England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/07/2007

Mr Justice Field:

Introduction

1. The substitution of Conditional Fee Agreements ("CFAs") for legal aid for most personal injury claims gave rise to a number of schemes that were sold to potential claimants on the basis that if their claim were accepted the litigation would be "risk free". There were three key components to these schemes: a "no win no fee" CFA between the claimant and a solicitor; the availability of a loan from a funder to cover the claimant's disbursements and other costs; and insurance to cover the claimant for his own disbursements, the defendant's costs, the insurance premium and the loan interest should the claim fail. The financial viability of the schemes depended on the achievement of a minimum claims success rate. If this target were hit, there would be a cash in-flow from the defendants' insurers in the form of damages and costs that would cover the funding and cost of the scheme and provide the entity running it with a profit.
2. As things turned out, however, a number of these schemes failed to achieve the critical success rate and collapsed. The result has been litigation between the funders and the insurers over the question whether the funders can recover in respect of unpaid loans either on assignments of the policies taken as part of the loan package or under protective provisions in agreements between the insurers and the funders. One such case was Goshawk Dedicated (No2) Ltd v Governor and Company of the Bank of Scotland [2006] 2 All ER 610 which arose out of the collapse of the scheme managed by The Accident Group ("TAG"). Here, in an attempt to establish that the funder (Bank of Scotland) had no enforceable rights under assignments of the policies issued by the claimant underwriters, the underwriters sought declarations that the credit agreements entered into with claimants under the TAG scheme failed to comply with the Consumer Credit Act 1974 ("the Act"). In an illuminating judgement to which I shall refer in some detail later, Sir Francis Ferris held that the credit agreements did not fail to comply with the Act and declined to make the declarations sought.
3. Another such case is the one before the court in these proceedings. This involves a scheme operated by Claims Bureau UK Limited ("CBUK"); the funder was again Bank of Scotland ("the Bank") and the insurer was Syndicate 1243 at Lloyd's, whose members for each year of account were some (but not all) of the defendants to this action. The scheme operated from September 2000 to early 2004. The Bank alleges that it is owed in excess of £11.3million in respect of outstanding loans relating to over 5,500 unsuccessful claims that were admitted into the scheme and seeks to recover this sum from the underwriters by three different routes: (i) as assignee of the policies; (ii) under a restitutionary claim for gross premium where the policies are void or unenforceable or the loan agreements were cancelled within the permitted period; and (iii) under a provision contained in the Master Certificate of Insurance. The provision in question ("the clause") is Condition 2 (c) which is in these terms:

2. Arrangements with the Funder

(c) Where Underwriters avoid or repudiate the Certificate or deny payment of any claim under the Certificate on any grounds whatsoever, whether fraudulent or not, including without limitation non-disclosure, misrepresentation, breach of Certificate or Master Certificate terms and Conditions or the application of any Exclusion, then Underwriters shall without delay indemnify the Funder to the extent of the amount of the outstanding loan (together with accrued interest payable thereon to the Funder by the Assured) due at the date of avoidance, repudiation or denial aforesaid. This Condition shall constitute a separate agreement between the Funder and Underwriters. This is without prejudice to Underwriters right of recovery from the Assured or Appointed Representative.

4. It is now common ground that the clause constitutes a collateral contract enforceable by the Bank.
5. On 15 September 2006 Gloster J ordered that there be a trial of preliminary issues arising out of BOS's claim under the clause. It is those issues that have been tried before me. They mostly involve questions of construction of the clause, and I must accordingly set out what I find to be the objective matrix of fact in the light of which the meaning of the condition must be determined.

The factual matrix

The Client Funding Agreement

6. The governing agreement between the Bank and CBUK was concluded on 30^th November 2000 under the name "Client Funding Agreement". The initial term was three years subject to termination on 6 months' notice to expire at the end of the initial period or at any time thereafter. By clause 2.2 the Bank agreed to make loans to claimants on the terms set out in Schedule 5 and by clause 5.4 the Bank was entitled to charge interest at a margin over the Bank's base lending rate.
7. For its part, by clauses 4.1 and 9.1, CBUK agreed to promote "the Scheme" defined as "the CBUK Scheme under which individuals who have suffered a personal injury sustained in any accident may enter into arrangements with CBUK for the provision of a legal expenses insurance policy which may be funded by a loan from the Bank or personally funded by an individual claimant". CBUK also agreed to provide the Services set out in Schedule 1 – marketing the Scheme, assessing potential claimants, managing the panel and vetting solicitors and providing to the Bank management reports – to the levels provided for in Schedule 2. By clause 4.4 CBUK also undertook to comply with its obligations under the Operations Manual issued for the use of its claims advisers and by clause 4.11 agreed not to vary or amend the Solicitors Operations Manual, the Panel Solicitors Agreement, the Conditional Fee Agreement and the insurance policy to be issued to claimants. By clause 4.12 CBUK also agreed to procure that the Rule 15 Panel Solicitor Letter, the Panel Solicitor Agreement, the Lampkin Vetting Agreement and the Northwest Administration Panel Solicitor Agreement would not be varied without the prior consent of the Bank.
8. The terms of the Panel Solicitors Agreement, the Conditional Fee Agreement and the insurance policy are set out in Schedules 6, 4 and 3 respectively. The first of these documents required the panel solicitor to observe and perform the procedures and obligations set forth in the Operations Manual to ensure that no claim was accepted which did not have a 65% chance of success and of achieving an award in excess of £1000.
9. By clauses 4.5, 11 and 12, the Bank had the right to inspect and audit CBUK's records and there were to be regular monthly meetings between representatives of both parties.
10. Finally, by Clause 8.3 CBUK agreed to indemnify the Bank against any direct loss incurred by the Bank in consequence of any failure to recover any outstanding loans (including interest) as a result of failure to receive policy proceeds, or the policy proceeds or the amount of damages received by the claimant being insufficient to cover the amount owing to the Bank.

