Category: Unfair relationship provisions

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High Court finds no unfair relationship arising out of a commercial bridging loan agreement

On 2 March 2021, the High Court handed down judgment in Credit Capital Corporation Limited v Watson [2021] EWHC 466 (QB) where a borrower (who had entered into an exempt bridging loan agreement) alleged his relationship with the lender was unfair under Sections 140A to 140C of the Consumer Credit Act 1974 (the ‘unfair relationship provisions’).

The facts

In essence, the borrower, Mr Watson, had entered into two exempt bridging loan agreements: (a) one for a loan of £1,475,000 with Credit Capital Corporation Limited (‘CCL’) and (b) one for £47,500 with Market Financial Solutions Limited (‘MFS’). Both agreements contained a business use declaration and therefore fell outside of the definition of a regulated credit agreement or a regulated mortgage contract.

The allegations of unfairness

Mr Watson made a number of allegations to say that his relationship arising out of the agreements was unfair under the unfair relationship provisions. The allegations included the following claims:

– a commission was paid to the broker without Mr Watson’s consent;

– rolling up the first year’s interest and deducting it from the advance was unfair;

– pressure was put on Mr Watson and a property was sold because of a false representation over the buyer’s identity; and

– there was a sale at an undervalue for one of the properties.

The Court’s finding on unfairness

Whilst the Court was critical of the evidence put forward by all of the parties, and the lack of evidence from a director of the lenders (particularly where one of the directors was heavily involved), it decided there was no unfairness. The key findings were:

– Mr Watson knew a commission would be paid and there was sufficient disclosure of it;

– there was nothing unfair in rolling up interest for the first year and deducting it from the advance (a common practice in bridging loans);

– whilst pressure was put on Mr Watson, it was not enough to make the relationship unfair;

– whilst there had been a misrepresentation over the identity of the buyer of one of the properties, Mr Watson found out the true position before exchange of contracts so this did not, on its own, make the relationship unfair; and

– there was no clear evidence to show that the properties were sold at an undervalue.

Comment

This is another example of the Court being slow to find unfairness where the borrower is a commercial or business borrower. The Court correctly identified that earlier decisions have not found enforcement unfair unless it has been done in an arbitrary or exploitative way.

The Court also correctly found there was no unfairness where a misrepresentation was made but the true position was discovered before exchange of contracts. It is submitted that this should also be the position in unfair relationship provisions involving consumers. Whilst the unfair relationship provisions do not require an actionable legal wrong to have taken place, it must be the case that there can be no unfairness if the borrower finds out the correct position before entering into the agreement.

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FCA writes to the Financial Ombudsman Service about the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme

On 4 May 2020, the UK Financial Conduct Authority’s Interim Chief Executive, Christopher Woolard, wrote to the Financial Ombudsman Service’s Chief Executive, Caroline Wayman, following the launch of both the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).

Mr Woolard’s letter sets out:

– entering into an agreement made under the BBLS is not a regulated activity because such agreements will be exempt credit agreements (but debt-collecting of those agreements will remain a regulated activity);

– there is no requirement to undertake a creditworthiness or affordability search before entering into an agreement under the BBLS;

– the unfair relationship provisions in Sections 140A to 140C of the Consumer Credit Act 1974 are expected to be dis-applied for agreements made under BBLS ; and

– the FCA’s expectations on creditworthiness assessments under the CBILS.

The FCA also updated its website on 4 May 2020 on the CBILS and BBLS.

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High Court hands down judgment on unfair relationship provisions involving a business borrower and the burden of proof

On 3 September 2019, the High Court handed down judgment in Promontoria (Henrico) Limited v Samra [2019] EWHC 2327 (Ch). The customer challenged the relationship arising out of the agreement as being unfair under the unfair relationship provisions in Sections 140A to 140C of the Consumer Credit Act 1974 (the CCA) because of (a) the assignment of the agreement from Clydesdale Bank plc to Promontoria (Henrico) Limited and (b) a claim that the lender gave a positive indication about future lending to the customer. It also considered the impact of the reversed burden of proof under Section 140B(9) of the CCA.

The Court decided the relationship arising out of the agreement between the lender and the customer was not unfair. The Court had real concerns over the customer’s evidence (see, for example, paragraph [24] of the judgment). But ultimately it did not consider the issues raised, after deciding “it was not necessary to go through the list of factors [set out in Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 (Comm)] in every case, or particularly useful to do so in a case such as this where the allegations of unfairness are somewhat diffuse” (see paragraph [94] of the judgment), meant there was any unfairness in the relationship.

The Court’s decision on the burden of proof is, however, important. It decided (see paragraph [26]) that:

“This … does not however mean, in my judgment (and Mr Hill did not contend) that where Mr Samra makes allegations of fact on which he relies he does not have the burden of proving them to the normal civil standard. The onus placed on the creditor is as to the relationship between it and the debtor, and does not have the effect that factual allegations made by Mr Samra must be accepted unless they can be positively disproved by contrary evidence.”

Now the High Court has given such a clear view on the burden of proof, it must now follow that the position is clear: a customer must prove the facts he says create unfairness arising out of the relationship and (once proven) the burden then shifts onto the lender to prove those facts (as proven) do not mean the relationship is unfair to the customer.