Horn & ors v Commercial Acceptances Ltd

Under a lending arrangement providing for tiered contributions, a defined contribution by the lender means the sum actually advanced by that lender. It cannot include money provided by an undisclosed third party who assumes the lending risk directly.

Where loan proceeds are held on trust and the agreement prescribes priorities for applying recoveries, the lender must account in accordance with those provisions. An express obligation to act in good faith may require disclosure of material facts, including the identity and extent of third-party funding. Breach does not necessarily require dishonesty or an improper motive. Rescission may be ordered by repayment of an equivalent sum where the original money cannot be restored. Damages still require proof of causation and loss.

The claim concerned an umbrella loan agreement under which the claimants provided subordinated top-up lending and Commercial Acceptances Ltd provided the first-tier lending. The defendant’s contribution was contractually prioritised in recovering sums from borrowers and the security.

In the transactions in issue, the defendant secretly arranged for Mr Goldstein to provide half of the first-tier lending. Following default and realisation of the flats, the defendant and Mr Goldstein were paid before the claimants, who suffered a substantial shortfall.

The claimants sought recovery on three alternative bases: construction of the Loan Agreement and Trust Deed, rescission for breach of good faith or fiduciary duty, and damages for breach of contract or fiduciary duty. The central issues were whether Mr Goldstein’s funding could count as the defendant’s contribution, whether recoveries had been distributed contrary to the contractual trust, and whether disclosure required dishonesty to be shown.

1. Construction and contractual priorities. The expression “CA Contribution” meant a personal contribution actually made by Commercial Acceptances Ltd. It could not be extended to Mr Goldstein’s contribution, which remained his contribution and did not become the defendant’s merely because the defendant acted as conduit for the funds. The surrounding provisions, including the contribution percentages, the priority provisions and the restrictions on alienation, reinforced that construction (paras [54]-[55]).
2. The defendant therefore breached clause 6.2 by failing to apply the realisation proceeds according to the agreed priorities. It also breached clause 7.1 by failing to hold and distribute recovered monies in accordance with the contractual trust arrangements. The claimants were entitled to judgment for the sums sought, because the proceeds were sufficient to discharge their capital (paras [56]-[58]).
3. Good faith and disclosure. Clause 18 imposed an express obligation of good faith. In the context of the master agreements and individual lending offers, that obligation required disclosure of material facts. The proposed involvement of Mr Goldstein as a 50% contributor to the first-tier lending was material, since the claimants were entitled to decide whether to participate with full information about who was assuming the principal lending risk (paras [66]-[70]).
4. A breach of good faith did not necessarily require dishonesty. The relevant question was whether the conduct breached the obligation of good faith. The court distinguished the observations in Medforth v Blake [2000] Ch 86, which were obiter, and relied on the approach in Niru Battery Manufacturing Company v Milestone Trading Ltd [2003] EWCA Civ 1446 (paras [72]-[78]). It was unnecessary to impose an overriding fiduciary duty because the contract defined the parties’ obligations (paras [68]-[71]).
5. Rescission and damages. Rescission was not barred merely because the original money and security could not be restored. The claimants could be restored by repayment of an equivalent sum, as explained in Independent Trustees Services Ltd v GP Noble Trustees Ltd [2010] EWHC 3275 (Ch) (para [81]). The damages claim, however, was limited to nominal damages: the loss resulted from the fall in property values, not from the defendant’s failure to provide all the first-tier funding (paras [82]-[85]).

First-instance judgment. No appellate history is stated in the judgment.