Banks pay attention in class (actions) part 1

Welcome to the first of a 3 part series on bank class actions. Over the past few years several class actions have been brought against banks by customers claiming that certain fees were ‘unfair’ and that they are entitled to recoup these fees.

In this series we will briefly:

analyse arguments on both sides of the debate; and
examine what these cases may mean to the penalties doctrine and contract law.

A 3-part series to this enthralling debate

In part 1 we introduce the general facts of the class actions and analyse what the penalty doctrine was before the landmark Andrews v ANZ case.

In part 2 we will delve a bit deeper into Andrews v ANZ as one of the first, and perhaps most notable, of the bank class actions.

Finally in part 3, we will discuss the case of Paciocco v ANZ (not to be confused with Pacquiao v Mayweather) as well as a look at the future of class actions and what companies can do to avoid the penalties doctrine in drafting their customer contracts.

Bank customers – fed up and taking action

Anyone who has read a bank statement knows banks charge fees for various ‘services’. Bank fees constitute a major source of revenue for banks. Amid mounting consumer frustration some customers have taken issue claiming that certain fees such as honour, dishonour, non-payment, late payment and over-limit fees are ‘unfair’ and should be classified as penalties. If classified as such then they would be deemed unenforceable.

Over 185,000 Australians who were charged these ‘unfair’ fees by the banks signed up to be part of the various class actions against banks including ANZ, Citibank, Commonwealth, NAB, Westpac, St. George, Bank SA, and BankWest

Doctrine of penalties – Mechanics v Equity

Historically, two lines of authority developed in relation to this doctrine:

the mechanical approach; and
the equitable approach.

In the UK a line of authority stemming from the Dunlop case¹, introduced the mechanical approach. In simple terms this approach advocated that if a sum (or fee) for damages payable under a contract was greater than the sum likely to flow to the payee from the breach of contract, the sum would be considered a penalty.

In Australia however, the mechanical approach was avoided in favour of the ‘equitable’ approach. This approach, which focuses on whether the purported liquidated damages clause is ‘unconscionable and extravagant’ (without considering if a breach has occurred) and if so, would then result in the clause being struck down as unenforceable. Courts both in the UK and in Australia have accepted the test from the Dunlop case, which focuses upon the distinction between a valid liquidated damages sum, which is compensatory in nature and a penalty, which is a sum intended to coerce performance or punish the breach.

What Andrews v ANZ was really about

At first instance in the Federal Court, Justice Gordon found that all except the late payment fees were not penalties, as the fees were not payable upon the occurrence of a breach of contract. Justice Gordon had followed the decision in the Interstar case², which stated that the doctrine of penalties was limited in its operation to non-performance of stipulations that constituted breaches of contract. On appeal, however the Full Federal Court came to a different conclusion, which was then ultimately appealed to the High Court.

Stay tuned for part 2, where we will delve deeper into Andrews v ANZ.

Misplaced confidence

¹Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.
²Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292.