The bank fee class action, stage 1: Andrews v ANZ Banking Group Limited [2011] FCA 1376

The matter of Andrews v Australian and New Zealand Banking Group Limited [2011] FCA 1376 was a hearing before Gordon J concerning the issue of whether the various fees and charges imposed by the ANZ bank on various customer defaults were capable of being characterised as penalties. The hearing was the first stage in a series of hearings designed to determine if the exception fees charged by the ANZ were unenforceable.

Her Honour set the scene about what was not in issue at [3]:

3 It is also important to identify what is not in issue.  ANZ accepted that in considering the law of penalties, 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 ANZ was deferred to a later hearing.  Next, these reasons for decision do not consider other accounts offered by ANZ or undertake some general enquiry into the practices of ANZ or any other bank.  They consider only the Separate Questions.  

That is, the question of whether the Exception Fees were all out of proportion to the loss was for a later date.

The plaintiff, being a representative plaintiff in a group proceeding, argued the following:

1. That the fees arose on breach of the contract between the ANZ and the customer, and by reason of that fact they were capable of being characterised as penal.
2. In the alternative, the law of penalties is capable of including amounts incurred on the happening of an event that does not constitute a breach of contract.

Her Honour concluded that the law of penalties is not capable of operating in the absence of breach (at [77] to [80]):

77 What the applicants sought to do was to construct an argument, based not only on old decisions but also the historical origins of the law of penalties, that the law of penalties is not confined to payments upon breach but extends to payments upon conditions or events lying within the area of obligation of the party required to make the payment.  That enterprise carried at least as much risk as that warned against by Mason and Wilson JJ in AMEV-UDC Finance Ltd at 183 and 186. 

78 The modern jurisdiction cannot be divorced from its origins in the wide dispensing power of the Court of Chancery in respect of oppressive bargains:  Meagher, Heydon and Leeming, at [18-095].  The law of penalties, confined (as it is) to payments for breach of contract, is a narrow exception to the general rule whereby 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.  As stated in Ringrow at [31] and [32] in the joint judgment of Gleeson CJ and Gummow, Kirby, Hayne, Callinan and Heydon JJ: 

The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships ...  Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed.  That is why the law on penalties is, and is expressed to be, an exception from the general rule.  It is why it is expressed in exceptional language. 

See also Thomas JA in Bartercard Ltd v Myallhurst Pty Ltd [2000] QCA 445 (at [26]) that “[t]he surveillance of courts over contracts is not based upon any underlying approval or disapproval of incentives or disincentives, which are a natural part of commercial arrangements”. 

79 Courts have consistently rejected a jurisdiction in equity to interfere with contractual freedom on the generalised ground that the provision in question is harsh or constitutes a hard bargain:  see, by way of example, Campbell Discount at 614 per Viscount Simonds and at 626 per Lord Radcliffe; Export Credits Guarantee at 224 per Lord Roskill; Meagher, Heydon and Leeming, at [18-100].  Instead, courts have developed equitable and common law principles in particular, well recognised, circumstances to prevent contracts being used as a means of taking unfair advantage of persons in positions of vulnerability, particularly the principles relating to unconscionable conduct, undue influence and duress. 

80 Indeed, the parties agreed that equity had a continued role to play in a number of circumstances where the common law would otherwise operate harshly or unconscientiously.  In those circumstances, equity would operate remedially and apply its restitutionary principles to overcome the consequences of a party having paid a penalty.  For present purposes, it is neither necessary nor desirable to seek to classify that jurisdiction as concurrent or auxiliary:  see Meagher, Heydon and Leeming, at [1-095].  

Her Honour considered that late payment fees were capable of being characterised as penalties, as they were an instance of breach of the customer's contract with ANZ. However, Her Honour identified four other fees, specifically honour fees, dishonour fees, over limit fees and non-payment fees, as not being capable of being characterised as a penalty. These were not capable of being characterised as penal because they did not arise from a breach, but instead they arose from a request by a customer to advance funds.

Penalties without a breach: Ange v First East Auction Holdings Pty Ltd [2011] VSCA 335

The matter of Ange v First East Auction Holdings Pty Ltd [2011] VSCA 335 was an appeal in the Victorian Supreme Court of Appeal before Neave and Tata JJA and Sifris AJA. The questions for the Court of Appeal concerned whether a fee payable on withdrawal of art from an auction was payable or not, including whether the fee was unenforceable as a penalty.

The Court of Appeal considered the question of whether a fee can be a penalty even when a breach had not occurred. That is, if a large fee is charged in the normal course of the contract, such as where a withdrawal fee is charged, can it be unenforceable as a penalty? The Court of Appeal held that it could not.

At [85] to [94] the Court of Appeal set out its reasoning, relying on the decision of the New South Wales Court of Appeal in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd [2008] NSWCA 310:

85 The trial judge held that clause 11 of the Agreement, which provided for the imposition of a withdrawal fee, was not an unenforceable penalty because the doctrine of penalties only applies to contractual terms requiring payment in the event of breach. According to Export Credits Guarantee Department v Universal Oil Products Co[33], AMEV-UDC Finance Ltd v Austin[34] and more recently, Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd,[35] a term imposing an obligation to pay money on the occurrence of a specified event, other than breach, is not a penalty.

86 The trial judge held that since clause 11 of the Agreement did not provide that withdrawal of an item from auction constitutes a breach, the doctrine of penalties had no application to the term requiring payment of a fee for withdrawing an item from auction. His Honour considered that the distinction between the two types of clauses was firmly established in the case law and it was not open to a judge at first instance to apply the penalty doctrine to the withdrawal fee term in these circumstances.

