Bank fees are always a sensitive issue for the community, and a matter of strong public interest in Australia. A recent judgment of the High Court has left open the possibility that high bank fees may contravene a long standing equitable prohibition against penalties.

The litigation of Andrews v Australia and New Zealand Banking Group Ltd (ANZ) is one of several proceedings against banks which are presently on foot in the Federal Court of Australia, and which raise similar issues. In broad terms, in each matter the plaintiffs are seeking repayment of bank fees charged to them under contracts with their bank.

Andrews v ANZ is a representative action, with the proceedings being undertaken on behalf of approximately 38,000 customers of the ANZ. The plaintiffs seek repayment of fees of about $50 million, already paid on various grounds including that the ANZ has engaged in “unconscionable conduct” in contravention of certain Acts, and that certain provisions in contracts between ANZ and the plaintiffs are void or unenforceable as penalties.

The subject provisions concern fees identified as honour, dishonour, and non-payment fees charged by the ANZ in respect of various deposit accounts, and fees identified as over limit and late payment fees charged by the ANZ in respect of credit card accounts.

The judgment delivered by in the High Court of Australia on 6 September 2012, citation [2012] HCA 30, involved a consideration of the penalty doctrine, which ANZ unsuccessfully argued was largely inapplicable to the present case.

We will briefly summarise the penalty doctrine and its history, before turning to consider the conclusions of the High Court in theAndrews Case.

The penalty doctrine

In Legione v Hately (1983) 152 CLR 406, Mason and Deane JJ said: “A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation” (at 445).

The additional or different liability is regarded as being in the nature of a security for the satisfaction of the contractual stipulation. The penalty need not be a requirement to pay a sum of money.

In general terms, the penalty doctrine provides that:

  • If compensation can be made for the prejudice or damage suffered by non-observance of the contractual stipulation, then the penalty will be enforced against the party in breach (the first party) only to the extent of that compensation;
  • If, on the other hand, the prejudice or damage to the interests of the second party is insusceptible of evaluation and assessment in money terms, then there is no “handle” for equity to intervene and the penalty doctrine has no application.

For example, in the High Court case of Waterside Workers’ Federation of Australia (WWFA) v Stewart (1919) 27 CLR 119, a bond was given by WWFA in the sum of 500 pounds on condition that it pay 50 pounds if and so often as its members in combination should go on strike. No relief was given under the penalty doctrine on the basis that whilst refusal to work would inevitably cause loss to employers, “no one can tell how much loss is sustained by not doing business”.

In Ringrow Pty Limited v BP Australia Pty Limited (2005) 224 CLR 656, the High Court approved the following statement of Lord Dunedin regarding penalties, and the distinction between a penalty and liquidated damages:

“[11]     The starting point for the appellant was the following passage in Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd:

“2.        The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage …

3.         The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ...

4.         To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

(a)        It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach …

(b)        It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid …

(c)        There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage'."

[12]      … Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where reconsideration or reformulation is in issue.”

However, the New South Wales Court of Appeal has fairly recently said that Lord Dunedin’s above observations should not be treated “as exhaustive statements of the law” and penalties “are not encountered exclusively in appositions with liquidated damages”.1

In Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292, a decision of the New South Wales Court of Appeal, the appellants engaged in the business of lending and procuring of moneys on the security of mortgages. The respondents were mortgage originators who found and brought forward to the appellants applications by third parties for loans, and managed the ongoing servicing of such loans. The legal relationship between the appellants and the respondents were governed by two written agreements in substantially the same form.

The appellants terminated both agreements with the consequence that the respondents ceased to be entitled to certain income under the agreements. The respondents asserted that the clause in the agreements which provided for the cessation of the payments were penalties.

The primary judge, Brereton J, held that the provisions in both agreements were void as a penalty and that the respondents continued to be entitled to the commissions in question. His Honour found that the stipulated forfeiture to remuneration already earned “does no work at all in relation to damages, but operates in a way that simply inflicts a loss on the (appellants) for the benefit of the (respondents), for no reason other than termination”.2 Brereton J also rejected the proposition that the doctrine of penalties has no operation in relation to a clause which provides for a sum to be paid on the occurrence of a specified event which is not a breach of contract.

