MSE News: Mortgage blow as building society hikes SVR

howardtheduck

It’s time to use a sledgehammer to crack some nuts (the nuts being Vigilant22 and MarkyMarkD. Below is my response to Skipton’s initial response. I’ve forwarded a copy of it to the FSA and the OFT.

WITHOUT PREJUDICE

Customer Services Manager
Skipton Building Society
The Bailey
Skipton
North Yorkshire
BD23 1DN

7th April 2010

Mortgage Account Number: **********

Mortgage Account Number: **********

To whom it may concern:

Re: Complaint against SVR rise

Thank you for your letter dated 29th March 2010 in response to my letter dated 1st March 2010 addressed to the Society’s Customer Relations Team.

Before I respond to the legal and regulatory matter you raised in response to my submissions numbered (1) to (5) in my letter of 1st March 2010, I would like to provide a little background as to the reason for challenging the Society’s removal of its SVR ceiling and increasing its Standard Variable Rate.

Hopefully my letter of 1st March 2010 explains the rationale for this move but fundamentally, it is being made on behalf of all those borrowers who lack access to the wealth of financial and legal resources available to the Society. Permit me if you will, to quote below a memorable passage of the last ever judgement of the late Lord Denning MR in George Mitchell V Finney Lock Seeds [1983] 2 AC 803 that I consider to be very relevant to the matter of the Society’s "exceptional circumstances" clause:

"The heyday of freedom of contract

None of you nowadays will remember the trouble we had - when I was called to the Bar - with exemption clauses. They were printed in small print on the back of tickets and order forms and invoices. They were contained in catalogues or timetables. They were held to be binding on any person who took them without objection. No one ever did object. He never read them or knew what was in them. No matter how unreasonable they were, he was bound. All this was done in the name of "freedom of contract." But the freedom was all on the side of the big concern which had the use of the printing press. No freedom for the little man who took the ticket or order form or invoice. The big concern said, "Take it or leave it." The little man had no option but to take it. The big concern could and did exempt itself from liability in its own interest without regard to the little man. It got away with it time after time. When the courts said to the big concern, "You must put it in clear words," the big concern had no hesitation in doing so. It knew well that the little man would never read the exemption clauses or understand them.
It was a bleak winter for our law of contract. It is illustrated by two cases, Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41 (in which there was exemption from liability, not on the ticket, but only in small print at the back of the timetable, and the company were held not liable) and L'Estrange v F Graucob Ltd [1934] 2 KB 394 (in which there was complete exemption in small print at the bottom of the order form, and the company were held not liable).

The secret weapon

Faced with this abuse of power - by the strong against the weak - by the use of the small print of the conditions - the judges did what they could to put a curb upon it. They still had before them the idol, "freedom of contract." They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to stab the idol in the back. This weapon was called "the true construction of the contract." They used it with great skill and ingenuity. They used it so as to depart from the natural meaning of the words of the exemption clause and to put upon them a strained and unnatural construction. In case after case, they said that the words were not strong enough to give the big concern exemption from liability; or that in the circumstances the big concern was not entitled to rely on the exemption clause. If a ship deviated from the contractual voyage, the owner could not rely on the exemption clause. If a warehouseman stored the goods in the wrong warehouse, he could not pray in aid the limitation clause. If the seller supplied goods different in kind from those contracted for, he could not rely on any exemption from liability. If a shipowner delivered goods to a person without production of the bill of lading, he could not escape responsibility by reference to an exemption clause. In short, whenever the wide words - in their natural meaning - would give rise to an unreasonable result, the judges either rejected them as repugnant to the main purpose of the contract, or else cut them down to size in order to produce a reasonable result. This is illustrated by these cases in the House of Lords: Glynn v Margetson & Co [1893] AC 351 ; London and North Western Railway Co v Neilson [1922] 2 AC 263; Cunard Steamship Co. Ltd. v Buerger [1927] AC 1 ; and by Canada Steamship Lines Ltd v The King [1952] AC 192 and Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 in the Privy Council; and innumerable cases in the Court of Appeal, culminating in Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69. But when the clause was itself reasonable and gave rise to a reasonable result, the judges upheld it; at any rate, when the clause did not exclude liability entirely but only limited it to a reasonable amount. So where goods were deposited in a cloakroom or sent to a laundry for cleaning, it was quite reasonable for the company to limit their liability to a reasonable amount, having regard to the small charge made for the service. These are illustrated by Gibaud v Great Eastern Railway Co [1921] 2 KB 426; Alderslade v Hendon Laundry Ltd. [1945] KB 189 and Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400."

