The traveller's saviour

The recent malaise in the airline industry has seen the ignominious demise of hitherto well-established carriers such as XL Leisure Group, Zoom and Silverjet, with others including Alitalia seeking urgent resuscitation from private investors and reluctant trades unions. While this has clear implications for the aviation industry, of greater concern is the impact on the customer. Having purchased tickets, many have found their holidays or return flights cancelled. The precipitate insolvency of these carriers has seen a stampede of victims beating a path to the door of their credit card issuers as well as desperate inspection of the rather vague ATOL regulations.

The Air Travel Organisers Licensing scheme (ATOL), managed by the Civil Aviation Authority, is a protection scheme for air holidays and flights, requiring all tour operators and travel firms selling these in the UK to hold an Air Travel Organiser's Licence. The clear benefit to the traveller is that, in the event of their tour operator going out of business, they receive a refund and a flight home.

However, these will not assist those who booked through the agent of a licensed operator or direct with the airline '“ a common theme, more so since the advent of the 'no frills' operators such as easyJet and Ryanair (and nobody is suggesting these are on the verge of bankruptcy).

It appears that for those who fall through the ATOL net, redress or recompense may be best secured by way of claims made against the credit card issuer through whom the flight was booked. In the recent case of Office of Fair Trading v Lloyds TSB Bank Plc [2008] 1 AC 316, Lord Hope of Craighead opined that 'not all consumers may be aware of the right of recourse against the card user'. In light of recent events, this position may have changed.

Liability of credit card issuer

Briefly, s.75(1) of the Consumer Credit Act 1974 provides that a creditor (here, the credit card issuer), in a debtor-creditor-supplier agreement (where the debtor is the customer and the supplier the airline company), will be jointly and severally liable with the supplier in respect of any misrepresentation or breach of contract by the latter in relation to the transaction financed by the agreement.

So, a failure to provide the flights by the airline supplier will constitute a clear breach of contract, for which the credit card issuer will be liable. As a sort of counterbalance, they are, by virtue of s.75(2), entitled to be indemnified by the supplier against loss suffered as a result of claims made against them under s.75(1). This is subject to a contrary agreement having been made between the supplier and credit card issuer and will, in reality, be of little use if the supplier is bankrupt.

The consumer welfarist nature of this provision is perfectly consistent with the purpose of the Consumer Credit Act. Its long title states that the act exists 'for the protection of consumers'. Lord Crowther, in his seminal Report of the Committee on Consumer Credit (Cmnd 4596), which itself acted as a quasi-catalyst for the 1974 Act, concluded that the act should strike a balance between the creditor and debtor and give the latter certain guaranteed contractual rights, particularly so where there was a connected lender and supplier 'engaged in a joint venture to their mutual advantage' (para.6.2.24). Further, when things went wrong, it was 'much easier' for the business debtor to secure a remedy against the supplier than it would be the individual (para.6.1.16) as 'the lender [was] not likely to be so inhibited by expense from suing the seller'.

Further, in respect of any irretrievable losses, the card issuers could 'spread the burden over the public at large' (para. 6.1.16.i). Such policy-orientated allocation of loss is nothing new and is now the norm in the tort of negligence, albeit under the guise of 'just, fair and reasonable'.

Four-party schemes

The application of the rule does, however, sit uncomfortably with the growth of 'four-party schemes'.

These differ from the traditional tripartite debtor-creditor-supplier agreement as envisaged by the Consumer Credit Act, and have evolved largely as a result of many card issuers acting as 'merchant acquirers' for Visa or Mastercard, the major international credit card networks. These 'merchant acquirers' process payments made by cards belonging to these networks for contracted suppliers, less a 'merchant service charge'. The suppliers are not members of the network.

Should the merchant acquirer also be the card issuer, the agreement remains a debtor-creditor-supplier one and the card issuer seeks reimbursement from the customer or debtor. Should the card issuer and the merchant acquirer be distinct, the latter is reimbursed by the issuer.

