Blog: The Rome I Regulation & Scottish consumer contracts

Here our Principal Solicitor, Mike Dailly, blogs on whether an English law governing clause can oust Scots law rights in consumer contracts in Scotland.

It is not uncommon for consumer contracts to contain a clause stipulating what law will apply to the agreement in the event of a legal dispute. These are known as “governing law clauses”.  But what happens if you live in Scotland – which has its own distinctive Roman law based legal system and jurisdiction - but your contract has a clause saying it is “governed by the law of England”?

For example you are ordinarily resident (domiciled) in Scotland but your credit card, loan agreement, or bank account says it is governed by the law of England?  This may seem academic for two obvious reasons. First, the Civil Jurisdiction and Judgments Act 1982 prevents a UK business raising court proceedings in England against a consumer domiciled in Scotland for consumer disputes. Second, most of modern consumer protection and financial services law is UK law (much of which derives from the implementation of EU Directives), so does it really matter if a consumer contract in Scotland has an English law governing clause?

Actually, yes it does matter. In short, because there are many historical and substantive differences in contract and debt law between England and Scotland. Moreover, these areas of law are devolved to the Scottish Parliament, and such distinctions have increased since 1999. To take but one example, from a court action I am currently dealing with at Govan Law Centre.

It is commonplace for international and domestic companies to purchase defaulting UK consumer credit debts from banks, and regulated credit card and loan providers. The purchaser buys the debt at a heavily discounted price, in exchange for assuming all of the risk in recovering some or all of the debt.

In my example case, a debt recovery company (“DRC”) bought a debt from MBNA (the bank that stood behind the Virgin credit card). The last payment from the consumer was in June 2012. The DRC buys the debt, and instruct Scottish solicitors who raise and intimate sheriff court proceedings in September this year.  The last acknowledgment of the debt was over 5 years ago, and as section 6 of the Prescription and Limitation (Scotland) Act 1973 creates a 5-year time bar for recovering such debts, you might think, the DRC is too late here. The court proceedings are incompetent, as the debt has prescribed under Scots law.

However, the consumer credit agreement contains an English governing law clause, and debts do not generally prescribe in English law for six years. Thus the DRC’s lawyers reasonably argue that as English law applies to this contract, the debt hasn’t prescribed in law. But does English law apply to a consumer contract where the consumer is habitually resident and domiciled in Scotland?

I think the answer may require an international paper chase, which goes something like this. The defender is a consumer and the credit agreement was a consumer contract for the purpose of the “Rome I Regulation”, Regulation (EC) No. 593/2008. Article 6 of the Rome I Regulation, provides as follows:

“Article 6

Consumer contracts

1. Without prejudice to Articles 5 and 7, a contract concluded by a natural person for a purpose which can be regarded as being outside his trade or profession (the consumer) with another person acting in the exercise of his trade or profession (the professional) shall be governed by the law of the country where the consumer has his habitual residence, provided that the professional:

(a) pursues his commercial or professional activities in the country where the consumer has his habitual residence, or

(b) by any means, directs such activities to that country or to several countries including that country, 

and the contract falls within the scope of such activities.

2. Notwithstanding paragraph 1, the parties may choose the law applicable to a contract which fulfils the requirements of paragraph 1, in accordance with Article 3. Such a choice may not, however, have the result of depriving the consumer of the protection afforded to him by provisions that cannot be derogated from by agreement by virtue of the law which, in the absence of choice, would have been applicable on the basis of paragraph 1".

