Eventually connected lender liability clause laid down

The Diet eventually has passed the bill concerning the Installment Sales Acton 11th June 2008; the government has been discussed the law revision.

The revised law introduces the lender liability clause: consumers who suffered a damage caused by unfair commecial conduc like as a misrepresentation can seek repayment to creditors as well as distributors.

Extent of the type of transaction

Connected lender liability clause is only applied to the certain type of credit; it will exclude credit cards transaction. The exent of the type of credit transaction is so tight; It differs from the enactment in UK credit law.

UK card issuers and suppliers for valid consumer claims against the supplier for misrepresentation or breach of contract are liable for the claims arising card transactions. Whilst it is argued whether the liability clause apply to the foreign transaction financed by credit card, the House of Lords has, on 30st October 2007, delivered its judgement in the case of The Office of Fair Trading v Lloyds TSB plc, Tesco Personal Finance Limited and American Express Services Europe Limited [2007] UKHL 48; it upheld the Court of Appeal’s judgement that connected lender liability, imposed by Section 75(1) of the Consumer Credit Act 1974 (“the Act”), applies to foreign transactions financed by credit cards issued under regulated consumer credit agreements, just as it applies to domestic transactions. The revised law, the Consmer Credit Act 2006, has a same clause.

Type of sales practice

As to the sales practice, connected lender liability clause only is applied to the doorstep selling and telephone selling; the distant selling except the telemarketing sales is out of this regulation.

The extent of liable cause

Credit Companies does no be liable in the case where the distributors’ failure of performance is incurred by their bankruptcy. 

Liability of creditors connected with bogus suppliers

If the undertakings conduct misrepresentation or omission violating the CCA in the tripartite credit agreement, the consumer not only rescind the contract with the supplier, but also he might be able to revoke the credit contract with creditor, because the supplier acted as a role of a intermediary of the creditor stipulated in sec.5 of the CCA concerning concluding the credit agreement.   

Court rulings

The  Osaka Summery Court, on 9th January 2004, approved the creditor’s liability in the tripartite credit agreement concerning a home-in-work case.

The Kobayashi Summery Court, on 22th March 2006, approved the creditor’s liability in the tripartite credit agreement concerning a home repair case by via doorstep selling.

Misrepresentation or provision of asserting evaluation

Consumers may revoke their declaration of wil to offer or accept a consumer contract if consumers make any of the specified mistakes set forth below as a result of any of the acts listed in the following items by a business operator at the time of being solicited to enter into such consumer contract by such business operator and thereby making said manifestation of intention: (i) to represent that which is not true as to an important matter. Mistake that the content of said representation is true; (ii) to provide conclusive  evaluations of future prices, of amounts of money that a consumer should receive in the future and of such other uncertain items that change in the future with respect to goods, rights, services and such other things that are to be the subject of a consumer contract. Mistake that the content of said conclusive evaluation so provided is certain (sec. 4(1) of the CCA).

Intentional omission of disadvantageous fact for supplier

Consumers may rescind their manifestations of intention to offer or accept a consumer contract if a business operator represents to said consumers the advantages as to important matters or things related to said important matters but intentionally fails to represent disadvantageous facts (limited to those facts that consumers would normally consider to be non-existent by such representation) at the time of solicitation by a business operator to enter into such consumer contract, as to important matters, and said consumers thereby mistakenly believe the non-existence of such facts. Provided, however, that this shall not apply where the business operator has attempted to make representations of such facts to said
consumers and said consumers refuse to hear such attempted representations (sec. 4(2) of the CCA).

Mistake of a credit contract via a distributor on a tripartite credit contract arrangement

The Tajimi branch of the Gifu district court, on 19th Jun 2007, provided interesting ruling concerning a consumer credit contract by which the purchaser was financed from the creditor connected with the distributor who scammed the purchase. 

Fact

The defendant was purchaser of a movable store building from a supplier connected with the plaintiff creditor and formed a tripartite credit agreement with the plaintiff company; the supplier acted as a intermediary of the plaintiff when the defendant concluded the finance contract with the plaintiff.

The plaintiff filed a claim to te defendant in arrear and the defendant made a counterclaim that the credit contract was void by virtue of mistake: whilst the supplier scammed the defendant, the credit contract was void, because the credit contract was induced by the mistake of the supplier who acted as a intermediary of the creditor at a credit contract formed.

Ruling

A person who, when he gave a declaration of will, was mistaken about its content, or did not intend to give a declaration with this content at all, is  void if it is to be assumed that he would not have given it if he had known the state of affairs and on a rational assesment of the case. It is stipulated in sec. 95 of the civil law.

