Reddy, Johnson Q & A, commercial law 2009–2010 2009-1

Q&A COMMERCIAL LAW 2009–2010

partnership’. The effect is that generally only small partnerships and not large-scale partnerships will benefit from the protections of the Act. The financial limit in s 15(1)(c) excluding hire agreements where the required hire payments would exceed £25,000 has been repealed (ss 1 and 2 of the CCA 2006). However, consumer hire agreements for wholly or predominantly business purposes where the required hire payments will exceed £25,000 are treated as exempt agreements under s 16 of the CCA 1974 (s 4 of the CCA 2006). The agreement here is therefore a regulated consumer hire agreement.

Agency

The partnership may be able to take advantage of the statutory agency in relation to Reg’s statements under s 56 of the CCA 1974. The statutory agency does not apply to consumer hire agreements unless the statements are made by the creditor or owner himself (which can include his employees and agent) and not by third party creditbrokers or suppliers (Moorgate Mercantile Leasing Ltd v Gell & Ugolini Dispensers

(1985) and Lloyds Bowmaker Leasing Ltd v MacDonald (1993)). It would be a question of fact whether at common law Reg is the agent of Stingray Photography, though the courts have been reluctant to create an agency in relation to intermediaries in credit transactions (Branwhite v Worcester Works Finance (1969)). If he were an agent, then as principal, Stingray Photography would be held liable for the statements of Reg if they gave rise to any legal liability as either misrepresentations or terms of the contract. The statements by Reg would probably be regarded as ‘antecedent negotiations’ made in relation to a regulated agreement, even though not directly concerned with the hire payments element, and such liability would be non-excludable (ss 56(1)(a), (3) and (4) – see Forthright Finance Ltd v Ingate & Carlyle Finance (1997)). If Reg were deemed to be not an agent but a freestanding principal, then s 56 of the CCA 1974 would not apply. The joint liability provisions in s 75 of the CCA 1974 do not apply to consumer hire agreements.

Misrepresentation

On the face of it, Reg’s remarks as to likely revenue from the booth look to be a mere opinion, but given his status and experience, the courts would probably imply a statement of fact that he had a reasonable basis for his opinion and if this did not exist, then potential liability might arise for misrepresentation. If he is an agent of Stingray Photography, an action for statutory negligent misrepresentation would be available under s 2(1) of the Misrepresentation Act 1967, with the added advantage that the onus of proving a reasonable factual basis for Reg’s opinion would lie on Stingray Photography (Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd (1978)). If Reg is a free-standing principal s 2(1) would not apply, as the consumer hire contract would not be with him but Stingray Photography, but here a common law tort action for negligent misstatement might lie, based on the

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principle in Hedley Byrne v Heller & Partners (1964), on the basis that Reg is aware that Bert is relying on his skill and judgment in relation to potential revenues and it is fair and just to impose liability on him.

Implied term

If the computerised printing facilities keep breaking down and this is attributable to a defect in the equipment, there is the potential for the termination of the contract for breach of the implied term of satisfactory quality under s 4 of the Supply of Goods and Services Act 1982 even though he has had the booth for three months (see UCB Leasing v Holtom (1987) and Farnworth Finance Facilities v Attryde (1970)).

Termination

Unfortunately for Bert, the statutory right of termination of consumer hire agreements provided in s 101 of the CCA 1974 will not apply as the annual payments exceed £1500 and the agreement is for business purposes (s 101(7) of the CCA 1974). Absent any contractual right of early termination, the partnership would be bound by the minimum hire period of 36 months.

Breach and damages

In the absence of any contractual right to reject for breach of the condition of satisfactory quality, or contractual right of early termination, then the partnership would be in breach of contract if they sought to terminate the hire before the 36-month minimum period had elapsed and could, assuming proper default procedures had been followed (ss 87–89 of the CCA 1974), face an action for damages for breach of contract or face a demand for immediate payment of the hire charges under a valid acceleration clause (Wadham Stringer Ltd v Meaney (1981)) as well of course as the return of the photography booth to Stingray Photography. It is quite probable that being a business contract there will be a liquidated damages clause in the hire contract and providing this is a reasonable pre-estimate of the owner’s loss will be upheld by the courts even if the amount payable under the clause exceeds the actual loss on this occasion (Robophone Facilities Ltd v Blank (1966)). The statutory rebate provision in s 94 of the CCA 1974 does not apply to consumer hire agreements. It is unlikely on the facts that the hirer could claim relief under s 132 of the CCA 1974 on grounds that it is just that he be relieved from some or all of his future hire payments and recover any part of instalments already made.

