Saturday, November 1, 2014

Unenforceable Agreements and Credit Rating Agencies

A striking feature of the credit market over the past decade or more is the growing importance of credit rating: its significance for an applicant in urgent need of credit for his business cannot be overstated. This has given rise to some difficult legal problems: an obvious one is the liability of a credit rating agency (‘CRA’) for negligent entries. Another is whether a CRA is entitled to take into account debts which are unenforceable for want of formality: this can often happen because the creditor has failed to comply with statutory provisions designed to protect certain classes of debtors or provisions relating to writing or execution. The question was considered recently by the Court of Appeal in Grace v Black Horse Ltd.

In 1997, Mr Grace bought his grandson a laptop computer on hire-purchase. Section 63 of the Consumer Credit Act 1974 provides that the creditor must supply a copy of certain agreements, of which this was one, to the debtor. Black Horse failed to comply with this provision since the copy of the hire-purchase agreement (‘HPA’) that it supplied differed from the copy that Mr Grace actually signed. At the time, the consequence of this error was that the agreement was, as the Court of Appeal put it, ‘irremediably unenforceable’, ie not even enforceable with the leave of the court. In short, the HPA was permanently unenforceable against Mr Grace, but the underlying debt was not extinguished. Black Horse—which presumably did not know this at the time—tried to enforce the agreement when Mr Grace fell into arrears and obtained default judgment in the County Court for £700 plus penalties imposed under the contract for delay. This default judgment was registered with CRAs in the United Kingdom. Soon after the unenforceability of the agreement came to light; default judgment was set aside the Black Horse’s claim was dismissed with costs. Black Horse removed the default judgment that it had registered with the CRAs but then made a separate entry claiming that Mr Grace had failed to pay £928: this sum represented the principal amount due under the HPA and the costs Black Horse had been required to pay in the County Court. As a result, Mr Grace could not obtain any banking facilities except a simple cash account for about four months and he brought a claim with respect to these losses.

The central question in the case was this: is a person who fails to pay an unenforceable debt a ‘defaulter’ for the purposes of registration with CRAs? This question arose because the defendant ran a causation argument: that although what it did constituted a breach of statutory duty, it could have legally registered Mr Grace’s name with the CRA for the principal amount of £800 and this would have had exactly the same impact on his credit facilities as the wrong registration did. This argument succeeded at first instance, but not in the Court of Appeal. Briggs LJ, with whose judgment Lord Dyson MR and Beatson LJ agreed, said that this was because of the reason for the unenforceability of the contract. That is, although the underlying debt remains, Parliament, in providing that the agreement that gave rise to the debt is unenforceable, has effectively decided that the debtor ‘need not pay’ during the period when it is unenforceable. Briggs LJ appears to have left open the possibility of allowing the creditor to make an entry with a statement that the debt is unenforceable:

I have not found the choice between these submissions at all easy.  But in the end I have concluded that Mr Brennan is right.  It was not accurate to describe Mr Grace as a defaulter under his hire purchase agreement once a competent court had decided that it was irremediably unenforceable against him… It is common ground that a default registration with a CCA is a stigma, with potentially serious consequences for the consumer’s credit rating.  Yet where Parliament has decided that a class of consumer should not have to pay a debt of that kind, and a court has decided (or the parties have recognised) that a particular consumer is within that class, I consider it very counter-intuitive to think that he can accurately be stigmatised as a defaulter in a semi-public register without, at least, the unenforceable nature of the debt being recorded in the same entry.  For it is invariably the creditor’s default in complying with the CCA that has led to the consumer being regarded by Parliament as not having to pay the debt, and a statutory liberty not to pay is so central to any continued non-payment that the registration of his non-payment as a default is generally inaccurate unless accompanied with a reference to that liberty.

Ultimately, the problem is not an unfamiliar one—the litigation about the recoverability of fees paid to car rental agencies under unenforceable agreements comes to mind (see, eg, Dimond v Lovell)—and it turns on precisely what effect non-compliance with the statute has on the underlying debt. The answer, for example, may be different if the debt is not ‘irremediably unenforceable’ but unenforceable without the leave of the court (see Black Horse at [43]).

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