Frances Elizabeth Wood v Commercial First Business Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice David Richards,Lord Justice Males,Lady Justice Elisabeth Laing |
| Judgment Date | 31 March 2021 |
| Neutral Citation | [2021] EWCA Civ 471 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case Nos: A3/2019/2949 and A3/2020/1424 |
| Date | 31 March 2021 |
[2021] EWCA Civ 471
Lord Justice David Richards
Lord Justice Males
and
Lady Justice Elisabeth Laing
Case Nos: A3/2019/2949 and A3/2020/1424
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
IN THE BUSINESS AND PROPERTY COURTS IN BRISTOL
PROPERTY TRUSTS AND PROBATE LIST (ChD)
Mr James Pickering (sitting as a Deputy Judge of the High Court)
[2019] EWHC 2205 (Ch)
and
APPEALS (ChD)
Mr Justice Marcus Smith
Royal Courts of Justice
Strand, London, WC2A 2LL
David Lord QC and Stuart Cutting (instructed by Moore Barlow LLP) for the Appellants
Stephen Meachem (of Law Tribe) for the Respondent Frances Elizabeth Wood
William Hopkin (instructed by Coodes LLP) for the Respondent Richard Miles Pengelly
Hearing dates: 11–12 November 2020
Approved Judgment
Introduction
These two separate appeals raise common issues, as to the circumstances in which a borrower is entitled to rescission of a loan contract and its accompanying mortgage or other security where the broker through whom the secured loan was arranged has received an undisclosed commission from the lender.
The lender and the broker were the same in both cases. The lender was Commercial First Business Limited (CFBL), which went into liquidation in November 2018 and was dissolved in December 2019. Soon after the various loans were made, they were assigned to third parties by way of securitisation. Those assignees are the appellants in both cases, but it is common ground that the assignments are immaterial to the issues raised. The broker was UK Mortgage and Financial Services Limited (the broker).
In both cases, the borrowers defaulted on the loans. In each case, the borrower sought rescission of the loan agreements and mortgages, on the grounds that CFBL had paid commissions to the broker without the knowledge or consent of the borrower.
In one case, Mrs Frances Wood issued proceedings to set aside the loan agreements and mortgages on a number of grounds in the Chancery Division of the High Court (the Wood case), after enforcement proceedings had been taken against her and possession orders had been made. The claim was heard by Mr James Pickering, sitting as a Deputy Judge of the High Court. He gave judgment in November 2019: see [2019] EWHC 2205 (Ch). He found in her favour on the issue of the undisclosed commissions, but rejected the other grounds advanced by Mrs Wood. He ordered CFBL to pay to Mrs Wood a total of £92,927, the aggregate of the undisclosed commissions paid by it to the broker, and rescinded the relevant mortgage agreements and deeds, on condition that she gave restitution to the relevant assignee in an amount to be determined by accounts which the judge ordered. The assignees appeal against the orders for rescission, with the permission of Flaux LJ.
In the other case, proceedings were brought against Richard Pengelly in the Bodmin County Court (the Pengelly case). The claim was issued by CFBL but its assignee was later substituted as claimant. The claim was heard by His Honour Judge Carr, sitting in the County Court at Truro, who dismissed Mr Pengelly's defence and counterclaim in its entirety and gave liberty to the claimant to enforce a possession order which had earlier been made. On appeal to the High Court, Marcus Smith J allowed Mr Pengelly's appeal as regards the claim for rescission based on the payment of an undisclosed commission paid by CFBL to the broker, subject to satisfactory arrangements for counter-restitution being agreed or determined by the court: see [2020] EWHC 2002 (Ch). The assignee appeals with the permission of Flaux LJ, who ordered that the appeal should be heard with the appeal in the Wood case.
