Fees and penalties
Alan L Tyree

Over two years ago, Federal Court judge Gordon J was faced with the question of whether certain fees charged by banks amounted to penalties. In a very long judgment (354 paragraphs) she traced the history of penalties and considered the individual fees in contention: Andrews v Australian and New Zealand Banking Group Limited [2011] FCA 1376. Nearly 75 of those paragraphs were devoted to the law of penalties. This was necessary because of detailed arguments put forward by the applicant bank customers:

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.

Gordon J rejected the argument, finding that a breach of contract was required to engage the doctrine of penalties. She considered the following fees:

• Late payment fees on credit card accounts;
• Overlimit fees on credit card accounts;
• Honour fees on a savings or current accounts;
• Non-payment fees on a savings or current accounts; and
• Dishonour fees on savings and current accounts.

She found that the first, late payment fees on credit card accounts, could be construed as a penalty, the others could not. The customers appealed to the Full Court of the Federal Court. The proceedings were removed to the High Court which held that the penalties doctrine was indeed wider than that found by Gordon J.

In Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35 Gordon J considered the same fee categories. In a very long judgment (379 paragraphs), she came to the same conclusions: excessive late payment fees are penalties, but honour, dishonour, non-payment and overlimit fees are not.

The High Court clarified, some say extended, the law on penalties in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30. In doing so, it overruled the NSW Court of Appeal in Interstar Wholesale Finance Pty Ltd v Integral Home Loan Pty Ltd [2008] NSWCA 310, a case relied upon by Gordon J. The High Court held:

• the rule against penalties is a rule of equity as well as a rule of law; and
• consequently, the penalty doctrine might be triggered by events other than a breach of contract.

A penalty may be in the nature of a punishment for non-observance of a contractual obligation, but the High Court chose to frame the matter in broader terms. Using the term 'stipulation', the Court noted that a secondary stipulation prima facie imposes a penalty on the first party if:

• as a matter of substance (not form);
• it is collateral or accessory to a primary stipulation in favour of the second party; and
• it imposes upon the first party an additional detriment in favour of the second party.

The secondary stipulation will not be a penalty unless it is extravagant or exorbitant and unconscionable in amount as measured against any conceivable loss of the second party.

The main sections of the High Court judgment are directed to showing that the stipulation need not be contractual and that the penalty need not be the payment of money.

Importantly, the High Court also emphasised another issue:

whether the requirement to pay the fees in question was not enjoyed by the ANZ as security for performance by the customer of its other obligations to the ANZ, or whether the fees were charged by the ANZ, as specified in pre-existing arrangements with the customer, and ANZ, respectively, for the further accommodation provided to the customer by its authorising payments upon instructions by the customer upon which the ANZ otherwise was not obliged to act, or upon refusal of that accommodation.

This rather confusing sentence was explained by reference to the decision in Metro-Goldwyn-Mayer Pty Ltd v Greenham [1966] 2 NSWR 717 which distinguished:

• a stipulation attracting the penalty doctrine (where a party is restricted by contract from performing an act); and
• one giving rise consensually to an additional obligation (where the party is permitted, but required to pay for the privilege).

For brevity, the remainder of this article will refer to these as 'restrictive stipulations' and a 'permissive stipulations'.

The distinction is so fine that, to a former law teacher, it begs to be included in an examination question. Even better, it was presented to Gordon J in Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35.

Electronic banking developments have almost extinguished the difference between savings and current accounts. Both types of accounts offer facilities to make third party payments with the consequential risk of overdrawing. Both types of account offer interest and are regulated to some extent by written contracts. The remaining features that distinguish the two are:

• possible limitations on withdrawals from savings accounts and;
• cheque facilities which are normally, but not always, associated with current accounts.

The introduction of electronic banking has also meant that banks now regularly issue written terms and conditions governing the operation of accounts. As is well known, these terms and conditions inevitably provide for 'exception fees' in certain circumstances.

The Applicant customers in Paciocco argued that the written contracts meant that the traditional banker-customer contractual provisions no longer applied. Gordon J rightfully rejected that argument, holding that the written contracts were to be interpreted within the framework of the traditional implied contractual terms as set out in the traditional cases such as Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002, Joachimson v Swiss Bank Corp [1921] 3 KB 110 and others.

In particular, and importantly for the outcome of the case, a cheque drawn by a customer which would have the effect of overdrawing the account is treated in law as a request by the customer for an advance: Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226; Barclays Bank Ltd v W J Simms Son and Cook (Southern) Ltd [1980] QB 677.

There is nothing magic about the payment order being in the form of a cheque. Any payment order, including an electronic one, which would leave the account overdrawn has the same effect: see, for example, Narni Pty Ltd v National Australia Bank Ltd [2001] VSCA 31.

The bank, in the absence of any pre-arrangement, has no obligation to honour the overdraft request: Bank of New South Wales v Laing [1954] AC 135; Office of Fair Trading v Abbey National plc [2008] EWHC 875 (Comm) 978. If it chooses to honour the request, interest is payable by the customer from that time even though the funds might not be immediately available to the customer due to delays inherent in the clearing system: Emerald Meats (London) Ltd v AIB Group (UK) Plc [2002] EWCA Civ 460; see also Dimond (HH) (Rotorua 1966) v Australia and New Zealand Banking Group Ltd [1979] 2 NZLR 739.

