High Court rejects customer’s ‘unfair relationship’ claim

10th October 2019

In the recent case of Promontoria (Henrico) Ltd v Gurcharn Samra [1], the High Court has rejected unfair relationship allegations made by a customer against its bank and distressed debt creditor. We highlight some key takeaways for lenders.

What is an ‘unfair relationship’?

Section 140A of the Consumer Credit Act 1974 (CCA) provides that a court may order the lender to reduce, discharge or repay a loan under a credit agreement should it determine that the relationship between the lender and the borrower is unfair to the borrower.

Unfairness may arise because of (a) the terms of the loan agreement; (b) the way in which the lender enforces its rights under the loan agreement; or (c) because of any other thing done or not done by or on behalf of the lender. When considering unfairness the court may take into account all matters it thinks relevant, plus the burden is on the lender to prove that the relationship is not unfair.

All of that means that the CCA affords significant scope for borrowers to challenge or reduce their liabilities pursuant to loan agreements, and the onus is on lenders to make sure that their terms and conduct are beyond reproach.

What are the key takeaways for lenders?

• Lenders should be alive to the risk of debtors raising the ‘unfair relationship’ defence when things go wrong.
• It is for the lender to rebut the accusation and to prove that the relationship was fair…
• …However that does not mean that when a debtor makes allegations of fact, he or she does not have the burden of proving them to the usual civil standard; and it does not, therefore, mean that a debtor’s allegations have to be accepted unless the lender can positively disprove them with contrary evidence.
• In considering whether a relationship is unfair, the court should not be limited by the borrower’s perception and should instead make an objective assessment.
• As well as having wide discretion to decide the question of unfairness, the court has a wide discretion as to the orders it may make.
• There is sometimes a tendency for struggling debtors to rely on technical legal arguments (and the CCA ‘unfair relationship’ argument is just one example) in the hope of reducing or avoiding liability to pay, justifying missed payments and or as a means of avoiding a possession order. In doing so, it is common for debtors – in particular those who are not properly legally advised – to overlook fundamental issues. For example, many debtors do not appreciate the fact that they have had had the benefit of funds advanced to them and have failed to repay, such that it is likely that the law of equity (fundamental fairness) would ultimately provide a remedy for lenders, and would prevent debtors from becoming unjustly enriched, in any event. Similarly, many debtors overlook the essential element of causation. The High Court’s findings in this case should remind debtors to critically assess, before spending time and cost becoming embroiled in litigation, the really crucial question of whether in fact any alleged failing or unfairness is really causative of loss or disadvantage claimed or alleged.
• Following on from that, the real danger in many such cases is that belief and reliance upon misleading and incorrect allegations could actually prove harmful to debtors. There is a risk that borrowers misled into withholding mortgage/loan payments could be exposed to mounting debt and potentially even to losing their homes, adding to the problems of those already in financial difficulties. In the interests of treating customers fairly, firms facing any such allegations should advise debtors to take their own specialist legal advice, and to discontinue any misconceived legal proceedings or defences, at the earliest possible time. It is, of course, in any debtor’s interest to keep any associated costs to an absolute minimum, not least because legal costs can, in the usual course, be added to the account, thereby exacerbating any existing affordability issues.

What happened in this case?

Facts

The customer originally had a commercial loan with Clydesdale Bank, repayable over 15 years. When customer required further funds in 2007, the bank provided refinancing on an interest-only basis for five years, with capital to be repaid in full at the end of that five year period. The additional facility – the subject of this dispute – was secured by charges over two leasehold properties. When the customer failed to repay, the bank provided a temporary overdraft and assigned the debt to the claimant (an investment fund which specialises in distressed debt). The claimant cancelled the overdraft, demanded payment and ultimately sought possession.

The customer defended the possession claim and sought an order reducing the sum payable or altering the terms of the facility, alleging that the relationship with the bank and/or the claimant was unfair pursuant to the CCA.

Allegations

The customer argued:

• The bank had resiled from a common intention or understanding that he would have 15 years in which to repay;
• He was disadvantaged because the bank had allowed him to give up his original facility in favour of a new facility with a shorter repayment term in circumstances where, by the time he would be negotiating an extension (that is, 2012 – five years after the new facility was granted in 2007), the leases would have reduced in value; and/or
• The terms of the new facility allowed the bank to assign the debt to the claimant, which was not a bank and not able to offer further financing.

High Court decision

The High Court rejected the customer’s arguments on all counts. The court found that it was not plausible that the customer had not read or understood the new facility letter when he signed it, and it held:

• None of the facility documents or correspondence provided evidence to support the suggestion that there had been a common intention or understanding that the customer would have 15 years in which to repay. The evidence showed that the customer had at all times been aware that the 2007 facility was for five years and would have to be either repaid or renegotiated after that time.
• The bank was not in breach of any duty for failing to prevent the customer from placing himself in a disadvantaged position or for failing to point out a matter which might turn out, at a later date, to be to his disadvantage. In addition, the customer was not actually significantly disadvantaged because (a) the majority of his original borrowing was already repayable within three years; and (b) the original loan contained terms which would have entitled the bank to withdraw the facility and require repayment in 2012 in any event.
• The new facility documents contained express provisions permitting the bank to assign to a person such as the claimant. Even if they had not, the bank would have been permitted under the general law to assign without limit. Further finance was never a right or a given. Nothing in relation to the assignment had increased the customer’s liability or deprived him of any opportunity or of any defence against liability.

Of particular interest to lenders, the High Court also noted [2] that the burden on the lender to prove that a relationship was fair does not mean that when a debtor makes allegations of fact, he or does not have the burden of proving them to the usual civil standard. It does not, therefore, mean that a debtor’s allegations have to be accepted unless the lender can positively disprove them with contrary evidence.

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[1] [2019] EWHC 2327 (Ch)
[2] Ibid. para 26