LORD WALKER
The limited
nature of the issue
1.
The members of the Court are well aware of the limited nature of the
issue which we have to decide in this appeal. But many of the general public
(who are understandably taking a close interest in the matter) are not so well
aware of its limited scope. It is therefore appropriate to spell out at the
outset that the Court does not have the task of deciding whether the system of
charging personal current account customers adopted by United Kingdom banks is
fair. The appellants are seven of the largest banks in the United Kingdom and
one building society (but I shall for convenience refer to them all as “the
banks”). The appellants accept that the system of “free if in credit” banking
prevalent in this country involves a significant cross-subsidy (amounting to
about 30 per cent of the banks’ total revenue stream from current account
customers) provided by those customers who regularly incur charges for
unauthorised overdrafts (a cohort, we were told, of the order of twelve million
people) to those customers (a cohort of about 42 million people) who are in the
fortunate position of never (or very rarely) incurring such charges. Banks in
other European countries adopt different forms of cross-subsidy; French banks
for instance, concentrate their charges on processing standing orders and debit
card transactions.
2.
Some would regard the United Kingdom system as being, in some sense at
least, obviously unfair, though Mr Sumption QC (for the banks) vigorously
disputed Lord Mance’s suggestion that his clients were engaged in a sort of
“reverse Robin Hood exercise”. That is an imponderable question which depends
partly on whether one’s perception of the average customer who incurs unauthorised
overdraft charges is that he is spendthrift and improvident, or that she is
disadvantaged and finding it hard to make ends meet. But it is not the
question for the Court.
3.
The question for the Court is much more limited, and more technical. It
is whether as a matter of law the fairness of bank charges levied on personal
current account customers in respect of unauthorised overdrafts (including
unpaid item charges and other related charges as described below) can be
challenged by the respondent the Office of Fair Trading (the “OFT”) as
excessive in relation to the services supplied to the customers.
4.
That issue depends on the correct interpretation (in its European
context) and application of Regulation 6(2) of the Unfair Terms in Consumer
Contracts Regulations 1999 SI 1999/2083 (“the 1999 Regulations”). Regulation
6(2) is as follows:
“In so far as it is in plain intelligible language, the
assessment of fairness of a 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.”
The context
requires “adequacy” to be read in the sense of “appropriateness,” as Lord
Rodger of Earlsferry pointed out in Director General of Fair Trading
v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481, para 64.
The Directive
and the Regulations
5.
The 1999 Regulations were made under section 2(2) of the European
Communities Act 1972 in order to transpose into national law Council Directive
93/13/EEC on unfair terms in consumer contracts (“the Directive”). The 1999
Regulations revoked and replaced similar regulations made in 1994 (SI
1994/3159) in order (as the explanatory note to the 1999 Regulations puts it)
“to reflect more closely the wording of the Directive”. Regulation 6(2) of the
1999 Regulations does indeed follow closely the English text of Article 4(2) of
the Directive, which is as follows:
“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.”
The Court has had
available the texts of Article 4(2) in French, German and some other languages,
but they cast little light on the interpretation of the English text.
6.
Both Mr Sumption (for the banks) and Mr Crow QC (for the OFT) made
submissions about the background to the Directive, its travaux préparatoires,
and academic commentaries on it. The Directive in its final form applies only
to contractual terms which have not been individually negotiated. That is the
effect of Article 3, which sets a fairly high threshold for meeting that test.
The Council’s original proposals had been more far-reaching but they attracted
a lot of criticism, especially from commentators in France and Germany, who
were concerned at such extensive inroads into freedom of contract. An article
by Professor Brandner and Professor Ulmer of the University of Heidelberg
((1991) 28 CML Rev 647) was particularly influential. In September 1992 the
Council brought forward new proposals which can be described as a compromise
solution balancing the need for consumer protection against residual freedom of
contract. Recital (19) reflects part of this compromise, though it does not
contribute very much to the understanding of Article 4(2):
“Whereas, for the purposes of this Directive, assessment of
unfair character shall not be made of terms which describe the main subject
matter of the contract nor the quality/price ratio of the goods or services
supplied; whereas the main subject matter of the contract and the price/quality
ratio may nevertheless be taken into account in assessing the fairness of other
terms; whereas it follows, inter alia, that in insurance contracts, the terms
which clearly define or circumscribe the insured risk and the insurer’s
liability shall not be subject to such assessment since these restrictions are
taken into account in calculating the premium paid by the consumer.”
7.
Another element of compromise is the so-called “greylist” set out in
Schedule 2 to the 1999 Regulations, exactly reproducing the annex referred to
in Article 3(3) of the Directive. This is an “indicative and non-exhaustive
list of terms which may be regarded as unfair.” Originally it was proposed as a
blacklist of terms which would be conclusively presumed to be unfair. The list
contains 17 items, four of which refer in one way or another to the monetary
consideration paid by the consumer:
“(d) permitting the seller or supplier to retain sums paid by
the consumer where the latter decides not to conclude or perform the contract,
without providing for the consumer to receive compensation of an equivalent
amount from the seller or supplier where the latter is the party cancelling the
contract;
(e) requiring any consumer who fails to fulfil his obligation to
pay a disproportionately high sum in compensation;
(f) authorising the seller or supplier to dissolve the contract
on a discretionary basis where the same facility is not granted to the
consumer, or permitting the seller or supplier to retain the sums paid for
services not yet supplied by him where it is the seller or supplier himself who
dissolves the contract;
. . .
(l) providing for the price of goods to be determined at the
time of delivery or allowing a seller of goods or supplier of services to
increase their price without in both cases giving the consumer the corresponding
right to cancel the contract if the final price is too high in relation to the
price agreed when the contract was concluded;”
8.
The basic test of fairness is in Regulation 5(1) of the 1999
Regulations, transposing Article 3(1) of the Directive. Regulation 5(1)
provides:
“A contractual term which has not been individually negotiated
shall be regarded as unfair if, contrary to the requirement of good faith, it
causes a significant imbalance in the parties’ rights and obligations arising
under the contract, to the detriment of the consumer.”
The consequences of
unfairness are set out in Regulation 8, transposing Article 6(1). Regulation 8
provides:
“(1) An unfair term in a contract concluded with a consumer by a
seller or supplier shall not be binding on the consumer.
(2) The contract shall continue to bind the parties if it is
capable of continuing in existence without the unfair term.”
9.
The Court of Justice has not yet had occasion to rule on the scope of
Article 4(2). Not all the member states have precisely transposed the Directive
into their national laws, since Article 8 provides that they may adopt or
retain more stringent provisions for consumer protection, so long as they are
compatible with the Treaty. France and Italy, like the United Kingdom, have
precisely transposed the Directive. The Netherlands and Spain have enacted more
far-reaching legislation affording greater protection to consumers. Germany
considered it unnecessary to transpose the Directive in any form, as its
national law already offered a greater degree of consumer protection.
The First
National Bank case
10.
The Law Lords have already considered Article 4(2) in Director
General of Fair Trading v First National Bank Plc [2001] UKHL 52, [2002] 1 AC 481. They considered it in the slightly different form in which it was
transposed by Regulation 3(2) of the 1994 Regulations:
“In so far as it is in plain, intelligible language, no
assessment shall be made of the fairness of any term which—
(a) defines the main subject matter of the contract, or
(b) concerns the adequacy of the price or remuneration, as
against the goods or services sold or supplied.”
So in the old
provision the words “in exchange” did not appear, and the nature of the
assessment was expressed a little differently. Before your Lordships neither
side attached much importance to these points of difference, since the dominant
text (as Lord Steyn put it in First National Bank at para 31) is that of
the Directive itself.
11.
In First National Bank the Director General of Fair Trading (the
predecessor of the OFT, which was established by Part 1 of the Enterprise Act
2002) sought an injunction to restrain the bank, which was active in the
consumer credit market, from using a standard term under which (on enforcement
of an overdue debt) interest was to continue to accrue at the contractual rate
until payment “after as well as before any judgment (such obligation to be
independent of and not to merge with the judgment)”. At first instance
Evans-Lombe J held ([2000] 1 WLR 98) that the term was a default term and not
(as the bank’s counsel had submitted) a “core term” within Regulation 3(2) of
the 1994 Regulations, but that it was not unfair in the statutory sense. The
Court of Appeal ([2000] QB 672) allowed the Director General’s appeal, agreeing
with the judge as to Regulation 3(2) but differing as to the fairness of the
term. Peter Gibson LJ (giving the judgment of the Court) deprecated the
expression “core term” (at p686):
“The test in respect of the relevant term is not whether it can
be called a ‘core term’ but whether it falls within one or both of paragraphs
(a) and (b) of Regulation 3(2).”
12.
On a further appeal by the bank the House of Lords allowed the appeal,
unanimously agreeing with the Court of Appeal as to the Court’s power to review
the term, but unanimously reversing the Court of Appeal as to the term’s
fairness. The key passages on the scope of Regulation 3(2) of the 1994
Regulations (now Regulation 6(2) of the 1999 Regulations) are para 12 of the
opinion of Lord Bingham of Cornhill and para 34 of the opinion of Lord Steyn.
13.
Lord Bingham observed in para 12, after references to the then current editions
of two leading textbooks (Treitel, The Law of Contract, 10th ed. (1999) p248
and Chitty on Contracts, 28th ed. (1999) para 15-025),
“The object of the Regulations and the Directive is to protect
consumers against the inclusion of unfair and prejudicial terms in
standard-form contracts into which they enter, and that object would plainly be
frustrated if Regulation 3(2)(b) were so broadly interpreted as to cover any
terms other than those falling squarely within it. In my opinion the term, as
part of a provision prescribing the consequences of default, plainly does not
fall within it.”
Later in that paragraph
Lord Bingham referred to the term as an “ancillary provision.”
14.
Lord Steyn observed in para 34:
“Clause 8 of the contract, the only provision in dispute, is a
default provision. It prescribes remedies which only become available to the
lender upon the default of the consumer. For this reason the escape route of
Regulation 3(2) is not available to the bank. So far as the description of
terms covered by Regulation 3(2) as core terms is helpful at all, I would say
that clause 8 of the contract is a subsidiary term. In any event, Regulation
3(2) must be given a restrictive interpretation. Unless that is done Regulation
3(2)(a) will enable the main purpose of the scheme to be frustrated by endless
formalistic arguments as to whether a provision is a definitional or an exclusionary
provision. Similarly, Regulation 3(2)(b) dealing with ‘the adequacy of the
price or remuneration’ must be given a restrictive interpretation. After all,
in a broad sense all terms of the contract are in some way related to the price
or remuneration. That is not what is intended.”
The background
and course of this litigation
15.
A complaint of infringement of the 1999 Regulations may be pursued in
proceedings in the county court commenced by an individual consumer by
reference to the terms of a particular contract that he or she has entered
into. It may also be pursued by the OFT which was established, as already
mentioned, by Part 1 of the Enterprise Act 2002 and is a “general enforcer” of
“Community infringements” under section 213(1)(a) of that Act (read with
section 212 and Schedule 13, para 5). This dual system (of what Lord Steyn, in para
33 of his opinion in First National Bank, referred to as “ex casu
challenges and pre-emptive or collective challenges”) is provided for by Article
7 of the Directive.
16.
Both types of challenge form part of the background to this appeal. As
Andrew Smith J put it at first instance (para 2):
“The Relevant Terms and Relevant Charges are being challenged on
two fronts: the [OFT] is investigating under the [1999 Regulations] the
fairness of the terms under which banks make such charges, and cases have been
brought by individual customers in county courts disputing charges levied by
banks, many of them relying not only on the 1999 Regulations but also on common
law rules about the unenforceability of penalties.”
17.
