Banking Bulletin

Commission and conflict of interest

The borrowers signed loan application documentation which advised that the lender pay commission to brokers in certain circumstances. The broker who arranged the loan was paid a commission of £240. This was in addition to the fee the borrowers paid to the broker. The borrowers argued that that payment had been a secret commission, and the disclosure in the documentation of the possibility of there being such a payment was inadequate and did not negate the secrecy. The lender argued that the disclosure had been sufficient and the borrower did not need to be told the actual amount to be paid.

The Court of Appeal found that there had not been a secret commission, but that the failure to obtain the borrowers' informed consent to the payment meant the broker was in breach of his fiduciary duty to the borrowers. By accepting the commission from the lender, the broker had put himself in a position where he had a conflict of interest. Borrowers in the nonstatus lending market, as here, were likely to be vulnerable and unsophisticated. To draw their attention to the potential conflict of interest, such borrowers required a statement of the amount of commission the broker was to receive (not just a warning that some commission might be paid). They also needed to be told explicitly that the payment to the broker could mean that he might not be in a position to give unbiased advice.

The court therefore concluded that, although the documentation the borrowers signed negated secrecy, it was insufficient to amount to an informed consent to the commission. For that failure, the borrowers had a claim for equitable compensation, and so were entitled to the return of the commission plus interest from the date it was received. It was not, however, appropriate to rescind the loan agreement and the related legal charge. This remedy would need to be triggered by a secret commission to justify such draconian relief.

Wilson & Another v Hurstanger Ltd

Mortgage extinguished by time

The bank took a charge on the borrowers' property. In January 1992, it demanded payment of the balance due under the secured facilities. In June 1992, it made a further formal demand specifically relying on the mortgage. One of the borrowers was subsequently made bankrupt. Periodically, the bank informed the borrowers that they continued to be liable and made demands for payment and referred to the mortgage. In 2006, the trustee in bankruptcy sought declaratory relief contending that the bank's right of action to recover the property had accrued in January or June 1992 when it had first made demands for repayment. As that was more than 12 years ago, the cause of action was statute barred under the Limitation Act 1980, and so the bank's charge had thereby been extinguished.

The bank argued that time only started to run once the borrowers were in adverse possession of the property. Here, it argued that the borrowers had continued to occupy with its implied permission - as no unequivocal demand for possession had been made.

The bank's arguments failed. The court held that there was no reason why time should not run from the date on which the mortgagee was entitled to possession, whether the mortgagee unequivocally demands possession on that date or forbears from doing so while trying to persuade the mortgagor to pay up. There was no requirement that the mortgagor be in possession without the consent of the mortgagee. The cause of action was time barred and the legal charge extinguished under s17 of the Act.

This judgment should be borne in mind where a lender is faced with borrowers with a long history of failure to pay and where the formal demand was first made some time ago. Protracted negotiations with such borrowers could lead to the security being forfeited.

Ashe v National Westminster Bank Plc

Imputed knowledge

The claimant used P, a company of which he was a director, as the vehicle to acquire another business. P and the defendant entered into a loan facility agreement to enable the purchase to go ahead. The loan agreement provided that in the event of a "major default" by P within a certain period, the defendant could demand immediate repayment of the amounts already drawn. The defendant subsequently served notice of default regarding a breach of a particular undertaking, but the grounds upon which that notice was served were found, at trial, to be invalid. The court did find however that a bribe had been made by the claimant to one of the defendant's directors to enable the acquisition to proceed. It found that knowledge of that payment could be attributed to P from the claimant as one of its directors, and that P's failure to advise the defendant of the bribe was of itself a "major default" under the agreement.

The Court of Appeal agreed. Information that came to the attention of a director, however that might occur, could properly be regarded as information in the possession of the company itself. The knowledge of the bribe could be attributed to P and P was required to disclose that information under the terms of the loan agreement. The failure to do so was a "major default" entitling the defendant to serve the default notice.

