Wilson & Anor v Hurstanger Ltd

This appeal raises two points under the consumer credit legislation and more generally and important points about commissions paid in breach of fiduciary duty. They arise on appeal from a judgment of Mr Recorder Michael Douglas Q.C. given in the Coventry County Court. He gave the defendant borrowers, Mr Wilson and Ms Burton, permission to appeal his conclusion that their loan agreement did contain a prescribed term correctly stating how they were to discharge their repayment obligations and to the claimant lender, Hurstanger Limited, to appeal his conclusion that the agreement did not state the amount of each repayment to be made. These conclusions meant that the agreement could be enforced by order of the court. The court so ordered on terms that the defendants were discharged from any liability to pay the claimant’s administrative/legal costs. Repayment of the loan was secured by a second legal charge on the defendants’ house and the Recorder made an order for possession. He rejected a submission that the claimant had paid a secret commission to the defendants’ broker and refused permission to appeal this part of his judgment. We granted permission at the beginning of the hearing.

By early 2003 the defendants were in arrears under their mortgage with the Alliance and Leicester Building Society. They applied for a loan of £8,000 to the claimant through a local broker, Mr Dunk, who carried on business as One Way Finance in Coventry. The loan was to pay off the arrears on the first mortgage of about £5,500, to pay the broker’s arrangement fee of £1,000 and to provide some surplus liquid funds for the defendants’ own use. Upon receipt of their loan application from the broker the claimant sent the defendants three documents for them to sign and return.

One of these documents authorised payment of the broker’s fee out of the loan proceeds. It also said “we understand that an amount in the sum of £295 will be debited to the loan balance being the legal costs incurred in this matter”.

A longer document was headed PLEASE READ THIS COMMUNCAITON CAREFULLY. BY SIGNING SAME WHERE INDICATED YOU CONFIRMED THAT YOU HAVE STUDIED AND UNDERSTOOD THE CONTENTS, PRIOR TO OUR PROCEEDING FURTHER WITH YOUR APPLICATION FOR A LOAN. This document which the defendants signed made a number of statements designed to show that they knew what they were letting themselves in for, including:

(d)

The broker who assisted us in making this loan application, is acting as our agent and is not tied in any way whatsoever to the company. We have not been persuaded, pressured or induced in any way to accept this loan or to borrow more money than we require or can comfortably afford to repay together with interest. In certain circumstances this company does pay commission to brokers/agents. In as far as it is able to do so; it endeavours to insure that the Broker conducts their business activities in a fair and proper manner. We will pay monies to your broker strictly in accordance with your signed authority by the deduction from this advance; this is not a condition of the loan.

This document also said that the sum of £295 would be debited to the mortgage balance on completion of the loan.

The transaction was completed on 5 August 2003 when the defendants executed the second charge on their house and the proceeds of the loan were dispersed in accordance with the authority which they had given to the claimant. But as well as the agreed arrangement fee of £1000 the claimant also paid the broker a commission of £240.

The second defendant took no part in the proceedings but at trial the claimant accepted that any defences raised by the first defendant also availed her. His defence took points under the consumer credit legislation in addition to the one with which we are concerned and, by amendment on the first day of the trial, he contended that the agreement was void or voidable by reason of the £240 payment by the claimant to the broker. By his counter claim he elected to avoid the agreement and claimed rescission and such other equitable relief as the court considered just.

It is not necessary or rewarding to go on a grand tour of the legislation in order to explain the issues we have to decide. Put shortly section 60 (1) of the Act gives power to the Secretary of State to make regulations as to the form and content of documents embodying regulated agreements. Section 61 (1) provides that a regulated agreement is not properly executed unless it is in a document containing all the prescribed terms and conforming to the regulations made under section 60 (1). An improperly executed agreement is enforceable against the debtor only on an order of the court (section 65 (1)), but no such an order can be made unless it contains all the prescribed terms (section 127 (3)).

Schedule 1 to the 1983 Regulations sets out the “information to be contained in documents embodying regulated consumer credit agreements”. Some of this information mirrors the terms prescribed by schedule 6, but some does not. Contrasting the provisions of the two schedules the Judge said:

33.

In my judgment the objective of Schedule 6 is to ensure that, as an inflexible condition of enforceability, certain basic minimum terms are included which the parties (with the benefit of legal advice if necessary) and/or the court can identify within the four corners of the agreement. Those minimum provisions combined with the requirement under section 61 that all the terms should be in a single document, and backed up by the provisions of section 127 (3), ensure that these core terms are expressly set out in the agreement itself: they cannot be orally agreed; they cannot be found in another document; they cannot be implied; and above all they cannot be in the slightest mis-stated. As a matter of policy, the lender is denied any room for manoeuvre in respect of them. On the other hand, they are basic provisions, and the only question for the court is whether they are, on a true construction, included in the agreement. More detailed requirements, which are designed to ensure that the debtor is made aware, so far as possible, of specified information (including information contained in the minimum terms) are to be found in Schedule 1.

