Payment by credit card
Alan L Tyree*
Abstract: Re Charge Card Services held that payment by credit card is absolute, discharging without condition the debt owed by the cardholder to the merchant. This note argues that Re Charge Card should be confined to its facts and that payment by credit card should be analysed in accordance with established principles of payment system law.
1 The problem
The rights of the parties may depend upon the basic relationships as well as the express contractual terms. For example, if the issuer makes payment to the merchant as an agent of the cardholder, then the cardholder is prima facie entitled to expect the issuer to exercise system rights to the benefit of the cardholder.1
2 Payment systems
Modern payment systems operate by circulating the liabilities of financial organisations, usually ADIs. In a typical non-cash payment, the payer’s ADI has a reduction in its liability to the payer and another, perhaps the same ADI, increases its liability to the payee. 4 The payer’s ADI incurs a liability to the payee’s ADI which is “settled” by a transfer of Reserve Bank liabilities.
In traditional payment systems, the payer’s ADI acts as agent for the purposes of making the payment. The payee’s ADI acts as agent for the payee for the purposes of receiving payment. These fundamental relationships have been held to be correct for the cheque system,5 for payment by documentary credit,6 and for payment by direct credit.7
3 Absolute vs conditional payments
Payment methods may be classified as “absolute” or “conditional”. An absolute payment unconditionally discharges the obligation owed by the payer to the payee. Where a payment is conditional, the obligation is discharged subject to the fulfilment of the condition. In the event that the condition is not fulfilled, the debt revives.
Whether a particular payment is absolute or conditional is a question of fact, but there are presumptions that particular payment methods are conditional.
For example, it has been held that payment by cheque is normally a “conditional” payment.8 Payment between the parties is complete when the cheque is tendered and accepted, but it is conditional. The condition in question is a condition subsequent: if the cheque is dishonoured on presentment, the debt owed by the payer is revived.
Similarly, it has been held that payment by documentary letter of credit is conditional.9 Again, the condition is a condition subsequent that the issuing bank will honour its commitment to make payment against conforming documents.
Cheques and documentary credits share a common feature. The drawee bank (in the case of cheques) and the issuing bank (in the case of credits) has no liability to the payee until the “conditions” are met. The drawee bank has no liability to the holder of a cheque until such time as the cheque is honoured. The credit issuing bank has no liability to the beneficiary until such time as it accepts the documents.
Payment by direct credit is different. The receiving bank has a liability to the payee at the time when the message is received.10 Indeed, it is consistent with the decided cases to say that payment is complete at the time when the receiving bank incurs an immediate (ie, on demand) liability to the payee.11
Completion of payment never depends upon the ADI providing cash to the payee. Payment is complete as between the parties when the payee accepts payment by a particular means. The payment becomes unconditional when the receiving ADI incurs an immediate and irreversible liability to the payee.12
4 Re Charge Card Services
The leading case on payment by credit card is Re Charge Card Services Ltd.13 The card in question was not a modern “four party” credit card, a point that is often overlooked in accepting the results of the case.
4.1 The facts
The system operated in the familiar way. Users would sign vouchers when acquiring goods or services. The service stations would submit the vouchers to CCS and would be paid their face value less a discount. Cardholders would be invoiced monthly and pay CCS the amount of the goods and services acquired.
CCS factored the debts owed by cardholders. Under a cover agreement, CCS agreed to assign all present and future receivables to Commercial Credit Services Ltd (“Commercial Credit”).
CCS went into creditors voluntary liquidation owing nearly £1.9 million to the participating garages. The liquidator collected over £2 million from cardholders.
The only issue before the Court of Appeal was whether the £2 million should be distributed to the participating garages or to Commercial Credit.
4.2 The decision
Counsel for the garages argued that there was a general rule that third party payment mechanisms are conditional payment. It was further argued that since the garages had not been paid by CCS that they were entitled to be paid by the customers. In short, it was argued that the condition was that the garages receive cash or cash equivalent.
The general principal was rejected by both the court at first instance and by the appeal court. It was held, rightly it is submitted, that there is no general rule or presumption that any particular payment method is conditional. As noted above, it has been held that payment by cheque and by letter of credit is generally conditional.
The Court held that whether payment is conditional or absolute must depend upon the contract between the payer and the payee. In the instant case, the contracts between the petrol purchasers and the garages were oral contracts of sale. The Court looked to the parties conduct to attempt to determine the terms of the contract.
Both parties knew that CCS would pay the garage upon presentation of the vouchers. Both parties knew that the customer would be liable to CCS. In the majority of cases, the garage had no information about the customer’s address or identity beyond the signed voucher.
