“Lemon law, noun – a law that states that you can return a motor vehicle to get it repaired or your money back if the vehicle is no good.” (Oxford Learner’s Dictionaries)

The car you just bought on instalment sale turns out to be a complete lemon. But when you return it to the dealership and cancel the sale, the bank still enforces the finance agreement and sues you for damages.

“Sorry to hear about the defects,” says the bank. “But that’s not our problem. We weren’t the supplier; we just financed the transaction. Your claim is against the dealership. You’re still bound by the instalment sale agreement and must cover our losses.”

Sued by the bank after buying a dud 4×4

A motor dealership in Koster (a small farming town in the North West Province) sold a 5-year-old Ford Ranger 3.2 TDCI 4×4 automatic to a mother, who bought it on behalf of her son with bank financing on an instalment sale basis.

All pretty standard stuff… Until, just four days after delivery, the oil cooler and gearbox started giving problems. The son returned it to the dealership, which replaced the gearbox. But then less than two months later, the vehicle overheated. Unsurprisingly the son returned it to the dealership as a dud that he no longer wanted. His mother, as buyer, formally cancelled the agreement with a lawyer’s letter.

The bank sued her for damages, and while it was successful in the High Court, the SCA (Supreme Court of Appeal) reversed that decision and upheld the buyer’s counterclaim for cancellation of the instalment sale and restitution of everything she had paid the bank. The bank must accordingly refund her the deposit and all the instalments she had paid it, together with interest and costs.

That outcome, and the SCA’s reasoning in reaching it, hold important lessons for all suppliers of goods of all kinds (not just vehicles), buyers, and banks.

When you buy a lemon, here’s how to make lemonade

The buyer’s success hinged on the Court’s findings that:

• The vehicle was seriously defective (probably because the incorrect gearbox had been fitted after an accident) and therefore unfit for its intended purpose.
• The defects were “latent”: hidden problems not visible on inspection.
• The buyer was entitled to rely on the “redhibitory action” (actio redhibitoria to lawyers), an old remedy that allows you to cancel a sale of defective goods, return them to the seller, and claim your money back. You will have to show that the defects existed at the time of sale, and that you, acting reasonably, wouldn’t have bought the goods had you known of the defects.
• The fact that the buyer had allowed the dealership to attempt repairs did not affect her right to cancel because it didn’t amount to a waiver (abandonment) of her rights.
• The Consumer Protection Act (CPA) generally requires consumers to exhaust all alternative dispute resolution remedies (such as referring complaints to the applicable Ombud) before going to court. In this case, however, because the bank had already sued the buyer in the High Court, she could raise her counterclaim as part of the same proceedings without first approaching an Ombud.
• Although the finance agreement itself fell under the National Credit Act (NCA), the vehicle (the goods) was still protected by the CPA – and that, as we shall see below, was critical to the outcome here.
• Equally importantly, the bank was not, as it argued, merely the financier. The wording of its own agreement showed that it acted as both the credit provider and the supplier.
• That’s a critical finding, because as “supplier” of the vehicle, the bank was subject to the CPA’s consumer protections, including the requirement that goods must be fit for purpose, of good quality, and free of defects.

Precedent setting?

After this far-reaching decision banks can no longer say “sorry, we just financed the deal, you must sue the seller”. Of course, any banks with differently worded agreements might still be able to argue that they really were nothing more than the finance providers, but banks generally will no doubt take steps now to mitigate this new risk. Perhaps we can expect much tighter lending restrictions or reworded finance agreements? Time alone will tell what they come up with.

For now, though, whether you are suing the seller or the bank to get your money back, your position will be a strong one if you can prove all the above factors.

Act quickly!

As a final cautionary note, the Court made it clear that you must act (i.e. cancel the sale and return the goods) within “a reasonable time” after discovering the defects.

So don’t delay. If you find out you bought a lemon and the seller refuses to cancel the sale and refund you, call us immediately.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

© LawDotNews