Written by Hugh Elder
Accompanied by five dealers and one pawnbroker, Hugh Elder tells the tale of a sorry string musician.
In classical musical circles, the viola and the viola players are the butt of jokes: “What’s the difference between chopping up an onion and chopping up a viola? No one cries when you chop up a viola.”
But there were plenty of tears on 26 February 2014, when a judge chopped up not a viola itself, but the proceeds of its sale.
The facts, as found by the judge, were that a professional musician, who owned a valuable viola (attributed to Ceruti in Cremona in 1803), needed some money urgently to pay a debt, ironically incurred following unsuccessful litigation against builders who had worked on her home. She borrowed £50,000 from the first of five dealers in musical instruments who feature in this tale, dealer A, who took possession of the viola with instructions to sell it, with repayment of the loan to come from the resulting proceeds.
Before dealer A found a buyer, however, the musician also arranged to borrow £100,000 from dealer B, who inspected the viola at dealer A’s premises but was not told about the loan from dealer A who, likewise, was not told about the proposed loan from dealer B.
Dealer B and the musician entered into a loan agreement for up to twelve months, extendable by agreement, with simple interest at 2.5 per cent per month. The loan agreement was evidenced by a document entitled ‘Offer of Loan Finance’ which was also embedded in a Chattels Mortgage Deed recording the terms of the loan and containing a covenant to pay capital and interest. The musician paid interest for ten months but then stopped.
Meanwhile, at the musician’s request, dealer A parted with possession of the viola to dealer C, who had told the musician that he had an interested buyer, on the basis that dealer C must return the viola to dealer A, if his buyer should decide not to proceed. Dealer C’s customer, after trying out the viola, decided not to proceed, but unfortunately dealer C returned the viola, not to Dealer A as he should have done, but to the musician. When dealer A found out, he asked the musician to give the viola back to him, but she did not do so.
Instead the musician, by then unexpectedly reunited with her viola, approached a pawnbroker to borrow even more money on the security of the viola. She did not tell the pawnbroker about the other loans. The pawnbroker agreed to lend £130,000 on the security of the viola but on condition that it remained with yet another London dealer, dealer D, who knew nothing of the previous transactions. He, in turn, was approached by dealer E, who thought that he might have a buyer for the viola. Dealer D allowed dealer E to take the viola so that his prospective buyer could try it out.
In a remarkable turn of events dealer E, who was equally oblivious to the loan history of the viola, happened to call at the shop of dealer A, whom he knew, and left the viola there when he went to get some lunch. Dealer A recognised the viola and, when dealer E returned from lunch, unsurprisingly dealer A refused to let him take the viola away.
The full story then came to light with all parties discovering each other’s respective interests. Dealer B, dealer D, the pawnbroker and the musician all demanded delivery up of the viola from dealer A, who refused to release it.
Litigation swiftly ensued. To simplify the dispute all parties agreed that dealer A could buy the viola for£230,000 (being the best price reasonably obtainable), which disposed of his claim. This money was paid into court to await the outcome of dealer B’s claim for £100,000 and the pawnbroker’s claim for £130,000. Despite the fact that the musician had received a combination of £230,000 from dealer B and the pawnbroker she maintained that she had no obligation to repay either of them.
In early 2014, the trial came on for hearing in front of Mr Justice Popplewell, who was doing his bit for access to justice by sitting both as a judge of the High Court and the Central London County Court at the same time.
The judgment given in Bassano v Toft & Ors  EWHC 377 9QB describes the variety of arguments under the Bills of Sale (1878) Amendment Act 1882 (The 1882 Act), The Consumer Credit Act 1974 (The 1974 Act) and the common law of pledge, which the musician deployed in an attempt to avoid repaying the loans.
1. Defences to Dealer B’s claim
(a) Defects under the 1882 Act
Dealer B had failed to register the Chattel Mortgage as a bill of sale and accordingly it was void and unenforceable under section 9 of the 1882 Act. However, although the mortgage was void on those grounds, did this mean that the musician was entitled to keep the money?
The judge found both that there was an implied agreement to repay the money independently of the defective bill of sale, following Davies v Rees (1886) 17 QBD 408, and there was an express agreement to repay in the Offer of Loan Finance document, which was further evidenced by the terms of the Chattel Mortgage and the ten interest payments at the agreed rate which the musician had made.
