UK Supreme Court decision on disputed credit agreement could have implications for lenders, experts say

Out-Law News | 31 Mar 2014 | 11:09 am | 4 min. read

A recent decision by the UK ’ s highest court involving a customer who claimed that his credit rating was damaged by a bank ’ s refusal to cancel a credit agreement for a laptop he had returned could have wide implications for lenders, legal experts have said.

In its judgment, the Supreme Court found that the bank had breached its duty of care towards customer Richard Durkin  because it had failed to make enquiries into the status of Durkins credit agreement when he told them that his position was that it had been cancelled. Commercial dispute resolution expert Jim Cormack of Pinsent Masons, the law firm behind Out-Law.com, said that this was what had led to a finding of negligence against the bank, which had told various credit reference agencies that Durkin was in breach of the agreement.

If the bank had made inquiries it would have learned of the dispute about cancellation of the credit agreement and in that situation reasonable care would have required the bank not to intimate a default to the credit reference agencies until that dispute had been resolved in favour of the survival of the credit agreement,he said. However, it might be said that just because the Supreme Court ultimately decided that the credit agreement had been cancelled does not mean that, prior to that decision, it was negligent to take the contrary view.

In effect, therefore, on one view the Supreme Court held that the duty of reasonable care required the bank not to express any view on a matter simply because that matter was in dispute. It would appear to have been an important part of the circumstances that the bank was apparently not under a duty to make any notification to the credit reference agencies and therefore could simply have chosen not to do so in the face of the dispute. In reaching its decision in the particular circumstances of this case, the Supreme Court may have extended a duty of care in relation to the accuracy of a statement to a duty not to make a statement at all simply because of the existence of a dispute about the matters dealt with in the statement,he said.

The case related to Durkins purchase of a laptop computer from PC World in Aberdeen in 1998. He was offered a credit agreement with a bank in order to fund the purchase, which he accepted; resulting in him entering into separate contracts with the bank and the retailer in relation to the purchase. After he took the computer home and discovered that it did not have an internal modem, which he had stated was a requirement, he tried to return the computer and cancel the transaction. This was not accepted by the retailer.

Durkins entitlement to cancel, or rescind, the sale agreement was ultimately upheld in the lower courts after several years of litigation. However, the separate credit agreement remained outstanding. Durkin had not paid the bank anything under the credit agreement, and so the bank had issued him with a default notice and notified credit reference agencies that he had not complied with his obligations under the agreement. This severely affected his ability to obtain any further credit. According to the Supreme Court judgment, these notifications remained on the credit registers until about 2005 or 2006.

In its judgment, the Supreme Court said that Durkins credit agreement was a restricted-use credit agreementas defined by the Consumer Credit Act. This being the case, the law implies a term into such a credit agreement that it is conditional upon the survival of the supply agreement, the judge said.

The debtor on rejecting the goods and thereby rescinding the supply agreement for breach of contract may also rescind the credit agreement by invoking this condition,he said. As the debit has no right to retain or use for other purposes funds lent for the specific transaction, the creditor also may rescind the credit agreement I am satisfied therefore that Mr Durkin was entitled to rescind the credit agreement.

On the duty of care question, the Court of Session had previously held that the banks only duty was to exercise reasonable care not to make untrue statementsabout Durkin to the credit reference agencies. This would have meant that it was up to Durkin to prove that the statements were untrue. The Supreme Court disagreed, instead finding that the bank was under a duty to investigate [Durkins] assertion [that the credit agreement had been rescinded] in order reasonably to satisfy itself that the credit agreement remained enforceablebefore reporting his default to the credit agencies.

[The bank] could readily foresee that registration of a default could damage Mr Durkins credit,the judge said. As it knew that Mr Durkins assertion of rescission of the sale agreement was unresolved, it had the options of (i) saying nothing to the credit reference agencies or (ii) if it chose to notify them, incurring the duty to him to take reasonable care to ensure that the notification was accurate.

If [the bank] had contacted [PC World], it is likely that [the retailer] would have said that it contested the rejection of the computer. But [the bank] would not have known whether [the retailers] stance was correct. If it had been faced with a contested rescission of the supply agreement and an asserted rescission of the credit agreement which it was not in a position to resolve, [the bank] should have refrained from intimating a default until the issues were resolved,he said.

In practical terms this creates a dilemma: lenders are forced either to say nothing because there is a dispute or to ensure the dispute is tested in the courts - neither very palatable - and to some extent giving the customer a veto simply on his say that there is a dispute,said litigation expert Craig Connal QC of Pinsent Masons.

Many would argue that making enquiry of the retailer is all that they should need to do. And if credit checks operate on the assumption that information providers will promptly send on information that they have, the system will break down if the exercise stalls due to a claimed dispute. What of other lenders who make checks in the meantime?he said.

Connal said that the fact that the Supreme Court inserted an implied term into the credit agreement to the effect that it was conditional on the continued existence of the sale agreement could have further repercussions for lenders.

In an environment where lenders carefully draft in detail for contingencies, it is odd to find the court starting anywhere other than the small print,he said. Lenders will need to consider whether as a matter of policy they would wish to review their terms in this light.