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WHAT DOES ‘ENFORCE’ MEAN?


In the recent case of McGuffick v RBS [2009] the High Court considered the important question of what ‘enforce’ means in relation to sections 77 and 78 of the Consumer Credit Act 1974.


Background


Where a borrower under a personal loan or credit card agreement wishes to establish whether an agreement is enforceable against him or her the first thing they do is request a true copy of their agreement from the lender. This is known as a section 77 or 78 request. Following a request and the payment of £1.00 the lender is obliged to provide the copy of the executed agreement. 


One of three outcomes is now likely, namely:


1. The lender provides a true copy of the agreement that is enforceable against the borrower.


3. The lender provides a copy of the agreement, but it is unenforceable against the borrower (usually because it is ‘improperly executed’).


3. The lender cannot provide a true copy of the agreement.


The lender does provide an agreement

Where the lender does provide the agreement, the questions of improper execution and enforceability of the agreement will rely on such things as how the agreement has been drafted, whether it has been signed by the borrower and whether the agreement’s terms were legible to the borrower. These issues were not addressed in the McGuffick case.


The lender does not provide an agreement


This is what was being considered in the McGuffick case. The law here is clear. In relation to both credit cards and personal loans the law says that where the lender fails to provide an agreement, he is unable to enforce the agreement while this default persists. But what does ‘enforce’ mean?

 

It is accepted by everyone (lenders included!) that enforce means the legal right to recover the debt. So, where a lender does not provide the agreement he cannot go to court and get a judgement against the borrower. Both sides in the McGuffick case accepted this fact.


What else does ‘enforce’ mean?


In the McGuffick case the borrower asked the court: What else does the inability to enforce mean? Does it mean, for example, that the lender cannot try to recover his debt through non-legal means, such as issuing demanding or threatening letters? Does it mean that the lender cannot report defaults of monthly payment to the credit reference agencies (CRAs)?  Also, if the lender cannot legally enforce the agreement, does this mean that the agreement is void, or has come to an end?

 

The judgement in McGuffick


The judge in the case, on the question of enforceability, decided, as follows:


1. An agreement which is unenforceable, because of the lender’s statutory failing to provide the agreement, is still a valid and subsisting contract; it is not void.


2. Although the lender cannot legally enforce the agreement until and unless he can provide it, he can still attempt to ‘enforce’ it in other ways, such as demanding payment, issuing a default notice, threatening legal action or instructing an agent to do these things.


3. Reporting defaults to CRAs was not ‘enforcement’, but rather an “essential tool of responsible lending” and could still be done.


What does this mean to the borrower?


A judgement that seems to describe unenforceable agreements as ‘enforceable’ is quite confusing to non-lawyers and understandably so! However, borrowers should not be alarmed by it. If the lender cannot go to court to enforce the agreement all other ‘enforcement’ activities are, frankly, fruitless and can just be ignored by borrowers.


The only area of real concern for some borrowers could be the fact that despite having a legally unenforceable agreement, the lender can still report payment defaults to CRAs. However, lenders will usually try to negotiate a reduced settlement of unenforceable agreements and, if the borrower is concerned about his credit rating, he could accept a settlement while insisting that his credit file be marked as paid in full and all defaults removed.


When has a lender provided an agreement and is it enforceable?

 

Finally, you need to know whether what the lender has provided you is an agreement or not? This is straightforward where a lender does not provide you with anything at all. However, it is less straightforward where (as unusually happens) the lender provides you with some documentation, which it claims is an agreement and fulfils its obligations under sections 77 or 78. 

The next question that arises is, if you have been provided with an agreement, is it enforceable against you? This is crucial, as many more agreements are unenforceable because they are ‘improperly executed’ than through not having being provided by the lender. The investigation into these questions, and advice on what you should do following our investigation, is where Debt Solutions Southwest Ltd can help you.