The court approved the counterclaim of the defendant. When the supplier employed the credit contract as a measure of fraud, the defendant could insist that the credit contract was void by mistake, even though the mistake existed in the inducement of the defendant and therefore the defendent did not make the inducement clear to the creditor. 

As the justivication reason of the decision, the court stated as follows: by forming the membership agreement, the creditor can acquire the new borrowers via marketing of the menber distrubutor and also can earn the membership fee from the distributor; when the tripartite cerdit agreement was employed by a measure of fraud of the distributor, the recognition of the creditor connected with the supplier, the recognition of the supplier should be regarded as same as the supplier at the judgement of the existence of the mistake, because the supplier acted as a intermediary of the creditor; the thought was accordance with the principle of the good faith and the consideration of reward; although the creditor could not argue that the supplied was only a third party on the credit agreement and that the credit contract was not influenced by the defect on the purchasing contract, it should be allowed.

If the above contract is a consumer contract, the issue is resolved by the statutory regulation as follows.

Mistake of a credit contract via distributor connected with a credit company

When a distributor acts as intermediary of a credit company to form the financing contract with the purchaser, the purchaser can consider that the recognition of the distributor is as same as the one of the credit company. It is base on following art.5 of the Consumer Contract Act 2001.

Article 5 (Third Parties Entrusted to Intermediate and Agents)

(1) The preceding article shall apply mutatis mutandis to cases where a business operator entrusts a third party to intermediate a consumer contract between the business operator and a consumer (which shall be referred to simply as “entrustment” for purposes of this paragraph), and the third party (which includes a person entrusted by such third party (including any person who is entrusted through more than two layers of entrustment) who shall be referred to as “entrusted person, etc.” hereinafter) commits any acts set forth in paragraphs (1) to (3) of the preceding article with respect to a consumer. In this case, “the business operator” referred to in the proviso of para. (2) of the preceding article shall be deemed to be replaced with “the business operator or the entrusted person4, etc. provided in para. (1) of the following article.”

(2) Any agent of a consumer (which includes a subagent (including any person appointed as a subagent through more than two layers). The same shall apply hereinafter), agent of a business operator and agent of entrusted person, etc. as above involved in the execution of a consumer contract shall be deemed to be the
consumer, business operator and entrusted person, etc., respectively in the application of paragraphs (1) to (3) of the preceding article (including the case where it is applied mutatis mutandis pursuant to the preceding paragraph. The same shall apply in the following article and in Article 7).

Duty of disclosure about a measure of payment by credit card via internet

The Sasebo branch of the Nagasaki district court stated that the credit card company had the obligation to explain the problem of online use of credit card; the user can use the credit card only to type the card holder’s number, his name and expiration  date. The court, on 24th April 2008, rejected the claim for payment by the credit card company by virtue of his negligence of information duty.

Fact

The claimant was a  credit card company and the defendant was the holder of the credit card issued by the claimant.  According to the ruling, the 58-year-old company employee of Sasebo, Nagasaki Prefecture, was asked by Tokyo-based Credit Saison Co. to pay about 3 million yen for the use in February 2005 of Web sites that the man said he did not access. It was later learned the man’s eldest son copied information from his credit card–such as the card number and expiry date–while the man was sleeping. The son, who was 19 at the time, then used the card information to pay for Web site services.

The plaintiff claimed its rules stipulate that credit card holders are personally responsible for payments associated with the unauthorized use of a card–including usage by family members. In responce, the defendant made a counterclaim: he had not been informed of payment systems that did not require identity verification data, such as a personal identification number, making it difficult to properly control the credit card.

Ruling

The court rejected the claim by the defendant: the credit-card company didn’t necessarily establish to the best of its ability an online payment system capable of preventing the unauthorized use of credit cards. The defendant therefore didn’t commit a serious offense.

As long as the newsreport, the reason why the court rejected the claim is not clear whether the credit contract was void by unauthorized representation (civil code, art. 115) or the plaintiff could not calim on the breach of good faith (civil code, art.1(2)).

Analysis

The credit card industry says that card holders are responsible for keeping and controlling their credit card. But, the plaintiff’s payment systems does not require identity verification data, such as a personal identification number, making it difficult to properly control the credit card. In other word, there is limiation for the usual consumer to prevent unauthorised use of the credit card.

On the other hand, the credit card company can adapt more strict measure to minimise unauthorised use of the credit card: the Japan Consumer Credit Industry Association, based in Shinjuku Ward, Tokyo, said, “We’d like to encourage member firms to take measures as early as possible vis-a-vis identity verification for online payments, such as for systems that require holders to enter information known only to them–perhaps a favorite color or a password–without requiring them to enter identity numbers.” 

While credit companies continue to provide the current online credit card payment system, if they can offer more safety system to prevent unauthorised use of credit card, the present service should be defective. In that case, the credit companies should take liability as long as they provide the defective services.

