This month we review some interesting developments in the finance sector, including the court's view on the existence of an 'intermediate' duty of care on lenders, the need to get the basics - like service - right, and the latest from the Supreme Court on the assignment and variation of pre-April 2013 conditional fee agreements (CFAs).
Does a lender have a duty to explain the financial implications of a fixed interest rate?
Lenders owe their customers a duty not to misstate facts that the customer could be expected to rely upon, but do they owe them any wider duty when providing information rather than acting in an advisory capacity? In Thomas and anor v Tridos Bank NV, the High Court held that it can.
In 2008, the claimants inquired about swapping their business borrowing from a variable rate to two fixed rate loans with 10 year terms. After receiving information from the bank, the loans proceeded but the claimants found themselves tied to far higher rates of interest (6.71% and 7.52%) than the then current market rate. They claimed this had significantly adversely affected their business. The terms and conditions of the loans provided for an early repayment fee and an onerous redemption penalty. The claimants alleged the bank had failed to explain to them the financial consequences of trying to end the fixed rate before the end of the 10 year period.
The High Court held there was no dispute that a bank owes a duty to take reasonable care not to misstate facts on which its customers can be expected to rely. It also held there can be an intermediate duty of care owed when a bank voluntarily undertakes to adhere to certain principles even where it is still only providing information (Crestsign Ltd v National Westminster Bank PLC ). In such circumstances, and where there is no relevant disclaimer or contractual exclusion clause, the court should be more ready to infer that a bank has assumed responsibility for adhering to such principles.
In this case, the bank advertised that it subscribed to the Business Banking Code. That Code includes a promise that, if asked about a product, a lender will provide a balanced view of the product in plain English with an explanation of its financial implications. There was no disclaimer or contractual exclusion clause in the contract between the parties that would lead to the conclusion the bank was not willing to assume responsibility for honouring that promise.
When the claimants asked about fixing the rate on their loans and the maximum redemption penalty, the bank owed them more than a duty not to mislead or misstate: it also owed a duty to explain the financial implications of fixing the rate. There was no duty to volunteer information, but there was a duty to advise in plain English and give a balanced view under the Code if asked.
The bank had failed adequately to explain the financial consequences of changing to a fixed rate and particularly the extent of the redemption penalty. In fact, the bank's failure to disabuse the claimants about the level of redemption penalty potentially payable was held to be a misrepresentation upon which the claimants had relied. Had the claimants been advised correctly, they would probably have had a much shorter fixed rate loan with affordable break-cost implications. The bank was in breach of its information duty (to give a balanced picture) to the claimants.
Things to consider
There are conflicting first instance decisions as to whether a lender may owe an intermediate duty of care outside of an advisory relationship and a decision from a higher court is needed to clarify the position. In the meantime, although a lender does not have to provide a comprehensive tutorial about a product, if asked it would be in its best interests to provide an explanation in plain English of what the product entails and the consequences of entering into it.
High standards required to ensure proper service of a statutory demand
Where a statutory demand has not been served correctly and the creditor has not done all that is reasonable for the purposes of bringing the demand to the debtor's attention, a bankruptcy petition based upon the demand cannot proceed.
So held the High Court on appeal in Canning v Irwin Mitchell LLP. A statutory demand (the first demand) issued by the defendant for its unpaid fees had been hand delivered to an address supplied by a tracing agent. Canning was not present at the address so the demand was posted through the letterbox. Canning denied ever living there or having received the demand. He asked for re-service to take place at his solicitor's address. By the time he was served with the second demand the bankruptcy petition (based on the first demand) had already been presented. The defendant argued the first demand was deemed served as it had done all that it reasonably could to bring it to Canning's attention as per r6.3(2) of the Insolvency Rules 1986 (the Rules).
At first instance, the deputy district judge found that the defendant had not done all that it reasonably could - Canning's solicitors (with whom they were in communication) could have been asked to co-operate with service. Despite this finding, the deputy judge refused to set the demand aside as he considered it would be disproportionate to do so. He considered that the failure to serve correctly had not caused the debtor serious prejudice as Canning was aware of the judgment upon which it was based. Canning successfully appealed.
The High Court held there had been a fundamental failure to effect service as, on the balance of probabilities, Canning had not received the first demand and neither had it come within his dominion. The wording of s268 of the Insolvency Act 1986 made it clear that service of a demand was a prerequisite of entitlement to present a petition. The deputy district judge's conclusion on the inadequacy of service was fatal and he was wrong to allow the petition to proceed.
