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Paciocco v Australia and New Zealand Banking Group Limited  FCA 35
The rule against penalties: The position after Andrews v ANZ
Until the High Court’s decision in Andrews v Australia and New Zealand Banking Group Ltd (2012) HCA 30 (Andrews v ANZ) conventional wisdom had been that the rule against penalties applied only where there had been a breach of contract. The rule can also apply where the obligation to pay an amount operates, in effect, to procure performance in providing a negative incentive.
However, while the High Court in Andrews v ANZ decided that the rule against penalties could apply to bank fees, it did not determine whether the bank fees in question were actually penalties. This question was considered by the Federal Court in Paciocco v ANZ. Further, the issue of what constitutes a penalty has far broader application outside the specific banking context.
Paciocco v ANZ was a representative proceeding brought by (i) Mr Paciocco and (ii) one of his companies, Speedy Development Group Limited. Both held bank accounts with ANZ. These accounts attracted certain fees (consisting of late payment, honour, dishonour, non-payment and overlimit fees) under the relevant contractual documentation.
These fees were alleged to be penalties at common law or penalties in equity. Further, if certain fees were not penalties, it was alleged that they constituted breaches of specific legislation (although this latter argument is not considered in detail in this note as it was dismissed by Gordon J).
The Federal Court decision
A 6 step process was used to determine which categories of bank fees constituted penalties:
- Step 1 - the terms and inherent circumstances of the contract, judged at the time the contract was made;
- Step 2 - the events surrounding the charging of each fee in question;
- Step 3 and 4 - the proper construction of the relevant stipulation(s) in the customer contract (i.e. what did the contract stipulate that ANZ and Mr Paciocco would do/had to do?);
- Step 5 - whether the stipulated fee was “extravagant, exorbitant and unconscionable”; and
- Step 6 - the loss or damage sustained.
Late Payment Fees
The late payment fees charged by ANZ on Mr Paciocco’s credit cards constituted penalties at both common law and in equity. While a plain reading of the contractual documents found that the late payment fee was payable by the customer upon breach of his contractual obligation to make payment by a specified date (i.e. the contemporary view of when penalties may arise), even if the late payment fee was not payable upon a breach of contract, it would still be a penalty. The stipulation that a fee of $35 would be charged to the customer’s credit card account if the amount was not paid by a specified date was collateral to the primary stipulation in favour of ANZ that required Mr Paciocco to make a minimum monthly payment by a due date (Paciocco v ANZ at  and ). That collateral stipulation, upon failure of the primary stipulation, imposed upon the customer:
“an additional detriment in the nature of a security for, and in terrorem of, the satisfaction of the primary stipulation which was extravagant, exorbitant and unconscionable” (Paciocco v ANZ at ).
Factors in the fee being found extravagant and unconscionable included that: (i) it was payable regardless of whether the amount was overdue one day, one week, or longer; (ii) it was an amount independent of the quantum of the overdue amount; and (iii) it was disproportionate given the loss likely to be suffered by ANZ.
While the court was satisfied that ANZ suffered some loss or damage by reason of late payments by the customer, “on any view, it was less than $35”. In fact the loss was assessed at between $0.50 and $3.00 (depending on the specific category of late payment fee in question).
The limitation defence
ANZ raised limitation defences to 2 of Mr Paciocco’s claims with respect to late payment fees on the basis that the fees in question were incurred more than 6 years prior to the commencement of proceedings. Three arguments were advanced as to why these late payment fees were not statute barred. The key argument, relying upon s 27 of the Limitation of Actions Act 1958 (Vic), was that he was entitled to rely upon the principle that, in cases of mistake, the relevant limitation period will be extended.
It was accepted that until the Andrews v ANZ proceedings, Mr Paciocco was under the belief that ANZ was entitled to charge the exception fees (and that he was obliged to pay them). ANZ contended that s 27 was limited to a mistake of fact and therefore did not extend to a mistake of law (a contention which the court rejected). However, ANZ did not advance a submission as to the ‘key question’ of when time began to run under the Limitation of Actions Act, so no alternative date was considered by the court. The court found that time did not begin to run until the Andrews proceedings were commenced and, accordingly, these claims were not statute barred.
Honour, dishonour, non-payment and overlimit fees
In contrast with the finding in respect of late payment fees, the remaining claims regarding the other categories of bank fee were dismissed. Gordon J held that the events for which these fees were charged were: (i) not a breach of a contractual obligation; and (ii) not charged in order to secure the performance of a primary stipulation e.g. not to overdraw the account or initiate an overdraw transaction. Instead, the customer was entitled to initiate such a transaction and the fee was payable in respect of ANZ’s consideration of and decision in respect of the request.
For example, in respect of dishonour fees, the court noted that:
“The fee the bank charges as a dishonour fee is a fee charged in return for the bank considering (and ultimately rejecting) the customer’s request… There is in my view, nothing unconscionable in the bank charging a fee to consider and reject an application which the customer has “chosen” to make, which is an application to alter the agreed terms of the credit facility between the bank and the customer”
Following Andrews v ANZ, the rule against penalties can apply in some situations that do not amount to a breach of contract. The issue is this: where should the line be drawn between those non-breach situations that are susceptible to the application of the rule and those that are not?
Paciocco v ANZ provides some guidance as to how this line may be drawn, particularly in the context of bank fees, though does not provide a ‘bright line’. Further, the application of the rule is potentially far broader in terms of both the nature of commercial relationships and industry relevance. Arrangements ranging from consumer contracts for services such as telecommunications to complex commercial arrangements, such as service level agreements in outsourcing and delay regimes in resource supply contracts, can include specific payments and/or fee reductions based on particular events.
Given the difficulty in assessing loss or damage arising from issues such as delay or service deficiency, the impact of, initially, Andrews v ANZ and, now, Paciocco v ANZ must not be underestimated.