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Office of Fair Trading (Respondents) v. Lloyds TSB Bank plc and others (Appellants) and others (Respondents)
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Office of Fair Trading (Respondents)
Lloyds TSB Bank plc and others (Appellants)
and others (Respondents)
 UKHL 48
1. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Mance, with which I agree. I gratefully adopt his statement of the background and the issues in this appeal.
2. Section 75(1) of the Consumer Credit Act 1974 makes a creditor under a debtor-creditor-supplier agreement jointly and severally liable with the supplier in respect of any misrepresentation or breach of contract by the latter in relation to a "transaction financed by the agreement". The question is whether a "transaction" within the meaning of the Act includes a transaction which takes place and is performed abroad and is governed by a foreign law.
3. There is nothing in the language of section 75(1) to exclude foreign transactions. But the appellant credit card issuers, who are "creditors" for the purposes of section 75(1), submit that, for two main reasons, such a limitation should be implied.
4. The first is the presumption that legislation was not intended to have extra-territorial effect: see Ex P Blain, In re Sawers (1879) 12 Ch D 522. But extra-territorial effect means seeking to regulate the conduct or affect the liabilities of people over whom the United Kingdom has no jurisdiction. In this case, the Office of Fair Trading accepts that section 75(1) applies only to agreements with a creditor carrying on business in the United Kingdom. The effect of the section is equivalent to the statutory implication of a term in the contract between a United Kingdom creditor and the debtor by which the former accepts joint and several liability with the supplier. If the supplier is a foreigner, the Act does not purport to regulate his conduct or impose liabilities upon him. It is only the United Kingdom creditor who is affected. To construe it as applying to such cases does not therefore conflict with the presumption against extra-territoriality.
5. The second reason is based upon section 75(2), which provides that, subject to contrary agreement, the creditor is entitled to be indemnified by the supplier against loss suffered by reason of claims against him under section 75(1), and also upon section 75(5), which says that a creditor sued under section 75(1) is entitled, in accordance with rules of court, to have the supplier made a party to the proceedings.
6. For the reasons already stated, section 75(2) and (5) would not be construed as applying to foreign suppliers. Parliament would be presumed not to have intended to impose a statutory liability upon foreigners. Of course the creditor, in his agreement with the supplier (if there is one) may have expressly contracted for a right of indemnity or he may have one under the foreign law. But he cannot invoke the statutory remedy under section 75(2).
7. The appellants submit that section 75(1) should be construed as limited to cases in which the supplier would have a right of indemnity under section 75(2). The two subsections should be treated as indissolubly linked. It seems to me, however, that if Parliament had wanted to limit the application of section 75(1) by reference to the enforceability of section 75(2), it would have said so. It is not obvious why there should be such a link. Section 75(1) is consumer protection legislation for the benefit of the customers of United Kingdom creditors. It cannot be excluded by agreement between debtor and creditor. Section 75(2) is a default provision to regulate relations between creditor and supplier. It applies only in the absence of contrary agreement and can be supplemented by the terms of the contract or (if foreign) the governing law. If card issuers choose to authorise the use of their cards by foreign suppliers or join four-party schemes under which their cards may be so used, they can be expected either to make their own arrangements about indemnity against liability under section 75(1) or accept that the commercial advantages of allowing foreign use outweighs the absence of a right of indemnity.
8. Section 75(2) is therefore an inadequate basis for implying a limitation in the scope of section 75(1). The appellants also relied upon provisions in the Act about cancellation which they said were incapable of application to transactions with foreign suppliers. Perhaps in some cases they are, but if section 75(2) cannot bear the weight of the appellants' argument for an implied limitation in section 75(1), the other provisions are still less able to do so. I would therefore dismiss the appeal.
LORD HOPE OF CRAIGHEAD
9. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Mance. I agree with them, and for the reasons they give I would dismiss the appeal.
10. Not all consumers may be aware of the right of recourse against the card issuer that section 75(1) of the Consumer Credit Act 1974 affords should the supplier breach his obligations under the supply contract. But there is no doubt that some are, and that claims are now being made in relation to foreign transactions as well as those entered into domestically. One such claim is pending in the Sheriff Court at Kirkcaldy: David Boyack v The Royal Bank of Scotland. Your Lordships were told that the claim in that case relates to a clock purchased in Dubai arising out of, it is said, misrepresentations that were made orally by the supplier. The case was sisted on 15 August 2007 to await the outcome of this appeal. The question whether the right of recourse extends to foreign transactions is therefore of considerable importance to consumers, as it plainly is too for the Banks and other card issuers.
