The paypal ruling: Internet payment and charge-back

Date 14 jan. 2009

On 19 December 2008, The Eastern High Court made a principled decision on the field of application of the consumer ombudsman’s guidelines for remote sale etc. in payment systems (“The Guidelines”). The ruling decided on whether the Guidelines could be applied to payment systems used for payment on the Internet.


The ruling, which has been actualised by the increase in purchase and sale on the internet via new forms of payment, establishes a narrow interpretation of the term “payment system”. Thus, the High Court dismisses the idea that the Guidelines may apply to payment providers. This entails that consumers buying goods on the Internet and paying via a payment provider achieve a legal position which is significantly poorer than consumers paying the seller directly, for example by cash on delivery.


The case in brief
With a foreign company (U), a consumer (F) had bought services for use of games on the Internet and paid with his VISA/Dankort via the internet payment system PayPal. PayPal is an independent payment provider who, among other things, arrange for payment between consumers and business owners via the Internet by issuance of so called e-money.


As F, subsequently, did not receive the services he had paid for, he contacted his bank (the “Bank”) with a view to having the payment reimbursed (so called “charge-back”). However, the bank refused to reimburse the payment because the payment had been made via PayPal.


F complained to the Danish Complaint Board of Banking Services (“Pengeinstitutankenævnet”) who decided in favour of him and granted that the payments were covered by the Guidelines and that the bank had to reimburse the money. As the bank, subsequently, informed the complaint board that it did not wish to be bound by the decision, F sued the bank.


Rules applying to payment on the Internet and the right to charge-back
A consumer who has not received the goods/services for which he or she has paid with a credit card may in certain circumstances demand for his/her payment to be reimbursed (charge-back). This is a consequence of the Guidelines issued in accordance with section 4(3) (formerly section 12a) of Act on Certain Means of Payment. The Guidelines also apply in cases where the consumer has been shopping on the Internet and paid with his/her credit card.


Among other things, the purpose of the Guidelines is to regulate the situations in which the completion of the payment transaction in practice places the consumer in a poorer position than the consumers who pay for example cash on delivery or by using a paying-in slip which travel with the goods. On par with this, it is stated in paragraph 5 of the Guidelines that a consumer claiming that the service ordered has not been delivered may demand for the card issuer to reimburse the amount. A consumer may demand for the payment to be reimbursed in case of absent or imperfect delivery, if the payment is covered by the Guidelines.


The Guidelines must be considered in context with the banks’ own guidelines for charge-back which correspond with the credit card company VISA’s code systems which contain a number of codes with exhaustive charge-back explanations. If a Danish company does not comply with VISA’s code system, VISA may impose a fine on the bank.


It follows from paragraph 1 of the Guidelines that payment systems with credit cards via which payment transactions are executed without the system reading off the credit card combining it with the credit card owner’s signature or PIN-code is covered by the Guidelines. It appears from the ombudsman’s comments that payment systems with payments without card will not be covered by the Guidelines in their present form.


As most transactions on the Internet are completed without the consumer providing his/her code or (virtual) signature, such payments will, as a main rule, be covered by the Guidelines.


With its ruling of 19 December 2008, the Eastern High Court has overruled a decision of 5 October 2006 made by the Danish Complaint Board of Banking Services (the “Complaint Board”) in which the Complaint Board concluded that a consumer’s payment with a credit card via a payment provider had to be reimbursed.


The decision of the Danish Complaint Board of Banking Services

In its decision of 5 October 2006, the Complaint Board met P’s claim and ordered the bank to reimburse P’s payment. The verdict was passed in dissent.


A majority of the Complaint Board found that payments with credit cards on the Internet which do not take place directly to the owner but through a third party, who according to agreement with the credit card owner and the seller arranges for the payment, was covered by the Guidelines. Thus, the majority attached importance to the purpose and the wording of the Guidelines.


Specifically, the majority found that they were not sufficiently informed about the case to make a conclusive decision on the plaintiff’s complaints. However, on the existing basis, the complaints could not be dismissed as unwarranted and, therefore, the bank was preliminarily ordered to reimburse the payments.


The ruling of the Eastern High Court

The High Court reached the decision that the Guidelines according to its wording only applies to payment systems with credit cards. The High Court stated that an amendment of the Guidelines is necessary before they may also be applied to payment systems without debit cards.


As neither the Guidelines nor the wording of section 4(3) (formerly section 12a) of the Act on Certain Means of Payment contained a detailed definition of the term “payment systems” the field of application of the provision had to be determined by a natural understanding of the text. According to such interpretation, only payment systems encompassing the parties who, apart from the card issuer, has concluded an agreement herewith on placing, receiving or conveying a payment by using the credit card are covered by the Guidelines.


In this connection, the High Court emphasised that only a payment agreement and not an agency agreement had been concluded between VISA and PayPal. Thus, PayPal was only entitled to receive payments. According to the opinion of the High Court, the Guidelines could not be extended to encompass a payment receiver that is not covered by the payment system in question. P’s payment to PayPal was, therefore, considered to be a separate payment and the subsequent reimbursement could not be warranted in the Guidelines. The temporal convergence between the two payments did not change this fact.



The importance of the ruling

Specifically, the ruling of the High Court entails that payments arranged for by payment providers on the Internet are considered separate payments. Such payments are, therefore, not payments directly to the seller. In case of payments which take place through more than one party only the first payment is covered by the Guidelines.


Generally, the ruling entails that only payments with credit cards directly between the consumer and the seller will be covered by the Guidelines until a possible amendment hereof takes place. Consumers who do not pay directly to the seller or, for example, pay via an account transfer therefore achieve a significantly poorer legal position than consumers paying directly or by credit card in that the former will not be able to demand for their payment to be reimbursed in case of absent or imperfect delivery.


In December 2008, the Ministry of Economic and Business Affairs sent a bill on amendment of the Act on Certain Means of Payment for consultation. Among other things, it is suggested that rules on “charge-back” are established. It appears from section 74 of the bill that in cases of payment transactions in connection with agreements on purchase of goods or services by remote sale (including online shopping) which are made possible through a payment instrument, payer’s provider must refrain from carrying out the payment transaction or, if the debit has been carried out, immediately credit the payer’s account if the amount debited is higher than the amount which has been agreed with the receiver of the payment, the goods or services ordered have not been delivered, or payer or the stated receiver have made use of an agreed-upon or statutory right of cancellation by abstaining from receiving or picking up the goods or services ordered.


If the bill is adopted with the present wording of section 74, the field of application of charge-back will be extended to cover all payments which have taken place with the payment instrument. Furthermore, section 74 legalises the former legal position and the PayPal ruling will be of no importance for future payments. The bill is expected to be proposed on 28 January 2009.


If you have questions regarding the ruling or require additional information on the rules on remote sale and online shopping, please contact attorney Dan Moalem (


The above does not constitute legal counselling, and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.