Banks pay attention in class (actions) part 3

Welcome to the third 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 were therefore entitled to recoup these fees.

In this series we will briefly:

analyse some of the 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 analysed what the penalty doctrine was before the landmark Andrews v ANZ case.

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

Here 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

In February 2014, Justice Gordon ruled that late payment fees on consumer credit card amounts were penalties. She determined that they were not a genuine pre-estimate of the loss ANZ would suffer and were extravagant and unconscionable compared to the actual loss. However, Justice Gordon found that the other fees were justified as they were charged for the provision of additional services by ANZ. She 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 regarding the late payment fees whilst Paciocco appealed against the decision that the other bank fees were not penalties and therefore valid.

Round 2 – Full Federal Court

On 8 April 2015, the Full Federal Court:

overturned Justice Gordon’s decision in relation to the late fees; and
upheld her decision in relation to the other fees.

The judges reasoned that the late payment fees for credit cards were not extravagant, exorbitant or unconscionable and therefore not penalties. In order to assess whether a fee is ‘extravagant and exorbitant’, the loss needs to be assessed prospectively as opposed to retrospectively. In assessing the loss, the ‘indirect consequences’ incurred as a result of a customer’s failure to perform an obligation could also be taken into account, according to the judges’ reasoning.

The Full Federal Court decision essentially upheld the principle of freedom of contract, in allowing banks to charge various fees.

No knock out – but status quo remains… for now

It should be noted, that an application for special leave to appeal to the High Court was filed on 6 May 2015.

The decision is a major obstacle for plaintiffs in current and future class actions relating to penalties. The decision also carries significance for other industries that charge similar fees (eg telecommunications and utilities providers). It also begs the question whether the restating of the penalties doctrine in Andrews v ANZ will have the momentous impact on commercial contracts as previously predicted.

Smart drafting

When drafting contracts, it is prudent to consider characterising the transaction (and draft terms) as a payment for a right or benefit, rather than a payment of liquidated damages for breach. Payment for a right or benefit under a contract shouldn’t ordinarily give rise to the risk of it being a penalty. Where a pre-agreed amount is to be paid in compensation, such as liquidated damages for delay, then that amount must be a genuine pre estimate of loss. If not, then it would likely be considered a penalty and therefore unenforceable.

Stay tuned for further developments.

Banks pay attention in class (actions) part 1
Banks pay attention in class (actions) part 2