Penalties: The final word

By Belinda Thompson, Kate Austin
Banking Class Actions Financial Services Royal Commission Litigation Oil & Gas

In brief

Today, the High Court handed down its long-awaited decision in Paciocco v Australia and New Zealand Banking Group Limited, bringing an end to six years of litigation. The High Court dismissed the appeal, holding that the late payment fee charged by ANZ on credit card accounts was not a penalty or otherwise unconscionable, unjust or unfair under the relevant statutory prohibitions. The decision provides the final word on the application of the penalties rule (at least for now). Partner Belinda Thompson, Managing Associate Kate Austin and Lawyer Kelly Roberts consider the decision and its implications.


The ANZ Exception Fees class action1 was commenced by Mr Paciocco and his company, Speedy Development Group Pty Ltd (the appellants in the High Court appeal). The appellants held credit card, savings and business deposit accounts with Australia and New Zealand Banking Group Limited (ANZ). Between September 2008 and July 2013, ANZ charged the appellants various 'Exception Fees', specifically late payment fees, overlimit fees, honour and dishonor fees and non-payment fees. The key claims made were that:

  • the contractual terms which entitled ANZ to charge the Exception Fees were penalties at common law and equity; and
  • the fees charged were unjust transactions under the National Credit Code, were unfair terms under the Fair Trading Act 1999 (Vic) and the Australian Securities and Investment Commission Act 2001 (Cth) and that ANZ engaged in unconscionable conduct under these same acts.

At first instance, Justice Gordon held that the credit card late payment fees charged by ANZ was the only fee which was penal in nature. Justice Gordon also dismissed the statutory claims.

On appeal, the Full Federal Court overturned the finding in relation to the late payment fee, but otherwise upheld Justice Gordon's findings. The Full Federal Court found that the late payment fee was neither extravagant or unconscionable when compared with the greatest conceivable loss flowing from the breach. Read more on our analysis of the Full Federal Court's decision in our previous Client Update: Significant 'blow' for penalties claims. 

The High Court appeal

The appellants filed two appeals as follows:

  • that the Full Federal Court erred in taking the view that the late payment fee was not a penalty (the penalty appeal); and
  • that the Full Federal Court erred in determining that the charging of the 'late payment fees' by ANZ was not unconscionable, unfair or unjust under the relevant statutory prohibitions (the statutory appeal).

The High Court's decision


Separate reasons were given for judgment in relation to both the penalty and statutory appeal. Chief Justice French and their Honours Justices Kiefel, Gageler and Keane dismissed the penalty appeal. Justice Nettle was in dissent and would have allowed the penalty appeal. The High Court was unanimous in their dismissal of the statutory appeal.

The final word – when will a fee be a penalty?

On appeal to the High Court, it was not in contention that the late payment fee was capable of constituting a penalty because it was imposed:

  • at common law, upon breach of contract; or
  • in equity, to secure the performance of another contractual requirement.

The relevant question for the High Court was the applicable test to determine whether a sum paid on default is to be characterised as a penalty.

The majority held that the overarching test appropriate in a case of this kind is whether such a sum is 'out of all proportion' to the interests of the party which it is the purpose of the provision to protect. These interests may be of a business or financial nature. Importantly, the test is not confined to loss in damages resulting directly from the breach.

The majority considered that ANZ's legitimate interests were not confined to the reimbursement of the costs directly occasioned by the appellants' default, but extended to the bank's interest in maintaining or even enhancing its revenue stream in order to make a profit.2 The majority considered that late payment impacted ANZ's interests in three areas: operational costs, loss provisioning and increases in regulatory capital costs.3 As these costs were greater than the fee imposed, the fee was not a penalty.

Although this matter was not raised on appeal, the High Court restated the correctness of its approach in Andrews v Australia and New Zealand Banking Group Ltd,4 that the application of the penalty rule applies upon breach of contract and in equity. The High Court appeared untroubled by the UK Supreme Court's comments that the finding that the penalty doctrine survived in equity was a 'radical departure from the previous understanding of the law'.5 As Chief Justice French put it, 'the common law in Australia is the common law of Australia'.6 However, interestingly, Chief Justice French noted that the penalties doctrine has been haphazardly developed and may benefit from statutory reform.

Dissenting judgment of Justice Nettle

Justice Nettle was in dissent and would have allowed the penalty appeal. His Honour appears to have adopted a more rigid approach in considering the scope and application of the relevant test to determine whether a fee is a penalty.

His Honour was influenced by the fact that the payment fee was fixed regardless of whether the late payment is 'serious or trivial with respect to time or amount'.7 Unlike the majority, Justice Nettle held that Justice Gordon was correct to assess 'greatest recoverable loss' by reference to what would be recoverable as unliquidated damages.8 His Honour found that ANZ's costs of loss provisioning, regulatory capital and some operational costs could not be taken into account because, in many cases, they were future costs not ultimately incurred by ANZ.

The statutory appeal

The High Court also dismissed the appeal in respect of the statutory causes of action, with the majority rejecting the statutory claims on their merits. Justice Nettle also ordered that the appeal be dismissed, but ordered so without any adjudication on the merits. The majority of the High Court agreed with the findings of the lower courts that ANZ's conduct was not unconscionable, unjust or unfair. None of the usual indictors of unconscionability or unfairness existed, having regard to ANZ's legitimate interests and the fact that these were not limited to losses occasioned by the appellants' breach.

In relation to unconscionability, Chief Justice Allsop in the Full Federal Court decision had provided detailed guidance on the meaning of unconscionable conduct. The High Court did not depart from this analysis. Justice Keane emphasised that the existence of a disparity in bargaining power alone is not enough to establish that the party which enjoys the superior power has acted unconscionably by exercising it. To focus on inequality of bargaining power is to ignore the words of the statute which require conduct to be unconscionable 'in all the circumstances'.

How does this affect you?

The High Court decision clearly casts serious doubt over the future of other penalties class actions.

More generally, the decision provides welcome clarity on the application of the penalty rule. Businesses in a broad range of sectors, including banking, finance, utilities and telecommunications can take comfort and guidance from the decision, as it permits the protection of a broader array of 'legitimate interests' in a range of clauses of this kind, therefore providing greater commercial certainty.


  1. [2016] HCA 28.
  2. See for example, Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, [216], [277] (Keane J).
  3. Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, [58].
  4. Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205.
  5. Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373, 1396 [41].
  6. Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, [9] (French CJ).
  7. Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, [348] (Nettle J).
  8. Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, [340]-[341] (Nettle J).