Compensation for inaccurate credit rating information?

27 Mar

The recent Supreme Court decision in Durkin v DSG Retail and others [2014] UKSC 21 has understandably attracted much publicity.  The case was a 14 year, David v Goliath, struggle in which Mr Durkin sought to put right the damage to his credit rating after he returned a laptop computer to DSG and rescinded the purchase agreement one day after purchase when he discovered that the computer did not met his specifications.

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Laptop

The recent Supreme Court decision in Durkin v DSG Retail and others [2014] UKSC 21 has understandably attracted much publicity.  The case was a 14 year, David v Goliath, struggle in which Mr Durkin sought to put right the damage to his credit rating after he returned a laptop computer to DSG and rescinded the purchase agreement one day after purchase when he discovered that the computer did not met his specifications.

The laptop had been bought with a £50 deposit and the balance funded by a debtor-creditor-supplier Consumer Credit Act 1974 credit agreement under section 12(b) of the 1974 Act.  The case turned on whether a right to rescind the purchase agreement created an implied right to rescind the credit agreement.  Lord Hodge (with whom the other Justices agreed) found that:

“It is inherent in a debtor-creditor-supplier agreement under section 12(b) of the 1974 Act, which is also tied into a specific supply transaction, that if the supply transaction which it financed is in effect brought to an end by the debtor’s acceptance of the supplier’s repudiatory breach of contract, the debtor must repay the borrowed funds which he recovers from the supplier. In my view, in order to reflect that reality, the law implies a term into such a credit agreement that it is conditional upon the survival of the supply agreement. The debtor on rejecting the goods and thereby rescinding the supply agreement for breach of contract may also rescind the credit agreement by invoking this condition. As the debtor has no right to retain or use for other purposes funds lent for the specific transaction, the creditor also may rescind the credit agreement. It appears to me that similar reasoning would apply to a section 12(c) agreement where the credit agreement tied the loan to a particular transaction.”

For Mr Durkin, however, that is not the end of the matter.  Whilst the long-running dispute rumbled on the creditor, HFC Bank Plc, treated Mr Durkin as being in default and intimated to various UK credit references agencies – Experian Ltd and Equifax Ltd according to the transcript of the judgment- that Mr Durkin had been in default since January 1999.  Despite various attempts by Mr Durkin to persuade the credit reference agencies to remove the default from their records, it appears to have remained until about 2005 or 2006 and had a significant negative impact on Mr Durkin’s ability to obtain credit.

In the First division HFC had admitted that it had a duty to take reasonable care not to make untrue statements about Mr Durkin to credit reference agencies but submitted that Mr Durkin had failed to plead or prove the nature of the enquiries HFC should have made or what the outcome of those enquiries would have been.  The First Divison accepted this and found that no negligent act or omission had been proved.  However, the Supreme Court took a rather different view and found (at paragraphs 33-35) that:

“HFC, knowing of Mr Durkin’s assertion that the credit agreement had been rescinded, was under a duty to investigate that assertion in order reasonably to satisfy itself that the credit agreement remained enforceable before reporting to the credit reference agencies that he was in default. HFC could readily foresee that registration of a default could damage Mr Durkin’s credit: it said so in its letter of 22 July 1999. As it knew that Mr Durkin’s assertion of rescission of the sale agreement was unresolved, it had the options of (i) saying nothing to the credit reference agencies or (ii) if it chose to notify them, incurring the duty to him to take reasonable care to ensure that the notification was accurate (cf. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, 486 per Lord Reid). HFC made no enquiries before intimating Mr Durkin’s alleged default to the credit reference agencies. After Mr Durkin complained about the entries on the credit registers, HFC told him to “sort matters out” with DSG. As the First Division recorded in amended finding of fact 21, HFC made no enquiries and, at all material times throughout the litigation, accepted without question DSG’s position that Mr Durkin had not been entitled to rescind the contract of sale.

It is relevant to ask what would have happened if HFC had made enquiries (McWilliams v Sir William Arrol & Co 1962 SC (HL) 70). The answer is clear. If HFC had contacted DSG, it is likely that DSG would have said that it contested the rejection of the computer. But HFC would not have known whether DSG’s stance was correct. If it had been faced with a contested rescission of the supply agreement and an asserted rescission of the credit agreement which it was not in a position to resolve, HFC should have refrained from intimating a default until the issues were resolved. HFC could have sought to test the continued effectiveness of the credit agreement by suing Mr Durkin to enforce its terms. Alternatively, it could have waited for Mr Durkin to sue to resolve the issue, as he later did. It would have known that if it did so, it was entitled to be indemnified by DSG under section 75(2) of the 1974 Act. But it should not have intimated the default without a reasonable basis for the belief that it had occurred. In so doing it acted in breach of its duty of care to Mr Durkin.

There may be cases in which a creditor, having made enquiries, acts reasonably in reaching the view that the debtor’s assertions are unfounded. This is not such a case.”

Damages of £8,000 were awarded to Mr Durkin for injury to his credit.

The case has potentially far reaching consequences, not just for creditors but for anyone passing information to credit reference agencies.  For example, where a consumer disputes a mobile phone bill on the basis that the contract had been properly terminated or that the service being charged for had not, in fact, been provided, it is possible that the supplier may report the ‘default’ to credit reference agencies, or threaten to do so, as a tactic to put pressure on the consumer,  However, on the basis of the Durkin judgment, if the supplier were to chose to make such a report before the consumer’s dispute was resolved, and if when it was eventually resolved it was resolved in favour of the consumer, the consumer may well have a claim for compensation against the supplier for passing inaccurate information to the credit reference agencies (subject, of course, to establishing (i) that the supplier had acted unreasonably and (ii) loss).

Moreover, and of direct application, it would appear that in every debtor-creditor-supplier credit agreement the creditor is under an express obligation to make enquiries into the circumstances of any alleged default before reporting it to the credit reference agencies and could be found to be liable for damage to credit score if they fail to make the appropriate enquiries.

Richard Griffiths

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