Court of Appeal delivers blow to banking industry with default ruling

The Court of Appeal has ruled that banks cannot impose a default on a person's credit file if the credit agreement in question has already been judged unenforceable.

The appeal decision stems from an earlier ruling in Grace & Anor v Blackhorse, in which District Judge Newman ruled a credit agreement entered into by William Brian Grace was 'irredeemably unenforceable'.

As a result of the court ruling Grace was released from his liability. He then stopped making payments to Black Horse, a part of the Lloyds Banking Group.

Unbeknown to Grace, Blackhorse not only recorded a default on his credit file, but also added their costs of the failed court action onto what had already been found to be an unenforceable debt.

Subsequently, Grace commenced legal proceedings for damages, although his claim failed before HHJ Halbert who found the claimant could not establish causation.

QualitySolicitors Howlett Clarke, secured permission to appeal the ruling. The appeal was heard before the Master of the Rolls, Lord Dyson, Briggs LJ and Beatson LJ.

The Court of Appeal unanimously found in Grace's favour, ruling it was not accurate for Black Horse to report him as a defaulter on his credit file.

Paul Tilley, a litigation executive and specialist in consumer credit law at QualitySolicitors Howlett Clarke, commented: "It was our view that the recording of a default in circumstances where the underlying agreement was unenforceable was not accurate and therefore contrary to principle 4 of the Data Protection Act 1998."

He continued: "This judgment could easily be overlooked, as I'm sure the banking world will be hoping. However, this case has given explicit guidance to the banking industry on an important issue and sends out a clear message that where a credit agreement is found to be unenforceable or where the parties accept the agreement is unenforceable, the creditor should not seek to argue that the debtor is a defaulter and record a default on the debtors credit file.

"This ruling may also open the door to challenge defaults recorded under credit agreements which are subject to temporary unenforceability such as through a failure to comply with section 78 Consumer Credit Act 1974."

John van der Luit-Drummond is legal reporter for Solicitors Journal