Judgments - Office of Fair Trading (Respondents) v. Lloyds TSB Bank plc and others (Appellants) and others (Respondents)

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    27.  No party to this appeal invites the House to engage in that debate. What matters is that there is nothing in sections 11, 12 or 75(1) purporting to legislate extra-territorially in relation to the supplier or the supply transaction financed by the credit agreement. To impose on United Kingdom card issuers a liability to United Kingdom card holders by reference to liabilities arising under a foreign supply transaction is not axiomatically to legislate extra-territorially. It is not uncommon for domestic contractual relationships to involve obligations defined by reference to foreign contracts or events. In these circumstances, I agree with the OFT's submission that, if there is any limitation on the transactions to which section 75(1) applies, it must be found in ordinary principles of construction and implication.

    28.  The card issuing appellants contend for, and Gloster J accepted, a limitation excluding from section 75(1) supply transactions with at least the following characteristics:

    "(1) the contract [between the debtor and the supplier] was made wholly outside the United Kingdom, or (if not) the acts of offer and acceptance were done partly within and partly outside the United Kingdom; and

    (2) the contract was governed by a foreign law; and

    (3) the goods were delivered, or services supplied outside the United Kingdom, or the goods were despatched outside the United Kingdom for delivery within the United Kingdom."

    Section 75(3) introduces only two (presently irrelevant qualifications to the generality of section 75(1). But the appellants seek to derive such a limitation from a variety of considerations. First, they submit that the implications, if section 75(1) applies to overseas transactions, are "startling and readily apparent", in that it would make United Kingdom card issuers the potential guarantors of some 29 million foreign suppliers, with whom they would not have any direct contractual relations. Gloster J in a clearly reasoned judgment accepted this among other of the appellants' submissions. But it is one which depends on today's market. The 1974 Act falls to be construed against the background of the market as it existed and was understood and foreseen at the time of the Crowther Report and the passing of the Act.

    29.  Further, the general factors outlined in paragraphs [4] to [6], which led the Crowther Committee to recommend the imposition on card issuers of a liability reflecting suppliers' liability to debtors, all apply as much to overseas as to domestic supply transactions - if not more so. In relation to overseas transactions, there would be likely to be an even greater discrepancy between the card holder's ability to pursue suppliers on the one hand and the ease with which card issuers could obtain redress through the contractual and commercial ties which Crowther contemplated would link them and suppliers. Card issuers' ability to bear irrecoverable losses and so "spread the burden" exists in relation to both overseas and domestic transactions.

    30.  That, in today's market, arrangements between card issuers and overseas suppliers under schemes such as VISA and MasterCard are indirect (rather than pursuant to a direct contract as is still the case with American Express and Diners Club) is a consequence of the way in which the VISA and MasterCard networks have developed and operate. Likewise, the fact that the rules of these networks give card issuers no direct choice as to the suppliers in relation to whom their cards will be used. The choice of suppliers is, in effect, delegated to the merchant acquirers in each country in which these networks operate, and provision is made, as one would expect, to ensure and monitor the reliability of such suppliers in the interests of all network members. That network rules may not provide all the protections that they might, eg by way of indemnity and/or jurisdiction agreements, is neither here nor there. They could in theory do so, and it is apparent that there are some differences in this respect between different networks. The Crowther Report and 1974 Act proceed on the basis of a relatively simple model which contemplated that card issuers would have direct control of such matters. A more sophisticated worldwide network, like VISA or MasterCard, offers both card issuers and card holders considerable countervailing benefits. Card issuers make a choice, commercially inevitable though it may have become, to join one of these networks, for better or worse.

