Durkin v DSG Retail Ltd & Anor [2014] UKSC 21

Mr Durkin bought a laptop from PC World funded by an HFC credit agreement, but rejected it the next day. HFC recorded him as in default, damaging his credit. The Supreme Court held he had validly rescinded the credit agreement and awarded £8,000 damages.

Facts

On 28 December 1998, Mr Durkin purchased a laptop computer from PC World (DSG Retail Ltd) in Aberdeen for £1,499, paying a £50 deposit and financing the balance of £1,449 through a debtor-creditor-supplier agreement with HFC Bank plc under section 12(b) of the Consumer Credit Act 1974. He had specified that he required a laptop with an inbuilt modem, and the sales assistant agreed he could return the product if it lacked one. The next day, on discovering there was no internal modem, Mr Durkin returned the computer and sought cancellation of both agreements. PC World refused to accept rejection. HFC, without making any enquiries, treated Mr Durkin as in default and reported this to Experian and Equifax, whose registers reflected the default until around 2005-2006, impairing Mr Durkin’s ability to obtain credit.

Mr Durkin recovered his deposit from DSG in an out-of-court settlement, then raised proceedings in Aberdeen Sheriff Court in 2004 seeking declarator that he had rescinded both contracts and damages of £250,000 against HFC. The sheriff, following United Dominions Trust Ltd v Taylor 1980 SLT (Sh Ct) 28, held that section 75 permitted rescission of the credit agreement and awarded damages of £8,000 (injury to credit), £6,880 (extra interest), and £101,794 (loss of capital gain on a Spanish property). The First Division reversed, holding section 75 did not permit rescission, and that Mr Durkin had failed to prove breach of duty or causation.

Issues

The Supreme Court considered: (i) whether Mr Durkin had validly rescinded the credit agreement; (ii) whether HFC was in breach of its duty of care in reporting default to credit reference agencies; and (iii) whether any breach caused loss beyond the £8,000 already awarded.

Arguments

Mr Smith QC for the appellant contended that section 75 of the 1974 Act entitled Mr Durkin to rescind the credit agreement following rescission of the sale contract. Mr Clark QC for HFC submitted that section 75 gave the debtor a ‘like claim’ against the creditor for misrepresentation or breach of contract but did not confer a right of rescission of the credit agreement itself; the debtor’s remedy lay in damages, set-off or compensation. HFC further submitted that Mr Durkin had failed to plead or prove the nature of the enquiries HFC ought to have made or their outcome.

Judgment

Section 75 and rescission

Lord Hodge (with whom Lady Hale, Lord Wilson, Lord Sumption and Lord Reed agreed) held that the First Division was correct that section 75(1) does not itself confer a right to rescind the credit agreement. The provision creates concurrent primary liability of the creditor for the supplier’s misrepresentation or breach, supported by joint and several liability and the creditor’s indemnity from the supplier under section 75(2). This construction reflected the ordinary meaning of ‘like claim’, was consistent with the Crowther Committee’s recommendation (Cmnd 4596, para 6.6.28), and made sense in the context of unrestricted-use section 12(c) agreements where the debtor might use borrowed funds for substitute purchases.

Implied condition at common law

However, Lord Hodge held that a restricted-use debtor-creditor-supplier agreement under section 12(b), tied to a specific supply transaction, contains an implied term that it is conditional upon the survival of the supply agreement. Where the supply transaction is brought to an end by the debtor’s acceptance of the supplier’s repudiatory breach, the debtor must repay borrowed funds recovered from the supplier and has no right to retain them for other purposes. Both debtor and creditor may accordingly rescind the credit agreement. This analysis avoids the complex remedial routes (unjustified enrichment, damages, Scots compensation or English equitable set-off, referencing Henderson & Co Ltd v Turnbull & Co 1909 SC 510 and Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927) which would otherwise be required, and is consistent with the policy of the 1974 Act. The reformulation did not come too late for Mr Durkin, whose consistent position had been that both agreements were rescinded.

Notice and the delictual claim

By virtue of section 102(1) of the 1974 Act, DSG was deemed HFC’s agent for receipt of written notice of rescission, satisfied by Mr Durkin’s letter of 8 March 1999. In any event, HFC had received direct notice by telephone. On the delictual claim, Lord Hodge held HFC breached its duty of care by intimating default to credit reference agencies without making any enquiries into Mr Durkin’s asserted rescission. Knowing rescission was contested, HFC should either have said nothing or, if reporting, taken reasonable care to ensure accuracy (citing Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465). HFC could have sued to enforce the credit agreement, or awaited proceedings by Mr Durkin, being entitled to indemnity under section 75(2). Applying McWilliams v Sir William Arrol & Co 1962 SC (HL) 70, had enquiries been made, HFC would have found the position contested and unresolved and should have refrained from reporting default.

Quantum

The Supreme Court could not disturb the First Division’s amended findings of fact under section 32(5) of the Court of Session Act 1988 absent legal error. The findings excluded causation for the interest-related losses and the Spanish property capital gain claim. Damages were confined to £8,000 for injury to credit.

Implications

The decision clarifies that section 75 of the Consumer Credit Act 1974 does not itself entitle a debtor to rescind a credit agreement on rescission of the underlying supply contract; instead, section 75 creates a concurrent claim against the creditor mirroring the claim available against the supplier. More significantly, the Supreme Court recognised an implied condition in restricted-use debtor-creditor-supplier agreements under section 12(b) that the credit agreement is conditional upon the substantive survival of the supply agreement it finances. Where the supply contract is rescinded for the supplier’s repudiatory breach, both debtor and creditor may rescind the credit agreement. Similar reasoning may apply to section 12(c) agreements where the loan is tied to a particular transaction.

The decision also confirms that a creditor who receives notice of an asserted rescission owes a duty of care to the debtor to make reasonable enquiries before reporting default to credit reference agencies. The judgment matters to consumers, credit providers and retailers involved in tripartite consumer credit transactions, providing a simpler mechanism for the unwinding of linked credit where goods are validly rejected. It also serves as a caution to lenders about the risks of reporting defaults without adequate investigation where rescission is asserted. The limits of the decision include that quantum questions remain governed by findings of fact, and that the reasoning is closely tied to credit agreements tied to specific supply transactions.

Verdict: Appeal allowed. The Supreme Court declared that Mr Durkin was entitled to rescind and validly rescinded the credit agreement with HFC in about February 1999. HFC breached its duty of care in reporting default to credit reference agencies. Damages were confined to £8,000 for injury to credit, the First Division’s findings of fact excluding the other heads of loss not being open to challenge.

Source: Durkin v DSG Retail Ltd & Anor [2014] UKSC 21