Feldarol v Hermes - Critical Casenote

Feldarol Foundry Plc v Hermes (London) Ltd (2004)

Write a critical casenote on Feldarol Foundry plc v Hermes (London) Ltd [2004] EWCA Civ 747 (Unrep. 11 May 2004)

A.Summary of the facts

The respondent ran an aluminium foundry business in Dorset, which was named, Federal Foundry plc. On 5 July 2002, the managing director, Mr Beresford, entered into a hire purchase agreement for a Lamborghini Diablo from the appellant, Hermes Leasing (London) Ltd. This was all arranged through TCA. On 6 July, 2002, Mr Beresford paid the remaining balance with a banker’s draft and this took place alongside the delivery of the vehicle to his home address.

Soon afterwards Mr Beresford noticed that the car did not handle particularly well. The main defects were those affecting the steering and as a result created instability at high speed. The brakes were also uneven and the air conditioning was not operating. In the original trial, the judge determined these defects could be repaired for the total cost of £1000, however it was also determined that these imperfections had caused the respondent, Mr Beresford, to lose faith in the entire make and model:

“Mr Beresford’s strong and genuine enthusiasm for the Lamborghini quickly turned to dust when he found that it handled badly, and his disappointment with this car quickly led him to think that he did not want a Lamborghini Diablo at all.”

The car was returned to the dealer on 24 July 2002 and he promised to resell the car and deliver a replacement to Mr Beresford, however, by the end of August, 2002, this still had not occurred. In order to take care of the hire purchase agreement, Mr Beresford sent a letter to TCA explaining that the car did, ‘not really suit’ him. The letter contained details of the arrangement for replacement that had been negotiated with the dealer and also contained the request for the current financing arrangement to simply roll over onto the replacement vehicle. TCA copied this letter for the appellant, Hermes Leasing (London) Ltd.

The first payment was made by Mr Beresford on 5 August 2002. Four days later, on 9 August 2002, Mr Beresford acted upon legal advice and wrote to the dealer in oder to clarify the fact that the vehicle had been returned following its rejection by Mr Beresford and that the arrangements made for a substitute was not to affect his legal rights and remedies that are normally provided for those who reject goods on account of unsatisfactory quality. This letter was copied to the appellant on 12 August 2002 and was accompanied by a statement containing the arrangement with the dealer.

TCA were not informed that the car was defective until 19 August 2002 but as soon as they received news of this, the company promptly informed the appellants, Hermes Leasing (London) Ltd. On 23 August 2002, Mr Beresford’s solicitors wrote to Hermes and confirmed that the car had indeed been rejected on account of its defects. Payments under the agreement then promptly ceased and the appellant stated that it had terminated the agreement prior to repossession of the vehicle from the dealer who later went into liquidation.

At the original trial, the financial implications of the above facts were determined and were not in dispute in the current case. Therefore, if the respondent, Mr Beresford had in fact validly rejected the car, he was entitled to £15,616 from the appellant, Hermes Leasing (London) Ltd. However, if valid rejection of the vehicle had not taken place, the appellant was entitled to recover £16,798. As a result of the dealer becoming insolvent, their financial liability in this matter could not be considered and this was unfortunate as solvency of the dealer would have rendered him liable to the unsuccessful party.

B.Legal Issues Arising

1)Breakdown of the applicable statues

(a)In the event of contracting within the course of business

The appellant argued that Mr Beresford had not adequately rejected the car. This was argued on the basis that Mr Beresford was in fact transacting within the course of his business and therefore, clause 4.1 of the terms and conditions of the agreement would have been valid:

“(1) It is expressly agreed and acknowledged that no representation, condition or warranty has been given by or on behalf of the owner in respect of any of the goods or about the quality, description merchantability, fitness or correspondence with description of the goods or otherwise of the goods. All such representations, conditions and warranties whether express or implied by law are excluded apart from those incapable of exclusion by virtue of any statutory enactment.”

