This morning the High Court of Australia handed down its decision in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 as to whether credit card late fees charged by Australia and New Zealand Banking Group Limited (ANZ) are penalties or otherwise unconscionable or unfair under relevant legislation.
The High Court majority (4 to 1) upheld the 2015 decision of the Full Court of the Federal Court, finding that late payment fees do not constitute penalties and are not otherwise unconscionable, unjust or unfair under relevant statutory provisions. The majority upheld the Full Court’s finding that the purpose of ANZ’s late payment fee was not to punish customers, but to protect ANZ’s legitimate interests in light of the conceivable losses which may have resulted from non-payment when the credit card facilities were established (such as loss provision costs, regulatory capital costs and collection costs). Accordingly, the fee did not amount to a penalty, notwithstanding that it did not represent a genuine pre-estimate of the loss that might be caused by a particular breach by a particular customer or that the costs actually incurred by ANZ as a result of a particular late payment were relatively small.
More broadly, the decision reaffirms the doctrine of penalties in Australia, as restated by the High Court in Andrews v ANZ (2012)[1], which prevents one party to a contract punishing the other for non-performance by requiring payment of a sum that is extravagant, exorbitant or unconscionable. This decision will likely bring to an end the numerous bank fee class actions commenced against other Australian banks which had been stayed pending this decision, as well as other “fee” class actions commenced against telecommunications and utilities companies.
Importantly, the decision signals that Courts will be reluctant to interfere with contractual provisions of this kind and will take a broad view as to the legitimate commercial interests which the provision seeks to protect.
In 2013, following the High Court’s restatement of the law of penalties in Andrews v ANZ, 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.
In February 2014, Gordon J (at that time a judge 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.[2]
In that decision, Gordon J accepted the applicants’ evidence that damage to ANZ resulting from late credit card payments was limited to the direct costs associated with the recovery of outstanding payments. Her Honour held that the late payment fee charged by the bank substantially exceeded the amount of damages that could be awarded for a breach of the obligation to pay the monthly payments by the due date. As such, her Honour held that the late payment fee constituted a penalty. Gordon J rejected as irrelevant ANZ’s evidence of the effect of late payments on its financial interests more broadly, which included:
On appeal, the Full Court of the Federal Court (Allsop CJ, Besanko and Middleton JJ) overturned Justice Gordon’s decision in respect of late payment fees, but otherwise upheld her Honour’s findings in respect of the other fees. The Full Court held that, in determining whether an agreed contractual sum was a penalty, the relevant test was whether it was commensurate with the interest protected by the bargain between the parties.[3] Accordingly, the Full Court held that, to characterise the sum, it was necessary to look to a party’s “legitimate interest” in the due performance of the relevant obligation, rather than the damage that could be proved following a particular breach after the event. The Full Court accepted ANZ’s evidence of the broader costs to its business associated with late credit card payments, and held that, in light of those costs, the late payment fees were not extravagant, exorbitant or unconscionable. Similarly, the Full Court concluded that ANZ had not engaged in unconscionable conduct and that the credit card contracts were not unfair or unjust.
Special leave was granted to appeal to the High Court on the question of the legal characterisation of the late payment fees. Two appeals were brought by the applicants.[4]
The first appeal dealt with the question of the late payment fees were unenforceable as a penalty at common law.[5]
The second appeal dealt with the question of whether the late payment fees contravened certain statutory prohibitions against unconscionable conduct, unjust transactions and unfair contract terms.[6]
The majority of the High Court dismissed the appeal, holding that the Full Court correctly characterised the loss to ANZ. French CJ, Kiefel, Gageler and Keane JJ, each in separate judgments, held that both appeals should be dismissed.
Their Honours made a number of interesting observations on the commercial characterisation of late payment fees.
Keane J noted that, in Andrews, the High Court identified that the critical issue is “whether the sum agreed was commensurate with the interest protected by the bargain”, and that the question to be addressed in order to distinguish a penalty from a provision protective of a legitimate interest is “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract.” Keane J considered it “fraught with difficulty” to contend that the purpose of the late payment fee was to punish customers, in light of the other interests it protected. His Honour observed that there was no legal reason why a bank’s fees and charges could not serve to maintain or enhance its revenue stream for the purpose of making a profit in a manner similar to all the other terms on which a bank makes its facilities available to its customers. On that view, the purpose of a late payment fee is to maintain profitability for shareholders, rather than to punish customers, and ANZ’s legitimate interest in its profitability is protected by the late payment fee because that fee assists in maintaining and protecting the bank’s reward or compensation for making a facility available to a customer. Keane J also observed that it was “something of a stretch” to argue that an unremarkable example of conduct by one market participant (i.e. ANZ) could be unconscionable, unjust or unfair, without also suggesting that the market itself is “unlawfully skewed”. Also relevant was the fact that Mr Paciocco chose to pay late, and thereby incur the late payment fee, as a matter of his own convenience.
The majority observed that the relevant question in characterising the fee was not what ANZ could recover in an action for breach of contract for late payment, but rather, whether the costs to ANZ and the effects upon its financial interests by default may be taken into account in assessing whether the late payment fees were penalties. While accepting that it may be difficult to measure the loss to the ANZ as a result of late payment, the majority concluded that the authorities (including Andrews) indicated that the Court must consider whether the fee was “out of all proportion” to the bank’s interest in “receiving timeous payment of the minimum Monthly Payment”. Accepting that late payments on credit cards impacted upon ANZ’s operational costs, loss provisioning and regulatory capital costs, the majority concluded that the fee was not out of proportion and did not constitute a penalty or contravene the relevant statutory provisions.
Gageler J held that, in light of ANZ’s commercial interests of ensuring observance by its customers of payment of the minimum monthly payment by the due date, the late payment fee could not be taken to have no purpose other than to punish the account holder. (DOUBLE NEGATIVE) Accordingly, it was not a penalty. Gageler J applied similar reasoning in respect of the statutory provisions.
This decision clarifies the penalty doctrine in Australia following Andrews v ANZ. It confirms that provisions of the kind considered in this case may be justified by reference to a broad range of legitimate commercial interests and the enquiry need not be confined to the consequences which may follow from one isolated breach by one customer. Regard may be had to a party’s interests with respect to a portfolio of related agreements and the losses that may flow from non-compliance generally.
The decision is likely to end the numerous bank fee class actions commenced against other Australian banks which had been stayed pending this decision, as well as other “fee” class actions commenced against telecommunications and utilities companies.
Anyone seeking to rely upon contractual payment clauses in a manner which minimises risk of the payment obligation being set aside on the basis of the doctrine of penalties.
Review your commercial arrangements to ensure that any contractual fees and charges are valid and enforceable in light of this decision.
[1] (2012) 247 CLR 205
[2] Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249
[3] Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199
[4] One in respect of the Full Court orders allowing the appeal to that Court by ANZ, and the other dismissing the appeal to that Court by the applicants.
[5] M220/2015
[6] M219/2015. Specifically, the statutory claims included the prohibition on “unconscionable conduct” in financial services under s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and s 8 of the Fair Trading Act 1999 (Vic) and, subsequently, the Australian Consumer Law; the “unjust transactions” regime under s 76 of the National Credit Code; and the regime rendering void “unfair” contractual terms under Pt 2B of the Fair Trading Act 1999 (Vic) and ss 12 BF and 12BG of the ASIC Act.