11. Section 75(1) of the Act is concerned with the relationship between the debtor and the creditor. As there is no indication to the contrary, the ordinary territorial limitation applies. It states what the law is in regard to transactions which have a sufficient nexus with the United Kingdom for them to be subject to its laws. For practical purposes this can be taken to be so where the card issuer carries on business in any part of the United Kingdom, bearing in mind that the Act extends to Northern Ireland: section 193(2). The same territorial limitation applies to section 75(2). As Mr Hapgood QC for the Banks pointed out, the right of indemnity under that subsection would not found an action in Dubai against the seller of the clock to Mr Boyack, in the absence of any indication that the law of any part of the United Kingdom was to apply their transaction. The seller is not subject to the jurisdiction of the Scottish courts, so he is under no incentive to enter an appearance in the action to answer the allegations that are made against him in Scotland. If Mr Boyack succeeds in his claim against the bank, the bank will have to go to Dubai to obtain redress against a supplier with whom - as this was a four-party transaction of the kind described by Lord Mance in para 24 - it has no contract. That, in essence, is the complaint that the Banks make about extending the right of recourse to foreign transactions. The absence of an effective means of redress in the case of four-party transactions, over which they have no direct control, lies at the heart of the argument.
12. The answer to the question whether the right of recourse under section 75(1) does extend to foreign transactions is to be found in the words of the statute, not in any presumption either way as to its application extraterritorially. As one looks for the answer, the most striking feature is the absence of any indication in the subsection that it was the intention that it should not to apply to them: see Lord Wilberforce's response to the question whether the statute that he was considering in Clark v Oceanic Contractors Inc  2 AC 130 could not have been intended by the legislature to apply to companies if they were non-resident, at p 152: "Why not?". The words "in relation to a transaction financed by the agreement", read with the definitions in sections 11(1)(b) and 12(b) of the Act, are unqualified. They are to be understood as extending to whatever was in contemplation when the agreement between the debtor and the creditor was entered into. In 1974 the use of credit cards issued by United Kingdom providers for foreign transactions was limited to Barclaycard: Report of the Crowther Committee on Consumer Credit (1971) (Cmnd 4596), para 3.9. But I do not think that it can be said that Parliament did not envisage the possibility of transactions being entered into abroad, linked to the relationship between the issuer of the card and the cardholder, of the kind that is now commonplace. Almost invariably - leaving aside American Express and Diners Club, who make their own arrangements - they are entered into today as part of a four-party transaction. But there is nothing in the language of section 75(1) to indicate that transactions of that kind are excluded from the right of recourse. Nor are transactions of that kind included among the transactions listed in section 75(3) to which section 75(1), expressly, does not apply.
13. The simple and unqualified statement of the right that is expressed in section 75(1) is consistent with the policy that lies behind the Act, informed by recommendations by the Crowther Committee. Its long title states that the new system which it lays down is "for the protection of consumers". That policy applies to debtors and creditors within the territorial reach of the Act generally. Transactions of that kind are to the commercial advantage of the supplier and the creditor. The creditor is in a better position than the debtor, in a question with a foreign supplier, to obtain redress. It is not to be assumed that the creditor will always get his money back. But, if he does not, the loss must lie with him as he has the broader back. He is in a better position, if redress is not readily obtainable, to spread the cost. He is in a better position to argue for sanctions against a supplier who is not reliable. For his part, the debtor is entitled to assume that he can trust suppliers who are authorised to accept his credit card. These considerations, which support the right of recourse in relation to tripartite arrangements, are just as powerful in the case of four-party transactions.
14. It was submitted that section 75(2) casts light on the meaning of section 75(1). But, unlike section 75(1), section 75(2) is not concerned with consumer protection. It is not to be seen as a quid pro quo for the right of recourse that is afforded to debtors by section 75(1). So I do not think that one can find here any implied limitation on the scope of section 75(1). Nor, for the reasons that Lord Mance has explained, is any implied limitation to be found in the provisions about cancellation and its consequences in sections 67-74 of the Act. Cancellation is just one of the risks that the creditor has to bear in its assessment of where the balance lies between the commercial advantages and disadvantages of the system that it enters into when it commences business as a card issuer. So, for these and all the other reasons that Lord Mance gives, I would reject the argument that section 75(1) applies only to domestic transactions.