This clause effectively excluded liability of Hermes Leasing (London) Ltd for any defect in the quality, description, merchantability or fitness of the vehicle. This exemption clause would therefore allow the appellant to validly contract out of s10(2) of the Sale and Supply of Goods (Implied Terms) Act 1973, which states that:

“Where the creditor…hires goods under a hire-purchase agreement in the course of a business, there is an implied term that the goods supplied under the agreement are of satisfactory quality.”

However, in order to validly contract out of this statutory provision, the respondent must have been contracting within the course of business and the clause for contracting out of the statutory right must have been reasonable as per s 6(3) of the 1977 Act.

“…As against a person dealing otherwise than as consumer, the liabilities specified in sub-section (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.”

(b)In the event of contracting as a consumer

While the provisions of the 1973 Act can be excluded for contracts carried out within the course of a business, s 6(2) of the Unfair Contract Terms Act 1977 stipulates that this is prohibited for consumer transactions:

“(2) As against a person dealing as consumer, liability for breach of the obligations arising from (b) section … 10 … of the 1973 Act …cannot be excluded or restricted by reference to any contract term.”

The consumer is defined under s 12 of the Unfair Contract Terms Act 1977, which states that:

“(1) A party to a contract ‘deals as consumer’ in relation to another party if —

(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and

(b) the other party does make a contract in the course of a business; and

(c) in the case of a contract governed by the law of … hire purchase … the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.”

Therefore, if the respondent were to be a consumer, he must also have validly rejected the goods purchased under the agreement and this would require that the goods were not of satisfactory quality as required under s 10(2) of the Sale and Supply of Goods Act 1973.

2)The legal issues for the court

(a)The legal status of the respondent

The court had to therefore firstly consider whether the respondent was acting as a consumer or within the course of a business. Was the party a consumer as defined under s 12 of the Unfair Contract Terms Act 1977?

(b)Where the respondent was acting within the course of business:

If the answer to (a) lay in the affirmative, was clause 4.1 of the agreement a reasonable disclaimer under s 6(3) of the Unfair Contract Terms Act 1977 for contracting out of the statutory rights under s 10(2) of the Sale and Supply of Goods Act 1973?

(c)Where the respondent was acting as a consumer:

If the answer to (b) lay in the negative, had rejection of the Lamborghini been satisfactory in accordance with s 10(2) of the Sale and Supply of Goods Act 1973?

C.The decision of the Court

The court decided that while Mr Beresford was a business party dealing, he nevertheless had contracted for the hire purchase of the car a as consumer in accordance with s 12 of the Unfair Contract Terms Act 1977.

This decision therefore meant that there was no need to analyse the reasonableness of clause 4.1 of the agreement between Mr Beresford and Hermes (London) Ltd, in accordance with s 6(2) of the 1977 Act and therefore, Justice Tuckey concentrated solely on whether rejection of the vehicle had been satisfactory. This was held in the affirmative.

D.The ratio decidendi – On determination of the status of the respondent

(a)S 12 of the Unfair Contract Terms Act 1977

Justice Tuckey first looked to the provisions under s 12 of the Unfair Contract Terms Act 1977, which defines the action of a party dealing as a consumer.

Justice Tuckey acknowledged analysis by the original court of the facts in relation to these provisions. The original judge had stated that the respondent had to have been acting in the course of a business since, in contrast to the requirements of s 12(1)(a) since Mr Beresford made the contract in the course of a business and held himself out as doing so:

“…it seemed to me that [the respondent] must have been acting in the course of its business. It is a company, which was purchasing a motor car for the purpose of providing the motor car to its managing director as a part of the rewards of his employment. It also seemed to me that [the respondent] had held itself out as acting in the course of its business by the terms of the agreement which provide a statement of the nature of the business and the number of years it has been established, which was signed by Mr Beresford in his capacity as director, and which includes a declaration under which Mr Beresford signed ‘I confirm that I/we have selected the goods and that they will be used for the purposes of my/our business.^[1]”

(b)Analysis of R & B Customs Brokers Co Ltd v United Dominion Trust Ltd [1988] 1 WLR 321.

