The decision of the High Court in Allied Irish Banks plc v Peter Counihan and Mary Counihan [2016] IEHC 752 has the potential to make it more difficult for financial institutions to enforce loans.

BACKGROUND

AIB applied to the High Court for summary judgment against Peter and Mary Counihan for default of a 2009 loan. The Counihans’ loan – a refinance of a previous loan used to purchase farmland - was documented as a business loan. However, the Counihans later claimed that they were, in fact, acting as consumers and they sought to have the loan invalidated on the basis that it contained unfair terms within the meaning of the Directive 93/13/EEC on unfair terms in consumer contracts (the “Unfair Terms Directive”). They also claimed that AIB was estopped from enforcing the loan because it had made representations that it would not enforce the full debt and would not seek to enforce its security over the family home.

By judgment delivered on 21 December 2016, Barrett J. declined summary judgment and instead, transferred AIB’s application to plenary hearing.

A POSITIVE DUTY TO ASSESS WHETHER UNFAIR TERMS EXIST

Barrett J. determined that the Courts have a positive duty to assess whether a credit agreement between a bank and consumer contains unfair terms by reference to a decision of the European Court of Justice (ECJ) in Aziz v Caixa d’Estalvis de Catalunya Tarragona i Manresa (Catalunyacaixa) (C-415/11). The ECJ held in this case that a national court is “required to assess of its own motion whether a contractual term falling within the scope of the [Unfair Terms Directive] is unfair, compensating in this way for the imbalance which exists between the consumer and the seller or supplier, where it has available to it the legal and factual elements necessary for that task.”

On this basis Barrett J. in Counihan observed that Aziz “appear[s] to contemplate a court, even in an adversarial system of justice, acting in an inquisitorial manner” and concluded that the Aziz duty – i.e. the duty of a court to assess the fairness of a contract term of its own volition – was ideally suited to a summary application for judgment being “...a classic example of proceedings in which the potentially ruinous consequences for a consumer of the court’s judgment...on the basis of relatively limited argument, requires the above-mentioned task be undertaken if consumers are to be protected in the manner contemplated by [the Unfair Terms Directive]”.

COURTS’ DUTY IN SUMMARY APPLICATIONS

In summary, according to Counihan, in any application by a lender for summary judgment against a consumer (defined as a natural person acting for purposes outside of their business, trade or profession):

» The Courts have a positive duty to identify any terms of that consumer’s credit agreement which may be unfair and which, if proven unfair and therefore non-binding, would yield an arguable defence for the borrower.

» This duty is to be discharged by a Court whether or not the borrower has raised an issue with any such term/s.

» This duty is to be discharged in three stages:

1. The Court is to identify terms which may be unfair and which may yield an arguable defence;

2. If this has not been argued by the parties, the Court should invite the parties to make further submissions; and,

3. If, following the parties’ submissions, it appears that potential arguable defences exist, the Court should send the application to plenary hearing.

» When assessing whether a term is unfair, the Courts must find prejudice to the borrower. When making this assessment on summary application, it appears from Counihan that a lesser test of prejudice applies, i.e. the Courts should consider whether there is a term that appears to operate prejudicially in the particular circumstances and “and not to look for anything more”.

COURTS’ DUTY IN PLENARY APPLICATIONS

Similarly, according to Counihan, on an application for plenary judgment against a consumer, the Courts have a positive duty to decide whether the terms of that consumer’s credit agreement are unfair whether or not such term/s have been put in issue by the borrower. The Courts at plenary hearing must assess the contract terms afresh and are not bound by findings of the Court on summary application that certain terms are / are not unfair. As regards prejudice, it appears that a more onerous test applies at plenary hearing and actual (as opposed to apparent) prejudice must be established.

WHAT IS UNFAIR?

Barrett J. held that the good faith requirement under the Unfair Terms Directive mandates fair and open dealing by a bank with the result that contractual terms must be expressed fully, clearly, and legibly with suitable prominence given in the contract to any disadvantageous terms.

In the course of the summary application, Barrett J. concluded that none of the terms of the Counihans’ loan with AIB were unfair within the meaning of the Unfair Terms Directive. He did not determine whether or not the Counihans were consumers, presumably because this question was overtaken by his finding that none of their terms were unfair.

WHEN WILL A BANK BE ESTOPPED FROM ENFORCEMENT?

The Counihans argued that AIB was estopped from enforcing the loan because AIB officials had made representations that the full debt would not be enforced and that AIB would not seek to enforce its security over the family home. Barrett J. observed that this claim to estoppel was not “some wild flight of fancy”. He acknowledged that these discussions “may turn out [to be] but the ebb and flow of banker-customer negotiations which did not reach fruition” however, given the low threshold applicable to have a summary application sent to plenary hearing, Barrett J. concluded that he could not say that the Counhians did not have even an arguable defence by virtue of the alleged estoppel. On this basis, he declined AIB’s application for summary judgment and referred it for a full hearing.

WHAT DOES THIS MEAN FOR FINANCIAL INSTITUTIONS?

The decision in Counihan has the obvious potential to make it more difficult for financial institutions to enforce loans. The decision is likely to be cited by consumer borrowers (and indeed, many commercial borrowers claiming to be consumers) seeking to invalidate credit agreements to avoid enforcement. If this occurs, there are good arguments available to financial institutions as to why the decision in Counihan should not be applied. To deploy such arguments to their best advantage, financial institutions should be prepared for Counihan style arguments to appear in enforcement proceedings and indeed, should factor those arguments into decisions on the type of enforcement action instituted against consumers and those who might argue that they are consumers.