Cessation of One.Tel's business
5 The second plaintiff ceased to provide telephonic services to customers on about 8 June 2001. Arrangements were made to permit One.Tel customers to transfer their business to other telephone companies including Optus and Telstra. Only a limited amount of evidence about these arrangements has been adduced.
6 One.Tel had approximately 720,000 active customers with debts outstanding of about $190 million. The average debt per customer during the administration was approximately $250-275. The first plaintiffs as administrators retained approximately 70 One.Tel staff specifically to collect the outstanding One.Tel customer debts. On average one staff member spoke to approximately 80 customers per day. The staff were "incentivised" to remain by the offer of bonuses based on debt recovery levels they achieved.
7 The plaintiffs' evidence, which I accept for purposes of this application, is to the effect that if the facilities were not available for the collection of customer debts, voluntary compliance by customers would dramatically fall away and the debt recovery process would be substantially impaired. Media coverage about the affairs of One.Tel had adversely affected voluntary compliance by One.Tel customers in payment of their debts. Of One.Tel's 720,000 customers, approximately 370,000 have debts in the range $0-$50, another 149,000 have debts in the range $51-150, and another 90,000 have debts in the range $151-400. Only 56,000 have debts in excess of $1000. The plaintiffs' evidence is that the most efficient manner of collecting customer debts up to $1000 is by aid of electronic banking facilities.
Mr Hockey's intervention
8 There was a large amount of publicity surrounding the collapse of One.Tel, and Mr Joe Hockey MP, Minister for Financial Services and Regulation, took an interest. On 19 June 2001 Mr Hockey wrote to the managing director of the Australian Bankers' Association ("ABA"), saying that people with direct debit or periodical payment arrangements with One.Tel had contacted his office to inform him that, despite approaches to their bank, One.Tel was still debiting money from their accounts. Further, said Mr Hockey's letter, the banks had said they were unable to stop payments from being made. Mr Hockey expressed the understanding that, once a customer says they want payments stopped, their bank is bound to act on that advice. He expressed concern that customers were being inappropriately charged, given that they were by then receiving no service from One.Tel. He urged the ABA to address the issue with its member banks, to ensure they were complying with their customers' wishes, including directions to terminate direct debit or periodic payments to One.Tel.
9 The Australian Payments Clearing Association ("APCA") wrote to its members on 20 June 2001, including the defendant, saying that Mr Hockey had raised with the ABA the issue of the ability of customers to cancel One.Tel direct debit authorities with their bank, and that the ABA intended to issue a press release (a draft was enclosed) making the point that banks would act on their customers instructions to cancel direct debit authorities. APCA's letter noted that under existing procedures, banks were to advise their customers wishing to cancel direct debit authorities to contact the debit users, but that nothing in the existing procedures prevented banks from acting on behalf of their customers to assist in the process of cancellation - apart, that is, from any obligation the banks had to act on notifications by customers to stop processing particular debits.
10 On 20 June 2001 Mr Hockey gave an interview in which he said that "the banks are on notice here, that if a customer says the direct debits are to stop, they are to stop, the customer rules." Consequently, he said, if a customer of One.Tel says to their bank that direct debits have to stop, then they have to stop and "any other arrangements are between the individual and One.Tel". Except for the last quoted observation, Mr Hockey's statements do not expressly take into account the possibility that by cancelling their direct debit authorities, customers may be acting in breach of their contractual obligations to One.Tel, and consequently acting to the potential detriment of other customers and creditors of the company.
11 The ABA's draft press release, enclosed with APCA's letter, was expressed in more cautious terms. It quoted the Chief Executive of the ABA as saying that any customer of an ABA member bank could, without first approaching the supplier (in this case, One.Tel), instruct their bank not to accept or post to their account a direct debit, under a direct debit authority. However, the Chief Executive was quoted as continuing:
"Customers should read carefully their contract with their supplier. They should take account of the contractual arrangements with their supplier, for example One.Tel, and first check they can safely cancel the authority this way without breaching their contracts."