(i)The facts of the case

Lord Justice Tuckey then recounted the further steps of the original trial, which, on the basis of the above case determined that Mr Beresford was in fact dealing as a consumer. The facts of this case were in point with the present dispute. A company purchased a car for use by one of its directors. As in the present case, the car was purchased from a finance company but was under the terms of a credit purchase as opposed to a hire purchase agreement. The car was also defective and the company claimed damages due to the implied term of unfitness for purpose as stated under s 14(3) of the Sale of Goods Act 1979. As in the present case the finance company was seeking to rely on the exclusion clauses of the agreement, which would be voided by virtue of s 6(2) of the 1977 Act if the car had been purchased by a consumer. With reference to this, Dillion LJ stated at 328 H that while the contract was drawn up in the name of the company and while the ‘Business Details’ were drafted in the agreement as a description of the business of the company as shipping brokers, the important issue was whether the contract was made within the course of business. He stated that regardless of the nature of the transaction, the mere identity of the party as a corporate entity rendered it a party acting within the course of business as opposed to as a consumer. The reason given for this was that any consumer contract concluded by a business would be ultra vires and therefore void:

“…where a company which runs a grocer’s shop buys a new delivery van, it buys it in the course of its business. Where a merchant bank buys a car as a ‘company car’ as a perquisite for a senior executive, it buys it in the course of its business. Where a farming company buys a landrover for the personal and company use of a farm manager, it again does so in the course of its business. Possible variations are numerous. In each case it would not be legal for the purchasing company to buy the vehicle in question otherwise than in the course of its business.^[2]”

(ii)Analysis of ‘in the course of business’ as a statutory provision

Justice Tuckey then followed the analysis of the original court and looked at the meaning of ‘in the course of business’ under the 1977 Act. It was determined that a degree of regularity of ‘the course of business’ would be required in order to determine the status of the transaction as one that did not fall within the definition of consumer. Therefore, more than the mere status of the party as a business itself would be required. Dillon, LJ emphasised this by reference to the House of Lords case of Davies v Sumner^[3]. In this case, Lord Keith had determined that a car had not been sold as an integral part of a business and that a degree of regularity would have to be established in order to determine otherwise. Again, Justice Tuckey quoted Dillon LJ from R & B Customs, who stated at 330 that:

“I find pointers to a similar need for regularity under the Act of 1977, where matters merely incidental to the carrying on of a business are concerned, both in the words which I would emphasise ‘in the course of’ in the phrase ‘in the course of a business’ and in the concept, or legislative purpose, which must underlie the dichotomy under the Act of 1977 between those who deal as consumers and those who deal otherwise than as consumers…”

Further to this, Lord Keith identified in the case of Davies v Sumner^[4] that the phrase ‘in the course of business’ was not to be used in the broadest possible sense. While this case applied to the Trade Descriptions Act 1968, it was considered trite law by Dillon, LJ that the same common sense should be applied to the Unfair Contract Terms Act 1977. Neill LJ stated in R & B Customs^[5]:

“It is of course true that s 1 of the Trade Descriptions Act 1968 creates a criminal offence whereas the other sections to which I have referred create no more than obligations in the civil law. Nevertheless, it would be unsatisfactory in my view if, when dealing with broadly similar legislation, the courts were not to adopt consistent construction of the same or similar phrases.”

Therefore Lord Keith’s finding in Davies v Sumner^[6] was that transactions ought to be distinguished between those regular and one-off deals that would ‘constitute a trade or business’ and other transactions which would, at best, only be incidental to the carrying on of the business. Lord Keith therefore reiterated the need for regularity by stating that:

“…here a degree of regularity is required before it can be said that they are an integral part of the business carried on, and so entered into in the course of that business.^[7]”

By following this ratio decidendi, Dillon LJ and Neil LJ^[8] both agreed that this degree of regularity had not been achieved in the case of R & B Customs^[9].

It is important to note the wider implication of this case, which was to render acceptable the occurrence of companies transacting as consumers and therefore allow them to benefit from consumer protection law. This will be analysed further below but it is crucial at this point to recognise that the purpose of consumer protection law is to safeguard the party with a lesser bargaining position and to also protect the interests of those who are not experts in the field of the subject matter of the transaction.

