10 March 2014
Practice Group:
Litigation and
Dispute Resolution
Bank Late Payment Fees Held to be Penalties –
Class Action Risk for Other Industries
By Mark Easton and Ashley Cameron
Paciocco v ANZ [2014] FCA 35
The Federal Court of Australia (Federal Court) has held that late payment fees charged
by a bank to its credit card customers were unlawful penalties.
Paciocco v ANZ [2014] FCA 35 is the first case to be decided following the High Court of
Australia's (High Court) decision in Andrews v ANZ (2012) 247 CLR 205 in which the
High Court extended the scope of the penalty doctrine under Australian law.
The case provides guidance as to how courts may approach the issue of late payment
fees in other existing class actions concerning penalties in the financial services sector
and may pave the way for further class actions against businesses in other industries.
History – Andrews v ANZ
In 2010, a class action was commenced in the Federal Court against ANZ by customers
alleging that a range of fees imposed by the bank were, among other things,
unenforceable penalties. The plaintiffs sought repayment of the fees.
In 2012, the High Court overturned existing case law which said that a fee could only be
a penalty if it was levied in respect of a breach of contract. Instead, the High Court held
that a sum charged to secure performance of a primary obligation may be a penalty even
if there has been no breach of contract. In other words, if a secondary obligation
(payment of the late fee) is imposed in order to secure performance of a primary
obligation (timely payment of an account) then it may be a penalty.
The High Court did not decide whether any particular fee was, in fact, a penalty.
Paciocco Decision on Late Payment Fees
Under his contract with ANZ, Mr. Paciocco was obliged to pay a minimum amount on his
credit card by a particular date each month, failing which, a late payment fee was
charged by the bank. The Federal Court held that the late payment fee was, in
substance, a collateral obligation levied as security for, and in order to compel
performance of, the primary obligation to make the monthly minimum payment on time.
ANZ charged its customers a late payment fee of AUD35 or (latterly) AUD20. The
Federal Court accepted expert evidence from Mr. Paciocco that the actual loss suffered
by ANZ as a result of a customer's late payment ranged from AUD0.50 to AUD5.50. In
this regard, the Federal Court found that the fees charged met the test of a penalty as
being extravagant and unconscionable relative to the greatest loss that could conceivably
have been suffered by ANZ.
Bank Late Payment Fees Held to be Penalties – Class Action Risk for Other
Industries
The Federal Court pointed to a number of factors in deciding that the late fees met the
test for a penalty at common law and in equity, in particular the fees were:
 payable upon breach of the customer's contractual obligation to pay ANZ on time and,
alternatively, were a secondary obligation imposed to secure payment to ANZ of the
monthly repayment on time (which satisfied the broader test in Andrews v ANZ (2012)
247 CLR 205)
 not payable for further services or accommodation by ANZ
 payable regardless of how late the customer was paying, and regardless of the
amount overdue
 not a genuine pre-estimate of loss suffered by ANZ
 disproportionate in amount to the actual loss and damage suffered by ANZ.
Decision on the Other ANZ Fees
Mr. Paciocco was only partially successful in challenging the bank's fees. Honour,
dishonor, non-payment and overlimit fees charged by ANZ were found not to be
penalties.
In contrast to the late payment fees, the Federal Court held that the action of overdrawing
a bank account was a request from the customer for an advance or loan from ANZ. This
required the consensual conduct of ANZ and the customer. The ANZ 'honour' fee for
considering the customer's request for additional services or accommodation was not a
penalty, but a fee for service.
The Federal Court considered the relative positions of ANZ and the customer, but found
that in all the circumstances, the imposition of fees (even the late payment fees) were not
unconscionable, unjust or unfair in contravention of the relevant statutory provisions.
How Far Back can a Plaintiff Claim?
ANZ sought to rely on the six year statutory limitation period for contractual claims and
contended that much of Mr. Paciocco's claim (being fees paid more than six years before
proceedings were commenced) was statute barred. However, the Federal Court held that
time did not begin to run until Mr. Paciocco was aware of his mistake in assuming that
ANZ was entitled to charge the fees – being the date of commencement of the first
Andrews proceedings in September 2010.
Implications – is Your Business at Risk?
Businesses which impose late payment fees similar to those dealt with in Paciocco v
ANZ [2014] FCA 35 are now at an increased risk of class action litigation by consumers.
Although current class actions are targeting the financial services sector, there is the
potential for class actions to target other industry sectors. In particular, those which deal
with a large number of consumers and impose fees on customers, which may not be fees
for additional services or accommodation. Potential targets include:
 fixed line and mobile phone providers
 internet providers
2
Bank Late Payment Fees Held to be Penalties – Class Action Risk for Other
Industries
 utilities (gas, water, electricity).
Businesses should review their current contracts and arrangements with customers in
light of decisions in Andrews v ANZ (2012) 247 CLR 205 and Paciocco v ANZ [2014]
FCA 35 and take steps to ensure that fees charged to customers are legally valid and
enforceable.
Authors:
Mark Easton
mark.easton@klgates.com
+61.2.9513.2482
Ashley Cameron
ashley.cameron@klgates.com
+61.2.9513.2471
Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt
Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto
Paris Perth Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco São Paulo Seattle Seoul Shanghai
Singapore Spokane Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington
K&L Gates practices out of 48 fully integrated offices located in the United States, Asia, Australia, Europe, the Middle East and
South America and represents leading global corporations, growth and middle-market companies, capital markets participants and
entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations
and individuals. For more information about K&L Gates or its locations, practices and registrations, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2014 K&L Gates LLP. All Rights Reserved.
3