County Court appeal confirms motor finance broker commission case correctly allocated to the small claims track

The County Court has upheld the allocation of a motor finance case involving the possibility of a secret commission to the small claims track: Jakub Kasperczak v FirstRand Bank Limited (London Branch) T/A MotoNovo Finance [2024] EWCC 22. Although the case has no precedent value it is nonetheless a useful indication of how the thousands of motor finance cases going through the County Court at the moment are likely to be case managed, at least until the Supreme Court hears the lenders' appeal against the Court of Appeal's decision in Johnson & Ors v FirstRand Bank Ltd (London Branch) T/A MotoNovo Finance & Ors [2024] EWCA Civ 1282 (see our blog post).

By way of reminder, Johnson involved three conjoined appeals: Johnson, Wrench and Hopcraft. The Court of Appeal considered the specific scenario of the sale of motor finance to financially unsophisticated consumers buying a second-hand car from a dealership which also arranged the finance, in circumstances where the dealer received a commission payment from the lender (either not disclosed or only partially disclosed to the customer). In this scenario, the Court of Appeal found that the car dealer (when acting as broker) owed to the customer: (a) an ad hoc fiduciary duty; and (b) a duty to provide information, advice or recommendations on an impartial or disinterested basis. As a result, the car dealers in Johnson could not lawfully receive a commission from the lender without first obtaining the customer's fully-informed consent to the payment of the commission, which on the facts, the Court of Appeal found they did not obtain.

The claim in Kasperczak was initially allocated to the fast track, but was reallocated to the small claims track by a District Judge following an application by the lender. The claimant appealed the reallocation decision, contending that the fast track was the appropriate track. The Circuit Judge hearing the claimant's appeal decided as follows:

1. Permission to appeal granted. As part of the reasoning behind the reallocation decision, the District Judge found that the claim was not a secret commission claim (only a half-secret commission claim). This undermined the claimant's valuation of the claim so that it did not meet the threshold for the small claims track. However, this conclusion was not sustainable following the Court of Appeal's decision in Johnson, given that the terms and conditions in Kasperczak contained an identical disclosure to that in Wrench, which was found to be a secret commission (or "no disclosure") claim. Accordingly, the Circuit Judge granted permission to appeal.
2. Appeal refused. While the District Judge's decision mischaracterised the claim, it was nonetheless still appropriate for the small claims track. The claimant's valuation was based on rescission and counter-restitution, which was "plainly impractical" in the case of a finance agreement that had run its course. Upholding the allocation to the small claims track, the Circuit Judge observed that the claimant could continue to be represented albeit the funding model may be less attractive, the evidence is likely to be limited, and the law in this area is well settled - at least until the Supreme Court hands down its decision in Johnson.

The limited costs recoverability on claims allocated to the small claims track means that, on balance, this decision is likely to be welcomed by financial institutions. If the impact of this decision is that fewer claimants have legal representation, then defendant lenders may need to take on more of the case management burden. However, lenders will have greater certainty on costs exposure and so may be less incentivised to settle weak claims.

We consider the decision in further detail below.

Background

The claimant and the lender entered into a conventional hire purchase agreement in relation to a second-hand Audi A6 vehicle, under which the amount advanced was £19,400 repayable over 60 months at a fixed rate of interest.

The finance was provided by the same lender as in Johnson and Wrench and the finance agreement contained a clause providing for the possibility of a commission which was identical to the equivalent clause in Wrench.

The claimant sought rescission of the agreement and compensation based on an "Account Reconstruction", which sought to set the value of the claim following rescission at almost £25,000, above the £10,000 threshold for the small claims track.

Decision

The claim was originally allocated to the fast track, but the lender applied for reallocation to the small claims track and a District Judge granted the application, prior to the Court of Appeal's judgment in Johnson. In summary, he found that:

• The value of claim had to be considered on a reasonable factual and legal basis, rather than on a "strategically hopeful" one.
• The claim was not a secret commission claim because the finance agreement made the possibility of payment of commission explicit, and as a result rescission was not possible.
• Nonetheless, having regard to the claimant's "Account Reconstruction", the figures were likely to be subject to "dramatic reduction".

The claimant appealed the reallocation to the small claims track, and the appeal was heard by a Circuit Judge, who granted permission to appeal but refused the appeal.

The Circuit Judge granted permission to appeal because the District Judge's conclusion that there was no realistic prospect of the claimant establishing that it was a secret commission case (and therefore finding that rescission was unlikely) was unsustainable following Johnson. As explained in more detail in our blog post considering Johnson, the Court of Appeal found that although the terms and conditions in Wrench referred to the possibility of commission being payable, in reality there was no disclosure, and so the case was a fully-secret commission or, more accurately described, a "no disclosure" claim. In a no disclosure case, the borrower is entitled to rescission as of right subject to counter-restitution.

The Circuit Judge refused the appeal because he considered the "Account Reconstruction" to be an outcome with no real prospect of success. It sought to restore the parties to their original position, ie the claimant receiving back the sums paid under the hire purchase agreement and returning the car and the value of its use. In the court's view, this was "plainly impractical" in the case of a finance agreement that has run its course. The contract between the claimant and the lender was primarily a financial one, and the value of the vehicle, depreciation and its use did not need to be considered when striking the appropriate balance of rescission and counter-restitution.

In the court's view, the best outcome from the claimant's perspective for which there was a real prospect of success was for the claimant to "in effect end up in the position of having acquired the vehicle with the assistance of an interest free loan". This would also give the claimant satisfaction for the commission paid by the lender to the broker, given that the commission was in effect financed by the enhanced interest rate paid by the claimant on the loan.

On that basis, the lender's valuation of the claim (below the £10,000 threshold) was more accurate, meaning the small claims track was the normal track for the claim, and there was nothing that took the matter outside of the normal track.