Section 75 and credit cards: misconceived interpretation?

Section 75 and credit cards: misconceived interpretation?

Article Type: Case note From: Journal of Financial Regulation and Compliance, Volume 13, Issue 3

Introduction

In a judgment of 12 November 2004, the High Court in Office of Fair Trading v Lloyds TSB Bank plc 1 held that section 75 of the Consumer Credit Act 1974 (CCA) did not apply to overseas transactions. In a press release of 21 December 2004, the Office of Fair Trading (OFT) indicated an intention to appeal against the High Court decision;2 it remains to be seen how the Court of Appeal will resolve the controversial debate on the scope of section 75. The inherent difficulty in the application of section 75 is that the CCA itself does not make the scope clear, so the OFT needed to seek to resolve the issue by way of a Court declaration.

In the High Court, Gloster J. rejected a County Court decision in Grove v American Express Services Europe Ltd (Unreported, 28 April 2003), which had applied s 75 to foreign transactions. Gloster J. also dismissed academic opinion on the matter in concluding that it is unlikely that Parliament had intended to place creditors in a position where they would have been exposed to connected lender liability for overseas transactions. If this interpretation of section 75 remains unchanged on appeal, the only recourse of the OFT will be to the Department of Trade and Industry (DTI) to bring forward legislation to fill the gap. The effect of the High Court decision is that consumers may only use credit cards abroad at their own peril, though it then seems that the UK is arguably in breach of article 11 of the Council Directive 87/102/ EEC on consumer credit.

Effect of Section 75 CCA

Ordinarily, the effect of Section 75 CCA is that when a lender provides credit to finance a purchase from a separate supplier pursuant to pre-existing or contemplated future arrangements with that supplier, the lender is equally liable with the supplier for any breach of contract or misrepresentation by the supplier if all of the following conditions are met: (a) the cash price of the item is over £100 but not more than £30,000; (b) the credit agreement is regulated, that is, where not more than £25,000 of credit is advanced to an individual (includes sole traders, partnerships and unincorporated bodies); (c) the creditor is in the business of granting credit and the agreement is made in the course of that business; and (d) the credit is advanced under the arrangements between the credit grantor and the supplier, so that a bank overdraft arranged by an individual to pay for an item is not covered.

In practical terms, when a customer purchases goods or services using a credit card there typically are four parties involved: (i) the cardholder; (ii) the retailer; (iii) the bank which issued the card, that is, the card issuer; and (iv) the bank which acts on behalf of the retailer, that is, the merchant acquirer. Where the card issuer and the merchant acquirer are different banks it is a four-party agreement; when they are the same it is a three-party agreement. In Office of Fair Trading, the credit card companies argued that section 75 did not apply to a four-party transaction. The High Court found in favour of the OFT in ruling that Section 75 covers both transactions.

The nerve-racking question was whether section 75 also covered transactions made outside the UK. The OFT thought it did; the card issuers thought it did not. The High Court ruled in favour of the card issuers. Thus,: you cannot sue the credit card company if things you buy abroad on plastic go wrong. Once you leave UK borders with your plastic in your wallet, you are on your own without extra protection from the CCA.

High Court Analysis of Section 75

Gloster J. in Office of Fair Trading did not derive much assistance from either the academic views or earlier case law. Professor Goode argues that section 75 should apply to overseas transactions and that it is up to ‘the creditor to exercise care in selecting overseas suppliers with whom to conclude arrangements.’3 Dismissing Goode’s view, Gloster J. took the view that, given that there are formidable problems in trying to obtain indemnity from overseas suppliers, it was wrong to impose liability on banks in relation to overseas ‘suppliers whom the bank most certainly has not selected’4. This emphasis on selection of suppliers denotes a perceived lack of contractual relationship, leading to the corollary that section 75 liabilities cannot be imposed in such a situation because no ‘pre-existing arrangement’ exists. Section 75 requires there to be a pre-existing arrangement between the creditor and supplier for liability to follow.

According to Jonathan Gidney, this type of analysis is flawed: ‘whilst no direct contractual relationship may exist, the Act requires ‘arrangements’ and not ‘agreements’the arrangement by the credit card company to honour transaction slips presented to it by otherwise unknown suppliers via the Visa or Mastercard network, and the agreement by the unknown supplier to accept the credit card for the payment of its goods, does in fact amount to a pre-existing arrangementIf Parliament had intended a formal contract to be in existence, why use the word ‘arrangement’ and not ‘agreement’?’5 This is reinforced when one considers that ‘arrangement’ denotes something less than ‘agreement, as shown in Re British Basic Slag Limited’s Agreements.6

Further, Gloster J. did not derive much assistance from the academic views for the reason that: ‘since, apart from expressing conflicting views, the level of analysis is not sufficiently deep.’7 It is here suggested that the seemingly conflicting academic views arise from the fact that section 75(1) does not expressly exclude foreign transactions. What it does clearly exclude are claims (i) under a non-commercial agreement (s 75(3)(a)), and (ii) so far as the claim relates to any single item to which the supplier has attached a cash price not exceeding £100 or more than £30,000 (s 75(3)(b) (as amended). What the academics are in reality saying is that, although the CCA is silent as to whether overseas transactions are covered, the Act is wide enough to cover such cases. The divergence of opinion depends on whose side you are: consumer protection or untamed economic pursuit. It is also a question of whether the perceived section 75 benefits to consumers in relation to overseas transactions outweigh the burden on credit card-issuers who control interest payable on the credit cards and are in a position to influence arrangements in the credit card network. The popular opinion is that consumer benefits outweigh the burden and the UK Government seems to be much in favour of consumer protection, which also accords with the wider EU requirements under the Directive on Consumer Credit.

