Unfair relationship? On what basis?

Claims under s.140 of the Consumer Credit Act 1974 (CCA) are commonplace. Whether as a ‘kitchen sink’ defence and counterclaim in response to the recoveries claim, or a ‘fall back’ position in a standalone claim against a lender, it does not matter for these purposes. There is however a perception on behalf of parties running the s140 argument that it will drive a compromise of the dispute on the part of the lender.

What drives debtor perception?

The perception is driven by the width of the provisions. Section 140A(1) allows the court to determine whether a relationship is unfair from the terms of the agreement, exercise or enforcement of the agreement or anything done (or not done) by the creditor. Section 140A(2) ‘helpfully’ directs that the court shall have regard to all matters it thinks relevant. If an unfair relationship is found, the powers of the court under section 140B are extensive. This is why lenders should take note of recent case law guidance on the interaction between basis clauses and s140.

What is a basis clause?

Loan agreements routinely contain clauses that: the lender makes no recommendation in relation to suitability, quality or performance; the agreement is the whole agreement between the parties; no reliance can be placed on representations unless stated in the agreement; and that the lender has not provided any advice (legal, investment or tax). Such clauses attempt to define the basis of the parties’ relationship (i.e. ‘basis clauses’) and create a contractual estoppel to prevent a party arguing the contrary.

Basis clauses are distinguishable from exclusion clauses, which are regulated by the Unfair Contract Terms Act 1977 (or the Consumer Rights Act 2015 for consumers) and the Misrepresentation Act 1967, and are subject to the question of reasonableness.

However, the distinction between a basis and an exclusion clause is not straightforward and the judgment in Michael Carney and others v N M Rothschild & Sons Limited1 is the first case where the efficacy of basis clauses has been tested in relation to unfair relationship claims.

What was the case about?

The claimants had entered into loan agreements containing the types of clauses noted above, and secured against their properties, for an investment scheme. The scheme was intended to avoid the Spanish equivalent of inheritance tax. The investments underperformed putting the properties at risk.

The claimants alleged unfair relationships arguing 49 different representations prior to entering into their respective loan agreements (Alleged Representations), in addition to them receiving investment and tax advice from the lender.

The lender’s position was three-fold:

  1. it did not advise the borrowers and did not assume responsibility for the giving of such advice;
  2. the Alleged Representations were not made; and

  3. even if they were made, they could not be relied upon because the basis clauses set out the scope of duties the lender was responsible for, which the claimants agreed to.

In looking at whether a clause is a basis clause, the court noted it will have regard to: (i) the natural meaning of the language; (ii) the factual context of the agreement, including whether it attempts to rewrite history; (iii) the format and location of the clause; and (iv) the positions of the parties (albeit bargaining power was not particularly relevant). Also, in the context of unfair relationships, even if a clause is not an exclusion clause or not unreasonable, it does not mean it is not unfair. That said, if categorised as a basis clause its impact on the issue of unfair relationship will be less.

What was the result?

On the issue of advice, the lender did not provide advice or assume an advisory role. The terms of the agreement made it clear there was no advisory role. The terms were basis clauses. Even if they had been exclusion clauses, they were reasonable.

On the Alleged Representations, these were not made, not false or not relied upon. Further, the basis clauses prevented reliance on the Alleged Representations. They were not exclusions clauses and in any event were reasonable. The lender could rely on them to prevent any attempted misrepresentation claim for the purpose of showing s140 unfairness.

How does it impact on me?

Get your agreements right – the importance of careful drafting and appropriate use of basis clauses cannot be underemphasised.

Communicate the basis – ensure you communicate clearly the basis of the lender’s involvement and the scope of the duties it undertakes.

Do not let your head drop in the face of the s140 argument – with the right basis for the relationship and appropriate lender conduct, claims for unfair relationship are perfectly capable of being successfully defended.

This article is intended only as a synopsis of certain recent developments. If any matter referred to in this article is sought to be relied upon, further advice should be obtained. Any questions arising from this article should be referred to Rob Payne (https://gateleyplc.com/people/rob-payne/) at Gateley Plc.

1 [2018] EWHC 958 (Comm)