Consolidated Finance Ltd v MccLuskey & Anor

This is an appeal from the order dated 25 May 2011 of Mr Recorder Pugh, sitting in the Southend County Court. On this appeal there is now only one issue: is whether the loan agreement, which is secured by the charge which the Recorder was asked to enforce, an exempt agreement for the purposes of the consumer credit legislation? So it would be appropriate to start by looking at the consumer credit legislation before I go further into the facts so that the question we have to decide is at the forefront of the reader's mind.

I start with Article 3 of Consumer Credit (Exempt Agreements) Order 1989/869, as in force at the relevant time. This provides that the Consumer Credit Act 1974 (“the 1974 Act”) “shall not regulate a consumer credit agreement which is an agreement of one of the following descriptions”. There then follows a list and paragraph (a)(i) (excluding an irrelevant qualification) reads as follows:

Section 12 of the 1974 Act sets out the meaning of debtor-creditor-supplier agreements, and it provides that:

“A debtor-creditor-supplier agreement is a regulated consumer credit agreement being—

(a)a restricted-use credit agreement which falls within section 11(1)(a), or

(b)a restricted-use credit agreement which falls within section 11(1)(b) and is made by the creditor under pre-existing arrangements, or in contemplation of future arrangements, between himself and the supplier, or

(c)an unrestricted-use credit agreement which is made by the creditor under pre-existing arrangements between himself and a person (the “supplier ”) other than the debtor in the knowledge that the credit is to be used to finance a transaction between the debtor and the supplier.

The appellant relies on section 12(1)(b) and contends that the loan agreement in this case is a restricted-use agreement which falls within section 11(1)(b) and is made by the creditor under pre-existing arrangements with contemplation of future arrangements between himself and the supplier. Section 12(1)(b) takes one back to section 11. Section 11(1) provides:

“A restricted-use credit agreement is a regulated consumer credit agreement—

(a)

to finance a transaction between the debtor and the creditor, whether forming part of that agreement or not, or

(b)to finance a transaction between the debtor and a person (the “supplier ”) other than the creditor, or

(c)to refinance any existing indebtedness of the debtor’s, whether to the creditor or another person,

and “restricted-use credit ” shall be construed accordingly”

The appellant relies on section 11(1)(b) of the 1974 Act. It contends that the loan agreement is a “restricted-use credit agreement” and that it constitutes a “regulated consumer credit agreement” “to finance a transaction between the debtor and a person...other than the creditor.” That person would be BPF.

The point to be made at the outset is that section 11(1) provides that an agreement must be an agreement to do that which is described in paragraph (b), namely to finance a transaction between the debtor and the supplier, and thus it is clear that it has to be a part of the agreement that there is a provision which qualifies under section 11(1)(b). This point was explained in the decision of this court in National Westminster Bank v Storey and Pallister [1999] CCLR 70 by Auld LJ at page 81. In dealing with an argument on behalf of the lender Auld LJ holds:

So it is important and essential for the purposes of succeeding on this appeal that the appellant establishes either an express or implied term. It does not seek to rely on any express term and so it will be necessary to consider whether there is an implied term.

Now for the facts. The Recorder's judgment sets out clearly the circumstances before him. The claimant in the action, and now the appellant, is Consolidated Finance Limited. In paragraph 5 of his judgment the Recorder explains that the claimant is a finance company. It has two associated companies for the purposes of the 1974 Act: Bankrupt Fund Limited (which he refers to as “BPF”) and Alpha Mortgage Brokers. He then in the succeeding paragraphs refers to the structure of the finance business of the claimant and its associates:

So the document which the Recorder refers to as “the loan agreement” is the agreement which this court has to consider in this case, the issue on which being whether or not that is an exempt agreement for the purpose of the 1974 Act.

Then the Recorder turns to the particular circumstances of this case in paragraph 12:

Then he explains that BPF had approached the first defendant and that she had signed the loan agreement with them and indeed the charge, and steps were taken to annul her bankruptcy. She had been made bankrupt on 20 March 2009 and BPF enabled her to obtain an annulment from her bankruptcy.

Ms McCluskey gave evidence to the Recorder. Since the hearing before the Recorder she has sadly died. This appeal is by the second defendant in the proceedings and co-owner of the property her brother, Mr McCluskey, and he is the respondent in these proceedings. I should say that the appellant is represented by Mr Malcolm Waters QC and Mr Devereux-Cooke and that the respondent is instructed by the Bar Pro Bono Unit and is represented by Mr Fealey. I am grateful to them both for their arguments.

