In this bulletin, Nicholas Towers explains arguments concerning the effect of the current Covid-19 pandemic on settlement agreements, while Robert Brown considers new guidance from the Financial Conduct Authority for mortgage providers, and notes updates on the FCA’s test case on the validity of business interruption claims and a Select Committee report on rough sleepers and renters.
Should you wish to discuss any of these topics, or raise any other queries, do not hesitate to contact either the clerking team (+44 (0)20 7420 9500 or email@example.com) or any member of Chambers. Please rest assured that Selborne Chambers remains fully operational and very much open for business.
Mark Warwick QC
Challenges to settlement agreements
By now many readers will have experienced a situation where a party to a settlement agreement, whether free-standing or contained in a Tomlin Order, is challenged because of Covid-19.
A common theme with these situations is that the paying party asserts that the settlement agreement (just being a contract) has been frustrated because of the lockdown consequential to the Covid-19 pandemic
First, the test, set out by Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd  1 AC 675 at 700:
“Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances: in such case, the law declares both parties to be discharged from further performance.”
Although the doctrine is broad and flexible, it nonetheless operates within very narrow limits and is not a convenient saving grace for a party who finds that they have struck a bad bargain.
In a situation where a paying party has done nothing more than contract to pay a defined sum by a certain date, and by reason of Covid-19 has been unable to put together the funds, can they rely on the doctrine of frustration? It is submitted that without more, they cannot. Performance of the settlement requires no more than the payment of money by a certain date. Nothing in the governmental and economic response to Covid-19 has made presentation of a cheque or a bank transfer impossible.
The paying party may argue that it was implicitly understood that the settlement sum would be generated by their business, and because this was closed the nature of obligation has significantly changed. Again, this is unlikely to succeed. A receiving party generally has no interest in where the payment comes from, be it business profits, a family member or a lender of dubious repute, so long as the money is received. The fact that the money might have to come from the latter, and be considerably more expensive, does not change the nature of the obligation.
The courts have been extremely reluctant to allow a party to rely on frustration simply because performing the contract has become more expensive. This would open the floodgates for a raft of claims whereby the rough and tumble of markets, even at the extremes, are relied upon to escape contractual liabilities. In Thames Valley Power Ltd v Total Gas & Power Ltd  1 Lloyd’s Rep 441 Christopher Clarke J. said this:
“… 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 conclusion is consistent with a line of cases, both on force majeure clauses and on frustration, … 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.”
Unless the parties have expressly agreed that payment will be made from business proceeds, or perhaps more likely, from the sale of a particular property to take place within a defined period, then it will be extremely difficult to argue that the increased difficulty in raising funds is a frustrating event.
Close attention must be paid to the terms of the agreement, as some will include a provision for an extension of time if a property is not sold in time, or similar mechanism to cope with a failure to sell, putting to bed any argument that the freeze on the housing market is a frustrating event.
If parties enter a settlement agreement post-judgment, frustration and discharge of that agreement will simply revert the position back to the judgment, which will usually be less appetising for the paying party and put an end to the discussion.
A word on Tomlin Orders. Parties subject to obligations under such orders, typically to pay money, are seeking to rely on Covid-19 to justify extensions of time to pay. The court has the jurisdiction to extend time limits in a consent order, including one that resolves the substantive dispute between the parties, and where time is expressly stated to be of the essence (Safin (Fursecroft) Ltd v The Estate of Dr Said Ahmed Said Badrig (Deceased)  EWCA Civ 739 at . However, having a broad discretion does not mean that it will be readily exercised, and in Pannone LLP v Aardvark Digital Ltd  EWCA Civ 803 it was said at :
“Assuming that there is a power so to do, where the settlement is embodied in an order of the court, it can rarely be appropriate for the court to intervene further than to the extent to which the contract can, by its own terms or pursuant to general contractual principles, be modified or discharged in the light of changed circumstances.”
For an ordinary commercial debt claim, it is highly unlikely that a court would descend into the arena to grant an extension of time due to financial problems caused by Covid-19. However, in the context of forfeiture, the authorities indicate a willingness to contemplate amendment where a standard order for forfeiture subject to payment of arrears by a certain date has been made by consent. This is likely because of existence of the statutory framework for the granting of relief from forfeiture. However, where that order and the annexed schedule also contain a compromise of further disputes, such as a tenant’s counterclaim for disrepair, it is submitted that courts will be very reluctant to interfere with the bargain struck by the parties.
