England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
LIVERPOOL DISTRICT REGISTRY

		The Law Courts, City Square, 35 Vernon Street, Liverpool L2 2BX
		26th July 2006

JUDGE PELLING QC:

1. In these proceedings the Claimant seeks a declaration under section 142(1) of the Consumer Credit Act 1974 that the Defendant lender is not entitled to enforce a regulated loan agreement entered into by the parties on 30th June 2004, whereby a total of £14,784.94 was lent to the Claimant and secured on the Claimant's house at 2 Pennington Street, Walton in Liverpool. If the Claimant succeeds in obtaining the declaration he also seeks an order requiring the removal of the charge from the register of title for the property, pursuant to section 106(c) of the 1974 Act.
2. This case was transferred from the County Court into the Mercantile List of the Queens Bench Division of the High Court at the request and with the consent of the parties. No witnesses were called and the case proceeded on the basis of the witness statements filed by the parties.
3. The agreement between the parties is in a form dictated by the Consumer Credit (Agreement) Regulations 1983. On the front of the agreement it is recorded that the amount of credit is £13,108.05, that an acceptance fee of £235 and a mortgage indemnity fee (MIF) of £1,441.89 has been charged, thus giving rise to total sum loaned of £14,784.94. The detailed terms are set out on the reverse of the agreement. clause 3 provides:

"Mortgage Indemnity Fee

The mortgage indemnity fee shall be charged to you by being included in the total amount of the loan. In return for payment of this fee we agree that in the event that it is necessary for us to enforce the security and the value of the secured property upon the sale is insufficient to cover all sums then due by you to us under this agreement we shall not pursue you for such shortfall."

4. In the statement dated 13th January 2006 the Claimant identifies the purpose of the loan in these terms, and I quote from paragraph 1, 2, and 5 of his statement as follows:

"I have taken out a number of secured loans with Welcome Finance over the past few years. The loans have been in joint names with my partner, Victoria King. Four loans have been taken out in total. Each loan has solely or in part has been used to settle the previous loan.

The last loan taken out is the subject-matter of this case. This loan was taken out on 30th June 2004. It was provided solely to re-finance the previous agreement. It is the only loan that I know have with Welcome."

Then at paragraph 5 the Claimant says this:

"The representative also advised me that I was eligible for a new loan. He explained that it would consolidate my existing debt and give me some spare cash to put me back on track. He also said the new loan would be at a lower interest rate than I currently had. This appeared to me, and as a result a further appointment was made for me and Victoria to go to Welcome's office to sort out the paperwork."

5. It is common ground that the payment of the MIF was mandatory, in the sense that the Claimant was not given an option whether to take the benefits of clause 3 or not. If the loan was to be made then the finance product offered was a secured loan subject to clause 3. The reasons for this were explained by the Mr. Orrell, the Defendant's Legal Manager, in his statement dated 24th February 2006, as follows:

"The Defendant's customers are, in general, sub-prime borrowers who have poor credit ratings and/or previous County Court judgments against their name. Accordingly, on average there is a higher level of default upon these agreements than you would expect with a higher quality loan book. Furthermore, in relation to the secured personal loans it is unusual for the Defendant to obtain a first legal charge over the customer's property and, therefore, the value of the security held by the Defendant can be extremely limited, if it has any value at all. The Defendant is therefore operating in a market where it potentially has a high loan to value secured on uncertain equity in the property. Given the higher than average level of default and the doubtful value of the security, the Defendant ensures that this type of finance agreement is priced appropriate to cover losses suffered by the Defendant. This higher risk is reflected by the rate of interest agreed to be charged to the customer. In addition, where the finance agreement is secured then the Defendant charges what in industry terminology is normally called a mortgage indemnity fee. By signing the secured personal loan agreement the customer agrees to pay the fee as shown on p. 7" ,

…

(I interpose, that is p. 7 of the exhibit to the witness statement)

"… resulting in the customer obtaining an immediate benefit as set out in the Terms and Conditions to the finance agreement. In summary, it means that the customer knows from the outset of the loan, and thereby has immediate peace of mind, that if the customer defaults on the finance agreement and the Defendant repossesses and sells the customer's property but there is insufficient equity remaining after all prior charge holders have been settled to fully repay the sums due, then the Defendant agrees that it will not take any steps against the customer to recover any shortfall. Instead, the Defendant agrees with the customer at the time the loan is initially given that the Defendant will simply write off the balance. In effect, the Defendant receives a sum from the customer when the loan is provided, in return for which the customer receives the benefit at that time of knowing that should he default a limit is imposed on his exposure at the level of the value of the equity in his property, if any. When the Defendant receives the fee it is not treated any particular way and simply forms part of the charges paid by the Defendant under the agreement. In particular:

9.1 no mortgage indemnity guarantee or insurance policy is in existence in respect of any security held by the Defendant, including that of the Claimant and Part 20 Defendants. Indeed, the Defendant has never taken out such guarantee or policy in respect of any loan with any customer.

