Katy Barnett, ‘News: Bank Fees Back to High Court’ (9 April 2015)

The High Court has dismissed an appeal from a decision of the Full Federal Court on the lawfulness of late payment fees for credit card and business bank accounts. The appellant, a business owner and head of the representative proceeding, argued that various late payment fees were penalties and/or unconscionable or unfair and contrary to various provisions of the Australian Securities and Investments Commission Act 2001 (Cth), the Australian Consumer Law and the National Consumer Credit Protection Act 2009 (Cth). The Full Federal Court allowed an appeal against the primary judge’s holding that none of the challenged fees were penalties or unconscionable or unfair, on the basis that whether the fees paid were exorbitant and extravagant should be examined by looking at the greatest predictable loss which could have flowed from the breach of the conditions, rather than what the losses incurred by the bank actually were. Before the High Court the appellants sought to demonstrate that the FCAFC erred in dealing with their arguments on the statutory norms of ‘unconscionable conduct’ , in failing to distinguish between the statutory norms and penalties at general law, and in its finding that where the fees were penal it was still not possible for the disproportion between the fees and the cost to the bank to give rise to statutory ‘unconscionability’, ‘unjustness’ or ‘unfairness’ absent proof that the fees were exorbitant from the bank’s perspective.

The first matter in the appeal related to whether the late fee was unenforceable as a penalty under the common law. The second matter related to whether the fees contravened the statutory provisions on ‘unconscionable conduct’ and ‘unjust’ or ‘unfair’ contracting. A four-member majority (French CJ, Kiefel J, Gageler J and Keane J) dismissed the appeals in both matters in separate judgments.

French CJ agreed with the reasons of Kiefel J on the common law claims and, in relation to the statutory claims, with the reasons of Keane J (at [2]), but also made additional comments on the divergence between the common law of Australian and the common law of the United Kingdom on penalties (see at [6]–[10]).

Kiefel J concluded that while it was difficult to measure the loss to ANZ from a late payment, consistently with the case law the central question is whether the late fee is out of all proportion to ANZ’s interest in receiving the minimum monthly payment on time, and against this test the appellants failed to show that the late fee was a penalty (at [69]). Noting the difficulties of making a pre-estimation of loss in this case, and acknowledging that a range of methods might be suitable, Kiefel J noted that the task of pre-estimation is not one that ‘calls for precision’: ‘The conclusion to be reached, after all, is whether the sum is “out of all proportion” to the interests said to be damaged in the event of default’ (at [57]). ANZ’s interest in the timely repayment of credit was relevant to its operational costs, its loss provisioning, and the increases in regulatory capital costs (see [59]–[67]). While the actual costs may have been far smaller than the late fee, they were nonetheless real potential costs that reflected injuries to ANZ’s financial position. Kiefel J concluded (at [68]) that ‘They were real because they had to be taken into account by the ANZ. The evidence called for the appellants did not address damage of this kind. It cannot therefore be concluded that the sums of $20.00 and $35.00 were out of all proportion to the interests so identified.’ Kiefel J agreed with Keane J in the second matter relating to the statutory provisions.

Gageler J began his analysis with several comments on the UK Supreme Court’s reading of Andrews (at [118]ff), arguing that Andrews was not a radical departure from the common law of Australia, and that its significance as applicable to this matter was in explaining a penalty as a punishment for non-observance of a contractual stipulation, extending an idea that originated in equity, and thus endorsing Lord Dunedin’s view in Dunlop (at [127], and see [128]ff on those origins, and at [141]ff on the reception of Dunlop). For Gageler J, examining whether the contract stipulation has no other purpose than punishment here requires a more specific inquiry into the commercial circumstances of in which the parties entered the contract (as opposed to the UK approach of asking whether the stipulation serves a ‘legitimate interest’, although these might lead to the same result): at [166]. Specifically, it meant asking whether the late fees had no other purpose besides punishment, or alternatively serving ANZ’s interest in ensuring that credit card customers made their minimum monthly payments on time (at [167]). The appellants failed to demonstrate that the fee served the first purpose because the evidence showed ANZ incurred commercial costs from late repayments that made the fees reasonable: these costs were not grossly disproportionate to the amount of the fee (see [169]–[177]). As to the second appeal, Gageler J held that the late payment did not contravene any of the various statutory norms against unconscionable conduct in contractual conditions, specifically s 12CB of the ASIC Act: the fees were clearly disclosed in a number of ways and the appellant could and did understand them, there was no evidence of undue influence or pressure leading to him signing the contracts, he could have terminated them at any time or sought a credit account at another bank, and even if the fees did lead to windfall gains to ANZ their conduct would still not have been unconscionable within the meaning of the Act (at [190]–[191]).

Keane J also held that the appellants had failed to show that the late fees were penalties. For Keane J, the bank had a ‘multi-faceted’ interest in receiving customers repayments on time, and its legitimate interest that is protected by the late fee emerges from the commercial context, namely, that it provides financial accommodation to many customers on standard terms and the commonality of those terms allowed the bank to fix the risk and reward over multiple transactions (see [271]–[273]). Moreover the bank also had a legitimate interest in timely repayment because repayment allowed it to pursue its business of lending to customers (see at [278]). Further, the evidence did not demonstrate any gross disproportion needed to show the punitive character of the fee, because it did not address the full range of ANZ’s legitimate interests protected by that fee (at [279]). Finally, Keane J held that the primary judge erred in examining the late fee as ‘turning upon a comparison between the quantum of the fee and the amount that might have been recovered in an action for damages’ (at [279]), but rather should look to the genuine pre-estimate of damage (as opposed to damages) as the loss caused by the breach, and not what a court might award as a remedy — and stipulating a greater remedy than would be available at law does not necessarily amount to a punishment: at [283]. As to the statutory claims, Keane J (French CJ and Kiefel J agreeing) dismissed all three. The fees did not involve unconscionable conduct contrary to s 12CB of the ASIC Act because that argument relied on the proposition that the fee amount must have been set only a cost recovery, and thus relied on an overly narrow assumption about ANZ’s legitimate interests (see at [294]). Nor did the fee constitute an unjust transaction or unfair contract term, again because these arguments confined ANZ’s legitimate interests too narrowly (see at [295]–[304]).

Nettle J, in dissent, would have allowed the appeal on the common law claim on the basis that the late fee was a penalty because it was grossly disproportionate to the greatest amount of damages that would be recoverable for the breach of the monthly payment obligation (Nettle J would have left the statutory appeal unadjudicated on the merits: see [375] and [376]). Contrary to the majority, Nettle J held the appropriate penalty test from Dunlop to have been of whether the agreed sum is ‘extravagant and unconscionable’ compared to the greatest loss that could conceivably be proved following a breach of the obligations (see [317]). Consequently, Nettle J saw the late fee as payable on a breach of the obligation to pay the monthly payment on time, and thus focused on the lateness of the payment rather than a failure to pay at all (at [338]). Following this approach, Nettle J held that the primary judge was correct to reject ANZ’s arguments that the late fee covered possible costs associated with bad or doubtful debts, increased regulatory capital and collections because to a very large extent those costs were not actually incurred (see at [349]–[369]). The total cost that might have been recoverable was at most $6.90 which was ‘extravagant or otherwise out of all proportion’ to the $35 (or the eventual $20 fee) that was charged, and thus the fee was a penalty (see at [371]).