A recent High Court decision says that the Regulations apply to bank guarantees where the guarantor and the principal debtor contract as natural persons and not in the course of their trade or profession.  

In the context of European legislation the definition of consumer is different from that which applies in the UK in the Consumer Credit Act 1974. The usual definition of a consumer is a natural person “acting for purposes that can be regarded as outside his trade or profession”. The UTCCR 1999 applies this more restrictive definition. In the case of Barclays Bank plc v Kufner [2008] EWHC 2319 the guarantor had given a guarantee in relation to loans to a company (Kel), that he owned and controlled to purchase a boat registered on the IOM ships registry and secured by a registered mortgage. The registration of the boat was moved to the Madeira ships registry and it was then sold to another company (Paelten) controlled by Mr Kufner. A loan was granted to Paelten for the purchase but the mortgage was not registered as either it or the bill of sale was not in correct notarised form. The IOM mortgage was discharged. In each case Mr Kufner had acted as guarantor in connection with loans to the borrower. The boat was sold unencumbered to another company (Mellabond) as Paelten had fallen under the control of a fraudster.  

The Bank claimed under the guarantee as there were only two loan payments made. The guarantor claimed first, that the bank was in breach of its duty not to release securities; and secondly, that he had a right of set–off relating to a cross claim for negligent misstatement.  

The judge, Mr Justice Field, found on the first point that the guarantee gave the Bank the right to release the security and was not a under a duty to take steps to register a new security. This was further found not to be an “unfair term” for the purposes of the UTCCR. The judge found that the UTCCR will “apply to a bank guarantee, at least where the guarantor and the principal debtor each entered into their respective contracts as natural persons and were not acting in the course of their trade or profession”. The boat in question was to be used for a charter business and so was for a business purpose. (However a statement by the judge that he thought that people “with the bargaining power of Mr Kufner” who was worth considerable amount of money should not have the protection of the UTCCR is probably not going to be upheld as the legislation, unlike the new provisions in the Consumer Credit Act 2006, does not allow for the inapplicability of the Regulations by reason of wealth).  

As to the set-off in the counterclaim for negligent misstatement and negligent misrepresentation, there was a standard form of clause in the guarantee that all payments are to be made “without any form of set-off, cross-claim or condition”. The court found that the clause was reasonable, there was nothing that prevented Kel from making a claim and that the Bank had a legitimate commercial interest in receiving payment when it was due instead of waiting for the settlement of the cross-claim litigation.  

Whilst holding that the UTCCR can apply to guarantees, this case is also quite instructive as to what can construed as fair and reasonable in this context. No set-off clauses can be reasonable as they do not usually bar actions being brought against a bank, and a bank has a right to receive its money whilst any claim is litigated. The judge also examined the reflective loss principle, which is if a company suffers a loss due to a breach of a duty owed to both the company and a shareholder, the shareholder cannot recover his diminution in the value of his shares as the loss is only a reflection of the loss to the company. Here Mr Kufner as shareholder in Paelten and guarantor of the loan could not claim as guarantor for the damage he suffered as a shareholder as his loss was reflective of the loss suffered by the company. Leave has however been given to appeal and the issues relating to application of the UTCCR to the guarantee and reflective loss will be re-argued in the Court of Appeal.