Consumer update

The unfair relationship test in the Consumer Credit Act 1974 was introduced in 2006 to replace the previous extortionate credit bargain test. The changes brought in a much greater element of discretion than had existed previously on the part of the court. Three cases recently have looked at that discretionary test from different angles.

One of the biggest criticisms levelled at the providers of payment protection insurance is the amount that was paid by way of commission by the insurer to the lender. At the end of last year the Court of Appeal had the chance to look at a case that had previously been dealt with by Judge Waksman QC in the Manchester Mercantile Court.

In Harrison v Black Horse Ltd [2011] EWCA Civ 1128, two borrowers sought to challenge the fairness of a loan agreement on the basis of the non-disclosure by the lender of a commission relating to the PPI premium. As is often the case, the PPI policy was provided by a separate part of the defendant's business. The premium was £10,200 of which 87 per cent was retained by the defendant by way of commission. In other words, the commission was 677 per cent of the cost of the insurance premium.

The claimants' case was dismissed both by a district judge and Judge Waksman. They appealed to the Court of Appeal solely in relation to the question of fairness under section 140A and B of the Consumer Credit Act 1974. Under that provision a court can make a remedial order if it considers the relationship (as opposed to the agreement) between the lender and the debtor is unfair to the debtor. The focus of the appeal was on the size of the commission and the fact that it had not been disclosed. The court summarised the argument in that 'the commission is so egregious that it gives rise to a conflict of interest which it was the lender's duty to disclose'.

The court expressed some surprise at the extent of the commission but ultimately did not interfere with the agreement as a result. The reason was that in a heavily regulated market there was no specific requirement to disclose the size of the commission. Note was also taken of the fact that in a Financial Services Authority report in 2007 reference was made to the high level of commission but it was not suggested this impacted on the fairness of the relationship. Finally, the August 2010 policy statement by the FSA which prompted the recent judicial review by the British Bankers Association listed the 15 most common failures in the sale of PPI and did not include non-disclosure of commission among them.

In Bevin v Datum Finance [2011] EWHC 3542 (Ch), Mr Bevin was served with a statutory demand by the respondent and applied to the court to set it aside. The basis upon which he applied to set it aside was that it was unfair under section 140A of the 1974 Act. He raised some other matters relating to his association with the owner of the respondent which did not succeed before the court. Initially Bournemouth County Court rejected his application to set aside the statutory demand on the basis that there was no triable issue and Mr Bevin appealed to the High Court.

The respondent had filed evidence in reply to Mr Bevin dealing with the ancillary matters raised. The issue of unfairness under section 140A related to the rate of interest and the level of capital repayment but no evidence was forthcoming on that point from the respondent. The court took note of the fact that under section 140A(9) where a debtor alleges an unfair relationship 'it is for the creditor to prove to the contrary'. The court therefore found that at first instance the deputy district judge erred in finding no triable issue.

Where the debtor Mr Bevin raised an allegation of unfairness under section 140A he had done all at he needed to. In the absence of any explanation from the respondent there was a live issue to be considered. The court commented that it would be very rare that an issue of unfairness could be dealt with on a summary application such as the one that had been made in this case.

Commercial relationship

A case involving a commercial credit agreement, Rahman v HSBC Bank Plc [2012] EWHC 11 (Ch), also gave rise to issues concerning section 140A and an unfair relationship. The eight claimants in this matter were a family who had developed a large property portfolio. The defendant bank had lent the family money as loans and overdraft facilities secured on a number of different properties. On 31 August 2011 the bank served repayment demands on the family in relation to various loans it said had become due and unpaid in the preceding months. The bank also claimed that the default entitled them to require repayment of all loans and overdrafts under cross-default clauses. On 1 September 2011 the bank appointed receivers in relation to their security.

The claimants contended that the agreement arose out of an unfair relationship under section 140A and specifically referred to the ability to require repayment on 24 hours' notice and the cross-default clauses. There was also an argument as to whether the bank had verbally agreed to extend the relevant loans to 15 years, which was rejected by the court.

In relation to the test of an unfair relationship, the court took particular note of the fact that this was a commercial relationship involving a substantial amount of lending. The claimants were quite able to assert a strong bargaining position and had shown a willingness to threaten to take their business elsewhere. A number of terms and conditions had been challenged in the course of the relationship but not the ones that were subsequently raised in the court.

The court did not accept that any of the clauses raised in the circumstances of this type of transaction and with regard to this relationship were problematic and did not make an order under section 140A. The clauses were common in commercial contracts.

Continuing consideration

The issue of unfair relationship is likely to continue to require significant judicial consideration. Particularly in the current climate surrounding banks the decision in Harrison that the level of internal commission was not something to create an unfair relationship suggests that it will not be an easy allegation to sustain. The Bevin case also emphasises that it is a complex test that cannot be dealt with summarily and will be deployed by those resisting lenders' court actions.

Finally, in Brandon v American Express [2011] EWCA Civ 1187, there was consideration of the timing stated in a default notice. Mr Brandon had run up a credit card bill with the credit card company in excess of £5,000. The company served a default notice requiring payment of the minimum payment within 14 calendar days of the notice. No payment was forthcoming and about three weeks later the company served a notice cancelling the agreement and then commenced proceedings to recover the debt relying purely on Mr Brandon's default.

The credit card company applied for summary judgment. At the hearing Mr Brandon challenged the validity of the default notice for not complying with section 88 of the 1974 Act. The Act requires a notice of default to specify a date for remedying an alleged breach that is not less than 14 days after the date of service of the notice. Mr Brandon's argument was that a requirement of payment within 14 calendar days of the date of the notice fell short of this time period. Originally a district judge had considered any such shortfall as being de minimis and had granted judgment.

On appeal the Court of Appeal held that, whether the potential defect in the notice had any practical impact on the parties or not, it was a mandatory requirement and Mr Brandon had a realistic prospect of success of defeating the validity of the notice. The court noted that the defendants could have successfully raised other issues that did not relate to non-compliance with the default notice. The fact that they had not done so meant the court could not consider those and judgment was set aside.