Why do banks charge late fees? Over limit fees? Honor and dishonor fees? Are they punishment for misbehaving customers or fees for services?
A judgment shortly due from the Federal Court of Australia will answer these questions, in a class action suit that saw thousands of customers challenge the validity of these so-called 'exception fees' which have earned hundreds of millions of dollars in revenue for the ANZ Bank, one of Australia's largest banks.
The answer—the reason the fees are charged—is important because the class representatives rely upon the equitable doctrine of penalties, which for centuries has held that a liability to pay a sum of money is void if it is intended to punish a party for (or to put it another way, to dissuade a party from) breaking its word, rather than to compensate any consequential losses.
The case will have ramifications for banks, other businesses across Australia and potentially across the globe.
In September 2010, Australian law firm Maurice Blackburn launched the first in a series of class action lawsuits against the largest banks in that country, on behalf of what grew to around 185,000 class members, claiming repayment of an estimated $220 million (USD) in late payment and overlimit fees charged to credit card accounts and honor and dishonor fees charged to transaction accounts.
The central argument was that the fees were repayable because they were "penalties." In common law countries and in the US, the doctrine of penalties was traditionally summarized thus: money payable upon a breach of a term of a contract is void as a penalty if it is imposed as security for performance of the term, in that it is in excess of a reasonable pre-estimate of the loss suffered as a result of the breach.
Thus, the case alleged that these $20 or $35 fees (AUD) represented windfall profits greatly disproportionate to the real costs to ANZ of a customer missing a credit card payment or overdrawing an account.
Two critical issues were identified early in the course of this class action litigation: one of law and one of fact.
The legal controversy arose in respect of the scope of operation of the penalties doctrine. ANZ argued that its fees were not charged in breach of contract at all but that, on a true reading of its contracts, its customers were permitted to overdraw their accounts or pay late and that the fees were charged for these events, which it said were in fact services supplied to its customers. Class counsel argued that, on an accurate analysis of 900 years of English and Australian legal history, the doctrine was applicable irrespective of whether the fees were payable upon a breach of contract.
The factual controversy concerned the quantum of the loss that could be suffered by ANZ as a consequence of the events triggering the fees: how much would it cost the bank when a customer was late in paying a credit card, or overdrew an account?
Justice Michelle Gordon, sitting on the Federal Court, ordered the first legal controversy to be determined separately and in December 2011 found, in favor of the bank, that the doctrine only applied where a sum was payable upon a breach of a contract, and that credit card overlimit fees, and honor and dishonor fees charged on transaction accounts, were not payable upon such a breach. In favor of the class however, Gordon also found that credit card late payment fees were payable upon breach.
The applicants appealed Gordon's decision to the country's highest court, the High Court of Australia, which in finding for the applicants in Andrews v. ANZ Banking Group Ltd in September 2012, held that the doctrine of penalties was not applicable only to sums payable upon breach of contract. In expressing the doctrine in a manner which significantly varied from its formulation over the course of English and Australian 20th century jurisprudence, the High Court embraced the broader concept of a "stipulation" as derived from Roman law's stipulatio:
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.
Thus, the High Court preferred substance over form and analyzed the nexus between the triggering event and the payment of the sum in all the circumstances of the arrangements between the parties, irrespective of whether the "stipulation" is in the form of a contractual prohibition. Further, a truly consensual arrangement where a fee is charged upon the provision of a service or some other form of what the court in Andrews, termed 'accommodation'—that is, if you get something in return for paying the fee—will not be a penalty.
This represents a departure from UK Authority which still limits the doctrine to circumstances of breach of contract. US law has created its own mechanism, via Restatement 2nd § 356(c), for granting primacy to substance over form by recognizing a dichotomy between penalty provisions and arrangements which offer genuinely alternative modes of performance.
In a nutshell, whether ANZ's fees fall within the scope of the Andrews penalties doctrine depends upon whether the exception fees are a detriment imposed on failure of a primary stipulation (e.g., "you must not overdraw your account") or simply a fee for a service.
This controversy, and those that necessarily followed, including the quantification of the loss suffered by ANZ as a result of the events giving rise to fees, were the subject of a December 2013 trial before Gordon. Class counsel retained a forensic accountant who gave independent expert testimony that ANZ's underlying costs were dramatically less than the fees in question. ANZ obtained its own expert testimony that those costs were dramatically in excess of those fees.
The parties now await a decision. Given Gordon's December 2011 judgment in which credit card late payment fees were held to be payable upon breach of contract, whether those fees are penalties depends upon whether they are in excess of their underlying costs. Credit card overdraft fees and honor and dishonor fees on transaction accounts will be penalties only if they are found to fall within the Andrews doctrine and are also excessive in light of underlying costs. Other statutory causes of action—including allegations of unfair contract terms, unjust transactions and unconscionable conduct—will also be determined.
Banking industry analysts and consumer advocates both in Australia and overseas will be awaiting this important judgment which will shed light not only upon the claims of class members involved, but also upon claims of those who have signed up to similar actions launched by Maurice Blackburn against seven other Australian banks.
More broadly, this judgment and the already influential Andrews decision will resonate through the legal departments of any companies which impose fees—late fees, excess fees or others—as a disincentive charged in order to shape customer behavior.
The judgment is expected to be delivered in the coming months and will be available here and cited as Paciocco v Australia and New Zealand Banking Group Ltd.
Andrew Watson is a Principal and national practice leader of Maurice Blackburn's Class Actions department, based in Melbourne. His primary focus is major litigation for shareholders who have been victims of corporate misconduct. Andrew has conducted, assisted in or supervised approximately 35 class actions on behalf of plaintiffs, including the Aristocrat, Concept Sports, Multiplex, Centro, NAB, Bank Fees and Kilmore East Kinglake and Murrindindi Bushfires class actions.Author: JURIST Guest Columnist Andrew Watson of Maurice Blackburn LawyersSource: Jurist.org