He Had 99 Problems but a Modem Ain’t One

Nimalan Devaraja discusses the case of the missing modem.

In Durkin (Appellant) v DSG Retail Limited and another (Respondents) (Scotland) [2014] UKSC 21, the UK Supreme Court considered the question as to whether a credit agreement can be rescinded by the debtor where the corresponding supply agreement is validly rescinded. The Supreme Court also considered the duty of care imposed on a bank before it notifies credit reference agencies of a debtor’s default under a financing agreement.
 
THE BEGINNING OF THE END
 
The aptly termed ‘laptop saga’ began on 28 December 1998 when Mr Durkin ventured into PC World in Aberdeen to purchase a laptop with an internal modem (remember, this was back in the dark ages of the internet, before Wi-Fi was available at your local Starbucks).
 
At the store, Mr Durkin spoke to one Mr Taylor, a member of the store’s management, about his requirements. Mr Taylor referred Mr Durkin to a sales assistant who identified a product for Mr Durkin. The sales assistant was unable to confirm whether the laptop met Mr Durkin’s specifications, but nevertheless agreed that Mr Durkin could return the laptop if it did not contain an internal modem. Based on this assurance, Mr Durkin purchased the laptop and entered into a debtor-creditor–supplier agreement (“credit agreement”) with HFC Bank plc (“HFC”) to fund the purchase.
 
Upon arriving home, Mr Durkin found that the laptop did not come with an internal modem. He went to PC World on the following morning to return the laptop and requested that the credit agreement be cancelled. Mr Taylor refused to accept Mr Durkin’s rejection of the laptop and took no steps to cancel the credit agreement.
 
TROUBLE WITH CREDIT
 
Having taken the position that both the supply agreement and credit agreement had been rescinded, Mr Durkin did not pay any money to HFC under the credit agreement. Upon receiving a request for payment, Mr Durkin informed HFC that he had rejected the laptop and had rescinded his contract with PC World and the credit agreement. Mr Durkin also wrote to the managing director of PC World to explain that he had rejected the laptop, that PC World’s manager had refused to refund the deposit and that HFC was now demanding money from him.
 
Unfortunately for Mr Durkin, this did not put an end to his travails. HFC again informed Mr Durkin that he was in arrears of his payments and that if he did not resume payments, they would serve a default notice on him under the Consumer Credit Act 1974 (“Act”). Mr Durkin responded by informing HFC yet again that the supply agreement had been rescinded and that he was not due to pay any sums under the credit agreement.
 
Without any investigation into Mr Durkin’s claim, HFC issued a default notice and intimated to the UK credit reference agencies, Experian Ltd and Equifax Ltd, that Mr Durkin had defaulted in his obligations under the credit agreement. The credit reference agencies recorded the alleged default on their registers which operated to prevent Mr Durkin from opening new accounts with credit card companies and other lending institutions. This caused Mr Durkin immense problems as he had used credit cards to fund his lifestyle and wanted to make use of interest-free credit balance transfers offered by credit card companies to minimise the cost of his borrowings by transferring such balance from one credit card company to another at the end of each interest-free period.
 
THE FIRST BATTLE
 
Infuriated with the actions of PC World and HFC, Mr Durkin made his first foray into the battle field by filing a small claims action against DSG Retail Limited (“DSG”), which operated, among others, PC World. Mr Durkin emerged semi-victorious when PC World returned his £50 deposit in an out-of-court settlement without any admission of liability.
 
However, this did not bring Mr Durkin any closer to resolving his dispute with HFC. Therefore, with the next move of his chess piece, Mr Durkin raised an action in the Aberdeen sheriff court against both DSG and HFC, seeking a declaration that he had validly rescinded both the supply agreement and the credit agreement.
 
Mr Durkin also claimed damages of £250,000.00 from HFC for its negligence in representing to the credit reference agencies that he had defaulted on the credit agreement. His claim for damages was made under three heads of loss, namely (i) damage to his financial credit; (ii) loss from interest charges caused by his inability to exploit the interest-free credit transfer schemes; and (iii) loss caused by his inability to pay a 30% deposit on a house in Spain in October 2003, measured essentially by the difference between the price in 2003 and the enhanced value of that property three years later. 
 
DSG contested Mr Durkin’s claim that he had rescinded the contract of sale but DSG’s defence was brushed aside when factual findings established that DSG had been in material breach of contract, thereby entitling Mr Durkin to rescind the supply agreement.
 
HFC disputed Mr Durkin’s right to rescind the credit agreement and his claim for damages. However, Sheriff Tierney held that section 75 of the Act (which inter alia provides that a supplier and creditor under a debtor-creditor-supplier agreement falling within section 12(b) are jointly and severally to a debtor in respect of any claim against the supplier for misrepresentation or breach of contract) applied. The Sheriff held that Mr Durkin was entitled to rescind, and on the facts, had rescinded both the supply agreement and the credit agreement.
 
Sheriff Tierney went on to award Mr Durkin (i) £8,000.00 for injury to his credit, (ii) £6,880.00 for the additional interest which he had to pay; and (iii) £101,794.00 for the loss of a capital gain arising from his inability to purchase the Spanish property.
 
A BIRD IN THE HAND IS BETTER THAN TWO IN THE BUSH
 
Dismayed at his envisioned riches being slashed to half, Mr Durkin appealed to the Inner House of the Court of Session (“Inner House”) against Sheriff Tierney’s assessment of damages. In retaliation, HFC cross-appealed against the Sheriff’s findings in relation to section 75 of the Act and that HFC had breached its duty of care and had been held responsible for the second and third heads of loss claimed by Mr Durkin.
 
