Volkswagen Financial Services (UK) Limited v George Ramage

This was an appeal by Mr Ramage in which he successfully challenged the enforceability of a term in a hire agreement that stipulated the amount the hirer was liable to pay in the event of a repudiatory breach of the agreement. The court found the term to be a penalty at common law and unenforceable.

Many finance companies will wish to review their own clauses in the light of the court's analysis of whether the clause was penal or a genuine pre-estimate of loss, especially given the current fever surrounding claiming refunds of bank charges.

Facts

Mr Ramage was a hirer under the terms of a hire agreement with Volkswagen. He went into arrears shortly after the first anniversary of a three-year agreement. The car was repossessed and Volkswagen sued for a money judgment calculated in accordance with the relevant term in the agreement.

The term in issue stated that the hirer was liable for the total amount of rentals payable during the hiring period, less the amount of rentals paid, and less also a small rebate (four per cent) on the rentals which had not become due.

At first instance, Mr Ramage argued that the term was a penalty and was unenforceable on the basis that it made him liable for the whole of the rentals payable over the term of the agreement irrespective of when the vehicle was returned to Volkswagen. If Volkswagen got the car back early on in the agreement, so that it was in new or nearly new condition, it could sell the vehicle (or indeed lease the vehicle to someone else) and would receive much more money back than it did if the car was recovered towards the end of the three-year term. Furthermore, it would also get accelerated payment of the whole of the future rentals subject only to the small rebate referred to.

Volkswagen accepted that for the term to be enforceable it had to provide for repayment of a sum that was a genuine pre-estimate of the loss it was likely to suffer - otherwise it was a penalty.

At first instance the District Judge concluded that the term was not a penalty but a liquidated damages clause. This clause was appropriate because of the difficulty of factoring into such a term variable factors such as the age, mileage and condition of the vehicle, and the popularity of its make or a particular colour.

The District Judge also appeared to place some weight on the fact that Mr Ramage was an intelligent and articulate individual who had entered into the agreement under his own free will.

On appeal

HHJ Sennitt held that the term did not provide for a genuine pre-estimate of loss and was therefore a penalty and unenforceable.

He was of the opinion that the term provided for a singular formula for measuring loss whether the breach occurred immediately after the beginning of the hiring or immediately before its conclusion. No account was taken of the fact that Volkswagen was relieved of paying for the road fund licence or of providing a recovery service from the date of breach. Most importantly of all, no account was taken of the fact that Volkswagen would get the car back earlier than it would otherwise have done and thus would be much more valuable. The value of a car was a variable figure which did not fit easily into a single formula for measuring loss. The Court was satisfied that it would be possible to draft a clause to take account of the "car factor" if it was desired to be a term that did attempt to set out a genuine preestimate of loss.

HHJ Sennitt placed reliance on the House of Lords decision in Bridge v Campbell Discount Company Limited [1962] AC. This was a case involving the hire purchase of a car where the corresponding term provided that the hirer was to pay the owner compensation for depreciation of the vehicle plus further sums as may be necessary to make the rentals paid equal to two-thirds of the hire purchase price. The House of Lords unanimously held that term was not a genuine pre-estimate of the loss. One reason given was that it could not be a pre-estimate of compensation for depreciation because depreciation would become greater the longer the hire went on, whereas under the formula referred to in the term, the sum that the hirer would have to pay would become less the longer the vehicle was in the hirer's possession.

Also applied was the case of Anglo-Finance Co Limited v James [1963]. Here, the Court of Appeal also held that a term which provided for the finance company being entitled in all circumstances to require that 100 per cent of the total hire purchase price (less credit for the amount realised by the vehicle) was not a genuine pre-estimate of loss. Again, this was singular formula for measuring damages that ignored the fact that the loss would fluctuate depending on when the car was recovered. HHJ Sennitt held that if the clause in Anglo Finance was not a genuine pre-estimate of loss then it was even more unlikely that the term in this case was.

Volkswagen sought to distinguish these cases on the basis that they related to hire purchase, not hire, agreements, where the intention was that the hirer would exercise the option to purchase and not return the car to it; and also on the basis that the term was sought to compensate for a loss of future rentals and not for depreciation. These arguments were dismissed.

Furthermore, HHJ Sennitt took the view that before inserting a liquidated damages clause in a contract, an owner needed to carry out some form of calculation to see what loss there might be if it were calculated on common law principles. Otherwise it could not be said that it was a genuine pre-estimate of loss. In this case Volkswagen could produce no such calculations to demonstrate a genuine pre-estimate.

Lastly, HHJ Sennitt found that the question of whether a term was a penalty was not to be determined by the vulnerability or otherwise of the hirer. Therefore, the intelligent and articulate Mr Ramage was as entitled as anyone to rely on the fact that the term was a penalty.

Comment

To guarantee their successful enforcement, such terms in both hire and hire purchase agreements need to take account of the variable of when the vehicle is returned. This will involve doing some loss calculations and the finance company should be prepared to produce those calculations in evidence in the event of a challenge to the term.