Asset finance case update and news

Lamarra v Capital Bank plc (2006) S.L.T 1053

This case concerns the perennial issue of satisfactory quality and, in particular, those cases where there are only minor defects to the goods. It is an important case for finance companies who supply goods to customers on hire purchase or lease agreements. This case concerns a car, but its principles are applicable to all types of equipment.

Facts

Mr Lamarra entered into a hire purchase agreement with Capital Bank for the hire of a new Range Rover supplied by a dealership called Shields Automotive. Mr Lamarra rejected the car just four days after entering into the agreement on the basis that, upon delivery, the vehicle had some defects. Finance companies will know that this factual situation is unfortunately very common.

Mr Lamarra agreed a price of £51,550 for the car and claimed that a reasonable person would expect to receive the vehicle free of any defects. The court found, at the time of delivery, the vehicle had several defects. In particular the front wheels were incorrectly balanced, there was some road speed noise emanating from the transmissional drive system, there was a scratch on the ashtray cover, the glove box was misaligned and, some of the paintwork was poorly finished.

So the defects were minor and the dealership offered to resolve all the complaints at their own cost (and in any event they were covered by the warranty).

What the court decided

In the original trial, the Sheriff concluded that the vehicle was of satisfactory quality and that Mr Lamarra had not been entitled to reject the vehicle. This was on the basis that the defects were easy to rectify and were in any event covered by the vehicle's warranty.

In the appeal, the dealership argued that the warranty was a 'relevant circumstance' to have taken into account when deciding whether goods were of a satisfactory quality. Under the terms of s.10 of the Supply of Goods Implied Terms Act (1973), goods are considered to be of satisfactory quality if they meet the standard a reasonable person would regard as satisfactory taking account of any description of the goods (if relevant) and all other 'relevant circumstances'.

On appeal, it was held that a warranty is only an undertaking by the manufacturer to remedy defects in the goods which emerge after its supply. However, the issue of the satisfactory quality of the goods had to be judged at the time of delivery - and so the warranty was irrelevant.

Additionally, in terms of the hire purchase agreement, it stated that Mr Lamarra could only have the benefit of the warranty if he complied with the terms of the agreement. By having refused to pay the instalments, the benefit of the warranty was not something he was contractually entitled to take the benefit of. On the facts of this case, however, the dealership had offered to remedy the defects at their own expense. This is therefore very much a secondary point of principle arising from the case.

The most important point of principle was that the car was sold as a high quality vehicle. The provisions of the 1973 Act specifically state that appearance and finish and freedom from minor defects are central to the definition of quality. It did not matter that the defects could be remedied, Mr Lamarra was entitled to expect to receive a car without any defects given the amount of money that he had paid.

Comment

This is a decision that very much strengthens the customer's hand in cases where there is customer dissatisfaction with the goods supplied, even where that dissatisfaction emanates from some relatively minor issues. It reinforces the need for finance companies to involve dealerships at a very early stage in these disputes and to be proactive in seeking to appease the customer and resolve a complaint.

It is likely that had Mr Lamarra purchased a lower value and lower specification vehicle, the court would not have been quite so strict on the finance company. It would have given more weight to factors such as looking at the ease at which the defect could be remedied and whether the defect was of such a kind that it was capable of being repaired to produce a result as good as new.

Black Horse Limited v Christopher Langford 2007 EWHC 907 (QB)

Section 56 of the Consumer Credit Act 1974 is a topic which has been out of the headlines for a little while following the high profile case of Forthright Finance v Ingate. However, in this case the court looked at the question of whether s.56 applies to bind a finance company in a situation where the finance company had no direct contact with the supplying dealership and, importantly, where the transaction was structured such that the vehicle was sold by the dealership to the broker before being sold on to the finance company.

Facts

Mr Langford went to Castleford Trade Car Centre and decided to buy a Lotus Esprit. Mr Langford paid a cash deposit of £3,000 and as part of the transaction agreed to part-exchange a BMW Z3 upon which there was outstanding finance to Black Horse.

It was agreed as between Mr Langford and Castleford that Castleford would discharge the existing hire purchase agreement between Mr Langford and Black Horse in relation to BMW, the balance outstanding being £7,548.37.

It is important to note that when the deal was agreed, no mention was made of any specific finance company which would finance the acquisition of the Lotus. Mr Langford did not find out that Black Horse would be financing the purchase of the Lotus until he went to Castleford's premises to sign the finance agreement. It was purely coincidence that Black Horse was the common finance company.

Upon agreeing the deal with Mr Langford, Castleford approached a firm of credit brokers called North Riding Finance (Poole) Limited to select a finance company to fund the purchase of the Lotus. North Riding had a written agreement with Black Horse in which it agreed to comply with all representations given by dealers (such as Castleford). It further undertook to adhere that dealers would settle sums due under hire purchase agreements in respect of cars taken in part-exchange. North Riding chose to place the business with Black Horse.

Castleford sold the Lotus to North Riding. The following day, North Riding sold it to Black Horse for the same price, and Black Horse hired the vehicle to Mr Langford on the terms set out in the hire purchase agreement.

It was accepted that North Riding and Black Horse had no prior knowledge of any promise on the part of Castleford to pay off the finance on the BMW. Mr Langford knew nothing at the time of negotiating to buy the Lotus of the involvement of Black Horse and indeed, at the time of sale, of its sale from Castleford to North Riding and then North Riding to Black Horse.