    31.  Mr Hapgood QC for the appellants drew attention to features of the present legal and commercial situation which they as card issuers regard as anomalous. Liability under section 75 only arises where the cash price of the supply is over £100 but not more than £30,000 (section 75(3)). It arises even if the credit only relates to part of the price (as where the consumer pays part in cash or by cheque). It is potentially unlimited, a source of repeated complaint by card issuers. It arises even where the card holder in practice uses his credit card like a charge card, paying off the entire balance in one instalment at once. Charge cards which, by contract, operate on this basis have been excluded from the operation of the 1974 Act by regulations made under section 16(5)(a). None of these anomalies is special to, or can be determinative of, the application of section 75(1) to overseas transactions. Their effects could be exacerbated if overseas transactions are covered, but, if so, only as a matter of degree and not in any way which provides a reason in principle for a different construction of section 75 to that which would otherwise apply.

    32.  As a matter of fact, it is accepted that, even in 1974, there was some limited use of credit cards (in particular Barclaycard) for overseas transactions. Further, the 1974 Act itself contemplated that credit agreements might have overseas aspects which could require special attention. Thus, section 16(5)(c) enables the Secretary of State by order to provide that the Act should not regulate consumer credit agreements with "a connection with a country outside the United Kingdom". Section 9(2) provides that "Where credit is provided otherwise than in sterling, it shall be treated for the purposes of this Act as provided in sterling of an equivalent amount". These provisions are directed at the nature of the credit agreement and of the credit provided under it, rather than directly at the supply transaction in a debtor-creditor-supplier context. But they militate nonetheless against the appellants' submission that the 1974 Act is incapable of affecting any form of credit to support an overseas transaction.

    33.  Another consideration is that if the concept of "transaction" is limited as the appellants suggest, the limitation must presumably apply throughout sections 11, 12 and 75. But in that event a restricted-use credit agreement for the purposes of a foreign transaction would cease to fall within section 12, and would instead be a "debtor-creditor agreement" within section 13. That this would be an unnatural categorisation appears from the language of these sections alone. But it is confirmed by the differing particulars which the Crowther Committee contemplated would be given in the respective cases of connected and unconnected loan agreements (Crowther, paras. 6.5.10 and 11), and which are now in fact required under the Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553). The particulars called for in the case of restricted-use debtor-creditor-supplier agreements within section 12 include, not surprisingly, a description of the goods, services or other things involved, whereas no such particulars are required in the case of a debtor-creditor agreement within section.13:cf para 3 of Schedule 1 to the Regulations.

    34.  At the forefront of the appellants' case is the submission that the 1974 Act contains provisions showing that it cannot have been intended to apply to overseas transactions. First among those relied upon is section 75(2):

    "Subject to any agreement between them, the creditor shall be entitled to be indemnified by the supplier for loss suffered by the creditor in satisfying his liability under subsection (1), including costs reasonably incurred by him in defending proceedings instituted by the debtor."

    This is supplemented in section 75(5) by a provision entitling the creditor "in accordance with rules of court" to have the supplier made a party to any proceedings brought against the creditor under section 75(1). The appellants submit, and Gloster J accepted, that the "whole premise" of these provisions is that a United Kingdom court will have jurisdiction over the supply transaction and the supplier.

    35.  Mr Sumption QC for the OFT accepts that the statutory indemnity provided by section 75(2) cannot operate worldwide. He submits that it is limited to contractual or restitutionary relationships subject to the law of one of the parts of the United Kingdom. It does not have either the mandatory quality or the background in social policy of section 75(1) to give it any wider application. Rather, it was designed to reflect that which it was assumed would anyway exist: see the Crowther Report para 6.6.31; and it is subject to any contrary agreement. An agreement to subject to a foreign law a relationship which is in all other respects domestic equates with or is analogous to a contrary agreement: cf eg English v Donnelly 1958 SC 494. Under the 1974 Act, section 173(1) voids any term to the extent that it is inconsistent with a provision of the Act for the debtor or hirer or his relative or any surety. Section 75(1) is such a term, s.75(2) is not.

