Are bank late payment fees void as a penalty?
On 27 July 2016, the High Court of Australia delivered its long-awaited judgment in Paciocco & Anor v Australia and New Zealand Banking Group Limited [2016] HCA 28.
The first appellant (Mr Paciocco) held two consumer credit card accounts (the Accounts) with the Bank. The terms and conditions of the Accounts required Mr Paciocco, following receipt of a monthly statement of account, to pay a minimum monthly repayment. If the minimum monthly repayment plus any amount due immediately was not paid within a specified time, a late payment fee was charged. The late payment fee was $35 before December 2009, and $20 thereafter. 26 late payment fees were charged to Mr Paciocco’s accounts.
Mr Paciocco and the second appellant, Speedy Development Group Pty Ltd, a company controlled by Mr Paciocco, were applicants in representative proceedings commenced against the Bank in the Federal Court of Australia, in which they alleged that the late payment fees, and various other fees charged by the Bank, were unenforceable as penalties. They also claimed that the Bank engaged in unconscionable conduct under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Fair Trading Act 1999 (Vic) (FTA), that the contracts for the accounts were made by unjust transactions under the National Credit Code and that the late payment fees were void as unfair terms under the ASIC Act and the FTA.
By majority (Nettle J dissenting), the High Court dismissed the first of the appeals holding that late payment fees charged by the Bank on consumer credit card accounts were not unenforceable as penalties. The Court unanimously dismissed the second appeal holding that the imposition of late payment fees did not contravene statutory prohibitions against unconscionable conduct, unjust transactions and unfair contract terms.
In dismissing the first of the appeals, the Court considered the test to apply in determining whether a sum paid on default is to be characterised as a penalty. The majority held that the overarching test is whether such a sum is “out of all proportion” to the interests of the party which it is the purpose of the provision to protect. These interests may be of a business or financial nature. Importantly, the test is not confined to loss in damages resulting directly from the breach.
The majority considered that ANZ’s legitimate interests were not confined to the reimbursement of the costs directly occasioned by the appellants’ default, but extended to the bank’s interest in maintaining or even enhancing its revenue stream in order to make a profit. The majority considered that late payment impacted ANZ’s interests in three areas: operational costs, loss provisioning and increases in regulatory capital costs. As these costs were greater than the fee imposed, the fee was not a penalty.
Although this matter was not raised on appeal, the High Court restated the correctness of its approach in Andrews v Australia and New Zealand Banking Group Ltd that the application of the penalty rule applies upon breach of contract and in equity.
A link to the judgment appears below:
