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FREE BOOK SAMPLE: Introduction to Enforceability (From 'Ellis and Kevan on Credit Hire, 5th Edition' by Aidan Ellis & Tim Kevan)

05/11/16. The next chapters are devoted to the vexed question of whether a particular credit hire agreement is enforceable in the light of various statutory and common law issues, which in particular dictate the form of consumer credit agreements.

The reader should be aware that these issues have a natural life cycle. First, perhaps prompted by new legislation, one insurer begins to argue that particular hire agreements are unenforceable in a few cases. Before long the issue becomes widely known and is litigated, initially at least, in a significant number of low value cases in the County Courts (characteristically with mixed results). Finally, a test case is selected and pursued through the higher courts. Whilst this process is ongoing, the hire companies will, if necessary, amend their agreements and procedures so as to seek to comply with the legislation. Once all the hire companies have successfully amended their agreements or all challenges to enforceability have been rejected by the Courts, the issue will cease to be argued.

As we write, many of the issues based on consumer protection legislation are at the end of this life cycle. Thus after a short period of great activity, arguments based on the Cancellation of Contracts made in a Consumer’s Home or Workplace Regulations 2008 (“the Cancellation Regulations”) are fading away and the Regulations themselves have been replaced. Moreover, it is rare - though not completely unknown - for contemporary contracts to fall foul of the 1974 Consumer Credit Act.

Nevertheless, a practitioner cannot afford to be unaware of the issues which arise in these cases. First, small or new hire companies may still have agreements which do not comply with all the relevant legislation. Second, the area of consumer credit or consumer protection is particularly prone to new legislation and new statutory instruments. There were at least 14 new statutory instruments affecting consumer credit agreements in 2010 alone. When novel issues arise under new legislation, the Courts are likely to be guided by the approach taken by the higher courts in respect of earlier legislation. Thus in relation to the 2008 Cancellation Regulations, many of the arguments drew inspiration from the earlier disputes about the Consumer Credit Act. As a result, understanding these principles will help to understand any new enforceability issues which may arise in the future.

The following chapters are designed to help the practitioner to address existing enforceability issues, and also to provide a framework which might be applied to analysing any new enforceability issues in the future.

We will therefore address:-

  1. Does enforceability of the credit hire agreement matter? (Chapter Four)

  2. Enforceability Issues under the Consumer Credit Acts (Chapter Five)

  3. Enforceability Issues under the Cancellation Regulations 2008 (Chapter 6)

  4. Other Enforceability Issues (Chapter 7)

Does Enforceability of the Credit Hire Agreement Matter?

Before considering the intricate issues that can arise from considering whether a particular agreement is enforceable, it is worth pausing to ask a logically prior question: why does it matter that the hire agreement is technically unenforceable?

The discussion that follows is informed by the common facts which arise in all these cases. The Claimant enters into a credit hire agreement, as a result of which the Claimant is provided with a replacement vehicle for a number of days. The agreement turns out to be technically unenforceable. The Defendant Insurer raises the unenforceability of the agreement as a defence to a claim by the Claimant for the hire charges.

Claimants may argue that, regardless of enforceability, the Claimant’s car was still damaged in an accident that was the Defendant’s fault. He still lost the use of his vehicle. The Claimant still needed and, in fact, obtained a replacement vehicle. The individual Claimant, usually, does not wish to challenge enforceability themselves.1 Why in these circumstances should the Defendant Insurer take the benefit of legislation which was only intended to protect the Claimant? Why can the Claimant not simply claim general damages for loss of use, even where a particular agreement is not enforceable?

We will look first at the resolution of this issue in Dimond v Lovell. Second, at the attempts by the hire companies to avoid the result in Dimond v Lovell through offering undertakings or subrogation. Third, at whether human rights arguments may assist the hire companies.

  1. The Decision in Dimond v Lovell

The Claimant in Dimond v Lovell argued that it did not matter whether the credit hire agreement between the Claimant and the hire company was unenforceable. It was argued that (a) if the agreement was unenforceable, the claimant would be unjustly enriched and (b) that the enforceability of the hire agreement was res inter alios acta (literally thing done between / among others). We will deal with these arguments in turn.

a. Unjust enrichment

The Claimant’s first argument was that if the hire agreement was unenforceable then Mrs Dimond would have had the benefit of a replacement vehicle at no cost to herself. She would therefore have been unjustly enriched at the hire company’s expense.

