Are satisfactory quality disputes straightforward claims for finance companies?

In short, no. Satisfactory quality disputes are highly fact sensitive (and usually, the finance company is not privy to the relevant facts) and they can be expensive and time consuming claims to defend. Further, the law behind these types of disputes can be a minefield for finance companies, particularly following the introduction of the Consumer Rights Act on 1 October 2015.

Where goods are judged by a court to be of unsatisfactory quality, the finance company may be unable to claim monies due under a finance agreement.

What is satisfactory quality?

In common with the Sale of Goods Act 1979, the Consumer Rights Act 2015 states that every contract to supply goods is to be treated as including a term that the quality of the goods is satisfactory.

The quality of goods is satisfactory if they meet the standard that a "reasonable person" would consider satisfactory taking into account any description of the goods, the price of the goods and all other relevant circumstances which includes any public statement about the goods. The factors to be taken into account include the description of the goods, price, fitness for usual purpose, appearance and finish, freedom from minor defects, safety and durability.

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Crucially, the goods must be satisfactory at the time of delivery to the customer, and the legal presumption is that if a fault occurs with a vehicle within the first six months, it is assumed to have been there at the time of purchase unless it can be proven otherwise.

In other words, the onus is on the finance company to prove that the fault now complained of was not present at the point of purchase. After the first six months, the burden of proof shifts onto the customer, who then has the evidential burden of proving that the vehicle was faulty at the time of delivery.

The Consumer Rights Act introduced an enhanced range of remedies for customers.

Remedies available to a customer

  1. 30-day right to reject – a customer has the right to reject the vehicle, provided the vehicle is rejected within 30 days from the date of delivery.
  2. Repair or replace – once the 30-day period has expired, the customer may give the dealer one opportunity to repair or replace the vehicle (in the event that a fault is identified by the customer).
    It is important to note that if a repair or replacement is not possible, or the attempt at repairing the vehicle fails, the customer has a further right to reject the vehicle. The repair or replacement must be carried out within a "reasonable time frame" at no cost to the customer and without causing significant inconvenience. For this reason, finance companies will often collect the vehicle from the customer and provide them with a courtesy vehicle while any repairs are being carried out.
  3. If the attempt at repairing or replacing the vehicle is unsuccessful, the customer may then ask for a refund (and return the vehicle), or ask for a price reduction (in the event they wish to keep the vehicle). The finance company may make a reasonable deduction for the use the customer has had of the vehicle after the first 30-day period. In the event that the "reasonable deduction" for the use of the vehicle cannot be agreed between the parties, then the court’s intervention is likely to be required so that the amount of the reduction can be ordered.

What is the courts’ view?

Lawyers will be familiar with the leading case law regarding satisfactory quality disputes.

These decisions, while in some cases decided many years ago, are still relevant today. Lawyers will be aware that the courts take the view that there has to be some tolerances when purchasing a new vehicle, even an expensive vehicle. The courts have also taken the view that a customer can drive a vehicle for 40,000 miles and still have the right to reject it.

Expert evidence is crucial in satisfactory quality disputes and it is important that the customer be put to strict proof of any allegation that the vehicle is not of satisfactory quality.

How to deal with a dispute

As is often the case, finance companies are usually put on notice of a dispute only after the customer has exhausted all avenues with the dealer, and the relationship between the dealer and the customer has broken down. The problem for finance companies is that they will often have no direct knowledge of the quality of the vehicle either at the point of sale, or indeed, at all, and have no direct knowledge of any representations made at the point of sale regarding the quality of the vehicle.

The position is further complicated because a customer can inform the dealer that it is exercising its rights to one of the remedies mentioned above and there is no requirement for the finance company to be notified.

Regular readers will be aware that there have been several other articles written regarding finance companies issuing new terms and conditions to suppliers to protect them in these circumstances. Finance companies should check the indemnity provisions in their contracts with dealers to see what the dealer’s obligations are in the event of a dispute and in the event of rejection.

Joining the dealer

It’s not all bad news for finance companies. They do have the right of joining the dealer into any court proceedings brought against it by a customer. Of course, this is only a viable option where the dealer is solvent, and the position may be different for captives or if the nature of a finance company’s relationship with a dealer is such that it may not want to sue them. In circumstances where the finance company has no desire to sue its dealer, the finance company may be left to pick up a significant bill in defending these types of claims (and may be left to foot the adverse costs order, in the event of the claim against it being successful).

In any dispute, the key for finance companies is to develop closer relationships with their dealers to ensure there’s a joined-up approach to dealing with customer complaints. This has the benefit of allowing future commercial relationships to continue with both the customer and the dealer.