There have, we were told, been many thousands of individual claims in
the county courts, many brought by litigants in person with the assistance of
on-line forms and advice. All or virtually all of these proceedings have been
stayed to await the outcome of these proceedings. The volume of litigation
speaks for itself as to the dissatisfaction (to use no stronger an expression)
felt by many thousands of customers affected by the challenged charges.
18.
In March 2007, following complaints made to it, the OFT started a formal
investigation of the fairness of terms relating to overdraft charges (these
were referred to in the pleadings and in the lower courts as “the Relevant
Terms” and “the Relevant Charges” and it is convenient to adopt the same
terminology). At the same time the OFT began a market study in order to
consider (in the words of the first witness statement of Mr Cavendish Elithorn,
a senior director of the OFT) “wider questions about competition and value for
money in the provision of personal current accounts in the UK, such as: (a) the
low levels of cost transparency and; (b) the ease with which consumers can
switch accounts.” At an early stage of the investigation the banks raised a
preliminary objection based on Regulation 6(2) of the 1999 Regulations. The
same issue had been raised in many individual claims in the county courts.
19.
In order to resolve the issue, and in accordance with written agreements
reached between the OFT and the banks, the OFT on 27 July 2007 issued
proceedings in the Commercial Court seeking a declaration that Regulation 6(2)
did not apply to the banks’ Relevant Terms then current. The banks, in order
to obtain a more comprehensive answer covering related issues raised in individual
claims, counterclaimed not only for declarations to the opposite effect to
those sought by the OFT (including an express declaration as to plain and
intelligible language) but also for further declarations that their Relevant
Terms were not capable of amounting to a penalty at common law, and
declarations relating to “good faith” under regulation 5(1). These issues were
raised both in relation to the banks’ then current sets of terms and in
relation to terms which were no longer current. The judge heard argument only
on the then current terms, for case management reasons. But our decision is
likely to cover almost all the “historic” terms as well. We were told that the
OFT and the banks have so far been able to agree that the lower courts’
decisions on the current terms should be treated as applicable to the historic
terms as well.
20.
In these circumstances Andrew Smith J had three groups of issues to
decide: issues as to Regulation 6(2) (including particular issues as to “plain
intelligible language”); issues as to Regulation 5(1); and issues as to common
law penalties. He gave judgment on 24 April 2008 after 14 days of hearings
during January and February 2008. His judgment ([2008] EWHC 875 (Comm), [2008] 2 All ER (Comm) 625) runs to 450 paragraphs and the Court of Appeal rightly
paid tribute to its quality and clarity. In brief, the judge decided the issues
as follows (the paragraph numbers specified below being the conclusions at the
end of the relevant discussion):
(1) on
the first group of issues, that the Relevant Terms were in plain intelligible
language except (in the case of four banks) “in certain specific and relatively
minor respects” (para 293); that they were not exempt under Regulation 6(2)
from assessment in point of fairness (para 421); and that the “excluded
assessment” construction was correct (para 436);
(2) that
none of the terms amounted to the imposition of a common law penalty (para
323); and
(3) that
it was inappropriate to give any declaratory relief as regards Regulation 5(1)
(para 447).
21.
The banks appealed, with the permission of the judge, against the
decision that Regulation 6(2) did not apply to the Relevant Charges. The judge
refused permission to the four relevant banks on the “plain intelligible
language” issue. The OFT did not seek to appeal but put in a respondent’s
notice with further grounds for supporting the judge’s decision on Regulation
6(2). The argument in the Court of Appeal was therefore mainly focused on the
scope of Regulation 6(2). The Court of Appeal (Sir Anthony Clarke MR, Lord
Justice Waller V-P and Lloyd LJ), in a judgment of the Court delivered on 26
February 2009 by the Master of the Rolls ( [2009] EWCA Civ 116 ), dismissed the
banks’ appeal for reasons which the Court described (para 112) as “somewhat
broader” than those of the judge. The Court refused to extend the permission to
appeal to the “plain intelligible language” issue. The banks’ further appeal to
the House of Lords (with leave granted on 31 March 2009) was heard in June 2009
but our judgment is (under transitional provisions in the Constitutional Reform
Act 2005 and the Supreme Court Rules) a judgment of the Supreme Court of the
United Kingdom.
The Relevant
Terms and Charges
22.
It will be necessary to come back to a detailed consideration of the Court
of Appeal’s reasoning, which Mr Sumption has subjected to robust criticism. But
I must first say more about the Relevant Terms and the Relevant Charges of the
banks. They are the material to which Regulation 6(2), properly construed, has
to be applied.
23.
The Relevant Terms and the Relevant Charges were covered in detail in
the pleadings, and annexes to the pleadings. There is a clear summary in
annexes B-E to the OFT’s joint reply and defence to the counterclaims. The judge
gave a general description of the operation of current accounts and authorised
and unauthorised overdrafts (paras 42-82). He then (in order to deal with a
range of questions as to plain intelligible language) covered a mass of detail
in a masterly fashion. His summaries of the eight banks’ terms and charges
starts with Abbey National (paras 130-154) and ends with Royal Bank of Scotland
(paras 274-292). This part of his judgment has not been challenged in any way,
and the Court of Appeal adopted it.
24.
For present purposes it is sufficient to set out the summary in paras 7
and 8 of the Statement of Facts and Issue agreed by the parties:
“There are four basic categories of Relevant Charges, as defined
in the Judgments below, not all of which are charged by all Banks: Unpaid Item
Charges; Paid Item Charges; Overdraft Excess Charges; and Guaranteed Paid Item
Charges.
a. An ‘Unpaid Item Charge’ is levied when the customer
gives an instruction for payment or, in some cases at least withdrawal, that
the bank declines to honour because the customer does not have sufficient funds
in his account or an arranged facility which covers it.
b. A ‘Paid Item Charge’ is levied when the customer
gives an instruction for payment or, in some cases at least withdrawal, for
which he does not have sufficient funds in his account, or an arranged facility
which covers it, and which the bank honours.
c. A ‘Guaranteed Paid Item Charge’ refers to a charge
distinct from a Paid Item Charge which some of the banks levy when they honour,
in accordance with the guarantee, a cheque issued in conjunction with a cheque
guarantee card (or, in the case of some banks, a debit card payment made under
a guaranteed debit payment system) for which the customer does not have
sufficient funds or a sufficient arranged facility.
d. An ‘Overdraft Excess Charge’ is levied if, during a
specified period (typically a day or a month) an account is and/or goes
overdrawn (and there is no overdraft facility), or the debit balance is and/or
goes above the limit on an existing overdraft facility.
Annexed hereto are summaries (one for each bank) that identify
the relevant contractual documents, the Relevant Terms and the Relevant
Charges. In all cases, there is a ‘terms and conditions’ document, and an
accompanying leaflet or tariff, which it is the Banks’ practice to make
available to the customer as part of the process of opening the account. This
litigation assumes the incorporation of the Relevant Terms into the contract
between the Banks and their respective customers. The Banks’ standard rates of
interest and charges are usually set out in the tariff/leaflet. Prior notice
of any material changes in the tariff (or terms generally) has to be given to
the customer under the terms of the Banking Code to which the Banks voluntarily
subscribe.”
The opposing
arguments in summary
25.
The appeal has been argued with conspicuous clarity and skill by Mr
Sumption and Mr Vos QC (the latter instructed on behalf of Nationwide) for the
banks and Mr Crow for the OFT. This brief summary is no more than a sketch
drawing attention to some salient points.
26.
The general thrust of Mr Sumption’s submissions for the banks was that
both the judge and the Court of Appeal had adopted an over-complicated approach
to an issue which, however important both for the consumers and for the banks,
is ultimately quite a short point of construction. Article 4(2) of the
Directive, now transposed by Regulation 6(2) of the 1999 Regulations, is
expressed in fairly simple and non-technical language, as is appropriate for a
Community measure which has to be applied across a variety of national systems
of contract law. It represents a compromise between consumer protection and
freedom of contract. The courts below, in seeking to identify and give effect
to the underlying purpose of the Directive, misread Regulation 6(2) as
concerned (in paragraph (b) as well as in paragraph (a)) only with what was a
“core” or “essential” part of the bargain, to which the consumer may be supposed
to have consented in a meaningful sense. The courts below had overlooked that
“core term”, if that expression is to be used at all, must be understood as no
more than shorthand for the contents of paragraphs (a) and (b). Mr Vos
supplemented Mr Sumption’s submissions by what he referred to as the
“debit/credit argument”, which focuses on the fact that customers who incur
Relevant Charges will view the essence of their contract with the bank
differently from those customers who never (or rarely) incur those charges.
27.
Against that Mr Crow’s primary submission was that the Court of Appeal
had reached the right conclusion for the right reasons. The fairness of payment
obligations falling within Regulation 6(2)(b) is exempt from assessment in
point of “adequacy” (appropriateness) only if they form part of the essential
bargain between the parties. The essential bargain constitutes only so much of
the contract as the consumer can be said to have consented to freely. The banks
had misunderstood the travaux préparatoires and drawn the wrong
conclusion from them. The Court of Appeal’s decision was supported by the
decision of the House of Lords in First National Bank. The Relevant
Charges were ancillary payment obligations and were not incurred in the normal
performance of the contract. The typical consumer would not clearly recognise
them as the price of services supplied by the banks in exchange.
The Court of
Appeal's reasoning
28.
It is therefore necessary for the Court to look closely at the Court of
Appeal’s reasoning. The general structure of the reasoning on the construction
issue is a summary, with some discussion, of the judge’s main conclusions (paras
12 to 22); discussion of First National Bank (paras 40 to 58), the travaux
préparatoires (paras 59 to 69), academic writings (paras 70 to 80) and the
relevant principles and the Court’s conclusions on the issue of construction (paras
81 to 92). This is followed by a relatively short section (paras 93 to 112)
applying the Court’s conclusions to the facts.
29.
The first point to note (in order to get it out of the way) is the
Court’s treatment of the “excluded terms/excluded assessment” controversy which
the judge had dealt with at some length. This point arose on the wording of
Regulation 3(2) of the 1994 Regulations (and may have been one of the reasons
for their replacement). It may appear an abstract point but it is potentially
of great practical importance, as Lord Phillips explains in his judgment (paras
60 and 61). The judge put the issue in these terms (para 422):
“If Regulation 6(2)(b) applies to a term, is any assessment of
its fairness excluded (the ‘excluded term’ construction), or does the
Regulation exclude only an assessment relating to the adequacy of the price
(the ‘excluded assessment’ construction)?”
He decided in
favour of the “excluded assessment” construction and that was not challenged in
the Court of Appeal or before this Court. Mr Sumption described it as a
distraction. For present purposes, I am inclined to agree. The precise nature
of the exercise in assessing the fairness of a reviewable term is no more than
marginally relevant to deciding whether or not a term is reviewable in the
first place. But in the long run it may become an issue of great practical
importance.
30.
The Court of Appeal then addressed the issue whether paras (a) and (b)
of Regulation 6(2) should be construed conjunctively (as the OFT had argued
before the judge) or disjunctively (as the banks had argued). The judge decided
that they should be construed disjunctively. The Court of Appeal commented (para
15):
“The OFT does not challenge his decision. We do not therefore
express a different view, although in our opinion it is important to construe paragraph
(b) of Regulation 6(2)(b) in the context of the whole of the Regulation
including paragraph (a).”
Here the Court of
Appeal was, I think, putting down a marker for what was to become one of the
most important themes in its decision.
31.
