In Office of Fair Trading v Abbey National Plc & Others [2008] EWHC 2325 (Comm), 8 October 2008, the Court found that certain historic terms and conditions for personal current accounts were not capable of amounting to penalties.
In Office of Fair Trading –v- Abbey National Plc & Others [2008] EWHC 875, the Court held (amongst other matters) that a number of banks' existing charges could not be penalties at common law. The banks subsequently sought declarations that certain other historic terms and charges were also not capable of amounting to penalties.
The focus of the OFT's 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, which together manage around 90% of the UK's personal current accounts, the OFT sought to establish that the Charges made by the banks are not excluded from an assessment of fairness under the Unfair Terms in Consumer Contracts Regulations 1999 and that the contractual terms upon which the banks relied to levy the Charges represented unenforceable penalties at common law.
In relation to the question of whether or not the Charges were exempt from an assessment of fairness under the regulations, the Court found that the Charges were not exempt, but left over the question of whether or not the Charges were actually unfair. This point is subject to appeal by the banks.
As for the question of whether or not the Charges amount to penalties, the OFT had argued in respect of the banks' current Charges 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. The Court, in its April 2008 judgment, 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 April 2008 judgment only dealt with the terms currently used by the banks. The OFT did not appeal the April 2008 judgment, and accepted that many other Charges, similar to those considered in the April 2008 judgment, were also not capable of amounting to penalties at common law. This left in dispute a number of historic terms and conditions used by some of the banks, who sought declarations from the Court that these Charges also do not amount to penalties.
A payment is not enforceable at common law if it is penal. For a charge to be considered penal, it must provide for payment on breach of a contract that is not a genuine pre-estimate of loss flowing from the breach, but which is instead an extravagant and unconscionable amount compared with the prospective loss. In order to determine whether the historic Charges were capable of being penalties, the Court considered the following issues:-
- Whether the term is truly of contractual effect (and not, for example, merely exhortatory or advisory);
- If it is of contractual effect, whether it imposes an obligation or prohibition on the customer (rather than, for example, stipulating a condition precedent to an obligation on the bank); and
- If it does impose a contractual obligation or prohibition on the customer, whether a Charge is payable on breach of it.
The banks sought a declaration that these historic Charges did not meet one or more of these three conditions (although they did not ask the Court to consider at this stage whether, if the conditions were met, the Charges would amount to more than a genuine pre-estimate of loss).
The Court accepted the OFT's position that it must look at "the substance of the arrangements between the bank and customer" when determining these questions. It might be relevant, in considering whether a term is of contractual effect, that it is set out in a leaflet which expressly states that it is of contractual effect or which contains provisions that are obviously contractual. However, the Court did not accept the OFT's interpretation of each of the relevant provisions, which, it said, would involve a significant and unjustified departure from their literal wording. In order to determine the meaning and effect of written provisions, the appropriate test was to ask what the words "in their relevant context, would mean to a reasonable man".
Having considered the relevant terms in relation to the banks requesting the declaration, the Court concluded that three of the banks (Barclays, Clydesdale and HSBC) were entitled to the declarations requested. Abbey and HBOS were entitled to the requested declaration in relation to most of their controversial historic terms (although the Court requested that further submissions and/or material be provided in relation to certain terms). The Court found that Lloyds TSB and the OFT should make further submissions as to whether any declaration should be made in favour of Lloyds TSB and if so on what terms (the further submissions were required because at the relevant time the contracts between Lloyds TSB and its customers were not incorporated in written form). In relation to RBSG, the Court could not make any declaration in its favour as things stood, but said that it would seek further assistance from counsel about its application. The Court considered that it needed further information about the contractual terms that were incorporated within certain customer leaflets.
Practical implications
The Court's decisions in relation to each bank's terms turned on those particular terms and the circumstances in which each relevant account was operated. The Court has (subject to receiving further submissions and information on some terms) again concluded that the banks' Charges are not unlawful penalties (principally because it found that the relevant provisions were not of contractual effect or because, if the relevant term did impose a contractual obligation on the customer, the Charge was not payable upon a breach of that term). This will be of comfort to the banks. However, there remains some doubt about the status of some of the banks' historic terms, and the Court is yet to rule on the issue of whether the historic terms and conditions are assessable for fairness under the regulations (although a ruling on this is expected soon). The banks were also given permission to appeal the April 2008 judgment in relation to the application of the regulations to the Charges. Accordingly, it is clear that the definitive conclusion which the OFT is seeking is still some way off.
This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood.
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