MasterCard International Incorporated v Reserve Bank of Australia

the parties 4 MasterCard is the administrator of the Scheme, which includes a large number of participant members comprising banks and other institutions. The RBA is the Central Bank of Australia, and is charged under the Standard and the Act with the responsibility of monitoring the implementation of the Standard. 5 The second cross-respondent, Edgar Dunn, is an independent expert appointed to calculate the benchmark to be used in setting the interchange fee in relation to the Scheme. By letter dated 15 September 2003, Edgar Dunn notified MasterCard that it had calculated a specific benchmark of fifty-eight basis points. 6 In order to understand the significance of the orders sought, it is necessary to consider in some detail the provisions of the Standard.

THe standard 7 The Standard made by the RBA was gazetted on 26 August 2002, and came into force on 1 July 2003. The central provision of the Standard is found at paragraph 9, which provides: "Interchange fees 9. On each of the dates specified in paragraph 10, the average of interchange fees implemented in the Scheme in Australia, calculated in accordance with paragraph 15 below, must not exceed the cost-based benchmark calculated in accordance with paragraphs 11-14 below." (Emphasis added) 8 Paragraph 11 is concerned with methodology and reads: "Methodology 11. The cost-based benchmark is calculated as the aggregate value of eligible costs of the nominated Scheme participants for the financial year prior to the date by which the cost-based benchmark must be calculated, divided by the aggregate value of credit card transactions for the same period undertaken using credit cards issued by the nominated Scheme participants, and expressed as a percentage. Eligible costs are: (i) issuers' costs incurred principally in processing credit card transactions, including the costs of receiving, verifying, reconciling and settling such transactions; (ii) issuers' costs incurred principally in respect of fraud and fraud prevention in connection with credit card transactions; (iii) issuers' costs incurred principally in providing authorisation of credit card transactions; and (iv) issuers' costs incurred in funding the interest-free period on credit card transactions, calculated using the average of the cash rate published by the Reserve Bank of Australia over the three financial years prior to the date by which the cost-based benchmark must be calculated." (Emphasis added) 9 Paragraph 12 provides that data on eligible costs must be drawn from accounting records of nominated Scheme participants, and be prepared in accordance with generally accepted accounting principles and Australian Accounting Standards. The expression "nominated Scheme participants" is defined in the Standard as those issuers that issued, in aggregate, credit cards which were used in at least ninety per cent of credit card transactions by value in the Scheme in Australia in the financial year prior to the date by which the applicable cost-based benchmark must be calculated. Those issuers are those determined by the administrator of the Scheme or other participants of the Scheme in Australia. 10 Paragraph 13 assigns a role in the setting of the cost-based benchmark to the independent expert in these terms: "13. Data on eligible costs of each nominated Scheme participant must be provided by that participant to an independent expert agreed to by the Reserve Bank of Australia. The expert must review the data to determine if the costs included are eligible costs and must use the data on eligible costs to calculate the cost-based benchmark." 11 Under paragraphs 17 and 18, MasterCard and the nominated Scheme participants must provide the RBA with the cost-based benchmark and the data on eligible costs to be used by the independent expert to calculate the cost-based benchmark by the date on or before which the benchmark must be calculated. MasterCard and the nominated Scheme participants must also certify annually in writing to the RBA, on or by a specified time, that the interchange fees were in compliance with the Standard. The Standard contemplates that the RBA will monitor the application of the Standard on a regular basis. 12 Other relevant definitions in paragraph 3 of the Standard are as follows: "3. In this Standard: an 'acquirer' is a participant in the Scheme in Australia that provides services to a merchant to allow the merchant to accept a credit card; 'credit card' means a card issued under the rules of the Scheme that can be used for purchasing goods or services on credit, or any other article used under the rules of the Scheme and commonly known as a credit card; 'credit card transaction' or 'transaction' in Australia means a transaction in Australia between a credit cardholder and a merchant involving the purchase of goods or services using a credit card; … an 'issuer' is a participant in the Scheme in Australia that issues credit cards to the issuer's customers; 'merchant' means a merchant in Australia that accepts a credit card for payment for goods or services; …" 13 Paragraph 7 of the Standard provides that the Standard is to be interpreted in accordance with its objective and by looking beyond form to substance. The expressed objective of the Standard is to ensure that the setting of wholesale ("interchange") fees in the designated credit card system is transparent, and promotes efficiency and competition in the Australian payments system. 14 The RBA has published a Guidance Note for the implementation of the Standard, which was designed to ensure consistency in the collection of cost data and to aid in the implementation of the Standard.

