpa provided documentation to Goldsmith Williams, including a “Bond to Let Account Assignment” document signed by Mr Atikpakpa and witnessed by Ms Usman, and a copy of his passport certified by Ms Usman. The mortgage advance of £507,941 was transferred to JULS in January 2002, but the transaction was not completed and Mr Atikpakpa stole the funds.

In late 2001 Mr Atikpakpa’s wife, who was also Ms Usman’s sister, applied for a loan from the same lender to purchase a property from Mr Atikpakpa.  Goldsmith Williams acted for the lender and JULS acted for Mr Atikpakpa.  The mortgage funds of £143,019 were transferred to JULS, but again the transaction was not completed and Mr Atikpakpa again stole the money.

JULS was intervened by the Law Society and subsequently wound up. The lender assigned its claims against JULS to Goldsmith Williams and judgment was obtained against JULS for the full amount of both loans. Goldsmith Williams relied on the Third Party (Rights Against Insurers) Act 1930 to seek recovery from Travelers under JULS’ indemnity insurance policy. However, Travelers argued that the claim was excluded from cover because both directors of JULS had been dishonest or condoned the dishonesty of the other.  The issue was therefore whether it could be established that Ms Usman had been dishonest or condoned Mr Atikpakpa’s dishonesty.

Travelers relied on three strands of evidence in support of this contention. 

1. The Law Society’s investigations revealed that Mr Atikpakpa had been involved in numerous other acts of mortgage fraud, and Ms Usman was linked to at least one of these transactions.

2. Evidence came to light from a separate trial that Ms Usman had personally committed mortgage fraud by falsifying her income on two applications she made in 2002.

3. Ms Usman had assisted her nephew to fraudulently obtain a mortgage by representing to the lender that he worked full time for JULS on a certain salary, when in fact this was not the case and he only worked part time for JULS.

The Decision

To determine whether Ms Usman had acted dishonestly, the Court applied a test based on whether her acts would be considered dishonest by the standards of a reasonably honest person. Condoning Mr Atikpakpa’s actions would mean she had to know about the dishonest act and did nothing about it.

There was no doubt Ms Usman’s conduct in the first transaction assisted Mr Atikpakpa, but this in itself did not mean she condoned it. The Court found that there was no evidence to link Ms Usman to the second transaction or to suggest that she had benefitted directly from Mr Atikpakpa’s dishonesty or even knew that the funds had been stolen. However, Mr Atikpakpa, Ms Usman and her nephew had all engaged in mortgage frauds by making false statements in application forms, and it was implausible that Ms Usman would be involved in carrying out mortgage frauds herself but would not know Mr Atikpakpa was doing the same.

It was held that Ms Usman had committed a fraudulent act in relation to the first transaction by witnessing Mr Atikpakpa’s signature and certifying his passport, which she knew would help him obtain a mortgage by deception. The Court found that Ms Usman had also condoned his dishonest acts in respect of the second transaction, as by that time she knew he was engaged in mortgage fraud and by doing nothing about it she had allowed a situation to arise where Mr Atikpakpa was able to steal the funds.  In reaching this conclusion the Court relied on the case of Zurich Professional Ltd v Karim [2006] EWHC 3355 (QB), where it was held that if an insured condones a course of conduct which is dishonest and which leads to or permits the specific act upon which the claim is founded, then the insurer is entitled to repudiate liability.

Comment

Solicitors’ professional indemnity insurance is covered by restricted Law Society minimum terms. This gives rise to only limited situations in which cover can be denied. Cover can only be denied on a case by case basis and usually only if all directors/ partners were involved in the dishonest conduct on the particular transaction. This case highlights that in applying a “dishonesty” exclusion in solicitor professional indemnity insurance policies, the Court will look broadly at the circumstances surrounding whether all the directors/partners in the firm individually knew or ought to have known about the dishonesty of other directors/ partners. In this case, the claims failed in respect of both loans despite the lack of evidence linking Ms Usman to the second transaction, because she was aware of and failed to prevent her co-director’s dishonesty in respect of other mortgages. 

For further information please contact Georgina Squire or the Partner with whom you usually deal

Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch)

This case is important for landlords seeking to recover rent from companies which have gone into administration.

Background Facts

Nortel Networks UK Limited (“Nortel”) entered into two long term leases of commercial properties. Nortel subsequently went into administration. Parts of the premises were sublet by Nortel and Nortel’s administrators (the “Administrators”) used part of the premises which were not sublet for the benefit of the administration.

Goldacre (Offices) Limited (“Goldacre”) applied to the High Court to determine whether rent, due to become payable on the next quarter date, was payable as an administrative expense.

Goldacre argued that once the administrators had decided to use part of the premises for the beneficial outcome of the administration they became liable for the rent as it fell due as an administrative expense under the Insolvency Rules 2009 (the “Insolvency Rules”).

The Administrators argued that the rules for liquidations were distinct from the rules for administration and that whether rent is an administration expense should be at the discretion of the administrator or the Court. The Administrators were not seeking to argue that they should be paying no rent at all but that they should only be liable for that part of the premises which they occupied and only for the time they occupied it.

The Decision

The Judge decided that it is mandatory for administrators to determine whether rent is an administrative expense when they occupy leasehold premises for the benefit of an administration by reference to the Insolvency Rules.

Under Rule 2.67(1)(a) of the Insolvency Rules administration expenses include “any expenses properly incurred by the administrator in performing his functions in the administration of the company”. Under Rule 2.67(1)(f) administration expenses include “any necessary disbursements by the administrator in the course of the administration”.

The Judge considered that the rent liability in this case came within the meaning of an administrative expense under Rule 2.67(1)(a), as the rent would be a sum payable in respect of a liability incurred by the administrator in performing his functions. The Judge further held that if the rent in this case did not come within Rule 2.67(1)(a) then it would fall within Rule 2.67(1)(f).

The Judge construed the rules in accordance with the underlying importance of promoting the rescue of companies involved in insolvency procedures. In cases where administrators continue to occupy premises it is usually done to try to keep the business going until a buyer can be found and so the payment of rent would be a payment for an expense incidental to the performance of the administrators’ duties

The Court then considered the Administrator’s argument that they should only pay rent for that part of the premises which they were occupying and only for the time they were in occupation. The Court looked at case law on liquidations, which states that where a liquidator adopts a contract, such as a lease, for the benefit of a liquidation, then it does so subject to the terms and conditions of that contract. Therefore, a liquidator would be liable for any sums payable such as rent. The Court held that this principle was the same in the case of an administration and so full rent was payable by an administrator as long as they remained in occupation.

Under the terms of Nortel’s lease, the rent was payable in advance in full on the quarter date. This meant that the full amount would need to be paid by the Administrator if they remained in occupation. The Court made it clear that the Administrator would not be entitled to a refund if it gave up occupation part of the way through a quarter as a payment in advance could not be apportioned under the Apportionment Act 1870.

The Court added that even if the amount of rent the Administrator was liable to pay was at the discretion of the Court it would still have found that the Administrator was liable to pay the whole of the rent due as the landlord could not realistically maximise the return from the property so long as the Administrator was in occupation.  

Comment

The case is important in confirming that payment of rent due on a leasehold property by a company in administration is deemed to be an administrative expense if the administrator is using the premises for the benefit of the administration.

This places landlords in a stronger position as, once payment of the rent is considered an administration expense, the landlord will be able to recover rent payments in priority to unsecured creditors.

For further information please contact Simon Geoghegan or the partner with whom you normally deal

On 25 November 2009 the Supreme Court delivered an important Judgment which is likely to have an impact upon nearly a million claims brought by aggrieved banking customers. The Judgment is the response to an Office of Fair Trading (“OFT”) investigation into current account charges which began over 2 years ago. The Court’s decision is a reprieve for retail banking but is not the necessarily the end of the story.

Background

The case centred upon the current account charges levied by banks when their customers went overdrawn without prior arrangement, cheques bounced or other payments were made in the absence of funds in a customer’s account. Claims by consumers against their banks to recover the charges they had paid, plus interest, began in late 2005 and many were successful as the banks decided to settle the claims rather than proceed to Court. However, the number of claims grew rapidly and a rising consumer rebellion grabbed the attention of the media.

Claimants tended to argue that the charges were either illegal penalties or that the terms under which they were levied were unfair under the Unfair Contract Terms in Consumer Contract Regulations 1999 (“the Regulations”) and therefore unenforceable. In March 2007, the OFT began a formal investigation into the fairness of terms relating to the charges imposed by the 7 largest UK Banks and 1 Building Society (“the Banks”).

The Banks argued from an early stage that the terms were exempt from being assessed for fairness by the OFT under the Regulations because they were the equivalent of the price paid by customers for their accounts. The Regulations provide that the fairness of the price paid for goods or services is not something that can be assessed under the Regulations.  As the number of claims and public pressure grew, the Banks agreed that the OFT could apply to the Courts to seek a declaration regarding whether the fairness of the charges were subject to scrutiny under the Regulations and/or whether they could be challenged as illegal penalties.

Judge Andrew Smith gave Judgment in the High Court on 24 April 2008. He decided that the wording of the terms which permitted the Banks to make the charges were in “plain intelligible language” (except in the case of 4 banks) and that they were not exempt from scrutiny under the Regulations. The Banks appealed to the Court of Appeal.  On appeal, the Court of Appeal refused the Bank’s appeal and found that the Regulations did apply. Undeterred, the Banks appealed to the new Supreme Court.

Supreme Court Decision

The Supreme Court decided that the Court of Appeal’s analysis of the Regulations was flawed and agreed with the Banks that the lower Courts had overcomplicated the matter. It held that there is no legal basis upon which a Court can decide that some services provided by the Banks are more essential to the contract with the customer than others. The services that Banks offer their customers are a comparable package of services and that, in terms of current accounts, those in credit give up competitive interest on their deposits whilst defaulting customers pay charges.

In its Judgment, the Supreme Court went further and decided that it was not necessary to show that the particular charge related to a particular transaction as this is not how such fees are applied. It said that this form of charging was crucial to the “free, if in credit” system of banking that the Banks operate in England and Wales in that those customers in the red subsidise the costs that would otherwise be charged to those customers in the black. The Banks’ appeal was allowed and the Court declared that the charges could not be assessed for fairness as they fall within an exception relating to the cost of a service provided to a consumer (namely, Regulation 6(2)).

Although the decision has been trumpeted in the media as a resounding victory for the Banks, the Court did not tie up all the loose ends and highlighted an alternative challenge that could be pursued by the OFT. As Lord Philips explained, whilst the assessment of the fairness of the ‘price’ of the charges was excluded, this did not mean that the fairness of a term of a current account could not be assessed under Regulation 5(1) of the Regulations. Regulation 5(1) provides that the fairness of a contractual term (such as a term giving a bank the right to levy a charge) can be assessed for fairness if it causes a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer.

Commentary

The Supreme Court’s decision is an unexpected but positive result for lenders as it confirms that charges are an integral part of the current account regime. Most, if not all of the claims issued by consumers challenged the legality of the charges either on the basis that they are a penalty at common law, which was rejected by the High Court, or that they were unfair under the Regulations on the basis put forward by the OFT. Unless the existing consumer claims are amended, it is likely that they will be struck out by the lower Courts who will follow the Supreme Court’s decision as a binding authority. 

Consumers with remaining stamina may now try to amend their claims to reflect the alternative basis of a challenge to the fairness of the charges under the Regulations. The OFT may also wish to test this theory before the Courts. The Banks may have won this particular battle but the war between the consumers and the banks may not be over yet.

For further information please contact Georgina Squire or the Partner with whom you usually deal

The High Court recently considered whether the seller of a development site had validly assigned its obligations and liabilities under a contract for the sale and leaseback of the development site and, if so, whether this amounted to a repudiatory breach of that contract.

Background Facts

The dispute concerned the question of who would be entitled to enjoy long leasehold interests in the ground floor commercial space of a tower of 298 flats on a development site close to the new Olympic Park in Stratford, East London (the “Site”). By an agreement dated 4 March 2005 (the “Agreement”) Quest Advisors Limited (“Quest”) agreed to sell the Site to the First Defendant, Mr Thomas McFeely. To acquire the site Mr Thomas McFeely agreed to pay £12,745,000 and also to grant to Quest “or as it directs”, long leases (999 years per lease) of the ground floor commercial space at peppercorn rents. Originally the Site was conveyed into the name of Mr Thomas McFeely alone, however, at some point it was conveyed into the joint names of Mr Thomas McFeely and his brother Mr Conal McFeely, the Second Defendant.

Under the Agreement Quest agreed to pay, or to procure to be paid by the appropriate lessee, a contribution towards the building costs of the Development on or before completion of the Development by Mr Thomas McFeely or his successor in title. The Agreement incorporated the Standard Conditions of Sale (Fourth Edition) (“SCS”). The SCS are generally used in residential property transactions, however, they can also be used in uncomplicated commercial transactions. SCS 1.5 states that the buyer is not entitled to transfer the benefit of the contract. Further, SCS 8.2.1 and 8.2.2 relate to a contract to grant a new lease and define a ‘seller’ as the proposed landlord and the ‘buyer’ as the proposed tenant.

By a deed dated 3 October 2006 (the “Deed”), Quest assigned the benefit of the Agreement to the second Claimant, Sharriba Limited. The terms of the Deed provided that Quest “assigned absolutely” not only benefit of the Agreement but all “obligations and liabilities pertaining thereto and contained therein”. The Deed was then followed by a notice of assignment (the “Notice”) which stated that “all…obligations and liabilities” had been assigned to Sharriba Limited. The register of title of the development showed a unilateral notice in respect of the Deed, which described the Deed as an “assignment” of the Agreement which contained “leaseback provisions”. The beneficiary of the unilateral notice was Sharriba Limited. The Defendants claimed that Quest was not entitled to assign the benefit of the Agreement and so Quest sought a declaration as to their entitlement to assign the benefit of the Agreement.

Alleged assignment of benefit by the Deed

The Defendants challenged Quest’s claim that it assigned the benefit of the Agreement to Sharriba Limited by the Deed. They argued that: (a) the Agreement is an agreement to grant new leases; (b) the Agreement incorporated the SCS; (c) by clauses 1.5, 8.2.1 and 8.2.2 of the SCS Quest was not entitled to transfer the benefit of the Agreement; (d) the benefit of the Agreement includes the right under clause 17 of the Agreement to require that the leases be granted to someone other than Quest if Quest so directs; and (e) the Deed purports to assign the benefit (i.e. to grant to Sharriba the right to require the leases be granted to someone other than Quest or itself).

