Financial limits and the Consumer Credit Act 1974

A recent direct access instruction from a client who found himself grappling with the Financial Ombudsman raised some technical but nonetheless interesting and potentially important issues on the financial limits to the joint liability provisions in the Consumer Credit Act 1974.

S.75(1) of the 1974 Act entitles a debtor under a debtor-creditor-supplier agreement who has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, to bring a like claim against the creditor.

This is a very useful section where the supplier goes bust - if payment was made on finance (including a credit card) then the consumer can make a claim against the finance company for the defaults of the supplier. So in my client's case, he had paid for building works on his credit card - the works were defective, and he sought redress from his credit card company.

There are financial limits to what transactions s.75(1) will cover. S.73(3) provides exceptions including at paragraph (b) (as amended by the Consumer Credit (Increase of Monetary Limits) Order 1983 (SI 1983/1878)):

so far as the claim relates to any single item to which the supplier has attached a cash price not exceeding £100 or more than £30,000.

By virtue of s.189(1) of the 1974 Act, unless the context otherwise requires, “cash” includes money in any form. “Any single item”, “attached” and “cash price” are not defined in the Act.

The courts do not appear to have been troubled by s.75(3)(b) in any reported cases. It is, however, a provision that provides fertile scope for argument.

Say I contract for the design, supply and fitting of a new kitchen for a cost of £30,050, the contract sum payable on finance. The kitchen turns out to be defective in the quality of the materials and workmanship, the fitter does a bunk, and I sue the bank that financed the works. Is it outwith s.75(1) or not? The kitchen consists of various goods: an oven, a hob, white goods, units, a sink with associated plumbing, and there are many services that are provided in the course of the works. The most expensive item might be the fancy cooker, at £4,000. The contract might break down the items; it might not. What if the contract price is discounted to £29,000?

These are the sorts of questions which arose in the instructions I received. The approach of the Ombudsman was that the contract (not dissimilar to my kitchen example) was outside s.75(1) because the price for the entirety of the works exceeded £30,000, even though the price paid was then discounted to below £30,000.

In my view that approach was wrong, for several reasons, which I will go on to discuss in this article.

My research also revealed a lacuna in the Act between the domestic financial limit in s.75 of the Act and the higher financial limits imposed as a result of an EU directive in s.75A. None of these issues - so far as I could see - have been canvassed in any court or in any text book.

The interpretation of s.75(3)(b)

It seemed to me that there were two questions of interpretation to resolve.

Firstly, what is the effect of the phrase “any single item”? This raises an interesting issue about s.75A of the Act, and reveals a lacuna.

Secondly, what is meant by “to which the supplier has attached a cash price”?

What is the effect of the phrase “any single item”?

As to the first question, it seemed very clear that a claim could relate to several items for the purposes of s.75(3)(b). This must flow from the wording “so far as the claim relates to any single item”. The paragraph draws a distinction drawn between the totality of the claim on the one hand and the components of what it looks to on the other. The phrases “so far as” and “relates to” means that we are not looking at the breakdown of the claim, but rather the breakdown of the supplies to which it relates. The phrase “single item” disapplies the rule of interpretation found in s.6(c) of the Interpretation Act 1978 that words in the singular include the plural, because here a contrary intention applies: the buttressing of “single” with “item”.

This certainly was the approach taken by Counsel in argument and the Court of Appeal in response in Office of Fair Trading v. Lloyds TSB Bank plc [2006] EWCA Civ 268 at [89-90], where both Counsel and the Court looked at this paragraph in the context of prices attached to single items.

So in my view, if, as a matter of fact, a claim relates to several items, then each such item must considered separately to see if the s.75(3)(b) exemption applies, and it is not possible to aggregate the value of those items and exclude s.75 if the aggregate exceeds £30,000,

Whether something is one or several items is a question of fact. There could be some interesting (and difficult) questions. If I buy a case of 1959 Chateau Mouton-Rothschild Premier Cru Grand Classe Paulliac (containing 12 bottles of that wine) it might cost me £36,000 - so if the case is to be treated a single item, then my claim is outside s.75. But what if I buy 12 bottles of the same wine for £3,000 each, so a total of £36,000? On my analysis, that claim is within s.75 because no single item exceeds £30,000. What if I drove a hard bargain and bought the case for £29,995 plus £10 delivery? Much may depend on the terms of the contract. I will return to this below.

