High Court considers test for unfair relationship and interaction of basis clauses
In what is understood to be the first case on the point, the Commercial Court recently held that basis clauses such as entire agreement clauses and those defining the scope of a relationship between a debtor and creditor were not exclusion clauses and critically, did not give rise to an unfair relationship pursuant to S.140A of the Consumer Credit Act 1974 (CCA).
The court also held that where allegations said to constitute an unfair relationship also constitute a standalone cause of action, for example, negligence or misrepresentation, then the legal test for those causes of action must be made out – otherwise there is a danger that the analysis of their significance becomes blurred and uncertain.
- N M Rothschild & Sons Limited (the Bank) granted loans of €292,500 and €750,000 to Mr and Mrs Carney and Mr and Mrs Fox (the Claimants) respectively in 2005/2006. The loans were secured against their properties in Spain.
- The purpose of the loans was to allow the Claimants to invest in a fund known as the ‘Optima 2 Fund’ provided by Aspecta Assurance International Luxembourg SA. The investment was promoted by an independent financial adviser.
- The contractual documentation between the Bank and the Claimants included various basis clauses, for example, (i) a clause defining the scope of the relationship between the Bank and the Claimants (a non-advisory relationship); and an entire agreement clause (the Basis Clauses).
- The investments underperformed, in part due to the financial crash in 2007-08 and did not generate sufficient funds to be able to repay the interest and the fees charged and the tax position was not as the Claimants had allegedly been led to believe. Consequently, the Claimants brought a claim against the Bank (some 12-13 years later) pursuant to S.140 of the CCA (unfair relationship provisions).
- S.140A provides that “the court may make an order under S.140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor is unfair because of one or more of the following: (a) any of the terms of the agreement…;(b) the way in which the creditor has exercised or enforced any of his rights under the agreement…; (c) any other thing done (or not done) by, or on behalf of the creditor (either before or after the making of the agreement…)”.
- If the court makes a finding of an unfair relationship, then under S.140B, it may reduce or discharge any sum payable by the debtor by virtue of the agreement. The burden of disproving an unfair relationship rests on the creditor.
The Claimants argued that the Bank acted unfairly and sought relief by removal of their indebtedness under the loans and removal of the charges against their properties. In particular:
(a) The Bank had provided the negligent advice and made misrepresentations. The Claimants alleged that the Bank acted as their adviser as to the suitability / risks of the investment and also as to its efficacy as a way of avoiding the Spanish version of inheritance tax. Further various misrepresentations had been made at a cocktail party and at a lunch by a Bank representative (the Substantive Claim). The Substantive Claim fell to be considered within S.140A (1)(c) because it concerned things done or not done by the Bank; and
(b) The Basis Clauses included in the contractual documentation between the Bank and the Claimants gave rise to an unfair relationship and so could not be relied upon (the Terms Claim). The Terms Claim fell to be considered within S.140A (1)(a) because the Basis Clauses were terms of the agreement.
The Bank denied that any advice was given or that any actionable representations were made. In the event that the representations were wrong or false, then it relied on the operation of the Basis Clauses.
The court’s considerations
HHJ Waksman QC, sitting as a Judge of the High Court made a number of key findings regarding the test for unfair relationship and basis clauses:
- Whilst the court had a discretion when granting a remedy under S.140B, the initial determination of whether or not there is an unfair relationship is more than an exercise of discretion and involves a large amount of “forensic judgment”. The Judge agreed with Lord Sumption in Plevin v Paragon that a wide range of considerations may be relevant to the fairness of a relationship.
- Sometimes the thing done or not done by the creditor is a free-standing matter – for example, the failure to disclose the high level of commission in Plevin. But it could also be something which is, or could be the subject of a separate claim, for example, negligent advice or misrepresentation. In such circumstances, “generally speaking…the same elements as are required by the cause of action should be shown when such matters are raised as constituting an unfair relationship. Otherwise, there is a danger that the analysis of their significance becomes blurred and uncertain”. Therefore, if an allegation of misrepresentation was relied on as part of an unfair relationship case then the debtor must show that the representation made was material and relied upon. Similarly, if there is an allegation of negligent advice, then the debtor must not only show that advice was given but there was an accompanying duty of care.
