Collins, DM

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Connected lender liability: clarification from the Supreme CourtDaniel M Collins* The BackgroundDescribed  in  its  Long  Title  as  existing  “for  the  protection  of  consumers”  and, judicially,  in  Southern  Pacific  v  Walker1 as  having  been  passed  “to  protect consumers  of  credit,  an  aim  which  accounts  for  its  substantive  content  and conditions its judicial interpretation”,2 the 1974 Consumer Credit Act has been the focus  of  considerable  and,  arguably  unjustified,  criticism.3  Despite  this,  its  role remains central as financial products become ever more complex and consumerism more rampant, as recently acknowledged in Rankine v American Express Services  Europe Limited,4  where H. H. Judge Simon Brown QC commented on the need for the  legislation  to  “protect  the  individual  unsophisticated  in  ﬁnancial  affairs  in contracts with unscrupulous and sophisticated ﬁnancial institutions”.5A plethora of recent legislation has sought to underpin this overriding objective of consumer  protection.  In  addition  to  the  Consumer  Credit  Act  2006,  an  array  of delegated legislation  was  introduced to give effect to wide-ranging EU provisions,6 and furthermore,  consumer credit-related regulated activity must now comply with the  FCA's  Consumer  Credit  Sourcebook  (or  “CONC”)  as  from  1  April  2014,  to coincide  with  the  transfer  of  consumer  credit  regulation  and  supervision  to  the Financial Conduct Authority.In considering specific legislative examples to test the welfarist credentials of the Act, a key example would be the connected lender liability-based s75, which states:“(1)  If  the  debtor  under  a  debtor-creditor-supplier  agreement  falling  within section  12(b)  or  (c)  has,  in  relation  to  a  transaction  financed  by  the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor.”1* Senior Lecturer in Law, Middlesex University, Mauritius. Southern Pacific Personal Loans Ltd v Walker [2009] EWCA Civ 1218; [2010] 1 All E.R.  (Comm) 854; [2010] Bus. L.R. 418.2 Southern Pacific Personal Loans Ltd [2009] EWCA Civ 1218 at [23] per Mummery L.J. 3 e.g. McGinn v Grangeworth Securities Ltd [2002] EWCA Civ 522; Times, May 30, 2002;  Independent, July 15, 2002 at [1] per Clarke L.J.4 Rankine v American Express Services Europe Limited (2008) C.T.L.C. 195.5 Rankine [2008] C.T.L.C. 195 at [9]. The Report of the Committee on Consumer Credit  (Cmnd.1971) 4596 ("Crowther Committee Report"), the catalyst for the Consumer Credit Act 1974, stated that the main objective of the legislation was "to provide for the small individual borrower the protection he unquestionably needs" (at [6.6.3]–[6.4]).6 Most  recently  the  Consumer  Credit  Directive  2008/48  on  credit  agreements  for consumers  and  repealing  Council  Directive  87/102  [2008]  OJ  L133/66,  effective  for consumer credit agreements made on or after February 1, 2011.1This multifactorial provision firstly requires there to be a regulated “debtor-creditor-supplier agreement”. Such will exist where there is a business connection between the creditor and supplier or, more specifically, an agreement intended “to finance a transaction between the debtor and a person (the “supplier”) other than the creditor”7 and “made by the creditor under pre-existing arrangements…between himself and the supplier” 8 where the cash price is over £100 but not £30,000.9 So, an example of a s.75 arrangement would be a typical credit card transaction, where the credit card  company will  have “arrangements” with a supplier (or retailer), whereby the latter agrees to accept the provider’s credit cards from customers as a mode of payment for the goods provided. Such tripartite relationships are known collectively as “three-party”  debtor-creditor-supplier  agreements,10 and  also  include  loans  provided  to customers  to  facilitate  purchases  from  the  supplier,  where  arrangements  exist between lenders and suppliers, under which the former provides finance to facilitate purchases from the latter. Clearly, this provision will not apply to s.12 (a) “two-party” debtor-creditor-supplier  agreements  such  as  hire  purchase  of  conditional  sale agreements, where the lender and supplier are the same entity.Section 75 imposes joint and several liability on the supplier and creditor. As such, a party who obtains faulty and/or wrongly described goods for example, could, on the basis of s.75, claim against the credit card company or the supplier where the latter is in breach of contract, provided such a claim complies with the six-year rule under  s.5 Limitation Act 1980, which states that an action in contract “shall not be brought  after the expiration of six years from the date on which the cause of action accrued”.  