The deficiency in service was not merely a formal defect or an irregularity. The absence of prejudice and considerations of proportionality did not enable the fundamental defect as to service to be remedied under r7.55 of the Rules. There had been a complete failure to abide by the normal service provisions and it would be wrong to exercise any discretion to cure such failures. The petition was dismissed.
Things to consider
This decision can be distinguished from other decisions where irregular service was allowed to stand because, either the creditor had done all it reasonably could (in the circumstances of the particular case) to bring the demand to the debtor's attention, or there had been a known and real connection of the debtor and the service address and the debtor had ultimately received the demand. The court was not prepared to ignore the absence of those factors in this case for the sake of proportionality.
Does a secured creditor need the court's permission to enforce its security over assets that are the subject of a freezing injunction?
The court has recently provided clarity over whether a secured creditor must seek court permission to enforce its security over assets subject to a freezing order.
In Taylor v Van Dutch Marine Holding Ltd and others, a secured creditor (TCA) applied to court to vary a freezing order imposed against the defendants' assets. Some of those assets were the subject of fixed charges under a debenture entered into by one of the defendants in TCA's favour. TCA wanted to enforce its right under the debenture to appoint a receiver to dispose of the charged property. It had asked the claimant to consent to the enforcement of the debenture, notwithstanding the freezing order. The claimant refused.
The High Court held that a freezing order operated personally against a defendant to prevent the dissipation of assets. It did not give security to a claimant and did not affect the genuine rights of third parties over those assets. An injunction did not prevent a secured creditor from enforcing its security over charged assets caught by the injunction. The secured creditor had independent rights over the assets.
The court's permission was not required to exercise the creditor's security as that was not an act prohibited by the terms of the injunction and so would not infringe it. Where the security enforcement did not involve a disposal by the defendant, was not collusive (in an infringement of the order) and did not amount to aiding and abetting a breach of the injunction, there was no duty on a third party to apply for a variation of the freezing order.
The court agreed to vary the order although it considered it did not need to do so.
Things to consider
The court distinguished earlier authority which seemed to suggest that a secured creditor was under a duty to apply for permission to enforce its security, as otherwise it would be in contempt of court. The court did not consider that the authority applied in a situation where a party has its own rights that are being enforced and does not do anything that constitutes a disposal by the defendant.
Indemnity clause did not cover losses arising out of self-referral to FSA
The Supreme Court, in interpreting an indemnity clause in an agreement for the sale and purchase of an insurance business, has held that the clause covered loss from mis-selling only where the loss arose following a claim or complaint by a customer to the Financial Services Authority (FSA) and not where the loss arose following self-reporting by the purchaser.
In Wood v Capita Insurance Services Ltd, the seller of an insurance broking company agreed to indemnify the purchaser of the company against "all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred and all fines, compensation or remedial action or payments imposed on or required to be made by [the purchaser] following or arising out of claims or complaints registered with the [FSA] ... pertaining to any mis-selling or suspected mis-selling" in the period before sale.
After purchase, the company employees alleged that products had been mis-sold to customers. Following an internal review, the buyer (and seller) informed the FSA which directed it to pay compensation to affected customers. The buyer sought to recover its losses under the indemnity clause. Was the clause triggered or not?
The Court of Appeal held that the indemnity was confined to loss arising from a claim or complaint made by a customer and not to losses arising from self-referral.
The Supreme Court agreed. When construing the contract, the court had to ascertain the objective meaning of the language used to express the parties' agreement. This meant the contract as a whole should be considered and, depending on its nature and the quality of the drafting, more or less weight to the wider commercial context need be given. Some sophisticated and complex contracts which were heavily negotiated and drafted by skilled professionals might be interpreted principally by textual analysis. Other contracts might be interpreted by a greater emphasis on the factual matrix because of their brevity or informality or lack of skilled professional assistance.
In this case, the contract as a whole had to be considered. The indemnity was in addition to detailed warranties relating to mis-selling. Those warranties were time-limited whereas the indemnity was not. Had the indemnity clause stood on its own without the warranties, the requirement of the claim having to be made by a customer and the exclusion of loss caused by regulatory action arising otherwise than out of such claims may have looked anomalous. However, taken together, it was not contrary to business common sense for the seller to try and limit its further exposure to liability for mis-selling after the warranties relating to the same had expired. The indemnity clause was only triggered in limited circumstances which did not include self-referral.
