Jersey: The OFT v Abbey National Decision - Enforceability Of Bank Charges

Last Updated: 19 November 2008
Most Read Contributor in Jersey, September 2016

On 24 April 2008, the English High Court released the judgment of Mr. Justice Andrew Smith in the "bank charges" case brought by the Office of Fair Trading ("the OFT") against seven high street banks and a building society in the UK.

The OFT has been investigating whether charges levied by the banks could contravene either the UK Unfair Terms in Consumer Contracts Regulations, 1999 ("the 1999 Regulations") or common law rules on the unenforceability of penalties. The bank charges being investigated by the OFT included "unpaid and paid item charges" (where the customer has insufficient funds in the account to honour the customer's obligations) and excess overdraft charges.

Although the immediate aim of the OFT in bringing the case was to determine whether it was entitled to investigate bank charges, it was also hoped (not least by the banks) that the proceedings might clarify the law applicable to claims brought by hundreds of thousands of bank customers in the U.K. since 2006. Thousands of claims in the UK have been stayed pending the judgment, and the case may well be relevant to the prospects of success for customers in similar jurisdictions such as Jersey, whose courts, although not subject to the 1999 Regulations, are likely to take account of the High Court's findings on common law enforceability of penalties.

The High Court held that the charges under consideration were not capable, under English common law, of being described as "penalties". The Court's reasoning on this point was that to be characterised as a penalty, the charge must become payable as a result of a breach of contract. The Court accepted each of the banks' submissions that the charges in question did not arise as a result of breaches of contract by the customer, as it was not in itself a breach of contract to exceed an overdraft limit or for the customer to have insufficient funds in the account to pay for their commitments.

Although Jersey law is not identical to English law as regards penalties (under Jersey law, "penalty clauses" are generally permissible unless they are manifestly excessive, whereas penalties are generally unforceable under English law) and although the High Court did not decide whether or not the banks' charges were unconscionable (which might perhaps be another route disgruntled customers in Jersey may choose to take), the fact that the High Court found that the charges were not penalties under English law is likely to make it more difficult for a customer to succeed in a claim under Jersey law.

The remainder of the case, in which the High Court held that the bank charges did fall within the OFT's remit to review, may well have a profound effect on the banks' treatment of U.K. bank charges going forward. However, there is no Jersey statutory equivalent to the 1999 Regulations and, as such, this part of the judgment is not immediately relevant to bank charges cases in Jersey (where the courts would be likely to fall back on the doctrine of "la convention fait la loi des parties", under which parties are presumed to have freedom to bind themselves to whatever contractual terms they choose, absent any factors negating their consent). It is also worth remembering that the High Court expressly did not make any findings that the banks' charges were actually unfair. It simply found that the OFT are entitled to take forward their investigation on the bank charges.

As a corollary to the main judgment, the High Court determined that a minority of each of the banks' terms and conditions did not use sufficiently plain and intelligible language, and the banks are expected to amend any wording which has been found to be non-compliant as a result. This may have an effect on banking terms and conditions utilised in Jersey, to the extent that they are derived from an English counterpart.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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