Credit Cards – Equal liability under Section 75 of the Consumer Credit Act 1974
Paying for goods or services by credit card is now a major part of daily life, with many people preferring this method of payment to using cash or cheques. An advantage of using a credit card is that, under Section 75 of the Consumer Credit Act 1974, customers who have a claim against a supplier for breach of contract or misrepresentation will generally have an equal claim against the card issuer.
Claims are often made against the card issuer when the supplier has gone out of business or disappeared. Firms will sometimes tell customers that they must first get a court judgment against the supplier. That is wrong. The customer can choose whether to claim against the supplier, the card issuer, or both.
In a case reported in issue 21 of ombudsman news (case study 21/11), we awarded a customer £250 compensation for the inconvenience a firm caused by repeatedly, and incorrectly, telling him that it was only required to meet his claim if he first obtained a court judgment against the supplier.
For Section 75 to apply, certain conditions must be met. Most credit card purchases will be covered, but:
- the cash price of the goods or services must be more than £100 and not more than £30,000; and
- purchases are not covered if they are made by debit cards or by charge cards (where the monthly bill has to be settled in full).
Also, Section 75 only applies if the credit has been provided under a 'pre-existing arrangement' that involves both the supplier and the credit provider. So credit cards are covered because suppliers are signed up by one firm (called the 'acquirer' to accept cards belonging to the relevant network - such as Mastercard or Visa. The arrangement involves both the supplier and firms that issue cards through that network.
However, credit card cheques are not covered because they can be made payable to anyone - not just to the suppliers appointed to accept the credit card. And the credit card company would not share liability if the card was used to withdraw cash to pay for the purchase.
There can be problems if the card is accepted by a different business from the one that provided the goods and services. We see this situation most frequently in connection with timeshare and holiday club membership, where it is not unusual for the timeshare or holiday club company to use the credit card facilities of another business. The business accepting the payment may simply be acting as agent for the supplier, in which case Section 75 will not apply. In order for Section 75 to apply, the business that accepts the payment and the supplier have to be 'associates' as defined in the Consumer Credit Act.
Where customers use a credit card to buy airline or other travel tickets from a travel agent, they cannot normally claim against the travel agent if the airline delays or cancels the flight. This is because the travel agent contracted to supply the ticket, not the flight. So the customer would not have a claim under Section 75 either.
However, things are different if customers use a credit card to buy the travel agent's own 'package' of travel arrangements. In such instances the agent is the supplier of the holiday package. This situation is illustrated in case study 31/6.
Section 75 does not, in itself, provide grounds for a claim against a supplier. Customers must have a valid claim of breach of contract or misrepresentation under other law, such as the Sale of Goods Act or the Misrepresentation Act. If they do, then they have a like claim against the card provider for the full amount of the claim.
The claim is not limited to the amount of the credit card transaction. Customers can claim for all losses caused by the breach of contract or misrepresentation. And this applies even if all they paid by credit card was the deposit.
So, for example, a customer who pays a deposit for goods - using a credit card issued by firm A - and then pays the balance using firm B's card, has the choice of claiming for the cost of goods and any consequential losses against:
- the supplier of the goods;
- firm A;
- firm B; or
- all three.
But of course, the customer cannot recover the same money twice.
However, to uphold a complaint we need to be satisfied that the customer had a claim for breach of contract or misrepresentation. This is straightforward if the customer has paid for goods or services that have not been provided at all. It is not so straightforward if the claim is that the goods were not of a satisfactory quality, or not as described to the customer.
If the dispute boils down to a question of taste, or simply to disappointment with the goods or services bought, then we are unlikely to be satisfied that there has been a breach of contract.
For example, we did not uphold the complaint of Ms X who said that her new haircut, paid for by credit card, did not suit her. Nor the complaint of Mr Z (who paid for a meal by credit card) after an altercation in the restaurant concerned. We took the view that he had received the items shown on the bill, and that his dispute really concerned how the restaurant treated him and his guests, rather than the quality of the meal he had paid for.
Many people now use their credit cards, rather than travellers cheques or cash, to pay for goods and services while on holiday abroad. Whether Section 75 applies to transactions abroad is a matter of dispute.
HSBC, Bank of Scotland and Sainsbury's Bank have agreed with the Office of Fair Trading that they will apply Section 75 to transactions abroad. Other card issuers will not. The argument is due to be resolved by the courts, as the Office of Fair Trading, Lloyds TSB Bank and Tesco Personal Finance have applied to the High Court for a declaration on whether Section 75 applies to foreign transactions.
