INTERNET PAYMENT SYSTEMS AND CONNECTED LENDER LIABILITY

 1.             NATURE OF ENQUIRY

1.1.      A number of companies are now providing internet payment systems, whereby one person can use the company's website to send money to another person.

1.2.      It has been suggested that buyers who use credit cards to fund payments to suppliers via internet payment system will not be able to take advantage of s.75 of the Consumer Credit Act 1974 in respect of breaches of contract or misrepresentation by the supplier.  This argument is based on the notion that, in these circumstances, the card issuer is merely financing the purchase of electronic money from the internet payment system, and not the purchase of goods or services from the supplier.

1.3.      LACORS' opinion is sought on the applicability of s.75 of the Consumer Credit Act 1974 in respect of transactions made through internet payment systems.

2.             HOW DO THESE PAYMENT SYSTEMS WORK?

2.1.      The various systems all operate their own rules.  However, for clarity, the example of PayPal will be used in any explanations given here.

2.2.      PayPal is the internet payment system operated as a subsidiary of the internet auction company eBay.

2.3.      PayPal allows payments to be made from one registered PayPal user to another registered PayPal user.

2.4.      It is possible to make and receive a payment via PayPal even if the obligation or decision to make a payment precedes one or both parties' registration with PayPal as a user.  That is, a contract could be made between two people, only one or neither of whom are registered PayPal users, and the parties could subsequently make and receive any payment under the contract via PayPal whether or not the contract required payment to be made in this way.

2.5.      A registered PayPal user has a 'stored value account' with PayPal.  Essentially, this is a deposit account.  No interest is payable on the account, and debit balances are not permitted.

2.6.      When one user makes payment to another user, the payment is credited to the recipient's stored value account.  The payment can be funded in various ways.  In particular, it can be funded from the recipient's stored value account or by a credit or debit card payment, or by a combination of these methods.

2.7.      The recipient is able to withdraw money from their stored value account by various methods including direct transfer to their bank account.

2.8.      There are three levels of PayPal account: Personal, Premier and Business.  For the recipient to be able to accept payments funded in full or in part by credit card, they are required to have a Premier or Business account.  These account types are, however, available to private individuals as well as to businesses.  It is therefore possible for private individuals to receive credit card-funded payments via PayPal.
 

3.             APPLICATION OF CONSUMER CREDIT ACT 1974

3.1.      Sections 75, 12 and 11 of the Act are reproduced in the Annex.

3.2.      For Section 75 to apply, there must be a transaction.  That is, the payment must be made pursuant to some contractual or similar obligation to pay.

3.3.      Section 75 will not apply in relation to items with a price of £100 or less, or with a price of more than £30,000.

3.4.      For Section 75 to apply, the transaction must be financed by a debtor–creditor–supplier agreement under s.12(b) or (c).  It follows that Section 75 cannot apply where the payment is funded exclusively in some other way (e.g. debit card, stored value account balance).

3.5.      Where the payment is funded, in whole or in part, by a credit card payment, and where the credit card was issued under a regulated agreement, the question arises as to whether a transaction has been financed by a d–c–s agreement under s.12(b) or (c).

3.6.      It has been argued that, although in these circumstances a transaction is financed by a d–c–s agreement under s.12(b), the transaction is in fact the purchase of electronic money from the internet payment company.  On this basis, a claim under s.75 would lie only where the internet payment company had breached the contract by failing to supply electronic money correctly.

3.7.      If this argument were to hold, it would be possible for card issuers to avoid liability under s.75 in all cases (whether in relation to internet transactions or otherwise) by the interposition of an electronic money institution on the supplier's side in each transaction.  Given that card issuers' liability is likely in most cases to be transferred to the supplier's bank or card-handling firm (the 'merchant acquirer'), there would be a strong commercial incentive for merchant acquirers to interpose an electronic money institution in this way, and the section would be redundant.

3.8.      It was decided in Office of Fair Trading v Lloyds TSB Bank Plc and others [2004} EWHC 2600 [Comm] paras. 15–17 that, in a 'four-party' transaction, the primary purpose of the credit card agreement is to finance the purchase of goods and services from a supplier just as in a 'three-party' transaction.  This common-sense view must apply equally to a payment made via an internet payment system, where again the primary purpose of the transaction is for the creditor to provide financial accommodation to the debtor in respect of a purchase of goods or services from the final supplier, and not in respect of a purchase of electronic money.  The internet payment system cannot be considered to be the supplier for the purposes of s.75.

3.9.      Therefore, where a credit card is used to fund a transaction via an internet payment system, the agreement is a restricted-use agreement under s.11(1)(b) of the Act, and the relevant transaction is the transaction between the debtor and the final supplier of goods and services, and not a purchase of electronic money from the internet payment system.

