In this article, Mark Erridge (Pupil Barrister with 25 Canada Square Chambers) sets out the law as it currently stands relating to undisclosed commissions in motor finance claims, ahead of the Court of Appeal handing down judgment in the consolidated appeals of Hopcraft v Close Brothers Ltd, Wrench v Firstrand Bank Limited (London Branch), and Johnson v Firstrand Bank Limited (London Branch) T/A Motonovo Finance (“the Hopcraft Appeals”).
Introduction
It is common industry practice, when a customer purchases a vehicle from a motor dealer on finance, where that finance is facilitated by the dealer acting as broker, for the finance provider to pay a commission to the dealer. Commonly, there is either no or limited disclosure to the customer of the existence or amount of the commission by the dealer or finance provider.
There has in recent years been a significant increase in litigation by customers (with the assistance of litigation funders) seeking to challenge the legitimacy of such an arrangement, on the basis that it falls foul of either common law or equitable principles relating to civil law bribes, or of the statutory regime under the Consumer Credit Act 1974 (‘CCA 1974’) relating to unfair relationships.
So far, decisions in the motor finance context have been at County Court level only, and have broadly gone both ways. However, the Court of Appeal has recently heard oral arguments in the Hopcraft Appeals, with the Court invited to consider the nature and scope of the duty owed to the customer where such a commission is paid by a finance provider to a motor dealer. When handed down, this judgment will have significant ramifications in the area of motor finance.
What follows is an explanation of the law as it currently stands (in August 2024).
Fully- & Half-Secret Commissions
As it is currently understood, the common law on civil bribes distinguishes between two types of ‘undisclosed commissions’, depending upon the level of disclosure relating to the commission, that is between ‘fully-secret’ and ‘half-secret’ commissions. The type of undisclosed commission dictates what remedy is available to the customer.
Fully-secret Commissions may be found where a commission is given by a lender to a broker, the fact of which is kept fully secret from the borrower. It is regarded as a civil law bribe. As a form of fraud, if proven, the remedies can be extensive, such as rescission of any ensuing contract at the borrower’s election.
However, where the fact of the commission is not kept fully secret from the borrower, that is, where the borrower is aware, or ought reasonably to have been aware, that the broker may be paid a commission by the lender, then the situation may fall into the ‘half-way house’ considered in the case of Hurstanger Ltd v Wilson [2007] EWCA Civ 299 (“Hurstanger”); the ‘half-secret’ commission. This commonly occurs where the terms of any agreement or documentation provided by the lender or broker suggests that a commission may or will be payable, but the amount is never specified. The remedies available in the case of half-secret commissions are somewhat more limited.
Structure of the Law
There is no authoritative guidance as to the approach to be applied to determine the nature of the commission and availability of the remedies. The following is the author’s suggested structure of the law as it currently stands, which will be adopted in this document:
- Does the relationship between the broker and borrower engage the law relating to secret or half-secret commissions at all?
- Has the commission been kept fully secret or half-secret from the borrower?
If fully secret:
- Was the payee under a duty to provide disinterested advice?
- Has the borrower satisfied the three-stage test in Industries & General Mortgage?
- What remedies are available to the borrower?
If half-secret:
- Did the broker owe the borrower a fiduciary duty, and has this duty been breached?
- What remedies are available to the borrower?
It is also common for such claims to include a cause of action alleging an unfair relationship between the borrower and lender pursuant to s.140A CCA 1974, which will be discussed below.
Initial Questions
(i) Does the relationship between the borrower and broker engage the law at all?
It is arguably a pre-condition to establishing a secret or half-secret commission that there exists between the broker and borrower a relationship akin to, but broader than, an agency relationship.
The key authority dealing with secret commissions is that of the Court of Appeal in Wood v Commercial First Business Ltd [2022] Ch 123 (“Wood”), which considered two related appeals in respect of commercial loans taken out from Commercial First by borrowers, who, despite paying a broker a fee to advise on and facilitate the loans, were not made aware that the broker was receiving a commission on each loan. It is notable that this is a fully secret case.
