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

Q&A COMMERCIAL LAW 2009–2010

on when they might be minded to impose requirements (s 42 of the CCA 2006). The OFT can require the doing or ceasing from doing any act in relation to the licensee’s business or proposed business (s 38 of the CCA 2006). Extensive supplementary powers are granted for the OFT to specify the time or period within which the required action is to be taken. A licensee who is unhappy with the imposed requirements can appeal to a newly constituted Consumer Credit Appeals Tribunal – the appeal will be by way of a full rehearing on the merits, and there is a further right to appeal to the High Court on a point of law (ss 55–58 of the CCA 2006). The OFT, again subject to a right of appeal to the Consumer Credit Appeal Tribunal, may impose a civil penalty of up to £50,000 for failure to comply with the requirement (ss 52–55 of the CCA 2006). However, before imposing a penalty, the OFT must give the licensee the reasons for the imposition of the penalty, and give them a chance to respond. It is hoped these extended powers and the more flexible penalties should allow a more effective enforcement regime by the OFT.

Unfair credit relationships

Sections 137–140 of the CCA 1974 gave the courts a very wide discretion to reopen extortionate credit bargains, which were agreements that required the debtor to make payments which were grossly extortionate or which otherwise grossly contravened the principles of fair dealing. The provisions, however, were not a great success, partly because they relied on the individual debtor taking legal action or raising the provisions by way of a defence, which few did, and the bar for court intervention was set at too high a level. The credit agreement did not merely have to be unfair or unreasonable but grossly exorbitant or grossly extortionate which was a difficult hurdle to surmount. The CCA 2006 repeals these provisions, and by ss 19– 22 of the CCA 2006 introduces new powers for the intervention if the agreement is unfair to the debtor. Unfairness is not defined but analogies may be drawn to the

Unfair Terms in Consumer Contract Regulations 1999 (see Director General of Fair Trading v First National Bank (2001)). In one key respect these provisions are wider, in that they cover both core and non-core terms, so can be used in relation to excessive interest rates. The court can take account of the whole relationship between the debtor and creditor arising out of the principal credit agreement and any related agreement (such as a brokerage or payment protection plan) and is unfair because of any of the terms of the agreement or of any related agreement or by the way in which the creditor has exercised or enforced any of his rights under the agreement or related agreement. The powers are also wider than those in the CCA 1974 in that the courts can look not only at the position when the agreement is entered into but how the agreement is being enforced. The court can take account of any relevant factor relating to the debtor or creditor. Extensive powers are given to set aside the agreement, vary it, reduce or discharge any sum payable or set aside any security given. It is also important to note that if the collective interests of debtors are being affected by the use of unfair agreements the Office of Fair Trading (or other qualified body

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such as a local trading standards department) can seek a voluntary assurance that the creditor desist from using such agreements or if necessary apply for a court injunction restraining the creditor from continuing use the offending agreement or terms (Pt 8 of the Enterprise Act 2002). It is important to note that these orders only apply to the creditor’s future conduct and do not provide for payment of compensation to individual debtors for past breaches. The OFT has issued a guidance document, ‘Unfair Relationships’ OFT854, May 2008, on how they intend to use their powers under Part 8 to secure voluntary assurances and court orders in this area.1

New dispute resolution regime

Vulnerable debtors are extremely reluctant to use the courts even if they are aware of their rights, which in many cases they are not, and so many of the protections provided by the CCA 1974 were theoretical rather than real. A key plank of the CCA 2006 is to provide a less formal and cheaper method of dispute resolution. This is done by extending the jurisdiction of the Financial Ombudsman Service set up under the Financial Services and Markets Act 20002 (ss 59–61 and Sched 2 of the

CCA 2006). The scheme is free for the individual debtor to use and is financed by fees and levies on the consumer credit industry. The FOS can award up to £1,000,000 in compensation, including damages for distress and inconvenience caused by the actions of the creditor. The awards are enforceable as court judgments. If a debtor is unhappy with how he has been dealt with by the creditor in relation to any matter connected with the credit agreement, the debtor after first exhausting the creditor’s internal complaints procedure, which he is required to have under the scheme, may take the matter to the FOS. Only if a complaint to the creditor fails to resolve matters can the complaint be taken to the FOS. If unhappy with the award of the FOS, the debtor can go the courts, but the creditor is bound by the ruling, subject to any judicial review challenge, for example that the FOS has exceeded its jurisdiction or acted unfairly. The defendant can contend that the complaint raises a novel point of law with significant consequences, and if the FOS agrees that it would be more suitably dealt with as a test case, it can be pursued in the courts, but the defendant creditor must agree to pay the costs of the complainant even if the complainant is unsuccessful. The courts accord the FOS a very wide discretion, and providing the decision is fair and reasonable in all the circumstances, the FOS is not bound to follow the strict letter of the law, subject only to their decision being set aside on the grounds that it was perverse or irrational (R (on the application of Heather Moor & Edgecomb Ltd ) v Financial Ombudsman Service (2008)).

