Connected lender liability in Parliament House

The First Division of the Court of Session tackled the tricky issue of connected lender liability under section 75 of the Consumer Credit Act 1974 in Durkin v DSG Retail Ltd and HFC Bank Ltd [2010] CSIH 49 and decided that under the section a consumer buyer’s rescission of a contract of sale of goods (a laptop computer) did not have the effect of also rescinding the connected loan contract by means of which the price was paid to the seller.

Mr Durkin's claim against the creditor in delict (made on the basis that his refusal to repay the loan had led to his being put on credit blacklists and being as a result unable to buy a property in Spain until after the credit registers had been put right, when the property was over £100,000 more expensive) was also rejected by the court.

The decision on section 75 is a controversial one, turning essentially on the view that the phrase “like claim” in the section – the consumer who has a claim under the sale contract has a like claim against the connected lender – does not reach rescission (i.e. termination of the contract) but only monetary actions such as damages.  It is understood that Mr Durkin, the consumer in this case, intends to take it to the Supreme Court, taking the view that the Division’s decision is a “travesty of justice” and adding “I have always said the law is an ass”.

While the language of the 1974 Act gives much support to the view of the First Division – e.g., rescission is not so much a "claim" as a "right" (as section 102 of the Act puts it); again, how can a lender be jointly and severally liable to rescission, as section 75 seems to require? – it is not clear that the policy of the Act in section 75 is satisfied.  It is a very odd result if the debtor continues in effect to have to pay for rejected goods not conforming with the requirements of the contract, notwithstanding the legal form of the transaction under which the liability incurred is that of a loan repayment.  The consumer's natural instinct will be to think there can be no ongoing liability to pay; but, as Mr Durkin's experience vividly illustrates, if the law is against that, the consequences of the consumer following instinct can be pretty horrible. 

As your correspondent attempted to point out in an article long ago – see 1984 SLT (News) 65 – section 75 tries to achieve the same result in connected sale and loans as would have followed in the typical hire-purchase transaction.  In hire-purchase, the creditor buys the goods from the supplier, and then hires them to the debtor, who pays instalments until the purchase price is completed and then becomes the owner.  In hire-purchase, if the goods are not conform to contract, the debtor's rejection and rescission would be good against the creditor, from whom payments made would be recovered and to whom payments to be made would no longer be due.  The creditor of course would then have recourse against the supplier, probably on the same grounds of the goods' non-conformity as a term of the contract under which the creditor bought the goods from the supplier.  So there is something in the argument that the policy of the Act is given best effect in connected sale-and-loan contracts by finding that when the buyer-debtor rescinds the sale contract, s/he can do the same with the loan contract.  The creditor should also be able to recover the money it has in fact paid to the supplier, either under the contract it has with the supplier or, if need be, under the law of unjustified enrichment (or restitution, in England).

It should also be noted (as it is at para 43 of the First Division's opinion, but only in summarising counsel's arguments) that if the debtor has made any contractual payment to the supplier, then rescission of the supply contract will involve the monetary claim to repetition of those payments (see Gloag on Contract, pp.59-60; cf McBryde on Contract, paras 20.142-3); and under section 75 that claim can be exercised against the creditor and set off against the liability under the loan.  It might be arguable that in connected sale-and-loan cases the debtor who has rejected the goods also has the right to repetition of the full price even although that price was de facto paid by the creditor; the supplier who has been paid for goods sold surely cannot deny the debtor-buyer repetition of that price on the grounds that the payment was actually made by a third party.  If this is right, then exercising a "like claim" against the creditor will again simply involve extinguishing the loan obligations.

It is to be hoped that this case will go to the Supreme Court and that we will then get at last an authoritative and comprehensive ruling on the meaning of section 75.   Your correspondent is by no means sure that the suggested policy argument can trump the argument from the language of the Act; but it is as clear from the First Division's decision as it was to your correspondent in 1984 that "the 1974 Act has not made all other law on sale of goods and breach of contract irrelevant.  The Act must be considered against the wider legal background." (1984 SLT (News) 65 at 67).  The policy argument is not wholly unsupported by legal ones.

Two final thoughts.  Mr Durkin bought his laptop from PC World in 1998.  It has taken 12 years for his case to get as far as Parliament House, and presumably it will be a wee while yet before he gets into court in London.  No doubt there are many reasons for this, but how many consumers would or could last this long in pursuit of their claims?  The other is the complete lack of customer care displayed by the supplier and the creditor (in particular) in dealing with Mr Durkin's claims at the outset of the problem.  For that reason alone, one hopes the First Division's is not the final word on the subject.