Because the main point arises from the interpretation of the loan agreement I will go next to the loan agreement which Ms McCluskey signed. It is called a sterling facility letter and it is the loan agreement which gives rise to the indebtedness secured by the charge sought to be enforced in these proceedings. It starts out by saying:

I would interpose to say that the sum of £24,000 was an estimate of the amount that would be required to pay off the debts in her bankruptcy, which were about £8,000, and to pay the costs in the annulment proceedings and the various other costs associated with her bankruptcy.

The agreement then contains an interpretation clause which states that unless the context otherwise requires certain definitions apply. There is a definition of “Availability Period” as meaning the period from the date of acceptance of this offer by the borrower until 22 June 2009. There is a definition of the “Debt" that reads:

It will be immediately observed that there is a circularity in that provision because the Loan and the Debt are the same thing, and so Mr Waters accepted that clause 2 is meaningless. Nonetheless it is important because it purports to set out the purpose of the Loan and we shall see the significance of that purpose in a moment. There is then clause 3, which provides for acceptance of the offer:

Then there was a provision in clause 14 for the borrower to pay a hypothecation fee of 2.5 per cent, with a minimum of £1,500 of the principal amount of the loan on the drawdown date. The hypothecation fee, if not paid in advance, was to be deducted from the loan on the drawdown date or, at the lender's discretion, to be capitalised and paid on redemption. The significance of that reference to hypothecation is that BPF agreed, as soon as it was in a contractual relationship with Ms McCluskey, that it would reserve the funds necessary for the purposes of her annulment proceedings and it uses the word “hypothecation” in that context.

The appellant submits that the loan agreement has to be interpreted against the matrix of fact in accordance with ordinary principles, and that properly construed the loan agreement contains by implication a term which supplies the purpose required by section 11(1)(b) of the 1974 Act.

So far as implied terms are concerned, the question of the appropriate test was considered most recently in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988; when I say “most recently”, most recently by the Privy Council. That decision lays down some important principles about the implication of terms into an agreement. The implications of the Belize decision have been considered by decisions of this court. Mr Fealy took us to Mediterranean Salvage and Towage Limited v Seamar Trading Commerce Inc [2009] EWCA Civ 531. I myself have also had to consider it in the case of Stena Line v Merchant Navy Ratings Pensions Fund [2011] EWCA Civ 543. Toulson and Rimer LJJ agreed with my judgment.

I propose to work from the analysis of Belize which I used in that case, because it sets out the important passages to which indeed Mr Waters has taken us to. At paragraph 36 I said that:

I then set out a paragraph from the speech of Lord Hoffmann which refers to BP Refinery v Shire of Hastings [1977] 180 CLR 266. In that case the Privy Council held that it was not necessary to review exhaustively the authorities on the implication of a term in the contract, but that:

“‘the following conditions ('which may overlap') must be satisfied:

'(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying" (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.'”

I continued:

“41.

But, Lord Hoffmann emphasised, it must not be forgotten that the real task is always one of interpretation. The effect of the implication must be to make the instrument mean what it would reasonably be understood to mean. The danger of using formulae, such as ‘necessary to give the contract business efficacy’, is that such phrases can take on a ‘life of their own’ and divert focus from the task of interpretation. Moreover, the process of interpretation is an objective one; the court does not ask what the parties intended any more that it asks what it would have been reasonable for them to agree. Indeed, the test propounded by Lord Hoffmann is written in the passive voice avoiding any suggestion that reasonableness is to be tested by reference to the views of a reasonable bystander or of one of the parties to the document.”

The term that is sought to be implied in this case so as to provide the contractual term required by section 11 was a term that the loan would be used to fund BPF in relation to the debts to be repaid for the purposes of the annulment and the costs of obtaining the annulment. It is apparent from Belize that the test which the court has to apply is: would that term spell out in express words what the agreement read against the relevant background would reasonably be understood to mean?

The Recorder in his judgment answered that question in the negative. I will set out the paragraphs of his judgment which it seem to me deal most fully with this point, starting at paragraph 49:

“49.

I turn to the general construction of the agreement. It is not well drafted albeit certain aspects, as I have just referred to, such as the repayment provision, are clear. I also find clause 6 on acceptance to be clear. In particular clause 6(1)(f) which I am satisfied provides that the agreement does not become an accepted agreement until after the annulment, which was on 18 May 2009. Accordingly the agreement only came into effect after the annulment on the 18^th May 2009.

50.