background 15 Edgar Dunn, the independent expert, obtained data from the nominated Scheme participants and proceeded to calculate the cost-based benchmark. The way in which this calculation was made is set out in an affidavit by Mr White, who undertook the task. In paragraphs 48 through 52 of his affidavit, Mr White describes the process which he undertook. He formed the view there were three separate classes of eligible cost, each of which needed to be treated differently in the application of the aggregation and division formula contained in paragraph 11 of the Standard. 16 The first class of costs are those costs for which the cost of "on us" and interchange transactions are practically the same, and for which the effort to separate the costs for "on us" and "not on us" transactions is not cost effective, or the difference is negligible. In this first class of costs, Mr White aggregated all costs and divided the sum by the aggregate value of all transactions. 17 The second class of costs were similar to the first, except that some participants provided six months of costs data and others provided twelve months of costs data. For this class, Mr White aggregated all costs and again divided the sum by all transactions. 18 The third class of costs is the one in contention in this application. It is useful to set out the way in which this was treated in paragraphs 51-53 of Mr White's affidavit, which read as follows: "51 Third Class of Costs This class of costs is comprised only of scheme fees related to authorisations and processing. These scheme fees are only assessed on interchange transactions. Because interchange fees (which is the object of the standard) are only charged on interchanged transactions and the interchange fees are based on the cost benchmark, it is only appropriate to aggregate these costs for all NSPs [Nominated Scheme Participants] and divide the aggregated costs by the credit card transactions to which they apply - that is, aggregated interchanged transactions. For this third class of costs, EDC [Edgar Dunn] summed scheme fees for authorisation and processing for all NSPs and divided that sum by the aggregate value of the related NSP credit card transactions (that is, interchanged transactions). This is necessary to achieve the goal of assessing the true costs of interchanged transactions. I believe it is consistent with the Standard. I do not believe the Guidance Note addresses these costs. 52 Paragraph 11 of the Standard refers to 'credit card transactions'. This includes both 'on us' and interchanged (or 'not on us' transactions). 'Eligible Costs' are comprised of (a) transaction processing, (b) authorisations, (c) fraud losses, (d) fraud prevention, (e) funding costs, and scheme charges, which as indicated above are comprised of 2 components: (f) scheme assessments (referred to in the Guidance Notes as a scheme fee) (which are levied on all transactions) and (g) scheme fees for authorisation and processing (which are levied only on interchanged transactions). The formula for calculating the cost-based benchmark as stated in paragraph 11 of the Standard is the 'aggregate value of eligible costs of the nominated Scheme participants … divided by the aggregate value of credit card transactions'. Therefore, the application of the formula using eligible costs and related transactions was undertaken using the following 3 components: (e) funding costs + (f) scheme assessment all transactions + (a) transaction processing costs + (b) authorisation costs + (c) fraud losses + (d) fraud prevention costs all transactions* + (g) scheme fees for authorisation and processing interchanged transactions

• All transactions in this part of the calculation is the sum of NSP 6 and 12 month transactions as matched to the costs provided. 53 This treatment of costs and transactions is consistent with the Standard. There are examples (such as in the US, the UK, and all other countries for which EDC and Edgar Dunn [Edgar Dunn & Company, a wholly owned subsidiary of EDC] conducts cost studies used in the determination of interchange fees) for which EDC and Edgar Dunn typically would have made a costs-based benchmark calculation differently than for this study but did not, because it would not have been in compliance with the Standard. For example, an interchange fee cost benchmark can be calculated by summing the total eligible costs for each NSP and then weighting the results by each NSP's share of transaction volume. Because the costs are used for determination of interchange fees, the weighting would most appropriately be made using each NSP's share of total interchanged transactions. If this approach had been used for the calculation of the cost-based benchmark at hand, the result would have been higher than the 58 bps [basis points] calculated by EDC. It was not used because the Standard says to aggregate costs and divide by aggregate transactions, rather than to determine each NSPs total eligible costs and then weight by the NSPs share of transaction volume. To do so would not have followed the Standard. 19 The costs in the third class of costs were divided by the aggregate value of transactions excluding all "on us" transactions. 20 On being notified of the Edgar Dunn calculation, the RBA took issue with the manner of calculation of the third class of costs. Essentially, the RBA says that, as in the other classes of cost, on the correct interpretation of paragraph 11 of the Standard, the total Scheme fees for authorisation and processing should be divided by all transactions and not only by the amount of interchange transactions. If this view is correct, then the benchmark would be lowered by about three basis points to fifty-five basis points.

