I noted in
December last year that the issue of bank fees was back
before Gordon J in the Federal Court. Today, Gordon J has
handed down her decision in Paciocco v Australian and
New Zealand Banking Group Limited
[2014] FCA 52. Her original decision on the matter,
Andrews v Australian and New Zealand Banking Group
[2011] FCA 1376, was appealed to to the High Court in
Andrews v Australia and New Zealand Banking Group
Limited
[2012] HCA 30. The case was remitted back to Gordon J.
Somewhat confusingly, Paciocco is another representative
plaintiff but the action is still the same. Interestingly,
the outcome of Paciocco is very similar to the
trial decision in Andrews. In the trial decision in
Andrews, Gordon J held that only late payment fees were
illegal penalties, whereas honour fees, dishonour fees,
overlimit fees and non-payment fees were not illegal
penalties. Despite the High Court’s extension of the
doctrine of penalties in 2012, the outcome of Paciocco
was identical:
only late payment fees were penalties. This must be a
relief to the bank and to other commercial entities, but a
disappointment to the consumers.
The late payment fees were capable of being a penalty
because for the purposes of the common law penalty doctrine
they were payable on breach and for the purposes of
equitable penalty doctrine laid down in Andrews by
the High Court, they were collateral to the main obligation
(to pay the credit card bill on time). They were intended to
be in terrorem of the other party; in other words,
they were intended to scare the other party into paying the
bill on time. They
were extravagant and unconscionable charges because they did
not reflect the losses the bank made as a result of the
failure to pay on time.
The honour fees, dishonour fees, overlimit fees and
non-payment fees were held not to be penalties, but genuine
service fees. Gordon J said these fees were pursuant to a
request from the customer for a service, and the customer
agreed with the bank to pay the fees. At common law, they
were not penalties because they did not arise upon a breach
of contract. At equity they were not collateral
stipulations. The liability to pay the fee did not arise
because of a failure of the main stipulation, and ANZ was
not bound to meet the customer’s ‘request’. Rather the
customer got an extra service for a greater fee (so it was
an alternative stipulation). Consequently there was no need
to assess whether the fees were extravagant and
unconscionable.
Moreover, the ANZ was not unconscionable in charging the
fees under the former
Fair Trading Act 1999 (Vic) or under the
ASIC Act 2001 (Cth). There was no dishonesty,
oppression or abuse on the part of the bank. The customers
understood what they were agreeing to, and were not under
any compulsion to overdraw. Nor were the terms unjust under
the Credit Code or unfair contract terms for the purposes of
the Australian Consumer Law.
The remedy granted to the plaintiff was an action for
money had and received for fees insofar as the plaintiff had
paid more than the cost to the bank of the late payment. The
late payment fees were said to be made pursuant to a mistake
of law. Related to this, one matter which may be of concern
to the ANZ was Gordon J’s decision that the
Limitation of Actions Act 1958 (Vic) only began
to run once the plaintiff discovered that he had paid the
money over under a mistake of law (see
s 27 of the Limitation of Actions Act, cf
s 5 of the Limitation of Acts Act).
Consequently the limitation period only began to run once
the Andrews litigation was commenced,
notwithstanding that a number of the penalty fees had been
paid more than six years before the action commenced. This
may open banks to claims dating back some time in relation
to late payment fees.
It will be interesting to see the ramifications for this
decision in respect of other class actions against banks.
The Age reported today that another class
action against banks is in the wings, with 170,000
plaintiffs and an estimated claim value of up to $200
million. It is not clear what proportion of that class
action relates to late payment fees, but according to
Paciocco, these late payment fees would be likely to be
penalties if the clauses are similar in form to those in the
ANZ contracts.
I suspect today’s
decision may be appealed to the Full Federal Court and may
end up before the High Court again. It may be a while
before the application of the penalties doctrine is fully
clarified in Australia.
