Capacity to enter into guarantee

Unless it would be obviously apparent that a guarantor lacked mental capacity when entering into a guarantee, the guarantee is binding.

In Josife (by his authorised representative) v Summertrot Holdings Ltd, Josife had suffered a stroke and had entered into an enduring power of attorney in 2004. His son was a debtor of the defendant and his wife had guaranteed the son’s debt. The son defaulted and the defendant issued bankruptcy petitions against Josife's son and wife.

In consideration of the defendant withdrawing those petitions and allowing the son further time to pay his debts, in 2006 Josife entered into a guarantee with the defendant under which he assumed the obligations of primary obligor. In 2012, the defendant made a demand under that guarantee and served a statutory demand. Josife’s wife applied to set it aside on the basis he was incapable of managing his affairs due to mental infirmity. She alleged he had lost his faculties by the time he entered into the guarantee and that the defendant knew that this was the position.

The evidence indicated that when the guarantee was negotiated and signed, Josife’s solicitor was in attendance. It was inherently unlikely that the solicitor would have acted for Josife as he had if it was apparent he was incapable of giving instructions. Josife’s son had also been present and had not protested about his father’s incapacity. Further, an independent solicitor had specifically explained the terms and effect of the guarantee to Josife and certified Josife’s understanding of what he was signing. In addition, no issue about the validity or effectiveness of the guarantee had previously been raised.

At first instance and on appeal the court refused to set aside the statutory demand. The High Court held that the question in issue was whether the defendant knew of Josife’s incapacity. The defendant would be bound if it would have been obviously apparent that Josife lacked capacity, even if it was ignorant of the true position. There was no real prospect of showing that it was apparent that Josife lacked capacity to grant the guarantee.

Things to consider

Knowledge, whether actual or constructive, of incapacity is essential to avoid a guarantee. Clear evidence would be needed to show incapacity and the evidence in this case all went the other way, indicating no lack of capacity and therefore a binding and enforceable agreement.

Priority of claims to the proceeds of sale

In In the matter of Black Ant Co ltd (in Administration), two charge holders, D and U, had advanced loans to two companies, X and Y, which went into administration. The issue was which had first claim to the proceeds of sale of the properties over which the securities were held.

D held the first charge and U the second charge. D had asked X and Y to sign new facility letters replacing the original facility letters. No new money was actually loaned and no repayment of the original loans was actually made or nominally shown in the companies’ accounts. The new priority letters referred to the loan offer being in substitution of, and not in addition to, all previous facility letters which were to be deemed cancelled.

According to U, this meant the original loans had been repaid and further advances  had been made, so depriving D of its priority. U relied on sections 49 and 50 of the Land Registration Act 2002 which contain anti-tacking provisions. These provisions limit the priority of an earlier registered charge to those advances made at the time of the charge together with any further advances that the lender is obliged to make under it. U also argued that as unpaid interest and fees under the original facility had been rolled up and included in the new facility letter, further advances had actually been made.  U claimed its charge now took priority.

The High Court dismissed U’s claim. It held the obvious meaning of “further advance” was an advance of further or additional funds. The purpose of the provisions was to ensure that priority was not obtained for an advance which a second mortgagee would not know the first charge holder had made or was under an obligation to make. The ordinary meaning of the words used, having regard to their purpose and the relevant background, had to be considered.

The new facility letters made no reference to deemed repayment or further advances as it would have served no commercial purpose for D to have done so knowing the effect would be to destroy its priority. That could not have been intended. The fact that the account showed no debit or credit entries reflecting a repayment or new advance weighed against that interpretation.

The court held the intention had not been for a new contract to be entered into. The new facility letter was in respect of the existing facility which was being varied, not brought to an end. No new advance was being made. Rolling up unpaid interest and fees could not sensibly be seen as making a further advance.

Things to consider

This is the first direct authority on the meaning of further advance. It will be helpful to lenders who are simply restating their facilities when consolidating extensions of term or agreeing to roll up unpaid interest and fees in respect of the original advance. Priority will not ordinarily be lost in such circumstances.

Onus on lender to give details of cost of PPI

Failing to mention the cost of payment protection insurance (PPI) is a breach of the obligation to communicate with borrowers in a fair, clear and non-misleading way.