1This can be seen on the OFT website: http://www.oft.gov.ac.uk.

2See the website of the FOS for more detail: www.financial-ombudsman.org.uk.

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Question 24

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

John acquired a car on hire purchase terms from Fleece You Finance. It provided for an initial payment of £2,000 and 24 monthly instalment payments of £500 each. After making the first monthly instalment payment, John fell into arrears with his next instalment. Fleece You Finance served a default notice which expired without John paying off the arrears and, thus, Fleece You Finance terminated the agreement. This was a three weeks ago and Fleece You Finance has today discovered that John had been involved in an accident with the car which has been repaired by Menders Ltd where he took it for repair. Fleece You Finance now wishes to recover possession of the car.

Advise Fleece You Finance.

(i)What difference, if any, would it make to your advice if John had made his first six monthly instalment payments before falling into arrears?

(ii)What further advice would you give upon learning that, whilst Fleece You Finance was seeking your initial advice, John visited Menders Ltd, paid the repair bill and took the car to Auctioneers Ltd who, on John’s instructions, sold it in an auction to a buyer whom it has so far proved impossible to trace?

Answer plan

The issues raised are:

•Did Fleece You Finance have the right to terminate the agreement?

•If so, can it recover possession of the goods without going to court?

•(Related to the latter question) are the goods protected goods?

•Does Menders Ltd have the right to enforce its improver’s lien against Fleece You Finance?

•In relation to rider (ii), is Fleece You Finance entitled to recover the car from the purchaser at auction, that is, assuming he can be traced?

•Can Fleece You Finance maintain an action against the auctioneer?

This question is written in more or less chronological order and that is the order of the issues just identified. It makes sense to deal with them in that order, taking care to deal first with the first issue, since, if the answer to that is definitely ‘no’, many of the other issues do not arise.

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Answer

First, we shall examine whether Fleece You Finance had the right to terminate the agreement as it has purported to do.

Fleece You Finance has served a default notice, which presumably asked for the arrears to be paid off. It is s 87 of the Consumer Credit Act 1974 which states the requirement for a default notice prior to the creditor being entitled to terminate the agreement. Section 87 does not, however, confer a right of termination. Fleece You Finance will have had the right to terminate the agreement if either the agreement specifically stated that in the circumstances (late payment of one instalment), it was entitled to do so, or else the agreement stated that prompt payment of sums falling due under the agreement was ‘of the essence’ of the agreement (Lombard North Central v Butterworth (1987)). Otherwise, Fleece You Finance had no such right arising merely from one late instalment (Financings v Baldock (1963)).

Assuming that Fleece You Finance did have the right to terminate the agreement, it appears to have satisfied the s 87 requirement. At least that is so, provided that the default notice complied with the requirements of s 88 (as amended by s 14 of the CCA 2006), including giving at least 14 days’ notice. On the assumption that it has complied with the default notice requirement, it is in principle entitled to recover possession of the car. There are, however, qualifications to that proposition. First, it cannot, otherwise than by court action, recover possession ‘from the debtor’ if the goods are protected goods. On the facts given, the car is not protected goods since the amount so far paid under the agreement by John comes to only £2,500, which is less than one-third of the total price of £14,000. If, to adopt the hypothesis in rider (i) in the question, John had paid six of the instalments before falling into arrears, then the goods would be within the definition of protected goods in s 90. In those circumstances, Fleece You Finance would be prohibited from helping itself to the goods either from John or from the garage to whom he had taken it for repair; the phrase in s 90 preventing recovery of the car ‘from the debtor’ extends to prevent recovery from the garage where John had taken it for repair (Bentinck v Cromwell (1971)). Helping itself to the car in contravention of s 90 would involve Fleece You Finance being liable to repay to John every payment he had made under the agreement. Even if the goods were not protected goods, there is still one other problem about Fleece You Finance being able to recover the car by helping itself: it may be unable to do so without trespassing on the garage’s premises. If Fleece You Finance were to do this, then it would be liable for breach of statutory duty: s 92. All of that, however, only prevents Fleece You Finance from helping itself to the car. Fleece You Finance can still bring court proceedings to recover the car. There would possibly be two people trying to resist such proceedings.

