Only the other day, Sinclair Davidson and I were debating the nature of bank fees and whether they were penalties. In that post, I noted the case of Andrews v Australian and New Zealand Banking Group [2011] FCA 1376 where customers of the ANZ were suing it in relation to a variety of fees the bank had charged them. I noted that the matter had gone on appeal to the High Court, but pessimistically predicted that Gordon J’s judgment would be upheld (with a caveat that I’ve been wrong before).
The breaking news is that I’m glad I added the caveat becuase I was wrong. The Press Release from the High Court this morning in relation to Australian and New Zealand Banking Group v Andrews [2012] HCA 30 says as follows:
On 5 December 2011, the Federal Court held that only the late payment fees were payable upon breach of contract. Following the decision of the New South Wales Court of Appeal in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292, the primary judge held that the penalty doctrine was limited to breaches of contract and thus could only be applied to the late payment fees. The applicants sought leave to appeal to the Full Court of the Federal Court of Australia.
…
The High Court unanimously rejected the proposition that the penalty doctrine applies only where there has been a breach of contract. The question is one of substance rather than form. The Court also rejected the proposition in Interstar that the doctrine had been absorbed into the common law. The fact that the honour, dishonour, non-payment and over limit fees were not payable for breach of contract did not prevent them from being characterised as penalties. It will be for the Federal Court on the further hearing of the matter to decide whether these exception fees are penalties.
The judgment is not available yet. But I can’t wait until it is. (Pity I’ve still got 20 papers to mark). I will do a post on it in more detail as soon as I’m able.
Update:
The full High Court judgment is available on Austlii now. More anon.
11 Comments
Having read the judgement (a few times) I’m still a little unclear as to exactly what a ‘penalty’ involves, other than the fact that in involves an (implied) obligation to not do something but in a way that doesn’t have to be a promise and therefore not necessarily a contractual obligation.
Perhaps to put it another way by applying it to the relevant case: If there’s a condition (attempting to overdraw an account) that triggers another term (a fee), and the contract is structure in a way that according to an objective reading of the contract the condition ought not occur (thou shalt not overdraw thy account), then the liability created by the term (fee) is limited to the damage of the condition (overdrawing the account). An alternative way to consider would be whether the contract is objectively seen as designed to discourage the occurrence of the condition (overdrawing) rather than present it a legitimate option (as per the “in terrorem” reference at [10]).
The reference to Metro-Goldwyn-Mayer at [82] would seem to suggest that to consider a party penalised the party must already have the right to invoke the condition (notwithstanding the condition and term in question). If the condition and term imply the creation of additional rights (rather than restricting existing rights) then the term won’t be a penalty since it isn’t otherwise a legitimate option. This suggests a way the banks could construct their contracts to avoid the wider penalties doctrine described in this case. Of course that case could also be explained by the difficulties in measuring damages incurred due to the additional showing of the film.
As far as bank fees go, I think it’d be fairly clear that a person doesn’t have a pre-existing right to overdraw their account. It would seem also that the account holder should not overdraw the account even though they don’t contractually promise not to do so, particular in light of clause 2.12 of the PDS quoted at [24] (I haven’t read the rest of the PDS to see how it fits in context). However, the question that seem to be sent back by the High Court is whether a person has a right to attempt to overdraw their account. That is, does the account holder bear responsibility to know the amount of funds account, or is it reasonable for them to rely on the bank to inform them when they lack the funds they are attempting to withdraw. In my opinion. in an age of automated transfers, direct debits and ‘instant’ electronic transactions, the bank will have a distinct informational advantage in determining the status of the account and therefore it is reasonable for someone to rely on the bank to inform them of the sufficiency of the funds in their account by attempting to authorise transactions even though it might overdraw their account.
This would mean that at the least, the dishonor and non-payment fees would seem to be penalties. The over-limit fees however would be about the bank granting, and the account holder taking advantage of, additional rights (additional overdraft/credit) that would not exist without the same contractual terms containing the fees, and therefore not necessarily constitute a penalty. The honor fees would seem to be somewhere in between, although I would hope that withdrawing an account an additional few dollars beyond an already overdrawn amount would not constitute an ‘additional right’ within the context of this doctrine.
