The High Court on penalties: bank fees and beyond
For the second time in four years the High Court has considered penalties, but the law remains somewhat fragmented and challenges remain for practitioners seeking to apply it in practice.
Paciocco v Australia and New Zealand Banking Group Ltd  HCA 28
In recent years, thousands of consumers participated in class actions against the major banks seeking to recover bank fees.
The first of those cases to reach the High Court was Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, in which the High Court decided that equitable relief against penalties had not been subsumed into the common law, and that the rule against penalties was not limited to cases arising out of a breach of contract.
Paciocco was the second bank fees case to reach the High Court. At trial, Gordon J held that late payment fee provisions in the terms of the ANZ’s consumer credit card accounts were unenforceable penalties (at common law and in equity): see Albert Monichino QC’s casenote here. The Full Court overturned Gordon J’s decision: see Kieran Hickey and Andrew Kirby’s casenote here.
The primary issue was whether late payment fee provisions in the terms of the ANZ’s consumer credit card accounts were penalties.
The High Court dismissed the consumers’ appeals by a majority of 4-1. The majority comprised Kiefel J (with whom French CJ agreed) and Keane and Gageler JJ. Nettle J dissented.
The common conclusion of the majority was that the consumers had failed to prove that the late payment fees were penalties.
The essential difference between the majority and Nettle J can be exposed by this question: when considering whether a collateral stipulation to pay a money sum (such as a late payment fee) is exorbitant, extravagant, unconscionable in amount, or out of all proportion, to what do you compare it?
The traditional approach has been to compare the money sum to “the greatest loss that could conceivably be proved to have followed from the breach”: see Lord Dunedin’s ‘test 4(a)’ in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 79. As the High Court previously put it, “In typical penalty cases, the court compares what would be recoverable as unliquidated damages with the sum of money stipulated as payable on breach”: Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at .
Nettle J followed the traditional approach, holding (at ) that on the facts and evidence this was a typical penalty case of the kind referred to in Ringrow.
In the majority’s view, the appropriate comparator was the “interests” protected by the primary stipulation. This approach drew more on Lord Atkinson’s speech in Dunlop than Lord Dunedin’s ‘tests’. This approach was hinted at in Andrews at , touched upon by the Full Court in Paciocco at  and , and embraced by the Supreme Court of the United Kingdom in the more recent decision of Cavendish Square Holding BV v El Makdessi; ParkingEye Ltd v Beavis  UKSC 67 (which, according to one learned commentator, “revolutionised the way in which the doctrine of penalties is to be approached in the United Kingdom”: see the paper delivered by Professor Doug Jones shortly before the High Court’s decision in Paciocco).
Importantly, the majority held that relevant “interests” may be broader than what might be recovered in an action for damages for breach of the primary stipulation (e.g. relevant interests may be intangible or unquantifiable, or quantifiable but too remote to be recoverable under the law of damages). On that basis, the majority took into account not only the direct operational costs incurred by the bank in relation to late payments, but also the ‘costs’ of loss provisioning and increases in regulatory capital (which ‘costs’ had been the subject of expert evidence adduced for the bank by a Mr Inglis).
Also, Keane J was prepared to recognise that the bank’s relevant “interests” included simply making a profit; although interest charges are the primary source of reward for a bank, his Honour recognised that late payment fees may play a role in maintaining or enhancing the bank’s reward.
Paciocco, unlike Andrews, was a relatively traditional penalties case in the sense that it arose in the context of a contract which responded to the breach of a primary stipulation by imposing a collateral obligation to pay a money sum. Thus the reasoning in Paciocco is likely to have application beyond bank fees, and apply to other liquidated damages clauses.
The main ‘lesson’ arising from Paciocco is that where a contract responds to the breach of a primary stipulation by imposing a collateral obligation to pay a money sum, practitioners will first need to consider the “interests” sought to be protected by the primary stipulation. Importantly, this may yield a range of answers that are broader than the answer to the question “what damages would be recoverable for breach of the primary stipulation?” Next, practitioners will need to compare the relevant “interests” to the money sum. Importantly, this may entail a qualitative comparison, rather than trying to ‘price’ the relevant “interests” or convert them into dollar terms in order to undertake a quantitative comparison. Only if the money sum is exorbitant, extravagant, unconscionable in amount, or out of all proportion, as compared to the relevant “interests”, will it be capable of characterisation as a penalty.
It remains to be seen how courts will draw the line between what are, and what are not, relevant “interests”, and the extent to which this is an objective question of construction of the contract, or a question about which evidence is needed (such as the evidence in Dunlop given by Dunlop’s manager, Mr Baisley).
Further, questions of presumptions and onus of proof are also likely to arise in practice. On one hand, on the facts of Paciocco it appears that the majority expected the consumers to anticipate the bank’s “interests”, and to adduce evidence of the bank’s ‘costs’ of provisioning and regulatory capital as part of the discharge of the onus on the consumers to prove that the late payment fees were penal. On the other hand, Nettle J considered that because Lord Dunedin’s ‘test 4(c)’ applied, an evidentiary burden fell on the bank to prove that the late payment fees were not penal. Arguably, that was the purpose for which Dunlop adduced the evidence of Mr Baisley, and the purpose for which ANZ adduced the expert evidence of Mr Inglis.
It is worth remembering that the law of penalties has been invoked in respect of collateral obligations that do not involve payment of a money sum (such as forced transfer clauses or forfeiture clauses): see e.g. Andrews at  – . It remains to be seen if, and if so the extent to which, courts consider the reasoning in Paciocco to be congruent with, or capable of application to, cases falling in those other categories.