Banks pay attention in class (actions) part 2

Welcome to the second of a 3 part series on bank class actions. Over the past few years a number of 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 the counter-arguments 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 introduced 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.

Round 1 – Federal Court

At first instance in the Federal Court, Justice Gordon found that bank fees could not be classified as penalties except for the late payment fees. Her Honour found that most fees were not payable upon the occurrence of a breach of contract and hence were not penalties. In doing so, Her Honour followed the decision in the Interstar case¹, which stated that the doctrine of penalties was limited to non-performance of stipulations that constituted breaches of contract. Accordingly, a breach of contract was an essential element for a finding that a fee or a payment was a penalty.

A further essential element for a fee to be classified as a penalty at common law and in equity, is if the fee is extravagant (or exorbitant) and unconscionable in amount.

Round 2 – High Court

In May 2012 the High Court, acting pursuant to s 40(2) of the Judiciary Act 1903 (Cth), removed the application for leave and heard each parties arguments.

The High Court was asked to consider whether a breach of contract was an essential element in determining whether a fee is a penalty. The High Court unanimously rejected the proposition that the penalty doctrine applies only where there has been a breach of contract and stated that the question was one of substance rather than form.²

The Court rejected the reasoning in Interstar, choosing instead to trace the development of the doctrine back to early times and concluded that penalties can arise in circumstances where a breach has not occurred. The Court was not asked whether any particular fee was a penalty and made no such findings. Instead it remitted the matter back to the Full Court of the Federal Court for the appeal to be heard (in order to determine whether the particular fees were penalties).

The High Court’s reasoning resulted in a new interpretation of the doctrine of penalties.

Ramifications of the High Court decision

This decision represents a considerable enlargement of the equitable jurisdiction of the Courts to supervise the operation of clauses in commercial contracts, particularly those contracts that have been drafted in accordance with Interstar, so as to avoid the operation of the doctrine of penalties.

The Court identified a distinction between a requirement to pay fees in consideration (or as security) for the performance of obligations of the bank to its customers and a fee charged by the bank where no obligations were required to be performed by the bank. The former would not be capable of being regarded as a penalty, while the latter would. This creates the scope for contracts, particularly in the banking and financial services sectors, to be drafted in terms that seek to avoid the operation of the doctrine of penalties by expressly providing that certain fees are charged in exchange for the performance of an additional service.

The next challenger

Since the High Court decision, another proceeding was commenced testing the High Court’s ‘decision’ regarding whether dishonour fees were charged to scare a customer into behaving a particular way (and hence a penalty) or whether they were validly imposed. This will be the topic of discussion in Part 3 of this series, so stay tuned.

Banks pay attention in class (actions) part 1

¹Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292.
²Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30.