It’s said that you can’t
shut the stable door after the horse has bolted, but this
presumes that there is only one door. If there is a gate on the
field around the stable, then the horse can be successfully
corralled by shutting the second door, even if the first door is
left wide open. And in Paciocco v Australia and New Zealand
Banking Group Ltd
[2016] HCA 28, the High Court effectively shut a ‘second
door’ to prevent the penalties doctrine from escaping. The
‘doors’ are the two questions a court must ask when establishing
whether a clause is a penalty and thus void or unenforceable:
Is this a clause to which penalties doctrine applies?
On the facts, is this clause a penalty?
The first door had been left ajar in Andrews v Australia
and New Zealand Banking Group Ltd
[2012] HCA 30, potentially allowing the penalties doctrine
to invalidate (at least partially) a wider range of clauses.
This post will focus on the penalties doctrine rather than on
the statutory claims of the appellants. It is suggested that
after Paciocco there will only be a very small number
of cases where plaintiffs can successfully challenge contractual
clauses as void or unenforceable penalties. The Court’s findings
regarding the question of whether a specific clause was a
penalty indicate that the second door has been closed so that
only the tiniest crack remains. This will be a relief for
organisations such as banks and utility companies as they will
have
greater latitude to charge late payment fees. And it will
provide particular relief for
construction contractors, who were concerned that abatement
provisions (often used in PPP or Public Private Partnerships)
and time bar provisions would be penalties pursuant to
Andrews.
Continue reading →
Coralling the
penalties horse: Paciocco v Australia and New
Zealand Banking Group Ltd
It’s
said that you can’t shut the stable door after
the horse has bolted, but this presumes that
there is only one door. If there is a gate on
the field around the stable, then the horse can
be successfully corralled by shutting the second
door, even if the first door is left wide open.
And in Paciocco v Australia and New Zealand
Banking Group Ltd
[2016] HCA 28, the High Court effectively
shut a ‘second door’ to prevent the penalties
doctrine from escaping. The ‘doors’ are the two
questions a court must ask when establishing
whether a clause is a penalty and thus void or
unenforceable:
Is this a clause to which penalties
doctrine applies?
On the facts, is this clause a penalty?
The first door had been left ajar in
Andrews v Australia and New Zealand Banking
Group Ltd
[2012] HCA 30, potentially allowing the
penalties doctrine to invalidate (at least
partially) a wider range of clauses. This post
will focus on the penalties doctrine rather than
on the statutory claims of the appellants. It is
suggested that after Paciocco there
will only be a very small number of cases where
plaintiffs can successfully challenge
contractual clauses as void or unenforceable
penalties. The Court’s findings regarding the
question of whether a specific clause was a
penalty indicate that the second door has been
closed so that only the tiniest crack remains.
This will be a relief for organisations such as
banks and utility companies as they will have
greater latitude to charge late payment
fees. And it will provide particular relief for
construction contractors, who were concerned
that abatement provisions (often used in PPP or
Public Private Partnerships) and time bar
provisions would be penalties pursuant to
Andrews.
The first door: What did the
Court decide about the application of penalties
doctrine?
Prior to Andrews, it was thought
that the doctrine of penalties had a fairly
narrow operation because a clause could not be a
penalty when a contractual payment was not
triggered by a breach of contract: see
Interstar Wholesale Finance Pty Ltd v Integral
Home Loans Pty Ltd
[2008] NSWCA 310. Consequently, if a clause
was drafted permissively (“I agree to pay a fee
of $50 if I overdraw my account”) it did not
engage the rule against penalties because the
payment was not triggered by a breach of
contract. Parties could avoid the penalties rule
with such drafting.
Andrews widened the opening of the
first door considerably because it held that a
breach of contract was not necessary to
enliven the penalties doctrine. It held that the
equitable doctrine of penalties had not
‘withered on the vine’ after the enactment of
the Judicature Acts, as had been
suggested by Mason and Wilson JJ in AMEV-UDC
Finance Ltd v Austin
(1986) 162 CLR 170 at 201. Andrews
said that the test for a penalty in equity was
as follows at [10]:
In general terms, a stipulation prima
facie imposes a penalty on a party (“the
first party”) if, as a matter of substance,
it is collateral (or accessory) to a primary
stipulation in favour of a second party and
this collateral stipulation, upon the
failure of the primary stipulation, imposes
upon the first party an additional
detriment, the penalty, to the benefit of
the second party.
