WATCHTOWER INVESTMENTS LTD. v PAYNE AND ANOTHER [2001] EWCA Civ 1159

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM WOOLWICH COUNTY COURT
His Honour Judge Welchman
[2001] EWCA Civ 1159Case No Case No: B2/2000/2346/PTAVenue Royal Courts of Justice, Strand, London, WC2A 2LL, Friday 20th July 2001
Between
WATCHTOWER INVESTMENTS LTD.AppellantPAYNE AND ANOTHERRespondents
Before
Lord Justice Peter GibsonLord Justice ClarkeMr. Frederick Philpott and Mr. David Giles (instructed by Messrs. Sherringtons of Edgware for the Appellant)Mr. Tristram Hodgkinson (instructed by Messrs Hudgell and Partners of Woolwich for the Respondents)Date 20 July 2001
[1]PETER GIBSON L.J.: This matter comes before this court as an application for permission to appeal, with the appeal to follow if permission is granted. It gives rise to some points of general interest on the consumer credit legislation. The central question is whether a payment, made contemporaneously with the completion of a consumer credit agreement requiring the payment of arrears under a prior mortgage, of such arrears out of the monies borrowed is part of the credit or a charge for the credit. The conclusion reached by the Judge in this case that the payment was a charge for the credit has not been followed by two other Judges. That inconsistency of decisions in the County Court would in itself justify the granting of permission to appeal, as the respondents to this application readily and properly acknowledge.[2]The applicant is the Claimant, Watchtower Investments Ltd. ("Watchtower"), a lender under a consumer credit agreement, secured by a legal charge, made with the Defendants Jack Payne and his wife Stella ("the Paynes") from the order made by His Honour Judge Welchman on 19 May 2000 in Woolwich County Court. Thereby the Judge(1) declared that (i) the credit agreement and the legal charge were unenforceable; (ii) applications made by the Paynes to reopen the credit agreement and the legal charge were not time-barred; (iii) the Paynes were deemed to have delivered a defence in proceedings commenced by Watchtower against the Paynes in 1995 and 1998 respectively; (iv) the Paynes' defences and claims within all the proceedings were not an abuse of process; and (v) the Paynes were entitled to pursue pleaded claims in proceedings commenced by Watchtower against the Paynes in 1990 and in the 1995 and 1998 proceedings, and(2) set aside orders for possession and other orders made in proceedings to enforce the credit agreement and the legal charge.[3]Watchtower is a non-status mortgage lender, specialising in lending to borrowers who are unable to obtain finance from primary lending sources. The Paynes have owned 9 Leylang Road, London SE14 ("the Property") since 1974. On several occasions prior to 1989 they have borrowed money on the security of the Property. In March 1989 they remortgaged the Property to the Leeds Permanent Building Society ("the Leeds"). The Paynes soon fell into arrears on that first mortgage. They answered an advertisement for loans which they had seen in a newspaper and completed an application form supplied by brokers, Freshfields Finance Ltd. ("FFL"), the information in which they confirmed to be correct to the best of their knowledge and belief. In it they said that they required a loan of £11,300. They stated the purpose of the loan as being "to clear arrears". The arrears were said to be £1,500 owed to the Leeds. On 21 November 1989 Watchtower sent the Paynes the drafts of the proposed credit agreement and legal charge which the credit agreement was expressed to incorporate. The amount of credit to be provided was said to be £11,300 and the annual percentage rate ("APR") for the proposed 10-year loan of £11,300 was said to be 38%, with monthly payments of £320.17. Cl. 5 was expressed to allow Watchtower on one month's notice to vary the rate of interest at will. Cl. 7(b) stated "Where this credit agreement is secured by a second mortgage, any first mortgage arrears .... must be discharged on or before completion of the loan." The draft legal charge was to be a second mortgage on the Property and was to take effect on the same date as the credit agreement. By cl. 8:
"If this or any other mortgage is in arrears [Watchtower] may repay any prior mortgage in part or in its entirety .... All money spent in doing so (including all costs and disbursements on an indemnity basis) shall be added to the loan to which this Legal Charge relates...."
[4]On 30 November 1989 the Paynes signed a letter headed "Application for Finance". In it they confirmed that the gross amount of the advance was £11,300 and stated that they understood that from that amount an insurance premium of £1,420 to cover payment protection would be payable to FFL on satisfactory completion of the loan and that that was in accordance with the Paynes' wishes. They confirmed that they could afford the monthly payments on the proposed loan. They also signed an undated and uncompleted letter addressed to "the lenders" in which they said:
"I confirm that once my first mortgage arrears have been cleared, I will be able to afford monthly payments of £ in addition to my first mortgage payments of £ per month."