I have to say that I do not find it particularly helpful to consider
whether paragraphs (a) and (b) should be read conjunctively or disjunctively. The
Court is not faced with a text (such as “charitable or benevolent” in the will
of Caleb Diplock: Chichester Diocesan Fund & Board of Finance v Simpson
[1944] AC 341, 349, 369) where the two approaches are stark alternatives. In my
view the two paragraphs must be given their natural meaning, and read in that
way they set out tests which are separate but not unconnected. They reflect
(but in slightly different ways) the two sides (or quid pro quo) of any
consumer contract, that is (a) what it is that the trader is to sell or supply
and (b) what it is that the consumer is to pay for what he gets. The definition
of the former is not to be reviewed in point of fairness, nor is the “adequacy”
(appropriateness) of the latter.
32.
The Court of Appeal then discussed First National Bank at some
length, focusing (entirely correctly, in my opinion) on Lord Bingham’s and Lord
Steyn’s description of the relevant clause as a default provision. The Court
also focused on Lord Bingham’s description of it as “ancillary” and Lord
Steyn’s description of it as “subsidiary.” That led to what I regard as a more
questionable conclusion (para 49):
“As we see it, it follows from the reasoning of the House of
Lords that what article 4(2) of the Directive was seeking to exclude from the
assessment required by the national authorities (here the OFT) was the core
bargain or the core price but not ancillary or incidental provisions. In our
judgment, Regulation 6(2) of the 1999 Regulations should be construed with that
underlying purpose in mind.”
The Court went on
similarly (para 52):
“In our view these considerations support the conclusion that
the purpose of Regulation 6(2)(b) was to limit the exclusion to the essence of
the price, just as the purpose of Regulation 6(2)(a) was to limit it to the
main subject matter of the contract. As appears below, the reason for the
limitation was to reflect the fact that the parties would be likely to (or
might well) negotiate the main subject matter of the contract and the essential
price but not the detail.”
The considerations
referred to were that Regulation 6(2)(b) referred to “the price or
remuneration” and not to part of the price or remuneration. This
impressed both the judge and the Court of Appeal. I do not see much force in
it, as the Directive is expressed in terse, simple language, and the 1999
Regulations follow the same style.
33.
This part of the Court of Appeal’s reasoning ends with a firm
conclusion. After approving the judge’s reliance on passages in successive
editions of Treitel (11th ed. (2003) p273 and 12th ed. (2007) para 7-101) the
Court went on (para 55):
“This last point is of some importance because the Banks submit
that, once the conjunctive construction has been rejected, there is no room to
apply the principle of essential bargain to price clauses, if only because of
the difficulty in deciding to which it applies and to which it does not. We are
not able to accept that submission. We accept the OFT’s submission that it all
depends upon the circumstances of the particular case and that it is a question
of fact whether a clause which might otherwise fall to be assessed is outside
the essential bargain between the parties.”
34.
The Court found support for this not only in First National Bank
but also in the travaux and in some academic writings. It identified the
purpose of the Article 4(2) exception as being (para 69) that standard form
contracts should be subjected to a test of fairness except so far as their
terms have been negotiated (the implication being that it was essential terms,
both as to specification and as to price, that a consumer would actually
negotiate). Therefore (para 69 (iii)):
“Ancillary or incidental price, remuneration or payment terms
will not fall within the exception in article 4(2) because they do not fulfil
the purpose or essential rationale of the exception.”
The Court noted
that a similar view had been taken in a Joint Consultation Paper issued in 2001
by the Law Commission and the Scottish Law Commission (though paragraph 3.32 of
the Paper, set out in para 79 of the judgment, is expressed in terms of
understanding rather than consent).
35.
The next section of the judgment contains a discussion of the relevant
principles of construction followed by a restatement of the conclusion that the
Court had already reached (para 86):
“The question is whether to import the notion of essential
bargain into the construction of article 4(2) and into both paragraphs (a) and
(b) of Regulation 6(2). Our answer to that question is yes, essentially for the
reasons we have already given when discussing the First National Bank
case and the travaux préparatoires. We would summarise them in much the
same way as Mr Crow did in the course of the oral argument:
(i) The concept of the essential bargain flows naturally from
the structure of the Directive, from the purpose of the Directive, from the
purpose of the exemption and from the decision in the First National Bank
case.”
These points are
then elaborated in (ii), (iii) and (iv).
36.
The Court of Appeal then went on to consider whether the Relevant Terms
and the Relevant Charges were or formed part of the essential or core bargain
between the parties. The Court recorded (para 99) fifteen points made by Mr
Crow, the general thrust of which was that an unauthorised overdraft was
something to which a customer was not entitled; it was exceptional and
unnecessary; in consequence Relevant Charges were contingent, uneconomic,
unadvertised and imperfectly understood. Against this Mr Vos (leading the
banks’ submissions in response to the fifteen points made by Mr Crow) pointed (para
101) to the banks having earned £2.56bn from Relevant Charges in 2006 (against
£4.1bn in net interest earned on accounts in credit) and to over 12 million
customers who had incurred Relevant Charges in that year. The majority of these
incurred more than one Relevant Charge. In the circumstances it was wrong, Mr
Vos submitted, to say that they were isolated incidents. It was a misuse of
language to describe unarranged borrowing as an exception to an exception. The
Court concluded (para 104):
“We say at once that there is undoubted force in these
submissions but we have nevertheless reached the conclusion that, when all the
circumstances are taken into account, the Relevant Charges are not part of the
core or essential bargain in the sense that that concept has been used in the
sources to which we have referred.”
The appeal was
therefore dismissed.
37.
The decision of the Court of Appeal was followed by Mann J. in Office
of Fair Trading v Foxtons Ltd [2009] EWHC 1681 (Ch), 10 July 2009.
We received written submissions on this decision. The submissions vary markedly
in their perceptions of how easily and satisfactorily the judge applied the
Court of Appeal’s test (which was of course binding on him). I do not think it
necessary to go further into the decision, especially as the relevant term was
in any event not in plain intelligible language.
The meaning of
Regulation 6(2)
38.
After considering the judgments of Andrew Smith J and the Court of
Appeal at length I am impressed, as no doubt all of us are, by the great care
with which both courts have considered all the arguments and materials put
before them. But I must respectfully say that I see force in Mr Sumption’s
criticisms of their approach as over-elaborate. The issue is a very important
one, but it is essentially quite a short point, even when all the elements
relevant to a purposive approach to construction are taken into account. I also
respectfully think that the courts below, although cautioning themselves that
“core terms” is a shorthand expression for the contents of paragraphs (a) and
(b) of regulation 6(2), tended to slip into treating it as an autonomous
expression which itself expressed the contents of both those paragraphs.
39.
I start with the language of Article 4(2) and Regulation 6(2) (I can see
no significant difference between them, although for no obvious reason Article
4(2) refers to assessing the unfair nature of a term whereas Regulation 6(2)
refers to assessment of fairness of a term). Paragraphs (a) and (b) are, as I
have said, concerned with the two sides of the quid pro quo inherent in
any consumer contract. The main subject-matter may be goods or services. If it
is goods, it may be a single item (a car or a dishwasher) or a multiplicity of
items. If for instance a consumer orders a variety of goods from a mail-order
catalogue – say clothing, blinds, kitchen utensils and toys – there is no
possible basis on which the court can decide that some items are more essential
to the contract than others. The main subject matter is simply consumer goods
ordered from a catalogue. I think that the Court of Appeal was wrong (para 55)
to dismiss the difficulties raised by the banks on this point as something that
the court could decide as a question of fact in the circumstances of the
particular case.
40.
Similarly, a supply of services may be simple (an entertainer booked to
perform for an hour at a children’s party) or composite (a week’s stay at a
five-star hotel offering a wide variety of services). Again, there is no
principled basis on which the court could decide that some services are more
essential to the contract than others and again the main subject matter must be
described in general terms—hotel services. The services that banks offer to
their current account customers are a comparable package of services. These
include the collection and payment of cheques, other money transmission
services, facilities for cash distribution (mainly by ATM machines either at
manned branches or elsewhere) and the provision of statements in printed or
electronic form.
41.
When one turns to the other part of the quid pro quo of a
consumer contract, the price or remuneration, the difficulty of deciding which
prices are essential is just the same, and Regulation 6(2)(b) contains no
indication that only an “essential” price or remuneration is relevant. Any
monetary price or remuneration payable under the contract would naturally fall
within the language of paragraph (b) (I discount the absence of a reference to
part of the price or remuneration for reasons already mentioned).
42.
In the case of banking services supplied to a current account customer
under the “free if in credit” regime, the principal monetary consideration
received by the bank consists of interest and charges on authorised and unauthorised
overdrafts, and specific charges for particular non-routine services (such as
expedited or foreign money transmission services). The most important element
of the consideration, however, consists of the interest forgone by customers
whose current accounts are in credit, since whether their credit balance is
large or small, they will be receiving a relatively low rate of interest on it (sometimes
a very low rate or no interest at all). The scale of this benefit is indicated
by the figure for 2006 already mentioned. Mr Sumption was wary about committing
himself as to whether interest foregone constituted part of the bank’s price or
remuneration for the purposes of Regulation 6(2)(b). Whatever view is taken as
to that, it is clear that just as banking services to current account customers
can aptly be described as a package, so can the consideration that moves from
the customer to the bank. Interest forgone is an important part of that package
for customers whose accounts are in credit, and overdraft interest and charges
are the most important element for those customers who are not in credit.
Lawyers are very used to speaking of a package (or bundle) of rights and
obligations, and in that sense every obligation which a consumer undertakes by
a consumer contract could be seen as part of the price or remuneration received
by the supplier. But non-monetary obligations undertaken by a consumer contract
(for instance, to take proper care of goods on hire-purchase, or to treat
material supplied for a distance-learning course as available only to the
customer personally) are not part of the “price or remuneration” within the
Regulation. That is the point of Lord Steyn’s observation in First National
Bank, in para 34, that “in a broad sense all terms of the contract are
in some way related to the price or remuneration.”
43.
This House’s decision in First National Bank shows that not every
term that is in some way linked to monetary consideration falls within
Regulation 6(2)(b). Paras (d), (e), (f) and (l) of the “greylist” in Schedule
2 to the 1999 Regulations are an illustration of that. But the relevant term in
First National Bank was a default provision. Traders ought not to be
able to outflank consumers by “drafting themselves” into a position where they
can take advantage of a default provision. But Bairstow Eves London Central
Ltd v Smith [2004] 2 EGLR 25 shows that the Court can and will be astute to
prevent that. In First National Bank Lord Steyn indicated that what is
now Regulation 6(2) should be construed restrictively, and Lord Bingham said
that it should be limited to terms “falling squarely within it”. I respectfully
agree. But in my opinion the Relevant Terms and the Relevant Charges do fall
squarely within Regulation 6(2)(b).
44.
That conclusion is not to my mind at variance with the message to be
derived from the travaux. It is a fairly complex message, reflecting not
only a compromise between the opposing aims of consumer protection and freedom
of contract, but also the contrast between consumer protection and consumer
choice (the latter being more central, perhaps, to basic Community principles).
This point was explored and explained in an article (not mentioned by the Court
of Appeal) to which Mr Sumption referred, that is Good Faith in European
Contract Law by Professor Hugh Collins, (1994) 14 OJLS 229. Mr Sumption placed
particular emphasis on the following passage:
“The history of the EC Directive on Unfair Terms in Consumer
Contracts reveals the struggle between these two interpretations of the economic
interests of consumers. Even at a late stage in the negotiations, the draft
Directive proposed by the Commission envisaged the introduction of a general
principle against substantive unfairness in consumer contracts. It invalidated
terms in standard form consumer contracts which caused ‘the performance of the
contract to be significantly different from what the consumer could
legitimately expect’, or which caused ‘the performance of the contract to be
unduly detrimental to the consumer’. But in the battle between the advocates of
consumer rights and the supporters of free competition, eventually the latter
emerged victorious in the Council of Ministers. The fairness of the
transaction in the sense of the price paid for the goods or services should not
be subjected to review or control. This is the meaning of the obscure Article
4(2) [which is then set out]. The final reservation in this provision [‘plain
intelligible language’] is significant. The Directive does not require
consumer contracts to be substantively fair, but it does require them to be
clear. Clarity is essential for effective market competition between terms.