Thus, the equitable penalties doctrine would
apply if a clause was a ‘collateral stipulation’
to a primary stipulation and imposed ‘additional
detriment’. However, contracting parties could
use ‘alternative stipulations’ which provided
‘further accommodation’ without contravening the
equitable penalties doctrine. These were clauses
which allowed for a higher payment if further
services or rights were provided by one party to
the other (Andrews, [79]-[82]).
After Andrews, it was noted that it
was difficult to distinguish between collateral
and alternative stipulations. There was concern
that clauses which had not previously been
thought to be penalties would now contravene the
law, as I discussed
here.
Paciocco leaves the first door ajar
– it affirms strongly that Andrews is
still the applicable law in Australia. By
comparison the UK Supreme Court recently
rejected Andrews in Cavendish
Square Holding BV v El Makdessi
[2015] UKSC 67. Lords Neuberger and Lord
Sumption (with whom Lord Carnwath agreed) stated
at [41] that Andrews was a ‘radical
departure from the previous understanding of the
law’. They were critical of the historical
analysis in the decision and declined to follow
it ([42] – [43]). Lord Mance
at [130] and Lord Hodge
at [240] also saw Andrews as an
extension of the law of penalties, and chose not
to follow it.
Only two of the judges in Paciocco
provide a detailed response to Cavendish.
French CJ’s short judgment states that he does
not find it necessary to consider whether the
UKSC’s reading of Andrews was correct,
but that Australian law and English law differ
on this point because the Australian common law
is distinct from English law. Gageler J argues
(at [118] – [127]) that the UKSC was incorrect
to hold that Andrews departed from a
previous understanding of the law.
Despite Gageler J’s arguments to the
contrary, it is clear that Andrews
represented a change from the previous
understanding of the law. The consternation
which greeted Andrews is proof enough
(see a critical take on the case in JW Carter, W
Courtney, A Stewart, GJ Tolhurst, ‘Contractual
Penalties: Resurrecting the Equitable
Jurisdiction’ (2013) 20 Journal of Contract
Law 99). The Andrews decision was
unexpected in part because the High Court had
emphasised the importance of preserving freedom
of contract in a slew of previous penalties
cases (see eg, Ringrow Pty Ltd v BP
Australia Pty Ltd
[2005] HCA 71; (2005) 224 CLR 656 at [27],
[31]-[32] (Full Court); AMEV-UDC
(1986) 162 CLR 170 at 193 – 194 (Mason and
Wilson JJ) and Esanda Finance Corporation
Ltd v Plessnig
(1989) 166 CLR 131 at 139 (Wilson and Toohey
JJ)). As Carter et al note, the High Court in
Andrews went in the other direction –
without acknowledging the previous cases – and
said at [5]:
But it may be observed that this pattern
of remedial legislation [consumer
legislation and the like] suggests the need
for caution in dealing with the unwritten
law as if laissez faire notions of an
untrammelled “freedom of contract” provide a
universal legal value.
Consequently, Andrews represented an
outlier. Paciocco is far more in line
with previous case law as a number of the judges
emphasise the importance of ensuring that
penalties law does not unduly encroach upon
contractual freedom (Gageler J at [156], Keane J
at [220] – [221], [250] – [251], Nettle J at
[342]).
The High Court did not deal with the
Andrews test in Paciocco because
it dealt with the question of whether a clause
was in fact a penalty (a ‘second door’ case).
However, unfortunately, we are still faced with
uncertainty about some aspects of Andrews,
including guidance on how the test of whether a
clause is a collateral or an alternative
stipulation works in practice, and how the
equitable and common law penalty doctrines sit
together (Gageler J’s judgment indicates that
they are distinct). In any case, Andrews
has been rendered largely ineffective by
the Court’s finding in Paciocco with
regard to the test to be applied to ascertain if
a particular clause was a penalty. I now turn to
that question.
