After what seems like an eternity, Mr Justice Andrew Smith has released his judgment in the Bank Charges Test Case (Office of Fair Trading v. Abbey National plc and 7 others [2008] EWHC 875 (Comm) - BBC News), dealing with the questions of whether overdraft "penalty" charges are covered by the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083, "the 1999 Regulations") and therefore subject to an assessment of fairness, whether the terms and conditions of the banks who took part in the case were in plain and intelligible language, and whether the relevant terms were penal in nature and therefore unenforceable at common law.

In a gargantuan judgment of 119 pages and 450 paragraphs, which one expects will cause the Courts some headaches when the millions of charge-reclaiming consumers lodge copies of it in support of their claims, Andrew Smith J concludes that the charges levied by the banks are not charges for services provided, and are therefore not excluded from the assessment of fairness by reg.6(2)(b) of the 1999 Regulations. Although the Judge accepted that services are provided when a bank makes payment upon receipt of an instruction from a customer and thereby allows a customer to borrow funds, the way in which such fees had been packaged and expressed did not suggest that they were in fact fees for services, only fees arising from the circumstances in which a transaction took place. In any event, the banks had contended that the fees were part of the "free if in credit" banking structure, and that they financed the system as a whole. Given that situation it is not surprising that the Judge held that the 1999 Regulations do not exclude assessment of such terms.

As expected, "Money Saving Expert" Martin Lewis (from whose website millions of template claim letters have been downloaded) proclaims this decision to be a "major victory" for the consumer, but whilst it certainly does the consumer's case no harm (consumer in the singular because the 1999 Regulations have a bearing only on individual contracts), there is still a long way to go. For a start, the ruling applies only to the terms and conditions of the banks involved in the case, and only the current editions of those terms. The banks could now re-write their terms to clearly express the erstwhile penalty fees as the fees for services provided, or even re-structure their charging regime such that the "free if in credit" system comes to an end, and all bank customers have to pay the price. And of course, there may yet be an appeal to a higher court.

That being said, it is anticipated that the Office of Fair Trading ("OFT") will now rapidly produce its conclusions as to the fairness of the "penalty" fees applied by the banks, most probably in line with its decision on credit card default charges, in which charges were generally considered fair if they were £12 or less.

The penalty issue was decided in favour of the banks, the Judge considering that on the terms before him, the fees charged were not occasioned by a breach of contract, because the consumer was not under a relevant contractual obligation. Given that the sum was payable otherwise than on breach of contract, the rules on penalties did not apply. This was an argument I raised in an article in the New Law Journal ("Highly Charged?" 20 April 2007 pp.536-7). Disappointingly for me, my other argument (that by agreeing to an ad hoc overdraft the banks waived any contractual breach and charged a fee pursuant to a variation of the contract) did not find favour with the Judge, but I can take heart from the fact that it seems to have been adopted by the ten QCs appearing for the various banks!

The millions of outstanding bank charge claims will remain on hold for the time being, but I suspect that, unless there is an appeal and a further stay of the claims, the solicitors for the banks, and the courts, had better be steeling themselves for a summer deluge!

Written by Chris Jeyes, Barrister at New Walk Chambers, specialising in Contract, Banking, Civil and Commercial Law.