If these fees were confirmed to be a penalty for breach of contract then under UK law the amount that could be charged would be limited to reflect the actual (and considerably lower) costs which were incurred by the bank.
The High Court held that although the charges were not penal, they fell within the remit of the legislation and hence their fairness could be assessed by the OFT.
Baroness Hale asserted that while the court had no power to do anything, Parliament could have chosen to construe the directive more broadly, and it would be up to the legislature to decide differently.
The regulations could be challenged as failing to implement the directive through a separate case, but since any decision by the ECJ would be prospective only the government, and not the banks, would have to pay any compensation.
The judgement concluded that the language used was clear and intelligible in the contracts of HSBC, Lloyds TSB, Nationwide and RBSG; and similarly in the most part for Abbey National, Barclays, Clydesdale and HBOS although lacking in minor detail.
In order for a provision for payment to be penal, it must provide for payment upon a breach of contract (see Export Credits Guarantee Department v Universal Oil Products Co, [1983] 1 WLR 399) that is not a genuine pre-estimate of loss from the breach but which is extravagant and unconscionable in amount in comparison with the prospective loss (see Jeancharm Ltd v Barnet Football Club Ltd [2003] EWCA Civ 58 at para 27).
297 The OFT rightly does not suggest that prima facie a customer is in breach of his contract with his bank if he gives instructions for a payment from his current account for which he does not have funds or a facility.
298 The OFT, however, identifies some provisions in the Banks' current and historical terms which, it is submitted, might give rise to customers being in breach of contract in these circumstances.
It is necessary to examine separately each of the provisions identified by the OFT as arguably penal in order to determine Leaving aside basic accounts, I consider that the OFT has identified all the arguably penal provisions in the terms now used by the Banks for their personal current accounts and in the historical terms of Clydesdale and RBSG to which I have referred.
299 The Banks emphasise that a Relevant Charge cannot be penal unless it is payable upon a breach by the customer, and illustrate this principle by referring to the decision of the Court of Appeal in Jervis v Harris [1996] Ch 195, which concerned a provision in a lease (clause 2(10)) obliging a tenant to carry out repairs and providing that if he did not do so, the landlord might do the repairs and recover from the tenant the costs and expenses of doing so.
This provision was held not to be penal, and Millett LJ said this (at p.206E-G): "… it is well settled that the event on which the sum alleged to be a penalty becomes payable must be a breach of some other contractual obligation owed by the obligor to the obligee.
A customer could not necessarily invoke the law about penalties to challenge charges payable for his bank lending him money simply because his account would not be overdrawn but for his own breach.
This is a matter about which the judge, Andrew Smith J, and the Court of Appeal took different views, although again it is not suggested that it raises on the facts of this case any particular issue of European law.
It is true that Relevant Charges are only incurred when a customer, either deliberately or inadvertently, gives an instruction or enters into a transaction, by which as a matter of law and contract he or she requests the bank to provide overdraft facilities.
Otherwise, as Mr Sumption pointed out, a customer could challenge each separate part of a package in isolation, although as a whole the price or remuneration charged was unchallengeable.
Alternatively, the OFT suggests, without committing itself, that, if there is any price or remuneration under a free-if-in-credit banking contract, it is more easily found in the customer’s agreement to pay overdraft interest.
Nevertheless, the concepts of “price or remuneration” must, I think, be capable in principle of covering, under a banking contract, an agreement to make a payment in a particular event.
The language of regulation 6(2)(b) is on its face therefore capable of covering a customer’s commitment, under the package contracts put before the House, to pay the Relevant Charges in the specified events.