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Spot The Connection - How Attached Are Credit And Sale Agreements?

Spot The Connection - How Attached Are Credit And Sale Agreements?

This week the UK Supreme Court issued its judgment in the laptop credit case: Durkin -v- DSG Retail Limited and HFC Bank plc.

Where in the world...?

In 1998, Mr Durkin went to PC World in Aberdeen, (a trading entity of DSG) to buy a laptop with a built-in modem.  The sales assistant helped him pick a computer and assured him that he could bring it back if it did not have a built-in modem.  

Mr Durkin paid a £50 deposit and signed a credit agreement with HFC Bank plc for the balance of £1,449.  As the laptop had no built-in modem, Mr Durkin handed it back the next day and requested the return of his deposit and cancellation of the credit agreement.  A 16-year battle followed.

DSG did not accept that Mr Durkin had the right to rescind the agreement until, in 2008, the Sheriff at Aberdeen agreed that he had. Perhaps more pertinently, HFC also refused to recognise Mr Durkin’s right to cancel the related credit agreement and pursued him for balances outstanding, eventually registering his default with credit reference agencies. Awarding Mr Durkin substantial damages because of damage to his credit rating, the Sheriff criticised HFC and asserted that it had a duty to make enquiries before registering the default. The Sheriff’s view was that in rescinding the sale contract Mr Durkin had also effectively rescinded the credit agreement.

The perils of appealing

Mr Durkin wanted more damages, so he appealed to the Inner House of the Court of Session.  Unfortunately for him, HFC cross-appealed. The appeal court upheld HFC’s arguments, dramatically reducing the amount of Mr Durkin’s damages, and also determining that the credit agreement was a separate contract which had not been cancelled when he rescinded the sale agreement.   

In a final appeal decision published yesterday, the UK Supreme Court said it could not vary the factual findings of the Inner House on damages.  However, and significantly for credit providers, it determined that the credit agreement contained an implied term that it would be cancelled where the related sale contract was rescinded and, therefore, that HFC breached a duty of care when it reported him to the credit reference agencies.

The Consumer Credit Act 1974

The arrangements between DSG and HFC meant that the credit agreement was a debtor-creditor-supplier agreement benefitting from Section 75 of Consumer Credit Act 1974. Crucially, section 75 makes the creditor equally liable with the supplier for the supplier’s breach of contract (including any pre-contract misrepresentations).    

The sheriff determined that the effect of section 75 was that if the debtor could cancel the contract with the supplier, he would effectively also cancel the credit contract.  The Supreme Court came to the same result on cancellation, but by a different route.  It held that section 75 did not give the debtor a special right to cancel the credit agreement.  However, as the sole permitted purpose of the credit was to pay for the goods, cancellation of the sale contract required the debtor to repay the credit. It concluded that such credit agreements contained an ‘implied term’ that they can only survive as long as the contract for supply does, supporting Mr Durkin’s position that he had cancelled the credit agreement.

Wider implications: a note of caution for creditors

This judgement provides useful clarification for all parties as to the fate of linked credit arrangements when a consumer rejects defective goods. An implied right to cancel the credit agreement accords with the original intention behind section 75 - to support the relatively powerless consumer who takes on the commercial muscle of the supplier.  In this context it would seem incongruous for the creditor to be able to continue as if nothing had changed.

This case is equally important as a reminder of the need for finance providers to be proactive with section 75 claims - to make enquiries and satisfy themselves as to the merits (and resolution) of any dispute between consumer and supplier before reporting a default to credit reference agencies (with foreseeable adverse consequences for the consumer).  Section 75, and the ‘implied term’, mean that the supplier’s dispute is the creditor’s dispute, and it is in the interests of all concerned for creditors to exercise the positive influence over suppliers originally envisaged by the legislators.

Will Cole
Senior Associate

Lorna Finlayson