In Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 the Federal Court Full Court reversed Justice Gordon’s decision in 2014 (see here) that the Late Payment Fees charged by ANZ on Mr Paciocco’s consumer credit cards constituted a penalty at common law and a penalty in equity.

The Full Court also rejected an appeal by the borrower against Justice Gordon’s decision that the honour, dishonour, non-payment or overlimit fees charged by ANZ were not penalties.

There was no change to the decision relating to 2 Exception Fees which ANZ admitted it was not permitted to charge under its contracts with Paciocco.

It is expected that the borrowers will seek leave to appeal to the High Court.

UPDATE: On 6 May 2015 the customers lodged applications for special leave to appeal to the High Court in respect of both the penalties decision and the decision that the fees were not unconscionable, unfair or unjust.

On 11 September 2015 the High Court granted special leave to appeal. The appeal will be heard in 2016.

The proceedings brought by Mr Paciocco and a company controlled by him is a representative proceeding (class action). He sought to set aside the bank fees charged by ANZ on the basis that they were either penalties at common law or equity; or were the product of unconscionable conduct by ANZ within the meaning of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), ss 12CB and 12CC, or the Fair Trading Act 1999 (Vic) (the FT Act), ss 8 and 8A; or were unjust under the National Credit Code in Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth); or as unfair contract terms under the FT Act, s 32W and the ASIC Act, s 12BG.

The Full Court agreed with Justice Gordon that the fees were not unjust, unfair or unconscionable.

Even though Justice Gordon correctly stated the legal principles the Full Court disagreed with Justice Gordon’s application of the legal principles.

The Full Court decided that for a contractual fee to be an unlawful penalty the essential element (at law or in equity) of the sum being extravagant, exorbitant and unconscionable has to be decided before the loss is calculated; there should be no calculation of loss unless the fee has first been characterised as penal.

The correct approach is to show at the time of entry into the contract that the fee was extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to follow from such a breach.

As a result of that approach, in contrast to Justice Gordon, the Full Court preferred the evidence of ANZ’s expert Mr Inglis and accepted that provisioning costs, the cost of regulatory capital and collection had to be taken into account to establish ANZ’s greatest conceivable loss (and that it exceeded the fee) in order to make the decision as to extravagance and exorbitance.

“104. The above distinction is important in the discussion of the differences between the two experts and the primary judge’s reasons in preferring one (Mr Regan) over the other (Mr Inglis). Different considerations may be seen to arise when one is seeking to address the question of what damage did Mr Paciocco’s or SDG’s breach of the term in question cause, as opposed to the question what could possibly be the greatest loss or damage that could arise by some breach of the term in question, as a means of assessing the proper protection for ANZ’s interest in the due performance of the obligation…..

141. It was, in my respectful view, therefore wrong to conclude, as the primary judge did at [129] and [139] of the reasons, that the admission was that the late payment fee was not a genuine covenanted pre-estimate of damage. To so conclude was to conclude that it was penal in character and so necessarily exorbitant and extravagant without the need for any further analysis….

147. 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, or ex ante. It is the prospective assessment of compensation commensurable with the interest of the obligee protected by the bargain. This is different from working out what damage can be proved from a particular breach after the event. It is different in timing, in perspective and in conceptual purpose. “