That was returned to Watchtower.[5]The credit agreement and the legal charge in the form of the drafts supplied to the Paynes were signed by them and on 14 December 1989 they were completed by solicitors for Watchtower. The same day Watchtower's solicitors sent to the Leeds a cheque for £1,776.89 to clear the arrears on the first mortgage and they wrote to the Paynes, confirming the completion and saying that in accordance with the Paynes' instructions they had made deductions of £1,776.89 for the Leeds and £1,420 for FFL from the loan and sent the balance of £8,104.11 to the Paynes. Despite the attempts by Mr. Newman of Watchtower's solicitors in his affidavit of 2 December 1999 to justify what was done, it does not appear that the Paynes had given instructions or other authority for the payment to the Leeds. However no objection was taken by the Paynes to what was done.[6]Before long the Paynes fell into arrears with the payments to Watchtower. On 17 May 1990 Watchtower served default notices on the Paynes. When the default was not remedied, Watchtower on 13 June 1990 commenced proceedings against the Paynes in Bromley County Court, seeking possession of the Property. A suspended order for possession was made on 3 August 1990. The arrears were paid off. The proceedings were transferred to Woolwich County Court in 1991.[7]On 30 March 1992 after the Paynes fell into arrears again further proceedings were commenced by Watchtower in Bromley County Court. But they were not pursued because the arrears were cleared.[8]Again the Paynes fell into arrears and on 15 March 1993 further proceedings were issued in Woolwich County Court. On 11 May 1994 a possession order was made. Again it was suspended while the arrears were paid off. The arrears were cleared by November 1994.[9]Thereafter the Paynes fell into arrears yet again. In July 1995 Watchtower commenced the fourth proceedings against the Paynes. The Paynes filled in Form N11M, the Form of Reply (Mortgaged Property), which had been introduced in 1993. Question 10, which was to be answered only if the loan secured by the mortgage (or part of it) was a regulated consumer credit agreement, was:
"Do you want the Court to consider whether or not the terms of your original loan agreement are fair?"
The Paynes ticked the "Yes" box.[10]But despite that, there is no indication that the court did consider whether the credit agreement was fair before it made a possession order on 6 September 1995. The Paynes cleared the arrears in November 1996.[11]Again the Paynes fell into arrears after that. On 13 January 1998 Watchtower for the fifth time commenced proceedings against the Paynes. Again the Paynes when completing Form N11M ticked the "Yes" box in answer to question 10. On 11 March 1998 Deputy District Judge Pithouse adjourned the case to enable the Paynes to make representations to the Department of Social Security. On 22 April 1998 District Judge Lee, again, it appears, without considering whether the credit agreement was fair, made a possession order suspended for two months. The arrears by then were over £3,500. Thereafter Watchtower agreed with the Paynes that it would not enforce the warrant of execution while the arrears were paid by instalments. £3,000 arrears had been paid and only the balance of £664.09 was outstanding when Watchtower by letters dated 7 October and 3 November threatened to enforce the warrant of execution.[12]Only then did the Paynes consult solicitors. On 10 November 1998 those solicitors wrote to Watchtower, seeking information. On 8 January 1999 they told Watchtower's solicitors that the point was being taken that the credit agreement was an extortionate credit bargain and could not be enforced. They applied to the court, seeking relief out of time. They said that there should be a retrial of the 1998 proceedings under CCR O.37 r.1. They also sought to appeal against the order made by District Judge Lee on 22 April 1998. On 4 June 1999 District Judge Lee dismissed the application. The Paynes appealed, and that and an application for leave to appeal out of time from District Judge Lee's order of 22 April 1998 came before Judge Welchman.[13]As precautionary measures, prior to the hearing the Paynes made applications in the 1990, 1995 and 1998 proceedings taking similar points that the credit agreement was unenforceable. They also on 10 December 1999 issued proceedings of their own to the same end.[14]Before I recount what the judge decided, it is convenient to refer to the relevant statutory provisions.[15]The Consumer Credit Act 1974 ("the Act") gave effect to recommendations made by the Crowther Committee on Consumer Credit ((1971) Cmnd. 4596). The purpose of the Act was, as its preamble states, to establish for the protection of consumers a new system of licensing and other control of traders concerned with the provision of credit and their transactions.[16]The Act imposed a detailed scheme of regulation on the supply to individuals of credit of an amount not exceeding a specified sum. The Act contains numerous special terms, for the most part defined in the interpretation section, s. 189(1), by reference to definitions in other sections.[17]A key term is "regulated agreement" which in s. 189(1) means, so far as is relevant, a consumer credit agreement. The meaning of a consumer credit agreement is to be found in s. 8:
"(1) A personal credit agreement is an agreement between an individual ("the debtor") and any other person ("the creditor") by which the creditor provides the debtor with credit of any amount. (2) A consumer credit agreement is a personal credit agreement by which the creditor provides the debtor with credit not exceeding [£15,000]."
[18]By s. 9:
"(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."
[19]S. 11 distinguishes between restricted-use credit agreements and unrestricted-use credit agreements. Thus by s. 11 (1) a regulated consumer credit agreement (a) to finance a transaction between the debtor and creditor or (b) to finance a transaction between the debtor and a person other than the creditor or (c) to refinance any existing indebtedness of the debtor, whether to the creditor or another person, is a restricted-use credit agreement, but not if the credit is in fact provided in such a way as to leave the debtor free to use it as he chooses (s. 11(3)). S. 18 relates to multiple agreements. It is unnecessary to go into the complexities of that provision.[20]S. 19 relates to linked transactions, and (so far as is material) provides:
"(1) A transaction entered into by the debtor .... with any other person ("the other party"), except one for the provision of security, is a linked transaction in relation to an actual or prospective regulated agreement (the "principal agreement") of which it does not form part if - (a) the transaction is entered into in compliance with a term of the principal agreement ...."
[21]The Crowther Committee had recommended that lenders should be required to disclose the true cost of credit to borrowers. S. 20 was intended to implement that recommendation. It provides:
"(1) The Secretary of State shall make regulations containing such provisions as appear to him appropriate for determining the true cost to the debtor of the credit provided or to be provided under an actual or prospective consumer credit agreement (the "total charge for credit") and regulations so made shall provide - (a) what items are to be treated as entering into the total charge for credit, and how that amount is to be ascertained; (b) the method of calculating the rate of the total charge for credit. (2) Regulations under subsection (1) may provide for the whole or part of the amount payable by the debtor or his relative under any linked transaction to be included in the total charge for credit, whether or not the creditor is a party to the transaction or derives benefit from it."