12 Mr Sherman, one of the plaintiffs, gave evidence that he received a telephone call from a person in Mr Hockey's office on 20 June 2001, drawing his attention to Mr Hockey's statement. He says that his partner Mr Walker received Mr Fryer's second letter of 20 June 2001 (described below) later on that day.
13 Mr Fryer, the bank officer who dealt with termination of the direct debit facility, gave evidence that he did not become aware of the terms of Mr Hockey's letter to the ABA until after he issued a letter terminating the facility on 26 June 2001. However, he acknowledged that he was aware of the substance of Mr Hockey's intervention at an earlier time. That is hardly surprising, given that Mr Hockey reinforced his letter with a media interview on 20 June 2001.
Negotiations leading up to termination of the facilities
14 Arrangements with respect to the merchant facility were handled on behalf of the defendant by Jennifer Fagg, Head of Global Cards Credit Risk Management. Arrangements with respect to the direct debit facility were handled on behalf of the defendant by Mr Graham Fryer, General Manager of Cash Management and Transaction Services.
15 On 15 June 2001 the first plaintiffs received a facsimile of that date from Ms Fagg of ANZ which raised a number of issues regarding the ANZ merchant facility. Ms Fagg was concerned that One.Tel customers who transferred to other telephone companies under the arrangements that had been established may not receive any credit for any pre-payments made to One.Tel; if the pre-payment had been made by credit card, the customers might charge back the prepayments under the merchant facility. She wanted to understand the extent of the potential chargeback liabilities before and after the commencement of the administration, and asked the first plaintiffs to confirm the dollar values of transactions pertaining to services paid for in arrears, and those paid for in advance. She said she expected cardholders to begin charging back pre-payments soon.
16 On 20 June 2001, Mr Fryer of ANZ wrote to the first plaintiffs, regarding a direct debit file submitted on 19 June by the first plaintiffs for processing 7839 customers' direct debits for a net total amount of $854,621. Mr Fryer said he thought the first plaintiffs should be aware that there may be a significant number of rejections as a result of customers of One.Tel putting a stop payment on their accounts for those debits or because their accounts had been cleared of funds. Noting that there was a fee of $11.50 for each returned item, he said the rate of rejections on a direct debit file processed on 30 May 2001 had been approximately 15 percent, and expressed the belief that the rate of rejections on the next occasion would be significantly higher, and consequently the first plaintiffs would incur a significant cost. He invited them to resubmit the file only for the larger items, but said that if he had not heard by 5 p.m. he would process the file.
17 Later on the same day, Mr Fryer wrote again to the first plaintiffs, requesting that they confirm:
(a) that all amounts on the Direct Debit file submitted on 19 June 2001 represented amounts believed by the first plaintiffs to be legally due to One.Tel, and
(b) that in the event of disputes with One.Tel customers, the disputes would be investigated by the first plaintiffs to determine their validity, and if the investigations supported the customers' claims appropriate refunds would be provided.
18 Mr Fryer's evidence, which I have no reason to disbelieve, was that this letter followed up on a conversation to similar effect between him and Mr Walker on the evening of 19 June.
19 On 21 June 2001 Ms Fagg wrote to the first plaintiffs purporting to suspend the merchant facility, on the ground that the information requested in her facsimile of 15 June 2001 had not been provided. She said the defendant would consider reinstating the merchant facility when the information was provided, or if acceptable alternative arrangements were made by 4pm the same day.
20 The first plaintiffs responded by letter to Ms Fagg dated 22 June 2001, saying that the suspension of the facility had caused immediate negative repercussions on their ability to collect customer accounts, estimating the immediate impact at approximately $1.5 million per day. The letter purported to provide the information that had been sought on 15 June, saying that customers who moved to Optus or Telstra under arrangements made after commencement of the administration would not be required by One.Tel to pay a break cost for termination of their agreements, but customers who terminated in other circumstances would be expected to pay that cost. There was no standing arrangement for Telstra to recognise credits, but One.Tel would process refunds except where the customers were debtors of One.Tel. The letter said that generally the billing arrangement between One.Tel and customers was that the customers paid monthly in advance.
21 Clearly by that time the first plaintiffs had become very concerned about the future of the facilities. Mr Sherman's evidence is that he had several telephone conversations with officers of the defendant to find out whether any decisions had been made to terminate the facilities.