    36.  The appellant card issuers submit that, if section 75(2) is limited to relationships between a card issuer and supplier subject to a domestic law of the United Kingdom, this confirms that section 75(1) cannot extend to overseas supply transactions. But that does not follow. First, the relationship of a United Kingdom card issuer and an overseas supplier may be subject to (say) English law. At the time of the Crowther Report and the 1974 Act, it would have been envisaged that such a relationship would in all likelihood involve a direct contract, and a United Kingdom card issuer would on that basis have been quite likely to stipulate for English law. Even now, network rules and the contractual agreements made by merchant acquirers with overseas suppliers could select a United Kingdom law to govern the relationship between United Kingdom card issuers and overseas suppliers, and they could no doubt also be structured to make the relationship directly contractual for at least indemnity purposes. The characteristics of an overseas supply transaction between a debtor and a supplier for which the appellants contend (cf paragraph 28 above) determine neither the nature nor the governing law of the relationship between a United Kingdom card issuer and an overseas supplier. Yet, on the appellants' case, section 75(1) and (2) cease to apply if an overseas supply transaction has at least those characteristics, even if the relevant card issuer could and would otherwise have the statutory indemnity provided by section 75(2) because his relationship with the supplier was governed by United Kingdom law. Mr Hapgood submits that subsections (1) and (2) of section 75 cannot be "disconnected". But the appellants' own case involves a disconnection, since it seeks to derive, from an indemnity provision capable on its face of applying to all creditor-supplier relationships subject to United Kingdom law, a limitation in the scope of liability under s.75(1) based on characteristics relating to the supply-debtor transaction which have no necessary connection with the creditor-supplier relationship.

    37.  Secondly, whatever the law applicable to the relationship between the United Kingdom card issuer and the relevant supplier, the card issuer may very well have a right to indemnity in respect of sums paid compulsorily under section 75(1). Section 75(2) does no more than reflect a well-recognised restitutionary right at English common law. Other developed legal systems are likely to recognise a similar right. Further, under the simple model contemplated at the time of the Crowther Report and 1974 Act, it would have been envisaged that a card issuer would be able to introduce into his relations with suppliers an express contractual indemnity mirroring the lines of section 75(2). Even today, the network rules for VISA and MasterCard could provide for suppliers to indemnify card issuers in full in respect of liabilities incurred under provisions such as section 75(1), and could no doubt also be structured, if necessary, to create direct contractual rights for that purpose. It cannot in these circumstances be assumed that Parliament envisaged that section 75(2) would be the only route to indemnity. Take the example of a tripartite situation which could have been foreseen at the time of the Act - a relationship between a United Kingdom card issuer and a French supplier subject to French law and to an express indemnity mirroring section 75(2). It is hard to think that Parliament would have intended the card holder to lose the benefits of section 75(1) merely because the indemnity arose contractually rather than statutorily.

    38.  Thirdly, the Crowther Report does not suggest that liability under section 75(1) depends on the existence of an effective indemnity. Section 75(2) is itself subject to any contrary agreement. More relevantly, Crowther recognised that the effect of section 75(1) would be to impose on card issuers irrecoverable losses, but took the view that card issuers were better able to bear them than card holders: see paragraph 19 above. Again, this militates against treating the existence of a statutory indemnity under section 75(2) as critical to liability under section 75(1).

    39.  As to section 75(5), it is true that, whatever rules of court may provide, an overseas supplier will be less easily brought before a United Kingdom court than a domestic supplier, and may simply ignore any attempt to join him, in which case any United Kingdom judgment may not be enforceable against him here or anywhere. But again it was a principal theme of the Crowther Report that creditors would have a strong contractual and commercial influence over their suppliers and that, where resort could not be had to such suppliers, losses were better borne by creditors, who could spread them over the public at large, than by debtors.

