Lancore Services Ltd v Barclays Bank Plc

A merchant acquirer may withhold card-payment funds where it reasonably suspects that the transactions are illegal or involve unauthorised third-party processing. Contractual provisions defining the acquirer’s primary obligation to pay do not become penalty clauses merely because the withheld sums exceed the acquirer’s eventual loss. The court will not imply a term requiring payment after a reasonable period where that would contradict the contractual allocation of risk. Relief against forfeiture is unavailable where the merchant had no contractual entitlement to the money and the relevant obligation cannot be undone. Restitution remains interstitial where the parties’ relationship is governed by contract.

Lancore operated a merchant account with Barclays for card transactions. It used that facility to process payments for third-party internet merchants, including transactions involving prescription medicines. Barclays suspended payments after discovering the nature of the transactions and later terminated the merchant agreement.

Lancore claimed damages, recovery of the withheld funds, restitution, and relief against forfeiture. It disputed that the agreement authorised Barclays to withhold the payments and alleged that the agreement had been varied or that Barclays was estopped from relying on its written terms. An earlier application by Barclays for summary judgment had been dismissed, and the matter proceeded to trial.

The central issues were whether Barclays was entitled to terminate the agreement and withhold the disputed payments, whether the withholding provisions were penalties or forfeitures, and whether Lancore had any agency, fiduciary or restitutionary claim.

1. Contractual entitlement. The payment details submitted by Lancore were not “Card Payments” within the primary meaning of the Merchant Terms and Conditions because the goods were supplied by third parties. Conditions 3.12(c) and 4.1 nevertheless gave Barclays an express right to withhold payments processed as card payments where they were payments to third parties or related to illegal transactions. Barclays reasonably suspected both forms of misconduct.
2. Termination and continuing withholding. Lancore was in breach of Condition 3.12(a), and Barclays was entitled to terminate the merchant agreement immediately under Condition 16.1. The right to withhold had already been exercised before termination and survived it. The only implicit limitation was that withholding based on reasonable suspicion could not continue once the reasonable suspicion ceased.
3. Construction and penalties. No term requiring Barclays to account for the funds after a reasonable period could be implied. The withholding provisions concerned the limits of Barclays’s primary payment obligation, rather than consequences imposed for breach. Alternatively, they were commercially justifiable because third-party processing and illegal transactions exposed Barclays to chargebacks, sanctions, regulatory and criminal risks, and reputational harm. They were not penalties.
4. Equitable and restitutionary claims. Relief against forfeiture was unavailable because Lancore had no proprietary or possessory right to the funds and could not undo the relevant breaches. The merchant agreement created no agency, fiduciary relationship or trust. Restitution could not be used to redistribute risks allocated by the contract.
5. Disposition. Lancore was entitled to repayment of its £36,000 security deposit, increased by accrued interest to £37,670.56, with further interest from 2 July 2007. Its remaining claims were dismissed.

The judgment was at first instance. An earlier application by Barclays for summary judgment was dismissed by the same judge on 13 June 2007, with no appeal. The present claim was otherwise dismissed, subject to repayment of the security deposit.