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IN THE SUPREME COURT OF JUDICATURE No CCRTF 97/1410/2

Royal Courts of Justice

Strand

London WC2

Tuesday, 14th July 1998

B e f o r e:

LORD JUSTICE KENNEDY

MR JUSTICE SUMNER

WOODCHESTER

- v -

SWAYNE & CO

(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR T HODGKINSON (Instructed by Anthony W Jeremy & Co of Cardiff) appeared on behalf of the Appellant

MR J GRUFFYD (Instructed by Messrs Watkins & Co of London) appeared on behalf of the Respondent

J U D G M E N T

(As Approved by the Court )

(Crown Copyright)

LORD JUSTICE KENNEDY: This is the defendants' appeal from a decision of Assistant Recorder Higginbottom who, in Cardiff County Court on 3rd October 1997, gave judgment for the plaintiffs in the sum of £13,453.07 with costs on the County Court scale 2.

The factual background to the action can, for present purposes, be stated quite briefly. The defendant appellants, Swayne & Co, are a firm of solicitors in Cardiff who, in 1992, decided to obtain a new photocopier. The machine was supplied by Photostatic Copiers Ltd, but Swayne & Co required finance. So the plaintiff respondents, Woodchester Lease Management Services Ltd, then Woodchester Equipment Leasing Ltd, became involved. On 7th April 1992 an agreement, described as a Rental Plan, was made between Woodchester and Swayne & Co which was for a minimum period of 72 months and provided, inter alia, for quarterly payments of rental in the sum of £648 plus VAT with an increase of 7.5% at end of year 1. Payments were made normally until the end of 1994. Swayne & Co then stopped payments and that, it is now common ground, amounted to a breach of contract. Clause 9.1 of the contract set out what was to happen in the event of default by the customer. So far as material, that clause provides:

"If -

(a) the customer fails to pay rental or other sums payable under this agreement ..... on the due date;

.....

(g) ..... then and in every such case (which, in the case of the events referred to in clauses 9 (a), (b) or (c), will be deemed to constitute a repudiatory breach of this agreement by the customer) an event of default shall be deemed to have occurred for the purpose of this agreement. On the occurrence of an event of default the company may by notice in writing to the customer immediately or at any time thereafter and for all purposes terminate any letting of equipment under this agreement."

That contractual right to determine the letting of equipment under the agreement has to be read with certain provisions of the Consumer Credit Act 1974 and some of the regulations made thereunder because, for the purposes of this case, it is admitted that the rental plan under consideration is a consumer hire agreement within Section 15 (1) of the 1974 Act and, thus, a regulated agreement for the purposes of that legislation.

Section 87 (1) of the 1974 Act provides that before a creditor or owner in the position of Woodchester can become entitled to terminate an agreement or repossess goods on hire he must first serve a default notice. Section 88 and the Consumer Credit (Enforcement Default and Termination Notices) Regulations 1983 (S/I No 1561) set out in some detail the form which the notice must take and what information it must contain. In particular, if the breach of contract relied upon is capable of remedy, the

notice has to state what action is required to remedy it, and

within what time scale. Section 89 provides that if that action is taken within the stated time scale, the breach shall be treated as not having occurred.

The relevant parts Section 87, 88 and 89 read as follows. Section 87 (1):

"Service of a notice on the debtor or hirer in accordance with section 88 (a ´default notice') is necessary before the creditor or owner can become entitled, by reason of any breach by the debtor or hirer of a regulated agreement, -

(a) to terminate the agreement, or

.....

(c) to recover possession of any goods ..... "

Section 88 (1):

"The default notice must be in the prescribed form and specify -

(a) the nature of the alleged breach;

(b) if the breach is capable of remedy, what action is required to remedy it and the date before which that action is to be taken;

(c) if the breach is not capable of remedy, the sum (if any) required to be paid as compensation for the breach, and the date before which it is to be paid.