Before responding to the legal and regulatory matters raised in my letter dated 1st March 2010, you state in your letter dated 29 March 2010:

“The Board believes that the near-zero level of Bank Base Rate is exceptional. However, the society will voluntarily re-impose the SVR ceiling at 3% above Base Rate once exceptional circumstances (as defined in my previous letter) no longer prevail.

The Society website contains a definition of “exceptional circumstances” as “The circumstances currently prevailing are exceptional under each of two separate tests, which have recently been defined by the Society's board as follows:

1. Base Rate is less than or equal to 2.7%;

OR

2. Base Rate minus the UK average Branch Instant Access savings rate (as published monthly by the Bank of England) is less than or equal to 2.5% for each of the three preceding months”

It further goes on to state “We have promised to track the performance of these two tests and advise when they no longer prevail. When this happens, we will voluntarily reinstate(emphasis added) the ceiling for customers who had the benefit of it under their mortgage terms, provided no other exceptional circumstances have arisen in the meantime.”

Am I therefore correct in assuming from the terms of your letter that I should be grateful to the Society’s Board for its kind offer to voluntarily abide by the terms of the contract?

I turn now in more detail to your response to my complaint. In my letter dated 1st March 2010 I submitted the following points:

1) The term has been invoked unreasonably because the circumstances are not exceptional.


You responded to this submission with the following:


· You state “The common meaning of “exceptional” is “unusual and out of the ordinary”, which by its very nature is difficult to define in advance, but when it exists it is very apparent.”

· You state “I do not believe anybody can dispute that with the lowest level of Bank Base Rate in the Bank of

England’s 315 year history being 2% up until December 2008, we are now in exceptional times with the level being 0.5%.”


· You state “You cite the case of re Citro [1991] Ch 142 in support of your argument. This was a bankruptcy case and therefore likely to be of little assistance in this case. In any event I doubt that the court was providing an all encompassing legal definition of “exceptional circumstances” in that case, rather it was determining what those words meant in the context of the case before it.”

"Exceptional" is defined in the Oxford English Dictionary as meaning “unusual, special, out of the ordinary course”. Whilst I concede the point that the common meaning of exceptional is “unusual and out of the ordinary”, I dispute that performance of the Society’s obligations in a low interest rate environment is rendered impossible by holding the Society to the “guarantee” it gives on page 5 of my Mortgage Offer document. “The residential standard variable rate is guaranteed (emphasis added) not to exceed the Bank of England’s base rate from time to time by more than a differential of 3% pa (or 3.25% pa if you do not have a direct debit discount). This differential plus the Bank of England base rate is called the “variable rate ceiling”.”


I further dispute that the term that gives the Society the right to remove the SVR Ceiling under exceptional circumstances is given “equal prominence” with the guarantee. The word “guarantee” is used no less than twice on page 5 of my Mortgage Offer document, at paragraph 7 and 9. Conversely, the term reserving to the Society the right to remove the variable rate ceiling is mentioned only once in my Mortgage Offer document (and nowhere else) at paragraph 11.


I do not consider your rather brusque dismissal of Re Citro as “a bankruptcy case and therefore likely to be of little assistance in this case” as indicative of the law in respect of ‘force majeure’ clauses such as the “exceptional circumstances” clause the Society has relied upon. You continue “In any event I doubt that the court was providing an all encompassing legal definition of “exceptional circumstances” in that case, rather it was determining what those words meant in the context of the case before it.”


Since you consider Re Citro as unrepresentative of the law, you may find the case of Thames Valley Power Limited -v- Total Gas & Power Limited [2005] EWHC 2208 of interest in determining the meaning of “exceptional circumstances”. As a Court of Appeal decision it represents a binding precedent for all lower courts.
The Court of Appeal decision in Thames Valley Power Limited -v- Total Gas & Power Limited [2005] EWHC 2208 confirms that, in the absence of some express provision to the contrary in the force majeure clause, "force majeure" does not includes an event or circumstance which makes the contract seriously uneconomic to perform. Thames Valley Power Limited (TVP) contracted to buy gas from Total for the operation of a combined heat and power plant at Heathrow Airport. The contract contained a pricing mechanism to fix what TVP would pay. This provided a "ceiling", above which the price could not increase, and a "floor", below which it could not fall. It also contained a clause relieving an affected party from the performance of its obligations upon the occurrence of a force majeure event. "Force majeure" was defined as "any event or circumstances beyond the control of the party concerned" resulting in that party failing to fulfil its obligations. There was a specific provision that "In assessing the circumstances of force majeure affecting the customer, the price of gas under this agreement shall be excluded". Gas prices rose and it became uneconomic for Total to keep supplying TVP at the contract price. Total informed TVP in writing that it was unable to carry out its part of the contract as a result. TVP's response was that the price increases did not make Total unable to perform - it just meant that the performance of Total's side of the deal would be less profitable for Total - and it requested an undertaking that Total continue to supply gas in accordance with the contract. Total invoked the force majeure clause. It argued that the exclusion from the definition of force majeure of gas prices affecting the customer - because it made no mention of gas prices from the supplier's perspective - meant a dramatic price increase could constitute a force majeure event if it would render Total's performance "commercially impracticable". The floor and ceiling mechanism protected TVP, but Total was very much exposed.

