Court of Appeal rules to clarify the law in motor commission claims

The Court of Appeal recently handed down its judgment on the joint appeal of three secret commission claims in the context of motor finance (Johnson v Firstrand Bank Limited, Wrench v Firstrand Bank Limited and ors Hopcraft v Close Brothers Limited [2024] EWCA Civ 1282) in which the claimants succeeded with their claims on appeal.

In the case of Hopcraft, this success came in the context of a fully secret commission claim and therefore presented less difficulty than the other two following the decision in Wood v Commercial First Business Ltd & ors [2021] EWCA Civ 471, which simplified the requirement for claims in secret commission cases. The appeals by Mr Johnson and Mr Wrench proceeded as cases where there had been partial disclosure of commission (to adopt the language preferred by the court over the historically used “half-secret”). The issues with which the court had to decide were:

1. Does a statement in the terms and conditions of the credit agreement that commission may or will be paid have the effect of negating secrecy, even where the borrower has neither read the statement nor been directed to read it?
2. For the purposes of establishing an accessory liability on the part of the payer of commission in a partial disclosure case, is it necessary for the broker to have owed a fiduciary duty to the claimant, or does the “disinterested duty” suffice?
3. If there is a fiduciary duty in a partial disclosure case, what are the necessary requirements to establish accessory liability on the part of the lender?
4. Did the broker owe the relevant duty to the claimants in these cases?
5. Is the lender liable for the repayment of the commission?
6. And in the case of Mr Johnson’s appeal an additional issue arose as to whether the relationship with FirstRand was unfair for the purpose of sections 140A-C of the Consumer Credit Act 1974, and what remedy should follow.

In deciding these issues the court grappled with the conflict between the Wood decision and that in Hurstanger Ltd v Wilson [2007] EWCA Civ 299 and provided obiter comments to which we return below. However, the court was keen to stress that claimants in the position of the appellants are vulnerable (requiring the credit to purchase their motors), are usually not told directly about commission or the events go too far back for reliable witness evidence (save for in a way that was “hidden in plain sight” buried in the terms and conditions) and expect a car dealer to make its profit by selling motors, and not through arranging finance.

Adequacy of disclosure

In Mr Wrench’s case the agreement that he signed contained overleaf the declaration: “A commission may be payable by us to the broker who introduced this transaction to us. The amount is available from the Broker on request.” His attention was not drawn to this and the court repeatedly noted that his attention was drawn, by contrast, to a clause dealing with the lender’s liability.

In Mr Johnson’s case a suitability document signed by him contained the declaration: “We do not charge a fee for handling your application for Consumer Credit, but we may receive a commission from the product provider.” His attention was again not drawn to this and the court paid particular attention to the fact that the documents with which he was presented were misleading and incorrect and that his lender, FirstRand, had a right of first refusal that was not disclosed to him.

The court held that both disclosures were not sufficient to negate the secrecy of the commission and, in particular, in Mr Wrench’s case held that the mere reference to the possibility of disclosure did not make his a case of partial disclosure. It was secret and the lender therefore had primary liability as payer of the commission.

The nature of the relationship between broker and claimant

Since the case of Wood the relationship required to establish liability in secret commission cases (as opposed to partial disclosure cases) is the disinterested duty. This was a lower bar and partial disclosure cases continued on the basis that a fiduciary relationship was required. Since the court held that commission was partially disclosed, it went on to assess the relationship.

On the facts, the court found that the lower, disinterested duty arose, but went on to find that “It is precisely because the brokers were in a position to take advantage of their vulnerable customers and there was a reasonable and understandable expectation that they would act in their best interests, that they owed them fiduciary duties.” To that extent, the fiduciary duty seems to be tied as much to the role undertaken by the broker as the nature of the claimant.

The court did not have any difficulty in dismissing the argument that a dealer could never be said to be impartial because it was always in its interest for there to be a sale, no matter the cost to the claimant. It found that the dealer was undertaking two different commercial roles: “In our judgment, as in Wood, in this particular context [financially unsophisticated consumers] the dealers/credit brokers would owe both a disinterested duty and a fiduciary duty of loyalty to their customers, unless they made it clear that they did not accept such duties.”

The lender’s liability

The lender’s liability follows the distinction between Wood and Hurstanger strands of cases. In secret commission cases a lender is a primary wrongdoer, being the payor of the commission and has primary liability to repay the commission to the claimant. Rescission of the finance agreement is also available. In partial disclosure claims, by contrast, the claimant must establish that the lender assisted the dealer in breaching their fiduciary duty.

This latter limb introduced a discussion of the requirement of such assistance being dishonest. The court’s conclusion on this point goes hand in hand with the question around the adequacy of disclosure of commission. The lender, knowing about the dealer acting as agent and the payment of commission, is taken to understand that the dealer will be in breach of its fiduciary duties unless it discloses all the relevant facts about commission. With this knowledge the lender is therefore taken to turn a blind eye to this breach, which, the court concluded, satisfies the requirement of dishonesty.

The Consumer Credit Act 1974

The court concluded that the payment of commission could render the agreement unfair within the meaning of the Consumer Credit Act, with the effect that the lender could be ordered to repay the commission and interest, together with interest on those sums. However, this arose in the context of the claim of Mr Johnson, where the court was particularly critical of the level of disclosure of commission and the lack of disclosure of the right of first refusal. Nonetheless, this decision should not be surprising since Plevin v Paragon Personal Finance Limited [2014] 1 WLR 4222, which determined these issues in the context of PPI claims.

Discussion

In its decision, the court highlighted the tension between Wood and Hurstanger throughout. It provided an obiter postscript discussing cases where disclosure of commission might be buried in terms and conditions and cases where a lender fell just short of sufficient disclosure and obtaining a borrower’s consent, and recognised that justice needed to be done in both. It particularly recognised that these decisions also had to be made in the context of an analysis of the sophistication of a claimant and did not depart from or criticise the decision in Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83 where a sophisticated claimant had received sufficient notice of the commission to give informed consent without knowing the amount.

The court may have had regard to a similar appeal from the High Court judgment in Expert Tooling and Automation Ltd v Engie Power Ltd [2024] EWHC 374, which is due to be heard by the Court of Appeal in 2025, dealing with secret commission considerations in the context of energy brokers acting for business customers. While the issues are very similar, it has to be expected that the court will be asked by the defendant to conclude that business customers be affixed with a greater degree of sophistication particularly when dealing with brokers whom they did not pay and whose sole role was to source energy contracts for them. In that case, simple disclosure in terms and conditions may be sufficient for a claimant to be deemed to have given informed consent in the same way as in Medsted.

Taken together, these issues may explain the court’s invitation to the Supreme Court for a definitive pronouncement. Indeed, both defendants have indicated that they intend to appeal the decision. Until then, however, the scope for claims against car dealers and lenders has increased, and simple disclosure of commission in terms and conditions, whether properly incorporated and signed or not, will no longer be sufficient to defeat these claims. Particularly consumers seem to be the subject of this protection, which may justify the departure from the usual rule that parties are taken to be bound by documents they sign, whether they have read them or not.

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