In the recent case of Paciocco & Anor v Australia and New
Zealand Banking Group Limited ("Paciocco")  HCA 28,
the High Court considered whether credit card late payment fees
charged by a bank were considered to be penalties.
Where a contract specifies an amount payable to one party for
breach of a contract term, often referred to as a liquidated sum,
and that sum is not based on a genuine pre-estimate of the damage
suffered by the breach, the clause can be deemed a penalty, and
unenforceable. The clause must reflect a negotiated level of risk
that the parties agree to bear on breach of contract.
Differentiating between a liquidated sum and a penalty, will be a
matter of construction, judged at the time of contract
In the case of Dunlop Pneumatic Tyre Company Limited v New
Garage and Motor Company Limited  AC 79 (approved in Ringrow
Pty Ltd v BP Australia Pty Ltd (2005) 222 ALR 306) the court held
that where the sum is extravagant and unconscionable, in comparison
to the loss anticipated as at the date of contract to arise from
the breach, the term will be a penalty. In evaluating whether
liquidated damages are 'extravagant and unconscionable',
the Court will also consider the degree of disproportion between
the liquidated sum and the loss likely to be suffered by the
innocent party, and the nature of the relationship between the
contracting parties including relative bargaining power, and
In Paciocco, Mr Piciocco and his company commenced an action
against the ANZ, after they were charged 'exception fees'.
Exception fees included late payment fees, over limit fees, honour
and dishonour fees in relation to their accounts with the ANZ,
effectively claiming that the fees were penalties. At first
instance, Justice Gordon of the Federal Court found that the credit
card late payment fees were the only fee penal in nature.
On appeal to the Full Federal Court held that the late payment
fee to be neither extravagant nor unconscionable when compared to
the greatest conceivable loss flowing from the breach. Mr Piciocco
appealed to the High Court on the basis that the Full Federal Court
erred in holding the late payment fee was not a penalty. The High
Court said the question was not what the innocent party might
recover in an action for breach of contract, but rather whether the
costs of the innocent party, and the effects upon its financial
interest by the default, could be taken into account in assessing
whether a payment is a penalty. That is, whether the sum is
'out of all proportion' to the interests of the party it
seeks to protect. The Court accepted that the late payments on
credit cards impacted on ANZ's operational costs, loss
provisioning and regulatory capital costs and when taking all of
those factors into account, it was satisfied that the late payment
fee was not a penalty and not out of proportion with the legitimate
financial interests of ANZ. Interestingly, the Court accepted that
the banks interests extended to maintaining and enhancing its
revenue stream for profit.
The approach taken by the Court and the decision leads to
consideration of other types of commercial contracts, which contain
default provisions that may be argued, in the event of a breach, to
be a penalty and unconscionable or extravagant and ultimately
unenforceable. Re-drafting may be necessary to make clear that
whatever the penalties sought to be imposed for default, to include
an explanation of the broader costs or impact to innocent party in
dealing with the default, of the legitimate financial interests of
the innocent party, and possibly the legitimate business interests
sought to be protected, to give weight to the reasonableness of
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.
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