Update: consumer

Consumer credit litigation continues to prove a lively area, particularly in the Manchester courts. In relation to cases involving payment protection insurance (PPI) mis-selling, there has been a one-all draw with two recent cases going different ways '“ but a study of the detail suggests otherwise.

The Supreme Court has also got to grips with some technical issues around the format of agreements. In peripheral litigation pre-action discovery has been considered and solicitors conduct has also featured.

Payment protection insurance

Yates v Nemo Personal Finance (Manchester County Court, 14 May 2010) involves an interesting consideration of 'unfair relationship' which is central to the post 6 April 2007 statutory framework.

Mr Yates and his partner took out a consolidating loan of £60,500 through a broker. In addition a sum of £15,468.75 for payment protection insurance and a broker's fee of £2,000 were added to the borrowing. At trial '“ by which time the claimant's relationship had foundered and the broker had gone into administration '“ three arguments were pursued against the lender:

• that the relationship between borrower and lender was unfair pursuant to section 140A of the Consumer Credit Act 1974 (CCA);
• that the lender had induced a breach of a fiduciary duty owed to the claimant by the broker through a payment of a commission that was not fully disclosed; and
• that the agreement was a 'multiple agreement' and that under section 18 of the CCA was improperly executed.

On the first point the court was prepared to accept that the amount of the PPI premium and the limited benefits it provided was sufficient to give rise to a potentially unfair relationship. An example was that the sickness benefits only covered Mr Yates and only for the first five years of the 20-year lending period. Having raised the issue of an unfair relationship, section 140B(9) shifted the burden of proof to the lender to advance evidence to show the relationship to be fair.

In this context the judge took into account that over half of the PPI premium was retained as commission by the lender and the broker. Furthermore, while the existence of this retention was disclosed, the amount of the premium was not. Taking everything together, the judge concluded that there was an unfair relationship under section 140A.

Breach of fiduciary duty failed because there was insufficient evidence of such a duty existing between the broker and the borrowers.

The final question of whether the agreement was a multiple agreement was significant. If the PPI borrowing was to be dealt with separately, it would fall under the £25,000 limit for 'regulated agreements' and would need to have been dealt with accordingly. The subtleties of the ways that debtor/ creditor agreements an debtor/creditor/ supplier agreements may give rise to an agreement being a 'multiple agreement' needs careful reading.

Here, the judge was persuaded that the PPI element was a separate part of the loan and that created a multiple agreement needing a different format for that element. Hence this element of the finance package was a regulated agreement. However, the judge did not consider that the whole agreement was covered by the CCA 2006 amendments following the removal of the £25,000 limit. Consequently this judgment appears to confirm that only the arguments concerning the unfair relationships provisions apply to loans taken out before 6 April 2007 for more than £25,000.

Generating guidance

In March Judge Waksman QC, who features in many consumer credit cases, dealt with a large number of PPI cases at a case management conference. In the interests of trying to provide some general guidance, three cases were selected to be brought to trial. Unfortunately two of them settled before the trial. That left the case of Black Horse v Speak [2010] EWHC 1866, the decision in which has been eagerly awaited.

Mr and Mrs Speak borrowed £5,000 from the claimant bank. At the same time they purchased a PPI policy of just over £2,000. It was the defendants' contention that the policy had been compulsory either at the insistence of the bank or the insistence of the bank's employee. In the former case the agreement would be defective as the PPI policy should have been shown as part of the total charge for credit. In the latter case there would be an issue of misrepresentation regarding the optional nature of the PPI.

The defendants raised further issues regarding breaches of the Insurance Conduct of Business Rules and also the possibility of an unfair relationship.

As can often be the case with PPI mis-selling, the fundamental issue was what happened in a meeting between Mr Speak and the bank's employee. There were no independent witnesses nor any other corroboration of what had taken place. In weighing the two accounts, the judge preferred the evidence of the employee over that of Mr Speak as being more dependable. On that assessment the defendants' case failed and the bank was found to be entitled to enforce the repayment of the outstanding loan including the PPI element.

Having set out to bring some clarity to the issues around PPI mis-selling, the judge went on to give some guidance more generally. This offered less comfort for the bank than the overall outcome of the case. The comments are obiter but are likely to carry some weight given the judge's experience in this area. Effectively, had the defendant's evidence been preferred over that of the bank's employee then the legal basis for disputing the enforceability of the loan was persuasive.

Dealing with various arguments, the judge rejected the bank's contention that, even if there had been a misrepresentation by their employee, the PPI remained optional because that is what was stated on the agreement. The oral representation (had it occurred) that the PPI had to be taken out was enough to make it compulsory. The significant point in that circumstance would be that the PPI should be treated as part of the total charge for credit and the agreement would have been incorrectly framed.

