Office of Fair Trading v Lloyds TSB Bank Plc
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Gloster DBE |
| Judgment Date | 12 November 2004 |
| Neutral Citation | [2004] EWHC 2600 (Comm) |
| Docket Number | Case No 2003 Folio No 687 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 12 November 2004 |
[2004] EWHC 2600 (Comm)
The Honourable Mrs Justice Gloster
Case No 2003 Folio No 687
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Roya1 Courts of Justice
Strand, London WC2A 2LL
Mr William Hibbert and Ms Julia Smith (instructed by The Treasury Solicitor) for the claimant
Mr Mark Hapgood QC (instructed by Lovells) for the 1st defendant
Mr Ali Malek QC and Mr Fred Philpott (instructed by SJ Berwin) for the 2nd defendant
Mr Mark Howard QC and lain MacDonald (instructed by CMS Cameron McKenna) for the 3rd defendant
Hearing dates: 22 July 2004 – 28 July 2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.
This is an application by the Office of Fair Trading ("the OFT") for the determination of certain issues arising in relation to the construction of section 75 of the Consumer Credit Act 1974 ("the Act") and, in particular, the section's application to "overseas" credit card transactions. The defendants are sued as representatives of all UK credit institutions who are licensed under the Act to carry on consumer credit business and who issue credit cards under regulated credit agreements with consumers. The first defendant, Lloyds TSB Bank plc ("the bank") issues credit, as well as debit and charge cards under the MasterCard and Visa schemes; the 2nd defendant, Tesco Personal Finance Limited ("TPF"), a joint venture company between the Royal Bank of Scotland Plc ("RBS") and Tesco plc ("Tesco"), likewise issues credit cards under the MasterCard and Visa schemes; the 3rd defendant, American Express Services Europe Limited ("AESEL"), a wholly owned member of the American Express Company group ("the Amex group"), issues charge and credit cards on the American Express card payment network in the UK.
Section 75 of the Act provides for creditors to be jointly and severally liable to debtors (cardholders) for misrepresentations and breaches of contract by the supplier of goods and services financed by the credit provided by the creditor under a regulated agreement. The section is in the following terms:
(1) If the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or (c) has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor who with the supplier, shall accordingly be jointly and severally liable to the debtor.
(2) Subject to any agreement between them, the creditor shall be entitled to be indemnified by the supplier for loss suffered by the creditor in satisfying his liability under sub-section (1), including costs reasonably incurred by him in defending proceedings instituted by the debtor.
(3) Sub-section (1) does not apply to a claim:
(a) under a non-commercial agreement, or
(b) so far as the claim relates to a single item to which the supplier has attached a cash price not exceeding £100 or more than £30,000.
(4) This section applies notwithstanding that the debtor, in entering into the transaction, exceeded the credit limit or otherwise contravened any term of the agreement.
(5) In an action brought against the creditor under sub-section (1) he shall be entitled, in accordance with rules of court, to have the supplier made a party in the proceedings."
A debtor-creditor-supplier agreement falling within section 12(b) is defined in section 12, so far as material, as follows:
"A debtor-creditor-supplier agreement is a regulated consumer credit agreement being: …
(b) a restricted-use credit agreement which falls within section 11(1)(b) and is made by the creditor under pre-existing arrangements, or in contemplation of future arrangements, between himself and the supplier …"
(The OFT does not pursue any argument based on the contention that the card arrangements give rise to an unrestricted use credit agreement under section 12(c).) Section 11(1)(b) defines a restricted use credit agreement as a regulated consumer credit agreement to "finance a transaction between the debtor and a person (the "supplier") other than the creditor". Thus essentially, for present purposes, in order to attract the "connected lender liability" imposed by section 75, the credit agreement must finance a transaction between the debtor and a supplier and be made by the creditor under pre-existing arrangements, or in contemplation of future arrangements, between the creditor and the supplier.
The application of the section to credit card arrangements has long been an area of dispute between credit card issuers and the industry regulator, the OFT, because of the nature of credit card operations The defendants assert that the Act does not impose a liability in relation to them in relation to overseas credit card transactions. This is primarily on the basis that:
(1) as submitted by the bank and by TPF (but not by AESEL), credit card issuers now operate through complex international networks scheme such as Visa and MasterCard; under those schemes, it is submitted there cannot be said to be "an arrangement between" the card issuer/creditor and the supplier where the supplier's agreement to accept cards the of a particular network is made not with the card issuer but with another member of the network; this is a common situation domestically and in overseas credit card transactions will often be the case;
(2) as submitted by all three defendants, the Act, properly construed, does not apply section 75 to a contract for goods and services that is made outside the United Kingdom, or has other foreign characteristics ("a foreign transaction"). (I refer in greater detail below to what the defendants contend are the constituent elements of a foreign transaction.)
Credit card issuers operate under the Visa, MasterCard and American Express international network schemes, of which they are members. This membership permits them to print the respective trademarks "Visa", "MasterCard" and "American Express" on their cards issued to cardholders under their credit agreements. The networks have comprehensive rules governing the operation of the respective schemes. In particular the rules provide that suppliers are recruited only by a limited number of members of the networks, who are given the status of "merchant acquirers". A supplier enters into a contract with a merchant acquirer, which contract obliges the supplier to accept all cards bearing a trademark of the relevant network as payment for goods or services supplied by them to such cardholders. In return, the merchant acquirer agrees to pay the supplier for any such transaction, less a discount. The merchant acquirer recoups his payment to the supplier from the card issuer through a settlement system organised by the network, together with a fee representing a proportion of the discount. The card issuer in turn is paid the supply price in full by the card holder pursuant to the credit card agreement. A credit card transaction of this nature is referred to in the industry as a "four-party transaction" with debtor, creditor, merchant acquirer and supplier involved. It is contrasted to the "three-party transaction" where the card issuer also "acquires" the merchant. There are approximately 100 Visa card issuers in the UK, and probably a similar number of MasterCard issuers in the UK, most of which do not acquire merchants. The detailed workings of the three schemes are extensively rehearsed in the evidence and it is not necessary for me to set them out in any greater detail at this stage. It suffices to say that in card payment systems there are commonly four parties, namely: (a) the card issuer (or creditor) who supplies the card to the customer and operates the customer's account from which payment is made; (b) the customer (or debtor) who makes payment using the card and is liable to pay the issuer; (c) the supplier or merchant (who is not a member of Visa or MasterCard or the Amex scheme or network) who exchanges goods or services for the customer's card details and consent to make the payment; and (d) the merchant acquirer, who recruits merchants/suppliers to the scheme, pays the merchant and obtains reimbursement from the card network clearing system. In a three-party transaction, there is no separate merchant acquirer as the card issuer selects and acquires the merchant. Consequently, the card issuer will reimburse the merchant directly for the particular transaction. In a four-party transaction, neither the card issuer nor its associate, are the same person as the merchant acquirer. It has been accepted by card issuers that domestic three-party transactions involve "arrangements between" the creditor and the supplier.
The bank and AESEL are both merchant acquirers and card issuers. The bank acquires merchants using the trading name "Cardnet Merchant Services" or "Cardnet". Depending upon where in the world the transaction takes place, and with which supplier, many transactions between the bank's respective debtors and suppliers will not be with suppliers in relation to whom the bank (or its associates) are the merchant acquirers, although in some cases that will be the Position. In other words, as with domestic transactions, some foreign transactions are third-party transactions and some four party transactions. In the case of AESEL, an Amex company (within the definition of associate in section 184 of the Act) operates (with certain exceptions) as merchant acquirer in the UK. AESEL issues or licenses its credit cards over its own separate network. In the...
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