In Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 (handed down on last Thursday 6 September 2012) the Australian High Court decided that bank fees may potentially be penalties, notwithstanding the fact that the trigger for the imposition of most of the fees was not a breach of contract. 

Andrews is a class action case where customers of the ANZ Bank are suing it in relation to a variety of "service fees" the bank had charged them in relation to transactions made on their accounts. At first instance (Andrews v Australian and New Zealand Banking Group [2011] FCA 1376) the plaintiffs were largely unsuccessful in their claim. Gordon J held that only late payment fees were capable of being characterised as a penalty, whereas honour fees, dishonour fees, overlimit fees and non-payment fees were held not to be penalties. She followed the New South Wales Court of Appeal in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd [2008] NSWCA 310 and held that the law of penalties had no application to contractual payments that arose upon the occurrence of an event which did not constitute a breach of contract. The honour fees, dishonour fees, overlimit fees and non-payment fees were not incurred as a result of breach of contract, but were payable because ANZ had met a request for a loan or an advance from a customer. By contrast, credit card late payment fees were capable of being a penalty, as they were imposed when a customer failed to make a payment within the time stipulated (in other words, the contract had been breached).

The High Court judgment in Andrews was a unanimous one from French CJ, Gummow, Crennan, Kiefel and Bell JJ. The judgment is learned with a focus on the historical background of the jurisdiction against penalties. Importantly, the High Court emphasises that it is the substance of the clause which matters, not the form. The penalties doctrine is not prevented from operating because there is no express contractual promise to perform the condition, and indeed a promise that a condition will be satisfied may often be the same in substance as a penalty which arises on the failure of a condition. Moreover, the Court confirms that the doctrine against penalties is equitable and that the rule against penalties arose in a context where express contractual promises to perform were not common; instead the usual means of drafting a contract was as a 'bond upon a condition'. Consequently equity can provide relief from stipulations which are drafted in a permissive manner but which are substantively the same as clauses which provide for penalties payable on breach.

That being said, the High Court specified that parties are still free to put a clause in their contract which allows for a higher payment if further services or rights are provided by one party (effectively an option). Among other things, the High Court refers to Pomeroy’s A Treatise on Equity Jurisprudence, 5th ed (1941), vol 2, §437, which states that 'alternative stipulations' are not penalties. The High Court also affirms Metro-Goldwyn-Mayer Pty Ltd v Greenham [1966] 2 NSWR 717, a case which involved a contract for the hiring of films to exhibitors for public showing. The standard form contract conferred the right to one screening at a particular time, and if the exhibitor wished to make additional showings, he was obliged to pay a sum which was four times the original fee. A majority of the New South Wales Court of Appeal decided that this additional payment was not a penalty, but a legitimate option to obtain the right to further screenings.

The decision has now been remitted back to the Federal Court for determination. Will the banks be able to argue that the fees are simply options to gain further rights for a greater sum? Or are the fees really penalties designed to force the other party to comply with their part of the bargain? Although the judgment appears to be an expansion of the previous law, it may be that its effect is less radical than it first appears because of the exception carved out for what Pomeroy called 'alternative stipulations'. I guess we'll just have to watch this space.

Kind regards,

Katy