What matters primarily for EC contract law is consumer choice, not consumer
rights.”
45.
The Court of Appeal took account of the travaux and of some
academic writing. It recognised as an underlying value the notion that freedom
of contract should prevail where there has been meaningful negotiation between
supplier and consumer, so that the latter does consent to the terms of the
contract. But I respectfully think the Court went too far in interpreting the
language of the Directive and the 1999 Regulations in order to meet that
perceived aim. The Directive and the 1999 Regulations apply only to terms which
have not been individually negotiated, and the Court departed from the natural
meaning of the text in order to achieve an unnecessary duplication of the
exception for individually negotiated terms.
46.
I would add a postscript to this part of the discussion. A variety of
expressions has been used, in the courts below and in argument (and to some
extent by this House in First National Bank), to describe those
contractual terms which are subject to review in point of fairness: ancillary,
subordinate, incidental, non-core, collateral. These may all be of some
assistance but it is important, in considering provisions which apply across an
extraordinarily wide range of consumer contracts, to treat them with caution. I
venture to repeat a paragraph from an opinion of mine (in which the other
members of the Appellate Committee concurred) in College of Estate
Management v Customs & Excise Commissioners [2005] STC 1957, para 30,
an appeal raising questions of Community law about whether there is a single or
multiple supply, and whether it is of goods or services, for the purposes of
value added tax:
“‘Ancillary’ means (as Ward LJ rightly observed ([2004] STC 1471
at [39]) subservient, subordinate and ministering to something else. It was an
entirely apposite term in the discussion in British Telecommunications
(where the delivery of the car was subordinate to its sale) and in Card
Protection Plan itself (where some peripheral parts of a package of
services, and some goods of trivial value such as labels, key tabs and a
medical card, were subordinate to the main package of insurance services). But
there are other cases (including Faaborg, Beynon and the present case)
in which it is inappropriate to analyse the transaction in terms of what is
‘principal’ and ‘ancillary’, and it is unhelpful to strain the natural meaning
of ‘ancillary’ in an attempt to do so. Food is not ancillary to restaurant
services; it is of central and indispensable importance to them; nevertheless
there is a single supply of services (Faaborg). Pharmaceuticals are not
ancillary to medical care which requires the use of medication; again, they are
of central and indispensable importance; nevertheless there is a single supply
of services (Beynon).”
Conversely,
delivery of goods or peripheral extras may be disregarded as ancillary for the
purposes of para (a) of Regulation 6(2), but the charges for them, if payable
under the same contract, are part of the price for the purposes of para (b).
The application
of Regulation 6(2)
47.
I can state my opinion much more briefly on the second main issue in the
appeal, that is the application of Regulation 6(2), properly construed, to the
facts. Charges for unauthorised overdrafts are monetary consideration for the
package of banking services supplied to personal current account customers.
They are an important part of the banks’ charging structure, amounting to over
30 per cent of their revenue stream from all personal current account
customers. The facts that the charges are contingent, and that the majority of
customers do not incur them, are irrelevant. On the view that I take of the
construction of Regulation 6(2), the fairness of the charges would be exempt
from review in point of appropriateness under Regulation 6(2)(b) even if fewer
customers paid them, and they formed a smaller part of the banks’ revenue
stream. Even if the Court of Appeal’s interpretation had been correct, I do not
see how it could have come to the conclusion that charges amounting to over 30
per cent of the revenue stream were (para 111) “not part of the core or
essential bargain.”
Should there be
a reference under Article 234?
48.
This Court, as the national court of last resort, is under an obligation
to make a reference to the Court of Justice under Article 234 of the Treaty if
a decision on the correct interpretation of the Directive is necessary to
enable the Court to give judgment, and the point is not acte clair.
Neither side showed any enthusiasm for a reference, because of the further
delay that would be occasioned in a very large number of claims at present
stayed. The Court is entitled to take the likely delay into account, although
not as an overriding consideration, in deciding whether to make a reference.
49.
If (as I understand to be the case) the Court is unanimous that the
appeal should be allowed, then in my opinion we should treat the point as acte
clair, and decide against making a reference. It may seem paradoxical for a
court of last resort to conclude that a point is clear when it is differing
from the carefully-considered judgments of the very experienced judges who have
ruled on it in lower courts. But sometimes a court of last resort does
conclude, without any disrespect, that the lower courts were clearly wrong, and
in my respectful opinion this is such a case.
50.
Even if some or all of the Court feel that the point is not acte
clair, I would still propose that we ought not to incur the delay involved
in a reference under Article 234, since a decision on the correct construction
of Article 4(2) of the Directive is not essential for the determination of this
appeal. The correct construction of Article 4(2) is a question of Community
law, but the application of the Article, properly construed, to the facts is a
question for national law. Even if the Court of Appeal was not clearly wrong on
the issue of construction, it was in my respectful opinion clearly wrong in
applying its construction to the facts. In other circumstances it might be
regarded as rather unprincipled to take that means of avoiding an important
issue of Community law, but in the special circumstances of this case I would
regard it as the lesser of two evils. There is a strong public interest in
resolving the matter without further delay.
Conclusion
51.
For these reasons I would allow the appeal. The declaration sought by
the banks in their counterclaims is inappropriate for the reasons explained by
Lord Phillips at the beginning of his judgment. I would declare that the bank
charges levied on personal current account customers in respect of unauthorised
overdrafts (including unpaid item charges and other related charges) constitute
part of the price or remuneration for the banking services provided and, in so
far as the terms giving rise to the charges are in plain intelligible language,
no assessment under the Unfair Terms in Consumer Contracts Regulations 1999 of
the fairness of those terms may relate to their adequacy as against the
services supplied.
52.
If the Court allows this appeal the outcome may cause great
disappointment and indeed dismay to a very large number of bank customers who
feel that they have been subjected to unfairly high charges in respect of
unauthorised overdrafts. But this decision is not the end of the matter, as
Lord Phillips explains in his judgment. Moreover Ministers and Parliament may
wish to consider the matter further. They decided, in an era of so-called
“light-touch” regulation, to transpose the Directive as it stood rather than to
confer the higher degree of consumer protection afforded by the national laws
of some other member states. Parliament may wish to consider whether to revisit
that decision.
LORD PHILLIPS
Introduction
53. In common
with most members of the public all members of the Court have a current account
with one or other of the appellants (“the Banks”). The Banks and the Respondent
(“the OFT”) have agreed that we should none the less hear this appeal. The
operation of a current account by a Bank for its customer involves the
provision of a number of different services. These include the collection of
cheques drawn in favour of the customer, the honouring of cheques drawn by the
customer, payments on behalf of the customer pursuant to the use by the
customer of credit or debit cards and cash distribution facilities.
54. The
customer rewards his Bank for the provision of these services in different
ways, in accordance with standard terms agreed between the customer and the
Bank. The majority of customers, who always keep their accounts in credit,
reward the Bank by allowing it to use the funds standing to their credit
without paying interest at the market rate. Somewhat misleadingly, the services
provided by Banks to such customers are said to be “free of charge”. The
position is very different in the case of a customer who permits his current
account to go into debit without having obtained, in advance, authority from
his Bank to overdraw. When this occurs, the customer becomes liable to pay
charges. In some instances the charge will be triggered by the performance of
an individual identifiable service, such as honouring a cheque. In other
instances a sum becomes payable if, during a specified period, an account is
overdrawn. These charges have collectively been described in this litigation as
“the Relevant Charges” and the terms under which they are imposed as “the
Relevant Terms”. I shall adopt that terminology. Mr Sumption QC, who appeared
for the Banks, preferred to call the charges “Insufficient Fund Charges”.
55. Lord
Walker has, in his judgment, explained the background to this litigation and
set out the relevant provisions of the Unfair Terms in Consumer Contracts Regulations
1999 SI 1999/2083 (“the 1999 Regulations”) and Council Directive 93/13/EEC
(“the Directive”), which the 1999 Regulations implemented. Subject to one
exception I shall not repeat that exercise.
56. The OFT
is minded to attack the Relevant Terms under the 1999 Regulations on the ground
that they are unfair. The Banks contend that any such attack will be
circumscribed by the provisions of Regulation 6(2) of the 1999 Regulations,
which provides:
“In so far as it is in plain intelligible language, the
assessment of fairness of a 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”.
It is common ground
that the Relevant Terms that are the subject of this appeal are largely in
plain intelligible language except (in the case of four banks) in certain
specific and relatively minor respects.
The issue
57. The
agreed Statement of Facts and Issue describes the issue raised by this appeal
as follows:
“Whether an assessment of the fairness of the Relevant Terms
(pursuant to which the Relevant Charges are levied) would relate to the
adequacy of the price and remuneration, as against the services supplied in
exchange, within the meaning of regulation 6(2)(b) of the Unfair Terms in
Consumer Contracts Regulations 1999.”
This does not
accurately describe the issue raised by this appeal, which is very much more
narrow. That issue is whether the Relevant Charges constitute “the price or
remuneration, as against the services supplied in exchange” within the meaning
of the Regulation. If they do not, the attack on the fairness of the terms that
is open to the OFT will not be circumscribed by Regulation 6(2)(b). If they do,
they will still be open to attack by the OFT on the ground that they are
“unfair” as defined by Regulation 5(1), but that attack cannot be founded on an
allegation that the Relevant Charges are excessive by comparison with the
services which they purchase, for that is forbidden by Regulation 6(2)(b).
58. That this
was indeed the issue was made clear by counsel on either side in their oral
submissions. Towards the close of his reply, Mr Sumption QC said this:
“All that I can ask the courts to declare, and all that my
clients have ever asked the courts to declare, is that the insufficient fund charges
are included in the price within the meaning of the word “price” in
[Regulation] 6 and that no assessment of the fairness of the terms imposing the
IFCs may relate to their adequacy as against the service supplied.”
59. Mr Crow
QC for his part submitted on behalf of the OFT that even if Article 4(2) of the
Directive did apply, the Relevant Terms were still subject to assessment for
fairness. In that event, while it would not be open to the OFT to assess the
fairness of the price by reference to the adequacy of the goods or services
supplied in exchange, it would be open to the OFT to assess the fairness of the
price according to other criteria.
60. This
agreement between the parties reflects acceptance by the Banks in the Court of
Appeal of a finding by Andrew Smith J that was contrary to one of their
submissions. The Banks had submitted that a term of a contract that provided
the “price or remuneration” for “goods or services supplied” was absolutely
exempt from assessment for fairness by reason of Regulation 6(2). This was
described as the “excluded term” construction of the Regulation. Andrew Smith J
held that this was not correct. Regulation 6(2) precluded assessing a price
term for fairness by reference to its adequacy as payment for the goods or
services provided in exchange. It did not, however, preclude assessing a price
term for fairness according to other criteria. This has been described as the
“excluded assessment” construction of the Regulation.
61. Mr
Sumption submitted that the difference between the “excluded term” and the
“excluded assessment” constructions was “a distraction from the real issues”. It
is certainly a distraction from the narrow issue that the parties are now
agreed is before the court. But it is only because the “excluded assessment”
construction has prevailed that the issue has been narrowed from that in the
Agreed Statement of Facts and Issue. Had the “excluded term” construction
prevailed, a finding in favour of the Banks that the Relevant Terms were
included within the meaning of the word “price” in Regulation 6(2) would have
precluded any challenge to those terms on the ground of fairness. As it is, if
the Banks succeed on the narrow issue, this will not close the door on the
OFT’s investigations and may well not resolve the myriad cases that are
currently stayed in which customers have challenged Relevant Charges.
