Britain's banks lost a three-year legal battle yesterday to exclude overseas purchases from credit card cover for defective goods. The House of Lords ruled that customers can seek compensation against a credit card issuer if they have a valid claim against a vendor for an overseas transaction.
The case was brought by the Office of Fair Trading and was disputed by Lloyds TSB, Tesco Personal Finance and American Express. Before the original case was brought in 2004, the law was not clear but many issuers paid out on overseas purchases as a matter of goodwill.
The ruling, which covers purchases of between £100 and £30,000, could cost Britain's banks millions of pounds. In 2006, the value of overseas purchases by credit card was £9.1bn.
Apacs, which represents the British payments industry, said the big concern to card companies was that the ruling also covered contingent liability. This means that an issuer could be liable for amounts above £30,000 if, for instance, faulty equipment caught fire and caused damage to property. Apacs said that as people travel more and increasingly use credit cards to buy goods and services, banks and other issuers could be faced with claims that go way beyond the ticket price of the transaction.
Lord Hope, one of the five judges on the appeal, wrote: "The creditor is in a better position than the debtor, in a question with a foreign supplier, to obtain redress... The debtor is entitled to assume that he can trust suppliers who are authorised to accept his credit card."
The judgment, which covers Section 75 of the 1974 Consumer Credit Act, upholds a 2006 Court of Appeal ruling.
Lloyds TSB said: "We are disappointed with the decision as we have long believed that Section 75 has no validity in relation to foreign credit card transactions. However, given that the House of Lords has confirmed the Court of Appeal ruling, we will continue our policy of paying valid claims for overseas transactions."
As well as purchases made when the customer is abroad, Section 75 covers telephone, mail order and internet purchases delivered to a UK address and transactions that included face-to-face dealings with a foreign supplier but were not completed in Britain. John Fingleton, the chief executive of the OFT, said: "The application of Section 75 to overseas credit card purchases has long been uncertain, which is unsatisfactory for UK consumers."