If the goods are no good, blame the plastic...

The long-running battle over who should foot the bill when our credit card purchases go sour has flared up again, with the publication of a new report by a consumer watchdog on users' rights under the law.

The National Consumer Council report, Credit Cards and Connected Lender Liability, was issued recently in response to the Department of Trade and Industry's (DTI's) consultation on the laws protecting credit card users. The thrust of the report is that credit card companies are "fobbing off consumers by claiming that they are not liable for faulty goods or substandard services paid for by credit cards".

Needless to say, the NCC's report has brought a swift response from the credit card industry. "The NCC is out of step and out of date with the rest of the UK consumer world," says Liz Phillips, Director of the Credit Card Research Group (CCRG) which represent all the major issuers of MasterCard and Visa cards in the UK.

Who is right and who is wrong? The root of the problem lies in section 75 (s75) of the Consumer Credit Act 1974, originally designed to protect people who bought goods on hire purchase. The law was formulated before payment by credit card had become part of our daily lives. Nevertheless, s75 does embrace all payments made with credit cards.

Basically, s75 states that if a person has a claim for misrepresentation or breach of contract against a supplier of goods or services with a cash price of pounds 100 or more, but not exceeding pounds 30,000, and the transaction has been financed in whole, or in part, by an agreement regulated by the Act, then the supplier and the creditor are jointly and severally liable.

The Act regulates agreements for the provision for personal as opposed to business use, up to pounds 15,000. Therefore the vast majority of credit card agreements are regulated by the Act.

This means that anyone who uses a personal credit card to pay for goods and services which are not provided, or which when supplied turn out not to be as described, can choose to seek redress from either the supplier, or the credit card company, or both parties. Furthermore, the claim is not limited to the cost of those goods or services - it can also include consequential damages.

Therefore if someone, for example, purchased a faulty carpet cleaner with a credit card, and as result all the carpets in their home were ruined, they could claim not only against the retailer and credit card company for the cleaner, but also for the cost of replacing their carpets. The claim for consequential damages is unlimited.

The UK's credit card companies deal on average with some 20,000 cases from aggrieved customers each year and pay out on average more than pounds 20m a year. So, what is the problem?

David Hatch, the NCC's chairman, said: "We have found that consumers are routinely told to go to the other side first, and even take the retailer to court, before the card issuer will pay out."

Bob Potts, chief executive of Barclaycard, did not deny that in cases of misrepresentation cardholders are asked first to approach the supplier of the goods and services: "It is frequently the easier way. Often, just the mention of Barclaycard solves the problem," he says. He likens an s75 claim for misrepresentation to making a claim on an insurance policy. "The insurance company will want to know if the claim is realistic and evidence will be required to support the claim. Likewise we cannot just reimburse without investigating."

While it may be more expedient for the cardholder to initially approach the supplier, by adopting this approach the card companies are not strictly following the law. Naturally, if the problem is then not solved to the consumer's satisfaction, the credit card company will then investigate a claim.

However, many claims are not clear-cut, Mr Potts argues: "Take the case of the dead parrot. A person buys a parrot from a pet shop; it becomes ill and dies. How can we act as judge and jury?" Both Barclaycard and Midland have experienced claims of this nature. In the Midland case, the post-mortem examination revealed that the bird had been fed unsuitable food by the purchaser, and this was the reason for the bird's demise - the cardholder had not been sold a sick parrot.

It appears reasonable that in cases of misrepresentation, the cardholder should take the initial steps to resolve the problem. Indeed, the Government's Deregulation Task Force has already proposed that the joint and several liability imposed by s75 should be replaced by second-in-line liability.

In other words, instead of being able to approach the card company without seeking redress from the supplier, the cardholder should only claim against the card company when his or her attempts at resolving the problem direct with the supplier have failed.

However, Sir Bryan Carsberg, the former Director General of Fair Trading, has advised the Government against this approach. When the Office of Fair Trading's report, Connected Lender Liability, was published last year, Sir Bryan stated, "Most consumers do go to the supplier first but in some cases, for example where the supplier has gone out of business, it would be a pointless exercise involving a real cost to the consumer in time and money."