Alleged repudiatory breach of the Agreement

The Deed and the Notice purported to assign Quest’s obligations to Sharriba. The Defendants, therefore, argued that the Deed and the Notice showed that the intention of Quest was that it was no longer bound by the Agreement. The Defendants contended that this was a repudiation of the Agreement, which the Defendants accepted by letter on 8 September 2008, and so the Agreement was at an end.

Availability of relief against the Second Defendant

The Claimants sought declarations that “on or before completion of the Development the Defendants [were] obliged to grant“ the leases of the ground floor commercial space to Sharriba or as it may direct, or to Quest or as it may direct. The Defendants contended that the obligation in the Agreement to grant the leases of the ground floor commercial space was not an obligation that Mr Conal McFeely owed as he was not party to the Agreement and so was not bound by the obligations under it.

The Decision

With regard to the alleged assignment it was held by Robin Knowles QC, sitting a Deputy Judge of the High Court, that the Agreement was both a contract to sell the Site and a contract to grant new leases. For the purposes of the contract to grant a new lease, SCS 8.2.1 and 8.2.2 apply SCS 1.5 so that Quest (the proposed tenant) was not entitled to transfer the benefit of the contract with regard to the grant of new leases. Therefore, when applying the SCS, Quest were not entitled to assign to Sharriba the right to require the leases to be granted to someone other than Quest. However, this did not affect Quest’s right to assign the benefit of the Agreement in relation to the contract to sell the Site, nor did it affect Quest’s right to require the leases be granted to someone other than itself and to exercise that right in whatever way Sharriba might wish.

In law the transfer of the obligations owed under a contract cannot be achieved by the act of one party who owes those obligations by assigning them to another without the agreement of the party to whom those obligations are owed; this is typically done using a novation agreement. Therefore, it was held that the Deed could not validly assign the obligations owed by Quest to Sharriba and so Quest remained under those obligations and any liabilities arsing from the Agreement. However, the Judge stated that it was plain that Quest did not think that it was acting contrary to the Agreement and that it sent the Notice because it considered the Deed was effective to transfer its obligations and liabilities to Sharriba who would then perform those obligations; even though this was an honest yet mistaken belief. Further, there was nothing to suggest that Quest would refuse to perform its obligations under the Agreement if it was held that Quest would continue to be bound by it. It was adjudged that Quest’s conduct did not amount to a repudiatory breach of the Agreement.

It was further held that both Mr Thomas McFeely and his brother had at all material times known of the agreement to grant the leases of the commercial space. There had been no valuable consideration on the disposition of the freehold interest from Mr Thomas McFeely to himself and his brother which did not, therefore, affect the beneficial ownership of the Site. As a matter of construction, the Judge held that the parties to the Agreement expressly contemplated that Mr Thomas McFeely, or his successor in title, would carry out the construction of the Site and so must have impliedly contemplated that Mr Thomas McFeely, or his successor in title, might grant the leases. For these reasons the Judge agreed that Quest was entitled to a declaration to the effect that on or before completion of the development of the Site the Defendants were obliged to grant the leases of the ground floor commercial space to Quest or as it may direct, provided that on or before the grant of each lease the lessee paid the Defendants the required contribution towards the building costs of the development of the Site. 

Comment

Whilst this case does not change the law in this area, it highlights the importance of ensuring that agreements are clearly and unambiguously drafted. Where an agreement purports to act as a contract for sale and leaseback, or indeed any commercial agreement whether or not it relates to property, it is of paramount importance that clear definitions are used. The parties, including any successors in title, should be sufficiently identified and referred to throughout the agreement and care should be taken to ensure that clauses do not conflict with each other, especially when any form of standard conditions are incorporated into that agreement. Such consideration will help to prevent future disputes and avoid litigation as a result of “…simply poor drafting”.

For further information please contact Owen Rafferty or the Partner with whom you usually deal

Court of Appeal, 5 November 2009

The Facts

Ms Heath had an existing mortgage with Halifax with an outstanding balance of £19,000. She wished to borrow more money and so applied to a different lender for a loan. The lender advanced just over £28,000. It was a term of the mortgage offer that Ms Heath’s existing mortgage with Halifax was discharged. The Halifax mortgage was repaid and Ms Heath was left with a surplus of £9,000 to use for her own purposes. The lender subsequently assigned the mortgage to Southern Pacific (“SPML”). Ms Heath fell into arrears and SPML brought possession proceedings against her.

At the time of the transaction, because the mortgage advance was in excess of £25,000, the loan agreement assigned to SPML was not regulated by the Consumer Credit Act 1974 (“the Act”). The agreement did not comply with the provisions of the Act in terms of the form and content of the loan agreement.

The Law

Credit can be supplied by a lender to a borrower for different uses. For example, a lender may lend money to a borrower in order to redeem an existing loan and it may be a term of the new loan that the existing loan is repaid. This term restricts the purposes for which the lender is prepared to make the loan and credit of this nature is defined by the Act as ‘restricted use’ credit.  In the alternative, a lender may agree to lend money to a borrower to use as the borrower sees fit. This sort of credit would be defined as ‘unrestricted use’ credit under the Act.

Section 18 of the Act provides for situations in which lenders may try to combine what are, in reality, two or more separate credit agreements in order to bring the combined agreement outside of the protection of the Act (classified as a ‘multiple agreement’).  As at the date of Ms Heath’s loan, the Act provided that credit agreements supplying credit of less than £25,000 would be regulated by the Act.

Section 18 also makes provision for credit agreements that could fall within more than one category but which cannot be dissected. For example, a borrower may enter into a credit card agreement under which he is able to draw cash to use as he sees fit (i.e. ‘unrestricted use’ credit) or he may buy goods with his credit card (i.e. ‘restricted use’ credit). Although the credit card agreement provides for different types of credit, Section 18 of the Act provides that it is nevertheless a single or ‘unitary’ agreement.

The Present Case

Ms Heath argued that her loan agreement was one which fell into two different categories under the Act as £19,000 was ‘restricted use’ credit (to repay her existing borrowing) and the balance was ‘unrestricted use’ credit because she could use this as she pleased.  She argued that there were actually two separate agreements, both of which should be regulated by the Act. Ms Heath suggested that, as she had not signed any agreement that complied with the Act in terms of form and content, both agreements were unenforceable under Section 18. 

SPML argued that the question of whether a credit agreement is a ‘multiple agreement’ depends upon the terms of the agreement. In this case, they said that Ms Heath’s loan agreement would only be categorised as a multiple agreement under the Act if the different types of credit were stated separately and were supplied under different terms. SPML pointed out that there was a single advance involved and that the same terms applied to this advance, irrespective of the nature of the credit supplied. SPML contended that it was not a multiple agreement for the purposes of Section 18.

Decision

The Court of Appeal found in favour of SPML. In interpreting Section 18, the Court held that the starting point should be the terms of the credit agreement. Ms Heath’s agreement could fall into two categories under the Act (restricted use credit and unrestricted use credit). However, because the terms of the agreement applied in the same way to each category; it was not a multiple agreement under Section 18. If the terms of the agreement had placed one part of the agreement into one category and another part of the agreement into another category, it would have been caught by Section 18 and deemed to be a multiple agreement.

Comment

The decision may represent a turn in the tide of litigation arising from the Act in favour of lenders.  The Court decided that Ms Heath’s argument, although inventive, was based upon an inaccurate interpretation of the statute. This case may lead lower Courts to be more sceptical regarding technical challenges made by borrowers and claims managers. Much of the argument before the Court involved attempts to explain the meaning of Section 18.  At the very least, the decision provides some useful judicial clarity on how that Section should be interpreted.

For further information please contact Georgina Squire or the Partner with whom you usually deal

Court of Appeal, 12 November 2009

Rosling King LLP recently acted for Southern Pacific Personal Loans Ltd (“SPPL”) in this test case before the Court of Appeal arising from the interpretation of the Consumer Credit Act 1974 (“the Act”).  SPPL were successful in their appeal.

Background

On 26 March 2005, Mr and Mrs Walker (“the Borrowers”) entered into a secured loan agreement (“the Agreement”) with SPPL.  The loan was for a fixed sum of £17,500 and the Agreement was regulated under the Consumer Credit Act 1974 (“the Act”). The Agreement displayed the ‘amount of credit’ as £17,500.  At the time they entered into the Agreement, the Borrowers paid a broker administration fee (“the Broker Fee”) in the sum of £875 to a mortgage broker responsible for arranging their loan with SPPL. The Broker Fee was paid by SPPL on their behalf and interest was charged on it for the term of the loan.

The Borrowers fell into arrears and SPPL commenced possession proceedings in response to which the Court made a suspended Order for possession on terms.  However, the Borrowers failed to comply with the terms of the suspension and SPPL sought to enforce the Order. In response to SPPL’s attempts to take possession of their property, the Borrowers appealed.

The Original Appeal

The Borrowers’ appeal was heard by HHJ Halbert sitting in the Chester County Court on 27 April 2009.  They alleged that the Agreement was unenforceable on the basis that the ‘amount of credit’ stated in the Agreement was inaccurate. The Consumer Credit (Agreements) Regulations 1983 provide that a regulated credit agreement must contain certain prescribed terms, one of which is the ‘amount of credit’ supplied by a lender.  If these terms are absent or incorrectly stated in an agreement entered into prior to April 2007, the Court is prohibited from making an enforcement Order in favour of a lender and the agreement is rendered ‘irredeemably unenforceable’. 

The key to the Borrowers’ argument was the interpretation of Section 9(4) of the Act, which provides that an item added to the total charge for credit in a regulated agreement should not be treated as ‘credit’ for the purposes of the Act, even though time is allowed for its payment. The Borrowers argued that the Broker Fee was in fact part of the true ‘credit’ supplied by SPPL as time had been allowed for its payment.  For this reason, the Borrowers said that the ‘amount of credit’ was incorrectly stated as £17,500 in the Agreement as it excluded the Broker Fee.

Controversially, the Borrowers also argued that Section 9(4) effectively prohibited a lender from charging interest on anything other than ‘credit’. They alleged that interest was a necessary feature of credit and that to charge interest on the Broker Fee would be to ‘treat it as credit’ in breach of Section 9(4).

Judge Halbert accepted these arguments and decided that the Agreement was irredeemably unenforceable.  SPPL appealed to the Court of Appeal.

The Second Appeal

On appeal, SPPL objected to the Borrowers’ purposive interpretation of Section 9(4) and the suggestion that the Act prohibited the charging of interest on anything other than credit.  SPPL argued that Section 9 was a definition section which defined ‘credit’ for the purposes of the Act and that interest was not a necessary feature of credit.  For example, interest-free credit is available to consumers and although interest is not charged on that credit, it is ‘credit’ for the purposes of the Act as it represents a financial accommodation under Section 9(1).  SPPL also pointed out that the definition in Section 9 was linked to other provisions of the Act designed to ensure that unscrupulous lenders could not add fees and charges to the amount of credit they supplied to a borrower and call them ‘credit’ in order to bring an agreement outside the protection of the Act. 

The Decision

In its unanimous Judgment, the Court of Appeal decided that Judge Halbert had been wrong to conclude that the Agreement was unenforceable and held that Section 9 was a definition section.  The Court rejected the Borrowers’ argument that Section 9 contained a prohibition upon the charging of interest on anything other than ‘credit’, as defined by the Act.  In his leading Judgment, Lord Justice Mummery held that any such prohibition would have been set out in plain terms in the Act, and it was not. The Court concluded that the Agreement was compliant with the Act and subordinate legislation and that SPPL was at liberty to enforce it.

Comments

The Act and Regulations flowing from it can be difficult to understand and interpret and the Court of Appeal has now given clear guidance regarding the meaning and effect of Section 9.  The decision is symptomatic of what appears to be a move by the higher Courts towards a more pragmatic and commercial view regarding technical challenges brought by borrowers to the enforceability of pre 2007 regulated agreements.  It may act as a deterrent to similar claims in future at County Court level and is good news for lenders.

For further information please contact Georgina Squire or the Partner with whom you usually deal

In December 2008 we reported that the Employment Appeals Tribunal (“EAT”) had decided that an employee transferred from a company in administration to another company was not afforded the protection of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). The Court of Appeal has now reversed this decision and, in the process, softened the impact of Regulation 8(7) of TUPE.

Background

Wellswood Ltd (“Oldco”), having started trading as a wholesaler in fruit and vegetables in 2003, found itself in financial difficulties by 2006. Upon consultation with an insolvency practitioner and a major creditor (“GTL”), Oldco entered into administration. GTL did not wish to purchase Oldco as a going concern as it would inherit Oldco’s book debts. Instead, GTL incorporated Wellswood (Yorkshire) Ltd (“Newco”) as a wholly owned subsidiary to purchase certain assets from Oldco, which included the lease of the premises and five out of seven of Oldco’s employees. Of these five, four took redundancy payments from the fund administered by the Secretary of State. This left Mr Oakwood.

Mr Oakwood was a salaried General Manager of Oldco and took a salary cut upon joining Newco, instead of seeking a redundancy payment. Mr Oakwood was subsequently dismissed by Newco having not completed one year’s continuous service with them. Mr Oakland brought a claim for unfair dismissal.

Law

Regulation 8(7) of TUPE

States that where bankruptcy or insolvency proceedings have been instituted with a view to the liquidation of the assets of the seller, the employees will not automatically transfer to the buyer.

Regulations 8(6) and 9 of TUPE

States that where bankruptcy or insolvency proceedings have been initiated but not with a view to the liquidation of the assets of the seller, the employees will transfer to the buyer.

Section 218(2) of the Employment Rights Act 1996 (ERA 1996)

States that, irrespective of the application of TUPE, if a trade, business or undertaking is transferred from a seller to a buyer, then the period of employment of an employee in the trade, business or undertaking at the time of the transfer counts as a period of employment with the buyer.

EAT Decision

Mr Oakwood’s claim for unfair dismissal was brought on the basis that his contract of employment had transferred under TUPE and was, therefore, continuing when he was transferred from Oldco to Newco.

Newco relied on Regulation 8(7) TUPE and stated that Mr Oakwood’s contract of employment did not transfer between Oldco and Newco upon the acquisition of the assets because of this Regulation; any rights that Mr Oakwood had accrued under his contract of employment with Oldco falling away when he  commenced, what was effectively, a new contract of employment for Newco.

