Bank of Scotland v Euclidian (No. 1) Ltd & Ors

A collateral contract requiring insurers to indemnify a funder where they avoid, repudiate or deny liability under an insurance certificate may operate broadly according to its wording. Where the clause covers refusal on any grounds whatsoever, it need not be limited to certificates complying with contractual definitions or to loans enforceable against the borrower. The amount of the indemnity may be quantified by the loan agreement without making enforceability of that agreement a condition precedent. A clause protecting the funder against the insurers’ refusal to pay is not necessarily security for the borrower’s obligations under the Consumer Credit Act 1974. For prescribed cancellation notices, “affect” refers to the direct statutory effect of cancellation on linked transactions. Non-compliance with prescribed wording is not subject to a de minimis exception where the legislation makes strict compliance a condition of enforceability.

The Bank of Scotland funded personal injury litigation claims admitted to a scheme operated by Claims Bureau UK Ltd. The defendants were underwriters whose master certificates contained a collateral contract requiring them to indemnify the Bank for outstanding loans where they avoided, repudiated or denied payment under a certificate.

The parties agreed that the clause was enforceable as a collateral contract. Preliminary issues concerned whether the clause applied where the claimant or loan was defective, whether the clause was security within section 113 of the Consumer Credit Act 1974, and whether loan agreements were unenforceable because their cancellation notices did not comply with prescribed forms.

1. Construction of the indemnity. The court applied the objective contractual approach in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. It held that “on any grounds whatsoever” included any refusal by the underwriters to accept liability under an issued certificate. The certificate did not have to satisfy the definitions of “Certificate” or “Assured” in the master certificate.
2. The words referring to the outstanding loan and accrued interest quantified the indemnity. They did not require the underlying loan to be enforceable against the borrower. The parties had contemplated that repayment would ordinarily come from damages, costs or insurance proceeds, rather than enforcement against the borrower. The underwriters therefore assumed the risk of refusal to pay under the certificate, including where the loan was forged, void, non-compliant or otherwise unenforceable.
3. The possible redundancy of condition 2(a) did not justify a different construction. The new clause had been introduced to give the Bank greater protection. The commercial consequences were not so unreasonable as to require clearer words.
4. Consumer credit security. The clause was not “security” within section 113 of the Consumer Credit Act 1974. It protected the Bank against the underwriters’ refusal to pay under an insurance certificate, rather than securing performance by the borrower. In any event, it was not provided at the borrower’s express or implied request, since the borrowers did not know of its existence.
5. Cancellation notices. Following Goshawk Dedicated (No 2) Ltd v Governor and Company of the Bank of Scotland [2006] 2 All ER 610, the court held that “affect” in the prescribed cancellation note referred to the direct statutory effect on linked transactions. The CFA was a linked transaction under section 19(1)(b), and cancellation could affect the insurance. The notices nevertheless used the prescribed note correctly because insurance was exempt from automatic cancellation. The statutory wording left no room for a de minimis principle.
6. The preliminary questions were answered accordingly. The clause applied despite the identified defects, and the cancellation-notice issue did not make the loan agreements unenforceable.