Gordon J had to consider 72 different exception fees, but the fees may be categorised as follows:

• Late payment fees on credit card accounts;
• Overlimit fees on credit card accounts;
• Honour fees on a savings or current accounts;
• Non-payment fees on a savings or current accounts; and
• Dishonour fees on savings and current accounts.

Gordon J considered each of the exception fees and identified the 'Exception fee event' for each, that is, the circumstances under which the fee became payable. She then considered if the 'Exception fee event' fell within the category of a 'restrictive stipulation' or a 'permissive stipulation'.

In all cases, this classification was sufficient to determine the matter, but she also considered if the fee was collateral or accessory to a primary stipulation in favour of the bank, finding that it was not. The reasoning in determining this issue was very similar to the restrictive/permissive classification.

ANZ charged a 'late payment fee' on a credit card account when a specified 'Minimum repayment' was not made by a specified time. The relevant clause in the Terms and Conditions stated:

The account holder must make the ‘Minimum Monthly Payment’ shown on each statement of account by the ‘DUE DATE’ shown on that statement of account.

Gordon J had no difficulty in finding that the 'Exception fee event' fell within the category of a 'restrictive stipulation'.

Terms and Conditions for the other fees were phrased in more permissive terms. For example, the 'Overlimit fees' identified a 'Credit limit' and provided that the customer 'must not exceed the credit limit unless … ANZ authorises the transaction…' If the credit limit was exceeded, an 'exception fee', the Overlimit fee, was charged.

'Honour fees' were charged when a debit on an account resulted in an overdraft. The 'exception fee event' was phrased in similar terms to that of the Overlimit fee: ANZ could, at its discretion' authorise the transaction but would charge a fee for so doing.

'Non-payment fees' were charged when a scheduled periodic payment was not met due to insufficient funds in the account.

'Dishonour fees' were charged when a cheque or other form of payment order was dishonoured for insufficient funds. Again, ANZ reserved the right to honour or dishonour the cheque, but would charge the dishonour fee if the cheque was dishonoured.

Gordon J found that each of these fell within the 'permissive stipulation' category. The customer was not prohibited from engaging in the various 'exception fee events', but was required to pay for the privilege.

The analysis is not always so straightforward. For example, with respect to one of the honour fees, the Terms and Conditions of the savings account stated baldly that 'you must not overdraw your account without prior arrangements being made and agreed with ANZ'. The Applicant submitted that this was a 'restrictive stipulation', and if read in isolation, it clearly is.

However, when read in the context of the entire banker-customer relationship, overdrawing the account is not a unilateral act of the customer. It is not a breach of contract to give a payment order which would result in an overdraft, and the overdraft cannot happen without the bank's approval. The bank is not obliged to meet the payment order, but it has the option of doing so.

The Late Payment fee could only be a penalty if the amount of the fee substantially exceeded the loss caused to the bank. How should the amount of loss be determined? The parties each spent a small fortune commissioning reports which showed, depending on the expert's employer, that the bank's loss was immense or infinitesimal.

In a master stroke of understatement, Gordon J noted 'The circumstances do not permit the loss to be assessed with certainty: see [46]-[47] above. The calculation or estimation of loss is difficult.' She estimated the cost at $3, a figure which, with respect, seems as good as any. Since the Late Payment Fee was $35, it was clearly 'extravagant, exorbitant and unconscionable'.

ANZ attempted to rely on the relevant statute of limitations, the Limitations of Actions Act 1958 (Vic) as well as some specialised limitation periods under various statutory claims.

Gordon J held that s27, providing for extended periods in cases of mistake, applied and that the action was timely. ANZ argued that s27 applied only to mistake of fact, but this was rejected. Gordon J, relying on the UK decision of Kleinwort Benson Ltd v Lincoln City Council [1988] UKHL 38, held that the provision was equally applicable to a mistake of law. As a consequence, time did not begin to run until the customer's discovered that ANZ was not entitled to charge the fees in question.

Gordon J also dismissed claims that the fees breached various statutory prohibitions. She found that there was no unconscionable conduct on the part of ANZ, no unjust transactions under the Credit Codes and no unfair contract terms. Although these matters form a significant and important part of Her Honour's judgment, they will not be further discussed here.

We can expect the Late Payment stipulation to be rewritten. Banks may feel free to use this version:

We would really, really like for you to pay by the due date, but Hey!, if not that's OK. We may at our option cancel your card and freeze your account or, at our complete discretion, allow you to continue for a fee of $50.

At first glance, this would seem to be a 'permissive stipulation' and so not a penalty. Perhaps it could go to the High Court for a final decision.

The legal system is obviously ill-suited for sorting out this basic consumer problem. It is no disrespect to Gordon J's judgment to note that it would totally baffle the average bank customer. Try explaining to Mr or Ms Citizen the difference between the various fees. The fine legal points are simply irrelevant to the main issue which is one of consumer protection.