The Evolution & History of Credit Hire (Part 1)

Credit hire is supposedly a very well-known subject area. The words credit hire mean different things to people. Whilst not a dictionary definition of the words “credit hire”, the topic means the following to me: a road traffic accident occurs, a claimant hires a vehicle on credit and then claims this against the defendant – the defendant defends this claim using a variety of arguments.

However, to truly understand credit hire, you have to understand its history. To understand its present, you have to understand its past – like most things in life.

The aim of this article is to present a summarised account of the history and evolution of credit, through my experience.

This article will be the start of a series of articles focussing on the history and evolution of credit hire. Due to the expansive nature of this subject, only a couple of areas will be dealt with in each article, so that it is easily digestible to the readers.

In this article I propose to deal with the history of the evolution of this subject on two topics, namely:

(1) arguments on what credit is

(2) arguments on whether an agreement is regulated

These two sections will be subdivided as into three sections as follows:

(1) background;

(2) history, and

(3) the present

Arguments on what credit is

Background

Let's go back to basics. The first issue in any case should usually be: is any “credit” provided under the credit hire agreement?

So, what is credit? The Consumer Credit Act 1974 (section 9 (1) is of limited assistance, merely defining credit as including “a cash loan, and any other form of financial accommodation”. The key words “accommodation” suggests an arrangement between the parties, which indicates agreement by both parties.

In Dimond v Lovell (2000, 2 All ER 897) there was reference by the House of Lords to Professor Goode’s definition of “credit” (Goode, Consumer Credit Legislation, loose-leaf ed., vol 1, para. 443) which had been approved by the Court of Appeal ([1999] 3 W.L.R. 561, 572) in Dimond v Lovell, which stated:

“credit [is] extended whenever the contract provides for the debtor to pay, or gives him the option to pay, later than the time at which payment would otherwise have been earned under the express or implied terms of the contract.”

Simply asserted when payment is agreed to be made later than normal time periods, this amounts to credit (though please see my article on “The meaning of “credit” under the Consumer Credit Act 1974 and its implications” published in February 2021 for a more comprehensive explanation).

Whilst there is naturally an element of uncertainty and subjectivity as to what a “normal” period to pay is, in reality there can be obvious cases where credit is not provided and where credit is provided.

A very obvious example of no credit is where payment is expected upfront as is often the case in “spot rate” or “basic hire rate” cases. Another example is: Party A hires a car from a hire company. The agreement states that payment needs to made within 14 days or 28 days of the beginning of the hire agreement – these can be described as “normal” payment terms and would not constitute credit.

In the alternative, let's say that Party A hires a car from a hire company. The agreement states that the hire must be paid within 1 year from the date of the agreement - I think it's fair to say that most would consider this to be a longer time to pay than is normal and hence would be credit.

If an agreement provides “credit”, then unless the agreement is “exempt” from the regulations under the provisions of the Consumer Credit Act, the agreement become a “regulated” one. However, if no credit is provided in an agreement, then one does not have to consider the issue of whether the agreement is exempt, though one would have to consider whether the agreement may be regulated due to the hire period being capable of subsisting longer than 3 months under section 15 (1) of the Consumer Credit Act 1974. Checking whether an agreement provides for credit should really be the first step in analysing the credit hire agreement.

History

I was surprised that when I first started doing credit hire in the year 1999 that there were not many arguments on the issue of whether “credit” had been provided in the first place. The fact that this argument was not raised substantially in the earlier days of credit hire may have led to poor habits being adopted, the fall out of which may be felt even today, in my view.

In the early days there was a focus, indeed perhaps a fixation on whether an agreement fell outside the regulations of the Consumer Credit Act 1974 either:

(a) by way of the credit period being limited to payment within 12 months from the beginning of the date of the agreement and therefore becoming exempt from the regulations (under article 3(1)(a) of the Consumer Credit (Exempt Agreements) Order 1989 (S.I. 1989 No. 869) or

(b) the hire agreement not being capable of lasting for more than 3 months and therefore the agreement not being regulated (section 15 (1) (b) of the Consumer Credit Act 1974).

