Neutral Citation Number: [2008] EWCA Civ 841
Case No: A3/2008/1216
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CARDIFF DISTRICT REGISTRY
MERCANTILE COURT
HIS HONOUR JUDGE CHAMBERS QC
6CF90369/MC502
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 21/07/2008
Before :

LORD JUSTICE WALLER
LORD JUSTICE LAWS
and
LORD JUSTICE LAWRENCE COLLINS
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Between :

	CONISTER TRUST LIMITED	First Respondent/
Claimant	
	- and -		
	JOHN HARDMAN & CO	Appellant/First Defendant	
	- and -		
	McCLURE NAISMITH (a firm)	Second Respondent/
Second Defendant	
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(Transcript of the Handed Down Judgment of
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Mr Clive Freedman QC and Mr William Hibbert (instructed by Kennedys Solicitors) for the Appellant/First Defendent
Mr Richard Mawrey QC and Mr Toby Riley-Smith (instructed by New Law Solicitors) for the First Respondent/Claimant
Mr Neil Hext (instructed by Herbert Smith LLP) for the Second Respondent/Second Defendant
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Hearing date : June 17, 2008
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Judgment

Lord Justice Lawrence Collins: 
I	   Introduction
1.	This is an appeal from a judgment of HH Judge Chambers QC (sitting as a High Court judge in the Cardiff Mercantile Court) given on April 11, 2008. It involves a short, but difficult, point of construction on a provision in an agreement between Conister Trust Limited (“Conister”), the first respondent, and John Hardman & Co, a firm of solicitors (“Hardmans”), the appellant. The main point is whether an agreement by Hardmans, under a personal injury litigation funding scheme, to discharge a client’s “remaining liability” under a loan agreement applies on its true construction where the loan agreement is unenforceable by virtue of the Consumer Credit Act 1974. 
2.	The judge held in favour of Conister that it did apply, and Hardmans appeals to this court. McClure Naismith (“McClures”), the second respondent, a firm of solicitors specialising in consumer credit law, was retained by Conister to draft the form of loan agreement. Conister claims that McClures was negligent in drafting the loan agreement, and McClures was a party to the preliminary issue because of its obvious interest in supporting Conister’s construction.
3.	The short point of construction has taken up some 130 pages of skeleton argument in this court.
The scheme
4.	The scheme for funding personal injuries claims was designed by Conister, which is an Isle of Man bank, and Ultra Insurance Company Limited (“Ultra”) which is an Isle of Man insurer.  Under the scheme, Conister would enter into agreements (“panel solicitor agreements”) with panel solicitors who would provide services to the clients on a conditional fee basis. 
5.	The panel solicitors would identify a person with a potential personal injury claim.  If they considered that the prospects of success of the claim were high enough, they would sign the person up to a conditional fee agreement.  That covered the client against the profit costs incurred by the solicitor in pursuit of the litigation.  It did not, however, deal with the question of the other side’s costs should the claim fail, and the disbursements that would be incurred (medical reports, etc.), and that would have to be funded along the way.
6.	It was necessary that the client incur these charges him or herself in order for them to be recovered against an unsuccessful defendant.  Had they simply been paid for by someone else, the indemnity principle would have meant that the defendant could say that they were not recoverable as costs. 
7.	In order to protect himself against the risk of losing, and in particular having to pay the other side’s costs and being unable to recover disbursements, the client would take out an After the Event (“Legal Care Protection policy”) insurance policy with Ultra.  This provided (inter alia) that, if the claim was unsuccessful, Ultra would pay the costs that the client was ordered to pay to the defendant, and the disbursements that “would have been recoverable” had the claim been successful.
8.	The terms of the Legal Care Protection policy defined an unsuccessful claim in such a way as to exclude claims which had stopped without the agreement of Ultra. It also contained conditions requiring the client to follow the solicitor’s advice and to co-operate in relation to a claim, and giving Ultra to right to terminate if the client failed to follow the advice of the solicitor or changed solicitor to one not approved by Ultra.
9.	There was no written agreement between Conister and Ultra, other than an agreement dealing with a single aspect of their arrangements, dated June 24, 2003, which was agreed between Conister and Ultra to be kept a “strict secret”. This provided that, in addition to the policy covering the disbursements which would otherwise have been recoverable from the other side, Ultra would also pay a further sum to cover additional items which would not have been recoverable from the other side as “disbursements”, but which had been financed by the facility (for example interest, various fees and charges), so as to repay the credit facility. It seems that this was also intended to cover the cost of the premium itself. 
10.	The premium for this policy depended upon the type of claim that was to be pursued: £525 for a road accident; £997.50 for all other claims.  
11.	Funding for the payment of this premium, together with the solicitors’ disbursements, was provided by a loan from Conister to the client under a consumer credit agreement (“credit agreement”), which (as I have said) was drafted by McClures. The manner in which the loan would be repaid depended upon the outcome of the litigation.  If the borrower won, the disbursements would in theory be recoverable from the defendant to the claim.  If he lost, he would be able to recover the disbursements under the Ultra policy.  
12.	Ultra began to insure cases funded by Conister under the scheme in June 2003. One of the solicitors who participated was Hardmans. Its panel solicitor agreement with Conister is dated October 27, 2003.