Interpretation of the standard 21 The primary rule of interpretation is that the language used in statutory instruments should be given its natural and ordinary meaning. As Lord Reid said in Luke v Inland Revenue Commissioners [1963] AC 557 at 577: "The general principle is well settled. It is only where the words are absolutely incapable of a construction which will accord with the apparent intention of the provision and will avoid a wholly unreasonable result, that the words of the enactment must prevail." 22 In some specific circumstances there may be a proper basis to "strain" the interpretation of the instrument to give effect to the clear purpose of the provision. In Newcastle City Council v GIO General Ltd (1997) 149 ALR 623 at 642, McHugh J said: "If the legislature uses language which covers only one state of affairs, a court cannot legitimately construe the words of a section in a tortured and unrealistic manner to cover another set of circumstances. … even when a court adopts a purposive construction to remedial legislation it is 'not at liberty to give it a construction that is unreasonable or unnatural'. Nevertheless, when the purpose of a legislative provision is clear, a court may be justified in giving the provision 'a strained construction' … to achieve that purpose provided that the construction is neither unreasonable nor unnatural." 23 As Pearce and Geddes say in Statutory Interpretation in Australia 5th edn. (2001) at 28: "If McHugh J's analysis is accepted, the line between what is and what is not acceptable is that a court may 'strain' the ordinary meaning of words, although not to reduce an interpretation that is 'unreasonable or unnatural'. This is helpful in that it emphasis the necessity of interpreting the actual words of the provision, while allowing that a less obvious interpretation may be adopted, so long as that interpretation is a credible one." 24 The tension which can exist between the specific language used and the objective of a provision in a legislative instrument which, in turn, could give rise to an interpretation which may "strain" the language, was adverted to by French J in Latitude Fisheries Pty Ltd v Minister for Primary Industries and Energy (1992) 110 ALR 209. In that case, the Court had to consider a fisheries plan of management. The Minister was required by s 7B(8) of the Fisheries Act 1952 (Cth) to perform his functions in accordance with the plan of management. The objectives of the plan were to conserve and reduce fishing pressure on the stocks of prawns in the fishing area of the fishery, and to promote the economic efficiency of the fishery. His Honour observed at 230: "In my opinion, if the minister or the secretary were to purport to perform a function or exercise a power under the [Fisheries] Act in relation to the fishery in a way that was in direct conflict with a provision of the plan or in a way which differed from that exhaustively prescribed by the plan for doing that thing, then the purported performance of the function or exercise of power would be ultra vires. The test is one of consistency and there is ample authority in a variety of contexts for the way in which it is to be applied. The generality of the content of the duty imposed by s 7B(8) is ultimately in the hands of the minister making the determination. The more prescriptive the plan in areas relating to the exercise of statutory powers and functions, the more confining the content of the duty imposed by s 7B(8) will be. A plan drawn in more general terms will allow greater freedom of action." (Emphasis added) 25 In my view, these latter words are apposite to a consideration of the wording of the Standard in this case, where the objective of the Standard is expressed in broad, general terms (transparency and the promotion of efficiency and competition in the Australian payments system), whereas the provisions as to the manner of calculation are specific, prescriptive and comprehensive. 26 The RBA submits that the language of paragraph 11 of the Standard is plain and detailed. There is no ambiguity or lack of clarity, so that the words must be given their normal and ordinary meaning in accordance with the basic principles of statutory interpretation. In particular, the RBA submits that paragraph 11 requires that the aggregated value of eligible costs, meaning thereby all eligible costs, must be divided by the aggregate value of credit card transactions, which is to say by all credit card transactions, and not simply those in respect of which interchange fees are applicable, as contended by Edgar Dunn. The reading that Edgar Dunn has adopted would require a substantial modification to the language. There is no basis to vary the language of the provision as is required if the approach of Edgar Dunn is adopted. Although the Guidance Note is designed to ensure consistency in interpretation, and does not control the interpretation of the Standard, it does provide a pointer as to what was intended. The Guidance Note supports the RBA submission, in that it describes the method of calculation as requiring a division by the aggregate value of credit card transactions for the prior financial year on credit cards of the Scheme issued by nominated Scheme participants. 27 MasterCard does not make any submission as to the correct interpretation of the method of calculation of the benchmark. 28 Counsel for Edgar Dunn submits that the Standard must be read in order to give effect to its objective, and by looking beyond form to substance, in accordance with the objective of the Standard, which is stated at paragraph 7. The objective, it is said, is to achieve a matching of costs to those transactions which give rise to the imposition of an interchange fee, and therefore, the appropriate course is to use the value of such transactions as the figure to divide into the total eligible costs. The reasoning behind this approach is set out in the paragraphs of the affidavit of Mr White that have been extracted above. 29 It is submitted for Edgar Dunn that, in the case of eligible costs which apply differentially to "interchange transactions" and "on us" transactions, a more sophisticated approach is required. It is said that the RBA approach is arbitrary, and produces a result that is inconsistent with the purpose of the Standard. The RBA approach precludes issuing banks from recovering all the costs of interchange transactions, and therefore defeats the objective of the Standard, which is to promote efficiency and competition. 30 In support of its calculation, Edgar Dunn submits that the RBA approach prevents issuing banks from recovering in the order of $4 million costs incurred each year in providing interchange transactions, because it fails to make proper allowance for the fact that "on us" transactions do not enliven the payment of interchange fees. Reference is made to extracts regarding the purpose of the Standard and the RBA reforms, which are on pages 8 and 9 of the document "Reform of Credit Card Schemes in Australia IV: Final Reforms and Regulation Impact Statement", issued by the RBA in August 2002. However, these extracts refer in broad terms to generalised objectives, and do not point to any specific mode of calculation. There was also reference to the need for the prices that financial institutions charge consumers to reflect the relative costs of providing credit cards, as well as having regard to demand conditions. The document "Reform of Credit Card Schemes in Australia: A consultation document" issued by the RBA, in December 2001, also refers to a costs based justification for the level of interchange fees. 31 Having regard to the generalised expression of the objective in the Standard, no useful guidance can be obtained from it which would warrant a departure from the language of paragraph 11. If the paragraph is perceived to operate unfairly, the appropriate course is to seek a variation of the language of the Standard. It is not for this Court to inject or rewrite the central provision of the Standard, which has been framed after several years of extensive investigation, submissions, consideration and meetings, as outlined in Visa International Service Association v Reserve Bank of Australia [2003] FCA 977 where I considered the validity of the Standard. Generally, the intention of legislation, and the objective sought to be achieved by it, are best determined by the language that has been used. Where language is clear and unambiguous, there is little or no room for the examination of other material to ascertain the true intention. In the present case, the language is unambiguous and should be taken to prescribe the way in which the objective was sought to be achieved. This is not a case where the language can or should be "strained". The construction contended for by Edgar Dunn does not merely "strain" the language but rewrites it. To use the language of McHugh J, such a construction would be both unreasonable and unnatural. There has been no evidence placed before me which would indicate that the language of paragraph 7 should be altered. It is not, in my view, for this Court to act on a basis different to that plainly expressed in the language of the Standard as to the particular way in which the objective of the Standard is to be achieved, unless there is compelling evidence which requires such a conclusion. The objective of achieving efficiency in the Australian payments system is one that is open to achievement in many diverse ways. In the absence of any specific material to warrant variation, it is not appropriate in this case to depart from the language of the Standard. 32 Accordingly, on the interpretation question, I consider that the submission advanced for the RBA is correct, and that the calculation made by Edgar Dunn was made on the basis of a misinterpretation of the Standard.

