Section 56 of the Consumer Credit Act 1974 is a topic which has been out of the headlines for a little while following the high profile case of Forthright Finance v Ingate. However, in this case the court looked at the question of whether s.56 applies to bind a finance company in a situation where the finance company had no direct contact with the supplying dealership and, importantly, where the transaction was structured such that the vehicle was sold by the dealership to the broker before being sold on to the finance company.
Mr Langford went to Castleford Trade Car Centre and decided to buy a Lotus Esprit. Mr Langford paid a cash deposit of £3,000 and as part of the transaction agreed to part-exchange a BMW Z3 upon which there was outstanding finance to Black Horse. It was agreed as between Mr Langford and Castleford that Castleford would discharge the existing hire purchase agreement between Mr Langford and Black Horse in relation to BMW, the balance outstanding being £7,548.37.
It is important to note that when the deal was agreed, no mention was made of any specific finance company which would finance the acquisition of the Lotus. Mr Langford did not find out that Black Horse would be financing the purchase of the Lotus until he went to Castleford’s premises to sign the finance agreement. It was purely coincidence that Black Horse was the common finance company. Upon agreeing the deal with Mr Langford, Castleford approached a firm of credit brokers called North Riding Finance (Poole) Limited to select a finance company to fund the purchase of the Lotus. North Riding had a written agreement with Black Horse in which it agreed to comply with all representations given by dealers (such as Castleford). It further undertook to adhere that dealers would settle sums due under hire purchase agreements in respect of cars taken in part-exchange. North Riding chose to place the business with Black Horse.
Castleford sold the Lotus to North Riding. The following day, North Riding sold it to Black Horse for the same price, and Black Horse hired the vehicle to Mr Langford on the terms set out in the hire purchase agreement.
It was accepted that North Riding and Black Horse had no prior knowledge of any promise on the part of Castleford to pay off the finance on the BMW. Mr Langford knew nothing at the time of negotiating to buy the Lotus of the involvement of Black Horse and indeed, at the time of sale, of its sale from Castleford to North Riding and then North Riding to Black Horse.
As sadly often happens, Castleford did not pay off the balance owing on the BMW to Black Horse and, upon receipt of the finance, went into an insolvency procedure. Accordingly, Black Horse claimed the balance outstanding on the BMW hire purchase agreement from Mr Langford which then stood at £7,468.94. Mr Langford denied liability on the ground that Castleford promised to discharge that balance and, by virtue of s.56, Castleford’s promise was deemed to have been made as agent for Black Horse.
It was Black Horse’s case that North Riding was the credit broker for the purposes of s.56 because the Lotus was sold to Black Horse by North Riding, not Castleford. Accordingly, there were no ‘antecedent negotiations’ between North Riding and Mr Langford.
What the court said
The judge at first instance said that this argument was misconceived. The purpose of the Act was to protect consumers and that it would make a serious inroad into that protection if the sale by the dealer to an intermediary broker rendered s.56 of no assistance. Being therefore inclined to find in favour of Mr Langford, the judge said that once the customer has been introduced by the dealer to the finance company, the provisions of s.56 then applied to all that dealer’s representations in the ‘antecedent’ negotiations’. The judge also stated that s.56 is not based upon the law of agency at common law. On appeal before the Honourable Mr Justice Gray sitting at Leeds District Registry, it was agreed that questions of agency at common law do not affect whether s.56 applies. All parties were in agreement that both North Riding and Castleford were ‘creditbrokers’ within the meaning given to them in the Consumer Credit Act, and it was Black Horse’s case that in the ‘antecedent negotiations’ Castleford was not acting as its credit brokers . The wording in section 56(1)(b) confined antecedent negotiations to those conducted in relation to goods sold or proposed to be sold by the credit broker to the creditor. Black Horse said that the credit broker which sold the Lotus to Black Horse was North Riding and in these circumstances s.56 had no application. In his judgment, the judge bore in mind that the purpose of the section was to protect consumers such as Mr Langford and appeared to find in favour of Black Horse with some reluctance.
However he agreed that the credit broker who conducted the antecedent negotiations was Castleford, but it was North Riding who sold the Lotus to Black Horse. Section 56(1)(b) applies only to the credit broker who actually sells or proposes to sell the goods to the finance company.
Mr Justice Gray did accept that for some purposes Castleford could be taken to be agents of North Riding and thus deemed to be sub-agents of Black Horse, for example, for the purpose of completing the necessary documentation. But that is a far cry from saying that, at an earlier stage, Castleford was already acting as agent for Black Horse. Judgment was therefore given to Black Horse for the sum claimed of £7,468.94.
This is a useful case for finance companies in that it confirms that they will not be caught by s.56 where the vehicle has been purchased by them from an intermediary credit broker as opposed to from the supplying dealer direct. Despite the court’s apparent desire to find in favour of the consumer, the terms of s.56 make it clear that where a transaction is structured in this way the finance company is not bound by any representations by a supplying dealer to pay off existing finance on part-exchanged vehicles.
Thus the case does indeed make some serious inroads into the protection intended for consumers in s.56. Is this what Parliament intended? Probably not. The loophole is one which may be closed by amendment in due course, but in the meantime it is there to be relied upon by finance companies and is worthy of consideration when structuring transactions.