Sutherland Professional Funding Ltd v Bakewells (a firm) & Ors (Rev 1)

Consumer credit agreements must contain the prescribed terms required by the Consumer Credit Act 1974 regime. A fixed interest sum payable on an earlier repayment date may require an express interest rate, and an agreed interest-free repayment arrangement must also be recorded. Where solicitors incur litigation disbursements and obtain client reimbursement through credit, they may be the supplier in a debtor-creditor-supplier agreement.

A contractual clause requiring solicitors to pay the amount outstanding where a loan agreement is unenforceable may create a primary payment obligation rather than a guarantee. The obligation may apply where unenforceability existed from the outset, but recovery is limited to the contractual Total Amount Payable and excludes default interest that the debtor could not lawfully owe.

SPFL provided regulated consumer credit loans to clients of Bakewells, a firm of solicitors, to fund litigation disbursements and related costs. The loans were made under a facility agreement, or MoA, between SPFL and Bakewells.

SPFL pursued Bakewells and its partners under clause 5.1 of the MoA after 69 underlying claims failed or produced insufficient recoveries. The defendants argued that the consumer credit agreements were irredeemably unenforceable, that clause 5.1 was an unenforceable guarantee or was otherwise limited, and that default interest was not recoverable. The central issues were the enforceability of the loan agreements, the construction of clause 5.1, and the extent of any interest liability.

1. Consumer credit agreements. The agreements omitted a term stating the applicable interest rate. A fixed sum payable on repayment at different times necessarily involved an implicit variation in the rate. The agreements therefore failed to comply with Reg. 6 and Schedule 6 of the Consumer Credit (Agreements) Regulations 1983, engaging Schedule 1 paragraph 9(b) and (c). An implied pro-rating term was required to avoid an absurd and uncommercial result, which also engaged the repayment provisions in Schedule 6 paragraph 5.
2. The separate agreement that loans repaid within 90 days would bear no interest was material to repayment and should have appeared in the statutory agreements. Testing occurred when the first statutory copy was sent, so the fact that no loan was repaid within 90 days was immaterial. The stated APR did not satisfy the requirement to state the applicable interest rate.
3. The agreements were debtor-creditor-supplier agreements. Bakewells incurred responsibility for litigation disbursements under its retainers and was entitled to reimbursement from its clients. The credit therefore financed, at least in part, the transaction between Bakewells and the clients. The prescribed cancellation notices were consequently absent, rendering the agreements irredeemably unenforceable under ss. 64(1) and 127(4)(b) of the Consumer Credit Act 1974.
4. Clause 5.1. Properly construed, clause 5.1 imposed a primary obligation on Bakewells to pay defined sums on the occurrence of specified events. It was not a guarantee. The clause applied where the loan agreement was unenforceable against the borrower, without limiting the cause of unenforceability to a breach by Bakewells. No contrary term could be implied.
5. Unenforceability could trigger clause 5.1 only once an obligation to repay had arisen and remained unpaid. However, the agreements’ unenforceability from the outset did not defeat the claim because clause 5.1 operated on the occurrence of either breach or unenforceability and was intended, with clause 3.2, to allocate the risk of unenforceability to Bakewells.
6. SPFL could recover the Total Amount Payable under the unenforceable agreements, but not default interest. The contractual definition of Total Amount Payable did not include default interest, and statutory non-compliance under s.77A prevented recovery of such interest from the debtors. The purported certificate did not conclusively ascertain the recoverable sums. Interest remained assessable under s.35A of the Senior Courts Act 1981.