Del boy no more – how fiduciary duty may change how car salespeople can behave

OMG! Second hand car salespeople – often viewed as the epitome of untrustworthiness and sharp practice and liable to sell their own grandmother if the price was right – are now something called fiduciaries; so says the Court of Appeal in the recent case of Johnson and Wrench v FirstRand Bank Ltd. trading as MotoNovo Finance and Hopcraft v Close Brothers Ltd. [2024] EWCA Civ. 1282 (the Johnson Case).

What has caused this seismic shift in status? In a word “Equity”.

The courts in England and Wales use Equity as well as Law when deciding cases. Law comes from Parliament, in Acts of Parliament (Statute Law) or from judges in cases decided on the facts of a particular case (Common Law).  

Equity is another (different) body of rules which the court can dispense. Equity is the court’s conscience. It is used by courts to soften what otherwise can be the harsh application of Law. Equity is where justice comes in …what is fair and just, is (often) delivered by Equity.

The Law and rules of Equity are agnostic as to whether any transaction is regulated or not or in the motor, consumer or asset finance sectors.

In addition to Law and Equity, there are regulations; for instance, the FCA rules set out in the Consumer Credit sourcebook (CONC). These are spawned from Statute Law (including the Financial Services and Markets Act 2000) but they are secondary in nature and not primary law.

The scope of regulation may not be the same as the Law or Equity and may not cover all areas the Law and/or Equity requires to be covered in any given situation. This is what happened in the Johnson Case.

The mischief in the Johnson Case was the non (or insufficient) disclosure to customers of commission paid by funders to the car dealerships (acting as credit brokers not just sellers of vehicles) which introduced those customers to them. CONC rules at 4.5.3 and 4.5.4 requires broad disclosure of the presence of commissions. Most of the industry took this to mean that it was sufficient disclosure, and thus in compliance with the regulation, to tell the customer commission may be payable and the amount, if asked.

The Johnson Case, the Court, said otherwise because the Court using Law and rules of Equity, went further than the scope of regulation.  The Court decided, on the facts, that the presence and amount of commission must be brought to the attention of those customers so that they could make a fully informed decision as to whether to allow the commission payment to be kept by the car dealership and proceed with the agreement. The Court was applying, not the regulation but the (Common) Law and (fiduciary) rules of Equity in relation to secret payments and bribes, which the commission payments were at risk of being, and so became, without disclosure.

A bribe is a secret payment to a fiduciary agent in circumstances in which the payment could possibly influence the fiduciary as a fiduciary in the exercise of their duties. Who or what is a fiduciary? The bad news – there is no set definition. Millett LJ in Bristol and West Building Society v Mothew [1998] Ch1 at page 18 had a go:

“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. A fiduciary must act in good faith; must not make profit out of his trust; must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit…[..] without the informed consent of his principal.”

In order to determine if a relationship has fiduciary obligations, you have to analyse the nature of any relationship and the role or function of the dominant party. So, one party to a relationship might be in the ascendancy when compared to the other. One party might be able to influence the other. One party might be vulnerable to suggestion and persuasion. One party might be trusted to act for the other in a certain way. One party might place confidence in the other to keep information confidential or to perform tasks on their behalf. These are all indications that one party in a relationship is dominant and may abuse that position for their own benefit.

However, all these factors whilst undoubtedly present in any fiduciary relationship do not either individually or collectively make a relationship a fiduciary one. All of these indicators are present most of the time in normal contractual dealings especially in consumer sale of goods transactions, where the seller is acting for his own benefit and wants to extract the best price from the buyer who may know less than the seller does. Rules of contract or tort law will apply to breaches of contract and/or tortious duties to protect and compensate the injured party.

Fiduciary obligations demand a higher standard. So how do they appear? Something more is needed – a precipitating agent – to release fiduciary obligations from the mix.  What has to be shown is that the actual circumstances of a relationship are such that one party is reasonably entitled to expect that the other will act in his or her best interests.

So, the question becomes is a buyer of a car from a car salesman reasonably entitled to expect the seller to act loyally and put the buyer’s interests ahead of his own so as to owe fiduciary obligations? Not in my view. But what if that salesman, at the same time, is also acting as a credit broker introducing the customer to a funder who will buy the car from him? Is the customer reasonably entitled to expect the salesmen to act loyally and owe fiduciary obligations to him, especially when the customer is not paying any brokerage fee for the introduction? The answer is more nuanced.

The Court of Appeal in the Johnson Case said the dealership did owe fiduciary duties which required the credit broking dealership to disclose the actual amount of the commission it received. The Court of Appeal decided in another case of credit broking that whilst there were fiduciary obligations on the broker, those did not amount to having to disclose the amount of commission. The distinguishing factor was the relative sophistication of the customers in each case. Equity protects the vulnerable and intervenes to require different amounts of disclosure according to the circumstances of the relationship and the parties in it.

The existence, and extent, of fiduciary obligations will be re-examined by the Supreme Court in 2025, when the Johnson Case appeal is heard and when hopefully clarity and finality is given in this complex area.