Sir Nicolas Browne-Wilkinson V-C said (at p708):
To my mind, all these factors point clearly to the conclusion that …the transaction was on in which the garage was accepting payment by card in substitution for payment in cash, ie as an unconditional discharge of the price. [Italics added]
The italicised portion of the above quotation represents a substantial logical leap. A garage might accept payment by cheque in substitution for payment in cash. A seller might accept payment by letter of credit in substitution for payment in cash. In neither case would we leap to the conclusion that payment was absolute.
In coming to its conclusion, both the court at first instance and the court of appeal emphasised that there was no general rule concerning payment by credit card. It is a qualification that is often overlooked by those who wish to find that all credit card payments are absolute.
Decision in American Express International Inc v Commissioner of State Revenue14 rested on whether the contract between the cardholder and the issuer came within a statutory provision: see para 34 of the judgment. As such, it is of limited value in considering the question of payment even though the court expressly approved Re Charge Card Services.
Re Charge Card Services was also discussed briefly by Tamberlin J in Visa International Service Association v Reserve Bank of Australia.15 The issue was whether the Visa credit card system was a “funds transfer” system for the purposes of the Payment Systems (Regulation) Act 1998.
Counsel for Visa International argued that Re Charge Card Services showed that there was no “funds transfer” in a credit card system. There is force to this argument if it is accepted that the presentation and acceptance of the card totally discharges the contractual obligation of payment (see below for rejection of this result).
Tamberlin J dealt with the argument by noting that the Visa and Mastercard systems provided instruments and procedures which “relate” to a transfer of funds “which facilitates the circulation of money and this circulation takes place at the final stage of settlement at the RBA level.”
Although unnecessary, he expressed the opinion that there is no transfer of funds at the merchant-cardholder stage.
7 Problems with re Charge Card
The decision in re Charge Card is out of step with modern credit card usage in several respects. In both the Chancery Court and in the Court of Appeal, much was made of the anonymous aspect of card use. For example, in detailing the structure of a modern credit card scheme, Sir Nicolas Browne-Wilkinson V-C noted (at 705):
- (C) The underlying scheme is designed primarily for use in over-the-counter sales, ie sales where the only connection between a particular seller and a particular buyer is one sale.
- (E) Because the transactions intended to be covered by the scheme would primarily be over-the-counter sales, the card does not carry the address of the cardholder and the supplier will have no record of his address. Therefore the seller has no obvious means of tracing the purchaser save through the credit company.
These observations simply do not accord with modern credit card use. In many cases the card will be used to make significant purchases and the merchant will make a point of obtaining the purchaser’s name and address. This point was noted by Powell J in American Express International Ltd v D Thomas Associates Pty Ltd (1990) 19 IPR 574 in the context of a wine promotion scheme. The “anonymous” use of the card will almost never be true when the card is used at a distance to make Internet or telephone purchases.
Crawford  also notes that some Canadian issuers do not expressly promise to pay the amounts charged by cardholders vouchers. He then asks and answers the question (at para11:02.3(c)):
In such a system, does it necessarily follow that the merchant absolutely discharges the cardholder where no contractual right of recourse to the issuer exists? I think not.
Even more importantly, modern credit card schemes make provisions for “chargebacks”. A chargeback is a reversal of a payment made to the merchant, and may occur at a significant time after the transaction in which the credit card was used. A chargeback is initiated by a complaint of the cardholder alleging that the transaction was fraudulent or that there is a dispute with the merchant as to the quality of the goods or services acquired.
What is the position of a merchant who is faced with a chargeback? Can he or she demand return of the goods? Can payment for the goods be claimed through a court process? The answer to these questions must be “yes”, yet if re Charge Card is correct, then the answer is clearly “no”. Any obligation owed by the customer to the merchant has been discharged by presentation and acceptance of the credit card.
This is obviously wrong, and it may be that recovery could be based on some basis other than the contract of sale and payment. But before looking for some arcane cause of action, perhaps it would be better to have a second look at the concept of payment by credit card. Perhaps there is a legal analysis which provides the “right” outcome and corresponds with normal commercial understanding.
8 Alternative analysis
As noted above, most modern payment systems operate through the transfer of ADI liabilities. This transfer is accomplished via contractual arrangements, the paying ADI acting as an agent for the payer, the receiving ADI acting as an agent for the payee.
Why should payment by credit card be any different? The analysis is simple: use of the card is the means whereby the cardholder/payer gives payment instructions to the card-issuing ADI. Contractual arrangements ensure that the Merchant Acquirer incurs a liability to the merchant, that the payer incurs a liability to the issuer and settlement between the ADIs is accomplished in the usual way in accordance with the scheme rules.