Firstly, John might seek to resist the proceedings by applying for a time order under s 129 – if he has been served with an arrears notice under s 9 of the CCA 2006

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he can make his own proposals for payments under such an order but must give the creditor 14 days’ notice of these proposals with the aim of securing a mediated settlement or an agreed submission to an order issued on those terms by the court (s 16 of the CCA 2006). Depending upon the evidence of John’s means, and there being a realistic chance of the rescheduled payments being met (Southern and District Finance v Barnes (1995)), the court might grant such an order, thereby allowing John a further chance at paying off his debt in such instalment pattern as the court decides. Secondly, even if John does not resist the proceedings, Menders Ltd, the garage, may wish to claim that it has a lien over the car for the cost of the repairs that it carried out. This is an improver’s lien. Of course, John is primarily liable to pay the repair bill since it was he who incurred it. In the absence of him doing so, Menders Ltd may wish to claim that its lien is enforceable against Fleece You Finance, the lien being the right to retain possession of the goods until the repair bill is paid. The lien is likely to be enforceable in law against Fleece You Finance, and that is so even if Menders knew that John was buying the car on hire purchase terms, and it is still so even if the hire purchase agreement expressly forbade John from creating a lien (Albemarle Supply Co v Hind (1928)). The lien being enforceable against Fleece You Finance means that it is not entitled to recover the car without first paying off the repair bill. In those circumstances, once it had paid the bill, it would of course have a right to indemnity from John under the doctrine of subrogation. There are two circumstances where the lien would not be enforceable against Fleece You Finance. The first is if the agreement expressly forbade John from creating a lien (or expressly denied him authority to do so) and Menders Ltd knew that fact when the car was brought in for repair. The second is if, when John took the car in for repair, the agreement with Fleece You Finance had already been terminated. In that case, Fleece You Finance would be entitled to the car free of the lien and that is so even if Menders Ltd was unaware that the agreement existed or, if it knew of it, was unaware that it had been terminated (Bowmakers v Wycombe Motors (1946)). It seems from the wording of the question that the agreement probably had not been terminated, that is, the default notice had not expired at the time John took the car in for repair. The relevant time is the expiry of the default notice, not when it was served, because, on the wording of ss 87 and 88(2), Fleece You Finance was not entitled to terminate the agreement until that moment. It appears that John did take his car in for repair before the expiry of the default notice.

What is the position if the agreement neither made prompt payment by John ‘of the essence’ nor expressly conferred a right to terminate in the event of a lateness in payment? In those circumstances, Fleece You Finance would have no right to recover possession of the goods, either from John or from Menders Ltd, unless of course the agreement expressly forbade the creation of a lien. In that case, the creation of the lien might well amount to a repudiation of the contract by John, in which case, Fleece You Finance might well be entitled to terminate the agreement. Whether it could recover possession without a court action would depend upon the factors already spelt out about that. Whether it could recover the

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car free of the lien would depend upon whether Menders Ltd knew of the restriction in the contract.

Having already dealt with rider (i) (in relation to protected goods), attention will now be turned to rider (ii). In this scenario, should the car ever be traced, s 90 will be no restriction upon Fleece You Finance recovering the car, since it only prevents recovery ‘from the debtor’ and does not apply where the debtor has effectively said goodbye to the goods. There may, of course, be some other, more fundamental, restriction upon Fleece You Finance recovering possession of the goods. It may be that whoever now has possession of the car has actually acquired title to it. This is because Pt III of the Hire Purchase Act 1964 will confer Fleece You Finance’s title upon the first private (that is, non-trade) purchaser, provided he bought in good faith, which means without actual notice of the prior hire purchase agreement (Barker v Bell (1971)). The auctioneers will not have been a private purchaser and, in any case, probably were not purchasers at all, but were simply agents of John in his selling the car. The person who bought the car in the auction presumably bought in good faith and thus, if he were a private (that is, non-trade) purchaser, will now have good title to the car (GE Capital Bank Ltd v Rushton (2005)). Assuming that that is the case or, alternatively, that the car is never traced, there are two possible defendants for Fleece You Finance to consider proceeding against. First of all, John has quite clearly now done an act which is wholly repugnant to the contract. If the contract has not already been validly terminated, Fleece You Finance should consider serving another default notice and thus bringing about its termination and then proceeding against John for the outstanding balance of the price. On any view, the amount of damages to which Fleece You Finance is entitled is the outstanding balance, minus any (statutory) rebate for early payment.

