In The Office of Fair Trading v Abbey National Plc and Others [2008] EWHC 875, the test case launched by the OFT into the legitimacy and fairness of bank charges, the High Court found that the charges do not represent unenforceable penalty clauses, but it held that they remain susceptible to an assessment of fairness by the OFT under the Unfair Terms in Consumer Contracts Regulations 1999 ("the Regulations"). Following an appeal by the eight institutions who are party to the proceedings ("the Banks"), the Court of Appeal has now handed down its judgment, which upholds the decision of the lower court, albeit for somewhat broader reasons.
The Regulations were drafted to implement the European Directive on unfair terms in consumer contracts, with the principal intention of protecting the rights of consumers in their contractual dealings with suppliers and to set out the circumstances in which a contractual term should be regarded as unfair. 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 will not be binding.
The Court of Appeal agreed with the lower Court that, providing 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.
If the intended assessment of the provisions in question could be classed as falling into either of these two categories, such an assessment under the Regulations would be precluded.
In considering this point, the Court of Appeal had regard to the nature of the services provided by the Banks and the manner and terms in which the standard documentation was provided to consumers, but also to the quantum of the payments in question, the services to which they were said to relate and any other payments required under the contract.
The key test was whether the relevant charges were part of the essential bargain between the Banks and their customers. By way of illustration, the Court of Appeal developed something of a sliding scale to assess the terms in question. Where the charges had been expressly negotiated between the Bank and the customer, they would not be subject to assessment under the Regulations. The more closely related the payments in question were to the essential bargain between the Bank and the customer, the more likely they were to be exempted from an assessment of fairness under the Regulations. Conversely, the more ancillary the payment terms were, the less likely they were to have come to the direct attention of the customer at the time the contract was entered into, and the less likely it was that an assessment of their fairness would relate to "the adequacy of the price or remuneration, as against the goods or services supplied in return" and thus be precluded.
The Court of Appeal noted that the underlying purpose of the Regulations was to protect consumers in circumstances where the particular terms of the contract are not freely negotiated between the parties and, as such, had particular regard to the position from the point of view of a typical consumer. Sir Anthony Clarke's judgment noted that "it seems unlikely in the extreme that the typical customer reads them [the terms]. In such circumstances, where the majority of the terms are not bargained directly between the parties and where it is not straightforward to identify the "price or remuneration" for the package of banking services, it seems to us... it is necessary to require a narrow definition of "price or remuneration"."
In addition, the Court of Appeal found that the charges incurred by a customer in circumstances where they have entered into an unauthorised overdraft are only triggered in contingent circumstances, in a similar way to default charges which are triggered following a breach of a contract (the Law Commission having already indicated that such contingent charges should be subject to review for fairness under the Regulations). The contingent nature of the charges supported an argument that the provisions were incidental or ancillary.
In light of the above, the Court of Appeal concluded that the relevant charges were not part of the essential bargain between the Banks and their customers and were not, therefore, exempt from an assessment of fairness under the Regulations.
Practical implications
The OFT will continue with its assessment of the fairness of the Bank's charges, with a view to reaching a final decision by the end of 2009. That said, this timetable may be at risk in view of the proposed forthcoming appeal. Although the Court of Appeal refused the Banks permission to appeal to the House of Lords, the Banks have since applied directly to the House of Lords and permission was given to appeal on 31 March. The OFT hopes that the appeal hearing will take place before the end of July. In the meantime, the large number of actions brought by individual consumers against the Banks will continue to be stayed pending the ultimate outcome of this test case.
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 (link to Stephenson Harwood website here www.shlegal.com ).
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