This was the finding of the Court of Appeal in Figurasin and another v Central Capital Ltd and another. This finding was reached despite the borrowers’ failure to read the loan documentation sent to them which did adequately set out the cost of the PPI.

The borrowers entered into a loan of £25,000 with the defendant. The offer of loan was made by one of the defendant’s employees over the phone. The borrowers were told the cost of the loan was £393.68 per month which included the cost of PPI. The only time the cost of PPI was mentioned separately was when the borrowers were told the premiums would be refunded at the end of the term when they would receive £8,750. No mention was made of the fact the PPI would actually cost them £12,248.40.

The draft loan agreement subsequently sent to the borrowers showed the loan and PPI as separate sums and as separate monthly repayment figures. The loan agreement was signed and returned without the borrowers fully reading it. They claimed not to have read it fully because they had been told the PPI would not generate an additional cost. They further claimed they had not been told that the PPI was optional and that it would cost them £102.07 per month. They alleged this was a breach of the Insurance Conduct of Business Sourcebook (ICOB) rule 2.2.3 as they had not been communicated with in a clear, fair and not misleading way.

The Court of Appeal, upholding the first instance judgment, found that there was a breach of ICOB. The loan agreement itself was clear and fair and contained all the necessary information about the cost of the PPI and the fact that it was optional. However, the telephone conversation with the borrowers had been misleading as to the true cost of the loan and PPI.

The lender had provided an inadequate explanation of how the PPI was to be funded or what it would cost. The reference to the refund was not sufficient for the borrowers to understand what they were committing themselves to. The omission of the costs of the PPI from the telephone script used was a deliberate marketing strategy. The adequate loan documentation was not sufficient to remedy the defects in the misleading telephone conversation which the borrowers had relied upon.

Things to consider

The ICOB rules exist to protect consumers from being misled even where they may have acted irresponsibly by not fully reading the documentation sent to them. Here, the communication of information was misleading and caused the borrowers to buy the PPI. Their failure to read the loan agreement did not break the chain of causation.

Credit agreement conditional upon survival of supply agreement

Where a Consumer Credit Act debtor-creditor-supply agreement finances a specific supply transaction, the law implies into the finance agreement a term making it conditional on the survival of the supply agreement. Where the supply agreement is rescinded for breach of contract, the credit agreement can also be rescinded.

This was the finding of the Supreme Court in Durkin v DSG Retail Ltd. Durkin has entered into this debtor-creditor-supplier agreement to fund the purchase of a computer. Durkin attempted to return the computer the day after purchase as it did not meet his requirements. The retailer refused to accept that rejection or cancel the credit agreement. Durkin refused to make any payments and told the lender he had rescinded both the purchase and credit agreement. The lender continued to demand payment and issued a default notice which was registered with the credit reference agencies.

Durkin sought damages for the lender’s negligent misrepresentation as to his alleged defaults. He claimed damages, including a sum for injury to his credit rating.

Although successful at first instance, the judgment was overturned on appeal and Durkin then appealed to the Supreme Court.

The Supreme Court held that s75(1) of the Consumer Credit Act 1974 (CCA) did not give the debtor any right to rescind the credit agreement as his claim against the credit card company was not a "like claim" as required by that section. However, this was a restricted use credit agreement tied to a particular transaction.

It was inherent in a debtor-creditor-supplier agreement under s12(b) CCA which financed a specific supply transaction that if the supply transaction was ended by the debtor accepting the supplier’s repudiatory breach, the debtor had to repay any sums recovered from the supplier. In order to reflect this, a term was implied into such agreements to make them conditional upon the survival of the supply agreement. It the debtor rescinded the supply agreement for breach of contract he could invoke that implied condition to rescind the credit agreement similarly. Durkin was therefore entitled to rescind the credit agreement without invoking s75 CCA.

The lender had been under a duty to investigate Durkin’s assertion that the credit agreement had been rescinded to determine whether it remained enforceable before reporting the alleged default to credit reference agencies. It had a duty to ensure that any such notification was accurate. It had notified the agencies without making any enquiries and so had no reasonable basis for believing that default had occurred. The lender was in breach of its duty of care to Durkin. He was awarded £8,000 in relation to damage caused to his credit rating.

Things to consider

Lenders must make enquiries to satisfy themselves that the sums remain due and owing before reporting default to credit reference agencies.