Freestanding or modifying agreements under the Consumer Credit Act; a payment guarantee is a performance bond; post winding-up transactions set aside; car hire charges need to be incurred; payment of disbursements doesn't render solicitors liable for adverse costs orders; Wragge & Co's finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Freestanding or modifying agreements under the Consumer Credit Act?

Freestanding and separate agreements are not modifying agreements and so not caught by the Consumer Credit Act 1974 (CCA).

This was the finding of the High Court in Swift Advances PLC v McKay in which the defendant appealed against a possession order granted to the claimant lender. The parties entered into a fixed-sum loan agreement regulated by the CCA which was secured on the defendant's home for £25,000.

The parties then entered into a second agreement for the sum of £110,000. This agreement was described as an unregulated credit agreement and was again secured on the defendant's home, pursuant to the terms of the earlier charge. Part of the sum advanced was used to pay off the first loan although this was not a condition of the second loan.

The defendant subsequently entered into a third agreement with the claimant; this time for £189,729 which again was described as an unregulated agreement. That sum was also secured on the defendant's property under the original charge and was used in part to pay off the previous loan. The defendant defaulted and the claimant obtained a possession order.

The defendant argued that the second and third agreements were modifying agreements within the meaning of section 82 of the CCA, that those agreements were in breach of the CCA and were therefore unenforceable.

The High Court disagreed. The second and third agreements did not vary or supplement the original regulated agreement. They were freestanding and separate agreements stated to be unregulated credit agreements and did not expressly refer to the first agreement. The second agreement did not require the first loan to be repaid from the sums it advanced. The first loan did not allow for supplementary loans or variations of the loan amount. The claimant was therefore entitled to enforce its order for possession.

Things to consider

The lender had erroneously referred in some communications with the defendant to the second and third agreements as modifying agreements or regulated CCA agreements. However, the court considered the wording and effect of the actual agreements themselves, and not the way they were post contractually described by the claimant's employees.

Payment guarantee is a performance bond

We first reviewed the decision in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA in our August 2012 issue of Finance Litigation Briefing. At first instance, the court held that even where a party is referred to in the guarantee as a "primary obligor", the agreement may still be a guarantee (creating a secondary obligation), not a performance bond (creating a primary obligation requiring payment on first demand).

The brief facts are that the claimant had entered into a shipbuilding contract with the buyer with the contract price payable in five instalments. The defendant bank provided finance to the buyer and issued a payment guarantee for the second instalment. The buyer failed to pay the second instalment and the claimant made a claim under the payment guarantee on the basis it was a performance bond, due on written demand. The demand was not met and the claimant sought summary judgment.

The defendant argued that the payment guarantee was a 'proper' guarantee, not a bond, despite some of the language used being appropriate for a performance bond. Therefore, its liability as guarantor was contingent on the underlying obligation and as there was a dispute about whether the second instalment was due at all, its liability could not be decided summarily.

At first instance, the court held the instrument to be a guarantee only. The claimant successfully appealed.

The Court of Appeal held that while the words used by the parties were highly relevant, there was, nevertheless, a presumption that if certain elements were present in the instrument, it would be construed in a particular way. It was a settled presumption that an instrument would almost always be construed as a demand guarantee or on demand bond where it:

  • related to an underlying transaction between the parties in different jurisdictions;
  • was issued by a bank;
  • contained an undertaking to pay 'on demand'; and
  • did not contain clauses excluding or limiting the defences available to the guarantor.

The guarantee in this case bore those elements. The Court of Appeal held that the court at first instance should have had more regard to the settled and accepted presumption that an instrument such as this was an on demand guarantee and not a traditional guarantee.

Things to consider

Guarantees of the type before the court in this case would be almost worthless if the bank could resist payment on the basis that the foreign buyer was disputing whether a payment was due, or could simply refuse to sign a certificate of approval which might be required by the underlying contract. The presumption gives the seller some security.

Post winding-up transactions set aside

Where a company has been wound-up, directors are no longer officers of the company and any transactions they enter into will be void.

This was recently affirmed by the High Court in Park Associated Developments Ltd v Kinnear and another. The defendants were directors of the claimant which owned 12 plots of development land. The claimant was wound up but two months later the defendants purported, as director and company secretary of the claimant, to execute property transfers transferring two plots to each of them.

The consideration was said to be £190,000 per pair of plots. The only evidence of the claimant receiving any benefit for the transfers was the discharge of charges on those plots in the sum of £57,000 per plot. The defendants were then registered as legal proprietors. One plot was later sold for £200,000. Two properties were rented out.

