BMW Financial Service (GB) Ltd v Hart

This appeal is concerned with a point of limitation arising out of a standard hire purchase contract concerning a car. The appellant is BMW Financial Services (GB) Limited, who are the successor to the original named company in the hire purchase contract, which was Land Rover Financial Services. The hirer was Mr Damon Hart, the respondent. Mr Hart has instructed solicitors but they do not appear and there is no-one appearing for the respondent today. We were informed that that would be the case in advance.

The essential facts of the case are that under a contract signed by both parties on 1 March 1999 Mr Hart took a Land Rover Discovery motor vehicle on hire purchase from the appellant, for a total sum of just over £35,000 less a deposit paid of £500, with instalments to be paid as provided in the contract. The balance of the amount payable, including interest charges and other fees, came to £39,967.25. The contract provided for 36 monthly rentals, each of £690.40, followed by a final balloon rental payment of just over £15,000.

Clause 2(b) of the contract referred to the rental instalments and the final balloon rental, and ended by stating:

“Punctual payment of all such sums shall be of the essence and a material condition of this agreement.”

Clause 11, headed “Termination by the Owner/Acceptance of Customer’s Repudiation” provided in part as follows:

“(a). The Owner will be entitled to terminate the hiring either by retaking possession of the Goods, or by written notice in any of the following circumstances

(i)

If the Customer fails to pay on the due date for payment, any rental or other payment under this or any other agreement with the Owner, or

[...]

(iii)

If the Customer is in breach of any of the terms of this Agreement ...

On expiry of any such notice, the Customer shall cease to be in possession of the Goods with the Owner’s consent.”

The next thing that happened was that Mr Hart left the United Kingdom and went to reside on the Continent. In the meantime, the vehicle was recovered and sold, and the net proceeds of that sale were applied as a credit to the sums due under clause 12(a). Nothing further, however, for the moment was done to recover the sums due. It is not clear why there was that delay, and it may be because of difficulties in tracing Mr Hart, who had dropped out of sight, but as the clock was ticking towards the expiry of six years from the date of the termination notice of 26 August 1999, namely on 26 August 2005, the appellants took a completed claim form and Particulars of Claim to Leeds County Court for issuing; the documents were stamped as received on that day, although not formally issued until 31 August 2005. The deemed date of issuing for the purposes of the Limitation Act was 26 August 2005. It is not in dispute in this case that that claim form was in time, if time began with the issue of the termination notice.

What came to be the issue in the case, however, was whether the relevant occasion for the commencement of time running was not the termination notice, whether the relevant date of that is its date of 26 August or its date of deemed service of 28 August, that did not matter, but rather it was submitted on behalf of Mr Hart in due course that time began to run on the day in July 1999 when he first missed the payment of a due instalment. On that basis, it was equally not in dispute that more than six years had run from that time, and if that was the time when time began to run, then it was not in dispute that the claim would be time-barred.

What happened was that the claim form was ultimately served by substituted service. An order for substituted service was made on 25 July 2006, and judgment in default was entered against Mr Hart on 28 September 2006 in the sum of £37,558.31. There is no dispute as to that quantum; the sole issue in the case is the issue of limitation to which I have referred.

Mr Hart did not return to the United Kingdom until in or around 2011, and then became aware of the judgment against him. On 7 October 2011, he applied to have that judgment set aside, albeit even after all this time he delayed a few months past the time that he was deemed to have found out about the judgment. His application to set the default judgment aside came before HHJ Halbert on 2 December 2011. The learned judge ruled that in light of the fact that the debt was already 11 years old, a few months further delay was neither here nor there, and ruled therefore that Mr Hart had applied sufficiently promptly for the purposes of the Civil Procedure Rules. That was, in all the circumstances of the case, a merciful judgment. The learned judge then considered the limitation point, and ruled on it in Mr Hart’s favour, and therefore set aside the default judgment. The decision was regarded by both parties, given the issue involved, as being the determinative decision in the case.

The judge’s decision was founded on the case of Reeves v Butcher [1891] 2 QB 509, a decision in this court. The judge considered that the decision in that case was that where a contract provides for two condition precedents, as in this case there was first of all a condition precedent of a default of payment, which set out a second condition precedent for the service of a termination notice, entitling a claimant to claim the termination payments, time began to run from the time that the first condition precedent was made, rather than from the time when the second condition precedent was fulfilled, on the theory that time started to run when the claimant was put in a position where he was entitled to avail himself of the fulfilment of the second condition precedent even if he had not yet done so. In this connection, the judge considered that one reason for that rule was that, otherwise, a claimant could postpone the running of limitation by failing to act on his entitlement. The judge said in terms that Reeves v Butcher was an exact parallel to the present case, and that he was bound by that decision. Subsequently, in considering the question of permission to appeal, the judge in the final paragraph of his judgment said both that he would not grant permission to appeal, because it seemed to him that the decision he had made was absolutely correct, given the decision of this court in Reeves v Butcher, but on the other hand he felt a bit of concern about the decision, and wondered whether in due course it would be thought right by some senior court to give permission, so that the Court of Appeal could look at the matter for itself.