(iii)Justice Tuckey’s disposal of counsel for the appellant’s arguments.

Counsel for the appellant objected to the use of R & B Customs^[10] on four grounds. Firstly, it ought to have been distinguished from the facts of the present case. Secondly, it was a two judge decision and therefore conflicted with the more recent case of Stevenson v Rogers^[11]. Thirdly, the case had been wrongly decided and that a company can never deal as a consumer.

Justice Tuckey applied the case of Stevenson v Rogers^[12] in order to determine whether these objections were in fact correct. In this case a fisherman had sold a fishing boat to the plaintiffs who in turn claimed damages for breach of the implied term of merchantable quality under s 14 (2) of the Sale of Goods Act 1979. Here Potter LJ concluded at p 1040E that the words, ‘in the course of business’ were intended to have a wide, face value meaning but he nevertheless concluded that the case of R & B Customs^[13] was to be binding but only with reference to s 12 of the Unfair Contract Terms Act 1977. Further to this, Potter LJ had also concluded that the interpretation of ‘in the course of business’ under s 12 was not be treated as synonymous of the equivalent passage in s 14(2) of the Sale of Goods Act 1979 and, thirdly, the obiter of Neill LJ, which referred to the statements of Lord Keith in Davies v Sumner^[14] was concluded without the crucial application of further intentions of parliament with regard to s 14(2) of the Sale of Goods Act^[15] and must therefore be rejected.

Potter LJ therefore concluded that the meaning of ‘in the course of business’ under s 14(2) of the Sale of Goods Act 1979 and s 12 of the Unfair Contract Terms Act 1977 were to be construed differently on account of evolutionary departure that occurred when s 12 of the 1977 Act repealed s 4 of the 1973 Act which had referred to ‘a seller in the course of a business.’ Potter LJ argued that s 4 of the 1973 Act could have been construed alongside s 14(2) of the Sale of Goods Act 1979 but this synonymy ended with the enactment of s 12 of the Unfair Contract Terms Act 1977 in relation to exemption clauses, which relates to parties ‘dealing as a consumer’ and not a ‘consumer sale’. Therefore, R & B Customs^[16] was binding only on cases referring to s 12 of the 1977 Act and not on s 14(2) of the Sale of Goods Act 1979.

As the current case dealt with s 12 of the 1977 Act, it was therefore distinguishable from the findings of Stevenson v Rogers.^[17] Justice Tuckey was therefore able to immediately expel the second, third and fourth objections of counsel for the appellant as regards use of R & B Customs^[18] as binding authority which even Potter LJ declared as binding in Stevenson v Rogers^[19]. Therefore, Justice Tuckey was of the opinion that the more blanket approach proposed by counsel for the appellant, which was to deem that businesses can never contract as consumers, was not within his power to decide.

As regards the possibility of distinguishing the case on the basis of the facts, counsel for the appellant had argued that R & B Customs^[20] dealt with a one-man private company whereas Feldarol Foundry plc v Hermes London (London) Ltd was a public company. Further to this, the respondent had held itself out as making a contract within the course of its business as per s 12(1)(a) of the 1977 Act. The agreement signed by Mr Beresford stated that:

““I/we confirm that I/we have selected the goods and they will be used for the purposes of my/our business” and the acknowledgment by the hirer in the terms themselves that “the goods will be used for his own business purposes”

As regards the first point, Justice Tuckey rejected this on the grounds that this fact was not a distinction that could relevantly render separate treatment of the two business entities. As for the second point, Justice Tuckey stated that:

“Neither the declaration or the acknowledgment are directed to the capacity in which the respondent is dealing. They deal with the use to which the car is intended to be put. They say nothing about whether the buying of cars is an integral part of the company’s business or the regularity of such transactions.”

(c)Critical Observations for Finding One by Justice Tuckey

(i)The material finding

As regards the material finding that the contract was a consumer contract, this does seem to be a very narrow point given that the capacity of the dealings of the respondent should not have been necessary to declare alongside an undertaking to utilise a vehicle for business purposes.

