Jurisdiction - Australia
ANZ Class Action update: Bank Fees can be Penalties only if Payable on Breach.

19 December, 2011



In a decision in the high-profile class action over bank fees, the Federal Court has held that certain late payment fees charged by ANZ to its customers are capable of being characterised as penalties, with the consequence that they might not be enforceable.  But the court also held that several other types of fees – honour fees, dishonour fees, “overlimit” fees and non-payment fees – are not capable of being characterised as penalties.
The rule against penalties: still a narrow exception
Can contracting parties agree in advance what amounts will be payable if one party acts in a way the contract does not intend?  If so, are there any limits on their ability to do so? Do those limits only apply to payment obligations triggered by a breach of the contract?  The law relating to penalties supplies an answer to these questions.
The applicants in Andrews v Australian and New Zealand Banking Group Limited claim that a variety of fees imposed by ANZ under the terms of certain of its banking products constitute penalties and are therefore void or unenforceable.  They have also sought repayment of all or part of the fees paid. 
In a lengthy judgment on the preliminary question of the characterisation of the fees in issue, Justice Gordon undertook a detailed survey of the history of the rule against penalties.  The Judge affirmed that the rule against penalties is a narrow exception to the general principle of freedom of contract pursuant to which parties may shape their contractual relationship – and allocate risk and reward – as they see fit.  She rejected attempts to significantly expand the scope of the rule. 
The modern principle is that a contractual provision requiring the payment of a stipulated sum on breach of the contract will be unenforceable if it is a penalty.  A liquidated damages clause will generally be a penalty if a party can demonstrate that the clause imposes a burden on the breaching party which is inconsistent with a genuine pre-estimate, made at the time the parties contracted, of the loss that would result from a breach of the relevant obligation.  The law allows the contract to compensate fairly for breach by “codifying” a damages regime.   Generally, it does not allow the contract to punish breaches or permit the innocent party to profit from them. 
But how does the law treat a clause which imposes an obligation to pay an amount when a party engages in conduct which the contract does not prohibit but seeks to discourage so as to protect or advance the interests of the other party?  This was a key issue in the ANZ proceedings. 
Some of the contract terms attacked in the class action imposed an obligation on a customer to pay money to ANZ on the occurrence of a certain event, such as overdrawing an account beyond a previously approved limit.  On their face, such provisions did not appear to provide for payment to be made on breach and so the bank argued that they were not capable of amounting to a penalty, whether or not the amount payable comprised a genuine pre-estimate of loss.  However, the Court was asked by the applicants to find that an obligation to pay money may be characterised as a penalty if the obligation to pay arises on the occurrence of an event that is not in itself a breach. 
Justice Gordon held that it cannot.  Her Honour considered the decision of the High Court of Australia in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, where only one judge (in dissent) considered that the rule against penalties could extend beyond payments triggered by breach of contract and where the majority held that a provision requiring payment on the occurrence of a specified event (but not upon breach) cannot be a penalty.
Some contracts oblige a party to make a payment if the other party chooses to terminate the contract upon the occurrence of an event of default.  The event of default may or may not comprise a breach of the contract.  Does the law of penalties apply to such contracts? In Andrews v ANZ, the Judge considered the earlier decision of Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2007] NSWSC 406 where at first instance, Justice Brereton of the NSW Supreme Court held that the law of penalties is not confined to circumstances where the event of default relied on comprises a breach, but that it extends to cases where a contract is terminated on the occurrence of an event of default, which falls short of breach.  Justice Gordon rejected this analysis which had in any event been overturned by the New South Wales Court of Appeal.  She confirmed the orthodox view that the law of penalties is concerned with the consequences of contractual breaches.
A question of construction
Whether a particular provision amounts to a penalty is ultimately to be determined by the words of the contract and the rules of contractual construction.  Is the obligation triggered by breach of some obligation imposed by the contract? 
In Andrews v ANZ one type of fee – which customer had to pay if they made a withdrawal or payment from their ANZ account with the effect of overdrawing the account beyond an approved limit – was held not to be a penalty.  This was because, properly construed, the contract did not prohibit such an overdrawing.  It merely provided that the bank had had no obligation to permit it.  Thus the fee in question was not triggered by breach but instead by the bank’s election to permit the overdrawing.  An argument that the fee should be regarded as a penalty as it formed part of a contractual mechanism to discourage certain conduct by customers was rejected. 
Another type of fee – a late payment fee – was expressed to be chargeable if certain amounts on a credit card statement were not paid within a set period of time.  In this case, Justice Gordon held that the late payment fee was payable as a direct result of an account holder’s breach.  As a matter of construction of the contract, it obliged the customer to pay on time and the fee was payable if that obligation was breached.
The end of the beginning
Subject to appeal, this decision clarifies the law regarding penalties and rejects attempts to increase the reach of the principle beyond the realm of contractual breach.  It endorses an approach to contract drafting which seeks to avoid the imposition of payment on other obligations directly by reference to one party’s breach.
However, the Court must now decide whether the particular fees, which it found were capable of  constituting penalties as they were triggered by breach, are in fact to be so characterised having regard to the burden they imposed on customers compared with the loss incurred by the bank due to the breach.    
Interestingly, the judgment records that ANZ had conceded that the fees in question were not a genuine pre-estimate of loss.  This concession is apparently to the effect that the parties to the particular customer contract did not actually turn their mind, at the time the contract was formed, to the loss that might be suffered by the bank if that customer failed to comply with the relevant obligations.  There was no actual attempt to pre-estimate loss in respect of the specific contract.  In the context of a mass market retail product of this sort, this is not a surprising concession on the part ANZ.  It would usually be impractical to undertake such an exercise.  It remains to be determined whether the relevant bank fees may be justified by demonstrating that:
  • such a pre-contractual assessment was undertaken by the bank on a “global” basis across all existing and potential customers;


  • looked at objectively, and irrespective of whether any pre-contractual assessment was in fact conducted for a particular contract or even the class of contract, the fees are not disproportionate to the costs or other losses likely to be incurred by the bank, either with respect to the particular customer or across a whole population of customers.
These important legal and factual issues – which have significant practical implications – are yet to be resolved.  It should also not be forgotten that there are numerous statutory encroachments on parties’ freedom of contract.  Provisions which are not capable of being characterised as penalties may still have to run the gauntlet of the unconscionability provisions of the Australian Consumer Law, state unfair contracts legislation and similar laws.
For further information, please contact:
Roger Forbes, Mallesons Stephen Jaques
Armen Varvachtian, Mallesons Stephen Jaques


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