01 April 2006

E-Commerce: OFT v Lloyds TSB Bank Plc

The Court of Appeal's decision in the Office of Fair Trading v Lloyds TSB Bank Plc and others [2006] EWCA Civ 268 is likely to have far reaching consequences for the development of e-commerce in the UK and beyond. This was an appeal from the judgment of Mrs Justice Gloster ([2004] EWHC 2600 (Com)) that s.75(1) of the Consumer Credit Act 1974 does not apply to foreign contracts, where the contract between the debtor and the supplier of goods or services was made wholly outside the UK, the contract was governed by a foreign law; and the goods delivered, or the services were supplied, outside the UK. Reversing Mrs Justice Gloster, the Court of Appeal held that the section applies to all transactions using credit cards regulated by the Consumer Credit Act 1974, whether they take place within the UK or elsewhere.

The significance of this judgment is that s.75 (1) of the Consumer Credit Act 1974 provides that if "the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or (c)" - that is to say a cardholder - "has, in relation to a transaction financed by the agreement, any claim against the supplier [that is to say a "merchant"] in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor." Thus, if I use a Barclaycard to buy furniture from a retailer that proves not be of satisfactory quality within the meaning of s.14 (1) of the Sale of Goods Act 1979, I have a complaint against Barclays Bank Plc which as well as against the retailer and as the bank is richer and possibly easier to find than the retailer it is as often as not the first port of call.

Banks can and do protect themselves against that sort of liability by insurance and obtaining indemnities from their merchant customers but what happens when one of their customers uses his or her card in some souk or bazaar or, for that matter website, thousands of kilometres from these shores where there is no equivalent to s.14 of the Sale of Goods Act 1979 and no business relationship between the card issuer and the merchant? When the Consumer Credit Act 1974 was passed there were effectively only two card issuers in the UK, namely "Barclaycard" which was issued by Barclays Bank and "Access" which was issued by all the other clearing banks (see APACS "History of Plastic Cards"). They were not interchangeable and the use of plastic cards abroad was restricted severely by exchange controls.

Electronic fund clearing associations like VISA International (for whom I used to work many years ago as the first UK based legal advisor) and MasterCard International were set up to clear transactions between the merchant customers in one country and card user customers in another. Every bank or national or regional association of banks that joins the VISA or MasterCard schemes has to subscribe to rules that facilitate the acceptance of cards bearing the VISA or, as the case may be, MasterCard trade marks and the clearance of payments made with those cards. These rules provide for charge backs which can impose onerous burdens on retailers.

Had Mrs Justice Gloster's decision been upheld it would have been possible for banks to limit the risk to British based financial institutions. The Court of Appeal's decision increases their exposure to bad debt. The question for retailers and ultimately consumers is how the banks will deal with this increased liability. Even before the Court of Appeal's decision it was difficult for dealer sites to obtain payment card clearing facilities because they are not the supplier of goods or services. This decision may make such services even harder to get. Merchant discounts - that is to say the amount that a bank charges its customer for clearing a payment - may rise and with them the cost of goods and services to consumers.

The Court of Appeal's decision was a logical and reasonable construction of s.75 but since the world has changed greatly since the publication of the Crowther Report (upon which the Consumer Credit Act 1974 was based) it is arguably time to review the fairness and utility of s.75.

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