Broad view taken will have ramifications beyond the
financial services sector.
Late payment fees charged by ANZ on its credit cards are not
unenforceable penalties, following the decision by the High Court
earlier today in Paciocco v Australia and New Zealand Banking Group
Limited  HCA 28 in a resounding win for the Bank.
In arriving at its 4-1 majority decision on the issue, the High
Court judges took a broad view of the factors that can be taken
into account in determining whether there is a penalty. This is
likely to limit the ambit of the doctrine of penalty generally. The
issue is not just one that affects consumer financial services
contracts, but all contracts, including standard form consumer
contracts such as utility or telco contracts, and commercial
contracts generally including project agreements, service and
maintenance contracts construction contracts and contracts for the
sale and purchase of assets.
The traditional view is that a penalty clause penalises a party
for breaching the contract or for the failure of a primary
stipulation by requiring it to pay a specified sum that is
extravagant and unconscionable in amount in comparison with the
greatest loss that could conceivably be proved to have followed
from the breach. If a clause is a penalty, it is void to the extent
it exceeds the actual loss suffered by the party.
Crucially, the three judgments comprising the High Court
majority have (although on slightly different bases) focused on
the interest of the party seeking to uphold the
clause and have taken a broad view of the losses
that can be relevant. Each judgment expressly found that
losses to be considered will not be limited to damages that
could be recovered if the Bank sued the cardholder for breach of
contract, so losses that would be considered too remote
under the Hadley v Baxendale test can be included. The contract can
therefore protect an interest that is different from, and
greater than, the damages that could be recovered for the
loss caused directly by the breach of contract.
In this case, three of the four judges in the majority expressly
loss provision costs (being the provision in accounts made by
the Bank each time a payment was late, reflecting an allowance for
what the Bank may not recover and the impairment of the value of
the Bank's financial assets); and
regulatory capital costs (being the costs attributable to
having to hold extra regulatory capital as a consequence of a late
could be taken into account in determining whether the late fees
were a penalty, even though such costs would not be recoverable as
contractual damages. As these costs significantly exceeded the
amount of the late fee, the Court found that the fee was not a
The Court also rejected the argument that the provision for, and
imposition of, late fees gave rise to statutory causes of action of
unconscionability, unjust contracts and unfair contract terms.
Key takeouts from the Paciocco decision
For businesses such as financial institutions, utilities or
telcos that use standard form contracts with provisions for fees,
such as late fees, the Paciocco decision gives them a wide basis
from which to justify fees that might be challenged as
For parties that impose the payment of fees, have regimes
involving differential payments based upon compliance with
performance indicators or have liquidated damages regimes for late
delivery, the Paciocco decision's focus on the interests of the
party seeking to uphold the clause offers greater scope for the
justification of such clauses
The impact of the High Court's decision in Andrews was to
expand the concept of penalties by dismissing the widely held
perception that the penalties doctrine was limited to breaches of
contract. The Paciocco decision is likely to have the reverse
impact because it provides wider bases for clauses being found not
to be penalties.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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