The Binding Authority Agreements

11. The underwriters were tied into the Scheme by four consecutive binding authority agreements for periods of 12 months beginning with an agreement which commenced on 1^st September 2000 and which was extended to expire on 30^th September 2001. Under these agreements CBUK was authorised, acting by certain named individuals, to issue standard form certificates of insurance to claimants who had: (a) entered into a standard form client agreement and CFA; (b) been vetted in accordance with the Operations Manual; and (c) been assessed to have a 65% or higher prospect of success. The last of the agreements expired on 13^th February 2004.

The Master Certificate of Insurance

12. The certificates of insurance issued to claimants incorporated the terms of the Master Certificate of Insurance. The Original Master Certificate operated until 30^th September 2001. The lender's clause in this original certificate provided:

2. Arrangements with the Funder

(c) Where the Certificate becomes void or voidable in the circumstances set out in Condition 3(a), 3(b), 4, or 6 or where Exclusion 3 applies, provided that the Appointed Representative is able to satisfy Underwriters that the circumstances entitling Underwriters to void or avoid the Certificate were not known by, nor should they have been known by, the Appointed Representative and were not the result of any negligence on the part of the Appointed Representative then, notwithstanding the avoidance of the Certificate, Underwriters shall reimburse the Funder in respect of the Premium and Loan Interest but shall be entitled to recover from the Assured the amount of that indemnity.

13. The clause under consideration in this action was substituted for the original clause in each of the Master Certificates for the years 1^st October 2001—31^st October 2002; 1^st November 2002—31^st August 2003; and 1^st September 2003—13^th February 2004.
14. The new clause was insisted on by the Bank following a review of its security in light of the fact that a greater number of loans than anticipated had been advanced and the claimant borrowers did not have to pass a credit scoring check.
15. At the same time that the new lender's clause 2 (c) was adopted, CBUK sent a letter dated 1^st October 2001 to the underwriters stating, inter alia: "We…hereby acknowledge the partnership nature of the Agreement We have entered with you …We confirm that, if Underwriters have indemnified the Funder to the extent of the outstanding loan plus interest in circumstances described in Condition 2 (c) of the Master Certificate, We will immediately repay Underwriters any such amount(s)." I refer to this letter because it was mentioned by both sides, although as I understood it, Mr Popplewell QC for the underwriters did not concede that it was part of the admissible background. Indeed, in my view it is doubtful whether, in the language of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912, the letter was "reasonably available" to the Bank. I therefore propose to leave it out of account when construing the clause, although I shall include in the factual matrix the fact that in reality the underwriters and CBUK were "partners" in the scheme and that it was open to the underwriters to seek a counter indemnity from CBUK. I should add that even if the letter were properly to be regarded as part of the admissible background, it would have made no difference to my decision on the construction of the clause.
16. Condition 2 (a) in all the Master Certificates provided:

2 (a) It is a condition of this Master Certificate and the Certificate that the terms and conditions of the loan facilities made available by the Funder in respect of the payment of the Premium and Own Disbursements shall be strictly adhered to including the terms of repayment of the loan. In the event that the terms of repayment of the loan are not complied with, the Funder shall be entitled (but is not obliged) to require Underwriters through Underwriters' Representative to cancel the Certificate with immediate effect and the premium received by Underwriters will be forwarded to the Funder and used by way of reduction of the outstanding loan. No other amounts shall be repayable by Underwriters if the Certificate is so cancelled.

The operation of the CBUK scheme

17. The scheme was marketed by CBUK. Claims Advisers employed either by CBUK or an associated company, Northwest Administration Ltd, would find and then visit potential personal injury claimants. The purpose of this visit was to make an initial investigation of the claim and capture the details on a pre-printed claim agreement form. It appears that the form and a declaration were signed by the claimant during this first visit, but it may be that the practice was to obtain the claimant's signature to these documents during the second visit referred to in paragraph 26 below. Amongst other things, the claim agreement provided:

"I agree to ...

Claims Bureau UK Ltd issuing a C.B.U.K. LITIGATION INSURANCE POLICY to cover own disbursements, third party costs and third party disbursements. The cost of the policy is £750 plus I.P.T. which will be paid to Claims Bureau UK Ltd by my appointed solicitor as a disbursement on my behalf. I FULLY UNDERSTAND THAT ANY UNRECOVERED INSURANCE POLICY PREMIUM OR PART THEREOF WILL BE DEDUCTED FROM ANY DAMAGES/COMPENSATION THAT ARE RECOVERED ON MY BEHALF.

...

I AUTHORISE Claims Bureau UK Ltd to receive any monies on my behalf and to deduct from those monies any of its charges which remain outstanding and account to me for the balance."

18. The claimant (now a "client") was also intended to sign as the borrower a standard form loan agreement which recorded the initial credit limit (usually £3000) and the rate of interest (usually 7% over LIBOR). The agreement was in the form of three sets, coloured pink, yellow and white respectively. Each of the sets was in identical terms save in one or two respects. The details filled in on the top (pink) set were recorded automatically onto the lower sets. The client signed the white version and the pink version was left with the client pursuant to section 62 of the Act because he or she had signed the agreement away from the Bank's premises.
19. Under the loan agreement, the client/borrower agreed to repay the loan on whichever was the earlier of: (a) his claim being settled or determined; (b) his being advised to withdraw his claim; or (c) the cancellation of the insurance policy. The borrower also agreed to repay the amount by which the account balance exceeded the credit limit within 7 days of receiving notice of the excess. By condition 3.1, the borrower authorised the Bank to make advances in accordance with instructions received from CBUK and by condition 5.1 the borrower agreed that the Bank could use funds received from the proceeds of the policy or from his damages to repay or reduce the account balance. By condition 6 the borrower agreed to take out and maintain the insurance policy and assigned it to the Bank by way of security of his obligations under the agreement. Under condition 2 (b) of the Master Certificate any damages and costs recovered by the client were first to be used to discharge the loan together with related interest made by the Bank.
20. At the first visit the Adviser was also supposed to leave with the client a Bank of Scotland leaflet called Guide to Litigation Claim Funding which was in the form of Questions and Answers.
21. Following the first visit, the claim as detailed in the claim form was vetted by personnel in CBUK's Head Office and again by Lampkin & Co, solicitors, or their delegate, Legal Reports and Services Ltd. As we have seen, the intention was that only claims with a 65% prospect of success would be accepted and put forward for an insurance certificate. Claims that passed the 65% test were sent for acceptance or rejection to one of the panel solicitors who had been approved to participate in the scheme.
22. If the claim was accepted by the panel solicitor, the next step was the allocation of an insurance policy number.
23. The Certificate of Insurance was issued by CBUK under the binding authority agreement either immediately following the allocation of a policy number or after the Bank had accepted the loan (as to which see below). The cover under the Insurance Certificate was up to £25,000 against "Defendant's Costs", "Own Disbursements", "the Premium" and any "Loan Interest", these terms being defined in the Master Certificate.
24. After the allocation of policy numbers and (in some instances) the issuance of the Insurance Certificates, there were sent to the Bank: (i) an import file containing the case and policy numbers and the relevant details; and (ii) the white and yellow versions of the loan agreement.
25. In deciding whether to accept the loan agreement, the Bank was not obliged to make (and nor did it) any credit assessment of the borrower other than, pursuant to Schedule 2 of the Client Funding Agreement, making checks to see if he or she was bankrupt and/or if there was a CIFAS^[1] match.
26. Once the Bank had accepted the loan agreement by signing the white version, a Claims Adviser would make a second visit to the home of the client. During this visit, the Adviser would give the client the Insurance Certificate and obtain the client's signature to the standard form CFA and a client care letter (the Rule 15 letter).
27. The CFA provided, inter alia:

