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On 27 July 2016, the High Court of Australia in Paciocco v Australia and New Zealand Banking Group Limited  [2016] HCA 28 dismissed the appeal, holding ANZ’s late payment fees of up to $35 in respect of its credit card accounts did not amount to a penalty, and were enforceable. The Court also held that the late payment fees did not breach the statutory prohibitions of unconscionable conduct and unjust and unfair contract terms raised by the appellant.

The High Court’s analysis provides clear guidance to the application of the law of penalties regarding default fees charged under financial services contracts and has the scope to be applied to other industries where late fees may be imposed.

This article looks at the key issues raised, the decisions in the lead up to the appeal, and the reasons for the High Court’s decision.

The Road to the High Court

At first instance, Justice Gordon dismissed the statutory claims in respect of all of the exception fees. Based on the following considerations, her Honour held that only the provisions for the late payment fees amounted to penalties:

  1. ANZ charged their customer fees when a customer failed to comply with the terms of their account, irrespective of whether the payment due was negligible; and
  2. The amount of the fees was extravagant and unconscionable in comparison to the costs ANZ had in fact incurred as a result of the breach.

On Appeal in the Full Court of the Federal Court

The Full Court on appeal upheld the majority of Justice Gordon’s decision. However, the Court overturned the conclusion regarding the late payment fees, holding that these also did not amount to penalties, and did not breach any of the identified statutory prohibitions.

The Full Court’s decision summarised the relevant questions to ask when determining if a fee will amount to a penalty as follows:

  1. Is the fee imposed to secure the performance of a contractual obligation (here, to make timely repayments)? and
  2. Is the fee’s amount “extravagant or unconscionable” (having regard to the greatest loss that could conceivably be incurred from a breach, assessed at the time of entry into the contract)?

The Court rejected the primary judge’s retrospective enquiry (ex post) as to whether actual damage ANZ sustained rebutted the apparent penal character of the late payment fee. The Full Court held that damages should be assessed prospectively (ex ante). Only after the fee is found to be a penalty is an ex facto enquiry appropriate to calculate compensation.

The High Court Appeal

The appellants in the High Court challenged the decision in respect of the late payment fees and the statutory claims. The key question in the appeal was, what was the appropriate test to determine whether a fee payable for a default in performing a contractual obligation amounts to a penalty.

What Was the Outcome of the High Court Appeal?

The High Court unanimously dismissed the appeal regarding the statutory prohibitions, and a majority of 4 out of 5 judges also dismissed the appeal in respect of the penalty argument. The High Court also agreed with the test applied by the Full Court and elaborated on some of the key aspects of this test – in particular, the legitimate interests that a late payment fee may protect.

Justice Kiefel noted that the words “extravagant”, “exorbitant” and “unconscionable” should be taken to describe the “plainly excessive nature of the sum in comparison with the interest sought to be protected by the sum” (at [34]). Not, as Justice Gordon had concluded, just the damages that directly flowed from the breach.

Based on this analysis, the Court held that the key consideration was whether the fee payable upon default is proportionate to the interests of the party whose interests the contractual provisions protect.

These interests may be a business or financial nature, and are not limited to direct financial loss, such as reimbursement of expenses, flowing from the breach. Justice Keane noted that ANZ’s ability to maintain or enhance its revenue stream to (or “intending to”) make a profit is a legitimate interest the late payment fee protects.

The Court identified three key cost areas within the legitimate interests of ANZ that the parties could have conceivably contemplated at the beginning of the contract, namely:

  1. Operational costs, being those costs associated with collections;
  2. Loss provisioning costs, being those costs that reflect the reduced value of customer accounts as a result of an increased risk of default occurring; and
  3. Increases in regulatory capital costs, being those costs incurred due to the need to hold additional funding capital to safeguard against unexpected losses, an amount which increases when the probability of default increases.

The amount of these estimates was sufficient to justify the amount of the late payment fee, and so the fee did not amount to a penalty.

The Statutory Claims

As mentioned above, the applicant also appealed the decisions made on the statutory claims. The High Court addresses these, and the findings are briefly summarised below.

Section 12CB(2) of the ASIC Act 2001 (as it was before 1 January 2012), sets out what the court must consider when determining whether a person had engaged in unconscionable conduct when supplying financial services.

Relevantly, the court must take into account:

  • The relative strengths of the bargaining positions of the supplier and the consumer ((2)(a)); and
  • Whether as a result of the supplier’s conduct, the consumer was required to comply with conditions that were not reasonably necessary to protect the supplier’s legitimate interests ((2(b)).

The Court noted that all matters in s 12CB(2) should be considered when assessing whether a financial services supplier has engaged in unconscionable conduct, however, the Court stated:

  • In respect of (2)(a), “the mere existence of a disparity in bargaining power…does not establish that the party which enjoys the superior power acts unconscionably by exercising it” [293]; and
  • In respect of (2)(b), ANZ had not engaged in any relevant conduct, as it did not cause Mr Paciocco to enter into the facilities. Mr Paciocco clearly understood the terms and conditions, and he “had a real choice as to whether to enter into the facilities and to make use of them” [309].

The Claim Under s 76 of the National Credit Code

Section 76(2) of the National Credit Code provided that a court was to have to regard to the public interest and all the circumstances of the case when determining whether a term of a particular credit contract was unjust.

The Court held that no element of the public interest that might bear on the assessment was identified and that it could not conclude that the standard contractual stipulation for charging the late payment fee resulted in the credit contracts being “unjust” [197].

The Claim Under s 32W of the Fair Trading Act

The Court reached a similar conclusion when assessing section 32W of the Fair Trading Act. 

That section provided that “a term of a consumer contract is to be regarded as unfair if, in all the circumstances, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer”.

The appellant argued that under the credit facilities, there was a detriment to the consumer as ANZ stood to profit from the consumer’s breach of contract without any “quid pro quo”. The imbalance was demonstrated by the “lack of any meaningful relationship between the late payment fee and the reasonably foreseeable loss which would result” [200].

The Court held that in fact, there was a meaningful relationship between the amount of the late fee and the accrual of costs to ANZ, which was reasonably foreseeable. Furthermore, the fee was not to Mr Paciocco’s detriment, as it was a risk he chose to take by not paying his account by the due date.

Key Takeaways

The High Court’s decision provides a much clearer understanding of the application of the penalty rule. As indicated earlier, the analysis in the judgment will provide a useful guide to the application and validity of fees charged for default under contracts in other industries. Rather than limiting fees for default to the actual damage incurred, such fees will be justified if they are not “out of all proportion” to the “legitimate interests” of the supplier under the contract. The Court’s broad view of what will be considered a “legitimate interest” of a supplier when assessing the “extravagance” of a default fee favours suppliers of services by taking into account the commercial realities of their business.


If you have any questions around late payment fees, or need assistance with your dispute, get in touch with our litigation lawyers on 1300 544 755.


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