Barrister Martin Horne considers the recent case of Bank of Beirut (UK) Ltd v Moukarzel Nabil [2021] EWHC 3777 (Comm) (“Nabil”)
The case concerned the Claimant’s application for summary judgment on a claim in respect of a loan facility extended to an individual.
It is interesting for three reasons:
1. It refers to a ‘checklist’ of matters which are likely to be of relevance when the court considers whether a lending relationship is unfair within the meaning of s140A(1) of the Consumer Credit Act 1974;
2. It demonstrates that where there is an alleged unfair relationship that does not present an immunity from a determination on application for summary judgment; and finally:
3. It highlights the relevance that debtor sophistication can play in respect of the question of whether the relationship is unfair.
Background
The Bank of Beirut (UK) Ltd (the “Bank”) provided credit to a Swiss company; Acacia Trading S.A (“Acacia”) between 2006 and 2012. The Defendant had an ownership interest in Acacia’s holding company. Security for Acacia’s credit facility was provided via a mix of cash margins held by the Bank, corporate guarantees from the holding company and personal guarantees including one from the Defendant. In 2014, Acacia experienced financial difficulties, fell behind on its repayments and defaulted on later promises to pay. The Bank proposed to lend the Defendant funds to repay Acacia’s debt instead of enforcing its guarantees. The Defendant agreed and signed a four-year loan facility in March 2016. The facility was governed by English Law.
The Defendant defaulted in October 2016. Attempts at recovery were met with promises to pay which proved empty and in September 2019 the Bank served a demand for repayment of the entire loan. No payment was made and a claim for the monies was issued in March 2020. The defence alleged inter alia that the relationship was unfair under s140A. There was an associated counterclaim for discharge or relief from the loan repayment obligation. The Bank’s application for summary judgment was heard by Sean O’Sullivan QC sitting as a Deputy of the High Court (the “Judge”).
The Decision
The alleged unfair relationship was dealt with from paragraph 25 of the judgment. The Judge’s summary of the law comprised a reminder of s140A and s140B(9), referenced general guidance from paragraph 10 of Plevin v Paragon Personal Finance Limited [2014] 1 WLR 4222 and a checklist from paragraph 346 of Deutsche Bank (Suisse) SA v Khan & Ors. [2013] EWHC 482 (Comm) (“Khan”) dealing with matters of likely relevance to the fairness of the agreement terms (addressing s140A(1)(a)) and the creditor’s conduct before, at and following formation (addressing s140A(1)(b) and (c)).
s140A provides:
“(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following—
(a) any of the terms of the agreement or of any related agreement;
(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).
(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor).”
S140B(9) provides:
“If, in any such proceedings, the debtor or a surety alleges that the relationship between the creditor and the debtor is unfair to the debtor, it is for the creditor to prove to the contrary.”
1. The checklist from Khan
At paragraph 27 of the Judgment, the Judge referred to the possible checklist devised by Hamblen J (as he was then) at paragraph 346 of Khan:
"These authorities suggest that the matters likely to be of relevance include the following:
(1) In relation to the fairness of the terms themselves:
a. whether the term is commonplace and/or in the nature of the product in question (Rahman [277]);
b. whether there are sound commercial reasons for the term (Rahman [278]);
c. whether it represents a legitimate and proportionate attempt by the creditor to protect its position (Maple Leaf [288]);
d. to the extent that a term is solely for the benefit of the lender, whether it exists to protect him from a risk which the debtor does not face (Maple Leaf [289]);
e. the scale of the lending and whether it was commercial or quasi-commercial in nature (Rahman [275]) (a court is likely to be slower to find unfairness in high value lending arrangements between commercial parties than in credit agreements affecting consumers); and
f. the strength (or otherwise) of the debtors bargaining position (Rahman [275]);
g. whether the terms have been individually negotiated or are pro forma terms and, if so, whether they have been presented on a "take it or leave it" basis (Rahman [275]);
(2) In relation to the creditor's conduct before and at the time of formation:
a. whether the creditor applied any pressure on the borrowers to execute the agreement (if an agreement has been entered into with a sense of urgency it will be relevant to consider to what extent responsibility for this lay with the debtor, as distinct from the creditor) ( Maple Leaf [274]);
b. whether the creditor understood and had reasonable grounds to believe that the borrower had experience of the relevant arrangements and had available to him the advice of solicitors ( Maple Leaf [274]);
c. whether the creditor had any reason to think that the debtor had not read or understood the terms ( Maple Leaf [274]); and
d. whether the debtor demurred at the time of formation over the terms he now suggests are unfair (this point has particular force if he did complain over other terms) ( Maple Leaf [274]; Rahman [276]).
(3) In relation to the creditor's conduct following formation and leading up to enforcement:
a. whether any demand was prompted by an 'improper motive' or was the consequence of an 'arbitrary decision' (Paragon Mortgages [54(b)]);
b. whether the creditor has shown patience and, before leaping to enforcement, has taken steps in the hope of reaching some form of accommodation (for example by attending meetings, engaging in correspondence and/or inviting proposals) ( Rahman [280-281]); and
c. whether the debtor has resisted attempts at accommodation by raising unfounded claims against the creditor ( Rahman [280-281])."
