On 12 October 2009 the Magistrates Court of South Australia delivered a judgment in favour of Police Credit Union (South Australia) in a case relating to fees which were alleged to be ‘penalties’ – Sedlaczek v Police Credit Union Ltd.  Langes+ acted for the credit union in relation to the matter.

Facts

Between 1998 and 2007 the plaintiff operated a deposit account with the credit union. The account had no credit facility attached to it. The account terms provided that the plaintiff should not overdraw the account, but if the credit union chose to honour transactions by the plaintiff which overdrew the account, such as direct debits and cheques, then it would charge the plaintiff a fee. The credit union charged such fees on 26 occasions over a period of almost 6 years. They amounted to $455.00 in total. On each occasion the credit union sent the plaintiff a letter advising her that a fee had been charged.

The claim

Some time after closing the account the plaintiff contacted ‘Bankbeaters’, in response to publicity suggesting that fees of this type could be recovered from financial institutions, and she later commenced legal proceedings against the credit union. She claimed that she was entitled to recover the fees because:

• They were not properly chargeable under the terms of the contract;
• They were ‘penalties’ at common law;
• The charging of the fees was unconscionable conduct under section 57 of the Fair Trading Act 1987 (SA) and sections 12CA, 12CB and 12CC of the ASIC Act 2001 (C’th); and
• The charging of the fees amounted to misleading and deceptive conduct.

The decision

Deputy Chief Magistrate Dr Andrew Cannon rejected all these claims.

In relation to the claim that the fees were penalties, His Honour found that, while the fees were imposed for breach of contract, the plaintiff had failed to prove that the fees were so disproportionate to the actual costs incurred by the credit union as a consequence of the breaches as to amount to penalties.

His Honour also found that while the account terms were not negotiable and were unilaterally imposed by the credit union, there was no pressure upon the plaintiff to choose the credit union as her banker instead of other institutions.  She chose the credit union. Its contract terms and fee structures were made known to the plaintiff and were ‘available and quite easy to understand’.  His Honour went on to say that the credit union had ‘acted consistently … in a principled way’.

For more information or for advice on responding to similar claims contact Shannon Adams, Partner, on 08.8168.9601

The Financial Hardship Principles issued by Abacus state that credit unions will (where appropriate and subject to availability) provide details about external financial counselling services (para. 7).

The Mutual Banking Code of Practice states that a credit union will have procedures in place to ensure members are referred to a financial counselling or similar service in appropriate cases (subject to availability) (clause 24.2).

Where can you find out about financial counsellors?

The Abacus website refers members to -
• the Commonwealth Financial Counselling Directory
• the Australian Financial Counselling and Credit Reform Association

Here are some suggested actions for credit unions:
• create a separate webpage on your website for financial hardship/assistance and include details of how members can contact a financial counsellor;
• include details in FSG or financial hardship brochures or newsletters;
• make available at branches copies of the Abacus brochures on managing credit and related material.

How would you feel as a manager or director of a lender if you read these comments in a court judgment:

Before the loan agreement was entered into, [the borrower] provided a form of authority to [the lender]’s mortgage manager to enable monthly interest payments to be deducted by direct debit. However, the hand-writing on the form was unclear as to whether the last numeral of the BSB number for the account to be debited was a six or a zero. The correct BSB number for the account ended with a zero. Unfortunately, [the lender] read it as “06 2006”.

 That relatively innocent combination of errors has generated contractual chaos. The problem was not identified until over six months after the commencement of the facility. In the meantime, each time [the borrower] was notified that the debit had been “dishonoured”, it made its payment by cheque, but [the lender] treated those as late payments and began to charge additional interest. [The borrower] disputed [the lender]’s entitlement to do so and continued to pay interest at the lower rate.

But that was the fact scenario behind Perpetual Trustee Company Limited v Agusta Pty Limited [2009] NSWSC 1075. I'm sure both sides are still wondering how the dispute got so far.

Apart from the fact that the amount involved was relatively large (it was a $2m facility and the security property is a commercial property owned by a company) the case is otherwise unremarkable.  There was a legal argument about renewal of the loan facility but I suspect the parties had locked themselves into intransigent positions about who was responsible for the mistake.

The result? The judge said:

Accordingly, it remains necessary to resolve the dispute between the parties as to whether there was default in respect of any of the interest payments due between November 2006 and May 2007. I am not satisfied that there was…

I am not satisfied that Agusta [the borrower] was at fault in any real sense for the problem that occurred with the direct debit. The authority form provided to Challenger [the lender] was simply unclear. The last numeral of the BSB number looks a bit like a zero and a bit like a six. The person who entered the information into Challenger’s system read it one way, but it could equally have been read the other, and it would have been a simple matter to check. There is no question of attributing blame, but the simple fact is that the process failed due to error on the part of Challenger.

In those circumstances, the implication of a term that Challenger would not treat interest as being due until after Agusta had been put on notice of the failure to debit the account is, in my view, reasonable and equitable. It is necessary to give business efficacy to the contract, because the mutual object of having payments made and received promptly could not be achieved unless Agusta was made aware of the problem. In my view, such an implied term is so obvious that it goes without saying. It is capable of clear expression and supplements the express terms of the contract rather than contradicting them.

The judge ordered that Challenger recalculate its debt and give the borrower an opportunity to pay the correct amount before taking possession of the security.

Are there any lessons from this? Whilst I have no knowledge of the facts other than those set out in the judgment, it confirms the old adage that there are 2 sides to every story. The discrepancy should have come out long before the case went to trial. No order has been made yet in respect of costs.