3.10.  If the agreement is covered by s.11(1)(b) of the Act, it is then necessary to show that it is made under pre-existing arrangements, or in contemplation of future arrangements, between the creditor and the supplier.

3.11.  Following the judgment in Office of Fair Trading v Lloyds TSB Bank Plc and others, paras 18–40, it is clear that there are indeed arrangements between the creditor and the supplier.  By looking at the whole network of arrangements which are involved, it is clear that the participants, including the suppliers, are subject to the rules and settlement processes of the card network. 

3.12.  Depending on the exact timing of the regulated agreement and of the supplier being permitted to accept credit card-funded payments via the internet payment system, the agreement may in some cases be made under pre-existing arrangements between the creditor and supplier, and in some cases made in contemplation of future arrangements; in neither case would s.75 be defeated.

3.13.  Again, if the mere interposition of an internet payment service between the supplier and the creditor were sufficient to defeat s.75, then the section would be redundant.

3.14.  The definition of 'supplier' in the Act does not exclude the possibility that the supplier is acting other than in the course of a business.  Therefore, the fact that a supplier is a private individual does not defeat s.75 liability.

3.15.  Following Office of Fair Trading v Lloyds TSB Bank Plc and others [2004} EWHC 2600 [Comm], there will be no liability under s.75 where the transaction is made pursuant to a foreign contract.
 

4.             CONCLUSIONS

4.1.      It is submitted that, where a transaction is made via an internet payment system, and that transaction is funded in full or in part by credit card, the card issuer will be liable in respect of any breach of contract or misrepresentation on the part of the supplier subject to the following conditions:

·             the credit card is issued under a regulated agreement.

·             the contract between the debtor and the supplier is not a foreign contract.

·             the price of each item, in respect of which the claim is made, is more than £100 and no more than £30,000.

4.2.      The supplier need not be a business for the card issuer to attract liability under s.75.

ANNEX: CONSUMER CREDIT ACT 1974

75 Liability of creditor for breaches by supplier 

(1)   If the debtor under a debtor-creditor-supplier agreement falling within section 12(b) or (c) has, in relation to a transaction financed by the agreement, any claim against the supplier in respect of a misrepresentation or breach of contract, he shall have a like claim against the creditor, who, with the supplier, shall accordingly be jointly and severally liable to the debtor. 

(2)   Subject to any agreement between them, the creditor shall be entitled to be indemnified by the supplier for loss suffered by the creditor in satisfying his liability under subsection (1), including costs reasonably incurred by him in defending proceedings instituted by the debtor. 

(3)   Subsection (1) does not apply to a claim— 
(a)    under a non-commercial agreement, or 
(b)    so far as the claim relates to any single item to which the supplier has attached a cash price not exceeding [£100] or more than [£30,000]. 

(4)   This section applies notwithstanding that the debtor, in entering into the transaction, exceeded the credit limit or otherwise contravened any term of the agreement. 

(5)   In an action brought against the creditor under subsection (1) he shall be entitled, in accordance with rules of court, to have the supplier made a party to the proceedings.

12 Debtor-creditor-supplier agreements 

A debtor-creditor-supplier agreement is a regulated consumer credit agreement being— 

[…]

(b)    a restricted-use credit agreement which falls within section 11(1)(b) and is made by the creditor under pre-existing arrangements, or in contemplation of future arrangements, between himself and the supplier, or 

(c)    an unrestricted-use credit agreement which is made by the creditor under pre-existing arrangements between himself and a person (the “supplier”) other than the debtor in the knowledge that the credit is to be used to finance a transaction between the debtor and the supplier. 

11 Restricted-use credit and unrestricted-use credit 

(1)   A restricted-use credit agreement is a regulated consumer credit agreement— 

[…]

(b)    to finance a transaction between the debtor and a person (the “supplier”) other than the creditor, or 

[…]

and “restricted-use credit” shall be construed accordingly. 

(2)   An unrestricted-use credit agreement is a regulated consumer credit agreement not falling within subsection (1), and “unrestricted-use credit” shall be construed accordingly. 

(3)   An agreement does not fall within subsection (1) if the credit is in fact provided in such a way as to leave the debtor free to use it as he chooses, even though certain uses would contravene that or any other agreement. 

(4)   An agreement may fall within subsection (1)(b) although the identity of the supplier is unknown at the time the agreement is made.

189 Definitions

[…]

“supplier” has the meaning given by section 11(1)(b) or 12(c) or 13(c) or, in relation to an agreement falling within section 11(1)(a), means the creditor, and includes a person to whom the rights and duties of a supplier (as so defined) have passed by assignment or operation of law, or (in relation to a prospective agreement) the prospective supplier;