Concurrent Liability on the Credit Card Company - Case Study Example

Consumer Credit Act of 1974 The connected lender liability and deemed agency provisions in the Credit Act of 1974 were formulated in order to protect consumers, by imputing concurrent liability on the credit card company or creditor when misrepresentations are made or a contract for sale of products or services is breached. Section 56 of the Act pertains to antecedent negotiations, wherein a creditor will be made liable for representations that are made by a dealer or seller of goods and services. Section 75 of the Act imputes concurrent liability on a creditor when a supplier is guilty of misrepresentation or a breach of contract. The significance of these provisions lie in the increased scope of liability imputed on the creditor. The Courts have recently also extended the scope of protection offered under the Connected Lender Liability provision of Section 75 to credit transactions occurring outside the U.K., making foreign creditors also liable for representations made by the supplier of the goods or services. But where the Deemed Agency provisions under Section 56 are concerned, a recent decision that has been rendered by the Courts has revealed the existence of loopholes in the law which creditors may be able to avail of in future, to escape liability that may arise. Connected Lender Liability Provision: The Consumer Credit Act of 1974 repealed and replaced most of the Hire Purchase Act of 1964 and was formulated specifically to provide greater protection to those buying on credit1. For purposes of the Credit Act of 1974, the card holder is a debtor and has borrowed funds from the credit card company, who is the creditor, in order to purchase goods or services. Section 75 of the Credit Act allows the credit card holders, in some circumstances where there has been a breach of contract or misrepresentation by an English supplier, a cause of action against the Credit Card Company or financier as well2. Specifically, this provision of the Act states that: “If the debtor has…….in retaliation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor.”3 As a result of this provision, credit card companies or financing entities will be jointly liable with sellers who make false representations or breach contracts. The question of whether the protection offered to consumers under this connected lender liability provision can also be extended to foreign creditors was addressed in the recent case of The Office of Fair Trading v Lloyds TSB plc, Tesco Personal Finance Limited and American Express Services Europe Limited4. Prior to this case, card issuers had not necessarily accepted that the provisions of Section 75 apply to foreign transactions but had honored transactions up to 30,000 pounds on a goodwill basis. The OFT commenced this action, seeking a declaration from the Court that foreign transactions that were financed by credit card issuers under the Consumer Credit Act of 1974 also be subject to the connected lender liability provision. The High Court held that the provision would not apply to foreign transactions, where the contract between the consumer and supplier of goods was made wholly outside the U.K, or where governing was by foreign law or where the goods were supplied or delivered outside the U.K. But the Court of Appeal overturned the High Court’s decision mainly on the basis that (a) the primary purpose of the Act is the protection of consumers and (b) there is nothing in the statute that suggests the provisions will not be applicable outside the U.K. This decision was affirmed by the House of Lords; as a result the interests of consumers have been accorded priority under this provision. Section 75(2) also specifies that the credit card company will have the right to be indemnified by the supplier for any losses that it sustains, arising from such claims from customers. Credit card companies may try to escape their liability for losses caused to the debtor by the supplier by arguing that there is no pre-existing arrangement or “contemplated future agreements” between them. But as Gitney points out, in general, suppliers in the U.K. enter into contracts with the credit card companies which are known as Merchant Supplier Agreements; hence this in effect constitutes a pre-existing agreement which will render the credit card companies concurrently liable with the supplier, for claims made by the customer.5 But the problem arises in the context of foreign transactions. The default statutory indemnity provision under Section 75(2) allowing a card issuer to enforce against a supplier with respect to any liability imputed to it as a result of the supplier’s omissions would be far more difficult to enforce for foreign transactions, as the Court of Appeals also acknowledged6. As a result, the indemnity provision may not necessarily apply in the case of every foreign transaction, hence card issuers may have to bear the losses arising out of the transactions when liability is imputed on them. But the House of Lords has clarified that this would in no way detract from the protection offered to consumers under Section 75(1) of the Act, which would apply in equal measure to foreign transactions. The House of Lords also expressed the opinion that since card issuers have a strong contractual and commercial influence over suppliers, they are in a better position to bear losses as compared to consumers. Sayer has argued that the connected lender liability and deemed agency provisions of the Credit Act of 1974 mean that there is an increased level of risk posed to credit card companies and it is vital for them to reserve for themselves, wide rights of indemnification in their contracts with the supplier.7 But this also means that the supplier may be precluded from taking independent action against the credit card holder, and Sayer argues that it would be inequitable to not allow any possible recovery for the supplier with the argument that unconditional payment has been made at the time of the transaction. This, while the connected lender liability provision is very beneficial for consumers, it may however pose some problems for credit card companies and suppliers, who in some instances could be forced to bear losses without any avenue for redressal. Deemed Agency Provision: Section 56 of the Credit Act includes within the scope of “antecedent negotiations”, any kind of negotiation which takes place between a debtor and a