On 27 July 2016 the High Court handed down the much anticipated judgment in Paciocco v Australia and New Zealand Banking Group Limited  HCA 28 (Paciocco). The case considered if late payment credit card fees were penalties (and thus unenforceable at law) or were unconscionable, unjust or unfair under the ASIC Act.
The High Court found that the late payment fees were not penalties and that the charging of these fees was not unconscionable conduct, unjust transactions or unfair contract terms.
Paciocco was commenced in 2013 following the High Court’s judgment in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 (Andrews). In Andrews, the High Court said that in order to determine if a penalty existed required consideration of whether the fee was:
- to secure performance of a primary obligation (e.g payment on time); or
- for further services and accommodation.
The Federal Court (Justice Gordon, who coincidentally is now a justice of the High Court) held that credit card late payment fees were penalties as they were extravagant and unconscionable when compared to the loss ANZ would actually suffer. The Court found the loss suffered by ANZ ranged between $0.50 and $5.50, yet the charges to Mr Paciocco’s account were either $20 or $35. The Court ordered that Mr Paciocco was entitled to be refunded the difference between the credit card late payment fees paid to ANZ and the actual loss suffered by ANZ, adjusted for interest.
With regards to the other fees, such as honour fees, dishonour fees, non-payment fees, overdraft and over-limit fees, the Court found these were not penalties (nor were they unconscionable conduct or unfair under the ASIC Act) because an attempt by a customer to overdraw or extend their credit limit was not a breach of contract. If the bank granted such credit, the granting constituted the provision of further services to the customer. The court found the fees were neither exorbitant nor unconscionable, leaving the fee limit to be determined by market forces.
On appeal in the Full Court of the Federal Court, the Full Court (Chief Justice Allsop and Justices Besanko and Middleton) upheld ANZ’s appeal (against the decision that the late fees were penalties) but dismissed the appeal of Mr Paciocco (from the decision that the other fees were not penalties).
In respect of the late payment fees, the Full Court disagreed with the finding that late payment fees were penalties as Mr Paciocco had not proven the amounts to be extravagant or unconscionable. In this respect, the Court held that an actual loss analysis should have been conducted after the fees were ascertained as penalties, based on forecasts not actuals, to determine whether the level of fees was extravagant or unconscionable at the date of the contract.
The Full Court agreed that the conduct of ANZ was not unconscionable, unjust or unfair under the ASIC Act. The Full Court held the fees could have been avoided by the conduct of the customer. Further, the terms were clear, and there was no evidence of unfair pressure, undue influence or unfair tactics.
The majority of the High Court held (Chief Justice French and Justices Kiefel, Gageler and Keane with Justice Nettle dissenting – Justice Gordon did not sit as she was the judge at first instance) late payment fees were not penalties because:
- as set out in the decided cases (Clydebank, Dunlop, Ringrow and Andrews) the test to be applied was whether the late payment fee was out of all proportion to ANZ’s interest in receiving the minimum monthly payment;
- ANZ was impacted by the late payment, in the form of operational costs, loss provisioning and increases in regulatory capital costs;
- the fact that those categories of costs could not be recovered by ANZ against a customer in an action for damages did not alter their relevance to the question of penalty;
- despite finding that the amount of late payment fees werenot a genuine pre-estimate of damage and the $20 and $35 sums were disproportionate to the proved up (estimated) loss, the appellants failed to establish the test at first instance and accordingly the appeal was dismissed.
For the same reasons the charging of late payment fees did not amount to unconscionable conduct, unjust transactions and unfair contract terms.
Paciocco confirms that banks have a right to charge customers late fees if the failure to make payments on time has sufficient impact on the bank. However, this case was lost primarily because Mr Paciocco did not prove that the actual impact to ANZ (eg operational costs, loss provisioning and increases in regulatory capital costs) was out of all proportion to the fees. Perhaps if evidence of those matters were lead at trial the outcome might have been different.
In the meantime, and if was ever in doubt, the full suite of bank fees (late payment, dishonour, overdrawn etc.) are not going away in a hurry.