Full Court of the Federal Court overturns judgment in Bank Fees case

Case Note by Kieran Hickie and Andrew Kirby

Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50

The Full Court of the Federal Court of Australia has overturned the decision of Gordon J that late payment fees charged by the ANZ bank on credit cards against its customers constituted penalties and were unenforceable.

In Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50, the Full Court of the Federal Court of Australia overturned the decision of Gordon J that late payment fees charged by the ANZ bank on credit cards against its customers constituted penalties and were unenforceable.

In the decision at first instance, Gordon J held that late payment fees charged by the bank were payable on breach of contract in order to compel a customer to comply with a primary stipulation under the contract, being the obligation to make monthly repayments on time. However, critically for banking customers and consumers of banking products, the Court held that the quantum of the late payment fees charged by the bank was unconscionable given that the loss suffered by the ANZ in respect of a customer’s failure to make a monthly repayment (being the primary stipulation) was considerably less than the fee charged.

Despite the Full Court agreeing with the trial judge that a late payment fee could be charged on a breach of contract, the Full Court held that the applicants could not prove that the late payment fees were ‘extravagant or exorbitant’ by reference to the loss suffered by the ANZ and therefore a penalty.

The case turned on the appropriate methodology to apply to determine the loss suffered by the ANZ by a customer’s failure to make a monthly repayment in breach of their credit contract. The Full Court held that in order to assess whether the late payment fee is ‘extravagant or exorbitant’, reference must be had to the loss suffered by the ANZ in relation to the failure of a customer to make a monthly repayment.

In determining the amount of the loss, the Full Court held the loss suffered by the ANZ bank needs to be assessed prospectively (ex ante) as opposed to retrospectively (ex post), and should not be determined by comparing the amount of the late payment fee with the actual loss suffered by the ANZ after the breach of contract has occurred (being the customer’s failure to make a monthly repayment).

The Full Court held that the appropriate methodology to apply to determine the amount of the loss is to determine the greatest prospective loss that could conceivably flow from the breach of contract by a customer in failing to make a monthly repayment. This could include indirect losses associated with ANZ customers failing to make monthly repayments. The Full Court accepted that these losses could include, by way of example, the costs associated with maintaining a collections department for the purpose of ensuring ANZ customers comply with their monthly repayments. On the basis of this methodology, the Full Court held that the late payment fees charged by the ANZ were not excessive in the circumstances and did not amount to penalties.

The findings by Gordon J’s findings that honour, dishonour and overlimit fees charged by the ANZ were not penalties (and therefore were enforceable) were not disturbed by the decision of the Full Court.