A recent decision of the Full Federal Court has brought attention back onto the issue of whether imposition of fees in commercial agreements could be unenforceable on the basis that they are ‘penalties’.
The decision comes at a time when the building and construction industry continues to ponder the implications of the earlier High Court decision of Andrews where it was held that the penalties at law do not necessarily arise only from a breach of contract. Andrews is often argued as a means of subverting time-bar provisions in construction contracts, however, there is controversy over its application in that context.
In 2013, Paciocco brought an action against ANZ claiming that the penalties charged by ANZ for late payments on consumer credit cards (late fees), as well as honour, dishonour and non-payment fees (other fees) were extravagant and did not reflect the actual loss suffered by the bank as a result of the respective consumer breaches.
Justice Gordon of the Federal Court accepted Paciocco’s argument in respect of the late fees, finding that when compared to the resulting loss suffered by the bank, they were penalties and therefore unenforceable. In contrast, her Honour also found that the other fees were not penalties, as they reflected the additional cost of services borne by the bank.
ANZ appealed this decision to the Full Federal Court, arguing that the calculation of the late fees was accurate based upon a methodology of prospective loss to be experienced at the point of breach. It claimed that Justice Gordon erred in considering the actual loss retrospectively and with the benefit of hindsight. Paciocco also appealed the finding that the other fees were a justified cost as ANZ was required to provide additional services.
The Full Federal Court stated that the punitive character of the fees being imposed must be contrasted with the non-punitive conception of a genuine pre-estimate of loss. The Court took the view that the question is whether the term in the agreement, as a matter of construction, provides for payment of a sum upon breach and imposes upon the obliger, an additional detriment to the benefit of the obliger, or alternatively some further contractual right or accommodation which is extravagant, exorbitant or unconscionable in the circumstances.
The Full Federal Court agreed with the argument put forward by ANZ, finding that the late fees needed to be compared against the greatest prospective loss that could conceivably flow from the breach, assessed at the time of entering into the contact.
In these circumstances, the late fees were not punitive. The Court also recognised that Justice Gordon took the correct approach in relation to the other fees, that is, that a broader category of costs (including indirect costs) can be taken into account when estimating loss resulting from a breach.
The impact on building and construction industry contracts is limited as Paciocco takes us no further than Andrews in relation to the extent of the Penalties Doctrine. Paciocco reinforces the requirement that liquidated damages must be a genuine pre-estimate of the extent of loss, made at the time of contract formation. Leave to appeal Paciocco to the High Court may be sought, leaving this space an important one to watch.