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Mistaken use of regulated paper not fatal

The consequences of using unregulated paper for an agreement which is as a matter of law regulated by the Consumer Credit Act 1974 (“CCA”) are well-known throughout the industry. As originally drafted the CCA rendered such agreements irredeemably unenforceable, though a significant amendment effective as from 2006 provides that in general most such agreements will be enforced by the court in the absence of prejudice to the customer.

What of the opposite scenario: as a matter of law the agreement is not regulated by the CCA, but the financier uses paper which states that it is?

We are concerned here not with dual purpose documents, which have long been in widespread use in the asset finance industry particularly in the business to business sector, and which contain an express carve out for the situation where the customer is not regulated by the CCA or where the agreement is for business use above the £25K limit. The situation we are addressing is where there is no such “dual purpose” exemption clause, but rather the financier simply uses regulated paper by mistake in an unregulated situation.

The point arose squarely for decision in the recent decision of the Court of Appeal in NRAM plc v McAdam [2015] EWCA Civ 751. This case involved a loan agreement which was outside the CCA limits which then applied, but in relation to which the financier had used regulated paper. The effect was that if CCA s77A applied, no interest was recoverable during a lengthy period of non-compliance with the provision of the required post-contractual statements, and in the case of this financier some 41,000 agreements were affected with a sum of approximately £285 Million in play.

The case was brought on as a test case before the Commercial Court, and at first instance Burton J ruled against the financier on the basis that it must take the consequences of having used regulated paper. For a number of reasons and on different bases of legal analysis, the judge was clear that the customer was entitled to all the protections and remedies afforded to him by the CCA, despite the fact that as a matter of law the agreement was not within the jurisdiction of the CCA.

The financier appealed to the Court of Appeal.

The agreement contained express statements as to the right of cancellation and the right of early settlement as thought to be required by the relevant CCA Regulations, and the court had little difficulty in finding that these express statements on the face of the agreement amounted to express contractual terms binding on the parties.

However, the Court of Appeal disagreed with the judge on all the remaining issues. Firstly, the Court ruled that just as it was not open to the parties to contract out of the application of the CCA, so it was not open to the parties to contract into the CCA either: –

“In the light of the highly technical provisions of the 1974 Act, including particularly the role of the court in enforcing regulated agreements, we agree with Mr Waters’ submission that it would require very clear words before one could conclude that the parties agreed to give the court power to enforce the agreements in the limited circumstances given by the 1974 Act and in no other circumstances. It would be very unusual to give a court a discretionary power to enforce an agreement and still more unusual to import mandatory requirements such as those imposed on the court by (among other sections) section 127 which are peculiarly inapt to be imposed by agreement, as are the powers to make time orders, to impose conditions or to suspend the operation of an order as provided for by sections 129 and 135. This must all the more be the case when the parties would be uncertain whether a judge of the County Court would even accept he had jurisdiction to make any necessary order in the first place”.

Secondly, it was wrong to construe the wording on the regulated paper referring to the CCA as an agreement between the parties that the CCA would apply: –

“There is no factual matrix that supports the judge’s approach that the representation should be construed as an agreement on the part of the parties that, irrespective of whether the agreement was in fact regulated, the parties agreed that the borrowers would be treated “as if” the agreement was regulated. The fact that the defendants in this case, and, as one might suppose, many borrowers in the other 41,000 cases, thought they had entered into regulated agreements which had the protection of the 1974 Act, or alternatively thought that, irrespective of whether their loan agreement was actually a regulated agreement, they none the less had the protections of the 1974 Act, is of itself no basis to justify the inclusion of the term found to exist by the judge”.

Thirdly, there was no ground for the operation of the doctrine of estoppel either: –

“For the reasons which we have already given above in relation to the issue of construction, similarly, in the estoppel context, the relevant statements are in our view simply not capable of being regarded as a shared assumption that, whether or not the agreement was a regulated agreement, it would be treated as if it were and as if, so far as possible, the defendants would have the protection and rights conferred by the relevant legislation in force from time to time. As we have already said, the terms of the relevant statements are wholly inconsistent with such an assumption”.

However, there is some solace for customers in the judgement in that the Court went on to say that a customer may still have a remedy against a financier where regulated paper is used in an unregulated agreement: –

“As we have already said in earlier passages in this judgment, in our view the relevant statements on any basis amounted to a representation by NRAM that the loan agreement was an agreement regulated by the 1974 Act and that the borrowers were entitled to the protections afforded by the Act to borrowers under such regulated agreements. That representation, as Mr Waters accepted, indeed had legal effect in the sense that, if, as was the case, it was false, the borrower would be entitled to sue for misrepresentation under the Misrepresentation Act 1967. Given the context and prominence of the relevant statements, we take the view that they are to be construed not merely as representations but also as contractual warranties and that the borrowers would have been entitled to sue for breach of contractual warranty”.


This is a welcome decision applying common sense principles to the convoluted issue of CCA regulation.

Although the agreement in question was made before the £25K limit for regulation was removed in 2006 for non-business transactions, an adverse decision would still have had significant consequences for the asset finance industry in relation to both past and future transactions.

A note of caution still applies in view of the Court’s remarks that statements about the applicability of the CCA amounted to contractual warranties. However, customers are likely to face a number of hurdles in bringing successful claims based on breaches of warranty: –

(1) It would normally be necessary for customers to establish reliance, which is likely to be difficult unless they can show they were aware of specific provisions of the CCA at the time of the agreement;

(2) it may well be difficult to prove loss and damage; and

(3) the limitation period of six years will run from the date of the making of the agreement.

Of course none of this applies to the dual purpose documents, which have always been widely used in the asset finance industry, particular for financiers dealing with business customers. It is difficult to foresee any customer bringing a successful argument based on the fact that it didn’t bother to read the clause exempting a dual purpose agreement from regulation by the CCA, and this Court of Appeal decision should be confirmation that the industry has nothing to fear from the use of dual purpose documentation.