Banking Penalties - Case Study Example

Banking Penalties Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 22nd September 2012 Introduction Australian banks charge customers a range of fees in relations to contractual breaches on their banking contracts. These charges include dishonor fees for credit or overdraft accommodation or late payment fees for late credit repayments. In comparison to the amount charged account-servicing fees and transaction fees these fees are way too high. The consideration of this paper is whether recoverability of such fees has any basis in law. The purpose of this paper is to explore whether small business as a clients of financial institutions can recover the fees charged due to contractual breaches. The paper explores previous judgments the law of penalty to analyze whether clients of financial institution can be protected from the fees charged and also briefly touches on relief available under the law of equity. The Law of Penalties Under the law of contract it is right for contracting party to recover damages from the other party, if the party fails to adhere to a term of the contract1. However, the fees is limited by the fact that for it to be legally enforceable it must be a valid pre-estimate of the loss the innocent party suffers due to the breach of the contract. These charges are defined as liquidated damages as they are compensatory in nature. In contrast, penalties are fees meant to punish the breaching party for non-adherence to contract terms. In law recovery of loss precipitated by breach of contract is possible in two distinct ways; a general action for damages or liquidated damages under a clause of the contract that mirrors a proportion of the estimated loss. In Ringrow Pty Ltd v BP Australia Pty Ltd (2004) 209 ALR 32 2general terms of contract set out that an innocent party is entitled to recovery of any loss suffered due to breach of contract even though there is no clause in the contract requiring such a payment. However, if the clause is punitive recovery for the loss is not covered under the rule in PC Developments Pty Ltd v Revell (1991) 22 NSWLR 6153. Even though actual loss does not have to be proved for recovery to be awarded by courts there must have been genuine endeavor to pre-estimate damages that may result from a breach of a contractual clause. Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co. Ltd [1915] AC 79 4held that where a pre-estimation of the loss is not possible the recovery is less likely to be a penalty. In contrast O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 400 maintains that such a clause may still constitute a penalty if it places unreasonable obligations on the breaching party5. As a penalty is not enforceable as recovery for breach of contract term, to get relief a person who is required to pay a charge for breach of contract must prove the clause that obligates him to pay the innocent party any fee is in fact a penalty6. In Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 it was established that the question of whether a contractual clause is a penalty must be substantive as contractual conditions are unique to individual contracts7. Courts have adopted two approaches to distinguish between penalty clause and liquidated damages. These approaches are termed as the unconscionability and the mechanical approach. In the mechanical approach suggested in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co. Ltd8 the distinction relies on the presence of extravagance and unconscionability of the amount of damages in comparison to greatest loss that the breach may cause. This means any amount that varies too much from the estimated loss is considered to be a penalty9. The mechanical approach is faulted as it has no consideration for fairness and it only recognizes penalties where the amount exceeds the maximum loss a breach of a contractual term may cause. In contrast, in AMEVUDC Finance Ltd v Austin (1986) 162 CLR 170 the high court recognized the right of parties to enforce clauses in the contract regardless of whether they might constitute a penalty10. The respect of parties’ freedom of contract means a disproportion between a pre-estimate of loss and the sum to be recovered due to a breach a breach of contract is no longer favored as a means of making the determination between a penalty and liquidated damages. O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 400 Justice Murphy defined penalties as ‘a trap for an unwary or unfortunate lessee’ because of its harshness and thus adopted another approach referred to as the unconscionability approach11. Citicorp v Australia Ltd v Hendry (1985) 4 NSWLR 1 suggested that courts should develop a principle that considers the negotiating position of the parties12. In Commercial Bank of Australia v Amadio (1983) 151 CLR 447 it was held that the nature of relationship between contracting parties is important13. AMEV-UDC Finance Ltd v Austin applied this unconscionability approach where Mason and Wilson JJ held that for a clause can be considered a penalty it must be‘unconscionable or oppressively harsh to the breaching party14. Mason and Wilson JJ asserted it is important for unqualified freedom of contract to be challenged for the protection of contracting parties who have weaker bargaining power. The two justices identified two important factors in distinguishing a term as a penalty15: 1. The proportion or disproportion between the sum demanded for breach of contract and the loss that may be suffered by the innocent party as a result of breach of the contract. 