The second door: What did
the court decide about the test to be applied to
a particular clause to ascertain if it was a
penalty?
The second question in penalties cases is
whether on the facts a clause is a penalty. The
test in Australia had been that stated by Lord
Dunedin in Dunlop Pneumatic Tyre Co Ltd v
New Garage and Motor Co Ltd [1915] AC 79,
as affirmed by the High Court in Ringrow
[2005] HCA 71; (2005) 224 CLR 656.
Dunlop held that a penalty is a
payment of money stipulated as in terrorem
of the offending party (i.e. intended to
frighten or intimidate), whereas the essence of
a liquidated damages clause is a clause which
constitutes a genuine agreed pre-estimate of
damage. Famously, Lord Dunedin went on to
suggest that a number of tests which “may prove
helpful or even conclusive”:
(a) It will be held to be penalty if the
sum stipulated for is extravagant and
unconscionable in amount in comparison with
the greatest loss that could conceivably be
proved to have followed from the breach…
(b) It will be held to be a penalty if
the breach consists only in not paying a sum
of money, and the sum stipulated is a sum
greater than the sum which ought to have
been paid. This though one of the most
ancient instances is truly a corollary to
the last test. …
(c) There is a presumption (but no more)
that it is penalty when “a single lump sum
is made payable by way of compensation, on
the occurrence of one or more or all of
several events, some of which may occasion
serious and others but trifling damage”…
On the other hand:
(d) It is no obstacle to the sum
stipulated being a genuine pre-estimate of
damage, that the consequences of the breach
are such as to make precise pre-estimation
almost an impossibility. On the contrary,
that is just the situation when it is
probable that pre-estimated damage was the
true bargain between the parties…
This test was approved by the High Court in
Ringrow, which qualified category (a)
by saying at [32] that if a sum is extravagant
and unconscionable, it must be ‘out of all
proportion’ to the potential loss.
Andrews also drew attention to the
judgment of Lord Atkinson in Dunlop and
summarised it as follows:
Lord Atkinson summarised the evidence
directed to showing that even if the sum
agreed appeared imprecise as a pre-estimate
of damage, it protected the appellant’s
interest in preventing undercutting, which
would disorganise its trading system. Thus
the critical issue, determined in favour of
the appellant, was whether the sum
agreed was commensurate with the interest
protected by the bargain.
[emphasis added]
Even without Cavendish, there was
room for the High Court to consider the
possibility of reconsidering the Dunlop
test. It had flagged that possibility in
Ringrow at [12] but declined to take the
opportunity at that time.
But Cavendish suggests that the
English courts have a new test to replace the
‘extravagant and unconscionable’ test from point
(a) of Lord Dunedin’s test in Dunlop.
Lord Neuberger and Lord Sumption’s joint
judgment proposed the following test at [32] of
Cavendish:
The true test is
whether the impugned provision is a
secondary obligation which imposes a
detriment on the contract-breaker out of all
proportion to any legitimate interest of the
innocent party in the enforcement of the
primary obligation. The innocent party can
have no proper interest in simply punishing
the defaulter. His interest is in
performance or in some appropriate
alternative to performance. In the case of a
straightforward damages clause, that
interest will rarely extend beyond
compensation for the breach, and we
therefore expect that Lord Dunedin’s four
tests would usually be perfectly adequate to
determine its validity. But compensation is
not necessarily the only legitimate interest
that the innocent party may have in the
performance of the defaulter’s primary
obligations. This was recognised in the
early days of the penalty rule, when it was
still the creature of equity, and is
reflected in Lord Macclesfield’s observation
in Peachy…about the application of
the penalty rule to provisions which were
“never intended by way of compensation”, for
which equity would not relieve. It was
reflected in the result in Dunlop.
And it is recognised in the more recent
decisions about commercial justification.
And, as Lord Hodge shows, it is the
principle underlying the Scottish
authorities.
