Reversal of fortunes

Sydney businessman Ian Brookfield used his Commonwealth Bank Platinum MasterCard to pay a $150,000 deposit for a $550,000 boat in March last year.

The boat builder, Sunseeker, failed before the boat was finished. Sunseeker went into administration and had receivers appointed late last year.

Brookfield sought to use the card's chargeback facility (reversing a transaction when there is a dispute with a merchant, typically when goods or services are paid for but not supplied) to get his money back.

The CBA lodged a chargeback request on his behalf in March with National Australia Bank, Sunseeker's bank.

The request was knocked back, as was a second one, put through in June.

Brookfield's case highlights the problems consumers have in understanding chargeback rules, dealing with financial institutions and getting consistent treatment.

A couple of cases cited by the Financial Ombudsman Service (FOS) in a recent report also illustrate the uncertainty about chargeback rules.

Credit and debit card issuers say chargebacks make for a more secure transaction. They are also used to correct duplicate billing, to fix a bank processing error and to deal with fraud.

The CBA wrote to Brookfield in July, telling him NAB had declined the request because it was out of time.

Card issuers set a time limit for chargeback applications of 30 to 75 days. The limit may apply from the date of the transaction or the agreed delivery date.

When Brookfield paid his deposit, the contract was to be finalised in December. He received notice from the receivers that the contract would be completed and he could take delivery of the boat.

Brookfield says the boat offered was deficient in a number of ways, including no warranty.

He says: There was still about $40,000 of work to be done on the boat. And with no warranty, my financier would not settle.

Brookfield is now in dispute with CBA, arguing its statements about chargebacks are misleading and it has a responsibility to credit his account for the $150,000.

He also claims the CBA mishandled the first chargeback application because it had assumed there was no set date for delivery of the boat, which would affect the chargeback timeframe applied by NAB.

Brookfield says his contract with Sunseeker had a completion date of December 12 and the bank should have been aware of that. He says the fact it did not include that information in his first application hurt his chances of a refund.

The CBA wrote to Brookfield in July, saying the bank had lodged a chargeback as requested and there was no obligation under chargeback rules to credit the customer's account. The outcome of the chargeback application is in the hands of the merchant's bank. Brookfield is also in dispute with NAB, which contends he was offered a finished boat and did not complete the transaction. He is arguing the boat was not completed to the terms of the contract.

NAB engaged Freehills to look into the matter and, on August 18, Freehills partner Peter Smith wrote to Brookfield with a response on the bank's behalf. The bank rejects Brookfield's claim that the terms of the contract were not fulfilled. It also points out that Brookfield had sought to buy the boat at a discount from the receiver, offering $170,000 on top of the $150,000 already paid.

CBA and NAB declined to comment on the case.

Whatever the merits of the different claims, Brookfield's case suggests the chargeback system is not as clear as card issuers claim and consumers are not aware of the rules.

It can be difficult to negotiate settlements when consumers have to communicate with their own banks but the ultimate decision is with the merchant's bank.

Brookfield is not alone, as a report by the FOS shows. In one case cited by the FOS, the consumer made a $1500 payment using a MasterCard credit card to join a travel club. The person then had a change of mind and used the 14-day cooling off period to ask for a refund. When the travel club failed to pay the refund (and later disappeared), the person contacted his bank to have the transaction reversed.

The bank said because the person had participated in the transaction, the chargeback could not go ahead as an unauthorised payment. For the transaction to be reversed, the bank would need to see a credit voucher from the travel club. Even when it was clear the club no longer operated, the bank maintained the same position.

The ombudsman's view was that because the consumer had cancelled the contract, the bank should have taken into account that the travel club had a legal obligation to issue a credit voucher. In the end the bank coughed up the $1500.

How the system works

A typical chargeback situation arises when goods are paid for using a credit or debit card and are not delivered.

If that happens, you notify the institution that issued the card. The issuer will investigate the case and when it is satisfied you are entitled to reverse the transaction, it will credit your account. It can take a few weeks to get the money back.

Behind the scenes, the bank that issued the card will then chase the merchant's bank to recover that money. Ultimately, it is the merchant's bank that has to make good on the failed transaction.