When is a late payment fee a penalty?

By Emily Stubbs, Lawyer, MST Lawyers

In the recent High Court of Australia (“HCA”) decision of Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 (27 July 2016), the HCA found that late payments fees on credit cards imposed by ANZ were not a penalty and did not contravene statutory prohibitions against unconscionable conduct, unjust transactions or unfair contract terms.

 The facts

Lucio Paciocco and a company he controlled (Speedy Development Group Pty Ltd) had credit cards and deposit accounts with ANZ which were all charged various fees by ANZ, including late fees, if the “Minimum Repayment” on the monthly statement together with the “Amount Due Immediately” were not paid by a specific date.

Paciocco and his company issued a proceeding in the Federal Court of Australia against ANZ claiming that the late payment fees and other various fees charged by the bank were unenforceable as penalties. In addition, Paciocco and his company also claimed that ANZ engaged in unconscionable conduct, that the contracts for accounts were made by unjust transactions and that the late payment fees were void as unfair terms.

 The issue

The HCA had to consider whether the various fees charged by ANZ to its credit card customers were enforceable or whether they were considered a penalty and therefore unenforceable.

What is a penalty?

Traditionally, a penalty is a payment of money stipulated by way of threat against the offending party as a means of punishment if the principal obligation under the contract is not performed. Usually, a penalty is intended to protect a party in a greater way than simply compensating for loss caused by the breach of contract. Before a sum stipulated would be considered a penalty it had to be extravagant and unconscionable.

By way of comparison, liquidated damages which also often appear in contracts, are typically considered a genuine pre-estimate of damage. However, this does not mean that if no pre-estimate of damage is made at the time the contract is entered into that a sum stipulated will be a penalty. In this HCA case, ANZ had admitted that no pre-estimate of the fees and charges had been made.

The HCA also stated that just because a sum reflected, or attempted to reflect, other kinds of loss or damage to a party’s interests beyond those directly caused by the breach, would it mean that the sum was a penalty.

When determining whether a sum to be paid on default is a penalty the construction and inherent circumstances of the contract are to be given consideration. The interests of the party seeking to impose late payment fees needs to be identified in order to be able to establish whether the late payment fee being imposed is out of all proportion to the party’s interest that the fee is designed to protect.

 The decision

The HCA found that the late payment fee and other charges were not out of all proportion to ANZ’s interest in receiving timeous payment of the minimum monthly payment on its credit card accounts. It also found that the late payment fees and other charges did not contravene statutory prohibitions against unconscionable conduct, unjust transactions or unfair contract terms.

 What does this mean?

This recent HCA case clarified the penalties doctrine in Australia and makes it clear that arguments to abolish the penalty doctrine are not supported by the majority. In clarifying the applicable test in determining a penalty, the HCA has broadened the grounds on which to justify fees that might ordinarily be challenged as penalties. For example, late payment fees do not have to be limited to damages that would only be claimable for breach of contract. This will generally benefit the party who is seeking to impose the payment of fees.

If you rely on late payment fees in your contracts or are looking to include them, it is recommended to have a review of your contracts to ensure that the fees and charges are valid and enforceable. If you sit on the other side of the fence, be wary of late payment fees and other charges when entering into contracts that may be imposed on you.

For more information on enforcing or avoiding late payment fees and penalty provisions in contracts, please contact our Dispute Resolution and Litigation team by email at litigation@mst.com.au or by telephone on Ph: +61 8540 0200.