To put my comment above in ‘plain English’ the Federal Court ruled (via common law) that if you promise:
(A) To do X;
and also promise:
(B) If you don’t do X, then to do Y;
and you don’t do X; then you can pay damages for breaching promise (A). By paying damages for not doing X, you have done the legal equivalent to doing X and therefore not triggered promise (B). Thus effectively the penalty for not doing X (whether payment or otherwise) is limited to the damages from not doing X.
The High Court added common sense (via equity) that if you kinda-sorta promised to do X then the penalty shouldn’t be worse than if you really-truly promised to do X (as above).
In the case at hand: X is to not (attempt to) overdraw the account and Y is pay a fee.
(Two further observations are that your link to the Federal Court case is borked, and that pinot noir does wonders for contract law).
Legal Eagle quoted behind The Australian paywall:
Okay, High Court unanimously rules that ANZ bank exception fees (honour, dishonour, late payment, overlimit) are capable of being penalties unenforceable in law.
Now enter the expert cost-accountants for the next year or so to argue as to whether the amount of the fees charged were out of all proportion to the damages likely suffered. The out of proportion bit, if it is proven, is the penalty component of the fees, with the other bit the quite legal compensation for damages the bank is entitled to charge as an innocent party for the customer’s conduct.
For example, is a $29.95 overdrawn fee excessive given all the direct and indirect costs to track and hunt it down? I tend to think so but the cost-accountants might persuade the court that it this is reasonable in the circumstances.
Still, even if the bank customers fail on a penalty argument they have unconscionable conduct arguments to pursue.
Thanks Desipis, linky fixed. I agree with you that I think that ultimately the fees will be penalties, because the way I read the use of Metro-Goldwyn Meyer is that it’s all about whether the fee is a genuine payment for a service, or whether it’s really an in terrorem payment. Which brings us back to David’s point that it will depends on how the cost accountants spin it. The original report on all this by Nicole Rich suggests that the fees are many time (sometimes many, many times) what it costs the bank to provide that service. Watch this space.
P.S. David, thanks for pointing out the article to me! I haven’t had time to chase it up because I’ve been teaching and marking, and writing a post on the judgment!!! Will post it directly.
Desipis, you have set off a train of inquiry in my mind. The post will have to wait until tomorrow, because I want to see if the court in Metro-Goldwyn-Meyer made any consideration of the reasonableness of the additional fee in that case, and made any statements about the value of the additional fee having to in some way reflect the value of the service. It seems to me that a court should make this inquiry, because otherwise we’re back at an Interstar position again – companies can get around the rule against penalties by simply drafting the contract as two alternative stipulations, where the other party gets a right for a greater fee – and it doesn’t matter how exorbitant that greater fee is. But being a NSWR decision, it’s not available online on any databases (god I hate those less official reporters which are not readily available online). So will have to visit my library at work tomorrow.
LE @7
Yes, however since 1 July 2010 as part of the Australian Consumer Law we have a single, national consumer law relating to unfair contract terms. Under the ACL, from 1 July 2010 unfair terms in standard form consumer contracts are void.
What is an unfair term?
ACCC and ASIC provide guidance of a key feature (among other things):
David, yes, I noted the ACL provisions in the comment thread to the previous post.
The first hurdle (not an insurmountable one) is that I’m not convinced that these kind of contracts fall easily into a category listed under s 25 ACL (although the list is not conclusive, as I noted earlier, it’s much easier to void a clause if it does fall within the list clearly).
But secondly, even if the courts are prepared to entertain the argument it might be unfair (and if I were a judge, I might be persuaded to do so)…I’m not convinced this provides an easy answer either, because you just run into the same queries as you would under penalties law – i.e. is the term reasonably necessary to protect the legitimate interests of the Bank? Is it simply a fair fee for the service provided? And so we go around again with the same kinds of query as before.
Anyway, we shall see whether my pessimism is warranted. I was wrong on which way the HCA would go (should have read my Pomeroy!) so I’m wary of being too definitive here.
LE @9
I’m catching up:
1. SMH Article on bank fees
2. Michael Pascoe has a go at lawyers and litigation funders
3. Sinclair Davidson posts on Catallaxy
4. LE first article on topic
Yep, that’s the timeline! I must say, I was incredibly excited when the decision came down. I had told my Remedies students just this Tuesday while we were looking at the topic of penalties that I thought we might have to wait a while. Hah!
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[...] really penalties designed to force the other party to comply with their part of the bargain? In comments on an earlier post, Desipis argues as follows: [T]he dishonor and non-payment fees would seem to be penalties. The [...]