The High Court’s decision in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 provides helpful guidance to contracting parties around the circumstances in which clauses will be found to be penal.

Though the High Court’s decision specifically deals with a late payment fee for a credit card account, like the decision in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; 247 CLR 30, to which it is a sequel, it will have wide-ranging effects.


By the time this class action reached the High Court (this time), the dispute was narrow. The only challenged fee was a late payment fee of $35 or $20, charged when a customer made the minimum monthly payment after the due date. Customers argued this fee was unenforceable as a penalty and its imposition was prohibited by various statutes (including prohibitions against unconscionable conduct and unfair terms).

By a 4–1 majority (French CJ and Kiefel, Gageler, and Keane JJ; Nettle J dissenting), the High Court decided that this fee was neither a penalty, nor prohibited by any relevant statute. The majority did not speak with one voice: on the penalty issue there are three separate sets of reasons, which though broadly similar are not identical.


All three sets of majority reasons focussed on identifying whether the fee was properly described as punishment, or as to whether the fee covered the potential loss that ANZ could suffer because of a late payment (protecting its legitimate commercial interests that would be affected if a customer paid late). Importantly, the majority accepted that a provision is not penal because it allows recovery of amounts that could not be recovered in a claim for damages (for example, because it is too remote).

On the evidence in the case, the majority was satisfied that the fee was not out of all proportion to that potential loss, or protecting those interests, therefore the fee was not a penalty. Notably, the High Court held the fee not to be penal despite ANZ admitting that it made no genuine pre-estimate of potential loss (indeed, no contemporaneous calculation or estimation at all). An adequate after-the-fact justification of the amount will be sufficient to justify its enforceability.

Though the High Court’s approach is different to that taken by the Supreme Court of the United Kingdom in the recent cases ofCavendish Square Holding BV v El Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67; [2015] 3 WLR 1373, the result may well be the same in many cases.

On the statutory prohibitions, Keane J’s reasons are the majority of the court. Largely because Keane J accepted that the late payment fee protected ANZ’s legitimate interests, he concluded that there was no statutory unconscionability or unfairness, despite the imbalance in bargaining power between ANZ and the customers.


The lengthy, and different, reasons contain subtleties that will be worked out in subsequent cases. But some potential consequences include:

  • Liquidated damages and performance abatements. The decision makes it more difficult to successfully challenge liquidated damages clauses, because of the broad range of matters that can be taken into account in comparison with the amount of the liquidated damages.
  • Long-term and relationship contracts. The decision appears to give even more scope for abatements and additional payments in long-term and relationship contracts, as there may be an additional interest to protect.
  • Time bars. The decision provides little support for the argument, sometimes made, that time bars are (or may be) void or unenforceable as penalties.
  • Challenging potentially penal clauses. The result in the case relied on the evidence at trial, in particular expert evidence about potential losses. Ensuring experts are properly instructed, and their evidence robustly tested, will be critical in future cases asserting provisions to be penal.