I will come to the Regulations made thereunder shortly.[22]Part V of the Act (ss. 55 - 74) sets out the requirements for entering into credit agreements and the information which must be disclosed to the debtor before a regulated agreement is made. By s. 60 (1) the Secretary of State was required to make regulations as to the form and content of documents embodying regulated agreements and such regulations had to contain such provisions as appeared to him appropriate with a view to ensuring that the debtor was made aware of (amongst other things) "(b) the amount and rate of the total charge for credit." Such regulations have been made (see the Consumer Credit (Agreements) Regulations 1983).[23]By s. 61 (so far as material):
"(1) A regulated agreement is not properly executed unless - (a) a document in the prescribed form itself containing all the prescribed terms and conforming to regulations under section 60 (1) is signed in the prescribed manner both by the debtor .... and by or on behalf of the creditor ..., and (b) the document embodies all the terms of the agreement, other than implied terms ...."
[24]By s. 65 (1):
"An improperly-executed regulated agreement is enforceable against the debtor ... on an order of the court only."
[25]Part IX of the Act (ss. 127 - 144) relates to judicial control. S. 127 (1)(a) provides that in the case of an application for an enforcement order under s. 65 (1) the court shall dismiss the application if , but (subject to subs. (3)) only if it considers it just to do so having regard to prejudice caused to any person by the contravention in question, and the degree of culpability for it and to the powers under s. 135 to impose conditions or suspend the operation of the order and s. 136 to vary agreements and securities. S. 127 (3) prohibits the making of an enforcement order under s. 65 (1) if s. 61 (1)(a) was not complied with unless a document itself containing all the prescribed terms of the agreement was signed by the debtor. S. 137 (1) allows the court, if it finds a credit bargain extortionate, to reopen it so as to do justice between the parties. S. 138 sets out the conditions to be satisfied if a credit bargain is to be held to be extortionate. S. 139 allows the court on the application of the debtor to reopen a credit agreement, if it thinks that just, on the ground that the credit bargain is extortionate. By s. 171 (7), if in s. 139 proceedings the debtor alleges that the credit bargain is extortionate, it is for the creditor to prove the contrary.[26]The Consumer Credit (Total Charge for Credit) Regulations 1980 ("the TCC Regulations") were made by the Secretary of State in performance of his duty under s. 20. In reg. 1 (2) "transaction" was defined as follows:
""transaction", except in regulation 5 (1)(c) below, means an agreement, any transaction which is a linked transaction by virtue of section 19 (1)(a) of the Act, .... any credit brokerage contract relating to the agreement and any other contract to which the debtor or a relative of his is a party and which the creditor requires to be made or maintained as a condition of the making of the agreement ...."
[27]Reg. 3 provided:
"For the purposes of the Act, the total charge for the credit which may be provided under an actual or prospective agreement shall be the total of the amounts determined as at the date of the making of the agreement of such of the charges specified in regulation 4 below as apply in relation to the agreement but excluding the amount of the charges specified in regulation 5 below."
[28]Reg. 4 was in these terms:
"Except as provided in 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, notwithstanding that the whole or part of the charge may be repayable at any time or that the consideration therefor may include matters not within the transaction or subsisting at a time not within the duration of the agreement."
[29]Reg. 5 specified the charges which, as reg. 3 indicated, are to be excluded from the total charge for credit in relation to an agreement. Some charges, viz. those in sub-paras. (a) to (f) of para. (1) are expressly called "charges" of particular descriptions, so that unless the item which satisfies the description in a sub-paragraph can properly be called a charge it would appear not to come within the sub-paragraph. Thus sub-para. (c) is "any charge relating to an agreement which is an agreement to finance a transaction of a description referred to in paragraph (a) or (b) of section 11 of the Act, being a charge which would be payable if the transaction were for cash." Sub-paras. (g) to (l) are expressly called premiums under contracts of insurance of various descriptions. They include in sub-para. (g) a premium under a contract of insurance made before the debtor applies to enter into the agreement, in sub-para. (i) a premium under a contract of life insurance where the policy monies payable under the contract are, under the transaction, to be used for the repayment of the credit under the agreement or under any other personal credit agreement secured by a land mortgage forming part of the transaction or of the total charge for credit, and in sub-para. (j) "a premium under a contract of insurance the making or maintenance of which is not required by the creditor as a condition of the making of the agreement."[30]I come now to the Judge's judgment. He dealt with the case without hearing oral evidence. The first issue which he considered was whether, as Mr. Hodgkinson, appearing before the Judge as he does before us, submitted, the credit agreement and the legal charge were by reason of s. 61 not properly executed and so by reason of s. 127 (3) unenforceable, with the result that any possession order would have to be set aside. The Judge referred to the argument for the Paynes that in compliance with a term of the principal agreement they entered into two linked transactions within s. 19 (1)(a). Those linked transactions were said to be the payment to the Leeds of the arrears on the first mortgage and the payment to FFL of the insurance premium. The Judge said (at p. 6 of the Transcript):
"If either of these transactions were [sic] linked transactions then the APR was not 38% but considerably more and other consequences follow."
Thus the Judge was indicating that in his view the answer to the question whether each payment was a linked transaction also answered the question whether that payment fell within the total charge for credit.[31]Then the Judge noted that Mr. Giles, then appearing alone for Watchtower, had accepted that the payment of the arrears was a transaction within the definition in reg. 1 (2) of the TCC Regulations. The Judge rejected Mr. Giles' submission that the payment was excluded by reg. 5 (1)(a) and (b), and said that it was not disputed that the consequence of the payment being a linked transaction was that the arrears were no longer credit and that the total charge for credit increased.

The Judge said (at p. 9 of the Transcript):

"The conclusion I reach is that the repayment of the arrears on the first charge was a linked transaction. There was a requirement that the arrears be discharged and the means by which Watchtower could do that on the Paynes' behalf. There may be an element of doubt about the exact mechanism by which they were discharged. However, having regard to the clear purpose of this legislation, the terms of the legal charge and the credit agreement and the way in which the Paynes were effectively compelled to repay the arrears I come to the conclusion that this was a linked transaction within section 19 (1) and also a transaction within the meaning of the TCC regulations. It follows that the agreement is wholly unenforceable and that the possession and other orders made against the defendants must be set aside as of right."
[33]The Judge next referred to the payment of the insurance policy premium, but said that the evidence on that issue was incomplete, and he reached no conclusion on it. He then considered three other issues on the footing that he was wrong on the linked transaction. First was limitation. He rejected the argument of Mr. Giles that this was an action on a simple contract, and accepted Mr. Hodgkinson's submission that this was an action upon a specialty for which there was a 12-year limitation period. He held that the Paynes were able to pursue their claim against Watchtower independently of the matter under appeal, subject to an issue on abuse of process. Second, he considered whether the Paynes entered a defence by ticking the "Yes" box in answer to question 10 in the Form N11M, having regard to CCR O. 49 r. 4(15). The Judge did not directly answer that. He said that in circumstances such as those before him there was a responsibility on the court to be proactive and to discover whether there was any serious issue to be tried. The court had not done that. The Judge held that the Paynes' delay in taking the points taken before him was excusable and should not debar them from raising matters of substance. The Judge said that if he was wrong on the linked transaction point, there should be a rehearing of the 1995 and 1998 proceedings, in which the Paynes could allege that the credit agreement was an extortionate credit bargain and seek to have it reopened. Third, the Judge considered whether the reopening of the matter would be an abuse of process. Relying on the decision of this court in Bradford and Bingley Building Society v Seddon [1999] 1 WLR 1482 the Judge rejected that argument. Accordingly the Judge made the orders summarised at the start of this judgment.[34]Before this court Watchtower by its Appellant's Notice sought to attack the Judge's conclusions on four grounds:(1) the payment of arrears was neither a linked transaction nor a charge for credit;(2) the limitation period for a claim that a credit bargain is extortionate is 6 years;(3) the ticking of the "Yes" box in answer to question 10 in Form N11M was not the entering of a Defence and there was no duty thereby placed on the court to be proactive and discover whether there was a serious issue to be tried; and(4) it was an abuse of process for the Paynes to raise points which were not put forward in the previous possession proceedings which resulted in possession orders against them.[35]Mr. Philpott, appearing with Mr. Giles for Watchtower, indicated to us in his opening submissions that only the first ground was being pursued before us. That was because of events which had occurred since the Appellant's Notice was prepared, in particular the publication of the decision of this court in Rahman v Sterling Credit Ltd. [2001] 1 WLR 496 . I need therefore say nothing about grounds (2), (3) and (4).[36]Mr Philpott's primary submission is that the payment of the arrears was part of the credit and not part of the total charge for credit. He pointed to s. 11(1)(c) as recognising a particular form of credit, viz. restricted use credit, being credit under a regulated consumer credit agreement to refinance an existing indebtedness of the debtor to another person such as a prior mortgagee, and he submitted that it could never have been contemplated that if the credit agreement required the application of the borrowed monies on a remortgage, that would entail that the amount to be so applied became part of the total charge for credit as distinct from the credit itself. He argues that the payment of arrears is not like interest and does not fall within the words of reg. 4 (b). He further submits that in paying off the arrears, the Paynes did not enter into a transaction but simply repaid a debt which by the terms of the prior mortgage they were legally obliged to pay in any event. By Watchtower's skeleton argument the point was also taken that even if the payment was a transaction it formed part of the credit agreement and so was not a linked transaction within s. 19 (1).[37]Mr. Hodgkinson submits that the Judge was right to hold as he did. He argues that because cl. 7 (b) of the credit agreement obliged the Paynes to pay the arrears, the payment was a charge payable under the credit agreement itself, which, as an agreement, is a transaction as defined in reg. 1 (2). He points to the description in reg. 3 of the items in reg. 5 as charges and submits that that regulation shows that if a payment is a condition of the advance of credit it falls within the total charge for credit whether or not it has a close purposive relationship with the loan. He submits that the word "payable" in reg. 4 (b) shows that in determining whether a payment other than interest is some other charge within that regulation it is only permissible to look at the credit agreement under which it is payable. Alternatively he says that the payment is a linked transaction and as such is a charge payable under the linked transaction. In the further alternative he says that the payment is a charge payable under the Paynes' mortgage with the Leeds, that mortgage being a contract to which the debtors are a party and which Watchtower as the creditor requires to be maintained as a condition of the making of the agreement.[38]The primary way in which the case is now put on behalf of Watchtower may well be rather different from the way it was put before the Judge. No doubt because of the concessions which I have noted, the crucial question for him was whether the payment of the arrears was a linked transaction, as it appears to have been accepted that, if it was, it fell within the total charge for credit. The Judge does not therefore appear to have considered that there was any difficulty over the meaning of "other charges". Nor is there any consideration by him of whether a mere payment could be said to be a transaction entered into by the debtor under which the payment was payable.