II	The agreements
Credit Agreement
13.	The credit agreement expressed the purpose of the credit facility as being to fund disbursements to be incurred by a panel solicitor on behalf of the Borrower/client in connection with the claim and expenses to be incurred in relation to the insurance policy.  The facility had a credit limit of £2,000.  The advances were to bear interest at a rate of 15% per annum.  The Borrower was to repay the lender the aggregate of the advances plus interest on the earliest of various events set out in Part 5 on the face of the credit agreement (“Repayment”), with an end date of 18 months after the date of the agreement.
14.	The details (credit limit, interest, APR etc) in the credit agreement were preprinted, essentially requiring only the client’s name and address to be inserted and the document to be signed by the client before it was returned to the lender. 
15.	The credit agreement was subject to Terms and Conditions on the reverse and in particular clause 2 dealing with draw downs and clause 3 with repayment.  Clause 6 dealt with events of default and the consequences of default on the Borrower. Clause 8 dealt with commencement of the credit agreement. 
16.	Clause 3.1, headed “Repayment,” provided:
“The Borrower shall repay the aggregate of the Advances drawn down and outstanding with all interest due under this Agreement on the Repayment Date.  Time of payment is of the essence of this Agreement.”

17.	Clause 3.2 provided:
“The Borrower unconditionally and irrevocably authorises the Lender to instruct Ultra Insurance to pay all sums due to the Borrower under the terms of the Insurance Policy taken out by the Borrower with Ultra Insurance to the Lender in reduction or discharge of the Borrower’s indebtedness under this Agreement.”
18.	Clause 3.3 dealt with repayment from damages and costs received by the panel solicitor:
“The Borrower hereby unconditionally and irrevocably authorises the Lender to accept payment from the Panel Solicitor on behalf of the Borrower out of damages or costs in respect of the Claim and hereby authorises and instructs the Panel Solicitor to make such payments to the Lender out of such moneys.”
Panel Solicitor Agreement
19.	These agreements were in a standard form. Clause 2 of the panel solicitor agreement between Hardmans and Conister provided:   
“2.1 	The Lender irrevocably authorises the Panel Solicitor to notify Ultra (and the Panel Solicitor undertakes to Ultra and the Lender that it shall notify Ultra) forthwith on the occurrence of any of the [six named events set out therein relating to the claim and relevant to the policy];
2.2	the Panel Solicitor shall ensure that each Borrower enters into a Conditional Fee Agreement with the Panel Solicitor;
...
2.4	the Panel Solicitor shall promptly submit a claim under the Insurance Policy on behalf of the Borrower.”
20.	Clause 3.1 provided that Conister was to make advances as and when so requested in writing by the Panel Solicitor in accordance with the credit agreement.
21.	Clause 4, under the heading “Repayment of the Advance”, provided:
“4. 	Repayment of the Advance
4.1	Forthwith upon recovery by the Panel Solicitor of any sums due to the Borrower in the Claim the subject of the Advance the Panel Solicitor shall pay all such sums received into the Solicitor’s Client Account.
4.2	Forthwith upon receipt by the Panel Solicitor of costs and damages in the Claim the Panel Solicitor shall forthwith upon receipt of such costs and damages apply the moneys so received (including, without limitation, the Panel Solicitor’s Basic Charges, Success Fee or other Disbursements) in discharge of the liability of that Borrower under the Consumer Credit Agreement and in priority to making any other payment to, or on behalf of, the Borrower, including any payments that may be due from the Borrower to the Panel Solicitor.
4.3	In the event that the Claim is an Unsuccessful Claim (as defined in the Insurance Policy), the Panel Solicitor will cause a claim to be made to the Insurance Company for payment of the Borrower’s indebtedness under the Consumer Credit Agreement.
4.4	The Panel Solicitor on behalf of the Borrower irrevocably authorises the Lender to instruct Ultra to pay all sums due to a Borrower under the terms of the Insurance Policy to the Lender in reduction or discharge of the Borrower’s indebtedness under the Consumer Credit Agreement.
4.5	In the event that after having concluded the Claim, having pursued any claim under the Insurance Policy and having received all monies due there remains any liability on a Borrower under that Borrower’s Consumer Credit Agreement, then the Panel Solicitor undertakes with the Lender to forthwith discharge that Borrower’s remaining liability to the Lender.”
22.	Clause 5.1 provided:
“The Panel Solicitor hereby warrants and represents to the Lender that:
...
5.1.4	the Conditional Fee Agreement contains an express provision whereby the Borrower irrevocably authorises the Panel Solicitor to repay any loans taken out by the Borrower in pursuit of the Claim either, in the event of a successful outcome, from the costs and damages awarded or, in the event of an unsuccessful outcome, from moneys paid under the terms of the Insurance Policy for the benefit of the Borrower.”  
III	    Consumer Credit Act 1974 (“the 1974 Act”)
23.	The first group of sections which is relevant deals with the form of agreement, and the consequences of non-compliance. Section 64(1) of the 1974 Act provides that in the case of a cancellable agreement, a notice in the prescribed form indicating the right of the debtor to cancel the agreement, how and when that right is exercisable, and the name and address of a person to whom notice of cancellation may be given must be included in every copy of the agreement given to the debtor.  The prescribed form is in the Consumer Credit (Cancellation Notices and Copies of Documents) Regulations 1983, SI 1983/1557.  The schedule sets out a long form of notice which was not included in the credit agreements.