"Paying us

If you win your claim, you pay our basic charges, our disbursements and a success fee. The amount of these is not based on or limited by the damages. You are entitled to seek recovery from your opponent of part or all of our basic charges, our disbursements, a success fee and the insurance premium. ...

If you lose, you must pay your opponent's charges and disbursements, your own disbursements and the premium plus any related loan interest, however you have taken out insurance cover against these risks through Claims Bureau (UK) Limited. ... If you lose, you do not pay our charges.

...

Claims Bureau (UK) Limited Litigation Insurance Cover

Claims Bureau (UK) Limited Litigation Insurance cover is only made available to you by solicitors who have joined the scheme.

You agree to pay a premium of £750.00 plus IPT for your Claims Bureau (UK) Limited Litigation Insurance Certificate of Insurance when you sign this agreement, although to ease the financial burden upon you we will arrange for this premium to be paid on your behalf. We undertake that the premium will be sent to Claims Bureau (UK) Limited on your behalf. If you lose your Claims Bureau (UK) Limited Litigation Insurance Certificate will cover your opponent's charges and disbursements, your own disbursements that we have incurred on your behalf and the premium plus any related loan interest. The maximum amount that the Underwriters will pay out in any event is £25,000.

If this agreement ends before your claim for damages ends, your Claims Bureau (UK) Limited Litigation Insurance Certificate ends automatically at the same time."

28. The next step was for the Bank to send to the client by post the yellow version of the loan agreement which alerted the client to a right to cancel exercisable during a 5 day cooling off period.
29. Until the end of 2002, the Bank advanced the loans to CBUK following the end of the five day cooling off period. After the end of 2002 the funds were advanced at the same time as the yellow version of the agreement was sent to the client. From January 2004, the premium element of the loan was advanced directly to the underwriters via a nominated recipient.
30. If the claim succeeded the recovery was paid to the Bank from which it recouped the principal and loan interest, and the balance, after deduction of further disbursements, was received by the client. If the claim failed the intention was that the insurers would pay under the policy up to £25,000 against "Defendant's Costs", "Own Disbursements", "the Premium" and any "Loan Interest".

The meaning and effect of the clause

31. Pursuant to the approach formulated in Lord Hoffmann's celebrated speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912, the task of the court is to ascertain the meaning that the clause would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
32. Mr Popplewell QC for the defendants submitted that the old canons of construction that an indemnity should be construed strictly against the indemnifiee continued to apply notwithstanding Investors Compensation Scheme. I disagree. In my opinion, Lord Hoffmann's construction principles govern whatever the type of contract falling to be construed, but that is not to say that in particular contexts, the court will not require very clear wording before it gives a provision a particular meaning. Thus, the majority of the House of Lords^[2] in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 adopted Lord Hoffmann's approach when construing a release, notwithstanding the old construction rules that had been applied to such contracts over the ages. And in Static Control Components (Europe) Ltd v Egan [2004] 2 Lloyds Rep 429 the Court of Appeal expressed the view that in the light of Lord Hoffmann's principle, "it may be that the concept that a guarantee should be "strictly construed" now adds nothing."

The underwriters'submissions on the wording of the first part of the clause.

33. In his submissions on the wording of the clause Mr Popplewell divided the provision into two parts, the first part consisting of the words:

Where Underwriters avoid or repudiate the Certificate or deny payment of any claim under the Certificate on any grounds whatsoever, whether fraudulent or not, including without limitation non-disclosure, misrepresentation, breach of Certificate or Master Certificate Terms and Conditions or the application of any Exclusion then …

34. Mr Popplewell contended that word "Certificate" signified that the clause only applied where a contract of insurance as evidenced by and contained in a Certificate as defined had been concluded and was being avoided or repudiated or coverage thereunder was being challenged. "Certificate" is defined in the Master Certificate as:

The certificate of insurance issued by the Coverholder to the Assured which specifies the Premium and a summary of the terms, Limit of Indemnity, Exclusions and Conditions contained in this Master Certificate.

35. "Assured" is defined as:

An individual (including his heirs and assigns), who has signed an agreement with the Coverholder and a Conditional Fee Agreement with the Appointed Representative, and who has been issued with a Certificate by the Coverholder and whose insurance cover under this Master Certificate has been declared to Underwriters through the procedures agreed with Underwriters' Representative.

36. "Conditional Fee" is defined as:

An enforceable agreement in writing between the Assured and the Appointed Representative entered into pursuant to Section 58(1) of the Courts and Legal Services Act 1990 as defined in the Conditional Fee Agreement Order 2000.