Such a contractual breach, may relate to express or implied terms- typically s.14 Sale of Goods Act 1979, and the requirement under s.14(2A) for goods to be of “satisfactory quality” or, more specifically, to “meet the standard that a reasonable person  would  regard  as  satisfactory,  taking  account  of  any…relevant circumstances”.  Significantly,  s.75(1)  will  also  apply  to  transactions  entered  into abroad by customers of UK card issuers,11 and those situations where only a deposit to the credit transaction is paid by credit card with the balance being settled with  cash.  Additionally,  s.75  is  relevant  where  a  supplier  has  perpetrated  a misrepresentation as to the nature of the goods or credit agreement, whereupon the customer, again, may pursue a claim against the supplier and a “like claim” against the  creditor.  However,  what  is  meant  by  a  “like  claim”?  It  has  generally  been accepted that the customer is able to seek rescission against the supplier for that particular transaction whilst abstaining from making further payments to the creditor. 7 Consumer Credit Act 1974 s.11(1)(b).8 Consumer Credit Act 1974 s.12(b).9 The new s.75A, introduced as part of implementation of the Consumer Credit Directive 2008/48,  confers  protection  for  purchases  of  over  £30,000  in  certain  prescribed circumstances.10 From April 1, 2014, such are described as ‘borrower-lender-supplier agreements’ by virtue of the Regulated Activities Order (SI 2013/188). 11 Office of Fair Trading v Lloyds TSB Bank Plc [2007] UKHL 48; [2008] 1 A.C. 316; [2007]  3 W.L.R. 733.2However,  the area of substantive confusion has been whether  (or not)  s.75 also conferred a right to rescind the credit agreement as well as the supply agreement? Judicial  attempts  to  answer  this  question  have  until  recently  been  rather unsatisfactory,  thereby  leading  to  considerable  academic  debate  and  conceptual ambiguity. For example, in United Dominions Trust v Taylor,12 the debtor rescinded a contract of sale for a car with a supplier and claimed to have “a like claim against the creditor” bank in respect of the loan provided for its purchase. It was held that the words “a like claim” were wide enough to include a claim for rescission of the loan contract,  even  though  the  creditor  had  not  been  responsible  for  any misrepresentation and/or breach of contract, Sheriff Principal Reid opining that  “It  would be odd, to say the least, if the right to rescind was not available  against the creditor and the right to restitution, which depends of rescission, was  available…The  section  does  not  require  that  the  claim  against  the creditor shall be justiciable on like grounds to the claim against the supplier, merely that is shall he the same sort of claim. The words ‘a like claim’ are thus wide enough to include a claim for rescission although the creditor has given no grounds for rescission of the loan contract.”13Despite this view being adopted in the later case of Forward Trust Ltd v Hornsby,14 there has been considerable critique of its “logic”15 and, indeed, such would seem to contradict  the original  intentions of  the Crowther  Committee,  which  anticipated a breach of s.75 rendering the creditor “answerable in damages…for breaches of any term of the agreement relating to title, fitness or quality of the goods” only.16The Supreme CourtThe matter would now appear to have been settled by the Supreme Court in Durkin v DSG Retail Limited,17 on appeal from the Scottish Inner House Court of Session18. In what is likely to become seen as a seminal authority on connected lender liability, the Supreme Court  has circumvented the  conceptual  difficulties  inherent  in  affording rescission of a s.12(b) credit agreement under s.75.The facts of this case were that in December 1998, Mr Durkin entered into a s.12 (b) agreement for the purchase of a laptop computer from PC World. It was agreed that should the laptop not have a inbuilt modem, Mr Durkin could return the item to the 12 United Dominions Trust v Taylor 1980 S.L.T. 18.13 United Dominions Trust 1980 S.L.T. 18 at 30. 14 Forward Trust Ltd v Hornsby 1995 S.C.L.R. 574; [1996] C.C.L.R. 18.15 e.g. Davidson, "The Missing Link Transaction" (1980) 96 L.Q.R. 343; and Lowe, "Missing Link  Transactions—Further  Observations"  (1981)  97  L.Q.R.  532;  Guest  and  Lloyd, Encyclopaedia of Consumer Credit Law (Sweet & Maxwell, 1999), p.2074/4.16 The Report of the Committee on Consumer Credit (Cmnd.4596, 1971) at [6.6.26–27].17 Durkin v DSG Retail Ltd [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715. 