I note that at tab 15, page 46 of the bundle, which are the terms and conditions of the instruction given by the defendant to BPF, which was signed by her on 30 March 2009, clause 4 reads as follows:

‘BPF will immediately hypothecate sufficient funds to pay off all your unsecured credit in full and repay as much of your registered charges as they deem necessary to effect the annulment of the bankruptcy and securing of the monies provides.’

51.

Although in clause 5 of those terms and conditions there is a reference to a third party funder, it is not made clear as to when that third party funder will become relevant. On the simple terms of clause 4, and looking at the manner in which the funding is made available, it seems to me that there are various ways in which this agreement, being the loan agreement, could be interpreted.

52.

The background to the payment of the bankruptcy creditors, which does not appear to be in dispute, is that on or about 8 May 2009 the claimant advanced funds to BPF. BPF, then, on the same day, made payments out but to the various creditors, which were sufficient to annul the bankruptcy, which was obtained on 18 May. The agreement, as I have found, between the claimant and the defendant only came into effect after the annulment on 18 May.”

Accordingly I am not prepared to imply such a term into the agreement. It follows that the purpose of the agreement is as stated at clause 2 and that I am, accordingly, not satisfied that the agreement was one whose purpose was to finance a transaction between the debtor and a person “(the ‘supplier’) other than the creditor, as would be required to bring it within section 11(1)(b). If the agreement does not come within section 12(b) (and it cannot do so if it does not come within section 11(1)(b)) the agreement cannot be an exempt agreement. Accordingly I find that the agreement between the claimant and the first defendant is a regulated agreement."

I should say, because it becomes relevant later, that the term sought to be implied before the Recorder was not exactly the same as that sought to be implied on this appeal. It was a term that the monies raised from Consolidated Finance would be used to pay off either BPF or the solicitors or other fees and expenses. In other words, it was not confined to repayment of the supplier of the service. The way Mr Waters puts it in his submission is that the monies raised by the loan were to be paid to BPF, which was providing a service, namely that of obtaining for Ms McCluskey an annulment of her bankruptcy.

Mr Waters submits, correctly, that the loan agreement must be interpreted against the matrix of fact which is properly available for its interpretation. He has very helpfully summarised the documents on which he relies at paragraph 16 of his supplemental skeleton argument. I intend therefore to go to that paragraph to describe the other documents that were available which came into existence at the time of the agreement and which provide the background against which the agreement was executed.

First, there was a brochure which was sent to Ms McCluskey. It contained a description of the services offered by BPF and also a set of frequently asked questions including the following:

Mr Waters relies on that passage as showing that the service of procuring annulment was provided by BPF and that third-party funds would be raised for that purpose.

The second document is a letter of authority which Ms McCluskey signed addressed to BPF but also headed "To whom it may concern" confirming that she had given instructions to BPF and to the solicitors Lupton Fawcett "to act on my behalf and to take all necessary steps to procure the annulment of my bankruptcy order". And that, on Mr Waters' submissions, confirms the nature of the service which BPF was offering.

The letter of authority also contained a set of conditions, which included the following which I will now read:

Mr Waters submits that condition 1 again underscores the nature of the service which BPF was providing. He also submits that, while it is true that the statement in condition 4 that BPF would hypothecate sufficient funds to pay off the debts to obtain the annulment could be read as meaning that BPF would itself be providing credit to Ms McCluskey, that phrase has to be read with the rest of the document and to the expression “third party funder” in condition 5 and also with the fact that Ms McCluskey was subsequently required to enter into what I have called “the loan agreement”.

Then Mr Waters relies on the letter written by Lupton Fawcett, the solicitors whom Consolidated Finance nominated to deal with the legal documentation. They wrote to Ms McCluskey on 16 April, stating that they were one of a number of firms of solicitors to whom BPF from time to time referred individuals seeking to annul their bankruptcy with the benefit of funds advanced through BPF. They continued:

And then on 23 April 2009 Lupton Fawcett wrote to Ms McCluskey, enclosing among other things the agreement and charge for signature and they stated in the first paragraph that the enclosures were documents:

So Mr Waters has relied on those documents as part of the background against which the loan agreement can be construed. His essential submission is that there can be implied into the loan agreement a provision that the loan will only be used by Consolidated Finance for the purpose of paying BPF, the supplier of the service to Ms McCluskey. He accepts of course that the implied term must be shown to be a contractually binding term and that it is not possible to "drift into non-contractual common purpose or intention". He accepts, fairly, that the term has to be one which is binding on both parties and that, accordingly, if it was Consolidated Finance in control of the monies and making the monies to BPF it could only make those payments for the purposes of discharging the costs of the annulment and the debts which were owing in the bankruptcy of Ms McCluskey. Likewise, he submits, if the funds were paid to Ms McCluskey she would likewise be bound in the same way to use them only for the purposes of her annulment.