- In relation to causation, in cases of negligent advice and misrepresentation, it would be “odd if any relief could be considered if they did not have at least some material impact on the debtor when deciding whether or not to enter the agreement…If the debtors would have entered into the agreement in any event, this must surely count against a finding of unfair relationship under S.140”.
- On the other hand, the court is not constrained in its unfair relationship analysis by the fact that the particular feature relied upon e.g misrepresentation, would itself have been time-barred if claimed as a standalone cause of action.
- To the extent that the court does award relief under S.140B, the court agreed with previous case law that any order should not give debtors a windfall but should reflect, as closely as possible, the overall position which would have applied had the matters giving rise to the perceived unfairness not taken place.
- Basis clauses can be distinguished from exclusion clauses (which might otherwise be subject to statutory control for example by UCTA) because they do not exclude a liability that would otherwise exist – they merely define the parties’ obligations in the first place.
- When considering whether the Basis Clauses in this case were exclusion clauses, the court should look (in the context of the non-advice clause) at the extent to which there are other oral or written indications that the relationship was advisory. If the evidence did suggest an advisory relationship, then this might point to the clause being exclusionary. But if there was none or the evidence was unclear, then the clause was simply deciding the status of the relationship and was not exclusionary In the context of clauses about representations, the court should consider the extent to which representations had been made and objectively relied upon.
- The modern approach to considering such clauses is to say that they are contractual estoppels – for example, the parties have agreed that no representations have been given or relied upon, or that no advice has been given. Provided that clear words are used, the general view is that there can be nothing wrong with the parties agreeing the basis on which they deal with each other as set out in such clauses.
- Just because a basis clause is not unfair pursuant to UCTA, the Unfair Terms in Consumer Contracts Regulations 1999 or the Consumer Rights Act 2015, does not mean that it cannot give rise to an unfair relationship under S.140A because of the different and wider exercise entailed by the unfair relationship provisions. Although in practice we expect it will be rare that a court holds that a basis clause is not fair under the consumer protection legislation but does give rise to an unfair relationship under the CCA.
Applying these principles to the case, the Judge held that there was no unfair relationship:
- As regards the Substantive Claim, there was no basis for finding that the Bank had an advisory role nor that there were any actionable representations;
- As regards the Terms Claim, even if the Bank had assumed an advisory role or there had been misrepresentations, the Basis Clauses would have acted as a shield and negatived these arguments. They were not exclusion clauses for the purposes of UCTA because they simply defined the relationship rather than excluding liability. Furthermore, even if they were exclusion clauses, they were not unreasonable pursuant to UCTA and there was no other reason to conclude that they were unfair for the purpose of S.140A CCA. The judgment goes into some detail as to why the Basis Clauses are not exclusion clauses and why if they were, they were not unfair in paragraphs 345 to 349 of the judgment. This reasoning may be useful for future similar claims.
Basis clauses have received much judicial attention over the years but this is understood to be the first case in which their efficacy in relation to an unfair relationship claim has been tested. It will be welcome news to lenders that the court was reluctant to find that such clauses could give rise to an unfair relationship.
The case is also a reminder of the breadth of the application of the unfair relationship provisions which extend beyond just regulated credit agreements. The judge’s more general comments in respect of having to show the elements of causes of action leading to an unfair relationship where they also constitute a separate cause of action are helpful. This should reduce attempts to water down what is required to establish an unfair relationship. The comments in respect of causation are also significant, mainly the fact that it will be difficult to establish an unfair relationship if debtors would have entered into the agreement in any event. This may be helpful in the context of PPI litigation where it can sometimes be apparent that the customer would have continued with taking out a PPI policy without question, but it is argued by claimant law firms that there is an unfair relationship and that there should be a full premium refund because commission was not disclosed by the lender.
It is not yet known whether the Claimants intend to appeal the judgment.