37. Mr Popplewell contended that even leaving aside the definition of Assured, it is inherent in the concept of an assured that there is a party to a contract. Once one takes account of the definition of Assured, the position is even clearer. Thus where a certificate had been issued but no claimant in fact existed, the certificate did not fall within the clause. One does not terminate a piece of paper, one terminates a contract, said Mr Popplewell. He further submitted that it was significant that whilst the clause refers to avoidance, repudiation and denial of payment (coverage), there is no reference to invalidity of the certificate. It made sense, he argued, to distinguish between where there has been a valid contract originally and where there has been none. Thus, generally speaking, where underwriters are on risk for any period of the insurance, they are entitled to retain the premium if the insurance is terminated, but if it is avoided ab initio, they might have to return the premium, provided the non-disclosure was not fraudulent. The draftsman of the clause is therefore to be taken to have had in mind the distinction between where a valid contract had come to an end by one of the processes identified in the clause and where there was never a valid contract of insurance at all.
38. Mr Popplewell also drew support for his construction from lender's condition 2(a). He argued that if his construction of the clause was correct, condition 2(a) would continue to play a role in a range of circumstances where the clause did not apply, but if the Bank's construction were right, condition 2(a) would be rendered entirely otiose. Further, if the Bank's construction were correct, the entire risk of non-payment would fall on the underwriters who, unlike the Bank with its right to control the operation of the scheme under the Client Funding Agreement, were not in a position to ensure that the Scheme was operated as it was intended to be operated.
39. It followed, submitted Mr Popplewell, that the clause did not apply where: (i) the Certificate had been issued beyond the authority conferred by the binding authority agreement; or (ii) the Certificate had been issued to someone who had not previously signed a CBUK claim agreement and/or a CFA which complied with the relevant statutory and regulatory requirements; or (iii) the certificate had been issued to a non-existent person

The underwriters' submissions on the second part of the clause.

40. The second part of the clause reads:

Underwriters shall without delay indemnify the Funder to the extent of the amount of the outstanding loan (together with accrued interest payable thereon to the Funder by the Assured) due at the date of avoidance, repudiation or denial aforesaid.

41. Mr Popplewell submitted that the effect of these words was that the underwriters were only obliged to indemnify the Bank where they were declining to pay under an insurance certificate issued in respect of a loan that was enforceable by the Bank against the borrower. Thus, if the underlying loan were unenforceable because of non-compliance with the Act, or because no borrower existed, or the loan agreement were forged, or it were void on non est factum grounds, the Bank would have no right to an indemnity in respect of that loan.
42. In support of this submission, Mr Popplewell argued that in the context of the clause "due" means the same as "payable" and "payable" means the debtor can be required to pay. He referred to Re Moss [1905] 2 KB 307 where Darling J said, "money can only be said to be due in a legal sense when it can be recovered in an action."
43. Mr Popplewell also had a subrogation point. He submitted that whether the clause was in the nature of a guarantee or an indemnity, to the extent that the underwriters paid under it they were entitled to be subrogated to the Bank's right to enforce the loan or loans in question, which was a valuable right. This being so, the clause should be construed as applying only where the underlying loan was enforceable against the borrower. An obligation to indemnify regardless of whether there was an enforceable underlying contract was so disadvantageous to the underwriters that the clause should only be held to have this effect if this was very clearly spelled out in the wording, which it was not.

The Bank's submissions on the wording of the clause

44. Dealing with the first part of the clause, Mr Bailey QC submitted that so long as a certificate had been issued, then if the underwriters refused to pay under it, they were liable to indemnify the Bank whether or not: (i) the certificate had been issued within the authority conferred by the binding authority; (ii) there was an Assured as defined; (iii) the loan agreement had been forged; or (iv) there was no claimant in existence. This, he said, was the effect of the words "on any grounds whatsoever". The clause does not say that the certificate must be a valid certificate and there is no legitimate basis for implying into the clause the constituent elements of the definitions in the Master Certificate as conditions precedent. Those definitions merely identify the paradigm position, and set out what ought to have happened. It does not follow that because one of those elements in the definitions is not satisfied, there was no Certificate whose avoidance or repudiation would trigger the indemnity in the clause. He pointed out that under Exclusion 2 in the Master Policy, Underwriters were not liable to indemnify the Assured in respect of "[a]ny claim if the Assured has not entered into a Conditional Fee Agreement or the Certificate is terminated before Conclusion" and contended that this only makes any sense as a contractual term if there would otherwise be liability to an "Assured" notwithstanding the fact that the "Assured" had not entered into a CFA.
45. Turning to the second part of the clause, Mr Bailey observed that there was a marked absence of any express words that made enforceability of the underlying loan contract a condition precedent to the underwriters' obligation to indemnify the Bank. He submitted that the words "to the extent of the amount of the outstanding loan (together with accrued interest payable thereon to the Funder by the Assured) due at the date of avoidance, repudiation or denial aforesaid" merely quantified the extent of the indemnity. They did not mean that there could be no indemnity unless the contract of loan was enforceable by the Bank against the borrower. In the alternative, if these words did not merely quantify the extent of the indemnity, they did no more than require that the contract of loan should be a valid contract and did not additionally require that the contract should be enforceable. Non-compliance with the Act, said Mr Bailey, does not render the credit agreement void but precludes the creditor from using the force of the law to compel the debtor to discharge his obligations under the terms of the regulated loan agreement. He referred to Wilson v First County Trust Limited (No 2) [2004] AC 816 at paras 31 and 164; R v Modupe [1991] CCLR 29 and Hitchens v General Guarantee Corporation [2003] CCLR 4.
46. As for Mr Popplewell's subrogation point, Mr Bailey submitted that the underwriters had no right to subrogation if they paid out on the indemnity because: (i) the clause was not a guarantee but imposed a primary obligation to pay money in certain circumstances which were all in the control of the underwriters; and (ii) in any event the indemnity under the clause is not against loss consequential upon an inability to enforce the loan, but is against loss consequential upon an inability to recover under the insurance.