22 The first plaintiffs wrote again to Ms Fagg on 25 June 2001 saying that suspension of the merchant facility was directly impacting their ability to collect money owing by customers of One.Tel, which amounted at that time to in excess of $200 million. It said that staff retained by One.Tel might be prevented from meeting their incentive targets and might leave. The letter enclosed a package of information that was being made available to One.Tel customers, including an open letter.
The administrators' "open letter"
23 The document referred to as the "open letter" in the first plaintiffs' letter of 25 June 2001 was headed "Open Letter to All One.Tel Customers". It informed customers that One.Tel had ceased providing services, and set out to explain the position in relation to issues concerning direct debits in favour of One.Tel. It stated that a customer could cancel his or her direct debit authority by sending a written request to the Direct Debits Team at One.Tel.
24 The open letter continued as follows:
"How will my cancellation request be dealt with?
Where a request has been made and you owe money to One.Tel, a cancellation request will not be processed and we will continue to process the direct debit authority until your account has been paid. At this point the cancellation request will be processed.
If no moneys are owed to One.Tel the cancellation of the direct debit or credit card authority will be processed.
Where there is a dispute on an account and moneys are owed to One.Tel Ltd, we will continue to process the direct debit authority, however a reconciliation of the account will be conducted by One.Tel and where appropriate a refund will be paid to you."
25 The letter also dealt with termination fees and other fees, and arrangements for transfer to other telephone service providers.
26 Mr Fryer gave evidence, which I accept, that when he received the open letter in draft form, on 22 June 2001, he formed the view that it denied the rights of One.Tel customers, because he regarded the customers as having the unconditional right to terminate their direct debit authority with One.Tel.
Termination of the facilities
27 On 26 June, Ms Fagg sent a facsimile to the first plaintiffs purporting to terminate the merchant facility. She said that the termination was pursuant to clause 31 (ii) (g) of the general conditions of the merchant facility agreement. That clause entitled the defendant to terminate the agreement without notice "if ANZ reasonably determines that the continued provision of the Merchant Facilities to the Merchant may damage the reputation of ANZ".
28 On the same day Mr Fryer wrote to the first plaintiffs. He referred to his letter of 20 June 2001 to which, he said, he had yet to receive a response. That appears to be true, on the evidence before me. He said that the defendant was concerned with the first plaintiffs' inability to provide the assurances set out in the earlier letter, and for that reason the defendant had not processed the direct debit file submitted on 19 June 2001. In the absence of the assurances sought, he said, the defendant was concerned that, in seeking to have direct debits processed, the first plaintiffs may not be acting in accordance with the terms of the agreement, in particular clause 1.5 and 1.6 of the Direct Debit Service Conditions of Use. On this basis, he said, the defendant was terminating the Direct Debit Agreement with the plaintiffs with immediate effect, pursuant to clause 10.1. I shall describe the contractual provisions of the direct debit facility later.
29 Mr Fryer said in evidence that the primary reason for the decision to terminate was the fact that the administrators' open letter to customers was inconsistent with the right of One.Tel customers to unconditionally cancel their direct debit authorities and prevent money being drawn from their accounts against their will.
30 He had two other concerns. He was concerned that the first plaintiffs had not given the defendant any assurance that the amounts for which it sought payment through the direct debit facility were amounts to which One.Tel was entitled, for services that had actually been provided.
31 He was also concerned that in practice customers look to their bank to resolve problems or disputes in relation to direct debiting arrangements, and it is time-consuming and ultimately fruitless for the bank to deal with the customer, because on most occasions the issue can be resolved only between the customer and the biller. If the biller is unable to assist the customer, the customer will become frustrated and this frustration will usually be reflected in the customer's perception of the bank, and consequently the bank's reputation will be affected. According to Mr Fryer, an adverse experience by a customer with any single banking product is likely to affect the entire banker-customer relationship, and therefore put in jeopardy the business of the bank with those customers in relation to all banking products, including credit card facilities, and home and personal loans.
