SYDNEY: 4 March 2014 - Michael Legg, Associate Professor, UNSW Law and John Emmerig, Partner, Jones Day examine bank fees class actions

Overview

The Federal Court of Australia has held that credit card late payment fees charged by Australia and New Zealand Banking Group Limited (ANZ) were penalties both at common law and in equity.  This entitles the bank customer to recover from ANZ the difference between the credit card late payment fees paid to ANZ and ANZ’s actual loss.  Further, the Federal Court found that the statute of limitations period of 6 years only began to run once the customer discovered, or could with reasonable diligence have discovered that the fees could be charged because they were penalties.

A number of other fees, non-payment fees, overdraw honour/dishonour fees and overlimit fees, were not penalties.  Nor were those fees charged in contravention of various statutory unconscionable conduct, unjust transaction or unfair contract term provisions. 

Since the commencement of proceeding against ANZ a number of other class actions have been filed against other banks operating in Australia.  The outcome in the class action against ANZ is therefore not just of relevance to the 40,000 group members in that class action but a guide for claims of another estimated 140,000 customers claiming against other banks.  Justice Gordon’s estimate of the quantum of damage suffered by ANZ in respect of each fee charged and the quantum of that fee, although small, when multiplied by the number of times a fee was charged and the number of claimants gives rise to a substantial liability for the banks.  However, it must be remembered that the ANZ case was decided based on the terms of the specific accounts in issue.  Accounts and banks with different terms may result in different outcomes.

The use of the penalty doctrine in relation to bank fees may also be transferred to other industries that charge consumers standard fees where that fee is not a genuine pre-estimate of the loss incurred by the company providing the service or product. 

Background

Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35 was a class action that proceeded on the basis that there would be a trial of all of the applicant’s claims against ANZ. 

The Applicants, Mr Paciocco and one of his companies, Speedy Development Group Pty Ltd (SDG), held accounts with ANZ. Mr Paciocco held a consumer deposit account and two consumer credit card accounts. SDG held a business deposit account. The contractual terms for both the consumer deposit account and the business deposit account entitled ANZ to charge honour, dishonour and non-payment fees. The contractual terms for the consumer credit card accounts entitled ANZ to charge late payment fees and overlimit fees. Mr Paciocco and SDG alleged that the contractual terms that entitled ANZ to charge these fees constituted penalties at common law and in equity.  The Applicants further contended that if a fee was not a penalty then ANZ had contravened various statutory provisions dealing with unconscionable conduct, unjust transactions or unfair terms.

Decision

Late payment fees

Justice Gordon considered the law of penalties at common law and in equity separately, however the application of the law largely hinged on a six-part test. The crux of the test was:

• Whether, on a proper construction, the purpose of the relevant stipulation is to secure performance of a primary obligation by the party subject to the fee or whether the fee is truly a fee for further services. If the latter, the fee cannot be characterized as a penalty.
• Further, whether the fee is “extravagant and unconscionable” in amount in comparison with the greatest loss that could conceivably be proved as a result of failure to pay on time.

Justice Gordon rejected ANZ’s submission that the late payment fees were a fee payable for a further period of credit being extended to a customer because of the absence of timely payment.  Rather, the late payment fees were levied upon either breach of the obligation to pay a minimum amount by a certain time each month, or as a collateral fee to be regarded as security for performance of the primary obligation, ie payment by a particular date. Further, as the fee was payable to secure performance of the party subject to the fee, it could only be enforceable if it was a genuine pre-estimate of the damage suffered by reason of that party’s non-performance.

Justice Gordon estimated that the quantum of damage suffered by ANZ in respect of each fee charged, although difficult to determine, was significantly less (50 cents in some cases) than the fees of $35 or $20 charged. In addition the same fee was payable regardless of whether the amount was trifling or serious, demonstrating a necessary degree of disproportion.

Her Honour concluded that the charges were exorbitant and unenforceable, and Mr Paciocco was entitled to recover from ANZ the difference between the credit card late payment fees paid to ANZ and ANZ’s actual loss.

Other bank fees

Justice Gordon held that the non-payment fees, overdraw honour/dishonour fees and overlimit fees were not penalties but genuine fees for services. Considering the relationship between the bank and the customer, her Honour held that an attempt by a customer to overdraw an account or exceed their credit limit should properly be construed as a request by that customer for a service (for credit, or an extension of credit). The making of such a request was entirely within the customer’s control and required the consensual conduct of both the customer and bank.

The bank’s consideration and granting (or non-granting) of such a request was properly characterised as a further service, thereby justifying the fees levied. It was concluded that as the customer was getting an extra service for a greater fee this was an alternative, not collateral, stipulation. Consequently there was no need for Justice Gordon to assess whether the fees were extravagant or unconscionable.

Alternative statutory causes of action

The applicant’s contended that in the event that the fees were not penalties, nonetheless;

• ANZ had engaged in unconscionable conduct in respect of its accounts under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and/or the Fair Trading Act 1999 (Vic) (FTA); and/or
• the transactions were unjust transactions under the applicable Consumer Credit Codes; and/or
• the contract terms were unfair terms under the FTA or the ASIC Act.

Justice Gordon concluded that there was no dishonesty, oppression or abuse on the part of the bank to elevate the conduct to the requisite level of “moral obloquy” required for contravention of these provisions. There was no allegation that the Applicants misunderstood what they were agreeing to, or were compelled to request the further services. Circumstances indicative of unconscionability, unjustness or unfairness had not been made out and each argument was rejected in turn.

Summary of Claims

Statute of Limitations Defence

Two late payment fees were incurred more than 6 years prior to the commencement of proceedings.  An attempt by ANZ to rely on the statute of limitations that imposed a 6 year limitation period was unsuccessful.  Mr Paciocco relied on the principles that extend limitation periods in cases of mistake.  The late payment fees were held to be made pursuant to a mistake at law and Mr Paciocco was entitled to rely on s 27 of the Limitation of Actions Act 1958 (Vic) which extends limitations in the case of mistake to when the mistake is discovered, or could with reasonable diligence be discovered.  Mr Paciocco only became aware that ANZ may not have been able to charge the late payment fees when proceedings were originally commenced against ANZ on 22 September 2010.  The limitation period ran from that date.