In brief: Today the Full Federal Court clarified the law of penalties as it applies to fees. The key development is that, in considering whether the amount of a fee is 'extravagant and exorbitant' compared to the potential costs incurred in dealing with a failure to perform an obligation, the court held that indirect costs could be taken into account. Subject to a likely attempt to appeal to the High Court, this development imposes a substantial hurdle for current and future penalties class actions. Partner Jenny Campbell (view CV) and Lawyer Alicia Lyons report.


The Full Court's decision1 addressed the appeals from all aspects of Justice Gordon's decision in February 2014 in the bank fees class action against ANZ.2 At first instance, her Honour found that:

ANZ's late payment fees were penal because:

  • the fees were charged when a customer failed to comply with the term of their account that required them to make a minimum payment each month; and
    • the amount of the fee was 'extravagant and unconscionable' compared to the costs the bank incurred in dealing with the customer's failure to make their payment on time;
    • ANZ's other exception fees (honour, dishonour and overlimit fees) were not penal because they were charged in respect of an additional service and not as a penalty for not operating the account in a certain way; and
  • none of the fees in question contravened the statutory prohibitions on unconscionable conduct.


The Full Court confirmed that the key questions in considering whether a fee is penal are whether:

  • it is imposed to secure the performance of another contractual requirement; and
  • if so, whether the amount of the fee is extravagant or exorbitant having regard to the charging party's 'legitimate interest' in the performance of the contract, assessed by reference to the greatest conceivable loss that might follow from a failure to comply assessed at the time of entry into the contract.

It also confirmed that a genuine 'fee for service' will not be a penalty and, on that basis, upheld Justice Gordon's finding that ANZ's honour, dishonour and overlimit fees were not penal.

The court also noted that the fact that behavioural modification may be one of the reasons for imposing a fee does not, of itself, make it penal.


In considering the class of costs that could be taken into account in determining whether the amount of the late fee was 'extravagant and exorbitant', Justice Gordon focused only on the direct costs actually incurred by ANZ when Mr Paciocco (the representative applicant) was late in making his payment.

The Full Court determined that that is not the appropriate test and that the exercise:

  • is to be conducted on a forward looking basis at the time of the contract (and not by reference to actual costs incurred after the event); and
  • requires a broader (prospective) assessment of the losses that could flow to the charging party in the event that the relevant obligation is not complied with (and therefore of the legitimate interest to be protected).

The court emphasised that this is a separate and distinct analysis to the question of the damage that has actually been incurred because of non-compliance. The separate question of actual loss suffered is only required if a fee is found to be penal and for the purpose of the assessing the degree to which the fee can be enforced.

Applying that approach, the Full Court found that, contrary to the first instance decision:

  • ANZ's costs of having a collections department, together with the additional loss provisioning costs and the costs of holding additional regulatory capital incurred as a result of a customer not making payments on time, could be taken into account in determining whether the late payment fee was penal; and
  • including those costs would likely increase the possible loss to a level at or about the amount of the fee in question.

On that basis, and having regard to the expert evidence given on behalf of both parties at trial, the Full Court overturned Justice Gordon's finding that ANZ's late payment fee was a penalty.


The Full Court confirmed Justice Gordon's decision that none of the fees in question contravene the statutory prohibitions on unconscionable conduct. In doing so, it confirmed that it is not interested in being a price regulator and will not intervene on the basis that a price may be said to be too high, in the absence of other indicators of unconscionability. The fact that standard terms may be imposed, with no opportunity to negotiate, does not alone give rise to unconscionability – there is still choice.


Although it was not necessary to decide the issue, the court indicated that it agreed with Justice Gordon's finding that the limitation period for the penalties claims did not start to run until the claimant could reasonably have discovered their cause of action. There was no appeal from her Honour's finding that the relevant time was when the first bank fees class action was filed in September 2010 (and that, prior to that time, they had been operating under a mistake of law as to ANZ's ability to charge the fees).


The most important aspect of the Full Court's decision is the finding that a broader category of costs may be taken into account in considering whether a fee is penal. Not only has this resulted in the initial finding in respect of ANZ's late payment fee being overturned, it is also likely to cause significant difficulties for the promoters of other current and proposed class actions in respect of the fees charged by other banks, finance companies and telecommunication companies.

It is, however, almost inevitable that there will be an application for special leave to appeal to the High Court.