There was in my view insufficient attention paid to whether there was credit being provided in the first place.

The implications of this inattention may have been substantial. Let me give an example. In the early 2000’s courts were clogged with argument that a certain type of agreement was regulated by the Consumer Credit Act 1974. I will call this “arrangement X”. This was the typical scenario: Party A has a road traffic accident with Party B. Party A informs their insurance company. Party A’s insurance company provides them with a vehicle from a supplier. The insurance company and the supplier have a contract whereby the insurance company agrees to pay for the hire charges (an agreement between the two companies). When the vehicle is supplied to the claimant by the vehicle supplier, Party A signs on a document whereby s/he agrees certain terms such as to maintain the vehicle in a good condition – on this agreement there is however no mention of payment terms and this is presumably because the payment of the hire is to be made by Party A’s insurance company to the vehicle supplier. The argument was that this document which Party A had signed fell foul of the Consumer Credit Act 1974 and was therefore unenforceable, as the “prescribed” terms were not on the documents. This scenario led to years of arguments in the courts, with “test” cases being run and cases being stayed pending potential appeals. It took years for it to be established that this situation namely “arrangement X” had nothing to do with credit hire at all or the Consumer Credit Act 1974.

There are numerous reasons why that arrangement X had nothing to with the with credit or the Consumer Credit Act 1974. In Bee v Jenson [2008 R.T.R.7] the Court of Appeal when dealing with a similar agreement to the one I have mentioned stated that the Consumer Credit Act 1974 would not apply to the arrangement “all as a provision of the original insurance to which the 1974 Act would not apply”. However, what does this mean, you may ask? I do not propose to go through the number of many possible reasons as to why the Consumer Credit Act 1974 would not apply, which I will discuss in a future article in this continuing series of articles.

If, however, you take the first step, then in that “arrangement X” the first question to ask is what evidence is there that the claimant had been provided with any “credit”? After all there is nothing to stop a case from being a consumer credit arrangement, notwithstanding that the insurance company will indemnify the customer for any credit hire charges. For example, a client signs a credit hire agreement whereby s/he is liable to pay the credit hire – however s/he has the benefit of insurance cover whereby his/her insurance is liable to indemnify him/her. The Consumer Credit Act 1974 does apply to this particular situation as notwithstanding the insurance company being liable to pay the client for the hire, there is still an agreement as between the client and the hire company for the provision of “credit”.

So, what stops the above “arrangement X” from being classed as credit being provided to the claimant?

For one there was not even the mention of any payment for the hire charges within the agreement that the claimant signed; so, if there is no mention of payment of the hire charges, then how can there be any credit provided? For credit to be provided under the Consumer Credit Act 1974, there must be a contractually agreed deferment of payment.

Further the arrangement of payment between the insurance company and the hire company cannot be the subject of the Act, as the Act requires an “individual” to be receiving the credit (section 8 (1) of the Act). After all the Consumer Credit Act 1974 was an Act designed for the “...protection of consumers...” [preamble to the Act]. Companies are neither “individuals” nor “consumers”.

If this had been sufficiently recognised at the time namely that there was no issue of “credit”, then many years of argument, costs and court time would have been saved. However, there were many courts (even to Circuit Judge level) that decided that “arrangement X” was a consumer credit situation as the document signed by the claimant did not have the prescribed terms on it as required by the Consumer Credit Act 1974.

The present

In credit hire if you do not observe the basics and the roots of this subject, then it's very much at your peril. As there was not much fixation on whether an agreement provided credit in the first place, this has led to bad habits to this day.

I have seen recently a new phenomenon in credit hire cases. In cases which have nothing to do with credit hire, hundreds of pages are devoted to basic hire rates and bank statements – however if there is no “credit” in a hire agreement, then why would impecuniosity even be an issue? I have this as recently as the year 2023, from both claimant and defendant solicitors, where hundreds of pages (and I suspect considerable costs) were devoted to basic hire rates and bank statements. In these cases, hire payments had been made upfront. They involved cases where all parties thought that these were credit hire cases, even my opponents and the judge! These cases had nothing to do with credit hire!

