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| Office of Fair Trading v Abbey National plc and Others | |
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| High Court | |
| Citations | [2008] EWHC 875 (Comm), [2008] All ER (D) 349 (Apr), (2008) The Times 29 April. |
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| Transcripts | Full text of judgment |
| Case opinions | |
| Andrew Smith J | |
 Law Portal |
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Office of Fair Trading v Abbey National plc and Others [2008] EWHC 875 (Comm) is a case about bank charges in the United Kingdom, concerning the situation where a bank account holder goes into unauthorised overdraft.
When a bank customer makes a payment request (whether by standing order, direct debit or using an ATM or debit card), banks generally make the payment as requested, and then charge fees (which may include "paid item" charges and unauthorised overdraft fees) which accrue on a daily basis whilst the unauthorised overdraft continues. The Office of Fair Trading ('OFT'), acting on behalf of consumers, challenged these fees under the Unfair Terms in Consumer Contracts Regulations 1999 ('UTCCR'), and also claimed that the fees were a penalty for breach of contract. The High Court held that although the charges were not penal, they fell within the remit of the legislation and hence their fairness could be assessed by the OFT.
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Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC Bank, Lloyds TSB, Nationwide Building Society and the Royal Bank of Scotland asked for declarations that their standard terms for charging customers were incapable of being penalties at common law. The OFT investigated charges where bank customers requested or instructed a bank to make a payment for which they had no necessary funds and was beyond an overdraft. The OFT argued that the breach of contract was not going into overdraft, but the customer telling his bank to go into overdraft. The bank argued that using a card without funds was a breach and therefore the charge was not penal.
The case was sparked initially by the request of Stephen Hone, a law student from Plymouth, England, for a refund of charges by Abbey. He argued that under the UTCCR, all penalty charges had to truly reflect the cost of administering them. Hone believed that penalty charges which are higher than their administrative costs are illegal. After filing in small claims court against Abbey, Hone eventually recovered £840 from the bank. The banks then sought a declaration that their charges for exceeding overdraft limits were not penalty clauses.
Andrew Smith J granted declarations for the banks. His ruling applied to "[u]npaid item charges, paid item charges, overdraft excess charges, and guaranteed paid item charges"[1]
The banks, engaging 9 Queen's Counsels and 15 other barristers, successfully established that the contractual terms were not penal, because the charge was not consequent on any breach of contract by a customer.[2] The remaining question was then whether the charges fell foul of the Unfair Contract Terms Act 1977 (particularly s 6(2)) or the UTCCR.
Much was made by the banks of the clear, intelligible language used in the clauses in question. The judgment concluded that the language used was clear and intelligible in the contracts of HSBC, Lloyds TSB, Nationwide and RBSG; and similarly in the most part for Abbey National, Barclays, Clydesdale and HBOS although lacking in minor detail.[3] It is unlikely that the relevant consumer protection law will be stifled by the conclusion of clear and intelligible language.[4]
The banks attempted to establish that the statute is inapplicable to the charges in question. The essence of the argument submitted was that the charges are remuneration for the service provided by the bank (supplying a bank account) and so these particular contractual terms are not severable from the contract as a whole. This argument was rejected by the High Court.[5]
The practical impact of this case is that customers can begin or continue claims against their banks and the lower courts will follow Office of Fair Trading v Abbey National plc and Others and assess the fairness of the clauses.
On penalties, Andrew Smith J said the following,
| “ | 295 Before dealing with other issues about the application of the 1999 Regulations, it is convenient next to consider whether the Relevant Terms and Relevant Charges are penalties so as to be unenforceable at common law against the customer. In order for a provision for payment to be penal, it must provide for payment upon a breach of contract (see Export Credits Guarantee Department v Universal Oil Products Co, [1983] 1 WLR 399) that is not a genuine pre-estimate of loss from the breach but which is extravagant and unconscionable in amount in comparison with the prospective loss (see Jeancharm Ltd v Barnet Football Club Ltd [2003] EWCA Civ 58 at para 27).
296 The Banks seek declarations that their Relevant Terms and their Relevant Charges "are not capable of amounting to" penalties at common law. They do not suggest that I can determine on the evidence before me whether the amounts levied by them are extravagant or unconscionable and no more than a genuine pre-estimate of loss. That would, if necessary, require consideration on another occasion. The Banks do, however, argue that the Relevant Charges are not payable upon a breach of contract on the part of customers. 297 The OFT rightly does not suggest that prima facie a customer is in breach of his contract with his bank if he gives instructions for a payment from his current account for which he does not have funds or a facility. He will not thereby be in breach of contract in the absence of special circumstances or some specific provision in his contract with the bank which prohibits what he does. 298 The OFT, however, identifies some provisions in the Banks' current and historical terms which, it is submitted, might give rise to customers being in breach of contract in these circumstances. For reasons that I have explained, in this judgment I consider provisions in current terms other than those governing basic accounts, specifically provisions in the terms of Abbey, Barclays, Lloyds TSB and Nationwide, and I also consider some historical terms used until recently by Clydesdale and by RBSG. It is necessary to examine separately each of the provisions identified by the OFT as arguably penal in order to determine
Leaving aside basic accounts, I consider that the OFT has identified all the arguably penal provisions in the terms now used by the Banks for their personal current accounts and in the historical terms of Clydesdale and RSBG to which I have referred. It has rightly not suggested that there is any penal provision in the terms now used by Clydesdale, HBOS, HSBC, and RBSG. 299 The Banks emphasise that a Relevant Charge cannot be penal unless it is payable upon a breach by the customer, and illustrate this principle by referring to the decision of the Court of Appeal in Jervis v Harris [1996] Ch 195, which concerned a provision in a lease (clause 2(10)) obliging a tenant to carry out repairs and providing that if he did not do so, the landlord might do the repairs and recover from the tenant the costs and expenses of doing so. This provision was held not to be penal, and Millett LJ said this (at p.206E-G):
Undoubtedly the law about penalties does not apply if the obligation is to pay for a service or upon an event other than a breach, even if the service is supplied or the event takes place against the background of or accompanied by a contractual breach, and even if the service would not have been provided or the event would not have occurred but for the breach. A customer could not necessarily invoke the law about penalties to challenge charges payable for his bank lending him money simply because his account would not be overdrawn but for his own breach. If an obligation to pay is penal, it must require payment upon the breach itself. |
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Leave was given by the High Court to appeal to the Court of Appeal.[6] Submissions were presented to the Court between 8 October and 5 November 2008. At present, judgment is being awaited.
