Exclusion clauses
Exclusion clauses

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Exclusion clauses

6.3.1 Challenges to the core exemption

Described image
Figure 13 Money

Despite the rationale behind the core exemption, its application proved to be controversial in practice, particularly in relation to bank changes.

Activity 7 Bank charges and the core exemption

Timing: You should allow yourself 30 minutes to do this activity.
  • a.Watch this video clip from February 2008 and answer the following questions about the case being discussed.

Note: although this case was decided pre-CRA 2015 it is still good law in relation to the indicative list in the Act.

Download this video clip.Video player: Clip 1 on
Skip transcript: Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

Transcript: Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

[What is the background to this case?]
[Andrew Ellson, Personal finance editor, The Times]
Andrew Ellson
There’s been a consumer revolt over bank charges and bank overdraft charges. Many of the high-street banks have been charging up to £40 for these so-called delinquent fees when customers go over their overdraft limits. There was numerous campaigns started online which are claiming that these charges, not only were they unfair, they were unlawful, and that you should – and they were encouraging consumers to approach the banks and ask for refunds of these charges.
[What is the case about?]
The test case which starts this week is not actually about whether overdraft charges are fair. It’s a fairly technical legal issue. It’s about whether the unfair terms in consumer contract regulations law applies.
If this law does apply to these charges, then the OFT can argue that charges should only be levelled as the administration costs, which is what these contract regulations mean. Because if the bank wins the case, it means that they can carry on charging these fees of, as they do at the moment, of up to £40.
[Who is likely to win?]
There’s been questions raised over the competency of the Office of Fair Trading and the strength of their legal case. At this stage, it’s still up in the air. If I had to guess, sadly, I wouldn’t be surprised if the banks win this.
End transcript: Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696
Clip 1 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696
Interactive feature not available in single page view (see it in standard view).
  • i.Who was the case being brought by?

a. 

The European Union


b. 

The UK Government


c. 

The Office of Fair Trading


The correct answer is c.

Comment

The Office of Fair Trading (OFT) brought a test case against Abbey National plc, six other banks and one building society. Under UTCCR 1999, the Director General of Fair Trading was given powers to try to prevent the continued use of unfair terms.

  • ii.What type of charges does it relate to?

a. 

Loan charges


b. 

Overdraft charges


c. 

Deposit account charges


The correct answer is b.

Comment

The case related to charges made when bank customers exceeded their agreed overdraft limit.

  • iii.Based on your knowledge of CRA 2015, what issue does the case involve?

a. 

What is a trader?


b. 

Transparency


c. 

Illegible terms?


The correct answer is b.

Comment

The issue was whether the OFT could investigate the fairness of the bank charges, or whether they fell under the core exemption as being an assessment of ‘the adequacy of the price or remuneration’.

In the earlier case of Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481 the House of Lords had held that a term in the defendant’s standard conditions for consumer loans did not fall within the core exemption, but was fair in any event. The suggestion was that the scope of the core exemption should be construed narrowly (Furmston, 2017, Chapter 6).

  • b.The case being discussed was heard by the Supreme Court in June 2009 as Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696. Now watch this video clip of a statement given by Lord Phillips, which explains the Supreme Court’s judgment. In no more than 100 words, summarise the decision.
Download this video clip.Video player: Clip 2 on
Skip transcript: Clip 2 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

Transcript: Clip 2 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696

Lord Phillips
This appeal was not about whether bank charges for those who overdraw on their current accounts are fair. It was about a much narrower issue. On what basis can the OFT – that is, the Office of Fair Trading – investigate the fairness of those charges.
The relevant regulation says that the OFT is not allowed to assess the fairness of a charge by the test of whether or not it represents a fair price or remuneration for the goods or services provided in exchange. The Court of Appeal had held that this exclusion only applied to core terms and that overdraft charges did not constitute core terms.
The Supreme Court did not agree with this approach. We have held that overdraft charges form part of the price or remuneration for the package of services that the banks provide to their current account customers. This means that the OFT cannot consider whether, in imposing those charges, the banks are giving fair value for money.
It may still be open to the OFT to assess the fairness of the charges by other criteria. For these reasons, the appeal is allowed. The order will be in the terms agreed by counsel.
End transcript: Clip 2 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696
Clip 2 on Office of Fair Trading v Abbey National plc [2009] UKSC 6, [2010] 1 AC 696
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Interactive feature not available in single page view (see it in standard view).

Comment

In this case, the court of first instance and the Court of Appeal had both held that reg 6(2) only applied to core terms. The charges were not viewed as part of the main subject matter of the contract and were, therefore, subject to review. However, the Supreme Court held that the charges formed part of the price or remuneration for the package of services the banks provided for their current account customers and, therefore, did fall under the core exemption.

There is one key limitation to the Supreme Court’s decision in Abbey National:

Regulation 6(2) (b) did not state that a court cannot review the price, but that it cannot review ‘the adequacy of the price as against the goods or services in exchange’.

At first instance, the question arose as to whether Regulation 6(2) (b) excluded a price term from any assessment of fairness (the ‘excluded terms’ construction) or whether it excludes only an assessment relating to the adequacy of the price (the ‘excluded assessment’ construction). Mr Justice Andrew Smith decided in favour of the excluded assessment construction. This finding was not challenged on appeal. The question therefore became not whether the OFT was entitled to assess the fairness of the relevant charges but whether, in doing so, it was entitled to take into account ‘the adequacy of the price or remuneration, as against the goods or services supplied in exchange’.

(Law Commission, 2012, paras 5.55–5.56).

This view is reflected directly in s.64 (1) (b) of the CRA 2015 which excludes from the assessment of the term ‘the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied’ under the contract.

Despite the Abbey National decision, there has been continued uncertainty over the scope of the core exemption. In Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch), [2011] ECC 31, the High Court considered terms requiring gym users to remain as members for a minimum period. Justice Kitchin concluded the terms were part of the main subject matter of the contract, but could still be assessed for fairness, providing that assessment related to the consequences for early termination and not to the definition of the subject matter.

The Court of Justice of the European Union (ECJ) ruled in Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt (Case C-472/10) [2012] 3 CMLR 1, where the ECJ had stated (at para. 23) that:

… the assessment of the unfair nature of terms was to relate neither to the definition of the main subject-matter of the contract nor to the adequacy of the price and remuneration … However, this exclusion could not apply to a term relating to a mechanism for amending the prices of the services provided to the consumer.

In Foster-Burnell, the County Court held that the fact the defendant had increased the overdraft charges meant that Hatóság applied and the core exemption under reg 6(2) was not applicable. The increased charges were held to be unfair under reg 5(1). This case does not set a binding precedent and has been appealed.

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