The latest ruling on connected lender liability under s75(1) of the Consumer Credit Act 1974 ("CCA") comes as a real blow to credit card firms, who now face the risk of being sued for potentially huge sums in consequential losses. In the recent case involving the Office of Fair Trading ("OFT"), Lloyds TSB Bank plc ("Lloyds TSB"), Tesco Personal Finance Limited ("TPF") and American Express Services Europe Limited ("AmEx"), the Court of Appeal ruled that connected lender liability under s75(1) of the CCA attaches to all transactions entered into using credit cards issued under consumer credit agreements (1) whether they take place within a three- or four party structure and (2) whether they are entered into in the UK or abroad.

The case was heard on appeal from the 2004 judgement of Mrs Justice Gloster sitting in the High Court. The first leg of the decision upholds Mrs Justice Gloster's ruling at first instance, however the ruling on overseas transactions overturns the High Court decision on such transactions.

Background to the dispute

The case is set against a backdrop of a long-standing disagreement between the OFT (and the Director General of Fair Trading ("DGFT") before it) and credit card issuers. The concept of connected lender liability has its roots in the Report of the Crowther Committee published in 1971 (Cmnd 4596), which expressed the view that in cases where a lender provides credit for the purchase of goods or services pursuant to arrangements between a lender and a supplier of those goods or services, the lender and supplier can be considered in commercial terms as joint venturers, as the arrangements operate to their mutual benefit in the promotion of their businesses. In such cases the Crowther Committee recommended that the debtor who has a claim for misrepresentation or breach of contract against the supplier ought also to have a remedy against the lender. The Government White Paper largely adopted the Crowther Committee's recommendation and, accordingly, s75 of the CCA became law in 1977. Disputes as to the situations in which s75 was to apply soon began to emerge. By the late 1980s the Banking Ombudsman was rejecting claims involving a foreign element as it considered that s75 was not intended to apply to such claims. The DGFT, however, maintained, as it always had, that s75 applied both to four-party and to foreign transactions.There followed a review of the applicability of s75 to credit card transactions and, in 1995, the DGFT recommended that liability might be restricted to the amount actually charged to the card under the overseas transaction. Following this review, the scope of s75 was subsequently the subject of a DTI consultation. In anticipation of legislation changes expected to result as a consequence of the consultation, credit card issuers undertook for a limited period only to pay out on s75 claims on foreign transactions on a voluntary basis, such payouts being limited to the amount actually debited to the credit card under the transaction in question. Credit card issuers also, again in anticipation of legislation changes, agreed on a 'without admission of liability' basis that they would voluntarily meet claims arising out of four-party transactions. However, in 1996 the DTI then stated that no clarification of the law was required and that legislation changes were not considered necessary.

By this stage many Banks were still, on a voluntary basis, treating four-party UK transactions in the same manner as three-party transactions for the purposes of s75 claims, however, no industry standard remained in effect as regards foreign transactions.

Following the threat in 2001 from the OFT of issuing a Stop Now Order against TPF (as it likewise threatened HSBC, Bank of Scotland and Sainsbury's Bank with such an order) and TPF's dispute as to the appropriateness of such procedure, TPF invited the OFT to consider initiating declaratory proceedings to clarify the position as to the application of s75. Thus, in 2003, under its obligation to superintend the working and enforcement of the CCA the OFT issued declaratory proceedings in the High Court against TPF and Lloyds TSB as representatives of credit card issuers operating under the four-party structure. AmEx, which largely operates under three-party structures, applied successfully to join the proceedings to ensure that its own position was considered.

In the High Court it was declared that credit card transactions entered into under a four-party structure attract connected lender liability, but Mrs Justice Gloster dismissed the OFT's application for a declaration that connected lender liability also attaches in respect of transactions entered into abroad, regardless of whether a three-or four-party structure was in operation.

From joint venturers to insurers

A long-standing concern of many credit card issuers is that s75 is unlimited in scope and could therefore give rise to large claims for consequential loss often vastly in excess of the amount of credit involved in the transaction. Furthermore, in overseas transactions the card issuer is unlikely to have heard of the vast majority of the millions of foreign suppliers and is likely to encounter major difficulties in assessing any s75 claim arising out of such a transaction, having no direct knowledge of, or access to, the facts giving rise to the claim.

Take, for example, the consumer who flies over to California for cosmetic surgery. Let us assume that the 'nip and tuck' has a cash price of between £100 and £30,000 as required by s.75(2) and the consumer pays just a small amount of the cash price by credit card. If the surgery were to prove unsuccessful the consumer could issue proceedings in the UK against the card issuer for potentially large sums of consequential loss. And as the consumer has a "like claim" under s.75, given the litigious culture of the USA, it is possible that the level of damages claimed for in such proceedings might be considerably larger than an equivalent claim had the transaction been a domestic one. For the reasons mentioned above, the card issuer would face real difficulties in assessing or defending such a claim. The card issuer would, of course, have a statutory right of indemnity against the supplier under s.75(2), however this too will have its difficulties for the card issuer, not least if the cosmetic surgeon has no or restricted indemnity insurance, or if the contract between the surgeon and the consumer contained a clause conferring exclusive jurisdiction on the Californian courts.

Other types of foreign transaction of particular concern to card issuers are timeshare purchases taking place overseas. Again, only a small deposit need have been debited to the debtor's credit card, but the potential claims against the card issuer in the case of misrepresentation or breach of contract by the supplier are potentially very large.

In effect, UK the credit card issuer will be underwriting transactions with millions of foreign suppliers, or, in the words of Mrs Justice Gloster, it will be "the insurer (for no premium) of the performance" of foreign suppliers. This situation seems far removed from the Crowther Committee's "joint venturers" analogy and reasoning behind s75. In overseas transactions, other than by means of the credit card network rules, credit card issuers have little or no ability to bring pressure on foreign suppliers to perform the contract with the cardholder. In reality, credit card issuers also have little influence over the foreign merchant acquirers in four-party structures, where at best they can attempt to insist upon the commercial chargeback provisions whereby liability is passed on to the merchant acquirer.

The future

The OFT has already published on its website "tips for consumers" following the recent judgement, including advising consumers who are buying an item costing over £100 where a deposit is required to consider paying the deposit by credit card and also advising that the consumer need not attempt to claim his money back from the supplier first as the credit card issuer is individually liable. As the s75 remedy becomes better known to consumers there is a concern among banks and credit card issuers that they are going to see an exponential growth in s75 claims for consequential losses arising out of overseas transactions.

Ironically, the original case was initiated not to reduce consumer protection afforded by s75, but rather to clarify the extent and application of s75 connected lender liability. The Court of Appeal's decision goes beyond, and has far more wide-reaching consequences than, enforcing the voluntary arrangements formerly in place under which card issuers met s75 claims on overseas transactions limited to the amount deducted on the credit card for the transaction. It also places UK banks and other card issuers under a considerably more onerous potential liability than their European counterparts, whose liability generally in cases of breach of contract or duty by the supplier is at best limited to re-crediting the amount charged to the credit card.

Lloyds TSB has indicated that it is considering an appeal to the House of Lords against the decision. In the absence of legislation on the issue, this may be the only avenue by which an outcome might be reached which protects the interests of consumers without placing potentially unlimited underwriting obligations on credit card issuers.