Are you “penalising” your customers?

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By Andrew Brown, Partner and Nirupa Manoharan, Special Counsel

The law of penalties arises where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a ‘genuine pre-estimate of damage’ likely to be caused by the breach.

In early 2014, the Federal court delivered a decision in a class action involving ANZ, which provided real cause for concern for businesses who routinely imposed break fees or late payment fees as a term of their standard contract.

In the appeal to the full Federal Court of Australia (Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50) the Court was asked to consider, among other things, whether the ANZ’s fees, including credit card ‘late payment fees’, were penalties and, accordingly, unenforceable in law.

ANZ late payments were not a penalty

The Court found that ANZ’s late payment fees were not a penalty, and held:

  1. To determine whether a fee is a penalty, two separate inquiries are required:
    1. firstly, determine whether the fee is, prima facie, a penalty; and
    2. secondly, determine whether the fee is extravagant and unconscionable in its amount in comparison with the greatest loss that could conceivably be proved at the date of entry into the contract which imposed the fee.
  2. The actual loss which was caused as a result of the breach was irrelevant to the above inquiries.

Is a fee prima facie a penalty?

The Court held that, prima facie, the late payment fee was not a penalty.

Allsop CJ stated that: “The enquiry as to the penal character of the contractual stipulation providing for the fee…requires an attendance to all the circumstances.”

It was noted that the “extravagancy” and “unconscionability” of the amount charged was not a relevant factor in determining whether the ANZ late payment fee was prima facie a penalty.

Is the fee extravagant or unconscionable?

The Court held that in assessing “extravagancy” and “unconscionability”, it was necessary to consider the prospective loss to ANZ as at the date of the contract, rather than the actual loss caused to ANZ.

By adopting a forward looking analysis of the “greatest loss” that could be proved as a result of the late payments, the Court found that the late payment fees were not “extravagant” and “unconscionable”.

Allsop CJ remarked: “That the assessment of extravagance, exorbitance and unconscionability is an essential element of the penal character is clear. Also clear is that the assessment must be done as at the time of entry into the contract. The assessment is for that reason, forward looking…It is the prospective assessment of compensation commensurable with the interest of the obligee protected by the bargain.”

Accordingly, the Court held that in undertaking an assessment of the character of the fee, it was necessary to take into account ANZ’s provisioning costs, regulatory capital costs and collection costs. Equally, the fact that there would be compensation to ANZ through interest charged on amounts owing also had to be taken into account in determining the bank’s final prospective loss.

In light of these factors, the Court concluded that ANZ’s late payment fee was not a penalty, as the possible loss to ANZ was likely at a level above the fee charged by it.


Although the decision provides a degree of comfort in relation to the imposition of such fees, the decision may be the subject of an application for special leave to appeal to the High Court. In these circumstances, businesses should still be cautious in the incorporation of such terms into their standard contracts.   Specifically, where fees are imposed for late payments as a matter of course, businesses should carefully evaluate whether the fee imposed represents a ‘genuine’ pre-estimate of loss to the business. Clearly, careful drafting of your contracts will be the key to safeguarding your position in circumstances where those contracts incorporate late payment and break fee clauses.

For further information, please do not hesitate to contact us.

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