The judge disagreed. As a first step he considered the factual matrix (briefly: long-term contract; Total competing with other tenderers; fluctuating gas prices; pricing mechanism consistent with those in other Heathrow Airport agreements; Total's substantial resources). He then emphasised that a force majeure event must have made Total unable to supply gas. There is a distinction between inability and inconvenience. "The fact that it is much more expensive, even very greatly more expensive for it to do so, does not mean that it cannot do so" (emphasis added). Allowing force majeure to be invoked where performance is commercially impracticable would add a "highly uncertain" and open-ended qualification which would be inconsistent with the rest of the agreement. This reflects a long line of authority. The sentence dealing specifically with gas prices affecting the customer was not enough on its own to alter the meaning of the rest of the clause. If Total had wanted to secure the result it was arguing for, it should have said so in the contract.


I have included below an extract from the judgement of MR. Justice Clarke (QBD Commercial Division, 27th September 2005) in the case. I quote directly, although the emphasis is mine:

[Continued ..................... ]

(IANYL)

howardtheduck

"Force majeure

44. In order for Total to be able to be released from its obligations under the GSA on the grounds of force majeure, it must establish

(i) The existence of force majeure, that is to say an event or circumstance beyond its control.

(ii) That that event or those circumstances have resulted in a failure by Total to fulfil one or more of its obligations under the GSA because it or they have caused Total to be unable wholly or partly to carry out such obligation or obligations

(iii) That notwithstanding the exercise by Total of reasonable diligence and foresight, it was or would have been unable to prevent or overcome the relevant event or circumstances,

(iv) That Total gave notice in writing of such force majeure as soon as possible after the occurrence of the cause relied on.

45. Mr. Wolfson accepts that, but for one provision of special condition 15, Total would not be arguing that they could invoke force majeure. The provision upon which he relies is the last sentence of standard condition 15.2 which reads: ʺIn assessing the circumstances of force majeure affecting the customer, the price of gas under this agreement shall be excludedʺ.
That provision, he submits, shows that it would not be open for TVPL as customer to contend that force majeure applied because of an increase in the price of the gas to be supplied to it under the GSA.

46. But no mention is made of the price of gas to the supplier. That omission must have some significance and makes it arguable that under this agreement a ʺsufficiently dramaticʺ increase in the market price of gas could amount to a force majeure circumstance if it had the result that the losses that Total would suffer under the GSA made its continued fulfilment of the GSA commercially impracticable. There is in this respect, he observes, a noticeable difference between the exposure of TVPL and that of Total. TVPL can never suffer a loss greater than the difference between the contract price and the market value of gas; even if gas had no value their loss would not exceed that price. Hence, he suggests, the last sentence of standard condition 15.2.

47. But Total is exposed to the difference between the price that it has to pay in the market for the gas that it is to supply to TVPL and the contract price. The market price has no limit, nor therefore does Totalʹs risk. There must, he submits, be a point at which the market price becomes so high that it is commercially impracticable for Total to continue. The last sentence of standard condition 15.2 supports the proposition that the parties contemplated that, when that point was reached, there would be a circumstance of force majeure. Inability should not be limited to physical inability, but extends to being, commercially speaking, unable.

48. The force majeure event or circumstance upon which Total relied was, he submitted, the fact that the prices which Total now had to pay had reached so high a point that Total could only perform the contract at a degree of loss that was quite beyond anything that anyone contemplated at the time of the agreement. Whether that was factually correct fell to be determined in the expert determination.

