KEANE J. These appeals concern late payment fees charged by the respondent, Australia and New Zealand Banking Group Limited ("ANZ"), in connection with two credit card accounts held by the first appellant, Mr Lucio Robert Paciocco.
Mr Paciocco and the second appellant, Speedy Development Group Pty Ltd ("SDG"), brought an action against ANZ in the Federal Court of Australia as a representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth). They claimed relief in respect of a range of fees charged in connection with Mr Paciocco's credit card accounts, a consumer deposit account held by Mr Paciocco, and a business deposit account held by SDG. At trial, those fees were referred to by the primary judge (Gordon J) compendiously as "exception fees".
The appellants claimed that the exception fees were unenforceable as penalties; alternatively, they claimed that charging the exception fees contravened standards set by a number of statutory regimes which protect consumers against "unconscionable conduct", "unjust transactions" and "unfair contract terms".
The primary judge held that only the exception fees charged in connection with Mr Paciocco's credit card accounts, which her Honour referred to as "late payment fees", were unenforceable as penalties. The primary judge did not consider whether the late payment fees breached any of the statutory regimes on which the appellants relied. As to the alleged breaches of the statutory provisions in respect of the other exception fees, the primary judge dismissed the appellants' claims.
ANZ appealed to the Full Court of the Federal Court against the primary judge's decision that the late payment fees were penalties. The appellants appealed against the primary judge's decision in relation to the other exception fees. The Full Court allowed ANZ's appeal, and dismissed the appellants' appeal.
The appellants appeal to this Court pursuant to a grant of special leave. There are two appeals before this Court. The issue that arises for determination in appeal M219 of 2015 is whether the late payment fees charged by ANZ contravened the proscriptive statutory regimes referred to above. The issue in appeal M220 of 2015 is whether those fees are unenforceable as penalties under the general law. It is convenient to refer to the claims in appeal M219 as "the statutory claims", and to the claims in appeal M220 as "the penalty claims".
For the reasons that follow, the issues in the two appeals should be determined adversely to the appellants and the appeals should be dismissed.
By a notice of contention filed in appeal M220 of 2015, ANZ argued that the appellants' claims to recover late payment fees incurred more than six years before proceedings were commenced are time‑barred by the operation of the Limitation of Actions Act 1958 (Vic). Because the late payment fees were not penalties, it is not necessary to resolve this issue.
The penalty claims
It is convenient to deal first with the issue of whether ANZ's late payment fees were unenforceable penalties under the general law. In that regard, some general observations by way of an overview of the appellants' case are necessary.
First, it is necessary to be clear as to what the case is not about. The appellants did not advance a case that the late payment fees were a manifestation of an unlawful abuse by ANZ of its market power. No attempt was made to advance a case to that effect under Pt IV of the Competition and Consumer Act 2010 (Cth). No attempt was made to advance a case of misconduct in contravention of any of the provisions of Div 2 of Pt 7.10 of the Corporations Act 2001 (Cth). Accordingly, it should be understood that a rejection of the case which the appellants did advance does not mean that there is no limit to the extent of fees and charges that banks might lawfully charge. Such a concern might be met by invoking laws which are directed to prevent the abuse of market power or dishonest conduct in the market.
Secondly, it was no part of the appellants' case that the charges by ANZ or other banks for their financial services should be fixed by the courts at reasonable levels. There are obvious difficulties inherent in determining what level of interest and charges would be "reasonable". In any event, no jurisdiction to make such a determination has been conferred on the courts. That said, the medieval laws against usury serve as a reminder that such laws have been tried in the past. But currently in Australia, no legislation authorises the application by the courts of a standard of reasonableness to determine the lawfulness of bank charges; and it is not suggested that the common law has developed such a standard.
Thirdly, the appellants did not advance a case that Mr Paciocco suffered from the kind of disability which attracts the intervention of a court of equity to protect the weaker party to a contract. The strength of the appellants' case lies solely in the finding by the primary judge that the cost actually incurred by ANZ in consequence of each failure by Mr Paciocco to pay his credit card account on time was of the order of $3. That amount can be contrasted with the amount of the late payment fee actually charged by ANZ: initially $35 and later $20. The large disparity between the late payment fee charged by ANZ and the expenses actually incurred by it in each case of late payment is the focus of the appellants' case. That disparity may well mean that the late payment fee could accurately be characterised as an example of profiteering by the bank. But whether a late payment fee is to be characterised as an unenforceable penalty is not to be determined by asking whether the enforcement of the fee will produce profits, even large profits, for the bank. The case advanced by the appellants was that the late payment fee was to be characterised as a penalty because its purpose was to punish Mr Paciocco for breaching his contractual obligation to make timely payment or to deter him from choosing not to perform his contractual obligation. And the appellants sought to make this case good by evidence which showed that the late payment fee exceeded the expenses actually incurred by ANZ on each occasion of default by Mr Paciocco. The disparity was said to be so great that the late payment fee could be seen to be out of all proportion to the bank's interest in recovering the expenses actually incurred by it.
To argue from these premises that the contractual purpose which characterised the late payment fee charged by ANZ was the punishment of its customers is fraught with difficulty once it is accepted that the bank's legitimate interests are not confined to the reimbursement of the expenses directly occasioned by the customer's default. The maintenance or even enhancement of ANZ's revenue stream, for the purpose of making a profit, is one explanation of the late payment fee. Indeed, it is the most obvious explanation because, generally speaking, it is the purpose which informs all the terms on which a bank makes its facilities available to its customers. And although interest payments are the primary source of reward to a bank for financial risks involved in the provision of financial accommodation to its customers, there is no legal reason why a bank's fees and charges may not serve the same purpose. In short, the late payment fee is readily characterised by the purpose of ensuring that ANZ's revenues are maintained at the level of profitability required by its shareholders. And the appellants did not seek to advance a case that the pursuit of this level of profitability was itself, in some way, not legitimate.
That the contractual purpose of the late payment fee was neither to punish late payment by Mr Paciocco nor to deter him from paying late can be seen by reflecting on the circumstance, noted by Allsop CJ in the Full Court, that the appellants "chose to run their affairs by risking the fees". There was no suggestion at all by the appellants that the exercise of that choice was forced on them by any circumstance beyond their control. Indeed, it was a choice from which Mr Paciocco could expect to derive some benefit if he was prepared, as he evidently was, to accept the risk that ANZ might terminate his accounts if it did not wish to retain his business. By choosing to incur the fees, Mr Paciocco made a rational decision to deploy his available funds to meet other claims on his resources. The rationality of that choice suggests that the amount of the fee was relatively modest, in that it was not of sufficient magnitude as to make the choice inconvenient for him as a matter of business.
