High Court finds that credit card late payment fees do not constitute unenforceable penalties

By 28/07/2016Contract
Credit card late payment fees

A win for ANZ (and other banks in similar litigation) but a decision that has increased the scope for disputation concerning alleged penalties.  The case is Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28.


Mr Paciocco was charged a “late payment fee” on his ANZ credit card accounts when the minimum monthly payment, plus any “amount due immediately” was not paid within a specified time.

The late payment fee was initially $35, later reduced to $20.

The late payment fees were payable upon breach of the contract governing the credit card facility. ANZ charged 26 late payment fees.

Mr Paciocco claimed that the late payment fees were unenforceable as penalties at common law, because the purpose of such fees was to punish him for making late payment, or to deter him from choosing not to perform his contractual payment obligation. Mr Paciocco sought recovery of the late payment fees as they exceeded the actual losses incurred by ANZ by reason of late payment.

Mr Paciocco gave evidence that the actual losses incurred by ANZ ranged from $5.50 to 50c, with the average being $2.60. ANZ gave evidence that the average collection costs (including actual costs and a proportion of common and fixed costs) attributable to late payment were in excess of $5 per event.

ANZ admitted that the late payment fee was not a genuine pre-estimate of the damage it may suffer in the event the minimum monthly payment was not made on time. In addition ANZ did not explain how the late payment fee had been arrived at.

However ANZ contended that it had an interest in timely payment, and that late payment affected its interests in 3 ways: through direct operational costs, and through (indirect) loss provisioning and increases in regulatory capital costs.

Loss provisioning related to accounting entries in ANZ’s profit and loss account which recognised reductions in the value of its customers’ accounts attributable to the risk of default. Such provisioning costs directly affected recorded profit.  ANZ gave evidence that the average contribution of a late payment to provisioning costs was $23 for Mr Paciocco’s account with a higher credit limit, and $27 for his account with a lower credit limit.

Regulatory capital costs were the ongoing costs ANZ incurred in holding capital it was required to hold by applicable prudential standards, as a buffer against unexpected loss. ANZ gave evidence that the average contribution of a late payment to regulatory capital costs was $23 for Mr Paciocco’s account with a higher credit limit, and $5 for his account with a lower credit limit.

Thus ANZ’s evidence was that its average costs for each late payment event were in excess of $50 for the account with a higher credit limit, and $35 for the account with a lower credit limit.

The trial judge held that the late payment fees were penalties because their amount exceeded the direct operational losses that ANZ had suffered. The trial judge did not take into account indirect costs allegedly incurred by ANZ.

The Full Court of the Federal Court allowed an appeal by ANZ, and held that the late payment fees were not penalties taking into account the legitimate interests of ANZ in the performance of the terms for payment. Further that the trial judge should not have rejected evidence given by ANZ as to the indirect costs to its financial interests associated with the late payments.

The result in the High Court

By a majority of 4 to 1 (Nettle J dissenting) the High Court dismissed Mr Paciocco’s appeal.

In short the late payment fees were not penalties because the operational, provisioning and regulatory costs incurred by ANZ were not grossly disproportionate to the late payment fees.

The High Court held that in assessing whether the late payment fees were penalties, the question was not only what ANZ could recover by way of unliquidated damages in an action for breach of contract (ie. operational costs), but also what other costs were incurred relevant to ANZ’s commercial interests (that could not otherwise be recovered at the suit of ANZ), including provisioning costs and regulatory costs.

French CJ

French CJ agreed that Mr Paciocco’s appeal should be dismissed for the reasons given by Keane J (at [2]).

Kiefel J

Kiefel J identified the relevant question as “whether the late payment fee is out of all proportion to the ANZ’s interest in receiving [timely] payment”, and held that such interests may be of a “business or financial nature.” (at [29], [69])

Gageler J

Gageler J identified the relevant question as whether the only purpose of the late payment stipulation was to punish, or whether it served the purpose of protecting ANZ’s interests in ensuring that minimum payments were made on time (at [158], [166], [167]).


  • the protection afforded by a stipulation to pay a specified sum of money upon a breach of contract might extend to the interests of an innocent party which are intangible and unquantifiable (at [161]);
  • the relevant indicator of punishment lies in the negative incentive to perform being so far out of proportion with the positive interest in performance that the negative incentive amounts to deterrence by threat of punishment (at [164]).

Keane J

Keane J (with whose reasons French CJ agreed) held that to establish that the late payment fees were penalties Mr Paciocco was required to establish a predominant punitive purpose. In particular by establishing that the agreed payments were grossly disproportionate in comparison with the full range of ANZ’s legitimate interests protected by that fee (at [221], [279]).

Those interests were not confined to the reimbursement of ANZ’s expenses occasioned directly by late payments (at [216]). The late payment fee was readily characterised by the purpose of ensuring that ANZ’s revenues were maintained at the level of profitability required by its shareholders (at [216], [278]).  Further, ANZ had a multi-faceted interest in the timely performance of its customers’ payment obligations (at [271]).

A genuine pre-estimate of damage may encompass actual loss suffered, albeit too remote to be compensable by way of damages under the rule in Hadley v Baxendale (1854) 9 Ex 341 [156 ER 145]):

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.” (at [283])

Keane J also noted that Mr Paciocco’s rational, voluntary and self-interested decision to incur the late payment fees was the opposite of the kind of rational response one might expect in response to a penal provision (at [217]-[219], [267]).

Nettle J (in dissent)

Nettle J held that ANZ’s only legitimate interest was the repayment of the credit card facility at the agreed interest rate plus adequate recoupment of costs actually incurred by the customer’s non-adherence to the terms of the facility (at [323]).

There was no evidence or other indication of any interest to be protected by timely payment apart from the avoidance of costs (at [324]). ANZ did not establish that it had actually incurred loss in relation to provisioning and regulatory costs.  The evidence given in support of those costs only constituted projections of the greatest amount of costs that could conceivably have been, but which were not in fact incurred (at [326]).

The law of penalties is concerned with whether an obligation to make a payment on breach of a contractual or other obligation is of an amount which is grossly disproportionate to the foreseeable consequences of the breach (at [330]). In this case:

to accept that the Bank was entitled to impose a late payment fee wholly disproportionate to the greatest loss that could conceivably be proved would be in effect to abandon a large part of the existing law relating to penalties” (at [334]).

Nettle J held that the trial judge was correct to consider whether the late payment fee was out of all proportion to the amount recoverable as unliquidated damages (at [343]).


The High Court’s decision has widened the field of potential disputation regarding alleged penalties.

However prospective plaintiffs may now be less likely to commence litigation, given that a defendant can now rely not only on its actual costs, but on costs related to securing its legitimate interests (including business and financial interests, and other interests which may be intangible and unquantifiable).  This is so even if such costs would not be recoverable as unliquidated damages in an action for breach of contract, provided the alleged penalty is not out of all proportion to such costs.