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Here are some of the changes:

• Over-the-Credit-Line Fee: $35
• Late Payment Fee:
  • $10 on balances up to $50
  • $35 on balances of $50 and over
• Returned Payment Fee: $29

Each of these fees represents a charge that is incurred if the cardholder fails to meet his or her contractual obligation, and in each, there is a factual question as to whether the amount of these fees fairly reflects the direct and indirect costs that the card issuer incurs under these circumstances.

That's important. These charges are essentially imposed as liquidated damages. "Liquidated damages" is the legal term used to describe a contractual specification of the amount of damages incurred under specific circumstances.

Such clauses are commonly and properly used to avoid having to determine the actual damages incurred, when one party to a contract fails to fulfill its obligations under the agreement, and when it would be difficult to determine how much the other party would actually be damaged.

There is a long-established principal of contract law that contracts may not specify that one party's failure to abide by contract terms can result in a windfall for the other party. Any charges imposed for failing to meet a contractual obligation are only permissible to the extent that they reasonably reflect the damages incurred, or in the case of liquidated damages, the damages that are likely to be incurred.

Do the charges listed above reasonably reflect the damages that Sears incurs:

• After approving a credit transaction that potentially results in an account being only a few dollars over the credit limit, they get an extra $35 in the process.
• An account on which $10 or less is due will be subject to a charge of $10 or $35, depending on the account balance.
• A returned check or rejected electronic transaction, which has been estimated to cost less than $5 to process, results in a $29 charge.

Most people have the erroneous impression that a contract is a contract, and if it's in writing and isn't an agreement to commit an illegal act, that it's valid. But these penalty clauses are considered contrary to public policy and unenforceable. The Uniform Commercial Code's prohibition on liquidated damages clauses that are penalties rather than a realistic proxy for damages reflects this view.

Here are some links about such impermissible liquidated damages clauses:

• DC cable company $5 late fee
  • http://www.morelaw.com/verdicts/case.asp?n=98-CV-1837+%26+98-CV-1838&s=DC+&d=25349
  • http://0-pubs.bna.com.pegasus.law.columbia.edu/ip/BNA/Atr.NSF/b98e90baa7fc51df85256b520075bdf7/a621946dc9ea3ff385256d6d0081421c?OpenDocument

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Revision r1.1 - 19 Jun 2004 - 03:20 by EliMantel  Privacy Policy

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