DECLARATIONs SOUGHT 33 In relation to the declarations sought in the MasterCard application, my conclusion is that the first declaration is not appropriate because is it unnecessary for the determination of the present dispute. The second declaration is contrary to my conclusion on the interpretation question. 34 During the proceeding, Counsel for MasterCard, Mr Hanks SC, submitted that the RBA had taken an extreme position, namely that MasterCard, in obtaining the determination by Edgar Dunn, was in breach of the Standard by failing to comply with it. He submitted that MasterCard found itself in a dilemma because if it did not apply the determination of Edgar Dunn, it could be treated as in breach of the requirements of the Standard. On the other hand, if the RBA interpretation was correct, then the benchmark determined by Edgar Dunn was invalid and there would be no applicable benchmark. Its contention was that this issue needed to be classified and left it to Edgar Dunn to defend the calculation. 35 In a letter to MasterCard dated 13 October 2003, Michele Bullock, the Acting Head of the Payments Policy of the RBA, wrote: "You will see from the attached letter to Mr White of EDC [Edgar Dunn] that EDC has not calculated the cost-based benchmark for the MasterCard Scheme in compliance with Standard No.1. Consequently, neither MasterCard nor its members in Australia have complied with the Standard." 36 During the course of the hearing, Mr Bathurst QC, on behalf of RBA, indicated that RBA would not give a direction under s 21 of the Act that there was a failure to comply with the Standard, if its contention as to the incorrectness of the determination by Edgar Dunn was sustained. This position was announced to MasterCard during the hearing. 37 I make no orders at this time. I will hear the parties as to the form of orders and costs at a time to be arranged with my associate. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Associate: Dated: 10 November 2003 Counsel for the Applicant/First Cross-Respondent: P Hanks, QC I E Davidson C Catt

Solicitor for the Applicant/First Cross-Respondent: Coudert Brothers

Counsel for the Respondent/Cross-Claimant: T F Bathurst, QC J E Griffiths, SC A J Payne

Solicitor for the Respondent/Cross Claimant: Clayton Utz

Counsel for the Second Cross-Respondent: S Gageler, SC M Leeming

Solicitor for the Cross-Respondent: Acuiti Legal

Date of Hearing: 30 October 2003

Date of Judgment: 10 November 2003