Bank fees safe... for now: Federal Court overturns penalty finding in Paciocco v ANZ
Corporate eBulletin - 13 April 2015
On 8 April 2015, the Full Federal Court, overturned a 2014 Federal Court decision which held late payment fees charged by ANZ amounted to penalties.1
The Court held that in evaluating whether a fee is 'extravagant and exorbitant' the fee should be compared to the greatest prospective loss that could conceivably flow from the breach, assessed at the time of entering into the contract, as opposed to a retrospective calculation of actual loss suffered. In addition, the Court held that a broader category of indirect loss can be taken into account when estimating the loss that may flow from a breach.
Although the case comes as a great relief to the banking and telecommunications industries, it is likely the High Court will be asked to hear the matter on appeal.
The class action against ANZ Bank, which began in 2013, challenged the legality of various banking fees imposed on customers.
The fees in question included:
- late payment fees on consumer credit card accounts;
- honour, dishonour and non-payment fees charged to consumers and business deposit accounts; and
- over-limit fees on consumer credit card accounts.
The main fees in contention were the late payment fees of $20 to $35 incurred each time a customer failed to repay the minimum amount on their credit card each month. This fee was incurred regardless of the lateness of payment and despite the direct loss suffered by ANZ as a result of late payment being estimated at first instance to be $0.50 to $5.00.
The main issue in contention is whether such fees are penalties and thus unenforceable.
In February 2014, Justice Gordon of the Federal Court decided that the late payment fees on consumer credit card accounts amounted to penalties, as they were not a genuine pre-estimate of the loss ANZ would suffer and were extravagant and unconscionable compared to the loss actually suffered.
However, Justice Gordon found that the other fees charged were justified by the provision of additional services by ANZ. For example, in the case of over-limit fees, the customer was being provided with an informal extension of credit, which warranted an additional fee. In the case of dishonour fees, Justice Gordon found that these were in exchange for ANZ's services of considering the customer's request for an informal overdraft.
Justice Gordon also rejected the contention that any of the fees contravened statutory prohibitions on unconscionable or unfair conduct.
Both parties appealed to the Full Federal Court. ANZ appealed against the decision that the late payment fees amounted to penalties, and Paciocco appealed against the decision that the other bank fees were not penalties and therefore valid.
On 8 April 2015, the Full Federal Court overturned Justice Gordon's decision in relation to the late payment fees, and affirmed her decision in relation to the other fees.
- The late payment fees for credit cards were not extravagant, exorbitant or unconscionable and therefore not a penalty.
- In order to assess whether a fee is 'extravagant and exorbitant', the loss needs to be assessed prospectively (ex ante) as opposed to retrospectively (ex post) (discussed below under 'Method for assessing extravagance').
- In assessing that loss, the 'indirect consequences' incurred as a result of a customer's failure to perform an obligation can also be taken into account (discussed below under 'Consideration of indirect consequences').
The Full Court confirmed Justice Gordon's decision that:
- the honour, dishonour, non-payment and over-limit fees constituted genuine fees for services and were not penalties;
- none of the fees contravened statutory prohibitions on unconscionable or unfair conduct; and
- the party claiming that a payment is a penalty has the onus of proving extravagance and exorbitance, which was not achieved in this case.
One of the key reasons behind the findings was the method which should be used to determine whether a fee is 'extravagant and exorbitant' compared to the loss suffered.
In her decision at first instance, Justice Gordon analysed the extravagance of the late payment fees on an ex post basis. This entailed a comparison of the fee with the actual loss suffered by ANZ after the breaches occurred, which she estimated to be between 50 cents and $5.00.
However, the Full Court agreed with ANZ's argument that the appropriate analysis should be ex ante. This involves an assessment of the greatest prospective losses that could conceivably flow from the breach, assessed at the time of entering into the contract.
The Full Court emphasised that the question of whether a fee is extravagant or exorbitant and, therefore, a penalty, is distinct from the question of the damage actually experienced due to a failure to comply with obligations in a contract. An ex post enquiry is only appropriate to calculate the compensation due to the penalised party after the fee has been found to be a penalty.
The Full Court also broadened the types of loss that could be taken into account when engaging in an ex ante assessment of a fee's extravagance or exorbitance.
At first instance, Justice Gordon only considered the direct loss incurred by ANZ when a late payment was made. The Full Court engaged in a much broader assessment of the potential losses suffered, by considering indirect consequences of a customer's failure to make timely payment.
For example, the costs incurred by ANZ in maintaining a collections department and in maintaining additional regulatory capital in order to make up for late payments, were losses that could be taken into account when assessing the reasonableness of the fee.
After taking into account the costs associated with these indirect consequences, the Full Court concluded that the late payment fees were not penalties.
This decision will be welcomed by financial institutions and telecommunications companies, which will feel vindicated in their practice of charging such fees under contract.
On the other hand, the decision is a major setback for the class action and the numerous other proceedings against banks and telecommunication companies which have been stayed pending the outcome of this test case. If this decision stands, it will be a significant obstacle for both current and future penalties class actions.
It also begs the question of whether the restating of the penalty doctrine in Andrews v ANZ (2012) 247 CLR 205 will have the momentous impact on commercial contracts previously predicted.
Although financial institutions and telecommunications companies are likely celebrating the victory, the 'bank fees' saga is far from over. Representatives for the class action have already indicated that special leave will be sought to appeal to the High Court.
1 Paciocco v Australia and New Zealand Banking Group Limited  FCAFC 50
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