While Article 22 of the Rome I Regulation does not oblige EU member states to apply Rome I to conflicts between the different laws of countries within a member state, it leaves this option open. And the UK and Scottish Parliament applies Rome I to internal UK governing law conflicts.  Regulation 4 of  The Law Applicable to Contractual Obligations (Scotland) Regulations 2009 (SSI 2009/410) extends the application of the Rome I Regulation (with the exception of Article 7 (insurance contracts) with are dealt with separately) to conflicts solely between the laws of Scotland, England and Wales and Northern Ireland and Gibraltar. Regulation 4 provides: 

“4.  Conflicts falling within Article 22(2) of Regulation (EC) No. 593/2008

Notwithstanding Article 22(2) of Regulation (EC) No.593/2008 of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I), that Regulation shall, with the exception of Article 7 (insurance contracts)1 , apply in the case of conflicts between— (a) the laws of different parts of the United Kingdom, or (b) the laws of one or more parts of the United Kingdom and Gibraltar, as it applies in the case of conflicts between the laws of other countries”.

We have more paper chasing because the effect of Regulation4 is to apply the Rome I Regulation to conflicts between different parts of the UK in contractual obligation cases. Thus a credit card agreement can choose - with the consent of the consumer by signing it - English law. The Rome I Regulation is then engaged. And on the face of it, section 23A of the Prescription and Limitation (Scotland) Act 1973, requires the Scottish courts to respect that choice for prescription issues.

However, section 23A(4) disapplies section 23A where Rome I is engaged, as would occur in our example case where English law is chosen to govern a Scottish consumer contract. However, the journey does not end there, because as we have seen Article 6.2 of Rome I prevents a consumer from losing statutory protections in their country of habitual residence which they would have enjoyed had the business not chosen a different law. So if a defender is a consumer who had their habitual residence in Scotland when the contract was concluded, English law can be chosen.

However, the Scottish consumer would still be entitled to enjoy the five year time period under the Prescription and Limitation (Scotland) Act 1973. A consumer protection that exists in Scotland is preserved by virtue of Article 6.2 of Rome I. All of which would mean the DPC can't rely on an English law six year time bar period for pursuing a debt in a Scottish consumer contract.  As this point looks set to be debated at Glasgow Sheriff Court, hopefully an answer to this interesting paper chase will be available shortly.

Blog: The Rome I Regulation & Scottish consumer contracts

Thousands of consumers in Scotland go bust despite "protection" - GLC's Personal Insolvency Law Unit report

Many consumers in Scotland enter into personal insolvency solutions believing that they will resolve their financial difficulties and secure much needed light at the end of a dark tunnel of unmanageable debt.

The aim is to take back control, repay debts as best as possible, and provide financial rehabilitation and a fresh start for those who have generally been through life crises. In many cases insolvency solutions work reasonably well, but there are far too many cases where things go horribly wrong. In our experience, both consumers and creditors lose out.

Govan Law Centre (GLC) was concerned with the high incidence of poor outcomes for extremely vulnerable consumers, which is why we appointed Alan McIntosh to head up the first ever pilot Personal Insolvency Law Unit in Scotland. The project has so far been self-funded by GLC on a pilot basis in order to properly assess the scope, and need, for a dedicated and free specialist service in Scotland.

Our Personal Insolvency Law Unit Unit has been ingathering evidence from casework in Scotland since the summer, and today we publish our interim findings. You can download our report here (opens as PDF).  We provide evidence of widespread mis-selling of protected trust deeds across Scotland. A failure of regulation in Scotland's personal insolvency market which is costing Scottish consumers millions of pounds for virtually no real service.

Our report, written by the Unit’s Project Manager, provides compelling evidence that there is an overwhelming need for a dedicated free specialist service; a service that can provide both second tier support to front line advice agencies but also undertake complex and contentious casework for consumers.  Our report evidences a number of important market and systemic failures, including a high level of failed protected trust deeds and the failure to protect a consumer’s home from repossession. 

We agree with today's editorial in The Herald. The Scottish Government needs to reconsider protection for debtor's homes, and review the licensing and regulatory framework for those who sell trust deeds in Scotland. This is a devolved matter.
  
A protected trust deed failure rate of 9 out of 10 must send alarm bells ringing to members of the Scottish Government and Scottish Parliament. As The Herald says, the evidence is "disturbing". Behind the statistics are human tragedies. Insolvency can and does happen to anyone.  The prospect of paying thousands of pounds for a service that all to often is doing nothing to help either consumer or creditors in Scotland is unacceptable.