Alternatively, if Mr Paciocco actually had insufficient funds available to meet his payment obligations to ANZ, his choice to pay the bank late meant that he avoided the transaction costs, and the inconvenience (and probably higher interest rates), which he would have incurred had he chosen to arrange an alternative source of finance to enable him to make timely payment of the amount owing on the credit card account. There was no suggestion that Mr Paciocco was, for any reason, unlikely to be able to make such arrangements had it been in his own interests to do so.
On either of these two scenarios, there is no reason to regard Mr Paciocco's choice to incur the fee as other than a rational economic choice on his part. A voluntary and self‑interested choice of this kind is the opposite of the rational response which one might expect to be generated by a penal provision, given that the characteristic purpose of a penalty is to deter non‑compliance.
Given the importance of the values of commercial certainty and freedom of contract in the law, the courts will not lightly invalidate a contractual provision for an agreed payment on the ground that it has the character of a punishment. The existence of legislation such as that invoked to support the statutory claims made by the appellants means that it cannot be said that "an untrammelled 'freedom of contract' provide[s] a universal legal value". But in the application of common law rules, the maintenance of freedom of contract is of abiding importance, subject, of course, to statute. Thus, in AMEV‑UDC Finance Ltd v Austin, Mason and Wilson JJ said:
"The courts should not … be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract."
Only in cases where gross disproportion is such as to point to a predominant punitive purpose have agreed payments payable on breach of contract been struck down as penalties. Thus, for example, where that purpose is not discernible because the evaluation and assessment of the loss covered by the agreed payment is "very expensive and very difficult … to calculate precisely", the penalty rule has been held to have no application. It may be that other laws concerned with the unfair or unreasonable use of superior bargaining power will affect the validity of the provision; but, subject to such laws, the penalty rule is not engaged by a provision which achieves a profit for the promisee at the expense of the promisor. That is because, if the provision is not distinctly punitive in its character, the penalty rule does not operate to displace the parties' freedom to settle for themselves the contractual allocation of benefits and burdens and the rights and liabilities following a breach of contract.
The leading case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, upon which the appellants principally relied, was itself a case where a clause providing for an agreed payment on any breach was upheld. Dunlop does not encourage invalidating provisions the purpose of which can objectively be seen to be the protection of the legitimate interests of one contracting party against default by the other. Nor does Dunlop suggest a narrow view of what interests may legitimately be protected by a provision for an agreed payment. It is certainly inconsistent with the notion that a contracting party's legitimate interests go no further than the performance of the principal terms of the contract.
Finally by way of overview of the appellants' case, the level of interest charged by a bank, while reflecting market forces, may also be affected by the extent to which other means are deployed to cover the risks of the provision of financial accommodation and reward the bank for taking those risks. In this way, the rate of interest demanded of each customer might be expected, other things being equal, to be lower because an enforceable promise is taken from each customer to pay a late payment fee. Such a fee serves to reduce the overall risk assumed by the bank in providing the card facility to its mass of customers and to ensure the level of profitability acceptable to the bank's shareholders. The appellants' claim involves the disturbing irony that, if the challenge to the validity of the late payment fee were to succeed, it could be expected to have the consequence that the cost of financial accommodation to all customers, including those who honour their contractual engagements, will be increased in order to maintain ANZ's revenue streams at a level unaffected by the proscription of the late payment fee. ANZ could be expected to seek to ensure that its revenue streams are maintained; and its evident market power is such that there is no reason to doubt that it would succeed, at least to a large extent, in achieving that end. It was accepted that Mr Paciocco would not have received better terms from ANZ's competitors in the market. This state of affairs is consistent with the oligopolistic character of the market.
Accordingly, if the late payment fees (which were relatively uniform among ANZ and its competitors) are unenforceable, interest rates or other charges could be expected to rise at the expense of those customers who adhere to their contractual engagements. That might not be thought to be a good thing. But however that may be, the mere prospect of such a consequence illustrates the danger of pressing the penalty rule into service for a purpose for which it is ill‑adapted.
Background
Mr Paciocco opened the first credit card account in June 2006, with a credit limit of $15,000, which was increased to $18,000 in November 2009. Mr Paciocco opened the second credit card account in July 2009 with a credit limit of $4,000. It will be convenient to refer to Mr Paciocco's two credit card accounts as "the card accounts".
The terms and conditions of the card accounts (set out in various contractual documents identified by the primary judge) provided that an account holder was required to pay a minimum monthly payment plus any other amount immediately due by a certain date shown on the account holder's statement of account. Until December 2009, that date was within 28 days of the end of a statement period. From December 2009, that date was the "due date" on the statement of account. Interest was charged at a rate of 12.24 per cent on the outstanding amount if the full balance of the card account was not paid by the due date shown on the statement of account.
The obligation to pay a minimum monthly amount was the primary payment stipulation in favour of ANZ. Until December 2009, in the event that the minimum monthly payment and any other amount immediately due were not paid within 28 days of the end of the statement period, a late payment fee of $35 was charged to the account holder's account. From December 2009, a late payment fee of $20 was charged to the account holder's account in the event that the minimum monthly payment and any other amount immediately due were not paid by the "due date". Until December 2009, eight late payment fees were charged to the card accounts. From December 2009, 18 late payment fees were charged to the card accounts.
The decision of the primary judge
The primary judge made a number of findings about the circumstances of Mr Paciocco's entry into the contracts for the card accounts. These findings have an important bearing upon both the penalty claims and the statutory claims. First, the terms of the card accounts "were contained in printed forms, which [Mr Paciocco] had no opportunity to negotiate." Secondly, at the time the card accounts were established, other banks charged late payment fees similar to that required by ANZ.
It was common ground that ANZ determined the quantum of the late payment fees and that it did not determine that quantum by reference to a sum that would have been recoverable as unliquidated damages.
The primary judge held that the contractual stipulation for a fee to be charged if the amount shown on the statement of account was not paid by a certain date was collateral to the primary stipulation in favour of ANZ that Mr Paciocco make a minimum monthly payment by a due date. The primary judge concluded that at law and in equity, the collateral stipulation was to be viewed as security for, or in terrorem of, the satisfaction of the primary stipulation. Her Honour stated the test whether such a stipulation was a penalty under the general law as follows:
"[A] stipulation (to pay a sum or other property) will not constitute a penalty at law or in equity unless it is 'extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved'".