As sadly often happens, Castleford did not pay off the balance owing on the BMW to Black Horse and, upon receipt of the finance, went into an insolvency procedure. Accordingly, Black Horse claimed the balance outstanding on the BMW hire purchase agreement from Mr Langford which then stood at £7,468.94. Mr Langford denied liability on the ground that Castleford promised to discharge that balance and, by virtue of s.56, Castleford's promise was deemed to have been made as agent for Black Horse.

It was Black Horse's case that North Riding was the credit broker for the purposes of s.56 because the Lotus was sold to Black Horse by North Riding, not Castleford. Accordingly, there were no 'antecedent negotiations' between North Riding and Mr Langford.

What the court said

The judge at first instance said that this argument was misconceived. The purpose of the Act was to protect consumers and that it would make a serious inroad into that protection if the sale by the dealer to an intermediary broker rendered s.56 of no assistance. Being therefore inclined to find in favour of Mr Langford, the judge said that once the customer has been s.56 then applied to all that dealer's representations in the 'antecedent' negotiations'. The judge also stated that s.56 is not based upon the law of agency at common law.

On appeal before the Honourable Mr Justice Gray sitting at Leeds District Registry, it was agreed that questions of agency at common law do not affect whether s.56 applies. All parties were in agreement that both North Riding and Castleford were 'creditbrokers' within the meaning given to them in the Consumer Credit Act, and it was Black Horse's case that in the 'antecedent negotiations' Castleford was not acting as its credit brokers . The wording in section 56(1)(b) confined antecedent negotiations to those conducted in relation to goods sold or proposed to be sold by the credit broker to the creditor. Black Horse said that the credit broker which sold the Lotus to Black Horse was North Riding and in these circumstances s.56 had no application.

In his judgment, the judge bore in mind that the purpose of the section was to protect consumers such as Mr Langford and appeared to find in favour of Black Horse with some reluctance. However he agreed that the credit broker who conducted the antecedent negotiations was Castleford, but it was North Riding who sold the Lotus to Black Horse. Section 56(1)(b) applies only to the credit broker who actually sells or proposes to sell the goods to the finance company.

Mr Justice Gray did accept that for some purposes Castleford could be taken to be agents of North Riding and thus deemed to be sub-agents of Black Horse, for example, for the purpose of completing the necessary documentation. But that is a far cry from saying that, at an earlier stage, Castleford was already acting as agent for Black Horse. Judgment was therefore given to Black Horse for the sum claimed of £7,468.94.

Comment

This is a useful case for finance companies in that it confirms that they will not be caught by s.56 where the vehicle has been purchased by them from an intermediary credit broker as opposed to from the supplying dealer direct. Despite the court's apparent desire to find in favour of the consumer, the terms of s.56 make it clear that where a transaction is structured in this way the finance company is not bound by any representations by a supplying dealer to pay off existing finance on part-exchanged vehicles.

Thus the case does indeed make some serious inroads into the protection intended for consumers in s.56. Is this what Parliament intended? Probably not. The loophole is one which may be closed by amendment in due course, but in the meantime it is there to be relied upon by finance companies and is worthy of consideration when structuring transactions.

The Trustee in Bankruptcy of Richard Canty v Canty (2007)

Although this case is about a trustee in bankruptcy's fight to realise his interest in a property by virtue of a debtor's bankruptcy, the facts (though extreme) are not untypical of a finance company's position when a hirer refuses to return goods to it despite the fact the court has ordered the hirer to do so.

In this case Mr Canty was made bankrupt in relation to a relatively small debt and he never accepted the position. There followed a number of appeals and challenges over the following years in which he attempted to reopen and relitigate earlier proceedings. The trustee in bankruptcy obtained an order for possession of Mr Canty's property. Mr Canty refused to hand it over and eventually took to the roof of the property to continue his protest where he stayed for some nine months. Some four years after having obtained his first possession order, the trustee in bankruptcy finally applied to the court for Mr Canty's committal for contempt of court following his failure to comply with a penal notice endorsed on the possession order. After adjourning to see if there were any other options available (and with Mr Canty still on the roof) the judge held that Mr Canty was in contempt for failure to comply with the penal notice and sentenced Mr Canty to six months in prison.

Mr Canty appealed to the Court of Appeal as regards both the committal and the length of the sentence. The Court of Appeal found that Mr Canty's wilful and deliberate breach had been maintained and the appeal failed. The decision shows that the courts are willing to take a hard line with those who persistently ignore court orders. It is a useful reminder to finance companies that although penal notices, and in particular committal proceedings, are extreme and draconian measures, they are effective remedies and available to them against hirers who persistently refuse to comply with delivery up orders.

Non-binding Protocol for settling dual finance cases

The Finance & Leasing Association, in consultation with its members, has put together best practice guidelines that finance companies might wish to follow in situations where two finance companies claim to be the owner of a car. This usually happens where the dealer has gone out of business and has failed to settle off outstanding finance. Full details can be found on the FLA website and the Protocol is still in draft form (and comments are welcomed on it).

In summary the Protocol suggest the two finance companies should do the following:

• Finance company A should supply finance company B with a copy of the agreement, a copy of the invoice from the original supplying dealer, a copy of the statement of the balance on the account, a note of settlement figure at the time of the conversion by B, and any details of any known transactions leading up to the sale to B (if known).
• B should within one month of receiving A's request either pay the settlement figure at the time of the conversion or the amount of the conversion, whichever is the lower. B should agree to waive the interest due since the conversion in recognition of the fact that B is effectively paying out twice on the same vehicle.
• If the matter cannot be resolved amicably, the FLA's assistance should be sought. The FLA will liaise with senior representatives of each company.
• If the matter cannot be resolved within two weeks of that referral, the parties may pursue legal remedies. If you have any comments on the draft protocol I would be happy to feed them back to the FLA on your behalf.