The Federal Court of Australia has found mostly for the banks in a class action regarding the legality of certain bank fees for overdrawn accounts, dishonoured payments and over-limit credit card charges.
The preliminary decision in Andrews v Australian and New Zealand Banking Group Limited found that most of the challenged fees were not penalties and so could be enforced by the bank. Others, however, have been referred by the Court to a substantive hearing next year.
A key issue for New Zealand is how, if at all, the judgment will affect cases brought under the Credit Contracts and Consumer Finance Act 2003 (CCCFA), under which default fees can only arise from a breach of contract. If the types of fees in the Andrews case do not relate to a breach of contract, then they might not be default fees either. This would mean that for the CCCFA to apply, such fees would need to fall within the definition of credit fees.
The scope of the decision
At issue was whether specific fees charged by the bank to three customers operating particular banking accounts were unenforceable penalties as a matter of contract law.
The decision did not relate to other accounts offered by the bank or undertake any general inquiry into the practices of that bank or any other bank.
The law of penalties
The law of penalties applies in respect of sums payable (or property transferable) where there is a breach of contract. The sum is enforceable if it is a genuine pre-estimate of loss from breach of contract. If not, then it may be a penalty.
The applicants in the Andrews case argued that the law of penalties also applied to sums that became payable on the happening of events other than a breach of contract.
Justice Gordon rejected this argument, ruling that there is “extensive and longstanding authority in Australia and the United Kingdom that the law of penalties has no application to a contractual provision requiring a payment on the happening of an event that does not constitute a breach of contract”.
Application to the fees in issue
Once Justice Gordon had concluded that the law of penalties applied only where there was a breach of contract, much of the applicants’ case against the bank fell away.
Her Honour noted that the usual contractual terms between banker and customer included a set of core banking law principles.
- A savings or deposit account is in law a loan to the banker.
- The issue of a cheque by a customer, or the giving of a payment instruction or withdrawal request to the bank, which would have the effect of overdrawing the customer’s account, is to be taken as a request by the customer for an advance or loan from the bank. The bank has discretion over whether to approve the loan.
- The bank has no obligation to pay a greater amount than the balance standing to the credit of the customer, unless overdraft arrangements have been made.
- If a customer with no express overdraft facility draws a cheque which causes the account to go into overdraft, the customer, by necessary implication, requests the bank to grant an overdraft on its usual terms as to interest and other charges.
In Her Honour’s view, it was apparent from these general principles that the customer had no contractual obligation to remain within the agreed credit limits or to refrain from trying to overdraw the customer’s account. Rather, when a customer tries to overdraw an account, two possibilities follow.
First, the bank may allow the customer to overdraw the account, subject to payment of the contractually agreed interest and charges. Justice Gordon held that there was no breach of contract in this situation, because the bank had agreed to the customer’s implied request to overdraw the account.
Second, the bank may refuse to allow the customer’s attempt to overdraw the account. In this situation, Justice Gordon held that there is also no question of any breach arising, in part because the bank’s refusal of the customer’s implied request for more funds means that the customer remains within the agreed credit limits.
Turning to the particular banking contracts in issue, Her Honour found that, under the law of penalties, the honour fees, dishonour fees, over-limit fees, and overdrawn fees in question in the proceeding could never be capable of being penalties. That was because they were effectively charged by the bank in return for its agreeing to consider a request by the customer for further funds. The fees were not payable as a result of any breach of the customer’s contractual obligations and so the law of penalties could not apply.
The position was otherwise with the late payment fees that the bank charged customers for failing to pay the minimum amount due on their credit card by the due date.
In this case, the customer did have a contractual obligation to pay the minimum amount due by a particular date. The late payment fee became payable a few days after that obligation fell due. Since the late payment fee was a fee payable as a result of the customer’s breach of contract, Justice Gordon held that the law of penalties could potentially apply to this type of fee. Whether or not the particular fees charged are in fact unenforceable penalties will be determined, along with other issues, in a substantive hearing next year.
It must be stressed that Justice Gordon’s decision was limited to considering particular fees charged by one bank in relation to particular types of account offered by that bank.
But there may be implications in New Zealand for the CCCFA in relation to default fees which, under the CCCFA, only arise from breach of contract. If the types of fees in the Andrews case do not relate to breach of contract, then they might not be default fees either. This would mean that for the CCCFA to apply, such fees would need to fall within the definition of credit fees.
In respect of each of the 17 fees considered by the Court, Justice Gordon carefully considered the detailed terms and conditions applicable to each type of bank account, as well as the particular regulatory framework within which the bank operated in Australia at the relevant time. Different terms and conditions might well have led, in some cases, to a different result.
Nevertheless, we consider that Justice Gordon’s analysis is likely to be very persuasive if a New Zealand court ever had to consider whether bank fees of the types in issue in the Andrews case were unenforceable penalties under New Zealand law.
As in Australia, the orthodox position in New Zealand is that the law of penalties applies only to sums payable on breach of contract. We also expect that, as in Australia, New Zealand law would not accept a customer to be in breach of its banking contract simply by overdrawing, or attempting to overdraw, its account.
It follows that a New Zealand court is very unlikely to find that honour fees, dishonour fees, over-limit fees and overdrawn fees are capable of being unenforceable penalties, although each case will turn on the precise terms and conditions of the relevant contract between banker and customer.
As for the Andrews litigation, the proceeding will go to trial next year to determine whether, as a matter of fact, the late payment fees are unenforceable penalties. The bank has already admitted that the fees do not represent any genuine pre-estimate of the loss flowing from breach, so the bank will presumably argue that the level of the fees is not so extravagant as to amount to a penalty. If the fees are found to be penalties, the applicants are seeking orders requiring repayment of all or part of the fees.