32 Termination of the direct debit facility had the effect of suspending payment of direct debits to customer debit accounts of about $6.9 million, and direct debits to customer credit cards of about $ 4.4 million, totalling $11.3 million. Credit card transactions of about $2.5 million were held in suspension by termination of the merchant facility, although some credit card customers paid by other means and (as mentioned below) interim arrangements were made on about 17 July 2001 to re-establish the merchant facility. Mr Sherman has given evidence that by 14 August 2001, the total possible payments from One.Tel customers if the direct debit facility payments held in suspension were processed and cleared would be $56.318 million, and that the direct debit transactions not processed by the defendant since termination of the direct debit facility had become $17.289 million. There are approximately 120,000 payments to either a credit card or bank account which are held in suspension and unprocessed by the defendant, many of which may now be unable to be processed and paid due to the subsequent receipt of requests from customers to cancel their direct debit authorities.
33 One of the issues at the final hearing of this case will be whether, as the plaintiffs allege, Ms Faye and Mr Fryer terminated the facilities directly or indirectly at the request of Mr Hockey. The evidence before me now is manifestly insufficient to permit any conclusion to be reached on that question. However, it is relevant for me to find, and I do find, that there is a serious question to be tried with respect to the allegation. The allegation is not so implausible as to be rejected at this interlocutory stage.
Subsequent negotiations
34 Mr Sherman protested about the defendant's decisions in telephone conversations with Mr Fryer and Ms Fagg on 26 June 2001. On 28 June 2001 the first plaintiffs wrote to Ms Fagg claiming that the purported termination of the merchant facility was in breach of contract, in pointing out that the defendant had never advised the first plaintiffs that it was proposing to make a determination under clause 31 (ii) (g) of the general conditions of that facility.
35 There is evidence before me of negotiations between the parties to explore the possible reinstatement of the merchant and direct debit facilities. Mr Sherman said that on 5 July 2001 he telephoned another bank officer, David Hewitt, Head of Technology and Media Entertainment Group of ANZ, who suggested that a meeting be arranged but then said:
"McFarlane has given undertakings to Joe Hockey and this needs to be handled through PR."
36 By 6 July 2001, the first plaintiffs had identified cases where customers had, before One.Tel ceased supplying services on 8 June 2001, received statements of account which included charges or service fees for the whole of June and/or July 2001. The first plaintiffs had processed credits for services billed in respect of periods after supply was discontinued, in order to ensure that amounts electronically provided to the defendant for processing would correctly reflect the true amount owed by the customer. The amounts credited were approximately $4 million. The first plaintiffs informed the defendant that this process had occurred, at a meeting on 6 July 2001. There was also discussion of the various ways in which the unprocessed direct debit files could be processed without exposing the defendant to the task of investigating chargebacks by dissatisfied customers.
37 By about 10 July 2001, the first plaintiffs had actually collected $15.7 million and a further $13.8 million was currently held in suspension because of termination of the facilities. As I have said, the merchant facility was reinstated on about 17 July. Thereafter, negotiations continued with respect to the direct debit facility. Mr Fryer made a diary note, which is in evidence, of a meeting between himself and representatives of the first plaintiffs on 27 July 2001. The note records that Mr Sherman wanted to pursue the option of setting up an "escrow" clearing account whereby unprocessed files could be processed and the money held for a period of time to be agreed, during which time if there was a dispute, the money would be returned to the customer but in the absence of disputes, it would be forwarded to the first plaintiffs at the end of the agreed period.
38 Mr Fryer's response, according to his note, was as follows:
"I advised that this did not resolve the principal concern we had with regard to the Administrators' advices to customers regarding their Direct Debit authorities. I explained that the reasons the Direct Debit Facilities were cancelled included, inter alia, the fact that the agreement between One.Tel and its customers provided customers with the right to terminate the facility at any time. However, the Administrators had sought to vary that agreement by refusing to cancel the facility at the customer's request. We therefore believed that this represented a breach of One.Tel's agreement with its customers and thus also constituted a breach of One.Tel's agreement with the Bank for the provision of the facility. It was for this reason that we would only be willing to reinstate the facilities with respect to customer initiated payments whereby the authorization was given following the cessation of the provision of telephony services."
