We recently prepared for trial a Funder’s defence to a claim which raised a number of difficult issues in relation to the annual statements required for a fixed sum credit agreement regulated by the Consumer Credit Act 1974 (“CCA”). In the event the matter settled before trial but a number of interesting points arose and are worth considering.Continue Reading
Funders should be well advanced in their preparations for the introduction of the EU General Data Protection Regulation on 25 May 2018.Continue Reading
A recent VAT case in the European Court Justice is of considerable interest to motor-vehicle financiers because it blurs the long established distinction between the VAT treatment of lease and hire purchase.Continue Reading
A recent case in the High Court contains some interesting comments on the extent to which an obligation to provide equipment on hire of satisfactory quality and/or fit for purpose extends beyond the initial point of delivery.Continue Reading
Ryan joined Bermans in 2010 and has been a member of the Asset Based Lending team since 2016. Ryan predominantly deals with prelegal correspondence and process driven claims and enforcement.Continue Reading
Gayle is Litigation Executive and has over 25 years experience of producing and managing court process for a variety of commercial clients and has worked extensively for clients in the asset based finance market. Gayle predominantly deals with undefended and process driven claims.
t: 0161 827 4615
Alissa joined Bermans in January 2017 as a Solicitor working across both of our Asset Finance and Invoice Finance departments.
Liverpool University Graduate, Alissa, has assisted and led on a broad range of finance transactions including real estate finance, social housing finance and corporate lending.
Alissa has a keen interest in live music and travelling, and have previously spent time travelling Thailand, Australia and Fiji.
Visit Alissa’s LinkedIn page here or see contact details below to discuss your legal matter with Alissa.
Tel: 0161 827 4601
Senior Litigation Executive
Anita joined Bermans in 1987 and has over 25 year experience in the recoveries arena has a deep understanding of finance and asset based recoveries procedures.
In addition to producing and managing court process for a variety of commercial clients Anita has her own caseload of undefended and defended small claims litigation primarily for the asset based lending industry.
Tel:0161 827 4602
An important decision of the Supreme Court has made it less likely that spurious challenges to asset financiers’ liquidated damages clauses will succeed.
For many years now there have been numerous challenges to liquidated damages clauses based on the common law rule against penalties, which in essence has been understood to provide that in order to be effective a liquidated damages clause must only provide for a genuine pre-estimate of the financier’s loss – otherwise it will be struck down as a “penalty” on the grounds of public policy.
Financiers have been careful to avoid a damaging precedent being set in a reported decision of the higher courts, but almost all asset financiers will have experience of being met with resistance to liquidated damages clauses on these grounds.
This area of law was ripe for review by the highest court, so a panel of seven judges sat in the combined appeals of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis (Consumers’ Association intervening)  3 W.L.R. 1373.
Unfortunately the judgments in these cases are rather complex, running to over 100 pages in total. Neither case involved asset finance but the principles to be derived are the same. The first case involved a complex series of investment agreements between sophisticated parties, whilst the second case involved the rather more mundane situation of a motorist overstaying the two hours allotted as free parking in a supermarket car park. However, both cases involved the court giving detailed consideration to the principles of liquidated damages and the concept of penalties.
The leading judgment was given by Lord Neuberger of Abbotsbury PSC and Lord Sumption JSC (with whom Lord Carnwath JSC agreed), who said at paras 31-32: –
“The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem) does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party’s conduct is to be influenced are “unconscionable” or (which will usually amount to the same thing) “extravagant” by reference to some norm.
The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance”.
Lord Mance JSC said something similar at para 152:-
“What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served and protected by the clause, and, second, whether, assuming such an interest to exist, the provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable.”
As a result of this decision standard liquidated damages clauses used throughout the asset finance industry will be more difficult to challenge as penalties. It will normally be possible for the financier to demonstrate that such clauses are commercially justifiable in the context of its legitimate interest in holding customers to their contractual obligations to make payments throughout the life of an agreement.
However, care should still be taken to ensure that as far as possible liquidated damages clauses properly reflect the losses likely to be sustained by a financier upon termination in the event of default, and particular regard should be had to the relevance of the value of repossessed equipment which may well differ in the case of a finance lease, an operating lease and a hire purchase agreement.Continue Reading
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  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: –
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.Continue Reading