(2) A date specified under subsection (1) must not be less than seven days after the date of service of the default notice ..... "

Section 89:

"If before the date specified for that purpose in the default notice the debtor or hirer takes the action specified under section 88 (1) (b) or (c) the breach shall be treated as not having occurred."

In the regulations the relevant paragraph is paragraph 2 which, so far as relevant, provides:

"Any notice to be given by a creditor or owner in relation to a regulated agreement to a debtor or hirer under section 87 (1) of the Act ..... shall contain -

.....

(b) the information set out in paragraphs 1 to 3, 6 and 8 of Schedule 2 to these Regulations; and

(c) statements in the form specified in paragraphs 4, 5 7 and 9 to 11 of that Schedule."

I, therefore, turn to Schedule 2 which - under the heading Details of breach of agreement and action required to remedy, or pay compensation for, the breach - has in paragraph 3 these words:

"A specification of -

(a) the provision of the agreement alleged to have been breached; and

(b) the nature of the alleged breach of the agreement, specifying clearly the matters complained of; and either

(c) if the breach is capable of remedy, what action is required to remedy it and the date, being a date not less than seven days after the date of service of the notice, before which that action is to be taken; or

(d) if the breach is not capable of remedy, the sum (if any) required to be paid as compensation for the breach and the date, being a date not less than seven days after the date of service of the notice, before which it is to be paid."

I return now to the facts. On 12th January 1995 Woodchester sent to Swayne & Co a default notice which they contend complied with

the provisions of the 1974 Act and the Regulations made thereunder. Swayne & Co accept that in most respects the notice did comply with the statutory requirements, but they contend that it had one critical flaw. It described the action required to remedy the alleged breach of contract as "payment of the sum of £879.90 by 24/01/95". In fact, as the assistant recorder found, the arrears of rental at that time amounted to £634.30. Woodchester claimed the higher figure because they wrongly increased the rental by 7.5% at the end of year 2 as well as at the end of year 1. An important issue which the assistant recorder had to decide was whether that error, which was admitted by Woodchester at the start of the hearing, rendered the default notice ineffective for the purposes of the 1974 Act. Rather surprisingly, no decision has been traced which is directly in point. But both the court below and this court have considered at the invitation of counsel some cases dealing with legislation of a similar kind. The assistant recorder gave careful consideration to those authorities, and concluded thus:

"A default notice served under Section 87 and Section 88 is not rendered defective merely because the action indicated as required to be taken to remedy the breach is in fact over and above the action necessary to remedy that breach."

In this court the second ground of appeal put forward by Swayne & Co asserts that the assistant recorder's conclusion in relation to the validity of the default notice amounted to an error of law. That is the only ground of appeal on which we have heard argument. We indicated yesterday, at the end of submissions in relation to that ground of appeal, that we were in the appellants' favour. Accordingly, it was not necessary to hear submissions in relation to ground 4, the only other ground of appeal which Mr Hodgkinson, for Swayne & Co, wished to pursue and in which it is contended that the assistant recorder was wrong in law in holding that the sums claimed by Woodchester pursuant to the contract were not a penalty. Mr Hodgkinson submits that the proper approach to the words of Section 88 (1) is to consider them in their statutory context, that is to say, having regard to the other provisions in the statute and the provisions of the Regulations, bearing in mind the purpose for which this legislation was enacted.

THE APPELLANTS' CASE

Mr Hodgkinson submits that if that approach is adopted there can be no doubt about what was required to be contained in a default notice in a situation such as this if the default notice was to comply with the statute. It had to state with reasonable accuracy the sum of money which the hirer had to pay to remedy his breach. An error such as that with which we are concerned must render the notice ineffective.

Mr Hodgkinson goes on to submit that none of the authorities relied upon by the assistant recorder, when properly considered, suggests otherwise. He further submitted that this court has no discretion in the matter and invited our attention to other parts of the statute, particularly Section 60 and the sections associated therewith including Section 127 where it is clear that a discretion is given which is noticeably absent in the case of Sections 87, 88 and 89.