The factual matrix

49. The circumstances constituting the factual matrix have been agreed by the parties. They include the fact that both parties knew when entering into the agreement (i) that TVPL was a single purpose company which had entered into agreements with HAL with a 15 year term for the acquisition of a co-generation plant that was to generate and supply electricity and heat which HAL required for Heathrow, and (ii) that it was a condition of the HAL agreements that a Gas Supply Agreement be entered into. Total also knew that it was in competition with other tenderers to supply the required gas, (i.e. it was not forced to contract) the market price of which fluctuates. In addition, the parties knew that the indices in the pricing formula in clause 6 of the special conditions were designed to be consistent with those in the HAL agreements and that such indices had themselves risen and fallen prior to 12th June 1995. The parties also knew that the Total Group had very large resources.

50. Despite the cogency with which they were advanced, I do not accept Mr. Woodfordʹs submissions for the following reasons:

1 The force majeure event has to have caused Total to be unable to carry out its obligations under the GSA.

Totalʹs obligation under the GSA is to supply, ie to make physical delivery of, gas in accordance with the conditions. These include provisions in respect of a nominated amount of consumption by the customer for each of the contract years, and a maximum consumption in any one day. Total is unable to carry out that obligation if some event has occurred as a result of which it cannot do that. The fact that it is much more expensive, even very greatly more expensive for it to do so, does not mean that it cannot do so.

2 To interpret clause 15 as applicable in circumstances where performance is ʺcommercially impracticalʺ or Total is ʺcommercially unableʺ to supply is to enforce a qualification highly uncertain in ambit and open ended in reach which is neither necessary nor obvious and which is inconsistent with the express terms of the GSA. Totalʹs obligation under the GSA to supply gas in return for the price is not dependent on nor is it related to the market price of gas. Nor is Totalʹs obligation an obligation to supply gas provided that the cost to it of doing so is not commercially unacceptable or impracticable. In those circumstances if Total can supply gas it cannot be said that they are unable to perform their obligations under the agreement.

3 The reference in the last sentence of standard condition 15.2 to what is not to be taken into account in assessing the circumstances of force majeure affecting the customer cannot in my view carry the implication, or cause standard conditions 15.1 and 15.2 to mean, that Total do not have to establish that some event has caused them not to be able to deliver gas. It serves perfectly well as a warning that so far as TVPL, which has to pay the contract price, is concerned, the size of that price is not to be considered for force majeure purposes. The customer cannot say that it is unable to pay the price because it is too high. It does not at all follow that the supplier is entitled to rely upon an increase in the market price in comparison to the contract price as a force majeure circumstance. This single sentence is in my view wholly inadequate to alter the clear meaning of the bulk of conditions 15.1 and 15.2. If the draftsman had meant these conditions to have the consequence now contended for, it is inconceivable that he would have expressed himself so obliquely.

4 This conclusion is consistent with a line of cases, both on force majeure clauses and on frustration, several of which are cited in Mr. Shepherdʹs skeleton argument, to the effect that the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure or frustration. I take as an example Tennants Lancashire Limited v Wilson CS & Co Ltd (1917) AC 495, a force majeure case where Lord Loriburn observed at p.510: ʺThe argument that a man can be excused from performance of his contract when it becomes ʹcommercially impossibleʹ seems to me to be a dangerous contention which ought not to be admitted unless the parties plainly contracted to that effectʺ.
I accept, of course that each clause must be considered on its own wording and that force majeure clauses are not to be interpreted on the assumption that they are necessarily intended to express in words the common law doctrine of frustration. Nevertheless, this line of authority, the legal backdrop against which the GSA was written, strongly supports the proposition that this case is no exception. No case has been cited to me in which a clause such as the present has been interpreted as relieving a party from its obligation to perform because the performance of the contract has become economically more burdensome. If a company as familiar with the effect of fluctuations as Total wished to secure that result, it would need to do so in much more explicit terms.

5 This conclusion is also support by a consideration of the factual matrix. In the circumstances in which the contract was entered into TVPL were, in the absence of clear word to the contrary, entitled to expect that Total would supply them with gas against payment of the contract price throughout the 15 year term and would not be entitled to refuse to do so because the cost of so doing had increased even exponentially. That was Totalʹs risk, particularly in the light of the price escalation clause which provided, within limits, for increases in the contract price in accordance with formulae based on indices. See Publicker Industries Inc v Union Carbide Corporation [1973] 17 UCC Reporter, Serv 989 where the existence of a contractual provision for limited increases in the price of ethanol resulting from a rise in the cost of ethylene ʺimpelled the conclusion that the parties intended that the risk of a substantial and unforeseen rise in its cost would be borne by the sellerʺ.