Fleece You Finance should also consider bringing a claim for conversion against the auctioneers. Selling someone’s car without the owner’s authority is undoubtedly conversion, and it is no defence to say that you were unaware that it was their car (Union Transport Finance v British Car Auctions (1978)); there would be no liability if the car were withdrawn from the auction without reaching its reserve and the auctioneer had acted in good faith (Marcq v Christie, Manson and Woods (2003)). It is an example of strict liability. To be able to bring an action in conversion, Fleece You Finance needs to be able to show that, at the time of conversion (that is, the sale of the car in the auction), it had an immediate right to possession. At common law, it undoubtedly did, since either the agreement was already terminated by virtue of the late payment (default notice and its expiry) or, if not, John’s putting the car into the auction, being an act wholly repugnant to the agreement, was an act entitling Fleece You Finance immediately to terminate the agreement and thereby entitling it to immediate possession (Union Transport Finance v British Car Auctions). However, the latter will not be effective in Fleece You Finance’s case because, however repugnant John’s acts are to the agreement, they do not entitle the creditor to terminate immediately. First, a default notice must be served. Thus, in the present case, we can

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say that Fleece You Finance will be able to proceed against the auctioneers in conversion only if Fleece You Finance had an immediate right to possession. Moreover, it will have had an immediate right to possession only if (as discussed earlier) it had a right to terminate the agreement as a result of the lateness of John’s payment. If it did, then, on the facts given, the default notice had already expired before the car was sold at auction, and thus it would be able to maintain an action for conversion against the auctioneers.

Financial Ombudsman Service – consumer credit jurisdiction

One of the problems with the regime set up by the Consumer Credit Act 1974 has been the reluctance of consumer debtors to use it which in part is due to the fact that individual disputes have to be resolved by legal action. One of the purposes of the Consumer Credit Act 2006 is to provide a less formal and cheaper method of dispute resolution (ss 59–61 and Sched 2 of the CCA 2006). The 2006 Act does this by extending to consumer credit disputes the jurisdiction of the Financial Ombudsman Service set up by the Financial Services and Markets Act 2000.3 The Scheme is free for the individual debtor to use and is financed by fees and levies on the consumer credit industry. The FOS can award up to £100,000 in compensation, including damages for distress and inconvenience caused by the actions of the creditor. The awards are enforceable as court judgments. If unhappy with how he has been dealt with by the creditor in relation to any acceleration payments issues, the debtor, after first exhausting the company’s internal complaints procedure which they are required to have under the scheme, may take the matter to the FOS. Only if a complaint to the creditor fails to resolve matters can the complaint be taken to the FOS. If unhappy with the award of the FOS, the debtor can go on to the courts but the creditor is bound by the ruling, subject to any judicial review challenge, for example, that the FOS has exceeded its jurisdiction or acted unfairly. The defendant can request that the complaint raises a novel point of law with significant consequences, and if the FOS agrees that it would be more suitably dealt with as a test case, it can be pursued in the courts but the defendant must agree to pay the costs of the complainant even if they are unsuccessful.

3 See the website of FOS for more detail: www.financial-ombudsman.org.uk.

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CHAPTER 7

CONNECTED LENDER LIABILITY

INTRODUCTION

This chapter covers the liability of the creditor for breaches of contract or misrepresentation by the dealer/supplier. The Consumer Credit Act 2006 does not amend either s 56 or s 75 dealing with connected lender liability and deemed agency.

Checklist

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

•definitions in the Consumer Credit Act 1974 and, in particular, that of debtor–creditor–supplier agreements;

•s 56 of the Consumer Credit Act;

•s 75 of the Consumer Credit Act.

Question 25

John and his wife, Susan, have always lived in England. John has a credit card agreement, made in 1990. Susan is a second cardholder on John’s account. Two months ago, whilst on holiday in France, Susan used the card in Fashions à la Mode to pay for a two-piece suit; the jacket was priced at 135 euros and the skirt at 60 euros, that is, the equivalent at the then rate of exchange of £90 and £40 respectively. The pound subsequently weakened and, by the time the transaction reached John’s account a month ago, the debit amounted to a total of over £150, Susan’s jacket thus costing in fact over £103 and the skirt over £46. Susan has since then contracted dermatitis from the jacket as she has proved allergic to some dressing in the collar. Also, the suit, which bore a label stating (in both English and French) that it was suitable for dry cleaning, has reacted badly to being given normal dry cleaning and both items have shrunk to half their original size.