18 Durkin [2010] CSIH 49; 2010 S.C. 662; 2011 S.L.T. 114.3store (the PC World policy was not to permit customers to remove a laptop from its box before purchase). Mr Durkin paid a £50 deposit, with the remaining balance of £1449 financed by a credit agreement with HFC. Within one day of purchase, and having identified that the laptop did not possess a modem for internet access, he attempted to return the laptop to the store and sought rescission of the sale  and credit agreement.  The store manager refused to accept Mr Durkin’s rejection of the laptop and failed to act to assist in the cancellation of the credit agreement which soon accumulated considerable arrears, with Mr Durkin having refused to make payments as they fell due. In addition to the arrears, HFC had registered numerous adverse entries on credit  registers  which  had  prevented  the  latter  from  obtaining  low  rate  finance elsewhere. With this in mind, Mr Durkin issued an action for declaratory relief against DSG and HFC in the Aberdeen Sheriff Court which, in 2008, ruled that the sales contract had been validly rescinded 19 and, notably, that Mr Durkin had, under s75(1) been entitled to rescind the credit agreement, and awarded him damages of £8,000 for  injury  to  his  credit,  £6,880  in  extra  interest  incurred  on  the  HFC  debt  and £101,794 for the loss of capital gain accruing from his inability to purchase a property abroad  as  result  of  his  damaged  credit  file.  Perhaps  not  unsurprisingly,  HFC appealed on the court’s interpretation of s.75 (1). The Inner House 20 (which reversed the earlier decision in respect of loss of interest and  loss  accruing  from  his  being  denied  the  opportunity  to  purchase  property abroad) determined that s.75 did not permit rescission of a credit agreement, with Lord Mackay of Drumadoon opining that in the event of a breach of a supply contract “… the statutory provision which is now section 75(1) (and the terms of the amendments to it that were debated) were intended to ensure that when a debtor has a claim against his supplier he shall have the like claim, in sense of  a  similar  claim,  against  the creditor,  who  has lent  funds to  finance the contract of  sale,  not a different or distinct  claim against that creditor…had Parliament intended that breach of the contract of sale should, of itself, entitle the consumer to rescind the credit agreement (or that rescission of the credit agreement would automatically occur if the contract of sale were rescinded), it would, in our view, have used different language than is to be found in section 75.”21So it  was  clear:  the  supply  and  credit  agreements  were  distinct,  and  “joint  and several liability” would not extend to the rescission of the credit agreement, but only  to  enable  the  recovery  of  damages  from  a  supplier  (and  from  his  creditor),  to 19 PC World did not subsequently appeal on this point.20 Durkin [2010] CSIH 49; 2010 S.C. 662; 2011 S.L.T. 114.21 Durkin [2010] CSIH 49; 2010 S.C. 662; 2011 S.L.T. 114 at [56]–[59].4compensate him for loss that he has incurred, or is liable to incur,  by reason of present and future obligations under the credit agreement to make payments. However, the Supreme Court, whilst agreeing with some elements of Lord Mackay’s approach,22 reversed this earlier decision and suggested that rescission of a credit agreement  forming  part  of  a  s.12  (b)  transaction  was  appropriate  in  certain circumstances, but by a different and less obvious route. Lord Hodge, in delivering the only judgment (with  Lady Hale,  Lords Wilson, Sumption and Reed agreeing) postulated that–“It  is  inherent  in  a  debtor-creditor-supplier  agreement  under  s.12(b)  of  the 1974 Act, which is also tied into a specific supply transaction, that if the supply transaction which it financed is in effect brought to an end by the debtor’s acceptance of the supplier’s repudiatory breach of contract, the debtor must repay the borrowed funds which he recovers from the supplier. In my view, in order to reflect that reality, the law implies a term into such a credit agreement that it is conditional upon the survival of the supply agreement. The debtor on rejecting the goods and thereby rescinding the supply agreement for breach of contract may also rescind the credit agreement by invoking this condition.”23This  clearly  indicates  a  fundamental  shift  in  interpretation:  whilst  the  court  acknowledged that the Inner House had been correct in its analysis of s.75 per se, and this provision would not offer rescission where such was not already available under  the  general  law,  it  concluded  that  Mr  Durkin  could  rescind  the  credit agreement based upon the common law implied term, where the supply agreement has already been rightfully rescinded for  breach of contract,  be this a breach of  implied  or  express  terms.   