24.	Section 65(1) provides:
“An improperly-executed regulated agreement is enforceable against the debtor or hirer on an order of the court only.”
25.	By section 127(4)(b) of the 1974 Act “the court shall not make an enforcement order under section 65(1) in the case of a cancellable agreement if ... section 64(1) was not complied with.”
26.	Secondly, by section 113(1):
“Where a security is provided in relation to an actual or prospective regulated agreement, the security shall not be enforced so as to benefit the creditor or owner, directly or indirectly, to an extent greater (whether as respects the amount of any payment or the time or manner of its being made) than would be the case if the security were not provided and any obligations of the debtor or hirer, or his relative, under or in relation to the agreement were carried out to the extent (if any) to which they would be enforced under this Act.”
27.	“Security” is defined in section 189(1) as:
“in relation to an actual or prospective consumer credit agreement or consumer hire agreement, or any linked transaction, means a mortgage, charge, pledge, bond, debenture, indemnity, guarantee, bill, note or other right provided by the debtor or hirer, or at his request (express or implied), to secure the carrying out of the obligations of the debtor or hirer under the agreement;”
28.	Thirdly, by section 170(1):
“A breach of any requirement made (otherwise than by any court) by or under this Act shall incur no civil or criminal sanction as being such a breach, except to the extent (if any) expressly provided by or under this Act.”
29.	In Wilson v First County Trust Limited (No 2) [2003] UKHL 40, [2004] 1 AC 816 a loan agreement breached regulations made pursuant of section 60(1) of the 1974 Act by failing correctly to state the amount of the credit.  The consequence was that by virtue of section 127(3) the court was not to make an enforcement order under section 65(1).  The issue before the House of Lords was whether section 127(3) was incompatible with Article 6 of the European Convention on Human Rights, or with the right to peaceful enjoyment of possessions under Article 1 of the First Protocol.  It was held that Article 6 was not engaged because section 127(3) restricted the substantive rights of the creditor and did not bar access to the court. Section 127(3) was held to be not incompatible with the right to peaceful enjoyment of possessions under Article 1. The House was divided on the reason for that conclusion, and I deal below with the reasoning.
IV	   The claim
30.	The claim arises under clause 4.5 of the panel solicitor agreement. The loans were for very modest sums, and the amount to which clause 4.5 could apply would not exceed £2000, plus interest, in relation to any one client. But the amount claimed under clause 4.5 is a sum of £176,566.43 together with contractual interest claimed at a rate of 15 per cent per annum, which now total a sum in excess of £350,000. The claim arises because, according to Conister, Hardmans mismanaged many files with the consequence that not only were there no recoveries from defendants or proposed defendants but also that there were no insurance recoveries on many files opened because the claims “ran into the ground” without the consent of Ultra.
31.	The credit agreements were regulated by the 1974 Act. Various defects are pleaded. It is only necessary to mention that they were alleged to be cancellable agreements and the pre-printed copy provided to the borrowers was said to have failed to contain the prescribed notice of cancellation rights required by section 64(1)(a) of the 1974 Act and the Consumer Credit (Cancellation Notices and Copies of Documents) Regulations 1983. As a result no enforcement order could be made by reason of section 127(4)(b). 
32.	Hardmans took the point that the firm had no obligation under clause 4.5 because the clients did not have any “remaining liability” to Conister under their credit agreements in view of the fact that the credit agreements were wholly unenforceable by virtue of the 1974 Act. Conister joined McClures as an additional defendant, alleging negligence in the drafting of the credit agreement. 
33.	A preliminary issue was ordered. The issue was whether, if any credit agreement was unenforceable against a client by reason of non-compliance with the 1974 Act and regulations made thereunder, such unenforceability would afford Hardmans a defence to Conister’s claim for payment under clause 4.5. McClures was represented before the judge and on this appeal in order to argue that Conister’s construction of the agreement is right, and therefore that Conister is able to recover the sums it is owed from Hardmans, with the consequence that Conister has suffered no loss from any breach of duty by McClures.
V	   The judge’s decision
34.	The credit agreements were, for the purposes of the preliminary issue, treated as wholly unenforceable by virtue of the 1974 Act. The judge found on the preliminary issue that there was still in these circumstances a “remaining liability” on the borrowers to Conister under the credit agreements which Hardmans had to discharge.  He found that the reference to discharging the client’s liability was “simply a means of identifying sums of money in order that they can find a place in the ledger of account” and meant “what remains outstanding out of the sums advanced”. 