The High Court in Office of Fair Trading sought to strike the balance between protecting consumers and protecting creditors. Section 75 clearly provides protection for both: the consumer can sue the creditor, and the creditor is entitled to indemnity from the supplier. As far as domestic transactions are concern, enforcing the provision is not difficult. It is arguable that as purchases by means of credit cards from foreign suppliers over the Internet increase, issuers are at risk of being inundated with claims whose merits they may generally be incapable of assessing. In these circumstances, Gloster J. was convinced that ‘given the machinery of s 75, the rules of court, and the principles on which this jurisdiction recognises foreign judgments, demonstrate that there can be no implication that s 75 should extend to overseas transactions because any such notion is in practice unworkable, where that person is not amenable to the United Kingdom jurisdiction. It is unlikely that Parliament intended to legislate for something which was unlikely to be effective in practice.8’ In rejecting an earlier decision by Judge Behar in Grove, Gloster J. was of the view that the county court judge did not have the benefit of the extensive argument she had in the High Court and hence he had not reached the right decision.

Misconceived Interpretation?

Whether or not the High Court decision in Office of Fair Trading achieves the balance sought, it remains unclear whether the ruling is correct on the scope of section 75. Gloster J dismissed the Court of Appeal decision in Jarrett v Barclays Bank Plc9 on the basis that ‘the point was not taken by the bank card issuers that section 75 did not apply in any event, because of the principle against the extra-territorial application of UK legislation’10. In other words, Gloster J. did not consider that the Court of Appeal addressed the issue of extra-territorial application of section 75. This seems contrary to what appears on reading Jarrett.

In Jarrett, although the claim by the debtor against the timeshare supplier was, by virtue of the Brussels Convention, subject to the exclusive jurisdiction of the Portuguese or Spanish court, it was held that it did not preclude the actions under section 75 against the creditors. On the jurisdictional issue of section 75, Morritt L.J. ,with whom Ward and Potter L.JJ.agreed, said: ‘I can see no reason at all for supposing that Parliament intended to enact in relation to the statutory cause of action conferred by section 75 (or section 56) any jurisdictional requirement to be observed in proceedings against the supplier.’11 It would appear that Morritt L.J. was expressing a view that the wording of the CCA provides no basis for the contention that section 75 did not apply where a British card is used to make payments abroad. It is here suggested that the policy of section 75 is to provide a debtor with a remedy against a creditor, which is likely to be more effective than his remedy against the supplier, and the creditor has to seek an indemnity or carry the loss if the supplier becomes insolvent. It will be interesting to see how the Court of Appeal reconciles its own decision in Jarrett and the High Court decision in Office of Fair Trading.

Indeed, the point made by Gloster J. about extra-territoriality seems to be fundamentally misconceived. The situation before the High Court in Office of Fair Trading envisages a defendant who is the card-issuer in the UK, the transaction under which liability arises being a credit transaction, and the debtor being almost invariably a UK debtor, so that the whole of the relevant transaction is based in the UK. Hence, there is nothing in section 75 precluding the debtor from bringing a like claim against the issuer in those circumstances. On the other hand, the creditor’s liability is limited to that of the supplier under the foreign law, which may be less strict. The fact that the issuer’s right of indemnity is against a foreign supplier should be irrelevant; that can be taken care of through the issuer’s contractual arrangements, including choice of law. Moreover, if the decision of Gloster J. remains unchallenged, it appears that the UK will be in breach of Article 11 of Council Directive 87/102/EEC on Consumer Credit, which obliges Member States to provide consumers with protection for intra-community transactions. The fact that the DTI has not made any provision specifically adopting Article 11 may suggest that the UK is content that section 75 satisfies the Directive and covers overseas transactions as well.

Conclusion

Academic writers have long called for a clarification of the legal position in relation to credit card transactions made overseas, and suggested that this be done ‘either by an amendment to the wording of section 75 or by a case reaching the Court of Appeal.’12 Such a case has arisen. It is unclear whether the Court of Appeal in Jarrett certainly did not think that section 75 did not apply to overseas transactions, so that the task now for the Court of Appeal is to reconcile its own decision in Jarrett and the High Court decision in Office of Fair Trading in order to end years of debate on the matter. With Gloster J’s point on the extra-territoriality of section 75 seemingly fundamentally misconceived, with prominent academic views in support of the views held by the OFT, and with the implication from the EC Directive on Consumer Credit, Office of Fair Trading is an appropriate case for the Court of Appeal to make a declaration that will clarify the law and end the debate. In the meantime, the lacuna in the protection of purchasers remains. While the OFT and credit card issuers battle it out in the Court of Appeal, although consumers are still protected under section 75 for domestic defective purchasess, they may not sue their credit card issuers for foreign defective purchases.

Jonathan Mukwiri

References

(1) [2004] EWHC 2600 (Comm); [2005] 1 All E.R. 843.

(2) OFT Press release number 214/04 at the OFT website (last accessed 05/04/05)

(3) Goode, Consumer Credit Law (Butterworths, 1989), at paragraph 16.61.

(4) [2004] EWHC 2600, paragraph 56.

(5) Jonathan Gidney, ‘Connected Lender Liability — a Domestic Remedy Only?’ (1996) 146 NLJ 762.

(6) [1963] 2 All E.R. 807, at 814 b-d and 819 c-f.

(7) [2004] EWHC 2600, paragraph 56.

(8) [2004] EWHC 2600, paragraph 51.

(9) [1999] Q.B. 1

(10) [2004] EWHC 2600, paragraph 55.

(11) [1999] Q.B. 1, at 15.

(12) Campbell, A. ‘Credit cards and section 75: Time for a change in the law’ (1996) 11 Journal of International Banking Law 527-532, at 532.