39 The suspension and termination of the facilities by the defendant jeopardised the first plaintiffs' ability to collect customer debts in a timely and efficient manner. The first plaintiffs believe that it is unlikely that they will be able to recover the majority of the direct debit customer payments which have been held in suspension by the defendant, by virtue of its not processing the direct debit file. Further, since 19 June 2001 the first plaintiffs have received in excess of 5,000 requests by customers that their direct debit facilities be cancelled. The cancellation of direct debit facilities by customers means that the first plaintiffs are forced to use other, less efficient collection methods to recover outstanding debts, making some debts uncollectible in a practical sense through effluxion of time.
The proceeding
40 The plaintiffs commenced the present proceeding by summons filed with abridgment of service on 11 July 2001, and then proceeded by statement of claim filed on 20 July 2001. After an interlocutory hearing before me on 13 July 2001, arrangements were made between the parties for reinstatement of the merchant facility, which has been operating in what I shall assume, for present purposes, to be a satisfactory way as from about 17 July.
41 The plaintiffs have applied for expedition of the proceedings, on the ground that the first plaintiffs need to determine speedily the defendant's liability to reinstate the facilities and to process the direct debit file. They also applied for orders for the separate determination of the questions of liability and assessment of damages, but in my reasons for judgment delivered on 3 September 2001 I denied that application.
Interim arrangements
42 On 21 August 2001 the solicitors for the defendant wrote to the solicitors for the plaintiffs saying that their client was prepared to reinstate the direct debit facility on specified conditions, including conditions that the reinstatement would permit direct debits only where the customer's authorization was given on or after 12 June 2001, and that the first plaintiffs would undertake not to process direct debits that were received by them on or before 11 June 2001.
43 On 28 August 2001 the plaintiffs' solicitors responded to that offer, saying that the offer did not represent a "commercially appropriate interim resolution". The difficulty, they said, was that all direct debit authorities from customers pre-dated 12 June 2001, and to re-contact the customers to refresh their direct debit authorities would not only involve a huge expenditure of time and money, but could well have a detrimental effect on collections of what had become long outstanding debts. They said that in fact, the first plaintiffs had commenced a process of contacting customers who had provided direct debit authorities to see whether they would consent to pay their debts by credit card. Given that many thousands of customers are involved, this process has been expensive and, moreover, the letter alleged that since the customers thought that their debts had been paid by direct debit, the staff of the first plaintiffs had been encountering "significant and mounting pressure and criticism from people in this position".
44 Mr Sherman's evidence is that after the reinstatement of the merchant facility, One.Tel collections staff telephoned "large" debtors who had supplied direct debit authorities, in an attempt to obtain their consent to debit the outstanding debts against their credit cards. In that way the first plaintiffs were able to process recovery of some debts against the merchant facility. Mr Sherman's evidence is that the first plaintiffs were able to recover approximately $3.2 million of debt in that way up to 31 August 2001. The debt would have been recovered virtually automatically if the direct debit facility had been available to be used, and the One.Tel collections staff have been almost completely taken away from their main role of collection from "difficult" debtors.
The plaintiffs' claims
45 The statement of claim, to which the defendant has lodged a defence, alleges that the defendant is liable to the plaintiffs on the following alternative grounds, namely that
· the termination of the merchant and direct debit facilities was in breach of the express or implied terms of the contract (paragraphs 15 and 17);
· the defendant acted unconscionably in purporting to terminate the facilities, contrary to s 51AA and/or ss 51AB and 51AC of the Trade Practices Act 1974 (Cth) and/or s 12CA and/or s 12CB of the Australian Securities and Investments Commission Act 1989 (Cth) (paragraphs 20, 22, 24 and 26).
46 The statement of claim seeks, by way of relief:
· declarations of breach of contract and breach of statutory provisions concerning unconscionability;
· mandatory and prohibitory injunctions to require the defendant to reinstate the facilities and to restrain it from relying on the purported termination of the facilities, and to restrain it from terminating their provision in the future;
· orders declaring certain provisions of the contract to be void, or refusing to enforce them;
· damages.