Paciocco v ANZ: Guidance on the application of the doctrine of penalties

The recent case of Paciocco v Australia and New Zealand Banking Group Limited (Paciocco) has provided some much needed guidance on the 2012 High Court case of Andrews and Others v Australia and New Zealand Banking Group Ltd (Andrews).

We previously reported on the matter of Andrews, which extended the reach of the penalty doctrine to compensation arrangements, whether or not associated directly with a breach of contract.

Paciocco clarified many of the issues raised by Andrews. What should be taken from Paciocco is that:

• a requirement to pay a sum will not be a penalty at law or in equity unless it is ‘extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved’; and
• a penalty can also arise in respect of fees payable to secure the performance of a party’s obligation.

Paciocco broadly dealt with the characterisation of late payment fees and honour, dishonour, non-payment or over limit fees.

A central question for the Federal Court was whether the requirement to pay the fee was security for performance by the customer of other obligations to ANZ, or a fee charged in accordance with pre-existing arrangements depending on whether ANZ chose to provide something more and further to the customer.

Late payment fees

It was held that the late payment fees charged by ANZ on Mr Paciocco’s consumer credit cards constituted a penalty at common law and in equity.

The liability to pay the late payment fee was contingent upon a breach of contract or alternatively, the payment was designed to be a disincentive to the customer making late payments on his credit card.

This payment was an additional detriment that was assessed to be extravagant and unconscionable and far in excess of what might conceivably be the damage ANZ would suffer as a consequence of the late payment. As the fees were not a reasonable pre-estimate of ANZ’s loss, they were found to be unenforceable penalties.

This was because, regardless of how late the customer was, the same fee was charged. The Court determined the quantum of the loss to be between $0.50 and $5.50. The fees were $20 or $35.

Honour, dishonour, non-payment or over limit fees

The honour, dishonour, non-payment or over limit fees charged by ANZ were characterised by the Court differently to the late payment fees and were held to not be a penalty.

The Court considered the requirement to pay these fees was not triggered by a breach of contract, but arose as a result of, and in exchange for, something more than or different from what had originally been agreed to by ANZ and the customer (i.e. allowing the customer to exceed the agreed credit limit).

The Court also found that the provision was not designed to secure or encourage a particular outcome that was favourable to ANZ, such as customers staying within their credit limits.

This case is currently under appeal by both ANZ and Mr Paciocco. We will keep you updated as to findings of the appeal.

If you have any questions in relation to the application of this case or on the enforceability of contractual provisions, including in standard form contracts, please contact us.