[39]The starting point should surely have been to consider whether the payment of the arrears was part of the total charge for credit by being part of the true cost to the debtor of the credit provided (see s. 20 (1)) or was part of the credit itself. The scheme of the legislation is that an item cannot be both credit and part of the total charge for credit. S. 9 (4) makes clear that even where time is allowed for the payment of an item entering into the total charge for credit, it is not to be treated as credit. As is stated in Goode: Consumer Credit Law and Practice IC [24.144], "s 9 (4) reflects the fundamental notion that credit involves financial assistance to the debtor, not charges and expenses he incurs". An item financed by the creditor may be part of the total charge for credit, in which case it must be treated as not forming part of the credit. Thus in Humberclyde Finance Ltd. v Thompson [1997] CCLR 23 , where the finance provided by the creditor included a sum for the payment of a waiver protection premium, this court held the premium to be part of the total charge for credit and consequently that it did not form part of the credit.[40]S. 20 points one to the TCC Regulations to see whether an item falls within or without the total charge for credit. By reg. 4 the items there described must be included within the total charge for credit unless excluded by reg. 5. There is no definition of a charge. But there are several indications from the Act and the regulations which may assist on what is comprehended by the words "other charges" in reg. 4 (b). First, s. 20 makes clear that the charges are those costs which represent the true cost to the debtor of the credit provided. Second, interest on the credit is the one concrete example of a charge from reg. 4 itself. Third, reg. 5 provides other examples of charges (though they are taken out of the total charge for credit). One sees there the type of item which is included as a charge such as a premium on a policy of insurance or charges under arrangements for the care, maintenance or protection of any land or goods. Unless charge is to be interpreted as meaning no more than what is payable under the transaction, it seems to me that the words "other charges" must serve to exclude some payments payable under the transaction. Mr. Hodgkinson, when pressed to give an example of a payment payable under the transaction which was not a charge, said that it would cover a payment which was not a condition of granting credit under the credit agreement. I own to having difficulty in envisaging such a payment in an actual credit agreement, other than an optional payment. But a non-compulsory payment may be a charge, as was held in Humberclyde to be the case in relation to a waiver protection premium. In any event, Mr. Hodgkinson accepted that in one type of case the fact that the agreement stipulated the expenditure of the credit in a particular way would, if he were right, lead to the provisions of the Act and the TCC Regulations being unworkable. That is where the credit is required to be wholly expended on a particular purpose, for example, in remortgaging the property on which the credit agreement is secured. That is because on Mr. Hodgkinson's interpretation, the advance would fall within the total charge for credit and there would be no credit at all.[41]I have found helpful the discussion in Goode: IC [29.148]: "'Other charges'" By 'other' is meant charges other than interest under the credit agreement .... 'Other charges' thus covers non-interest charges payable under the credit agreement itself (eg a finance charge on a hire-purchase agreement or a charge unrelated to the time-value of money, such as a commitment fee, a documentation fee or a redemption fee) and interest or charges payable under any other contract forming part of the transaction. 'Charges' is not defined, but in the context of the TCC [Regulations] 1980 would appear to denote as its natural meaning payments enacted for the provision of services or the grant or use of facilities related to the subject matter of the credit agreement, as opposed to the purchase price of land or goods under that agreement or amounts under some other agreement forming part of the transaction which relate solely to what is to be provided under that other agreement and are unrelated to what is being provided under the credit agreement. So if the debtor is required to pay survey fees, land registry fees, legal costs, stamp duties, or installation charges, or is required to enter into ancillary contracts for the installation, maintenance or insurance of the subject matter of the credit agreement involving servicing charges or insurance premiums, all these are encompassed within the term 'charges' and have to be brought into the computation of the total charge for credit if payable 'under the transaction', unless excluded by reg 5. On the other hand, where the debtor buys goods on credit or borrows money to be applied to a particular purchase, it is obvious that the purchase price does not constitute 'charges' but represents the amount of the credit itself, for to treat the purchase price as forming part of the total charge for credit would lead to the absurdity of a credit agreement in which no credit was provided at all! Again, where the debtor is required, as a term of the credit agreement, to buy goods which the creditor does not finance (eg a safe in which to keep jewellery financed by the credit) or to mortgage or charge a lease of the debtor's property to the creditor as security, neither the purchase price of the goods nor the rent or service charges payable under the lease form part of the total charge for credit, for they are not liabilities incurred in connection with anything provided by the credit agreement but are sums payable exclusively in respect of a different subject matter."[42]Mr. Hodgkinson criticised this passage and in particular the illustration given by the editors in the last sentence. He may or may not be right in that particular criticism, but he had no answer to the point taken in the penultimate sentence of the passage. He suggested that this passage may have been written without taking into account the decisions of this court in Huntpast Ltd. v Leadbeater [1993] CCLR 15 and Humberclyde which are not referred to in the paragraph containing the passage in question. That is not only mere speculation: it is improbable in the extreme given the references to both cases elsewhere in the work including in the following two paragraphs and given the frequent revisions of the work. The passage was provided to us as part of issue 2 dated June 2000 and the following two paragraphs are part of the same issue. Moreover I do not see anything in Huntpast inconsistent with what is said in Goode.[43]In Huntpast the borrowers executed a loan agreement and a third mortgage under which they borrowed £18,500 from the lenders on the security of a property. The borrowers in the application form described the purpose of the loan as being "Redeem 1 st and 2 nd , balance to borrower and re-mortgage". The offer of advance included as a condition:
"(5) Any first mortgage and/or second or subsequent charges subsisting upon completion must be discharged out of the advance."