6 The letter of 5th July does not claim that Total has become unable to supply gas. It indicates that as a result of increasing prices and the price formula in the GSA, it will become ʺuneconomicʺ for large parts of the year to supply gas, and gives notice that unless there is a significant fall in the anticipated UK market price of gas during the autumn and winter months, it will be unable to supply further quantities of gas after 30th September. At the same time it offers to supply gas at the market price. It thus indicates that Total can in fact continue to supply gas but at a loss or a lesser profit if it only receives the contract price.

7 There is no evidence before me that establishes that Total cannot supply gas for the remainder of the term. On the contrary, Mr. Sheadʹs witness statement of 21st September states that Total is confident that it can procure TVPLʹs requirements beyond 1st October 2005 on a day ahead basis and offers to do so at a pass through price: and, if their argument on force majeure and remedies fails, Total have undertaken to continue to supply.

8 Mr. Shead also gives an estimate on a ʺbest guess basisʺ of totalʹs financial position in the future. His evidence is to the effect that Total will lose about £9½ million up to the date of termination of the contract. The calculation assumes that the cap will be breached, i.e. the market price of gas will exceed the maximum that TVPL can be required to pay, in the second quarter of 2006 and never return under the cap until the end of the contract. Even on the assumption – which I do not accept – that a sufficiently dramatic increase in the price of gas could amount to a frustrating event even though Total could still supply gas, an increase in market price which took the market price to a height no greater than the cap could scarcely have that consequence.

In short, Totalʹs claim to force majeure is in my judgment ill-founded. The notice does not state, nor is it the case, that Total has become unable to supply TVPL with gas. Even if the notice had stated that Total would not be able physically to supply gas in the future it would be premature; as it is, it claims only that at some unspecified date and absent a downward move in the market, it will become uneconomic to do so."



With respect to point 4 of Mr Justice Clarke’s dismissal of Mr Woodford’s submissions in the Thames Valley Power case, surely the Society as a properly managed and commercially astute building society would be familiar with the effect of interest rate fluctuations, would it not?

• You state “It was not our intention to retrospectively define “exceptional circumstances” for the purposes of the contract. This term was not incorporated into the contract at a later date and neither are its terms inferred”.
• You state “Nor have we any point claimed that we have the sole right to define “exceptional circumstances”. We have defined them, as I have mentioned above, because of the onus to show objectively that exceptional circumstances existed when the decision was made to remove the ceiling.”

Since you state that you did not at any point claim that you had the sole right to define “exceptional circumstances”, would rising unemployment resulting from the “exceptional” economic downturn qualify as a valid reason for borrowers to make lower mortgage payments until their economic situation improved? Somehow I feel the argument for borrowers pleading their own “exceptional circumstances” and citing the economic downturn for making lower mortgage payments would be given short shrift by the Society.

• You state “For the benefit of our borrowers we chose not to use an extensive list of circumstances - as you are aware there are many other circumstances which could have been included, but are not so easily measurable. It is not simply our own belief that the circumstances we used in our definition are exceptional.”

The “exceptional circumstances” clause the Society has relied upon is an exclusion clause citing “force majeure”. However, it is not possible to benefit from force majeure if it was not explicitly provided for it in an agreement: it does not apply automatically. As a result, before the principle of ‘force majeure’ can be relied on, it needs to be clearly defined in the contract and must cover the particular event that has arisen. Usual events of ‘force majeure’ include war, act of terrorism, labour disputes, pandemics, compliance with law, order, rule or regulation, fire, flood and storm. Based on the facts of particular cases, the courts have found events such bad weather, football matches, funerals, insufficient financial resources AND miscalculations (being events which one party sought to rely on as events of ‘force majeure’) as not amounting to ‘force majeure’.

The following is what Halsbury’s Laws of England says about ‘force majeure’ (emphasis added):

“Many contracts expressly provide for performance to be excused if rendered impossible by unavoidable cause such as act of God, the Queen's enemies, act of state, force majeure or vis major.

Stipulations to that effect are effective, provided that they are not uncertain in their terms and that there's compliance with any notice requirement.

A force majeure clause must be construed in each case with due regard to the nature and general terms of the contract and, in particular, with regard to the precise words of the clause.

Such a clause on its proper construction may allow the court to take account of the promisor's obligations under other contracts despite the fact that, as a rule, it's no excuse that contracts with third parties prevent the fulfilment of the contract in question.

When the contract excuses a party from delays due to unavoidable causes, he may be outside the protection of that provision if he fails, before making the contract, to inquire whether such unavoidable causes exist and to inform the other party.