Licensing agreement

In the second scenario, the partnership merely license Stingray Photography to place the machine in their shop and to account for any proceeds received for use of the machine, minus a commission. It follows from this that if no one used the machine,

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they would not be required to pay any money to Stingray Photography. The question then arises whether it is still a regulated consumer hire agreement within s 15 of the CCA 1974. The answer to that question appears to be no, as a result of the decision in TRM Copy Centres (UK) v Lanwall (2008), where it was held that for a bailment to fall within the scope of the Act, there must be an element of payment involved, and where in that case, involving a photocopier, in a post office the owner of the shop only had to account for the proceeds of use of the copier minus a commission, it was held that as there were no mandatory hire charges, it was not a regulated consumer hire agreement. The outcome here is then that in the second scenario it would be an unregulated credit agreement governed by the common law and it would depend on the terms of the licence whether and under what conditions the partnership could terminate the licence – presumably if the machine did not work they might, in absence of any express provision, rely on an implied term to give business efficacy to the contract that the licensed equipment actually work satisfactorily (Liverpool City Council v Irwin (1977)).

Question 20

[Assume the Consumer Credit Act 2006 is fully in force.]

Steve is facing serious financial problems, having recently lost his job, and he also owes money to a variety of creditors, including a number of credit card companies. Steve sees an advertisement in the Newtown Gazette by Access Brokers offering to arrange debt consolidation loans at affordable interest rates for people with concerns about multiple debts. Steve visits Access Brokers and signs a proposal form to enter into an unsecured £30,000 consolidation loan, repayable over five years at 21% APR with Newtown Loans Ltd. The loan is to be used to pay off his existing loans and leave him with about £5,000 for his personal use. He is given a copy of the unexecuted agreement by Access Brokers and five days later receives a copy of the executed loan agreement from the creditor, Newtown Loans Ltd. Three months later he receives written notice advising him that the interest rate is to be raised to 28% APR. The letter states that this is because of adverse credit conditions caused by the so-called credit crunch. Steve also learns that Access Credit do not hold a credit brokerage licence under the Consumer Credit Act 1974. He is also concerned that the interest rate he is being asked to pay is not affordable, and the advertisement gave no indication of the rates involved in the proposed consolidation loans. A friend has also told him he should have received another copy of the loan agreement and therefore he can stop repaying the loan.

Advise Steve on the following:

1whether the credit agreement is enforceable as the introduction to the creditor was made by an unlicensed credit broker;

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2whether any criminal offence has been committed by the brokers in relation to their advertisement in the Newtown Gazette;

3whether he has received the appropriate number of copies of the agreement and, if not, is the loan agreement enforceable; and

4whether Newtown Loans can unilaterally vary the interest rate.

Answer plan

The question requires the candidate to be aware of the licensing provisions relating to credit brokers and the effect on the principal credit agreement if the credit-broker is unlicensed; the criminal regulation of false and misleading credit advertisements, and the key requirement in cases where lenders are trying to entice over-extended or indebted consumers into debt consolidation arrangements to give a typical APR; the copy requirements in the CCA 1974; how specific the creditor has to be about the circumstances in which a variable interest rate may be adjusted, and whether there is any limitation on the variation power at common law or under the CCA 1974 and CCA 2006.

Answer

Introduction to creditor by unlicensed brokers

Credit brokerage is an ‘ancillary credit business’, and the carrying on of such a business requires a licence granted by the OFT (ss 145 and 147 of the CCA 1974). As the £25,000 limit no longer applies to consumer credit agreements with nonhigh net worth individuals for non-business purposes, the introduction here is for entry into a regulated consumer credit agreement (s 2 of the CCA 2006). An introduction by an unlicensed credit-broker means that the principal credit agreement is unenforceable without a validation order from the OFT even if the principal creditor does hold a valid licence (s 148 of the CCA 1974). Either the credit-broker or the creditor can seek to apply for such an order and the OFT can deem the credit-broker to have been licensed at the time when the agreement was entered into with Steve. In deciding whether to grant such an order, the OFT will take account of the degree of prejudice to the debtor and the degree of culpability involved; was it merely an administrative oversight, or deliberate fraud on the part of the credit-broker? The OFT will also take account of the degree of culpability of the principal creditor in not ensuring that credit-brokers they dealt with were licensed.

