After much anticipation, the High Court has delivered its judgment in Paciocco & Anor v ANZ  HCA 28 and has upheld the decision of the Full Federal Court of Australia that ANZ's late payment fees were not penalties. In making its decision, the High Court reaffirmed the freedom of contract and held that courts should refrain from interfering in contracts unless the fee is out of all proportion to the loss suffered and not a genuine pre-estimate of the loss likely to be sustained by the party not in breach.
This decision will provide relief to not only banks and non-bank lenders but also to those businesses that have contracts which charge fees upon breach of contract.
The proceedings were initially commenced by an ANZ customer, Paciocco, alleging that a number of late payment fees on consumer credit cards charged by ANZ were unenforceable on the basis they were a penalty under common law or were in breach of various State and Commonwealth statutes amounting to unconscionable conduct and unfair contract terms and/or an unjust transaction.
At first instance, Her Honour Justice Gordon found that the fees were penalties as the fee was extravagant when compared with the actual loss suffered by ANZ as a result of the late payment.
The case was appealed to the Full Federal Court, where Justice Gordon's judgment was overturned. The Full Federal Court held that in order to determine whether a fee was extravagant and unconscionable, and therefore a penalty, required an assessment of the greatest prospective loss that could flow from the breach, assessed at the time the contract was entered in to. This included provisioning costs, costs of regulatory capital and collections costs. The Court ultimately found that the late payment fees charged by ANZ were not extravagant when considering the greatest possible loss suffered by ANZ.
The Full Federal Court's decision was appealed to the High Court.
High Court's decision
The High Court upheld the Full Federal Court's decision, dismissing the appeal and holding that the late payment fees were not penalties.
Relevant test to determine if a fee is a penalty
The High Court did not stray from the long established common law test in determining whether a fee is a penalty. Despite each of the five judges providing their own explanation as to what this test incorporates, all judges held that a fee would be a penalty where the sum is extravagant and unconscionable to the loss of the party not in breach. Justice Gageler went as far to say that a fee will only amount to a penalty where it has no other purpose but to punish.
Significantly, the High Court upheld the Full Federal Court's decision that the assessment of the loss to ANZ occurs at the time the contract was entered into, and not, as Justice Gordon held at first instance, at the time of the breach. The High Court rejected the Appellant's expert evidence as it only considered the actual loss as a result of the breach and did not address the full range of ANZ's legitimate interests protected by the fee at the date of the contract.
The High Court held that ANZ's legitimate interests included costs such as regulatory costs and collection costs. Further, in order to determine the loss suffered it was held that ANZ's multi-faceted business interests needed to be considered in a commercial context, including factors such as the risk assumed by the bank in making facilities available to customers and the freedom to pursue profit. As the Appellant's evidence did not address these interests, the High Court found that the Appellants did not establish that the fees were penalties.
The High Court's decision in Andrews & Ors v ANZ  HCA 30 was criticised by the Supreme Court of the United Kingdom as a "radical departure from the previous understanding of the law".
Although the High Court stated that this was not the time to critique the divergent approaches the Court did comment that such criticism was incorrect and based upon a misunderstanding of what was actually decided in Andrews.
Additionally, the High Court reaffirmed their decision in Andrews that a detriment imposed can amount to a penalty if it is activated by a breach of contract or some other event that is not a breach of contract.
However, the High Court did not consider it to be necessary to provide any further insight into this extension of the penalty doctrine, as the case at hand was related to a fee arising out of a breach of contract. Accordingly, many of the questions left unanswered in the Andrews case still remain uncertain.
Things to take away
The decision should provide a level of comfort to those businesses with contracts containing provisions charging fees that are incurred for breach of contract.
The High Court emphasised that a court should only interfere with a contract if the customer can demonstrate that the fee was grossly disproportionate to all legitimate potential costs that could be incurred by the other party in a commercial context as assessed at the time the contract was entered into. It is clear that this test sets a high threshold for the customer to satisfy in order to prove that a fee is a penalty.
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