OFT test case says connected lender liability extends to foreign transactions

Introduction

The House of Lords has, today, delivered its judgement in the case of The Office of Fair Trading v Lloyds TSB plc, Tesco Personal Finance Limited and American Express Services Europe Limited [2007] UKHL 48, unanimously upholding the Court of Appeal’s judgement that connected lender liability, imposed by Section 75(1) of the Consumer Credit Act 1974 (“the Act”), applies to foreign transactions financed by credit cards issued under regulated consumer credit agreements, just as it applies to domestic transactions. This means that the joint liability of UK card issuers and suppliers for valid consumer claims against the supplier for misrepresentation or breach of contract does now extend to claims arising out of foreign credit card transactions (as before where the cash price is between £100 and £30,000). The landmark ruling has potentially significant consequences for UK credit card issuers.

Background

The parties originally agreed to seek a declaration from the High Court as to the proper construction of Section 75. Up until then card issuers, while not accepting that Section 75 applied to foreign credit card transactions, had honoured, on a goodwill basis, valid foreign transaction claims up to £30,000 (the maximum purchase price permitted under the Act to make such a claim). At the same time, the card issuers and the OFT had, for some time, been in discussions as to the Section’s remit, culminating in the OFT threatening to serve “stop notices” if card issuers did not honour foreign credit card transactions.

The OFT began the action, seeking a declaration that foreign transactions financed by credit cards issues under consumer credit agreements regulated by the Act were subject to the connected lender liability imposed by Section 75(1) (it also sought a declaration that card issuers operating a four-party system (those where the card issuer and the merchant acquirer are different entities), as well as those operating a three-party system (where the card issuer and the merchant acquirer are the same entity) were caught by Section 75(1) but this was not the subject of the House of Lords appeal, it not allowing leave to appeal the Court of Appeal’s decision, which confirmed the decision of the High Court that four and three-party transactions were similarly caught).

The High Court held that Section 75 did not apply to foreign transactions – those, it defined, as being where the contract between the consumer and supplier of goods or services was made wholly outside the UK, was governed by foreign law and where the goods were delivered/services supplied outside the UK. In summary, it concluded that:

1. In the absence of express enactment or clear implication the rules of statutory construction were strongly against giving a UK statute territorial effect and also against subjecting foreigners to liability under English legislation in respect of acts committed abroad;

2. The Act contains neither express provision or anything to suggest or imply that Section 75 could properly be construed as applying to foreign transactions. Indeed, the implication was to the contrary as such an application would be unworkable given the foreign supplier would not be amenable to the jurisdiction of the English Court.

The Court of Appeal overturned the High Court’s decision, mainly on the basis that:

1. The primary purpose of Section 75 is consumer protection – to provide additional protection for consumers under consumer credit agreements;

2. There is nothing in Section 75(1) or the statutory indemnity between card issuers and suppliers provided for under 75(2), to distinguish between transactions in the UK, abroad or on the internet;

3. There is nothing in the Act that its effect is only to UK transactions; if so, Parliament would have had to determine precisely where the transaction had been entered into;

4. While the default statutory indemnity, under Section 75(2), for a card issuer to enforce against a supplier in respect of any claims bought against the card issuer as a result of a supplier’s acts or omissions, might be more difficult to enforce, or even ineffective as against a foreign supplier, this does not mean that Section 75(1) does not apply to these transactions. Section 75(2) did not control the meaning of Section 75(1) contrary to the intention of Parliament;

5. The fact that the Act may impose liabilities on foreign suppliers, which may not be enforceable abroad, does not provide sufficient reason for construing the Section as only applying to UK transactions.

House of Lords decision

The House of Lords gave the banks leave to appeal the point but has, today, confirmed the Court of Appeal’s decision that there is nothing in the Act which limits Section 75(1) except to UK credit agreements:

1. There is an absence of any indication in the Act that foreign transactions are excluded and this is consistent with the consumer protection policy objective behind Section 75(1), which might be more needed in respect of foreign transactions than domestic ones;

2. To the contrary, while credit card use was limited in the 1970s, Parliament envisaged overseas agreements by virtue of Section 16(5) (providing the Secretary of State with the power to exclude certain transactions from the scope of the Act) and Section 9(2) (credit in currencies other than sterling) respectively;

3. Sections 75(1) and (2) are not linked and Parliament would have made this clear if it were the case; (1) is for consumer protection; (2) is a default indemnity provision in the absence of contrary or other contractual provision and is not a quid pro quo for Section 75(1). It is hard to think Parliament intended a consumer to lose the benefit of being able to make a claim against the card issuer for the supplier’s acts or omissions simply because the card issuer only had available a statutory, rather than a contractual, indemnity;

4. While the House accepted that Section 75(2) may not be able to operate worldwide (and Lord Hoffman went as far as to say that the provision did not cover foreign suppliers) given that a foreign supplier may simply ignore UK proceedings and attempts by the card issuer to join him in and the judgement might then not be unenforceable in that supplier’s jurisdiction, and that, therefore, card issuers may have to bear irrecoverable losses, this did not mean that Section 75(1) does not apply to foreign transactions. Card issuers have strong commercial and contractual influence over suppliers and are better placed to bear any losses than consumers;

5. Furthermore, the fact that card issuers’ unlimited liability could be exacerbated in this situation, was also not a reason for a different construction of the provision;

6. The problem in relation to four party transactions, that card issuers do not have direct contracts with and less control over suppliers, is a function of the development of the network rules. It may be the main complaint of the Banks but it not a reason for a different construction of the Section; instead the network rules could provide an indemnity, a direct contractual indemnity between supplier and card issuer could be provided; Parliament envisaged contractual arrangements and it cannot be assumed that it considered Section 75(2) the only route to indemnity;

Potential consequences for UK credit card issuers

In relation to domestic transactions, there is unlikely to be great change; UK credit card issuers have met valid claims up until now and the statutory indemnity is easier to enforce domestically.

However, in relation to foreign transactions, the risks for credir card issuers, as consumers become more aware of the right under Section 75(1) (and many are already aware of this and today’s decision will only serve to highlight it), include that:

1. The number of claims in relation to foreign transactions may rise. This is reinforced by the OFT’s comment today that consumers should positively use their credit cards, as opposed to other forms of payment, for foreign transactions in order to receive the protection of Section 75(1). The OFT even recommends payment of deposits by credit card for this reason. Foreign transactions include purchases while the consumer is on holiday or internet shopping from the UK;

2. The lack of control UK card issuers have over foreign suppliers may make it more difficult to attempt to defend or resolve claims from consumers;

3. The statutory indemnity under Section 75(2) may not operate or be effective as a foreign supplier and, accordingly, UK card issuers will be liable for potentially unlimited liability arising from valid claims which cannot be recouped;

4. Card issuers will be left with the options of attempting to enforce an English judgement in the foreign supplier’s jurisdiction or, if such a claim exists in that jurisdiction, bringing an equivalent restitution claim against the supplier, both of which may be little used in practice, being neither straightforward or inexpensive.

CMS Cameron McKenna LLP acted for American Express Services
Europe Limited in the action.