Australia: What bank fees constitute penalties?

Insurance Update March 2012

Bank fee Class Action

Judgment was handed down late last year by Gordon J in John Andrews & Ors v Australian and New Zealand Banking Group Limited [2011] FCA 1376. This judgment dealt with the declarations sought by the applicants that the arrangements between ANZ and the applicants in relation to ANZ charging an exception fee on the accounts in question are void and unenforceable as they amount to a penalty, and required the determination of Separate Questions which identified certain specific Exception Fees charged by ANZ to account holders in relation to an identified ANZ account.

The applicants in the proceedings were customers of ANZ seeking declarations that Honour Fees, Dishonour Fees, Over-limit Fees, Non-Payment Fees and Late Payment Fees (Exception Fees) charged by ANZ on a variety of accounts, could constitute a penalty and as such were unenforceable or void.

Gordon J found that of these Exception Fees only the Late Payment Fees could constitute a penalty. Her Honour based her reasoning on an analysis of the contractual and regulatory framework which underpins each of the Exception Fees and found that only the Late Payment Fees which were charged in respect of late payments in respect of consumer credit cards could be characterised as a fee charged as a result of a breach of contract and were therefore the only category of the Exception fees that was capable of being characterised as a penalty. In making that finding Her Honour pointed out that it was accepted that the Exception Fees did not constitute a genuine pre-estimate of damage. However, consideration of the quantum of the Exception Fees and, in particular, whether that Exception Fee was out of all proportion to the likely damage suffered by the ANZ was deferred to a later hearing.

Law of Penalties

The case provides an excellent summary of the development of the law on penalties in both England and Australia. Her Honour made the observation at the outset that "the law of penalties is a narrow exception to the general rule that the law seeks to preserve freedom of contract, allowing parties the widest freedom, consistent with other policy considerations, to agree upon the terms of their contract. Equity, however, continues to play a role in the law of penalties, a law which is confined to payments for breach of contract."

In their assertion that the Exception Fees constituted a penalty, the applicants sought to construct an argument that the law of penalties was not confined to payment made upon breach of a contract, but also applied to payments made upon conditions or events lying within the areas of obligations of the party required to make the payment. They referred both to past decisions and the historical origins of penalties.

After extensive and careful analysis of the law of penalties, Gordon J in rejecting this characterisation or broad definition of a penalty, made the following conclusions with respect to the law of penalties:

  • The law of penalties is a narrow exception to the general rule that the law seeks to preserve the freedom of contract.
  • To the extent that there are judicial statements to the effect that breach is not an essential element, this is limited to the applicability of the law of penalties to lease and hire purchase agreements governing the consequences of termination of these agreements. The state of the current authorities in respect of contractual payments upon termination is that the law of penalties is only applicable where the agreement is terminated for breach of contract.
  • Where the contract has provided for a sum or amount to be paid upon breach of the contract, the question as to whether the sum is a penalty is a question of construction to be decided upon the terms of and inherent circumstances or each particular contract.
  • A sum will be a penalty in circumstances where it is considered to be extravagant and unconscionable in amount by comparison to the greatest loss that could conceivably be proved to have followed from the breach or could not be considered a genuine pre-estimate of loss that would flow from the breach.

Whether the Exception Fees Constituted a Penalty

In rejecting the applicant's assertion that Honour Fees, Dishonour Fees, Over-Limit Fees and Non-Payment fees were penalties, Gordon J first characterised the relationship of a saving or deposit account as being, in law, a loan to the bank whereby the bank borrows the money and proceeds from the customer who undertakes to repay them on demand.

On the other hand, where an issue of a cheque by a customer or the giving of a payment instruction to the bank would have the effect of overdrawing the customer's account, Gordon J construed this as a request by the customer for an advance or loan from the bank, which the bank has the discretion to approve or disapprove.

Accordingly, Her Honour found that:

  • The action of overdrawing an account is not a unilateral action by the customer. It is an action that requires the consensual conduct of both the bank and the customer and as such, cannot be construed as conduct constituting a breach of some contractual obligation. In other words, if the bank agrees to and approves a transaction with the effect of overdrawing a customer's account, the customer cannot then be in breach of its contract with the bank.
  • Similarly, in circumstances where the bank exercises its discretion and refuses to approve a payment instruction that would have the effect of overdrawing the customer's account and in doing so charges the customer a Dishonour Fee, this is not a case of a breach of contract as no advance or loan is made and the account is not overdrawn.

In these circumstances the Honour and Dishonour fee are not payable on breach of a term or condition of the contract. Instead they are payable by a customer in response to a request for credit.

Her Honour reached similar conclusions in respect of Over-Limit Fees (charged in respect of credit card accounts) and Non-Payment Fees (charged in respect of an authorised Periodical Payment that is not made because there are insufficient funds in the account).

By contrast, her Honour held that the Late Payment Fees were charged to the customer as a result of the customer's breach of their contract, that being their failure to pay within the required time-frame of 28 days. Unlike the requests for loans, which are at the discretion of the bank, the failure to comply with the payment obligations within the stipulated time-frame is not at the discretion of the bank and therefore, constitutes a unilateral breach of the contract.

Accordingly, the Late Payment Fee could constitute a penalty if the amount being charged was not a genuine pre-estimate of damage or was out of all proportion to the likely damage caused to the bank should payment not be made within the required time-frame. This specific factual issue was deferred for hearing at a later date.


Her Honour's judgment is a good outcome for the banks given that Her Honour found that 13 of the 17 fees were not capable of being characterised as a penalty. However, in respect of those fees that her Honour found were not penalties, the applicants are not precluded from persisting with their claims for damages in respect of those fees being unconscionable.

The case provides a detailed analysis of the law of penalties in Australia and provides banks with a useful framework which can be applied to similar fees and charges being made to their customers and in light of this decision, other potential defendants should now analyse fees levied in the event of late payment to ascertain whether on a construction of the relevant contracts those fees can be construed as payable as a consequence of an event of default under the contract. The case also highlights the importance of being able to establish if necessary that these fees do in fact constitute a genuine pre-estimate of damage or that the fees charged are not out of all proportion to the damage caused.

An important question that arises from this decision is whether the applicants will obtain leave to appeal Her Honour's judgment direct to the High Court. The applicants have filed a special leave application. However, it remains to be seen, in circumstances where a significant number of issues remain unresolved in these proceedings, whether the High Court will entertain such an appeal at this stage, or whether the applicants will be required to conduct the whole of the current litigation before any appeal to the High Court can be entertained. Given that an appeal now would not resolve the controversy between the parties, we consider it likely that the High Court will deny an application for special leave at this stage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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