Tuesday 20 March 2007

Tody we finished our look at consumer law by looking at consumer credit. The problem with consumer credit is:

Being persuaded by a man you don’t know
To sign an agreement you haven’t read
To buy something that you don’t want
With money that you haven’t got!

There are many ways to obtain credit, e.g. overdraft, loan, in-store credit cards, bank credit cards or one of the following:

HIRE PURCHASE - a contract of hire which gives the hirer an option to buy the goods at the end of the hire period. This is one way of buying a car, but not all deals involving car are HP.

Whilst the ‘hire period’ is in force the repayments plus interest are made. The hirer cannot sell the goods by right until all of the instalments have been paid. So a third party will not receive good title unless it is sold to an innocent private purchaser (not a trade buyer).

CREDIT SALE - A contract for the sale of goods which simply means that in return for the price the seller promises to transfer to the buyer the property in the goods. The buyer will be entitled to take delivery immediately. The ownership will usually transfer to the buyer at or before the time that he takes the delivery. So if the buyer sells the goods he has good title to pass to the seller.

CONDITIONAL SALE - A contract for sale of goods where the buyer takes possession immediately, but property in those goods does not pass until a condition has been fulfilled. The condition is usually that the buyer pays all of the instalments. So, ownership remains with the seller whilst the buyer has possession. A good title cannot be obtained if the goods are sold prior to this date, except under the rule of the HP Act concerning motor vehicle sales to private individuals.

THE CONSUMER CREDIT ACT 1974

Most consumer credit agreements now come within this Act, designed to provide reasonable protection for consumers. This is achieved in several ways:

§ Regulating the formation, terms and enforcement of credit agreements
§ Anyone engaged in the consumer credit business must be licensed
§ An advertisement for credit must show its true cost
§ Restrictions on door-to-door selling on credit, i.e. salesmen selling double glazing must be licensed in respect of the credit offered
§ Creates criminal offences, e.g. trading without a licence
§ It makes it impossible to contract out of the provisions of the Act

The Act applies to ‘consumer credit agreements’, defined by s8 as:

“credit agreements made between an individual[1] (the ‘debtor’) and any other person (the ‘creditor’) by which the creditor provides the debtor with credit not exceeding £25,000.” During the next two years the higher figure will be abolished.

Credit agreements include:

§ Hire Purchase agreements
§ Conditional Sale agreements
§ Credit Sale agreements
§ Credit Card agreements
§ Loan agreements
§ Bank Overdraft agreements

They are all called ‘regulated agreements’ and must comply with the provisions of the Act and regulations made under it. Not included are hire agreements where the hirer never becomes the owner (TV rental).

The Formation of a Regulated Agreement

It must be IN WRITING, often using a standard form provided by the creditor.

There are pre-contractual disclosure requirements that must be complied with to ensure that the borrower is aware of the nature and full cost of the transaction, he being provided with a copy of the final written agreement. These include information on:

§ Total charge for credit
§ The APR
§ Cash sale price

A full detailed written agreement covering all the terms of the agreement.

Signature of the agreement by the debtor and creditor should only take place when the agreement has been fully completed.

Debtor must receive a copy of the agreement.

A failure to comply means that the creditor cannot enforce the agreement without an enforcement order from the court - usually the County Court.

Extortionate Terms

Barcabe v Edwards [1983] – a loan with an APR of 319% was prima facie extortionate. The court re-opened the agreement and substituted a flat interest rate of 40% - an equivalent APR of 92%!

A Ketley Ltd v Scott [1981] – a bridging loan with an PAR of 57.35% was not extortionate, taking into account the high degree of risk taken by the lender.
Cancellation

High pressure sales patter convinces you to sign something which you know that you shouldn’t. So a door-to-door double glazing salesman at your home, or an agreement that you signed in the Gracechurch Centre following ‘oral representations’ is covered by this. To exercise a right to cancel the debtor must send a written notice to this effect to the creditor within five days of receiving his copy of the agreement completed by the creditor.

The effect is that the transaction is without effect and the debtor is entitled to a return of any deposit or goods traded in part-exchange. In return the debtor must return the goods or make them available for collection. It is applicable to sums over £35.

The consumer protection is roughly the same, with a seven-day cooling-off period. It was enacted following a EU Directive on doorstep selling. Further, the TIMESHARE ACT 1992 provides for a fourteen day cooling-off period for those who sign agreement to purchase timeshares, where one of the parties to the contract is located in the United Kingdom.

Liability of the Creditor

In an HP agreement it is the creditor (usually a finance house) and not the dealer (e.g. car dealership) who will be liable if there is a breach of any of the conditions and warranties implied by the SUPPLY OF GOODS (IMPLIED TERMS) ACT 1973. Attempts to exclude liability for such breaches are void.

Joint Liability in Consumer Credit

In credit sales and conditional sales, liability for breach of contract and misrepresentation is shared between the finance house and the dealer, provided that they have a business link (e.g. A shop accepting Visa cards). The liability applies only to amounts between £100 and £30,000.

Termination of Regulated Consumer Credit Agreements

If a debtor is in breach of the agreement (e.g. fails to pay instalments), then the creditor may wish to terminate the agreement. To do this, under s87 of the 1974 Act, he must first serve a default notice setting out:

§ Amount required to bring payments up to date
§ Time by which payments must be made (minimum 7 days, shortly to become 14 days)
§ The consequence of failure to comply with the notice
§ The provision of the agreement under which the agreement can be terminated
§ The fact that if the breach is remedied the agreement will not be terminated

If the notice is not complied with the creditor can exercise his right to terminate the agreement, with the following consequences:

The creditor may be able to recover possession of the goods, unless it is an HP agreement and the debtor has already paid one third of the total price of the goods. They then become ‘protected’ and a court order is needed. Failure to comply by the creditor is severe:

Recovery of Goods By the Creditor

If an agreement is terminated the creditor is entitled to recover possession of the goods. However:

The creditor cannot, without the permission of the debtor, or an order from the court, enter premises to repossess the property.

If the goods are ‘protected’ then, unless the debtor is prepared to hand them over, a court order is again necessary to repossess them. They are protected when one third of the payments due has been made.

The court can always, when considering a possession order, make a ‘time order’ giving the debtor more time to pay by extending the life of the agreement

The Powers of the Court

The court may make the following orders:

§ TIME ORDER - giving debtor extra time to pay
§ RETURN ORDER - orders debtor to return the goods to the creditor
§ TRANSFER ORDER - allows debtor to return part of the goods and allowing him to keep the other part.

Debtor’s Right of Termination

Section 99 gives a debtor under a regulated hire purchase or conditional sale agreement a statutory right of termination. He should give notice, in writing, of his intention to terminate, usually to the creditor. When he exercises the right he has to return the goods which are not protected. He must also pay:

§ Any loss caused by his failure to take reasonable care of the goods; plus
§ All arrears due; plus
§ A sum sufficient to bring payments up to half the total price.

You should be able to see that this is not a good deal for a debtor. He would be better off agreeing to reschedule his payments.

I later handed out a copy of the will of the late Donald Campbell, which she shall use whilst studying wills and probate. This will begin next week.