In response to the huge public concern in relation to the legitimacy and fairness of bank charges, the OFT launched a test case in the High Court in July 2007, The Office of Fair Trading v Abbey National Plc and others [2008], EWHC 875, for a declaration on the application of the law in respect of unauthorised overdraft charges. A judgment has now been given which leaves many unanswered questions. Banks will be reassured by the Judge's finding that the charges do not represent unenforceable penalty clauses. However, they will be left wondering by his conclusion that the charges remain susceptible to an assessment of fairness under the Unfair Terms in Consumer Contracts Regulations 1999 ("the Regulations"). With the defendant banks set to appeal, even before any formal judicial determination as to the actual fairness of the charges is made, the definitive conclusion which the OFT was seeking still seems some way off.
The focus of the OFT's well published investigation into bank charges has been the unauthorised overdraft and returned item charges ("the Charges") which banks levy in circumstances where customers' accounts go overdrawn above an agreed facility level or where cheque or direct debit payments are returned unpaid due to a lack of funds in the customers' accounts. In a test case brought against eight institutions, together managing around 90% of the UK's personal current accounts, ("the Banks"), 1 the OFT has sought to establish that the Charges made by the Banks to their customers are not excluded from an assessment of fairness under the Regulations and that the contractual terms upon which the banks relied to levy the Charges represented unenforceable penalties at common law.
The law relating to penalty charges is long established. Fundamental to this common law principle is that, for it to be treated as an unenforceable penalty, a charge must have been imposed as a result of a contractual breach by the customer. In the present case the OFT argued that customers who incur unauthorised overdrafts or who give instructions for a payment to be made without being in possession of the necessary funds are in breach of contract and that the Banks' decision to extend an "unarranged" overdraft to the customers simply represents a waiver of that breach. Following a thorough review of the standard terms and conditions of each of the Banks, the Judge concluded that customers are, in fact, under no contractual commitment to avoid unauthorised borrowing. Since the Charges were not payable upon breach of contract, the Judge concluded that they could not possibly represent unlawful penalties. As a result, there was no need for him to go on to consider whether the charges were extravagant or unconscionable.
The Regulations were drafted with the principal intention of protecting the rights of consumers in their contractual dealings with suppliers and set out the circumstances in which a contractual term should be regarded as unfair. The Regulations apply to terms that have not been individually negotiated, as is the case with the underlying bank/customer contractual documentation in the present case. Fundamentally, terms will be regarded as unfair under the Regulations if, contrary to the requirement of good faith, they cause a significant imbalance in the rights and obligations of the parties to the contract, to the detriment of the consumer. In those circumstances, any such offending terms are not binding.
The Banks sought to rely upon an exemption in the Regulations which seeks to limit the Court's ability to interfere in the bargain, reached between the two parties to a contract, providing the terms of the contract are written in plain and intelligible language. The exemption provides that, as long as a term is in plain and intelligible language, an assessment of its fairness must not relate to:
a) the definition of the main subject matter of the contract; or
b) the adequacy of the price or remuneration, as against the goods or services supplied in exchange.
The Banks insisted that the relevant terms were drafted in plain and intelligible language. On this issue the Judge decided that the appropriate test is whether the contractual terms are sufficiently clear to enable the customer to have a full understanding of the type of charges the bank is entitled to levy, the circumstances in which it is entitled to levy them and the likely quantum of those charges. It was held that the terms, pursuant to which the Charges were levied, were in plain intelligible language except in certain specific and relatively minor respects.
The Banks then went on to argue that the exemption should be applied because the Charges relate to the main subject matter of the contract and that any assessment of the Charges would necessarily involve looking at "the adequacy of the price or remuneration". In response to this argument, the Judge found that the simple decision-making process undertaken by the bank when deciding whether or not to provide a customer with an unauthorised overdraft could not be said to relate to the main subject matter of the contract. In turn, the Judge held that the Charges are only a part of the price or remuneration for the overall package of services supplied by the Banks, and are only levied when those services are supplied in the particular circumstances of the customer being without the necessary funds. Accordingly, any assessment of the Charges would not relate to the adequacy of the price or remuneration paid by the customers, as against the goods or services supplied in their entirety by the bank in exchange.
Following the above reasoning, the Court found that the Charges were, therefore, not exempt from an assessment of fairness under the Regulations. However, the Court declined to make any declaration as to the meaning and effect of the requirement of good faith under the Regulations and, thus, the question of whether or not the Charges are actually unfair remains to be decided in the second phase of the proceedings. In the meantime, the Banks, having been given permission by the Judge, have announced their intention to appeal.
Practical implications
The impact of the Court's decision not to characterise the Charges as unlawful penalties is likely to be far reaching. With care taken at the drafting stage to ensure that charges or payments are not subject to a breach of contract but, instead, become due from customers on the occurrence of a carefully defined and specific event or series of events, it should be possible for suppliers to by-pass the common law principle of penalty clauses to the potential detriment of consumers.
Given that the Court's decision in relation to the application of the Regulations remains subject to challenge in the appeal courts, it is more difficult to address the likely implications of this part of the judgment. That said, it is clearly significant that the Judge considered the Charges to be capable of assessment for fairness. If this decision is upheld, the next step will be for the OFT to obtain a judicial decision as to the actual fairness or otherwise of the Charges. Should the Court find that the Charges are unfair, this will have a significant financial impact on the Banks. However, it is also likely to have a fundamental effect on the way the Banks do business and the way they charge for their services going forwards.
Footnote:
1. Abbey National plc, Barclays Bank plc, Clydesdale Bank plc, HBOS plc, HSBC Bank plc, Lloyds TSB Bank plc, Nationwide Building Society and The Royal Bank of Scotland Group plc
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