Discussion

47. In my opinion, when interpreting the clause it is important to bear in mind that the Bank advanced the loans on the basis that it (the Bank) would in the vast majority of cases be repaid either out of the damages and costs recovered on the borrower's behalf from a defendant or, if the claim failed, as assignee of the insurance represented by the certificate. Given these routes to repayment the Bank was prepared to advance the loans without giving the borrower a credit score^[3], which was an important aspect of the scheme because many claimants might have been refused a loan if their credit rating had to come up to scratch. Accordingly, it was appreciated all round that when making the loans the Bank would place no or virtually no reliance on the prospects of recovering the loan from the borrower under the loan agreement.
48. In my judgement, given that the Bank was advancing the money under the loan agreements against the issuance of an insurance certificate by CBUK as agent for the underwriters, the first part of the clause is to be construed as Mr Bailey sought to construe it and for the reasons he advanced. Thus I am of the view that the words "on any grounds whatsoever….including without limitation" mean what they say and include any refusal by the underwriters to accept that they are bound under a certificate to pay in accordance with the certificate's terms when a claim has failed to succeed. Accordingly, it is not necessary for the certificate to comply with the definition in the Master Certificate. All that is necessary is that there be a certificate that was issued in respect of the loan for which an indemnity is sought under the clause. Nor is it necessary for there to be an Assured as defined in the Master Certificate. As Mr Bailey pointed out, the Master Certificate itself contemplates in Exclusion 2 that there could be a liability to an "Assured" who does not comply with the requirements of the definition because he has not entered into a CFA (as defined).
49. As for the second part of the clause, in my judgement the sole function of the words "to the extent of the amount of the outstanding loan (together with accrued interest payable thereon to the Funder by the Assured) due at the date of avoidance, repudiation or denial aforesaid" is to define the extent of indemnity by reference to the terms contained in the loan agreement accepted by the Bank, whether or not that agreement is enforceable by the Bank against the borrower. As I have said, it was appreciated all round that when making the loans the Bank would place no or virtually no reliance on the prospects of recovering the loan from the borrower under the loan agreement. It follows in my opinion that when agreeing to the clause the parties cannot have placed much if any reliance on the value to the underwriters of any subrogation right to enforce non-status loans. The parties are therefore not to be taken to have agreed that the underwriters would only make good such loss as the Bank would have been entitled to recover from the borrower. On the contrary, in light of the background reasonably available to both of them, the parties are to be taken to have agreed that the underwriters would make good any loss suffered as a result of any refusal to pay under the insurance certificate.
50. The meaning and effect of condition 2(a) in the Master Certificate is somewhat difficult to fathom. It may be that this condition is rendered otiose if the clause is construed as I think it should be. But this does not lead me to construe the clause in the manner contended for by Mr Popplewell. The clause came into the Master Certificate because the Bank insisted on its inclusion in substitution for the old lender's clause 2 (c). It is unreal to imagine that careful consideration was given as to how it fitted in with conditions 2 (a) and (b). The reality is that the new clause was simply bolted on to the surviving conditions with the intention that it should provide greater protection than did the previous conditions.
51. I appreciate that the effect of my construction of the clause is that as between the Bank and the underwriters the risk of loss resulting from mismanagement of the CBUK scheme, particularly in the vetting of claims, is thrown on the underwriters, and yet the Bank had considerable control over the operation of the scheme under the Client Funding Agreement. However, it was up to the underwriters whether they agreed to the clause or not. They must or certainly ought to have considered the possibility of it being construed as I have construed it. They had considerable leverage over CBUK, since the binding authority agreements were yearly agreements only. It was open to them, therefore, to insist on having more control over the way the scheme was operated and/or to pass on to CBUK some or all of the liability under the clause. In the event, they decided to agree to the clause and accept the risks involved in doing so. For these reasons I do not think that my construction of the clause is so commercially unreasonable that it requires clearer words than appear in the clause.

The non-construction issues

52. In addition to the questions turning on the construction of the clause there are two issues that go to the clause's enforceability under the general law. The first of these issues arises even if the clause is given the construction I have placed upon it. The second only arises if Mr Popplewell's construction of the second part of the clause is upheld. I have found against Mr Popplewell on his construction of the second part, but since the second issue was fully argued before me I propose to deal with it nonetheless.

Is the clause a "security" for the purpose of section 113 (1) of the Act?

53. Section 113 of the Act is headed Act not to be evaded by use of security and provides:

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.

54. The definition section in the Act (s.189) provides that

"security", in relation to an actual or prospective consumer credit agreement or consumer hire purchase 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.

55. The loan agreements were undoubtedly "consumer credit agreements". The underwriters argue that the clause falls within the definition of "security", with the result that, if the underlying loan agreements are unenforceable (as the underwriters contend they are), by section 113 the clause too is unenforceable.
56. In my judgement, the clause does not fall within the definition of "security" for two alternative reasons. First, the indemnity under the clause is not given to secure the carrying out by the borrower of his obligations but is given against the underwriters refusing to pay under an insurance certificate. Second, the clause was not at the request express or implied of the borrowers. It was common ground that the clause was not at the express request of the borrowers and that the borrowers were not made aware of the clause or of the Bank's insistence that it be incorporated into the Master Certificates. Mr Popplewell submitted nonetheless that the clause was at the borrowers' implied request because the clause was insisted on by the Bank, so that it could be said that the borrowers only received the loans because the Bank obtained the inclusion of the clause in the Master Certificates. I reject this submission. I cannot see how a security can be at the implied request of a borrower where the debtor does not know that the security has been obtained or that it was insisted on by the lender. I am supported in this conclusion by Guest and Lloyd's Encyclopaedia of Consumer Credit Law which states when dealing with the meaning of "security":

In order to "request" the security, even impliedly, the debtor must at least know of its existence. For example, a recourse clause in the master agreement between a finance house and its dealer, whereby the dealer guarantees the indebtedness of its customers under higher-purchase agreements between those customers and the finance house (the existence of which the customers are usually unaware), as in Unity finance limited v Woodcock [1963] 1 WLR 455, is not a "security" within the Act

Are the loan agreements unenforceable by reason of the terms of the cancellation notices contained in the pink and yellow versions?