The question to be decided by the Court was whether the transaction between the companies was one that attracted the application of Regulation 8(7). The EAT decided that due to Oldco’s weak financial position, the insolvency proceedings were instituted with a view to the liquidation of the assets of the company. Regulation 8(7) did, therefore, apply and Mr Oakwood was not protected by the provisions of TUPE that allow for the transfer of employees in a relevant transfer.

Court of Appeal Decision

The Court of Appeal openly stated that it did not wish to deal with the point of whether Regulation 8(7) applied or not, as Mr Oakwood had appealed against the EAT decision on reliance on section 218(2) of the ERA 1996, a new argument to the proceedings. The Court of Appeal allowed the inclusion of a new argument into the appeal as Newco had received plenty of notice of its intended use. In view of section 218(2) of the ERA 1996, the Court felt obliged to side with Mr Oakwood and confirmed that there had been no break in the continuity of his employment. Mr Oakwood was afforded all of his accrued rights in relation to unfair dismissal and redundancy pay rights.

Comment

The decision of the EAT went against the guidance provided by the Department for Business, Enterprise and Regulatory Reform, which stated that administrations do not fall within Regulation 8(7) TUPE. Parliament has so far failed to clarify what particular insolvency proceedings should be characterised as being ‘with a view to liquidation’ under TUPE and, coupled with the decision by the Court of Appeal in this case, it is now extremely uncertain when a buyer of a business and its assets from a company in administration can avoid the automatic transfer of employees under TUPE. Given the uncertainty and the undoubted number of companies in administration offering the sale of its business and assets immediately upon entering administration in the current climate, the point is sure to reach the Courts again soon. The opportunity should then be taken, if not before, to clarify the now muddied waters of when Regulation 8(7) of TUPE applies.

For further information please contact Niki Avraam or the Partner with whom you usually deal

Phillip McGuffick –v- The Royal Bank of Scotland Plc (High Court, October 2009)

There has been a sharp rise in claims by borrowers seeking to challenge the enforceability of loan agreements regulated by the Consumer Credit Act 1974 (“the Act”) and subordinate legislation.  Many borrowers are attempting to take advantage of the statutory framework of the Act to challenge their lenders and avoid paying back their debts. However, the High Court has recently provided clarification of the law which will be a welcome development for lenders and may discourage some claims by borrowers.

The Facts

Mr McGuffick borrowed the sum of £17,034 from The Royal Bank of Scotland (“RBS”) on 3 October 2005. The loan agreement between the parties was a regulated agreement under the Act. Unfortunately, Mr McGuffick was unable to meet the monthly instalments and repayments stopped within the first year of the term of the loan. RBS served a default notice upon Mr McGuffick under Section 87(1) of the Act, together with formal notice which stated that they intended to take action to recover the debt and that if Mr McGuffick did not bring his account up to date within 28 days of the letter, RBS would report the default to various credit reference agencies.

Mr McGuffick’s solicitors wrote to RBS requesting a copy of his loan agreement under Section 77 of the Act. Under this provision, RBS was obliged to produce a copy of the loan agreement within 12 working days. If it failed to do so, RBS would be prevented from taking enforcement action.

RBS could not find a copy of the loan agreement and so wrote to Mr McGuffick’s solicitors to say that it would not take enforcement action to recover the outstanding debt but that Mr McGuffick should continue to make repayments as the loan agreement was still in force. Further, RBS warned that, if Mr McGuffick failed to make his monthly repayments, RBS would report his continuing default to credit reference agencies.

In response to RBS’ failure to retrieve a copy of the loan agreement, Mr McGuffick commenced proceedings in the County Court alleging that the loan agreement was unenforceable and that RBS were prohibited from taking the action that they had threatened. The case was transferred to the High Court to be heard as a test case.

Main Issues

The High Court was invited to provide guidance upon a number of issues that had arisen as a result of the dispute between RBS and Mr McGuffick. RBS eventually managed to produce a copy of the loan agreement between the parties and was therefore able to take enforcement action to recover the debt in the usual way. However, Mr McGuffick’s claim raised questions regarding the status of the loan agreement and the contractual rights and duties of the parties during the period in which RBS was unable to comply with Mr McGuffick’s statutory request.

The Court considered, amongst other things, whether Mr McGuffick’s contractual obligation to pay the monthly instalments was suspended or extinguished during the period in which RBS had been unable to produce a copy of the loan agreement and whether the reports made by RBS to credit reference agencies regarding Mr McGuffick’s failure to pay under the agreement constituted enforcement action or ‘steps in enforcement’, which RBS may be prohibited from taking whilst it was unable to produce a copy of the loan agreement. 

The Decision

The Court held, amongst other things, that where a loan agreement is rendered unenforceable as a result of a lender’s failure to comply with a statutory request for a copy of the relevant loan agreement, the lender’s rights are not extinguished. The borrower’s contractual obligation to make the monthly repayments is not suspended; it continues to apply. The parties’ contractual rights and obligations continued to exist during a period of default, though the lender was prevented from enforcing its rights during that time.

The Court decided that the threats made by RBS of reporting Mr McGuffick’s default to credit reference agencies and/or the reports made regarding the status of his loan account did not amount to enforcement action or ‘steps in enforcement’ under the Act. The Court concluded this was an essential aspect of responsible lending.

Comment

This decision provides useful clarification of what a lender can and cannot do during the period in which it is retrieving a copy of the loan agreement.  Although a lender may not call in a loan or enforce a Judgment during this period, it may continue to report to credit reference agencies regarding the status of an account and take various other steps.

This case should encourage borrowers to continue to meet their contractual obligations to pay monthly instalments due under loan agreements in circumstances where a lender has been unable to provide a copy of their loan agreement.  Lenders may find that a raft of similar claims are either withdrawn or amended.  At a time when borrowers are becoming ever more aware of their statutory rights and are increasingly willing to challenge the enforceability of loan agreements, this decision is good news for lenders.

For further information please contact Georgina Squire or the Partner with whom you usually deal

It is estimated that around 40 million policies of payment protection insurance (“PPI”) have been sold in Britain in the last 6 years alone, making this the second biggest selling insurance product on the market. However, the way in which these products have been sold may have unintended and serious consequences for lenders when they seek to take enforcement action against their borrowers.

The Consumer Credit Act 2006 provides that the Court may examine whether an unfair relationship exists between a lender and a borrower. What constitutes an unfair relationship is not specified in the Act and therefore Parliament has left this question to the Courts. A recent County Court decision illustrates the potential implications for lenders if the Court decides that a relationship with a borrower is unfair.

The Facts

Ms Thorius took out a credit card with MBNA in 2002, which was emblazoned with the logo of Sunderland FC, her favourite football team. At the time of her application, MBNA strongly recommended that Ms Thorius should purchase a PPI policy to meet her monthly payments if she fell ill or was made redundant. However, she indicated in writing on the application form that she did not require PPI. Her request fell on deaf ears and a PPI policy was taken out in her name at a cost of £20 per month, which later increased to £30 per month. MBNA did not disclose to Ms Thorius that it would receive regular commission payments from the PPI insurer and neither did they supply Ms Thorius with a copy of the credit card agreement.  This would prove to be fatal.

Ms Thorius ran up a balance on her card but then lost her job and she attempted to make a claim under the PPI policy. Her claim was refused. As time passed, she was unable to meet her repayments but her credit limit was increased to allow for the spiraling balance on her account, which eventually grew to in excess of £8,000.  MBNA subsequently demanded repayment of the debt and took enforcement action.  

After a 9 hour hearing at the Newcastle-upon-Tyne County Court, Deputy District Judge Jacqueline Smart decided that the PPI policy had been unfairly imposed by MBNA and, as a result of the way in which the PPI policy had been sold; that an unfair relationship existed between MBNA and Ms Thorius.  The Judge also took a dim view of the “secret commission” that MBNA had received from the PPI insurer.  

MBNA were ordered to either repay the PPI premiums of £2,500 plus interest or the value of the commission it had received.  Further, as MBNA were unable to produce a copy of the original signed credit card agreement, the Court held that MBNA could not take enforcement action against Ms Thorius, which means that she will not have to repay the debt.

MBNA applied to the Court for permission to appeal but this was refused as MBNA had failed to locate a copy of the original credit card agreement. Bearing in mind the consequences of the Judgment, MBNA may now apply for permission to appeal direct from the Court of Appeal. 

Comment

The way in which PPI policies have been sold in the past has recently come under close regulatory scrutiny. This Judgment reinforces the view that lenders may find themselves up against hard fought defences from borrowers on credit cards and loans.  Ms Thorius’ representatives have been keen to stress in the press that the Judgment could open the floodgate for similar claims against lenders where the PPI policy has been sold alongside a loan. However, although the Courts may choose to be guided by the Judgment, they are free to decide similar cases differently.  This will change if the Court of Appeal reviews and makes a decision on this case, which would then be binding on all lower courts in the same circumstances.

It is important to remember that it was MBNA’s reported failure to produce a copy of the original credit card agreement that was the primary influencing factor in this case. Lenders should take note of the Court’s power to prevent action being taken to collect a debt where they decide that an unfair relationship exists. The Court will examine the circumstances in each case before making their decision.  That is why it is important for lenders to treat these cases seriously and ensure that the best possible position is presented to the Courts at hearings.

The Financial Services Authority (FSA) has recently begun a review of the sale of PPI policies on other loans, including mortgages and proposes to introduce new rules to ensure that PPI complaints are handled properly and redress is paid where appropriate. Its Consultation Paper 09/23, The Assessment and Redress of PPI Complaints, was published last week and invites responses by 30 October. The FSA has set a short consultation period due to its recognition of the need to make a speedy determination on this issue. The FSA has recently directed lenders to re-open 185,000 previously rejected complaints about PPI and to assess whether their responses were fair. Clearly, this will be a live issue for the foreseeable future.

For further information please contact Georgina Squire or the Partner with whom you usually deal

The Final Countdown: Companies Act 2006 provisions effective from 1 October 2009

The final pieces of the jigsaw that is the Companies Act 2006 (the “Act”) are due to come into force on 1 October 2009. Since receiving Royal Assent on 8 November 2006, the provisions of the Act have come into force in stages (see Caught in the Act: September 2008). With the final stage of the implementation imminent, this update highlights the key provisions that will come into force on 1 October 2009.

Company formation

A key change made by the Act is that from 1 October 2009 both private and public companies can be formed by a single shareholder. A public company must still have at least 2 directors (at least one of whom must be a natural person) under the provisions of the Act.

In terms of the documents required by Companies House to incorporate a company, an application to register a company (Form IN01) will need to be accompanied by a shortened version of the memorandum of association (see below) and articles of association. There will be 3 new types of model articles for different types of company: private companies limited by shares; private companies limited by guarantee; and public companies.  The new model articles, which replace Table A, will apply as the default position (to the extent not modified or excluded) to new companies formed from 1 October 2009, but will not automatically apply to existing companies whose articles will remain unchanged.  The new model articles have been drafted to be as simple as possible and have been designed with the needs of small, owner-managed businesses in mind. Existing companies may therefore consider amending their articles to reflect the new model articles.

Constitution

Currently, a company’s constitutional structure is governed by its memorandum of association and articles of association. From 1 October 2009 the Act puts an end to the constitutional significance of the memorandum of association by removing the requirement for a company to state its objects (i.e. what the company can do). This means that a company’s objects will be unrestricted, unless any restrictions are specifically set out in its articles; thus effectively abolishing the ultra vires rule (which provided that a company could only act within the powers set out in its memorandum of association). For an existing company, its objects will become part of its articles of association, which can be amended or deleted in accordance with the requirements of the Act. The memorandum of association will not disappear but it will be reduced to a document that merely states that the subscribers wish to form a company and, in the case of a company that is to have a share capital, agree to take at least one share each. The articles of association will therefore become a company’s main constitutional document and companies may wish to consider including any restrictions on their powers in the articles.

Company Names

The Act introduces a number of new provisions relating to a company’s name. Of interest is that the Act confers a right on a person to object to the registration of a company’s name if it is similar to a name in which that person has goodwill. Currently, a company can change its name by special resolution. From 1 October 2009 a company will still be able to change its name by special resolution; however the Act provides that it can also do this by other means provided for in the company’s articles of association. This provision effectively allows the company to determine the procedures that it should follow to change its name.

Directors and Secretaries

The Act introduces some key changes relating to the information that directors and secretaries should file at Companies House. One such provision is that a director will need to provide two sets of addresses: a service address (which can be the registered address of the company) and a residential address. The service address will be on the public record but the director’s residential address will be kept confidential with only specified public authorities or credit reference agencies having access to it. This provision is intended to give directors greater protection of their personal information as there has been concern that the provision of such information was open to abuse.

Practically, this means that a company will have to hold two registers: one containing the directors’ service addresses, which must be open to public inspection, and a second that contains the directors’ residential addresses, which must be kept secure and confidential.

Authorised Share Capital

The Act removes the requirement for a company registered after 1 October 2009 to have an authorised share capital. For companies that were incorporated before 1 October 2009, the authorised share capital stated in its memorandum of association will be treated as a provision in the company’s articles of association stipulating the maximum amount of shares that the company may allot. Companies incorporated prior to 1 October 2009 might consider passing an ordinary resolution to remove reference to the authorised share capital or adopting articles that do not contain a statement of authorised share capital. It should be noted that a company will be required to file a statement of capital with Companies House each time there is a change in the amount of the company’s issued share capital.

Allotment of Shares

Currently, when a company is considering issuing further shares it has to check that its directors have sufficient authority to issue the relevant shares. From 1 October 2009 the directors of a private company which only has one class of shares will have unlimited authority to allot that class of shares, unless of course they are prohibited from doing so by the company’s articles.

Acquisition of Own Shares

A company incorporated after 1 October 2009 will no longer need specific authorisation in its articles of association to be able to buyback its own shares. However, a company will be prevented from acquiring its own shares if its articles specifically prevent such an act.

The above summary represents an overview of the provisions of the Act that will come into force on 1 October 2009 and is intended only as a guide. There are also a number of transitional provisions that apply to companies registered under the Companies Act 1985.

For further information please contact James Walton or the Partner with whom you usually deal

We are aware that a number of consumer action groups are advising consumers to apply for default judgments, obtained against them by lenders for failure to make repayments, to be set aside on the basis that notice of assignment of the mortgage has not been served correctly. This is relevant where, for example, a lender has purchased a mortgage loan book and so was not the original party to the mortgage contract. If argued successfully this would mean that the assignee lender had no right to bring an action in the first place.

