The High Court has its say on penalties

In brief

Written by Partner Belinda Thompson, Managing Associate Kate Austin and Lawyer Kelly Roberts

In case you haven't heard, last week the High Court handed down its decision in Paciocco v Australia and New Zealand Banking Group Limited.¹ In what was perhaps the most highly anticipated High Court decision of the year, the majority found that credit card late payment fees charged by ANZ were not penalties. Here we look at what the High Court had to say about the penalties rule and what this means for business and for class actions in the financial services space.

What happened?

The ANZ Exception Fees class action was commenced by Mr Paciocco and his company, Speedy Development Group Pty Ltd (the appellants in the High Court appeal). The appellants sought to challenge the validity of credit card late payment fees and other fees charged by ANZ on their accounts.

At first instance, Justice Gordon held that the credit card late payment fee charged by ANZ was the only fee which was penal in nature and that none of the exception fees charged by ANZ were otherwise unconscionable, unjust or unfair under the relevant statutory prohibitions.

On appeal, the Full Federal Court overturned the finding in relation to the late payment fee, but otherwise upheld Justice Gordon's findings. The Full Federal Court found that the late payment fee was neither extravagant nor unconscionable when compared with the greatest conceivable loss flowing from the breach.

The High Court's decision was a win for ANZ on all accounts. Chief Justice French and their Honours Justices Kiefel, Gageler and Keane, dismissed the penalty appeal. Justice Nettle was in dissent and would have allowed the penalty appeal. The High Court was unanimous in their dismissal of the statutory appeal.

When will a fee be a penalty?

The relevant question for the High Court was the applicable test to determine whether a sum paid on default is to be characterised as a penalty. The majority held that the test is whether such a sum is 'out of all proportion' to the interests of the party which it is the purpose of the provision to protect.² These interests may be of a business or financial nature.

The majority considered that the concept of ANZ's interests was not confined to the reimbursement of the costs directly caused by the appellants' default, such as collection costs. Rather, it included the bank's broader interest in maintaining or even enhancing its revenue stream in order to make a profit.³ The majority considered that late payment impacted ANZ's interests in three areas: operational costs, loss provisioning and increases in regulatory capital costs.⁴ As these costs were greater than the fee imposed, the fee was not a penalty.

The majority's decision is consistent with the tone and reasoning of the Full Federal Court. The majority took quite a commercial approach in considering what is appropriate to be taken into account when considering the relevant interests. Importantly, the test is not confined to loss in damages resulting directly from the breach.

This can be contrasted with Justice Nettle's reasoning in dissent, where his Honour adopted a more rigid approach in considering the scope and application of the relevant test to determine whether a fee is a penalty. His Honour was not prepared to allow many of the costs contended for by ANZ on the basis that these were future costs not ultimately incurred.

The commerciality of the decision will be welcomed by many. The decision reflects the importance of the concept of freedom of contract and the court's general reluctance to interference with the bargain that is struck. Businesses in a broad range of sectors including, banking, finance, utilities and telecommunications can take comfort and guidance from the decision, as it permits the protection of a broader array of 'legitimate interests' in a range of clauses of this kind, therefore providing greater commercial certainty.

Potential reform?

While the decision now provides welcome clarity on the application of the penalty rule, the Chief Justice did suggest that the haphazardly developed penalties doctrine may also benefit from statutory reform.⁵ He observed that there had been much activity in this area internationally with the development of internationally applicable model rules and principles, concluding that 'it may be that in this country statutory law reform offers more promise than debates about the true reading of English legal history'.⁶

It remains to be seen whether parliament will take up his Honour's suggestion.

What's next?

So, what does this mean for the financial services sector?

Media commentators have asked whether the decision will sound the 'death knell' for class actions.⁷ Certainly, the High Court decision casts serious doubt over the future of other penalties class actions, but we doubt this will affect the risk profile for financial services class actions generally going forward. As our research shows, shareholder class actions and financial services class actions remain the two most common types of class actions commenced in the past five years.⁸ We expect that we will continue to see entrepreneurial plaintiff law firms and funders look for various new ways to bring claims, including in the financial services sector.

We will be monitoring the space carefully.