Lord Hoffmann addressed this point robustly:

The real difficulty, as it seems to me, is that to treat Mrs. Dimond as having been unjustly enriched would be inconsistent with the purpose of section 61(1). Parliament intended that if a consumer credit agreement was improperly executed, then subject to the enforcement powers of the court, the debtor should not have to pay. This meant that Parliament contemplated that he might be enriched and I do not see how it is open to the court to say that this consequence is unjust and should be reversed by a remedy at common law: compare Orakpo v. Manson Investments Ltd. [1978] A.C. 95.”2

Lord Hobhouse also rejected the Claimant’s argument:

Again I agree with your Lordships that there is no basis for implying an obligation of the hirer to pay contrary to the statute. Nor is there any basis for the application of some restitutionary principle. The contemplation of the parties was that the hirer should not in fact pay out of her own pocket for the hiring of the car. In the present case she has not been unjustly enriched; her position is precisely that which was intended.”3

Thus the House of Lords relied on the terms of the relevant legislation to reject the unjust enrichment argument. By enacting the legislation, Parliament had decided that, in order to protect consumers, in certain circumstances an agreement could not be enforced. The Court could not subvert this intention by allowing the hire company to enforce the agreement through the back door by a claim in restitution.

b. Res inter alios acta

The second line of the Claimant’s argument was to assert that it did not matter to the success of her claim against the Defendant whether she was liable to pay for the hire.

After reviewing the authorities, Lord Hoffmann stated that:

since high water the tide has retreated. The courts have realised that a general principle of res inter alios acta which assumes that damages will be paid by "the wrongdoer" out of his own pocket is not in accordance with reality. The truth is that virtually all compensation is paid directly out of public or insurance funds and that through these channels the burden of compensation is spread across the whole community through an intricate series of economic links. Often, therefore, the sources of "third party benefits" will not in reality be third parties at all. Their cost will also be borne by the community through taxation or increased prices for goods and services.”4

He then quoted Lord Bridge in Hunt v Severs,5 as Scott V-C had done in the Court of Appeal, and also referred to the fact that for voluntary carers the Claimant “can sue only if he claims as trustee for the person who provided the services”. He then concluded:

This case is of course far away from the gratuitous provision of services (usually by a relative) which was considered suitable for recovery as trustee in Hunt v. Severs [1994] 2 A.C. 350. If Mrs. Dimond is allowed to sue Mr. Lovell as trustee for 1st Automotive, the effect will be to confer legal rights upon 1st Automotive by virtue of an agreement which the Act of 1974 has declared to be unenforceable. This would be contrary to the intention of the Act. The only way, therefore, in which Mrs. Dimond could recover damages for the notional cost of hiring a car which she has actually had for free is if your Lordships were willing to create another exception to the rule against double recovery. I can see no basis for doing so. The policy of the Act of 1974 is to penalise 1st Automotive for not entering into a properly executed agreement. A consequence is often to confer a benefit upon the debtor, but that is a consequence rather than the primary purpose. There is no reason of policy why the law should insist that Mrs. Dimond should be able to retain that benefit and make a double recovery rather than that it should reduce the liability of Mr. Lovell's insurers.”6 (emphasis added)

Lord Hobhouse made a careful analysis of the basis for loss of use claims and in particular for the claim for hire and stated that whilst “Each case depends upon its own facts”, “loss of use of the chattel in question is, in principle, a loss for which compensation should be paid”. However, he went on:

one of the relevant principles is that compensation is not paid for an avoided loss. So, if the plaintiff has been able to avoid suffering a particular head of loss by a process which is not too remote (as is insurance), the plaintiff will not be entitled to recover in respect of that avoided loss.”7

It should be noted that the approaches of Lords Hoffmann and Hobhouse are not identical. Lord Hoffmann laid emphasis on the breach of the relevant legislation. In similar terms to his rejection of the unjust enrichment argument, he concluded that where a statute has rendered an agreement unenforceable the common law should not step in and render it enforceable again. But he also relied on the risk of double recovery – if the damages were awarded to the Claimant, she could not be compelled to pay the hire charges to the hire company and so she would recover for her loss twice. Lord Hobhouse’s approach was broader and simply emphasised the principle of compensatory loss coupled with remoteness. This distinction has some practical significance, since Claimants may argue that Lord Hoffmann’s approach only applies to agreements which are rendered unenforceable by reason of breach of an absolute provision of consumer protection legislation and is tied to situations where there is a risk of double recovery. It would not necessarily apply to common law enforceability arguments for example. Defendants may, however, rely on the broader approach taken by Lord Hobhouse.

The result of Dimond was thus that the unenforceability of the hire agreement did bar the Claimant from recovering hire charges.

