Office of Fair Trading v Abbey National Plc & Ors

A contractual term is capable of engaging the law against penalties only where it has contractual effect, imposes an obligation or prohibition on the customer, and a relevant payment is payable upon breach. Construction depends on the words in their context and what they would convey to a reasonable person. A charge may be penal even though it is payable only in specified circumstances, or although the breach is not the necessary and sufficient cause of payment. Where payment may arise from several events, including breach, it may be penal when the circumstances giving rise to payment are the breach. Terms governing overdraft facilities must therefore be distinguished from terms imposing contractual obligations on customers.

The Office of Fair Trading brought proceedings concerning bank current-account terms and charges alleged to be capable of amounting to penalties at common law. Following the court’s earlier judgment, reported at [2008] EWHC 875 (Comm), the dispute was narrowed to a relatively small number of terms used by the defendant banks.

The banks sought declarations that those terms and charges were not capable of being penalties. The court considered whether the terms were contractual, whether they imposed obligations or prohibitions on customers, and whether relevant charges were payable upon breach. It also considered the proper exercise of the declaratory jurisdiction and whether further factual investigation was required.

1. The court exercised caution in making declarations because customers whose rights might be affected were not represented. Nevertheless, declarations were appropriate where the contractual provisions could be identified with sufficient certainty and the legal position could properly be determined without further factual investigation. The declarations also served the practical purpose of facilitating the orderly management of county-court claims.

2. In deciding whether a term had contractual effect and imposed a prohibition on the customer, the court considered the substance of the arrangements and the contractual context. The test of construction remained what the words would convey to a reasonable person in context. A significant departure from the natural and ordinary meaning of the wording was not justified merely to identify a potentially penal term.

3. The fact that a payment is made because the customer obtains an advantage from wrongdoing does not prevent the law against penalties from applying where the benefit and corresponding expense are inherent in, or intimately related to, the wrongdoing. Nor must breach be a necessary and sufficient cause of payment. A buffer, a limit on the number of charges, or other conditions governing when a charge is levied do not necessarily prevent it from being payable upon breach.

4. Where a sum is contractually payable upon several events, including breach, it is capable of being a penalty when the circumstances giving rise to payment are the breach, but not when payment arises from other circumstances. The distinction drawn in Jervis v Harris [1996] Ch 195 did not prevent the principle applying to charges connected with unauthorised overdrafts.

5. Applying those principles, the court held that the relevant Barclays, Clydesdale and HSBC terms, most of the Abbey terms, and the HBOS terms apart from Intelligent Finance were incapable of being penal. The position concerning certain Abbey, Lloyds TSB and RBSG terms required further submissions or remained undetermined. Declarations were granted or further considered on that basis.

First-instance proceedings. The judgment records an earlier judgment in the same litigation at [2008] EWHC 875 (Comm), but no appeal from that decision was before the court.