35.	The reasoning of the judge was as follows:
1)	Clauses 3 and 4 of the panel solicitor agreement were posited on the assumption that the credit agreement, as drafted, was compliant with the legislation, but that did not mean that its operation was agreed to be dependent upon the validity of the assumption (para 19);
2)	The words “indebtedness” and “liability” carried no necessary implication of legal obligation but were simply a means of identifying sums of money in order that they could find a place in the ledger of account which was the product of the formula (para 20);
3)	It had been decided in Wilson that the effect of the legislation was that the rights of the lender were extinguished in favour of the borrower; a liability could not exist without there being a corresponding right, and Wilson was binding authority to the effect that Conister had no rights under an unenforceable consumer credit agreement, and it followed that the borrower had no corresponding liability; and since Wilson was dispositive of the question of the legal definition of the word “liability” in the present context, for Conister to succeed it had to on a general construction point (paras 28, 30 and 31);
4)	The effectiveness of the authorities granted by the client and to be operated by Hardmans had no bearing upon the proper construction of clause 4.5 (para 44);
5)	It would be odd if clause 4.5 were to be read so as to deprive Conister of the recovery of a shortfall from Hardmans where the agreement was unenforceable  because of conduct attributable to Hardmans (para 47);
6)	Whatever the correct description of clause 4.5, it was not an obligation which stood or fell with the validity of the third party’s obligation to the party seeking to enforce it (para 51);
7)	Although it was arguable that it was an indemnity, it was not obvious that the discharge of the relevant indebtedness would have had the automatic effect of conferring upon Hardmans any rights held by Conister, and it was therefore difficult to argue that Hardmans were surrendering a valuable right in the event that the credit agreement was unenforceable (para 53);
8)	Claims over by Hardmans against the client did not feature in anyone’s approach to the scheme (para 54);
9)	The credit agreement was clearly identified in the panel solicitor agreement, and its enforceability or lack of enforceability did nothing to change that identification; and the word “liability” in clause 4.5 was of the same colloquial convenience as was the employment of the words “debtor” and “creditor” in Lord Nicholls’ speech (at [31]) in Wilson, and an incorrect assumption that the consumer credit agreement was compliant with the legislation did not alter the meaning of the words (para 55);
10)	The obligation under clause 4.5 was not an unenforceable security for the purposes of section 113 of the 1974 Act (para 59).
VI	   Arguments on the appeal
36.	I will deal with the arguments more fully where necessary in the following sections, but I set out here the main points made in the notice of appeal and the respondent’s notices.
Hardmans
37.	The proper approach to construction is to start with the natural and ordinary meaning of the words, and then to consider whether the background facts require a departure from that meaning.  The natural and ordinary meaning of “liability” requires a corresponding enforceable right, as does (as the judge held) the legal meaning of the word “liability.”
38.	A proper construction of clause 4.5 required the construction of clause 4 as a whole (as the judge accepted), but also in the context of the parallel provisions of the credit agreement, and in a commercially sensible way which would avoid placing Hardmans under an obligation which was impossible properly to perform and/or under a conflict of interest.  In particular the judge should have found a construction which in relation to clause 4.2 would put Hardmans in a position of conflict of interest should have been avoided.
39.	The judge failed to take into account relevant factual background, and there was no background material from which the judge could properly infer that the parties intended by the words used simply a meaning as identifying sums of money which had been advanced.
40.	Without prejudice to Hardmans’ contention that even if the obligation was an indemnity, the obligation was no greater than if it were a guarantee (as it was only an obligation to discharge the remaining liability) the judge was wrong to find that clause 4.5 was not a guarantee but was “arguably” an indemnity.
41.	The judge was wrong to reject Hardmans’ submission that it was relevant to the proper construction of clause 4.5 that it would not have a right of recovery from the client in respect of unenforceable agreements. The judge failed properly to apply the principles in Owen v Tate [1976] 1 QB 402, and wrongly failed to find that Hardmans would be subrogated under section 5 of the Mercantile Law Amendment Act 1856, which would be a valuable right only where the credit agreements were enforceable. The fact that there could be no recovery by Hardmans against the client in respect of sums paid under clause 4.5 was relevant to the construction of clause 4.5.
42.	The judge wrongly placed reliance on the potential for unenforceability caused by Hardmans’ conduct when obtaining signatures to the credit agreements.  
43.	The judge wrongly held that clause 4.5 did not fall within the scope of section 113 of the 1974 Act.  The judge wrongly held that the obligation under the clause 4.5 was not assumed at the implied request of the borrowers.  Each client entirely requested the security which Conister demanded as a condition of lending under the scheme.
Conister 
44.	In its respondent’s notice Conister seeks to uphold the judgment on the following additional grounds: (1) The judge misunderstood the ratio of the speeches in Wilson; (2) the judge should have held that, as a result of section 170(1) of the 1974 Act, the only consequences of non-compliance with the regulations would be that Conister could not successfully sue the debtor or any surety coming within the statutory definition of “security” in section 189(1) by reason of section 113; (3) the judge should have found that as a matter of general legal principle the unenforceability of the primary obligation did not adversely affect the enforceability of an indemnity given in respect of that obligation.
McClures
45.	McClures’ principal additional points by way of respondent’s notice were as follows: (1) the use of the words “indebtedness” and “liability” in the remainder of the panel  solicitor agreement, in particular when analysed against the terms of the credit agreement, supported a construction of those words which did not involve the concept of enforceability; (2) the commercial background, and in particular Hardmans’ central role in the operation and management of the scheme, was consistent with the construction of clause 4.5 put forward by Conister and McClures.