Law of Property Act 1925

Under section 136 of the Law Property Act 1925 (“LPA 1925”) notice of assignment must be given to the other party to a contract (i.e. the borrower) expressly in writing. There is no prescribed time limit for giving notice but the assignment is only legally valid when the borrower receives the notice.

Until proper notice is given, only an equitable assignment has taken place. An equitable assignment differs from a legal assignment in that where there is a legal assignment the assignee can bring an action (e.g. for recovery of a debt) in its own name against the borrower. On an equitable assignment the assignee would need to join the assignor as a party to the action before an action could be brought against the borrower. Alternatively, notice would have to be served in the correct manner before an action could be brought in the assignee’s name.

Section 136 LPA 1925 is silent as to how the notice should be served. The default statutory provision is found under section 196 LPA 1925. It provides that if notice is given to the other party by registered letter and is not returned undelivered, it will have been deemed to have been served. This means that whilst notice may be given expressly in writing, it will not be deemed served unless it has been sent by registered post.

Section 196 LPA 1925 refers to “registered letter”. The postal service “registered post” no longer exists. Instead, a notice should now be sent either as first class post with a certificate of posting (available through Royal Mail) or by recorded delivery; under the Recorded Delivery Act 1962 any notice which is deemed served by registered post will also be deemed served if sent by recorded delivery.

Section 196 (5) also states that its provisions extend to notices required to be served unless a contrary intention appears. In other words, if there is an express clause in the contract (which would include a lender’s mortgage conditions) that stipulates how any notices necessary under the contract are to be served, that will take precedence over the statutory provision in section 196.

Conclusion

If the mortgage conditions are silent as to how notice should be served, the provisions of the LPA 1925 will prevail. Express notice, in writing, must be given to the borrower and either delivery evidenced (by Affidavit of Service) or sent by registered letter, and not returned, in order to be validly served in accordance with section 196 LPA 1925. If this is not done, the borrower could argue that they did not receive the notice and that the assignee has no right to bring an action against the borrower in its sole name.

If, however, the mortgage conditions provide that notice is to be given by other means, e.g. by normal post, then so long as the method prescribed in the mortgage conditions has been followed, the notice will have been validly served.

A successful argument by a borrower that a notice of assignment has not been validly served does not give a total defence to that borrower and render the sums being claimed by the lender irrecoverable. The lender would, however, have to serve a notice of assignment on the borrower in using the correct method and then recommence litigation, thus incurring extra expense. Alternatively, the assignee will need to join the original lender into the action. Even if this is possible and the original lender consents, it will again incur extra expense

Mortgage lenders should ensure that their mortgage conditions include a clause which varies the provisions of Section 196 LPA 1925 and that they follow the prescribed method of service to ensure that borrowers cannot use this to delay and increase the costs of recovery litigation.

For further information please contact Ann Ebberson or the Partner with whom you usually deal

The High Court has recently held that a bank and its customer were liable in restitution further to a mistaken payment being made into the customer’s account which the bank then wrongly permitted the customer to draw upon.

Background Facts

The claimant, Mr Jones, imported cars with the assistance of a Mr Sharkey who appeared to act as an agent for Murway Automotive Sales & Leasing (“Murway”). Before the cars were delivered to Mr Jones he had to make payment to Murway. This was done by CHAPS transfers from Mr Jones’ company’s account with Lloyds TSB to a bank, the details of which were provided by Mr Sharkey.

In February 2006, Mr Jones ordered a number of cars through Murway and was instructed to make payment to an account held at the Bank of Scotland. In March 2006, Mr Jones proceeded to make the payment, however due to a mistake on the CHAPS transfer form the monies were transferred to Miss Churcher’s account held with Abbey National Plc (“Abbey”). Mr Jones had previously made a payment to Miss Churcher’s account upon Mr Sharkey’s request.

Upon realising his mistake, Mr Jones contacted Lloyds TSB and Abbey by telephone informing them of the error. Lloyds TSB in turn also contacted Abbey to request that the payment be returned and sent various SWIFT messages to Abbey cancelling the payment and recalling the funds. However, by the time Abbey had requested authority from Miss Churcher to return the funds, she had withdrawn most of the funds and paid them to Mr Sharkey. Mr Jones did not recover any of the monies back from Miss Churcher, nor did he receive the cars that he had ordered.

The Issues

Mr Jones subsequently issued proceedings against Miss Churcher and Abbey claiming payment in restitution from both defendants as a result of the payment he made being a mistake of fact. Mr Jones argued that Abbey was made aware of the error before Miss Churcher had withdrawn the funds from her account. The law of restitution comprises a body of rules that effectively prevents a person becoming “unjustly enriched” at another’s expense. To succeed in such a claim, the claimant must show that: the defendant has received a benefit or has been enriched; that enrichment is unjust; and that the enrichment is at the claimant’s expense. Both Miss Churcher and Abbey argued that it would be inequitable for the Court to make an order of restitution.

Abbey submitted that it did not have any knowledge of the error until after Miss Churcher had withdrawn the monies and, even if they did have knowledge of the error, they could not have repaid the monies to Mr Jones unless Miss Churcher either gave them permission to do so or they breached their banking mandate with her. To this end, Abbey sought to rely on the defence of “ministerial receipt” arguing that it was powerless to act without Miss Churcher’s consent as the funds had already cleared. The defence of ministerial receipt can be relied upon by an agent, such as a bank, who has received monies from a claimant on behalf of their principal, the customer, and then paid that money to the customer. If the monies credited to the customer are irreversible, the bank may seek to rely on this defence. In the alternative, Abbey raised the defence of “change of position” in that they sought to show that they had changed their position in good faith as a result of the payment. Miss Churcher also sought to rely on this defence and claimed that she had been duped into receiving and paying the monies to Mr Sharkey.

The Decision

The Court rejected the arguments raised by both defendants and held that they were both liable in restitution for the error of payment made by Mr Jones.

The Court disagreed with Abbey’s defence of ministerial receipt, rejecting its assertions that once monies had cleared into Miss Churcher’s account it was then her money and that Abbey was powerless to act. The Court noted that should a bank wish to protect itself from liability in such circumstances, it should intervene and act. Further, the Court dismissed Abbey’s contention that it had acted in good faith because it had actual knowledge of the error as it had received various communications from Lloyd’s TSB; Abbey had delayed in taking any action to rectify the mistake. As the judge stated:

“Given the risk of misappropriation that can arise when an erroneous payment is made, one would expect all banks to have robust systems in place for rectifying such errors with the appropriate urgency.”

With regard to Miss Churcher, the Court ruled that she had not changed her position in good faith as she failed to make sufficient enquiries as to why the monies were paid into her account and also made no real effort to return the monies to Mr Jones. 

Comment

This case highlights the need for financial institutions to undertake full investigations into transactions that they suspect may have been made in error and to rectify that error as soon as possible so as to avoid being liable to a third party in restitution. What is clear from the facts of this case is that on a numerous occasions Mr Jones and Lloyds TSB informed Abbey of the error, yet Abbey failed to take any appropriate action. Had the matter concerned a possible fraudulent transaction, it is likely that Abbey would have had certain safeguards in place to stop any monies from being withdrawn while further investigations took place. Clearly, there is a need for banks and other financial institutions to take stock of the implications of this case and review their internal practices and procedures relating to payments made in error and to perhaps bring those procedures in line with those concerning fraud.

For further information please contact James Walton or the Partner with whom you usually deal

Background

The first claimant, Levicom International Holdings BV, was a wholly owned subsidiary company of the second claimant and was involved in the telecommunications business. The defendant was a firm of London solicitors. The case related to advice that the defendant had provided to the claimants, in a dispute that the claimants had had with two Swedish companies, Tele2 Sverige AB and Tele2 AB.

In January 1999, the claimants entered into a Framework Agreement and Share Purchase Agreement (“the Agreements”) with the two Swedish companies. The Agreements were designed to raise finance to help develop the claimants’ business. The Agreements created a restriction, whereby the Swedish companies were prevented from competing in any cellular network business in the Baltic States.

A while after the Agreements had been signed, the Swedish companies purchased the issued share capital in a Latvian company. The claimants sought advice from the defendant, relating to a breach of the Agreements, by the Swedish companies. The defendant wrote two letters to the claimants, in January 2001 and March 2001, advising them in respect of a breach of the Agreements, the remedies available and possible settlement.

The claimants contended that, acting on the defendant’s advice, they brought arbitration proceedings, rather than settling the dispute. The claimants incurred considerable costs and contended that they settled the dispute, in June 2004, on unsatisfactory terms. The claimants argued that the defendant did not advise them properly of the difficulties that they faced. The claimants sued the defendant for around €50 million.

The Claim Against the Defendant

The claimants contended that (i) the defendant had provided them with negligent advice; (ii) the claimants had then relied on that advice, when negotiating with the Swedish companies; (iii) the claim would have been settled had the claimants received correct advice, but instead proceeded to arbitration; and (iv) loss was suffered as a result, as the dispute was settled on less favourable terms, and the claimants incurred the costs of the arbitration.

The Decision

It was held that the defendant’s January and March letters were negligent, as the claimants reasonably understood it to mean that they were entitled to substantial damages. The basis of this advice was unfounded. It was not established that the defendant had failed to exercise proper skill, care or competence in the conclusions that they had reached. But, the defendant had not conveyed their advice clearly enough to the claimants. The defendant was entitled to state that there could be a breach of the Agreements, and that the claimant could establish damages, as well as being able to reject the first offer of a settlement. The defendant’s assessment of the situation, however, had been too optimistic and did not relay the difficulties that the claimants would have to overcome, to prove its case.

Despite the negligent letters, however, there was no finding that the negligence had caused the claimants a loss. It was not possible to infer, from the evidence, that the claimants would have acted any differently, had the defendant’s advice been any different. The defendant was found to be in breach of contract, but was liable for only nominal damages of £5.

The correct test of causation, in establishing whether a lawyer is negligent, when advising his client in legal or other matters, is not clearly established. Had it been necessary to decide it, Smith J would have adopted the test in Bolitho v. City and Hackney Health Authority [1997] 4 All ER 771. The test in Bolitho accepts that there is a range of views that are properly held, as well as a range of courses of action that can be taken. The test is, therefore, what the range is, rather than the exact view or course of action, which should have been taken.

Conclusion

The defendant was found negligent because it did not properly convey its advice to the claimants and because it was overly optimistic in its assessment of the claimants’ position. However, there was no evidence that proved the claimants would have acted any differently if the advice had been different. As a result, the defendant was liable for nominal damages only.

Comment

The issue of causation should be carefully considered by those bringing or defending a claim for negligent advice. To succeed in bringing a claim for negligence, all the elements of negligence must be made out. In particular, a claimant must be able to prove that the negligent advice caused them to suffer a loss. If they cannot, the claim will fail.

For further information please contact Helen Thurkettle or the Partner with whom you usually deal

The Chancellor, Alistair Darling, has announced that legislation will be introduced in the Finance Bill 2009 which will amend the rules on Stamp Duty Land Tax (SDLT) relief for leasehold enfranchisement.

Leasehold Enfranchisement

The Leasehold Reform, Housing and Urban Development Act 1993 was introduced to give the leasehold owners of flats the right to come together to purchase the freehold of the block of flats in which their property is situated. Under the legislation, it was intended that the actual purchase of the freehold would be made by a nominated purchaser, which would typically be a company owned by the tenants participating in the enfranchisement and set up specifically to make the purchase. No provisions were made in the initial legislation for how the nominated purchaser company should be set up.

The law in this area was reformed by the Commonhold and Leasehold Reform Act 2002 which had the intention to help more leaseholders qualify for the right to enfranchisement. The Act provided that a claim for enfranchisement would have to be made by a “Right to Enfranchisement” (RTE) company, set up by the leaseholders.

However, whilst the Act set out the requirements for how an RTE company should be set up, the statutory provisions for RTE companies under the Commonhold and Leasehold Reform Act 2002  have never been brought into force. This has meant that whilst leaseholders have exercised their statutory rights to enfranchisement, they have not done so using an RTE company as defined by legislation.

The Current Position in respect of SDLT

At present, under the Finance Act 2003, relief from SDLT relief can be claimed for leasehold enfranchisement. However, the relief can only be claimed by an RTE company, as defined by the Commonhold and Leasehold Reform Act 2002. Since the statutory provisions for RTE companies under the Commonhold and Leasehold Reform Act 2002 have never been introduced, RTE companies have not technically been formed according to statute and it has not been possible to claim the relief.

This was tested in Elizabeth Court (Bournemouth) Ltd v Revenue and Customs Commissioners [2008] All ER (D) 188. A group of leaseholders set up a company to purchase the freehold of the block of flats and followed the requirements for an RTE company as set out in the Commonhold and Leasehold Reform Act 2002. They then claimed relief from SDLT under the Finance Act 2003. The House of Lords held that only an RTE Company as defined by the Commonhold and Leasehold Reform Act 2002 could claim relief and since the relevant provisions of that Act had not been given Royal Assent.

Reform by the Finance Bill 2009

It is proposed that the Finance Bill 2009 will reform the provisions for SDLT relief on leasehold enfranchisement by removing the reference to RTE companies. This will allow relief to be claimed by any nominee company acquiring the freehold of a block of flats on behalf of qualifying leaseholders.

This will allow the relief to be claimed as had originally been intended.

For further information please contact Ann Ebberson or the Partner with whom you usually deal

The Court of Appeal has held that in principle there is no reason why someone who is a shareholder and director of a company cannot also be an employee of a company.

Issue

The matter concerned two appeals, both raising similar questions, from the Employment Appeal Tribunal (“EAT”). Mr Neufeld was the respondent to the first appeal and Mr Howe the respondent to the second appeal.

The main issue in the cases before the Court of Appeal was whether Mr Neufeld and Mr Howe had been employees of the failed companies. If they were employees, they would benefit from the protection of section 182 of the Employment Rights Act 1996 (“ERA”) given to employees whose employer has become insolvent. This section of the ERA provides that if an employee makes an application - which satisfies the Secretary of State that the employee’s employer has become insolvent, the employee’s employment has been terminated and the employee was entitled to be paid the whole or part of a debt - then the Secretary of State shall pay the employee out of the National Insurance Fund.