62. There is
a further general point to be made. It seems likely that many of the customers
who have challenged Relevant Charges have done so on the basis that they are
excessive for the individual services to which they relate. They have treated
the Relevant Charges as being levied in exchange for those services. Equally,
one of the provisional grounds of attack advanced by the OFT has been that the
Relevant Charges are out of all proportion to the cost of providing the
services to which they relate. The Banks’ primary case is that these attacks
are founded on a misconception that the Relevant Charges are payment for the
services that trigger them. According to the Banks the reality is that the
Relevant Charges are simply part of the payment in exchange for a global
package of services. If that is correct, it would seem to follow that the
attack based on the disparity between the cost of providing the services that
trigger the Relevant Charges and the amount of the Relevant Charges is based on
a false premise and does not in fact involve an assessment of fairness that
relates “to the adequacy of the price or remuneration, as against the goods or
services supplied in exchange”.
63. This was
a point that was appreciated by Andrew Smith J. At paragraph 400 of his
judgment he says:
“Moreover, the basis of the whole package argument is that the
Relevant Charges are not the price or remuneration for services but part
of the price or remuneration for services. An assessment of the fairness of the
Relevant Charges does not involve an assessment of the level or adequacy or
appropriateness of the overall price or remuneration for the package of
services supplied by the Bank, and an assessment of the fairness of the
Relevant Charges as against those services, apart from being entirely beside
the point, would not intrude upon the essential bargain between the parties
that the Directive and the 1999 Regulations intend should be protected from
assessment. The whole package argument does not engage the policy of the
Directive and the 1999 Regulations for exempting the fairness of the Relevant
Terms from assessment. Indeed, I am far from convinced that an assessment of
part of the price or remuneration (or at least for less than what is manifestly
the predominant part of the price or remuneration) for goods or services would
ever be covered by Regulation 6(2)(b), but since this is not an argument
advanced by the OFT, I say no more about that.”
64. Mr Crow
did not submit before us that if the Relevant Charges formed part of the price
paid in exchange for the package of services, they could not be included within
the meaning of the word “price” in Regulation 6(2). I consider that Regulation
6(2) could apply to a complaint that the Banks’ charges overall, of which the
Relevant Charges are an important element, are unfair because those who pay
them pay an excessive amount in exchange for the package of services in respect
of which they constitute part of the payment. Thus the issue of whether or not
the Relevant Charges form part of the “price or remuneration, as against the goods
or services supplied in exchange” within Regulation 6(2) is not necessarily
academic. No attack has yet been made, however, on the level of the Banks’
charges overall.
The reasoning of
the Courts below
65. Both
Andrew Smith J and the Court of Appeal concluded that the Relevant Terms did
not qualify as price or remuneration within the meaning of those words in
Regulation 6(2).
66. At the
heart of the reasoning of Andrew Smith J was the conclusion that the Relevant
Charges were not covered by Regulation 6(2) because they were not the “price or
remuneration” for “services supplied in exchange”. They were not charged
“in exchange” for anything. While most of the charges were triggered by
the provision of an individual service they were not imposed by way of payment
for those services. They were charges levied because the services in question
were supplied by the Banks “in particular circumstances”. One of the four types
of Relevant Charges was not triggered by the provision of a service. Unpaid
Item Charges were levied when a request to honour a cheque on an overdrawn
account was refused. Refusing a request could not properly be described as a
service at all.
67. Andrew
Smith J rejected the Banks’ case that the Relevant Charges were part payment
for the entire package of services provided by the Banks to current account
customers for the following reasons:
“I am unable to accept this argument, for two (linked) reasons.
First, I do not consider that the payments are made in exchange for the whole
package of services supplied by the Bank when it is operating a current account.
It is not a natural use of language to say that the Relevant Charges are levied
or paid in exchange for those services supplied when an account is in
credit. Secondly, I do not consider that the payments are the price or
remuneration for those services in any natural meaning of the phrase or
within the meaning of Regulation 6(2). The payments would not be so recognised
by the typical customer when he opens a current account with a Bank, and they
are not generally so presented by the Banks in their terms or other
documentation.”
68. The Court
of Appeal reached the same conclusion as Andrew Smith J, but by a different
process of reasoning. Lord Walker has set out that reasoning at length. Once
again I shall restrict myself to the essence of the Court’s conclusion. In
relation to Unpaid Item Charges the Court held that giving consideration to a
request to honour a cheque on an overdrawn account was a service, even if the
request was turned down. Thus each of the events that triggered a liability to
pay Relevant Charges involved the provision of a service. It was not, however,
realistic to consider that each Relevant Charge was payment for the individual
service that occasioned its imposition. Rather, the substance of the contract
had to be analysed as a package.
69. The Court
then went on to divide the package into the “core or essential bargain” and
provisions that were “incidental or ancillary”, holding that Regulation 6(2)
only applied to the former. The core or essential bargain was comprised of
those matters to which the typical consumer would have regard when deciding
whether to enter into the agreement with the Bank. The latter would be those to
which he would not attach importance when concluding the contract.
70. The Court
decided that charges which were contingent upon the customer overdrawing on his
current account would not have been considered of significance by the typical
customer at the time of establishing the account. The charges would only be
imposed in contingent circumstances and were akin to default charges triggered
by a breach of contract, although they were not in fact triggered by a breach
of contract because of the manner in which the contractual relationship had
been expressly framed. The customer would not consider the contingent liability
to pay the Relevant Charges in the event of overdrawing on his account an
essential part of the Bank’s agreement to provide these services without charge
provided that he remained in credit. It followed that the liability to pay the
Relevant Charges was not part of the core or essential bargain and did not fall
within the ambit of Regulation 6(2).
The approach to
the issue
71. Early in
his argument Mr Sumption said:
“[T]here is…room for argument about whether the insufficient
fund charges are part of the price for the package of services or just the
particular service which occasions their being charged, but we will submit that
it is unrealistic to say, as the judge did, that insufficient fund charges are
not payable in exchange for any service at all and are, therefore, not a price
at all.”
72. This
raises the questions by what criteria do you decide whether the charges are
payment for services, if so, whether individual charges are payments for
individual services or part payment for a package of services, and from whose
viewpoint do you decide those questions? So far as the latter question is
concerned, the choice would appear to be between the viewpoint of the customer,
having regard to the facts that he would reasonably be expected to know, the
viewpoint of the Banks, having regard to the more extensive knowledge held by
the Banks, or no viewpoint at all, on the basis that these questions have to be
answered by application of an objective test to all the material facts. There
is an allied question of whether the language used to describe the obligations
imposed by the terms is relevant or whether one looks simply at the nature and
effect of those obligations.
73. The
narrow issue raised by this appeal is only relevant as part of the wider issue
that will arise if and when the Relevant Terms are challenged as being unfair.
At that point the question may arise – are the terms being challenged on the
ground that the Relevant Charges are excessive having regard to the services
that are provided in exchange for them? The court before which the challenge is
made may then have to decide whether any, and if so what, services are provided
in exchange for the Relevant Charges as a stepping stone to deciding whether
the challenge is one precluded by Regulation 6(2). To answer that question the
court will, in my view, properly have to consider the role played by the
Relevant Charges having regard to all the facts that are relevant to the
operation of the contractual adventure and not just to those that are, or
reasonably should be, within the knowledge of the customer.
Conclusions
74. I wish to
express my admiration for the detailed and perceptive analysis of Andrew Smith
J, although I do not share all the conclusions that he reached. He examined
each of the Relevant Charges and the circumstances in which they fell to be
paid. He concluded that it was impossible to say that each charge was given in
exchange for the event that triggered it. I agree with that conclusion. It
accords, of course, with the primary way in which the Banks put their case. The
same conclusion would, I think, have been reached by a reasonably informed
customer who applied his mind to the question. In each instance the Judge
identified aspects of the provisions for payment of the Relevant Charges that
would be anomalous if they were intended to be paid in exchange for the service
to which they related. I will take one of the charges made by Barclays to
illustrate such anomalies. A ‘Paid Referral Fee’ is charged when the
Bank honours a cheque, standing order or direct debit in circumstances where
the account is overdrawn without prior arrangement. The fee is not charged per
transaction but at £30 per day. But the fee is only charged on a maximum of
three days per month. A customer would not conclude that the fee was charged in
exchange for the transaction or transactions concluded on the days when the
charges were made but that any other similar transactions in the course of the
month were provided free.
75. I agree
with Andrew Smith J that a careful analysis of the transactions giving rise to
the obligation to pay the Relevant Charges leads to the conclusion that they
are not the prices paid in exchange for the transactions in question.
76. I shall
revert to the Judge’s rejection of the Banks’ case that the Relevant Charges
were part of the remuneration paid for the package of services provided to
holders of current accounts. First I wish to address the reason why the Court
of Appeal rejected that case.
77. The Court
of Appeal accepted that the contract between the Bank and its customer had to
be treated as a package. They did not exclude from the package services that
were supplied at a time when the current account was overdrawn. They accepted
that the Relevant Terms were terms that provided for payment of price or
remuneration. They held, however, that they were not “core” payment terms but
“ancillary or incidental price, remuneration or payment terms” (paragraph
69(iii)) which did not constitute price or remuneration that fell within
Regulation 6(2).
78. I can see
no justification for excluding from the application of Regulation 6(2) price or
remuneration on the ground that it is “ancillary or incidental price or
remuneration”. If it is possible to identify such price or remuneration as
being paid in exchange for services, even if the services are fringe or
optional extras, Regulation 6(2) will preclude an attack on the price or
remuneration in question if it is based on the contention that it was excessive
by comparison with the services for which it was exchanged. If, on analysis,
the charges are not given in exchange for individual services but are part of a
package of different ways of charging for a package of varied services, this
does not mean that they are not price or remuneration for the purpose of
Regulation 6(2). As I observed earlier, an assessment of the fairness of the
charges will be precluded if the basis of the attack is that, by reason of
their inclusion in the pricing package, those who pay them are being charged an
excessive amount in exchange for the overall package.
79. The Court
of Appeal accepted the following argument advanced by the OFT. The object of
Regulation 6(2) is to exclude from assessment for fairness that part of the
bargain that will be the focus of a customer’s attention when entering into a
contract, that is to say the goods or services that he wishes to acquire and
the price he will have to pay for doing so. Market forces could and should be
relied upon to control the fairness of this part of the bargain. Contingencies
that the customer does not expect to involve him will not be of concern to him.
He will not focus on these when entering into the bargain. The Relevant Charges
fall into this category. Free-if-in-credit current accounts are opened by
customers who expect to be in credit. Customers who go into debit without
making a prior agreement for an overdraft normally do so because of an
unforeseen contingency. Customers do not have regard to the consequences of
such a contingency when opening a current account. Accordingly, the Relevant
Charges that are then levied do not fall within Regulation 6(2).
80. It seems
to me that this reasoning is relevant not to the question of whether the Relevant
Charges form part of the price or remuneration for the package of services
provided but to whether the method of pricing is fair. It may be open to
question whether it is fair to subsidise some customers by levies on others who
experience contingencies that they did not foresee when entering into their
contracts. If it is not it may then be open to question whether the Relevant
Terms fall within Regulation 5(1). These questions do not, however, bear on the
question of whether the Relevant Charges form part of the price or remuneration
that is paid in exchange for the services provided to the holder of a current
account. In agreement with Lord Walker, and for the additional reasons that he
gives, I am not persuaded by the Court of Appeal’s reasons for excluding the
Relevant Charges from the “price or remuneration” in Regulation 6(2).