Read further coverage of this story in The Herald here.

Thousands of consumers in Scotland go bust despite "protection" - GLC's Personal Insolvency Law Unit report

Overwhelming unmet need for specialist personal insolvency advice in Scotland: update on the work of the Personal Insolvency Law Unit at GLC

Here, Alan McIntosh, Project Manager of Govan Law Centre's (GLC) Personal Insolvency Law Unit provides a brief update on some of the innovative work of our new service.

Over the last few months we have found that there is a overwhelming unmet need for specialist advice and support for clients in Protected Trust Deeds (PTDs) and who are bankrupt in Scotland. It has found many debtors are failing to obtain appropriate advice and representation in relation to:

• Protecting their homes in PTDs and Bankruptcy; and
• Obtaining advice and representation when their PTDs are at risk of failing.

The majority of cases that our specialised Personal Insolvency Law Unit has been dealing with have involved the debtor’s home when they have been threatened with being sold. Sometimes this has been as creditors have made the debtor bankrupt, but increasingly also involves cases where debtors have sought advice from advice services, like Citizen Advice Bureaux and insolvency practitioners and entered into solutions on their advice.

In one case Renfrewshire Law Centre working alongside with GLC's Personal Insolvency Law Unit, was able to make an offer of composition which was accepted by creditors, after an application to eject the debtors from their home had been in front of the sheriff for over a year. The PTD had been granted almost ten years earlier, despite initially only being expected to last three years.

Alan McIntosh, Project Manager

The problem with this case was when it was signed the proposal was that the debtor would not deal with the property to the end of the Protected Trust Deed, at which point they could re-mortgage. However, in that time the credit crunch occurred and clients were not able to re-mortgage, meaning despite continuing to pay their mortgage they lived with the threat of losing their home over that period.

In a similar case, granted around the same time, the £27,321 of debt the client granted the Trust Deed for grew to £52,507, due to statutory interest of 8% per annum being added. The case is still ongoing, however, when the client signed the Trust Deed he was advised he could re-mortgage at the end of the three years, but was not able to. Since then, with three children still living in the home, the mother of the family has passed away.

Another cases involved a client who had been referred onto an insolvency practitioner by a Citizen Advice Bureaux, in 2010, after the credit crunch, with the proposal being that the client could re-mortgage at the end of the Protected Trust Deed and deal with their equity then. The Trustee is now raising court action to sell the home, as the client has predictably struggled to re-mortgage in the current financial environment and with the credit rating they now have.

There have been other successes, however, with some lenders being prepared to show forbearance to debtors when the client’s circumstances have been explained, including that there have been disability issues in the family. However, even when these lenders are majority lenders in the bankruptcy, this has not always provided a solution and there is a number of on-going issues in such cases relating to technical procedural matters, that may still prevent a satisfactory solution being found.

The reality is personal insolvency law in Scotland is extremely complex and many debtors who are now trapped in solutions are struggling to source the specialist help they require to provide them with advice and assistance. Nearly all of Scotland’s free sector advice services are designed to advise clients on how to enter into bankruptcy and protected trust deeds, often with as we have found disastrous consequences, but there are no specialist services available to help people when things go wrong.

We aim to publish an interim report on our findings, based on our case work and relevant empirical evidence.  In the short time our Unit has been operating, it is clear there is a dearth of specialised advice available to clients who are in personal insolvency solutions, despite the serious consequences it can have for clients, risking their homes, often after they believed they had received best advice by people that should have been helping them.  

Sadly, all too often the initial advice given to clients was wrong, not impartial and the administration of the case has been flawed and contributed significantly to the risk of the case failing or the debtor losing their home.

Overwhelming unmet need for specialist personal insolvency advice in Scotland: update on the work of the Personal Insolvency Law Unit at GLC