The first order
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In February 2005, Mr P was overseas attending a trade fair. A customer from Singapore contacted the company via its website and placed an order for goods totalling $8,161.70. Mrs P accepted the order.
Between 19 and 22 February 2005, the customer provided Mrs P with the details of six credit cards to process payment for the first order. The payment was split over four of the six cards.
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Mrs P seeks advice from her bank
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On 22 February 2005, Mrs P rang the bank’s merchant enquiries line as she was concerned about the number of credit cards that had been provided by the customer for payment of the first order. However, because it was out of usual business hours Mrs P’s call was automatically routed to the bank’s general enquiries line. Mrs P spoke to an operator who was not trained in merchant matters.
Mrs P told the operator about the nature of her business and that her customer was using multiple credit cards to pay for the first order. The operator informed Mrs P that ‘it is not unusual for a person to have more than one credit card’. Three days later, Mrs P shipped the first order to the customer in Singapore.
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The second order
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On 28 February 2005, the customer placed a second order with the company for goods totalling $14,948.44.
Between 3 and 5 March 2005, the customer provided a further ten credit card numbers in payment of the second order. The payment was split over five of the ten cards. Between 8 and 21 March 2005, Mrs P sent the second order to the customer in Singapore.
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Singaporean buyer using misappropriated credit cards
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After all of the goods had been sent to Singapore, the bank received notification from the banks that had issued the nine credit cards used to pay the company, that the true cardholders had not authorised the payments. This means that the cards, or the card numbers and expiry dates, were used without the cardholders’ consent. In this case, it appeared that the card or card details were likely to have been stolen.
The bank asked the company to establish that the true cardholders had authorised the purchase of the goods. Under the merchant agreement with the bank, a transaction is not valid if the cardholder disputes liability and it is subsequently found that the cardholder did not authorise the transaction. Invalid transactions can be eversed, or “charged back” to the merchant.
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Credit card transactions reversed
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As the company was unable to provide information to the bank to establish that the true cardholders had authorised the payments, the bank charged back the transactions, totalling $23,110.14, to the company’s account. Mr and Mrs P disputed the bank’s entitlement to charge back the transactions.
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BFSO’s investigation
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The dispute was investigated by a case manager who issued a Finding that the bank was not entitled to charge back the transactions relating to the first order because it had engaged in conduct which was misleading, but was entitled to charge back the transactions relating to the second order. Mr and Mrs P rejected the case manager’s Finding and the case proceeded to a Recommendation issued by the Ombudsman.
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The Ombudsman’s Recommendation
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The issue for the Ombudsman’s review was whether the bank had engaged in misleading conduct, which would override the company’s contractual liability for some or all of the transactions. The Ombudsman considered the question of misleading conduct in relation to each of the first and second orders. The outcome of the Recommendation was the same as the case manager’s Finding.
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Did the bank mislead the company?
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The Ombudsman considered that the bank’s telephone operator had engaged in misleading conduct when he told Mrs P ‘it is not unusual for a person to have more than one credit card’.
The Ombudsman’s view was that this comment was not in itself incorrect or misleading but, taking into account the information Mrs P provided about the nature of her business and her customer, the comment was potentially misleading.
The Ombudsman noted that the bank’s telephone operator did not refer Mrs P to someone who could have provided her with more accurate information. The Ombudsman concluded that, taking into account the background information Mrs P had provided to the bank, this amounted to a misrepresentation by omission and was misleading conduct.
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Was the bank liable for both orders?
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The Ombudsman’s view was that the misleading conduct of the bank was to be limited to the circumstances surrounding the first order. For the misleading conduct of the bank to have been operating as an inducement to the company to proceed with the second order, Mrs P would have had to have understood the bank’s operator to have said something along the lines of ‘more than one card is not unusual and in fact you should not be unduly worried by the risk involved in dealing with a person using 16 card numbers’.
The Ombudsman concluded the nexus between the bank’s misleading conduct and the company’s reliance on that conduct was broken when the company received the details of a further ten credit cards in payment of the second order. The misleading conduct by the bank overrode the company’s liability under the merchant agreement for the losses incurred in relation to the first order only.
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Resolution
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The Ombudsman recommended that the bank pay compensation to the company for its loss in respect of the first order. This was calculated to be the value of the goods supplied, less the profit on those goods, which amounted to $5,532.24, plus freight costs of $182.
The Ombudsman also recommended that the bank refund fees charged on the transactions relating to the first order as well as pay interest on the compensation.
The Ombudsman’s recommendation was accepted by the bank and the company.
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