Her Honour held that the evidence of Mr Inglis, an expert witness called by ANZ, did not assist in the application of that test because it reflected a "theoretical accounting" exercise. Mr Inglis was instructed to assess the maximum amount of costs that ANZ could conceivably have incurred as a result of late payments. Mr Inglis attempted to assess the cost of collecting the unpaid debt, the cost to ANZ of increasing its provisions for the greater risk of late payment or non‑payment or default in repayment by Mr Paciocco and the opportunity costs associated with the need to meet regulations relating to the bank's capital reserves. The primary judge held that "increase in loss provisions" and "increase in the costs of regulatory capital" were not loss or damage suffered as a result of Mr Paciocco's late payments. This was said to be because those matters were too remote to be compensable as loss or damage caused by the late payment. As her Honour put it:
"provisions and regulatory capital are part of the costs of running a bank in Australia. No increase in them can be directly or indirectly related to any of the late payments by Mr Paciocco. As the [appellants] submitted, there are many cases each year by banks against customers and guarantors where the principal debtor has defaulted. In those cases, the banks seek damages limited to the sums outstanding, enforcement costs and interests. No one has suggested that a bank would be entitled to recover an increase in provisioning or the cost of its regulatory capital."
On the other hand, the appellants' expert, Mr Regan, had been instructed to identify the damage actually suffered by ANZ as a result of the late payments by Mr Paciocco and the amounts needed to restore ANZ to the position it would have been in had the late payments not occurred. The primary judge adopted Mr Regan's methodology and found that, while the actual loss suffered by ANZ as a result of the late payments could not be precisely determined, it was probably no more than $3 per late payment event; and, on any view, considerably less than $35 or $20. On that basis, the primary judge concluded that the late payment fees were extravagant and unconscionable and therefore penalties.
The decision of the Full Court
The principal judgment in the Full Court was written by Allsop CJ, with whom Besanko and Middleton JJ agreed generally in separate judgments.
Allsop CJ held that the primary judge erred in conflating two enquiries: "the anterior enquiry as to whether the provision is penal in character; and the later enquiry as to the remedial consequence of any such characterisation." Allsop CJ said that the two enquiries were separate, and that:
"one looks forward and is referable to the time of entry into the contract and the extent of the legitimate interest of the obligee in the performance of the relevant provision of the contract; the other looks backwards to see what damage has been demonstrated to have been caused by the breach or failure of the relevant provision in order to found some relief for such breach or failure."
Accordingly, identifying the primary judge's error, Allsop CJ said that:
"to the extent that the primary judge is to be taken to have undertaken an ex post enquiry of actual damage as a step in assessing whether the prima facie penal character of the late payment fee was rebutted (as a reading of all the reasons requires) her Honour, in my respectful view, was wrong."
Allsop CJ held that, in assessing whether a stipulation is a penalty, "the correct approach [is] to look at the greatest possible loss on a forward looking basis". As his Honour explained:
"The question as to whether [a stipulation] is penal is to be assessed by reference to the question whether it is extravagant or exorbitant by reference to the obligee's legitimate interest in the performance of the contract assessed by the greatest loss that could conceivably be proved to have followed from a breach or failure to comply."
The Full Court regarded Mr Regan's evidence of the damage actually suffered by ANZ as a result of the late payments by Mr Paciocco as irrelevant to the question whether the late payment fees were extravagant and unconscionable by reference to the greatest loss that could conceivably be proved to have followed from the breach. Allsop CJ said that the enquiry undertaken to answer that question "is not assisted by knowing what the damages from [the late payments] were." Rather, the Full Court regarded Mr Inglis' forward‑looking approach as correct.
The Full Court accepted Mr Inglis' evidence as identifying three categories of cost which might conceivably be incurred as a result of late payment. First, ANZ was required to take up a loss provision on its profit and loss account when customers fail to meet a monthly repayment obligation on a credit card account. Secondly, it was required to hold regulatory capital sufficient to cover unexpected losses: as the risk of non‑recovery of its loan assets increases, as upon the failure of an account holder to make a minimum monthly payment, the amount of regulatory capital that ANZ is required to hold increases. Thirdly, there was the cost of collection activity to recover the amounts due when a customer fails to meet a monthly payment. The Full Court held, contrary to the primary judge, that it was appropriate to take into account the three categories of costs in assessing the extravagance or otherwise of the late payment fees because they were "legitimate business cost[s]" and "part of the costs of running a bank".
It is apparent that the Full Court resolved the difference between the evidence of Mr Inglis and Mr Regan without descending into close consideration of the accuracy of the calculations made by either witness. The primary judge rejected Mr Inglis' estimate as a theoretical calculation unconstrained by the rules which limit the damages recoverable by suit for breach of contract, while the Full Court proceeded on the basis that the exercise performed by Mr Inglis was to be preferred, being the exercise required to indicate the greatest loss that could conceivably be proved to have followed from the breach, an exercise which was none the worse for being "theoretical".
The difference between the Full Court and the primary judge turned on the question whether this theoretical exercise was consistent with the penalty rule's test of the character of a stipulation. The Full Court was not invited to reject Mr Inglis' approach on the basis that his calculations were unreliable. To the extent that the appellants' argument in this Court sought to advance such a contention, it should not be entertained. The Full Court cannot be said to have erred in failing to accept an argument that was not put to it; and, in any event, even if one puts Mr Inglis' calculations to one side, Mr Regan's evidence does not support the conclusion that the late payment fee was a penalty. Mr Regan's evidence proceeds on too narrow a view of the legitimate interests of ANZ protected by the late payment fee. If the expert evidence on either side does not show that the late payment fee was so far out of proportion to the effect upon the legitimate interests associated with the bank's business that its purpose was punitive, then the appellants' case must fail.
For the sake of completeness, it should be noted that Allsop CJ also dealt with the admission by ANZ in its amended defence that:
"ANZ did not determine the quantum of each [of the late payment fees] by reference to a sum that would have been recoverable as unliquidated damages."
Allsop CJ held that an admission that the fee was not, in fact, a pre‑estimate of the sum which might have been recovered as damages for breach did not necessarily mean that the fee in question was a penalty; that determination could only be made in light of all of the "contemporaneous acts and approaches" of the parties to the relevant contract. It may be said immediately that the Full Court was clearly correct in this regard. As was said in Cavendish Square Holding BV v Makdessi by Lord Neuberger of Abbotsbury PSC and Lord Sumption JSC:
"[T]he penal character of a clause depends on its purpose, which is ordinarily an inference from its effect. … [T]his is a question of construction, to which evidence of the commercial background is of course relevant in the ordinary way. But, for the same reason, the answer cannot depend on evidence of actual intention."