On these cases, both sets of solicitors had prepared the case on the basis that this was a credit hire case where arguments of impecuniosity were relevant. In these cases, the claimants had pleaded the case on the basis of impecuniosity and repeated this in the statements. The defendants in turn had responded in their pleaded defences to the case as credit hire cases. I managed to settle these cases on reasonable terms for my clients, knowing that the cases were in an absolute state of disarray!

If one does not understand the basics in credit hire, then this will “snowball” into an array of unnecessary and time-consuming hurdles. Assuming a case is a credit hire case leads to court orders for financial documents to be disclosed, bank statements being disclosed, tax returns being made available, with extensive evidence of BHR rates being disclosed. The fact that a case has nothing to do with credit hire is really the responsibility of the claimant and defendant representatives to recognise, as it seems the court will understandably take at face value an assertion that a case is a “credit hire” case.

If you do not know the history of credit hire, then the above examples are testament to how this can affect your case adversely. I am interested to know precisely how many cases we have presently in the system that are understood as credit hire cases, when they are actually just hire cases? I am also interested to know in how many cases faulty pleadings, wrong court orders, bank statements, tax returns, and basic hire rates are produced when the cases had nothing to do at all with credit hire. My suspicions are there are more cases wrongly categorised as credit hire in the system than are currently recognised.

Arguments on whether an agreement is regulated

Background

The issue of whether or not an agreement is regulated is in my view the second step, after first deciding whether or not credit has been provided. Everyone is used to hearing that a hire agreement is regulated. But what does this actually mean?

The key legislation in credit hire is of course the Consumer Credit Act 1974. A consumer credit contract or a consumer hire agreement is regulated by the Act. It can be regulated in two different ways: regulated due to the agreement providing credit and/or regulated due to the agreement providing hire. A consumer credit agreement can also be a hire agreement, and a hire agreement can also be consumer credit agreement. Indeed, in my view the Consumer Credit Act 1974 should instead have been named the “Consumer Credit and Hire Act 1974"! It's really a misnomer to call it just the Consumer Credit Act, when the element of hire can also regulate it, even when credit has not been granted.

If credit has been granted, then the agreement is regulated by the Act, unless it can be exempted under one of the exceptions. If credit has not been granted, then you can go on to consider the second step namely whether hire has been provided. This “credit” check and “hire check” can be reversed the other way around, with it being checked first whether there is hire and then whether there is credit – the result will be however the same. Though in my view doing the “credit” check first is the better way.

History

Before the House of Lords decision in Dimond v Lovell [2000] 2 All ER 897, courts were littered with decisions on whether agreements were exempted from the Consumer Credit Act 1974 or not. A good example was the Court of Appeal case of Zoan v Rouamba [2000] 2 All ER 620 which decided that payment which had to be made 12 months after the date of the agreement was not exempt.   Indeed, most of these arguments on exemption were focussed on whether the 12-month payment exemption applied or not. There were numerous district judge and circuit judge level cases with differing interpretations on whether an agreement was exempt.

Ever since Dimond v Lovell, hire companies became adept at wording the agreement in such a way that they are excluded from the Act in one way or the other, both on the credit aspect and also on the hire aspect. Hire companies usually attained this in two ways, one way to “defeat” the regulations on the credit aspect and another way to “defeat” the regulations on the hire aspect.

The usual way that the credit argument was defeated was this: exempt the agreement by providing that the payment for hire must be made within 12 months beginning with the date of the agreement and in less than four instalments (article 3(1)(a) of the Consumer Credit (Exempt Agreements) Order 1989 (S.I. 1989 No. 869).

The usual way the hire argument was defeated is to draft terms to the effect that the hire agreement cannot last for longer than 3 months, which means that the agreement is not a regulated hire agreement pursuant to section 15 (1) (b) of the Act.

