Key Points
- In Paciocco v Australia and New Zealand Banking Group Limited ("ANZ") [2015] FCAFC 50, the Full Court of the Federal Court of Australia (the intermediate appeals court in the Federal Court hierarchy) overturned the trial judge's finding that ANZ credit card late payment fees were penalties at law and in equity.
- The Full Court found that the trial judge erred in determining whether the fee was a genuine pre-estimate of the loss through undertaking a comparison between the actual loss arising from the specific transactions and the fee (what the Full Court called an ex post analysis) rather than a forward-looking analysis of the greatest loss that ANZ could have incurred at the time the contract was entered into and the fee (an ex ante analysis). Further, the Full Court found that the late payment fee was not extravagant and unconscionable and therefore was not a penalty at law or in equity.
-
The Full Court otherwise upheld the trial judge's finding
that:
- the other fees imposed by ANZ were not penalties;
- imposing the fees was not unconscionable conduct or unjust;
- the provisions of the contract in relation to the fees were not unfair contract terms; and
- Mr Paciocco's claims were not statute barred.
- Mr Paciocco and Speedy Development Group Pty Ltd ("SDG") (together, the "Applicants" in the primary proceedings) have applied for leave to appeal the judgment to the High Court of Australia (the highest and final appeals court).
Background
The matter first came before Gordon J of the Federal Court in
2014. The matter was brought by Mr Lucio Paciocco and a company
controlled by him, SDG. The matter was a representative proceeding
under Pt IVA of the Federal Court of Australia Act 1976
(Cth).
Mr Paciocco held a consumer deposit account and two consumer
credit card accounts with ANZ. SDG held a business deposit account.
The Applicants sought to set aside bank fees charged by ANZ because
the fees:
- were penalties, either at common law or in equity; or
- were the products of unconscionable conduct by ANZ within the meaning of the Australian Securities and Investments Commission Act 2001 (Cth) (the "ASIC Act"), ss 12CB and 12CC, or the Fair Trading Act 1999 (Vic) (the "FT Act"), ss 8 and 8A; or
- were unjust under the National Credit Code in Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth); or
- were charged pursuant to contractual provisions that were unfair contract terms under the FT Act, s 32W and the ASIC Act, s 12BG.
ANZ denied the claims made by Mr Paciocco and SDG and contended
that Mr Paciocco and SDG were statute barred from bringing claims
in relation to two of the fees because they were debited from the
account more than six years prior to the commencement of the
proceedings.
Gordon J made the following findings:1
- The credit card late payment fees charged by ANZ were penalties at common law and in equity.
- The bank customers were entitled to recover from ANZ the difference between the credit card late payment fees paid to ANZ and ANZ's actual loss.
- The nonpayment fees, overlimit fees, honour fees and dishonour fees were not penalties.
- None of the fees was charged in contravention of various statutory provisions in relation to unconscionable conduct, unjust transactions or unfair contract terms.
- Mr Paciocco's claims were not statute barred.
Both parties appealed Gordon J's decision. ANZ submitted that
Gordon J erred in finding that the late payment fee was a penalty
and that s 27 of the Limitation of Actions Act 1958
(Vic) applied to two fees (thereby bringing those claims within
time).
Mr Paciocco and SDG contended that Gordon J erred because her
Honour did not construe the fees (other than the credit card late
payment fee) as penalties and her Honour did not find that there
was statutory unconscionability, unjust transactions or unfair
contract terms.
The Full Court, which comprised Allsop CJ, Middleton J and Besanko
J, overturned Gordon J's finding that the late payment fee was
a penalty but otherwise upheld her Honour's judgment.
Were the Bank Fees Penalties?
The legal test pertaining to penalties, as stated by Gordon J in
her Honour's primary judgment and confirmed as correct by the
Full Court, is as follows:2
1. Identify the terms and inherent circumstances of the contract,
judged at the time of the making of the contract.
2. Identify the event or transaction which gives rise to the
imposition of the stipulation.
3. Identify if the stipulation is payable on breach of a term of
the contract (a necessary element at law but not in equity). This
necessarily involves consideration of the substance of the term,
including whether the term is security for, and in
terrorem of, the satisfaction of the term.
4. Identify if the stipulation, as a matter of substance, is
collateral (or accessory) to a primary stipulation in favour of one
contracting party and the collateral stipulation, upon failure of
the primary stipulation, imposes upon the other contracting party
an additional detriment in the nature of a security for, and in
terrorem of, the satisfaction of the primary
stipulation.
5. If the answer to either question 3 or 4 is "yes,"
then further questions arise (at law and in equity), including:
5.1 Is the sum stipulated a genuine pre-estimate of damage?
5.2 Is the sum stipulated extravagant and unconscionable in amount
in comparison with the greatest loss that could conceivably be
proved?