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Whether any advertising offences were committed

Truth in lending is a core principle of the CCA 1974. The Act created a general offence of issuing a false and misleading credit advertisement in s 46 of the CCA 1974 and more detailed positive content requirements by the statutory instrument made under s 44 of the CCA 1974. On 26 May 2008, s 46 was repealed, and false or misleading credit advertising is now dealt with under the Consumer Protection from Unfair Trading Regulations 2008. On the assumption that the credit crunch was not foreseen, and so the advertisement was placed in good faith, it would have to be argued that the use of the word ‘affordable’ was misleading and that it would deceive the average consumer – one who is deemed to be reasonably well informed, reasonably observant and circumspect (reg 2(2) of the CPUTR 2008). It would have to be argued that the advertisement is misleading under reg 5 of the CPUTR 2008, and it caused or would be likely to cause the average consumer to take a transactional decision they would not otherwise take. It is very doubtful whether the use of word ‘affordable’ of itself would be enough, and given that the consumer must receive a copy of the draft agreement and a pre-contractual notice setting out material terms which would indicate the annual percentage rate, or at least an estimated rate based on assumptions that it would be reasonable to make (Consumer Credit (Disclosure of Information) Regs 2004), it is hard to argue that the advertisement alone would cause the consumer to enter the loan of itself. It is unlikely therefore that the advertisement breaches reg 5 of the CPUTR 2008 which could lead to a criminal prosecution for breach of a strict liability offence under reg 9 of the CPUTR 2008. It might be argued that the omission of the typical interest rates was a material omission under reg 6 of the CPUTR 2008, in that the information would be needed by an average consumer to take an informed transactional decision in the context. As the pre-contract information document and the draft credit agreement would clearly set out the Annual Percentage Rate and total charge for credit, it is difficult to argue that their omission in a general advertisement of itself would be a misleading omission.

A more likely route to conviction is that the credit broker has breached reg 8 of the

Consumer Credit (Advertisements) Regulations 2004 in advertising the ability to arrange debt consolidation loans without specifying the typical annual percentage rates for such loans, which generally means those available to at least 66.66 per cent of customers – this is the case, as the advertisement appears to be directed to those who might be expected to believe that their recourse to fresh credit is restricted because of current debt problems (s 151(1), s 167 and Sched 1 of the CCA 1974). Breach of the regulations is a strict liability offence and if Newtown Loans were referred to in the advertisement, they would be deemed to be an advertiser as well (s 189 of the CCA 1974) and could face prosecution as well, unless they were able to bring themselves within the due diligence defence in s 168 of the CCA 1974 – that the offence was due to the act or default of access loans and they had taken all reasonable precautions and exercised all due diligence to avoid the commission of the offence.

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Was principal credit agreement properly executed?

One of the key elements of the CCA 1974 regime is to ensure the debtor receives full information about his commitments both in the agreement itself and by the provision of appropriate copies (ss 60–65 of the CCA 1974). Failure to do this will mean that the agreement is improperly executed and only enforceable either by the free and informed consent of the debtor given at the time enforcement is sought or an enforcement order from the court (ss 65, 127 and 173(3) of the CCA 1974). It is important to note that the agreement is not void or voidable merely civilly unenforceable in a court and if the debtor makes all payments and performs the agreement no further redress will normally be available. Here the debtor has been given a copy of the unexecuted agreement at the premises of the broker as required by s 62(1) of the CCA 1974. As the agreement is not cancellable, and a copy of the executed agreement, and any other document referred to in it (signed and accepted by the creditor – the debtor being the one who has made the offer) has been sent to him by post within seven days of the agreement being executed, then it appears the correct formalities in relation to copies have been carried out and the agreement is properly executed (s 63(2) of the CCA 1974).

Validity of unilateral variation clause

Variable interest loans are quite common – often linked to the Bank of England base rate or some other index. At common law, the courts are generally unwilling to imply a term that any interest variation clause must be operated in a fair or reasonable manner, or that the creditor is required to adjust the interest rate downwards when the base rate falls. The minimum requirement is that the interest rate is set in good faith, and not in an arbitrary, capricious or dishonest manner (Nash v Paragon Finance (2002) and Paragon Finance v Pender (2005)). Furthermore, in Lombard Tricity Finance Ltd v Paton (1989) it was held that the creditor need not outline each and every circumstance which might lead to an adjustment of an interest rate; it was sufficient to state that it was ‘subject to variation by the creditor from time to time on notification as required by law’. It might be possible to argue that a unilateral increase of the rate of interest by 25% a year by the creditor means ‘the way in which the creditor has exercised or enforced any of his rights under the agreement’ has created an unfair relationship (s 19 of the CCA 2006) and permit the court to reduce the rate.

