Unfair Contract Terms, Unfair Prices and Bank Charges

Publication Date01 Jan 2011
AuthorSimon Whittaker
Unfair ContractTerms, Unfair Prices and Bank Charges
This note co nsiders how the Unfair Terms in Consumer Contracts Directive 1993 draws the li ne
between the review of unfair contract terms and the review of u nfair contracts (and, in particular,
unfair prices) in the context of two cases concerning ban k charges:Abbey Life plc vTheO⁄ce of Fair
Trading(20 09)(the Bank C hargescase) i nthe UK Supreme Court and Case 484/08 Cajade Madrid
(2010) i n the European Court of Justice.The note explains the proper question to be addressed by
a court for this purpose under article 4(2) of the Directive a nd criticises the Supreme Court’s
approachto the i nterpretation of article 4(2) and its applicationof the UK regulation implement-
ing this article to the circumstances in the Bank Charges case.
How does EU legislation governing consumer contracts draw the line between
the review of unfair contract terms and the review of unfair contracts, and, in
particular, of unfair prices? This question has arisen in two recent cases in relation
to consumer bank charges: the ¢rst was decided by the UK Supreme Court in
agreed test case proceedings brought by the O⁄ce of Fair Trading (the Bank
Charges case);
the second was decided by the European Court of Justice in
response to a request for a preliminary ruling by the Spanish Supreme Court
(Caja de Madrid).
The UK Bank Charges case concerned the proper interpretation and possible
application to certain charges made by banks to consumers in the operation of
their personal bank accounts of Regulation 6(2) of the Unfair Terms in Consu-
mer Contracts Regulations 1999.
This implements (with apparently no substan-
tive change) article 4(2) of the Unfair Terms in Consumer Contracts Directive
19 93 ,
which provides that:
Assessment of the unfair nature of the terms shall relate neither to the de¢nition of
the main subject matter of the contract nor to the adequacy of the price and remu-
neration, onthe o nehand, as against the services or goods supplied in exchange, on
the other, in so far as the se terms are in plain intelligible language.
Caja de Madrid arose from proceedingsbrought by a bank customers’associationto
stop a major Spanish bank from using a particular class of contract term in its
St. John’s College, Oxford.
1O⁄ce of FairTrading vAbbey National plc [2008] EWHC 875 (Comm) (Andrew Smith J); [2009]
EWCACiv 116; [2009] 2 WLR 1286;[2009] UKSC 6; [2009] 3 WLR1215(the Bank Charges case).
2Case 484/08 Cajade Ahorros y Monte de Piedad de Madrid vAsociacio
¤n de Usuarios de Servicios Bancarios
(Ausbanc)of 3 June 2010.
3SI 1999/2083 (the 1999 Regulations).
4EC Directive 93/13 on unfair terms in consumer contracts (the1993 Directive).
r2011The Author.The Modern Law Review r2011 The ModernLaw Review Limited.
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2011) 74(1) 106^134
standard home loan contract, but the European Courts preliminary ruling con-
cerned the question whether Spain’s omission of any provision based on article
4(2) in its legislation implementing the 1993 Directive constituted a breach of
EU law.This note will focus on the UK Supreme Court decision, but I will refer
to the opinion of Advocate-GeneralTrstenjak and the European Court’s decision
in Caja de Madrid where they castl ight on the questions which it raises. Iwill then
look brie£y at the impact on these questions of the likely reform of the 1993
Directive by the Proposal for a Consumer Rights Directive.
The proceedings were brought by the OFT with the agreement of eight banks
and building societies(the banks) as a test case principally to determine the ques-
tion whether the OFT was entitled to assess the fairness of a series of contract
terms in the personal banking accounts of their customers conducted on a basis
known as ‘free -if-in-credit’.
Various sample sets of contract terms were put for-
ward in the course of the proceedings as the basis of this determination, some
current and some formerly used (so-called ‘historical terms’). The key examples
(known in the litigation as ‘the relevant terms’) comprised four categories of
charges all of which arose where a customer gives an instruction for payment or
withdrawal in circumstanceswhere he or she has insu⁄cientfunds (and no agreed
overdraft facility) to cover the instruction or withdrawal. Some of the charges
arose in circumstances where the bank nevertheless honours the instruction or
withdrawal, some where it chooses not to do so.
The OFT wished to consider the question whether these terms were unfair
within the meaningof the 1999 Regulations soas to attract its intervention either
under those Regulations
or under the Enterprise Act 2002,
and for this purpose
it put to theHigh Court the broadissue whether it was entitled to do sou nderthe
Regulations or whether such an assessment fell within the exclusion found in
regulation 6(2)(b) of the Regulations, as requiring the assessment of fairness of a
term relating to‘theadequacy of theprice or remuneration, as against the goodsor
services supplied in exchange.
5Proposalfor a Directiveof the EuropeanParliamentand of the Councilon ConsumerRights Com (2008) 614/3.
The proposal has encountered a considerable amount of opposition, especially in relation to its
adoption of a general principle of ‘full harmonis ation’ (article 4). This has led the rapporteur of the
European Parliament’s Committee on the Internal Market and Consumer Protection to propose
instead a policy of ‘targeted full harmonisation’: see A. Schwab, Draft Report on the proposalfora direc-
tive of the European Parliament and of the Council on consumer rights 2008/0186 (COD) (31 May 2010
(Chapters1^III); 9 June 2010 (Chapters IV^VII)).
6The question was also raised as to whether the relevant terms could constitute penalty clauses at
common law: AndrewSmith J. held that theycould not on the basis that the charges did not arise
on breach of any obligation by the customer, a decision whichwas not subject to appeal: [2008]
EWHC 875(Comm) at [295]^[324].
7For details of the terms see the Bank Charges case [2009] UKSC 6 at[24] as agreed by the parties.
8The 1999Regulations, regs 12 to 14.
9The Enterprise Act 2002,Part 8.
10 [2008] EWHC875 (Comm) at [3]^[7].
r2011The Author.The Modern Law Review r2011 The ModernLaw Review Limited.
(2011)74(1) 106^134

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