Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28
Contract; remedies for breach; penalty clauses; pre-estimates of loss; other factors.
Facts: Paciocco held two credit card accounts with the Australia and New Zealand Banking Group Ltd (ANZ). One of the terms of the contract specified a ‘Late Payment Fee’ which would be charged if Paciocco failed to pay the monthly payment due. ANZ fixed the ‘Late Payment Fee’ from time to time, without consulting with its customers. At the time of this dispute, it was set to $20.00. In a class action against ANZ, Paciocco argued that the term setting out the fee was a penalty and was therefore unenforceable.
Issue: Was the Late Payment Fee of $20.00 a penalty and therefore unenforceable?
Decision: The Late Payment Fee was not a penalty, because it was not ‘extravagant’ or ‘unconscionable’ with regard to the business and financial interests of ANZ in ensuring timely payments.
Reason: In many cases, the distinction between liquidated damages and a penalty will be useful. A liquidated damages clause is one which represents a genuine pre-estimate of loss or damage which would result from a breach. But if a clause is not based on a pre-estimate of loss, this does not necessarily mean that it is a penalty. A stipulated sum might also reflect other kinds of loss or damage to the protected party’s interests, beyond those directly caused by the breach. The proper test to determine whether a clause is a penalty is whether or not the sum is ‘extravagant’ or ‘unconscionable’ because it is plainly excessive or ‘out of all proportion’ to the interest sought to be protected by it. In this case, late payment was found to impact ANZ’s interests in several respects: through operational costs, loss provisioning, and increases in regulatory capital costs. Because the sum of the Late Payment Fee was not ‘out of all proportion’ to these interests, it was not a penalty.