Background Facts: Mr Neufeld

Mr Neufeld began working at Newfeld Press Limited (“NPL”) in 1982 as a salesman and in 1998 he became a director and shareholder in NPL. In July 2001, NPL was transferred to A & N Communications in Print Ltd (“A & N”). Mr Neufeld was a director of A & N and held 90% of its shares; another two directors each held 5% of A & N’s shares respectively. At the time of the transfer it was agreed by all three directors that Mr Neufeld would be A & N’s managing director and also be employed by A & N as part of its sales team. According to Mr Neufeld’s evidence, he worked an average of 60 hours per week carrying out sales and managerial duties for which he was paid a weekly wage subject to PAYE and National Insurance; such evidence pointing to the fact that he was an employee.

Pointing against Mr Neufeld’s employee status was that he had given two guarantees for machinery and sales financing and made a personal loan of £20,000 to A & N. Mr Neufeld made a claim under the ERA for a redundancy payment, notice pay and holiday pay after A & N became insolvent in October 2005. This claim was disputed by the Secretary for Trade and Industry (now the Secretary of State for Business, Enterprise and Regulatory Reform).

The first instance decision of the Employment Tribunal (“ET”) found that Mr Neufeld was not an employee and as such his claim should be dismissed. Mr Neufeld appealed this decision; the appeal being upheld by the EAT who concluded that Mr Neufeld was an employee. The Secretary of State appealed this decision.

Background Facts: Mr Howe

In 1979 Mr Howe started Track Records, which at that stage was only a trading name. In December 2004, Mr Howe transferred Track Record’s assets to the newly incorporated TRM. Mr Howe held 100% of TRM’s shares and was the sole director. He arranged to pay himself a weekly salary of which tax and National Insurance was deducted as an employed person. The profits that TRM made were invested back into it. Mr Howe gave a number of guarantees for TRM’s liabilities including one to the landlords of TRM’s shop. Mr Howe also arranged for TRM to borrow £50,000 from the bank, for which he gave a guarantee secured on his own house. By the end of 2006, TRM was experiencing financial difficulties and so, upon the advice of insolvency practitioners, he ran the business down. By August 2007 he had disposed of TRM’s stock and the shop’s fixtures and fitting. Mr Howe put TRM into voluntary liquidation and claimed that his employment had been brought to an end. Mr Howe subsequently made a claim under the ERA for a statutory redundancy payment.

At the ET, the judge found that Mr Howe was an employee of TRM and, therefore, was entitled to be paid the claimed statutory redundancy payment. The Secretary of State appealed this decision. The appeal was dismissed, however, the EAT gave the Secretary of State permission to appeal to the Court of Appeal.

The Court of Appeal Decision

The general questions raised by both appeals were:-

1)         Can a controlling shareholder and director of a company become an employee of that company under a contract of employment?

2)         Are there any guidelines that assist tribunals in deciding whether a shareholder/director has become an employee?

Having reviewed the conflicting case law in this area, the Court of Appeal dismissed both of the appeals. It held that there is no reason in principle why someone who is a director and shareholder, even if they have total control of a company, cannot be an employee of the company under a contract of employment. Further, it will be no answer to such a claim to argue that:-

1)         the extent of the employee’s control of the company is such that the contractual requirement for an employer to control the employee cannot be satisfied; or

2)         that the practical control that the employee has over his own destiny, including the fact that he cannot be dismissed from his own employment except with his consent, prevents him from being an employee.

The Court of Appeal went on to note that whether or not a shareholder or director is an employee is a question of fact for the court or tribunal to decide. In such a case, there will be two issues to decide:-

1)         whether the putative contract is a genuine one or a sham; and

2)         assuming that the contract is genuine, whether it amounts to a contract of employment, rather than, for example, a contract for services.

Comment

The case is useful as it provides clarification on the previous conflicting case law relating to whether shareholders and directors can also be employees. It was noted in the submissions in this case that in 2008 there were some 12,000 claims by directors on the National Insurance Fund. The Court of Appeal decision gives guidance to ETs dealing with such cases, which in the current economic climate will be welcomed as the numbers of such claims are expected to rise. While the case is good news for shareholder/director employees, who may be able to claim redundancy payments, it should act as a warning to prospective purchasers of companies who may obtain additional employment liabilities relating to shareholder or director employees.

For further information please contact Niki Avraam or the Partner with whom you usually deal

This is the most up to date authority in the area of lender professional negligence. The case examined whether a non-fraudulent Defendant could recover a contribution towards their liability from a fraudulent co-Defendant and confirmed the basis upon which losses in deceit cases are to be quantified.

The underlying facts of the case

In 2005, the Claimant (“Nationwide”) made two advances of £10.5 million and £1 million to a property developer (“Goldgrade”) on the security of commercial property, valued fraudulently by DHL’s employee at between £10.5 million and £16 million. The property’s true value was between £1.3 million and £1.5 million.

Nationwide brought proceedings against the First Defendant valuers, (“DHL”) for fraudulent misrepresentation (deceit). It relied upon fraudulent valuations when advancing monies to Goldgrade and, as a result, lost a great deal. The Claimant also brought proceedings against the Second Defendant solicitors (“Cobbetts”) for breaching their duties to their lender client by failing to identify and inform the lender of the underlying fraud. Cobbetts claimed a contribution from DHL. Nationwide obtained summary judgment against DHL in deceit and accepted an offer of settlement from Cobbetts in the sum of £5,585,001 plus costs of £555,000.

The questions in this element of the case were: (i) how should Nationwide’s claim against DHL be quantified; (ii) what was the quantum of Cobbett’s contribution claim against DHL; and (iii) could Cobbetts recover a contribution from DHL in respect of the costs settlement agreed with Nationwide.

Calculating the value of the Buildings Society’s claim against DHL

As the claim was in fraud, DHL were unable to use the defence of contributory negligence. The Court stated that Nationwide was able to recover losses which flowed from its reliance on DHL’s valuation of the property. The losses suffered need not have been foreseeable, provided they were caused by the fraudulent statement. This meant that Nationwide was able to recover, amongst other things, the advance; lost interest which would have been earned had other loans been made; costs of management and staff time; additional funding costs and the loss of opportunity to make other loans. These sums, less the current value of the property, brought the total recoverable to more than £21 million.

Calculating Cobbetts’ contribution claim against DHL

Nationwide accepted a settlement of £5,585,001 from Cobbetts. The question then arose as to how much of this settlement figure Cobbetts could claim from DHL. The Court looked at whether the starting figure for calculating the amount of the contribution should be the total claim value of £21 million, or the accepted settlement sum of approximately £5.5 million. Another question that arose was whether Cobbetts could use the defence of contributory negligence, even though DHL were not able to do so.

The claim against the Defendants was based on two principles: a claim in deceit against DHL and a claim in negligence against Cobbetts. The sums recoverable under these claims differ. A claim in deceit allows for recovery of all direct losses. A claim in negligence only allows for recovery of all those losses that are reasonably foreseeable.

The Civil Liability (Contribution) Act 1978 governs those instances when contributions are being sought between litigating parties. Section 1(1) states that, in order for the Act to apply, the parties must be liable “in respect of the same damage”. The Court found here that “the same damage” was to that element of Nationwide’s loss for which both parties were responsible. They were both liable in negligence, not deceit. The starting figure when determining the total of Cobbetts’ contribution claim against DHL was therefore the value of the negligence claim, £13.2 million.

The defences which can be relied upon by defendants to claims for deceit and negligence also differ. In a claim of deceit, the defendant cannot rely on contributory negligence, whereas they can in a claim in negligence. The Court decided that it would be unjust if Cobbetts were not able to rely on this defence.

Cobbetts were entitled to rely upon the defence of contributory negligence. The Court deducted 50% of the full value of the negligence claim, leaving £6.6 million. The Court then apportioned the loss, holding the valuer 80% liable and the solicitors 20% liable to Nationwide.

Cobbetts were, as a result, able to recover the settlement sum of £5,585,001 from DHL in their contribution claim, less 20% of £6.6 million. This meant that £4.26 million was recoverable from DHL by Cobbetts.

Cobbetts’ claim for a contribution from DHL in respect of costs

The Court held that it was appropriate to adopt the same percentage split of responsibility between the co-defendants when determining costs.  

Conclusion

This case is useful as it shows how the Courts are currently dealing with some key facets of a lender professional negligence claim. It gave guidance in dividing responsibility between co-defendants.  It also endorsed some of the well known principles in professional negligence litigation. 

For further information please contact Georgina Squire or Helen Thurkettle

HORSHAM PROPERTIES GROUP LIMITED V. CLARK & ANOTHER 2008

Following the very widely reported decision in the case of Horsham Properties v. Clark and Another and the initial review instigated by the Ministry of Justice following that decision, the Council of Mortgage Lenders has now published their response to the questions raised by the review.

Both the decision in the Horsham case and the Council of Mortgage Lenders have simply re-affirmed what has always been the position regarding mortgagee’s rights of possession and sale as set out in the Law of Property Act 1925 (“LPA”). Section 101 of the LPA provides that a lender has a power of sale to sell a secured property in the event of a default by a borrower. It applies to secured charges and can only be exercised in the circumstances set out in the relevant sections of the LPA.

As was shown in the Horsham case, a lender does not have to sell a property with vacant possession.  For example, if there is a buy to let mortgage and the property is tenanted at the time of default, then the lender may decide that they will exercise their power of sale and sell the property with the tenant still in place. For a standard residential loan, the Lender may still sell the property without a Court Order if the borrower has left the property and the Lender can sell with vacant possession.  However, if the borrower is still in residence then the Lender will need to obtain a Court Order in order to obtain vacant possession before sale.  This is of course very standard procedure for Lenders.

Obviously Section 101 of the LPA is only one of the Lender’s remedies when dealing with a defaulting borrower and all other remedies need to be considered whenever a borrower defaults.

As the Council of Mortgage Lenders has said in its response to the Ministry of Justice initial review, any change to existing statute law relating to mortgages would be fundamental to the lending industry. However at this time, no such change has taken place and lenders are still able to rely upon the same sections of the LPA that they have been able to since 1925.

For further information please contact Ann Ebberson or the Partner with whom you usually deal

Haden Young Limited v Laing O’Rourke Midlands Limited [2008] EWHC 1016 (TCC)

Background

Mechanical and electrical works were commenced by Haden Young Limited on the basis of a letter of intent. The works were completed without the parties concluding the sub-contract. Haden Young Limited argued that a contract did not exist as the parties were still in dispute as to certain essential terms of the contract and that it was accordingly entitled to payment on a quantum meruit basis for the work carried out.

Decision

The Technology and Construction Court held in favour of Haden Young. The parties had not reached agreement on several key terms of the sub-contract such as the level of professional indemnity insurance required, the number of permitted assignments of the sub-contractor’s collateral warranty, and whether payment should be linked to the provision of the collateral warranty. The Court held that no sub-contract had been concluded and as a result Haden Young was entitled to reasonable remuneration assessed on a quantum meruit basis for the mechanical and electrical works carried out.

Diamond Build Limited v Clapham Park Homes Limited [2008] EWHC 1439 (TCC)

Background

Building works commenced on the basis of a letter of intent which provided that the parties would enter into a JCT Intermediate Form of Building Contract 2005 by deed. The letter of intent contained a cap of £250,000 on the employer’s liability in relation to works carried out by the contractor that were the subject matter of the tender. The letter of intent also provided that the undertakings in the letter would be extinguished on the execution of the building contract.

The terms of the building contract were agreed and the contract documents were sent to the contractor for execution. However, by the time the contractor executed and returned the contract documents, relationships between the parties had deteriorated and the employer refused to pay the contractor in excess of letter of intent’s financial cap.

The contractor argued that either (i) no contract existed between the parties or (ii) as a result of the issue of the contract documents for execution, a JCT Intermediate Form of Building Contract 2005 existed between the parties and the financial cap provided in the letter of intent was accordingly extinguished.

Decision

The Technology and Construction Court held that a valid contract existed between the parties on the basis of the letter of intent. As the building contract had not been executed as a deed, the letter of intent had not been superseded and the financial cap was applicable and enforceable. 

Comment

Letters of intent are commonplace in the construction industry and it is inevitable that they will continue to be used. However, the Haden Young and Diamond Build decisions highlight the dangers associated with such letters of intent where works carry on in the absence of a concluded building contract. Where key terms of the building contract have yet to be agreed, employers must ensure that their liability is sufficiently limited under the terms of the letter of intent. The Haden Young case makes clear that employers may face paying the contractor on a quantum meruit basis where costs are incurred in absence of agreed terms or a financial cap.

On the other hand, the Diamond Build decision acts as a reminder to contractors and employers to consider carefully the provisions of letters of intent with which they have been presented. Where a letter of intent contains a financial cap and works proceed in the absence of an executed building contract, contractors should be careful and may wish to ensure that similar financial caps are agreed with any sub-contractors engaged or that the financial caps are extended as and when necessary.

For further information please contact Jonathan Hyndman or the Partner with whom you usually deal

The Appellate Committee of the House of Lords has recently dismissed an application for permission to appeal a Court of Appeal decision that valuers have an unqualified obligation to value the correct property.

Background Facts

The case concerned the nature of the obligations undertaken by a surveyor (“C”) who was instructed by a mortgage lender (“P”) to value a property offered by a borrower (“H”) as security for a loan. The property to be valued, 1 Bakers Yard, was situated at Plot 1, an area of land on a new development which had been divided up into 5 plots; none of which displayed a house number. At the time of the valuation the house that stood at Plot 1 was little more than a shell, having no windows or roof. A house that had almost been completed stood on Plot 5.

However, due to representations made by H to C as to the location and identity of the correct security, C inspected and valued the house at Plot 5 rather than Plot 1. P relied upon the valuation and advanced a loan to H, the security for which was 1 Bakers Yard. Following the repossession of 1 Bakers Yard and subsequent sale, P suffered a shortfall and sought to recover it from C.

Decision of the Court of Appeal

By a majority, the Court of Appeal followed the Judge’s decision at first instance and held that, in addition to a valuer’s duty to exercise reasonable care and skill in carrying out a valuation, valuers have an unqualified obligation to value the correct property. By failing to fulfil that obligation, C was in breach of contract.

Moore-Bick LJ, giving the leading judgment, stated that:

“…although there is a presumption that those who provide professional services normally do no more than undertake to exercise the degree of care and skill to be expected of a competent professional in the relevant field, there is nothing to prevent them from assuming an unqualified obligation in relation to particular aspects of their work.”

