The Federal Court yesterday decided in a class action against ANZ that four of the five "disputed" fees charged by the bank to its customers were legitimate and not liable to be set aside as penalties1. The Court determined that honour fees, dishonour fees, over-limit fees and non-payment fees were legitimate fees for services provided by the bank.
The claimants were, however, successful in establishing that late fees charged on credit cards were potentially a penalty and may be unenforceable, although further evidence is to be received on that issue before a final determination is made. The class action brought by litigation funder IMF and lawyers Maurice Blackburn claims around $50 million for about 34,000 customers. Other banks are said to be targets depending on the outcome of the case. Yesterday's decision will have banks and credit providers breathing easier, despite press reports implying otherwise.
Is that a penalty?
Various claimants to the class action contend that charges debited to their accounts by ANZ were unenforceable penalties and are liable to be refunded. Broadly, the charges were applied in circumstances where a customer's account became overdrawn beyond agreed credit limits. Unsurprisingly, a consideration of these issues rested heavily on the case law applying to the law of penalties and the terms and conditions of the various facilities between ANZ and their customers.
As to the law of penalties, the Court conducted a sweeping review of the development of the law in the area and concluded as follows:
- contrary to submissions by the claimants) that the law of penalties is confined to payments upon breach of contract
- a contractual stipulation will be a penalty where a contract "stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach,"2 and
- the law of penalties is a very discrete exception to the rule that courts should give prominence to the position that parties should be free to agree upon the terms of their bargain.
As to the common law underpinning the relationship of banker and customer, the Court noted the following uncontentious principles:
- the relationship between banker and customer is in contract
- where a customer issues a payment instruction or withdrawal request to its bank which would result in the customer's account becoming overdrawn, that act is considered a request by the customer for an advance or loan which the bank may, in its discretion, approve or refuse, and
- if a customer without an overdraft facility does something to cause the account to go into overdraft, that act is considered a request to their bank to grant an overdraft on its usual terms and conditions.
Having considered the common law in relation to penalties, the banker and customer relationship, the relevant terms and conditions and the legislative framework, the Court considered that the honour fees, dishonour fees, over-limit fees and non-payment fees were legitimate fees for services provided by ANZ.
Critical to such a finding was the following matters:
- ANZ retained a discretion (both as a matter of law and construction of its terms and conditions) to allow or disallow transactions which would exceed agreed contractual limits
- the customers' actions in overdrawing the relevant accounts were not unilateral. As the Court noted in relation to the honour fees charged: "It was an action that required the consensual conduct of the bank and the customer. That is not, and cannot be, conduct constituting a breach of some contractual obligation. If ANZ agreed to and approved a transaction that overdrew a customer's account (thereby allowing the transaction to proceed), the customer could not then be in breach of its contract with ANZ,"3 and
- accordingly, the exercise of discretion was seen by the Court to be inconsistent with the fee being payable on breach of a term or condition (which, as above, is a pre-requisite to the prospect of a penalty arising). Rather, the fee was payable upon the bank meeting a request from a customer.
Penalty – credit cards?
Clause 22 of ANZ's Credit Card Conditions of Use 2004 - read with the Account Fees and Charges October 2003 - imposed a late payment fee that would be charged if the 'Monthly Payment' plus any 'Amount Due Immediately' shown on the statement of account was not paid within 28 days of the statement date. In examining whether or not this fee might constitute a 'penalty', the Court questioned whether the proper construction of these provisions imposed a late payment fee as a result of the customer's breach of these provisions. The Court held that it did.
Whilst ANZ accepted that the charge was not a genuine pre-estimate of its damages, it argued that properly characterised, the late payment fee was a fee charged by it as part of the operation of the account and in respect of the increased risk of default in repayment of the amounts borrowed. However, in finding that the charge was a payment consequent upon breach of contract, the Court stated that the issue is simply to characterise the contractual stipulation and determine the consequences, if any, for failure to comply with it. In this instance there was a clear consequence for failing to pay the monthly fee when required: namely, the charging of a fee.
That said, the Court noted that it is for ANZ to justify the size of the fee in "Stage 2" of the proceedings and, in undertaking that task, it may seek to attribute some part of the fee to credit risk. This was not a question of fact or law that the Court was required to determine at this stage of proceedings and accordingly, the issue as to whether the fee is truly a penalty will be determined at trial.
Whilst a cursory glance of the media suggests that the decision is impliedly a "win" for the claimants, that is not so. As above, four of the five charges were found not to be penalties on the basis that they did not arise as a result of any breach of contract by ANZ's customers. Indeed, if ANZ is able to convince the Court that the fees charged following late payments of monthly credit card transactions are referable to an overarching cost of doing business, then those charges might also not be penalties.
Reassuringly, the decision underlines the primacy that the Courts continue to give to established "banker and customer" principles and the contractual provisions applying to financial products issued by banks. In essence, a penalty cannot arise in circumstances where the effect of a transaction is for a customer to request an indulgence of their bank. Absent a breach of contract, the law simply refuses to countenance an argument that a charge applied by a bank is unenforceable as a penalty.
When "Stage 2" of the proceedings reconvenes, it is sure to be keenly watched by bankers, lawyers and commentators alike.
1 Citing Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656
2 At paragraph 182. These comments were also broadly applicable to all other charges, apart from those relating to late fees payable on credit cards.
3At paragraph 182. These comments were also broadly applicable to all other charges, apart from those relating to late fees payable on credit cards.
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