5.3 Is the stipulation payable on the occurrence of one or more or
all of several events of varying seriousness?
These questions are necessarily interrelated.
6. If 5 has been satisfied, then the stipulation is unenforceable
to the extent that the stipulation exceeded that amount. Put
another way, the party harmed by the breach or the failure of the
primary stipulation may enforce the stipulation only to the extent
of that party's proved loss.
Late Payment Fee. In relation to the late payment
fee, ANZ's key submission was that Gordon J, having correctly
stated the law in relation to penalties, failed to apply the
material before her Honour. According to ANZ, the correct approach
to applying step 5 of the legal test (in particular step 5.2) was
founded upon the need to show, by an ex ante (i.e.,
forward-looking) analysis at the time of entry into the contract,
that the stipulation was extravagant and unconscionable in
comparison to the greatest loss that could conceivably be proven to
follow from such a breach. It was submitted that the primary judge
undertook an ex post analysis or assessment of the actual
loss arising from the breaches by Mr Paciocco and SDG.
The Full Court accepted ANZ's submission on this point and
found that Gordon J had essentially conflated steps 5 and 6 by
taking an ex post analysis of actual loss in determining
whether the fee was penal in character. Allsop CJ explained that
step 5 and 6 are concerned with different enquiries—step 5 of
the test is intended to be determinative of whether the stipulation
is penal in character, whereas step 6 is concerned with the damages
available to the party harmed. As such, step 5 looks forward and is
referrable to the time of entry into the contract and the
legitimate interest of the obligee in the performance of the
relevant provision of the contract. Step 6 looks backward to see
what damage has been demonstrated to have been caused by the breach
or failure of the relevant provision.
A corollary of the Full Court accepting ANZ's submission that
step 5 requires an ex ante analysis was the Full
Court's finding that Gordon J incorrectly placed weight on the
fact that ANZ had not undertaken a genuine pre-estimation of the
damages when it entered into the contract. The Full Court held that
the absence of such conduct does not mean that the fee in question
was a penalty. However, Allsop CJ noted that, contrary to the fact,
had ANZ conducted a bona fideassessment of the loss if the customer
breached the term, then it would have gone some way to a conclusion
that the character of the provision was not penal and therefore was
a genuine pre-estimate of damages.
A further related submission made by ANZ was that the trial judge
erred in accepting Mr Paciocco's and SDG's expert's
evidence in relation to the unconscionability and extravagance of
the fee. It was accepted by the primary judge (and the parties)
that the assessment of extravagance, exorbitance and
unconscionability is an essential element of the penal character
and that such an assessment must be done at the time of entry into
the contract. The Full Court found that Mr Paciocco's and
SDG's expert, Mr Regan, was retained only to consider step 6 of
the test—quantifying the bank's actual loss so as to
determine the amount to be repaid to the customer. Mr Paciocco and
SDG (who hold the burden of proof in relation to proving that the
fee was exorbitant and extravagant at the time of entering into the
contract) submitted that the evidence of Mr Regan was also relevant
to the question of examination of exorbitance and extravagance
prospectively. This approach was adopted by the primary
judge.
The Full Court found that Mr Regan did not attempt to look forward
to assess what conceivably could be the damage from some (but not
this particular) breach of the contract, and therefore one cannot
take from Mr Regan's evidence that the amount was extravagant
or exorbitant by reference to the greatest conceivable loss that
might be caused by a breach of the term in question. Further, the
Full Court stated that the primary judge was wrong to criticise
ANZ's expert, Mr Inglis, for taking a prospective inquiry as to
ANZ's greatest conceivable loss in his evidence in relation to
step 5 that the fees were not extravagant or exorbitant.
Other Fees. Mr Paciocco and SDG appealed on the
basis that Gordon J erred in finding that the other fees were not
penalties. The Full Court upheld Gordon J's findings.
Unconscionability, Unjust Terms and Unfair Terms
Mr Paciocco and SDG contended that Gordon J wrongly found that
imposing the fees was not unconscionable conduct or unjust and the
provisions of the contract in relation to the fees were not
unfair.
In relation to statutory unconscionability, the gravamen of the
attack was the asserted failure to take into account what was said
to be the huge disparity between the level of the fees and the
costs ANZ sustained by the exception fee events. Allsop CJ noted
that the submission was put in "rich language of illusory
services, price gouging, monopolistic price setting and cartel-type
price fixing, and unethical overcharging. Much of the language was
not supported, or even informed, by the evidence of the
case".3
Further, Allsop CJ noted that the fact that the primary judge
concluded that the fees were in excess of the damages caused by the
breaches by the Applicants did not make that analysis universally
relevant in relation to statutory unconscionability. Rather, the
question of whether the conduct of ANZ was unconscionable should
take into account all of the circumstances of the case. The Full
Court stated that Mr Paciocco did not demonstrate, from a
reasonable perspective of all of the circumstances, that the fees
were unconscionable.