C had argued before the Court of Appeal that a valuer was required to do no more than exercise such skill and care as might be expected of a reasonably competent valuer and that included locating the property to be inspected.  They sought permission to appeal to the House of Lords which was refused.  Accordingly, the decision of the Court of Appeal remains good law.

Comment

Given the current economic downturn, it is likely that the number of repossessions will grow. That, combined with further falls in the housing market, inevitably will lead to a rise in litigation as lenders seek to recover any shortfalls they suffer from professionals, including valuers. In the previous recession, litigation of this type was prevalent and led to a number of key principles being established regarding the duties owed by valuers to lenders, a lot of which were handled by this firm. 

The Court of Appeal decision in this case imposes a strict duty on valuers to ensure that they have carried out a valuation of the correct property. Sir Anthony Clark MR, in his dissenting judgment in the Court of Appeal, drew attention to the difficulties that valuers may face in identifying the correct property in areas where properties are under construction or are flats. However, as the duty to value the correct property is strict, if that is what they have been instructed to do by their client, a valuer must ensure that they overcome these difficulties and take further instructions if they are in any doubt in order to ensure that they do not face a claim in future. Otherwise, valuers may seek to protect themselves by issuing disclaimers in their valuations.  The decision is helpful to lenders as it effectively provides them with a guarantee as to the correct identity of a property or further ammunition in their shortfall recovery arsenal other than where the valuer has protected himself in advance of producing this valuation.

For further information please contact Georgina Squire or the Partner with whom you usually deal

The Facts

On 15^th January 2008, Alchemy exchanged contracts (the “Contract”) to buy the lease of a house at 27 Walton Street, London, SW3 from the Astors for £1.26m. The Contract provided for completion on 13^th March 2008. As long as the parties were not in breach of their relevant contractual obligations, either party had the right to terminate the Contract if the superior landlord’s consent to the sale had not been obtained by three working days before completion (Condition 8.3.3).

The Contract incorporated the standard conditions of sale, together with various special conditions. Each side had assumed it was the other side’s responsibility to obtain the Landlord’s consent to the assignment due to the presence of some obscure special conditions. As a result, the Astors’ solicitor took no steps to obtain consent, until about a week before completion. It then took some time for Alchemy and its solicitor to provide the information required by the superior landlord’s solicitor.

Consent from the superior landlord had not been obtained by 13^th March, but neither side attempted to terminate the Contract. On 25^th April, the landlord indicated, in principle, that it was prepared to give consent. On 19^th May, however, Astor’s solicitors received a notice purporting to rescind the Contract under Condition 8.3.3, on the basis that the landlord’s consent had not yet been obtained. A without prejudice letter accompanied the notice offering to proceed with completion at a reduced price.

The Issue

Sales J had two main issues to decide. First, he had to decide whether the standard condition applied due to the existence of a special condition, as well as the fact that the Contract was not conditional explicitly upon the obtaining of the landlord’s consent. Secondly, Sales J had to decide whether the claimant was prevented from rescinding due to its own breach.

The Decision

The judge concluded that the claimant had been in breach of its obligation to provide information to the landlord on 11^th and 13^th March (the completion date). Condition 8.3.3 states explicitly that a party cannot rely upon its right in Condition 8.3.3 if it is in breach of its obligation to provide all reasonably required information and references. The judge held that the Contract could not have been rescinded at that stage.

But the claimant was no longer in breach on 19^th May, the date of the notice to rescind, as the landlord had been provided with the required information. The judge had to decide whether the contract could be rescinded at this stage.

The judge held that condition 8.3.3 prevents rescission where the party purporting to rescind is in breach; or where it is not in breach, but where the past breach continues to have a disruptive effect. The judge concluded that any right to terminate had to be exercised promptly to let the Astors know where they stood. Otherwise, they were likely to incur further expense in complying with their obligations under the contract, as was the case here. By waiting for more than two months, Alchemy had lost its right to terminate by failing to act sufficiently promptly.

Conclusion

A right to rescind where the landlord’s consent has not been obtained can be lost as a result of an earlier breach. The right to rescind must be exercised by the completion date or a day or two thereafter. The real reason that Alchemy had wanted to terminate the Contract was due to the fall in property prices. Alchemy was not allowed to terminate the Contract because it had failed to act quickly enough and had given the impression that the deal was still on for months after the missed deadline.

For further information please contact Owen Rafferty or the Partner with whom you usually deal

Poorly managed service charges are a frequent cause of disputes between landlords and tenants, owners and occupiers. Following the recent opening of the new Westfield Shopping Centre in London, the landlord proposed an increase in the service charge by 75%, enraging the tenants, including the Arcadia group. The Westfield increase is in order to cover costs including cleaning and marketing. However, when it comes to service charges, landlords are obliged to follow the procedure under the lease when it comes to the tenant’s liability to pay a service charge and a tenant is entitled to refuse to comply with any demands which are made in disregard of the stipulated procedure under the lease.

What are service charges?

Service charges are payments made by leaseholders to the landlord - the freeholder, or more usually a managing agent - for all the services they provide. These will include maintenance, repairs and buildings insurance, and could also include lifts, lighting, cleaning of common areas and gardening, as well as the costs of managing the property. Service charges are usually collected a year in advance, with any surplus repaid or shortfall collected at the end of the financial year.

Right to ask for more?

An important case decided in the Court of Appeal on 23 July 2008 has sounded a wake up call to landlords and their agents. Simply stated it means it is vitally important they fully follow the language of leases in order to recover service charges. Failure to do so led a landlord, Leonora Investment, losing a claim for £263,117 plus costs (Leonara Investment Co Ltd v Mott Mcdonald Ltd).

After redecorating the block, the landlord tried to claim a contribution by way of service charges to the costs it incurred in redecorating. The landlord served a demand separate to and in addition to the end of year statement and demand. The court held that the landlord was not entitled to claim this additional sum as the landlord had not followed the procedure prescribed under the lease in claiming the additional costs of redecorating.

Genuine mistake?

However, can a landlord serve an amended statement and demand if relevant expenditure is omitted from the year end statement, which the landlord is obliged to provide at the end of the year and which refers to the landlord’s total expenditure for that year? Despite the judgment in Leonara, a landlord can amend previous year end statements and demands to add expenditure omitted from them if the omission was a genuine error rather than a deliberate omission (Universities Superannuation Scheme Limited v Marks & Spencers Plc (1999). In the words of Tuckey LJ in Leonara, “Businessmen dealing with one another often make mistakes and there is no scope for saying that the provisions in this clause gave the landlord only one opportunity to get it right”.

What is best practice?

However, it is best practice for landlords to include relevant expenditure in year end statements and they should not be making a practice of claiming additional or exceptional expenditure in addition to standard expenditure. Furthermore, if a landlord does decide to serve an amended statement and demand for previous years, the courts have suggested that it can do only if it acts with reasonable expedition after discovering the error.

This reasoning applies to all leases, both commercial and residential. However with residential leases there are, of course, elaborate statutory provisions that also have to be observed. The Commonhold and Leasehold Reform Act 2002 introduced various new obligations on landlords in relation to service charges and administration charges which obligations have come into force on a piecemeal basis. One of the latest to come into force is the obligation on a landlord to give residential long leaseholders (a term of more than 21 years) prescribed information when making a demand for service and/or administration charges. From 1 October 2007 a landlord must supply long leaseholders with a summary of their rights and obligations relating to service and administration charges when sending out service and administration charge demands. A leaseholder may withhold the service or administration charge payment if a landlord fails to provide the summary with the demand.

For further information please contact Owen Rafferty or the Partner with whom you usually deal

Pre-packaged sales in administrations

On 1 January 2009, Statement of Insolvency Practice 16 (“SIP16”) took effect. SIP16 is a guidance note issued to licensed insolvency practitioners (“Practitioners”) that sets out required practice for those engaged on pre-packaged sales.

A “pre-pack” is a sale of a company’s business and assets that is negotiated before an administrator is appointed with the intention that completion of the sale takes place immediately or shortly after such appointment. 

Purpose of SIP16

SIP16 sets out principles and essential procedures which Practitioners are required to comply with. Failure to comply with SIP16 may be considered by the Practitioners’ regulatory authority for the purposes of disciplinary or regulatory action.

SIP16 Guidelines

Practitioners who are acting on a pre-packaged sale in an administration are required to:

- keep in mind the duties which they, and those who act on their advice, owe to parties who might be affected by the arrangement and have regard to the associated risks;

- keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale, and be able to explain and justify why such a course of action was deemed appropriate for that company;

- make it clear to the directors of the company that they have been appointed to advise the company and not the directors on their personal position;

- encourage the directors of the company to take independent advice, particularly if there is a possibility of the directors acquiring an interest in the assets in the sale; and

- keep in mind the duties and obligations which are owed to creditors in the pre-appointment period and be aware of the potential liability which may attach to any person who is party to a decision that causes a company to incur debt and who knows there is no good reason to believe it will be repaid. Such liability is not restricted to directors.

Further, SIP16 specifically requires that administrators acting on a pre-packaged sale:

- demonstrate that they have performed their functions in the interests of the company’s creditors as a whole; and

- demonstrate that they have avoided unnecessarily harming the interests of creditors as a whole when realising property to distribute to secured or preferential creditors.

SIP16 and Disclosure

Unsecured creditors have no say in a “pre-pack”. Therefore, it is necessary to provide creditors with a detailed explanation and justification of why the sale was undertaken to ensure they are satisfied that the administrator has acted with due regard for their interests. The emphasis is on transparency. The information to be disclosed by the administrators, after making appropriate enquiry, to creditors in all cases where there is a “pre-pack” includes:

- the source of the administrator’s initial introduction;

- the extent of the administrator’s involvement prior to appointment;

- any valuations obtained of the business or the underlying assets;

- the alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes;

- why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration;

- details of requests made to potential funders to fund working capital requirements;

- whether efforts were made to consult with major creditors;

- details of the assets involved and the nature of the transaction;

- the consideration for the transaction, terms of payment, and any condition of the sale contract that could materially affect the consideration;

- if the sale is part of a wider transaction, a description of the other aspects of the transaction;

- the identity of the purchaser(s);

- any connection between the purchaser and the directors (or former directors), shareholders or secured creditors of the company;

- whether any directors had given guarantees for amounts due from the company to a prior lender, and whether that lender is financing the new business; and

- any options, buy-back arrangements or similar conditions attaching to the contract of sale.

Discussion

Pre-packaged administration sales are considered a useful method for maintaining businesses and maximising value. However, they are often criticised for giving the impression of a company being distressed one day and fully operational the next. SIP16 is intended to improve transparency on pre-packaged administration sales, hence the heavy emphasis on disclosure to all creditors.

Recent examples of pre-packaged administration sales include Whittard Of Chelsea and high street clothes store USC. No doubt many more will follow during the course of 2009.

For further information please contact James Walton or the Partner with whom you usually deal

The Employment Appeal Tribunal has recently decided that an employee, transferred from a company in administration to another company, was not afforded the protection of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).

Background Facts

Wellswood Ltd (“Oldco”) began trading in early 2003 as a wholesaler in fruit and vegetables to the hotel and catering market. However, by mid-2006 Oldco had run into financial difficulties and, upon agreement with an insolvency practitioner and a major creditor (“GTL”), Oldco went into administration. GTL was not willing to buy Oldco as a going concern as this would mean taking on Oldco’s book debts. Instead, Wellswood (Yorkshire) Ltd (“Newco”) was incorporated as a wholly owned subsidiary of GTL to be used as a vehicle for acquiring the assets of Oldco. Certain assets were purchased by Newco, which included the lease of the premises formerly occupied by Oldco and five of the seven Oldco employees; four of those employees received redundancy payments from the fund administered by the Secretary of State. The date of the relevant transfer was deemed to be on or about 6 December 2006.

Mr Oakland, a salaried General Manager of Oldco, was one of the employees transferred. Mr Oakland took a salary cut upon joining Newco but did not seek a redundancy payment. Mr Oakland was dismissed by Newco on 23 November 2007. 

The Issues

Further to being dismissed, Mr Oakland bought a claim for unfair dismissal against Newco. Mr Oakland argued that his contract of employment had transferred under TUPE and so his employment was continuing. However, Newco argued that Mr Oakland was not an employee of Oldco immediately before any relevant transfer from Oldco to Newco on 6 December 2006. Therefore, Mr Oakland had not completed 1 year’s continuous service with Newco so as to qualify for ordinary unfair dismissal protection at the date of his dismissal by Newco on 23 November 2007.

Decision at First Instance

At the initial Hearing it was further argued by Newco that, even if Mr Oakland was employed by Oldco at the time of the relevant transfer to Newco, he was precluded from relying on TUPE by virtue of Regulation 8(7). Regulation 8(7) provides that Regulation 4 (which transfers employment liabilities and contracts) and Regulation 7 (which controls the dismissal of employees) do not apply “to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.”

The Employment Tribunal (“ET”) agreed with Newco’s submissions and found that, given the facts of this matter in relation to the insolvency of Oldco, the effect of Regulation 4 was disapplied by Regulation 8(7) and that Mr Oakland did not have sufficient service to bring a claim for unfair dismissal against Newco. Mr Oakland appealed this decision.

The Employment Appeal Tribunal

The Employment Appeal Tribunal (“EAT”), Peter Clark HHJ sitting alone, followed the first instance decision and dismissed Mr Oakland’s appeal. He explained that in order to decide whether the TUPE exception applied, an ET must consider 4 questions:

1. Whether there was a relevant transfer under TUPE;

2. Whether the transferor (in this case Oldco) was subject to insolvency proceedings;

3. Whether the insolvency proceedings were under the supervision of an insolvency practitioner at the relevant date; and

4. Were the insolvency proceedings instituted with a view to the liquidation of the assets of the transferor?

Peter Clark HHJ, noted that the fourth question was the critical issue; if the insolvency proceedings were found to be done with a view to liquidation then the exception under Regulation 8(7) would apply and the employment contract would not have transferred. Mr Oakland argued that this was a question of insolvency law, however the EAT found that this should be a question of fact for the Employment Tribunal rather than a question of law. The EAT accepted that if the administrators were continuing to trade a business as a going concern with a view to sale then TUPE protection will be afforded to the business’s employees. However, in the present matter this was not the case due to Oldco’s weak financial position and that the ET was entitled to conclude that the appointment of Joint Administrators was with a view to the eventual liquidation of Oldco’s assets by way of a creditors’ voluntary liquidation.

