Where a bank holds security for a loan, it can clearly enforce that security if the borrower is unable to repay its mortgage by selling the secured property and applying the sale proceeds to discharge the mortgage debt. But what if the borrower also has a potential claim for damages against the bank: can the borrower set off its cross-claim against the sums due to the bank? This was one of the issues considered by the court of appeal in Woodeson and another v. Credit Suisse (UK) Limited  EWCA Civ 1103.
Mr and Mrs Woodeson remortgaged their property with Credit Suisse using a foreign currency loan (in Swiss francs). The loan facility enabled them to redeem their existing mortgage and invest the surplus monies in sterling deposits. The interest rate on sterling was at that time much higher than that on Swiss francs, and the aim was to capture the interest rate difference between the currencies while also benefiting from a lower cost mortgage.
The loan documentation included a term stating that payments must be made "without set-off".
The deal proved disastrous following the fall in the Bank of England Base Rate from October 2008. When the Woodesons failed to repay their loan, Credit Suisse issued possession proceedings and obtained an order for possession of the property.
In response to the possession proceedings, the Woodesons brought claims against Credit Suisse for mis-selling the Swiss franc facility, seeking damages for negligence, breach of statutory duty and deceit. They sought various declarations, including a declaration that they were entitled in equity to set off any such damages against the sums due to Credit Suisse under the mortgage. A right of equitable set-off arises where a claim and cross-claim are so closely connected that it would be manifestly unjust to enforce one without taking the other into account.
Credit Suisse applied for summary judgment on the Woodesons' cross-claims. The bank argued that (1) the claims on which the declarations were based were time-barred, and (2) the Woodesons had contracted out of any right of set-off.
The judge at first instance granted summary judgment on the claims for negligence and breach of statutory duty, but not on the claim for deceit. The judge held that:
- the claims for declarations were based on freestanding claims which were time-barred so that, unless limitation had been postponed (under section 32 of the Limitation Act 1980), they were out of time;
- it was arguable that the Woodesons may not have been able to appreciate that they had a claim in deceit until the disclosure by Credit Suisse of certain internal documentation, with the result that limitation for the deceit claim (but not for the claims in negligence or for breach of statutory duty) may have been postponed under the Limitation Act;
- it was arguable that it was unreasonable to apply the no set-off provisions to a deceit claim (under the Unfair Contract Terms Act 1977 or Unfair Terms in Consumer Regulations 1999).
The Woodesons appealed on three grounds:
- the claims for declarations were not time-barred and could be pursued as heads of equitable relief, to be used as defences as and when needed;
- there were arguable grounds that Credit Suisse had deliberately concealed facts relevant to the claims in negligence and for breach of statutory duty (as well as for deceit), thereby postponing limitation; and
- the anti-set-off provisions could not be relied on in circumstances where Credit Suisse had failed to draw the Woodesons' attention to them or explain their effect (applying the principle in Interfoto Picture Library v. Stiletto  QB 433).
The Court of Appeal dismissed the appeal on all grounds.
On the limitation issue, the court held that the cross-claims were time-barred. There were two main reasons for the decision:
- the court emphasised that a claim for a declaration could not be treated as being separate from the underlying cause of action on which it was based. A court should not therefore entertain a claim for a declaration that a defendant owes a debt or is liable for damages if such claim is made once the debt or damages claim is statute-barred. In this case, the underlying claims in tort and for breach of statutory duty would have had to be brought within six years of the accrual of the cause of action (unless time could be extended as a result of any deliberate concealment of facts relevant to those causes of action), and the Woodesons' position could not be improved by making claims for declarations rather than for damages;
- the Woodesons also argued that the declarations were an integral part of the account that they, as mortgagors, would be entitled to seek from Credit Suisse to establish the sums owed under the mortgage, and could not be time-barred. The court held that where a mortgagor might wish to rely on a claim that an account should reflect its own claims against the mortgagee bank, such claims could not be reflected if they were time-barred because they would be pursued as claims in their own right, and not as a defence to the claim by the bank.
On this last point, Lord Justice Longmore also pointed out that the Woodesons' argument concerning the account was contrary to the well-established principle, set out in Spencer Day v. Tiuta International  EWCA Civ 1246, that a bank can use the proceeds of sale of a property under a mortgage to discharge the mortgage debt without regard to any claim for set-off. This point was explored in more detail by the second appeal court judge, Lord Justice Leggatt (see further under "The Spencer Day principle" below).
On concealment, the court agreed with the first instance judgment and held that, while the documents disclosed by Credit Suisse could arguably extend time for the deceit claim, they were not relevant to the negligence and breach of statutory duty claims. It was much easier to establish a prima facie case in negligence and breach of statutory duty, than it was in deceit, and the facts necessary to do so for the negligence and breach of duty claims were apparent well before the limitation period.
Longmore LJ suggested that, given the Spencer Day principle, any argument about the set-off provisions might prove academic. In any event, the principle in the Interfoto case (requiring a person relying on a particularly onerous or unusual clause to show that it had been brought to the other party's attention) was not applicable. In that case, the clause was considered to be unreasonable on its face and was contained in a document that had not been signed by the person against whom it operated. Here, there was evidence that clauses excluding set-off were not unusual in mortgage transactions and Mr Woodeson had signed the documentation containing the clause.
The Spencer Day principle
As Longmore LJ recognised, the Spencer Day principle may have made arguments about the anti-set-off provisions academic. Leggatt LJ went further, making it clear that the application of the principle meant that the Woodesons could not, as a matter of law, set off their mis-selling claims against their mortgage debt, irrespective of whether or not the transaction documents contained a no set-off clause. Those claims could only be pursued as freestanding claims for damages (as long as they were not time-barred).
Spencer Day (and the authorities referred to in that decision) establishes that a mortgagor cannot, by asserting an equitable right of set-off, prevent the mortgagee from enforcing its security by selling the mortgage property and recovering the mortgage debt from the proceeds of sale (without having to give credit for the mortgagor's claim). Leggatt LJ summarised the implications of this:
- the Woodesons had no right to prevent the property from being sold and the proceeds being used to repay their debt to the bank;
- in repaying the mortgage debt, Credit Suisse did not have to give credit for any damages arising from the Woodesons' cross-claims;
- the position would have been no different (1) had the cross-claims not been time-barred and (2) whether or not there were anti-set-off provisions in place.
This case is a reminder of the principle that even where a borrower has a cross-claim for damages, a mortgagee bank cannot be prevented from enforcing its security under a mortgage and applying the proceeds of sale to discharge the mortgage debt, and doing so without having to give credit for the cross-claim. Of course the principle does not prevent a borrower from bringing a freestanding claim against the mortgagee for damages (such as the Woodesons' claim in deceit), subject to that claim not being time-barred.
A mortgagee bank will still want to include provisions in its loan documentation excluding a borrower's right of set-off. This will ensure that undisputed payments under the mortgage are paid without set-off (for example, where a bank has mistakenly deducted amounts from the borrower's account). A bank might also want to exclude any right of equitable set-off in the event that, rather than enforcing its rights under a mortgage, it were to bring a personal claim under its loan agreements (for example, in the event that the proceeds of sale from its security were insufficient to repay the loan). In either case, the effectiveness of any such contractual exclusion would be subject to the provisions being reasonable.
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