Improperly executed Consumer Credit Act agreement - compatibility with the Human Rights Act

Wilson v First County Trust Ltd (No 2) (HL(E)) [2003] 3 WLR 568

In this case, the House of Lords held that section 127(3) of the Consumer Credit Act 1974 (the Act) was not incompatible with the right to a fair trial and the right to the protection of property under the Human Rights Act 1998.

The background to the case is straightforward.

Ms Wilson borrowed 5,000 from First County Trust and pawned her car as security.

The loan remained outstanding and First County threatened to sell the car if the loan was not repaid.

Ms Wilson issued proceedings claiming that the loan was unenforceable because it did not contain all the prescribed terms required of a regulated agreement under the Act and that, additionally, the security was likewise unenforceable.

The Court of Appeal agreed with Ms Wilson.

As a result, Mrs Wilson was entitled to keep the amount of her loan, pay no interest and recover her car.

Not surprisingly, the Court of Appeal was concerned at this outcome and a further hearing was convened to determine whether section 127(3) of the Act was incompatible with the right to a fair trial and the right to the protection of property.

Section 65(1) of the Act provides that an improperly executed regulated agreement is enforceable against a debtor only by an order of the court.

Section 127 of the Act sets out the powers of the court on an application under section 65(1).

Section 127(3) of the Act provides that the court shall not make an enforcement order in a case where there is no document signed by the debtor or no document signed by the debtor which contains all the prescribed terms of the agreement.

The Court of Appeal held that section 127(3) infringed the right to a fair trial and the right to the protection of property and made a declaration of incompatibility.

The effect of a declaration of incompatibility is not to change the validity, enforcement or continuing operation of the offending provision of the statute, but to give the government of the day the opportunity to fast-track legislative amendments so as to bring the statute into line with the European Convention on Human Rights.

In these circumstances, the Secretary of State for Trade and Industry, by now a party to proceedings, appealed against the decision of the Court of Appeal and won in the House of Lords.

One effect of the decision of the House of Lords is that there is no prospect of amending legislation, based on incompatibility with the convention, to aid regulated agreements that are unenforceable owing to the operation of section 127(3) of the Act.

At the same time, the judges indicated that there was no prospect of a claim succeeding for unjust enrichment to recover loans advanced under unenforceable agreements.

The clear message from this case is that great care has to be taken to ensure that the relevant statutory provisions are complied with for a regulated agreement.

To fail to do so is to jeopardise the recovery of any loans or other credit advanced and to render security meaningless.

From a broader perspective, Parliament may wish to consider whether the provisions of section 127(3), even though compatible with the Human Rights Act, ought to remain on the statute book, especially in circumstances where an honest, minor and non-prejudicial mistake can render regulated agreements unenforceable.

By Simon Sugar, Barrister, 36 Bedford Row, London