The Full Court found that ANZ's conduct did not have the
values of unconscionable conduct:4
There was no dishonesty; there was no trickery or sharp practice;
the fees were fully and not unfairly disclosed; the applicants were
not vulnerable, nor were customers generally; the fees could be
avoided by the customer; these applicants chose to run their
affairs by risking the fees; there was no victimisation, predation
or taking advantage of the applicants, or, on the evidence, of
anyone; the bargaining power to set the terms was real, but the
customer was not forced to deal with the bank or to incur the fees;
there was no lack of good faith by ANZ.
The Full Court concluded that to find that ANZ's conduct was
unconscionable would "require the court to be a price
regulator in banking business in connection with otherwise honestly
carried on business in which high fees were extracted from
customers".5
Middleton J (who agreed with Allsop CJ's reasons) noted the
need for courts in reaching an ultimate determination of whether
there had been statutory unconscionable conduct to undertake the
familiar tasks of evaluating the facts and engaging in statutory
construction consistent with established principles. Middleton J
contrasted this with the undesirable situation of a judge imposing
his or her perceptions of desirable social goals. His Honour went
on to contrast the role of the legislature, which enacts
legislation to give effect to policy decisions about desirable
standards of commercial behaviour, and the court, which applies
those standards to specific factual scenarios that come before
it.
Additionally, the Full Court rejected the submission by Mr
Paciocco and SDG that there was any unfairness or unjustness in the
fees. The court noted that although it can be accepted that
unjustness and unfairness are of a lower moral or ethical standard
than unconscionability, the court's analysis in relation to
unconscionability would also justify a conclusion that there was a
lack of unjustness or unfairness.
Statute of Limitations
While the Full Court was not required to consider the statute of
limitations argument in light of the finding in favour of ANZ,
Besanko J nonetheless considered ANZ's contention that
s 27 of the Limitations of Action Act 1958 (Vic) does
not apply to claims in relation to two of the fees.
Section 27 states that if there is a mistake then the period of
limitation shall not begin to run until the plaintiff has
discovered the mistake or could with reasonable diligence have
discovered it.
The Full Court upheld the primary judge's conclusion as the
words of s 27(c) are quite general and are capable of being
given an ambulatory effect so that it applies to both a mistake of
fact and a mistake of law.
Ramifications
The immediate effect of the Full Court's judgment is to
bring to a halt a number of pending and threatened class actions
against banks and other corporations based on their fees being a
penalty. However, before the novel idea of using the penalties
doctrine to found consumer class actions can be said to be dead, it
is necessary to wait and see if the High Court of Australia grants
special leave to appeal. Of note is that days after the Full
Court's judgment was handed down, the Attorney General of
Australia announced the appointment of the primary judge, Gordon J,
to the High Court of Australia. Her Honour will be sworn in on 9
June 2015 but will not sit on any appeal of Paciocco v ANZ
to the High Court.
Based on the above reasoning, the Full Court's decision
provides the following lessons:
- For liquidated damages clauses or clauses that provide for a fee if there is a breach of another term, the amount charged must be an amount that would be a genuine pre-estimation of loss, and it must not be exorbitant or unconscionable.
- If a party did not, in fact, undertake the exercise of deciding whether the liquidated damages clause is a genuine pre-estimation of loss when entering into the contract, then this will not mean that the liquidated damage clause is penal (although if the exercise is undertaken, it may be helpful in proving that it is not penal).
- When giving instructions to expert witnesses, it is important they receive the correct instructions as to the scope of their inquiries; in this case, it was fatal that Mr Regan was asked only to consider the actual loss arising out of the breaches of the contracts as that was not relevant to the test as to whether the fees were penal.
- Fees that are higher than the loss incurred will not lead to a conclusion that imposition of those fees is unconscionable, unfair or unjust; other factors must be present to make such a conclusion.
- Mistakes of law may be a basis for contending that the limitation period runs from the date that the mistake of law was discovered or could with reasonable diligence have been discovered. This creates a risk that transactions considered final and settled might be challenged many years after they have taken place on the basis of mistake of law, possibly revealed by a subsequent judicial decision (which reverses an earlier authority).
Footnotes
1 See Jones Day Commentary, "Bank Fees Class Actions in Australia: Customers Recover Credit Card Late Payment Fees That Exceeded Bank's Costs" (February 2014).
2 Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50, [26] and [19] – [28]; Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35, [15] and [13] – [48] citing Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; Dunlop Pneumatic Tyre Company Ltd v New Garage and Moto Co Ltd [1915] AC 79; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170.
3 Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50, [330].
4 Ibid, [336].
5 Ibid, [347].
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