S.75A of the 1974 Act and the lacuna

Whilst I have confidence that my interpretation of s.75(3)(b) is the correct interpretation, the waters are somewhat muddied by 75A(6)(a) of the Act. Initially thought might suggest a counter-interpretation to the one I advance above. I have concluded that it does not (and indeed I am of the view that it supports my interpretation), but I set out my thinking on this rather technical point for the sake of completeness.

S.75A of the 1974 Act was introduced in 2011 as a result of the coming into force of the Consumer Credit Directive (Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC) (“the Directive”).

S.75A makes further provision in relation to creditor liability. Its scope is narrower than s.75 in that it does not apply to credit agreements outside the scope of the Directive, and only to a “linked credit agreement”, defined in s.75A(5) as “a regulated consumer credit agreement which serves exclusively to finance an agreement for the supply of specific goods or the provision of a specific service and where (a) the creditor uses the services of the supplier in connection with the preparation or making of the credit amount or (b) the specific goods or provision of a specific service are explicitly specified in the credit agreement”.

S.75A does not apply where “the cash value of the goods or service is £30,000 or less” (s.75A(6)(a)), or (subject to one irrelevant exception) where “the linked credit agreement is for credit which exceeds £60,260”.

So, in broad terms, s.75A has effect in a £30,000 to £60,260 band.

Why? Because the Directive does not apply to “credit agreements involving a total amount of credit of less than EUR 200 or more than EUR 75,000” (Article 2, para 2(c)).

So, the apparent intention of s.75A is to let s.75 deal with (I use broad language) cases involving up to £30,000 (s.75 covering a range of credit agreements that include “linked credit agreements”) and then above that figure s.75A kicks in, dealing only with linked credit agreements up to a ceiling of £60,260 (the sterling equivalent of EUR 75,000 at the time of enactment).

To effectively implement the Directive, “the cash value of the goods or service is £30,000 or less” in s.75A(6)(a) has to be the same boundary as “so far as the claim relates to any single item to which the supplier has attached a cash price not exceeding £100 or more than £30,000”. If the boundary is different, then there will be lacuna. Avoiding that lacuna is an argument for construing one as being the same boundary as the other, and might go to support the Ombudsman’s apparent finding in my client’s case that an invoice exceeding £30,000 is outwith s.75.

However, even on the most purposive interpretation, there does indeed appear to be a lacuna. I give an example to demonstrate it.

What if I agree to buy 300 bottles of a rather lesser wine than Mouton-Rothschild for £100 a bottle, and I use a linked credit agreement to do so? The wine turns out to be vinegar, the wine merchant has done a runner, and I now wish to sue the finance company. I cannot go under s.75A because the cash value of the goods is £30,000, and so is below the minimum value set by s.75A(6)(b). And I cannot go under s.75, because the claim relates to (300) single items to which the supplier has attached a price that does not exceed £100 (it might be different if I had bought 25 cases for £1,200 a case). Article 15(2) of the Directive required me to have the right to pursue the bank in this situation (the total amount of credit was within the EUR 200-75,000 band) and yet the combination of ss.75 and 75A do not provide me with a remedy.

The problem arises because s.75 of the Act and Article 2, paragraph 2(c) of the Directive are looking at different things. S.75 of the Act is looking at claims insofar as they relate to specific items to which a certain price was attached. But the Directive looks at “credit agreements involving a total amount of credit less than EUR 200 or more than EUR 75,000”.

I do not think the wording of s.75A(6)(a) undermines my interpretation of s.75(3)(b) – rather, upon an examination of the source of s.75A, it becomes apparent that it looks at a different matter (aggregate credit) than s.75(3)(b) (pricing of single items) and therefore it is not surprising that the two boundaries do not meet.

What is meant by “to which the supplier has attached a cash price”?

As to the second question, “cash price” is a difficult phrase given that “cash” includes money in any form by virtue of s.189(1) (unless it be said that the context requires otherwise). On one level, a “cash (including money in any form) price” is the same thing as a “price”. In statutory interpretation there is sometimes said to be a presumption against “surplusage”, under which if one reading of a statute would make words redundant and another would not, the latter is preferred (although too much emphasis can be put on this presumption: see Nourse L.J. in Omar Parks v. Ellington [1992] 1 W.L.R. 1270 at 1273).