John and Susan have learned that Fashions à la Mode has become insolvent and

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gone out of business. Advise Susan what remedy, if any, she might have against John’s credit card company.

Answer plan

The issues raised involve s 56 and, especially, s 75 of the Consumer Credit Act 1974. The issues raised are as follows:

•Is John’s credit card agreement one which is regulated by the Consumer Credit Act?

•Can a second cardholder take advantage of ss 56 and 75?

•Are there ‘arrangements’ between the creditor and the supplier?

•Do these sections apply when the card is used abroad?

•If they do, does English law apply?

•If the above questions are all answered in the affirmative:

(a)are the requirements for liability under s 75 established?

(b)are the requirements for liability for misrepresentation, relying on s 56, established?

Answer

If Susan’s transaction with Fashions à la Mode is governed by English law, she might be able to show that she was the victim of an actionable misrepresentation and also a breach of contract by Fashions à la Mode. Whether she can show either of those will be considered a little later. Assuming she can do so, to have a valid claim against the credit card company, Susan will need to rely upon either s 56 or s 75 of the Consumer Credit Act 1974. This requires, inter alia, John’s credit card agreement to be a regulated consumer credit agreement. It will not be a regulated agreement if it is exempt (for example, if, like a traditional American Express card, it requires each periodic account to be settled in a single payment).

Can a second cardholder take advantage of ss 56 and 75?

The question refers to the transaction reaching ‘John’s’ account. Thus, Susan presumably is not jointly liable with John. It would seem at first sight therefore that Susan cannot rely on either of the sections in question, since s 56 refers to negotiations with ‘the debtor’ being conducted by the negotiator (here, Fashions à la Mode) as agent of the creditor, and s 75 applies where ‘the debtor’ has a claim against the supplier. Not being jointly liable with John, Susan is not in ordinary

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parlance a ‘debtor’. However, the definition of debtor in s 189 is of ‘an individual receiving credit under a consumer credit agreement . . .’. Therefore, Susan arguably is a debtor since she does not have to pay immediately for the goods purchased and that is a financial accommodation; thus, she receives ‘credit’ which is defined by s 9 as including a cash loan and ‘any other form of financial accommodation’. This interpretation is as yet uncertain, since there is no reported case on the issue, and it is also arguable that since it is John who is going to have to pay the account, it is he (and not Susan) who receives a financial accommodation, although Susan would argue that they both received such a financial accommodation. If she is not a ‘debtor’ within the meaning of the Act, she will have no claim against the credit card company.

‘Arrangements’

There must be ‘arrangements’ between the credit card company and Fashions à la Mode for there to be liability by virtue of ss 56 and 75. Neither section applies unless the credit card agreement is a ‘debtor–creditor–supplier’ agreement. If it is such an agreement, that will be because it falls within s 12(b) of the Act and it will not fall within s 12(b) unless it was made under pre-existing arrangements, or in contemplation of future arrangements, between the credit card company and Fashions à la Mode. Given that John’s credit card company is an English one and Fashions à la Mode was a French retailer, it is quite likely that John’s credit card company was not the merchant acquirer, that is, was not the person who introduced Fashions à la Mode to the VISA or other payment collection system to which they both belong. It is also quite likely that Fashions à la Mode received payment indirectly from John’s credit card company. Some banks and credit card companies have claimed that in these circumstances, there are no ‘arrangements’ between the credit card company and the supplier. This, however, seems a ‘try on’ by the credit card companies in question, since ‘arrangements’ is clearly a wide word and does not require direct contractual relations between the creditor and supplier. It has now been decided that there will be ‘arrangements’ in this context in both the case of three-party and four-party credit agreements, so albeit that dealings will be indirect through an intermediary ‘merchant acquirer’ there will be ‘arrangements’ between John’s credit card company and Fashions à la Mode (see Office of Fair Trading v Lloyds TSB plc (2006)). The term ‘arrangements’ is to be given a broad construction and its meaning was not to be cut down by s 187(1).

Use of card abroad

Does the Consumer Credit Act apply to cards used abroad? It has been decided that the Act does apply to regulated agreements made in England (as John’s appears to have been) where the card is used to purchase goods abroad (Office of Fair Trading v Lloyds TSB plc (2007)). A credit card agreement contains what amounts to a standing

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