To say, as did Lord Dunedin in Dunlop, that the question whether a provision is a penalty is a question of contractual "construction" is to say that the question is one of identifying the legal character of the provision from the effect of its terms in the commercial context in which it is to operate. The characterisation of a stipulation as a "genuine covenanted pre‑estimate of damage" is a legal question which does not depend upon an evidentiary enquiry into the parties' motivation or subjective intention, purpose or calculations. As Deane J observed in O'Dea v Allstates Leasing System (WA) Pty Ltd, a payment stipulation may be characterised as a penalty notwithstanding that the parties "subjectively intended to make a pre‑estimate of damages in the event of breach."
The appellants' submissions as to penalty
The appellants argued that the Full Court erred in assessing the greatest loss that ANZ could conceivably have suffered as a result of the late payments by taking into account heads of loss that would not be compensable at law in an action for damages for breach of contract. In this regard, the appellants contended that the Full Court erred in holding that evidence of the actual damage suffered by ANZ was irrelevant to whether the late payment fees were penalties; and in holding that some of the costs said to have been incurred by ANZ as a result of the late payments were relevant to the assessment of whether the late payment fees were penalties.
As to the first of these contentions, it may be accepted that evidence of the actual costs incurred by ANZ by reason of the late payments was not irrelevant. Mr Regan's evidence may have assisted in making the case that the late payment fees did not reflect a genuine pre‑estimate of damage if the scope of that exercise were confined to the recoupment of the expenditures necessitated by each particular default. But to show what ANZ actually spent on each occasion of default by Mr Paciocco is not to show what damage might conceivably have been suffered to the interests ANZ was entitled to protect.
The second of the appellants' contentions should not be accepted because the view advanced by the appellants of the legitimate interests that ANZ may seek to protect by the late payment fee is too narrow. The acceptance of such a view would broaden the scope of the penalty rule to encompass provisions which are outside its rationale.
The penalty rule: a rule in search of a rationale
The penalty rule is of ancient but somewhat uncertain origin. In Cavendish Square, Lord Neuberger and Lord Sumption, following the view of Professor Simpson, identified the origin of the penalty rule in the "equitable jurisdiction to relieve from defeasible bonds." The concern of equity was that no more should be recovered from the defaulting party than was necessary to ensure that the innocent party's interest in performance was not diminished. On that approach, a provision which was ancillary to or security for the "substance" of the transaction would not be enforced in equity so long as a defaulting party seeking relief was ready, willing and able to perform the substance of that party's obligations. As Lord Macclesfield said in Peachy v Duke of Somerset, equitable relief was founded on "the original intent of the case, where the penalty is designed only to secure money, and the Court gives him all that he expected or desired".
An ancillary or security provision could not be enforced in equity at all to the extent that it went beyond the substance of the transaction. In the 17th and 18th centuries, the courts of common law sought to obviate the need for separate proceedings in Chancery by adopting the penalty rule. As Tindal CJ observed in Smith v Bond, this process was assisted by legislation whose object was to "take away the necessity of applying for relief to a court of equity".
Since the work of Professor Simpson to which Lord Neuberger and Lord Sumption referred in Cavendish Square, Professor Biancalana has traced the common law's engagement with penalty clauses back to the 13th century, noting that the penalty rule originated as an aspect of the jurisdictional tussle between the ecclesiastical courts and the courts of common law. According to Professor Biancalana, the common law courts were, at first, disposed to uphold penalty clauses as lawful, but by the turn of the 14th century had come to regard them as objectionable on the basis that they were a form of usury, which was unacceptable to medieval Christianity. It may also be said that the development of the law reflecting the Church's disapproval of usury was aligned with the economic interests of the dominant political class, the landed aristocracy, who, asset rich but cash poor, were chronically disinclined to keep their contractual engagements to those who had the recurring misfortune to have lent them money.
Some modern statements of the penalty rule are couched in terms of robust commerciality rather than in terms of a concern about usurious charges by lenders or the nice adjustments of equity. In Ringrow Pty Ltd v BP Australia Pty Ltd, this Court, in a unanimous judgment, said:
"The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships. ...
Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged 'extravagant and unconscionable in amount'. It is not enough that it should be lacking in proportion. It must be 'out of all proportion'."
This passage emphasises that the rule against penalties operates as an exception to the primacy otherwise accorded to considerations of certainty and freedom of contract where neither party is under a relevant disability. And the exceptional nature of the rule, in turn, invites close scrutiny of its rationale.
Medieval religious scruples against usury associated with a primitive agrarian economy do not provide a satisfactory basis on which the penalty rule might now be sustained. Nor is the function of the penalty rule adequately explained by the concerns which led courts of equity to make adjustments to ensure that both parties obtained what equity saw as the "substance" of their transaction and no more in cases within its jurisdiction. The Supreme Court of the United Kingdom in Cavendish Square conceived of the penalty rule as serving a purpose which stands apart from its equitable roots. According to Lord Neuberger and Lord Sumption, the rule against penalties operates on grounds other than that the putative penalty clause is regarded as a "matter of substance" as mere security for the performance of a principal obligation. As their Lordships explained:
"Because [clauses which provided for payment of a specified sum in place of common law damages] were a contractual substitute for common law damages, they could not in any meaningful sense be regarded as a mere security for their payment."
In Andrews v Australia and New Zealand Banking Group Ltd, this Court was not concerned with the late payment fee, but with other exception fees which were not charged upon breach by the customer. Given the issues before it, the Court, not surprisingly, stated the penalty rule in terms which reflect the ongoing influence of its equitable origins in cases where the impugned payment is charged otherwise than upon breach of contract, and held that the penalty rule may operate in the absence of a breach of contract. On that point, this Court's decision in Andrews was not followed by the Supreme Court of the United Kingdom in Cavendish Square. But that difference does not matter, either for the resolution of this case, which is a case of breach of contract, or for the identification of the rationale for the operation of the penalty rule in a case of breach of contract. The real objection, as a matter of public policy, to a penalty clause which operates upon breach of contract is that it is no part of the law of contract to allow one party to punish the other for non‑performance. On that point, this Court and the Supreme Court of the United Kingdom are in accord.