81. I now
turn to the reasons given by Andrew Smith J for rejecting the Banks’ case that
the Relevant Charges are part of a package of prices or remuneration paid for a
package of services – see paragraph 67 above. First he says that it is not a
natural use of language to say that the Relevant Charges are levied or paid in
exchange for those services supplied when an account is in credit. It does not
seem to me that this does full credit to the package approach. I do not imagine
that there are many customers who run a current account that is permanently
overdrawn in circumstances where they have not specifically agreed an overdraft
facility. Most customers who incur Relevant Charges run current accounts that
are in credit most of the time. I do not think that it is an unnatural use of
language to say that the Relevant Charges that they pay are paid as part of
the price or remuneration provided in exchange for the package of services that
they receive.
82. If the
Relevant Charges are not part of the price or remuneration for the services
provided, the question arises of how the charges should be classified. The
answer suggested on behalf of the OFT is that they are in the nature of default
payments, imposed not as a hefty element in the price that the Banks hope that
customers will pay for their services but by way of sanctions to discourage
them from overdrawing on their current accounts. At paragraph 107 the Court of
Appeal held:
“[The Relevant Charges] are…akin to default charges which are
triggered by a breach of contract. Although they are not in fact triggered by
a breach of contract because of the manner in which the contractual
relationship has been expressly framed, this does not mean that they are not
contingent charges…”
83. Andrew
Smith J considered at paragraphs 295 to 324 whether the Relevant Charges were
penalties at common law so as to be unenforceable for that reason. He held that
they were not because a penalty at common law is a payment that becomes payable
upon a breach of contract. Liability to pay Relevant Charges is not contingent
upon breaches by the customers of their contracts. It is not a breach of any of
the standard form contracts under consideration to overdraw, or attempt to
overdraw, on a current account. Mr Sumption rightly conceded, however, that the
Banks could not convert what were in effect penalties into “price” simply by
wording their contracts so as to ensure that the contingencies that triggered
liability to pay the charges did not constitute breaches of contract.
84. Mr Crow
argued that the Court of Appeal was correct to describe the Relevant Charges as
akin to default charges. They were only payable in what he described as
“aberrant circumstances”. He pointed out that many of the terms that give the
impression that the charges are the cost of exercising contractual options are
of recent origin. Contracts that preceded them had terms which indicated that
customers were not to go into overdraft without prior arrangement, even if
doing so was not technically a breach of contract. He pointed out that this is
still true of the following current term of the Nationwide Building Society’s
terms:
“Your FlexAccount is a share of Nationwide Building Society. It
will give membership rights to the account holder(s)….Your membership may be
withdrawn if you overdraw without agreement or exceed an agreed overdraft.”
85. Mr
Sumption challenged that submission. He submitted that, at a time when
virtually the whole population had a personal current account, the ability to
overdraw informally and at short notice and without elaborate negotiation was
an important tool of personal finance management. It was an extremely valuable
facility, not properly to be described as an aberration.
86. Andrew
Smith J rejected the OFT’s submission that the Banks’ terms that treat an
instruction that involves overdrawing as a request for an overdraft were
misleading. He held:
“75. Thus, apart from Nationwide, the Banks’ terms and
conditions are couched in terms of the customer making a request of the Bank
and the Bank responding to it, and in some cases they refer to the Bank
considering the request. The OFT criticises this terminology as an artificial
device recently introduced which disguises the true nature of the parties’
dealings when a customer gives his bank an instruction which would, if paid,
take the account into debit. Similarly, the OFT suggests that the use of the
term ‘overdraft’ to describe the debit balance created in these circumstances
has misleading connotations, and emphasises the differences between the debit
balance resulting from such a payment and an overdraft facility that a bank and
a customer might agree should be available on an account.
76. Certainly, this terminology has been introduced by the
Banks into their documentation relatively recently. However, I am unable to
accept that the references to the customer making a request for an overdraft
when he gives a Relevant Instruction are inappropriate or create a fiction. On
the contrary, they spell out what is, as a matter of legal analysis, implicitly
done when a customer gives a Relevant Instruction. Of course, there are
differences between any resulting overdraft and a facility arranged by a
specific agreement between a customer and his bank. A facility for an overdraft
typically, and as provided by the Banks under their current terms (to which I
refer below), commits the bank to allow the customer to overdraw on his account
for as long as the facility is in place and within its limits, and, while of
course it is possible for a facility to be confined to use for a stipulated
purpose, it does not typically cover only a specific payment by the customer. If
a fee is charged, it is generally for the facility itself, regardless of
whether it is in fact used by the customer to borrow or how much it is so used.
(None of the Banks charges a customer for requesting a facility in advance if
the request is refused.) However, none of this means that it is misleading to
use the expression ‘overdraft’ to refer either to a facility or to borrowing
under a facility or to unarranged borrowing. To my mind the expression is
flexible enough naturally to encompass all these usages.”
As Mr Sumption
observed there has been no appeal against this finding.
87. In
support of his submissions Mr Sumption relied upon the fact that a very
significant number of customers incur Relevant Charges and upon the overall
contribution that these charges make to the revenue earned by the Banks from
operating current accounts. In the region of 20% of customers incur Relevant
Charges but these account for over 30% of the revenue received by the Banks
from current account customers. This compares with about 50% that represents
the benefit of the use by the Banks of the funds in the accounts of customers
who are in credit.
88. When the
relevant facts are viewed as a whole, it seems clear that the Relevant Charges
are not concealed default charges designed to discourage customers from
overdrawing on their accounts without prior arrangement. Whatever may have been
the position in the past, the Banks now rely on the Relevant Charges as an
important part of the revenue that they generate from the current account services.
If they did not receive the Relevant Charges they would not be able profitably
to provide current account services to their customers in credit without making
a charge to augment the value of the use of their funds.
89. For these
reasons I have formed the conclusion that the Relevant Charges are, as the
Banks submit, charges that they require their customers to agree to pay as part
of the price or remuneration for the package of services that they agree to
supply in exchange.
90. My
conclusions accord with those of Lord Walker and, for the reasons that he gives
as well as my own, I would allow this appeal.
91. I have
not found this an easy case and I do not find the resolution of the narrow
issue before the court to be acte clair. I agree, however, that it would
not be appropriate to refer the issue to the European Court under Article 234. I
do not believe any challenge to the fairness of the Relevant Terms has been
made on the basis that they cause the overall package of remuneration paid by
those in debit to be excessive having regard to the package of services
received in exchange. In these circumstances the basis on which I have answered
the narrow issue would seem to render that issue academic. It may be that, if
and when the OFT challenges the fairness of the Relevant Terms, issues will be
raised that ought to be referred to Luxembourg. That stage has not yet been
reached.
LADY HALE
92.
For the reasons given by Lord Walker and Lord Mance, I too would allow
this appeal and make the declaration proposed by Lord Walker.
93.
I would only add that, should this or any other Parliament be minded to
take up the invitation given in the last paragraph of Lord Walker’s judgment,
it may not be easy to find a satisfactory solution. The banks may not be the
most popular institutions in the country at present, but that does not mean
that their methods of charging for retail banking services are necessarily
unfair when viewed as a whole. As a very general proposition, consumer law in
this country aims to give the consumer an informed choice rather than to
protect the consumer from making an unwise choice. We buy all sorts of products
which a sensible person might not buy and some of which are not good value for
the money. We do so with our eyes open because we want the product in question
more than we want the money. Should financial services be treated differently
from other goods and services? Or is the real problem that we do not have a
real choice because the suppliers all offer much the same product and do not compete
on some of their terms? This is the situation here. But it is not clear to me
whether the proper solution is to find some way of forcing the suppliers to
compete with one another in the terms they offer or whether the solution is to
condemn one particular model of charging for those services. Fortunately,
however, that is for Parliament and not for this Court.
LORD MANCE
94.
Council Directive 93/13/EEC of 5 April 1993 and The Unfair Terms in
Consumer Contracts Regulations 1999 (S.I. No. 2083), which implement the
Directive domestically, both relate to “unfair terms in contracts concluded
between a seller or [a] supplier and a consumer”. They make the validity of “a
contractual term which has not been individually negotiated” subject generally
to the criterion of fairness (defined by reference to whether “contrary to the
requirement of good faith, it causes a significant imbalance in the parties’
rights and obligations arising under the contract, to the detriment of the
consumer”). This appeal concerns the exception to this rule, provided in
Article 4(2) of the Directive and Regulation 6(2). It is not suggested that
there is any material difference between these two provisions. As Regulation
6(2) puts it:
“In so far as it is in plain intelligible language, the
assessment of fairness of a 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.”
“Adequacy” (the
word also used in the Directive) means appropriateness or reasonableness (in
amount).
95.
This appeal is concerned with Relevant Charges in the form of unpaid
item charges, paid item charges, overdraft excess charges and guaranteed paid item
charges levied when a customer gives instructions or undertakes a transaction
without having sufficient funds to back it. The Office of Fair Trading (OFT)
has written to various banks expressing concerns about the fairness of the
terms agreed by the banks with their customers so far as they provide for
payment of Relevant Charges. The question for decision is whether the OFT would
be entitled to challenge the fairness of such terms under regulation 12. It is
now accepted that such terms are not individually negotiated within regulation
5(1). But it is also common ground (except in the case of four banks in certain
specific and minor respects) that they are in “plain intelligible language”
within regulation 6(2). The issue is whether the Relevant Charges or the
agreement to pay them constitute “price or remuneration” in exchange for the
supply of services within regulation 6(2). If they do, then any challenge to
their fairness based on their appropriateness in relation to such services is
excluded under regulation 6(2). Any assessment based on matters not relating to
the appropriateness in amount of the price or remuneration is not excluded by
regulation 6(2)(b). This regulation is clearer than its predecessor (regulation
3(2) of the 1994 Regulations) which suggested grammatically that it was only a
“term which . . . concerns the appropriateness of the price or remuneration”
that was immune from challenge (language reflected in some of the reasoning in Director-General
of Fair Trading v First National Bank plc [2002] 1 AC 481, below).
96.
The parties have in their written cases and oral submissions identified
two broad issues for determination. The first concerns the proper
interpretation of regulation 6(2)(b), the second whether the Relevant Charges
fall within the scope of that regulation, properly interpreted. The first issue
is one of European law. As to the second, however, no question of European law
is involved in the determination of the relevant circumstances. The parties
also agree that no such question is in this case involved in applying the
regulation, properly interpreted, to the circumstances – including identifying
the price or remuneration in exchange for which goods or services are to be
supplied. European Court of Justice authority for this differentiation appears
to be limited to the assessment of unfairness under articles 3 and 4(1) of the
Directive (regulations 5 and 6(1) of the Regulations): Freiburger
Kommunalbauten GmbH Baugesellschaft & Co. KG v Ludger Hofstetter and Ulrike
Hofstetter (Case C-237/02); but I accept its correctness in principle.
97.
Since the Directive and Regulations are concerned with terms in
contracts, it is first of all necessary to identify the relevant contracts. This
is a matter about which the judge, Andrew Smith J, and the Court of Appeal took
different views, although again it is not suggested that it raises on the facts
of this case any particular issue of European law. The banks’ primary case is
that the relevant contracts are the contracts for an overall package of banking
facilities made by the banks with their customers. Andrew Smith J rejected
this analysis as unnatural: payments by way of Relevant Charges could not be
said to be paid in exchange for services supplied when an account is in credit;
and the description “free-if-in-credit” connoted that there was no price to be
paid when an account was in credit (paras. 398-9). Furthermore, if the relevant
contract was taken to be the overall package, the Relevant Charges would
represent no more than part of the price or remuneration, and an assessment of
the fairness of such charges as against the package of services would be
“beside the point” and “would not intrude upon the essential bargain” intended
to be protected from assessment (para. 400).
98.
