Questions raised recently about financial incentives offered by dealers to customers have highlighted some of the difficult issues that these present. David Wood, consultant at DWF, looks at the legal implications for motor dealers and lenders.

Section 56 of the Consumer Credit Act 1974 provides that negotiations conducted by a dealer under pre-existing introduction arrangements are deemed to be carried out by the dealer as agent for the lender as well as on their own behalf.

Lenders have long known that dealer offers to settle part-exchange finance can expose them to liability if the dealer does not or cannot honour that promise. But what about other incentives, such as deposit and monthly finance contributions, or even more extreme cases such as offering mid-term upgrade rights?

Dealer offers – a lender liability?

A dealer’s negotiations could include a number of statements, representations and promises made by the dealer about the goods or the finance transaction.

Apart from statements which are regarded as mere ‘sales puffs’, not having any legal consequences, these dealer statements could either be intended only as representations, which do not become part of the contract but are meant to secure the customer’s agreement to the transaction, or be so fundamental to the transaction as to become terms of it, and, accordingly, the credit agreement.

Whatever the status of the statement or representation, as long as they were offered as part of antecedent negotiations, the deemed agency means that the lender must honour what was offered, whether they were aware of it or not.

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Does the fact that the dealer may also have a direct liability make a difference?

Of course, where a lender finances a vehicle through hire purchase, credit or conditional sale, the customer’s contractual relationship will primarily be with the lender, and they will have no direct contract with the dealer who will sell the vehicle to the lender to enable it to enter into its agreement with the customer.

The law has, however, recognised that dealers can, by making pre contractual statements, be deemed to have a collateral contract with the customer. Even statements such as “it is a good little bus, I would stake my life on it” have been found to create a collateral contract with the customer, in the form of a warranty.

However, under the deemed agency provisions the dealer also commits the lender to any statements made to the customer, despite the fact that it may also be liable under its collateral contract with the customer.

Why should this be of particular concern to lenders-dealer offers which impact financial terms?

Apart from the immediately apparent consequence of these provisions – the lender’s liability for such statements – of more concern is the impact on the terms of the agreement the customer enters into with the lender. Are such contributions merely misrepresentations or terms of the collateral contract, or could they also amount to contractual terms of the main transaction?

A dealer deposit contribution is, in effect, a reduction in the cash price for the vehicle; a contribution to monthly payments affects the net amount payable by the customer. Given the lender’s liability for these offers, they clearly have a direct effect on the net cost to the customer of entering into the agreement.
So, in all respects, however the figures are presented, the stated cash price and the monthly instalments payable by the customer will be less than is stated on the agreement and the ‘halves’ and ‘thirds’ calculation will also be mis-stated, thereby affecting the enforceability of the agreement. It also means that the terms of the arrangement may not be fair, clear or not misleading.

A dealer’s offer to upgrade vehicles mid-term necessarily implies early termination rights that may not be consistent with the terms of the agreement. Any of these offers could be deemed to be terms of the agreement, and their failure to be included in the written terms could make the agreements unenforceable.


So, while the lender’s liability for dealer offers is undoubted, such offers could well be more than a mere representation, or simply a term of a direct or collateral contract with the dealer. Accordingly, the terms of dealer offers should be considered very carefully to ascertain their impact on the terms of the credit agreement.