UK: Unfair Contract Terms In Bank Guarantees

Last Updated: 27 February 2009
Article by Edward Davis and Sue Millar

The Commercial Court has decided in Barclays Bank Plc v Alfons Kufner [2008] EWHC 2319 (Comm) that a wealthy businessman was not entitled to rely upon unfair contract terms legislation to prevent the bank from relying on certain clauses in its loan and guarantee documentation.

Mr Kufner gave a guarantee to Barclays as security for a €3,494,322.00 loan ("the Kel loan") made to a company beneficially owned by Mr Kufner, Kel Maritime Limited, to finance its purchase of a motor yacht. It was stipulated that the loan could not be drawn down until a mortgage over the vessel had been formally registered in the Isle of Man. Shortly after a mortgage had been registered, it was decided that the vessel would be sold to a company called Paelten, based in Madeira, also owned by Mr Kufner. The bank executed a further loan agreement ("the Paelten loan"), containing the same condition precedent requiring the mortgage to be registered in Madeira (a step which required the mortgage in respect of the Kel loan to have been discharged), and backed by a further guarantee from Mr Kufner. When the bank attempted to register the Paelten mortgage the Madeira Shipping Registry refused to do so, because the supporting documents had not been notarised. Three months later, and before the bank had managed to register the Paelten mortgage, the vessel was transferred to another Madeira company. In February 2007, the bank served a stop order on the Madeira Shipping Registry in respect of the vessel. However, the vessel had already been transferred off the register.

Only two payments were ever made, totalling €71,040.01, under the Kel loan. The bank argued that there had been no drawdown under the Paelten loan, there was never any transfer between the accounts of the two companies on the bank's books and, as such, the Kel loan had never actually been discharged. As a result, the bank issued a notice of default and in April 2007 gave formal notice of demand to Mr Kufner under the guarantee in the sum of €3,540,000 plus interest and costs. The bank issued an application for summary judgment in respect of its claim.

Mr Kufner put forward a series of defences to the Court, each of which he argued had a real prospect of success. The Court rejected Mr Kufner's first argument, which was that the Kel loan had effectively been discharged when the Paelten loan was executed. The Court was satisfied that all parties had proceeded on the basis that the original loan would only have been discharged if and when the bank obtained a mortgage which was capable of being registered in Madeira.

Mr Kufner also argued that the bank had owed him duties in equity not to release any security held for the guaranteed indebtedness and had breached such duties by discharging the Kel mortgage without first ensuring that a registrable mortgage had been granted by Paelten. In response, the bank pointed to two specific clauses in the guarantee which sought to exclude or modify any such equitable duties. These clauses included the wording:

"5.3 From time to time we may: ...

f) release, enforce or not enforce our rights under any such security, guarantee or commitment."

Mr Kufner challenged the validity of these clauses by reference to Regulation 8(1) of the Unfair Terms in Consumer Contracts Regulations 1999 which provides that "an unfair term in a contract concluded with a customer by a seller or supplier shall not be binding on the consumer." The Court's view was that, if valid, clause 5.3(f) would clearly have entitled the bank to release the Kel mortgage. In deciding upon the validity of the clause, the Court had regard to the definition of a "consumer" in the Regulations, which is any natural person who, in contracts covered by the Regulations, is acting for purposes which are outside his trade, business or profession. The Court held that Mr Kufner was acquiring the component parts of a ship chartering business and was acting in a business capacity in doing so. In any event, it was held that for a guarantee to be covered by the Regulations, both the guarantee and the principal contract to which it was ancillary must be executed by a "consumer" and that Kel had clearly not entered into the Kel loan as a consumer. Mr Kufner's defence on this point was therefore rejected as unsustainable.

Finally, Mr Kufner sought to rely on a right of set-off in respect of a claim he said was available to him or to Kel against the bank for negligent misstatement. The background to this prospective claim was a meeting held in January 2007 at which an employee of the bank and the bank's solicitor had told Mr Kufner not to worry since the vessel was "on the hook". Mr Kufner claimed to have relied upon this as the bank's assurance that appropriate steps had been taken to ensure that no further sale or transfer of the vessel could take place without the bank's consent. Mr Kufner claimed that he ought to be entitled to set off the losses suffered as a result of the alleged misstatement against the sum which the bank was now claiming.

The bank relied on a clause in the Kel loan agreement which provided that all amounts due under the agreement (or any related security agreement) shall be paid "without any form of set-off, cross-claim or condition". Mr Kufner argued that such a clause was unenforceable since it failed to satisfy the test of reasonableness provided for in the Unfair Contract Terms Act 1977. On the basis of the evidence before it, the Court decided that there was no material disparity between the parties – Mr Kufner was an experienced businessman with a net worth of some €27 million. He also had at all times had available the services of his solicitor who would have made him aware of the implications of this clause. In addition, the clause did not actually prevent Mr Kufner from bringing a claim against the bank. As a result, the Court held that the clause was reasonable and could be relied upon by the bank to resist any form of set-off.

Having found that none of the defences advanced by Mr Kufner had a real prospect of success, the Court gave judgment in favour of the bank on a summary basis.

Practical implications

This judgment will be of particular interest to those banks whose standard form loan agreements and guarantees contain clauses seeking to limit equitable duties owed to the counterparty and to exclude claims for set-off. However, such lenders should be aware that the Court's reluctance to afford protection to the defendant under unfair contract terms legislation in this case was due to his status as a wealthy and experienced businessman, with access to legal advice. The Court could have been more sympathetic had the arguments regarding the validity of the exclusion clauses been brought by a "consumer". Banks should not lose sight of this fact when negotiating loan agreements and guarantees with individuals.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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