In the meantime, most firms voluntarily operate a policy to accept otherwise valid claims up to the amount of the credit transaction. We consider all firms should do this as a matter of good banking practice.
Case Studies
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.
Credit Cards – Equal liability under Section 75 of the Consumer Credit Act 1974
Case Study 31/6 : Holiday package - Airline flights cancelled - Pre-existing arrangement between travel agent and customer - Whether Section 75 applied
Mr B used his credit card to pay the deposit to a travel agent for a holiday package that the travel agent had put together. Part of the package included two flights that the agent arranged with an airline. Unfortunately, the airline went out of business before Mr's holiday began and he had to buy two new tickets.
Complaint Upheld
We took the view that, in this case, there was a contract between Mr B and the travel agent to supply the holiday package. The travel agent breached that contract by failing to supply the tickets that made up part of the package. The contract between Mr B and the travel agent was financed under 'pre-existing arrangements' between the supplier of the package (the travel agent) and the bank that issued the credit card. So we considered that the bank should treat the claim as if Section 75 applied.
The bank agreed to meet the claim.
Case Study 31/7 : Digital TV package - Customer alleged breach of contract with credit card company - Whether Section 75 applied
Mr T used his credit card to buy a digital television package through a supplier. The package included a 12-month subscription with a pay-TV company. Two months later, the pay-TV company stopped broadcasting.
Mr T wrote to the credit card company, complaining that it was in breach of contract and threatening to take action against it. When it rejected his complaint, Mr T came to us.
Complaint Rejected
We decided that the supplier had fulfilled its contract with Mr T by providing the equipment and the subscription. The supplier had not contracted to supply programmes. So it had not been in breach of contract and Mr T had no claim against his credit card company.
There had not been a pre-existing arrangement between the broadcasting company and the credit card company. So any breach of contract by the pay-TV company was not covered under Section 75. We did not uphold the complaint.
Case Study 31/8 : Customer asks bank to stop credit card transaction - Whether bank acted properly by paying the retailer
Mr C visited a specialist retailer and placed an order for the manufacture and installation of two custom-made doors. He paid by credit card. A couple of weeks later, he decided he only wanted one of the doors and he tried to cancel part of his order. However, the retailer refused to accept this, citing the terms of the contract Mr C had signed.
In due course, both doors were delivered and one of them was installed. However, Mr C insisted that the other should be returned to the retailer. Mr C contacted his bank and asked it not to pay the full cost from his credit card account. However, the retailer claimed the full cost and the bank paid it. When the bank rejected Mr C's complaint that it had acted improperly, he came to us.
Complaint Rejected
Customers sometimes mistakenly believe that they can phone their bank and stop a credit card transaction, in the same way as they can stop a personal cheque. This is not the case. Once a cardholder has given authority for a transaction, it cannot be stopped.
Mr C had authorised the credit card payment and it was not open to him to withdraw it. So the bank had acted properly in paying the retailer. The retailer had fulfilled its part of the bargain. Mr C had simply changed his mind about the door - it had not been faulty - so the retailer had not been in breach of contract.
Case Study 31/9 : Customer claims the watch he bought while abroad had been misrepresented as a designer-make - Whether customer entitled to refund from credit card company
While on holiday in Turkey, Mr J bought a gold watch. He said he was told it was an expensive designer brand and he paid £1,000 for it, using his credit card.
However, shortly after he returned home, the watch stopped working. Mr J eventually got the watch repaired at a cost of £65. However, the repairer told him it was a fake and worth very much less than he had paid for it. Mr J then asked his bank to refund the difference between the amount he paid for the watch and the amount the repairer said it was worth.
When the bank refused to meet his claim, Mr J came to us. He said he had been told that under Section 75 he was entitled to a refund from his credit card company.
Complaint Settled
There was no evidence to support Mr J's allegation of misrepresentation on the part of the retailer in Turkey. None of the documents he was given when he bought the watch described it as a designer-make. The UK repairer confirmed that the watch was made of 18 carat gold and it was specified as such in the sales documents. So there did not appear to have been any breach of contract. Even if the transaction had happened in the UK, Section 75 would not have applied. However, the firm agreed to meet the cost of the repair.