This case is authority for the proposition that it is not necessary for an ‘agency’ relationship to exist between the broker and borrower in a fully secret case, that instead one must simply demonstrate that the person who is offered or paid a secret commission is “someone with a role in the decision-making process in relation to the transaction in question e.g. as agent, or otherwise someone who is in a position to influence or affect the decision taken by the principal” (Richards LJ at [51], citing Clark J in the case of Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm) at [108]).
Although Wood strictly applies only to fully secret cases, given that (as will be discussed later) in half-secret cases it is at present necessary to demonstrate the more onerous requirement that a fiduciary relationship exists between the broker and borrower, such a half-secret claim will clearly also fall at the first hurdle if the Court is not even satisfied that the broker is, in connection with the borrower, “someone with a role in the decision-making process in relation to the transaction.”
In two appeal cases at county court level (both now the subject of appeal as part of the Hopcraft Appeals), HHJ Worster considered the approach to be adopted in respect of secret and half-secret commissions pursuant to motor finance agreements: Mark Hurst v BMW Financial Services (GB) Limited (Birmingham CC, Jan 2024, unrep.) (“Hurst v BMW”) and Andrew Wrench v FirstRand Bank Limited (Birmingham CC, Jan 2024, unrep.) (“Wrench v FirstRand”). In both cases, the claimant was a borrower who purchased a vehicle from a car dealer who also facilitated as broker a motor finance agreement with the defendant lender. A commission was paid to the broker by the lender, which was not kept entirely secret from the borrower, but was not fully disclosed.
In Hurst v BMW, HHJ Worster endorsed at [16] the approach of the trial judge who had: “…correctly identified that the first issue was whether Mr Hurst’s relationship with Lookers engaged the law relating to bribes and secret commissions.” The trial judge had applied the Novoship test, concluding that the broker was someone with a role in the decision making process in relation to the transaction in question, on the basis that the broker could decide which of its available lenders it made known to the customer, or to only provide information about BMW’s products, which had a restrictive effect on Mr Hurst’s decision and so meant that the broker was someone in a position to influence or affect the decision.
HHJ Worster overturned the trial judge. His conclusion at [17] is worth citing in full:
“The conclusion that the broker was someone who was in a position to influence or affect the decision is difficult to sustain. This broker had no role in the decision making process in the sense that it could take the decision or affect the principal’s legal relations with BMW. The test referred to in Wood at [51] is formulated in the context of the duties of such a person. Novoship is authority for the proposition that the duty under consideration is not to be restricted to agents properly so called, but covers a broader group. But to qualify for membership of that broader group, the person must be involved in the decision making process in some way. On these facts I cannot see that this broker would qualify for membership. The broker’s role here is to put forward potential finance options, not to take part in the decision making process or influence of affect that decision. It acts as a broker. The options it puts forward may affect what the purchaser decides to do in terms of finance, but that is something different to an involvement in the decision making process, or a role which allows it to affect or influence the decision. The broader group does not include a person who simply acts as an advisor or provides information.” [emphasis added]
The question is fact-specific and therefore sensitive to the evidence of the broker’s role, and the outcome of cross-examination of the borrower.
(ii) Is the commission fully Secret or half-Secret?
A three-stage test to determine whether a payment amounts to a “secret commission” was set out by Slade J in Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573 (“Industries & General Mortgage”), the third stage of which is of direct relevance to the question of whether the commission is considered fully secret or ‘half-secret’:
(1) the person making the payment makes it to the agent of the other person with whom he is dealing,
(2) he makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing, and
(3) he fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person's agent.
The touchstone of a secret commission is, naturally, secrecy. As noted by Chitty LJ in Shipway v Broadwood [1899] 1 QB 369 (“Shipway”) at 373: “the real evil is not the payment of money, but the secrecy attending it.” However, secrecy may be difficult to establish where there has been some disclosure relating to the commission to the borrower by the broker or lender, for example where the finance agreement terms refer to the broker being paid a commission, but not specifying the amount.
