This morning the Full Court of the Federal Court handed down its decision in Paciocco v ANZ[1], as to whether bank fees charged by Australia and New Zealand Banking Group Limited (ANZ), including credit card late payment fees, honour and dishonour fees, are penalties or otherwise unconscionable or unfair under relevant legislation.

The Full Court has overturned Justice Gordon’s first instance judgment that credit card late payment fees charged by ANZ to its customers constituted penalties at law and equity (and were therefore largely unenforceable).

The decision otherwise upholds Justice Gordon's findings that honour, dishonour and overlimit fees charged by ANZ were not penalties, unconscionable or unfair.

While the decision is very fact specific, it is a major setback for other class actions based on penalties.  The decision is likely to be the subject of an application for special leave to the High Court of Australia.  Subject to the High Court, the decision's impact will be felt when considering the question of how  to quantify the hypothetical losses that may flow from a breach, against which a fee must be assessed.


In 2013, following the High Court’s restatement of the law of penalties in Andrews v ANZ[2], a fresh class action was commenced against ANZ by some of its customers in respect of exception fees charged by the bank, including credit card late payment fees, overdraw honour fees, dishonour fees, non-payment fees and overlimit fees.  A series of similar class actions have also been commenced against other major Australian banks and more recently against telecommunications companies and utilities.  These class actions are presently stayed pending the final determination of the ANZ proceedings.

In February 2014, Justice Gordon of the Federal Court held that the credit card late payment fees charged by ANZ constituted penalties both at common law and in equity, but otherwise that the other fees in question were not penalties and were not otherwise unconscionable or unfair under the relevant legislation.

In this decision, Justice Gordon held that the late payment fees were payable on breach of contract or were payable to compel a customer to comply with a primary stipulation, namely to make monthly repayments on time.  Justice Gordon also held that the quantum of the late payment fees charged were extravagant or unconscionable having regard to the loss suffered by ANZ, which her Honour determined to be between $0.50 and $5.50 per event. In relation to the overlimit, honour and dishonour fees, Justice Gordon determined that these were payable in return for the provision of further accommodation in the form of consideration of a request for further credit, and so were not penalties.

ANZ appealed the primary judge’s decision in relation to the credit card late payment fees, and Mr Paciocco cross-appealed in relation to the other fees.

The decision

On appeal, Chief Justice Allsop (with Justices Besanko and Middleton agreeing), upheld ANZ’s appeal and dismissed the appeal by Mr Paciocco.

Credit card late payment fees

The Chief Justice agreed with Justice Gordon’s determination that the credit card late payment fee should be characterised as one payable upon breach of contract, or as a collateral or accessory stipulation as security for, or in terrorem of, a primary stipulation to make timely repayments in accordance with the terms of credit.

Notwithstanding this, the Chief Justice found that the applicants did not prove that these late payment fees were extravagant or unconscionable and so were not penalties.  In this respect the Chief Justice disagreed with Justice Gordon’s approach of undertaking an ex post analysis of actual loss from the breaches to determine whether the fees were extravagant or unconscionable.  The inquiry as to actual loss flowing from the breach was one that should only have occurred after the fees were shown to be penalties (to determine the level of redress), and the Chief Justice held that the analysis should have been performed ex ante, to determine whether the level of the fees was extravagant or unconscionable having regard to the greatest loss that could flow from a breach, assessed as at the date of the contract.

The Chief Justice also allowed a number of categories of loss that had been rejected by Justice Gordon, specifically provisioning costs, costs of regulatory capital and collections costs including an element for infrastructure.  In this regard, the Chief Justice appears to have taken a broad approach as to the types of loss that can be taken into account and made allowance for the legitimacy of protecting ANZ’s commercial or economic interests. Taking these costs into account, the Chief Justice held that the possible loss to ANZ from each late payment fee event would likely increase to a level at or above the fees charged by ANZ.

Other exception fees

The Chief Justice rejected Paciocco’s appeal that Justice Gordon had erred in her conclusions that the other exception fees charged by ANZ were payable for further accommodation or further contractual benefit, and were therefore not penalties.  The Chief Justice also rejected Paciocco’s contention that the fees charged were unconscionable, noting that Paciocco had failed to demonstrate that the requisite unconscionability, unjustness or unfairness applied to any of the fees (including the late payment fees).


Justice Besanko (with whom Chief Justice Allsop and Justice Middleton agreed) also dealt with the issue of whether some of Paciocco’s claims were barred under the Victorian Limitation of Actions Act, which relevantly provided for a 6 year limitation period.  At first instance, Justice Gordon had determined that, in relation to exception fees incurred and paid more than 6 years prior, Paciocco was entitled to rely on s27 of the Limitation of Actions Act which extended limitation periods in the case of mistake, because Paciocco had paid such fees under a mistaken belief that ANZ was entitled to charge them.

ANZ appealed this finding of the basis that this exception should be confined to mistakes of fact (not law).  Although this issue was rendered largely nugatory by virtue of the other findings in the judgment, Justice Besanko held that section 27(c) of the Limitations of Actions Act should be given an ambulatory construction and operated to postpone the activation of limitation periods in cases of mistake (including mistake of law) and rejected ANZ’s appeal.

Consequences of the decision

Bentham IMF, the litigation funder for the class action proceedings, has announced that it is likely that Paciocco will seek special leave to appeal to the High Court on the judgment. The decision as it stands represents a significant setback for the other bank fee class actions, as well as class actions commenced against telecommunications companies and the utilities companies.  The decision also reinforces the proposition that a party seeking to set aside a fee as a penalty bears the onus of proof, particularly with regard to establishing that the quantum of the fee is, in all relevant respects, extravagant or unconscionable.

Who does this affect?

Anyone who is concerned to draft contractual payment clauses in a manner which minimises risk of the payment obligation being set aside on the basis of the doctrine of penalties.  

What do you need to do?

Review your commercial arrangements to ensure that any contractual fees and charges are valid and enforceable.