Courts of common law have long exercised the power to award exemplary damages to punish a tortfeasor in certain circumstances; but the courts have consistently refused to countenance the enforcement of attempts to impose punishment by contract as a sanction for non‑performance or to threaten such punishment. As Lord Hoffmann said in Co‑operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd:
"the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance."
Earlier, in Dunlop, Lord Parmoor had described a penalty as a "sum inserted as a punishment on the defaulter"; and in Australia in Legione v Hateley, Mason and Deane JJ described a penalty as a punishment for non‑observance of a contractual provision by the imposition of an additional or different liability. That description was approved in the unanimous judgment of this Court in Andrews. Similarly, in Cavendish Square, Lord Neuberger and Lord Sumption said of the observation in Legione by Mason and Deane JJ:
"[I]n so far as it refers to 'punishment' and 'an additional or different liability' as opposed to 'in terrorem' and 'genuine pre‑estimate of loss', this definition seems to us to get closer to the concept of a penalty than any other definition we have seen. The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre‑estimate of loss. These are not natural opposites or mutually exclusive categories."
To similar effect, this Court in Ringrow rejected the suggestion that the impugned provision must be proportional to the legitimate commercial interests of the party relying upon it in order to avoid being characterised as a penalty. It is only where the impugned provision requires a payment upon breach which is out of all proportion to the legitimate commercial interests of the party relying upon it that the punitive character of the provision stands revealed.
"In terrorem"
Courts of equity regarded a collateral provision designed to provide an incentive to perform a principal obligation as objectionable on the ground that its enforcement was unnecessary to give the promisee the benefit of the substance of the transaction. Such a collateral provision might be described as operating "in terrorem", because of its evident tendency to deter the promisor from non‑performance.
In Campbell Discount Co Ltd v Bridge, Lord Radcliffe said in relation to the use of the phrase "in terrorem" as identifying a purpose characteristic of a penalty:
"I do not myself think that it helps to identify a penalty, to describe it as in the nature of a threat 'to be enforced in terrorem' … I do not find that that description adds anything of substance to the idea conveyed by the word 'penalty' itself, and it obscures the fact that penalties may quite readily be undertaken by parties who are not in the least terrorised by the prospect of having to pay them and yet are, as I understand it, entitled to claim the protection of the court when they are called upon to make good their promises."
On the other hand, if one regards the function of the penalty rule as being to preclude contracting parties from imposing punishment for breach of contract, it is not difficult to accept that a clause which has a deterrent effect by virtue of the prospect of punishment with which it confronts a defaulting promisor should be characterised as a penalty. In this sense, it may not be unhelpful to use the phrase "in terrorem".
Dunlop revisited
The preceding discussion of the rationale of the penalty rule affords a contemporary framework for a discussion of Lord Dunedin's statements in Dunlop upon which the appellants' case was based. Lord Dunedin was concerned to offer guidance in drawing the distinction between an agreed payment and a penalty. His Lordship said:
"2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. …
(c) There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage'.
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre‑estimated damage was the true bargain between the parties." (citations omitted)
Four points may be made here in relation to his Lordship's propositions. First, it is to be noted that proposition 4(b) harks back to the classic case of a bond upon condition to secure the payment of a lesser sum by a covenant to pay a greater sum. The more general run of cases, where breach engages an obligation to pay a specified sum, is addressed by Lord Dunedin's proposition 4(a). That this is so may also be seen by reference to the observations of Lord Parmoor in Dunlop. His Lordship said:
"There are two instances in which the Court has interfered when the agreed sum is referable to the breach of a single stipulation. ... The agreed sum, though described in the contract as liquidated damages, is held to be a penalty if it is extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made. ...
...
The second instance in which the Courts have sanctioned interference is in the case of a covenant for a fixed sum, or for a sum definitely ascertainable, and where a larger sum is inserted by arrangement between the parties, payable as liquidated damages in default of payment. Since the damage for the breach of covenant is in such cases by English law capable of exact definition, the substitution of a larger sum as liquidated damages is regarded, not as a pre‑estimate of damage, but as a penalty in the nature of a penal payment."
The late payment fee is not within Lord Parmoor's "second instance" or Lord Dunedin's proposition 4(b). As Allsop CJ noted, "[t]he fee may or may not, in fact, be greater than the sum due; [but] that does not appear on the face of the provision, or from an understanding of the facts." Thus, the late payment fee was not necessarily a demand for payment of a larger sum upon failure to pay a smaller sum. The appellants' attempt to rely upon Lord Dunedin's proposition 4(b) is out of step, not only with the rationale of the penalty rule applicable in cases of breach of contract, but with authority. It is proposition 4(a), not proposition 4(b), on which the appellants' case must depend.
Secondly, as Mason CJ and Wilson J observed in Hungerfords v Walker, "legal and economic thinking about the remoteness of financial and economic loss have developed markedly in recent times." This observation has much force. It was only in that case, decided in 1989, that Australian jurisprudence finally accepted the (now obvious) economic reality that to be kept out of money due is to suffer real economic loss so that damages should be recoverable in tort for loss of the use of money. More recent decisions have recognised the nature of the consequences for a lender of a default by a borrower in a payment obligation, and that these consequences extend beyond the mere fact of non‑payment of the sum due on the due date. In Lordsvale Finance Plc v Bank of Zambia, Colman J observed that:
"the borrower in default is not the same credit risk as the prospective borrower with whom the loan agreement was first negotiated. … [M]oney is more expensive for a less good credit risk than for a good credit risk".
The common law's relatively recent acceptance of the economic reality that risky credit is more expensive credit has been accompanied by an appreciation of the nature of the relationship between the greater financial risk assumed by a bank by reason of late payments by customers and the costs to the bank's revenue stream associated with that increased risk. In short, if the adverse effects of late payment upon the bank's revenue stream are not covered by a late payment fee, those expenses can be expected to be covered by other charges, or by way of higher interest rates, imposed across the class of bank customers who use the same lending facility as the contract breaker. In this regard, in the United States, the Court of Appeals for the Second Circuit in Citibank NA v Nyland (CF8) Ltd, referring to earlier authority in that Court which rejected the assertion that an uplift in interest rates upon default was a penalty, said:
"[D]ebtors might fare worse … if creditors were not allowed to impose variable rates, because creditors would then impose higher rates for the full life of the loan in order to reallocate the risk."
