Wilson & Anor v Hurstanger Ltd

Judgment

Lord Justice Tuckey:

The Facts

3. 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”.

4. 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:

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

5. 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.

A. NETT AMOUNT OF LOAN £7000.00

B. PROTECTION PAYMENT PLAN PREMIUM (OPTIONAL) £0

C. TOTAL LOAN INCLUSIVE OF BROKERS FEE OF £1000.00 £8000.00

D. RATE OF INTERST PER MONTH 1.29%

(Variable in accordance with Condition (4) overleaf)

E. APR (No account of any variation of the rate or 16.60%

Amount of interest payable has been taken)

F. NUMBER OF MONTHLY REPAYMENTS 240

G. AMOUNT OF MONTHLY REPAYMENTS £93.33

(Assuming no variation of the rate of interest)

Under these boxes the agreement said:

The APR at (E). is based upon a total charge for credit which includes, the total charge for credit (other than interest at clause 1.4 overleaf) inclusive of (a) the borrowers brokers arrangement fee of £1,000 which sum is not a condition of the loan imposed by the lender and (b) the lenders administrative/legal costs of £295 (which becomes due and payable upon completion of the loan). The lender may agree to defer collection of this sum to a date no later than termination of this agreement or its earlier redemption, such costs if deferred will continue to bear interest at (D) above until discharged in full.

The Consumer Credit Legislation

A term stating how the debtor is to discharge his obligations under the agreement to make the repayments, which may be expressed by reference to a combination of any of the following –

(a) number of repayments;

(b) amount of repayments;

(c) frequency and timing of repayments;

(d) dates of repayments;

(e) the manner in which any of the above may be determined,

or in any other way, and any power of the creditor to vary what is payable.

Paragraph 4 requires “a term stating the rate of any interest on the credit to be provided under the agreement”.

11. 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.

I agree. The discretionary power under section 65 (1) to order enforcement of an agreement which does not comply with schedule 1 may be exercised on terms discharging the debtor from having to pay any sum payable under the agreement (section 127 (2)).

12. 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.

The Consumer Credit Appeals

66. Following the sub-paragraph numbers in paragraph 5, the agreement.

(a) specifies the number of repayments: one

55…a term stating that there should be a single lump sum payment at the end of the term of the loan plus interest on that sum calculated over the period of the loan at a rate of 1.29% per month … would satisfy paragraph 5 notwithstanding that the amount of the repayment was not expressly stated.

21. 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.

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.

He rejected the submission that the statement that the sum of £295 would attract interest at the rate of 1.29% until discharged would be an expression of a specified proportion of a specified amount because:

102…Although £295 is a specified amount, the repayment will not be a “specified proportion” of that amount. The repayment will be such figure as is produced by applying to the sum of £295 a rate of 1.29% per month for X months or Y days. That is the “rate of charge” (as referred to in Schedule 1 paragraph 10) but the repayment required on the deferred date (whenever that may be) is not a “specified proportion” of anything.

Secret Commission?

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

The cases cited support these propositions. Here I think the requirement is more special. Borrowers like the defendants coming to the non-status lending market are likely to be vulnerable and unsophisticated. A statement of the amount which their broker is to receive from the lender is, I think, necessary to bring home to such borrowers the potential conflict of interest.

[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.

and told such brokers to:

[20]. disclose both orally and in writing at an early stage, the existence and nature of any commission or other payment payable by the lender … they should explain clearly the implications of any such commission for the broker’s role with regard to the borrower. This is in order that the borrower is clear as to any potential conflict of interest on the part of the broker. The Office would encourage brokers to disclose the amount or likely amount or percentage figure of the commission, since such transparency will help to reassure borrowers that they are receiving appropriate advice from the brokers. Where this is not done, the broker should disclose the factors which will determine its calculation, including whether it will be a percentage of the loan or a fixed sum and whether it is intended to reflect the actual costs incurred by the broker in arranging the loan or is linked to the total volume or value of business brought to the lender over a given period. All such disclosures should be made in writing before the borrower enters into the loan agreement and preferably before the loan application is submitted to the lender.

39. 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).

40. 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.

41. So what is the position in this case? Mr Say submits that the disclosure to the defendants was entirely inadequate and did not negate secrecy. It simply said that a commission might be paid to the broker but should have said that a commission was to be paid and stated the amount because these facts were known at the time the defendants were asked to sign the document relied upon by the claimant. The defendants’ fully informed consent to the payment of commission had not therefore been obtained. Furthermore he submits that the notice was ambiguous: having said that in certain circumstances the claimants did pay commission it went on to say it would “pay monies to your brokers strictly in accordance with your signed authority by deduction from this advance”.

42. Mr Seymour submits that it was for the defendants to establish that there had been inadequate disclosure. The allegation that the claimant had paid a secret commission or bribe was serious and yet the defendants had called no evidence to substantiate it. We do not know what, if anything, they were told by the broker or what they understood from the document which they signed. It had not been established that the claimant had procured any breach of duty by the broker. Nevertheless Mr Seymour submits that there was sufficient disclosure. Secrecy had been negated by informing the defendants that commission might be paid and the payment did not become secret simply because they were not given the actual details of the amount paid. Nor, Mr Seymour submits, was the notice ambiguous. Read carefully, as the borrower was told to do, the passage relied upon by Mr Say referred first to a payment by “the company“ “in certain circumstances”, and then two sentences later to monies payable by the borrower which they had authorised to be dispersed out of the proceeds of the loan. In other words the document is referring to different payments by the lender and the borrower. The payment by the lender to the broker would only be made in certain circumstances; the payment by the defendants out of the proceeds of the loan would be made to the broker in any event.