Comment

This case is helpful for those purchasing businesses in administration or indeed those involved in administration, however, it will not be warmly welcomed by employees; particularly given the current economic outlook. The decision contradicts the official guidance of the Department for Business, Enterprise and Regulatory Reform (the “BERR Guidance”), which states that administrations do not fall within regulation 8(7) and that Regulations 4 and 7 will always apply. In his judgement, Peter Clark HHJ, noted that the BERR Guidance was not of any assistance in specifying how insolvency proceedings are to be characterised. The test set down by the EAT is therefore useful for those seeking to acquire businesses in administration to help to determine whether or not an employee will be afforded protection under TUPE. It was also noted by the EAT that the exception of Regulation 8(7) was one of policy to help with the ‘rescue culture’ rather than put purchasers off by the effects of TUPE protection; a very pertinent consideration given the rise in the number of insolvencies of late.

For further information please contact James Walton or the Partner with whom you usually deal

In the recent case of Limit No.2 Ltd v AXA Versicherung AG, the Court of Appeal heard an appeal by the Insurers against a decision that the Reinsurers were entitled to avoid to reinsurance treaties due to a misrepresentation by the Syndicates’ broker.

Background

The case concerned two facultative/obligatory treaties of reinsurance relating to construction and operating risks. Limit No.2 Ltd were reinsured by Albinga Versicherung AG, now AXA Versicherung AG.

The first treaty was initially written for twelve months from 1^st July 1996 and then extended by endorsement for a further seven months to 31^st January 1998. The second treaty was written for twelve months thereafter up to 31^st January 1999.

When placing the reinsurance business, the Syndicates’ brokers, Newman Martin and Buchan Ltd (“NMB”), attached a front cover to the draft slip and information sheet provided by the Syndicates for the purpose of placing the reinsurances. On the front cover sheet, which was faxed by NMB to the reinsurers on 4 July 1996, the brokers, referring to the Syndicates, said:

“As a matter of principle they maintain high standards and would not normally write construction unless the original deductible were at least £500,000 and preferably £1,000,000.”

The treaties turned out badly for the reinsurers who, in 2005, instigated an inspection of the relevant records of risks ceded to the treaties. The inspection revealed that most of the relevant risks ceded by the Syndicates had deductibles considerably lower than the £500,000. The reinsurers thus sought to avoid the treaties on the grounds of misrepresentation.

Decision at First Instance

It was held by Jonathan Hirst QC, sitting as Deputy Judge of the High Court, that the reinsurers were entitled to avoid the reinsurance treaties for misrepresentation. The Judge held that the brokers’ statement on the fax to the reinsurers on 4 July 1996 was a statement of the Insurers’ “current policy” in respect of deductibles as at that date. Accordingly, there was a misrepresentation which was material. As the misrepresentation had induced the 1996 reinsurance treaty, it could be avoided by the reinsurer.  The endorsement extending the treaty could likewise be avoided, either because it was a mere extension (or amendment) to the treaty or because the representation continued to be effective as at July 1997. It was further held that the second treaty could also be avoided as the representation continued to be effective as at 1 February 1998.

Decision of the Court of Appeal

The Court of Appeal upheld the decision at first instance on the 1996 treaty and the endorsement.  The decision relating to the 1998 treaty was set aside.

The representation

Longmore LJ, giving the leading judgment, came to the conclusion that the underwriter did not intend in July 1996 that his future underwriting would be on terms that there would be deductibles of at least £500,000. On the inevitable basis that any representation by the brokers was made on their client’s behalf, the Syndicates could not disavow it. The Judge at first instance was entitled to come to the conclusion that the Syndicates had no policy or intention normally to write construction risks with the stated deductible.

The 1997 Endorsement

It was held that the 1997 endorsement was not to be regarded as a new contract as it was an amendment or variation of the existing contract. It followed that the amended contract was voidable for misrepresentation.

The 1998 Renewal

It was held that on any view the 1998 renewal was a new contract and so there were new obligations of good faith. It was stated that there were two questions which arose: firstly, whether the representation made by the brokers in July 1996 continued to be effective in 1998 and secondly, whether there was any obligation on the Syndicates to disclose that their policy or intention as to deductibles had changed. Longmore LJ, noting how powerful the remedy of avoidance is in the hands of an insurer or reinsurer, did not consider that a Court should struggle to hold that everything at inception is to be impliedly repeated on renewal. Accordingly, the Court of Appeal held that there was no continuing representation as far as the 1998 treaty was concerned and that the reinsurers were not entitled to avoid it.

Comment

This case highlights the importance of the relationship between an insured and their broker - more specifically the importance of an insured knowing exactly what a broker is communicating on its behalf. In this case it did not matter that it was the broker rather than the insured who had made a statement regarding the deductibles. It also did not matter how the statements were made. The statements made prior to placement were considered to be material to the risk and thus influenced the underwriter’s decision.

For further information please contact Georgina Squire or the Partner with whom you usually deal

In the recent case of Pegasus Management Holdings SCA and another v Ernst & Young (“E&Y”) and another, the Court considered when exactly the claimant suffered damage, so as to ascertain whether a professional negligence claim would be statute-barred.

Background

In April 2007 the second claimant, Mr Bradbury, sold an electronics manufacturing company he had built up for a substantial amount of money. In April 1998 Mr Bradbury, on the advice of E&Y decided to acquire shares in a newly incorporated Luxembourg registered company, Pegasus Management Holdings SCA (Pegasus). The consideration Mr Bradbury had received from the sale of the electronics manufacturing business had been paid in loan notes.

On 9 March 1998 E&Y produced a note on reinvestment relief for Mr Bradbury. The note advised on the setting up of a company registered in Luxembourg, but which would be resident and trade in the UK for corporation tax purposes. Mr Bradbury sold the loan notes for approximately £90 million. He used the proceeds to subscribe to the shares in Pegasus and to fund the acquisition of further “qualifying businesses” for Pegasus, with the intention of qualifying for reinvestment relief and reducing his tax liability. These transactions took place following the advice of E&Y. In October 2002 it became clear that the “base cost” which was paid for the companies acquired by Pegasus did not include the goodwill of the business. The knock on effect of this was that when Pegasus came to sell the businesses it would still be liable for CGT.

Pegasus and Mr Bradbury issued proceedings against E&Y. The claimants accepted that any claim they may have had in contract was statute-barred. However, they believed that the damage suffered in tort occurred before the limitation period began to run.

Duty of Care

If E&Y were to owe Pegasus a duty of care then this must have arisen from a contract between the two parties, or an assumed responsibility from E&Y to Pegasus. There was no communication between the parties from 26 March 1998 when Pegasus was incorporated and 2 April 1998 when the share issue took place. There was no signed contract and Lewison J held that there was no duty of care.

When did the limitation period start to run?

In tort, the limitation period is six years from when the loss was sustained. It was held that Mr Bradbury suffered the loss as soon as he subscribed to the shares in Pegasus on 2 April 1998, as he could not change his decision once it had been made. If he had sold his shares in Pegasus, he would have lost his right to tax relief. Consequently, the claim for negligence was statute-barred.

Comment

When deciding when the actual loss materialised, there must be causation. On the facts of the case, it must be demonstrated that the negligent advice caused the loss. There are numerous Court of Appeal cases where a claimant receives property or rights which turn out to have a lower value than anticipated, due to incorrect advice from a retained professional. The Court of Appeal has determined in these cases that the claimant suffered damage when the transaction took place regardless of whether or not the property or rights in question were not worth less than the claimant paid for them.

The House of Lords has held that a contingent liability is not itself actual damage. Where the damage suffered is purely contingent, time does not start to run for limitation purposes until the loss becomes actual.  Actual damage must result in the claimant being “worse off” and involves a comparison between the “before” and “after” positions in the real world. This requires a comparison of what the client received and what they should have received.

If Mr Bradbury had received the correct professional advice he would have bought shares in a company that would not have prevented him acquiring the tax relief he sought. Lewison J held in this case that the damage was therefore sustained at the moment the shares were purchased.

This case highlights the difficultly with limitation law. As Lewison J noted in his judgment, “it ought to be relatively straightforward to decide when a person has suffered damage. Unfortunately it is not”.

For further information please contact Georgina Squire or the Partner with whom you usually deal

The recent decision of the Court of Appeal addressed the construction of the words “at all times” in an insurance warranty. The Judge at first instance had found that the clause meant exactly what it said; the Court of Appeal overturned his decision as they held that the literal meaning could not have been intended by the parties, taking into consideration the context of the policy as a whole and the circumstances surrounding the formulation of the contract.

Facts

Mr Pratt entered into a twelve month marine insurance contract for a small fishing vessel with accommodation for the crew on board. One evening, when the boat was tied to a quay, but with no crew on board, a fire broke out. Fire was an insured peril under the insurance policy and there was no suggestion of Mr Pratt or his crew having caused the fire.

The insurance contract

The contract was subject to the following condition:

“Warranted Owner and/or Owner’s experienced Skipper on board and in charge at all times”.

The issue

The sole question before the Court of Appeal was whether there had been a failure on the part of Mr Pratt and his crew to comply with the warranty. The insurance company argued that a literal interpretation of the clause must be taken and as neither Mr Pratt nor anyone else was on board at the time of the fire, they were not liable. Mr Pratt argued that the warranty, if applied literally, would give absurd results and that it was obvious that it was directed to those times when the vessel was navigating or working.

The legal principles

Clauses in insurance contracts must be construed having regard to the context of the contract and the circumstances surrounding its inception. Investors Compensation Scheme Ltd v West Bromwich Building Society confirmed that an insurance contract must be construed as if to a reasonable person having all background knowledge of the situation in which they were in at the time of the contract.

Lord Steyn neatly summarised the current judicial thinking in Sirius Insurance Co v FAI Insurance by stating that “there has been a shift from literal methods of interpretation towards a more commercial approach”.

Application to the facts

The Court looked to the purpose of the warranty, which was held to be to ensure that the vessel was properly crewed “in circumstances in which at least two members of the crew […] could be expected to be on board.” The primary purpose of the warranty, read as a whole, was found to protect the vessel against navigational hazards.

The expression “at all times” was found to be ambiguous because it did give a clear qualification of the warranty. The expression could not therefore be given its ordinary or natural meaning.

Due to this ambiguity, the warranty was construed contra proferentem, in favour of the Insured, Mr Pratt. It was held that the warranty did not define clearly when the insurance company required the owner or the owner’s skipper to be on board and was therefore held not to apply when the vessel was tied up in dock.

Comment

Warranties are an extremely powerful weapon in the hands of insurers as breach results in them being discharged from liability from the moment of the breach. Insureds should be aware of this severe nature of a warranty when they agree to include them in insurance contracts.

This case shows how the Courts are now prepared to ignore the previous literal construction of a warranty if it believes that its intention was ambiguous. Being a Court of Appeal decision, this decision is now a precedent for arguments being raised by Insureds for a more commercial and practical approach to the construction of warranties. Insurers and Insureds should be aware of the precise words of warranties within their insurance contracts. Unless they are clear and unambiguous, they may be set aside.

For further information please contact Georgina Squire or the Partner with whom you usually deal

On Monday 24 November the Chancellor of the Exchequer published his 2008 pre-budget report.  One of the key areas of interest for our lender clients is contained within Chapter 5 which is entitled “Helping People Fairly (“the Report”). Chapter 5 contains information on how the government intends to support home owners in financial difficulties by helping to protect against repossession.

The Report echoes the Financial Services Authority’s (“FSA”) regulatory mantra of borrowers being treated fairly and, as with MCOB, there is a clear indication that moves towards repossession should only be taken as a last resort.  The FSA will continue to keep its regime for borrowers, including those facing repayment problems, under review and its supervisory and enforcement action to ensure lenders treat borrowers in arrears fairly is to remain a critical priority. 

Similarly, the report confirms that the Government will continue to keep the framework for consumer protection in the mortgage market under review. 

In addition to promoting the long term stability of the housing market and meeting the challenge of increasing the housing supply, the Government is concerned over the rising number of repossessions.  This concern has already led to the introduction of a number of initiatives which aim to provide additional support for those facing the threat of losing their home.  One of these, which was announced in September 2008 as part of a £1 billion package to support homeowners, first time buyers and the house building industry is the introduction of a number of new mortgage rescue schemes.  The Chancellor has indicated in the Report that these schemes will now be extended to include second charge holders and that the start date will be brought forward to December 2008 when the schemes will be available in 60 local authority areas. 

The Office of Fair Trading will also bring forward its sector guidance to early next year.  This will mirror existing regulation for first charge lenders by aiming to ensure that second charge lenders do everything possible to treat customers sympathetically and to only repossess as a last resort.  The Government’s aim is to reduce the number of repossessions of vulnerable households by up to 6000 over the next 2 years.

The creation of a new Lending Panel reporting to the Chancellor and the Secretary of State for the Department for Business, Enterprise and Regulatory Reform was also announced.  It is proposed that the Panel will monitor lending to both businesses and households and has been tasked with establishing a reporting framework to allow improved monitoring of the mortgage market; encouraging the highest standards of industry best practice in supporting borrowers with mortgage repayment problems, consistent with statutory regulation; and promoting better awareness of industry and government initiatives to find alternatives to repossession and allow borrowers with financial difficulties to remain in their homes.

In addition, in line with the new protocol for mortgage possession claims and the resulting best practice guidance published by the Council of Mortgage Lenders and the Finance and Leasing Association, the Report confirms that the major mortgage lenders on the new Lending Panel will adopt the best practice of the leading lenders over the coming year and not initiate repossession action for at least three months after the account goes into arrears.  This delay in the commencement of proceedings is to be subject to the wishes of the individual borrower, and will understandably not apply in cases of fraud.

In practice, the impact of these elements of Chapter 5 is likely to be minimal for the majority of lenders as the general ethos of treating borrower’s fairly is now well ingrained in all aspects of their business.  That said, it will be interesting to see the long term effect of the newly appointed Lending Panel and whether the 3 month postponement in the commencement of possession proceedings will do anything other than delay a lender’s decision to ultimately seek possession.

The full report and accompany documents are all available on the Treasury’s website at www.hm-treasury.gov.uk/prebud_index.

For further information please contact Georgina Squire or the Partner with whom you usually deal

A new pre-action protocol for mortgage possession claims will take effect from 19 November 2008, with no transitional provisions.