In Hurstanger the Court of Appeal recognised the situation where there was sufficient disclosure to negate secrecy but the borrower’s informed consent had not been obtained. Tuckey LJ at [37] considered there to be “no logical objection” to such a “half way house”. The broker’s terms in Hurstanger confirmed that “In certain circumstances [the lender] company does pay commission to brokers/ agents.” Tuckey LJ asked two questions of this disclosure.
Firstly, did the disclosure negate secrecy? Yes – at [41]: “If you tell someone that something may happen, and it does, I do not think that the person you told can claim that what happened was a secret. The secret was out when he was told that it might happen.”
Secondly, was the borrower’s informed consent obtained? No – at [42]: “[The broker’s terms] could and should have been clearer and informed the defendants that a commission was to be paid and its amount and done so in terms which made it clear that the defendants were being asked to consent to this. I also think this statement should have been accompanied by the warning recommended by the OFT to the effect that its payment to the broker might mean that he had not been in a position to give unbiased advice.”
The example is given in Wood (itself a fully secret case) by Richards LJ at [127] that the commission would be half-secret if the borrowers “…knew, or they would have known if they had read the terms of business, that the broker might be paid fees by lenders”. By contrast in Wood the broker’s terms of business imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the amount of the fee. Per Richards LJ at [134]: “Without such disclosure, the borrowers were not on notice that any commission might be paid. On the contrary, the only conclusion from the absence of any notification as required was that no commission was to be paid. The undisclosed commissions were therefore secret, not half-secret, commissions.”
Borrowers may seek to run an argument that a term in the agreement providing for payment of a commission was not fully incorporated into said agreement, or lacked sufficient clarity to be understood, or was not specifically drawn to their attention. HHJ Worster in Wrench expressly disavowed such considerations: the question is whether secrecy is negated, not whether the term was incorporated; that is a question of fact (at [22]). He considered it inappropriate for the Court to carry out an exercise in semantics (at [25-26]).
Fully Secret Commissions
(iii) Was the payee under a duty to provide disinterested advice?
Once the Court is satisfied that the broker in principle falls within the class of persons to whom the law on secret commissions applies, and that the secrecy has not been negated, Wood confirms that the Court must next consider whether the broker owed a duty to the borrower to provide disinterested information (Richards LJ at [48]).
It had been argued in Wood that in order for a broker to be liable for a fully secret commission, there must exist between the broker and borrower a ‘fiduciary relationship’, i.e. a relationship of close proximity and trust as recognised by the law in a number of contexts, such as between director and company, or trustee and beneficiary. The Court of Appeal on that occasion reviewed the authorities and held that it was not necessary to establish a fiduciary relationship. However this question is once again up for consideration by way of the Hopcraft Appeals.
HHJ Worster considered the application of this test in Wrench in the context of motor finance brokers, concluding that it was difficult to maintain on the facts that the broker owed a duty to provide disinterested information to the Claimant. At [35] he noted:
“In the same paragraph the Judge concludes that the brokers had a duty to provide information on an impartial or disinterested basis. That was an application of the test formulated in Wood at [48]. The problem with that finding, is that the brokers were self evidently not impartial or disinterested. They were selling the cars, and in the course of undertaking that sale they were providing Mr Wrench with information about finance.”
It is therefore strongly arguable that where a broker provides a dual role to a borrower, both as seller of a vehicle and as broker of a motor finance agreement, these roles are not separable in the context of the duties owed by the broker. It would be unusual to expect a broker with demonstrable self-interest in selling the vehicle to act impartially when suggesting finance in respect of the same vehicle. This situation may be distinguished from the commercial lending in Wood where the broker merely facilitated the loan, and did not, say, act as vendor of the land in respect of which the commercial loans were secured. In the latter hypothetical case, such a party would have a vested interest in ensuring successful completion of the sale, which cannot realistically be ignored when providing information relating to the loan which facilitates the sale.