43. Having looked at the pleadings, the written submissions and the Recorder’s judgment it seems to me that it was common ground between the parties at trial that the only disclosure made to the defendants was by means of the claimant’s document which the defendants signed. The broker’s letter said nothing about any disclosure which he had made; nor did Mr Fellowes suggest that anything else had been disclosed by anyone. By signing the document the defendants must be taken to have understood what it said but no more. Quite apart from this, the passage from Bowstead which I have cited in [35] says that it is for the agent to establish that sufficient disclosure has been made. Here the claimant knew that the broker was the defendants’ agent and so it had to show that it paid commission to him in circumstances where its borrowers had given their informed consent to such a payment. That was obviously the purpose of the document the defendants were asked to sign. The question is whether it achieved that purpose.

44. Did it negate secrecy? I think it did. If you tell someone that something may happen, and it does, I do not think that the person you told can claim that what happened was a secret. The secret was out when he was told that it might happen. This was the Recorder’s view and I agree with him.

45. Was the defendants informed consent obtained? I do not think it was. The passage which I have quoted was muddled although, read carefully, for the reasons given by Mr Seymour, it may not in fact have been ambiguous. But it could and should have been clearer and informed the defendants that a commission was to be paid and its amount and done so in terms which made it clear that the defendants were being asked to consent to this. I also think this statement should have been accompanied by the warning recommended by the OFT to the effect that its payment to the broker might mean that he had not been in a position to give unbiased advice.

46. So for these reasons I do not accept either party’s submissions about the disclosure. This is a half way house case. The claimant did not pay the broker a secret commission but procured the broker’s breach of fiduciary duty by failing to obtain the defendants’ informed consent to the broker acting in the way he did.

47. This conclusion means that the defendants are not entitled to deploy the full armoury of remedies which would have been available if this had been a true secret commission case. If it had been, a difficult question would have arisen as to whether they were entitled to rescission as of right. As the loan agreement was voidable and the defendants had elected to avoid it, the argument would be that the agreement had gone and they were entitled to rescission simply on terms as to counter-restitution. In other words the equitable remedy of rescission would simply be deployed in aid of the common law to ensure that its consequences were dealt with fairly between the parties.

48. But no such difficulty arises when considering the appropriate remedy for breach of fiduciary duty for which purely equitable relief is available. Here there is no doubt that the court has a discretion as to whether or not to grant rescission. This is illustrated by Johnson v E.B.S. Pensioner Trustees Limited [2002] Lloyds Reps. PN 309 where this court had to consider, among other things, whether a guarantee given by one of the defendants as security for a loan made by solicitors to his company should be rescinded because the solicitor acting for him had a conflict of interest and had been in breach of his fiduciary duty by failing to disclose that his firm received service charges on the loan. The court (Mummery and Dyson LJJ and Douglas Brown J) upheld the Judge’s refusal to grant rescission and rejected the submission that rescission was available as of right in such circumstances. The remedy was discretionary. Dyson LJ said:

79. When exercising its equitable jurisdiction the court considers what fairness requires not only when addressing the question of the precise form of relief, but also when considering whether the remedy should be granted at all.

49. In Johnson the court ordered the solicitor to account for the service charge to his client. In this case the broker could similarly have been required to account to the defendants for the £240 commission he received from the claimant. But no such claim has been made against the broker and so, alternatively, the defendants have a claim for equitable compensation against the claimant as it procured the broker’s breach of fiduciary duty. This mirrors the common law right to claim the return of a bribe as money had received.

50. I think the defendants are also entitled to interest on the £240 from the date it was received (5 August 2003). Mr Seymour says only “ordinary” interest should be awarded. I would award simple interest at the loan agreement rate of 1.29% per month.

51. The only remaining question is whether we should order rescission of the loan agreement and its related legal charge. As I have said we have a discretion as to whether or not to make such an order. I do not think we should do so. The agreement and charge are fair and have been held to be enforceable except for the £295. The defendants will be fully compensated by an award of £240 plus interest. To rescind the transaction altogether would be unfair and disproportionate. This is my view irrespective of whether the defendants would be able to make counter-restitution.

Conclusion

52. I would dismiss both the consumer credit appeals. I would allow the “secret” commission appeal and award the first defendant £240 plus simple interest at 1.29% per month from 5 August 2003. This award is in favour of the first defendant as only he has participated in these proceedings, but the liability must be to both defendants. The parties should agree some means of ensuring that payment to the first defendant is in full and final satisfaction of the second defendant’s claim as well.

53. The Recorder stayed enforcement of the agreement and the legal charge (including his order for possession) pending this appeal. We will consider any further application for a stay when we hand down this judgment.

54. Finally I should like to pay tribute to the Recorder’s judgment in this case. It is a model of clarity and deals comprehensively with the various complicated issues he had to decide. He cannot be criticised for the conclusion he reached about secret commission since on the way the case was argued before him I think he reached the right conclusion.

Lord Justice Jacob: I agree

Lord Justice Waller: I also agree