The party may not be protected by the clause where a force majeure event doesn't in fact render performance impossible.”
From the definition of ‘force majeure’, it is clear that the occurrence of an event that cannot be controlled is the crucial factor. As such, a historically low interest rate could potentially be an event of ‘force majeure’. However, in order to rely upon this, the Society should have included a ‘force majeure provision’ and define events of force majeure so as to include a historically low interest rate.

The global recession has brought to the surface the question of whether an economic downturn constitute force majeure events which are unforeseeable and beyond the reasonable control of the parties, thereby excusing the parties from the performance of their obligations as long as such events persist. This issue becomes particularly pertinent where the clause is not narrowly defined, leaving the door open for such a question to be raised.

The Society’s argument in respect of “exceptional circumstances” is based on a "catch-all" provision whereby in order to avoid failure to specify a particular event of force majeure, it is usual to include the general sweep-up proviso of "exceptional circumstances". Whether a historically low interest rate qualifies as "exceptional circumstances" in this case is something that, unfortunately, can only be tested in court.

However, given the Thames Valley Power case, in the absence of express wording, it seems unlikely that the courts will recognise a force majeure event where the performance of the contract could still be made, albeit with commercial difficulty or with increased cost. In that case it was held that for high gas prices to constitute a force majeure event, the contract needed to specifically incorporate such an eventuality as a force majeure event. The fact that the contract was no longer profitable for Total did not excuse them from performance. The wording dealing specifically with gas prices affecting the customer was not sufficient to alter the meaning of the rest of the force majeure clause.


In addition, following the House of Lords decision in Photo Production Ltd v Securicor Ltd [1980] AC 827 the more serious the breach, or the consequences of the breach, the less likely it is that the court will interpret the exclusion clause as applying to the breach as per Photo Production Ltd v Securicor Ltd [1980] AC 827. I would submit that the consequences of Society’s actions for approximately 64,000 borrowers and the seriousness of the breach make it even more unlikely that a court will apply the “exceptional circumstances” exclusion clause.

2) Skipton Building Society drafted the term and the term will be construed contra proferentem.
I maintain my submission that the removal power is ambiguous not merely because “exceptional circumstances” is not defined but because there has been no attempt to provide examples of events that would qualify as “exceptional circumstances” releasing the Society from its SVR ceiling pledge. It is extremely important to draft an exclusion clause in clear and precise terms; the slightest ambiguity may be seized upon by a court to hold the exclusion clause inapplicable as in Suisse Atlantique Societe d'Armament Maritime v Rotterdamsche Kolen Centrale [1967] 1 AC 361 HL although there was some evidence of a more relaxed and realistic approach to the interpretation of exclusion clauses as in Photo Production Ltd v Securicor Ltd [1980] AC 827. In Photo Production Ltd Lord Diplock said that “the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses”, noting that many of these cases involved consumer contracts and continued “any need for this kind of judicial distortion of the English language has been banished by Parliament's having made these kinds of contract subject to the Unfair Contract Terms Act 1977”.
[Continued ............................ ]

(IANYL)

howardtheduck

3) The KFI makes no reference to the Society being able to revoke the SVR ceiling in breach of FSA disclosure requirements.

• You state that “In terms of the KFI for your residential mortgage, which is subject to FSA disclosure requirements, I note that your mortgage was introduced by a mortgage intermediary and under the FSA regulations your intermediary is responsible for the production of the KFI, not the Society. The Society does not see, and is not required to see, an intermediary KFI. The Society did not pass information about the ceiling to intermediaries or to sourcing systems as part of the product details. This means the ceiling on your revert rate should not have been included in the KFI. If the ceiling is not disclosed in the first place, then there is no detriment in not disclosing a right of removal. I have stated previously, the ceiling and the right to remove it were stated in the same place and with equal prominence in your mortgage offers.”

My Skipton mortgages were both obtained in 2006. The mortgage intermediary they were obtained through was Sequence UK, which was acquired by Connells, a subsidiary of Skipton Building Society in 2003. So who is responsible for the accuracy of my Key Facts Illustration? Well, according to the FSA’s Mortgages: Conduct of Business Rules, the lender is responsible for the accuracy of a KFI which it produces and gives to the consumer. The lender is also responsible for the accuracy of a KFI which it produces and provides to an intermediary so the intermediary can give it to the consumer. Principle 2 of the FSA’s Mortgages: Conduct of Business Rules requires a firm to conduct its business with due skill, care and diligence. Given that my KFI was obtained via Sequence UK, which was owned by Connells at the material time, which in turn was owned by the Society at the material time, there is a strong argument that the Society is liable for the accuracy of my KFI.

