Are credit card late payment fees penalties? Apparently not…

Following the High Court's decision in Andrews v Australian and New Zealand Banking Group Ltd (2012) 247 CLR 205, there was an expectation that the High Court's decision in Paciocco v Australian and New Zealand Banking Group Ltd [2016] HCA 28 (the Paciocco Case) would favour the customer. This was not the case.

The Paciocco Case (which was commenced by Mr Paciocco and his company as representative plaintiffs in a class action) involved a claim that the late payment fees and other fees charged by the bank in relation to credit cards were unenforceable at common law and equity because they were penalties. There were also allegations of unconscionable conduct by the bank, in that the fees charged amounted to unjust transactions and were unfair terms of the contract between the bank and the customer.

At first instance the Federal Court determined the matter in favour of the customer, finding that the fees were penalties. The bank appealed to the full Federal Court, which overturned the first instance decision and found in favour of the bank. The full Federal Court's decision was appealed to the High Court.

By majority, the High Court upheld the full Federal Court decision. The High Court confirmed that the late payment fees were not unenforceable as penalties, and that, in charging them, the bank was not engaging in unconscionable conduct.

In relation to whether the late payment fees were a penalty, the High Court applied the test of whether the fee is "out of all proportion" to the interests that would be damaged in the event of a default. The bank indicated that a default in payment would impact on its operational costs, loss provisioning and result in increases in regulatory capital costs.

Ultimately, the majority of the High Court decided that because the costs of late payment impacted on the bank's financial interests and were greater than the fee they imposed on the customer, the fee was not a penalty. Specifically, it found that fees of $20 and $35 were not "out of all proportion".

What is meant by "out of all proportion"?

The High Court was careful to explain the differences between the words:

  • "out of all proportion";
  • proportional; and
  • lacking in proportion.

For the fee to be "out of all proportion" it had to be closer to being extravagantly high, exorbitant or substantially disproportionate to the interest being protected. The High Court determined that the bank fees in question did not meet this threshold.

What seems to underlie the "proportion" point is that the contracts that contained the late payment fees were entered into freely by the customer. As a result, the High Court was against using the various consumer protection laws to set aside the bargains on which parties of full capacity had agreed, and found that a disparity in bargaining power alone was not enough to establish unconscionability.

Was this the right decision?

The decision is and will remain controversial. Consumer groups are already calling for reform, and until such time as any legislative reform is forthcoming consumers have little choice but to check the fine print before signing credit card contracts and exercise their right to shop around for the best terms available.