Late payment fees struck down as penalties

Australia and New Zealand Banking Group Limited [2014] FCA 35 (‘Paciocco’)

In a land mark judgment handed down on 5 February 2014 by the Federal Court, Gordon J held that late payment fees charged by the ANZ Bank infringed the doctrine of penalties.

The decision was handed down in a class action brought by about 43,500 customers against the ANZ Bank. An attack on other bank fees – “honour, dishonour, non-payment and over limit fees” (‘the other fees’) was rejected. Therefore, the judgment represents a mixed result for the protagonists.


The class action commenced with a lead plaintiff, Andrews. In an earlier judgment, Gordon J decided on a trial of preliminary questions, that the doctrine of penalties did not apply to the fees in question other than potentially the late payment fees, because the other fees were not payable on a breach of contract. In Her Honour’s view, a breach of contract was an essential pre-condition to the invocation of the Court’s jurisdiction to review whether a contractual provision infringed the doctrine of penalties Andrews v Australia and New Zealand Banking Group Ltd (2011) FCA 1376.

On appeal, the High Court overturned Gordon J’s decision, holding that the equitable doctrine of penalties may apply, notwithstanding that there is no breach of contract, and that the equitable doctrine has not been subsumed by the common law doctrine of penalties Andrews v Australia and New Zealand Banking Group Ltd (2012) HCA 30.

According to the High Court, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance:

(a) it is collateral to a primary stipulation in favour of a second party;

(b) upon the failure of the primary stipulation, it imposes upon the first party an additional detriment, the penalty, to the benefit of the second party; and

(c) it operates in the nature of security for, and in terrorem of, the satisfaction of the primary stipulation.

The High Court distinguished a ‘collateral stipulation’ from an ‘alternative stipulation’, the latter involving the imposition of a fee for an additional service.


On being remitted to Gordon J, Paciocco replaced Andrews as lead plaintiff.  Her Honour’s latest judgment methodically applies the High Court’s judgment to the different fees in question. Once the doctrine of penalties (whether in its common law or equitable form) is found to apply, the following interrelated questions fall to be considered:

Is the sum stipulated a genuine pre-estimate of damage?

Conversely, is the sum stipulated extravagant and unconscionable in amount, in comparison with the greatest conceivable loss, as judged at the date of entry into the contract? In this regard it is relevant to ask, is the same sum payable on the occurrence of one or more or all of several events of varying seriousness?

The late payment fee of about $35 was payable upon non-occurrence of timely payment. The same fee was payable regardless of the amount that was overdue on the customer’s account. The evidence before the court was that it cost the bank about $3 in administrative costs upon the customer being late in payment on a relevant account. The bank conceded that the fee was not calculated by reference to any detailed estimate of the loss that it would suffer.

The court held that the late payment fees were payable upon the customer breaching its contractual obligation to make timely payment and that the fee operated in the nature of security for, and in terrorem of, the satisfaction of the primary stipulation (to pay on time). Further, it held that the late payment fee was extravagant and unconscionable in amount and conversely, was not a genuine pre-estimate of the bank’s damage flowing from the customer being late in payment.

On the other hand, the other fees survived attack because they were considered by Gordon J to be alternative stipulations providing for an additional fee for an additional service. Unlike the late payment fee, they were not payable upon a breach of contract by the customer. For example, an honour fee was payable where a payment instruction was given by the customer to the bank which, if the bank chose to act on the instruction, would overdraw the customer’s account. As the bank was not required to honour the customer’s request, the fee could not properly be considered as security for performance by the customer of its obligation to the bank.

In defence of the claims made against it, the bank raised a limitations defence under the Limitations of Actions Act 1958 (Vic) to defeat recovery of late fees paid more than six years prior to the commencement of the proceeding. Gordon J held that time only began to run for the purposes of the limitation period, once the relevant plaintiff discovered that the moneys had been paid under a mistake. Therefore, the bank is exposed to claims for recovery of late fees paid more than six years ago.  This finding creates some uncertainty as to the financial ramifications of the decision.

In sum, the court found that the plaintiffs were entitled to recover as moneys had and received, the difference between the late payment fees and the bank’s loss consequent upon the customer’s late payment. The process for quantification of the plaintiffs’ loss has been set down for further hearing.


According to recent press reports, the immediate financial ramifications of the decision are that the ANZ Bank will be required to pay the plaintiffs in the class action about $15 million. The decision however has broader ramifications as:

· there are many more ANZ bank customers other than the members of the class action who have been affected by late payment fees. Therefore the bank’s financial exposure is expected to be considerably greater;

· there are similar class actions against other banks in the pipeline; and

· equivalent late fees are regularly charged by other commercial enterprises, including telcos and utility companies.

A question that no doubt that will engage commercial enterprises and their lawyers going forward is whether late payment fees, albeit in some modified form, may be sustainable if drafted as alternative stipulations.

Albert Monichino QC –

CommBar profile

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