VII	Discussion
Approach to construction
46.	There is nothing between the parties on the approach to construction. Both sides rely on what they say is the relevant background material. Both sides say that the natural and ordinary meaning of the words supports their construction. All parties agree that the words of clause 4.5 should not be interpreted in isolation from the rest of clause 4 of the panel solicitor agreement or from the credit agreement (which is annexed to the panel solicitor agreement). All parties rely on the anomalous consequences which might flow from  their opponent’s construction. The only difference in approach is that Conister argues that as a matter of law the word “liability” is apt to include an obligation which is unenforceable by virtue of the 1974 Act. 
Assistance from the case law?
47.	The parties, and to some extent the judge, relied on cases in a variety of contexts in which the nature of the liability under a loan or credit agreement which falls foul of consumer credit legislation has been considered.
48.	Hardmans relied on Eldridge and Morris v Taylor [1931] 1 KB 416, in which the Court of Appeal held that a wife who was surety for her husband’s obligation under a contract which was unenforceable under the Moneylenders Act 1927 was not liable because “the debt of the principal is gone” (per Scrutton LJ at 420) or “the principal debtor is not liable” (per Slesser LJ at 423).
49.	Conister and McClures relied on R v. Modupe [1991] CCLR 29. The appellant had obtained loans using false information to buy cars. One of the charges was evasion of liability by deception under a loan agreement which did not comply with regulations under the 1974 Act because the loan details had not been properly completed on a form. The agreement was not enforceable without an order of the court (but it was not a case in which the agreements were irredeemably unenforceable). The decision of the Court of Appeal (Criminal Division) was (at 35) that the fact that agreement was not enforceable without an order of the court did not mean that there was no existing liability; there was an existing liability, albeit only enforceable by an order of the court.
50.	I have already said that in Wilson v First County Trust Limited (No 2) [2003] UKHL 40, [2004] 1 AC 816 it was held that section 127(3) was compatible with Article 6 of the European Convention on Human Rights, and with the right to peaceful enjoyment of possessions under Article 1 of the First Protocol; and that the House was divided on the reasons for the conclusion on the Article 1 point. The majority considered that Article 1 was not engaged because (per Lords Hobhouse and Scott) the effect of the legislation was that the lender never acquired rights against the borrower or because (per Lord Hope) the borrower never had a right to enforce the agreement. Lord Nicholls (with whom Lord Rodger agreed) considered that Article 1 was engaged because the lender had rights, which were extinguished by legislation, but that the interference with those rights was justified.
51.	Lord Hope said (at para 108) that the lender “never had an absolute and unqualified right to enforce” the agreement. Lord Hobhouse considered that the lenders “never in truth validly acquired” the claimed contractual right: para 137. Lord Scott said that the agreement was not void or unlawful but was “merely unenforceable except on an order of the court” (at para 164); section 127(3) did not constitute an interference with the pre-existing right to enforce payment because the Act and section 127(3) prevented the lender “from ever possessing that right”, and the statutory provision prevented the transaction “from having the quality of legal enforceability” (at para 168).  Lord Nicholls (with whom Lord Rodger agreed) said that, where there was a failure to comply with the Act, the legislation did not deprive a regulated agreement of legal effect, or render it void, since it was enforceable by the debtor against the creditor (para 31). But the lender’s “rights were extinguished in favour of the borrower by the legislation” (para 44); the agreement was “rendered irredeemably unenforceable by section 127(3)” (para 46); the legislation “renders the entire agreement inoperative” (para 49); and the lender “loses all his rights under the agreement” (para 72). But even Lord Nicholls referred to section 127(3) as being “a restriction on the scope of the rights a creditor acquires under a regulated agreement” (para 36). 
52.	The judge considered that Wilson was binding authority to the effect that Conister had no rights under an unenforceable credit agreement, and it followed that the client had no corresponding liability. Wilson was dispositive of the legal definition of the word “liability” but that was not conclusive on the question of construction. In concluding that the word “liability” in clause 4.5 did not mean legal liability the judge relied on the colloquial use of the words “debtor” and “creditor” by Lord Nicholls at para 31. 
53.	I do not consider that any of the cases assists on the question of construction in the present context. The most that can be said is that the different formulations in Wilson indicate that for the purposes of Article 1 of Protocol 1 the lender is in the position of never having had any rights or having them extinguished. It is not suggested that the panel solicitor agreement was drafted or negotiated against the background of that decision.  The judge was wrong in considering that Lord Nicholls used the words “debtor” and “creditor” in a colloquial sense and therefore supported the judges’ conclusion. The words “debtor” and “creditor” are terms defined by section 189(1) of the 1974 Act to be used irrespective of whether the credit agreement is enforceable. 
Background material
54.	All parties relied on elements of background material to support their construction, but I do not consider that there is anything in this material which is of more than marginal relevance to the question of construction.
55.	First, Hardmans points to the fact that the scheme documentation provided for a recovery against the client directly. This is said to show that enforceability against the client is an important part of the scheme as a whole. Hardmans also points to the fact that Conister chose to go through the circuitous route of lending under a regulated credit agreement to the clients (with all its difficulties of compliance, cooling-off periods and enforcement), rather than offering a single practice loan to the panel solicitor, imposing a simple and total liability for all the sums lent on the solicitor and not the client. The respondents say that there was evidence that it was generally understood that there was no practical likelihood of being able to enforce against individual borrowers (over and above any damages or insurance proceeds received by the relevant solicitor).  