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CHAPTER 6

DEFAULT AND TERMINATION OF

CREDIT AGREEMENTS

INTRODUCTION

This chapter covers the termination of hire purchase agreements as well as other regulated agreements; challenges by the debtor to an allegedly unfair credit agreement and the use of the Financial Ombudsman Service instead of the courts in the event of a dispute with the creditor.

Checklist

The following topics should be prepared in advance of tackling the questions:

•need to issue arrears and default notices and arrears and default information sheets under ss 8–12 of the Consumer Credit Act 2006;

•need for and effect of a default notice under s 87 of the Consumer Credit Act 1974;

•non-default notice under ss 76 and 98;

•time orders under s 129 of the Consumer Credit Act;

•liability of surety in relation to regulated agreements;

•protected goods provision in s 90 of the Consumer Credit Act;

•accelerated payments clauses;

•hire purchase customers’ right of termination under s 99 of the Consumer Credit Act;

•claim by owner against a third party to whom a hire purchase customer has sold or bailed the goods;

•the consumer credit jurisdiction of the Financial Services Ombudsman under ss 59–61 of the Consumer Credit Act 2006;

•the jurisdiction to intervene in an ‘unfair relationship’ between the creditor and the debtor ss 19–22 of the Consumer Credit Act 2006 replacing

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extortionate credit bargain provisions in ss 137–40 of the Consumer Credit Act 1974.

Question 21

Just over five months ago, Fred traded in his old car in part-exchange for a new car which he acquired from XYZ Finance under a regulated hire purchase agreement. The hire purchase agreement showed the following details:

•a cash price of £21,000;

•a total hire purchase price of £24,000;

•a part-exchange allowance of £4,000.

Under the agreement, Fred agreed to make an initial cash payment of £2,000 and 36 monthly instalment payments of £500.

Upon trading in his old car and taking delivery of the new one, Fred paid the initial payment of £2,000 and has since paid the first three of the £500 monthly instalments. However, he is now two months in arrears with his instalments and a week ago wrote to XYZ Finance, informing it that he was temporarily out of work and unable to keep up his payments.

Advise Fred as to his legal position now that he has received a default notice which complies with the requirements of the Consumer Credit Act 1974 and states that unless he pays off his outstanding arrears within seven days, XYZ Finance will regard the agreement as terminated.

Answer plan

This question demands a consideration of the area of termination of a hire purchase agreement. The plan is to consider the following:

•have the procedures in relation to dealing with arrears been followed?

•has a terminating event occurred?

•what are the consequences of termination arising from Fred’s breach?

•can Fred avoid those consequences, for example, by paying off the debt before expiry of the default notice or applying for a time order (and how in all of that does the fact that the goods are ‘protected goods’, if indeed that is what they are, help Fred)?

•is it worthwhile for Fred to exercise his own right of termination?

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•is there any other way out of the mess for Fred, for example, selling the car or refinancing the debt?

Answer

The question states that the hire purchase agreement is a regulated one. No information is given about whether the formalities and documentation requirements of the Consumer Credit Act 1974 have been satisfied, and it is assumed in this answer that they have been.

The problem requires a discussion of whether the agreement has been, or can be, terminated and the possible consequences of that for Fred.

Arrears information and arrears notice

The creditor would have to check whether it had to serve a notice of ‘sums in arrears’ under s 9 of the CCA 2006 which will be the case where the debtor is required to have made more than two payments under the agreement and the amount of the shortfall is no less than the sum of the last two payments which Fred is required to have made before the relevant time. This applies here, and within 14 days of these conditions being satisfied under a fixed-sum credit agreement, an arrears notice must be served and with this notice a copy of an OFT-issued ‘arrears information sheet’ must be given which is designed to inform debtors who receive an arrears notice of what steps they might take and the consequences of taking remedial action (s 8 of the CCA 2006). Failure to give such a notice will mean that while this default continues, the creditor may not enforce the agreement and the debtor will not be liable for interest or any default sum during the non-compliance period (s 11 of the

CCA 2006).

Terminating event – Fred’s breach

Has a terminating event occurred? There is no doubt that Fred is in breach of his agreement by becoming in arrears. There are three alternative ways in which this could be argued to be a terminating event. The first is if it amounts to a repudiation by Fred. On the facts, that argument would be difficult to sustain, since there is no outright refusal by Fred to honour the agreement and his failure to pay two instalments, coupled with Fred’s letter referring to him being temporarily out of work, hardly signifies a repudiation.

The second way that Fred’s breach could be argued to be a terminating event is if the agreement expressly gives to XYZ Finance a right to terminate the agreement, for example, if Fred falls into arrears exceeding seven days’ delay in making any

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