If you bought a skadonk, you can cancel the credit agreement, the court says

It’s not the first time a consumer bought a car, discovered it was a lemon, and then decided to hand it back and cancel the vehicle financing agreement.

That’s exactly what happened to Aletta van Niekerk of Koster in North West province, who in 2017 purchased a second-hand 2012 Ford Ranger from motor dealer Autorama in Klerksdorp. The car was bought for her son, Gerrie van Niekerk.

Read: Consumers increasingly approaching consumer commission after being sold defective cars

It was financed by FirstRand for R268 180 over 72 months, after the trade-in of another vehicle valued at R150,000 as a deposit.

The vehicle was found to have several defects, prompting Van Niekerk to decide that she was no longer interested in it.

In December, the Supreme Court of Appeal reaffirmed her right – and those of millions of other consumers in SA – to cancel a vehicle finance agreement because of a latent defect. This followed an appeal by Van Nierkerk in the North West High Court, which ruled the bank was within its rights to reject cancellation of the agreement.

Background

The vehicle was delivered to Van Niekerk on 20 December 2017, but four days later she started having problems with the oil cooler and gearbox. Gerrie van Niekerk returned the vehicle to Autorama, and the gearbox was replaced.

Read: How to avoid repossession, and when to invoke ‘prescription’

The vehicle was returned to Gerrie on 25 January 2018, but within two months it was overheating again. He told Autorama he was no longer interested in the vehicle, and asked the dealer to cancel the financing agreement.

Van Niekerk’s attorney Trudie Broekmann confirmed the cancellation in a formal letter to the bank and Autorama in April 2018.

A professional mechanic engaged by the attorney, Gonasagren Moodley, stated in writing that the replaced gearbox was from an entirely different model and was not suitable for the vehicle. At trial, Moodley pointed to several defects, including issues with the gearbox and the oil cooler.

FirstRand did not agree to the cancellation of the agreement and launched proceedings in the high court. Van Niekerk filed a counterclaim against the bank, to which the bank responded by arguing that the counterclaim was premature, as she had not exhausted all her remedies available to her under the Consumer Protection Act (CPA).

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Van Niekerk counterclaimed for cancellation and refund of payments made (R170 023, including the deposit equivalent and five instalments).

The bank also argued that the vehicle had been purchased from Autorama and that it – not the bank – was the supplier. The North West High Court had earlier ruled in the bank’s favour, but this was overturned by the SCA.

The bank argued that Van Niekerk had waived her common-law right to cancel the agreement when she returned the vehicle for repairs.

The SCA rejected this, emphasising that waiver requires deliberate abandonment of a known right, either expressly or through conduct inconsistent with its enforcement. Citing precedent, the court noted that attempting repairs does not waive rights if the buyer acts promptly upon discovering defects. Van Niekerk’s actions were found to be reasonable, and the defects were indeed material and latent.

The bank also argued that as a mere credit provider and not the supplier of the goods, and the National Credit Act’s exclusions of certain credit agreements from the CPA meant that consumer protections for defective goods did not apply to it.

The SCA leaned on the now-famous Constitutional Court judgment in Nkata v FirstRand Bank, which emphasised that the core of the National Credit Act (NCA) is to protect consumers and create a responsible, efficient and effective credit market.

On this reading of the law, the SCA ruled that the CPA was relevant in ensuring the quality of the goods supplied to Van Niekerk.

Escape routes blocked

The bank’s escape routes were now almost entirely blocked, except for the argument that it was not the supplier of the goods.

Here, the bank was foiled by its own credit agreement, which read: ‘We sell the goods to you on the terms and conditions of this agreement’, and ‘We will remain the owner of the goods until you have paid all of the amounts due under this agreement’.

Read:
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Under the National Road Traffic Act, the bank is registered as the ‘titleholder’, while Van Niekerk was recorded as the ‘owner” – which required her to keep the vehicle in a good and roadworthy condition at her own cost.

“Having regard to the interpretation of the above clauses, and in the context of the entire credit agreement, leads to the inescapable conclusion that the bank most certainly wore two hats when it entered into the agreement, namely, as that of supplier and that of credit provider,” the SCA judgment stated.

Consumer advocate and legal advisor Leonard Benjamin has long argued that consumers purchasing defective vehicles should cancel the agreements, return the vehicles and stop making monthly payments.

Hold the banks accountable

“The solution is completely legal, as I have argued for many years, and seems too good to be true. But now we have a Supreme Court decision that supports my argument.”

Writing for Acts Online, Benjamin says there may be concerns that the financing company will blacklist the consumer. “However, it would be illegal to blacklist consumers who have enforced their legal rights by cancelling the agreement. In any event, blacklisting can be successfully challenged by complaining to the Credit Ombud.”

The courts have finally held the banks responsible for this type of behaviour, Benjamin told Moneyweb.

“For more than a decade, they have avoided accountability by arguing that they are ‘only the financier’, despite the explicit terms of their agreements that they are selling the vehicle to the consumer.

“When a complaint is lodged with the bank, instead of taking responsibility, the banks cheekily offer to mediate between the consumer and the dealer. That’s the height of cynicism.

“Disappointingly, the courts and the ombudsman have failed consumers by simply regurgitating the banks’ arguments, even when the terms of the agreement have specifically been pointed out to them. The legal position should not be contentious.

“The bank buys the car from the dealer in its own name, not on behalf of the consumer. It does so to get ownership. It then sells the car to the consumer, thereby attracting the obligations of a seller, under the common law, and a supplier under the CPA.”

The judgment does not have the far-reaching implications that many suppose, adds Benjamin, but there are steps one can take to reduce the risks.

For a start, get an indemnity from the dealer, or structure the instalment agreement so that the vehicle is hypothecated (pledged as collateral without transferring ownership or possession to the lender) to the bank. While this is not as secure as ownership, it gives the bank a limited real right.

“The bank will then be registered as the title holder to avoid the possibility of ownership being transferred without its involvement,” says Benjamin.

Read:
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