Mortgage Possession Proceedings
As things currently stand, the general stay on most possession proceedings (and appeals in such proceedings) is due to run out later this month.
It is not clear whether there will be any extension to that general stay, although county courts have been taking steps to prepare for hearings to re-commence soon.
Ahead of that potential restart, the Financial Conduct Authority (FCA) has published updated guidance for mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators, on dealing with customers in the exceptional circumstances arising out of Coronavirus/Covid-19.
The key points are that:
“Customers that have not yet had a payment holiday and who experience financial difficulty have until 31 October 2020 to request one.
“The current ban on lender repossessions of homes will be continued to 31 October 2020. This will ensure people are able to comply with the government’s policy to self-isolate if they need to.
“Firms will communicate with customers regarding what happens when their payment holiday ends. They should offer a range of options for how the missed payments will be repaid, if they are able to resume payments.
“Lenders will continue to support customers who have already had a payment holiday where they need further help. Firms should contact their customers to find out what they can re-pay and, for those who remain in temporary financial difficulty, offer further support, which will include the option of a further three-month full or part payment holiday.
“Payment holidays offered under this guidance will not have a negative impact on credit files. However, consumers should remember that lenders may use information obtained from other sources, such as bank account information, in their lending decisions.”
So far as repossessions are concerned, the guidance says as follows.
“Firms should not commence or continue repossession proceedings against customers before 31 October 2020, given the unprecedented uncertainty and upheaval they face, and Government advice on social distancing and self-isolation. This applies irrespective of the stage that repossession proceedings have reached and to any step taken in pursuit of repossession. Where a possession order has already been obtained, firms should refrain from enforcing it.
“We consider that commencing or continuing repossession proceedings at this time is very likely to contravene Principle 6 and MCOB 2.5A.1R – absent exceptional circumstances (such as a customer requesting that proceedings continue). We will not hesitate to take appropriate action where necessary.”
Practitioners will be aware that a breach of the Mortgage Conduct of Business Rules does not, without more, create a defence to a claim for possession. The defendant may, however, have a claim for damages which can be relied upon by way of a set off to argue that execution of a possession order should be suspended. As Simler J said in Thakker v Northern Rock plc  EWHC 2107 (QB), at :
“I am accordingly satisfied that the rules themselves do not give rise to such a defence, even if proved. The stage of the proceedings at which these rules are relevant is the second or discretionary stage referred to earlier. At that point the judge will consider as a matter of discretion, whether to suspend execution of a possession order or to stay such an order. The fact that there are alleged breaches of MCOB, or the code, can be raised, and the question whether and to what extent those breaches give rise to any loss resulting in damages can then be considered. However, they do not afford a basis in law for maintaining that the rights of the mortgagee under the mortgage contract to possession, a fundamental and important right, are unenforceable.”
The FCA has also suggested that even where lenders are not regulated under Financial Services and Markets Act 2000, such lenders may still be in breach of general consumer protection law if they do not follow the FCA’s guidance:
“Where there has been an assignment of the rights under the mortgage contract to a non-authorised person, the person must still comply with general consumer protection law including the Consumer Protection from Unfair Trading Regulations 2008. A commercial practice may be unfair under those Regulations if (among other things) it contravenes the requirements of professional diligence. Professional diligence means the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers. The guidance below is intended to describe the standards of skill and care we consider may reasonably be expected of lenders in the mortgages market in the current exceptional circumstances of coronavirus. If, therefore, a lender does not follow this guidance, that could call into question whether it is meeting the requirements of the 2008 Regulations, even if the lender is not regulated under FSMA.”
The new guidance is based on proposals that were first published on 22 May and were then the subject of a very brief the consultation period of just four days. The FCA’s aim was publish the finalised guidance “quickly”; the final guidance was published on 2 June.
FCA test case on the validity of business interruption claims
While on the subject of the FCA, it is worth noting that an update was published on 1 June 2020 regarding the “test” case to determine what, if any, business interruption cover is provided in relation to Covid-19. A representative sample of 17 different policy wordings and a list of proposed questions for determination have both been published. A hearing is currently anticipated to take place in the second half of July. Further information is available at the FCA’s Business interruption insurance page here.
Rented residential property
As set out above, the position at the moment appears to be that possession proceedings relating to rented residential property will begin again at the end of this month. The House of Commons Select Committee on Housing, Communities and Local Government has published an interim report on Protecting rough sleepers and renters. Amongst other recommendations, the Committee has called for urgent legislation to allow for a discretion in possession cases where a tenant is in rent arrears due to coronavirus.