UK: Fraud and the Hire Purchase Act

Last Updated: 17 May 2004

In Shogun Finance Limited v Hudson (FC), the House of Lords considered the effect of a purported hire purchase agreement in relation to a car. The purported agreement was made between a fraudster pretending to be a third party and a finance company, Shogun Finance Limited ("Shogun). The House considered in particular whether a third party purchasing the car had obtained good title from the fraudster.

The fraudster had dishonestly obtained the driving licence of a Mr Durlabh Patel, of 45 Mayflower Road in Leicester. He went to a car dealer showroom with it, introducing himself to the sales manager as Mr Durlabh Patel of 45 Mayflower Road. The fraudster said he wished to buy a particular car on display in the showroom and agreed a price with the sales manager, subject to obtaining hire-purchase finance. The fraudster completed Shogun’s standard form hire-purchase agreement, entering the name, address and driving licence number of Mr Durlabh Patel and forging his signature on it. The sales manager gave the details supplied to him by the fraudster to Shogun’s sales support centre which checked those details with at least one credit reference agency. Shogun found Mr Patel to be creditworthy and considered the signatures on the driving licence and draft hire-purchase agreement to match. Shogun accepted the proposal purported to be made by Mr Patel and following payment of a deposit by the fraudster to the motor dealer – partly in cash and partly by cheque which was later dishonoured – the fraudster obtained possession of the car. The fraudster subsequently sold it to a Mr Hudson who bought it in good faith, in his private capacity. The fraudster later disappeared and could not be traced.

Shogun argued that the car belonged to it and claimed its return or value in lieu. Mr Hudson, however, claimed that he was entitled to keep the car since the fraudster had passed good title to him under one of the statutory exceptions to the nemo dat rule that a seller of goods cannot pass to a purchaser better title to those goods than he himself possesses. The statutory exception relied upon is to be found in Section 27 of the Hire Purchase Act 1964 ("HPA") as substituted by the Consumer Credit Act 1974. It reads as follows:

"(1) This section applies where a motor vehicle has been bailed…under a hire-purchase agreement, or has been agreed to be sold under a conditional sale agreement, and, before the property in the vehicle has become vested in the debtor, he disposes of the vehicle to another person.

(2) Where the disposition referred to in subsection (1) above is to a private purchaser, and he is a purchaser of the motor vehicle in good faith, without notice of the hire-purchase or conditional sale agreement…that disposition shall have effect as if the creditor’s title to the vehicle has been vested in the debtor immediately before that disposition."

For the purposes of Section 27, "creditor" means the person by whom goods are bailed under a hire-purchase agreement and "debtor" means the person to whom a motor vehicle is bailed under such an agreement.

The issue in the appeal was whether there was a hire-purchase agreement between Shogun and the fraudster. If so, the fraudster was a "debtor" thereunder and passed good title to the car to Mr Hudson. If not, Mr Hudson would not have obtained good title.

It was held that Shogun had only been prepared to contract with the Mr Durlabh Patel who had identified himself in the manner required by the standard form hire-purchase agreement and met the requisite credit requirements. Therefore, Mr Durlabh Patel was the debtor under the agreement. Oral or other extrinsic evidence was not admissible to contradict the terms of the written agreement and show that it was not made between Mr Patel and Shogun but in fact between Shogun and the fraudster.

The argument that extrinsic evidence is always admissible to demonstrate who the contracting parties are was rejected. Lord Hobhouse held that,

"The rule that other evidence may not be adduced to contradict the provisions of a contract contained in a written document is fundamental to the mercantile law of this country; the bargain is the document; the certainty of the contract depends on it."

It was however held that there was no consensus ad idem or "meeting of minds" between Shogun and the fraudster, an essential ingredient in the formation of a contract. Lord Phillips of Worth Matravers explained that each of the parties to a contract must be shown to have agreed with the other, so that if, for example, A makes an offer to B, but C purports to accept it, there will be no contract. In deciding whether the parties have reached an agreement, the courts ask whether each intended to contract with the other. Where the identity of a party to a purported contract which is in writing, is in issue, this should be determined by construing the contract itself. Lord Phillips said that where a contract is made orally, he would suggest a strong presumption that each party intends to contract with the other. However, no such presumption was needed where dealings were conducted exclusively in writing. In this case, the agreement was stated to be between Shogun and Mr Patel, and neither the fraudster or Shogun had intended to contract with the other. The fraudster could not be said to be a party to the agreement and therefore could not be the debtor under it.

The motor dealer was acting as Shogun’s agent in making delivery of the car. However, the dealer’s authority was to deliver the car to Mr Durlabh Patel. In delivering to the fraudster it acted outside that authority and there had therefore been no bailment of the car by Shogun to the fraudster. Furthermore, such delivery would not have been a delivery "under a hire-purchase agreement" since there was no such agreement between Shogun and the fraudster.

Lord Hobhouse made the final point that since Mr Patel’s signature on the hire-purchase agreement was a forgery, there had never been an offer capable of acceptance by Shogun. It would therefore follow that there had been no legally binding contract. Similarly, Lord Phillips held that, although Mr Patel was stated to be the hirer under the agreement, since it had been concluded without his authority it was null and void. Therefore, the fraudster had no title to transfer to Mr Hudson.

It is interesting to note that this case, which was unreported at county court level, made its way up to the House of Lords. Several of the law lords grappling with the issues noted that the law in this area is problematic and many of the reported cases difficult to reconcile. However, as Lord Walker pointed out, a recurring issue in the authorities is the need for the court to decide which of the two innocent parties (original seller and ultimate purchaser of the goods) should bear the loss resulting from the fraud of a third party. Often, the court is more sympathetic to the ultimate purchaser since, in the words of Lord Denning MR in the case of Lewis v Avery [1972], "it was the seller who let the rogue have the goods and thus enabled him to commit the fraud". Sellers beware!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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