Earlier this month the Federal Court gave a boost to several class actions against banks when it ruled late fees charged by ANZ were penalties. It begs the question...which other industries that charge late fees will become targets for class actions?
In Andrews, the High Court changed significantly the accepted understanding of the penalty doctrine in Australia by ruling that a provision can be penal even if it is not triggered by a breach of contract (see Andrews v ANZ - Do all contracts need to be rethought?)
Since then, there has been much uncertainty about how the penalty doctrine operates. Some questions commonly asked are:
- Will courts be willing to strike down as penalties commercial bargains freely made between sophisticated commercial parties?
- Where there is no breach of contract, how will a party prove its loss?
- What will be the event triggering the loss?
On 5 February 2014, the Federal Court in Paciocco v Australia and New Zealand Banking Group Ltd  FCA 35 considered some of the issues raised by Andrews in detail.
Paciocco, like Andrews, is a class action brought against ANZ in respect of a number of categories of bank fees, on the grounds that the fees are penalties, unconscionable at law and/or charged in breach of certain statutory provisions which are designed to protect consumers.
THE DECISION IN PACIOCCO
The fees in question were seen as falling into two broad groups – (1) late payment fees (Late Fees) and (2) honour, overlimit and dishonour fees (Service Fees). (Certain other non-payment fees were dealt with on a basis unrelated to Andrews, and are not considered here.)
The Court found that Late Fees (which were charged by ANZ when the amount shown on a statement of account was not paid by the due date) were penalties under the common law and in equity.
The Late Fees were held to be contingent upon a breach of contract and collateral to a primary stipulation (to make a payment by a particular date) in favour of ANZ.
Additionally, the Court found that the Late Fees were extravagant and unconscionable on the basis they were substantially in excess of the maximum conceivable loss that might be suffered by ANZ.
A Late Fee of $35 was payable regardless of whether the customer was one day or one week late (or longer), and regardless of whether the amount overdue was trifling or a large amount. The Court assessed the quantum of ANZ's loss at between 50c and $5.50, depending on the fee.
On the other hand, the Service Fees which were charged by ANZ in response to a withdrawal or payment request from a customer, were found to be fees for an additional service, as opposed to a collateral stipulation, and therefore, were not considered penal.
ARE ALL LATE FEES AT RISK?
Late fees are not unique to banks. They are common to a wide range of consumer service contracts including:
- mobile phone contracts
- energy and water supply contracts;
- pay TV contracts; and
- gym memberships.
More complex commercial arrangements also frequently include late fees.
Where a court considers that a late fee is "extravagant and unconscionable" as opposed to a "genuine pre-estimate of damages", then the fee will be unenforceable to the extent the amount exceeds the loss that can be proved. Factors the Court in Paciocco considered significant included:
- Whether the same fee was payable regardless of whether the customer was one day or one week late (or longer), and regardless of whether the amount overdue was $0.01 (trifling), $100, $1,000 or even some larger amount.
- The relative bargaining power of the parties, including each party's rights to negotiate or vary the terms of the contract or terminate it.
Importantly (as was the case with certain contracts considered in Paciocco in respect of which late fees were found to be penalties) consumers frequently have no opportunity to negotiate the terms of their service contracts. Where fees are imposed as a result of the inequality of bargaining power between a corporation and its customer, the Court in Paciocco found that this will increase the risk of such fees being found to be penalties.
- An objective assessment of the possible loss that might be incurred judged as at the time of entering the contract.
- Expert evidence as to what the quantum of any conceivable loss might be.
HOW FAR BACK WILL THE COURT GO?
ANZ raised limitation defences in respect of certain fees being considered by the Court in Paciocco. ANZ submitted the only relevant fees were those charged in the period 6 years prior to the commencement of the proceeding, in reliance on the Limitations of Actions Act 1958 (Vic).
The Court rejected ANZ's submission, and held that, as the fees were paid under a mistake of law, the limitation period started to run from the day the mistake was discovered. The Court determined this was the day the proceeding commenced. The result is that all late fees charged by ANZ at any time may be affected.
The large amounts in dispute mean an appeal from both sides appears likely. However, on the current state of the law, all late fees of a similar character to the ones charged by ANZ are open to question.
The implications for other financial services institutions are, obviously, significant. The litigation funder, Bentham IMF Ltd, who is funding the ANZ bank fee class action is also funding similar class actions against seven other banks operating in Australia. It has been estimated these eight 'bank fee' class actions, including the ANZ class action, are being run on behalf of approximately 185,000 customers and seek to recover in excess of $240 million in damages.
There is little doubt that the liberal class action regime in Australia (see A class above - The emergence of Australia as a prime class action jurisdiction) has allowed for the significant growth of funded class actions and the targeting of claims where the potential return to the funder is so substantial as to warrant the cost of running a complex class action.
In respect of late fees, the target is currently the banking sector, but there is clearly the potential for the target to widen and spread to other sectors where late fees are commonplace.
In an environment where funded class actions have become the norm (Australia is now the most likely jurisdiction outside North America for a company to face a class action), the importance of reacting early to potential class action claims and developing strategies to avoid, manage and defend class actions has never been more important.
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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