Mr Gruffyd, for the respondent, submits that it is important to recognise that the notice does not itself give the owner of the goods rights against the hirer. His right of redress, if any, is to be found in the terms of the contract. The only purpose of the notice is to warn the hirer to give him a last chance, and if that opportunity is not taken to enable the owner to take the next step. If the hirer does what the notice requires he is in no danger even if, as in this case, he has overpaid. If he pays the amount really owing he is still, Mr Gruffyd contends, in no danger because the owner then takes further action at his peril, although that seems to me to be a somewhat doubtful proposition if, as Mr Gruffyd contends, the default notice is itself a valid notice. The statute, Mr Gruffyd contends, provides a short period during which the hirer can, if necessary, seek legal advice. The authorities, Mr Gruffyd submits, support this more generous interpretation of the provisions of Section 88 (1) as do the words of the statute itself which does not - in Section 88 (1) (a) or (b) which, for present purposes, are the relevant

provisions - refer to a sum of money. (One can see by way of contrast Section 88 (1) (c) and paragraph 3 (d) of Schedule 2 to the Regulations.)

In my judgment, Mr Hodgkinson is right for the reasons which he has given. This statute was plainly enacted to protect consumers, most of whom are likely to be individuals. When contracting with a large financial organisation they are at a disadvantage. The contract is likely to be in standard form and relatively complex with a number of detailed provisions. If the hirer is said to have broken its terms, the hirer needs to know precisely what he or she is said to have done wrong and what he or she needs to do to put matters right. The lender has the ability and the resources to give that information with precision. If he does not do so accurately then he cannot take what Mr Gruffyd conveniently referred to as "the next step".

That, as it seems to me, is the scheme of the legislation. It

would be frustrated if the notice could claim that in order to put matters right the hirer must pay a sum far in excess of the amount in fact owing and yet constitute a valid notice. It is all very well to say that a hirer can seek advice on receipt of a notice but a hirer has very little time in which to do so. It may be as little as seven days. (See Section 88 (2)). He may not at first appreciate that the large sum set out in the notice is inaccurately calculated and plain wrong. It may be,

perhaps because of earlier defaults on his part or the incidence of interest, not at all easy to calculate what in fact is owing and the hirer may, thus, be misled into believing that the sum set out in the notice is right. He may even be frightened by that belief.

It is worth remembering that very often these type of contracts are, in fact, complicated in themselves, quite apart from the question of any default, that those who draw up the contracts, that is to say, the finance companies, have necessarily the obligation of being able to calculate what is owing thereunder.

As Mr Hodgkinson points out, the words of Section 88 (1) require the lender to "specify" not only the nature of the breach - which in this case was adequately described as failure to pay the rental specified on their due dates - but also what action is required to remedy the breach. In the context of this case that meant specifying accurately what sum of money had to be paid.

The court might overlook an error which could be described as no more than de minimus, but Mr Gruffyd realistically does not contend that the error with which we are concerned can be so described.

The lender should be able to calculate, as I have already said, quite easily, what sum is due whereas the ordinary hirer may not

know. Section 88 (1) (b) does not, in terms, refer to a sum of money only because it applies to all types of breach of contract. Section 88 (1) (c) is different because in the case of a breach

which cannot be remedied compensation can only be expressed in terms of money so the sub-section is able to refer to "the sum (if any) required to be paid".

It is also worth remembering that a valid notice pursuant to

Section 88 can lead to the position in which the lender is able to repossess the goods with all the disruption that may cause to a hirer who, if Mr Gruffyd is right, may be in a position to pay a lesser sum which is the sum which should be paid but of which he has no knowledge because the notice has not been correctly drawn.

