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On Wednesday 7 July 2010, the UKSC handed down judgment in Southern Pacific v Walker [2010] UKSC 32.  The Court, consisting of Lords Hope, Walker, Brown, Mance and Clarke, unanimously dismissed the appeal and upheld the decision of the Court of Appeal on the interpretation of section 9(4) of the Consumer Credit Act 1974, finding that the consumer credit agreement entered into by the appellant borrowers with the respondent lender was not unenforceable as the amount of credit had been correctly stated and a charge for credit was not converted into an amount of credit by way of interest being payable on the charge. 

Facts

Mr and Mrs Walker (the “Borrowers“) applied for a loan from the lender, Southern Pacific Personal Loans Ltd (“SPPL“) (the appellant is the successor in title to SPPL).  The Borrowers signed a credit agreement (the “Agreement“) on 26 March 2005 and SPPL signed the Agreement on 20 April 2005.  The Agreement, as a consumer credit agreement pursuant to section 8(2) of the Act (a personal credit agreement by which the creditor provides the debtor with credit not exceeding £25,000), is regulated by the Act and the relevant regulations made under section 20 of the Act, namely the Consumer Credit (Total Charge for Credit) Regulations 1980 (the “TCC Regulations“) and the Consumer Credit (Agreements) Regulations 1983 (the “Agreements Regulations“) (together the “Regulations“).

In the Agreement, the Amount of Credit was £17,500, the Broker Administration Fee was £875 and (since the borrowers could not pay the latter) the Total Amount Financed was £18,375 (i.e. the sum of the Amount of the Credit and the Broker Administration Fee).  Interest was charged on the Total Amount Financed at a rate of 13.98% per annum.  The Borrowers fell into substantial arrears and SPPL claimed possession over the Borrowers’ home.  District Judge Gilham made a suspended order for possession on terms that the Borrowers made the payments as and when due and paid off the arrears by monthly instalments.

Mr and Mrs Walker sought to appeal, on the technical point that under the Act, the amount of credit has to be correctly stated, otherwise the whole credit agreement will be unenforceable.  Their contention was that the Agreement should have stated the credit to be £18,375, not £17,500.  The issues in the appeal were therefore: (i) what is the correct definition of “credit” under the Act, and (ii) whether the Act permits interest to be levied on a charge for credit (such as the Broker Administration Fee).

The Act, the Regulations and Wilson v First County

Sections 9(1) & (4) of the Act provides as follows:

“9 Meaning of Credit

(1) In this Act “credit” includes a cash loan, and any other form of financial accommodation”

(4) For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment.

Regulation 4 of the TCC Regulations, entitled “Items included in the total charge for credit” provides that “Except as provided by regulation 5 below, the amounts of the following charges are included in the total charge for credit in relation to an agreement: (a) the total of the interest on the credit which may be provided under the agreement; (b) other charges at any time payable under the transaction by or on behalf of the debtor or a relative of his whether to the creditor or any other person.”

Pursuant to section 61(1)(a) of the Act, a consumer credit agreement must contain “all the prescribed terms” and section 127(3) of the Act renders agreements pre-dating 6 April 2007 (such as the Agreement) wholly unenforceable.  The prescribed terms for the Agreement were:

(i) A term stating the amount of credit (Agreements Regulations reg 6(1) and Sch 6, para 2);

(ii) A term stating the rate of any interest on the credit to be provided under the agreement (Agreements Regulations Sch 6, para 4); and

(iii) A term stating how the debtor is to discharge his obligations under the agreement to make the repayments (Agreements Regulations Sch 6, para 5).

It was decided in Wilson v First County Trust Ltd [2001] QB 407 that an agreement is unenforceable if an amount of credit is not correctly stated in it.  In that case, the “amount of the loan” in the agreement was the sum of the loan and the document fee and therefore the amount of credit was misstated.

Decisions Below

In April 2009, Mr and Mrs Walker succeeded in Chester County Court before Judge Halbert, who held (applying Wilson) that the Agreement did not correctly state the amount of credit and should therefore be unenforceable.  Since interest was being charged on the £18,375 Total Amount Financed, £18,375 should have been stated as the Amount of Credit.  The Judge also held that the Act did prohibit interest on a charge for credit, accepting the argument of the Borrowers’ counsel that to charge interest upon “any element of a regulated advance is by definition to treat that element as credit”.

The Court of Appeal (Mummery LJ, Sullivan LJ and Owen J) disagreed, holding in October 2009 that the “Amount of Credit” was correctly stated in the Agreement by the clear division and labelling of the different elements making up the “Total Amount Financed”, an expression which was not one used in the Act and was accordingly not prohibited by the Act.  In respect of the prohibition of interest on the charge for credit, (a) interest was not a necessary feature nor an indicator of a credit amount and (b) section 9(4) of the Act did not mention interest and therefore did not prohibit it.  Lord Justice Mummery further reasoned that if legislative intention had been to prohibit interest on charges for credit, this would have been expressly dealt with, which it is not, and concluded that the £875 fee, although prohibited from being treated as “credit” under section 9(4) of the Act, was not prevented from (nor did it convert itself into credit by) accruing interest.

UKSC Judgment

Lord Clarke, delivering the unanimous judgment of the court, held that, but for the provisions of section 9 of the Act, there would be a strong case for arguing that, since the total amount advanced under the Agreement was £18,350, that was the amount of credit and, since that sum was not expressed to be the amount of credit, the Agreement did not contain a prescribed term and was therefore unenforceable.  However, because section 9(4) provides that an ‘item entering into the total charge for credit’ shall not be treated as credit, a sum forming part of the total charge for the credit cannot be treated as part of the amount of credit.

The UKSC followed the “plain meaning” of section 9(4) and various case law authorities by first assessing the total charge for credit and then stripping this out before determining the “amount of credit”.  There is no definition in the Act of “charge for credit” so the question is therefore what is the total cost to the Borrowers of the credit provided under the Agreement.  The UKSC considered both the Broker Administration Fee and the interest on that fee, which were both subject to contention in this case.  The Broker Administration Fee was considered a genuine cost of the credit as it was a fee paid to intermediary brokers.  This and the interest thereon were considered by the UKSC as “other charges” within regulation 4(b) of the TCC Regulations (as set out above) and therefore included in the total charge for credit.

The UKSC accepted that, “in ordinary parlance”, the total amount financed was the total amount of the loan or credit under the Agreement, however, section 9(4) of the Act prevented this from being so and the fee of £875 could not be treated as credit.  “By way of postscript”, Lord Clarke noted that, had the fee been included in the “Amount of Credit”, the Borrowers would have succeeded on the basis of Wilson v First County.

It is interesting to note that section 127(3) and the requirement for “prescribed terms” only applies to agreements entered into before 6 April 2007 and, further, when the Consumer Credit (Agreements) Regulations 2010 come into force, documentation of the “total amount of credit” will be required, which will make obsolete arguments as to what is and is not an “amount of credit” under a consumer credit agreement, such as those advanced in this case.  This judgment is a promising outcome for lenders as they increasingly face the problem of defaulting borrowers attempting to render their agreements unenforceable.