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Risks around reporting to Credit Reference Agencies following the decision in Grace & Anor v Black Horse

  • United Kingdom
  • Financial institutions


In the recent case of Grace & Anor v Black Horse [2014] EWCA Civ 1413, the Court of Appeal held that it was a breach of the fourth data protection principle of accuracy for lenders to report debtors who fail to make payments of irredeemably unenforceable debts as defaulters to credit reference agencies (CRA), without also stating that the agreements are unenforceable.

Although on the face of it, Briggs LJ found that the 2009 case of McGuffick v RBS remains good law, the practical implications of Grace appear to be at odds with the message in McGuffick that creditors are entitled to make adverse credit reference reports about defaulting debtors when the debts are unenforceable.

The facts

In 1997, Mr Grace (G) entered into a hire purchase agreement with Chartered Trust PLC (CT), Black Horse's predecessor. G subsequently fell into arrears. CT then commenced proceedings and in 2000 obtained default judgment against him.

During the course of a series of county court hearings, it came to light that G's credit agreement had been improperly executed, making it irredeemably unenforceable under s.127(4) of the Consumer Credit Act 1974.

Although the default judgment was set aside, an adverse credit reference report was filed stating that G had defaulted under the agreement in the sum of £928. That default registration remained on his file until January 2004.

G alleged that as a result, his ability to obtain banking facilities had been impaired until October 2004 and that his partner's ability to obtain favourable APR rates in a 2003 hire purchase agreement had also been adversely affected.

In December 2009, G and his partner issued a claim for damages for breach of statutory duty. At first instance, the claim was dismissed by HHJ Halbert on limitation and causation grounds.

The decision of the Court of Appeal and its implications

On appeal, Briggs LJ took the case down an unexpected track. He agreed with the principle in McGuffick and several other established authorities that an unenforceable credit agreement does nothing to invalidate the debtor's underlying liability (even in relation to irredeemably unenforceable agreements).

Nevertheless, he concluded that it was wrong under data protection principles to describe such debtors who fail to make payments under irredeemably unenforceable agreements as 'defaulters', unless the reports also explain that the agreements are unenforceable.

Briggs LJ recognised however, that G's agreement was irredeemably unenforceable, leaving the argument as to whether the same position applies to those agreements which are only temporarily unenforceable "for another day".

In relation to limitation, the appellants attempted to overcome the six year challenge by relying on s.32(2) of the Limitation Act, arguing that there had been a 'deliberate concealment' by CT.

However, this required them to prove that CT knew at the time of registering the default with the CRA that they were acting in breach of duty, which they could not do. The same challenges are equally likely to apply to other debtors contemplating similar action arising out of historic debts.

The issue of causation may attract further judicial attention in future claims. How G was able to persuade Briggs LJ that he had only been able to obtain limited banking facilities as a direct result of CT's adverse CRA report was not addressed in any detail, leaving the question open as to whether the position would have been any different if CT's credit report had not been the only adverse report on G's file.

What's next?

The parties have been encouraged by the Court of Appeal to pursue mediation or some other form of ADR to resolve their differences given the amounts at stake but an appeal to the Supreme Court may yet mean that further judicial guidance will be forthcoming on this issue.

If the position is left as it stands, it creates difficulties for lenders in the way they communicate with CRAs because lenders may make reports without knowing of defects in credit agreements and even if lenders wish to flag unenforceable agreements, this could require IT changes before it is possible to do so.

This case is the latest in a series of court cases seeking damages resulting from allegedly inaccurate reports to CRAs . Lenders should consider reviewing their reporting policies to ensure they are robust and to avoid being the subject of future claims.

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