LORD WALKER OF GESTINGTHORPE
15. I have had the advantage of reading in draft the opinions of my noble and learned friends, Lord Hoffmann, Lord Hope of Craighead and Lord Mance. For the reasons which they give, with which I fully agree, I too would dismiss this appeal.
LORD BROWN OF EATON-UNDER-HEYWOOD
16. I have had the advantage of reading in draft the opinions of my noble and learned friends, Lord Hoffmann, Lord Hope of Craighead and Lord Mance and for the reasons which they give, with which I fully agree, I too would dismiss this appeal.
17. Credit cards have become a worldwide convenience. For many they have superseded cheques. Consumers often use them to pay for goods or services where formerly cash would have been tendered. Consumers may know that their use carries the advantage of a potential right of recourse against the card issuer should the supplier breach his obligations relating to the supply contract. This advantage arises under section 75(1) of the Consumer Credit Act 1974. The question now is whether it extends to the use of credit cards in relation to foreign transactions. The respondent, the Office of Fair Trading ("OFT"), acting in the interests of consumers, maintains that it does. The appellants, Lloyds TSB Bank plc and Tesco Personal Finance Ltd, credit card issuers and representatives of the UK credit card industry, maintain the contrary.
18. Section 75(1) reads:
A credit card involves a debtor-creditor-supplier agreement falling within section 12(b), the consumer being the debtor and the card issuer the creditor: the agreement is "a restricted-use credit agreement which falls within section 11(1)(b) and is made by the creditor under pre-existing arrangements, or in contemplation of future arrangements, between himself and the supplier"; a restricted-use credit agreement within section 11(1)(b) is "a regulated consumer credit agreement to finance a transaction between the debtor and a person (the 'supplier') other than the creditor". Section 75(3) disapplies section 75(1) to a claim under a non-commercial agreement or relating to any single item with a cash price of or under £100 or over £30,000.
19. The 1974 Act was enacted following the Report of the Committee on Consumer Credit chaired by Lord Crowther (Cmnd 4596). The Committee in chapter 6.1.15 identified as the first of three primary tasks of consumer credit legislation "the redress of bargaining inequality", including "giving the credit consumer certain built-in contractual rights and limitations of liability which cannot be excluded" (para 6.1.15.i). It observed that it was the law's task to maintain a fair balance between the creditor and the debtor, and that in considering which of two innocent parties should bear the greater loss, it was "much easier for the business debtor to do so than the individual debtor". The former could "in the light of his business experience, take account of certain loss risks in his charges and thus spread the burden over the public at large. The impact of one item of loss upon an individual debtor may be extremely severe" (para.6.1.16.i).
20. The Committee distinguished "connected" from "unconnected" loans - foreshadowing the later statutory distinction between debtor-creditor-supplier agreements (s 12) and debtor-creditor agreements (s 13). The Committee described connected loans as involving situations where "the sale and loan aspects of the transaction are closely intertwined" and the connected lender and the seller, where not the same person, are "in effect engaged in a joint venture to their mutual advantage" (para 6.2.24). In paras 6.6.24-29 it concluded that in such situations the legal right which a buyer might have against his seller was not sufficient protection, observing that the majority of cases in which the buyer was likely to suffer were those where the seller was of doubtful repute and able to continue in business only because of the financial support received from the lender. In that light, the Committee recommended that the connected lender (creditor) should incur a primary liability for a supplier's misrepresentation or breach (para 6.6.26), along lines later reflected in section 75(1). It explained:
21. The Committee added this:
A right of indemnity was duly incorporated in section 75(2) which I set out in paragraph 34 below. Its existence and scope are central to the banks' case on this appeal.
22. The Committee in chapter 6.12 applied its reasoning regarding connected lending to the liability of credit card issuers for defective goods and services, explaining that:
Further, the card issuer was "much better placed than the cardholder to secure redress from the offending supplier" and agreements between issuers and suppliers would usually impose an express obligation on the supplier to deal promptly with legitimate complaints by cardholders (para. 6.12.10). The consideration that a card issuer might be unwilling to make a claim on a particular supplier for fear of losing that supplier's goodwill was "a commercial matter which the issuer or other lender has to decide for itself"; it did not justify depriving the consumer of the protection which the Committee believed he should otherwise have (para. 6.12.11).