There is in my opinion a flaw in this reasoning. It is not comparing
like with like. Viewing the matter at the level of the banking contracts, the
comparison is between, on the one hand, the package of services offered by the
banks (some or all of which may or may not be used by any particular customer)
and, on the other, the customer’s commitment to pay such charges as may arise
from whatever facilities he does use. At this level, the banks’ case is that
price or remuneration is or includes the customer’s potential liability for
charges, rather than the payments which he or she has actually to make if and
when such charges are incurred. In my opinion the Court of Appeal was right in para.
97 of its judgment to identify the relevant contract as being in the first
instance the banking contract for an overall package of facilities. That is the
contract in which the Relevant Charges appear and were agreed.
99.
Further, any challenge to the fairness of a term must be to its fairness
in the context of the relevant contract in which it appears. It is “beside the
point” if it is not. If, on a proper analysis, the customer’s potential
liability for the Relevant Charges is the or part of the “price or
remuneration” in exchange for which the overall package of banking services is
supplied, and it is challenged on the ground that it makes such price or
remuneration disproportionate overall, then regulation 6(2)(b) excludes the
challenge. If there is no challenge to the overall proportionality of the
overall price or remuneration of the package, then I fail to see how a
challenge to the proportionality of the Relevant Charges in relation to the
cost of providing particular services in isolation can be admissible or
relevant. A term which is proportionate in context cannot become
disproportionate viewed out of context.
100.
It is true that Relevant Charges are only incurred when a customer,
either deliberately or inadvertently, gives an instruction or enters into a
transaction, by which as a matter of law and contract he or she requests the
bank to provide overdraft facilities. So, each time such a request is made and
acted upon (even if only with the result that the request is declined), it is
possible to identify a more developed contractual relationship as arising. Under
that relationship, the Relevant Charges become payable in respect of the
request (although not, the judge thought, in exchange for any services provided
in consequence of the request). I do not however consider that this
relationship can be the contract to which the Directive and Regulations refer. If
the agreement to incur the Relevant Charges is part of an overall package
contract, its vulnerability to challenge and, if permissible, any assessment of
its fairness under the Directive and Regulations must, as I have said, depend
upon an analysis of such agreement as part of the package contract. Otherwise,
as Mr Sumption pointed out, a customer could challenge each separate part of a
package in isolation, although as a whole the price or remuneration charged was
unchallengeable.
101.
Issues arise under two heads: the first, the proper interpretation of
Article 4(2) and Regulation 6(2) (I shall for convenience generally refer only
to the latter); and the second, the application on the facts of whatever is
that proper interpretation. As to the first, it is common ground that not every
provision for payment contained in a contract for the supply of goods or
services is rendered immune from scrutiny under Regulation 6(2). There can be
payments which do not constitute either “price or remuneration” of goods or
services supplied in exchange. Further, payments which do constitute price or
remuneration in this sense can be challenged as unfair on grounds which do not
relate to their appropriateness in amount as against the goods or services
supplied in exchange. Heads (d), (e), (f) and (l) in the grey list of terms set
out in Schedule 2 to the Regulations fall within one or both categories. Director-General
of Fair Trading v First National Bank plc [2002] 1 AC 481 provides another
example.
102.
In the First National Bank case, the House was concerned with a
provision in a regulated credit agreement for interest to continue at the
credit agreement rate as against a borrower who had defaulted and against whom
judgment had been entered for the principal and interest outstanding to
judgment. The County Courts (Interest on Judgment Debts) Order 1991 (SI No
1991/1184) meant that there was no statutory claim for or right to
post-judgment interest. Hence, the rationale for including a continuing
interest provision in the credit agreement. The case arose under Regulation
3(2) of the Unfair Terms in Consumer Contracts Regulations 1994, which provided
that “no assessment shall be made of the fairness of any term which …. (b)
concerns the adequacy of the price or remuneration, as against the goods or
services sold or supplied”. (This is slightly, though possibly materially,
different wording to that of Regulation 6(2) of the 1999 Regulations which
replaced it.) The House held that Regulation 3(2) did not apply, but went on to
hold the term to have been fair. Passages from the speeches of Lord Bingham of
Cornhill (para. 12) and Lord Steyn (para. 34) have been set out by Lord Walker.
Both considered that clause 8 fell outside Regulation 3(2)(b), as a provision
prescribing the consequences of default. Lord Bingham added in a sentence
drawing on the particular wording of Regulation 3(2)(b) that “It does not
concern the adequacy of the interest earned by the bank as its remuneration but
is designed to ensure that the bank's entitlement to interest does not come to
an end on the entry of judgment”. Lord Hope of Craighead’s explanation is also
relevant. He said (para. 43) that:
“Condition 8 is a default provision. The last sentence of it is
designed to enable interest to be recovered on the whole of the amount due on
default. That amount includes legal and other costs, charges and expenses, so
it is not confined to the outstanding balance due by the borrower. I do not
think that it can be said to be directly related to the price charged for the
loan or to its adequacy. It is concerned instead with the consequences of the
borrower's breach of contract. It sets out what is to happen if he fails to
make the repayments to the bank as they fall due. I agree that regulation
3(2)(b) does not apply to it, and that its fairness as defined in regulation
4(1) of the 1994 Regulations must be assessed.”
This underlines the
distinction between payments due in exchange for the original loan and the
financial payments (including those relating to “costs, charges and expenses”)
due on default under the clause. The decision of Gross J in Bairstow Eves
London Central Ltd. v. Smith [2004] EWHC 263 (QB); [2004] 2 EGLR 25
provides another example of the same distinction.
103.
The contracts made by customers for an overall package of banking
facilities have been described as on a “free-if-in-credit” basis. The OFT
submits that this indicates or suggests that the agreement to pay Relevant
Charges cannot be regarded as the or a part of the price or remuneration in exchange
for which banking facilities are supplied. The banks submit, on the contrary,
that the clear corollary of “free-if-in-credit” is that the services provided
will not be free if the customer is not in credit. They ask rhetorically what
other price or remuneration there is, if not the Relevant Charges. The OFT’s
response is that it is conceptually possible to have a contract for services
without anything in exchange that counts in terms of regulation 6(2)(b) as
either price or remuneration. That I would accept. The bank might (especially
under a basic banking contract which did not allow any overdraft in any
circumstances) be content to operate on the basis that its profit would come
solely from its power to use money which customers deposited with or arranged
to have transferred to it. That power follows from the bank’s ownership of
money deposited with or transferred to it. (Further, since the deposit with or
transfer to a bank of money is the main or part of the main subject matter of a
banking contract, any assessment of the fairness of it or its legal
consequences would appear to be excluded under regulation 6(2)(a), rather than
(b).) Alternatively, the OFT suggests, without committing itself, that, if
there is any price or remuneration under a free-if-in-credit banking contract,
it is more easily found in the customer’s agreement to pay overdraft interest.
104.
In accordance with general European legal principle, article 4(2) and
regulation 6(2) are as exceptions to be construed narrowly. Nevertheless, the
concepts of “price or remuneration” must, I think, be capable in principle of
covering, under a banking contract, an agreement to make a payment in a
particular event. The language of regulation 6(2)(b) is on its face therefore
capable of covering a customer’s commitment, under the package contracts put
before the House, to pay the Relevant Charges in the specified events. There is
no reason why a customer should not be given free services in some
circumstances, but, as a quid pro quo, be expected to pay for them in others.
105.
At various points the submissions before the House addressed the policy
underlying the free-if-in-credit system of charging. It is clear from the
description free-if-in-credit itself that the system is likely to involve
significant elements of cross-subsidy. Some customers (those remaining always
or largely in credit) pay no or few charges, while others pay charges more
regularly. Overall, around 30% of the banks’ income from their customers is
derived from the Relevant Charges. According to the OFT’s own Market Study of
July 2008, 77% of customers surveyed who had incurred a Relevant Charge in the
past 12 months had heard of such charges before they incurred one. The Relevant
Charges levied on any particular customer greatly exceed the actual net cost to
the bank of complying with the request(s) impliedly made by the customer
leading to the incurring of such charges. But it is obvious on reading the
charging structure that charges cannot be directly related to the actual costs
of providing any particular service triggering them. There are of course other
obvious elements of cross-subsidy, even between customers who remain in credit.
Customers who maintain large current accounts and receive no or limited
interest on them subsidise in a sense customers who manage consistently to keep
just in credit. Mr Jonathan Crow QC for the OFT made clear that the OFT does
not contend that the element of cross-subsidy provided by the Relevant Charges
affects the question whether regulation 6(2)(b) applies. Regulation 6(2)(b)
would apply if the banks simply decided to charge more for particular services
in order to pay their directors more or to earn more for their shareholders. It
cannot make any difference to its application if the banks decide to adopt a
business model which charges more for one type of transaction in order to
subsidise another.
106.
The OFT’s case, essentially accepted by the Court of Appeal, is that the
agreement to pay the Relevant Charges is not price or remuneration, because
regulation 6(2)(b) is confined in scope to payments in exchange for sales or
supplies on which payments the consumer can be taken to have focused and to
which he can be taken truly to have consented. The Court of Appeal encapsulated
this conclusion as “import[ing] the notion of essential bargain into the
construction of article 4(2) and into both paragraphs (a) and (b) of regulation
6(2)” (para. 86). It added that “the concept of the essential bargain flows
naturally” from the structure and purpose of the Directive because not every
payment that a consumer makes falls within regulation 6(2)(b), and such a
construction “prevents regulation 6(2)(b) being construed too widely”. It
considered that its conclusion reflected “the reasoning both in the travaux
préparatoires and in the First National Bank case”, which it
interpreted as indicating that ancillary or incidental payment terms were not
intended to be exempt from assessment for their “adequacy” under regulation
6(2) (paras. 64, 69 and 86).
107.
The considerations which the Court of Appeal saw as relevant to the
broad test which it thus identified were as follows (para. 90):
“90. The above analysis suggests that the following
considerations are relevant to this broad question, together no doubt with many
others, depending upon the facts of the particular case:
i) The nature of the services provided as a whole and the manner
and terms in which the standard term documentation is provided to consumers.
ii) The quantum of the particular payment, the goods or services
to which it is said to relate and the other payments required under the
contract.
iii) In order to be 'price or remuneration' within the meaning
of article 4(2) the payment provision must not be ancillary to the central
bargain between the consumer and supplier. Along this sliding scale:
a) if the payment obligations are
directly negotiated between the consumer and supplier they will not be subject
to assessment for fairness under the Directive;
b) the more closely related the
payment term is to the essential bargain between the parties, the more likely
it is to fall within the exception in article 4(2); but
c) the more ancillary the payment
term is and the less likely it is to come to the direct attention of the
consumer at the time the contract is entered into, the less likely it is to be
within the concept of 'price or remuneration' within the meaning of the
Directive.”
108.
One difficulty about the Court of Appeal’s reasoning lies in its
reliance on the concept of negotiation or indeed bargain, as in para. 90(iii)(a)
and (b) above – and elsewhere, repeatedly, in its judgment: see paras. 64, 87,
107 and 109 (negotiation) and 86, 90, 94-95 and 106 (bargain). The Court of
Appeal suggested that the absence of any negotiation or bargain or of any
ability to negotiate or bargain militated strongly against a conclusion that a
particular charge constituted (part of) the price or remuneration. However, the
Directive and Regulations are only concerned with contractual terms which have
not been individually negotiated. Another difficulty is that the Court of
Appeal’s broad test, and the sliding scale of relevant considerations
introduced by para. 90, convert the apparently simple language of regulation
6(2)(b) (or article 4(2)) into a complex and uncertain value judgment. This is
rendered even more complex by the Court of Appeal’s further conclusion that the
judgment should be made by the court through the eyes of “the typical consumer”
(para. 91). This led to considerable argument before the House as to who might
be regarded as the typical consumer. Was it relevant to look at the whole body
of customers, or at those who would or might be likely to incur Relevant
Charges? Before the House Mr Crow for the OFT summarised three main
considerations on which the OFT relied to determine whether a payment was part
of the essential bargain, namely whether the payment was (a) ancillary, (b)
readily recognisable or visible by a typical customer and (c) one arising in
the normal performance of the contract.
