Consumer hire contracts and linked transactions: understanding your protections

It seems that many small businesses in the UK may have been offered the “opportunity” to hire electronic equipment, such as screens or printers, on the basis that the cost of hire will be offset by income from the use of the equipment (e.g. to display advertising or provide printing services).

The business might be asked to sign two contracts with two different companies, a hire contract with a leasing company and an income-producing services contract with an advertising/printing company. The contracts would be for the same amount and duration so they appear to cancel out. But after a few payments of the income under the services contract the advertising/printing company goes bust. Meanwhile, the lease company continues to demand the hire payments under the hire contract, suddenly claiming that the contract for advertising or printing was an entirely separate agreement, and not part of the overall deal.

The complexity of the paperwork and relatively small monthly payment means that some businesses might not bother to insist that the two payments should offset each other, so that if the income stops, so should the hire payments. This article explains the potential regulatory support for that argument.

Levels of protection vary depending on the type and size of the business

Business owners usually fall into two broad categories: sole traders and companies. But the law relating to consumer hire agreements treats a sole trader as a “consumer” if the amount owed is less than £25,000; and this includes individuals, partnerships of 2 or 3 individuals, and unincorporated associations of individuals (like some clubs). If the sole trader owes a total of more than £25,000 under the hire contract and enters into the hire contract for business purposes, the contract will be an “exempt” agreement (but still regulated to a significant degree, as explained below).

This guide refers mainly to the regulatory protection for these types of sole trader, but companies who entered into these arrangements might also be entitled to similar protection under contract law, for example, on the basis of express or implied terms, misrepresentation, frustration and/or mistake. Dealings with companies could also affect whether the hire company or broker is fit to be authorised by the Financial Conduct Authority (“FCA”).

Regulation of hire contracts in the UK

If a sole trader agrees a hire contract with another business in the UK, the agreement will likely be subject to the provisions of the Consumer Credit Act 1974 (“CCA”) and certain regulations under the CCA. But one complexity associated with regulated hire contracts is that some CCA regulations introduced in 2010 do not apply to them, and this might be a problem for some hire companies and brokers.

In addition, the activities of entering into the hire contract as owner, and introducing the sole trader to the hire company, are regulated activities requiring authorisation by the FCA.

Certain pre-contract disclosures must be made in relation to regulated hire contracts, and the contract itself must comply with other ‘form and content’ requirements, otherwise a court order is required to enforce it. Regulated firms must also ensure that their customer communications and financial promotions are clear, fair, and not misleading,” unless it indicates clearly that it is solely promoting consumer hire agreements for the purposes of a customer’s business. Commissions payable to brokers are also regulated.

Exempt hire contracts must include a business purpose declaration, but merely including the wording will not satisfy the requirements if the declaration is not true or the amount owed is less than £25,000. The regulated activity of “credit broking” also covers exempt hire contracts, and they are covered by provisions of the CCA dealing with “unfair relationships”.

Regulatory protection also extends to related or “linked” transactions and contracts, as explained below.

Consumer hire and broking firms are also subject to certain FCA rules requiring them to conduct their businesses with “integrity”; “due skill, care and diligence”; to “take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”; and to “pay due regard to the interests of its customers and treat them fairly”. This would oblige the hire company to monitor and manage its relationships with its brokers or other intermediaries to understand what they are doing on its behalf; as well as applying to the conduct of the broker. A firm’s or its officers’ unregulated activities (e.g. hire contracts with companies) could be taken into account, particularly where they have a potential impact on the firm’s regulated business, its ability to meet the threshold conditions and/or matters of fitness and propriety.

Pre-contract disclosures and cancellable agreements

As mentioned above, the hire company or its broker must make certain pre-contract disclosures before a regulated hire contract is signed, otherwise the hire contract is only enforceable by court order. Enforcement includes repossessing the equipment.

A hire contract would likely be interpreted as a “cancellable agreement” where the prior negotiations included oral statements made in the sole trader’s presence by someone acting for or on behalf of the hire company or broker, and the agreement was signed by the sole trader at his or her premises.

In that case, the hire company would have had a duty to notify the sole trader of cancellation rights in relation to the hire contract, otherwise the hire contract would not have been properly ‘executed’ and can only be enforced by court order (including repossessing the equipment).