56.	It was plainly not an important part of the scheme that there was a direct right of recoverability against individual clients, but the documentation made them personally liable, and I do not consider that the construction of clause 4.5 is affected by this point. There were good commercial reasons for not making the loan to the firm, not least that the interest element would have been wholly irrecoverable.
57.	Nor do I derive any assistance from a second point made by Hardmans, which is that panel solicitors were not responsible for the drafting of the credit agreement, and that consequently Conister should be held responsible for the consequences of the lack of compliance because it knew that this was a vital part of the scheme.
58.	Similarly I do not consider that there is anything in the third point, which is that Conister charged interest to the client at 15% p.a., suggesting that it undertook a substantial risk in the lending, consistent with the lending being primarily to the clients and not being wholly underwritten by Hardmans.  This says nothing about who was to take the risk if the credit agreements were unenforceable.
59.	Fourth, it is said that Hardmans was a small firm of solicitors, having only two partners, with the sort of practice to which this sort of scheme was attractive. That, it is said, suggests that the solicitors would not take on the whole risk. In my judgment, there is nothing in this point. If the scheme had been operated properly there was very little risk for any party, given the very modest amount of each loan.
60.	There are two additional points which are raised as relevant background with which I deal below under the heading “Commercial consequences”. The first is Hardmans’ argument that it is an important part of the background or common understanding that there could be no recovery by Hardmans against the client if it had to pay out to Conister under an unenforceable agreement.
61.	The second is the reliance by McClures on the contention (accepted by the judge: para 47) that Hardmans could themselves have been responsible for the agreements being unenforceable. In addition, it is said that it would have been anticipated that Hardmans’ performance would materially contribute to the chances of the obligation to pay being triggered, and consequently the context in which Hardmans agreed to make payment under clause 4.5 was one in which they would have been expected to have been a potential cause of any shortfall that was experienced. That, it is said, reinforces the absolute character of the obligation in clause 4.5.
Commercial consequences
62.	This heading overlaps to some extent with the background category.
(1) Inability of solicitor to recover against client  
63.	The first point made on behalf of Hardmans is that the parties would have contemplated that if Hardmans had to pay Conister under clause 4.5 then Hardmans would have had a right of reimbursement from the client. 
64.	I should in this context deal briefly with the subsidiary argument (not pressed strongly) by Hardmans that clause 4.5 was a guarantee. Hardmans’ primary position was that it is not strictly necessary to consider the question as to whether clause 4.5 is one of guarantee or indemnity. If it is an indemnity, its terms are defined by reference to the liability remaining on the client.   If there is no liability, there is nothing to discharge. But it maintains, as a secondary position, that as a guarantee, the obligation to “discharge that Borrower’s remaining liability” did not require Hardmans to make payment in relation to sums advanced under a credit agreement which could not be enforced by Conister against the client. The argument was deployed for two reasons. The first was in support of the argument that clause 4.5 could apply only to enforceable obligations. The second was in support of the argument that the parties contemplated that Hardmans would have a right of recovery from the client. The judge held that clause 4.5 was not a guarantee but was “arguably” an indemnity. 
65.	In Yeoman Credit Ltd v Latter [1961] 1 WLR 828, at 835, Harman LJ expressed the view that the question whether a contract is one of guarantee or indemnity was “a most barren controversy  ... [which] has raised many hair-splitting distinctions of exactly that kind which brings the law into hatred ridicule and contempt by the public.”  Subject to that reservation, I am satisfied that the obligation in clause 4.5 is not a guarantee. It imposes on the solicitor a primary obligation to reimburse Conister in respect of any shortfall on the credit agreements, howsoever arising. It does not contemplate the kind of secondary obligation which arises under a normal contract of guarantee. But nothing turns on this point in this appeal.
66.	Hardmans’ main argument on this aspect is that it is an important part of the background or common understanding that there could be no recovery by Hardmans against the client if it had to pay out to Conister under an unenforceable agreement. If the solicitor were to be required by clause 4.5 to pay Conister notwithstanding the unenforceable nature of the credit agreement, he would be left without a right of indemnity or restitution or subrogation against the client/borrower consequent upon that unenforceability. This being the case, it is a strong pointer to the construction that a solicitor is not required to pay to Conister under clause 4.5 in circumstances where the credit agreement is unenforceable against the client/borrower.  
67.	Hardmans says that the right of recovery against the client can be derived from (a) restitutionary principles, or (b) section 5 of the Mercantile Law Amendment Act 1856, but only if the credit agreement were enforceable.  As to (a), even if the indemnity was not given at the request of the client, Owen v Tate [1976] 1 QB 402 is not an obstacle because Hardmans would not have been acting “officiously” in exposing itself to the legal obligation to Conister. No restitutionary right can exist as against the borrower in circumstances where the underlying credit agreement is unenforceable.  The solicitor by making payment in respect of the unenforceable credit agreement does not confer any benefit on the borrower. As for the surety’s right of subrogation under the 1865 Act, by stepping into the shoes of the lender, the solicitor does no more than acquire the same remedy as the lender: if the credit agreement is unenforceable, there is no remedy to acquire.
