The consequences of a poor credit rating can be severe and it is important that any default registrations with CRAs are accurate.  Accordingly, individuals are increasingly likely to hold lenders to account over any incorrect registration.

In a recent case, Grace v. Black Horse Limited, the Court considers when a default is not rightly a (registerable) default. 

Background

Similarly to the recent Supreme Court decision in Durkin v. DSG Retail Limited, the facts of this case begin with the purchase of a laptop computer under a hire purchase agreement in the late 1990’s.

Following a dispute and his deliberate refusal to make payments under the agreement, Mr Grace was pursued by Black Horse. During the course of proceedings, it was discovered that the hire purchase agreement was irredeemably unenforceable due to the breach of s.63 of the Consumer Credit Act 1974 (the CCA) and the consequences of s.127 (as was in force then). This was because a copy of the agreement was not provided to Mr Grace.

The Issue

The important question for determination was highlighted by Lord Justice Briggs as “the legitimacy of registration as a default with [CRAs] of a non-payment by a debtor (or hirer) of monies contracted to be paid under a regulated but irremediably unenforceable credit agreement, which has not previously been directly addressed in any reported decision”.

It was argued by Black Horse’s counsel that the approach to such matters should follow the decision of Flaux J in the case of McGuffick v. RBS where he held (at para 113) that even where an agreement was unenforceable, this did not prevent a lender registering a default with a CRA. Indeed, this is often a helpful tool in a lenders’ armoury when enforcement is not (immediately) available.

However, Briggs LJ distinguished the present case fromMcGuffick. The present case was concerned with (a) the accuracy of the registration of non-payment under an unenforceable agreement as a “default in payment”; and, more importantly, (b) in McGuffick Flaux J was considering a temporarily unenforceable agreement rather than anirremediably unenforceability one.

Black Horse also argued that as the CRAs computerised systems did not permit an endorsement that the agreement was actually unenforceable it should not be a requirement to make it an accurate registration. Finally, it was put to the Court that it was in the interests of public policy that such non-payment information should be shared with other lenders.

The Court was not persuaded on any of these points.

The Decision

It was held that it was not accurate to describe Mr Grace as a “defaulter” under his agreement where this was irremediably unenforceable without, at least, the unenforceable nature of the debt also being recorded in the same entry. This was therefore found to be a breach of a statutory duty under the Data Protection Act 1998 (namely a breach of the fourth principle – accuracy) and actionable under s.13.

Commentary

There are two distinct outcomes of this case.

Firstly, where the facility to provide an endorsement (alongside the default registration) is unavailable and where an agreement is irremediably unenforceable, lenders should reconsider making entries describing a “default in payment”. Albeit, we recognise that since the CCA was amended in April 2007 that particular class of agreements has been significantly limited.

Secondly, and importantly, there may yet be further consequences to come. As Briggs LJ puts it:

“I recognise that this conclusion may require a re-examination of remediable unenforceability, because I am by no means sure that the same analysis may not equally apply.  Why should the exempt debtor be labelled a defaulter during any limited period during which Parliament had decided that he should not have to pay?  But that question is for another day.”

This raises an important question over the practice of lenders using default registrations with CRAs as an effective tool in the pre-enforcement process.

An examination of a lender’s duties when reporting to CRAs was also considered in the case of Gatt v. Barclays. Here the claim for defamation (where the use of the description “delinquent” was found to be accurate) failed.

Nonetheless, HHJ Maloney QC found, amongst other matters, there is a duty owed by the lender to provide accurate credit references (akin to job references) and, in certain circumstances, this duty would extend to a spouse/business partner of the person subject to the reference.

Conclusion

Individuals are increasingly reliant on a good credit rating to obtain lending at a low rate or even at all. The consequences of a bad credit rating are significant and long lasting. As a result, the scope of claims will be tested and it is possible that the challenges to CRAs’ records and the lenders’ registrations/submissions will increase in the future.

In particular, there are three key points worth highlighting from the above:

  1. A lender should refrain from registration of a default with a CRA where the agreement is irremediably unenforceable as McGuffick does not apply to these cases;
  2. Accuracy is key to any registration with a CRA notwithstanding the constraints of the reporting system; and
  3. There is a significant and wide reaching question still to be determined as to whether a lender is entitled to register a default where an agreement is unenforceable albeit that it may be remediable.

Grace & Anr v. Black Horse Limited [2014] EWCA Civ 1413 
McGuffick v Royal Bank of Scotland [2009] EWHC 2386 (Comm)
Gatt v. Barclays Bank Plc & Williams [2013] EWHC 2 (QB)
Durkin v. DSG Retail Limited [2014] UKSC 21