57. The pink and yellow versions of the loan agreement were cancellable agreements because the borrower signed outside the Bank's premises (s.67(b)), and as such, by section 64(1), each had to contain a notice in the prescribed form indicating the right of the borrower 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.
58. The prescribed forms of notice are contained in the Consumer Credit (Cancellation Notices and Copies of Documents) Regulations ("the Cancellation Regulations") 1983 No 1557 (as amended by 1988 No 2047). Since the loan agreement was a "debtor creditor supplier agreement," the form applicable to the pink version was Form 5 in Part II of the Schedule to the Cancellation Regulations (see reg 5(1)) and the form applicable to the yellow version sent to the borrower was Form 11 in Part III of the same Schedule.
59. The pink version contained the following notice:

YOUR RIGHT TO CANCEL

Once you have signed you will have for a short time a right to cancel this agreement. You can do this by sending or taking a Written notice of cancellation to Bank of Scotland [address]. If you cancel this agreement, any money you have paid, goods given in part-exchange (or their value) and property given as security must be returned to you. You will not have to make any further payment.

Note: Your notice of cancellation will not affect your contract of insurance. [Italicised emphasis added]

60. Below the notice was a box containing the words:

This is a copy of your agreement for you to keep. It includes a notice about your cancellation rights which you should read.

61. The yellow version sent to the client after the Bank had accepted the agreement had two boxes on the first page containing:

YOUR RIGHT TO CANCEL

You have a right to cancel this agreement. You can do this by sending or taking a Written notice of cancellation to Bank of Scotland ….You have Five Days starting with the day after you received this copy. You can use the form provided. If you cancel this agreement, any money you have paid, goods given in part-exchange (or their value) and property given as security must be returned to you. You will not have to make any further payment.

Note: Your notice of cancellation will not affect your contract for insurance. [Italicised emphasis added]

CANCELLATION FORM

(Complete and return this form ONLY IF YOU WISH TO CANCEL THE AGREEMENT).

To: Bank of Scotland, [address]

I/We hereby give notice that I/We* wish to cancel agreement.

Signed [etc]

62. The prescribed forms include a number of sentences in square brackets with a footnote outside the end bracket. Each footnote carries a different instruction. By regulation 2 (2) of the Cancellation Regulations the wording of the prescribed forms must be reproduced in the copies of the agreement left or sent to the borrower without any alteration or addition, except that every form must be completed in accordance with any footnote. If the credit agreement is improperly executed in accordance with the Act it is unenforceable against the debtor (ss. 64 (1), 65 (1) and 127 (4) (b)).
63. Each of Forms 5 and 11 contains the following bracketed sentence:

[Note: Your notice of cancellation will not affect [your contract for life assurance] [your contract for insurance] [your contract of guarantee] [your contract to open a current account] [your contract to open a deposit account]4

64. The instruction in both Forms attached to footnote 4 is: "Creditor to omit words in square brackets where not applicable."

The submissions advanced on behalf of the underwriters

65. Put shortly, the underwriters contend that the italicised words in the cancellation notices contained in the pink and yellow versions of the loan agreement did not comply with Forms 5 and 11 and that therefore the loan agreements between the Bank and the clients are unenforceable. The agreements were non-compliant because a notice of cancellation served by the client would "affect" the contract of insurance and therefore the words "Note: Your notice of cancellation will not affect your contract for insurance" were "not applicable" and should have been omitted.
66. Mr Popplewell for the underwriters submitted as follows. Parliament intended strict compliance with the wording of the prescribed Forms in order to further the twofold purpose of the Regulations: (i) the general purpose of forming an essential part of the supply of information required under the Act; and (ii) a specific purpose of giving effect to the special protective regime concerning the vulnerable consumer's statutory right to cancel. Applying well known principles of statutory construction, the prescribed words in Forms 5 and 11 must be given their plain and ordinary meaning and the ordinary meaning of "affect" and "applicable" is that given respectively for these words in the Oxford Concise Dictionary, namely, "to have an effect on …to make a difference to" and "relevant, appropriate".
67. The five contracts referred to in Forms 5 and 11 set out in paragraph 64 above are "linked transactions" within section 19 of the Act. As a general rule, the service of a cancellation notice cancels any linked transaction as well as the credit agreement and (s.69 (1) (i)). This is because the existence of a linked transaction and in particular any liabilities of the consumer that have accrued thereunder would be likely to deter the consumer from exercising his right to cancel. However, under the Consumer Credit (Linked Transactions) (Exemptions) Regulations 1983 ("the Exemption Regulations"), the five linked transactions contained in the brackets after the word "Note" in Forms 5 and 11 are exempted from the automatic cancellation under s. s.69 (1)(i)). Accordingly, in prescribing the information set out in paragraph 64 above, the presumed purpose was to ensure that the information about the linked transactions in question was given to consumers, lest they be deterred from exercising their cancellation rights by a misunderstanding of the "effect" of cancellation of the regulated agreement on these transactions.
68. The ordinary meaning of the words "Your notice of cancellation will not affect your contract of insurance" is that the consumer's notice of cancellation will not produce an effect on the contract of insurance which was entered into as part of the transaction for which he was offered credit. The absence of any effect on his contract of insurance as a result of cancellation of the loan agreement will be relevant to the consumer's decision whether to cancel or not.
69. The statement "Your notice of cancellation will not affect your contract of insurance" was highly misleading and in fact wrong with the result that the Bank's notice of cancellation rights did not comply with the prescribed Forms 5 and 11. The statement was wrong because service of a cancellation notice would produce an effect on the contract of insurance (which was a linked transaction) and the contract of insurance depended on the existence of a CFA. The CFA was a linked transaction by reason of section 19(1)(b) because the disbursements incurred under the CFA were financed by the loan agreement. The CFA was also a linked transaction by reason of section 19(1)(c) in that it was the solicitor who initiated the CFA and he knew that the loan agreement had been made or contemplated that it might be made. The cancellation of the CFA would affect the contract of insurance because if cancelled it would be treated as if it had never been entered into (s. 69(4)) and under Exclusion 2 and Condition 5 of the Master Certificate of Insurance underwriters are not liable to indemnify the Assured if the Assured has not entered into a CFA which is in force during the course of the proceedings.
70. In the alternative, the cancellation of the loan agreement would affect the contract of insurance because all the elements of the CBUK scheme, including the loan and the insurance, were intended to operate as a single scheme. In particular, the scheme envisaged that the loan would be used to fund the insurance premium.

