On 5 December 2011, Justice Gordon of the Federal Court delivered an important judgment on the enforceability of exception fees charged by the ANZ Bank. The decision has wider implications for similar fees charged by other banks and financial institutions. The case is a class action brought by three applicants on behalf of a much larger group of ANZ customers and is the vanguard of a wider consumer movement to challenge bank fees in a series of class actions.
In a decision to be appealed by both parties, her Honour has determined that 4 of 17 fees she examined are capable of being characterised as a penalty. There will be a further hearing to determine whether those amounts are excessive and, if they are, whether they are unenforceable and/or void as penalties. No hearing date has been set and is not expected to be until late 2012. The parties are due back in Court for directions on 16 March 2012.
Analysis of the decision
Her Honour determined specific separate questions concerning whether each of the 17 identified exception fees charged to one of the applicants was capable of being characterised as a penalty. Broadly speaking, the separate questions were, in respect of each of the exception fees:
- Was the fee payable upon breach of any or all of the agreements between the applicants and ANZ?
- In the alternative:
- was the occurrence or default of occurrence of the events set out in the provisions, as a matter of substance, treated by ANZ and the applicant who incurred the fee, as lying within the area of obligation of that applicant in the sense that it was that applicant's responsibility to see that the event did or did not occur; and
- was that applicant obliged contractually to pay or forfeit or suffer the retention of the fee upon or in default of the occurrence of the event?
- If the answer to either (a) or (b) above is yes, is the fee capable of being characterised as a penalty by reason of that fact?
The 17 fees were divided by the parties into four broad categories:
- Saving exception fees – dishonour, honour and non-payment fees in relation to retail or personal overdraft and savings accounts;
- Card exception fees – over limit fees and late payment fees in relation to credit cards;
- Commercial card exception fees – commercial card over limit fees and commercial card late payment fees incurred on business credit cards; and
- Business exception fees – honour fees, dishonour fees and non-payment fees incurred in relation to business savings and overdraft accounts.
Her Honour confirmed the Australian position that, in order for a fee to be a penalty, it must be payable upon a breach of contract:
' Put another way, the law of penalties requires the Court to determine whether the payment for non-observance of the contract is payable in terrorem. That is, as a punishment to deter breach of the contractual obligation …
 As ANZ submitted, there is extensive and long-standing authority in Australia and the United Kingdom that the law of penalties has no application to a contractual provision requiring a payment for the happening of an event that does not constitute a breach of contract …
 The law of penalties, confined (as it is) to payments for breach of contract, is a narrow exception to the general rule whereby the law seeks to preserve freedom of contract, allowing the parties the widest freedom, consistent with other policy considerations, to agree upon the terms of their contract …'
Her Honour then applied that rationale to the legal framework within which the modern contract between banker and customer operates. Her Honour analysed the legislative and regulatory framework within which banks operate and provide credit as well as the terms and conditions, both expressed and implied, that formed the relevant contracts between each applicant and ANZ.
Her Honour determined that, in the modern context, when a customer seeks a withdrawal or payment from their account by giving an instruction to ANZ that has the effect of overdrawing the customer's account, it is construed as a request by the customer for an advance or loan from the bank, and the bank has a discretion to approve or disapprove that transaction.
Pursuant to the terms between the customer and ANZ, ANZ was entitled to charge a fee immediately upon determining to honour the transaction thereby temporarily increasing the overdraft limit. Her Honour stated in relation to that fee (at ):
'...upon giving a payment instruction to ANZ and ANZ exercising its discretion to provide a further loan to Saliba, Saliba immediately became liable to pay the exception fee to ANZ – an Honour Fee. The precise description and amount of the fee could not be ascertained until ANZ had chosen to either honour or dishonour the instruction; nevertheless, the relevant act which caused the imposition of the fee was the giving of the instruction, or the request, by Saliba.'
Her Honour continued:
' Put another way, the action in overdrawing the account was not a unilateral action by Saliba. It was an action that required the consensual conduct of the Bank and the customer. That is not, and cannot be, conduct constituting a breach of some contractual obligation. If ANZ agreed to and approved a transaction that overdrew a customer's account (thereby allowing the transaction to proceed), the customer could not then be in breach of its contract with ANZ … The Honour Fee was charged in respect of ANZ's decision concerning the request for additional borrowing …'
 … [the exception fee] was charged by ANZ in connection with the supply of a banking product within a single contract, was able to be charged on many occasions and was charged in circumstances in which the customer was entitled to terminate the contract under which the fees were charged at any time of its choosing without penalty.'
Her Honour found that 13 of the 17 fees she examined fell within a similar framework and were fees imposed by the bank, as agreed, in relation to a request by the customer for an extension of further funding, whether by way of overdraft or by an advance or loan over approved and agreed limits.
On the other hand, her Honour found that fees imposed as a result of and as a consequence of late payment of amounts due in relation to credit cards were imposed by ANZ as a result of the customer's breach of the relevant provisions. When a fee is imposed upon a customer in circumstances where the customer has breached the contract by failing to take a required step, in this instance making a payment within a defined period, it is capable of being characterised as a penalty.
Her Honour noted that it is yet to be determined whether or not the fee is a penalty; that will be determined at a later hearing yet to be arranged. To be a penalty, the fee must be found to be extravagant and unreasonable and out of all proportion to the likely damage suffered by ANZ.1
Her Honour's decision has been appealed by the applicants in relation to 13 of the fees and is likely to be appealed by the ANZ in relation to th other 4 of the fees. Any appeal must be filed by 25 January 2012. It is likely that when the appeal is lodged ANZ will seek to have the appeal dealt with prior to the assessment hearing into the 4 fees her Honour found could be penalties.
The solicitors who are acting for the applicants have commenced proceedings against the 3 remaining "big 4" banks and against Citigroup nevertheless. At this stage, those proceedings are subject to Orders that the contents of the proceedings are not to be disclosed2. They are all listed for directions on 9 March 2012, a week before the ANZ case.
1 at  applying the obiter of the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd  HCA 71
2 Order made by Gordon J on 16 December 2011, the date the proceedings were commenced.