Permission has now been granted for this appeal, and it is necessary to consider the case of Reeves v Butcher, and the judge’s observations on it. Reeves concerned a five-year loan by the plaintiff to the defendant under a written agreement, which provided that there was a “power to call in the same at an earlier period in the events hereinafter mentioned”. The plaintiff agreed not to call in the money for the five years, if the defendant should regularly pay the interest. But it was also provided that the repayment of the loan could be accelerated in two circumstances. One arose if the borrower died before the expiration of the term, in which case it would be lawful “to call in the said principal sum upon giving to the executors or administrators six calendar months’ notice in writing” of the intention to call in the loan. And the second was that if the borrower:

The action to recover the loan was commenced more than six years after 21 days had run following the defaulting payment of a quarterly instalment of interest, but there was no demand prior to the service of the writ separate from the issue and service of that writ. So the issue before the court was whether in those circumstances the claim was time-barred, or whether it was saved from being time-barred by the absence of any formal demand prior to the issue of the writ. This court held that no such demand was necessary, and that the claim was time-barred. Lindley LJ said (at 511):

“The agreement is one reasonably easy to be understood. It provides for a loan for five years, subject to a provision that if default is made in punctual payment of interest, the principal shall be recoverable at once. Now, the Statute of Limitation (21 Jac. I, c. 16) enacts that such actions as therein mentioned including “all actions of debt grounded upon any lending or contract without specialty” shall be brought “within six years next after the cause of such action or suit, and not after.” This expression “cause of action” has been repeatedly the subject of decision, and it has been held particularly in Hemp v. Garland 4 QB 519, decided in 1843, that the cause of action arises at the time when the debt could first have been recovered by action. The right to bring an action may arise on various events, but it has always been held that the statute runs from the earliest time at which an action could be brought.”

Fry LJ said (at 511/512)

“The agreement contains a stipulation that the lender shall not call in the principal sum for a period of five years, if the borrower should so long live, and should duly and regularly pay the interest. This implies a contract by the borrower that the principal debt should be paid at once on the death of the borrower, or on default in payment of interest. The subsequent provisions imply a contract by the lender not to enforce payment after the death of the borrower until the expiration of a six months' notice, and a contract not to enforce payment of the capital for default in payment of interest until twenty-one days after such default, thus giving the borrower further time. Subject to the stipulations, the implied contract to pay the principal remained in force. The principal, therefore, became payable twenty days after the first quarterly instalment of interest became due, and from that time the statute of limitations began to run. If authority is wanted, Hemp v. Garland 4 QB 519 is in point.”

Lopes LJ said (at 512):

“Now, when first had the plaintiff a cause of action? When default was made for twenty-one days in payment of an instalment of interest. Hemp v. Garland (1842) 62 R.R. 423, is in point.”

Without looking at Hemp v Garland, which was plainly considered to be an identical case, it is possible to see that the three Lords Justice in Reeves v Butcher did not regard the language of “call in and demand” as requiring a separate demand as a condition precedent to the issue of proceedings. That was quite understandable in a contract which plainly used the expression “call in and demand” as referring to the issue of proceedings themselves. One can see that quite plainly in relation to the first of the two provisos to the five-year term of the loan arising on the death of the borrower, because the contract there said that it should be lawful for the creditor to call in the sum upon giving six months’ notice to the administrators or executors of the deceased borrower. So in that situation, it is the giving of a six-months’ notice which is the relevant condition precedent beyond the death of the borrower. In the case of a default of payment of quarterly interest, on the other hand, it is merely the passing of 21 days which allows the creditor to call in and demand payment.

It is plain to me both on the language of the contract itself, and upon the reasoning of the judgments in Reeves v Butcher, that the reference to calling in and demanding the loan is simply a reference to the right to issue proceedings once the relevant condition precedent of failure to pay a due instalment of interest for 21 days had occurred. So that was a case of a single condition, default of payment for 21 days, and not, as the judge in this case thought it to be, a case identical to the provisions of our contract, whereby you need first of all a breach, such as failure to pay an instalment due, and then a termination notice which may or may not be given.