The submissions advanced on behalf of the Bank

71. The Cancellation Regulations and the Exemption Regulations are closely related and are intended to be read together. Each was part of a total package of consumer credit regulations that were made on 24^th October 1983, laid before Parliament on 3^rd November 1983, and which came into operation on 19^th May 1985.
72. Sections 67-73 of the Act constitute a series of statutory provisions providing debtors with specific rights in relation to the cancellation of certain regulated agreements during the cooling-off period. The purpose of a notice giving a debtor information about his cancellation rights is to summarise the rights of cancellation that are provided by these sections of the Act.
73. The reason the Note identifies the five types of contract contained therein is that they are the same categories of linked transactions that are exempt from automatic cancellation by virtue of section 69(5) and the Exemption Regulations. It follows that the clear intent and purpose of the prescribed Forms was to inform the debtor of the effect of Section 69 and whether there was a linked transaction which was exempt from automatic statutory cancellation pursuant to Section 69(1)(c)(i) of the Act.
74. Accordingly, the task required of a creditor by footnote 4 is straightforward and intended to be easy to comply with. If there is no linked transaction of the type exempted from automatic cancellation, the Note is "not applicable" and must be omitted. On the other hand, if there is a non-exempt linked transaction, then the relevant part of the Note is applicable and must remain included in the prescribed form of notice given to the debtor. Thus, the obligation imposed by the Regulations is essentially an administrative one. It demands no broader or more complex enquiry on the part of the creditor than as to the existence of a linked transaction (within the meaning of Section 19 of the Act) in one of the categories defined by the Exemption Regulations and replicated in the parenthesis in the Note itself. The answer to that enquiry provides the answer to the question posed by footnote 4.
75. Under section 189 "notice of cancellation" has the meaning given by section 69 (1). Accordingly, by the word "affect", the Note is referring to a direct statutory effect that would result if the particular linked transactions are not exempted from automatic cancellation by the Exemption Regulations.
76. It follows that the Bank was correct to omit in the notice of cancellation rights the words of the Note in parenthesis, for these words were "not applicable". And the Bank was required to include the words: "Note: Your notice of cancellation will not affect your contract for insurance" because a contract of insurance is exempt from automatic cancellation under section 69(5).
77. The legislature cannot have intended to place the creditor under an obligation, on pain of losing all his rights, to reach an accurate view whether one part of a complex transaction will indirectly "affect" a policy which is not cancelled under the Act. The underwriters' interpretation of "affect" and "not applicable" would place a creditor in an impossible position and/or severely constrain the scope of commercial activity falling under the Act because on that interpretation it was possible that a notice of cancellation could impact on a linked transaction of which the creditor is totally unaware.
78. Further, and in any event, a notice of cancellation would not have had the direct effect on the insurance contract contended for by the underwriters because the CFA is not a linked transaction under section 19(1)(b) or (c). It is not a linked transaction under section 19(1)(b) because it was not financed by the loan agreement: the CFA is a no win no fee arrangement; it therefore did not oblige the client to reimburse the disbursements paid on his behalf. It is not a linked transaction under section 19(1)(c) because the solicitor did not initiate the transaction, see eg Citibank International Plc v Schleider [1999] GCCR 2281.
79. Additionally, where a cancellation notice has only an indirect effect on a linked transaction, it does not "affect" that transaction for the purpose of the prescribed forms. It follows that even though the policy and insurance and the loan agreement are intimately bound up in a single scheme, the cancellation of the loan agreement did not "affect" the insurance policy. Further, and in any event, the cancellation of the loan agreement did not inevitably impact on the insurance policy because the scheme contemplated the possibility of a client funding the insurance and other disbursements from his own resources without the need of a loan.
80. Finally, if the Bank ought to have omitted the Note, this was not a failure to provide the loan agreement in the required form because the departure from what is prescribed was de minimis.

Discussion

81. The question whether the Bank's loan agreements are unenforceable by reason of the terms of the cancellation notices was decided by Sir Francis Ferris in Goshawk Dedicated (No2) Ltd v Governor and Company of the Bank of Scotland [2006] 2 All ER 610. There, the TAG scheme and the wording of the transactional forms were not materially different from the scheme and the wording of the forms before me. Further, all the principal submissions addressed to me were addressed to Sir Francis by Mr Howard QC for the underwriters and Mr Butcher QC for the Bank.
82. Where a judge of first instance after consideration has come to a definite decision on a matter arising out of a complicated and difficult enactment, the modern practice is that a second judge of coordinate jurisdiction will usually follow that decision unless he is convinced it is wrong, see Halsbury's Laws of England, vol 37 para 1244 and Police Authority for Huddersfield v Watson [1947] 1 KB 842 at 848 (Div Ct).
83. Despite Mr Popplewell's elegant submissions, far from being convinced that Sir Francis was wrong, I am convinced that he was right. Thus, Sir Francis upheld the Bank's submissions on the meaning of "affect" and "not applicable". In para 67 of his judgement he said:

Beyond the points on which I have expressed a view I have found the arguments on each side finely balanced and I confess that my mind has fluctuated. In the end, however, I have reached the conclusion that the Bank's contentions are to be preferred. While I find no single argument to be conclusive, there is one which I have found to be particularly impressive. Mr. Howard's submission that parliament cannot have intended the Bank to make a misleading statement appeared at first sight to be a telling point. But if Goshawk were right in saying that the creditor is obliged, when considering whether or not he is required to include the relevant note, to form a view whether cancellation of part of what may be (and in this case is) a complex transaction involving a number of separate elements will in any manner at all "affect" an insurance policy which is another of those elements, the means adopted by the legislature for the communication of that view to the debtor would be wholly inadequate. The creditor is not enabled to give advice to the debtor. If he concludes that the cancellation will "affect" the policy (in the sense of "affect" contended for by Goshawk) all the creditor can do is to omit the relevant note. He cannot add words of explanation as to what sort of effect he envisages. Still less can he indicate any element of doubt. If a statement that the notice of cancellation of the credit agreement will not affect an insurance policy is to be taken as meaning that the cancellation will not have any kind of effect, direct or indirect, then the silence which would result from the creditor concluding that the notice would affect the policy would be no less misleading than an erroneous statement will not affect the policy. These problems will not arise if the legislative provisions are construed in the more limited sense contended for by Mr. Butcher. In my judgment this represents the correct view.