Is payment by credit card absolute or conditional? As long as there are rules permitting chargebacks, it must be acknowledged that payment is conditional. The condition is that there is no subsequent chargeback. If there is a chargeback, then the original debt revives. Solvency of the credit card issuer is no more a condition than it is with payment by cheque or any other method that effects payment through a transfer of institutional liabilities.
In accordance with the principles laid down by National Australia Bank Ltd v KDS Construction Services Pty Ltd,16 we would say that payment to the merchant is complete at the time when the credit card is accepted. Payment is, however, conditional on the Merchant Acquirer accepting liability and the expiry of time available for chargebacks.
How would Re Charge Card Services be decided using this analysis? The judgment would be very short: “The garages have been paid from the moment that CCS accepted liability. Case dismissed with costs.”
Is it too late to reject the Re Charge Card Services analysis? The case is not binding on an Australian court. Those Australian cases which have considered it have not depended on the principle for the outcome. Indeed, the alternate analysis presented here makes it clear that a credit card system is a “payment system” for the purposes of the Payment Systems (Regulation) Act 1998.
Further, the payment aspects of Re Charge Card Services were not necessary for the decision. The sole issue in the case was to determine which party bore the risk of insolvency of the card issuer. All that was necessary is to determine that payment to the garages was complete. As noted above, receipt of cash is never a criteria to determine whether a non-cash payment has been made.
The result in Re Charge Card Services is not suitable for modern credit card payments. A simple agency analysis is more in keeping with the operation of modern payment systems and the credit card system as implemented in Australia.
Application of these payment systems principles shows that payment by credit card:
- is made by the Card Issuer as agent for the payer
- is received by the Merchant Acquirer as agent for the merchant/payee
- is complete when the merchant accepts and processes the credit card
- is conditional, the condition being that the Merchant Acquirer accepts liability to the merchant/payee and that no chargeback is initiated in the time available for chargebacks
- in the event that the conditions are not satisfied, then the debt owed by the cardholder to the merchant revives.
- Bradley Crawford. Payment, Clearing and Settlement in Canada. Canada Law Book, Aurora, Ontario, 2002.
- Benjamin Geva. The concept of payment mechanism. Osgoode Hall LJ, 24:1, 1986.
- Alan L Tyree. Riedell gets a credit card. JBFLP, 13(4):300 – 303, Dec 2002.
- Alan L Tyree. Deposits by strangers. JBFLP, 14(1):42–44, Mar 2003.
- Alan L Tyree and Andrea Beatty. The Law of Payment Systems. Butterworths, Sydney, June 2000. ISBN 0 409 31701 2.
- Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are my own and do not necessarily reflect the views of any other person or organisation.
- See Riedell v Commercial Bank of Australia Ltd  VLR 382 and Tyree .
- See American Express International Inc v Commissioner of State Revenue  VSC 32.
- Visa International Service Association v Reserve Bank of Australia  FCA 977
- This assumes that the accounts of the payer and the payee are in credit and, in the case of the payer, that there are sufficient funds to cover the payment. The statement needs no qualification if the concept of negative liability is accepted: see Tyree and Beatty  and Geva .
- London Joint Stock Bank Ltd v Macmillan and Arthur  AC 777; Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd (1981) 55 ALJR 574.
- Midland Bank Ltd v Seymour  2 Lloyd’s Rep 147
- Royal Products Ltd v Midland Bank Ltd  2 Lloyd’s Rep 147; Dovey v Bank of New Zealand  3 NZLR 641
- National Australia Bank Ltd v KDS Construction Services Pty Ltd (1987) 62 ALJR 63.
- Alan (W J) & Co Ltd v El Nasr Export & Import Co  2 QB 189; cf Saffron v Societe Miniere Cafrika (1958) 100 CLR 231 .
- Assuming that the receiving bank is authorised to receive payment on behalf of the payee: see Tyree.
- Momm v Barclays Bank International  QB 79; Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia)  AC 850; the “on demand” part is to deal with the decision in A/S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari (The Chikuma)  1 WLR 314.
- This is not to say that the payment may not be recovered by legal action, but it may not be reclaimed by a unilateral act of the payee or the payee’s agent. For example, the payment may be complete and unconditional but, if made under a mistake of fact, may be recoverable by legal action.
-  Ch 150;  Ch 497 (CA)
-  VSC 32
-  FCA 977.
- (1987) 62 ALJR 63