This analysis of Reeves v Butcher is confirmed by consideration of the earlier case of Hemp v Garland, to which each of the three judges in Reeves v Butcher referred. That concerned a loan repayable by instalments, with an acceleration clause which provided that the repayment of the loan could be made the subject of proceedings (“liberty to enter up judgment”) if there had been a failure to pay any instalment due. A number of instalments were unpaid, but the creditor forbore to claim repayment for more than six years from the time of the first default of payment. It was held that the creditor was time-barred. But that was a simple case of a contract whose acceleration clause, without more, accelerated the liability to repay the whole loan upon the failure to pay any single instalment of it. So that was a one condition contract.

There have been many subsequent decisions in which the language of demand has sometimes amounted to a condition precedent to the arising of a cause of action permitting proceedings, and sometimes it has not amounted to such a condition precedent. It is a matter of the construction of each contract. The need to construe each contract carefully on its own terms has been emphasised in subsequent authority, amongst which I think it necessary only to refer to Thakore v Malick (unreported, 26 March 1982), which reviews authorities up to that date, including what is perhaps the leading authority for these purposes of Lakshmijit v Faiz Sherani [1974] AC 605. I quote from the judgment of Sir Sebag Shaw in Thakore v Malick, where he considers Lakshmijit. He said of that case:

“The facts as recounted in the headnote may be summarised as follows.

Under the agreements, the purchasers were given immediate possession but were made subject to the performance of certain obligations so long as any money remained owing by them. Clause 20 of the first agreement provided that if at any time two of the quarterly instalments should be in arrear and unpaid for more than 7 days after the due date of the second of such overdue payments then the vendor, at his option ‘(a) may enforce the present contract in which case the whole of the purchase money ... shall become due and at once payable’. The purchasers defaulted in payment. The vendor made demands for payment but the purchasers continued in default. Thereafter notice was given that unless the money was paid in 30 days the agreements were determined and possession of the lands was required. After the expiry of the period stated notice was given that the agreements had been determined and possession of the lands was demanded. The trial judge held that the vendor’s claim to possession was statute barred, having regard to the chronology of events which it is unnecessary to recite here. In the course of the judgment of the majority, Lord Cross referred to the cases of Reeves v Butcher and Harry Smith v Craig [that was a decision of the Court of Session [1938] SC 620], and cited Lord Aitchison’s observation in the latter case that ‘The contract, as I read it, simply means that on default of any payment there is a constructive default of all payments.’ Lord Cross then turned to the sale agreements and said that ‘their Lordships do not construe these sale agreements as imposing an obligation on the purchasers to pay the whole purchase price as soon as they make such default in payment of instalments as entitled the vendor to exercise the remedies given to him ... That obligation only arises if the vendor elects to impose it on them by making a demand for payment’.”

Similarly, Dunn LJ said:

“In Lakshmijit v Faiz Mohammed Khan Sherani [1974] AC 605, Lord Cross, at page 617, explained the contracts in Reeves v Butcher and H. Smith v Craig in this way:

‘In each case the Courts held that the plaintiff’s right of action accrued as soon as the defendant made default in payment of an instalment of interest and was barred after six years from that event. They were not treated as cases in which the plaintiff could elect between inconsistent remedies but as cases in which each contract imposed an obligation on the defendant to pay the principal lent as soon as the interest fell into arrear;’ see e.g. per Fry L.J. in Reeves v Butcher ‘the agreement contains a stipulation that the lender shall not call in the principal sum for a period of five years if the borrower should duly and regularly pay the interest. This implies a contract by the borrower that the principal shall be paid at once on default in payment of interest’;”

Lord Cross might have referred to the 21 days’ allowance stipulated in Reeves v Butcher, but that makes no difference to the principle which Lord Cross was there applying on his understanding of the cases of Reeves v Butcher and Smith v Craig.

Therefore, both on my interpretation of Reeves v Butcher standing by itself, assisted by my interpretation of the case relied on by their Lordships in that case, the case of Hemp v Garland, and also in the light of the authoritative discussion of Reeves v Butcher both in this court in Thakore v Malick and in the Privy Council in Lakshmijit, it is plain that the learned judge in this case below erred in his interpretation both as to Reeves v Butcher and also, in my respectful judgment, in his interpretation of the contract in this case. There is no avoiding the conclusion that in this case there can be no right to sue for the clause 12 payments, that is to say for the full sum due upon an acceleration less any debits which should be credited, or plus any additional amounts which might be claimable, until a termination notice has been given or an acceptance of the repudiation has otherwise been communicated. In this case, the same termination notice was both the exercise of the right to terminate by notice, and also an acceptance of a repudiation, itself a matter referred to in clause 12. It is only upon the serving of such a notice or a communication of such an acceptance of a repudiation that the much greater amounts due under clause 12 become due. Before such a notice or acceptance of repudiation, the only amounts due are the outstanding instalments. Unlike the cases discussed in the jurisprudence, the mere failure to pay an instalment does not by itself, under the provisions of the relevant contract, accelerate the obligation to repay the whole amount outstanding.

