Deputy District Judge Austin, sitting in the Dartford County Court, recently handed down an important judgment in Kim Patricia Parker v Black Horse Limited v Browne & Sons (Loddon) Limited t/a ESS Scooters , Unreported, 17 December 2010, on a key issue for lenders facing claims by debtors under Section 75(1) of the Consumer Credit Act 1974 (the “CCA 1974”): whether, in the event it successfully opposes a debtor’s claim, it is entitled to be indemnified for its costs (even on the small claims track) from the third party supplier.
Connected Lender Liability
Section 75(1) of the CCA 1974 has been seen by many consumers as a valuable method of consumer protection. It gives the debtor a ‘like claim’ against the creditor where he or she has:
- a regulated agreement under the CCA 1974 falling within Section 12(b) or (c); and
- a claim for breach of contract or misrepresentation against the supplier.
This right therefore covers two popular ways that consumers buy goods: either a loan agreement linked to the supply of goods or a credit card. It does not, however, apply to hire purchase agreements.
By Section 75(2) of the CCA 1974 (and subject to any agreement between the creditor and the supplier), the creditor is entitled to be “indemnified by the supplier for loss suffered by the creditor in satisfying his liability under [Section 75(1)], including costs reasonably incurred ... in defending proceedings instituted by the debtor”.
Mrs Parker went, with her son, to buy a scooter from Browne & Sons (Loddon) Limited t/a ESS Scooters (“ESS”). Mrs Parker applied for a loan with Black Horse Limited (“Black Horse”) for the balance of the purchase price. Black Horse accepted Mrs Parker’s application provided she agreed to use the monies only for buying the scooter. She agreed so Black Horse loaned her the monies subject to a fixed-sum loan agreement (the “Agreement”). This arrangement is fairly typical and meant that the Agreement was subject to Section 75(1) of the CCA 1974.
Shortly after taking delivery, and on 26 April 2009, the Parkers told ESS about a problem with the scooter’s rear wheel. A third party was asked to prepare a report and on 16 July 2009 it noted that all of the complaints seemed “to be unfounded” except for an oil leak, which it thought had been caused by someone removing the panels and pulling the breather pipe off.
Mrs Parker did not agree and issued proceedings against Black Horse for rescission of the Agreement and a return of the monies she had paid under it. She claimed the scooter was of unsatisfactory quality and that she had rejected it. Black Horse defended the claim and, after adding ESS as a Third Party, sought an indemnity from it under Section 75(2) of the CCA 1974.
Mrs Parker’s Claim
The claim was allocated to the small claims track where the Court will not generally order an unsuccessful party to pay the winning party’s costs. After hearing evidence, Deputy District Judge Austin dismissed Mrs Parker’s claim against Black Horse as:
- there was “no evidence that the scooter was ever rejected”; and
- the third party that inspected the scooter had become insolvent and Mrs Parker could not “physically hand it back”.
Both Black Horse and ESS argued that Mrs Parker had behaved unreasonably meaning they were entitled to their costs under CPR 27.14(2)(g). This says, in general terms, that where a party behaves unreasonably then the Court has the discretion to award costs over and above the small claims fixed costs to the ‘innocent’ party. Deputy District Judge Austin rejected this submission and declined to depart from the normal rule on small claims.
Black Horse’s Claim for Costs from ESS
Given the Court’s decision on the claim, Black Horse sought its costs of defending the claim and pursuing the claim for an indemnity against ESS. It argued that these costs were, to use the wording of Section 75(2), “costs reasonably incurred ... in defending proceedings instituted by the debtor” and that the fact CPR 27.14 restricted the recovery of those costs from Mrs Parker did not affect the indemnity provided by an Act of Parliament (as an Act must prevail over the CPR).
By contrast, ESS argued that:
- Because the invoice was between ESS and Mrs Parker’s son, Section 75(1) did not apply as this refers to the “debtor” having a claim against the supplier: the only person who could make the claim was Mrs Parker’s son and he was not the debtor;
- Section 75(2) refers to “such liability”; this meant Section 75(2) was only engaged when a debtor succeeds in a claim: Mrs Parker had not; and
- The effect of requiring ESS to indemnify Black Horse was to “penalise [ESS] for providing a scooter to [Mrs Parker] that has found to be of satisfactory quality”.
After hearing these submissions, Deputy District Judge Austin decided that:
- The key question was the meaning of the word “liability” in Section 75(2) and, in particular, whether this just gives an indemnity where a debtor succeeds in her claim;
- Black Horse’s argument that its costs were “costs reasonably incurred by [Black Horse] in defending proceedings instituted by” Mrs Parker was “unimpeachable”;
- The argument that, despite the restriction on costs under CPR 27.14, an Act of Parliament giving an indemnity for those costs must prevail was accepted “as valid”;
- The effect of Section 75(2) was that “liability” refers to “the creditor’s inclusion as a party to the action” as it would otherwise lead to the odd result that only an unsuccessful creditor could obtain an indemnity under Section 75(2);
- There was abundant evidence to show that Mrs Parker was a party to the transaction because she paid part of the deposit and entered into the Agreement.
He then went on to order ESS to pay Black Horse’s costs on the indemnity basis.
Creditors are often put into a difficult position when Section 75(1) applies: it is faced with defending a claim where it often has nothing more than basic evidence of the transaction. Creditors are, of course, entitled to rely upon any defence that the supplier may have but, in our experience, trying to establish that defence and whether, for example, any standard terms of business were incorporated into the supply is often very difficult. Section 75(2) of the CCA 1974 was introduced to provide such a creditor with a right (subject to any agreement between the supplier and the creditor) to be indemnified. The Office of Fair Trading made it clear in its report on ‘Equal Liability – Section 75 of the Consumer Credit Act 1974’ that “the credit grantor is entitled to be reimbursed for any loss he suffers from the result of a claim. This includes all costs reasonably incurred in defending the claim, and the cost of meeting … the claim [if it] is upheld”.
We fully endorse the Court’s decision, which follows an earlier County Court decision of HFC Bank plc v JMC Holidays  CLY 128 where His Honour Judge O’Brien decided that a creditor was entitled to be indemnified for its costs of defending a small claim. In these types of cases, the creditor has no control over the goods or services, no involvement in the sale process and often no idea about the terms of the sale. It must be right, in our view, that whenever a creditor gets dragged into these types of disputes, it must receive a full indemnity (regardless of the outcome) from the supplier. Suppliers facing such claims should therefore quickly look, in appropriate cases, to resolve them: if they fail to do so, they will have to foot the creditor’s legal bill regardless of the outcome.