The loan agreement contained as one of the "Conditions of Loan" "The Borrower hereby authorizes and directs the Lender forthwith to make on the Borrower's behalf out of the Principal Sum the payments set out in paragraph J above." Those payments were sums totalling nearly £11,000 in discharge of the first and second mortgages, £4,500 to brokers, nearly £3,000 interest on the loan and a balance to the borrowers of merely £65.49. The borrowers at a time when the loan was expected to be £25,000 had agreed by a separate agreement to pay the brokers £5,000 as an arrangement and service fee. £4,500 represented the reduced fee payable in respect of the reduced loan.[44]It does not appear to have occurred to anyone that the payments to discharge the first and second mortgages, although a condition of the loan agreement, might fall within the total charge for credit. The argument related only to the £4,500 fee. The fact that the payment of that fee was a condition of the loan agreement was relied on by the borrowers as bringing that fee within the total charge for credit. But that was rejected, Sir Christopher Slade (with whom Fox and Steyn L.JJ. agreed) saying (at p. 26):
"The brokerage fee was in truth payable under the credit brokerage contract between the borrowers and the brokers, which was not an 'agreement' within the meaning of regulation 1 (2). The lenders acceded to the borrowers' request simply as a matter of convenience for the borrowers."
Sir Christopher noted subsequent changes to regs. 1 (2) and 5 (1)(d) which has has the effect of including brokerage fees in reg. 4 (b).[45]However Sir Christopher then considered two items within the £4,500 brokering fee, £450 legal fees charged by the lenders' solicitors and £125 fire insurance premium, which were deducted by the lenders from the amount payable to the brokers. He accepted that those items were not payable by the borrowers to the brokers as a matter of contractual obligation, but he held that they were part of the true cost to the debtor of the credit provided within s. 20 and came within "other charges" in reg. 4 (b). That decision therefore demonstrates that what is payable as a condition of the credit agreement is not determinative of whether it is a charge forming part of the true cost of the credit, and the court is entitled to look at the reality of the position.[46]I have already touched on the facts of Humberclyde . The question was whether the payment, out of additional credit provided by the lenders, of a payment waiver premium payable only if the borrowers chose to exercise a payment waiver option was an item to be included in the total charge for credit. This court (Aldous and Brooke L.JJ.) held that it was, though Brooke L.J. questioned why as a matter of policy that should be so. Not all the observations of the court are easy to reconcile with Huntpast , to which no reference is made. Thus at p. 29 Aldous L.J. said "The words 'charges at any time payable under the transaction' in regulation 4 (b) means charges that the debtor is liable to pay under the agreement", and Brooke L.J. also said at p. 31, in agreement with Aldous L.J., that because the premium waiver fee was a charge payable under the transaction it had to be treated as within the total charge for credit. But that was a decision not on the meaning of "other charges" but on "payable under the transaction", and to the extent that it decided that one need look only to see whether the contract provides for its payment, it is inconsistent with Huntpast .[47]For my part however I have no difficulty with the actual decision in Humberclyde that the premium, being for the provision of a benefit in the stipulated contingency relating to the credit (that if one borrower died within 5 years the other borrower would not be liable to pay the balance of the instalments), was a charge payable under the credit agreement and part of the true cost to the borrower of the credit provided.[48]The significant point made in the passage from Goode which I have cited is that a line can and must be drawn between what constitute charges and what constitutes credit, the former being in context payments exacted for the provision of services or the grant or use of facilities related to the subject matter of the credit agreement, whereas the latter constitutes, for example, the purchase price of land or goods under the agreement or amounts under some other agreement relating solely to what is to be provided under that other agreement and unrelated to what is being provided under the credit agreement.[49]In another paragraph in Goode, IC [29.161], after discussion of the meaning of "transaction" in reg. 1 (2) other examples of "other charges" are given:
"(a) Charges payable to the creditor under the credit agreement which are not payable for use of the financial accommodation as such but are merely designed to reimburse to the creditor expenses he incurs in connection with the transaction, eg survey fees, legal fees, stamp duties. (b) Charges payable, whether to the creditor himself or to a third party, under a transaction separate from the credit agreement, being a transaction entered into by the debtor or a relative of his and required by the credit agreement to be entered into or maintained as a condition of making of the credit agreement. Into this category (subject to reg 5) would fall charges payable to the creditor or a third party under contracts for the installation, maintenance or insurance of the property or the goods the subject of the credit agreement, whether those contracts are entered into in compliance with the credit agreement or existed at the time when the credit agreement was made and are continued in compliance with it. (c) Charges payable under any contract entered into by the debtor or a relative of his for the provision of security relating to the credit agreement – eg survey or valuation fees or legal costs payable under a charge on property given by the debtor's father as collateral security."