They went on to note that
the rule against penalties interferes with
freedom of contract which undermines certainty
in the law, particularly in commercial
contracting. They pointed to inequality of
bargaining power as an important factor at [35],
and said that ‘[i]n a negotiated contract
between properly advised parties of comparable
bargaining power, the strong initial presumption
must be that the parties themselves are the best
judges of what is legitimate in a provision
dealing with the consequences of breach. They
also cited Lord Woolf in Philips Hong Kong
Ltd v Attorney General of Hong Kong (1993)
61 BLR 41 at 57 – 59 where he specifically said
that a court could consider whether ‘one of the
parties to the contract is able to dominate the
other as to the choice of the terms of a
contract’ as a factor in deciding whether a
clause is a penalty.
In Paciocco, the majority also took
the approach that the test should consider
whether the sum was agreed was to punish, or
whether it was to protect a legitimate interest
of the contracting party (see Kiefel J at [51] –
[56], with whom French CJ agrees on penalties,
Gageler J at [166] and Keane J at [269] – [270])
although each of the judges framed the test in
slightly different terms. Nettle J (dissenting)
said that ordinarily the Dunlop test
was appropriate for ascertaining whether a
clause was a penalty and that considerations of
legitimate interest only arose in more complex
cases where the party had an interest beyond
compensation for breach (at [318] – [322]).
As Kiefel J said in the
special leave application hearing, principle
is often ‘best understood by reference to its
application to the facts’ (lines 587 – 600).The
issue in this case was that ANZ had admitted
that it did not calculate the late payment fees
on its credit card according to what would have
been recovered as damages. It conducted an
ex post facto consideration of the costs
which it incurred which included losses which
would not have been available as damages for
breach of contract. The majority held that ANZ
had a legitimate interest in obtaining
performance of the contract, and it did not
matter that ANZ had not pre-estimated the costs
before imposing them, nor did it matter that the
costs were not costs that could be recovered for
breach of contract. Kiefel J at [58] and Gageler
J at [172] and [176] said that ANZ had a
legitimate interest in receiving timely payment
of credit. Keane J agreed at [274] – [277] that
the bank had a legitimate interest in timely
payment, but more than that, at [278], he said
ANZ had an interest in lending profitably, and
was entitled to charge fees which were greater
than the contractual loss which was recoverable
in order to profit. Nettle J (dissenting) said
that this was the kind of contract where the
bank had no other interest other than getting
repayment of its losses recoverable in damages,
and the Dunlop test applied – whether
the agreed sum was ‘extravagant and
unconscionable’ compared to the greatest loss
that could conceivably be proved following a
breach of the obligations (at [317]). Nettle J
focused on the lateness of the payment rather
than a failure to pay at all (at [338]).The fees
were greater than any loss which could
conceivably be proved, and thus they were
illegitimate penalties.
In the event, the test
proposed by the High Court in Paciocco
looks very similar to the Cavendish
test, and in practice, the outcomes of cases
decided under the two jurisdictions are likely
to be very similar. However, there is is one
telling absence in the analysis of the High
Court in Paciocco. To my mind, the only
justification for interfering with freedom of
contract via the doctrine of penalties is where
there there are factors which suggest that the
contracting was not actually free. One factor
not considered by the High Court is
disproportion in bargaining power between the
parties. As Cavendish usefully points
out, most commercial contracts involving
well-matched and well-advised parties will not attract
the doctrine of penalties. This cuts out a lot
of the angst regarding the impact of the
penalties doctrine on commercial contracts, but
leaves an opening for the doctrine to operate
where there is disproportion in bargaining
power. In this case, as Nettle J’s dissenting
judgment points out at [309] and [371], the
bargain involved standard form contracts between
large commerical parties and consumers much
lower bargaining power. As I
have argued elsewhere, while there may have
been banks which offered lower fees on credit
cards, the information was not readily available
until 2009, and the transaction costs would be a
disincentive for seeking a better bargain. Keane
J said that Mr Paciocco ‘freely risked’
incurring a fee by not paying his credit card on
time (at [267]), but can the bargain really be
said to be free when he could not readily enter
a contract with more advantageous terms with
other banks? It is a pity that the majority did
not explore this issue more thoroughly. As it
stands now, I suggest that the second door has
been slammed shut too thoroughly. Almost no
clauses will be found to be penalties, as
parties can almost always ex post facto
justify the imposition of fees.
