Paciocco v ANZ  FCA 35
The Federal Court of Australia (Federal Court) has held that late payment fees charged by a bank to its credit card customers were unlawful penalties.
Paciocco v ANZ  FCA 35 is the first case to be decided following the High Court of Australia's (High Court) decision in Andrews v ANZ (2012) 247 CLR 205 in which the High Court extended the scope of the penalty doctrine under Australian law.
The case provides guidance as to how courts may approach the issue of late payment fees in other existing class actions concerning penalties in the financial services sector and may pave the way for further class actions against businesses in other industries.
History – Andrews v ANZ
In 2010, a class action was commenced in the Federal Court against ANZ by customers alleging that a range of fees imposed by the bank were, among other things, unenforceable penalties. The plaintiffs sought repayment of the fees.
In 2012, the High Court overturned existing case law which said that a fee could only be a penalty if it was levied in respect of a breach of contract. Instead, the High Court held that a sum charged to secure performance of a primary obligation may be a penalty even if there has been no breach of contract. In other words, if a secondary obligation (payment of the late fee) is imposed in order to secure performance of a primary obligation (timely payment of an account) then it may be a penalty.
The High Court did not decide whether any particular fee was, in fact, a penalty.
Paciocco Decision on Late Payment Fees
Under his contract with ANZ, Mr. Paciocco was obliged to pay a minimum amount on his credit card by a particular date each month, failing which, a late payment fee was charged by the bank. The Federal Court held that the late payment fee was, in substance, a collateral obligation levied as security for, and in order to compel performance of, the primary obligation to make the monthly minimum payment on time.
ANZ charged its customers a late payment fee of AUD35 or (latterly) AUD20. The Federal Court accepted expert evidence from Mr. Paciocco that the actual loss suffered by ANZ as a result of a customer's late payment ranged from AUD0.50 to AUD5.50. In this regard, the Federal Court found that the fees charged met the test of a penalty as being extravagant and unconscionable relative to the greatest loss that could conceivably have been suffered by ANZ.
The Federal Court pointed to a number of factors in deciding that the late fees met the test for a penalty at common law and in equity, in particular the fees were:
- payable upon breach of the customer's contractual obligation to pay ANZ on time and, alternatively, were a secondary obligation imposed to secure payment to ANZ of the monthly repayment on time (which satisfied the broader test in Andrews v ANZ (2012) 247 CLR 205)
- not payable for further services or accommodation by ANZ
- payable regardless of how late the customer was paying, and regardless of the amount overdue
- not a genuine pre-estimate of loss suffered by ANZ
- disproportionate in amount to the actual loss and damage suffered by ANZ.
Decision on the Other ANZ Fees
Mr. Paciocco was only partially successful in challenging the bank's fees. Honour, dishonor, non-payment and overlimit fees charged by ANZ were found not to be penalties.
In contrast to the late payment fees, the Federal Court held that the action of overdrawing a bank account was a request from the customer for an advance or loan from ANZ. This required the consensual conduct of ANZ and the customer. The ANZ 'honour' fee for considering the customer's request for additional services or accommodation was not a penalty, but a fee for service.
The Federal Court considered the relative positions of ANZ and the customer, but found that in all the circumstances, the imposition of fees (even the late payment fees) were not unconscionable, unjust or unfair in contravention of the relevant statutory provisions.
How Far Back can a Plaintiff Claim?
ANZ sought to rely on the six year statutory limitation period for contractual claims and contended that much of Mr. Paciocco's claim (being fees paid more than six years before proceedings were commenced) was statute barred. However, the Federal Court held that time did not begin to run until Mr. Paciocco was aware of his mistake in assuming that ANZ was entitled to charge the fees – being the date of commencement of the first Andrews proceedings in September 2010.
Implications – is Your Business at Risk?
Businesses which impose late payment fees similar to those dealt with in Paciocco v ANZ  FCA 35 are now at an increased risk of class action litigation by consumers.
Although current class actions are targeting the financial services sector, there is the potential for class actions to target other industry sectors. In particular, those which deal with a large number of consumers and impose fees on customers, which may not be fees for additional services or accommodation. Potential targets include:
- fixed line and mobile phone providers
- internet providers
- utilities (gas, water, electricity).
Businesses should review their current contracts and arrangements with customers in light of decisions in Andrews v ANZ (2012) 247 CLR 205 and Paciocco v ANZ  FCA 35 and take steps to ensure that fees charged to customers are legally valid and enforceable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.