    40.  The appellants submit that there are other provisions in the 1974 Act which indicate that section 75(1) cannot have been intended to address foreign supply transactions. Under section 67 et seq certain credit agreements are cancellable within a cooling-off period (of either five or 14 days), and, where notice of cancellation is given, section 69(1) provides that it "shall operate - (i) to cancel the agreement, and any linked transaction, and (ii) to withdraw any offer by the debtor or hirer, or his relative, to enter into a linked transaction". On cancellation, the supplier must repay any sums he has received from the debtor (section 70(1)); the supplier and creditor are jointly liable to repay to the debtor any sums paid by him (section 70(3)); where the creditor repays the debtor, the supplier must indemnify the creditor for loss thereby suffered including costs (section 70(4)); and the debtor is treated as having the statutory duty to take reasonable care of the goods supplied (both pre- and post-cancellation) (section 72(3), (4) and (7)), but is under no duty to deliver them up save at his own premises and upon request (section 72(4) and (5)), and where no such request is made within 21 days of cancellation his duty to take care of the goods ceases. The preceding provisions of section 72 do not however apply to certain goods, including perishables, consumables after consumption, goods supplied to meet an emergency and goods incorporated in land (section 72(9)).

    41.  The circumstances in which a right of cancellation arises are limited: the negotiations for the credit agreement must have "included oral representations made when in the presence of the debtor or hirer by an individual acting as, or on behalf of, the negotiator", but, even then, an agreement is not cancellable if it falls within one of two categories: the first, if it is secured on or to finance the purchase of land, the second if it is signed by the debtor or hirer at premises at which the creditor or owner or any party to a linked transaction (other than the debtor or hirer or a relative) or the negotiator is carrying on business (section 67). A typical situation in which the right to cancel exists is thus where a credit agreement is, after oral negotiations and representations in the debtor's presence, signed at the debtor's home.

    42.  Where a right to cancel exists, it is correct that notice of cancellation can in law only impact on a linked transaction which is sufficiently connected with the United Kingdom. The nature of the link does not require final determination here. Section 69(1) may simply address all linked transactions subject to any United Kingdom law. But its protective intent may give it a wider impact, eg upon any linked transaction involving a supplier and/or debtor dealing as part of the United Kingdom market. Whatever its scope, there are situations in which cancellation of a linked transaction could not on the face of it be effective, eg if the supply transaction took place overseas with a foreign supplier subject to a foreign law. Further, if in such a case the United Kingdom creditor were to repay the debtor sums paid by the debtor prior to the notice of cancellation, the statutory indemnity provided by section 70(4) would not be effective, if the creditor-supplier relationship was subject to a foreign law. The scope of the indemnity provision in section 70(4) thus raises similar considerations to those already discussed in relation to section 75(2). The absence or inapplicability of the statutory indemnity does not necessarily exclude the existence of a statutory liability on the part of the creditor towards the debtor under section 70(1).

    43.  The ineffectiveness of the provisions for cancellation in relation to overseas supply transactions (eg made with a foreign supplier for supply overseas subject to a foreign law) is more problematic. But the Court of Appeal was in my view right to hold that it is insufficient to affect the apparently unqualified application of sections 11. 12 and 75(1) to any supply transaction. The cancellation provisions of section 67 et seq are ancillary to the main purpose of the Act. Section 69(5) of the Act permits regulations excluding linked transactions, of a description to be prescribed in the regulations, from the operation of the right to cancel. So the present problem could be entirely avoided by regulations. The right to cancel can anyway only arise in limited circumstances, and can then only impact on linked transactions in the case of a debtor-creditor-supplier agreement where credit is advanced within the very short cancellation period provided by section 68. That means, in the case of a credit card, that the card was issued and used and cancellation then took place within that period - probably a very rare occurrence. Be that as it may, it remains true that the cancellation provisions could in law be ineffective or inapplicable in certain situations which may be envisaged at least theoretically. But that possibility, arising in the ancillary context of cancellation within the cooling-off period, is in my view quite inadequate to shape or change the construction otherwise attaching to the separate and much more central provisions of section 75(1).

    44.  For the reasons I have given, which substantially coincide with those given by Waller LJ in the Court of Appeal, I consider that there is nothing in the 1974 Act to introduce or require any further limitation in the territorial scope of section 75(1), other than that the credit agreement must be a United Kingdom credit agreement. I therefore reject the appellant card issuers' submission that section 75(1) is limited in application to domestic supply transactions and so inapplicable to overseas supply transactions, however defined. I would accordingly dismiss this appeal.


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