UK Default Charges Controversy - Legal Background

Legal Background

A personal account holder at a bank may have a number of facilities associated with their accounts, such as the ability to process direct debit transactions, standing orders for regular fixed payments, and an overdraft. Banks may typically charge customers a fee of around £30 (individual banks vary) for authorising a transaction which puts a customer over their authorised overdraft limit, or for refusing payment when there are insufficient funds held in the account to meet it. Similarly, credit card issuers typically (until June 2006) charged customers a fee of around £25 for payment that is late, insufficient, or not made, and the same for exceeding their authorised credit limit. It is estimated that in the financial year 2003-2004, UK banks as a whole benefitted from an estimated £3 billion as a result of default charges alone.

When a customer exceeds his or her overdraft limit, this constitutes a breach of contract, as the customer has agreed not to borrow more than agreed. When this happens, the injured party (in this case the bank) is entitled to be reimbursed with a reasonable sum to cover the costs it has incurred as a result of the breach, or otherwise the value of the injury expressed in cash terms (liquidated damages). The value does not have to reflect the actual amount of the losses, only that it is a reasonable estimate of such. If the amount demanded by the injured party is excessive, they are unjustly enriched, and the breaching party has no obligation to pay the excess.

Any clause in a contract which makes a provision by which unjust enrichment may occur may be unenforceable at law - that is to say that if the amount is excessive, the injured party will be unable to enforce the charge in court. Any clause which explicitly provides for unjust enrichment is considered unlawful at common law.