84. Apart from the fact that I did not find the arguments finely balanced -- I thought the Bank's submissions were markedly more convincing than the underwriters' -- I agree with everything said here by Sir Francis. For the reasons he gives I too accept the submissions advanced by the Bank and reject those argued on behalf of the underwriters.
85. On the question whether cancellation of the loan agreement would "affect" the insurance policy in the TAG scheme, Sir Francis held that if the Bank's interpretation of "affect" is rejected, indirect effects in the form of the non-payment of the premium are not to be disregarded (p 693 b). I agree.
86. Sir Francis also held that: (i) the CFA was a linked transaction under section 19(1)(b) because the fulfilment of the terms in the CFA as to disbursements required finance which came from the credit agreement (see para 81); and (ii) in consequence the insurance contract was "affected" (para 84). Again, I agree. Since under section 69(4) the CFA is to be treated as never having been entered into, the cancellation of the CFA impacted on the insurance for the reasons advanced by Mr Popplewell.
87. As to whether the CFA was a linked transaction under section 19(1)(c), Sir Francis was not satisfied on the facts before him that it was the solicitor who initiated the CFA (p. 634 b). I too am not satisfied on evidence that the solicitor initiated the transaction, but it would be open to the underwriters in a particular case or cases to prove the contrary.
88. Finally, I agree with Sir Francis's conclusion (para 108) that, given the stark wording of reg 2(2) of the Cancellation Regulations and the consequences of non-compliance laid down in sections 65 and 127(3) and (4) of the Act, there is no room for the operation of any de minimis principle.

The issues determined

89. The questions ordered to be tried and my answers thereto are as follows.

(PI Claimant means "Personal Injury Claimant")

90. Whether condition 2 (c) of the Master Certificate dated 1^st /16^th October 2001 and 31^st October 2002 constitutes a collateral contract between the Claimant and the Defendants enforceable by the Claimant in its own right as alleged in paragraph 10A of the Amended Particulars of Claim.

Answer

It is agreed that condition 2 (c) constitutes a collateral contract between the Claimant and the Defendant in its own right. There may be some dispute as to whether the collateral contract is an overarching contract or whether there were individual collateral contracts but I am not asked to determine to this question.

91. If the answer to question 1 is yes, whether the Defendants would be entitled to refuse to indemnify the Claimant under clause 2 (c) of the Master Certificate dated 1^st /16^th October 2001 and 31^st October 2002 in respect of the amount of an outstanding loan if and on one or more of the grounds that.

2.1 The PI claimant did not exist.

Answer

No. For the reasons given in paragraphs 47-48 and 50-51 above the clause does not require there be a Certificate as defined or an Assured as defined.

2.2 The PI claimant's signature on the loan agreement was forged.

Answer

No, for the reasons given in paragraphs 47-51 above the clause does not require that there be an enforceable loan obligation or an Assured as defined.

2.3 The loan agreement between the PI claimant and the Claimant is void under the principle of non est factum.

Answer

See answer to 2.2

2.4 The loan agreement between the PI claimant and the Claimant is

unenforceable as a result of a failure to comply with the requirements of the Consumer Credit Act 1974 and any regulations made thereunder.

Answer

No, for the reasons given in paragraphs 49 and 51 above

2.5 The terms of the loan agreement have not been strictly adhered to.

Answer

It was agreed between the parties that this issue is no longer in play.

2.6 The PI claimant had not in fact sustained personal injury.

Answer

This question contemplates that the certificate of insurance was issued outside the authority of the binder because the claim was not vetted. It also raises the issue whether there must be a Certificate as defined. The answer is No, for the reasons given in paragraphs 47-48 and 50-51 above.

2.7 The claimant had not signed an agreement with CBUK.

Answer

No, for the reasons given in paragraphs 47-48 and 50-51 above the clause does not require that there be a Certificate as defined or an Assured as defined.

2.8 The PI claimant had not entered into a Conditional Fee Agreement which complied with section 58 of the Courts and Legal Services Act 1990 and the Conditional Fee Agreement Order 2000.

Answer

See the answer to 2.7.

2.9 The certificate of insurance issued to the PI claimant was unauthorised and is not binding upon the Defendants.

Answer

No, for the reasons given in paragraphs 47-48 and 50-51 above.

2.10 The certificate of insurance issued to the PI claimant pre-dated the execution of the agreement between CBUK and the PI claimant and /or the execution of a CFA.

Answer

See the answer to 2.7.

2.11 The PI claimant's claim had been accepted into the scheme and/or pursued without due care and diligence.

Answer

This question contemplates departures from the scheme that would be inconsistent with the definitions of Certificate and Assured. The answer is No, for the reasons given in paragraph 49 and 50-51 above

2.12 The PI claimant's claim had been accepted into the scheme and/or pursued contrary to the terms of the Operations Manual.

Answer

See the answer to 2.11

2.13 The PI claimant's claim had been accepted and pursued under the Scheme in a manner which had prejudiced the Defendants' position.

Answer

See the answer to 2.11.

3. If the answer to question 2.4 above is yes, whether a loan agreement concluded between the Claimant and a PI claimant is unenforceable by reason of the fact that the notice of cancellation included a note stating. "Your notice of cancellation will not affect our contract of insurance."

Answer

This question does not arise given the answer No to question 2.4

Note 1   Credit Industry Fraud Avoidance System    [Back]

Note 2   See Lord Bingham at para 8; Lord Hoffmann at para 39; and Lord Clyde at para 78.    [Back]

Note 3   It was contemplated that the Bank would check to see if the claimant was bankrupt and whether there was a CIFAS match but this fell well short of conducting the usual credit scoring exercise undertaken before a retail bank loan is advanced.    [Back]