Mohammad Jafari-Fini v Skillglass Ltd & Ors

Bank's security rights upheld

TAI owned a number of shares in Nam which were charged to the bank. The charge was subsequently called upon against TAI. When TAI was wound up, and in an attempt to destroy the bank's security, Nam sought to exercise a power contained in its own articles to redeem the shares owned by TAI (still charged to the bank) and to then offset the redemption price against a judgment debt owed by TAI to Nam.

The Privy Council confirmed that there could be no redemption for the purposes of a set-off against an insolvent company. Such redemption would also be ineffective even as against a solvent company if prior notice of a bank's charge had been received and where there was no equity left over against which the set-off could operate. Here, the purported redemption was a nullity. The shares should be re-registered in the bank's name, so that it could exercise its right to take possession and exercise the power of sale of the shares at its own discretion.

It is pleasing to note that in giving judgment, the Privy Council expressed the need to maintain the confidence which bankers should have in the willingness of the courts to uphold their security rights.

Hague v (1) Nam Tai Electronics Inc, (2) Tele Art Inc (in liquidation), (3) Bank of China (Hong Kong) Ltd

IVA thwarts claim to interest

The claimant obtained a judgment against the defendant for breach of a guarantee. The defendant entered into an IVA with his creditors, which included his liability to the claimant. The defendant paid the judgment sum to the claimant, but not the interest awarded on it. The claimant contended that the award of interest was a post-IVA claim, and threatened to bankrupt the defendant which would lead to a termination of the IVA. The defendant applied for a stay of execution of the interest part of the judgment, on the ground that it was within the IVA.

The court found that, although the claim for interest occurred outside the IVA, the claimant had to be taken to have agreed to be bound by the IVA regime as a whole in respect of any provable debt. This included both the principal amount of its debt and interest thereon. If the IVA ran its course and was completed, the creditors, including the claimant, had to be taken to have agreed that they would have no further claim against the defendant in respect of the debts that were provable. The existence of the IVA was a special circumstance rendering it unjust for the order for interest to be enforced while the IVA subsisted (or was successfully concluded).

El Ajou v Stern

The extent of a guarantee

This is a Wragge & Co case, when we acted for the successful claimant on its appeal to the Court of Appeal. The hearing was in Birmingham, when the Court of Appeal was on one of its rare travels out of London in March for a week.

The case turned on the interpretation of a guarantee. The customer sought a novation of six hire purchase agreements from oldco to newco. With oldco, one of the six agreements had been guaranteed by the second and third defendants, as directors of the customer. For the novation, the claimant wanted all six agreements guaranteed, and the guarantee document sent out to the defendants was an all monies guarantee. However, it referred on its face to the agreement to be guaranteed, as identified within a box in the body of the guarantee document. That box was, unfortunately, left blank.

The claimant sought to rely on extrinsic evidence - the letters and attendance notes of telephone calls made in the lead up to the novation of the agreements. The claimant argued that the extrinsic evidence confirmed that all parties understood and intended the guarantee to reach across all six novated agreements. The defendants argued that either the guarantee was void in its entirety for uncertainty, given the missing information; or, if not, at most carried over simply the prior guarantee of the one agreement only.

The court agreed with the claimant. The extrinsic evidence was allowed to explain the meaning of the guarantees. The court accepted that it was clear that at least the second defendant was well aware of the claimant's intention to obtain a guarantee across all six agreements, and that he had acknowledged that that had to happen. As he acted as agent in the negotiations for his wife also, she also was bound by a guarantee to all six agreements.

This is a helpful case supporting that extrinsic evidence can be used to explain the ambit of a guarantee where the guarantee on its face may be less clear than might have been wished.

Caterpillar Financial Services Limited v Goldcrest Plant and Groundworks Limited & Others

The extent of a guarantee - again

In another guarantee case decided in March, this time at first instance, the court allowed a claim for summary judgment on a guarantee where, again, there was dispute as to the contract which had been guaranteed.

The guarantee set out that it was a guarantee in relation to the payment of liabilities under a contract defined as "contract number 12345S" and which was dated on or about the date of the guarantee and entitled "Letter of Agreement and Terms of Business".

The claimant was able to bring to court a contract dated on or about the date of the guarantee, made between the correct parties, and with the correct title. However, the contract did not show contract number 12345S.

