Addendum: National Westminster
Bank PLC v Anthony John Story and Mary Pallister
Since the above article was published
in Release 49 the Court of Appeal has given judgment in the case
of National Westminster Bank PLC v Anthony John Story and
Mary Pallister, which is reported at [1999] CCLR 70. This
is the first case on section 18 of the Consumer Credit Act 1974
to reach the Court of Appeal. The above article should be read
subject to the following comments on the case, which is referred
to as Story.
Story concerned an agreement
between the bank and the appellants made in November 1986 by which
the bank agreed to advance a total of £35,000 by three separate
credit facilities: an overdraft of £15,000 to Mr Story and
two separate loans, of £5,000 and £15,000, to the
appellants jointly. By subsequent agreements the permitted overdraft
rose to £61,572.78 and the loans to a total between them
of £456,012.16. The appeal concerned the latter sum only,
and the question was whether or not, under section 18 of the 1974
Act, the November 1986 agreement, so far as it related to the
two loans, should be treated for the purposes of the Act as two
separate agreements, one for each loan. If the answer was in the
affirmative they would on the facts be regulated agreements which
were improperly executed, and therefore subject to section 65(1)
of the Act (consequences of improper execution).
The only ground on which it was alleged
by the appellants that the two loans should be so treated was
that the loan for £5,000 was a restricted-use credit agreement
as defined by section 11(1) while the other loan was an unrestricted-use
credit agreement as defined by section 11(2). It was held by His
Honour Judge Jack in the Bristol Mercantile Court that in fact
both loans were for unrestricted-use credit and that the November
1986 agreement was a single agreement that therefore did not fall
within section 18. Both these findings were upheld on appeal.
They involved a finding that the only reason the appellants had
for treating the loans as two credit facilities rather than one
was to provide what Auld LJ at 4E described as ‘simple accounting
for what was believed to be their entitlement to mortgage [tax]
relief of £5,000’. This would not be a relevant factor
for the purposes of section 18.
The decision in Story has some bearing
on the legal meaning of section 11 of the 1974 Act, but that is
not our present concern. So far as concerns section 18 the only
interest of the decision lies in certain obiter dicta which reveal
an uncertain judicial grasp of the intended working of the section.
The purpose of the following notes is to resolve any doubts thus
created. References are to the transcript of the Court of Appeal
judgment.
1. Judge Jack, as quoted by Auld
LJ at 3B and 8G, said ‘it would be artificial to break [the
transaction] down into three separate agreements and contrary
to the way it was made’. This is an inadmissible argument.
Section 18(2) clearly and peremptorily says that, where a part
of an agreement falls within section 18(1), that part shall
be treated for the purposes of the Act as a separate agreement.
Section 18(2) is necessarily artificial because ex hypothesi
the parties themselves made only one agreement.
2. Auld LJ at 6E repeats, without
refuting it, a suggestion by counsel that section 18 could have
been got round if the parties had negatived its application by
an express stipulation in their agreement. This overlooks the
fact that section 173(1) of the Act forbids contracting out.
3. Auld LJ at 14A-D appears to give
support to the suggestion in paragraph 4.5 of the Office of Fair
Trading’s discussion paper of June 1995 ‘Multiple
Agreements and section 18 of the Consumer Credit Act 1974’
that an agreement is not in parts if the categories are so interwoven
that they cannot be separated without affecting the nature of
the agreement as a whole. This suggestion runs contrary to the
plain wording of section 18 and is without any foundation.
4. Auld LJ at 14F supports Professor
Goode’s suggestion mentioned above in this article (page
3) that the phrase ‘category of agreement mentioned in this
Act’ should be construed as if it said ‘category of
agreement mentioned in Part II of this Act’. For the reason
I give there, this view is untenable. Auld LJ goes on to say:
‘On that approach . . . restricted-use and unrestricted-use
credit agreements . . . are separate ‘categories’’.
They are undoubtedly separate categories on either approach.
5. Judge Jack and Auld LJ overlooked
the effect of section 18(1)(a) in rendering the overall agreement
a multiple agreement by reason of two distinct facts. The first
(Case A) is that one part of it (the £15,000 overdraft)
is a running-account agreement while the other part (the £20,000
loan) is a fixed-sum credit agreement. The second (Case B) is
that one part of it (covering £12,000 of the credit advanced)
is, as argued in the Comment appended to the CCLR report of the
case, a restricted-use credit agreement (being a refinancing agreement
falling within section 11(1)(c)), whereas the remainder is an
unrestricted-use credit agreement. Section 18(2) then requires
each part to be treated as a separate agreement.
In Case A this means that the £15,000
overdraft is a separate running-account agreement while the remainder
is a separate fixed-sum credit agreement for £20,000. This
is of no significance since overdraft facilities are excepted
from having to comply with the documentation requirements of the
Act.
In Case B section 18(2) means that
one deemed agreement is a £12,000 restricted-use credit
agreement while the other is an unrestricted-use credit agreement
for £23,000. This is significant, because the first agreement
is within the Act’s £15,000 limit. However it is not
clear on the facts whether the refinancing was intended to be
effected by way of the first or the second agreement in Case A
(or through a mixture of the two). Section 18(4) is then brought
into play in relation Case B. It runs as follows-
‘Where under subsection
(2) a part of a multiple agreement is to be treated as a separate
agreement, the multiple agreement shall (with any necessary modifications)
be construed accordingly; and any sum payable under the multiple
agreement, if not apportioned by the parties, shall for the purposes
of proceedings in any court relating to the multiple agreement
be apportioned by the court as may be requisite.’
This means that the overall agreement
must be treated with any necessary modifications as if
it were two agreements, one a £12,000 refinancing agreement
and the other an agreement for £23,000 which is not refinancing.
Any sum payable under the overall agreement (by the debtors or
the creditor) was required to be apportioned by the court as
may be requisite.
By the time the case came to court it would have been clear (though
it is not clear from the judgment of Auld LJ) exactly how the
£12,000 had in fact been handled by the bank. It would certainly
have been held back from the £35,000 borrowing. It would
have been held back from drawings under the overdraft, or from
drawings on the loan, or partly as to one and partly as to the
other. It is submitted that the court’s apportionment under
section 18(4) should have been made accordingly. If the entire
holdback was from the overdraft then the documentation requirements
of the Act would not bite because the £12,000 refinancing
agreement would have been entirely by an overdraft excepted from
those requirements. If the entire holdback was from the £20,000
loan then the loan agreement would fall to be treated as two regulated
agreements, one a restricted-use credit agreement for £12,000
and one an unrestricted use credit agreement for £8,000.
If it was partly the one and partly the other the result would
depend on how it was divided.
[Published in Consumer Credit Control via Release 50.]
