The Court of Appeal have handed down their judgment in the NRAM appeal case which has important implications for how loan agreements are constructed
We considered the NRAM decision at first instance in January 2015 and our briefing can be found here.
Prior to 6 April 2008, under section 8(2) of the Consumer Credit Act 1974 (the Act), a consumer credit agreement was regulated if the amount of credit provided did not exceed £25,000. Many lenders used the same form of agreement whether a loan was more or less than £25,000 because a single set of documentation for all lending was preferable for operational reasons.
Northern Rock Asset Management (NRAM), the taxpayer owned company managing Northern Rock’s mortgage back book has approximately 41,000 borrowers in receipt of more than £25,000 of credit and whose credit agreements, pre-contract information and loan offer documentation repeatedly stated the agreement was “regulated under the Consumer Credit Act 1974,” despite exceeding the £25,000 limit under section 8(2).
The issue for the Court of Appeal was whether the rights and remedies available under the Act, or protections equivalent to such rights and remedies, were incorporated into these unregulated agreements notwithstanding that they fell outside the statutory scheme.
The size of the issue
The availability of the rights and remedies under the Act was important because NRAM had not implemented the requirements of section 77A correctly, by not stating the amount of credit originally provided to the borrower with the effect that the debtor has no liability to pay interest or charges in respect of the period of non-compliance.
NRAM provided redress to those borrowers with regulated agreements but not to those borrowers with unregulated agreements for credit over £25,000 on the basis that those borrowers did not have any rights under section 77A. If they were required to provide redress to these borrowers the cost to NRAM was stated to be £258million.
The Commercial Court at first instance concluded that, on a proper construction of the loan agreement, it should be treated as if it were a regulated agreement.
Decision of the Court of Appeal
Lady Justice Gloster identified five issues the Court needed to address:
Was it possible to ‘contract into' the Act?
The court identified that whilst it was possible to contract into the Act, as it contained many provisions emphasising the importance of regulations made under the Act and the role of the Court in enforcing any regulated agreement, it would require very clear wording before the Court could conclude that was in fact the parties’ intention. Such wording was not utilised in the NRAM loan documentation.
On a true construction of the loan agreement, were the provisions of the Act were incorporated?
The Court ruled that as some fundamental provisions of the Act could not legitimately be incorporated into the contract by agreement (such as the imposition of criminal sanctions) then, in the absence of evidence of the parties’ shared intention to the contrary, the remaining provisions could also not be incorporated. Essentially, if the parties had intended to only include certain provisions, they should have clearly stated so.
Had NRAM expressly or impliedly agreed the borrower would have the protection offered by the Act?
Following on from the findings above, the inclusion in the loan documentation of statements such as “This is a credit agreement regulated by the Consumer Credit Act 1974” could not be treated as an agreement between the parties to grant the borrower only those elements of protection able to be offered by the Act, but instead simply as a statement making an incorrect assertion.
Was the statutory wording in the statements capable of giving rise to an estoppel preventing NRAM from denying the borrowers the rights conferred by the Act?
Following on from the findings above, as the Court could not find any ‘shared assumption’ between the parties concerning the protections offered by the Act, no estoppel arose.
Was there a representation or warranty the loan agreement was in fact a regulated agreement?
The prominent inclusion in the loan documentation of statements such as “This is a credit agreement regulated by the Consumer Credit Act 1974” led the Court to view these as not merely representations but instead contractual warranties giving right to the borrowers to sue for breach of the same. It was also conceded by NRAM that the borrower is likely to have a cause of action for misrepresentation under the Misrepresentation Act 1967.
Implications of the decision
Overall, this is a welcome outcome for lenders who have documentation equivalent to that used by NRAM.
The sting in the tail is Lady Justice Gloster’s finding that the representations amount to contractual warranties. This could provide fertile ground for challenge from borrowers seeking to sue for breach of those warranties and claims could also be brought for misrepresentation.
However, these would not be straightforward claims and are quite different to automatically being afforded the protections set out in the Act. In the circumstances of the NRAM case, most of the borrowers would also be likely to be time-barred from bringing any such claims in any event.