2. An alleged unfair relationship does not present an immunity from summary judgment
Whilst still considering the applicable law, the Judge next moved on to consider the decision of Peter Smith J in Bevin v Datum Finance [2011] EWHC 3542 (Ch) (“Bevin”), a case often cited in skeleton arguments involving alleged unfair relationships in support of the proposition that all the debtor need do is to allege unfairness to shift the legal burden to the creditor to prove that the relationship is not unfair, there is no need to show a prima facie case of unfairness (see paragraph 55 of Bevin).
Paragraph 53 of Bevin was of relevance in Nabil:
"… It is self-evidenced, to my mind, that, where there is an issue as to unfairness, it is going to be very difficult at a summary stage to resolve that issue one way or the other … One has to be careful to put aside one's beliefs and speculations, and decide cases on evidence. This is especially so where the conclusion shuts out a party at a summary stage, and deprives him of an opportunity fully to deploy the issue as to unfairness."
That extract was relied in by the Defendant as argument that summary disposal was inappropriate when an unfair relationship was alleged. Such argument was countered by the Bank by reference to an extract from Paget's Law of Banking (at paragraph 9.17 and associated footnotes):
"For this reason courts will need to be particularly astute to ensure that an allegation of unfair relationship is not used as a vehicle for an unwarranted attempt at resisting summary judgment. Attempts to resist summary disposal may draw strength from the fact that once the debtor or a surety alleges that the relationship between the creditor and the debtor is unfair, the burden is on the creditor to prove the contrary. However, a bare assertion made without proper particulars or evidence to support it is unlikely to have a real prospect of success. A court may be able to approach an application for summary disposal, relying on facts and assumptions made in favour of the debtor and reasoning that the facts taken at their highest do not disclose unfairness in the relevant sense."
(underline added)
In coming to a conclusion on whether Nabil could be determined summarily, the Judge acknowledged that where an unfair relationship is alleged, the creditor has an evidential burden to show that the relationship was not unfair (as s140B(9) says). However, when the creditor relies on uncontested evidence which suggests there is no basis on which the relationship could be said to be unfair, the burden switches to the debtor to identify facts suggesting unfairness and a bare assertion will not suffice (see paragraph 31 of Nabil). A similar point is made in Bevin at paragraph 59:
“So what happens under s.140(9) is Mr. Bevin makes an assertion. The creditor then has to prove that the clauses are reasonable, and he would have to set out his case for so doing. At that stage only would Mr. Bevin be required to make a showing to challenge the factors which the creditor asserts show that the arrangement is unfair.”
The Judge came to a decision in Nabil by reference to the facts advanced by the Bank to which the Defendant had limited answer and thus determined that the matter was a ‘paradigm case’ where summary judgment should be granted.
3. The relevance of debtor sophistication to the question of whether the relationship is unfair
The arguments raised by the Bank in support of the suggestion that the relationship was not unfair were described by the Judge as ‘powerful’ (at paragraph 37) and were as follows:
(i) The facility comprised a high value, unsecured loan, made for a commercial purpose, by a specialist trade finance banking institution, to an overseas party who was engaged in the restructuring of a substantial international corporate group;
(ii) The Defendant was a sophisticated borrower;
(iii) There was no allegation of pressure by the Bank or suggestion that the Defendant had no other option but to enter the facility;
(iv) The Defendant had for many years advanced substantial guarantees to secure Acacia’s borrowing;
(v) The restructuring and the facility were negotiated against a background of corporate restructuring which was advised;
(vi) There was no suggestion that the relative bargaining positions of the parties had resulted in unfairness;
(vii) The Defendant had the resources and wherewithal to take whatever advice he needed.
In contrast, arguments raised by the Defendant as to the fairness of the agreement terms were given short shrift:
(i) The Bank had charged the same interest to the Defendant as had applied on the Acacia lending, that did not suggest unfairness;
(ii) It was unrealistic and extreme to suggest that the Bank should have told a borrower ‘like the Defendant’ that banks charge compound interest;
(iii) The scale of the lending was commercial in nature, there was no sign of imbalance in the negotiating positions, the terms the Defendant obtained were extremely favourable given the Acacia lending was in default;
Arguments raised by the Defendant as to conduct before and at formation were given equally short shrift:
(i) The facility contained a written warning that, if the Defendant was in any doubt as to the consequences, he should seek independent legal advice;
(ii) The Defendant was sufficiently sophisticated to seek his own advice if he needed it;
(iii) The Defendant could not expect the Bank to investigate what legal advice is being given to a high net worth, highly sophisticated borrower;
(iv) context was very important, the Defendant was the ‘type of borrower’ who could be expected to take a view about whether he could repay;
(v) the idea that somebody ‘of this kind’ should be taken into the office by a representative of the Bank, sat down and asked to work through his income and outgoings was simply unrealistic;
(vi) there were good reasons why the Bank may want to undertake credit checks for its own protection and if it did not do that properly it took the risk;
In respect of conduct following formation, the Judge found that the Bank had acted with restraint in the enforcement of the debt and afforded the Defendant considerable time to pay even in the face of repeated unfulfilled promises of payment.
Finally, in respect of other considerations: there was no reason to think that the Defendant had not read and understood the terms. There was no suggestion of any pressure being applied, and there was no complaint by the Defendant at any earlier point about any unfairness, it was only alleged in defence of the proceedings. Accordingly, because the Defendant could point to nothing suggesting unfairness, summary judgment was granted in favour of the Bank on the claim and counterclaim.
Nabil thus serves to demonstrate that properly argued, debtor sophistication can come within ‘all matters the court thinks relevant’ within the meaning of s140A(2).