9.2 no such guarantees or insurance policies are taken out or arranged by the Defendant in respect of its secured loan agreements.

9.3 no fund has ever been set up by the Defendant to cover losses from shortfalls which have been written off following defaults in secured personal loans."

6. The point that arises in this case is a narrow one. As I have already noted, on the front of the agreement form the amount of credit is stated net of MIF, which is included as a charge. The Claimant's case is that the MIF should have been included in the statement of the amount of credit and not as a charge, so that the amount of credit is understated. It is accepted by the Defendants that if the Claimant is correct in these submissions then the loan agreement would be irredeemably unenforceable and that the Claimant would be entitled to the relief sought.
7. The issue depends upon a true construction of the Consumer Credit (Total Charge for Credit) Regulations 1980. The purposes of these Regulations is to ensure that the debtor should be able to know the true cost of the credit facility on offer and to be able to compare different types of facility, and to contrast these costs with the cost of financing from the borrower's own resources. This, indeed, is the effect of section 20 of the 1974 Act, pursuant to which the Regulations were made. The relevant paragraphs of the 1980 Regulations for present purposes are Regulations 3, 4 and 5, which provide as follows:

"3. Total charge for credit

For the purposes of the Act the total charge for the credit which may be provided under an actual prospective agreement shall be the total of the amounts determined as at the date of the making of the agreement of such of the charges specified in Regulation 4 below as apply in relation to the agreement, but excluding the amount of the charges specified in Regulation 5 below.

4. Items included in total charge for credit.

Except as provided in Regulation 5 below, the amounts of the following charges are included in the total charge for credit in relation to an agreement...

(b) other charges at any time payable under the transaction by or on behalf of the debtor or a relative of his, whether to the creditor or any other person; and

(c) a premium under a contract of insurance payable under the transaction by the debtor or a relative of his whether the making or maintenance of the contract of insurance is required by the creditor:

(i) as a condition of making the agreement; and

(ii) for the sole purpose of ensuring complete or partial repayment of the credit, and complete or partial payment to the creditor of such of those sums included in the total charge for credit as are payable to him under the transaction in the event of the death, invalidity, illness or unemployment of the debtor, notwithstanding that the whole or part of the charge may be repayable at any time or that the consideration therefore may include matters not within the transaction or subsisting at a time not within the agreement.

5. Items excluded from total charge for credit.

(1) The amounts of the following items are not included in the total charge for credit in relation to any agreement...

(i) A premium under a contract of insurance other than the contract of insurance referred to in Regulation 4(c) above."

8. It is common ground that Regulation 4(c) is not relevant, being limited in its effect to payment protection insurance, which is mandatory under the terms of an agreement to which that regulation applies. The Claimant's case is that the MIF is a payment to which Regulation 5(i) applies, that is, "it is a premium under a contract of insurance", whereas the Defendant's case is that the MIF is a charge to which Regulation 4(b) applies, and which has been properly presented in the agreement.
9. The Claimant referred to various cases in which consideration has been given as to the meaning of the phrase "police of insurance" or "contract of insurance" for the purpose of showing, by reference to these formulations, that clause 3 satisfies all the criteria identified in the cases so as to enable him to argue that the MIF is to be treated as an insurance premium. To my mind this approach has its dangers. None of the cases relied on purport to give a comprehensive definition of a contract or policy of insurance. Indeed, most of the judgments expressly disavow such an intention. The question that I have to answer is what the phrase used in these particular Regulations means. The other danger, as I see it, of such an approach is that it is based on the propositions that all contracts that satisfy the criteria are, and must be, contracts of insurance when, in truth, all that can be said is that a contract that satisfies the criteria may be a contract of insurance.
10. With these qualifications I turn to the cases. The lead case is Prudential Insurance v. ILC [1904] 2 KB 659. It is worth noting the factual basis of that case. The issue was a fiscal one, in that the issue between the parties, as identified on p. 660 of the report, is whether the document under consideration was a policy of life insurance within the meaning of the definition contained in section 98 of the Stamp Act 1891, with the consequence that duty was to be 2s 6d as being a covenant for securing the payment of money not exceeding £100, whereas the contrary contention was that the instrument was to be treated as a policy of life insurance and the duty payable would be one shilling. Chanel J. defined policy of insurance for these purposes at pp. 663-664 of the judgment. In so far as it is material, Chanel J. said as follows:

"Where you insure a ship or a house you cannot ensure that the ship will not be lost or the house burned but what you do insure is that a sum of money should be paid upon the happening of a certain event. That, I think, is the first requirement in a contract of insurance; it must be a contract whereby for some consideration, usually, but not necessarily, for periodical payments called 'premiums' you secure to yourself some benefit usually, but not necessarily, the payment of a sum of money upon the happening of some event. Then the next thing that is necessary is that the event should be one which involves some amount of uncertainty. There must be either uncertainty whether the event will happen or not; or, if the event is one which must happen at some time, there must be uncertainty as to the time at which it will happen."