  1. Attempts to avoid the Rule in Dimond v Lovell

Since the decision in Dimond, Claimants have tried various different approaches in order to avoid the conclusion that hire charges are not recoverable.

The Claimant in Burdis v Livsey offered an undertaking that they would pay over to the hire company whatever was recovered in damages. This was an attempt to remove the risk of double recovery.

The Court of Appeal was unimpressed:

We think the short answer to these submissions is that double recovery is a bar to the analysis and it is not overcome by the undertaking. Even though the contractual obligations of the claimant to pay Helphire for hire and repairs subsist if the credit agreements are unenforceable Helphire have no enforceable right to recover these amounts. The claimant has not paid and cannot be required to pay them so that if he recovers from the defendant there will be double recovery. The undertaking given to the court is truly collateral and could not be said to be the consequence of the defendant’s tort. It is to be noted that the Court of Appeal was not tempted by a similar undertaking offered in Dimond”8

In Bee v Jenson, the Defendant took issue with the fact that the hire charges had been paid direct by the Claimant’s insurer and were not a liability owed by the Claimant himself. The Court of Appeal held that “it does not follow from the fact that Mr Bee was not liable for the hire charges of the replacement car that he cannot recover damages for the deprivation of his use of his so doing he may in legal jargon be recovering general damages rather than special damages, but there is no significance in that”9

This dicta has been relied on by Claimants to argue that hire charges may still be recoverable by way of general damages, even in the face of an unenforceable agreement. At least in the case of consumer protection legislation where unenforceability is absolute, this reliance appears misplaced because it would run contrary to the House of Lords decision in Dimond itself.

In Chen Wei v Cambridge Power and Light Ltd, the Court resolved the conflict between the two decisions in this way:“there is, however, a material difference between recovering general damages for an admitted injury and recovering special damages in respect of an alleged debt that is positively unenforceable under recent policy-based legislation”.10 In that case the Court found that, following Dimond, no general or special damages were recoverable.11 The Court of Appeal reached the same result in Salat v Barutis.12

In Wei, the Claimant tried to find a further way around Dimond by arguing that the court should not make findings about the agreement, because one party to the agreement (the hire company) was not a party to the action. This too was rejected, with the Court holding that “provided an issue involving a third party contract is relevant in the RTA case...there is no reason in principle why the fact that the credit hire company is not actually a party should debar the RTA court from dealing with the issue and making findings...A related point, which I do consider valid, is that the RTA court should exercise a proper caution about making such contractual findings”.13

In relation to the 2008 Cancellation Regulations, Claimants have also sought to argue that they had ‘affirmed’ the contract by bringing the proceedings. The foundation for that argument is a statement by the Advocate General in the European case of Martin v EDP Editores that it is for the consumer to decide whether to maintain a contract which was apparently unenforceable.14 However, in Salat v Barutis the Court of Appeal confirmed that “Whether the Regulations, properly understood, allow a consumer to affirm a contract that would otherwise be unenforceable against him so as to render it enforceable depends on the intention of the legislation.”15 The Court was inclined to find that the Regulations did not permit affirmation, but did not need to decide the issue because “in order for any affirmation to occur it would be necessary at least for the consumer to know that the contract was unenforceable and, in that knowledge, to express in unequivocal terms his willingness to be bound”.16 On the facts, the Claimant could not establish the factual basis for an affirmation, because there was no evidence that he took any positive action after becoming aware that the agreement was not enforceable.

We should also draw attention to one other possible attempt to distinguish Dimond. In McGuffick v Royal Bank of Scotland,17 the High Court accepted that a creditor could continue to report the debtor’s outstanding amount to credit reference agencies, even though the loan agreement was unenforceable pursuant to the Consumer Credit Act (at least in circumstances where the unenforceability of the agreement could be remedied by the creditor). That reasoning was recently approved and extended to cover irredeemably unenforceable agreements by the Court of Appeal in Grace v Black Horse Ltd.18This may allow Claimants to argue that even though an agreement is unenforceable, if they do not pay the hire charges they may still be exposed to adverse consequences which were not known at the time of Dimond. Claimants may potentially argue that they should not be exposed to the risk of these consequences, at the instance of the tortfeasor. This argument has yet to be ruled on.

  1. Subrogation / Already Paid

In more recent cases, the Claimant finessed their argument further. Instead of simply relying on an undertaking to pay the charges, which as we have seen failed in Burdis v Livsey, Claimants began to arrange for the hire charges to be paid by an insurance company and to argue that, having already been paid, no enforceability issue could arise...

Aidan Ellis
Temple Garden Chambers

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