Thirdly, à propos of Lord Dunedin's proposition 4(c), which states a "presumption" (albeit a weak one) that a single lump sum payable on the occurrence of one of several breaches of differing levels of seriousness is a penalty, it may be said that Mr Paciocco's choice to run his affairs by risking the fees affords a practical demonstration that the fixed quantum of the fee was sufficiently modest in amount that it was not apt, in the circumstances of its contemplated operation, to have an effect in terrorem of Mr Paciocco.
It is useful here to refer, by way of analogy, to ParkingEye Ltd v Beavis (Consumers' Association intervening). In that case, the Supreme Court of the United Kingdom upheld the validity of a provision with the effect that the maximum permitted stay in the defendant's shopping centre car park was two hours with free parking during that period, but that £85 would be charged to those who stayed longer, reducible to £50 if paid within 14 days. Lord Neuberger and Lord Sumption held that:
"although [the car park operator] was not liable to suffer loss as a result of overstaying motorists, it had a legitimate interest in charging them which extended beyond the recovery of any loss."
Overstaying motorists reduced the parking spaces available to other customers of the retail outlets in the shopping centre. That created a situation which was apt adversely to affect the goodwill of the business of the operator of the car park by inconveniencing other users of the car park as would‑be customers of the shopping centre. Their Lordships drew the inference that overstayers "must regard the risk of having to pay £85 for overstaying as an acceptable price for the convenience of parking there." In the present case, as noted above, Mr Paciocco freely risked incurring the late payment fee as a matter of his own convenience. It can be inferred that having to pay the fee was, in the commercial context in which the fee was to operate, an acceptable cost of avoiding the expense and inconvenience of meeting his obligations as to timely payment of his account. That such an inference is available as to the operation of the provision in its commercial context is inconsistent with a purpose of punishment for breach.
Fourthly, Lord Dunedin's summary was meant as a guide to the application of the rule. His Lordship's propositions were not intended to be applied as if they were the provisions of a statute. The terms "extravagant" and "unconscionable" in Lord Dunedin's proposition 4(a) are not used in contradistinction to reasonable, much less as free‑standing criteria of invalidity. In proposition 4(a), the terms "extravagant" and "unconscionable" function as pointers towards the punitive purpose which imbues the challenged provision with the character of a punishment. And as Lord Neuberger and Lord Sumption said in Cavendish Square, "the real question" is whether the impugned provision "is penal, not whether it is a pre‑estimate of loss."
In Cavendish Square, Lord Neuberger and Lord Sumption accepted that, although there was "a case" for judicial abrogation of the penalty rule on the ground that it is "antiquated, anomalous and unnecessary, especially in the light of the growing importance of statutory regulation", the penalty rule should be retained because it serves the useful purpose of preventing a party from exercising a remedy where "the adverse impact of [the remedy] on the defaulter significantly exceeds any legitimate interest of the innocent party." Lord Neuberger and Lord Sumption considered that the courts can avoid inappropriate application of the penalty rule:
"(i) by [proceeding upon] a realistic appraisal of the substance of contractual provisions operating on breach, and (ii) by taking a more principled approach to the interests that may properly be protected by the terms of the parties' agreement."
In Andrews, this Court summarised the "critical issue" as being "whether the sum agreed was commensurate with the interest protected by the bargain." This Court's discussion in Andrews of the decision in Dunlop focused upon the reasons of Lord Atkinson, who accepted that an agreed payment upon breach should not be unenforceable where, though it "appeared imprecise as a pre‑estimate of damage, it protected the [seller's] interest in preventing undercutting, which would disorganise its trading system". Accordingly, the question to be addressed in order to distinguish a penalty from a provision protective of a legitimate interest is:
"whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract."
ANZ's legitimate interest
It may be accepted immediately that a bank, like any other party to a contract, has no legitimate interest in punishing its customers for their defaults or in threatening them with punishment in order to discipline their behaviour. But a bank has a multi‑faceted interest in the timely performance of its customers' obligations as to payment.
The legitimate interest of ANZ protected by the late payment fee cannot be apprehended without an understanding of the commercial context in which that interest requires protection. It is an awkward irony of the appellants' case that, in a class action representing many claimants unified in their assertion that this aspect of the contract of adhesion made by each of them with the bank is unenforceable as a penalty, the appellants' focus was upon the individual contract between Mr Paciocco and ANZ.
Lord Dunedin in Dunlop recognised that the supposedly penal character of the operation of a contractual term must be understood by reference to the "inherent circumstances" in which it is to operate. In the present case, those circumstances include the fact that ANZ is a bank engaged in providing financial accommodation by way of bank card facilities to many customers on standard terms. The agreement, common to each customer, to pay the late payment fee required by ANZ was an aspect of ANZ's business which enabled the bank to provide accommodation to each customer. The fixing of risk and reward on each side of each transaction reflected the circumstance that it was one of many transactions and that the very multiplicity of these transactions was a factor bearing upon the pricing of each facility to each of many customers. The circumstance that the value of an increase in credit risk may be difficult to assess is a consideration which tends against an affirmative conclusion that the stipulation is to be characterised as a punishment. That consideration gains added force where the creditor is a bank which, as such, is exposed to the risk that many borrowers may default at one time in circumstances unforeseen at the time of the original arrangements.
One aspect of ANZ's interest is obvious as an ordinary aspect of the business of a bank. Because of the relationship between the financial risks assumed by a lender and the cost of the facility to customers, the economic effect of provisions calculated to secure the protection of the bank by a late payment clause cannot be viewed in isolation from other elements of the cost of the facility to borrowers, such as interest.
The Supreme Court of the United States in Smiley v Citibank (South Dakota) NA held that late payment fees charged by a bank on its credit card accounts were not unenforceable penalties. The case turned upon the Court's acceptance of the bank's argument that the late payment fees could be characterised as "interest" which the bank was permitted to charge under what the Court regarded as an ambiguous provision of the National Bank Act of 1864. The Court held that it was reasonable to interpret the statutory term "interest" as including:
"any payment compensating a creditor … for an extension of credit … or any default or breach by a borrower of a condition upon which credit was extended. It includes, among other things, the following fees connected with credit extension or availability: numerical periodic rates, late fees, not sufficient funds … fees, overlimit fees, annual fees, cash advance fees, and membership fees."
The Court held that it was:
"perfectly possible to draw a line … between (1) 'payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower of a condition upon which credit was extended,' and (2) all other payments. To be sure, in the broadest sense all payments connected in any way with the loan - including reimbursement of the lender's costs in processing the application, insuring the loan, and appraising the collateral - can be regarded as 'compensating [the] creditor for [the] extension of credit.' But it seems to us quite possible and rational to distinguish … between those charges that are specifically assigned to such expenses and those that are assessed for simply making the loan, or for the borrower's default."
