What the High Court’s decision on ANZ’s late payment fees has to do with schools

The High Court has recently upheld an earlier decision of the Full Federal Court, finding that late payment fees charged by the ANZ Bank on consumer credit card accounts were enforceable as penalties. Let’s focus on the late fee, which was $20 ($35 until 2009).

The Court asked:
• whether the fee was extravagant and unconscionable in amount compared to the greatest conceivable loss; and
• whether the late fee was a genuine pre-estimate of damage.

In deciding whether the fee was exorbitant or unconscionable, the Court looked to see what interest the ANZ had in its customers paying their fees on time. The Court stated that the ANZ had a ‘legitimate’ and ‘multi-faceted’ interest in the timely performance of its customers’ payment obligations.

This is because, firstly, banks like the ANZ assume financial risk by making their facilities available to customers. For example, if many borrowers fail to pay their fees on time, banks will be exposed to an increased credit risk. The Court found that the late payment fee operated as ‘compensation’ to equalise the ANZ’s financial risk.

Secondly, when customers repay on time, banks have the freedom to lend more money to their customers. If fees are paid late, banks lose the opportunity to profit by re-investing the funds. Since the ANZ had a legitimate interest in having its customers pay their fees on time, and because an increase in credit risk was difficult to assess, the fee was not extravagant and unconscionable.

The Court also found that the fee was a genuine pre-estimate of damage because all the ANZ’s legitimate business interests were likely to suffer.

The significance of this case for schools is that it underlines the importance of ensuring that the enrolment provisions do not act as a penalty. Although the ANZ was successful, the judgment highlights that, when a school imposes a late fee, it is important that the fee reflects the estimated cost to the school of the school fees being paid late and is not an amount that could be considered extravagant or unconscionable. In the words of the Court, the late fee should operate as ‘compensation’ to equalise the school’s losses. It should not seek to penalise.

There is also a common provision requiring parents to give a term’s notice before withdrawing a child or pay a term’s fees in lieu. Is this provision enforceable? The law says “No” if it is a penalty but “Yes” if it is for “liquidated damages.” A penalty is a requirement to pay an amount of money to frighten the potential offending party into compliance. In other words, a penalty involves the school threatening the parents: “Give notice or pay up!” Liquidated damages, on the other hand, are a genuine pre-estimate of the loss to the school of the parents’ failure to give notice.

In order to determine whether the provision in the enrolment contract is a penalty or liquidated damages, one must look at the circumstances at the time the contract is entered into, not at the time of the parents’ failure to give notice which may, of course, be years later. Looking at the contract, one must determine whether it was the objective intention of the parties that the provision was to be a coercive penalty, or whether the intention was that it be a genuine pre-estimate of the value of the damage. The subjective intention of the parties is irrelevant. The name, if any, given to the payment in the enrolment contract is not determinative. In other words, to simply say that the term’s fees in lieu of notice are a genuine pre-estimate of damage will not save the provision if a term’s fees were not, at the time the contract was made, a genuine pre-estimate of damage.

Having said that, it is no obstacle to the amount stipulated being a genuine pre-estimate of damage that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. Indeed, that is just the situation when one needs to estimate the amount of the future damage. Of some comfort is that the courts have said that latitude must be given to genuine pre-estimates of damage, and that the sum must be “out of all proportion,” or “extravagant, exorbitant or unconscionable” before being declared a penalty.

Contact %7F%96%AE%BA%AB%91%BBC%BD%B9%B1%D7%D9X if you have a question about possible penalty provisions in your school's enrolment contract.