It was argued in Office of Fair Trading v Lloyds TSB Bank Plc, that s.75(1) should not apply in such cases, as no arrangements were in place or in contemplation between the card issuer and the supplier within the strict the meaning of s.12(b). This appears to be a tenable view. After all, the very existence of s.75(1) has been justified on the basis of the ability of the issuer to commercially rebuke the supplier, made the easier by a privity of contract between the parties: 'it has no contract. That in essence, is the complaint' (per Lord Hope). However, Lord Mance suggested that the language of 'arrangements' used in the act were 'well capable of embracing the modern relationships between card users and suppliers under networks like Visa and Mastercard'. Lord Hope agreed, claiming that there was nothing in the language of s.75(1) to indicate that transactions of that kind are excluded from the right of recourse. On the face of it, this appears somewhat superficial. More troubling was the tacit acceptance that in 1974, neither the Crowther committee or parliament could have foreseen how the credit card industry would develop, yet the House of Lords felt it possible to claim that 'arrangements' would have been intended to cover such situations.

Foreign transactions not excluded

However, the judgment is noteworthy for confirming that s.75(1) will apply even to those transactions entered into abroad by customers of UK card issuers. This is vital in respect of the current meltdown in the aviation industry '“ many UK travellers will book flights with foreign carriers while abroad. Victims of the Hong Kong carrier, Oasis, were certainly looking for reimbursement from their UK-based card issuers. On this, Lord Hoffman, in a brief judgment, opined that 'there is nothing in the language of s.75(1) to exclude foreign transactions'. Even if a presumption against this legislation having extraterritorial effect existed, it did not assist the appellant card issuers as it did not seek to regulate the conduct of those over whom the UK had no jurisdiction; it applied 'only to agreements with a creditor carrying on business in the United Kingdom'.

Lord Hope concurred and held that presumptions were not a deciding factor, the key being the words used in the statute and the intention of parliament, whose avowed aim was the 'protection of consumers' with the natural inference being that such a policy 'applies to debtors and creditors within the territorial reach of the act'. However, far from being a panacea for the customer, they must still prove there is a valid claim under foreign law against the supplier for the alleged misrepresentation and/or breach of contract (see comments of Sealey and Hooley, Commercial Law at 842).

Significantly, s.75(2) affords the card issuer or creditor a right of indemnity against a supplier for loss suffered by the former in meeting his obligations to a debtor under s.75(1). Its supplicant, s.75(5), further guarantees the creditor a right to have the supplier made a party to the proceedings brought against the creditor under s.75(1). While both will be useful in respect of UK suppliers, they are generally impotent as against overseas suppliers. In Office of Fair Trading v Lloyds TSB Bank Plc, the respondent bank argued that any remedy for a debtor under s.75(1) must be contingent on the card issuer having a right of indemnity under s.75(2). In dismissing this, Lord Hoffman doubted whether there was any link between the provisions. This must be right, when considering the act's emphasis on consumer protection which 'cannot be excluded by agreement between debtor and creditor'. According to Lord Hope, we have a 'quid pro quo for the right of recourse that is afforded to debtors by s.75(1)'. Lord Hoffman further stated that those issuers using authorised foreign suppliers directly or via four-party schemes 'can be expected to make their own arrangements about indemnity. . . or accept that the commercial advantages of allowing foreign use outweigh the absence of a right of indemnity'.

No escape from liability

In essence, this is all about commercial risk taking and the courts adopting a market individualist approach by refusing to step in when things go wrong or when creditors are exposed to what they consider to be serious potential liability '“ there are 29m credit card outlets worldwide, with only 700,000 being in the UK. It is for them to take steps to avoid or minimise exposure to loss. On this, Lord Mance claimed that it is still an option for issuers and merchant acquirers to insist on a contractual indemnity with UK law determining the issue. On this basis, we could be left with the peculiar situation of having a customer claiming under s.75(1) under foreign law and the card issuer seeking an indemnity against the same supplier under UK law.

Indeed, the creditor and supplier are totally at liberty to make whatever arrangements they wish. It is trite law (for example, Kay's Leasing Corporation Property Limited v Fletcher [1964] 116 CLR 124) that parties may decide to settle any dispute using foreign law.

In conclusion, there appears to be no logical reason why the card issuers should avoid liability for overseas transactions. They issue cards knowing that many will be used abroad. While they are understandably happy to reap the profits of such arrangements, they must surely accept the losses when things go wrong. For this and many other reasons, banking will never quite be the same.