In this case the Court of Appeal considered whether a declaration pursuant to s 11(2) of the Consumer Credit Code was effective where it was executed several days before the mortgage documents but several days after the execution of a non-binding ‘indicative letter of offer’.
Section 11 of the Code sets out a number of presumptions relating to when the Code applies to a loan including:
“Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).”
Pivotal to the dispute was whether the extended definition of ‘contract’ in Schedule 1 to the Code applied to s 11(2):
“Contract includes the series or combination of contracts, or contracts and arrangements”.
At first instance, before the Consumer Trader & Tenancy Tribunal, the borrowers argued that the ‘indicative letter of offer’ they signed was a contract for the purposes of s 11 of the Consumer Credit Code basing their argument on the applicability of the extended definition. In opposition the lender argued, and the Tribunal accepted, that the indicative letter of offer was not a contract could not have enforced the contract if the lender decided not to proceed.
In the Court of Appeal Tobias JA (with whom Giles JA and Campbell JA agreed) held the opposite view:
“In these circumstances, the acceptance by the appellants of the letter of offer … resulted in a contract coming into existence whereby.. [the solicitor firm] warranted that it had authority from an undisclosed but identified lender to provide a loan of $52,000 in accordance with the terms of the offer. That contract was followed two days later by the tender … of the mortgage documentation … By executing those documents … there thereby came into existence a “credit contract” within the meaning of s 5 of the Code.
In these circumstances it cannot be gainsaid that there was other than a series of contracts or arrangements within the meaning of the extended definition of “contract”…In my opinion Conway’s submission that the extended definition of “contract” has no application to s 11 should be rejected.”
It follows that any contract which results in there eventually coming into existence a “credit contract” within the meaning of s 5 of the Code will nullify the effect of a s 11(2) declaration if it is executed prior to the declaration. Thus lenders should ensure the Credit Code declaration is the first document the borrower’s sign.
Lenders relying on s 11(2) declarations should also note that Tobias JA commented:
“Even where a loan is “rolled over” at the end of its initial term, there is much to be said for the view that a new credit contract is entered into at the time of rollover which, if the credit provider wishes to avoid the application of the provisions of the Code thereto, would require it to obtain a s 11(2) declaration prior to any such rollover being effected.”