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Banking and Finance analysis: Do customers rescind a credit agreement to finance a purchase when they rescind the purchase agreement? Catherine Robert, of Hogan Lovells International LLP, explains the Supreme Court’s answer to that question.
Durkin v DSG Retail Ltd and another  UKSC 21,  All ER (D) 249 (Mar)
The appellant had entered a credit agreement with the second respondent bank to purchase a computer from the first respondent shop. When he rejected the computer because it did not conform to his contract of sale, the shop did not accept that he had validly rescinded that contract and the bank treated him as being in default of the credit agreement and intimated that default to credit reference agencies. The appellant claimed damages for financial loss caused by the damage to his credit. The Supreme Court decided that the appellant had been entitled to rescind the credit agreement on rescission of the contract of sale.
What issues did this case raise?
The key issue was whether Mr Durkin was entitled to rescind the credit agreement with HFC Bank (HFC) when he rescinded the purchase agreement for the computer.
Mr Durkin also challenged the amount of damages awarded to him. He had originally claimed damages of £250,000 under three heads of loss:
At first instance, he had been awarded £8,000 for damage to his credit rating, an additional £6,880 for additional interest, and £101,794 in relation to the Spanish property. HFC had not challenged the award of £8,000, but had successfully appealed against the award of damages for the second and third heads of loss on evidential grounds. Mr Durkin asked the Supreme Court to reinstate the original award of damages, but this aspect of his appeal was dismissed because the Supreme Court could only go behind the Court of Session’s findings of fact if there was a clear error of law. This means that the Supreme Court did not consider whether, as a matter of law, Mr Durkin could recover indirect losses of this type from HFC.
Does the judgment clarify the scope and application of the Consumer Credit Act 1974, s 75(1) (CCA 1974)?
Yes, it establishes that CCA 1974, s 75(1) does not give the debtor a right to rescind a credit agreement. The case concerned a restricted-use credit agreement, ie a credit agreement where the purpose of the loan is to finance the purchase of goods or services from a particular supplier. The Supreme Court held that, because the credit agreement only exists to finance the supply agreement, a term will be implied into the credit agreement that it is conditional on the survival of the supply agreement. As a result, the debtor has the right to rescind the credit agreement if the related supply agreement is rescinded.
Why has this case gone on for so long?
Mr Durkin brought proceedings against DSG Retail Limited and HFC in January 2004. The hearings took place in spring 2007 and judgment was handed down a year later by the Sheriffdom of Grampian Highland and Islands. This judgment was appealed by both sides to the Court of Session, which handed down the judgment five years later, in June 2010. The Court of Session judgment was itself appealed to the Supreme Court. The Supreme Court judgment was handed down on 26 March 2014. The delay of ten years between the issue of the claim and the Supreme Court judgment is very unusual and is not explained in the judgments.
What are the implications for lawyers and their clients?
The Supreme Court noted that under CCA 1974, s 102, the debtor can give notice of rescission either to the supplier or to the creditor. Lenders will therefore need to ensure that the suppliers which they deal with report any notice of rescission immediately so that the lender can:
The case also underlines the importance of not reporting customers as being in default of a credit agreement before making proper enquiries when they report a dispute with a supplier or assert that the credit agreement has been rescinded. A lender owes a duty of care to a customer to give accurate reports to credit reference agencies and so, if the lender fails to make reasonable enquiries about a dispute, it is likely to be liable for losses which the customer suffers as a result of an inaccurate report. It may be very difficult for a lender to establish whether the customer is in the right, and the Supreme Court’s view was that, in these circumstances, the customer should not be reported as being in default. Lenders should therefore review their reporting procedures and consider how they can be improved.
Does the case reflect any developing trends in this area of the law?
The case reflects the general trend towards protection of consumers. It does not resolve the important question of the extent to which lenders are liable for loss suffered by a customer, such as Mr Durkin’s loss on the Spanish property, so there are likely to be future cases on this issue.
Interviewed by Robert Matthews.
The views expressed by our legal analysis interviewees are not necessarily those of the proprietor.
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