The judgment in NRAM PLC v. (1) JEFFREY PATRICK McADAM (2) ANN HARTLEY serves as a warning to regulated firms that if you offer a customer greater protections than they are legally entitled to, you have to provide them or face the consequences. In this case, Northern Rock sought a declaratory judgment having treated a set of loans to consumers as regulated agreements for the purposes of the Consumer Credit Act 1974, although some of them exceeded the then £25,000 limit. When Northern Rock failed to provide its customers with required statements, it claimed it was not obliged to provide these to customers whose loans were not in fact regulated. In this note, we explain why the court thought otherwise.

The Facts

Background

The Claimant, Northern Rock Asset Management PLC, the successor company to which Northern Rock Building Society transferred its business in 1997, entered into a large number of unsecured credit agreements between 1999 and March 2008 as part of a product called the "Together Mortgage". This allowed consumers to borrow up to 95% of their home's value on a secured basis and then a further fixed sum unsecured loan up to 30% of the value of their home, capped at £30,000. Interest on the unsecured loan was charged at the same rate as for the secured part. The Defendants for the purposes of these proceedings were two such borrowers who took out the maximum £30,000 loan.

The basis of the dispute

Prior to 6 April 2008 consumer credit agreements were regulated by the Consumer Credit Act 1974 (1974 Act)  if the amount of credit provided under them did not exceed £25,000. From 1 October 2008 s.77A of the 1974 Act, which was introduced into the 1974 Act by the Consumer Credit Act 2006 (the 2006 Act), required periodic statements to be provided to the debtor by the creditor under a regulated agreement for a fixed sum credit. Where the creditor failed to give a statement to the debtor within the prescribed time limit for doing so, the debtor would have no liability to pay any interest or default sum in respect of the period of non-compliance. The creditor's obligation to provide s.77A statements took effect on 1 October 2008 and applied to all relevant agreements in force at that point.

The Claimant treated all loans, whether under or over £25,000, as if regulated under the 1974 Act. The dispute arose because the Claimant failed to implement the requirements of s.77A properly.  The statements they provided did not state the amount of credit originally provided to the borrower under the agreement as required. The Claimant recognised this breach and had already provided redress to affected borrowers with regulated agreements (ie for £25,000 or less) by furnishing them with a correct set of statements and re-crediting to their accounts any sums wrongly debited on account of interest and default sums during the period of non-compliance. However, the Claimant had not provided any such redress to borrowers whose loans exceeded £25,000 on the grounds that as their loan agreements were not regulated by the 1974 Act they had no rights under s.77A. If the Claimant was required to make redress to this wider set of customers then there were approximately 41,000 further affected borrowers and the estimated cost of compensation was an additional £258 million. It therefore began declaratory proceedings in the High Court to determine what the correct position should be.

Both sides accepted that the Defendant's agreement was not a regulated agreement, so the issue under consideration was the impact various statements made to the opposite effect by the Claimant had in contract. Alternatively, it was also considered whether they amounted to a "shared assumption" for the purposes of estoppel by convention or constituted representations such as to found estoppel by representation.

The decision and judge's reasoning

Considering the wording of the pre-contractual information, loan offer and loan agreement documents provided to all the borrowers, Mr Justice Burton indicated that the repeated references to the fact that the agreements were regulated under the 1974 Act constituted "the clearest possible warranty that the agreement was regulated such that, given that it was not regulated, the claimant was in breach of that warranty". It was agreed by the parties and Mr Justice Burton that they could not have, by agreement, converted the contract into a regulated agreement. Mr Justice Burton acknowledged that the Claimant was unlikely to be the only bank who had treated loans above and below £25,000 in the same way as the practice was addressed in two leading textbooks - Goode: Consumer Credit Law and Practice and Guest & Lloyd Encyclopaedia of Consumer Credit Law.

The Defendants maintained that, although the agreements were not regulated agreements, they were agreements whereby the Claimant agreed to give the Defendants the rights and benefits of the 1974 Act as if it was a regulated agreement (so far as possible). Relying on a number of authorities demonstrating that the courts have been willing to allow provisions from a range of sources to be incorporated into contracts, even where some of them are clearly not relevant, the Defendants argued that the 1974 Act had been incorporated into the agreements, except insofar as its provisions were irrelevant. Furthermore, the defendants asserted that incorporation included subsequent amendments (because s.77A had not been implemented at the time of the agreements) because any other such interpretation would be illogical as the legislation was known to change often.

The Claimants responded by arguing that because the agreements were not regulated agreements the references to the 1974 Act must be disregarded as inappropriate or immaterial and the court should imply the words "if applicable" after each reference. They further argued that much of the 1974 Act was irrelevant as there were already express provisions in the agreements covering the same issues. Indeed, they stated that the s.77A provision for repayment or discharge of liability was directly inconsistent with the express terms for payment in the agreements. The Claimants also asserted that in the event that the Defendants argued that "as if" rights applied by reason of contract, there was nothing to indicate that at the time of contracting the parties intended such contractual rights as existed should vary with future amendments to the legislation. By this they meant that there was no justification for treating the Defendants "as if" they had borrowed under a regulated agreement, nor any implication that they should be treated "as if" so entitled.

Mr Justice Burton found that as the 1974 Act was expressly mentioned in the agreements, such references to it could not be ignored. He also rejected the argument that only the 1974 Act as it stood at the time was incorporated. He said that the parties knew that they had tied their agreements to a regulatory regime which would change over time. He found that where provisions of the 1974 Act override or qualify express terms in the agreements then it is as if these terms are written out of the agreements. He was satisfied that the references to the 1974 Act were as contractually binding in those agreements for amounts over £25,000 as for those under £25,000. Mr Justice Burton reasoned that the Defendants were contending that they had entered into "whether or not" contracts. He concluded that, whether or not the agreements were regulated agreements, they were to be treated as if they were, such that the agreements for loans over £25,000 and those under £25,000 received the same treatment.

In the alternative, he also found that there was a shared assumption that all the agreements were regulated agreements sufficient to give rise to an estoppel by convention and/or a contractual estoppel. However, he cautioned that estoppel might not be available on the basis that it can only be used as a shield, not a sword.

Regarding estoppel by representation, he referred to Goode's argument that a contracted party is estopped from reneging on express statements made regarding another parties' rights as under legislation which could have been terms of the agreement and which represent the common intention of the parties.

Overall he concluded by declaring that:

• the rights and remedies in relation to s.77A were imported into the agreements; and
• the Claimant was in breach of its obligations under the agreements by virtue of its failure to indemnify the Defendants in respect of its breach of s.77A.

Conclusion

Northern Rock has indicated that it is still considering whether or not to appeal this judgment.  However, assuming either that it does not, or that any such appeal is unsuccessful then, as Mr Justice Burton observed, Northern Rock will not have been the only financial institution to decide one set of documents is easier to manage than two, and as a result to have - whether intentionally or not - offered greater protection to some customers than it legally needed to. The judgment serves as a warning that, where you do this, you are likely to be warranting that you provide those protections, and therefore will incur liability if you fail to provide them.