A common frustration shared by school admissions teams across the globe is insufficient notice of student withdrawal. Working in the education sector over the last decade, I’ve come across varying requirements for notice of withdrawal with some schools enforcing the notice requirements quite strictly, whilst some schools are reasonably lenient. As we all know, life happens, circumstances change, and it’s not always possible for families to provide notice months in advance, but including a clause in your enrolment agreement to collect additional fees can protect your school from financial
loss.
However, what makes me cringe is when schools refer to these additional fees as a ‘penalty.’ A poor choice of word because, at law, penalties are unlawful and not enforceable. In my opinion, a better choice of words would be ‘a pre-estimate of the school’s loss as a result of insufficient notice’ as this in my view is lawful and enforceable. It’s a bit of a mouthful, I know, but well worth the effort!
Let’s take a closer look...
ANZ case study
Some of you might recall a few years ago, a class action related to ANZ charging excessive late payment fees on credit cards ended up in the High Court. In short, the credit cardholders claimed the late payment fees of $25-$35 were grossly disproportionate and extravagant (and therefore, unlawful) when compared to the loss sustained by ANZ when a credit card fee was paid after the required due date.
Cardholders claimed that the calculation of loss should be assessed by the amounts needed to restore ANZ to the position it would have been in if the credit cards were paid on time. ANZ, on the other hand, said the loss suffered had impacted three cost areas:
- Operational
- Loss provisioning
- Increases to regulatory capital
In short, ANZ claimed to have suffered more loss than just the costs associated with ensuring the organisation would be in the same position if fees were paid on time. The result? The court preferred ANZ’s argument, agreeing that the fees were a genuine pre-estimate of loss, suffered as a result of late payments and therefore, not a penalty.
Interestingly, ANZ didn’t try to calculate the actual loss it would have sustained had the customer not paid their credit card on time. While not essential, the court held that if ANZ had done the calculations before setting the late payment fee, then it would have tended to suggest the clause was not a penalty.
2022 ACAT Decision
The ACAT (ACT Civil and Administrative Tribunal) recently passed judgement on a matter concerning a school’s insufficient notice clause. Whilst an ACAT decision is not binding, the decision handed down in Brindabella Christian Education Ltd v Respondent provides further insight on how the court is likely to view an issue related to such clauses in school agreements.
Here, the tribunal decided that a notice term requiring one terms’ fees in lieu of advance written notice constituted an unfair contract. This is because the school could vary fees without prior notice, and without giving the parents the chance to withdraw their child from the school without penalty.
The decision suggests that schools must be able to prove that they had or were going to suffer loss form the withdrawal. It was also found that the loss depends on factors such as whether the child is able to be replaced by another. It would be difficult to argue that a loss was suffered in circumstances where a child’s spot is subsequently filled by an eager participant from a long waitlist.
Despite this, losses are likely to justified where students are withdrawn after schools have hired teachers and committed resources for the following year based off the number of committed students.
Relevance for schools
You might now be able to see the similarity with the assessment of whether charging a full term’s fees for insufficient notice could be considered grossly disproportionate and extravagant compared to the loss sustained by a school. Should schools be able to charge upwards of $5,000 - $8,000 if a family provides say, five weeks’ notice instead of a complete term? Or where the spot is easily filled by another student?
In my experience, it’s quite uncommon for schools to undertake a pre-estimation of costs associated with the financial impact of insufficient notice. That being said, short notice is an inconvenience and a cost to a school, so I believe schools should have the right to charge a fee to cover these costs.
The ANZ case and the decision of ACAT provide clear guidance as to what measures an organisation such as a school should take to ensure a fee is not a penalty or an unfair contract.
In my view, schools should do two key things:
1. Assess the costs associated with families providing short notice
Take a broad, yet as accurate as possible approach and include: administrative costs, operational costs, IT costs, extra-curricular costs, and costs of filling a new enrolment. Once you’ve completed this, be sure to file the assessment and review it annually.
2. Amend the relevant clause in your Enrolment Agreement
Update the clause in your Enrolment Agreement so that it includes a reference to the assessment being a pre-estimate of the loss sustained by providing insufficient notice. Remember, the wording is important here!
3. Carefully consider when to enforce the clause
You should consider the individual circumstances surrounding the withdrawal of a student, and if you would be able to prove in those circumstances that a loss had been suffered. Do you have a waitlist and has their spot been filled? Or, is the spot not able to be filled and have resources already been committed based on the number of students committed?
Wrapping up
I’m always surprised that these clauses are rarely challenged as penalties. Paying upwards of $8,000 would surely seem disproportionate and extravagant, without any assessment as to the loss suffered, or how it’s calculated. In my view, this is likely because these clauses are less relied upon compared to late credit card payment clauses reflecting the relationship between a family and a school is completely different from that of a bank and its client. However, given the increasing cost of education, I believe that it’s only a matter of time before this is challenged.
In light of the instructive 2022 Decision of the ACAT, schools will still be able to require one term’s fees in lieu of notice. Enrolment contracts will not be unfair where terms of enrolment are transparent, and not unduly enforced.
Undertaking the steps set out above should significantly reduce a school’s risk of its ‘Notice of Withdrawal’ clause being classified as a penalty or an unfair contract.
For more information on updating your school’s enrolment agreement, get in touch with the team at Clifford Gouldson Lawyers for advice.
