In February the High Court commenced hearing the case of Paciocco v ANZ, the latest in a long saga concerning ANZ’s bank fees. These fees included honour, dishonour and non-payment fees with respect to deposit accounts, and late payment and over limit fees with respect to credit card accounts. The litigation dates back to the 2011 case of Andrews v ANZ, when a representative action was brought against ANZ over these fees. Here we set out the history of this complex matter and what the current argument is before the High Court.


The decision at first instance was heard by Justice Gordon in the Federal Court. The core issue was whether the fees were in effect ‘penalties’. Contracts frequently contain a ‘liquidated damages’ clause which stipulates the amount that one party agrees to pay the other if a particular event occurs, such as a breach of the contract. These provisions are unenforceable if they are found to be a penalty. They will be a penalty if the amount of money to be paid is extravagant and unconscionable when compared with the greatest loss that could have resulted from the event. The plaintiffs argued that ANZ’s fees were penalties, and therefore they were entitled to a refund of them.

Justice Gordon found that only the late payment fees on the credit cards were a penalty. All of the remaining fees were not. This was because, traditionally, only a provision concerned with a breach of contract could be characterised as a penalty. This point had recently been upheld by the NSW Court of Appeal in Interstar Wholesale Finance v Integral Home Loans. The late payment fee on ANZ credit cards did arise out of a breach of contract, as there is a contractual obligation to repay the money by a specific date. On the other hand, an over withdrawal limit fee, for example, does not arise from a breach of contract between the back and the customer. It is an additional option the bank offers to withdraw more money than is in the account in exchange for the fee.

The first High Court appeal

The plaintiff appealed to the High Court in the case of Andrews v ANZ (2012) 247 CLR 205. The Court unanimously overturned Interstar, holding that the law on penalties could be engaged by clauses that are not necessarily a breach of contract. The Court set out when the law on penalties will be engaged. The law on penalties will apply if the provision is collateral to a primary stipulation in the contract. The law on penalties will not apply if the provision is an alternative option that carries an additional cost.

To demonstrate the distinction between these two categories, the Court referred to the case of Metro-Goldwyn-Mayer v Greenham. The case concerned a contract that conferred the right to public showings of films for one screening only. If an additional screening of a film occurred then the exhibitor was obliged to pay a sum equivalent to four times the original fee. The NSW Court of Appeal held that the law on penalties was not engaged as the term was an additional option to exhibit the films again for a higher fee. After setting out this distinction, the High Court in Andrews remitted the matter back to the Federal Court for determination.

Back to the Federal Court

Justice Gordon heard the matter again in the case of Paciocco v ANZ (2014) 309 ALR 249. Despite the High Court’s expansion of the doctrine of penalties, Her Honour reached the same decision she did in Andrews: only the late payment fees were penalties. The law on penalties was engaged for the late payment fees because they were collateral to the primary stipulation of paying the bill on time. They were penalties because they were extravagant and unconscionable, in that they did not reflect the loss the bank suffered upon late payment.

The other fees did not engage the law on penalties as they were alternative options. This is because they were not collateral to a primary obligation under the contract, and instead granted the customer an additional service option. For example, a customer has the option to overdraw their account in exchange for an additional fee. The plaintiff appealed this decision to the Full Court of the Federal Court.

Appeal to the Full Court of the Federal Court

The matter was heard in the case of Paciocco v ANZ (2015) 321 ALR 548. The Full Court held that none of the fees were penalties. The Full Court agreed that the late payment fees were collateral and therefore the law of penalties was engaged. However, they disagreed with the conclusion that they were extravagant and unconscionable. In reaching this conclusion, the Full Court found that Justice Gordon incorrectly determined at what point the analysis of the bank’s loss is to occur. Her Honour conducted her analysis by looking at the actual loss the bank suffered. The Full Court held that the correct approach was to look at the predictable loss the bank possibly could have suffered from the failure to pay on time.

The current High Court appeal

The Full Court of the Federal Court’s decision is the subject of the present appeal before the High Court. The appellants are arguing that the Full Court has misapplied the law in determining if a penalty is extravagant or unconscionable. The traditional formulation of the test comes from the iconic case of Dunlop Pneumatic Tyre v New Garage & Motor [1915] AC 79.

In that case, Lord Dunedin described two relevant principles for determining if a clause is a penalty. The first is whether the sum stipulated is extravagant and unconscionable when compared to the greatest loss that could have possibly followed the breach. The second is whether the sum stipulated is a greater amount than the sum which ought to have been paid. This second principle is described as a ‘corollary’ to the first. It is this second principle that the appellants rely upon. They argue that because the bank fees for late payment were higher in some instances than the actual amount charged on the credit card, then they are penalties. However, this may not be as simple as it appears.

The High Court has unanimously accepted the Dunlop formulation of penalties in Ringrow v BP Australia (2005) 224 CLR 656. However, the Court did hint that the test may be due for reconsideration, in order to determine whether ‘any element in the contemporary market-place suggests the need for a new formulation’. The Court may ultimately find that, in modern society, the second principle is no longer a corollary to the first. A clause stipulating a sum greater than the sum which ought to be paid may not necessarily be ‘extravagant and unconscionable’ when considered with reference to modern commercial and financial reality. If the High Court is willing to modernise Lord Dunedin’s formulation, then it may create difficulty for the appellant’s case.

The appellants also argue that even if the second principle is not applicable, the Full Court of the Federal Court misapplied the first with respect to the late payment fees. The Full Court focused on what losses might be possible or predictable, which was substantially higher than what actually eventuated. The appellant’s argue that just because a large loss can be hypothesised, it should not mean the clause can never be a penalty. Rather, they argue that the likely loss, considered with respect to what actual loss occurred, is the correct method.

Therefore, the High Court will have to determine two issues that will likely have, regardless of the outcome, a significant impact on the future of the doctrine of penalties. The first is the modern status of the traditional Dunlop formulations. The second is whether analysis of the loss the relevant clause seeks to prevent can have reference to the actual loss that was suffered. Regardless of the outcome, Paciocco will likely have significant impact on the future of the doctrine of penalties. The High Court has reserved its decision. At the time of writing we eagerly await the judgment so we may finally know how this saga will conclude.