(ii)The implications for business consumers

Further to this, as stated above, the case followed R & B Customs on the point that companies may transact as consumers. Despite the factually loose findings for such a capacity in the current case it is clear that consumer protection for businesses is important. This is due to the fact that, despite the raised bargaining position of businesses, the increased consumer protection should extend to businesses where the said transaction is not one that is normally dealt with and is therefore not within the general scope of business expertise. As said before, the protection of the less knowledgeable party is the focus of consumer protection and businesses are equally vulnerable to the lack of acumen that usually befalls the individual.

(iii)The counter argument from Parliament

The 2002 consultation paper^[21] on this matter were not in favour of the notion that businesses could contract as consumers and in the Law Commission Report 292, it was surmised that this would render the other party unsure of the power of their exclusion clauses^[22]. In addition, a great deal of research would have to be conducted in order to ascertain whether the contract was one that was merely incidental to the business and not within the course of business^[23]. Therefore, the Law Commission is now committed to the enactment of further provisions for a reasonableness test for exclusion clauses as a means of rectifying the possibility of unfairness in business-to-business contracts^[24].

EThe Ratio Decidendi – On determination of whether the car had been satisfactorily rejected

(a)The Court

The question here was whether the defects in the car were sufficiently severe so as to merit a breach of s 10(2) of the 1973 Act. Here Justice Tuckey affirmed the findings of the original court and stated that any defect that renders the driving of a vehicle unsafe cannot be deemed to be of satisfactory quality:

“if it is potentially unsafe to drive because of defects in its steering and brakes it cannot be described as being of satisfactory quality. As the implied term was a condition of the contract — Section 10 (7) of the 1973 Act — its breach entitled the respondent to reject the car.”

It was however also submitted by the appellant that the car had not been rejected until after the moment of affirmation of the contract via the agreement to accept a substitute car and the payment of the first instalment under the hire purchase agreement. Justice Tuckey adopted a sweeping approach to this issue and stated that the acceptance or rejection of goods is not to be dependent upon ‘technical or legal niceties.’ Instead Justice Tuckey stated that the court must determine whether there has been acceptance or rejection of goods provided in accordance with the seller’s contractual obligation to deliver goods of the expected quality under the contract. Justice Tuckey then turned to the facts of the case and showed that the Lamborghini had been returned within days of notification of dissatisfaction. The letter of 12 August, 2002 was also a clear affirmation of rejection and the only reason for the payment of the first instalment was for the purpose of rollover of the financial arrangements for the substitute car. In the eyes of Justice Tuckey there was therefore no way that this Lamborghini could have been accepted.

(b)Critical Observations for Finding Two by Justice Tuckey

Unlike the above determination of the status of the respondent as a consumer, the second finding of satisfactory rejection of the vehicle offers little discussion and was the obvious route for the court.

Footnotes

^[1] Feldarol Foundry plc v Hermes London (London) Ltd [2004] EWCA Civ 747, paragraph 12

^[2] R & B Customs Brokers Co Ltd v United Dominion Trust Ltd [1988] 1 WLR 321 at 328 H

^[3] [1984] 1 WLR 1031

^[4] ibid

^[5] R & B Customs Brokers Co Ltd v United Dominion Trust Ltd [1988] 1 WLR 321 at p 336D

^[6] [1984] 1 WLR 1031

^[7] ibid

^[8] supra note 6

^[9] [1988] WLR 321

^[10] ibid

^[11] [1999] QB 1029

^[12] ibid

^[13] supra note 10

^[14] supra note 7

^[15] The examples given were parliamentary Hansard and the First Report of the Law Commission.

^[16] Supra note 10

^[17] Supra note 12

^[18] Supra note 2

^[19] Supra note 12

^[20] Supra note 2

^[21] The Law Commissions’ 2002 Joint Consultation Paper, Unfair Terms in Contracts (Law Commission Consultation Paper No 166, Scottish Law Commission Discussion Paper No 119) para 5.12

^[22] The Law Commissions’, 2005 Report 292, Unfair Terms In Contracts, Report on a reference under section 3(1)(e) of the Law Commissions Act 1965, para 4.41

^[23] ibid

^[24] ibid paras 4.41 – 4.44