Federal Court Finds Late Payment Fees on Credit Card A Breach of Contract

Federal Court Justice Michelle Gordon, in a landmark decision on Monday, ruled that late payment fees on credit card charged by the ANZ Bank are considered penalties and is a breach of contract on the part of the customer.

The ruling is part of the $50-million class action suit against ANZ Bank filed by 34,000 customers, and part of a larger set of class action suits being pushed by the International Monetary Fund against 12 banks with more than 250,000 depositors. The 12 include the Commonwealth Bank of Australia, National Australia Bank, Citigroup and Westpac.

The Reserve Bank of Australia estimates that the banks earned $1.2 billion in exception fees in 2008. Since the court case covers six years, the amount involved could be as high as $6 billion.

Prior to the landmark ruling, ANZ Australia Chief Executive Phil Chronican said that the bank had dropped the late fees to improve transparency to customers. He added that since the move, customer complaints have gone down significantly.

"Our consistent position has been that while some of these fees may have been unpopular, we believe they were lawful and we're pleased this has been largely vindicated in today's ruling," Mr Chronican said in a statement.

"The one finding in IMF's favour does not provide a resolution for class action participants. It's a complex case still in the preliminary stages and we will continue to vigorously defend the IMF action next year," he added.

The decision also has implications for telecommunications companies, credit card firms, councils and utilities which also charge late payment fees.

With the favorable decision, the court's next move it to determine how much ANZ should have charged in late fees on credit cards versus the $35 fee it imposed. The basis for that step is that late payment, which is considered a breach of contract, must be based on actual costs incurred. ANZ is expected to say that they fees it collected are the actual costs the bank incurred.

The court also ruled that other fees charged by the bank such as the dishonour fee and honour fees were not penalties and not a breach of contract on the part of the bank. The fees range from $25 to $60.

The IMF said it will seek an appeal of Ms Gordon's decision with the High Court and later with the Court of Appeals. The IMF insisted that late payment fees, dishonour and honour fees are penalties, unconscionable under common law and violates the Trade Practices Act and the Corporations Act.