Seeing red

Consumers are increasingly reclaiming the charges which banks have imposed on them when they have made use of an unauthorised overdraft. Specialist websites have been set up to provide standard letters for consumers to use when seeking to reclaim such charges, and with an increasing number of complaints, even the Financial Ombudsman Service has published a draft letter which consumers can send to their own bank or building society.

The rise in consumer dissatisfaction has also prompted the Office of Fair Trading to launch a market study into personal bank current account pricing, alongside a formal investigation into the fairness of charges for unauthorised overdrafts and returned items. The report is expected at the end of the year.

Previously the general trend saw banks not defending court actions, chosing to simply return the charges, but now the rules of the game have changed.

Penalty or damages?

Going back to basics, the case of Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915] AC 79 established that a distinction had to be drawn between a liquidated damages clause and a penalty clause. The former was a genuine pre-estimate of the loss likely to flow from a breach of contract; the latter was a sum fixed more to penalise the party in breach. Only the former was enforceable.

Much of the argument against the charges imposed on consumers when they enjoyed an unauthorised overdraft was that such charges were penalty clauses, since they did not represent the real loss or damages caused to the bank. There is even a website dedicated to supporting this argument: www.penaltycharges.co.uk

Such an approach has, however, now been imperilled by the decision in Berwick v Lloyds TSB Bank Plc [2007] EW Misc 1 where the issue was tackled head on for the first time. The current account charges set out by the bank on its website referred specifically to its 'overdraft excess fee' and its 'returned item fee'.

The overdraft fee was payable when the consumer went overdrawn without permission, or strayed beyond the agreed overdraft limit. The return fee was levied when, in so many words, a cheque or direct debit was bounced.

The point made by the district judge was that these terms did not actually prohibit the consumer from going overdrawn, nor did his own web search reveal any such terms.

The district judge also tackled the question as to whether a term could be implied into the contract with the bank that the consumer would not overdraw. Such a term, he accepted, could be implied only if that were necessary.

The key factor identified by the district judge was that, at any one time, a consumer would not know the exact state of his balance. As he said, 'it is likely that on any given day the balance shown by those records will not be the same as the cleared balance on the account. . . by reason of the variable and unascertainable delays in clearance in both directions'.

A contract without any such term, he concluded, made 'perfectly acceptable commercial sense' without it. Since the consumer was, therefore, not in breach of contract when taking an unauthorised overdraft, it followed that the rules as to penalties could not be invoked. It is difficult to fault the logic of this decision.

Reasonable charges argument

Section 15 of the Supply of Goods and Services Act 1982, provides that where the consideration for a service is not determined by or under the contract, then the charge for the service must be reasonable.

The claimant pointed out that the charges in his case had varied. He argued that the charges were unreasonable because they exceeded the cost to the bank of the circumstances giving rise to the charge.

The district judge, however, felt that these particular charges should not be taken in isolation. One also had to consider the charges in the context of the various other services which the bank provided, such as the provision of bank statements, and the facility of direct debits and standing orders. So assessed, the charges in this case were not shown to be unreasonable.

This is a justified approach, but it can be queried whether the district judge was right to consider the issue of reasonableness at all. He said that the bank had amended the charges from time to time, as it was entitled to do under the contract. Thus, he said, the charges were arguably 'determined in a manner agreed by the contract', and thus had to be reasonable.

With respect, s15 of the Act only applies the test of reasonableness when the charge is not thus determined, hence the consequent consideration of the test was unnecessary, if still, of itself, compelling.

Unfair terms

Reference was made to s3 of the Unfair Contract Terms Act 1977, which covers contracts made with a consumer, or on the other party's written standard terms. The district judge referred to the contract being on the banks' standard terms, but did not pause to consider (since there was no need to) whether these were written standard terms. It would be an interesting question for a subsequent case to decide if web-based terms count as written terms for the purposes of the 1977 Act.

When s3 does apply, it subjects to the test of reasonableness any contract term allowing the proponent of that term to exclude or restrict liability for breach. Given that there was no breach of contract by the bank, as the court noted, s3 could not apply.

No reference was made to another category of contract term within s3, namely clauses which seek to allow a party to 'render a contractual performance substantially different from that which was reasonably expected of him'.

Since, as noted above, the district judge had concluded that there was nothing unreasonable in the charges, there was probably little merit in pursuing this particular line. Much greater consideration was however given to the Unfair Terms in Consumer Contracts Regulations 1999 (SI no 2083).

The Regulations provide that a contract term is unfair, and invalid, if not individually negotiated, and if it causes a 'significant imbalance' in the parties' rights and obligations, contrary to the requirement of 'good faith'.

The bank, however sought to rely on reg 6(2) which says that if the disputed term is in 'plain, intelligible language' (which seemed to be accepted in this case) then an assessment of fairness cannot concern itself with the adequacy of the price for the services provided.

The court agreed with this argument, affirming that the charges complained of were part of the price of the services provided by the bank.

On the other hand, the court is not completely prevented from considering the price of a service since the indicative list of terms, which may be regarded as unfair contained in Schedule 2 to the Regulations, does refer to price variation clauses where a consumer is given no right of cancellation if the price is too high in relation to the price agreed when the contract was concluded.

Although no right of cancellation was provided for in this contract, a party who takes the benefit of an unauthorised overdraft would find it difficult to show that any such term was unfair.

Brennan case

The case of Brennan v NatWest Bank is before the Mayor's and City of London County Court. The claimant is arguing that charges imposed by NatWest are a disproportionate penalty and therefore 'unfair' under the 1999 Regulations.

He is also arguing that the imposition of such disproportionate penalties amounts to either a breach of contract or the torts of breach of statutory duty and intentional infliction of harm by unlawful means.

There is also a claim for an account of profits and for distress as well as inconvenience.

His case, of course, has not been helped by the Berwick ruling. Nor is it helped by district judge Ian Besford, in Hull, who has said that some 20 odd claimants in a case before him were unlikely to succeed because Lloyds TSB had successfully defended its position in Berwick.

In the circumstances, it now seems inevitable that an appellate court will be required to sort out this whole penalty charge business.