Taking credit: road accident victims vs credit hire companies

So far in the decades-long war of attrition between credit hire companies and defendant insurers, consumers have at worst suffered the boredom and inconvenience of spending a bemusing day at court. But in the increasingly hostile legal, regulatory and commercial environment for credit-hire companies it may be that consumers will suffer more than mere inconvenience.

The Jackson reforms pose a threat to the credit hire industry. For example, the new CPR 44.16(2) disapplies claimants' qualified one-way costs shifting (QOCS) protection where proceedings include a claim which is made for the financial benefit of a person other than the claimant. Paragraph 12.2 of the Costs Practice Direction uses claims brought to recover credit hire charges as a specific example of what the new CPR 44.16(2) is designed to tackle. There is also an ongoing Office of Fair Trading investigation into the credit hire industry.

A changed environment could prompt credit hire companies to reconsider their long-standing policy of not enforcing hire agreements against consumers and instead look to call in debts due under such hire agreements. If that does happen, there will be risks for consumers and lawyers in this field.

The credit hire model

Consumers who lose the use of vehicle following a road traffic accident need replacement vehicles while their own are being repaired or replaced. Such consumers often find their way to credit hire companies. The consumer enters into an agreement with the credit hire company, who supplies a hire vehicle at an extortionate daily rate. However the consumer is not asked to pay upfront. Instead, the hire car is provided to the consumer without any payment in advance on the basis that the consumer will cooperate in bringing an action against the other party in their road traffic accident. An action is brought - often at the same time as a vehicle damage claim and/or personal injury claim - against the other party on the basis that the consumer is liable for the full, extortionate value of the hire charges payable under the hire agreement.

There are often reasons to believe that such hire agreements are not enforceable. But defendants' enforceability arguments aside, the defence in a credit hire action typically comes down to asserting that (1) the claimant had enough money to hire in the usual way (i.e. not on credit); and therefore (2) that the sum payable by the tortfeasor should be limited to what the claimant would have paid had he hired on a normal, non-credit basis (the basic hire rate).

The effect is that in a typical credit ?hire claim, the claimant (nominally the consumer, really the credit hire company) will recover a sum for hire charges which is substantially less than the sum payable under the hire agreement.

Hire agreements in these cases typically provide that the hirer is liable for the full value of the hire charges in any event. Whatever is not recovered from the other party in an action (whether that is the full value of the hire charges because the hirer lost on liability or a portion of them because the basic hire rate was applied) is recoverable from the consumer.

Some of the larger credit hire companies provide policies of insurance which apparently indemnify hirers against the risk of having to pay hire charges due under the hire agreement. However, provision of such policies is by no means universal. In any case the value of such policies, effect of policy exclusions etc has not - so far as I am aware - ever been tested.

Unambiguous agreements

Until now, credit hire companies have almost never sought to recover hire charges from consumers. To do so would have been commercially damaging. Public and regulatory attention would have been drawn to the hire companies. The referral streams bringing business - including insurers who refer clients to credit hire companies rather than bear the cost of providing courtesy cars - might have dried up.

Thus, the credit hire companies' restraint has been predicated on the calculation that it is more important to protect the future trading environment than to recover the full value of hire charges in each case. But if, because of the change in the commercial and legal environment, future trading becomes unattractive anyway then that calculation might change.

Even if many credit hire companies do continue to trade, if the commercial challenges considered above cause some credit hire companies to enter administration, an administrator seeking to maximise recovery for creditors of that company should look to call in the large sums in paper debts which he finds in the failing credit hire company's filing cabinets.

If credit hire companies do seek to recover hire charges from the consumer, the consumer would have very little chance of success in defending the claim. Hire agreements are typically unambiguous that the hirer is and remains liable for the whole value of the hire charges.

Crucially, if the claim has been litigated then a consumer will probably have signed a witness statement in which he attests that he is liable for the full value of the charges due under the hire agreement. He cannot then in a later action deny that there was an enforceable agreement between himself and the hire company.

The defendant consumer in such an action would have no insurer to stand behind him. A large proportion of such claims would be small claims and so there would be little or no chance of defendant consumers being able to engage representation under a CFA.

On the other hand a credit hire company, looking to squeeze all possible value out of the hire agreements which it had accumulated over the past six years might, for example, engage solicitors under a damages-based agreement (DBA). The volume of claims could make it a profitable line of work for solicitors, with potential for recovering in a proportion of cases at an early stage by litigating against unrepresented litigants who might just pay to make the problem go away.

Professional risks

There are reputational and professional risks for members of both professions engaged in credit hire litigation on the claimant side.

A consumer who finds himself pursued by a credit hire company in this way might fairly ask why he was not warned by his legal advisers of the risk to him posed by entering into such an agreement.

This is particularly the case where - as sometimes happens - the consumer is first ?in contact with the solicitor and it is the solicitor who refers the consumer to the credit hire company.

Further, a consumer who entered such an agreement where there were viable arguments about enforceability - whether by virtue of the 2008 doorstep selling regulations or a more traditional contractual point - might ask why he never received advice as to the relative merits of pursuing the driver whose tort caused him to enter the credit hire contract and denying that he was bound to pay hire charges at all.

Solicitors and counsel advising lay clients with a credit hire claim might be wise, therefore, to consider whether or not there are viable arguments that the credit agreement is unenforceable and advise accordingly. In addition, when drafting pleadings and witness statements solicitors should consider what effect those documents might have in any future action brought by the credit hire company to recover hire charges payable under an agreement.

Simply put, it can no longer be safe to advise consumer clients or conduct litigation on the basis of a presumption that credit hire companies never enforce agreements against such consumers.