Taking credit

The past few months have not seen high-profile decisions such as the British Bankers Association judicial review, but there have been some interesting arguments on the finer points of consumer credit law.

All those people who, in a flush of New Year optimism, signed up to a gym on 1 January only to see their kit abandoned at the bottom of a wardrobe by Easter, will be interested in an action brought by the Office of Fair Trading against a gym membership management company.

The defendants in Office of Fair Trading v Ashbourne Management Services Ltd & Ors [2011] EWHC 1237 (Ch) worked with approximately 700 gyms across the country on what they described as membership recruitment and retention. The activity that attracted the attention of the OFT was their encouragement of the gyms to sign consumers up to minimum membership terms of 12 to 36 months. Also, where there was a subsequent default of monthly payments, there was demand for full payment of the remaining membership fees and a practice of referring those customers to a credit reference agency.

The OFT's case was that the agreements were regulated consumer credit agreements under the Consumer Credit Act 1974 which had been improperly executed. Various terms in the agreements were unfair under the Unfair Terms in Consumer Contracts Regulations 1999, it said. It claimed further that various practices amounted to an unfair commercial practice under the Consumer Protection from Unfair Trading Regulations 2008.

In relation to the first issue, the defendants conceded that if the 1974 Act applied then the agreements had not been properly executed. The basis on which it was argued that the agreements were brought within the ambit of the Act was the fact that the agreements were for a minimum term; that on default immediate payment of the remaining balance was demanded; and the reporting to credit reference agencies.

Unfair practices

The court expressed concern about the stance of the defendant towards defaulters but did not consider that was relevant to whether the agreements fell within the 1974 Act. It distinguished the agreements from others to which the Act did apply on the basis that the gym membership was being paid for as the facilities were being used, month by month. This was different from a situation where, but for a credit agreement, there would be payment up front.

A further point raised by the OFT was that in some cases the gyms offered discounts where payment of the full membership was made upfront. Therefore, the alternative, more costly, monthly payments should be considered a form of credit. The court trod a fine line by stating that because there was not a general obligation to pay the full amount upfront with the subsequent offer to defer the payment at an increased price this did not make it a credit situation and the 1974 Act did not apply.

The court then considered the issue of fairness of the contracts under the 1999 and 2008 regulations. Under the 1999 unfair terms regulations there is a need to show a significant imbalance between the parties, to the detriment of the consumer, in a manner or to an extent which is contrary to good faith. There were six issues the OFT put forward as a breach under the 1999 regulations, although the most significant was the issue of the minimum membership term. The main concern was the fact that the majority of members tended to overestimate the use they will make of their gym membership and that this had been evidenced by a large number of complaints received on this point.

There was a complex consideration to be undertaken by the court as to whether it was precluded from considering the issues under the 1999 regulations. This would be so if the offending aspect of the agreement was part of the main subject matter of the agreement. It also considered whether it was expressed in plain language and whether it was unfair.

In treading a careful path the court found that it was entitled to consider the issues as it was not the minimum term as such that was the problem but the consequences of early termination in the light of it. Furthermore the defendants were considered to be unfairly taking advantage of the naivety of potential customers entering into the agreements regarding their potential use of the facilities. The OFT therefore succeeded in having that part of the agreements declared to be in breach of the 1999 regulations.

The reporting of 'defaulters' to credit reference agencies was considered to be an unfair business practice under the 2008 unfair trading regulations. This was on the basis that the defendant was reporting what it believed was an unpaid debt. In reality it was no more than a potential claim for unliquidated damages that had yet to be proved in court.

In relation to the above two matters and also a number of other items, the OFT was awarded a declaration and an injunction.

Those representing consumers may have felt that, following the decision of the Supreme Court, in relation to default bank charges, the 1999 regulations were of limited assistance. In this case the court has been willing to take a forthright approach on behalf of a large class of consumers.

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