(iv) Has the borrower satisfied the three-stage test in Industries & General Mortgage?
The Court of Appeal in Wood broadly endorsed the three-stage test for a secret commission outlined by Slade J in Industries & General Mortgage, save for a determination that it is unnecessary for the recipient of the commission to be an agent of the borrower. Therefore, the test can be stated as:
(1) the person making the payment makes it to someone with a role in the decision-making process of the other person with whom he is dealing;
(2) he makes it to that person knowing that that person has such a role; and
(3) he fails to disclose to the other person with whom he is dealing that he has made that payment.
Notably, where this test is made out, there are no ancillary requirements: dishonesty and corrupt motives are irrefutably presumed (Novoship); there is no need to establish that the secret commission had any influence on its recipient (Shipway); and it matters not whether the payments were made to the broker or a third party close to him (Novoship).
(v) What remedies are available to the borrower in a fully secret case?
In a fully secret case, the borrower has a range of equitable and legal remedies available, as noted by Tuckey LJ in Hurstanger at [37]. The borrower may:
(i) Rescind the contract ab initio providing that counter-restitution can be made, or terminate for the future where counter-restitution is not possible;
(ii) Claim for money had and received to recover the value of the bribe, as it is regarded as an overpayment for the product; and
(iii) Claim for damages for the actual loss which has been sustained as a result of a transaction which has been entered into as a result of a bribe.
In respect of a claim for rescission, provided the Court is satisfied that a fully secret commission has been taken, applying the tests outlined above, in principle the motor finance agreement will be voidable at the borrower’s election. The Court has no discretion to refuse to grant such rescission. The question for the Court is whether counter-restitution (‘restitutio in integrum’) is possible.
While an ability to make restitution is essential to an action for rescission, the Courts require that this should be substantial rather than precise. Therefore, if property has retained its substantial identity, rescission is possible even though the property has deteriorated or depreciated or cannot be restored in its original state.
For example, in Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745, the buyer of a car sought rescission for misrepresentation by the seller. It was held that the buyer could rescind despite substantial depreciation of the vehicle’s value and the enjoyment of the vehicle by the buyer. Longmore LJ said as follows, at [30]:
“Rescission is prima facie available if “practical justice” can be done. If “practical justice” requires a representor to be compensated for depreciation, it is for the representor so to assert and prove; likewise if the representor asserts that use of the car is to be taken into account… The absence of evidence about depreciation or the value of the use of the car should not operate to the disadvantage of the representee who should never have been put in the position of having a troublesome old car rather than a brand new one.”
For a practical, if brief, demonstration of the order for counter-restitution in relation to a vehicle which has depreciated, in Scuderia Prestige Automobile Limited v Mr Imran Malik [2021] EWHC 2744 (Ch), Chief Master Shuman said at [57]:
“I am satisfied that the claimant is entitled to rescission of the agreement and that the defendant should have returned the McLaren and £35,000 [being a balancing payment on part-exchange] on or about 23 April 2020. The McLaren has now depreciated in value and the claimant is entitled to an enquiry as to the diminution in value and an award of damages in that amount. It is no bar to that claim that the defendant is said to have carried out works to the McLaren.” [emphasis added]”
Therefore, when conducting the restitutionary exercise required by rescission, the Court is to take account of the depreciation of the vehicle’s value and the enjoyment of the vehicle by the buyer, however the burden would appear to be on the lender to adduce evidence of the depreciation or value of the use of the car.
Half-Secret Commissions
(vi) Did the broker owe the borrower a fiduciary duty, and has this duty been breached?
Within the Hopcraft Appeals, the 3 Court of Appeal Judges hearing the appeals have been invited by the Appellants to consider whether Wood has effect beyond fully secret cases, to determine whether the Wood duty to provide disinterested advice is a sufficient connection between the customer and broker in a half-secret case, rather than the more onerous requirement of demonstrating that the broker owed fiduciary duties to the customer.