There was another argument that never seemed to have taken off the ground, though to me it seemed a very strong argument that a certain type of hire agreement was unenforceable. In this type of hire agreement, the agreement would state that the hire charges should be paid within 12 months beginning with the date of the agreement. The hire agreement also stated that the hire could not last for more than 3 months. So, presumably the agreement was exempt from regulation on the credit angle and excluded from the regulation on the hire angle? Well, it was more complicated than that! The credit hire company had also stated that if the hire charges were paid later than the 12 months provided, then interest would be payable! This fell within the potential situation of credit being provided for longer than 12 months, hence depriving the credit hire company of the exemption. I suspect that it may well be the case that those credit hire companies that had this provision for interest re-drafted future agreements to ensure that credit did not include interest or at least remain silent on interest in the agreement. If any such agreements exist now with provision for interest in those terms, then it will be at the peril of the credit hire company.

Present

Post Dimond v Lovell, there have been no real difficulties in enforceability arguments, as hire companies have been able to draft the hire agreement in such way that it exempts the agreement from the Act or is drafted in such was way that it is not covered by the Act.

So, arguments on the enforceability of the agreement do not generally succeed, though pleaded defences still insist on having these points pleaded in general defences. There is an argument that perhaps defences should not always plead unenforceability as a matter of routine, as this can distract the court from the better points. I have on occasion heard the more able judge’s make adverse comments on such generalised defences, especially those judges that were active in the era when defences were perhaps more fine-tuned than now.

These general defences can sometimes lead to embarrassing situations for a party. I recall once that my opposing counsel was pushed by the judge into explaining why the hire agreement was “unenforceable”. A general defence had been filed citing the “unenforceability” of the contract. The defence counsel stated that the reason why the contract was unenforceable was this: the hire agreement had been signed about 2 years ago, there had been no attempts to enforce the contract in that time and therefore the agreement was unenforceable! This argument however altogether misses the point that what is required for unenforceability is a “contractual” agreement to defer payment beyond the 12 months; it's not sufficient that the credit hire company has simply not just enforced the debt within those 12 months.

Otherwise, this would mean that wherever there was an unpaid debt beyond 12 months from the beginning of the date of the agreement, the agreement was unenforceable, if the hire company had not made attempts to pursue the debt against the debtor. Of course, a more specialised counsel in credit hire would probably not have even argued the unenforceability point in this scenario, however the point I am making is that a blanket assertion that the agreement is unenforceable can lead to confusion.

Whether or not there is any chance of an agreement being declared unenforceable is almost always an argument apparent from the papers. It is almost always the case that it is the terms of the hire agreement that show an apparent weakness on enforceability. This weakness can then be potentially exploited at trial. There is a case for saying that defences should therefore be more fine-tuned and only include enforceability arguments in the defence, if the papers show such a case is arguable. To have an “all embracing” defence with generic points can distract the judge from the better points on a case and lead to adverse consequences for the pleading party.

There is another important point here to be made about the present era. There can be a tendency for some lawyers and even some judges to say that whenever a credit hire case entirely fails that it is “unenforceable”. We must be very careful indeed here about the language used, as it can create confusion. Indeed, in my view it is very unhelpful to call a contract “unenforceable” in any in case other than when it is unenforceable due to legislation such as the Consumer Credit Act 1974. I have for example encountered the term unenforceable being used for “misrepresentation” cases by judges, which can confuse cases such as Dimond v Lovell and Salat v Barutis with misrepresentation cases. “Unenforceability” cases and “misrepresentation” cases are guided by completely different regimes – language matters.

Conclusion and summary

Particularly in the field of credit hire, the history of the subject matters. Knowing the history and the evolution of the subject matter will make you understand the present. Not being aware of the history of the subject will create all sorts of tripwires and hazards in current cases. I have seen first-hand examples of this on a number of cases I have been instructed on, particularly recently.

As the history and evolution of credit hire reaches about a “generation” in terms of time span, it seems to me that the lessons learnt from the past may be fading in memory which is to the peril of everyone involved in the credit hire industry.

Please note this article does not constitute legal advice for any specific case or cases.                                                

© Mohammed Azeem Ali 2024 03/04/2024