68.	In my judgment this point does not assist on construction. I do not consider that the solicitor’s right of recovery against the client can be taken to have been a relevant background feature. Clause 4.5 is not a guarantee and therefore no right of subrogation under the 1856 Act arises. The application of Owen v Tate is a controversial matter which does not arise for decision in this case, and I do not consider that a controversial and uncertain right of recovery can be a relevant factor in the process of construction. Nor do I consider that the commercial consequence of the solicitor being unable to recover from the client was commercially significant. The right of recovery was purely theoretical given the status of the clients and the modest amount of the maximum advance for any individual client. The judge took a realistic view in his conclusion that claims over by Hardman against the client did not feature in anyone’s approach to the scheme. 
(2) Conflict of interest
69.	Hardmans says that if the words “liability” and “indebtedness” are construed to refer to unenforceable obligations, then the result would be, especially because of clause 4.2, to put the solicitor in a position of conflict of interest, which shows that it would not be a commercially sensible construction.
70.	The argument is that clause 4.2 of the panel solicitor agreement is to be read alongside clause 3.3 of the credit agreement. Clause 3.3 recognises that the damages or costs received by the panel solicitor are received on behalf of the client, i.e. it is the money of the client. Both clauses make it clear that these sums are to be applied “on behalf of the Borrower” in discharge of the liability of the client under the credit agreement. The authority for the solicitor to make such payment is set out in clause 3.3, which provides that the client “authorises and instructs” the solicitor to make such payment and “unconditionally and irrevocably authorises” Conister to accept such payment.
71.	It could not be the case, it is said, that the solicitor was being required to pay the client’s money from client account to the lender in circumstances where the credit agreement is unenforceable. The solicitor is a fiduciary.  If he knows about the unenforceability, he cannot withhold this information from the client. If told, the client may well instruct him not to pay client moneys in that way and the solicitor as agent is bound to obey that instruction.  If the solicitor’s authority under the credit agreement to apply his client’s money has been removed in the circumstances of an unenforceable agreement, then there can be no separate authority given to the solicitor by reason of the panel solicitor agreement.
72.	Hardmans says that, on its construction, the solicitor is not in a position of conflict. His obligation under clause 4.2 is no greater than that of his client.  He has to apply the money “in discharge of the liability of the Borrower under the Consumer Credit Agreement”.  The consequence of the unenforceability is that there is no liability of the borrower (for all the reasons advanced by Hardmans), and accordingly there is nothing to discharge.  There is therefore no conflict at all.  
73.	In my judgment this is a purely theoretical risk. There is nothing in clause 3.3 of the credit agreement which restricts the solicitor’s authority to repayment of enforceable loans.  Nothing in the 1974 Act prevents consensual payment having the contractual effect stipulated in the contract.    The agreements do contain the potential for Hardmans to be a position of conflict, but I accept the argument for McClures that that problem is not avoided by Hardmans’ construction. Hardmans would have been put into a conflict position if any of their clients had purported to withdraw the authorities set out in clauses 3.2 and 3.3 of the credit agreement.  That is so whether or not the credit agreement was enforceable. I do not understand Hardmans’ argument that in such a case it could interplead. 
(3) Unenforceability caused by solicitor’s conduct
74.	The judge thought that the common assumption was that the credit agreement was compliant with the 1974 Act, and that the risk that the parties must be taken to have foreseen was that a credit agreement would become unenforceable because of some act or omission on the part of Hardmans: para 47. Consequently he considered that it would be odd if clause 4.5 were to be read so as to deprive Conister of the recovery of a shortfall from Hardmans where the agreement was unenforceable because of conduct attributable to Hardmans.
75.	I accept the argument for Hardmans that this is not an eventuality which should be taken to have been envisaged by clause 4.5. The scheme prescribed the procedural steps to be taken by or on behalf of the solicitor in relation to the client entering into the credit agreements, and the circumstances in which the solicitor might be responsible for unenforceability were remote. Although it is not necessary to express a concluded view, it also seems to me likely that Conister would have a claim for damages against Hardmans for breach of an implied term of the panel solicitor agreement if Hardmans did not follow the prescribed procedures in implementing the scheme, and that that would have been the protection, and not a claim under clause 4.5.
Indemnity
76.	Conister says that it is a matter of general legal principle that the unenforceability of the primary obligation does not adversely affect the enforceability of an indemnity given in respect of that obligation, unless the statute making the principal debt unenforceable expressly makes the indemnity unenforceable also. It relies on what it says is a pattern in various areas of the law where courts have upheld the validity of an indemnity where the primary obligation itself is unenforceable: (1) under a contract by a minor (2) under an ultra vires contract by a company to purchase its own shares; (3) under a commercial contract where creditor and indemnifier arranged their commercial affairs on the premise that the indemnity would be honoured; (4) under hire-purchase agreements rendered unenforceable under the Hire-Purchase Acts where the creditor and indemnifier have entered into a recourse agreement; (5) under a land disposition contract unenforceable for failure to comply with the Statute of Frauds 1677 or the Law of Property Act 1925; (6) under a contract unenforceable against the principal debtor under the Limitation Act 1980.