• You state “I also note your original products were both Fixed Rate until April 2009. The Standard Variable Rates were the “revert to” rates. Neither of your mortgages were BOE trackers – only the ceiling on the Standard Variable Rates had any linkage to the BOE base rate. I also note that our new Standard Variable rates from 1st March are less than the then standard variable rates in force and stated in your offers when you took out your loans.”

For the avoidance of any doubt, I am NOT querying the Fixed Rate on my mortgage products and your answer does not address my concern. Skipton Building Society’s SVR is linked directly to the BOE BR. Therefore the contract is for a base rate tracker with a guaranteed ceiling or “collar”. The fact that it is called an SVR is immaterial. It is as immaterial to the issue of breach of contract as the fact that the Society’s new Standard Variable rates from 1st March 2010 “are less than the then standard variable rates in force and stated in your offers when you took out your loans.”

• You state “The Halifax mortgages you cite were BOE base rate tracker products. Halifax stated the rate tracked BOE base rate in the KFI but included no reference to the collar. That is why they were unable to enforce it”.

Given that the Society’s SVR was a de facto base rate tracker (despite being called a SVR), I submit that the failure to include the SVR ceiling in my KFI in addition to not disclosing a right of removal in the SVR represents a breach of the FSA’s disclosure requirements in addition to rendering the term unenforceable.

I have included below an extract from ‘The Times’ newspaper dated 3rd December 2008:

“The Financial Services Authority indicated yesterday that more than half a million Halifax customers on tracker mortgages should benefit from further interest rate cuts even though the small print on their loans supposedly prevents them from doing so.

An estimated 550,000 Halifax borrowers with tracker mortgages, which move up and down in line with the base rate, appeared set to miss out on future rate cuts because the small print on their loans allowed Halifax to stop reducing rates once the base rate falls below 3 per cent.

Jon Pain, the FSA's retail market manager, said yesterday that this 3 per cent threshold, or “collar”, could be unenforceable. He said collars should be included in a lender's key facts illustration (KFI) - the mortgage documents given to every borrower. Halifax removed the details of its collar from its key facts in 2005.

Mr Pain told the Council of Mortgage Lenders (CML), the industry body representing the banks and building societies that make home loans: “If it is not [included] you run the real risk of both breaching our disclosure requirements and having an unfair contract term you cannot enforce.”

A spokesman from the FSA defended the request to simplify the documentation, adding: “It cannot be right that to shorten your KFI you take out something which is required under FSA rules. It is a rule that a collar should be included in a lender's KFI.” ”

4) The unilateral and retrospective definition of what constitutes “exceptional circumstances” creates a significant imbalance in our respective rights under the contract to my detriment as a consumer, contrary to the requirement of good faith.

Good faith was dealt with in the judgment of the House of Lords in the case of Director General of Fair Trading v First National Bank Plc [2001] UKHL 52 with Lord Bingham saying that it was "not an artificial or technical concept". The requirement of good faith is one of "fair and open dealing" and that openness requires terms to be expressed "fully, clearly and legibly, containing no concealed pitfalls or traps". Lord Bingham also went on to say that fair dealing requires that firms should not, deliberately or unconsciously, take advantage of consumers, whether because of their lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or a number of other factors.

I submit that Skipton Building Society has breached this requirement of good faith by not including in my Key Facts Illustration any reference to its ability to renege on its pledge in "exceptional circumstances".

I consider that the Society has breached the FSA's Mortgage: Conduct of Business rules by failing to make me aware of the existence of a floor, trigger or similar feature in an appropriate manner at both the pre-application and offer stages of my mortgage, in accordance with the FSA's Mortgage: Conduct of Business rules.

As regards the pre-application stage, there is no mention of a floor, trigger or similar feature in my Skipton mortgage Key Facts Illustration nor to the best of my knowledge is there mention of a floor, trigger or similar feature in any of Skipton's KFI's.






In respect of the mortgage offer stage, I submit that I was not made aware of the existence of the "exceptional circumstances" proviso tucked away towards the bottom of page 5 of my mortgage offer in an appropriate manner in accordance with the FSA's Mortgage: Conduct of Business rules.

• You state “I would also invite you to consider if you are “a consumer” for the purposes of the UTTCR s4(1) in relation to account number ********* as this is a Buy to Let mortgage and you had * other Buy to Let properties at the time you took out this loan.

