Overview

Today, Justice Gordon handed down her decision in Paciocco v ANZ, concerning whether bank fees charged by ANZ (including credit card late payment fees, honour and dishonour fees) were penalties or otherwise unconscionable/unfair under relevant legislation.

Justice Gordon determined that credit card late payment fees charged by ANZ to Paciocco were penalties at both common law and equity and therefore unenforceable, but otherwise held that the overdraw honour fees, dishonour fees, non-payment fees and overlimit fees were not penalties or otherwise charged in contravention of the various statutory unconscionable conduct provisions.

Justice Gordon held that the quantum of the credit card late payment fees was extravagant (or exorbitant) and unconscionable in amount, and estimated that the actual damage suffered by ANZ in respect of each fee charged was only between $0.50 and $5.50 (depending on the specific fee), in contrast to the fees of $35 or $20 charged by ANZ. Accordingly, Paciocco was entitled to recover from ANZ the amount of the fee that was in excess of this.

The decision by Justice Gordon will impact a number of other class actions commenced in respect of bank fees against the other major Australian banks. It is also likely to have an impact upon commercial arrangements and the drafting of commercial contracts.

Background

In 2010 a representative action was commenced against Australia and New Zealand Banking Group Limited (“ANZ”) by some of its customers in respect of various fees imposed on them. As part of those proceedings, it was alleged that that the fees payable by the customers to ANZ were void or unenforceable as penalties. At first instance, Justice Gordon held that the majority of those fees could not be penalties as the fees were not payable on breach of contract, with the exception of the late payment fees, which were capable of being penalties.

The question was removed to the High Court for consideration, and in late 2012, the High Court delivered a judgment that overturned recent caselaw on penalties that required breach as an essential element in determining whether a fee is a penalty (Andrews v ANZ). The High Court decided that the correct approach is to ask whether the purpose of the fee is to secure performance of a primary obligation by the party subject to the fee or whether the fee is truly a fee for further services or accommodation. If it is a fee for further services or accommodation, it will not constitute a penalty even where the fee payable is significant. If the fee is payable to secure performance of the party subject to the fee, it will only be enforceable if it is a genuine pre-estimate of the damage suffered by reason of that party’s non-performance.

In 2013 a further representative action was commenced against ANZ in respect of its fees with a view to determining the position following the High Court’s decision.

The Decision

Credit card late payment fees

Today, Justice Gordon determined that credit card late payment fees charged by ANZ constituted a penalty at both common law and equity. Her Honour restated the principles of penalties in light of the High Court’s decision in Andrews v ANZ, adopting the broader approach that a penalty can arise not only in respect of fees payable upon breach of contract, but also in respect of fees payable to secure an obligation or performance of a party.

Justice Gordon determined that, under the relevant contracts with ANZ, Paciocco was obliged to pay a minimum amount by a certain time each month and that the credit card late payment fees were levied upon either a breach of this obligation, or as a collateral fee to be regarded as security for, or in terrorem of, performance of this obligation. Additionally, her Honour held that the quantum of the late payment fees charged was extravagant and unconscionable relative to the loss actually incurred by ANZ on breach of this obligation. In this respect, Justice Gordon preferred the expert evidence adduced by Paciocco to that adduced by ANZ, and made findings that the loss occasioned by ANZ for the imposition of each fee ranged anywhere from $0.50 to $5.50, depending on the circumstances, compared to the $35 or $20 charged by ANZ. As a result, Justice Gordon held that Paciocco was entitled to receive the difference between the credit card late payment fees paid to ANZ and ANZ’s actual loss, adjusted to take into account interest.

Other exception fees

Justice Gordon also determined that the other exception fees charged by ANZ to Paciocco, comprising of honour fees, dishonour fees, overlimit fees and non-payment fees, were not penalties. In this respect, her Honour considered the banking relationship between the bank and its customer, and held that an attempt by a customer to overdraw an account or exceed their credit limit should properly be construed as a request by that customer for credit, or an extension of credit, from the bank. The making of such a request was entirely within the customer’s control (having regard to the relevant bank balance/credit limit at the time) and required the consensual conduct of both the customer and bank.

The bank’s consideration and granting (or non-granting) of such a request was held to be further services or accommodation and justified the fees levied. Additionally, Justice Gordon also determined (although not strictly necessary), that such fees were not otherwise extravagant and unconscionable.

Unconscionable conduct

Justice Gordon was also asked to consider whether ANZ engaged in unconscionable conduct in respect of its accounts under the ASIC Act, whether the transactions were unjust transactions under the applicable Consumer Credit Codes, whether the contract terms were unfair terms under the Victorian Fair Trading Act or the ASIC Act.

Justice Gordon relevantly rejected each of these arguments in turn, holding that circumstances indicative of unconscionability, unjustness or unfairness had not been made out.

Limitations

One question that did arise was whether some of Paciocco’s claims were barred under the Victorian Limitation of Actions Act, which relevantly provided for a 6 year limitation period. Paciocco argued that, in relation to exception fees incurred and paid more than 6 years prior, he was entitled to rely on s27 of the Limitation of Actions Act which extended limitation periods in the case of mistake. Paciocco relevantly argued that he operated under the belief that ANZ was entitled to charge the exception fees and that the limitation period did not begin to run until he discovered his mistake.

Justice Gordon held that s27 extended to Paciocco’s mistake of law, and that accordingly the limitation period did not run until after the first Andrews v ANZ proceeding was commenced on 22 September 2010. Her Honour also held that the relevant limitation periods under the ASIC Act and the Victorian Fair Trading Act were not, however, subject to a similar extension.

Consequence of the decision

This decision will immediately have an effect on the numerous other bank fee class actions commenced against the other banks. Although this decision is not determinative of these other actions, the principles and findings made by Justice Gordon are likely to expedite any potential settlement of these class actions and should largely confine the scope of any further hearings (if necessary).

The decision also provides further guidance on how a Court will deal with the question of penalties in construing contractual clauses following the High Court’s decision in Andrewsv ANZ. In particular, a Court will look to the purpose of such fees to determine whether they are payable to secure the performance of a primary obligation and if so, whether some further accommodation is provided for the fee (in this instance the consideration and extension or non-extension of additional credit). In light of this recent authority it is critical for companies to turn their minds to the question of whether certain types of fees (eg break fees or non-performance fees) that are payable under commercial contracts are capable of constituting penalties and therefore unenforceable.