Therefore, ultimately this is a simple case upon the wording of this contract. Mr Buck, who has made helpful submission in his skeleton argument, has thought it right to draw to our attention that the decision of the judge below has caused some consternation to the hire purchase industry, which contracts generally on terms very similar to those represented by clauses 11 and 12 of our contract. Perhaps the fear of the industry was overstated by Mr Buck, perhaps not; at any rate, in the light of the jurisprudence to which I have referred, there was it seems to me in truth no need for them to worry.

It seems to me that for the reasons which I have sought to give, this appeal must be allowed. In the circumstances, it is the only issue in the case, and the effect of the allowing of this appeal is that the default judgment will not be set aside, if my Lords agree, and the default judgment will stand.

I agree. The contract in this case, being a hire purchase agreement, provided for the payments of instalments over a period of time. In this case, they were to be followed by a final balloon payment. The contract also provided in clause 12 that if the customer failed to pay any instalment of hire when it became due, the hirer should be entitled to terminate the agreement, recover possession of the vehicle and recover the amounts provided for by that clause. Those amounts reflected the unpaid instalments of the price of the vehicle, less credits due to the customer. The effect of giving notice under clause 12 was to treat the contract as discharged, and thereby, in effect, to accelerate the customer’s liability for the sums that would otherwise have fallen due for payment in the future.

There has been some debate, particularly in counsel’s skeleton argument, about whether the claim under clause 12 sounds in debt or damages, but for my part I do not think it makes any difference, since the obligations to make the payments in the future were not broken until the hirer elected to treat them as discharged. The judge thought that the case was covered by the decision of this court in Reeves v Butcher [1891] 2 Q.B. 509, to which Rix L.J. has referred. In that case the claimant sought to recover a loan following the failure of the borrower to pay an instalment of interest on the due date. The loan agreement provided that it could be called in if there was a failure to pay any such instalment of interest. The action was commenced within six years of the demand, but more than six years after the default in payment. This court held, following the decision in Hemp v Garland (1842) 62 R.R. 423, that the cause of action accrued when the default in payment occurred, because it was at that point on the true construction of the agreement that the right to recover the loan arose.

In my view, the judge was wrong to think that that decision applied to the present case. In this case, the right to recover the sum set out in clause 12 did not arise unless and until the hirer gave notice to terminate the contract. That was a right that he could choose to exercise or not, but unless he elected to do so, the contract continued in existence and instalments of hire would have fallen due at the stipulated intervals. Under section 5 of the Limitation Act 1980 time in a case of this kind runs from the date when the cause of action accrues. In this case, the cause of action to recover the amounts claimed under clause 12 did not accrue on the customer’s default alone, but only upon the election of the hirer to terminate the contract.

In my view, therefore, the claim is not time-barred. For those reasons, as well as the reasons given by Rix L.J., I agree that the appeal should be allowed.

I agree with both my Lords’ judgments, and add a few observations of my own. This is not a case of repayment of a loan already made. The consideration under the contract moving from Mr Hart was the obligation to make a series of periodical payments, plus the final balloon payment. In the ordinary way, therefore, BMW would have had to wait for each instalment to fall due before it could sue for that instalment. The payments due under clause 12 are not simply an accelerated payment. Other losses are also recoverable, and adjustments need to be made to the outstanding future payments of hire in order to produce a calculated rebate.

Clause 12 is on its face subject to two conditions precedent; namely the termination of the hiring by the owner under clause 12, or the acceptance by the owner of the customer’s repudiation. In my judgment, since one or other of those conditions precedent must be fulfilled before the right to payments under clause 12 arises, it must follow that no cause of action accrued until satisfaction of one or other of those two conditions.

I agree, therefore, with my Lords, Lord Justice Rix and Lord Justice Moore-Bick, in their analysis of the decision of this court in Reeves v Butcher. The conclusions of my Lords, with which I agree, are consistent not only with principle but with authority, and in particular the decisions in Lakshmijit v Faiz Sherani and Thakore v Malick. Where the Limitation Act makes a different provision, it does so expressly; for example in paragraph 7 of schedule 1 to the Act dealing with forfeiture, which provides:

“(1)

Subject to sub-paragraph (2) below, a right of action to recover land by virtue of a forfeiture or breach of condition shall be treated as having accrued on the date on which the forfeiture was incurred or the condition broken.”

That exception is needed, because as a matter of general principle where a remedy arises on the election of one party to the contract, the cause of action does not accrue until the election is made.

For these reasons, in addition to the reasons given by my Lords, Lord Justice Rix and Lord Justice Moore-Bick, I too would allow the appeal.