Upholding the terms of the guarantee, the court held that it was clear this contract was being guaranteed, and that the omission of the contract number was non-material. There was no issue that the defendant could have been in any doubt as to the obligations it was guaranteeing pursuant to a contract of which it was fully aware.

Zenithoptimedia Limited v Wall Group Limited

Right to reject repaired goods

The claimant bought machinery from the defendant which proved defective. The defendant took back the equipment and repaired it to "factory gate" standard but refused, despite repeated requests, to tell the claimant what had been wrong with it. The claimant found out informally what the problem had been, and was concerned about what effect using the defective equipment might have had on other parts of the equipment and what the effect on the manufacturer's guarantee period might be. The claimant rejected the machinery. Was it entitled to do so?

The House of Lords held that it was. When the equipment was taken away to be repaired, the parties had entered into a separate inspection and repair agreement. It was an implied term of that agreement that, so long as the defendant performed its obligations under the agreement, the claimant would not exercise its right to rescind the contract of sale. The right to reject would be lost once the claimant accepted the goods. However, the claimant was entitled to make an informed choice as to whether to accept the goods. The defendant was under an implied obligation to provide the information sought, and failure to do so amounted to a material breach of the inspection and repair agreement entitling the claimant to reject the equipment. This was so even though the court accepted that the equipment had been repaired to "factory gate" standard.

This judgment could also be relevant in a hire purchase scenario where a borrower alleges unsatisfactory quality and demands knowledge of the defects and repairs undertaken to rectify the position. If the information is sought, it needs to be provided.

J & H Ritchie Ltd v Lloyd Ltd

Partial summary judgment

The claimant sought summary judgment against the defendants for damages for conspiracy to defraud. The defendants had raised false invoices regarding the supply of plant to the claimant and had manipulated accounts to conceal the falsity. They had shared the net sums obtained between them equally. The second defendant entered into settlement negotiations with the claimant so that the summary judgment application proceeded against the first defendant only.

The court found that the first defendant had no real prospect of successfully defending the claim. It held that as a matter of strict entitlement, the claimant could seek judgment against the first defendant for the full gross loss plus interest. However, it then ordered that, given the claim and settlement negotiations with the second defendant, to avoid double recovery and to set an unarguable recovery target, it would only enter a partial summary judgment for half of the amount sought plus interest.

This seems an unusual, and unwelcome, judgment in a case where defendants are jointly liable, especially where the negotiations with the one defendant have not been concluded. The court was seeking to avoid double recovery and to achieve clarity and effectiveness. Will this have been achieved if the negotiations with the second defendant fail or he turns out to be a man of straw?

Costain Ltd v (1) Wilson, (2) Cutler (T/A Cutler Plant & L Cutler Plant)

Banking practice relevant in claim for conversion

We first reported on this case in November of last year. A summary judgment was obtained by the liquidator of the claimant against the bank for conversion of the claimant's cheques. The bank had credited its customer (U) with over 400 cheques which U had presented but to which it did not have title. The cheques belonged to the claimant, an associated company of U bearing a similar name. At first instance the court dismissed the bank's defence under s4 Cheques Act 1957 that it had acted in good faith and without negligence. It held that the bank had no realistic prospect of establishing it had not been negligent, and it also found that the names on the cheques had not been checked. However, there had also been unchallenged evidence of current banking practice from the bank to the effect that a sufficient match of names was good compliance and the bank appealed.

The Court of Appeal held that current banking practice was highly relevant to the issue of negligence, and the bank's evidence about its practice, especially if unchallenged, was relevant evidence of the current practice of bankers. The judge had not been entitled to reject out of hand or disregard the bank's evidence that the current banking practice was that a sufficient match of names was acceptable, and that the names in question did in fact sufficiently match. That evidence raised an arguable case on the absence of negligence. Further, the bank's evidence that there was nothing in the circumstances to put it on enquiry could not be summarily rejected. Therefore, at this summary stage, the judgment was set aside, and the claim will now proceed to trial.

Architects of Wine Ltd (A company registered in the Cayman Islands) (In Liquidation) v Barclays Bank Plc