On the basis of Belize Mr Waters submits that this term can be implied. He submits that, in relation to clause 2 of the agreement which I have read, that there was clearly a drafting mistake in that, that it was meaningless and that that clause cannot be made an effective clause as a matter of corrective interpretation. But he submits that that clause with the rest of the documentation surrounding the execution of the loan agreement can be used to interpret the agreement so as to reach the conclusion that there is to be implied into the loan agreement a term of the nature which he contends is properly to be implied into it.

I now turn to my conclusions. I start by making the point that Lord Hoffmann made in Belize that, if a term is not actually stated in an agreement, the usual presumption is that it is not intended to be there. So the court looks very critically at arguments that terms have to be implied into agreements. Such terms may, and in this case would, impose additional obligations on the parties and so that is something about which the court exercises caution. Moreover, as Lord Hoffmann also states at the start of the relevant passage in Belize, the court cannot improve the parties' agreement; all it can do is interpret it. There is a distinction between interpreting a document and rewriting it.

I start with the purpose clause in this case, which is one sentence only, namely "The Loan is to be used for the purposes of refinancing the debt". I have also explained that that clause is entirely circular because the debt and the Loan are one and the same thing. So Mr Waters has, very fairly, accepted that that clause is meaningless. In those circumstances, in my judgment it is very difficult, if not impossible, to establish that there is any other purpose that has been agreed between the parties or that can properly be implied. If there is one purpose which has formed part of the agreement and it turns out to be ineffective, then the likely inference is that the parties intended that that should be their purpose, albeit ineffective, and that they did not intend any other purpose and that no other term can be found to be an implied term, reading it against the relevant background.

But even more difficult is it logically to argue that a clause which is meaningless can provide support for another purpose so that that new purpose can be derived from it. I accept of course that the clause sought to be derived would be broadly in the same ballpark. The arrangements between the parties concern the way in which the debts in the annulment were to be paid and how that was to be done. However the fact is that, if the clause was meaningless, it is difficult logically to see how it can support any argument as to purpose. I will need to come back to that point at the end.

The next point, in my judgment, and here I am grateful to a submission made by Mr Fealy based on the BP Refinery case, is that there are simply too many loose ends. Mr Waters fairly accepts that the implied term has to create a binding obligation on both parties but, as the Recorder pointed out, there are several ways in which this agreement could be performed. There is no necessary obligation for it to be performed in the manner suggested in the proposed implied term. There is nothing in the agreement itself which mandates that method. Moreover there is a lack of precision or, to use the expression in the BP Refinery case, a lack of clear expression as to the detail necessary to make the clause work. As I have said, both parties have got to be bound. I put it to Mr Waters, what would happen if BPF made a request for a sum of money to be paid to it which included amounts which were not properly due in respect of the debts due in the bankruptcy of Ms McCluskey? Mr Waters' response was that his clients would be liable for those monies and could not claim that they were part of the Loan, but that was not accepted by Mr Fealy. He submits that the agreement is not capable of that interpretation. What is secured is the Loan and that Loan is established by reference to the amounts which have been paid to BPF, so clearly there is difficulty and a lack of precision about how this implied term would work and what its consequences would be. As I see it, one cannot get out of the terms of the loan agreement. The position for which Mr Waters contends is that Consolidated Finance would not be able to recover those funds. It does not seem to me that that is clearly so.

There was also an example given to Mr Waters about what would happen if Ms McCluskey in fact obtained funds from another source. She might inherit a large sum of money from a distant relative before the annulment was completed. Would she be obliged to use the monies she received for the purposes mentioned or could she use her own funds? And the response was that she would be free not to draw down the monies until the annulment was obtained. Here, again, there is a qualification on the obligations that are contained in the agreement, which again leads to the conclusion that there is a lack of precision about the implied term.

We must also bear in mind that there has been no application for rectification, that the appellant accepts that the purpose clause cannot be cured by interpretation and that in addition (and this is significant) the term sought to be implied is expressed in different terms from that which is sought to be implied below. Now it may be that the effect of the terms on the facts would not be different but that is not the question. In order to imply a term, the court has to know what the term actually is and the words in which it is expressed, and the fact that it has been put in several ways throws doubt upon whether or not there is a reliable implied term such as would meet the test in Belize.

