A court has found that the Financial Ombudsman Service is required to have regard to the application of legal principles when making a determination but it does not have to apply legal principles to the exclusion of other considerations.A debt purchaser and credit manager, Pioneer Credit, claimed that FOS breached the terms of its membership contract when it made an error of law in disputes involving Pioneer and several debtors.Pioneer relinquished its FOS membership and refused to pay $112,419 of fees. In a Supreme Court of Victoria ruling handed down last month, Justice Anne Ferguson rejected Pioneer's claim and ruled that FOS could order Pioneer to pay the fees with interest.Pioneer joined FOS in 2009. Around the same time it purchased about 2000 credit card debts that had been originated in the United Kingdom - most of them by Barclays Bank. Pioneer set out to recover the debts of borrowers living in Australia. Between July and December 2009 FOS received ten complaints concerning Pioneer's attempts to recover some of the acquired debts from Australian residents.The complaints raised questions about whether Pioneer had complied with ASIC's Debt Collection Guide and whether Pioneer has breached both the Privacy Act and the Credit Reporting Code of Conduct by listing defaults on the borrowers' credit files.In an initial finding, FOS found that the debts were unenforceable in Australian courts. Pioneer submitted that FOS did not decide the question of law correctly and that, having made an error of law, it was in breach of its membership contract.Under the FOS terms of reference, it aims to resolve disputes having regard to law, applicable industry codes or guidelines, good industry practice and fairness.Pioneer submitted that there were also implied contract terms, which FOS breached. These implied terms included a requirement that FOS must correctly decide a question of law, and not make a decision that a tribunal would not reach based on evidence.Ferguson rejected the argument about the implied terms. She said: "In my opinion there is no implied term such as that contended for by Pioneer and thus no breach of the membership contract. "FOS is only required to have regard to applicable legal principles. It is also clear that that is only one of the matters to be taken into account."It cannot be said that FOS is required to apply legal principles to the exclusion of all else, nor that it will be in breach of the membership contract should it fail to apply the law strictly."The question of FOS's adherence to legal principles has long been controversial. A number of submissions to a review of FOS by consultant Cameronralph Navigator last year argued that its determinations were too subjective and did not pay enough attention to legal principles.For example, Allianz Australia said in its submission: "We would like to see more regard paid to legal principles, including the laws relating to contracts, when considering a dispute. We regularly see a 'fair and reasonable' test taking precedence over the rules a court would apply."Like