The Mercantile Court recently considered the enforceability of Consumer Credit Act Loan Agreements (“CCALAs”) and their use as a method of funding the payment of disbursements in litigation proceedings. This case serves as a reminder to lenders that loans regulated by the Consumer Credit Act 1974 (“CCA 1974”) are governed by a highly specialised area of the law. However, this case also confirms that a lender may have a route of recovery other than against the borrower under a CCALA.
The Claimant entered into CCALAs with clients of the Defendant (the “borrower/s”). The purpose of the CCALAs was to assist the borrowers, who were pursuing personal injury claims, in paying disbursements and the ATE premiums incurred in those actions. The loans themselves were made from a loan facility from the Claimant to the Defendant, pursuant to an agreement in writing (the “Minute of Agreement”).
The Minute of Agreement provided that, in the event of any breach of the CCALA by the borrower, or, in the event that the CCALA was unenforceable against the borrower, the Defendant would pay (on demand) the total amount which remained unpaid by the borrower at the date of breach or unenforceability.
The Defendant subsequently settled/discontinued their clients’ claims for sums that were too low to allow the repayment of the CCALA. The Claimant decided not to pursue the borrowers but to pursue the Defendant under the Minute of Agreement.
It was the Defendant’s case that the Claimant was not able to pursue the borrowers for payment because the CCALAs were “irredeemably unenforceable” because they did not comply with the prescribed terms and stipulations of the CCA 1974.
It was the Claimant’s case that the CCALAs were enforceable. However, even if they were not, clause 5.1 of the Minute of Agreement created a clear obligation on the Defendant to pay. The Defendant argued that clause 5.1 amounted to a guarantee, which in the circumstances was unenforceable. Further, even if there was a primary obligation to pay, it did not arise in circumstances where the unenforceability was as a result of the Claimant’s failure to ensure the CCALAs complied with the CCA 1974.
The issues to be decided were:
(1) Were the CCALAs enforceable?
(2) Was clause 5.1 of the Minute of Agreement a guarantee or a primary obligation to pay?
(3) Did liability under clause 5.1 arise in circumstances where unenforceability arose as a result of the CCALAs not being compatible with the CCA 1974?
(4) Was default interest payable on the Claimant’s loss?
The Court held that the CCALAs were not enforceable, as they did not comply with certain key provisions of the CCA 1974. However, it was held that this was not material to the Defendant’s obligations under clause 5.1 of the Minute of Agreement. Consequently, it was held that clause 5.1 created a primary obligation for the Defendant to pay in circumstances where there was a breach of the CCALA by the borrower, or where the CCALA was deemed to be unenforceable as against the borrower.
It was held on the facts of this case that clause 5.1 did not amount to a guarantee, but that it was intended to be a primary obligation to pay on the occurrence of two specified events. It was held that the drafting of clause 5.1 positively suggested that a guarantee was not intended because not only did it provide for payment in the event of default by the borrower, but also where the borrower’s obligation had become unenforceable.
The Court further held that the Defendant was still liable in circumstances where the underlying CCALA was unenforceable. This was because the terms of the Minute of Agreement provided that it was the Defendant’s responsibility to ensure the CCALAs were enforceable as against the borrowers “without limitation” and this included ensuring compliance with the CCA 1974.
In respect of the loss recoverable, the Claimant contended that it was entitled to recover from the Defendant the total principal, contractual and default interest otherwise recoverable from the borrower. The Court held that, as the requirements of the CCA 1974 had not been met, default interest was not recoverable from the borrower. Further, clause 5.1 provided the Claimant was entitled to recover the Total Amount Payable under the CCALA from the Defendant. The definition of Total Amount Payable in the CCALA did not include reference to default interest so this could not be recovered from the Defendant.
This case is highly fact specific and relates to particular provisions of the Consumer Credit Act 1974. However, it serves as a reminder that lenders may have more than one route of recovery when a borrower defaults on their loan repayments. It also confirms the importance of complying with statutory provisions when entering into CCALAs, as well as the importance of ensuring that any secondary agreements are widely drafted, to ensure recovery in the event of default or breach.
For further information, please contact Georgina Squire or the Partner with whom you usually deal.