In one swift move, the Inner House struck a double blow to Mr Durkin’s wallet. Not only did Mr Durkin’s appeal on the amount of damages fail, but HFC’s counsel, fully utilising his oratory skills, persuaded the Inner House that section 75 of the Act did not allow Mr Durkin to rescind the credit agreement. The Inner House also accepted HFC’s submission that, absent averments and evidence of the sort of enquiries which a bank could reasonably have been expected to make, Mr Durkin had not shown that HFC had failed in its duty of care.
 
HFC’s counsel also convinced the Inner House that the evidence did not permit Sheriff Tierney to hold that HFC’s breach of duty had caused Mr Durkin losses under the second and third heads of loss. The Inner House therefore amended the Sheriff’s findings of fact to exclude his claims for loss of interest and the loss arising from his inability to purchase the property in Spain. The Inner House granted judgment in favour of HFC.
 
THE BATTLE BEFORE THE FIVE JUDGES
 
In a last throw of the dice, Mr Durkin appealed to the Supreme Court against the decision of the Inner House. The issues before the Supreme Court were (i) whether Mr Durkin had rescinded the credit agreement; (ii) whether HFC was in breach of a duty of care to him; and (iii) whether, if there was a breach of duty, such breach had caused Mr Durkin loss in excess of the £8,000.00 which Sheriff Tierney had awarded for the loss of his credit.
 
The Supreme Court held that the credit agreement was a restricted-use credit agreement under section 12(b) of the Act which is used to finance a transaction between the debtor and a third party supplier.
 
With an early heart-stopper to Mr Durkin’s claim, the Supreme Court agreed with the Inner House’s finding that section 75 of the Act did not give the debtor any right to rescind the credit agreement if he did not have such a right under the general law.
 
However, just when it looked like the last glimmer of hope had died for Mr Durkin, the Supreme Court threw him a lifeline. The Supreme Court found that it was inherent in a credit agreement under section 12(b) of the Act that if the supply transaction which it financed is brought to an end by the debtor’s acceptance of the supplier’s repudiatory breach of contract, the debtor may repay the borrowed funds which he recovers from the supplier. The Supreme Court found that in order to reflect that reality, the law implies a term into such a credit agreement that it is conditional upon the survival of the supply agreement. Therefore, the debtor on rejecting the goods and thereby rescinding the supply agreement for breach of contract may also rescind the credit agreement by invoking this condition. It was on this basis that it was found that Mr Durkin was entitled to rescind the credit agreement.
 
Made of sterner resolve than the Inner House, the Supreme Court was not swayed by the argument by HFC’s counsel that the burden was on Mr Durkin to plead or prove the nature of the enquiries that HFC should have carried out and what the outcome of those enquiries would have been before it could be established that HFC had breached its duty of care.
 
The Supreme Court instead took the view that HFC, knowing of Mr Durkin’s assertion that the credit agreement had been rescinded, was under a duty to investigate that assertion in order reasonably to satisfy itself that the credit agreement remained enforceable before reporting to the credit reference agencies that he was in default. The Supreme Court was of the view that HFC should have contacted DSG first, and having discovered that there was a contested rescission of the supply agreement and an asserted rescission of the credit agreement, should have refrained from intimating a default to the credit reference agencies until the issues were resolved.
 
Instead HFC had, in breach of its duty of care, jumped the gun and notified the credit reference agencies immediately without taking any reasonable steps to ensure that the notification was accurate, despite being able to foresee that registration of a default could damage Mr Durkin’s credit.
 
SHOW ME THE MONEY
 
As HFC had earlier decided not to contest the award of £8,000.00 for injury to Mr Durkin’s credit if it were established that HFC had breached its duty of care, the only issues left to be determined were Mr Durkin’s claims under the second and third heads of loss.
 
To Mr Durkin’s dismay, he failed in his attempt to further pad his wallet. At the Inner House stage, the Court had held that:-
 
(1)     Sheriff Tierney had not established the extent to which Mr Durkin would have made use of the interest-free credit transfer schemes between 2001 and 2005 or the net benefit he would have gained from such use; and
 
(2)     There was no evidence to support Sheriff Tierney’s crucial finding that the additional borrowing incurred by Mr Durkin from the Northern Rock Building Society was caused by the non-availability of the interest-free credit transfer schemes by the credit card companies and had used up funds which otherwise would have been available to pay the deposit on the Spanish property.
 
The Supreme Court found that the above, which were findings of fact made by the First Division, showed that there was no causal link between the adverse credit reference and the second and third heads of loss. As there was no legal error demonstrated, the Supreme Court concluded that it was precluded from going behind the findings of fact by the Inner House. 
 
Although the Supreme Court allowed the appeal and declared that Mr Durkin was entitled to rescind and had validly rescinded the credit agreement, it only awarded damages of £8,000.00 to Mr Durkin as a result of the injury caused to his credit by HFC’s breach of its duty of care.
 
COMMENTARY
 
This writer takes the position that the Supreme Court had reached the right decision. It seems completely unreasonable and commercially impracticable for a credit agreement to remain standing when the underlying supply agreement has been rescinded, particularly when the credit obtained under the credit agreement could only be used to purchase the subject matter of the supply agreement.  
 
It would also seem to be the correct view that the burden must rest on the creditor to investigate any dispute arising from a credit agreement before making statements to the credit reference agencies as the creditor would be in the best position to carry out the investigation to determine whether the default had in fact occurred. In the writer’s view, this is the key point in the Supreme Court’s decision.   
 
Although Mr Durkin’s success in the Supreme Court may seem like a hollow victory to him, his perseverance has clarified the law on section 12(b) of the Consumer Credit Act 1974 and set a benchmark for creditors to follow in the reporting of alleged defaults on financing agreements to credit reference agencies.