2. The characteristic of the relationship between the contracting. Clark JA in AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564 held that the context of the contract and the relationship of parties to the contract an important consideration while evaluating a clause that is in question16. In Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 Cole J adopted the unconscionability approach and also further developed it by setting out aspects of a relationship that may allow court to interfere with the freedom of contract, these are17: The relationship of the parties at the time of contract formation. The origins of the contractual term. The negation power of the parties. Whether each part had full knowledge of the clause under question. Whether the innocent party acceded to the contract with knowledge that a breach of the contract may be advantageous as a result of application of the penalty clause. Application If the law of penalties is applied to the class action suit against Australian bank it is likely to succeeded. Considering the two factors set out in AMEV-UDC Finance Ltd v Austin the following questions would need to be answered18; whether the late payment penalties and the dishonor fees charged on the firm exhibit a high degree of disproportion with the actual loss the bank suffer due to breach of contract by their customer. It has been shown that banks charge as much as 5 to 16 times of the amount it cost them to process a dishonored cheque, moreover late payment fees also reflect this disproportion19. Secondly, the firm would have to show it was in a weaker position during the formation of the contract and thus the clause that requires the firm compensate was imposed on the firm. The firm would have a harder time proving that it was a weaker position in the negotiation stage as Citicorp v Australia Ltd v Hendry distinguishes between the unfairness of clause to an individual borrower and that of business that access to legal advice. However since banking contract are standard form the firm had lesser bargaining power than the bank during the formation of the contract. It is clear banking contracts are given on a give or take basis and thus the bank is the one that fully exercises its freedom of contract. It follows then as held in Campbell Discount Co. Ltd v Bridge [1962] AC 600 at 624 a weaker contractual party should be awarded relief from unfair penalties20. The bank would find it hard to overcome the challenge set out in Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 21that requires them to show that they did not intentionally accede to the contract as they presumed they would benefit from the penalty clause in future. Even though the above argument is based on the unconscionability approach the banks would still be found liable of charging customer penalty charges for breach of contract. This is due to the fact that the penalty are by far more than any maximum loss that may be suffered by banks due to the breach of contract by the firm. Conclusion The firm is able to recover the dishonor and late payment charged by various banks as it is possible to prove that the fees constitute penalties that are not recoverable under the law of penalties and equity. Bibliography A. Articles/Books/ Reports Chris Connelly and Khaldoun Hajaj, Small Business Banking Issues Paper, Financial Services Consumer Policy Centre, University of New South Wales, April 2002 Christine Long, ‘Red alert on fees’, The Age, 24 March 2002 Elizabeth Lanyon, ‘Equity and the Doctrine of Penalties’ (1996) 9 Journal of Contract Law 234, 237 Jason Clout, ‘Bank ‘club’ fair comment: Fels’, Australian Financial Review, 15 April 2002. PricewaterhouseCoopers, Survey of retail banking fees – an independent analysis, April 2003 RBA, ‘Banking Fees in Australia’, Reserve Bank of Australia Bulletin, May 2004. B. Case Laws AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564 AMEVUDC Finance Ltd v Austin (1986) 162 CLR 170 Campbell Discount Co. Ltd v Bridge [1962] AC 600 at 624Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 Citicorp v Australia Ltd v Hendry (1985) 4 NSWLR 1 Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 Commercial Bank of Australia v Amadio (1983) 151 CLR 447 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co. Ltd [1915] AC 79 Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 400 PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615 Ringrow Pty Ltd v BP Australia Pty Ltd (2004) 209 ALR 32 Read More