Things to consider
The case serves as another reminder that parties should use clear wording to reflect their agreement at the outset to try and avoid disputes arising later on. Regard should also be had to the wider contractual context as, where provisions cover similar ground, the meaning of one provision will impact upon how another is interpreted - even if the result may appear subsequently to have resulted in a poor bargain for one of the parties.
Can pre-April 2013 conditional fee agreements survive assignments and variations?
Many cases funded by conditional fee agreements (CFAs) and after the event (ATE) insurance policies entered into prior to the abolition of recoverable success fees payable under a CFA and ATE insurance premiums are still filtering through the courts. The abolition, brought about by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), came into effect for CFAs and ATE insurance entered into on or after 1 April 2013, for general commercial litigation cases, and 6 April 2016 for insolvency-based cases.
Since then, there has been much uncertainty about whether CFAs entered into before the cut-off dates, but which have been assigned to new legal advisers or where the underlying claim has been varied, are deemed to be new agreements or continue to be governed by the transitional provisions under LASPO. The relevance being, of course, that if they are deemed to be new agreements, a losing party would not have to pay the successful party's success fee or premium, if the date of the new agreement post-dates the relevant cut-off dates.
The Supreme Court has provided some comfort to funded parties in Plevin v Paragon Personal Finance Ltd. As is well known, in Plevin, the claimant brought a payment protection mis-selling claim against the defendant. The claim was dismissed at first instance but was successful on appeal to the Court of Appeal. The defendant's appeal to the Supreme Court was unsuccessful and the defendant was ordered to pay the claimant's costs.
The claimant entered into a CFA with her solicitors in 2008. Between 2009 and 2012, the firm of solicitors reconstituted itself as an LLP and then a limited company with work in progress being transferred between the new entities by way of various agreements. The CFA had originally covered all proceedings up until trial and the seeking of leave to appeal from an unsuccessful result. Two deeds of variation of the CFA were entered into in 2013 (after LASPO had come into force) and 2014 to extend the CFA to cover the conduct of the appeals in the Court of Appeal and the Supreme Court respectively.
The claimant also obtained ATE insurance in 2008 to cover legal expenses and costs up to and including the trial period. That insurance was subsequently topped up to cover the appeals.
The Defendant argued that the CFA had not been validly assigned to the two successor firms as only work in progress as at the date the transfer agreements transferring work to those entities had been assigned and not work that had then yet to be done.
It further argued that the success fees for the appeals were not recoverable as the deeds of variation of the 2008 CFA were new agreements entered into post-LASPO. It also argued that the ATE insurance premium was not recoverable as the appeals did not constitute part of the same proceedings as the trial.
The Supreme Court held that:
- The CFA had been validly assigned. The court rejected the argument that work in progress only meant work already done at the date of transfer and not future work done on the same matters. Further, the new firms had written to the claimant shortly after each transfer advising her of the change, referring to the CFA and confirming they would continue to act for her on the same terms as before.
- The success fee was recoverable for the Court of Appeal and Supreme Court proceedings. The deeds of variation were not new agreements as they provided for litigation services in relation to the same underlying dispute as the original CFA, albeit on appeal. The deeds of variation had not discharged or replaced the original CFA but were clearly expressed to be a variation of the original CFA, leaving its terms unchanged, save for adding in reference to the appeal and altering the success fee.
- The ATE premium was also recoverable. The policy had been topped up to cover the two appeals, but those top ups were amendments to the original policy, not fresh contracts, and were to enable the claimant to defend what had been won when funded under the original policy. As with the CFA, the policy covered the same proceedings and there was no reason why the transitional provisions of LASPO would limit recovery to a particular stage in the litigation. The benefit of the pre-LASPO costs regime would apply to top-up amendments made after it came into force.
Things to consider
The court's majority view was that the purpose of the LASPO transitional provisions was to preserve vested rights and expectations arising from the law as it had previously stood and that purpose would be defeated by the imposition of a rigid distinction between different stages of the same litigation.
The judgment is fact-specific however, and whether an assignment of a CFA subsequent to the commencement of LASPO will be effective will depend on the specific wording of the assignment and the parties' intentions.