Two years ago we reported on the Federal Court decision of Paciocco v ANZ which found that late fees charged by ANZ were constituted unenforceable penalties which were “extravagant, exorbitant and unconscionable charges”.   

An appeal to the full bench of the Federal Court saw that earlier decision reversed and the High Court has dashed the hopes of bank haters Australia wide in rejecting the appeals arising from that decision.

A clause has historically been considered a penalty if it required a party who had breached a contract to pay a specified sum which was extravagant or unconscionable when compared against the greatest loss which the innocent party could have proved to flow from the breach.

To provide a simple example: if the greatest loss a hire car company could suffer if a party failed to return a car on time would be the fee the company would charge another customer to rent out the same car, a contractual clause requiring the first customer to pay a very significant extra sum above the normal hire cost, if the car was returned late, would appear to be a penalty.  As it it stands following this decision, arbitrary late fees for services or goods now appear more likely to be considered as fair by the courts.

The appellant in this matter had argued the late fees were disproportionate and extravagant compared to the actual costs the bank would suffer if a client was in breach of their agreement with the bank.  Each side had led expert evidence on just what costs the bank would suffer, in particular consideration was given to the loss provision costs, regulatory capital costs and collection costs which ordinarily would not sound in damages on a breach of contract action by the bank against a customer.

However, the High Court decision found that those loss provision costs, regulatory capital costs and collection costs affected the legitimate interests of the Bank when considering if the charges were penalties and further the fact that those categories of costs could not be recovered in an action for damages did not alter this conclusion.

This represents a broadening of the considerations which weighs against contractual clauses being found to be penalties.

Ultimately, the High Court found the fees and charges, considering the costs affecting the legitimate interests of the Bank, were not penalties and that this held even though the charges were not genuine pre-estimates of damage and might be disproportionate to the actual loss suffered by the bank.

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