Underpinning the Supreme Court's liberal construction of the statute regulating bank lending is an appreciation that a late payment fee is part of the compensation for the risk assumed by the bank in making the facility available to the customer; "compensation" in this discourse being used, not in the sense of making good a loss, but in the sense of reward for risk. Maintaining or enhancing that reward is part of the legitimate business of a bank.
Another legitimate interest which is an ordinary aspect of the business of a bank is the freedom the bank obtains, by timely repayment by its customers, to pursue more profitably its business of lending to its customers than would be the case if it is constrained to take into account the effect of defaulting customers upon its revenues. This interest is not limited to the loss of the opportunity to profit by re‑investing funds paid late. If a bank's customers comprised only borrowers who paid on time in accordance with their contractual arrangements, the bank's freedom from the risks associated with late payment would enable it to maximise its revenues by reducing the cost of its facilities to all its customers in order to secure more customers and hence higher revenues. Some lenders may seek to improve their profits by deliberately soliciting the business of chronic defaulters, but it would be distinctly naïve to think that those borrowers would not be required to pay for a less attractive credit rating by higher interest rates.
Accordingly, it is worth reiterating that even if one were to put the evidence of Mr Inglis to one side, the evidence of Mr Regan would not support the conclusion that the late payment fee was punitive in character. Mr Regan's evidence was not apt to demonstrate the gross disproportion required to establish the punitive character of the late payment fee because it did not address the full range of ANZ's legitimate interests protected by the late payment fee. Further, for reasons now to be discussed, the primary judge erred in treating characterisation of the late payment fee as turning upon a comparison between the quantum of the fee and the amount that might have been recovered in an action for damages.
Pre‑estimate of damage or recoverable damages
The appellants argued that the Full Court misapplied Lord Dunedin's proposition 4(a). They noted that the expression used in Dunlop - "the greatest loss that could conceivably be proved to have followed from the breach" - speaks only of damages recoverable by action in consequence of a breach of contract and not of loss which is too remote to be compensated by an award of damages. The appellants' submission was that it is not the case that any set of circumstances resulting in loss that might be hypothesised can be taken into account in assessing whether a clause is penal.
The appellants submitted that the primary judge was correct to reject ANZ's submission that "increase in loss provisions" and "increase in the cost of regulatory capital" were losses incurred as a result of late payment and to conclude that these matters were too remote to form part of compensable damage. The appellants also argued that, to the extent that the Full Court held that collection costs exceeding the amount of the late payment fee could be taken into account, that finding should be set aside.
It is not the case that authoritative formulations of the test of punitive extravagance are invariably stated in terms of a comparison between the impugned payment and what might be recovered by litigation. This Court said in Ringrow:
"The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract‑breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach."
It will be noted that this formulation of the rule does not depend upon a demonstration of the quantum of damages which would be recovered in an action. To speak of damage, as opposed to damages, is to speak of the loss caused by the breach, not the remedy which might be awarded by a court. To speak of a "genuine pre‑estimate of the damage" is to speak of the damage liable to be suffered by those parts of the bank's legitimate business interest that it is trying to protect. A genuine pre‑estimate of that damage may encompass items of loss actually suffered, albeit too remote to be compensable by way of damages by virtue of the rules in Hadley v Baxendale. An agreement for the recovery of such loss is consistent with the absence of a punitive purpose. For a party to stipulate for a more ample remedy than is available at law is not to visit a punishment on the other party.
An agreed provision avoids the uncertainty and expense of litigation. The benefit of such a provision to both parties and to the legal system is obvious. Even in medieval times, the authority we know as Bracton considered that a clause providing for the payment of an agreed sum upon a breach of contract served the legitimate purpose of removing the uncertainty and expense of litigation involved in establishing the quantum of damages recoverable for a breach of contract.
In summary as to appeal M220 of 2015, the appellants' claim that the late payment fees were penalties fails. I turn to consider the statutory claims.
The statutory claims
Three statutory regimes were invoked by the appellants:
(a) a regime which prohibited "unconscionable conduct" in connection with the supply of financial services, operated concurrently by s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act") and s 8 of the Fair Trading Act 1999 (Vic) ("the FTA"), until the latter was replaced by the Australian Consumer Law ("the ACL");
(b) a regime which regulated the provision of credit and allowed for the reopening of "unjust transactions" (the term "unjust" including "unconscionable, harsh or oppressive") under s 76 of the National Credit Code, in force pursuant to the National Consumer Credit Protection Act 2009 (Cth); and
(c) a regime which rendered void "unfair" contractual terms pursuant to Pt 2B of the FTA and ss 12BF and 12BG of the ASIC Act.
Each of the regimes did not apply throughout the whole of the period to which the statutory claims relate, and the regimes were subject to amendment. However, nothing turns on that fact.
Some general observations by way of overview of the statutory claims will aid an understanding of what follows. First, as the primary judge noted, there was no allegation of any dishonesty or abuse of market power by ANZ, or that ANZ concealed the requirements of the late payment fee from Mr Paciocco, or that he was unable to understand the effect of the contracts in that regard, or that he entered into the contracts as the result of the exercise of financial pressure placed upon him by ANZ. The primary judge also noted that Mr Paciocco was under no obligation to use the card accounts and was free to terminate them should he so choose. Importantly, the primary judge observed that:
"Mr Paciocco did not contend that there was anything unusual or exceptional in the manner in which the card accounts were entered into or in their terms. On the contrary, it was common ground that similar terms were offered by ANZ's competitors." (citations omitted)
Given that the appellants did not suggest that ANZ dealt with Mr Paciocco in any way less favourably than he would have been treated by any other supplier of credit card facilities, and in the absence of an allegation that the market in which this state of affairs prevailed was itself brought about by unlawful conduct, or an allegation that Mr Paciocco was driven to agree to ANZ's terms by financial pressures of which the bank was aware, the appellants' statutory claims take on an air of unreality.
