Lancore Services Ltd v Barclays Bank Plc

A merchant acquirer’s obligation to pay under a merchant services agreement is confined to transactions falling within the contractual definition of a Card Payment. Where the merchant did not provide the goods or services, a third-party transaction is outside that obligation, even if it was processed as a card payment. Contractual provisions allowing the acquirer to refuse or withhold payment may be read consistently with that primary limitation, and may permit permanent retention. The court will not imply a term requiring release after a reasonable period or limiting retention to actual loss where that term conflicts with the express agreement. The withholding is not an unenforceable penalty if the retained sums never became payable. Contractual allocation of the risk also prevents the merchant recasting the claim in agency, fiduciary or restitutionary terms.

Lancore Services Ltd v Barclays Bank Plc concerned an appeal from an order dated 25 June 2008 made by His Honour Judge Hodge QC in the Chancery Division, Manchester District Registry. The appellant operated a merchant account with the respondent under a merchant services agreement intended to cover its own kitchenware sales. It instead processed substantial card transactions for third parties, including transactions involving prescription medicines.

The respondent suspended payments and terminated the agreement. The trial judge found that the transactions were unauthorised third-party transactions and that the respondent was entitled to retain the money. The appeal challenged the construction of the agreement, the existence of an implied time or loss limitation, the alleged penalty, and alternative agency, fiduciary and restitutionary claims. The central issue was whether the agreement required payment of sums arising from transactions which were not supplied by the merchant.

1. Appeal dismissed. The court upheld the trial judge’s rejection of the claim for approximately £1.9 million.
2. Condition 2.1 imposed an obligation to pay only the amount of all Card Payments included in approved Payment Details. The definition of Card Payment referred to payment for goods or services provided by the merchant. Transactions processed for third parties, where the merchant had not provided the goods, therefore never became sums payable under condition 2.1.
3. The expression Card Payment was used in an extended sense in conditions 3.12 and 4.1 where necessary to address third-party transactions. Condition 4.1’s fifth sentence entitled the acquirer to decline payment for a transaction which was not a Card Payment but had been processed as one. Condition 4.1(a) also covered third-party transactions. Those provisions supported a right of permanent retention ancillary to the primary absence of liability to pay.
4. No term could be implied requiring payment after a reasonable period, or limiting retention to chargebacks or actual loss. The proposed term was inconsistent with conditions 2.1 and 4.1. The officious-bystander approach required consideration of how the parties would respond to the suggested term; the acquirer might have rejected it, particularly given the risks of illegal or aggregated transactions.
5. The withholding provisions were not a penalty. On the proper construction of the agreement, the sums were never payable, rather than being forfeited because of a breach. Condition 2.1 therefore was not a penalty clause.
6. The agreement created no agency or fiduciary relationship. Restitutionary arguments could not redistribute risks which the parties had already allocated by contract.

1. Court of Appeal (Civil Division) — The appeal was dismissed for the reasons given by Lord Justice Rimer, with Lord Justice Goldring and the Chancellor agreeing: [2009] EWCA Civ 752.
2. Chancery Division, Manchester District Registry — His Honour Judge Hodge QC dismissed the claim, save for an immaterial payment order. The appeal challenged that decision.