In the latest judgement relating to the West One Loans court case with Salkeld Investments Ltd, the judge has held that the case must go to trial because there is disagreement “…about the context and the practices and assumptions of bridging finance.”

Judge Mackie QC held that “There is a stark conflict of evidence which can only be resolved, if it has to be, at trial”, which is due to take place on the first available date after 31st December 2012. 

He further stated, “If the matter goes to trial the issues will be complex and expensive to try. Salkeld [the Claimant] claims that there is a short cut because the essential issues are clear but West One says that the law and facts are unclear and there must be a trial.”

Case summary

“The Claimant under a previous name, invested £235,000 in what was to be a loan, arranged by the Defendant, secured by a first charge on a house in Fulham. The Defendant's solicitors, as a result of an identity fraud, paid the £235,000 to a fraudster before the security was in place. The Claimant says that the Defendant is, under the contract between them, liable to repay the money because the loan was not secured as promised. The Defendant says that its obligations under the contract were only to use reasonable skill and care and that the agreement was subject to standard terms which show this and limit liability. The Claimant responds by denying that the standard terms were incorporated and by claiming that if they were they do not on their proper construction excuse the Defendant and in any event are unreasonable under the Unfair Contract Terms Act.”

‘Legally impossible for a lender to obtain a charge’

Defending West One, Mr de Verneuil Smith contended that “…the duty of his client was limited to one of taking reasonable care, that it was legally impossible for a lender to obtain a charge over a property before a loan was advanced.”

Judge Mackie however, “…declined to accept this as a proposition without evidence” and permitted further evidence from a conveyancer to be submitted.

Specialist evidence was sought from Mr Miller, partner at the firm of Seddons, who said, “…it is possible but very unusual to obtain a registered charge before releasing loan monies to a borrower. Such an arrangement would only be possible if the borrower agreed to it. Further it is not standard practice for bridging lenders or residential mortgage lenders to obtain a registered charge before releasing loan monies to a borrower. The standard market practice for bridging loans and for residential mortgages is that funds are released to the borrower before a registered charge is effected.” 

The case report continued: “In more than 1000 bridging loan matters which Mr Miller has dealt with he has never had an instruction from a lender to register a charge before releasing a loan to a borrower. However Mr Miller accepts that it would have been entirely possible for the Defendant to have obtained a registered charge over the property before advancing the loan to the borrower.”

Therefore, “The contention of impossibility was therefore misconceived but obtaining a charge before making the loan would in practice be unusual in a bridging finance deal.”

The Claimant’s case is that West One has acted in breach of contract because “…it is common ground that the Defendant failed to obtain security but nonetheless advanced the Loan.”

Mr Singla, acting on behalf of the Claimant, submitted that there was a running assumption between the parties, “as evidenced by the email exchanges, the Terms Sheet, the Valuation Report, and the Defendant's own marketing materials was that the Defendant would only make the Loan to the Borrower once security had been obtained and hence the only risk to which the Claimant would be exposed was if the amount of the security obtained by the Defendant subsequently proved to be insufficient.”

“Accordingly, insofar as the Defendant chose to advance the Loan to the Borrower before it had obtained a registered charge, the Claimant contends that the Defendant did so entirely at its own risk. Even if the Court takes the view that the parties to the Contract must have contemplated that the Defendant would advance the Loan to the Borrower before it had obtained a registered charge over the house. Mr Singla submits that the Defendant was nonetheless under an absolute obligation to obtain security. If the Defendant advanced the Loan to the Borrower on the basis only of security documents (as in fact happened), it was still liable to the Claimant for breach of contract if those security documents subsequently turned out to have been forged.”

‘Unusual and contrary to universal market practice of bridging lenders’

West One Loans’ solicitor, Mr Smith, however argued that “…the background knowledge that was reasonably available to the parties and specifically the standard market practice of bridging lenders is wholly inconsistent with construing the retainer as containing an absolute warranty that registration of the charge would take place before the release of loan monies to the borrower. 

“The standard and reasonable practice of bridging lenders and residential mortgage lenders is precisely the converse practice: to release loan monies before registration is achieved but in reliance upon the security documentation completed by the borrower and the priority period granted by the Land Registry priority search. The Claimant's construction is therefore highly unreasonable, unusual and contrary to universal market practice of bridging lenders. The Defendant is a professional arranger and provider of bridging loans. It cannot ordinarily be found to guarantee results and the evidence is that bridging lenders do not as a matter of course promise not to release loan monies until a charge is registered.”

Yet West One Loans’ Company Profile stated: "The service offered to clients includes the entire management of their lending operation. The management company obtains loan applications, processes each application by taking up all necessary references where applicable, obtains chartered surveyors valuation, prepares and submits the facility letter and finally instructs solicitors to perfect a legal charge over the property or properties offered as security..."

The judge held that these terms relied upon by the Claimant “can only be implied if they spell out in express words what the Contract, read against the background facts, would reasonably have been understood to mean. It is not obvious or reasonable for a party to promise the outcome of something beyond its control, namely, the conduct of the borrower in proceeding with the loan.”

‘Bridging lenders who might now face a wave of litigation’

Finally, it was held that “…there is a compelling reason why summary judgment should not be granted on the basis of an implied term because such an implication would have very significant repercussions for bridging lenders who might now face a wave of litigation based upon the standard market practice constituting a breach of an implied term only to release loan monies after a registered charge is obtained.

But the judge rejected this submission. He stated: “The facts relating to the doing of the deal are unusual and the dispute arises because the transaction was not documented as competently and clearly as it would have been in most cases.”

The judge concluded: “The role of the Defendant, as an arranger and packager of bridging finance is not a common and conventional one like that of a solicitor or accountant and is thus less easy to classify. The role may not be very common even within the world of bridging finance. The role of the Claimant also requires consideration - it appears to be a sophisticated investor but there is debate about that. Further imprecision arises from the fact that the terms of the contract, including any terms to be implied, must be found not in a written agreement but in the background material and in an informal sequence of emails. 

“The issue is fact sensitive…” and the answer “…depends on such matters as the nature of the service to be performed, the context and how far the end result is one which a professional person can reasonably guarantee. Indeed there may be within one contract some duties which are absolute and others which are only to take reasonable care. These are matters on which a Defendant is entitled to insist on evidence at a trial and it would not be right for me, despite my firm first impression, to reach a decision solely on the written material now available.”

He finally added: “There will be leave to defend on the question of what the obligations of the parties under the Contract were. There is no prospect of the Defendant establishing that the Client Agreement formed part of the contract unless its unpromising claim based on a telephone conversation succeeds.”