A third requirement identified by Chanel J. has been superseded by subsequent cases and is not relevant to the issues I have to decide in any event. Chanel J. continued by summarising the position, as he saw it, at p. 664 of the report in these terms:

"A contract of insurance then must be a contract for the payment of a sum of money, or for some corresponding benefit such as the re-building of a house or the repairing of a ship to become due on the happening of an event, which event must have some amount of uncertainty about it and must be of a character more or less adverse to the interests of the person effecting the insurance."

11. This definition was followed by Templeman J. (as he then was) in DTI v. St. Christopher Motorist Assurance Association Limited [1974] 1 LLR 17, where the issue was whether the service offered was insurance that triggered a requirement that the Defendant comply with various regulatory requirements applicable to insurance companies. Templeman J. concluded that the contract there being considered was a contract of insurance applying the reasoning set out by Chanel J. in Prudential Insurance Company v. ILC even though what was provided on the occurrence of the contingency was a service not money. It is worth noting Templeman J's warning in the final paragraph of his judgment at p. 21, which was in the following terms:

"It does not follow that the definition given by Chanel J. in a case based on the facts with which he was concerned and applied by me to a case in which I am now concerned is an exhaustive definition of insurance. There may well be some contracts of guarantee, some contracts of maintenance, which might at first appear to have some resemblance to the definition laid down by Chanel J. and which, on analysis, are not found to be true contracts of insurance at all. I wish to guard myself, particularly in view of the fact that, as I have said, Counsel for the Department has had no vocal opposition except mine against deciding anything other than that the rules and trade of the defendant company in the present case amount to insurance. Counsel for the Department himself suggests that some further limitation in that the event which must happen must not be an event within the control of the insurer; but whether that, in fact, be so I need not now decide. It is sufficient for my purposes that the narrow distinction which might have been argued differentiate the case of the defendant from the normal type of insurance, that narrow distinction being the insistence that the defendant company pays for its service instead of paying the member the amount which it will cost him to provide a service, is not one which enables the defendant company to carry on business outside the provisions of the Insurance Companies Acts. In the result, I am prepared to make a declaration in the terms of paragraphs 1 and 2 of the summons."

12. An example of a contract that would satisfy Chanel J's requirements, but still not be a contract of insurance, was that given Mr. Onions Q.C., counsel for the Defendant, namely, a performance bond. That point was one which, in my judgment, is well made as illustrative of the dangers of what Mr. Onions called a "tick the box approach". As Sir Robert Megarry V-C put it in MBU v. The Department of Trade and Industry [1980] 1 Ch. 82, 90:

"I only say that for the purposes of this case it seems to me that a contract which contains these three elements is likely to be a contract of insurance and a contract that lacks any of them is likely not to be a contract of insurance. I may add that Templeman J. instances some contracts of guarantee or of maintenance which might satisfy such a test and yet be no true contracts of insurance."

13. In my judgment the Claimant's case that the payment is to be characterised as a premium under a contract of insurance within the meaning of the 1980 Regulations is misplaced, for, at least, the following reasons. First, I accept the Defendant's submission that the decision of Court of Appeal in Humber Clyde Finance v. Thompson [1997] CCLR 23 remains good law. That case was concerned with a payment waiver option in a conditional sale agreement. The effect of that provision was that, provided the nominated person, Mr. Thompson, died within five years of the making of the agreement, Mrs. Thompson would not be liable to pay to the respondent any balance under the agreement other than instalments in arrears at the date of the death of Mr. Thompson. The Court of Appeal held that the premium payable for the payment waiver, which was optional, was a charge within the meaning of Regulation 4(b) because, as Aldous J. put it at p. 29:

"The words 'charges at any time payable under the transaction' in Regulation 4(b) mean charges that the debtor is liable to pay under the agreement. In this case there was one agreement. As drafted it was in a form to be completed so as to regulate the rights of the parties. It provided terms upon which the debtor could obtain waiver of the payments upon death of the nominated person. As signed, the agreement provided an advance of money to buy the car and agreement to the waiver of the repayments upon the death of Mr. Thompson. There was one agreement with the result that the £769 odd paid for the waiver option was part of the total charge for credit."