77.	It is not necessary to go through these examples in detail, because I do not consider that they assist in the process of construction in this case. I accept Hardmans’ submission that most of them can be explained on the basis that the agreement had the effect of treating the person giving the indemnity as a principal, or on the basis that the agreement on its true construction imposed the obligation irrespective of the validity of the obligation apparently assumed by the person whose liability was to be discharged: see, e.g. Yeoman Credit Ltd v Latter [1961] 1 WLR 828, 834-835. This may be a matter of policy, as in the case of performance bonds: Gulf Bank KSC v Mitsubishi (Heavy Industries) Ltd. (No.2), [1994] 2 Lloyd’s Rep. 145 where a performance bond was enforceable irrespective of the invalidity or unenforceability of the underlying construction contract. 
Two points of law on the 1974 Act
78.	Two short points of law arose, only the first of which was dealt with by the judge.
(1) Section 113
79.	The first is Hardmans’ point that the judge was wrong to find that clause 4.5 was not a “security” (as defined by section 189(1)) in relation to the credit agreement and therefore unenforceable to the same extent by virtue of section 113.
80.	The argument was that the liability under clause 4.5 was assumed at the implied request of the borrowers when they entered the scheme. By applying for and accepting a loan under the scheme, each client impliedly requested the doing of anything necessary to allow them to benefit from the scheme, and consequently the giving of security which was demanded by Conister as a condition of lending under the scheme, including the obligation of Hardmans under clause 4.5.
81.	I am satisfied that there is nothing in this point. By section 189(1) a security may include an “indemnity … or other right provided by the debtor, or at his request (express or implied).”  There was no such request, express or implied. The obligation under the panel solicitor agreement was undertaken prior to, and wholly independently of the obligations under the individual credit agreements. Nor was the obligation undertaken by Hardmans to secure the carrying out of the clients’ obligations. Bank of Scotland v Euclidian (No 1) Ltd [2007] EWHC 1732 (QB), [2007] CTLC 151, at paras 53-56, a decision of Field J to this effect on a differently worded contract between underwriters and a bank, was correctly decided.
(2) Section 170(1)
82.	Conister argued that the 1974 Act was set up as a self-contained code regulating (often in minute detail) a defined sector of the credit and finance industry. The sanctions are carefully graded from the creation of imprisonable criminal offences downwards. In terms it provides that its sanctions exclude all others: section 170(1). Consequently where the sanction imposed by the 1974 Act on a creditor is the removal of his remedy of enforcement of a particular primary right, that is the only sanction. The enforcement of a secondary right based on that primary right is only barred if the 1974 Act expressly bars that enforcement of that secondary right itself: R v Modupe [1991] CCLR 29.
83.	I do not consider that there is anything in this point. Hardmans is right to say that, if the contractual obligation in clause 4.5 relates only to enforceable liabilities, there is no question here of a “sanction” imposed by the application of the 1974 Act: it is simply a matter of construction of a contract. R v Modupe has nothing to do with the point.
VIII	   Overall conclusions
84.	The judge decided that in context the phrases “indebtedness under the Consumer Credit Agreement” in clause 4.3 and “remaining liability to [Conister]” in clause 4.5 carried no necessary implication of legal obligation but were simply a means of identifying sums of money in order that they could find a place in the ledger of account that was the product of the formula (para 20). His conclusion (at para 55) was that the use of the word “liability” in clause 4.5 was of “colloquial convenience” (just as Lord Nicholls had used the words “debtor” and “creditor” in Wilson at [31]).  I have already suggested that this was a misreading of Lord Nicholls’ speech, since those are terms defined by section 189(1) of the 1974 Act.
85.	To some extent the present exercise is one of impression. No assistance can be derived from dictionary definitions, and I have already concluded that no assistance can be derived from the cases on consumer credit law. Nor do I derive any assistance from the point made by Hardmans that Conister could have made the point clear beyond doubt by appropriate wording. That can always be said when parties differ on the meaning a contract.
86.	I have not derived any assistance from the background material. Nor have I derived any assistance from what the parties say are the odd consequences of each other’s interpretation. I accept that there might have been anomalies in the application of clause 4.5. The reality of the matter is that this was an unanticipated situation, and has only arisen by the unfortunate coincidence of what appears to have been McClures’ negligent drafting of the credit agreement and Hardmans’ mishandling of the claims.
87.	I accept that the word “liability,” like the words “obligation” and “right,” does not necessarily import the notion of enforceability, and that the phrase “unenforceable liability” is not a contradiction in terms. A jurisprudential analysis that liability must have a corresponding right (cf Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning (1923)) would not be helpful in a commercial context. But in my judgment, Hardmans is right to say that the natural meaning of “liability” in the present context refers to a person being liable in law. The natural and ordinary meaning of “liability”, in the context of the language used in clause 4.5, is something which is enforceable. That is reinforced by the fact that clause 4.5 refers not only to the borrower’s “remaining liability” but also to “any liability on a Borrower under that Borrower’s Consumer Credit Agreement.”
88.	The commercial consequence may be that Conister will have a right of recovery against McClures rather than against Hardmans.
89.	I would therefore allow the appeal and substitute a declaration that the answer to the question posed by the preliminary issue is in the affirmative. 
Lord Justice Laws:
90.	I agree.
Lord Justice Waller:
91.	I also agree.