On 1 - 3 April 2025, the UK Supreme Court heard an appeal by two car finance providers against the Court of Appeal's decision in the linked cases of Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcraft v Close Brothers Ltd. The lenders seek to overturn the Court of Appeal's decision that they are liable to borrowers for commission payments made to the car dealers who brokered their hire purchase contracts.
We previously discussed the regulatory aspects of this matter in our recent article (The Supreme Court hears motor finance test case), and the Court of Appeal's judgment on this matter in separate article (Court of Appeal hands down decision in motor finance test case).
In this article, we consider the common law position and arguments to date, and the key questions on which the Supreme Court's decision is awaited.
Background
In all three cases, the claimants visited car dealerships with the intention of purchasing a vehicle. The car dealers assisted the claimants in obtaining a loan from third-party lenders to fund the purchase. The claimants subsequently entered into credit agreements with the lender defendants following the relevant introduction by the car dealers. In turn the car dealer received a commission – which the car dealer had some degree of discretion in setting – from the lender for arranging the credit agreement. In one of the cases the commission arrangement between the lender and car dealer was concealed from the claimant entirely. In the other two cases, the claimants did not know and were not told that a commission was to be paid. However, the lender's standard terms and conditions for the loans made reference to the fact that commission may be paid to the car dealer. The Court of Appeal characterised this scenario as a "partial disclosure".
The Court of Appeal decided in favour of the customers. It found that in acting as credit broker, the car dealers owed a "disinterested duty" to their customers (i.e. a duty to provide information, advice or recommendation on an impartial or disinterested basis). Additionally, the car dealers also owed in tandem with the disinterested duty an "ad hoc fiduciary duty" to the customers, which required them to act with loyalty and avoid conflicts of interest. In all three cases the Court of Appeal determined that there was a conflict of interest and no informed consent by the customer to the receipt of the commission.
The Court of Appeal ruled that if the commission payment was fully secret from the customer, then the lender has a primary (not merely accessory) liability to the customer. If, on the other hand, the commission was partially disclosed, then there is no "secret" commission, but the lender may still be liable as an accessory to a breach of fiduciary duty by the dealer if the dealer owed such a duty (which in these cases it had said they did). As for each of the three cases it was held:
- In Hopcraft, there was no disclosure of the commission and so the lender was liable on a primary basis.
- In Wrench, the hire-purchase agreement contained a clause stating that commission "may" be payable to the broker who introduced the lender and "the amount is available from the Broker on request". The Court noted that whether there has been sufficient disclosure is a factual question. Ultimately, they did not consider that referring to the payment of commission in the small print of terms and conditions was sufficient to negate secrecy.
- In Johnson it was conceded that the possibility of a commission had been adequately drawn to the attention of the consumer, such as to negate secrecy. Therefore, the commission was not considered secret, and the "disinterested duty" did not apply. However, the lower Courts had already concluded that Mr Johnson had not given his fully informed consent to the commission and on this basis, the dealer had breached its fiduciary duty to Mr Johnson. The lender could therefore be liable as an accessory to that breach.
The appeal to the Supreme Court
The lenders' primary ground of appeal is the argument that the car dealers should not be found to have owed fiduciary duties to the consumers. They add that there is no difference, or no relevant difference, between an ad hoc fiduciary duty and a disinterested duty.
The lenders argue that the touchstone for identifying a fiduciary is the obligation of loyalty. That core obligation gives rises to the rules that a fiduciary must act in good faith, must not allow a conflict to arise between their interest and that of their principal, and must not act for their own benefit or that of a third person without the informed consent of the principal.
The position advocated by the lenders is that a person is a fiduciary if and only if they have undertaken that obligation of single-minded loyalty. That is, that they have agreed to act for or on behalf of another person and in such a manner that their own interests will be subordinated to those of that other person.
The lenders submit that the car dealers did not undertake any such obligation, nor could the customers have understood them to have done so. There were three primary reasons for this:
- The contract of sale and the hire purchase agreement are inextricably linked. It is thus not plausible to say that the dealer-broker undertakes to act with single-minded loyalty in respect of the hire-purchase arrangements. The Court of Appeal was wrong to find that the two contracts could be treated entirely separately. It was accepted evidence that the price paid for the car may be lower if finance is taken, showing that the two deals are interlinked. It was also in evidence that the customers approached their intended purchases based on an idea of what monthly payments they could afford. There was tension in the Court of Appeal's acknowledgement that only a quite sophisticated consumer would realise the dealer-broker is fulfilling two roles and the idea that there are two entirely distinct transactions. It is not argued that a fiduciary duty is owed in relation to the car sale, thus if the contracts are not separable then there should be no fiduciary duty on the finance aspect of the transaction either.