But finally one comes to the point which was raised by Sir Robin Jacob. Loan agreements can work perfectly well without purpose agreements, and in this case, since the parties had put in a purpose clause which does not work, there is no reason why this agreement cannot work perfectly well without it. Of course, there is a great deal of surrounding documentation dealing with other aspects of the transaction, but it is not necessary to create a binding obligation on the parties as would be created by the proposed implied term. The only reason for having that implied term is to bring the loan agreement within the meaning of a restrictive-use agreement so that the exemption can be implied.

So in my judgment, although I have expressed it rather differently and at greater length than the Recorder, the Recorder did come to the right conclusion that it is not possible in the circumstances of this case to imply a term such as is sought to be implied by Consolidated Finance.

Mr Fealy also pointed out that the implied term would also fail on the grounds of applying the test of necessity, which he submits is still part of the law and unaffected by Belize. That indeed, I would accept, is another way of analysing the point.

There are three points which remain with which I must deal. First, we were taken to the judgment of HHJ Hazel Marshall QC in the Central London County Court dated 14 June 2012. This is a very substantial document, and I am indebted to Mr Waters for producing it. It has provided interesting background and I am always assisted by reading the judgments of experienced judges in the relevant field as is HHJ Marshall, but her judgment does not in fact deal with an implied term, which is the sole issue with which I am concerned, and so I am not going to say more about it.

Secondly, it is not in my judgment necessary to deal with the Respondent's Notice.

Thirdly, I wish to deal with the application for amendment which this court refused. Mr Waters submitted and applied to amend his ground of appeal in his skeleton argument of 25 July 2012 to argue that, if the judge was right not to imply a term, the loan agreement would have constituted an unrestricted-use agreement under section 11(2) of the 1974 Act and that on that basis the loan agreement should have been held to be a debt-creditor-supplier agreement under section 12(c) because it was an unrestricted-use agreement which was made by the creditor under pre-existing arrangements between himself and BPF in the knowledge that the credit was to be used to finance a transaction between the first defendant and BPF, namely the supply by BPF of services intended to procure the annulment of Ms McCluskey's bankruptcy.

This court refused permission to amend after hearing detailed submissions from both counsel on the basis that reasons would be given when this court came to give judgment on the appeal. The position is that this court had no explanation as to why this point was not raised earlier. It is, it is said, a pure point of law. It is one which was well capable of being taken at a very early stage. It had not been taken by the Recorder. The intendion to take the point on this appeal that could have been raised with the respondent very much earlier. That point is not without force, because the respondent is facing a situation in which it is said that he is also liable under the loan agreement and that carries with it a very substantial rate of interest (we are told 25 per cent per annum). In addition, it appears that on analysis the section 12(c) point, which is the point sought to be run, would raise a question as to whose knowledge was involved. Mr Waters submits that it must be the knowledge of the creditor. If, however, this turns out to be incorrect then it would be the knowledge at the time of the agreement of Ms McCluskey as well. That was not a matter which was ventilated and investigated at trial, so that the respondent is at risk of a further prejudice if that ground were to have been admitted. In those circumstances I took the view that to raise the point now was prejudicial and that the prejudice cannot be overlooked where there is no explanation for its not having been obtained earlier.

The second point is that when this matter came before Rix LJ on paper for permission, it was not explained to him that it was necessary for the appellant to succeed to establish an implied term. Rix LJ gave permission, but what he said in his reasons at page 21 of the appeal bundle is that it was arguable that the arrangement came within section 11(1)(b) of the Consumer Credit Act 1974 on the basis that BPF is a supplier for these purposes. He said the Recorder considered the argument solely from the point of view of whether the purpose could be introduced into the agreement as an implied term. Then he added:

In those circumstances, when giving permission Rix LJ stated that it is doubtful whether a term can be implied and he went on to distinguish that doubt from the argument which he considered was arguable. There is thus some doubt whether Rix LJ has given permission on the basis of the full information as to the appellant’s case. Where it turns out that permission has been given and the reasons given suggest that the Lord or Lady Justice did not have full information, there is an obligation on the parties to go back to the Lord Justice and ask whether or not in the changed circumstances permission was still given. That course was not taken. I am not saying that the permission would have been rescinded, but it was nonetheless a factor which the Lord Justice should have been invited to consider.

For the reasons which I have also given, I would dismiss this appeal and make no order on the Respondent's Notice.

I agree.

So do I.