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Recent decisions of the High Court and the Federal Court have caused a significant upset in the banking industry and is a big win for bank customers. The consequences of these decisions extend beyond banking to all suppliers of goods and services who try to claim a “penalty” for late payment of invoices or other charges and fees that cannot be properly characterised as a reasonable estimate of the actual loss or damage suffered due to the late payment or other conduct by the debtor.
The decision of the High Court in Andrews v Australia & New Zealand Banking Group Ltd  HCA 30 introduces a new interpretation of the penalties doctrine that applies to fees designed to secure performance of contractual obligations, even if the fee is not triggered by a breach of contract. This decision is significant, as it means that fees for the purpose of securing compliance with contractual obligations will only be enforceable if they represent a genuine estimate of the loss resulting from a breach of contract or non-performance of a contractual obligation.
As a consequence of the decision in Andrews, fees in commercial contracts should only be imposed for additional services or accommodations that have been provided, so as to avoid a determination that the fee is an unenforceable penalty.
The very recent decision of the Federal Court in Paciocco v Australia & New Zealand Banking Group Ltd  FCA 35 in February 2014 applies the new interpretation of the penalties doctrine. In this case, Justice Gordon followed the precedent in Andrews and found that credit card late payment fees being charged by Australia & New Zealand Banking Group Ltd were “penalties” and were therefore unenforceable.
The High Court in Andrews focused on the enforceability of various fees and charges imposed by Australia & New Zealand Banking Group Ltd (ANZ). The action was commenced in 2010 by a number of ANZ's customers. Part of the claim by the customers alleged that the fees charged by ANZ were void and unenforceable as penalties.
The High Court unanimously ruled that a fee is a penalty if the main purpose of the fee is to secure performance of contractual obligations. If the fee is actually a charge for further services or accommodations, then it will not be a penalty. The fee must be a genuine estimate of the loss that will be suffered by the party affected by the breach or non-performance; if the fee is out of proportion or unconscionable and extravagant when compared to the loss likely to be suffered, it will be deemed to be a penalty.
The decision in Andrews is significant, because it extends the penalties doctrine to apply to situations where a breach has not occurred. There are two approaches that businesses can use to ensure that agreed-upon fees are not treated as penalties following Andrews:
With the new interpretation of the doctrine against penalties now in place, it is important to ensure that any fees imposed under commercial contracts can be described as being for some additional service or accommodation, as opposed to securing performance of contractual obligations.
An example of an approved fee comes from a previous decision from the NSW Court of Appeal in Metro-Goldwyn-Mayer v Greenham  2 NSWLR 717, which was approved by the High Court in Andrews. That decision focused on an issue regarding a contract for the hiring of films to exhibitors for public showing. The contract only provided for one showing of each film and contained a provision that a fee was payable for each additional screening. It was held that the fee was not a penalty, instead being a payment for an additional accommodation that had been provided to the exhibitors. In Andrews, the High Court found that certain fees imposed by ANZ could also be characterised in this way. For example, over limit fees were found to be charges for an additional service in the form of an overdraft facility.
The new interpretation of the doctrine against penalties will prevent parties to contracts from having punitive fees imposed upon them where the contract is breached or an obligation is not performed. This means that contracting parties are unable to agree to a fee-based punishment for breach or non-performance. This will apply to any contract including conveyancing, supply of goods or services or loan contracts.
On 5 February 2014, the Federal Court handed down its decision in Paciocco. In this case, Justice Gordon was asked to consider whether some of ANZ's fees (including credit card late payment fees, over limit fees and dishonour fees) were penalties or otherwise unconscionable.
The Court determined that ANZ's credit card late payment fees were penalties both at common law and equity and were therefore unenforceable. Justice Gordon found that these fees were charged either upon breach of the obligation to pay a minimum amount by a certain date, or to secure performance of that obligation. The amount charged was disproportionate when compared to the loss suffered by ANZ.
Justice Gordon found that other fees charged by ANZ, including dishonour fees and non-payment fees, were not penalties and were enforceable. These fees were properly characterised as charges for additional services or accommodations.
Paciocco provides the courts with guidance on how to apply Andrews when dealing with fees in commercial contracts.