Are “exception fees” penal and therefore unenforceable?

09 May 2008

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The recent English decision of Office of Fair Trading v Abbey National plc [2008] EWHC 875 (Comm) has considered the issue of the enforceability of “exception fees” by banks and concluded that such fees are not “penalties” at common law, and therefore are not unenforceable on that basis.

Context

The Australian Bankers’ Association (ABA) defines “exception fees” as those fees disclosed in account terms and conditions which may be charged when:

• there are insufficient funds available to cover a transaction which either results in a dishonour or honour (the latter occurring where there is an agreed approval by the customer for the bank to overdraw);
• credit card payments are late; and
• credit card limits are exceeded.

The Abbey National case, amongst other things, considered whether similar charges amounted to penalties and were thus unenforceable at common law. In order for a provision requiring payment to be penal, authority suggests that it must provide for payment upon a breach of contract that is not a genuine pre-estimate of loss from the breach and is extravagant and unconscionable in comparison with the actual or prospective loss.

Decision

The English High Court considered various terms in common accounts available at several leading banks which imposed fees on customers should they overdraw their accounts. It held that none of the similar terms considered actually placed a contractual commitment on customers not to overdraw their accounts. As the overdrawing of an account could therefore not constitute a breach by the customer, the payment for such an overdrawing could not be considered penal. Accordingly, the court did not need to consider the size of the overdraw fees charged relative to estimates of the bank’s actual losses or issues of unconscionability, and no evidence was tendered as to the size of specific fees. Whether or not there had been a breach of a contractual obligation by the customer was the threshold issue.

Significance

Australian courts are yet to consider the applicability of the penalties doctrine to bank fees. The cases which have considered the doctrine in other contexts have focused on the development of that part of the doctrine which addresses issues of disproportion in penalty and damage suffered, and issues of unconscionability. The Abbey National case demonstrates that the careful drafting of a customer’s obligations may prevent the use of the doctrine in the context of the normal banker-customer contractual relationship.

The ABA has welcomed the decision as supporting its long-standing view that Australian exception fees are not penalties. An April 2008 press release by ABA has however acknowledged that due to community concern regarding exception fees, the ABA and member banks have been actively involved in local initiatives to improve disclosure, educate consumers on how to avoid such fees and also maintain a competitive market place to bring downward pressure on such fees.

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