Such  a  right  to  rescind  a  related  credit  agreement represents more than a nuanced amendment to established legal authority and goes well beyond the remedy of damages envisaged by the Crowther Committee Report24 –  albeit  at  a  quantum  to  include  losses  incurred  in  complying  with  any  credit agreement which, Lord Hodge confirmed, would not “extinguish his debt until either it  was upheld by the court or the creditor agreed to cancel the debt”,25 a position which would be generally unsatisfactory to the debtor. The reality would now appear to be that where there exists a s.12(b) agreement, rescission of the credit agreement is facilitated by common law principles and not s.75, although as Lord Hodge stated “the  result  is  the  same  but  the  mechanism  more  simple”.26 The  practical consequences of this approach are that where a s.12(b) transaction is underpinned by a credit card purchase, the implication of such a term will not entitle the debtor to  rescind the entire credit card agreement, only that part of the credit facility used to make  the  purchase.  Of  course,  the  position  is  different  should  the  instrument 22 Durkin [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715 at [19].23 Durkin [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715 at [26].24 The Report of the Committee on Consumer Credit (Cmnd.4596, 1971) at [6.6.26–27]. 25 Durkin [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715 at [22].26 Durkin [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715 at [28].5financing the transaction be a loan,  taken for the specific  purchase,  where  such could clearly be rescinded in its entirety should circumstances permit. On a similarly pragmatic note,  the Supreme Court further  acknowledged27 that  HFC was under a duty of care in negligence to Mr Durkin to ensure the credit agreement had not been rescinded  (as  he  claimed  it  had  been)  before  reporting  adverse  credit  to  credit  reference agencies. Their  breach of this duty sounded in damages,  assessed at £8,000. To this end, lenders should now take steps to investigate such matters to avoid claims from aggrieved debtors whose credit has been compromised and not indicate a default until such questions are resolved.In essence, the connotation of this decision is that even where he has fully complied with the numerous and byzantine legislative consumer credit provisions, a creditor may not be able to avoid rescission and the inevitable uncertainty over the amount of interest he can ultimately claim from the debtor although, as the Crowther Committee suggested, it was paramount that the debtor be endowed with certain guaranteed contractual rights, particularly so where there was a connected lender and supplier  “engaged in a joint venture to their mutual advantage”.28 To this end, therefore, the Supreme Court has further shifted the balance of protection towards the consumer by circumventing the manifest precincts of s.75 through use of the traditional implied term, itself a simplistic yet highly effectual tool for reinforcing the raison d'être of the Consumer Credit  Act,  namely consumer protection.  This  will  obviate the need to seek the sanction of other, less malleable common law principles, such as frustration which, according to Lord Hodge, would not assist a debtor “because the creditor will have  paid  the  supplier  and  the  purpose  of  the  credit  agreement  will  have  been fulfilled by the  purchase of  the  goods,  before the  consumer  rescinds the supply contract”29  27 Durkin [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715 at [33]–[34].28 The Report of the Committee on Consumer Credit (Cmnd.4596, 1971) at [6.2.24].29 Durkin [2014] UKSC 21; [2014] 1 W.L.R. 1148; [2014] 2 All E.R. 715 at [25],  Krell v Henry [1903] 2 K.B. 740 distinguished.6

Connected Lender Liability: Clarification From the Supreme Court

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Connected Lender Liability: Clarification From the Supreme Court

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