The Bank Fees Case

Aug 8 2016

Publications

Industries which charge fees such as late payment fees, honour, dishonour and non-payment fees, and overlimit fees including the banking, telecommunications and utilities industries can breathe a sigh of relief following the High Court’s decision to uphold the entitlement of Australia and New Zealand Banking Group Limited (ANZ) to charge its customers various fees.

Recently the High Court handed down its decision in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 upholding the entitlement of Australia and New Zealand Banking Group Limited (ANZ) to charge its customers various fees, including late payment fees. This affirms the decision of the Full Federal Court that overturned the first instance judgment of Gordon J (now a member of the High Court) in 2014, where her Honour held that ANZ’s late payment fees in banking contracts were unenforceable as penalties.

Background

In 2013, a class action was launched against ANZ challenging the validity of various fees (described as ‘exception fees’) charged by ANZ on the basis that they were penalties or were the product of unconscionable or unjust conduct. The fees in question included credit card late payment fees, honour, dishonour and non-payment fees, and overlimit fees. There are a number of other institutions facing similar class actions in relation to fees charged such as NAB, Citibank, Commonwealth Bank, Westpac, as well as telecommunication companies such as Vodafone, Optus and Telstra.

In February 2014, in the Federal Court, Gordon J determined that the credit card late payment fees were penalties, as they were payable upon breach of contract and were not a genuine pre-estimate of damage or loss that ANZ would suffer. Her Honour found that the fees were “extravagant and unconscionable” when compared to the actual loss suffered by ANZ as a result of late payment. Justice Gordon did not therefore decide whether the ANZ breached any statutory provisions dealing with unconscionability. However, the other fees in question were found to be of a different character and did not constitute penalties at common law or in equity. The liability to pay these fees was held to arise in exchange for a further service from ANZ.

ANZ appealed Justice Gordon’s decision to characterise late payment fees as penalties, and the customer cross-appealed on the finding that the other fees were legitimate and not penalties. On appeal, the Full Federal Court overturned Justice Gordon’s finding that the late payment fees were penalties. The Full Court also held that the fees did not fall within any of the statutory categories of unconscionable conduct, unjustness or unfairness. The Court otherwise affirmed her Honour’s decision that overlimit, honour and dishonour fees were not penalties.

The High Court decision was handed down on 27 July 2016 in favour of ANZ. The case was run as two separate proceedings:

  1. whether the late payment fee (‘LPF’) was a penalty at common law; and
  2. whether the LPF breached any statutory provisions dealing with unconscionability;

Although four judges found that the LPF was not a penalty and did not breach any statutory provisions, they each delivered separate judgments. There are, however, a number of common findings:

  • The test for determining whether a fee could be categorised as a penalty does not depend on whether the fee is a genuine pre-estimate of loss suffered as a result of the breach but whether it was extravagant, exorbitant or unconscionable or disproportionate.
  • To assess whether a fee is ‘extravagant, exorbitant or unconscionable’, the court should assess the fee against the greatest loss that could conceivably flow from non-payment, assessed at the time the contract was entered into rather than retrospectively. It was also appropriate to consider the broader commercial interests of the bank in relation to late payment: provisioning costs, costs for maintaining regulatory capital and costs related to running a collections department could all legitimately be taken into account even though they might not be recoverable in an action for liquidated damages against a customer who was in breach of the relevant loan contract.
  • Courts will be reluctant to interfere with freedom of contract even where the contract is standard in form and where the customer has little bargaining power to negotiate the terms.
  • The onus lies with the customer to demonstrate that a fee is extravagant or unconscionable as at the time of entering into the contract.
  • None of the imposed fees breached any statutory prohibitions under the Australian Securities and Investments Commission Act 2001 (Cth), the Fair Trading Act 1999 (Vic) or the National Credit Code relating to unconscionable or unfair conduct. ANZ had properly disclosed the fees to the customers when they entered into the loan contract. Further incurring of the fees did not arise out of the actions of ANZ, rather the fees could have been avoided by the customer complying with the loan contract. The court also found that ANZ had acted honestly and in good faith in disclosing the fees upfront.

Observations

The Chief Justice of the High Court, French CJ, makes some interesting comments about the apparent divergence of the common law in Australia from that of the common law of the UK, especially following the High Court decision in Andrews. Nevertheless, the separate judgments all refer to the House of Lords decision in Dunlop Pneumatic Tyre Co Ltd v New Garage and tor Co Ltd [1915] AC 79.

Interestingly, in 2012, the High Court handed down its decision in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30.  The High Court in that case held that in Australia, contrary to the accepted position in England (and the remainder of the common law world), the penalty doctrine is not confined to obligations arising from a breach of contract.  The penalty doctrine can operate where a stipulation, regardless of whether or not it is activated by a breach of contract, is in substance penal. However, in Paciocco, the High Court accepted that the late payment fees were incurred as a result of breach of contract and so it was not necessary to consider Andrews although it was noted by the High Court that the UK Supreme Court (the successor to the House of  Lords) has taken a different view on this point.

Implications

The High Court decision upholds freedom of contract even where there is disparity of bargaining power and the use of standard form contracts.

It also upholds the enforceability of contractual provisions entitling banks to charge various fees that may be far greater than the bank could expect to recover in damages providing they are not extravagant, exorbitant or unconscionable or disproportionate. The decision addresses an area of significant business risk since the High Court’s expansion of the doctrine of penalties in Andrews in 2012 and the decision of Gordon J in Paciocco at first instance in 2014.

Additionally, this decision is of significance, not only to the banking and finance industry, but also to the telecommunications, utilities and other industries which charge fees similar to those considered in Paciocco and which would have been subject to class actions if the High Court had decided against the ANZ.

Written by:
Neil Hannan | Partner | +61 3 8080 3589 | nhannan@tglaw.com.au
Nicholas O’Connell | Lawyer | +61 3 9641 8721 | noconnell@tglaw.com.au