Introduction

In December 2014 the High Court’s judgment in this test case left NRAM (previously Northern Rock PLC) with a potential liability of £258 million. This was as a consequence of NRAM using the same paperwork for both regulated and unregulated agreements, including for the wider suite of pre-contractual and contractual documentation between 1999 and March 2008. The High Court’s view was that as a result this gave customers with such unregulated agreements the same rights and remedies as customers with standard regulated agreements.

Unfortunately for NRAM, the statements it provided in line with its s.77A responsibilities were defective. Consequently, customers with standard regulated agreements who received such defective statements had no liability to pay interest or default sums in respect of the period of non-compliance. The High Court’s view was that customers with unregulated agreements also had no liability for interest or default sums due to their contractual paperwork also stating that the agreement was regulated. As mentioned, NRAM’s total liability has been estimated as potentially £258 million.

Unsurprisingly NRAM sought to appeal the High Court’s judgment.

The Court of Appeal

The Court of Appeal identified five potential issues to address as to whether customers who took out unsecured loans of more than £25,000 under agreements that incorrectly stated they were regulated by the CCA were entitled to the same rights and remedies as customers with agreements that were regulated by the CCA:

whether it is possible to ‘contract in’ to the CCA;

whether the provisions of the CCA were incorporated into the agreement;

whether NRAM expressly or impliedly agreed that the borrower was to have the protections available under the CCA, irrespective or not it actually did;

if the statutory wording in the relevant statements did not constitute a contractual term, whether it gave rise to an estoppel;

whether there was a representation or warranty that the agreement was a regulated agreement when it was not.

Contracting In To The CCA

The Court was of the opinion that it was conceptually possible for parties to contract into the Act and subsequently give the court’s the power to enforce. However, this could only be achieved through very clear wording and in NRAM’s case no such wording was present. Touching on this point from a different angle later in the judgment, the Court’s view on the whole in relation to ‘contracting in’ seems to be that parties cannot do so on a wholesale basis to allow the provisions to apply. Instead, they need to use wording that clearly indicates that it is the parties’ intention that the provisions apply. Quoting an article by Mr R.E. Megarry:

“The difference is between saying, ‘The Acts shall apply’ and saying, ‘I agree to your having by contract the same rights as if the Acts applied’.”

Incorporating CCA Provisions In To The Agreement

On this point the Court gave a clear judgment that was extremely favorable from a lender’s perspective. The agreement did not expressly incorporate any specific rights or remedies under the CCA into the agreement, such as by stating “you (the consumer) are entitled to the rights available under s.77A of the Consumer Credit Act 1974”. The question before the Court on this issue therefore was whether the term “regulated by the Consumer Credit Act” expressly incorporated the provisions of the CCA en masse. 

As touched upon above in relation to contracting in wholesale, the Court of Appeal disagreed with High Court’s view that the phrase “regulated by” was sufficient to incorporate the provisions of the CCA, instead taking the view that the phrase “regulated by” was a statement of fact. In the Court of Appeal’s view these words were not clear words of incorporation.

For the general rights and remedies under the CCA to be enforceable under an unregulated agreement, the agreement itself would need to expressly include them, for example by stating a clause along the lines “(this agreement is) subject to the rights and remedies under the Consumer Credit Act 1974”.

Whether NRAM Agreed To CCA Protections For The Consumer

The Court of Appeal took the view that statements such as “This is a Credit Agreement regulated by the Consumer Credit Act 1974” did not treat borrowers on unregulated deals as if they had the benefit of unspecified statutory protections afforded to regulated borrowers under the CCA. In the Court’s own words, statements such as the one mentioned above:

“do not reflect any bilateral agreement between the parties that they intend to apply the provisions of the 1974 Act by contract to an agreement that lies outside its scope, in the event that the representation is untrue”

The words are simply a factually inaccurate description of the nature of the agreement with no contractual ramifications or obligations coming about as a result. 

Estoppel

The Court of Appeal rejected the High Court’s view that – in the event that no contractual term was incorporated into the agreement – NRAM was estopped, specifically contractual estoppel, estoppel by convention or estoppel by representation, from denying the respondents had the benefit of the rights available under the CCA.

Representation Or Warranty?

The Court of Appeal found on this issue that the statements to the effect that the agreement was regulated were both representations and contractual warranties that the agreement was regulated by the CCA and consequently that the customers were entitled to the rights and remedies afforded by the Act. In the event that these representations and warranties were false, which on construction the Court of Appeal found them to be, the customers would be entitled to sue under the Misrepresentation Act 1967 and therefore a breach of contract and breach of warranty had occurred.

However, it was accepted by all parties that the breach occurred at the time the loan agreements were entered into which in turn allowed NRAM a limitation defence.

Going Forward

This is obviously an extremely positive judgment from the perspective of lenders. The only potential downside is the view taken by the Court of Appeal that incorrectly stating an agreement as being regulated by the CCA amounts to a misrepresentation and a contractual warranty for which a customer can sue for breach.

That said, the NRAM situation arose in part because agreements in excess of £25,000 did not fall into the category of regulated consumer credit. With the £25,000 cap now removed entirely, the provision of any credit to an individual or relevant recipient of credit will require the use of a regulated credit agreement, unless of course the agreement is exempt in which circumstances the prescribed requirements for that particular exemption will need to be followed. As such, the only remaining category of unregulated lending that remains is primarily that to companies and partnerships of four or more.

Were a lender to state on its agreements with companies and partnerships of four or more that the deal was regulated, it would be interesting to see if the courts adopted the view that such a statement constituted a misrepresentation and breach of contractual warranty or that an entity which materially was not a consumer could adopt consumer rights. The prudent thing to do however is, as always, for lenders to ensure that their standard contracts and supporting contractual documentation do not incorrectly state they are something they are not.