Like an iceberg hiding its mass beneath the waves, the true magnitude of the High Court's decision in Andrews v ANZ is yet to be realised.
On the surface, the iceberg’s tip is apparent. In its rejection of the long accepted position that the penalty doctrine is only activated on a breach of contract, the High Court paved the way for a wider range of bank fees, including dishonour fees on overdrawn accounts, to be potentially categorised as ‘penalties’ and therefore be refundable.
More than 170,000 Australian bank customers are now lining up to fight for the return of some $220 million in bank fees.
The obvious lesson from Andrews is that it is the substance of the clause which matters, not the form. A bank fee (or indeed any stipulation) may be found to be penal if it is out of all proportion to the obligation that the stipulation sought to secure.
For example, if a customer is charged a $45 dishonour fee for an overdrawn account when in reality the cost to the bank is a fraction of that amount, then it may now be classed as a penalty.
This means cleverly drafted fee clauses which are in substance penal, but which were previously protected from judicial review because they were triggered by something other than a contractual breach, may no longer be enforceable.
In its discussion, the High Court did distinguish between a fee legitimately charged for an additional service or benefit and a penalty.
Approving Metro-Goldwyn-Mayer Pty Ltd v Greenham  2 NSWR 717, the High Court confirmed that no matter how large the fee, where it is charged for an additional accommodation or service, as opposed to security for an existing obligation, it cannot be a penalty.
Why is this important? It means that clauses which require payment for further services will not be classified as penalties. For this reason, serious thought should be given to drafting relevant provisions to make it clear that any fees imposed are in return for the bank performing an additional service for the customer (i.e. in return for a benefit to the customer).
In its decision the High Court confirmed that the penalty doctrine only applies to loss or damage that can be valued in money terms. This is because it is the availability of compensation which generates the “equity” upon which the Court intervenes.
No doubt arguments will now be raised that the penalty doctrine does not apply to many situations because it is not possible to quantify the monetary loss suffered.
Very early in the judgement, the High Court commented that in the context of greater legislative intervention in the banking sector and parliament’s renewed focus on consumer protection over freedom of contract, parties should expect Courts to be more willing to step in and remedy cases which they view as unfair. The High Court cited a number of authorities to the effect that the common law should adapt to changes in legislation.
This may be the first signal that Courts will be increasingly willing to intervene in such cases.
The High Court confirmed that the penalty doctrine is still a creature of equity. Due to the obvious power imbalance between banks and retail customers, this case was ripe for equitable intervention. However, there is an open question as to whether a sophisticated commercial party (with bargaining power much greater than a retail customer) will enjoy the same protection.
Where a large corporation negotiates a loan facility with a bank in a competitive environment, will that corporation be afforded protection in equity or will the Court hold it to its bargain?
While the Andrews case is focused on consumer bank fees, this is just the tip of the iceberg. The High Court’s decision that the substance of a clause will determine if it is penal in nature will impact on many businesses and contractual arrangements outside the banking sector – e.g. construction contracts which include a liquidated damages regime.
Companies that impose ‘service fees’ or ‘late payment fees’ should review their contracts and consider the enforceability of the relevant provisions.
The matter has been sent back to the Federal Court for determination on the remaining questions. The banks will have to persuade the Court that fees previously charged, such as dishonor fees or fees for overdrawing an account, were reasonable to recover the cost incurred.
Given the large sums involved in this case and the interests of the many other banks who are being sued in similar actions, it is likely that Andrews will be in focus for years to come.
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