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The High Court backs the ANZ on bank fees
It shouldn’t really be big news, but it probably is: the High Court has held that contracts mean what they say.
In our analysis of last year’s ANZ bank fees decision by the Full Federal Court, we said:
“corporations can breathe a small sigh of relief that a degree of commercial and legal good sense has prevailed. Contracting parties can once again negotiate damages clauses with greater certainty that they will do their job – which is to simplify, rather than complicate, the resolution of disputes arising out of a breach of contract. “
Last week, the High Court affirmed the Full Court’s decision that the ANZ’s late fees were not a penalty and were therefore enforceable in accordance with their terms. In so doing the Court signalled that it does not see the role of the courts as scrutinising private agreements and making adjustments to bring them into line with standards of reasonableness or fairness imposed by the courts. Exception fee clauses, such as those imposing fees by banks on customers for late payment of their accounts, will be enforceable other than in the most extreme cases where they are out of all proportion with what is necessary to protect the bank’s commercial interests. Contracting parties can reach agreement as they see fit, and they will be held to their agreement.
The case specifically involved late fees and other exception fees charged by ANZ Bank that were said to be higher than the bank’s costs incurred as a result of customers’ late payments.
There are many other examples of commercial contracts where fees are imposed by suppliers that establish an incentive for customers to perform their contractual obligations. Most electricity, water and gas utilities charge fees for late payment of invoices, as do telecommunications companies and many other service providers. Even car park operators charge fees for lost tickets or for allowing vehicles to exit outside their usual operating hours.
The ANZ decision means that it can no longer be argued that these fees must reflect, and not exceed, the costs of the supplier. Except where the fee is grossly disproportionate to the commercial interests of the supplier (which is a broader notion than merely its costs incurred), the High Court has said it is up to the parties to agree on the quantum of the fee.
The decision signals that the High Court does not see it is an appropriate role for courts to oversee, and apply their own standards to, private contracts. It will be interesting to see if this approach finds expression in other areas. For example, for the past couple of decades various courts have been prepared to imply into commercial contracts a requirement that parties to act toward each other in good faith in performing their contractual obligations. The High Court has never had the opportunity to consider whether it is appropriate to imply such an obligations where the parties have not seen fit to include one expressly in their contract.
If the “hands off” approach is followed, it seems that the High Court may be reluctant to scrutinise contractual obligations agreed to by contracting parties by imposing a fairly nebulous obligation of this kind. Rather, one imagines it would leave it to the parties to perform their bargain on precisely the terms in which they expressed it. Will last week’s decision encourage a plaintiff to take an implied term case to the High Court? Time will tell.
In depth: the issues
Mr Paciocci, a customer of ANZ, argued that the fees charged (initially $35 and later $20) for late payment of his minimum repayment on his credit card:
- was an unenforceable contractual term as it was a penalty for breach of contract;
- breached the statutory prohibitions against unconscionable conduct, unjust transactions and unfair contract terms.
(a) The penalty case
The High Court confirmed that the test for determining if a term which provides for the payment of a sum upon breach of a contractual term is a penalty was “whether the sum agreed is commensurate with the interest protected by the bargain”.1 The sum will be a penalty if it is “extravagant and unconscionable”.2 Another way of putting it is whether the sum charged by the bank was “out of all proportion” to the interests affected.3
The policy is to prohibit a contractual term which has no other purpose than to punish.
The High Court busted a couple of myths about what this means:
- if no pre-estimate is made, at the time the contract is entered into, of the loss likely to be suffered if a customer payment is made late, it does not follow that the late fee is a penalty.
- if the late fee is greater than the damages directly caused by the late payment, it does not follow that the late fee is a penalty.
The use of the words “extravagant and unconscionable” reflect that the sum must be excessive or completely out of proportion with the protection of the contracting party’s interest.
The “interest” to be protected goes beyond the losses suffered by the bank as a direct result of the late payment. That is – it is beyond that which would be compensable if a claim for damages was brought for a breach. This is an important point and is the means by which the wider commercial context in which the contract is made can be taken into account.
The court identified the commercial interests of ANZ in receiving payment on time in respect of the credit it advanced to its customers. Its interests included not just recovery of collection costs, which are directly attributable to the late payment, but impacted the bank’s interests more broadly through:
increased operational costs;
the need for loss provisioning; and
increases in regulatory capital costs.
These interests would be too remote to be recoverable as damages. However, they form part of the context which ought to be taken into account to determine whether the late payment fee could not be said to be “out of all proportion” to the legitimate commercial interest ANZ had in ensuring that its credit card customers made their minimum monthly payments by the due date.
(b) The statutory case
The High Court also found that the imposition of late payment fees did not breach the statutory prohibitions against unconscionable conduct, unjust transactions and unfair contract terms.
In considering whether there was a breach of unconscionable conduct provisions, the court pointed out the difference between:
- a term that might be said to be unconscionable, such as the late payment fee term; and
- conduct on the part of a supplier, as a result of which the customer was required to comply with the term.
The unconscionable conduct provisions were only concerned with prohibiting the latter and not the former.
The court found that the unconscionable conduct provisions were not breached as there was no suggestion that there was unconscionable conduct on the part of ANZ in causing Mr Paciocci to enter into the credit card contracts which contained the late fee terms.
The unjust transactions and unfair contract terms provisions were also dispensed with on the same reasoning that the late fee was not a penalty: there was nothing unfair or unjust in a supplier seeking to protect its legitimate commercial interests through the imposition of a fee, so long as the fee is not out of all proportion to the interest.
The unjust terms provisions of the Competition and Consumer Act are to be strengthened later this year to apply to small businesses. However the High Court’s reasoning will still apply to the manner in which those provisions are to be interpreted.
1Andrews v ANZ (2012) 247 CLR 205 at 236
2Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 79 at 87
3 per Kiefel J.