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Factual Background

On the 28 December 1998, Mr Durkin purchased a laptop from PC World (DSG Retail Ltd) for £1,499. Mr Durkin wanted a laptop that specifically contained an internal modem. Company policy prohibited Mr Durkin from removing the laptop from its packaging to determine whether it had an internal modem. The sales assistant agreed to let Mr Durkin purchase the laptop on the basis that if it didn’t contain an internal modem he could return the laptop. Mr Durkin entered a debtor-creditor-supplier agreement with HFC Bank Plc  under the Consumer Credit Act 1974, s 12(b), to fund the purchase for the entire amount of £1,499. A deposit of £50 was paid at the time of purchase.

Upon discovering that the laptop did not have an internal modem, Mr Durkin returned to PC World the next day and requested a refund of his deposit and the cancellation of the credit agreement. PC World refused to accept the rejection of goods or take steps to cancel the credit agreement. Mr Durkin refused to make any further payments and informed HFC that he had rescinded both the purchase and credit agreement. In due course, Mr Durkin began to receive demands for payment from HFC who also issued a default notice against him which was subsequently registered with various credit reference agencies.

Appellate History

In 2004, Mr Durkin sought relief in the Aberdeen Sheriff Court against DSG and HFC stating that he had validly rescinded the contract of sale and credit agreement. Mr Durkin claimed damages from HFC under the following three heads of loss as compensation for false representations made to credit agencies:

  • damage to his financial credit rating;
  • loss from interest charges caused by his inability to exploit the offers of 0% credit; and
  • loss caused by his inability to put down a deposit on a house in Spain.

Sheriff Tierney followed Sherriff Principal Reid’s opinion in United Dominions Trust Ltd v Tylor 1980 SLT (Sh Ct) 28 and held that s 75(1) of the 1974 Act entitled Mr Durkin to rescind both the sale contract and credit agreement.

Sheriff Tierney awarded Mr Durkin:

  • £8,000 for injury to his credit rating;
  • £6,880 for the extra interest which he had to pay; and
  • £101, 794 for the loss of capital gain arising from his inability to purchase the Spanish property.

Sherriff Tierney agreed that HFC was in breach of its duty of care to Mr Durkin.

Mr Durkin appealed to the Court of Session against the assessment of damages. HFC cross appealed against the Sheriff’s findings that (i) s 75(1) of the 1974 Act enabled Mr Durkin to rescind the credit agreement; (ii) that HFC was in breach of its duty of care; and (iii) that HFC’s breach of duty had caused the second and third heads of loss. Mr Durkin’s appeal was refused and it was found that s 75(1) of the 1974 Act did not permit Mr Durkin to rescind the credit agreement.

Furthermore, the Court of Session found that HFC was not in breach its duty of care to Mr Durkin nor had it caused loss under the second and third heads of claim. Accordingly, Mr Durkin brought an appeal to the Supreme Court.

The Supreme Court

The Supreme Court agreed with the Court of Session that s 75(1) of the 1974 Act did not confer any right on Mr Durkin to rescind the credit agreement. The leading judgment was given by Lord Hodge, and it addressed the following five points:

  • S 75(1) provides that a debtor shall have a “like claim” against the creditor who along with the creditor shall be jointly and severally liable to the debtor. Therefore, a debtor who has a right of action against a supplier for misrepresentation or breach of contract for supply can sue the creditor for that misrepresentation of breach of the supply contract;
  • The creditor and supplier should be jointly and severally liable to the debtor;
  • Subject to s 75(2) of the 1974 Act, the creditor is entitled to an indemnity from the supplier as he can be sued for matters that are outside his control;
  • The Judge’s views were consistent with the Report of the Committee on Consumer Credit in 1971 which ultimately led to the 1974 Act as stated in the judgment:

“We therefore recommend that where the price payable under a consumer sale agreement is advanced wholly or in part by a connected lender that lender should be liable for misrepresentation relating to the goods made by the seller in the course of antecedent negotiations, and for defects in title, fitness and quality of the goods”

and;

  • There is no right to rescind a finance agreement where the debtor can use borrowed funds to obtain substitute or other goods and services if such use does not contravene the credit agreement.

However the question remained: how could a debtor obtain an effective remedy if a contract of sale was rescinded but the credit agreement was not?

Conclusion

The court agreed that pursuant to s 12(b) of the 1974 Act, a fundamental feature of a debtor-creditor-supplier agreement allows for a supply transaction to be brought to an end by the debtor’s acceptance of the supplier’s repudiator breach of contract, the debtor is then under an obligation to repay the borrowed funds which he recovered from the supplier.

The court addressed the reality of such arrangements by suggesting that the law implies a term whereby the survival of a credit agreement is conditional upon the survival of the supply agreement. By rejecting the goods and thereby rescinding the supply agreement Mr Durkin could also rescind the credit agreement by invoking the implied condition.

Furthermore the court found that HFC were under a delictual duty to investigate whether a supply agreement had been rescinded and they should not have intimated a default to the various credit agencies without having investigated the matter first.

The award of £8,000 for damage to credit was upheld, but the court rejected Mr Durkin’s claims for damages in respect of the extra interest paid and for loss of capital gain on the Spanish property, on the grounds that the court was only able to assess issues of law and could not overturn findings of fact.