14. In my view there is no material distinction between the provision there being considered and the provision under consideration in this case. However, it was argued on behalf of the Claimant that the outcome of this case depended upon a concession, wrongly made, that the option was not a contract of insurance. This point was dealt with by Brook L.J. at p. 30 of the report, where he said this:

"We have been told by counsel that the concept of a payment waiver option is a relatively recent one and there have been decided cases in courts in the United States which academic writers in this country consider should be followed by English courts to the effect that the exercise of such an option does not give rise to a contract of insurance, apparently because no benefit is paid to the customer if the fortuity occurs. This point was not argued by counsel before us."

None of the members of the Court of Appeal in that case expressed the view that the concession was wrongly made. Brook L.J., in my judgment, impliedly suggested that it was correctly made by his comment at p. 31 that:

"It is difficult to see as a matter of policy why a premium waiver fee, which is not required by the creditor as a condition of making the agreement, should be treated as an item included in the total charge for credit and not excluded in the same way as items in Regulation 5(1) are excluded."

The policy point he made would not have been relevant if he thought the concession had been wrongly made. It is worth noting that the policy point he makes in any event is of no application to this case because the payment of the MIF was mandatory.

15. It was argued on behalf of the Claimant that Humber Clyde now must be read in the light of two other Court of Appeal decisions, that in Watchtower Investments v. Payne [2001] EWCA Civ 1159 and McGinn v. Grangewood Securities [2002] EWCA Civ 522. The first of these cases was not formally cited to me by counsel appearing on behalf of the Claimant, notwithstanding he placed reliance upon it. However, it would appear that a loan was made in part to discharge certain arrears on a first mortgage. The issue was whether this charge by the lender of the arrears was a charge or part of the credit. In the course of his judgment Peter Gibson LJ. said, as set out in paragraph 56 of the judgment in McGinn:

"In the absence of a statutory definition of a charge I cannot pretend that it will always be easy to draw the line between an item forming part of the total charge for credit and an item forming part of the credit itself when the borrowing is for expenditure or for a purpose required or authorised by the credit agreement. The court must consider all the circumstances, including the documents relating to the agreement and may well have to ascertain objectively the purpose of the borrowing. For the reasons already given I reject Mr. Hodgkinson's submission that it is only permissible to look at the contractual documents. The purpose of the court's consideration is to arrive at what, in reality, is the true cost to the debtor of the credit provided."

Having concluded as I have set out above, Peter Gibson L.J. then concluded that the objective purpose of the loan under consideration in Watchtower included the payment of arrears and thus was part of the credit and not a charge.

16. It was submitted on behalf of the Claimant in this case that this approach should be followed here and should lead to the same conclusion. In my judgment this is entirely unreal. Aside from the fact that it seems unlikely that an objective purpose of the loan was the obtaining the benefits of clause 3 of the loan agreement, there is no evidence from the Claimant that supports such a proposition. Indeed, the evidence I have set out above is clearly to contrary effect. Thus, whilst I accept that the Court of Appeal decision in Humber Clyde must now be read subject to Watchtower, I do not accept that it has any impact on the outcome of this case. There is no evidence from the Claimant that enables the point even to be argued. McGinn decides no new principle but is simply an application of the Watchtower principle to particular facts.
17. Aside from the points I have already made, even if the Chanel J. test is applied uncritically, in my view it is not satisfied. What was bought was a financial package. The benefit conferred by clause 3 was not something that was to be acquired on the happening of a future contingency. The waiver was acquired at the time when the contract was entered into in form and in substance. The payment was made in consideration of an immediate surrender or waiver of rights that the lender would otherwise have. In this regard what was being bought was essentially the same as a collision damage waiver. I agree with the FSA's characterisation of such a right in its FAQ sheet concerning travel insurance where, in relation to such provisions, it is said as follows:

"Q. I offer collision damage waiver to my vehicle rental customers, would this be a regulated activity?

A. No, collision damage waiver is a commercial arrangement between the rental customer and the rental company. This limits the rental customer's financial liability for any damage to the rental vehicle. Contractual waivers of this kind are not considered as contracts of insurance because the hirer's payment is essentially made to alter the relationship between the two contracting parties. Under this the hirer will not be liable if an uncertain event occurs."

This analysis applies, in my judgment, with equal force to the waiver under consideration in this case.

18. In the end I return to the purpose of the Regulations. As I have already noted, one of the purposes is to enable a debtor to know the true cost of the credit facility under consideration. If the Claimant is correct in his submission then the effect would be to understate the annual percentage rate of the charge for credit. Thus, if the Claimant is correct then what I regard as one of the purposes of the Regulations I am construing would be defeated. At its lowest this suggests the Claimant's case is unlikely to be correct. I also accept Mr. Onions' submission that if the Claimant is correct then wholly unintended consequences would follow, which would include the ability of a lender to seek to attack the right of a borrower to the benefit of clause 3 on grounds of material non-disclosure years after the event. This seems an unlikely outcome and unintended. In the result, in my judgment the Claimant's case fails and is dismissed.

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