The liquidators of the claimant sought re-transfer of the properties, or rectification of the registers, as well as recovery of the sale proceeds and rental income. The defendants argued that the company had not been in liquidation at the time of the transfers.

The High Court held there was evidence that the order for winding-up had been made before the transfers had taken place. The claimant therefore retained beneficial ownership of the properties. Alternatively, rectification of the register could be ordered as the defendants had, as a minimum, caused or contributed to the mistaken registration by lack of proper care.

The defendants should have been aware of the company's affairs. The director had known of the winding-up application and could be expected to ensure that he knew what had transpired. The title register would be rectified to show the claimant as proprietor. The sale proceeds of the one plot (plus interest) were to be paid to the claimant and the rent could be recovered. Consideration should be given to providing credit to the defendants for the sums used to discharge the charges on the properties and for completing the development.

Things to consider

No trial judge would have accepted that the directors believed the winding-up had not taken place without taking steps to determine if that were so or not. Had they taken such steps, they would have discovered the company had been wound up and that they had no right to deal with its assets. Their lack of proper care was no defence.

Car hire charges need to be incurred

When faced with a substantial car hire claim, finance companies would do well to put a business claimant to proof that the replacement car was reasonably needed.

This was the decision of the Court of Appeal in Singh v Yaqubi when the claimant claimed £92,953 in hire costs for a replacement Rolls Royce that he hired for 54 days for business purposes while his Rolls Royce was being repaired following an accident with the defendant.

The claimant had a fleet of six other prestigious cars for use by his business but required a replacement Rolls Royce to ensure the "correct impression" was maintained in his business circles.

However, the defendant put in issue whether the replacement was actually needed and therefore the cost of hire reasonably incurred, given the other vehicles available. The claimant failed to produce evidence as to what the Rolls Royce had been used for before the accident, or what the replacement vehicle had been used for during the hire period.

The Court of Appeal held that where need for a replacement vehicle has been put in issue, the onus is then on the claimant to establish that need, especially where such large sums are claimed. The court would not infer need. It would then be up to the defendant to show that that need had not been reasonably met.

The claimant had failed to adduce evidence to establish that need and the claim for the car hire costs therefore failed.

Things to consider

The position is somewhat different for private motorists who may not be able to predict what particular use may be made of the vehicle during the hire period. Businesses are expected to be able to do so, however.

Payment of disbursements doesn't render solicitors liable for adverse costs orders

Solicitors who fund disbursements for impecunious claimants will not be liable for adverse costs simply because they do so. They might be so liable, however, if there is evidence that they were the true party to the litigation and were directing it for their own financial gain.

This was the finding of the Court of Appeal in Flatman v Germany and Weddall v Barchester Health Care Ltd. The claimants' personal injury claims were funded by way of conditional fee agreements (CFAs) with their solicitors. They could not afford to take out after the event (ATE) insurance. The solicitors therefore paid some, if not all, of their disbursements as the claims proceeded.

The claimants lost their claims. The defendants sought disclosure of the claimants' funding arrangements to determine whether they should then seek a costs order against the solicitors.

The Court of Appeal held that an adverse costs order could be made against a solicitor who was a "real party" in critical respects and who not merely funded the proceedings but substantially controlled and benefitted from them

It went on to find that the payment of disbursements by a solicitor comes within the meaning of expense in s 58 of the Courts and Legal Services Act 1990. This defines a CFA as an agreement "...which provides for his [the clients] fees and be payable only in specified circumstances".

Therefore, as the legislation visualised that solicitors might fund disbursements, the fact that they did so could not, on its own, justify a conclusion that the solicitor had stepped outside the normal role of a solicitor so as to justify an order for disclosure.

However, in Weddall, the claimant had disclosed information himself to the defendant to the effect that he had not wanted to bring the litigation without ATE insurance, but had been left with no alternative but to proceed as he was unable to pay the costs already incurred by his solicitors. He had already disclosed information to suggest that the solicitors had gone beyond mere funding of disbursements and that they were taking the lead in the litigation and controlling its course. That information justified an order for further disclosure.

The Court of Appeal also suggested that it was open to a successful party to invite an impecunious funded opponent to reveal the extent to which the litigation had been supported by a third party and to provide a reason why a costs order should not be enforced against it. In this way, evidence may come to light of whether an indemnity for cost had been provided or whether some other behaviour may lead to an order for disclosure; and, thereafter, an order against the solicitor for adverse costs.

Things to consider

The main part of this decision is good news for solicitors, funded parties and access to justice. The final comment by the Court of Appeal may also prove helpful for successful parties who may not otherwise be able to enforce a costs order against an impecunious funded party.