Conclusion –
Whither the penalties doctrine?
Paciocco
explicitly confirms the continued existence of
the penalties doctrine in common law and equity,
but one must query whether there is any point
retaining it when it has such a narrow
application once the law is applied to a
particular clause, as in this case. To continue
the metaphor,
the
shutting of the second door has effectively
gelded the penalties horse in all but the most
extreme cases. And it does not seem that
consumers can gain much hope from statute
either. Although this post has focused on the
common law aspect of the decision, a majority of
the High Court found that ANZ had not
contravened any statutory provision against
unconscionable or unfair terms. This is
unsurprising, as what was at issue in this case
was not unconscionability in terms of unfair
pressure,
vulnerability, lack of knowledge or the like.
It was an allegation of substantive unfairness
of the bargain itself, which seldom gives rise
to relief.
If Parliament wishes to provide relief for such
bargains, it will have to legislate more
explicitly.
AGLC3 Citation: Katy
Barnett, ‘Coralling the Penalties Horse: Paciocco
v Australia and New Zealand Banking Group Ltd‘
on Opinions
on High (8 August 2016) <http://blogs.unimelb.edu.au/opinionsonhigh/2016/08/07/barnett-paciocco>.
5 THOUGHTS ON “CORALLING
THE PENALTIES HORSE: PACIOCCO V AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD”
Thanks to David Starkoff for a productive discussion on Paciocco
which inspired me to write this post.
Great article! Just one point of concern:
“To continue the metaphor, the shutting of the second door has
effectively gelded the penalties horse in all but the most extreme
cases.”
Shutting the door and gelding are two very different metaphors!
Perhaps: “In shutting the second door, the High Court appears to
have emblazoned the stables with an equine influenza quarantine
notice, to ensure that anyone approaching the issue again will do so
with extreme caution.”
Thanks Scott. I did wonder if I was taking things too far with
gelding…! As one of the co-editors said – “It would have to be a
very unlucky closing of the gate?”
Haha, indeed! The metaphorical RSPCA would not be happy with
the High Court.
Another thought: Keane J emphasised ANZ’s interest in raking
a profit, but he was not alone. On my reading, Gaegler J
makes a similar point (much briefer) at [172]:
“Provisioning costs directly affected recorded profit, and
the costs of regulatory capital were a real outgoing. The
primary judge was undoubtedly correct in describing
provisioning costs and regulatory capital costs as part of
the costs of running a bank in Australia. But ANZ was not
confined by a principle of law to adopting a pricing
strategy for its credit card products which involved
cross-subsidisation.”
Yes, I think you’re right. He’s more subtle about it
than Keane J, but there’s a definite sen
Thanks to David Starkoff for a productive discussion on Paciocco which inspired me to write this post.
Great article! Just one point of concern:
“To continue the metaphor, the shutting of the second door has effectively gelded the penalties horse in all but the most extreme cases.”
Shutting the door and gelding are two very different metaphors! Perhaps: “In shutting the second door, the High Court appears to have emblazoned the stables with an equine influenza quarantine notice, to ensure that anyone approaching the issue again will do so with extreme caution.”
Thanks Scott. I did wonder if I was taking things too far with gelding…! As one of the co-editors said – “It would have to be a very unlucky closing of the gate?”
Haha, indeed! The metaphorical RSPCA would not be happy with the High Court.
Another thought: Keane J emphasised ANZ’s interest in raking a profit, but he was not alone. On my reading, Gaegler J makes a similar point (much briefer) at [172]:
“Provisioning costs directly affected recorded profit, and the costs of regulatory capital were a real outgoing. The primary judge was undoubtedly correct in describing provisioning costs and regulatory capital costs as part of the costs of running a bank in Australia. But ANZ was not confined by a principle of law to adopting a pricing strategy for its credit card products which involved cross-subsidisation.”
Yes, I think you’re right. He’s more subtle about it than Keane J, but there’s a definite sen