Office of Fair Trading v Lloyds TSB Bank Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice Waller |
| Judgment Date | 22 March 2006 |
| Neutral Citation | [2006] EWCA Civ 268 |
| Docket Number | Case No: A3/2004/2720 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 March 2006 |
[2006] EWCA Civ 268
Lord Justice Waller
Lady Justice Smith and
Lord Justice Moore-Bick
Case No: A3/2004/2720
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Mrs Justice Gloster
2003 Folio 687
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Michael Briggs QC and Mr William Hibbert and Mr Josh Holmes (instructed by the Treasury Solicitor) for the Appellant
Mr Mark Hapgood QC and Miss Maya Lester (instructed by Lovells and SJ Berwin) for the First and Second Respondents
Mr Mark Howard QC and Mr Iain Macdonald (instructed by CMS Cameron McKenna) for the Third Respondent
This is the judgment of the court.
The background to the appeal
The Consumer Credit Act 1974 established a new regulatory framework governing the provision to consumers of credit of all kinds. It was passed following the publication of the report of the Committee on Consumer Credit under the chairmanship of Lord Crowther ("the Crowther Committee") which criticised the previous state of the law and made detailed recommendations for a new code embodying a comprehensive regime that would be fair to lenders while at the same time providing consumers with an appropriate degree of protection. It is no coincidence that the protection of consumers is given prominence in the long title to the Act.
The Act applies to consumer credit agreements of all kinds, such agreements being defined in section 8(2) as personal credit agreements by which the creditor provides the debtor with credit currently not exceeding £25,000. All consumer credit agreements are regulated agreements within the meaning of the Act and thus subject to its provisions unless exempted. By section 9(1) the term "credit" includes a cash loan and any other form of financial accommodation. The effect of these provisions is that all forms of consumer lending within the statutory limit fall within the scope of the Act. This is an important matter to bear in mind in this case which raises issues relating to the construction of the Act that are of great significance to the credit card industry but which may be of less significance to other familiar and widely used kinds of consumer credit agreements.
This is an appeal from the judgment of Gloster J delivered on 12 th November 2004. The background to that judgment is a long-standing disagreement between the Director General of Fair Trading, now the Office of Fair Trading ("the OFT") , and the issuers of credit cards relating to what is called "connected lender liability" under section 75(1) of the Act. The Crowther Committee considered that in cases where a lender provides credit for the purchase of goods or services pursuant to arrangements between himself and the supplier the two of them can be considered in commercial terms as joint venturers since the arrangements operate to their mutual benefit in the promotion of their businesses. The Committee therefore recommended that in such cases the debtor who has a claim for misrepresentation or breach of contract against the supplier should have a remedy against the lender as well. This recommendation to create connected lender liability eventually found expression in section 75(1) of the Act. If credit card issuers in the United Kingdom incur a liability of this kind in relation to transactions entered into by their cardholders in this country, that is no doubt a significant matter; if they incur a similar liability in relation to transactions entered into by their cardholders abroad, it is obviously very much more so.
The agreements under which banks and other financial institutions issue credit cards represent a form of consumer credit agreement falling within the scope of the Act. Originally credit cards were issued within the framework of what we shall call for convenience a "three-party" structure. This involves (i) an agreement between the card issuer and the cardholder to extend credit by paying for goods or services purchased by the cardholder from suppliers who have agreed to honour the card; (ii) an agreement between the card issuer and the supplier under which the supplier agrees to accept the card in payment and the card issuer agrees to pay the supplier promptly; (iii) an agreement between the cardholder and the supplier for the purchase of goods or services. However, as the industry has grown there have been three significant developments which together have given rise to the present dispute.
The first is the development of what may be called the "four-party" structure. This developed out of the use by card issuers of what are called "merchant acquirers" to recruit new suppliers willing to accept the issuer's card. In the classic four-party structure there is interposed between the card issuer and the supplier the merchant acquirer acting as an independent party. There is an agreement between the merchant acquirer and the supplier, under which the supplier undertakes to honour the card and the merchant acquirer undertakes to pay the supplier, and an agreement between the merchant acquirer and the card issuer, under which the merchant acquirer agrees to pay the supplier and the card issuer undertakes to reimburse the merchant acquirer. There is, however, no direct contractual link between the card issuer and the supplier.
The second development has been the increasing ability to use credit cards abroad. Originally the number of suppliers willing to accept credit cards in this country was limited and the number of suppliers in foreign countries willing to accept credit cards issued by financial institutions in this country even more limited. However, over the course of time it has become possible to use credit cards in many different countries around the world, so that there are now millions of suppliers worldwide who will accept cards issued by the major institutions.
The third development has been the creation of large international credit card operating networks. At least two of these, Visa and MasterCard, are established as independent organisations operating under what are in substance four-party structures with the addition of a sophisticated clearing house system. Under the rules of the network the card issuer enters into an agreement with its customer to extend credit in connection with the purchase of goods or services from any supplier who has agreed to honour the network card. The merchant acquirers recruit suppliers to the network rather than to any individual card issuer and the supplier undertakes to honour the network card regardless of the identity of the issuer and in most cases without having any clear idea who the issuer may be. The card issuer undertakes to reimburse the merchant acquirer, though he may previously have been unaware of his identity or existence and is likely to have been wholly unaware of the existence or identity of the supplier. The arrangements are all underpinned by a complex agreement between the card issuers and the merchant acquirers, all of whom are members of the network.
It is against this regulatory and commercial background that the following two questions raised by this appeal have to be decided: (i) does connected lender liability under section 75(1) of the Consumer Credit Act 1974 attach to transactions entered into by means of credit cards where a four-party structure exists? (ii) does connected lender liability under section 75(1) attach to transactions entered into outside the United Kingdom by cardholders using credit cards issued under credit agreements to which the Act applies, whether the transaction is entered into under a three-party or four-party structure? Credit card issuers have always recognised, and still recognise, that transactions entered into with suppliers in this country under a three-party structure attract connected lender liability. Until recently they have also been willing to operate on the basis that connected lender liability attaches to transactions entered into under a four-party structure, but without accepting that it does so as a matter of law. In neither case, however have they been willing to accept that such liability attaches to transactions entered into abroad.
The OFT contends that connected lender liability under section 75(1) arises in relation to any transaction financed by a credit card issued in the United Kingdom, whether the transaction is entered into under a three- or four-party structure and whether the transaction was entered into in this country or abroad. Credit card issuers dispute that construction of the Act and that has led those who operate mainly under a four-party structure to assert that section 75(1) does not apply in that situation, whether the transaction financed by the use of the card was entered into in this country or abroad. This construction, however, is for obvious commercial reasons resisted by credit card issuers who operate mainly or entirely under a three-party structure.
The respondents to this appeal and (save for the Third Respondent) also the cross-appellants, Lloyds TSB Bank plc ("Lloyds TSB") , Tesco Personal Finance Ltd ("Tesco") and American Express Services Europe Ltd ("Amex") are card issuers who between them represent the range of business practices to which the appeal and cross-appeal relate. Their individual positions can be summarised in the following way:
(i) Amex employs associate companies as its merchant acquirers in relation to the bulk of its suppliers. By...
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