skip tocontent

ombudsman news

issue 3

March 2001

mandates - when signatories fall out

As the following two case studies show, some couples enter into banking arrangements that they later regret.

Miss K and her partner, Mr L, had a joint current account. Each of them had a cheque guarantee card. The mandate they signed when they opened the account said:

  • each of them was jointly and individually liable for any overdraft, and
  • the mandate could not be cancelled unless the cheque guarantee cards were returned.

Miss K and Mr L fell out. Miss K asked the firm to freeze the account, but could not return Mr L's cheque guarantee card. Mr L went on writing cheques using the cheque guarantee card, running up an overdraft.

When Mr L's card was about to expire, the firm automatically sent him a new one. Miss K said she should not be liable for the overdraft. The firm said she was liable. It was compelled to pay Mr L's cheques because they were supported by the cheque guarantee card. Miss K had agreed to the issue of the card, and had agreed to be liable until it was returned.

Miss M had a credit card account, and nominated her partner, Mr N, as an additional cardholder. The application Miss M signed said that she would be liable for anything incurred by Mr N until he cancelled the arrangement and Mr N's card was returned.

Miss M and Mr N fell out. Miss M asked the firm to cancel her former partner's card, but was unable to return it to the firm. Mr N continued to use the card. Miss M said she should not be liable for these transactions. The firm said she should be liable, because she had agreed to remain liable until the card was returned.

how do we approach such cases-

First - we consider the contractual position. Is the firm right in saying that the wording makes Miss K or Miss M liable- The obligation is irrevocable unless they can get the card back from their former partners, which seems unlikely if they have fallen out. So the term is an onerous one.

The law requires that an onerous term be fairly brought to the attention of the person who is to be bound by it (often known as the Interfoto test, because of a court case of that name). So the term must be reasonably prominent, and not hidden away.

Next - we consider what good industry practice would require. If Miss K or Miss M asks the firm to freeze the account or put a stop on the card, Miss K or Miss M should take reasonable steps to recover the card. But the firm should also take any reasonable steps available to it to keep Miss K's or Miss M's liability to a minimum.

In the case of a credit card, the firm can reduce the credit limit to £1 and put a marker on the account so that Mr N's card is captured if he uses it for a transaction that requires authorisation. All traders have a floor limit below which authorisation is not required, however, so this will not stop every smaller transaction.

Miss K or Miss M will have to stand the cost if:

  • they are contractually liable;
  • the firm has taken any reasonable steps that good industry practice requires; and
  • (despite that) the former partners are able to enter into transactions that the firm is obliged to honour.

In Miss L's case, we decided the relevant term was sufficiently clear, though it could have been clearer. Miss L was liable for the cheques her former partner wrote using the original cheque guarantee card, because the firm had no choice but to pay these.

But the firm should not have issued a replacement card, and Miss L was not liable for the cheques he wrote using the replacement. In Miss M's case we decided the relevant term was clear and unambiguous. So she was contractually bound.

But the firm was slow in taking reasonable steps to keep her liability to a minimum. Some of the transactions, which required authorisation, could have been prevented if the firm had acted sooner. Miss M should not be liable for those. But some of the transactions would have gone through anyway, because they did not need authorisation. Miss M was liable for those.

David Thomas

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.