You might think that a dealer who vehicle checks a car as clear of finance on buying it from a private seller would be protected if a finance company subsequently comes to call. You would be wrong.

I am advising on a case through my Motor Trade website "Dealer Club" at the moment which looks like it might leave a small dealer the victim of fraud at a cost to him of around £9000. This is more than the cost of the car he bought. And if he does not capitulate but defends and loses, it could easily go to £15,000+ if legal costs are added in.

Like many smaller traders he buys some stock from private sellers, in this case from a classified advertisement on eBay. The car, a Fiat Panda 100HP in black was cheap - but not cheap enough to ring alarm bells.

The vendor flagged up that it was HPI clear in the ad and even ran an image of a certificate from the RAC branded version. The trader viewed the car and agreed to purchase subject to running his own HPI check which he did that day. It came back clear and he paid for it and collected the following day. The car was sold shortly after for a modest profit, customer delighted. That was in March 2010.

In December 2010 the dealer was contacted by solicitors for a finance company stating their clients continued interest in the car. A claim was made under Section 3 of the Torts (Interference With Goods Act) 1977 alleging Conversion - effectively his selling the vehicle without the consent of the finance company

The claim was for:

• damages in the sum of £7445.99 - presumably the HP still owing as it bears no relation to the value of the vehicle
• interest at the county court rate of 8% since date of sale in March
• unspecified legal costs and disbursements in the region of £500-£1000

Should he defend he was warned costs would escalate to between £2000 and £5000.

Not surpringly the dealer immediately raised the issue that the vehicle showed as "finance clear" at the time and indeed a subsequent check (made on the date of receipt of the letter) showed it still to be so finance clear with HPI.

The solicitor responded in turn that

"In relation to your comments to HPI there is no duty or obligation at law for our client to register their interest with HPI and our client's failure to register their interest with HPI does not amount to a defence to a conversion claim."

In the real world one might expect that the failure of a finance house to register its interest with HPI and other agencies might amount to gross negligence and the court would find accordingly.

Unfortunately in the legal world there is a precedent that goers back to when HPI was a trade association:

Moorgate Mercantile Co Ltd v Twitchings [ 1977] AC 890

The owner of the goods and the buyer were finance companies and both were members of HPI (Hire Purchase Information), a company set up to keep a register of hire purchase agreements relating to motor vehicles offering additional services to members to reduce the risk of fraud and theft. The buyer received a proposal to buy the car from them, searched the HPI register, found no extant hire purchase agreement registered and bought the car to relet it on hire purchase. The car was subject to an existing hire purchase agreement. Contrary to the usual practice the owners had not registered the hire purchase agreement.

The House of Lords held that the owners owed no duty to the buyers despite the fact that they were both members of HPI and were not estopped.

Had any member of the general public been scammed in such a way then S27 of the Hire Purchase Act 1964 (now s22 of schedule 4 of the Consumer Credit Act 1974) would have afforded protection

It is almost impossible to develop "good title" on a vehicle in normal circumstances. The general rule of nemo dat says that one cannot give what he does not have. A person cannot transfer a title to another person if he never had one to start with.

S22 is the exception. So when the vehicle was bought by the dealer "in good faith" and he then resold it, good title was obtained by the private buyer and thefinance company cannot take it back from them. The private buyer is classed as the first "innocent purchaser".

Unfortunately the terms affords the dealer no such privilege - see subsection 3 below:

(1) This section applies where a motor vehicle has been bailed or (in Scotland) hired under a hire-purchase agreement, or has been agreed to be sold under a conditional sale agreement, and, before the property in the vehicle has become vested in the debtor, he disposes of the vehicle to another person.

(2) Where the disposition referred to in subsection (1) above is to a private purchaser, and he is a purchaser of the motor vehicle in good faith, without notice of the hire-purchase or conditional sale agreement (the "relevant agreement") that disposition shall have effect as if the creditor's title to the vehicle has been vested in the debtor immediately before that disposition.

(3) Where the person to whom the disposition referred to in subsection (1) above is made (the "original purchaser") is a trade or finance purchaser, then if the person who is the first private purchaser of the motor vehicle after that disposition (the "first private purchaser") is a purchaser of the vehicle in good faith without notice of the relevant agreement, the disposition of the vehicle to the first private purchaser shall have effect as if the title of the creditor to the vehicle had been vested in the debtor immediately before he disposed of it to the original purchaser.

Furthermore having paid for an HPI check a private customer would have been afforded the protection of the HPI guarantee had the terms been fulfilled and anything gone wrong.

Unfortunately unless that protection is brought as additional service from HPI (as it was not in this case) it does not apply to the motor trade. Our recommendation is if you don't have protection on your motor trader policy at the moment you should buy into the Dealer's Guarantee.

Despite the finance company taking the most basic acceptable measures to protect their interest there is a case to argue that the dealer must settle their bill.

On better motor policies -- like the ones Dealer Club sells -- the dealer has protection in the event of "unlawful conversion" or "fraudulent conversion" and could have claimed in these circumstances. Unfortunately the client in this case has a "road risks" only policy which offers no such benefits.

So what of the person who took out the finance, who sold the financed car to the dealer knowing it to be finance impaired and who has now disappeared over the horizon?

Well Hampshire police are on his trail. However I refer though once again to the solicitor for the finance house.

"We can confirm we have spoken directly to Hampshire Police and are fully aware of their involvement in the matter. Our client has provided a witness statement to Hampshire Police setting out their position that there has been no fraud committed by their customer against them.

"Should you consider that fraud has been committed against you we kindly suggest you pursue it after seeking independent legal advice."

"Once again we reiterate our position. You have interfered with our client's title to the Vehicle and our client is entitled to receive damages from you."

Edited by LucyBC on 27/01/2011 at 11:59