The Court of Appeal handed down the Judgment in the case of Grace & Anor v Blackhorse on 30th October 2014. This judgment could easily be overlooked, as im sure the banking world will be hoping, however this case has given clear guidance to the banking industry on an important issue- Defaults recorded on credit files.
Part of the Grace case involved an issue with Mr Graces credit file. Mr Grace had purchased a laptop using finance provided by Chartered Trust (Blackhorses predecessor), there were a number of issues with the agreement and the end result was Chartered Trust and Mr Grace ended up in Chester County Court before District Judge Newman.
The Judge ruled that the credit agreement was “irredeemably unenforceable” and therefore Mr Grace did not have to pay. As a result of the Court ruling Mr Grace was released from his liability.
This is often the case with agreements where lenders unlawfully repossess protected goods under s90 & 91 Consumer Credit Act 1974 or for example where for agreements executed before 6th April 2007, the creditor failed to include the prescribed terms within the agreement or failed to give cancellation rights where the agreement was cancellable etc.
So, Mr Grace stopped payments, as per the Courts order, and carried on with his life. However, unbeknown to Mr Grace, Blackhorse recorded on his credit file that Mr Grace had defaulted under his agreement. In addition, and somewhat bizarrely, Blackhorse also added to the debt the costs of the failed action even though there was no mandate for them to do so. This inflated the debt which was recorded on Mr Graces credit file.
When Mr Grace became aware of the default, he asked the lender to remove it but would not. It seems that they sought comfort from the case of McGuffick v RBS and the default was not initially removed.
Accordingly Mr Grace commenced proceedings for damages as a result of the reporting of the default on his credit file.
The claim came before HHJ Halbert, however, relying on McGuffick the Judge found that Mr Graces claim failed because Mr Grace could not establish causation. In essence HHJ Halbert ruled that Mcguffick allowed creditors to report defaults on consumers credit files. We however disagreed.
Mr Grace contacted me after permission to appeal had been refused on the papers by Lady Justice Arden, so the grounds of appeal were redrafted, the expert assistance of Mr Thomas Brennan was drafted in and we succeeded in securing permission to appeal at an oral hearing before Lord Justice Christopher Clarke in October 2013.
The appeal was heard on 6th October 2014 before Lord Dyson MR, Briggs LJ and Beatson LJ.
It was our view that the recording of a default in circumstances where the underlying agreement was unenforceable was not accurate and therefore contrary to principle 4 of the Data Protection Act 1998 especially in circumstances where, to quote Lord Hoffman in Dimond v Lovell Parliament intended that if a consumer credit agreement was improperly executed, then subject to the enforcement powers of the court, the debtor should not have to pay. If the Court orders the debtor does not have to pay because the creditor has breached a consumer protection statute then why should the bank be able to label the debtor as a “defaulter” after all thats tarring all people with the same brush!! it would mean in real terms that a consumer who has been treated appallingly by the lender and seeks to enforce his or her rights through the Courts would be dumped in the same category as someone who simply borrowed money with the express intention of never paying the money back. There is a world of difference between the two.
So, we argued these points before the Court of Appeal, and as can be seen from Paragraphs 23 through to 44, the Court agreed.
The banks challenge is set out at paragraphs 36 to 40 which i have quoted below.
- For Black Horse Miss Urell countered as follows. First, if it was the case (as I have concluded that it was) that the underlying agreement remained lawful and in force, then it necessarily followed that arrears under it could form the basis of an accurate default registration, just as had happened in the McGuffick case. Looked at from the viewpoint of the agreement, the arrears did involve a default, even if the creditor could do nothing to enforce payment. Secondly, and as was accepted by Flaux J in the McGuffick case (at paragraph 101), the CRAs’ computerised registration systems do not accommodate endorsements about unenforceability. Thirdly, Mr Grace had defaulted under his hire purchase agreement long before it was declared unenforceable on technical grounds, and other lenders had a legitimate interest in being able to find that out, in furtherance of the public policy favouring responsible lending. While acknowledging that a default registration with a CRA was always a stigma, she said that it was not inappropriate where the debtor was only immune from enforcement on technical grounds. Finally she submitted that unenforceability under the CCA was a specific statutory sanction which did not in terms include a prohibition against default registration, and lenders should not be made to suffer that added penalty by a sidewind.
- I will take those submissions in turn. As to the first, I recognise that my conclusion that the judge was right to equate the consequences of irremediable unenforceability with those described by Flaux J as flowing from remediable unenforceability is a large step towards a conclusion that there was therefore no breach of the DPA arising from the default registration. But that consequence is not inevitable. Flaux J was not asked to address an alleged breach of the fourth principle (i.e. because the registration of the debtor as a defaulter was inaccurate). It may have been common ground that, if the debt survived, then Mr McGuffick was a defaulter in relation to it, even though payment could not be enforced. Equally, his conclusion that the registration was fair and lawful (for the purposes of the first principle) may have involved an unspoken conclusion that it was accurate.
- As for the second submission, I have not been persuaded that the shortcomings in the CRAs’ registration systems can excuse a registration which is in substance inaccurate because of an omission (namely that the ‘default’ related to an unenforceable agreement). If an accurate registration cannot be accommodated, then the answer is for the industry to change its registration systems, and in the meantime for inaccurate registrations not to be made.
- Thirdly, there is nothing in Miss Urell’s point that Mr Grace defaulted before his agreement had been declared unenforceable (and that on the court’s own motion). The default registration was not made until after the judgment declaring unenforceability, and asserted that he continued after that judgment to be a defaulter. Nor is there merit in the submission that Mr Grace had escaped enforcement on technical grounds. The requirements of the CCA for which unenforceability is the sanction are part of a structure laid down by Parliament for the protection of consumers and the regulation of the consumer credit market. Although they may be technical in their application, and the consequences for non-compliance sometimes draconian, they are not mere technicalities in the sense that Miss Urell described them. In the present case for example the discrepancies in the copy agreement sent to Mr Grace were about the interest rate and the APR under the hire purchase agreement. There is nothing merely technical in the statutory requirement that these matters be clearly and accurately set out for the consumer.
- Finally, although there is some force in the submission that the sanction of unenforceability should not be extended by a sidewind, it fails to address the real question, which arises under the DPA, not the CCA. The real question is whether it was accurate to describe Mr Grace as a defaulter, once his agreement has been declared unenforceable.
As can be seen by the last paragraph above, unlike McGuffick, the question for the Court to consider was not whether the default amounted to enforcement under the CCA, this was squarely a case to be determined under the data protection act and as the Court pointed out at para 40, the real question is whether it was accurate to describe Mr Grace as a “Defaulter”.
The Court unanimously found that it was not accurate to report to Mr Graces credit file that he was a Defaulter.
It was also confirmed that the fact the CRA system couldnt register anything other than the “default” was not a Defence that the banks could hide behind.The Court made this clear at para 38 of the Judgment. I have not been persuaded that the shortcomings in the CRAs’ registration systems can excuse a registration which is in substance inaccurate because of an omission (namely that the ‘default’ related to an unenforceable agreement). If an accurate registration cannot be accommodated, then the answer is for the industry to change its registration systems, and in the meantime for inaccurate registrations not to be made
The clear message coming out of this case is that where a credit agreement is found to be unenforceable or where the parties accept the agreement is unenforceable, the creditor should not seek to argue that the debtor is a defaulter without clarifying that the agreement is unenforceable and if the system cannot support such recording then the Default should not be registered at all.
Clearly the banking industry needs to carefully consider this ruling, if they fail to heed the warning from the Court of Appeal then there will no doubt be damages claims under s13 Data Protection Act 1998!!