On 27 July 2016, the High Court handed down its judgment in the matter of Paciocco v Australia and New Zealand Banking Group Limited  HCA 28, finalising the long running dispute. Here’s a look at the decision of the High Court and how it might impact on you in the future.
Mr Paciocco held credit card and deposit accounts with the Australia and New Zealand Banking Group Limited (‘the Bank’). Mr Paciocco’s company, Speedy Development Group, also held business accounts with the Bank. All accounts held by Mr Paciocco were charged late payment fees on the accounts. These fees were charged to accounts at the end of the month if the minimum monthly payment and any immediate amounts owing were not paid by a specified date.
Mr Paciocco challenged the Bank on the grounds that the late fees were ‘penalty clauses’ because they were not a genuine loss incurred by the Bank where a person or company made a late repayment. This argument was made both under common law, equity, the Fair Trading Act 1999 (Vic) and the National Consumer Credit Protection Act 2009 (Cth).
At first instance, the late payment fees were held to be penalty clauses, but other fees charged in respect of the accounts were not. On appeal, the Full Court of the Federal Court held that the late payment fees were not a penalty and upheld the finding that the other bank charges were also not a penalty.
Two appeals came before the High Court for determination, on both common law and statutory issues.
The High Court turned its attention to whether or not late payment fees on bank accounts could be considered penalty clauses at common law. If such late fees were found to be a penalty to customers, then they would be unenforceable by the Bank.
The second appeal considered whether or not the late payment fees constituted statutory unconscionable conduct or unfair contract terms.
Chief Justice French and Justices Kiefel, Keane and Gaegler dismissed the appeals and upheld the Full Court of the Federal Court’s decision. Justice Nettle dissented. The reasoning of the High Court in coming to this decision is interesting and may have future implications for the banking industry and the law concerning penalty clauses more generally.
Justice Kiefel delivered the leading judgment on the common law and equitable claims concerning penalty clauses.
Justice Kiefel’s judgment canvassed the legal history of the law against penalty clauses. In doing so, her Honour adopted the Australian position which originated in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 79. Throughout her Honour’s reasons, she also distinguished the recent Australian position in Andrews v Australian and New Zealand Banking Group (2012) 247 CLR 205 from the position in the United Kingdom.
Her Honour opined that ‘the conclusion to be reached, after all, is whether the sum is “out of all proportion” to the interests said to be damaged in the event of default [of the contract].’ In the context of this, her Honour discussed whether the Bank’s interests in claiming a late fee were legitimate.
For the Bank, her Honour identified their interests in claiming a late payment fee as to limit operational costs, to provide for losses incurred through default and to prevent regulatory capital costs. In analysing the Bank’s three main interests, her Honour found that a $20 or $35 penalty for late payment was not out of all proportion with protecting the Bank’s legitimate interests. Particularly, the late payment fees were actually less than the losses incurred by the Bank on default of a customer. In light of that conclusion, the late payment fees were not a penalty.
In terms of the appeal on statutory issues, Justice Keane delivered the leading judgment. His Honour upheld the Full Court of the Federal Court’s reasoning, noting that the Bank had not acted unconscionably or unfairly under statute.
Takeaway Lessons on Penalty clauses
- The existing position from Pneumatic and Andrews remains Australian law, despite criticism of Andrews in the United Kingdom. Chief Justice French made clear that Australian common law is its own distinct body of law from that of the United Kingdom.
- The test for considering penalty clauses is, in any event, whether the amount claimed in default is ‘unconscionable or exorbitant’ and whether the penalty is ‘out of all proportion’ to the interests it is seeking to protect.
- For consumers, this decision may come as a surprise. Many had expected that fees such as these claimed by the Bank would likely be found to be penalties, especially in light of the increasing tendency of courts to find in favour of consumers.
- For practitioners, it is worth reviewing this decision, particularly the judgments of Justice Kiefel and Justice Keane. The analysis of penalty clauses will undeniably be useful should such a case arise in your own practice.
- Ultimately, business will benefit from the clarification of the law on penalties. They will be able to protect their legitimate interests in contract into the future without the potential of any such protection being labelled a penalty.