The appellants seek to stigmatise as unconscionable or unfair or unjust an activity in the marketplace in which nothing materially distinguishes the situation and conduct of either Mr Paciocco or ANZ from any of the other participants in that activity. It may be said that ANZ and its competitors have dealt "unconscionably" or "unfairly" or "unjustly" with all of their customers in that, in a careless or partisan use of language, all banks may be said to do so as a matter of course. But to argue that conduct by one participant in a market, which is an unremarkable example of conduct engaged in by all participants in that market, is unconscionable, or unjust or unfair, in breach of the statutory norms, without any suggestion that the market itself is unlawfully skewed, is something of a stretch. And the argument falls distinctly short of the mark in this particular case, given that there was no suggestion that Mr Paciocco was driven to seek the card accounts as a result of "pressure put upon [him] by [his] poverty", or that Mr Paciocco incurred the late payment fees as a result of financial difficulties which prevented him from making timely payment in accordance with his contractual obligations. As has been seen, Mr Paciocco chose to pay late, and thereby incur the late payment fee, as a matter of his own convenience.
In these circumstances, it would have been surprising if either Court below had held that ANZ took advantage of Mr Paciocco in a way which would meet the statutory descriptions of "unconscionable conduct", "unjust transactions" or "unfair terms".
Unconscionable conduct
Allsop CJ rejected the "gravamen" of the appellants' attack on ANZ's conduct, which depended upon what was said to be the "huge disparity between the level of the fees and the costs [ANZ] sustained by the exception fee events." His Honour concluded that:
"In all the circumstances, in particular, the lack of any proven predation on the weak or poor, the lack of real vulnerability requiring protection, the lack of financial or personal compulsion or pressure to enter or maintain accounts, the clarity of disclosure, the lack of secrecy, trickery or dishonesty, and the ability of people to avoid the fees or terminate the accounts, I do not consider the conduct of ANZ to have been unconscionable. To do so would require the court to be a price regulator in banking business in connection with otherwise honestly carried on business in which high fees were extracted from customers."
The appellants submitted that s 12CB of the ASIC Act was introduced to address "the general disparity of bargaining power" between financial services providers and consumers. That submission may be accepted as far as it goes; but it does not go very far. While a disparity in bargaining power may be necessary to attract the operation of the provision, the mere existence of the disparity is not sufficient to do so. The existence of a disparity in bargaining power, which is an all‑pervading feature of a capitalist economy, does not establish that the party which enjoys the superior power acts unconscionably by exercising it. In this latter regard, s 12CB of the ASIC Act, as in force immediately prior to 1 January 2012, relevantly provided:
"(1) A person must not, in trade or commerce, in connection with the supply or possible supply of financial services to a person, engage in conduct that is, in all the circumstances, unconscionable.
(2) Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of services to a person (the consumer), the court may have regard to:
(a) the relative strengths of the bargaining positions of the supplier and the consumer; and
(b) whether, as a result of conduct engaged in by the supplier, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and
(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the services; and
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the services; and
(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent services from a person other than the supplier.
...
(4) For the purpose of determining whether a person has contravened subsection (1) in connection with the supply or possible supply of financial services to another person:
(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section."
The appellants' argument focused upon s 12CB(2)(a) and (b) of the ASIC Act without regard to the other provisions which may be relevant. The argument that the Full Court should have concluded that the fee was unconscionable on the basis that it was not set at an amount limited to cost recovery only must be rejected because of its erroneously narrow assumption as to the legitimate interests of ANZ. Further, to focus upon the relative strengths of the bargaining positions of Mr Paciocco and ANZ is to ignore the requirement of s 12CB(1) to consider "all the circumstances". Section 12CB(1) does not proscribe the existence of a disparity in bargaining power as opposed to the manner of its exercise. And, as has been noted, nothing in the manner of ANZ's exercise of its superior bargaining strength fell foul of the other provisions of s 12CB(2).
Unjust transactions and unfair contract terms
The appellants argued that the late payment fees were unjust under s 76 of the National Credit Code. Section 76(1) of the National Credit Code provides:
"The court may, if satisfied on the application of a debtor, mortgagor or guarantor that, in the circumstances relating to the relevant credit contract, mortgage or guarantee at the time it was entered into or changed (whether or not by agreement), the contract, mortgage or guarantee or change was unjust, reopen the transaction that gave rise to the contract, mortgage or guarantee or change."
Section 76(2) provides that, in determining whether a term is unjust, the court must have regard to the public interest and to all the circumstances of the case. Section 76(2)(a) to (p) also provide that the court may have regard to a range of matters, including "any … relevant factor", in making that determination. A close reading of s 76(2) of the National Credit Code reveals significant overlap between that sub‑section and s 12CB(2) of the ASIC Act.
In such circumstances, the appellants' focus upon s 76(2)(e) of the National Credit Code was once again too narrow. Section 76(2)(e) provides that the court may have regard to:
"whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee".
As has already been noted, reliance on this sub‑section reflected the appellants' misapprehension of the legitimate interests that ANZ was entitled to protect.
The appellants also argued that the late payment fees were unfair contract terms within the meaning of ss 32W and 32X of the FTA and s 12BG of the ASIC Act. At the relevant time, s 32W of the FTA provided:
"A term in a consumer contract is to be regarded as unfair if, in all the circumstances, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer."
Section 32X of the FTA set out matters which could be taken into account by the court in determining whether a term of a consumer contract was unfair.
The Full Court held that the late payment fees were neither "unjust" nor "unfair". Having already considered all of the circumstances at the time of Mr Paciocco's entry into the credit card contracts, and the effects of the terms of those contracts, the reasons of the Full Court in this respect were unsurprisingly brief. Allsop CJ said:
"Considering the terms of s 32W of the [FTA], at the time of entry into the arrangements, did the provisions in question cause an imbalance in the parties' rights and obligations to the detriment of the consumer? It is difficult to see why this would be so by reference to the matters in s 32X or otherwise. The provisions were clearly disclosed. In most instances, the fees could be avoided. No trickery took place. Although set by the bank in contracts of adhesion, the contracts were terminable at the will of the customer; and the fee could be avoided by the conduct of the customer that was not unreasonable - keeping to her or his contractual limits."
His Honour concluded that:
"Neither the relevant provisions of the [FTA] nor of the National Credit Code exhibit the intention that the Court should assume the role of a price regulator. It is unjustness or unfairness of transactions or terms that is required to be demonstrated. Price may affect such an evaluation but it does not determine it."
That conclusion is correct: to conclude otherwise would be to give the consideration of price a decisive effect which it is not given by the legislation.
In this Court, the appellants argued that the late payment fees caused a significant imbalance in the parties' rights and obligations to the detriment of the customer. The requirement of s 32W that the term be "to the detriment of the consumer" was not satisfied because the late payment fee was not a detriment to Mr Paciocco. As has been seen, it was an expense which he chose to risk as more convenient to him than paying his account on time.
Conclusion
Both appeals should be dismissed with costs.