87 Grounds 3, 4, 5 and 6 of the Amended Notice of Appeal are directed towards the trial judge’s finding that clause 11 was not void as an unenforceable penalty. Mrs Ange contends that the trial judge erred in law in finding that the clause was not void as an unenforceable penalty, failing to find that clause 11 took effect upon breach, failing to find that withdrawal of the paintings by Mrs Ange was in breach of the Agreement and failing to find that the law of penalties was not limited to breaches of contract.

88 The submissions for Mrs Ange on the penalty issue centred on the correctness of the decision in Interstar. In that case, a judge of first instance in the New South Wales Supreme Court held that the doctrine of penalties extended beyond a term providing for the consequences of a breach of contract. The decision of Brereton J was subsequently reversed by the New South Wales Court of Appeal. After examining the conflicting authorities, Allsop P (with whom Giles and Ipp JJA agreed) held that the better view was that the payment complained of must be conditioned on a breach of contract.

89 In written submissions, counsel for Mrs Ange submitted that the Court should find the approach taken by the New South Wales Court of Appeal was plainly wrong and that the reasoning of the primary judge in the matter should be preferred. However, at the hearing of the appeal, Counsel properly acknowledged that the Court of Appeal’s decision was not plainly wrong. He did not abandon the point, but rather suggested that it was a matter that should be dealt with by the High Court (if necessary), rather than an intermediate appellate court.

90 Counsel for Bonhams submitted that there were compelling reasons for following the decision of the Court of Appeal in Interstar and that this Court should not depart from the practice of following the decision of another State’s appellate court on a common law principle.

91 The current state of the law in Australia is that a term of a contract that imposes an obligation on a party to pay money on the happening of a specified event which is not a breach of contract does not constitute a penalty. Primarily, this is because it is not the role of the court to relieve a party from a bad bargain.

92 In Interstar, in reversing the decision of Brereton J, the President of the New South Wales Court of Appeal, Allsop P said:

[106]In my view, the expression of view by the primary judge that the doctrine of penalties (distinguished from relief against forfeiture) in the common law of Australia (using that expression to mean, relevantly here, the general law encompassing common law and equity) was not limited to circumstances of breach of contract was not open to his Honour. The intermediate appellate authorities in Australia, the persuasive view of a unanimous House of Lords, existing High Court authority and other views expressed in the High Court constrained the primary judge (and constrain this court) to limiting the application of the doctrine of penalties to circumstances of breach of contract. If a wider doctrine is to be enunciated in the form of that appearing in [75] of his Honour’s reasons, it is for the High Court of Australia to enunciate it. This is so not least because of the need to resolve the views of a number of justices of the High Court, including but not limited to a majority of the court in IAC (Leasing).[36]

93 The decision of Allsop P is, with respect, careful, considered and comprehensive. The paragraph referred to above clearly represents the present state of the law. It is also consistent with the approach followed by the Full Court of the Supreme Court of South Australia in Diakos v Mason.[37] 

94 Accordingly, it is not for this Court to determine that the jurisdiction to set aside a term as a penalty extends to circumstances beyond a breach of contract.[38]
95Grounds 3, 4, 5 and 6 are therefore not made out.

I know that reliance is being placed on this decision in ANZ Bank class action in the Federal Court of Australia, because the plaintiffs to that class action are alleging that the doctrine of penalties extends beyond a breach. That is, to the extent that overdrawing, dishonouring, etc is not a breach by the customer, then the fees charged by ANZ are penalties in any event.

It will be interesting to see the outcome of the ANZ class action in light of the decision in Ange.

Calcorp (Australia) Pty Ltd and Ors v 271 Collins Pty Ltd [2010] VSCA 259 - contractual penalties in terms of settlement

The matter of Calcorp (Australia) Pty Ltd and Ors v 271 Collins Pty Ltd [2010] VSCA 259 (Calcorp) was an appeal from the judgment of O'Neill J in the County Court. The appeal was heard by Nettle, Redlich and Harper JJA of the Court of Appeal. Nettle JA gave the main judgment.

The proceeding arose from the entry of judgment in the County Court of Victoria under terms of settlement which previously compromised that proceeding. The appellant claimed that the entry of judgment under the terms of settlement for the full amount which the respondent claimed in the original proceedings was a penalty. The County Court held that this was not a penalty and the Court of Appeal agreed with the County Court's judgment to this extent.

ANZ class action progress - ANZ seeks time to calculate fees

The ANZ 'bank fees class action' is an action run by Maurice Blackburn lawyers in the Federal Court of Australia on behalf of 27,000 ANZ bank customers. Maurice Blackburn has prepared a good summary of the litigation here. The litigation is funder by IMF (Australia) Ltd, a litigation funder.

In the class action the group of  customers are suing the ANZ bank for 'exception fees' (e.g. credit card overdrawing fees) which they claim are unlawful because the fee charged for the particular default is not a genuine pre-estimate of ANZ's actual loss on that default. ANZ is being sued for $50million in damages, which presumably is the plaintiffs' estimate of the unlawful fees previously charged. Obviously ANZ has to establish that each fee correlates with the value of the bank's loss on the particular default. So, for instance, if a person is charged $30 for overdrawing a credit card limit of $8,000, the bank needs to demonstrate that it incurred a $30 loss or thereabouts by reason of the customer's action.