(b) Defects under the 1974 Act
The next argument against dealer B was that his loan was governed by the 1974 Act and, that as he was unlicensed for that purpose, the loan was unenforceable. Under section 8 (3) of the 1974 Act a consumer credit agreement is not a regulated agreement if it is an exempt agreement under section 16B of that Act. Section 16B (1) provides that the Act does not regulate an agreement granting credit of more than £25,000 “if the agreement is entered into by the debtor….wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by him”. Section 189(1) of the 1974 Act defines “business” as including a “profession or trade”.
But as the musician had borrowed money from dealer B to pay legal costs arising from litigation against her builders, the judge found that the musician was not acting wholly or predominantly for the purposes of a business carried on by her when she entered into the loan, so the loan was an exempt agreement under section 16B of the 1974 Act.
Finally, the musician then argued that the loan was unenforceable as dealer B did not have a licence to carry on a consumer credit business, a requirement under section 21(1) of the 1974 Act.
Under section 40 of the 1974 Act, regulated agreements by unlicensed creditors are unenforceable if made by a creditor “in the course of a consumer credit business”. The term “consumer credit business” is defined in section 189(1) of the Act as meaning “any business being carried on by a person so far as it comprises or relates to (a) the provision of credit by him, or (b) otherwise his being a creditor”.
Although dealer B was a dealer in musical instruments, he did not usually lend his customers money; this loan was a ‘one-off’, arranged following the intervention of a member of his church and not made in the course of his usual business. Nevertheless, the musician argued, as dealer B’s business was that of a dealer, if he had realised his intended security and taken possession of the viola it would have formed part of the stock of his business; accordingly it fell to be considered as part of a business undertaken by him and subject to the provisions of the 1974 Act.
An ingenious argument, but unsuccessful. Section 189 (2) of the 1974 Act provides: “A person is not to be treated as carrying on a particular type of business merely because occasionally he enters into transactions belonging to a business of that type”. In Hare v Schurek  CCLR 47, a car dealer, who did not usually extend credit to his customers, sold a car to a friend and entered into a ‘one-off’ hire purchase agreement with him. The Court of Appeal held that he did not require to be licensed for this purpose.
2. Defences to the pawnbroker’s claim
(a) Defects under the 1974 Act
Against the pawnbroker the main argument was that the loan document did not comply with the 1974 Act because it was not signed by the musician. The pawnbroker was an ‘online’ business and the musician ‘signed’ the loan agreement by going to its offices, creating an account online, logging on, creating a password and, when the terms of the loan agreement appeared on screen, she clicked on the acceptance button marked “I accept”.
Section 7 of the Electronic Communications Act 2000 provides that an electronic signature is admissible as evidence of authenticity. Section 61 of the 1974 Act requires an agreement to be signed “in the prescribed form”, which at that time was that required by The Consumer Credit (Agreements) Regulations 2010. Regulation 4 (3) (a) provided that the signature must be in a space indicated in the document and dated. Regulation 4 (5) recognised that a document may be completed electronically.
Although the words ‘I accept’ appeared in the ‘space indicated in the document’ the musician’s name appeared on the preceding page. The judge found that the word ‘I’ could be treated as the unambiguous mark of the musician, following the decision of Baker v Dening (1838) 8 Ad & E 93, in which it was held that a signature need not consist of a name, but may also consist of a letter by way of mark, even where the party executing the mark can write.
(b) Loss of security interest by loss of possession.
Although pledge agreements (which include pawns) with consumers are regulated under the 1974 Act, common law issues can arise where, as here, the pledgee parts with possession. Although it is necessary for a pledgee to take actual or constructive possession of a chattel in order to vest his special interest, not every subsequent parting with possession is sufficient to defeat that interest.
The musician argued that the pawnbroker had lost its right to sell the viola when it parted with possession by giving the viola to dealer D whom, it will be remembered, allowed Dealer E to take it away with him.
After reviewing the (mainly 19th and early 20th century) authorities, the judge concluded that while a pledgee could lose its special interest to a superior property interest held by someone other than thepledgor, such as a true owner from whom the pledgor had derived no good title or a subsequent bona fide purchaser for value without notice of the pledge, that interest would not be lost by parting with possession where the parting is either involuntary or, where voluntary, inconsistent with the preservation of that special interest.
So in this case the pawnbroker did not lose its interest by delivery of the viola to dealer D for safe-keeping and demonstration to prospective purchasers in order to enable it to be sold and the pawnbroker repaid from the proceeds. And as delivery by dealer D to dealer E was unauthorised by the pawnbroker, it was not a voluntary surrender of possession by the pawnbroker.
The consequence was that both lenders were repaid, the musician losing her second piece of litigation as well as her viola. There was no encore.
Why is a viola like litigation? Because everyone is relieved when the case is closed.
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