Having taken up your kind invitation to consider whether I am “a consumer” for the purposes of the UTCCR s4(1), in my considered opinion I am “a consumer”. The definition of consumer in the Regulations is “any natural person who, in contracts covered by these regulations, is acting for purposes which are outside his trade, business or profession”.


HM Revenue & Customs regards Buy to Let as an investment and explicitly states that Buy to Let property is not a business asset for Capital Gains Tax purposes. To obtain further clarification, I have contacted HMRC and confirmed that they do not regard Buy to Let as a business but rather as an investment unless incorporated as a company or utilised as the primary source of an individual’s income. This is not the case with my “buy to let” properties as I have neither taken the step of incorporation nor do they represent my primary source of income. I submit that the approach taken towards “buy to let” by HM Revenue & Customs, which is eminently placed to resolve the issue of what constitutes a business, is the correct approach.






5) The SVR rate ceiling is a guarantee that the Society has subsequently reneged on.

• You state that “The Society had a clear contractual right to remove the ceiling which was spelt out in its mortgage offers. Exercising that right cannot be said to be “reneging” on its commitment.

I dispute that the Society had a clear contractual right to remove the ceiling for the reasons I have spelt out in the preceding paragraphs.

• You state “I would wish to stress that the newspaper article of the 4th March 2009 was in response to the particular circumstances – the proposed BOE base rate reduction on the following day – whereby I confirmed we would honour our commitment by reducing our rate to keep within the ceiling. As I have stated, our customers have had the benefit of this for a considerable period when many other lenders either did not reduce or raised their standard variable rates”.

I submit that the contract was induced by a misrepresentation by an unqualified use of the word “guarantee” (twice) in the mortgage offer. Furthermore, for those borrowers applying for the Society’s SVR mortgages after 4th March 2009, the misrepresentation was further exacerbated by the Society’s CEO David Cutter stating on 4th March 2009, "We have pledged our residential standard variable rate will NEVER be more than 3 per cent above base rate and, even with this at its lowest level for 315 years, we will honour our promise."

I have sent this complaint via recorded delivery so there can be no question of Skipton Building Society having received it. I expect a final response within eight weeks of the initial receipt of my complaint as per your complaints procedure. In the event that no response is provided by the Society within the eight week period I will refer my complaint to the Ombudsman.

Yours sincerely

HowardTheDuck

(MarkyMarkD, Vigilant22, in the immortal words of Lloyd Grossman, "it's over to you".)

(IANYL)

JPS29

Thanks Howard.

A thorough and substantiated response to Skipton. Will be interesting to see if they realise their obligations at this stage or let it go to the courts

howardtheduck

Thank you JPS29. I'd like to see on what legal basis Skipton's lawyers contend that Thames Valley Power should not be followed by the court.

JPS29

The scenario I was thinking about was whether Skipton would basically throw in the towel, faced with evidence of the likes you are presenting them with to blow their catch all clause out of the water (thames valley) and the negative press they have received and honour the original agreement(s) or whether they would intend to drag this out through the courts and any intended legal action against them, Leon kaye etc...

VIGILANT22

To even suggest "Skipton would basically throw in the towel" on the back of this letter is in the simplest form "naivety".....You seem to overlook all the remarks that the FSA would have been party to Skipton's decision long before it was announced.........

JPS29

I may be many things but I wouldn't have said naive was one of them.

My "scenario" which I was "thinking" about was not solely based upon Howard's letter but other factors also. Just one of them being Halifax and it's SVR debacle being one of them. I am not overlooking anything about the FSA but I haven't as yet seen one statement from the FSA saying that they "agreed" to Skipton's course of action.

Anyway, my scenario was based on legal action, through the courts, not sanctions/directions from the fsa.

VIGILANT22

It has been posted repeatedly....do you really think in this current climate...Skipton would have just bulldozed ahead without any consultation with the FSA....As a matter of course lenders (chief ex's) are always in meetings at Canary Wharf...so do you really think this wouldn't have been discussed!

JPS29

Being posted repeatedly isn't what I said though is it. You are banging on about the FSA but I already mentioned this was only one factor, but as you seem to keep bringing it up could you please provide me with a link or a cut and paste of the FSA stating "explicitly" that it either had agreed to Skiptons actions prior to them being announced OR that they have reviewed Skipton's actions and still give them their full backing.

This would carry more clout than simply saying that it must have been discussed, there are meetings all the time etc... Or is that just my naivety?