The class action involving bank fees is back in court again. Last year, the class action against banks was uplifted to the High Court in Andrews v Australia and New Zealand Banking Group Limited  HCA 3. It was remitted back down to the Federal Court for decision in light of the High Court’s decision last year and is presently being heard. The case involved the rule against penalties in contract. The essence of the rule is that parties may stipulate the amount payable for certain breaches of contract (known as ‘liquidated damages’), but if the amount payable is not a genuine pre-estimate of loss and is instead in terrorem of the other contracting party (i.e. designed to scare them into performance rather than compensate for loss) then the clause may be struck down by the law against penalties: see Ringrow Pty Ltd v BP Australia Pty Ltd  HCA 71; (2005) 224 CLR 656, affirming Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 79.
There has been intense media interest in the case (see here and here) and indeed, I was contacted by a number of outlets when the case went back to the Federal Court (for example, here and here) . As noted on Monday, there is a great deal of money at stake for both the banks and the customers. The present class action involves a $57 million claim, but other planned class actions are estimated to be worth $243 million, and more may be in the pipeline, depending on the success of this claim.
What was the High Court’s decision in Andrews v ANZ?
At first instance (in Andrews v Australian and New Zealand Banking Group  FCA 1376) the plaintiffs were largely unsuccessful in their claim. Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd  NSWCA 310 held that it was necessary for a breach of contract to trigger the necessity to make the payment. Consequently, a clause which was drafted permissively (“I agree to pay a fee of $50 if I overdraw my account”) did not engage the rule against penalties because the payment was not triggered by a breach of contract. However, the High Court overruled Interstar and held that permissively drafted clauses could potentially engage the rule against penalties. The Court said at :
In general terms, a stipulation prima facie imposes a penalty on a party (“the first party”) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.
The court distinguishes between a ‘collateral stipulation’ (which will engage the rule against penalties) and an ‘alternative stipulation’ (which will not engage the rule against penalties).
In Andrews v ANZ, the High Court used Metro-Goldwyn-Mayer Pty Ltd v Greenham  2 NSWR 717 to provide an example of a permissible ‘alternative stipulation’. The case involved a contract for the hiring of films to exhibitors for public showing. The contract conferred the right to one screening at a particular time, but if the exhibitor wished to make additional showings, he was obliged to pay a sum four times the original fee. A majority of the New South Wales Court of Appeal decided that this additional payment was not a penalty, but a legitimate option to obtain further screenings. The situation was likened by Holmes JA to a lease to a farmer where a particular rate of rent was stipulated for one area of land with a covenant not to cultivate another area. The lease would say that if the farmer wished to cultivate that other area, he would have to pay a higher rate of rent. [Although Holmes JA does not reference it, this example must be derived from the scenario suggested by Lord St Leonards in French v Macale (1842) 2 Drury 269, 275-6 which the High Court cites in Andrews v ANZ at ]. Holmes JA says that the clause in the screen contract is essentially analogous to this situation, as the additional use of a film beyond what was authorised might entitle the distributor to a much higher rent. He notes that further showings would result in greater profit for the exhibitor and would affect the rate of hire the distributor could get from another exhibitor in the area, and that accordingly the clause was not a penalty.
With respect, the distinction between a ‘collateral stipulation’ and an ‘alternative stipulation’ is not an easy one to draw.
The High Court in Andrews v ANZ did not discuss the requirement in Ringrow and AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 190 (Mason and Wilson JJ) that disproportion will only be considered if the sum is ‘out of all proportion’ and ‘extravagant and disproportionate in amount.’ It also remains unclear to what extent disparity of bargaining power is relevant under Andrews v ANZ. For example, is it relevant that the plaintiffs in Andrews v ANZ were consumers who signed standard form contracts and who had limited opportunities to contract with another bank on more favourable terms, because all banks charged fees? Dicta in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 by Mason and Wilson JJ at 193 suggest the nature of the relationship between the parties is a factor relevant to the assessment of whether a clause is a penalty or not, but dicta in Esanda Finance Corp Ltd v Plessnig (1989) 166 CLR 131 by Wilson and Toohey JJ at 142 suggest that disparity of bargaining power should not be overemphasised.
What are the broader ramifications?
To my mind, the liability of the banks is likely to depend on whether the fees are ‘extravagant and unconscionable’. The level of disproportion between the loss suffered and the fee charged is likely to play into the court’s decision as to whether the sums are judged to be collateral stipulations or alternative stipulations. Obviously, given what was said above about the quantum of the claims, the liability of the banks could be great if the plaintiffs’ claims are upheld either partially or wholly.
There are broader ramifications for commercial contracting generally. The Andrews v ANZ decision may mean that clauses which were drafted on the basis of Interstar and thought to avoid the penalties rule now fall foul of the penalties rule. Even if the clauses are ultimately held not to be penalties, the decision leads to commercial uncertainty, as contracting parties will feel able to challenge such fees until the law is settled (see a recent article by Richard Manly SC, ‘Breach no longer necessary’ (2013) 41 Australian Business Law Review 314, 334-5).
Banks and other businesses will be awaiting the outcome of Andrews v ANZ with bated breath, as will consumers. I suspect it is highly likely that this case will end up in the High Court again, whatever the outcome before Gordon J.