End of the loan?

On 26 March 2014 the UK Supreme Court found in favour of consumer Richard Durkin in his appeal from the Inner House of the Court of Session’s decision: [2014] UKSC 21.

Background

The legal dispute has been ongoing for 16 years. Mr Durkin purchased a laptop computer financed by a loan of around £1,500 from the respondents, HFC Bank plc. Mr Durkin returned the laptop to PC World, where he had purchased it, and rescinded the sale contract on the basis of an alleged misrepresentation by the sales assistant that it contained an inbuilt modem (which it did not).

Mr Durkin’s position was that his rescission of the sale contract to PC World had the effect of also rescinding the credit agreement with HFC Bank. HFC Bank disagreed and reported his default in payment under the credit agreement to credit reference agencies.

Mr Durkin initially claimed damages of £250,000 for losses including damage to his credit record and a resulting inability to obtain funding to acquire a property in Spain.

He claimed that under s 75(1) of the Consumer Credit Act 1974, the right to rescind a credit agreement was “a like claim against the creditor” to that of being entitled to rescind the contract of sale with the supplier. Aberdeen Sheriff Court agreed and awarded him £116,000 (including £8,000 for injury to his credit. However, on appeal the Inner House overturned this award and held that the credit agreement had not been rescinded. Therefore HFC Bank was entitled to treat him as being in default of his obligations and to report this to credit reference agencies.

The Inner House held that, on a proper construction of s 75(1), when a debtor has a claim against his supplier he shall have a like claim, in the 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 the creditor.

The court stated that the contract of sale and the credit agreement were two distinct contracts. Rescission of the contract of sale did not amount to rescission of the credit agreement, and s 75(1) in itself did not provide Mr Durkin with a basis for rescinding the credit agreement.

Supreme Court appeal

The Supreme Court agreed with the Court of Session’s reasoning that s 75(1) does not give a debtor any right to rescind the credit agreement if he does not have such a right under general law. However Lord Hodge stated that the law implies a term into a credit agreement such as the one in this, that it is conditional on the survival of the sale contract. As such, the debtor on rejecting the goods and rescinding the sale contract for breach of contract may also rescind the credit agreement by invoking this condition. On that basis, Mr Durkin was entitled to rescind the credit agreement, and had done so.

The Supreme Court awarded Mr Durkin £8,000 in damages. Lord Hodge found that HFC Bank was under a duty to investigate and reasonably satisfy itself that the credit agreement remained enforceable before reporting to credit reference agencies that he was in default. In failing to do so, HFC Bank acted in breach of its duty of care to Mr Durkin.

HFC Bank had not contested the sheriff’s award of £8,000 for injury to Mr Durkin’s credit if it were established that it had breached its duty of care to him.

However the Supreme Court held that it was unable to go behind the finding of fact by the Court of Session that there was no evidence to support the sheriff’s finding that Mr Durkin’s additional losses were caused by the non-availability of 0% credit, rather than by his general level of expenditure.

Issues for consideration

Consumers will not need to rely on a complex (and potentially costly) application of s 75 to recover losses to a creditor caused by the misrepresentation or breach of contract by the supplier of goods.

Creditors will have to consider their duty of care and potential liability for injury to credit when registering defaults to credit reference agencies.

The Supreme Court’s appellate powers are restricted to matters of law and it cannot alter findings of fact if there is no demonstrated legal error.

Costs of the litigation have yet to be determined. They will be well in excess of the £8,000 awarded to Mr Durkin.