Turning to the authorities, the idea of requiring a notice to be served prior to repossession can be found in statutes long before 1974 - see in particular Section 14 of the Conveyancing and Law of Property Act 1881, Section 146 of the Law of Property Act 1925, Handel v The City of London Brewery [1901] Ch D 496 and Fox v Jolly [1916] 1 AC 1. They are decisions in relation to the 1881 Act. Silvester v Ostrowska [1959] 1 WLR 1060 was a decision in relation to Section 146 (1). That section provides:

"A right of re-entry or forfeiture under any proviso or stipulation in a lease for a breach of any covenant or condition in the lease shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice -

(a) specifying the particular breach complained of; and

(b) if the breach is capable of remedy, requiring the lessee to remedy the breach; and

(c) in any case, requiring the lessee to make compensation in money for the breach;

and the lessee fails, within a reasonable time thereafter, to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor ..... "

In Silvester the notice specified breaches of the covenant to repair and breach of a covenant against sub-letting. In fact there was no covenant against sub-letting in the lease. But having regard to what had been decided in the earlier cases, the notice was held to be sufficient for the purposes of Section 146. As Mr Hodgkinson points out, the breach relied upon was accurately set out even though there was an unjustified reference to another alleged breach. No payment of money was contemplated. The wording of Section 146 was not such as to require the landlord to "specify" what had to be done to remedy the breach.

In Shepherd v Lomas [1963] 2 All ER 902 this court considered a notice served under Section 24 (2) (d) of the Agricultural Holdings Act 1948. At page 906 Harman LJ said:

"I do not think that the notice need be good in every single respect in order that the landlords can rely on it. It is enough if there are substantial portions of it to which they can point as defects in performance on the part of the tenant. That is consistent with the cases under the Conveyancing and Law of Property Act, 1881, to which Lord Denning, MR, has referred, which show quite clearly that a notice served by a landlord, which contains within it matters which he cannot enforce, whether because there was no covenant or because the covenant had not been broken, is not invalidated thereby and that he may rely on other parts of it in respect of which the tenant is in default."

The argument which commended itself to the assistant recorder in the present case was that the approach to Section 88 (1) (b) of the 1974 Act should be the same as that adopted in relation, for example, to Section 24 (2) (b) of the Agricultural Holdings Act 1948. I do not agree. Here we are dealing with a statute which, for good and obvious reasons, requires a lender or owner to set out precisely what needs to be done to put right the alleged breach of contract. If a sum of money has to be paid it needs to be "specified". And if the figure given is more than the sum which the giver of the notice is entitled to demand, the notice, in my judgment, must be invalid. A similarly strict approach was taken in this court in relation to a preliminary notice under Case D of the Agricultural Holdings (Notice to Quit) Act 1977 in Dickinson v Boucher [1983] 269 EGLR 1159. But, as Mr Gruffyd points out, the words of the statute were very different. I do not, therefore, look to that authority for support in arriving at the conclusion to which I have already referred.

That leaves only the question of what sum of money the plaintiffs are now entitled to and what should be done in relation to costs. It is common ground that if the assistant recorder, whose judgment I regard as a model of clarity, had reached the same conclusion as I have reached in relation to the default notice, he would have entered judgment for the plaintiffs in the sum of £634.30 plus interest. The total sum, inclusive of interest, is now £1,154.42. There was no money in court so he would have awarded costs on scale 1. In my judgment, that is the order which should now be made in respect of costs in the lower court. Mr Hodgkinson sought to persuade us that because the plaintiffs did not concede their error until the start of the trial and because a lot of the hearing time was devoted to the issue of the default notice we should make a different order in relation to costs. I disagree. I note in passing that a lot of the hearing time was devoted to issues not raised in this appeal, some of which appear on first sight to have no merit whatsoever. So far as the appeal is concerned, it is agreed that costs must follow the event.

The appeal therefore, in my judgment, should be allowed with costs.

MR JUSTICE SUMNER: I agree. I would only and my tribute as well to the particularly clear and careful judgment of the learned assistant recorder.

Order: Appeal allowed with costs