The next chapter in the class action litigation challenge to bank fees

The Full Court of the Federal Court has delivered another twist in one of Australia’s largest class actions, overturning the decision of the primary judge that some of ANZ’s bank fees were void for being penalties.

The Full Court stressed that such fees will only be void if they are ‘extravagant and unconscionable’ and that the fees in this case did not clear that ‘high hurdle’.

The background to the case

The case concerns a challenge to a number of bank fees imposed by ANZ. While the bank fees all contained different terms and conditions and were imposed in a variety of different circumstances, they can largely be grouped into four categories:

• Late payment fees – which were charged on credit card accounts at a flat rate whenever a customer failed to make a repayment by a nominated time.
• Overlimit fees – which were charged on credit card accounts whenever a customer initiated a transaction on their card which, if accepted by ANZ, would put the account over its credit limit.
• Honour fees – which were charged on business accounts where ANZ chose to honour a request for payment that would put a customer’s account into overdraft.
• Dishonour fees – which were charged on business accounts where ANZ chose not to honour a request for payment that would put a customer’s account into overdraft.

Justice Gordon, in her decision at first instance, had determined that the late payment fees could be characterised as a penalty.

The penalties were declared void because they did not bear any relationship to the loss or damage that ANZ could have claimed for a breach of the obligation to pay on time.

Her Honour found that the overlimit fees, honour fees and dishonour fees were not penalties, but fees which were legitimately chargeable by ANZ for providing a service beyond the scope of the original contractual obligation (namely, considering and processing a request by the customer for an extension of credit).

ANZ appealed the decision that the late payment fees were penalties. The plaintiffs appealed the decision that the other fees were not.

The law of penalties

The class action had previously been to the High Court to seek a clarification of the legal framework which would apply when considering whether the bank fees should be considered penalties.

Based on the guidance provided by that case, both Justice Gordon and the Full Court approached the question of whether a fee was a penalty as an exercise made up of a number of sub-questions. Those sub-questions can be summarised as follows:

1. Is the fee payable for a breach of a contract or for the failure of some stipulation in the contract (such as that repayments will be made on time, or that the account will stay within a defined credit limit)?
2. Is the amount of the fee extravagant and unconscionable having regard to the greatest loss that could conceivably be proved by ANZ to arise from the breach of contract or failure of the stipulation?

If the answer to both questions is ‘yes’ then the bank may not charge the fee, but may instead charge a lesser amount representing its true economic loss from the breach of contract or failure of the stipulation.

The Full Court’s decision

The Full Court dismissed the plaintiff’s appeal and upheld ANZ’s appeal.

In relation to the plaintiff’s appeal, the Full Court agreed with Justice Gordon that the overlimit fees, honour fees and dishonour fees were not penalties, as they were not payable for a breach of contract or the failure of the stipulation that the account remain within a defined credit limit.

The fees were not penalties because they were payable upon ANZ assessing whether or not to allow the transaction to be processed. In doing so, ANZ was providing a service to the customer in that it was assessing a request by the customer to extend credit (or further credit) to the customer that ANZ was not otherwise obliged to provide. The Full Court held that ANZ was entitled to charge a fee for performing that service even if that fee was greater than the cost of providing the service.

Because the answer to the first question was ‘no’, it was not necessary to consider whether the fee was extravagant and unconscionable having regard to the greatest loss that could conceivably be proved, or if that amount could be recovered by ANZ as its true loss.

In relation to ANZ’s appeal on the late payment fees, the Full Court agreed with Justice Gordon that the answer to the first question was ‘yes’. That is, the late payment fee was payable upon the failure of the customer to make the payment on time. The failure to pay on time did not, as argued by ANZ, amount to a request by the customer for an extension of credit.

However, the Full Court disagreed with Justice Gordon on the answer to the second question. They did not agree that the amount of the late payment fee was ‘extravagant and unconscionable’ having regard to the greatest possible loss that could be proved by ANZ to arise from the customer’s failure to pay on time.

They identified three key errors in the way that Justice Gordon had approached this second question. They were as follows:

• First, the Full Court considered that Justice Gordon placed too much weight on the fact that the same fee was payable by the customer regardless of the severity of the breach. That is, the same amount was payable by a customer who was one day late in paying one cent as was payable by a customer who was several months late in paying many thousands of dollars. The Full Court found that this was a relevant consideration, but should not have been treated as determinative.
• Second, when Justice Gordon assessed the ‘greatest possible loss’, her Honour did so by considering the actual circumstances of the breach that had occurred in the case before her. That was an impermissible approach because the assessment must be carried out as at the time that the contract was entered into, when the particular facts of the subsequent default would not have been known.
• Third, Justice Gordon confined her consideration of the ‘greatest possible loss’ to the amount of loss that would be recoverable in an action for breach of contract. This meant that her Honour dismissed some of ANZ’s costs, such as provisioning for greater risks of non-recovery on overdue accounts. The Full Court said that while these costs may not be recoverable in an action for breach of contract, they formed part of ANZ’s legitimate economic interests that the imposition of the fee sought to protect.

Comment

Many businesses, from construction companies to landlords to financial institutions, impose fees, charges or liquidated damages that could potentially be subject to the law of penalties.

The approach taken by the Full Court – particularly in expanding the definition of ‘greatest possible loss’ to include damage to economic interests that would not be protected by an award of damages – greatly increases the ability of businesses to impose fees and charges in their standard terms and conditions.

However, the law of penalties remains a highly technical and complex area of law, and it is easy for provisions to be declared void if they are not carefully drafted and regularly reviewed to ensure that they comply with the evolving case law.

It is also important to bear in mind that the approach taken by the Full Court may not be the approach that ultimately prevails. The lawyers for the plaintiffs in the class action have already vowed to return to the High Court to appeal this decision, so any business that is concerned about this area of law should continue to follow developments in this case.