[50]I note that in the Encyclopaedia of Consumer Credit Law in the notes to reg. 4 (b) at p. 3082 the editors give as possible examples of 'other charges' items which, as in Goode, might be said to fall within the natural meaning of the term 'other charges' in its context, viz. "financial charges, setting up charges, credit card fees, documentation fees, commitment fees, "option to purchase" fees, redemption fees, legal fees, search fees, stamp duty, surveyors' and valuers' fees, installation charges, maintenance charges …. Mortgage indemnity premiums, and insurance premiums …." It is not difficult to see how such items, like those suggested in Goode, may fall naturally within the meaning of charges as comprised in the true cost to the debtor of the credit provided.[51]Until the present case was argued in the County Court no one appears to have suggested that a credit agreement for the provision of credit which under the agreement is wholly or partly to be applied in effecting a remortgage in whole or in part of an existing mortgage requires the treatment of the credit so applied as part of the total charge for credit as distinct from the credit itself. If Mr. Hodgkinson was right, in Huntpast the true credit was £65.49 and the total charge for credit was £18,434.51. To my mind that offends common sense, and while that may not be the safest guide to construing the consumer credit legislation, I am not prepared to adopt a construction which has that result. I note that in Grangewood Securities Ltd. v McGinn His Honour Judge Langan Q.C. in Norwich County Court on 8 October 2000, in a case of a credit agreement under which there was a provision similar to that in the present case that arrears under a prior mortgage had to be discharged on or before the completion of the loan, refused to follow the decision of Judge Welchman in the present case and held that the payment of the arrears did not come within the ambit of "other charges". In Broadwick Financial Services Ltd. v Spencer , His Honour Judge Neligan in Truro County Court followed Judge Langan. I say no more on these decisions as we are told that Judge Langan's decision is under appeal and will be heard by this court in the autumn.[52]In the absence of a statutory definition of a charge, I cannot pretend that it will always be easy to draw the line between an item forming part of the total charge for credit and an item forming part of the credit itself when the borrowing is for expenditure or a purpose required or authorised by the credit agreement. The court must consider all the circumstances including the documents relating to the agreement and may well have to ascertain objectively the purpose of the borrowing. For the reasons already given I reject Mr. Hodgkinson's submission that it is only permissible to look at the contractual documents. The purpose of the court's consideration is to arrive at what in reality is the true cost to the debtor of the credit provided.[53]I return to the circumstances of the present case. Mr. Hodgkinson has submitted that the payment of the arrears is a charge payable under the credit agreement by reason of cl. 7 (b). He submitted that the purpose of paying the arrears on the first mortgage to the Leeds was the purpose of Watchtower and not that of the Paynes and he drew our attention to what Mr. Payne said in an affidavit of 26 February 1999 when he referred to needing finance to clear a debt due to Charringtons Brewery and to having indicated, when requesting a loan, that he wanted £10,000 for home repairs in addition to settling outstanding debts. Mr. Hodgkinson, in response to questions from the court, made a belated application that if the appeal is allowed the case should be remitted to the County Court to determine the question left unanswered by the Judge, whether the payment to FFL falls within the total charge for credit, but also the question which the Judge determined relating to the arrears, with evidence to be heard on that question.[54]As the Paynes did not pay the arrears to the Leeds out of any money of their own before the completion of the loan, in reality as a requirement of the credit agreement at the moment it was completed the payment of the arrears had to come out of the money being lent by Watchtower; otherwise there would have been no completion. However I also have no doubt that on the available material the payment of the arrears was also a purpose of the Paynes. At the time of the application for the loan, the Paynes were several months in arrears to the Leeds. Courts see only too frequently how building societies are not content to allow arrears to mount up without seeking to enforce their rights. The application form signed by the Paynes and confirming the information supplied, whilst plainly not giving all the purposes of the proposed £11,300 loan in referring only to paying off £1,500 arrears, need not be doubted in its statement that that at least was a purpose. Mr. Payne's evidence in his witness statement is plainly inaccurate, even as to the amount of the loan for which he applied as well as its purposes, and could not have been drafted with the actual application form in mind. He never sought to explain why the application form was completed in the way it was once he had been reminded of its contents. In the circumstances it is inevitable to conclude that the objective purpose of the loan at least included the repayment of the arrears. Although at one time I was attracted by the idea of remitting this point to the County Court for further evidence, I have come to the conclusion that this would serve no useful purpose.[55]Does the payment of the arrears fall within the true cost to the Paynes of the credit provided or is it part of that credit? I have no doubt but that it does not properly fall within "other charges" in reg. 4 (b) because it is not of the nature of a charge for credit as distinct from being part of the credit itself. It is akin to the purchase price for land or goods in the example given in Goode in the passage cited. Accordingly because of this point, which does not appear to have been considered by the Judge, I would respectfully disagree with the conclusion of the Judge.[56]In the light of that conclusion it matters not whether "the transaction" in reg. 4 (b) is the credit agreement or a linked transaction or some other contract falling within reg. 1 (2). If the payment of the arrears is not a charge it is unnecessary to decide any of these further questions, and I would prefer to say nothing on them.[57]I would give permission to appeal and allow this appeal, set aside the order of the Judge and remit the case to the County Court to consider whether the payment to FFL fell within the total charge for credit and whether the credit agreement was an extortionate credit bargain. LORD JUSTICE CLARKE:[58]I agree that we should give permission to appeal and allow this appeal for the reasons given by Peter Gibson LJ. I set out below the essential reasons which have led me to that conclusion because I have not found this somewhat mesmerising statute easy to construe, because there are a number of conflicting county court decisions and because we are disagreeing with the judge. I shall use the same expressions as Peter Gibson LJ has done.[59]It appears to me that the crucial question for decision is whether the discharge of the arrears on the first mortgage is the discharge of "other charges at any time payable under the transaction by or on behalf of the debtor … to the creditor or any other person" within the meaning of reg 4 of the TCC Regulations.