High Court Rules on Bank Fees
September 26, 2012
There has been much media attention on a recent decision of the High Court of Australia: Andrews v Australian & New Zealand Banking Group Limited  HCA 30 (the “ANZ case”). The reason for the publicity was that the Court’s decision potentially affects just about everybody who has a bank account.
The court action had been brought by a group of the bank’s customers alleging that some of its fees were penal in nature and thus illegal. The High Court agreed with the customers, even though the primary judge had decided that the fees did not in fact infringe the law against penalties in contracts. The High Court returned the case to the Federal Court for the whole matter to be heard again, in light of their clarification of the law in this area.
The fees in question were the ANZ’s “honour fees”, “dishonour fees”, “over limit fees” and “late payment fees”. All banks charge these types of fees, such that similar court actions have been brought against the other major Australian banks. However, the court system held these actions over whilst the ANZ case was decided as a kind of “test case” by the High Court.
The Court firstly affirmed the pre-existing law. That is, if a contract says that a party who breaches the contract must pay an amount which exceeds what can be objectively regarded as a genuine estimate of the damages that the other innocent party will suffer as a result of the breach, then the relevant provision is penal in nature and hence unenforceable against the breaching party.
However, the Court went further. It changed the previously understood law which said that there firstly had to be a breach of contract before the law against penalties could be invoked. The Court said that this wasn’t so. A party may not necessarily be in breach of the contract for the penalty condition to be found to be unfulfilled. It will be enough if the amount payable by the party under that condition materially exceeds the damage or loss suffered by the innocent party. If the condition is penal in nature the innocent party cannot lawfully recover from the other party under it.
In terms of the fees in question in the ANZ case, it will now be up to the bank to show that the charged amounts bear some relation to the management, time and costs necessarily expended in monitoring customers’ accounts. This will be no easy task. It is often the case that for banks and finance companies generally, chasing up customer accounts is overly costly relative to the amounts and risks involved.
Accordingly, such fees are often set at levels which seek to deter aberrant customer behaviour, rather than punish it. By acting primarily as a deterrent, the argument is that the clause enables the financier to minimise its costs so that a more attractive product offering is the outcome.
The High Court seemed to recognise this. It said that a contractual obligation to pay an amount in return for a right or benefit will not be penalty even if the amount payable substantially exceeds the value of the right or benefit. Similarly no penalty arises if the innocent party cannot calculate the damage it suffered.
So, as regards the ANZ, in the Federal Court it will have to demonstrate that a benefit exists to compensate for its impugned fees, and/or its customers cannot truly calculate the losses they’re supposed to have incurred.
More generally, for companies and businesses other than financiers they too will be affected by the ANZ case. Until it is finally resolved they will need to review their standard contracts for clauses which impose liquidated damages, service fees or late payment charges, lest they find some of their customers begin to assert that that such clauses are unenforceable as penalties.
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This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.