The long awaited decision of the High Court in the credit card fee class action case of Paciocco v Australia and New Zealand Banking Group Ltd  HCA 28 was handed down in favour of the banks this week.
LATE PAYMENT FEE NOT A PENALTY
In a majority decision, the High Court held that in order to determine if the late payment fee is a penalty, the court will measure it against the full range of a bank's legitimate interests to be protected, not the amount that might be recovered in an action for damages. This is assessed at the time the contract is entered into. In this case, it was held that the late penalty fee of $35 (later reduced to $20) aligned with protecting the bank's legitimate interests.1
LATE PAYMENT FEE NOT UNCONSCIONABLE, UNJUST OR UNFAIR
The High Court also held that that the imposition of the late payment fee (at $35) was not:
- "unconscionable" conduct (s12CB of the ASIC act 2001 (Cth), s 8 of the Fair Trading Act 1999 (Vic) (FTA) which was subsequently replaced by the Competition and Consumer Act 2010 (Cth));
- "unjust" for the purposes of s 76 of the National Credit Code; or
- "unfair" for the purposes of Part 2B of the FTA.2
APPROACH TO PENALTIES
In deciding if a fee is a penalty, the court applied the four guiding principles set out in Dunlop Pneumatic Tyres Co Ltd v New Garage and Motor Co Ltd  AC 79 which defined a penalty in the following terms:
"the essence of a penalty is a payment of money stipulated as in terrorem* of the offending party"3In this case, the cardholder made a commercial decision not to pay the account and to incur the late payment fee. Justice Keane described this as
"a practical demonstration that the fixed quantum of fee was sufficiently modest in amount that it was not apt, in the circumstances of its contemplated operation, to have an effect in terrorem"4.
The four guiding principles are:
- a sum will be held to be a penalty if the sum stipulated is extravagant and unconscionable in amount in comparison with the greatest loss that could be conceivably be proved to have followed the breach. This is the primary guiding principle for assessing whether the sum in question is a penalty (in the case of the bank's late payment fee, the amount of the fee was held to be less than the greatest loss possible and not "out of all proportion" with the bank's interest in receiving timely minimum monthly payments);
- a sum will be held to be a penalty where the relevant breach giving rise to the fee is the failure to pay a sum of money and the fee is a sum greater than the sum which ought to have been paid (this principle is a corollary of the first principle and historically arose from situations where to secure payment for a lesser sum a covenant to pay a higher sum was entered into) (the fee of $35 would not necessarily be more than the sum outstanding);
- there is a presumption (but no more) that an amount is a penalty when a 'single lump sum' is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others only trifling damage (the presumption is weak and was rebutted on the basis that the fee, based on the cardholder's behaviour, was not "stipulated in terrorem"); and
- it is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences are such as to make a precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damages was the true bargain between the parties and not a penalty (further the requirements of extravagance and unconscionability (see (a) above) are still required to be established if the sum is to be considered a penalty).5
STORM CLOUDS GATHER
Justice Keane made the following observations:
"But currently in Australia, no legislation authorises the application by the courts of a standard of reasonableness to determine the lawfulness of bank charges; and it is not suggested that the common law has developed such a standard."6
"The appellants' claim involves the disturbing irony that, if the challenge to the validity of the late payment fee were to succeed, it could be expected to have the consequence that the cost of financial accommodation to all customers, including those who honour their contractual engagements, will be increased in order to maintain ANZ's revenue streams at a level unaffected by the prescription of the late payment fee. ANZ could be expected to seek to ensure that its revenue streams are maintained; and its evident market power is such that there is no reason to doubt that it would succeed, at least to a large extent, in achieving that end. It was accepted that Mr Paciocco would not have received better terms from ANZ's competitors in the market. This state of affairs is consistent with the oligopolistic character of the market.
Accordingly, if the late payment fees (which were relatively uniform among ANZ and its competitors) are unenforceable, interest rates or other charges could be expected to rise at the expense of those customers who adhere to their contractual engagements. That might not be thought to be a good thing. But however that may be, the mere prospect of such a consequence illustrates the danger of pressing the penalty rule into service for a purpose for which it is ill-adapted."7
In making these observations, Justice Keane appears to be suggesting that the current law does not prevent banks from charging unreasonable or excessive fees. Expert evidence in this case indicated the direct cost to the ANZ of a late payment to be approximately $38; compared to the fee of $35.
The issue of excessive fee charging arose in the context of credit card surcharging by merchants. From September 2016, merchants will need to commence compliance with the RBA's surcharging standard9 which prescribes that merchants will only be able to recoup certain direct costs related to the acceptance of payments via credit cards. This standard replaces the existing "reasonable charges" standard10 as this was insufficient to stop the undesirable behaviour of some merchants to which it was directed. To stop merchants unduly profiting from surcharging credit card payments, the Government amended the Competition and Consumer Act11 to give the ACCC the power to enforce the fee standard set by the RBA which prescribes and limits the fee components upon which the surcharge can be based (reducing it to a limited cost recovery exercise).
However, as Justice Keane indicates, such a response may not be effective in this case due to the 'oligopolistic character of the market' prompting a need for even more comprehensive measures.
These comments are made at a time when the opposition and other parties are calling for a Royal Commission into banking activities. Whilst the late payment fee was held not to be a penalty, the courts were not applying a reasonableness test to which many sections of the community expect banks and other large businesses to be held accountable. This is something the banks' detractors could certainly use to add further pressure on the Government to establish a Royal Commission or legislate to stop, what they perceive to be, high fees being charged. If this eventuates the banks may well be celebrating a pyrrhic victory.
1 Paciocco v Australia and New Zealand Banking Group Ltd  HCA 28 at 84 -88
2 Ibid at 90-94
3 Ibid at 79
*"in terrorem" translated from Latin is "in fear"
4 Ibid at 82
5 Ibid at 79-88
6 Ibid at 62
7 Ibid at 66
8 Ibid at 63
9 Standard No. 3 of 2016: Scheme Rules Relating to Merchant Pricing for Credit, Debit and Prepaid Card Transactions
10 Standard No. 2: Merchant Pricing for Credit Card Purchases
11 Competition and Consumer Amendment (Payment Surcharges) Act 2016
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