Southern Pacific Mortgage Ltd v Heath

Section 18 of the Consumer Credit Act 1974 requires the court to begin with the terms of the agreement. The fact that credit has different uses does not itself create separate contractual parts. Where an agreement contains genuinely separate parts in disparate categories, those parts are treated as separate agreements. Where the agreement is unitary but falls within disparate categories, it is treated as an agreement in each category and the statutory requirements apply cumulatively. A single facility that must be drawn down as a whole remains unitary, even if part is earmarked to redeem an existing mortgage. If the total credit exceeds the statutory limit, it is not a regulated agreement.

The appellant’s existing Halifax mortgage was redeemed from a new lender’s advance of almost £29,000, with the balance released for her use. After arrears arose, the respondent brought possession proceedings. The appellant argued that the advance comprised separate restricted-use and unrestricted-use credit agreements under section 18 of the Consumer Credit Act 1974. Because the statutory formalities had not been followed, she contended that the loan was unenforceable.

His Honour Judge Purle Q.C., sitting as a High Court judge, extended time for the appeal but dismissed it in a judgment dated 29 January 2009: [2009] EWHC 103 (Ch). The central issue was whether the loan’s terms divided it into separate parts or instead created one agreement falling within more than one category.

1. Disposition. Lord Justice Lloyd gave the judgment of the court. Lord Justices Dyson and Waller agreed. The appeal was dismissed.
2. Construction of section 18. The court held that the analysis must begin with the terms of the agreement. It is incorrect to begin merely by identifying different categories of credit and then infer that the agreement contains separate parts. The relevant question is whether the agreement’s terms place one part in one category and another part in a different category, or place the agreement or a part of it within two or more disparate categories.
3. Paragraphs (a) and (b) of section 18(1) are mutually exclusive. Paragraph (a) applies where the agreement contains elements which can properly be seen as separate parts; section 18(2) then treats those parts as separate agreements. Paragraph (b) applies where the agreement is not divisible into separate parts but falls within two or more disparate categories; section 18(3) then requires the Act to apply cumulatively according to each relevant category. “Categories” in paragraph (b) therefore means disparate categories, rather than every category into which a regulated agreement might fall.
4. The section has an anti-avoidance function, preventing parties from combining separate transactions so that the statutory controls are escaped. Practical consequences may legitimately be considered when resolving an ambiguity in the statutory language. The approach was consistent with the anti-avoidance purpose identified in National Westminster Bank v Story [1999] CCLR 70. Dimond v Lovell [2002] 1 AC 384 and Burdis v Livsey [2002] EWCA Civ 510 illustrated that a contract should not be divided by separating the creation of a debt from the terms governing its payment.
5. The statutory analysis of Example 16 in Schedule 2 was wrong to the extent that it treated paragraphs (a) and (b) as simultaneously applicable. Section 188(3) requires the substantive provisions of the Act to prevail over an inconsistent example. Example 18 might be correct because a current-account facility and an overdraft facility could constitute distinct parts governed by different terms.
6. On the facts, the advance was a single facility which had to be drawn down as a whole. Even assuming that the amount used to redeem the Halifax mortgage was restricted-use credit, the terms did not divide the agreement into separate parts. It was therefore a unitary agreement falling within section 18(1)(b), not two agreements under section 18(2). As the credit exceeded £25,000, it was not a regulated agreement and the order below stood.

• Court of Appeal (Civil Division). The court dismissed the appeal on 5 November 2009: [2009] EWCA Civ 1135.
• High Court, Chancery Division, Birmingham District Registry. His Honour Judge Purle Q.C., sitting as a High Court judge, extended time for the appeal but dismissed it on 29 January 2009: [2009] EWHC 103 (Ch).