[60]The steps which lead to that conclusion are these: i) By section 60(1) of the Act the Secretary of State was required to make regulations as to the form and content of documents embodying regulated agreements. By the combined effect of section 60(1) and the Consumer Credit agreements Regulations 1983 a regulated agreement must state the amount of the credit and the rate of the APR. ii) By section 61(1)(a) a regulated agreement is not properly executed unless a document in the prescribed form itself containing all the prescribed terms and conforming to regulations under section 60(1) is signed in the prescribed manner both by the debtor and by or on behalf of the creditor. iii) By section 65(1) an improperly executed agreement is enforceable only by an order of the court. iv) Section 127 regulates the powers of the court to make enforcement orders under section 65(1) and by section 127(3) prohibits the making of such an order if section 61(1)(a) is not complied with unless a document itself complying with all the prescribed terms of the agreement was signed by the debtor. v) For this purpose the prescribed terms of the agreement are those prescribed by reg 6(1) of the Consumer Credit (Agreements) Regulations 1983, which for this type of credit provides that the prescribed terms are those set out in column 2 of schedule 6. They include a term setting out the amount of the credit. vi) It follows that unless either the agreement itself or some other document signed by the debtor correctly sets out the amount of the credit the court cannot make an enforcement order under section 65(1) and the agreement is unenforceable. vii) By section 9(4) an item entering into the total charge for credit shall not be treated as credit. It follows that, if the amount paid to discharge the arrears on the first mortgage was part of the total charge for credit, it should not have been included in the amount of credit in the document signed by the debtor. The amount of the credit should have been shown net of the total charge for credit. viii) The amount of the credit was in fact simply shown as £11,300, which it is common ground included the sum paid to discharge the arrears because the arrears were discharged out of the £11,300. The amount of the credit was thus not shown net of the amount paid by way of arrears. It follows that the agreement is unenforceable if the amount so paid is part of the total charge for credit. ix) Section 20(1) provides: "The Secretary of State shall make regulations containing such provisions containing such provisions as appear to him appropriate for determining the true cost to the debtor of the credit provided or to be provided under an actual or prospective consumer credit agreement (the "total charge for credit") and regulations so made shall provide –(a) what items are to be treated as entering into the total charge for credit, and how that amount is to be ascertained;(b) the method of calculating the rate of the total charge for credit." x) By reg 3 of the TCC Regulations the total charge for credit is defined as the total of the amounts determined as at the date of the making of the agreement of such of the charges specified in reg 4 as apply in relation to the agreement but excluding the amount of the charges specified in reg 5. xi) By reg 4 the "total charge for credit" includes: "(a) the total of the interest on the credit which may be provided under the agreement; and (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." xii) It follows that if the part of the credit used to discharge the arrears on the first mortgage was a charge payable under the transaction by or on behalf of the debtor to the creditor or any other person the agreement is not enforceable and the court has no discretion to make an enforcement order.[61]It is of course well settled that the charge for the credit may be part of the credit in the sense that it is monies borrowed as part of the total loan. Moreover the cases show that a particular sum may be a part of the charge for the credit whether it is a sum which the debtor is bound to pay under the terms of the agreement or an optional or non-compulsory payment: see Humberclyde Finance Ltd v Thompson [1997] CCLR 23 .[62]On the other hand, I entirely agree with Peter Gibson LJ that the mere fact that a sum is payable (or repayable) under the credit cannot make it part of the cost of the credit because otherwise there would be no credit but only charges for the credit, which would be absurd.[63]The question is therefore how to decide whether a particular sum is part of the charge for the credit because (as stated above) section 9(4) expressly provides that an item entering into the total charge for credit shall not be treated as credit. Section 20(1) points the way. It seems to me to make it clear that the total charge for credit is the true cost to the debtor of the credit. It supports the conclusion that the credit and the cost of the credit or the charge for credit or for the credit are different things and that the question to ask in the case of any particular item is whether it can fairly be regarded as part of the true cost of the credit. If the answer is yes it is part of the total charge for credit.[64]The essential question is therefore whether the cost of discharging the arrears on the first mortgage was part of the true cost of the credit. I agree with Peter Gibson LJ that it was not because part of the purpose of the credit was to pay off the arrears so that it was in truth part of the credit and not part of the cost of the credit. In paragraph 41 he has quoted some of the discussion in Goode which includes this sentence:
"On the other hand, where the debtor buys goods on credit or borrows money to be applied to a particular purchase, it is obvious that the purchase price does not constitute 'charges' but represents the amount of the credit itself, for to treat the purchase price as forming part of the total charge for credit would lead to the absurdity of a credit agreement in which no credit was provided at all."
I agree.[65]It seems to me that the question in each case must be whether part of the purpose of the transaction was that the borrower should borrow the item in dispute as part of the credit or whether it was part of the true cost of the credit. The answer to that question cannot depend upon the subjective intentions of the parties but must depend upon a consideration of the communications between the parties set against the surrounding circumstances or factual matrix.[66]It follows that the question whether the discharge of the arrears on the first mortgage is the discharge of "other charges at any time payable under the transaction by or on behalf of the debtor … to the creditor or any other person" within the meaning of reg 4 of the TCC Regulations depends upon two things. The first is whether the arrears were charges and the second is whether, if so, they were payable under the transaction.[67]I agree with Peter Gibson LJ that the discharge of the arrears on the first mortgage was plainly part of the purpose of the loan and was not part of the true cost of the loan. It follows that the amount of the arrears was not part of the total charge for credit or for the credit and that it was not necessary so to describe it in the agreement or on any other document signed by the debtor.[68]Like Peter Gibson LJ, I too at one stage thought that it might be appropriate to remit this question to the county court, but I agree with him that there is no purpose in doing so because there is no suggestion that there are any documents passing between the parties or their agents which might be relevant to it and the answer cannot depend upon the subjective intentions of Mr or Mrs Payne as expressed in the witness box.[69]I should add that the second question, namely whether, if the discharge of the arrears was the discharge of a charge, it was payable under the transaction does not arise.[70]In all these circumstances I agree that the appeal should be allowed but that the matter should be remitted to the county court for determination of the matters to which Peter Gibson LJ has referred. MR.

JUSTICE MAURICE KAY:

[71]For the reasons given by Peter Gibson and Clarke L.JJ., I agree that this appeal should be allowed and that the case should be remitted to the county court for consideration of the payment to FFL and the question whether the credit agreement was an extortionate credit bargain.

ORDER

Appeal allowed, the order of the judge set aside and the case remitted to the County Court to consider whether the payment fell within the total charge for credit and whether the credit agreement was an extortionate credit bargain. Draft order as minuted by counsel. (Order does not form part of approved Judgment)

Cited in 7 later judgments