What might “cash” or “cash (including money in any form) price” mean in this context if it means anything?

The context here is the Consumer Credit Act. It seems to me that the most likely candidate is that the “cash price” is the price before finance. This was the approach taken by the Court in the course of its discussion in OFT v. Lloyds TSB Bank plc (at [90]). Further support for this interpretation can be found in the Consumer Credit (Disclosure of Information) Regulations 2010 (S.I. 2010 No. 1013), made under the 1974 Act, Regulation 1(2) of which defines “cash price” for the purposes of those Regulations as:

in relation to any goods, services, land or other things means the price or charge at which the goods, services, land or other things may be purchased by, or supplied to, the debtor for cash account being taken of any discount generally available from the dealer or supplier in question;

It would be surprising to me if “cash price” under the 2010 Regulations meant something different than “cash price” under the Act.

Under the 2010 Regulations, pre-credit contract information has to be disclosed by the creditor to the debtor before the agreement is made, including:

(e) in the case of—

(i) credit in the form of deferred payment for specific goods, services or land, or

(ii) a linked credit agreement,

a description of the goods, services or land and the cash price of each and the total cash price,

(f) the rate of interest charged, any conditions applicable to that rate, where available, any reference rate on which that rate is based and any information on any changes to the rate of interest (including the periods that the rate applies, and any conditions or procedure applicable to changing the rate),

(g) where different rates of interest are charged in different circumstances the creditor must provide the information in paragraph (f) in respect of each rate,

(h) the APR and the total amount payable under the agreement illustrated (if not known) by way of a representative example mentioning all the assumptions used in order to calculate that rate and amount,

(i) the amount (expressed as a sum of money), number (if applicable) and frequency of repayments to be made by the debtor and, where appropriate, the order in which repayments will be allocated to different outstanding balances charged at different rates of interest…

(my emphasis)

This further emphasises the point. It would be most curious if a credit agreement said “cash price”, with a figure given, and yet a different formula was used to get to the “cash price” for the purposes of finding out whether joint liability applied under s.75.

What I do not think “cash price” means is price before discount. The cash price for any single item must be the price payable by the customer (excluding any finance). I fail to see any legislative purpose served by using a price neither charged nor paid. It would lead to significant uncertainty if such a price was used: not least because in these days of technology, the retail price often moves frequently. If discounts are to be excluded, what discounts are included? Those volunteered by the retailer? Those insisted upon by the customer? Those negotiated?

I did wonder whether there might be significance in the phrase “to which the supplier has attached”. That suggest a unilateral action and might lend support to an argument it was the “ticket” or “label” price, before discount. But what I think it relates is to the division of cash price and finance price in cases where there is a written finance agreement. There the supplier does attach a cash price, because he is required to do so under the regulations.

Finally, returning to my kitchen example, what if the contract was a lump sum contract where the price for the kitchen was £30,050? Such contracts are known as “entire contracts” - they are rare and require clear words (see Keating on Construction Contracts at [4-005]) the cash price did not exceed £30,000). It seems to me that such a contract, rare that it is, is potentially one where the kitchen becomes a “single item” to which the supplier has attached a cash price in excess of £30,000. There could potentially be a claim relating to the entire kitchen (say, for example, I ordered a brand-name kitchen and got supplied with a fake one) which might fall foul of s.75(3)(b) - although one can see a judge straining to avoid that construction.

Conclusion

A flat rejection of s.75(1) claims where the contract price exceeded £30,000 (which on one reading appeared to be the approach of the Financial Ombudsman) is, in my view, far too broad.

The reality, I suggest, is far more nuanced than that, particularly in cases where the contract is for the supply of goods and services, and where there have been discounts and variations.

Care needs to be taken to consider what the contract provides for - is it an entire contract, or a complex contract? The price the customer actually was contractually bound to pay (excluding finance) becomes important. And finally there needs to be an analysis of which single items the claims relate to.

There is significant scope for debate as to what claims s.75(1) and s.75A might relate to. The £30,000 minimum for s.75A simply does not work, and may at some future point require a reading down by the UK courts (with the added complication of Brexit).

In the meantime my wine-drinking readers might take care to never order wine of less than £100 a bottle and in transactions not exceeding £30,000 in total!