However, until the outcome of the Hopcraft Appeals, it is understood that Wood applies only to fully secret cases, and that in half-secret cases it is necessary for the customer to establish a breach of fiduciary duty on the part of the broker. The explanation for this disparity is given by Richards LJ in Wood at [21]:
“…in the case of a so-called half-secret payment, the decision of this court in Hurstanger Ltd v Wilson [2007] 1 WLR 2351 required there to be a fiduciary relationship. The basis for this difference is that half-disclosure means that the payment is not, in law, a bribe, but equitable remedies are available if the disclosure is insufficient to satisfy the need for informed consent where there is a fiduciary relationship.”
In the context of a broker–borrower relationship, it is a fact-specific exercise whether fiduciary duties are owed, since not all broker–principal relationships are fiduciary. The touchstone of a fiduciary relationship is loyalty. An authoritative statement as to who is a fiduciary was provided by Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 (“Mothew”) at p18:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. […] he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”
In short, the existence of a fiduciary obligation depends upon whether the relationship between the broker and borrower was one of trust and confidence. It is crucial to consider first the nature of the duties expressly and impliedly owed by a broker to a borrower, posing the question whether the broker can properly be said to owe an unwavering obligation of loyalty.
It may well be difficult to establish that such obligations are owed in the context of a broker who also acts as seller of the vehicle. It is difficult to contend that such a broker falls under an explicit or implied duty not to make a profit out of his trust, where profit is the entire motivating factor for the provision of the brokerage services, i.e. to facilitate the sale.
This argument has been accepted on appeal at county court level in Johnson v FirstRand Bank Limited (Cardiff CC, 6 July 2023, unrep.) (“Johnson”), a case involving facts nearly identical to Wrench and Hurst. In Johnson, HHJ Jarman KC rejected the borrower’s argument that the broker owed him a fiduciary duty, noting at [19]:
“[Counsel for the borrower] accepted that the dealer was wearing two hats, one when it was selling the car and the other when it was dealing with finance. In my judgment this is the essential distinction with the broker cases, where brokers do not themselves offer what their client wants, but offer the service of obtaining it, namely finance. It is difficult to see how in practice or in principle a car dealer could offer single minded loyalty to a customer when dealing with the finance, but not when selling a car to the same customer which gives rise to the need for finance. Finance is incidental to the purchase of the car for those who need to borrow.” [emphasis added]
(vii) What remedies are available to the borrower in a half-secret case?
Unlike in fully secret commission cases, if the Court is satisfied that the commission was half-secret and that the broker owed and breached a fiduciary duty to the borrower, rescission is not available as of right: the Court retains a discretion as to whether or not to grant rescission. In general, the Courts have generally expressed some degree of reluctance to grant rescission in such cases, accepting the Defendant’s arguments that rescission would be unfair and disproportionate.
Indeed, the Court of Appeal in both Hurstanger and McWilliam refused to order rescission of the loan agreements in those cases. In Hurstanger, Tuckey LJ considered at [51] that “To rescind the transaction altogether would be unfair and disproportionate.”
Unfair Relationship
An alternative cause of action lies in the assertion that there exists between the borrower and lender an unfair relationship existing for the purposes of s.140A CCA 1974, which provides that:
(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following:
(a) any of the terms of the agreement or of any related agreement;
(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).
In practice, claims are usually brought upon s.140A(1)(c) CCA 1974, namely on the basis of unfairness arising due to “any other thing done (or not done) by or on behalf of the creditor”. If the Court is satisfied that the relationship is unfair, then the Court has far-reaching powers under s.140B CCA 1974 to order the return of any monies paid under the agreement, amongst other remedies.