23. As appears from these passages, the Crowther Report was issued and the 1974 Act enacted in an era when credit cards involved tri-partite arrangements - between a card issuer and card holder, between the card issuer and suppliers authorised by the card issuer to accept its cards and between the card holder and a particular supplier in relation to a particular supply. American Express and Diners Club continue to operate on this basis. But the position with most other cards is now more complex. Large-scale consolidation has led to card issuers becoming members of one of the two main international credit card networks, VISA and MasterCard. Under the rules of these networks, certain card issuers are authorised to act as "merchant acquirers", in practice only within their home jurisdictions. They contract with suppliers ("merchants") to process all such suppliers' supply transactions made with cards of the relevant network, by paying to such suppliers the price involved, less a "Merchant Service Charge". Suppliers do not become members of the network, but contract with merchant acquirers to honour the cards of the network (ie to accept them in payment of supplies). Where the merchant acquirer is itself the issuer of the card used in a particular transaction, the transaction is tripartite and the merchant acquirer looks direct to its card holder (debtor) for reimbursement of the price. But in the more common (and in the case of a foreign transaction inevitable) case of use of a card issued by a card issuer other than the merchant acquirer who acquired the particular supplier, the network operates as a clearing system, through which the merchant acquirer is reimbursed by the card issuer, less an "Interchange Fee". This is a fee less than the Merchant Service Charge, so that both the merchant acquirer and the card issuer receive a commission on the transaction. The House was told that there are some 700,000 credit card outlets within the United Kingdom, and some 29 million worldwide. The value of foreign transactions in which United Kingdom credit card issuers are involved is, however, presently less than 10% of that of domestic transactions.
24. In the courts below, the appellant card issuers contended that the consequence of the development of four-party schemes - whereby a credit card can be used to pay a supplier not recruited into the network by, and not in a contractual relationship with, the relevant card issuer - was that there were no "arrangements", pre-existing or in contemplation, between that card issuer and supplier within the meaning of s 12(b) of the 1974 Act. So, they submitted, section 75(1) could have no application. Both Gloster J  1 All ER 843 and the Court of Appeal (Waller, Smith and Moore-Bick LJJ)  QB 1 rejected that submission, and the House refused permission to appeal on the point. The Crowther Committee and Parliament when enacting the 1974 Act did not know how the credit card market would develop. But the language of "arrangements" used in the Act is well capable of embracing the modern relationships between card issuers and suppliers under networks like VISA and MasterCard: cf per Lord Hoffmann in R (Quintavalle) v Human Fertilisation and Embryology Authority (Secretary of State for Health intervening)  2 AC 561, para 33, considering Lord Wilberforce's statement of principle regarding the application of statutory provisions in new circumstances in Royal College of Nursing of the United Kingdom v Department of Health and Social Security  AC 800, 822.
25. The card issuers' submission that section 75(1) applies only to domestic transactions arises on that basis. Legislation is primarily territorial. It is now common ground that section 75(1) is subject to some territorial limitation. In Clark v Oceanic Contractors Inc  2 AC 130, 144-145, Lord Scarman described the principle as being, that, unless the contrary is expressly stated or plainly implied, United Kingdom legislation is "applicable only to British subjects or to foreigners who by coming to the United Kingdom, whether for a short or a long time, have made themselves subject to British jurisdiction". However section 75(1) only addresses the relationship between the card issuer (creditor) and the card holder (debtor), and the OFT accepts that the principle of territoriality means that sections 11, 12 and section 75(1) of the 1974 Act are confined to United Kingdom credit agreements.
26. The precise delimitation of a United Kingdom credit agreement is open to debate, on lines explored in Goode's Consumer Credit Law and Practice (1999) paras 49.82-49.90 (suggesting that the relevant nexus depends upon the co-location in the United Kingdom both of the debtor or hirer's residence or place of business and of the negotiation or making of the credit agreement, or, in other cases, upon an evaluation of all the factors connecting that agreement with the United Kingdom) and Guest and Lloyd's Encylopaedia of Consumer Credit Law para 2-194/2-9 (tentatively advancing as the test whether the relevant debtor or hirer dealt as part of the United Kingdom market - eg resided and negotiated the agreement here).