The fact that the PPI could be cancelled after 30 days did not otherwise make it 'optional' and would not have saved the bank. The judge also indicated that where there was a lower rate of interest offered on a loan with PPI compared to a loan without PPI, the optional nature of the PPI was undermined. The lower interest loan was then a distinctive agreement that effectively included compulsory PPI.

A rather sophisticated argument on behalf of the bank that the PPI could be treated as both part of the total charge for credit and part of the credit at the same time was rejected as being against the statutory framework under the CCA.

Total charge for credit

The Supreme Court has considered the difficult issue of where a line should be drawn between items that are defined as part of the credit under an agreement and items which are part of the total charge for credit in Southern Pacific Securities v Walker [2010] UKSC 32.

This issue often comes to the fore in litigation because the 'credit' provided and the cost to the borrower of receiving that credit (or the 'total charge for credit') must be shown separately in the signed agreement. In pre-2007 agreements, if a lender gets this wrong it can have the effect of rendering an agreement unenforceable.

Mr and Mrs Walker borrowed £17,500 from the lender. In addition a broker fee of £875 was paid and this sum was loaned to the borrowers by the lender under the same terms as the principal sum and interest was charged. In the loan agreement the broker's fee was shown as being part of the total charge for credit rather than part of the credit. When the lender took action upon the borrowers default, the latter raised an issue of whether the agreement was incorrectly drawn and therefore unenforceable.

The judgment makes the observation that if the agreement had been drawn the other way '“ with the £875 shown as part of the 'credit' '“ the borrowers would probably have adopted the alternative argument in an effort to defeat the agreement's validity. That is probably correct.

The case is a useful one as the issues are simple; there are effectively only three elements to the loan, the credit, the broker's fee and the interest. The Supreme Court's judgment follows a number of previous decisions in lower courts. The first step is to decide if an item is part of the 'total charge for credit' and, if so, exclude it from the 'credit'. In this case the broker fee was deemed to clearly fall into a category of something which was part of the cost of obtaining the borrowing. There was nothing in the legislation to exclude it from that category just because interest was payable on the broker's fee as well.

The separation of 'credit' from items comprising the 'total charge for credit' is not simple and has been a key area for claims of unenforceability. The effects of the 2006 changes '“ removing the automatic unenforceability under section 127(3) of the CCA '“ take much of the heat out of this issue. This will be compounded when the new Consumer Credit (Agreements) Regulations 2010 come into force next year.

Pre-action disclosure

Issues of disclosure feature heavily in mis-selling litigation in one form or another. Claimants would say that many lenders and associated institutions pay scant regard to obligations of disclosure pre-action. Defendants would probably counter that they have found themselves inundated with large numbers of speculative requests for documents. Applications for pre-action disclosure under CPR rule 31.16 often result.

In Kneale v Barclays Bank [2010] EWHC 1900 (Comm), the High Court considered an appeal against an order for disclosure. Mr Kneale had sort redress after seeing a Panorama programme that suggested many credit card agreements entered into before 6 April 2007 were unenforceable. A request for disclosure was made on his behalf under section 78 of the CCA. A copy of the pro-forma agreement and terms and conditions were supplied by the bank rather than a copy of the actual agreement. Section 78 disclosure was considered in detail in the case of Carey v HSBC [2009] EWHC 3417 (QB) (see Solicitors Journal 154/17, 4 May 2010).

It was said on behalf of Mr Kneale that without a copy of the original agreement it was not possible to advise whether he had grounds to challenge the agreement on the basis of improper execution. An application under CPR rule 36.16 succeeded before the circuit judge and the bank appealed.

The High Court reviewed the grounds on which pre-action discovery would be ordered. It was not necessary to establish a real prospect of success. However, it found Mr Kneale's application speculative. The difficulty here is that few debtors will recall any detail of the original agreement. In effect the court has said that, to succeed on an application for pre-action discovery in these circumstances, a debtor must raise a meaningful issue that requires an answer.

Non-party costs order

The fall out from the decision of court in Carey and the collapse of Cartel Client Review Limited and Consumer Credit Litigation Solicitors continues in Adris & Ors v Royal Bank of Scotland & Ors [2010] EWHC 941. In a salutary judgment, HHJ Waksman QC made a non-party costs order against Richard Burley, the sole principal of CCLS. The basis of the order was that CCLS had failed to obtain after-the-event insurance for a number of clients who were then the subject of claims which effectively foundered following the decision in Carey. That failure was considered a gross breach of duty to the claimants.

A similar attempt to obtain an order against Carl Wright, the sole shareholder and managing director of Cartel Client Review, did not succeed on the basis that obtaining insurance was CCLS's responsibility.

The pace of reported cases in the area of consumer credit litigation is not slowing down. The past few months have provided useful clarification in a number of areas. As statutory changes take effect, however, the force of that clarification will diminish and further litigation will doubtless follow.