Connection between s.140A CCA 1974 and secret commissions at common law
A half-secret commission was held to be unfair for the purpose of s.140A by the Court of Appeal in Nelmes v NRAM [2016] EWCA Civ 491 (“Nelmes”), which involved a claim based in part upon non-disclosure of a commission paid by the lender to the broker in the context of secured lending over properties. Curiously, this claim was pleaded solely upon the s.140A statutory ground, with the Court noting in passing that the Claimant could have sought relief in common law or at equity in line with Hurstanger.
In Nelmes, the root of the unfairness as found was the fact that the payment deprived the borrower of the disinterested advice of his broker, a common pleading in motor finance claims based upon secret commissions. However, this therefore requires the Court to consider whether there has been a breach of a duty to give disinterested advice, and an application of the approach in Wood, in essence ‘piggy-backing’ upon the civil law bribe as a cause of action.
However, the Courts have held that where the unfairness relied upon is ‘piggybacking’ upon a separate common law cause of action, all the constituent elements of that separate action are required to be made out. For example, in Carney v NM Rothschild and Sons Ltd [2018] EWHC 958 (Comm), a claim involving the mis-selling of PPI, HHJ Waksman KC said this at [50]: “It seems to me that generally speaking, and subject to the burden of proof which is of course on the creditor here, the same elements as are required by the cause of action should be shown when such matters are raised as constituting an unfair relationship. Otherwise, there is a danger that the analysis of their significance or otherwise becomes blurred and uncertain.” This approach was followed by HHJ Worster in Hurst (at [41]).
Therefore, where a Claimant brings a claim pleaded exclusively under s.140A CCA 1974 without reference to the common law relating to secret commissions, the Court should nonetheless apply the common law tests as set out above in order to determine whether the relationship is unfair. Further, where a claim is pleaded in the alternative upon both the statutory and common law causes of action, where the Court finds the common law cause of action is not made out, it is suggested that the statutory cause of action will rarely succeed.
Consideration of the Entirety of the Agreement
Section 140A(2) CCA 1974 requires the Court to have regard to all matters it thinks relevant in order to determine whether a relationship is unfair. As confirmed by the Supreme Court in Smith v Royal Bank of Scotland plc [2023] UKSC 34, this requires the court to consider the whole of the relationship between the parties; the assessment is a broad and holistic one.
In this regard, the borrower’s own attitude to the commission payment is crucially important. Where it is established in evidence that fact of the commission would have made no difference to the borrower’s decision to proceed with the finance agreement, i.e. that the borrower would have continued with the finance even had the existence and amount of the commission been fully revealed, this is an important factor which militates against a finding of unfairness.
Indeed, in Hurst, HHJ Carter found on appeal that the trial judge had failed to properly undertake the exercise required by s.140A(2) CCA 1974. The trial judge had based his finding of an unfair relationship solely upon two grounds, namely a breach of duty arising from the payment of the commission and the failure to refer to other lenders. However, it had been established in evidence (as a result of the trial Judge’s own questioning, no less), that the payment of the commission would have made no difference to the borrower’s decision to proceed with the finance. HHJ Carter considered that in failing to take account of this admission by the borrower, the Judge had erred in finding an unfair relationship.
Conclusion
The matters on appeal within the Hopcraft Appeals go to the heart of the nature and structure of the law on secret commissions in motor finance claims. The Court of Appeal is invited to reconsider the scope of the Wood duty, and provide guidance as to whether motor dealers can be said to owe either a fiduciary duty or the Wood duty to their customers in a situation where they have a vested interest in the sale of the vehicle. Although it is likely that the Court will provide some useful guidance on this question, in the author’s view, the outcome of the Hopcraft Appeals is unlikely to be wholly determinative in favour of either side, with cases likely to turn upon their individual facts.
As regards the law as it currently stands, where the Claimant does succeed at trial, it is notable that this is usually on the basis of a Hurstanger half-secret commission or unfair relationship, with the remedy usually limited to the amount of the commission plus interest. Claims must nevertheless be defended vigorously, due to the risk of the Court ordering rescission of the agreement.