Disputes are a fact of life when dealing with finance collections. They can be time consuming, expensive and sometimes have unsatisfactory outcomes.

In our on-going series of bulletins we look at some common disputes and give you guidance and tips on how to deal with them quickly and effectively.

Most finance agreements contain clauses seeking to exclude liability – how far can they be relied on?

Introduction

The supply of a telephone system is a typical three-way arrangement. The supplier attends the premises of the customer, sells and then installs the telephone system, invoices the finance company, which in turn enters into a leasing or hire agreement with the customer.

Very often the finance company will play no active role in the supply or indeed any of the negotiations which have taken place up to that point. The key questions to be addressed are:

• Is the supplier the agent of the finance company? Might the finance company be bound by their representations?
• Can the finance company rely on a disclaimer clause in the lease?

In this three-way relationship, the finance company does have the option of issuing proceedings against both customer and supplier. If a satisfactory quality/fit for purpose defence is raised by the customer and proven in court, then the finance company ought to be indemnified by the supplier on the basis of a claim for breach of the contract to supply.

There are however certain practical difficulties. In some instances the supplier is simply no longer in business. The supplier is a source of business for the finance company and they may not wish to involve them in proceedings. It is also more expensive to run proceedings involving 3 parties.

Is the supplier the agent of the finance company?

A typical finance agreement will contain a clause along the lines of “except as provided by statute or where expressly authorised by the lessor the supplier of the equipment is not the agent of the lessor”.

As well as potentially being an agent, the other consideration is whether the supplier or its employees acquired ostensible or apparent authority as a result of an express or implied representation made by the finance company.

In Woodchester Equipment Leasing Limited v British Association of Canned Food Importers [1995] CCLR 51it was held that unless there is exceptional factual material, a relationship of principal and agent does not arise between a finance company entering a hire purchase agreement and the dealer or retailer; and the position is the same where the agreement entered into is not a hire purchase agreement but a simple hire or leasing agreement.

In the absence of any other factors (such as joint publicity and marketing material) between the finance company and supplier to suggest a connection, it follows that the supplier is not the agent of the finance company and the finance company is unlikely to be bound by any representations made by a supplier.

However, sections 9(4) to 9(6) of the Supply of Goods & Services Act 1982 also need to be considered:

“9.4 Subsection (5) below applies where, under a contract for hire of goods, the bailor bails goods in the course of a business and the bailee, expressly or by implication, makes known (b) to a credit broker in the course of negotiations conducted by that broker in relation to goods sold by him to the bailor before forming the subject matter of the contract, any particular purpose for which the goods are being bailed.

9.5 In that case there is (subject to subsection 6 below) an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied.

9.6 Subsection 5 does not apply where the circumstances show that the bailee does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the bailor or the credit broker.”

A credit broker is defined by section 18 of the 1982 Act as a person acting in the course of a business of credit brokerage, however credit brokerage is defined widely to include effecting introductions to other credit brokers.

The question therefore is whether the customer was ‘introduced’ to the finance company. In most cases this is likely to be the case and so there is a likelihood that subsection 5 will apply.

What about disclaimer clauses?

A typical clause might read “the lessee acknowledges and warrants that

(1) the equipment is required for the purpose of a business carried on by the lessee and acquired at the lessee’s request,

(2) in selecting the equipment the lessee relied on its own skill or judgment,

(3) acceptance by the lessee of delivery of the equipment is conclusive proof that the lessee is satisfied that it is in all respects in good working order and in conformity with the lessee requirements and

(4) the lessor does not accept responsibility for the equipment’s correspondence with the description, quality, condition or suitability”.

It is standard industry practice for the customer to sign a certificate of satisfaction when the goods are delivered, triggering payment to the supplier and the setting up of the deal.

Section 7(3) of the Unfair Contract Terms Act 1977 (UCTA 1977) provides that liability can only be excluded or restricted insofar as the clause satisfies “the requirement of reasonableness”. The burden of proving that any such clause is reasonable lies with the finance company.

Section 11 of UCTA 1977 states that the requirement of reasonableness is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made. There is some guidance provided in the Act including the strength of the parties’ bargaining positions, whether the customer received an inducement to enter into the hire, and whether the customer knew or should have known about the existence of the term.

In the case of R&B Customs Brokers Company Limited v UDT [1998] 1 WLR 321 the clause under consideration read:

“2(a) Any warranty or condition as to condition, description, quality or fitness for any particular purpose is excluded from the contract of sale unless the buyer is dealing as a consumer”

It cannot be said that as a matter of customer protection any exclusion is per se unreasonable. In the case or R&B Customs the most obviously important factors were (1) that the company was dealing in the course of business and the customer was not devoid of commercial experience, (2) that even though they would have recourse against the third party, the defendants have never themselves had possession or inspected the car. In view of those factors, Dillon LJ held that “the reasonableness test was satisfied in relation to condition 2(a)”

In Lease Management Services v Purnell Secretarial Services [1994] CCLR 127 it was held that “where the condition excludes all liability for breach of any representation or warranty, express or implied, the burden of proving reasonableness will not be lightly discharged. In the ordinary way the buyer would need to have brought home to him clearly that, for instance, although the seller had expressly given him an oral assurance about the goods, the assurance was of no legal effect and was wholly negatived by the conditions of sale. In other words, that what had been given by one hand had been taken back by the other. In the ordinary run of things the mere presence of an exclusion clause among a series of small print standard terms will not be adequate for this purpose. It will not be adequate because it is not reasonable to suppose that a buyer will appreciate that such terms override statements expressly made by the seller with the intention the buyer shall rely on them”.

In the case of Abbey National Business Equipment Leasing Limited v Dora Ife [2003] CLY 723, the judge held that the exclusion of the implied statutory terms as to satisfactory quality and fitness for purpose was reasonable in the circumstances as:

• both parties had traded as businesses at arm’s length;
• the finance company had never seen the goods when the hiring agreement was entered into;
• the customer had selected the goods having seen the supplier and discussed the matter with him; and
• only the customer could determine her business needs.

In Sovereign Finance Limited v Silvercrest Furniture Limited [1997] CCLR 76 it was held that where the natural meaning of the clause was there was to be no liability for any express representation or warranty it amounted to a total exclusion of all liability and that such “…natural meaning is offensive to reason…”. Further that “any clause with that meaning is therefore prima facie unenforceable”.

The fact that the clause, or its true construction, was too wide to be reasonable, meant that the clause as a whole was to be regarded as unenforceable even though the parties relying on the clause may wish to rely on an obligation which it might be reasonable to exclude if it were excluded on its own. The way in which the term is in fact operated or relied on is irrelevant.

The clause in R&B Customs v UDT was drawn more narrowly and was a conscious attempt to accept some liability and to exclude merely the terms implied by statute.

In principle therefore, depending on all the circumstances, it would follow from Sovereign Finance and Purnell that a term which merely excluded the terms implied by statute may be held to be reasonable; provided there was a conscious attempt to accept some liability and the exclusion did not extend to express representations.

Conclusion

In conclusion therefore the following factors may be relevant:

• Whether the parties are dealing with each other at arm’s length;
• Whether the finance company has / had an opportunity to inspect the goods;
• Whether the customer signed an acceptance certificate that makes it clear that they examined the goods and found them to be satisfactory and in accordance with description;
• Whether the customer had any commercial experience or could be considered to be of equal bargaining power; and
• How clear / extensive the exclusion clause was and whether it was brought to the customer’s attention.

Whilst this checklist can be useful, the usual warning applies that each case will turn on its own facts.