A court can also take this opportunity to declare that a hire company is not entitled to exercise specified rights in relation to the credit agreement or any linked transaction, as explained below.

Linked transaction

In the current scenario, the income contract would be a “linked transaction” within the meaning of the CCA if, for instance, the firm promising to pay the income arising from the use of the equipment financed by the hire contract (“Income Provider”):

(a) was an associate of the hire company; a negotiator in the prior negotiations for the hire contract; or knew at the time when the income contract was signed that the hire contract had already been made or it was contemplated that the hire contract might be made; and

(b) initiated the income contract by suggesting it to the sole trader, and the sole trader entered into it—

(i) to induce the hire company to enter into the hire contract, or

(ii) for another purpose related to the hire contract (e.g. to obtain the financial offset that had been promised).

It is not possible to ‘contract out’ of the CCA protection for ‘linked transactions’. In addition, any contract would be void to the extent that it attempts to limit or exclude liability for acts or omissions of the negotiator of a regulated hire contract.

A linked transaction entered into before the making of a hire contract has no effect until such time (if any) as that agreement is made. If the sole trader withdraws from or cancels the hire agreement, he withdraws from or cancels the linked transactions. Equally, certain orders made in relation to the enforcement (or lack of enforceability) of the hire agreement can be applied to the linked transactions.

Unfairness – section 140A-C of the CCA

A court could make certain orders in relation to a hire contract, even if it has ended, if the relationship between the sole trader and the hire company arising out of the hire contract or related agreement is unfair to the sole trader. Unfairness could arise from:

(a) any terms of the hire contract or related agreement (including a linked transaction);

(b) the way the hire company has exercised or enforced any of his rights under the contract(s);

(c) any other thing done (or not done) by or on behalf of the hire company at any time.

The court must have regard to all matters it thinks relevant, and must (to the extent that it is appropriate to do so) treat anything done (or not done) by another person on behalf of the hire company as if it were done (or not done) by or in relation to the hire company.

If the sole trader alleges unfairness, it is for the hire company to prove the contrary.

An order can be made by the court even if it places on the hire company (or any associate), a burden in respect of an advantage enjoyed by someone else (like the Income Provider or the broker).

The orders that a court can make in this scenario may be any one or more of the following–

(a) require the hire company, or any associate or former associate of his, to repay (in whole or in part) any sum paid by the sole trader (whether paid to the hire company, the associate or the former associate or to any other person);

(b) require the hire company, or any associate or former associate of his, to do or not to do (or to cease doing) anything specified in the order in connection with the agreement or any related agreement;

(c) reduce or discharge any sum payable by the sole trader by virtue of the agreement or related agreement;

(d) otherwise set aside (in whole or in part) any duty imposed on the sole trader by the agreement or related agreement;

(e) alter the terms of the agreement or related agreement;

(f) direct accounts to be taken, or (in Scotland) an accounting to be made, between any persons.

An order may be made only:

• on an application made by the sole trader;
• at the instance of the sole trader in any court proceedings to enforce the agreement or any related agreement; or
• at the instance of the sole trader in any other court proceedings where the amount paid or payable under the agreement or related agreement is relevant.

An application by the sole trader may only be made–

• in England and Wales, to the county court;
• in Scotland, to the sheriff court;
• in Northern Ireland, to the High Court

Termination rights

There is a right for the sole trader to terminate a consumer hire agreement after 18 months if the agreement provides for payments which exceed £1,500 in any year (subject to some other exceptions).

Repossessing equipment without a court order

If the hire company were to recover possession of the equipment without a court order (where one is required), the sole trader may apply to the court for an order that—

(a) all or part of any sum paid by the sole trader to the hire company in respect of the goods shall be repaid, and

(b) the obligation to pay all or part of any amount in respect of the goods shall cease.

General contract issues under the hire contract

The hire contract may contain clauses that try to exclude liability or statements made outside the contract, which a court might not enforce; and the sole trader might be able to argue he or she was entitled to terminate the contract(s) for breach of the obligation to provide the income.

If you wish to know more or discuss your circumstances, please contact Simon Deane-Johns.