Court of Appeal finds unfair relationship where secret commission deprives borrower of broker’s independent advice

The Court of Appeal has found the relationship between a lender and a borrower to be unfair under section 140A of the Consumer Credit Act 1974 (CCA) on the basis that an undisclosed agreement under which the lender was to pay the borrower's broker a procuration fee (commission) deprived the borrower of the disinterested advice of his broker. The lender was ordered to account to the borrower for the full amount of the commission paid to the broker.

The decision can be distinguished from Plevin (and indeed is in the judgment). Essentially, the unfair relationship in this case was a repackaged breach of fiduciary duty / Hurstanger claim which appears to now be capable of providing underlying cause for a section 140A claim. The foundation of the unfair relationship was that the borrower was deprived of the disinterested advice of his broker. In Plevin, the unfair relationship arose from an entirely different scenario, where the borrower was deprived of the ability to assess the value for money offered by the PPI. More detail on the distinction is set out at the end of this article.

Background

Mr Nelmes owned a portfolio of residential properties. In February 2007, Mr Nelmes engaged the brokerage services of Mr Ian Blair of ASC West Yorkshire (AWC) with a view to consolidating of all his lending relating to the properties and accessing further funds.

Mr Blair brokered two commercial loans between Northern Rock PLC (now NRAM Plc) (NR) and Mr Nelmes, totalling £2.85m, in April and July 2007. The arrangements between Mr Nelmes and AWC were that Mr Nelmes would pay AWC an arrangement fee of 0.75%.

The formal loan offers disclosed arrangement fees which were to be paid by Mr Nelmes to NR, £21,483 in respect of the loan in April and £8,500 in respect of the loan in July. NR paid half of these arrangement fees on to AWC as procurement fees. However, this was not disclosed to Mr Nelmes.

Over the course of 2008 to 2013, Mr Nelmes fell behind on his loan repayments. NR served two formal demands in July 2013 and appointed receivers on 31 July 2013.

First instance decision

Mr Nelmes brought proceedings against NR in which he claimed that his relationship with NR was unfair under section 140A. Mr Nelmes alleged that the relationship was unfair as the result of a number of factors, including the terms in the loan offer, NR’s conduct during the negotiation of the loan agreement, the relationship between NR and the broker and NR’s conduct after formation and leading up to enforcement.

At first instance, the Leeds County Court declined to find any aspect of the relationship unfair save one relating to the appointment of receivers (see further below) and declined to grant any relief. The county court also ordered Mr Nelmes to give up possession of the property in which he was residing, being one of the properties charged as security.

Mr Nelmes appealed that decision.

Appeal decision

Save for two instances, the Court of Appeal found that Mr Nelmes’ claims of an unfair relationship were not made out. For example, the Court agreed with the judge at first instance that there was nothing unfair about the terms of the agreement or NR’s conduct generally in negotiating the agreement and seeking to enforce the agreement.

The two instances where the Court did find that NR’s conduct was unfair as follows.

1.    Relationship between NR and the broker

Mr Nelmes alleged that NR and Mr Blair were cooperating to mislead Mr Nelmes about the loan offer and sought to support this contention by reference to the large undisclosed commission which he was paying indirectly to Mr Blair.

At first instance, the judge found that Mr Nelmes was making too much of the commission, which was not uncommon as was the non-disclosure of the same, and that the payment of such a commission did not mean that NR and Mr Blair were cooperating to mislead Mr Nelmes.

While the Court agreed that the judge at first instance was entitled to find that NR and Mr Blair were not cooperating to mislead Mr Nelmes, it did not agree in relation to the commission.

The Court’s view was that Mr Blair, and his company AWC, was acting as agent for Mr Nelmes in his dealings with NR, so that Mr Nelmes was entitled to his undivided loyalty. Mr Blair/AWC’s acceptance of the commission which was kept secret from Mr Nelmes was a breach of the duty owed by the broker to him. This breach was brought about by NR in paying the commission.

The Court noted that, based on the principles set out in Wilson v Hurstanger, Mr Nelmes would be entitled to recover the amount of the commission paid by NR to Mr Blair/AWC from either of them, had he brought an action for breach of duty (presumably not brought because of a potential time bar). Despite the fact that a classic Hurstanger claim was not brought, the fact that NR would have been liable for such a claim seems to have been a persuasive factor for the Court. The Court’s analysis that the relationship was unfair follows immediately from the Hurstanger discussion, the redress awarded mirrors that typical of a successful Hurstanger claim, and the Court explicitly made reference to the breach being brought about by NR (as in Hurstanger).

The Court was satisfied that the relationship was unfair on account on the following: (i) the term of the credit agreement that Mr Nelmes should pay NR an arrangement fee; (ii) the related agreement that NR should pay commission of half that amount to Mr Nelmes’ broker; (iii) the payment of that commission; and (iv) the failure of NR to tell Mr Nelmes about the payment. Specifically, it said that a payment of this nature deprives a borrower of the disinterested advice of his broker and is, for that reason, unfair. The fact that such undisclosed commissions were not uncommon at the time does not alter the position.

On this basis, the Court required NR to account to Mr Nelmes for all the commission it paid to the broker (roughly £15,000) together with interest from the date of the payment.

The Court did not grant any additional relief. The non-disclosure did not mean that Mr Nelmes was not in a position to assess the value for money offered by the proposed deal as was the case in Plevin v Paragon Personal Finance. There was also no plan to conceal any of the terms of the deal from him.

2.    Appointment of receivers

The Court of Appeal also agreed with the decision of the judge at first instance that, while there was nothing unfair about NR’s decision to appoint receivers, it was unfair to move to the appointment of receivers immediately after the deadline for Mr Nelmes to provide a proposal to repay his debt and six days before the date NR had itself set for enforcement; and to have done so while information on the basis of which a proposal might have been formulated was being sought. There was no need to act with such precipitate haste.

However, the Court went on to say that, even if receivers had not been appointed until a reasonable time later, say a month, it would have made no substantial difference. Accordingly, the unfairness in question did not call for any order under section 140B.

Distinction from Plevin

The Court of Appeal’s decision in this case is in many ways distinguishable from the decision in Plevin:

• In Plevin, the unfair relationship arose (in the main) because of the amount of the undisclosed commission received by the lender from the insurer. The lender was not the agent of the borrower, and no breach of fiduciary duty (and therefore no Hurstanger liability) arose. The instant case is essentially one of an unfair relationship arising out of a secret commission claim.
• It was also made clear in this case that Mr Nelmes was still in a position to assess the value for money offered by the proposed deal, presumably on the basis that Mr Nelmes was a sophisticated borrower with many years of experience and was aware that an arrangement fee was payable, even if he was not aware that half of that fee would be paid to Mr Blair/AWC. The claimant in Plevin was not in the same position.
• The Court of Appeal use the distinction at point 2 above to explicitly differentiate this case from the claim made, and ruling in, Plevin. Paragraph 37 of the judgment illustrates that this is a decision made on different grounds, with a different consideration of relief.
• In this case, the borrower was required to pay a fee to the broker directly as well as an arrangement fee to the lender (half of which was then paid to the broker). This was not the case in Plevin.