Paragraph 13 of schedule 1 required the agreement in this case to contain information as to:

The amount of each repayment to be made under the agreement expressed as –

(a)

a sum of money;

(b)

a specified proportion of a specified amount (including the amount outstanding from time to time);

(c)

a combination of heads (a) and (b) above; or

(d)

in a case where the amount of any repayment cannot be expressed in accordance with head (a), (b) or (c) above, a statement indicating the manner in which the amount will be determined.

For these reasons I do not accept Mr Say’s submissions. When referring to Mr Say’s submission that the only repayment obligation was to be found in boxes F and G the Recorder pointed out that if that was so then the agreement did comply with paragraph 5. This led Mr Say to submit that if boxes F and G contained the terms upon which a total of £8,295 was to be repaid box D, which stated the rate of interest, would be wrong and so the agreement did not comply with schedule 6 paragraph 4. This, as Mr Say conceded, was an extremely unmeritorious argument but as the agreement does not bear the construction upon which it is premised I do not need to deal with it further.

For the reasons I have given I would dismiss the defendants’ consumer credit appeal.

So I turn to the claimant’s consumer credit appeal. Schedule 1, as I have already said, sets out the information which the agreement is required to contain. The Recorder rightly noted that the requirements of paragraph 13 were more precise and demanding than those of Schedule 6 paragraph 5. Based on his conclusion that this agreement required the defendants to repay £295 plus interest at the date of termination (as opposed to the date of completion), the question he had to answer was: could the amount of this repayment be expressed as (a) a sum of money or (b) a specified proportion of a specified amount or (c) a combination of these two? If it could the agreement did not comply; if it could not then it was common ground that the agreement did comply with paragraph (d).

The Recorder held that it was possible to state the amount of the repayment at termination as a sum of money. If this was 5 August 2023 it would be £295 plus £1210; it could be expressed as £295 plus interest of £X per day/month/year until the date of repayment or something similar to this. He said:

104 …In my judgment such a statement would express the amount of the repayment as a sum of money and would fulfil the purpose of Schedule 1 by providing important information to the borrower about the repayment which he was letting himself in for on top of the monthly instalments required in the box.

Mr Seymour attacks the Recorder’s conclusions on grounds which he did not advance below. He submits that the agreement complied because it expressed the repayment as a sum of money (a). Alternatively it was expressed as a sum of money and a specified proportion of a specified amount; in other words it was a combination of heads (a) and (b) complying with (c).

Mr Seymour’s first submission is simple. He says that the agreement required payment of £295 on completion and the Recorder was wrong to conclude that there had been any agreement to defer collection after completion.

As I have already said I do not accept this submission. The Recorder found as a fact that the pre-contractual documentation evidenced an agreement to defer collection of the £295. His conclusion about this is, I think, unassailable. Such an agreement was contemplated by the standard form contract. The documents show that from the outset it had been the claimants’ stated intention, to which the defendant obviously agreed, that the £295 would be debited to the loan balance on completion and would not therefore be paid or become payable at that time. The agreement to defer became effective at the moment of completion. It follows that the agreement did not state the amount of the repayment as a sum of money because a repayment of £295 plus interest was required.

Mr Seymour’s alternative argument is that the requirement to pay interest on £295 at 1.29% per month is a statement of a specified proportion of a specified amount. So the amount of the repayment stated by the agreement is £295 (a) plus 1.29% per month of £295 (b) thus complying with head (c) of paragraph 13.

Ingenious though this argument is, I do not accept it for the same reasons as the Recorder gave when rejecting this argument based, as it then was, solely on sub-paragraph (b). The interest is not stated as a proportion of £295. It is only stated as a rate (a requirement of paragraph 10 (1) of this schedule). It does not tell the borrower the amount to be repaid but leaves the calculation to him. Stating the manner in which the amount to be repaid is to be determined is sufficient for schedule 6 paragraph 5, but not in my judgment for schedule 1 paragraph 13.

So for these reasons I would also dismiss the claimant’s consumer credit appeal.

As I have already said this issue only arose by amendment made at trial. The first defendant did not give or call any evidence about it. A letter from the broker was put before the Recorder saying he was not tied to the claimant and that “it was an expectation that we would receive a commission from the lender in addition to the broker fee negotiated with the borrower”. The claimant called Mr Fellowes, one of its directors, who explained that the tertiary or non-status lending market was highly competitive and that it had become necessary for small companies like the claimant to pay commission to brokers to attract their business. Such commissions were a matter of separate discussion or negotiation and the rates were largely dictated by market forces. The Recorder notes that he was not invited to make any finding that this was a trade practice because, if there was such a practice, it was not suggested that the defendants were aware of it. However he did find that there was nothing unusual about the circumstances in which the commission was paid in this case or its amount (3%) which he described as conventional.

The Recorder proceeded on the basis that it was common ground that where a person (in this case the claimant) makes a payment to the agent of another person with whom he is dealing (in this case the defendants) knowing of the agency and fails to disclose that he is making or has made that payment, the other is entitled to rescind the contract. The dispute before the Recorder was purely factual: was the £240 commission paid by the claimant to the broker secret? Relying on the document which said that the claimant did pay commission to brokers in certain circumstances the Recorder held that the payment was not secret. He said that anybody reading that document, as the defendants were enjoined to do, would appreciate that the broker might receive a direct commission from the claimant. Such notice would have enabled the defendants to challenge the broker, insist on a term that no commission be paid or approach a different broker. If the borrower simply proceeded with the transaction without comment or enquiry “the inference must be that he or she would not be troubled if commission is in fact paid to the broker by the lender”. He therefore concluded that the commission was not secret.