- In many cases there will be clear contra-indications against an undertaking of loyalty. For example, the fact a lower purchase price may be offered if the customer chooses to take finance is a clear indication to the customer that the dealer must have some interest in getting them to take finance. And the statement in the terms provided by some of the dealers that they may receive a commission from the lender is squarely at odds with any undertaking of loyalty to the customer.
- The statutory and regulatory framework tells against the imposition of a fiduciary duty. The fact that commissions are paid in car finance transactions is well-known and understood. For example, the Hire Purchase Act 1974 was enacted following a report by the law Reform Committee which had made clear that the dealer was the lender's agent; this brought with it advantages to the customer such as making the lender liable for any misrepresentation by the dealer as their agent.
If the Supreme Court is not persuaded by this first ground of appeal, then the lenders submit that there should be no common law tort of bribery establishing primary liability on the part of the lenders (per prior Court of Appeal authority, as a technical matter the law treats a secret commission as a bribe). They argue the lenders' risk of liability should be limited to that of accessory liability for dishonest assistance in a breach of fiduciary duty. They add that in these cases, dishonesty on the part of the lenders should not be found and thus on the facts the lenders should not be liable.
The lenders submitted that the common law tort of bribery is anomalous and should no longer be recognised as on closer inspection it has no firm basis in case law. Their primary submissions to support this were:
- The claimant's right to recover the amount of a bribe from its recipient is founded on the equitable 'no profit' rule, which applies only to fiduciaries.
- The claimant's right to seek recission of any contract entered into with the briber is founded on the procurement of a breach of the equitable 'no profit' rule.
- Remedies for bribery should thus be exclusively equitable.
The lenders supplement the argument that liability should be limited to equitable accessory liability only with the argument that that liability can only be established if the lender can be shown to have acted dishonestly, which on the facts of these cases would not be made out.
For a person to be found to have acted dishonestly requires that they were aware of the relevant facts about a transaction which makes participation in it contrary to ordinary objective standards of honesty. The lenders submitted that this would require them to know that the dealer was not entitled to receive commission, which was not the case. Moreover, on the objective limb of the dishonesty test, it is not obvious that simple fact of paying the dealer a commission would be deemed dishonest given that it is expressly permitted by the FCA's regulatory regime.
Comment
The Court of Appeal stated at the end of its judgment that there were tensions in the existing case law on this topic, which had not been easy to reconcile, and that at some point a definitive ruling from the Supreme Court would be desirable. Fortunately, this is now on the horizon, with the Supreme Court indicating that it hopes to deliver judgment in this expedited appeal this summer.
The key questions for the Supreme Court to answer include what facts give rise to an ad hoc fiduciary duty, whether there is such a thing as a 'disinterested' duty and whether that is different from an ad hoc fiduciary duty. This will found the position of whether the payer of a commission to a fiduciary is directly liable to the principal – that will be the case if the commission was secret.
For non-secret commissions, if a fiduciary duty was owed by the dealer-brokers, then the Supreme Court will need to decide what state of knowledge the payer needs to have had to be liable for dishonest assistance. The Court's guidance on this question will also be critical for lenders whose terms did explain to customers that commission was paid.
The Supreme Court's decision may have an impact beyond the immediate context of the motor finance industry. As is evident from, for example, the recent case of Expert Tooling and Automation Ltd v Engie Power Ltd [2025] EWCA Civ 292, commissions are paid to brokers in many industries. The legality of payment of such commissions without the fully informed consent of the customer could be in issue whenever a broker is used. Parties who pay commissions to brokers who place business for them therefore will be watching keenly to learn whether the practice risks rendering them liable to the customer.
The outcome of this appeal is difficult to predict. The five-judge panel appeared to critique the respondents' position closely, but the multi-faceted nature of this appeal means that inferences cannot be drawn from this as to what the court will conclude. The Supreme Court's decision is expected in or around July 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