The issues on appeal
Although the borrowers succeeded on the issue of undisclosed commissions in both cases, there is an important difference in principle between the two judgments under appeal. In the Wood case, Mr Pickering held that in order for relief to be granted against the party who paid the undisclosed commission, it was not necessary for a fiduciary relationship to exist between (in these cases) the client and the broker. By contrast, Marcus Smith J held that a fiduciary relationship was a necessary pre-condition to the grant of relief, including rescission, against the party who paid the commission. The first ground of appeal in the Wood case is that Mr Pickering was wrong on that issue. A respondent's notice was not filed in the Pengelly case, seeking to uphold Marcus Smith J's order on that additional ground, but the issue inevitably arises in that appeal as well.
In any event, it was held in both cases that a fiduciary relationship existed between the broker and Mrs Wood and Mr Pengelly respectively, and that finding is challenged on both appeals.
It was contended by the appellants in both cases that the commissions paid by CFBL to the broker were properly categorised as half-secret commissions of the type found by this court in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351. If that were the case, the court would have a broad discretion as to the relief it should grant. In both cases, it was held that the commissions in these cases were fully secret, not half-secret, commissions.
There are thus three issues raised by these appeals:
(1) Is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief against the payer of the undisclosed commission?
(2) Did a fiduciary relationship exist between the client and the broker in these cases?
(3) Are the commissions that were paid properly categorised as half-secret commissions?
The facts
Mrs Wood carried on a buffalo farming and organic mozzarella cheese-making business at two farms in Somerset. She started the business at Higher Alham Farm, Batcombe, Shepton Mallet, Somerset and in 2006 purchased a second farm, Dean Street Farm at Dean, Shepton Mallet, Somerset. In May 2006, she borrowed £1,020,000 from CFBL secured by a mortgage over Higher Alham Farm, which was largely applied in repaying two loans secured on that property. They included a loan of £314,000 from UK Country Capital Limited (UKCC), a company owned and controlled by Des Phillips, who also owned and controlled the broker.
In July 2007, Mrs Wood borrowed a further £1,427,320 from CFBL, secured by a mortgage over Dean Street Farm. These funds were largely applied in repayment of further loans that had been made by UKCC.
In November 2007, a further loan of £174,474 was made by CFBL to Mrs Wood, secured by the mortgage over Higher Alham Farm.
These loans were all arranged through the broker, engaged by Mrs Wood for the purpose of finding loan finance. She paid a fee of £14,500 in respect of the first loan and a fee of £3,726 in respect of the third loan. The broker waived its fee for arranging the second loan.
The broker also received commissions from CFBL: £30,600 (3%) for the first loan, £57,092.80 (4%) for the second loan, and £5,234.22 (3%) for the third loan. It was not disputed that Mrs Wood did not know that these commissions were paid.
Turning to the other case, Mr Pengelly farms at The Barn, Middle Amble, Wadebridge, Cornwall. In 2005, he borrowed £81,250 from CFBL, secured by a mortgage on his farm, partly to repay two loans at what he considered to be uncompetitive interest rates. The loan was arranged through the broker, to whom Mr Pengelly paid a fee of £2,954.48. The broker was also paid commission of £2,437.50 (3% of the loan) by CFBL. It was not disputed that Mr Pengelly was not informed of the payment of this, or any, commission by CFBL.
The broker's terms of business were the same in both cases. They provided as follows:
“The firm is registered with the Financial Services Authority under registration number 305196:
a) Full advice and recommendation;
b) Information on different types of mortgage products available to allow you to make a choice;
c) Information on a single product only, where no advice given.
We offer information on different types of mortgage products available to allow you to make a choice.
We work from a panel of lenders to enable you to select the appropriate lender and mortgage product to meet your individual circumstances and needs and we will therefore be acting on your behalf.
During our initial meeting, we will be completing a detailed mortgage questionnaire to enable appropriate advice to be given to you on your mortgage requirements.
We will also provide you with information relevant to your mortgage needs, covering such items as an explanation of the main repayment methods and the implications of taking out a mortgage.
Once we have made our recommendations to you, we will confirm our advice in writing. You should keep this as it will be an important record of our discussions. Details of the loan will also be confirmed in your lender's formal offer.
We may receive fees from lenders with whom we place mortgages. Before we take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250, we will confirm that we will receive up to this amount. If the fee is £250 or more, we will tell you the exact amount.
We will treat all your...
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