A creditworthy decision

Philip Havers QC and William Hibbert discuss the implications of legislative change to section 127(3) of the Consumer Credit Act 1974 as called for by the judiciary in Wilson v First County Trust Ltd to ensure compatibility with the European Convention on Human RightsIn Wilson v First County Trust Ltd (2 May 2001) the Court of Appeal made a declaration of incompatibility under section 4(1) of the Human Rights Act 1998 in relation to a section of the Consumer Credit Act 1974 which had left a pawnbroker unable either to recover the 5,000 it had lent or to enforce the pawn of the BMW it had taken as security.

The 1974 Act requires consumer credit agreements to comply with the formalities in the Consumer Credit (Agreements) Regulations 1983.

If they do not, section 65 of the 1974 Act provides that a court order is required before they can be enforced.

The court then has a discretion, taking into account the lender's blameworthiness and any prejudice to the borrower, in deciding whether to make an order and on what terms.

However, if the borrower has not put his signature to a document containing certain 'prescribed terms' identified in the 1983 regulations, section 127(3) of the 1974 Act prohibits the court from making an enforcement order.

Errors in drawing up a credit agreement can arise that cause no prejudice to the borrower, but section 127(3) means that the loan (and in consequence any security under it) becomes wholly unenforcable.

The original appealWhen deciding the original appeal in favour of the borrower ([2001] 2 WLR 302), this removal of the court's discretion to allow the lender any recovery struck the Court of Appeal as potentially incompatible with the pawnbroker's rights under article 6(1) of and article 1 of the first protocol to the European Convention on Human Rights.

Article 6(1) guarantees the right to a fair hearing which the European Court of Human Rights long ago held to include the right of access to a court, and article 1 of the first protocol guarantees the right to the peaceful enjoyment of one's possessions and the right not to be deprived of one's possessions except in the public interest.

Therefore, the court directed that notice should be given to the crown under section 5 of the 1998 Act and adjourned the appeal for further hearing.

As expected, the Secretary of State for the Department of Trade and Industry, the sponsoring government department for the 1974 Act, was represented at the adjourned hearing to argue against any such incompatibility.Court of Appeal judgmentThe court held, first, that the 1998 Act applied to agreements made before it came into force on 2 October 2000 since the relevant event, as far as whether the convention rights had been infringed, was not the date of the original agreement but the making of an order on the appeal.This was so because section 6 of the 1998 Act requires the court itself to act in a way which is compatible with convention rights and thus the court must have regard to the facts as they are at the time when it makes its order.The secretary of state then argued that the 1998 Act could have no application where the effect of existing legislation was to prevent any effective rights from ever coming into existence.

The agreement was, it was said, unenforcable as soon as it was made, and thus the pawnbroker never acquired any effective right to recover the debt or enforce the security nor any possession of value because at the moment that they were in principle created under the agreement, the 1974 Act rendered them valueless.This argument was rejected.

The court drew attention to the structure of the 1974 Act, by which rights under improperly executed agreements were recognised as existing, but which simply restricted the court's power to make an enforcement order.

It was that restriction on the court's power that engaged the 1998 Act.

Accordingly, it was necessary to examine whether the restriction pursued a legitimate aim and was proportionate.

But, interestingly, when the parliamentary record was examined to find out parliament's purpose in removing the court's discretion so far as the prescribed terms were concerned, it was apparent that no coherent explanation was to be found, nor was one provided at the hearing by the department.

In contrast, good reasons were set out in the parliamentary material as to why the court should have discretionary control.

In the absence of any explanation, the court could discern no good policy reason to justify the distinction and found that the restriction was neither legitimate nor proportionate.

In other words, the restriction was incompatible with the convention rights.

It followed that the question arose as to whether it was possible to read and give effect to the relevant provisions of the 1974 Act in a way compatible with the convention rights.

The court concluded that it was not.This left the question whether, as a matter of discretion, a declaration of incompatibility should be made and the court concluded that it should.

As the court pointed out, such a declaration provides a basis under the 1998 Act for a minister of the Crown to consider whether there are compelling reasons to make amendments to the existing legislation by remedial order for the purpose of removing the incompatibility.

Permission to appeal was refused.

Immediate effectWhat is the immediate effect for lenders? Section 4(6)(a) of the 1998 Act provides that a declaration of incompatibility 'does not affect the validity, continuing operation or enforcement of the provision in respect of which it is given.' Therefore, the courts will have to continue to apply section 127(3) of the 1974 Act for the time being.

All that has happened is that a strong judicial message has been sent to the department and to parliament that legislative change is necessary.The 1974 Act is currently under review by the DTI and the Office of Fair Trading and the necessary changes required to section 127(3) will no doubt form part of that review.

While most consumers are not aware of the technical traps that can render their agreements unenforcable, lenders have got used to living with the risks.

Perhaps the other immediate effect on lenders will be to increase the value for securitisation and acquisition purposes of any loan book which may have question marks over it.Although the declaration expressly referred to credit agreements, there seems no reason to distinguish consumer hire agreements and no doubt a similar declaration will follow in relation to hire.

More significantly, it is unclear whether the same arguments necessarily apply to section 127(4) of the 1974 Act, where a failure to give notice of cancellation rights has the same effect of preventing the court making an enforcement order.This provision has a longer legislative history, being derived from the old Hire Purchase Acts, and it is arguably clearer why parliament intended to penalise lenders who failed to reproduce the necessary notices of these rights in their agreements.A significant issue that was left unresolved by the Court of Appeal was whether a restitutionary claim could be advanced to recover monies rendered irrecoverable by the provisions of the 1974 Act.

In Dimond v Lovell [2000] 2 All ER 897 (the case which put the brakes on the credit-hire business by holding many such agreements unenforcable under the 1974 Act), the House of Lords held that to treat the consumer as unjustly enriched was inconsistent with the intention of the 1974 Act whose provisions expressly contemplated such a consequence.However, if, as the Court of Appeal has held, it is contrary to the 1998 Act for parliament to provide that debtors escape all liability and creditors lose all remedies even in the case of a minor mistake as a result of which no prejudice was suffered by the debtor, why should the common law not intervene? No doubt that this and other points will give fuel to the ongoing credit-hire debate.

Philip Havers QC practises from One Crown Office Row Chambers and barrister William Hibbert practises from 1 Gough Square