The protocol will apply to cases where arrears have accrued on first charge residential mortgages and home purchase plans regulated by the FSA; second charge mortgages over residential property and other secured loans regulated by the Consumer Credit Act 1974 on residential properties and unregulated residential mortgages.

The protocol has been introduced to provide guidance to lenders and borrowers to ensure that repossession actions are taken only as a last resort.

The protocol places an obligation on the part of the lender and the borrower to act fairly and reasonably with each other to resolve any matter concerning arrears. It also encourages more pre-action contact between the parties with the aim of reaching an agreement before a possession claim is commenced.

The key provisions of the protocol are as follows:-

1.         When a borrower falls into arrears the lender must provide the borrower with:-

(a)        the National Homelessness Advice Service booklet on mortgage arrears or the required regulatory information sheet;

(b)        information as to the total amount of arrears; the total outstanding amount of the mortgage; whether interest will be charged and an estimate of interest or charges payable.

2.         The lender and borrower must take reasonable steps to discuss the cause of the arrears, the borrower’s financial circumstances and proposals for repayment.

3.         The lender should advise the borrower to contact their Local Authority or refer the borrower to appropriate sources of independent debt advice.

4.         The lender should consider reasonable requests from the borrower to change the payment date or method of payment. If the lender refuses the request it should provide the borrower with a detailed explanation of the reasons for the refusal.

5.         The lender should respond promptly to any proposals for payment by the borrower. If the lender is refusing to accept the proposal, it should give reasons for the refusal within 10 working days of the proposal being made.

6.         If the lender makes a proposal for repayment, the borrower should be given a reasonable amount of time to consider the proposal. The proposal should be set out in sufficient detail for the borrower to understand the full implications of the proposal.

7.         If the borrower fails to comply with an agreement, the lender should give the borrower 15 working days notice of its intention to start a possession claim unless the borrower remedies the breach of the agreement.

Further provisions include the lender not considering commencing a possession claim where the borrower has submitted a claim to an insurer under a mortgage payment protection policy and the borrower has submitted all the evidence necessary to process the claim. A lender should also consider postponing the commencement of a possession claim where the borrower can demonstrate reasonable steps have, or will, be taken to market the property for sale at an appropriate price.  

The Courts will take the view that a possession claim should not be commenced when a settlement is still actively being pursued, or where the borrower has made a genuine complaint to the Financial Ombudsman.

Comment

The Courts can request that an explanation is given as to the actions that have been taken to comply with the protocol. Mortgage lenders will, therefore, need to be able to demonstrate that they have considered all available options prior to commencing a possession claim and acted reasonably. Failure to do so could lead to delays in proceedings and may have costs implications if there has not been compliance.

For further information please contact Georgina Squire or the Partner with whom you usually deal

In the recent case of Cuthbert v Gair, the Court considered whether costs incurred pre-litigation by a loss adjuster, where a solicitor had not yet been instructed, could be recovered as a disbursement or expense where that work would normally have been carried out by a solicitor. The loss adjuster’s costs could not be recovered following instruction of a solicitor unless there existed a formal agency agreement between them.

Background

The Claimant sought damages for personal injuries suffered in a collision at the Defendants’ equestrian centre as a result of negligence and/or breach of The Occupiers Liability Act 1957. Damages were limited to £15,000.

The Claimant later discontinued the personal injury claim. At a costs hearing, the costs were awarded in favour of the Defendants. The Claimant appealed this result.

The Facts

When the Defendants’ insurers were notified of the claim they instructed a firm of loss adjusters (Q) to undertake the necessary investigations into the claim. These investigations included corresponding with the Defendant and the Claimant’s solicitor, obtaining witness statements and dealing with documentation. This work constituted the basis for the costs under the first invoice.

The Defendants’ insurers subsequently instructed a firm of solicitors to defend the claim. However, Q continued to undertake work once the solicitors had been instructed, including disclosing documents to the Claimant’s solicitors. This work constituted the basis for the costs in the second invoice.

The Appeal

On appeal, the Claimant argued that:

(i)                   the work undertaken by the loss adjusters was pre-litigation work completed by someone other than a legal representative and did not therefore constitute costs recoverable on an inter parties basis;

(ii)                 the sum incurred under the first invoice was at a time when the Defendants were not legally represented and the costs could not therefore constitute a disbursement; and

(iii)                the whole costs claim was not incurred by the Defendants and should not be paid as it fell foul of the indemnity principle; it was a cost incurred by their insurance company.

The Defendants argued that the doctrine of subrogation applied, ie: the insurers “stepped into the shoes” of the Defendants and could therefore recover the costs of Q as an expense or disbursement.

The Costs Judge, Master Haworth, held that work that would normally be carried out by a solicitor is not recoverable as a disbursement, thus preventing the Defendants from recovering the costs under the first invoice.

Further, the relationship between Q and the Defendants’ solicitor, when they were instructed, was not one of principal and agent; Q were instructed by the insurers, not the solicitors as there was no letter of instruction or terms of engagement, only the invoices that were addressed directly to the insurers. The costs under the second invoice were also not recoverable by the Defendants; there was no liability on the part of the Defendants for Q’s costs; the invoices were addressed to the insurers. To allow recovery under the inter parties basis would therefore be a breach of the indemnity principle.

Lastly, the Judge held that the costs were not recoverable as the work carried out by Q did not come within the “expert assistance” exception; the insurer was simply contracting out part of its job to investigate the claim.

Comment

The Judge refuted the argument that the doctrine of subrogation applied in this instance and thereby deprived the insurer of recovering the loss adjuster’s costs, stating instead that “had the Defendant’s solicitor in this case sought the assistance… on an agency basis the Defendant’s solicitors would have been entitled to recover the costs”. In their submissions, the Defendants argued that to take this approach would transform recovery of costs into a book keeping exercise. The effect of the judgment may mean that, if Insurers wish to have the prospect of recovering their adjuster’s fees on a successful defence, they will have to route the instruction and invoicing through their defence solicitor. Although cumbersome and expensive, this may become a practice for ensuring that loss adjuster costs are recoverable.

It is important to note that the Judge conceded that, where such work is instructed by solicitors, the costs associated with it are recoverable.

For further information please contact Georgina Squire or the Partner with whom you usually deal

The recent case of Kier Regional Limited v City and General (Holborn) Limited and third parties highlights the difficulties faced by construction creditors in the current economic downturn when seeking to enforce judgment, which in turn enforces an adjudicator’s decision, through the use of a third party debt order.

Background

In 2000 City and General (Holborn) Limited (the “Employer”) entered into a joint venture agreement with Cambridge Gate Properties Limited and Temple Guiting Manor Limited (together the “Third Parties”) for the development of part of a property owned by the Employer. The Employer engaged Kier Regional Limited (the “Contractor”) to carry out the development.

Relations between the Employer and the Contractor deteriorated during the course of the development. Numerous adjudications occurred, one of which resulted in an award in favour of the Contractor of circa £700,000 together with fees and interest for loss and expense as a result of delay. Payment was not forthcoming and the Contractor was granted summary judgment to enforce the adjudicator’s decision. The judgment sum was not paid by the Employer and the Contractor applied to enforce judgment by way of final third party debt orders relying on the fact that both the accounts of the Employer and the Third Parties showed that the Third Parties were significant debtors of the Employer. The Employer cross-applied for a stay of execution in relation to the summary judgment arguing that a full arbitration, scheduled to commence imminently, may result in the adjudicator’s decision being overturned.

The decision

The Technology and Construction Court held that whilst the accounts of the companies suggested debts were owed to the Employer by the Third Parties, these were, in fact, merely contingent liabilities. Although there was no express provision in the joint venture agreement, Coulson J found by implication that the parties had agreed that profit (or loss) would not be shared until the costs of the building works were determined.

The final account was still being disputed by the Employer and the Contractor. Accordingly, it could only be determined whether the Third Parties actually owed monies to the Employer by reason of their participation in the joint venture when the final account of the development costs was resolved. Given that a third party debt order will only ever be granted by the court where the relationship of creditor and debtor exists between the judgment debtor (in this case the Employer) and the third party, Coulson J refused to grant the final third party debt orders and allowed the Employer’s application for a stay of execution in relation to the summary judgment.

Although the court refused to grant the Contractor’s application for final third party debt orders, Coulson J went on to provide useful guidance in relation to the exercise of the court’s discretion to make such orders as a means of enforcing an adjudicator’s decision.  

Coulson J stated that the starting point must always be the underlying policy behind the Housing Grants Construction and Regeneration Act 1996 which:

“may perhaps be inelegantly summarised in this way: save in exceptional circumstances, the adjudicator’s decision is to be enforced by the courts. That principle has been underlined by the TCC and the Court of Appeal in numerous cases over the past decade”.

Coulson J stated that once judgment to enforce an adjudicator’s decision is obtained, it should be treated in the same as any other judgment of the court for enforcement purposes. However, Coulson J distinguished the circumstances of the current case in that:

“the particular enforcement mechanism under review (third party debt orders), involves parties who were not parties to the construction contract, and who might therefore be said not to have signed up to the ‘pay now, arbitrate later’ philosophy behind the 1996 Act.”

In light of the impending arbitration, Coulson J stated that when exercising its discretion to grant a third party court order the court, as a matter of principle, should take into account that fact that “the underlying decision (and therefore judgment) [ie the adjudicator’s decision] is the subject of legitimate (and in this case imminent) challenge”.

In addition, Coulson J stated that the court must also consider whether the effect of granting a final third party order would be inequitable in the circumstances. In this case it was clear both Third Parties would be forced into insolvent liquidation and accordingly would suffer a clear prejudice if such an order was made.  Coulson J stated that the courts were not prepared to force companies into insolvent liquidation where the judgment debt to which the third party debt order would be attached was itself based upon a disputed adjudicator’s decision.

Comment

This case appears to be the first of its kind heard in the Technology and Construction Court and highlights the difficulties a construction party will face when seeking to enforce, by way of a third party debt order, judgment obtained for the enforcement of an adjudicator’s decision.

Where a construction party has obtained both an adjudicator’s decision and summary judgment in his favour he must then be able demonstrate to the court that there is a debt due to the judgment debtor from a third party and difficult evidential burdens will no doubt arise in this regard.

In addition, the court must also be satisfied that the making of a final third party order would not be inequitable having regard to all the circumstances. Given the significance attributed to temporary conclusiveness of an adjudicator’s decision by the judiciary, together with their reluctance to force companies into insolvent liquidation, this may be a difficult task to fulfil in the current economic market.

For further information please contact Georgina Squire or the Partner with whom you usually deal

In the recent case of Barclays Bank Plc v Alfons Kufner, the High Court considered whether or not an experienced businessman was able to rely on unfair contractual terms legislation to protect him from fulfilling his obligations under a guarantee he made to a bank.

Background

In June 2006, Mr Kufner gave a guarantee to Barclays Bank Plc (“Barclays”) by way of security for a loan made by Barclays to an Isle of Man company beneficially owned by Mr Kufner, Kel Maritime Limited (“Kel”). The purpose of the loan was to finance the purchase of a motor yacht which Mr Kufner intended should be chartered under the management of a business associate. The loan was made under a loan agreement between Barclays and Kel and the sum guaranteed by Mr Kufner was €3.54 million.

In April 2007, after only two payments had been made under the loan agreement by Kel, Barclays sought to recover the outstanding monies and enforce the guarantee.

The Hearing

A clause in the loan agreement provided that all amounts due under the agreement (or any related security) shall be paid “without any form of set-off, cross claim or condition”. Mr Kufner submitted that this clause was unenforceable as it fails to satisfy the requirement for reasonableness under Unfair Contract Terms Act 1977 (“UCTA”). UCTA regulates and limits the extent to which business liability for breach of contract and breach of duties can be avoided be means of contract terms.

Further, it was also argued by Mr Kufner that he was not in any event liable for the guarantee. It was submitted that certain clauses under the loan agreement that allowed Barclays to “release, enforce or not enforce” its rights under any such security in relation to the guarantee were not binding on him by reason of the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”). These regulations apply in relation to unfair terms in contracts concluded between businesses and consumers.

The Decision

In considering whether the set-off clause was substantively unreasonable, the Court considered the strength of the bargaining positions of the parties and whether Mr Kufner knew or ought to have known about the existence of the term. Given that Mr Kufner was an experienced businessman, with a net worth of €27 million, there was no perceived material disparity between the parties.  Secondly, Mr Kufner had the services of his lawyer available to him and so ought to have known about the existence of the term. 

It was held that there was nothing unfair or unreasonable in requiring sums due under the loan agreement to be paid without set-off as this clause, nor any other clause in the agreement, did not bar a claim being made against Barclays and, at the same time, Barclays had a legitimate commercial interest in receiving payment under the loan agreement when due, rather than being kept out of its money while a cross-claim is litigated.

As to the Defendant’s submissions regarding the UTCCR, the Court took the view that the regulations apply to a bank guarantee, at least where the guarantor and principal debtor each entered into their respective contracts as consumers and were not acting in the course of their trade or profession. However, in this case it was held that the UTCCR did not apply as it was not a consumer arrangement. Kel, a company, did not enter into the loan agreement as a consumer. Mr Kufner did not execute the guarantee in such capacity but did so in a business capacity for the purposes of his trade or business. The Judge, Mr Justice Field, observed:

“I cannot believe that the framers of the [UTCCR] intended that someone of the bargaining power of Mr Kufner and who procures the purchase of the components of a business at the cost of several millions of Euros should have the protection afforded by the legislation.”

Comment

Many lenders’ standard loan agreements and guarantees contain clauses which exclude set-off. Similarly, they also contain clauses that exclude or restrict the lender’s duty not to impair or release security held for enforcement of a contract with the principle debtor. They are industry standard or boilerplate clauses. This case is therefore of interest to all lenders as the judgment clarifies the limited circumstances in which unfair contractual terms legislation may apply to guarantees. Further, the judgment has confirmed that clauses excluding set-off in a loan agreement are not deemed to be unreasonable under UCTA.

However, caution should be observed as, in the circumstances of this case, the parties were perceived to be on equal terms due to Mr Kufner being an experienced businessman who also had the added advantage of legal advice. Not all persons entering in to a loan agreement or a guarantee with a lender will be in such a position. In such circumstances the Court may well have deemed the set-off clause to be unreasonable under UCTA and so unenforceable.

For further information please contact Georgina Squire or the Partner with whom you usually deal