The New South Wales Court overturned the decision of Brereton J, finding that payment conditioned on a breach of contract is an essential element of a penalty and that there had been there had been no breach of contract by the appellants.

Allsopp P, with whom Giles and Ipp JJA agreed, also offered the following words of caution (underlining added):

“The issues in this appeal raise or may raise important questions for commercial law, the common law and equity, and the relationship of all three to each other. If I may respectfully say (though I have the misfortune to disagree with him) the primary judge’s thoughtful reasons highlight the potential tension between different approaches in this field. In my view, as I have attempted to explain, the weight of existing authority (underpinned by a recognition of the need for clarity and certainty and by a respect for the bargains of parties) is to limit the doctrine of penalties within narrow and clear boundaries.”

The Andrews Case

On 13 December 2011, the primary judge (Gordon J) gave answers to certain separate questions, the substance of which was to ask whether the relevant fees were payable upon breach by the applicants of contractual obligations to the ANZ, and, in the alternative, to ask whether it had been the responsibility of the applicants to see that the circumstances occasioning the imposition of the fees did not arise. If there was an affirmative answer to either of the alternative questions, the primary judge was then required to answer whether the fees were "capable of being characterised as a penalty by reason of that fact".

The primary judge found that the late payment fee was payable upon breach of contract and therefore was capable of characterisation as a penalty. The ANZ did not seek to appeal against that finding.

However, in respect of the honour, dishonour, non-payment and over limit fees, the primary judge held that these were not charged by the ANZ upon breach of contract by the customer. Nor was the occurrence of the event upon which the fees were charged (overdrawing the account or credit limit or attempting to do so) an event which the customer had an obligation or responsibility to avoid. Having thus answered in the negative each of the alternative questions, the primary judge followed what had been decided by the New South Wales Court of Appeal in Interstar and held that it was unnecessary to answer the question whether the fees were capable of characterisation as a penalty.

The High Court upheld the appeal, saying (at [78]):

The … restrictions upon the penalty doctrine urged by the Court of Appeal in Interstar should not be accepted. The primary judge erred in concluding, in effect, that in the absence of contractual breach or an obligation or responsibility on the customer to avoid the occurrence of an event upon which the relevant fees were charged, no question arose as to whether the fees were capable of characterisation as penalties.”

Crucial in the High Court reaching the conclusion that the restrictions upon the penalty doctrine urged by the Court of Appeal inInterstar should not be accepted, was an examination of the law respecting bonds.

As the High Court noted, a bond is an instrument under seal, usually a deed poll, where the obligor is bound to the obligee. The ordinary form of bond is accompanied by a condition. The performance or occurrence of the condition discharges the bond, and there is an acknowledgement of indebtedness on the part of the obligor if the condition is not performed. An action in debt for the sum of the bond was the remedy for enforcement of the bond at law, however the court of equity limited the recovery in an action on a bond to the damages actually suffered by the oblige - if the failure of the condition was compensable. The High Court noted that this distinction has developed into the modern distinction between penalties and liquidated damages, as captured in the observations of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co.

The High Court noted that the law respecting bonds was received from Roman law and developed before the modern law of contract, and concluded that “it does not follow, as the ANZ would have it, that in a simple contract the only stipulations which engage the penalty doctrine must be those which are contractual promises broken by the promisor” (at [45]).

What does the Andrews Case mean?

The High Court did not make any finding as to whether the relevant fees charged by the ANZ were penalties, noting that this question was for the primary judge upon the further conduct of the trial.

However, it is potentially significant that the High Court rejected the attempt by the New South Wales Court of Appeal to “limit the doctrine of penalties within narrow and clear boundaries”.

It will be interesting to see what findings the primary judge makes in respect of each relevant fee charged by the ANZ, including whether:

  • the fee represents a genuine pre-estimate of the damage suffered by it;
  • the loss suffered by the ANZ is insusceptible of evaluation and assessment in money terms, with the result that the penalty doctrine has no application; or
  • the fee “is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from” the occurrence of the event giving rise to the fee.

Certainly, all four of the big Australian banks (ANZ, Commonwealth Bank of Australia, Westpac Banking Corporation and National Australia Bank) and many of their shareholders will be monitoring with great interest the further trial of the Andrews Case, and any subsequent appeal/s.