During the course of counsels’ submissions on this part of the case it seemed to us that we might need to consider the applicable law, its application to the facts of this case and the consequences of doing so in rather greater depth than counsel had anticipated. Therefore at the end of the hearing we asked for written submissions and we are grateful to both counsel for the further submissions which they have provided.

Certain things are clear. The defendants retained the broker to act as their agent for a substantial fee. The contract of retainer contained the usual implied terms, but the relationship created was obviously a fiduciary one. As a fiduciary the agent was required to act loyally for the defendants and not put himself into a position where he had a conflict of interest. Yet he agreed that he would be paid a commission by the other party to the transaction which his clients had retained him to procure. By doing so he obviously put himself into a position where he had a conflict of interest. The defendants were entitled to expect him to get them the best possible deal, but the broker’s interest in obtaining a further commission for himself from the lender gave him an incentive to look for the lender who would give him the biggest commission.

The broker could only have acted in this way if the defendants had consented to his doing so “with full knowledge of all the material circumstances and of the nature and the extent of [his] interest”. (Bowstead Article 44, 18^th Edition [6-055] – duty to make full disclosure). An agent who receives commission without the informed consent of his principal will be in breach of fiduciary duty. A third party paying commission knowing of the agency will be an accessory to such a breach. The remedies for breach of fiduciary duty are equitable: they of course include rescission and compensation.

What amounts to sufficient disclosure for these purposes? Bowstead says:

6-057. Consent of the principal is not uncommon. But it must be positively shown. The burden of proving full disclosure lies on the agent and it is not sufficient for him merely to disclose that he has an interest or to make such statements as would put the principal on inquiry: nor is it a defence to prove that had he asked for permission it would have been given.

I think this is an accurate statement of the law. Whether there has been sufficient disclosure must depend upon on the facts of each case given that the requirement is for the principal’s informed consent to his agent acting with a potential conflict of interest.

There is some doubt as to whether the agent’s duty of disclosure requires him to disclose to his principal the amount of the commission he is to receive from the other party. At [6–084] Bowstead says:

… where [the principal] leaves the agent to look to the other party for his remuneration or knows that he will receive something from the other party, he cannot object on the ground that he did not know the precise particulars of the amount paid. Such situations often occur in connection with usage and custom of trades and markets. Where no usage is involved, however the principal’s knowledge may require to be more specific.

There is nothing about any of this which should come as a surprise to any lender or broker working in the non-status lending market. In November 1997 the Office of Fair Trading issued revised guidelines which told such lenders to:

[15]. warn that the broker or other intermediary may not be in a position to give unbiased advice if they are tied to the lender or are paid a fee or commission by the lender. [16] The contract documentation and any customer booklet or leaflet … should … indicate if any commission or other payment is payable by the lender to the broker, and should explain the purpose and nature of any such commission and the basis of calculation.

Obviously if there has been no disclosure the agent will have received a secret commission. This is a blatant breach of his fiduciary duty but additionally the payment or receipt of a secret commission is considered to be a form of bribe and is treated in the authorities as a special category of fraud in which it is unnecessary to prove motive, inducement or loss up to the amount of the bribe. The principal has alternative remedies against both the briber and the agent for money had and received where he can recover the amount of the bribe or for damages for fraud where he can recover the amount of any actual loss sustained by entering into the transaction in respect of which the bribe was given. (Mahesan v Malaya’s Housing Society [1979] AC374, 383). Furthermore the transaction is voidable at the election of the principal who can rescind it provided counter-restitution can be made. (Panama & South Pacific Telegraph Co. v India Rubber, Gutta Percha, and Telegraph Co. [1875] 9 Ch App 515, 527, 532-3).

But “the real evil is not the payment of money, but the secrecy attending it” (Chitty L.J. in the leading case of Shipway v Broadwood [1899] 1 QB 369, 373). Is there a half way house between the situation where there has been sufficient disclosure to negate secrecy, but nevertheless the principal’s informed consent has not been obtained? Logically I can see no objection to this. Where there has only been partial or inadequate disclosure but it is sufficient to negate secrecy, it would be unfair to visit the agent and any third party involved with a finding of fraud and the other consequences to which I have referred, or, conversely, to acquit them altogether for their involvement in what would still be breach of fiduciary duty unless informed consent had been obtained. There is no authority which sheds any light on this question. We have been referred to Bartram & Sons v Lloyd [1904] 90 Law Times Reports 357 where a secret commission had been agreed and paid but the question there was whether the principal had elected to affirm the contract with the other party at a later meeting when he was given some information about what had happened. The court held that he had not, but the decision turned upon whether the principal had made his election with full knowledge of the material facts and not upon the consequences of an inadequate initial disclosure.