109.
The Directive was the result of an iterative process between the
Commission, European Parliament and Council of Ministers. The outcome was, as
not uncommonly happens, significantly different from that originally proposed. The
Commission’s original proposal of 24 July 1990 (COM(90) 322 fin) and its
Explanatory Memorandum of 3 September 1990 were drafted with a view to
regulating by reference to the test of fairness “every contract between a
consumer and a party acting in the course of his trade, business or profession,
whether the contract is a “take or leave it” contract, or is in standard form
or is negotiated individually”. The proposal was the subject of a critique by
Hans Erich Brandner and Peter Ulmer (The Community Directive on Unfair Terms
in Consumer Contracts: some critical remarks on the proposal submitted by the
EC Commission, (1991) 28 CMLR 647); these authors argued that any control
by the courts or administrative authorities of the reasonableness or
equivalence of the relationship between the price and the goods or services
provided was “anathema to the fundamental tenets of a free market economy”, and
that the focus should be on improving transparency in this area, the
requirement of transparency being “directed against terms which may conceal
the principal obligations or the price and thus make it difficult for the
consumer to obtain an overview of the market and to make what would (relatively
speaking) be the best choice in a given situation” (p.656).
110.
The Committee on Legal Affairs and Citizens’ Rights of the European
Parliament issued a report on 9 April 1991 (A3-0091/91), which suggested the
amendment of the proposal to exclude individually negotiated contract terms. The
Economic and Social Committee (consulted by the Council of Ministers) issued
its opinion on 24 April 1991, suggesting both that individually negotiated
contractual terms required different treatment and that an additional criterion
of unfairness should be introduced, namely “the non-transparency of a contract
term” (OJ No C 159, 17.6.1991). The European Parliament repeated its stance
that individually negotiated terms should fall outside the proposal, and
proposed that terms containing clauses “which are unreadable or likely to be
misunderstood by consumers because they are not in plain language” should be
regarded as unfair (OJ No C 326, 16.12.1991). The Commission on 5 March 1992
responded with an amended proposal (COM(92) 66 fin). This distinguished between
the treatment of non-negotiated and negotiated terms, but would have continued
to regulate the latter where “imposed upon the consumer” as a result of the
seller/supplier’s economic power or the consumer’s economic and/or intellectual
weakness. The amended proposal also contained a requirement (in terms which
become part of the final article 5) that all written terms offered to the
consumer in writing “must always be drafted in plain, intelligible language”.
111.
On 22 September 1992 the Council of Ministers adopted its Common
Position on the basis of article 100a of the Treaty (8406/92). This restricted
the proposal to contractual terms which had not been individually negotiated. It
introduced article 4(2) in its final form and accepted the requirement under
article 5 that all written terms offered to the consumer in writing “must
always be drafted in plain, intelligible language”. The accompanying reasons
explained in relation to article 4 that “the new wording …. is intended to
clarify the procedures for assessing the unfairness of terms and to specify
their scope while excluding anything resulting directly from the contractual
freedom of the parties (e.g. quality/price relationship)”. The Parliament
accepted the Council’s Common Position on 16 December 1992, and the Directive
was finalised on this basis.
112.
The legislative history shows therefore an extensive process of
development, during which the original proposal was replaced by an amended
proposal which was itself very largely amended. The measure ultimately agreed
was confined to non-negotiated terms. It stressed the need for transparency
(“plain, intelligible language”) in relation to all such terms. But, provided
such transparency existed, any assessment of the fairness of such terms was
excluded in relation to “the definition of the main subject-matter of the
contract” and “the adequacy of the price and remuneration …. as against the
services or goods supplied in exchange ….”. The general approach and the
rationale as explained in the Council’s Reasons match those of Brandner and
Ulmer in their article cited above. It would re-write the legislation to read
article 4(2) of the Directive or regulation 6(2) as if they introduced as the
test a complex enquiry as to whether or how far consumers had actually
exercised contractual freedom when agreeing upon a price or remuneration stated
in plain and intelligible language in a contract into which they entered. Article
4(2) and regulation 6(2) can loosely be described as being concerned with the
assessment of “core terms” (see e.g. First National Bank). But that is
on the basis that price and remuneration always fall within them. The Court of
Appeal erred in introducing a yet further restriction, whereby it would be only
“essential core terms” which could attract immunity.
113.
In my opinion, the identification of the price or remuneration for the
purposes of article 4(2) and regulation 6(2) is a matter of objective
interpretation for the court. The court should no doubt read and interpret the
contract in the usual manner, that is having regard to the view which the
hypothetical reasonable person would take of its nature and terms. But there is
no basis for requiring it to do so by attempting to identify a “typical
consumer” or by confining the focus to matters on which it might conjecture
that he or she would be likely to focus. The consumer’s protection under the
Directive and Regulations is the requirement of transparency on which both
insist. That being present, the consumer is to be assumed to be capable of
reading the relevant terms and identifying whatever is objectively the price
and remuneration under the contract into which he or she enters. A contract may
of course require ancillary payments to be made which are not part of the price
or remuneration for goods or services to be supplied under its terms. The First
National Bank and Bairstow Eves cases illustrate the distinction by
reference to default terms.
114.
Andrew Smith J considered and rejected a submission that the Relevant
Charges constituted in reality no more than penalties, disguised (at least in
the case of all the terms save those of Nationwide Building Society) by
drafting which expressed the charges as arising in respect of services to be
provided by the banks. He held that, far from being inappropriate or
artificial, the language of request reflected the true legal analysis of a
situation where the customer gives an instruction or enters into a transaction
for which insufficient funds exist in his or her account (paras. 75-76). There
has been no appeal against that conclusion, and the fact that the relevant
contractual arrangement is an overall package contract made between a bank and
each customer tends in my view to confirm the conclusion. A customer making
such a contract accepts that the free-if-in-credit system involves substantial
charges if instructions are given or transactions entered into which involve
putting the account into debit. While the incurring of Relevant Charges is no
doubt something that customers would like to avoid, it is a clearly explained
and, objectively viewed, very important feature of the overall package. The OFT’s
case that such charges are not “readily visible” or “recognisable” as the price
is in my view untenable. In so far as it relies on the consideration that the
charges are out of proportion to the actual cost of rendering any services in
respect of an instruction or transaction which would involve an (or an increase
in an) unauthorised overdraft, it also presents the paradox, that the higher
the Relevant Charges, the less visible or recognisable they are said to be as
the price of the overall package.
115.
Taking the view that I do of the meaning of both the Directive and the
Regulations, the question arises whether it is nevertheless incumbent on us to
refer the interpretation of the Directive to the Court of Justice. Under CILFIT
v Ministry of Health (Case 283/81; [1982] ECR 3415) and in the
absence of any prior Court of Justice authority, this depends upon (a) whether
the question is relevant to the outcome of the case and (b) “whether the
correct application of Community law is so obvious as to leave no scope for
reasonable doubt”. In the latter connection we have to ask ourselves whether
the answer we consider correct would be equally obvious to the courts of other
Member States and to the Court of Justice itself; and in this regard we have to
bear in mind the fact that Community legislation is drafted in different
languages which may convey different meanings to different readers, that the
Community concepts it uses (here “price and remuneration”) are autonomous
concepts and that every provision of Community law must be placed in the
context of Community law as a whole. In the present case, we are concerned with
a relatively simple sentence, using simple and basic concepts, and the scope
for different readings of different language texts seems very limited. The
complex and unpredictable value judgment involved in the Court of Appeal’s
approach was based in large measure upon a clear error, in treating the
existence or absence of negotiation as significant in a context dealing by
definition only with non-negotiated terms. The suggested test of what is “not .
. . ancillary to the main bargain” involves a restatement of the language of
the Directive and Regulations; that language treats the “price or remuneration”
as axiomatically part of the core bargain and so immune from scrutiny for
reasonableness. Bearing in mind the general Community aim of legal certainty,
the likelihood of the Court of Justice (or any other Member State’s courts)
accepting the Court of Appeal’s approach to the interpretation of article 4(2)
seems to me remote indeed. I would regard the position as acte clair
and not as requiring a reference.
116.
However, if one takes a different view on whether the position is acte
clair, there remains the question of relevance. Eliminating the Court of Appeal’s
clear error in introducing as part of the test whether the relevant term had
been “directly negotiated”, and assuming that the Court of Appeal was generally
right in adopting as a test whether the term was “not . . . ancillary to the
main bargain”, the question would be whether the Court was right to treat the
terms of the package contracts relating to the Relevant Charges as ancillary
terms, rather than as part of the agreed price or remuneration in exchange for
which the banks undertook to provide their whole package of services. That
question would involve the application of the Directive and Regulations, which
is, as I have said, a matter for domestic, not European, law. The starting
point would be that the banks’ customers committed themselves, under plain,
intelligible language, to pay the Relevant Charges in respect of instructions
given or transactions entered into without sufficient funds and in return for
the package of services offered by the banks. The Court of Appeal identified a
series of considerations, relating to the nature of personal current accounts,
the contingent circumstances in which such instructions or transactions could
come about, the uneconomic nature (from the customers’ viewpoint) of the
Relevant Charges and the absence of any marketing of the banks’ services by
reference to such Charges (para. 99). It summarised the incurring of Relevant
Charges as being “simply outside (or outwith) the ordinary conduct of the
contractual relationship” (para. 99(xv)).
117.
Mr Crow repeated and expanded on these points in his case (para. 81) and
in his oral submissions before the House; he suggested that, if any price or
remuneration could be identified at all, then the bank interest charged on any
unauthorised overdraft was “more readily recognisable as the payment made in
exchange for the overdraft” (case, para. 81(r)). But there is no reason why the
price or remuneration payable for a package of services should not consist of a
contingent liability. The uneconomic nature of the Relevant Charges from the
customers’ viewpoint constitutes the importance of the charges from the banks’
viewpoint, and the plain intelligible language of the banking contracts made
evident that there must be a considerable element of cross-subsidy in respect
of customers while they remained in credit. Like Lord Walker, I would therefore
disagree with the Court of Appeal’s application of its test, even had I
considered that test to be correct so far as it focused on what was or was not
“ancillary” to the main bargain. In these circumstances, it would be
unnecessary to make a reference, even if the view were to be taken that the
meaning of price and remuneration in article 4(2) of the Directive is not acte
clair.
118.
I would therefore allow the appeal and grant the relief proposed by Lord
Walker in paragraph 51. I would also endorse Lord Walker’s final paragraph.
LORD NEUBERGER
119.
I also would allow this appeal for the reasons given by Lord Walker and
Lord Mance, and would grant the relief proposed by Lord Walker in paragraph 51.
120.
I also agree with Lord Phillips, whose
reasons are, I think essentially the same as those of Lord Walker and Lord
Mance. On the one issue on which there may be some disagreement, namely whether
the resolution of the dispute as to the interpretation of article 4(2) is acte
clair, I share Lord Mance’s scepticism as to whether the Court of Justice
would adopt the meaning accepted by the Court of Appeal. However, like Lord
Phillips, I consider that it is possible that the Court of Justice would adopt
such an interpretation, and therefore, if the resolution of that issue were
essential to the determination of this appeal, I would, very reluctantly, have
concluded that a reference was required. However, as he says, it is unnecessary
for the issue to be resolved for the purpose of this appeal – as explained by
Lord Walker in para 50, and by Lord Mance in paras 116 and 117.