It is not bad that the court approved the negligence of the information duty of the credit company. However, It shall be temporarily measure of solution for consumer’s injury; such rationale which relieves customer’s compensation would vanish if the system of online payment of the credit card become known widely. It does not take long time.   In that situation, the customer can not blame the negligence of the information duty. I think that the liability of the credit company should be based on the provision of the defective system rather than the negligence of the information duty. 

Credit companies make profit or can reduce their cost by maintaining such system, at the same time the customer’s risk might be increasing; it shall be justifiable reason for the credit company to take responsibility for the damage caused by the system.  

Credit company is liable for the excessive selling

The Osaka District Court, on 23th April 2008, approved the liability of the credit company for the exessive selling of the distributor

Fact

The defendant credit company was in association with the distributor and financed the purchasing of the plaintiff; while the plaintiff was ex-employee of the distributor, she bought a lot of “kimono”, Japanese traditional clothes, and “futon”, Japanese style mattress from the distributor.

Ruling

By the reason why the payment was  sometimes exceeding her wages and the defendant credit company has been recognizing it, the court approved that the credit company was liable with he distributor by tort; the court, therefore, ordered the defendant to pay damage compensation of the amount payment as from the time when the total payment had exceeded her gross income.  

Influence 

The Installment Sales Law prohibits the credit company excessive lending, although the law has no regulation of civil sanction for the breach of the restriction. For the purpose of the law, the credit company has to investigate the affordability of repayment in the customer prior to the finance; the annual income of the customer is one of significant materials for the judgement of his lending. In other words, the credit company associated with the distributor is in the situation that he can acknowledge whether the amount of the purchase of the customer exceed his/her income or not.

In this connection with this court decision, most creditors associated with the distributors may be liable in the case of lending connected with excessive sales.

Excessive sales of kimono violates the suitability rule, Takamatsu Appeal Court said

The application of the suitability rule is expanding to the general consumer transaction gradually.
Court of appeal  

The Takamatsu Appeal Court approved the original court ruling on 22th July 2007. The original court ruled that excessive kimono sales was void by virtue of the breach of public moral and ordered the sales company and the connected credit company to pay compensation, on 29^th January 2008. The ruling of appeal court said as followes. 

The most of goods that the plaintiff purchased were expensive products like as Kimono, Japanese traditional cloth.  The defendant selling store had duty not to exercise a excessive sales with consumer; the trading was necessary to be suitable with the client’s understanding and needs of the trading; it might be estimated by her age,  occupation, income, trading history in past, financial status and the circumstance of her life. Same duty was imposed to the Credit companies connected with the selling store and loaned the payment of the purchasing products, therefore they may not loan excessively beyond the borrower’s repayment capability; it was basis on good faith (civil code, section 1(2)).

The ruling also said that the contracts of selling and credit in case degree of the excessiveness was outstandingly could be void by virture of  the public moral (civil code, section 90).

Law reform

The Installment Sales Law prohibits the excessive lending (art. 34); but the breach of the obligation has no effective sanction including civil penalty; the article is only in nature of declaration. While the METI considers the law reform of credit transaction, the effective regulation of excessive lending is targeted in forthcoming law revisions; it can be seen in the METI report on 10th November 2007. Above mentioned rulings shall get behind this law reform.

Inspection duty of creditors against member shops

Does METI change his attitude to the reform of installment sales law? Although the ministry does not still decide, the ministry seems to hesitate to enact the connected lender liability legislation.

Previous suggestion 

Previously, METI had been suggesting establishing the connected and several liability clause in the forthcoming law reform. However, according to the recent news report[1], the METI seems to consider only to insert the inspection duty of creditor which is against the member shops; as a result, any civil penalty clause may not be established on the upcoming law.

The meaning of duty of inspection

The creditors tend to deny the existing of such inspection obligation against the member shops in good faith principle; the inspections are not their duties, but they are the rights protecting the creditors’ interests; therefore, they must not be blamed by virtue of the omission of the duty in civil law. 

Penalty

By the forthcoming law reform, administrative bodies can order the creditors to provide relevant materials in question; they shall seek adequate explanation of the creditors who are regarded as neglecting the necessary inspections. To the creditors who are against the aforementioned duties, pertinent administrative penalties shall be imposed.

Civil sanction

Actually, consumers can sue damage claims to the creditors, who are against the inspection duty, based on the breach of good faith in civil law. But in such damages claim lawsuits, they have to show the negligence of creditors concerning the execution of their inspection duty. It is not easy for consumers to prove them. At least, the law should set up the presumption clause which surmises the negligence of creditors in case creditors cannot submit adequate material of executing their duties.

---

[1] http://www3.nhk.or.jp/news/2007/09/25/d20070924000067.html