Speak of the devil: the High Court rules on penalties

By Legal Eagle

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.


The full High Court judgment is available on Austlii now. More anon.


  1. Posted September 7, 2012 at 8:50 pm | Permalink

    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.

  2. Posted September 7, 2012 at 9:51 pm | Permalink

    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).

  3. Posted September 9, 2012 at 7:40 am | Permalink

    Legal Eagle quoted behind The Australian paywall:

    University of Melbourne contract law expert Katy Barnett said the case could have an impact on any contracts, such as mobile phone contracts, that included a fee unrepresentative of a genuine pre-estimate of losses suffered.

  4. Posted September 9, 2012 at 8:07 am | Permalink

    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.

  5. Posted September 9, 2012 at 12:09 pm | Permalink

    LE @7

    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

    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):

    A term is unfair when it causes a significant imbalance in the parties’ rights and obligations arising under the contract and it is not reasonably necessary to protect the legitimate interests of the business and it would cause detriment to another
    party if it were to be applied or relied on.

  6. Posted September 9, 2012 at 6:14 pm | Permalink

    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

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  1. […] 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 […]

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