company and commercial news
To Pay or not to Pay? [ 10 Nov 2006]
Charles Gerada
If any ‘default’ charges have been added to your credit card statement because you have missed a payment or somehow exceeded your credit limit, help may be at hand . . .
The Office of Fair Trading recently concluded its investigation into the default charges imposed by 8 leading credit card issuers. Its report, which can be accessed at http://www.oft.gov.uk/Consumer/Money/default.htm ordered these companies to reduce these charges to £12 or less if they are to avoid enforcement action. Most currently charge between £20 and £25 per default, an amount which the OFT considered to be excessive and unfair.
Although the OFT investigation has ignited a media debate about the validity of the charges, the law on the subject is well established. Indeed many people with enough determination (as well as a passing knowledge of case law) have for years been able to avoid such charges by arguing that they amount to an unenforceable penalty.
Cases on ‘penalty clauses’ date back to the nineteenth century when a court held that a provision in any contract that requires a party in default to pay a pre-determined sum will be unenforceable if that sum represents more than a genuine pre-estimate of the amount a court would award if the claimant were to sue for breach of contract.
The cost to financial institutions of dealing with such default situations is thought to be minimal (probably even less than the £12 threshold which the OFT has set for taking legal action) so the charges are capable of being challenged. Remember too, as long as a penalty clause amounts to a penalty, the entire deduction is unenforceable, not just the amount by which it exceeds £12.
Whilst the OFT’s report should give consumers much needed confidence and ammunition to resist the charges as they appear on their statements, the law’s protection does not only apply to credit card charges nor does it only apply to consumers. The same argument can be applied to bank charges and any other situation where you or your business is a party to a contract which seeks to impose such amounts if a breach occurs.
If you have any concerns about penalty clauses or require advice on avoiding them please contact Charles Gerada (ccg@jgrlaw.co.uk).
For further information on bank charges and ways to make a claim against your bank to avoid them you might want to visit HYPERLINK www.bankchargeshell.co.uk.