creditor. These include negotiations “conducted by the creditor or owner in relation to the making of any regulated agreement, or…….in relation to goods sold or proposed to be sold by the credit-broker to the creditor before forming the subject-matter of a debtor-creditor-supplier agreement….. or conducted by the supplier in relation to a transaction financed or proposed to be financed by a debtor-creditor-supplier agreement.”8 This indicates that the scope of liability will extend to the creditor in all kinds of intermediary agreements as well, where a transaction occurs between a buyer and seller. Hence, while under common law, a dealer may not normally be considered to be an agent of a creditor, as established in the case of Branwhite v Worcester Finance Works Ltd9 the deemed agency provision as stipulated above, would in effect make the dealer or intermediary agency, the agent of the creditor. But despite the implications as given above, the consumer may need to exercise more care and caution in entering into purchase agreements, as revealed in the case of Black Horse Ltd v Langford10. In this case, the consumer Langford agreed to purchase a Lotus Esprit from the Castleford Trade Car centre, in exchange for a BMW on which he had already made about 3000 pounds worth of down payments. Castleford agreed to arrange finance to enable Langford to purchase the Lotus and to assume the balance of the loan from the finance company that remained to be paid on the BMW. Castleford approached a credit broker named North Riding Finance (Pool) Ltd and this Company arranged for Langford to enter into an agreement with a finance company, Black Horse Ltd to purchase the Lotus Espirit. The problem arose when Castleford went out of business and did not pay off the balance on the BMW loan as it had promised. The creditor, that also coincidentally happened to be Black Horse Ltd, claimed the balance from Langford, who denied liability on the basis of the deemed agency provision of Section 5. His argument was that Castleford’s promise to pay off the balance was made as the agent of Black Horse Ltd, it was the credit broker in this instance, thereby placing the liability on the creditor Black Horse specifically as stipulated under Section 56(1)(b) of the Credit Act of 1974. Black Horse however contended that since Castleford had not sold the Lotus to it, but to North Riding instead, it was not the credit-broker for Black Horse, as defined under Section 56 (1)(b). The Court of First Instance held in support of Langford, stating that despite North Riding being involved, Castleford was acting as credit-broker for Black Shore. The Court in its decision, stated: "The purpose of the Act is to protect consumers and it would seem to me to make a serious inroad into that protection if the sale by the dealer of the motor car to an intermediary before its sale to a finance company renders s 56 of no assistance to the customer."11 But at the Court of Appeal, it was noted that although both Castleford and North Riding fell under the category of credit-brokers, Langford’s contention that the deemed agency provisions would apply to Castleford was questionable. Black House submitted that Section 56(1)(b) of the Act applies only to transactions "by a credit-broker in relation to goods sold or proposed to be sold by the credit-broker to the creditor." Hence the provisions of liability under the Act would apply to North Riding with whom negotiations were conducted, not to a totally different credit broker with whom Black Horse had not entered into any finance negotiations. Gray J held that the proper construction of Section 56(1)(b) would apply only to the credit broker that actually sells or proposes the goods or services to the finance Company. In this instance Castleford had not at any time approached Black Horse or entered into any negotiations with it, hence the liability of the creditor could not be established. This decision has enormous significance to the interests of consumers, because it exposes a loophole in the law, namely that a consumer may be denied the protection afforded through the establishment of liability under the deemed agency provision. It is only when a dealer who sells a vehicle to the consumer also enters directly into an agreement with the finance company that the consumer will be protected under the provisions of Section 56. In the event that there are intermediary brokers also involved in the process, the consumer may be denied full protection under this provision, because the finance Company will not be liable for representations made by the dealer. It is therefore necessary for consumers to take steps to determine whether an intermediary broker will be contacted to arrange finance for them, because this could make a significant difference to the statutory protection offered to them. Conclusions: Both the Connected lender liability provision and the deemed agency provision were formulated to extend the scope of protection available to consumers in the event of misrepresentation or breach of contract by suppliers. But in terms of their operation, it must be concluded that while the Section 75 provisions provide enhanced protection for consumers even for foreign transactions, the Section 56 provisions could leave them without recourse to adequate protection if intermediary credit-brokers are involved. This would allow financiers a loophole to escape liability through the use of such intermediary brokers. But where liability for foreign transactions is concerned, the credit card companies/financiers appear unlikely to be able to avoid liability. While the indemnity clause allows financiers some recovery from suppliers, this may not extend within the foreign context as well. References: Consumer Credit Act (CCA74), http://www.timeshare.org.uk/cca74.html; Gitney, Jonathan, 2008. “Connected lender liability: a domestic provision only?” http://www.stiveschambers.co.uk/articles/article_lender_liability.pdf; Kelly, David, Holmes, Ann E.M., Hayward Ruth ,2002. “Business Law”, Routledge, at pp 561 Sayer. P.E., 1986. “Paying by Plastic”, New Law Journal, 136 (6278): 1030 Section 75(1) of the Credit Act of 1974, http://www.johnantell.co.uk/CCA1974.htm; Cases Cited: Black Horse Ltd v Langford (2007) EWHC 907 (QB) Branwhite v Worcester Finance Works Ltd (1968) 3 All ER 104 The Office of Fair Trading v Lloyds TSB plc, Tesco Personal Finance Limited and American Express Services Europe Limited [2007] UKHL 48 Read More