1.1 This note concerns the latest instalment in the overdraft charges test case. This case was started by the Office of Fair Trading (OFT) against Abbey, Barclays, Clydesdale, HBoS, HSBC, Lloyds TSB, RBS and Nationwide (the Banks). The main purpose was to decide whether the OFT could assess the fairness of certain charges for going into an unarranged overdraft on a personal current account (the Relevant Charges) under the Unfair Terms in Consumer Contracts Regulations 1999.
1.2 The huge importance of the case arises from the fact that for 2006 alone the Banks earned £2.56 billion from the Relevant Charges, obtained from some 23 per cent of their customers, as well as the very substantial refunds they may have to make.
1.3 On 24 April 2008 the High Court held the Relevant Charges were capable of being assessed for fairness under the Unfair Terms Regulations. This was, essentially, because they were not core terms and were therefore not exempt under Regulation 6(2)(b) from the assessment of fairness. The Banks appealed this decision.
1.4 On 26 February 2009 the Court of Appeal dismissed the appeal and upheld the decision of the High Court. The Court of Appeal refused permission to appeal to the House of Lords, but the Banks have applied to the House of Lords for leave to appeal.
1.5 The Court of Appeal did not examine whether the Relevant Charges were unenforceable on the grounds that they were penalties at common law. The High Court had decided that most of the Relevant Charges were not penalties, and the OFT did not appeal against this decision.
2 The Charges
2.1 The Relevant Charges were payable when a customer instructed its bank to make a payment from its personal current account for which there were not enough funds and where the payment was not covered by an arranged overdraft (Relevant Instructions).
2.2 The Relevant Charges fell into four categories:
(a) Unpaid Item Charge: a bank declines to honour an instruction due to insufficient funds;
(b) Paid Item Charge: a bank honours an instruction despite insufficient funds;
(c) Overdraft Excess Charge: an account goes overdrawn and either there is no overdraft facility or the overdraft limit is exceeded; and
(d) Guaranteed Paid Item Charge: a bank honours an instruction despite insufficient funds due to a guarantee such as a cheque guarantee card.
2.3 The Court of Appeal decided to consider the different Relevant Charges together.
3 The Regulations
3.1 Regulation 6(2) provides: “In so far as it is in plain intelligible language, the assessment of fairness of a certain term shall not relate:
(a) to the definition of the main subject matter of the contract; or
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.”
3.2 The Banks argued at the original hearing that when they paid, declined or processed a Relevant Instruction they were supplying “services” within Regulation 6(2) and the Relevant Charges were part of the “price or remuneration”. The High Court held that the Banks only provided “services” when paying on a Relevant Instruction, but when they did so this was not “in exchange for the price or remuneration”.
4 The Directive
4.1 The Unfair Terms Regulations implement European Directive 93/13/EEC on unfair terms in consumer contracts (the Directive). Regulation 6(2) stems from from article 4(2) of the Directive, whose purpose is to limit the protection given to consumers in some respects. The Court of Appeal thought the Directive was fundamental in the appeal.
4.2 Article 4(2) states:
“Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.”
5.1 The critical question was whether the terms providing for the Relevant Charges related to “the adequacy of the price or remuneration, as against the … services supplied in exchange”. In other words, were the Relevant Charges a part of the essential bargain between the customer and the bank?
5.2 The Court of Appeal relied heavily on the case of The Director General of Fair Trading v. First National Bank plc (First National Bank case). In that case the House of Lords thought the purpose of the exemption was to exclude from assessment the essential features of the substance of the bargain. However, the purpose of the exemption was not to exclude terms relating to incidental or ancillary services.
5.3 The Banks argued the First National Bank case was of no help because that case concerned the predecessor regulations to the Unfair Terms Regulations (namely, the Unfair Terms in Consumer Contracts Regulations 1994). The Court of Appeal, however, decided the principles established in the First National Bank case remained relevant, as they both derived from the Directive:
“Lord Bingham recognised that, even if they are important terms, terms that do not express the substance of the bargain but are incidental to it, do not fall ‘squarely’ within Regulation 3(2)(b) and the Regulation does not apply to it. It was an application of this general principle that led Lord Bingham to conclude that the term was not covered by Regulation 3(2)(b). The application of the general principle was that, the term being a provision that dealt with the consequences of a default, it was to be regarded as incidental.”
5.4 Regulation 3(2)(b) of the predecessor 1994 regulations was analogous to Regulation 6(2)(b) of the Unfair Terms Regulations.
5.5 The Court of Appeal stated: “Not without hesitation, we have reached the conclusion that the Relevant Charges are not part of the essential bargain.”
5.6 The Court drew further inspiration for its view from a Law Commission report on the Unfair Terms Regulations:
“Consumers are much less likely to take into account terms which will only apply in certain circumstances (whether or not those circumstances involve a default) and accordingly these terms should be subject to review.”
5.7 The Banks had submitted that the contingent nature of the charges was irrelevant to the question of whether the Relevant Charges are part of the core bargain. However, the Court of Appeal stated that this strongly suggested that they were incidental or ancillary terms. Their contingent nature, and the fact that the Relevant Terms were not individually negotiated, suggested that the Relevant Charges were not ‘”the price or remuneration” within the meaning of Regulation 6(2).
5.8 The Court of Appeal agreed that:
“the question of whether a payment is the price or remuneration depends on the substance of the agreement between the parties and the true nature of the payment rather than upon how it is described or presented, and it would, I think, be surprising if the court felt able to conclude that a payment is the price or remuneration within Regulation 6(b) even though the typical consumer would not recognise it as such when presented with the terms of the seller or supplier.”
5.9 The Court of Appeal gave several reasons for this view. It signalled that some of these reasons were broader than those provided in the High Court, although its conclusion was the same. The Court of Appeal took the view that the most important reason the Relevant Charges were not part of the essential bargain for the purposes of Regulation 6(1) was that customers were much less likely to consider terms that applied only in certain circumstances (whether those circumstances involve a default). Therefore, such terms should be subject to the fairness test.
6.1 The Court of Appeal again quoted the High Court judgment:
“Regulation 6(2) exempts assessment of the fairness of the balance of the essential bargain between a seller or supplier and a consumer. As the banks themselves explain, under a ‘free-ifin- credit’ price structure the economic balance in a contract between a bank and its current account customer is between the package of services supplied by the bank and the total benefits to the bank from operating the current account, not only by way of Relevant Charges but also in particular by way of the use of the funds if the account is in credit and interest if it is in debit. On no view does an assessment of the Relevant Charges (or the Relevant Terms) impinge upon the adequacy of the totality of the benefits received by the bank in exchange for the package of services. The OFT’s investigation might well involve consideration of the fairness of the structure of a ‘free-if-in-credit’ pricing regime but that is very different from an assessment of the overall ‘adequacy’ of the benefits to a bank from operating it.”
6.2 The Banks may well win permission to appeal from the House of Lords, due to the public interest in the issues involved and because the Court of Appeal reached its decision “not without hesitation”. Meanwhile, the stay on dealing with refund claims remains, and all concerned will continue to assess the economic and other implications of the case, including the accountancy treatment of the sums involved.