The matter of penalties and fees within contracts

Recently, there have been a number of appeals from the customers of eight leading banks in Australia concerning the fees that they have paid and for which they claim are ‘unfair’.

This became a unified case, with over 170,000 customers going to court in order to gain $223 million back as compensation for these fees. These fees were described as the fees for late payment, non-payment, over-limit fees, honor and dishonor.

These fees were lately introduced in Australia, and have now become a genuine profit for the financial institutions, and not only them.

Some telecommunication providers as well offer contracts in which these kinds of terms can be found. The fees have become a much discussed topic as to whether or not they are legal, and whether they should be considered penalties.

The focal point of the applicants’ argument against the Australian and New Zealand Banking Group Ltd (ANZ) was that these fees should be regarded as penalties, and that, as such, is void and cannot be enforced. Since the ANZ had already taken the money, the applicants now want the money to be returned.

The argument that the fees were actually penalties was based on the grounds of the ‘penalties vs liquidated damages’ issue. This issue states that the difference between penalties and liquidated damages is that the latter is an actual pre-estimated compensation for the damages suffered, while the former is a sum that is significantly, if not extremely, higher than the actual damages.

The penalties are there only as means to make the defaulter pay, and are not enforceable in courts, as their evaluation is extremely excessive.

The ANZ did not seem to agree with this, as they argued that it is only possible to recover the damages for the penalties that occurred as a breach of contract and for no other type of penalties.

This means that, since there was no breach in the contract, no money paid as these fees can be recovered, except for the late payment fees, as they are a breach of contract.

Their argument was based on an earlier decision by the New South Wales’ Court of Appeals, which stated that the doctrine of the penalties’ relief was only applicable in the cases where there has been a breach of contract.

The High Court then proceeded to regard the question in another light, and that is, contrary to this earlier decision, to see whether the doctrine of penalties’ relief was applicable when there has been no breach of contract. If this doctrine was applicable, then the case would have to go to the Federal Court for further ruling.

The High Court judged that, in contrast with the NSW Court of Appeals’ decision, the penalties need not always be a consequence of the breach of contract. Therefore, the High Court has made a distinction between two things: an obligation to make a payment as a result of a breach, or some other situation in the contract, which is out of all proportions and an obligation to make a payment as a price of a benefit provided (such as a service). The first is a penalty, the second is not.

What this all means is that there is a possibility to question whether certain fees are penalties when they are related to an occurrence of a certain event, without respect as to whether the occurrence is regarded as a breach of contract or not. However the High Court also states that when it is stipulated in the contract that a payment made is for certain benefits or rights, then the fees stands as a ‘price for a service’ and not as a penalty.

To clarify the situation, it should be said that the issue of whether a fee is a ‘price’ or a penalty can be clearly stated in the contract. For example, a credit card contract can include a clause which prohibits the customer from going over the limit, thus imposing a fee that is out of proportions as to prevent this from happening. This is to be interpreted as a penalty.

However, the clause can be stipulated not to prohibit the customer from going over the limit, but instead to give the option of going over the limit for certain, predetermined, ‘price’. This is not to be considered a penalty, and therefore cannot be compensated. This requires the contracts to be examined individually and see how the clauses for the payments were stipulated, and then to make the decision. This is now a case for the Federal Court.