The High Court decision in July 2016 in the case of ANZ Bank and Paciocco was a class action challenging the “late payment fee” charged by ANZ to its card holders who failed to pay their monthly payments on due date. The current ANZ late payment fee is $20 and is applied irrespective of the amount owing by a card holder. The argument against ANZ was that this late payment fee was a “penalty” and as such, was unenforceable.
ANZ did NOT suggest that its fee represented an estimate of the loss or damage which the bank would suffer due to the late payment.
The Court concluded that this was NOT a penalty, and as such the bank was entitled to charge and recover the late payment fee. In reaching its conclusion, the Court provided valuable commentary which is relevant, not only in this case, but more widely to penalty provisions in commercial contracts in general –
- a “penalty” is in the nature of a punishment for non-observance of a contractual obligation, and as such is unenforceable;
- in this case the late payment fee was intended to protect the wider interests of the bank and was different from a claim for compensation for loss or damage suffered;
- the payment obligation would only be characterised as an unenforceable penalty if it were extravagant, unconscionable or exorbitant, or if it was out of all proportion to the interests of the party being protected;
- although contracts frequently provide for “liquidated damages” being a pre-agreed estimate of the damages which could be suffered for a breach of contract, the agreed charge does not need to be a pre-estimate of such damages;
- it may be that the damages are uncertain in nature and cannot be accurately ascertained or precisely estimated and accordingly, a charge designed to reflect the commercial interests of the party protected would not necessarily be regarded as a penalty;
- the difficulty of proving loss or the uncertainty of the loss which could arise might make it reasonable for the parties to agree in advance what the payment figure should be, in order to avoid the problem of calculation;
- in an English case (Cavendish Square), a non-compete provision in an agreement for the sale of a business which provided that, upon breach of the non-compete, the seller would not be entitled to any further payments of the purchase price, was upheld as not being a penalty because it protected the legitimate interests of the purchaser in the goodwill of the business;
- an agreed sum may be disproportionate to the loss suffered but to be a penalty it must be “out of all proportion”.
In this case, the wider commercial interests of ANZ were recognised by the Court, and the late payment fee was not regarded as a penalty.