Paciocco v Australia and New Zealand Banking Group Ltd

HIGH COURT OF AUSTRALIA

FRENCH CJ,
KIEFEL, GAGELER, KEANE AND NETTLE JJ

LUCIO ROBERT PACIOCCO & ANOR  APPELLANTS

AND

AUSTRALIA AND NEW ZEALAND BANKING
GROUP LIMITED  RESPONDENT

Paciocco v Australia and New Zealand Banking Group Limited

[2016] HCA 28

27 July 2016

M219/2015 & M220/2015

ORDER

Matter No M219/2015

Appeal dismissed with costs.

Matter No M220/2015

Appeal dismissed with costs.

On appeal from the Federal Court of Australia

Representation

D F Jackson QC with M B J Lee SC and W A D Edwards for the appellants (instructed by Maurice Blackburn)

A C Archibald QC and M H O'Bryan QC with C van Proctor for the respondent (instructed by Ashurst Australia)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Paciocco v Australia and New Zealand Banking Group Limited

Banker and customer – Rule against penalties – Consumer credit card accounts – Late payment fees – Where late payment fees were $35 and $20 – Where costs actually incurred by respondent upon failure by first appellant to make timeous payment of amounts owing were approximately $3 – Where late payment fees not genuine pre‑estimates of damage – Where respondent alleged it could conceivably have incurred loss provision costs, collection costs and regulatory capital costs as a result of first appellant's default – Whether late payment fees penalties – Whether late payment fees extravagant, exorbitant or unconscionable – Whether late payment fees out of all proportion to interests damaged – Whether respondent's legitimate interests confined to reimbursement of expenses directly occasioned by first appellant's default.

Contract – Rule against penalties – Essential characteristics of a penalty – Whether sum disproportionate to actual loss suffered amounts to a penalty – Whether sum incorporating loss too remote to be recoverable in action for damages amounts to a penalty – Relevance of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.

Trade practices – Consumer protection – Late payment fees – Unconscionable conduct – Unjust transactions – Unfair terms – Whether late payment fees unconscionable, unjust or unfair.

Precedent – Apex courts of foreign jurisdictions – Status of unwritten law of United Kingdom in Australia.

Words and phrases – "exorbitant", "extravagant", "genuine pre-estimate", "in terrorem", "late payment fees", "liquidated damages", "out of all proportion", "penalty", "unconscionable", "unconscionable conduct", "unfair terms", "unjust transactions".

Australian Securities and Investments Commission Act 2001 (Cth), ss 12BF, 12BG, 12CB, 12CC.
National Consumer Credit Protection Act 2009 (Cth), Sched 1 s 76.
Fair Trading Act 1999 (Vic), ss 8, 8A, 32W, 32X.

1. FRENCH CJ.   These appeals concern the enforceability of late payment fee provisions in contracts between the first appellant and the respondent bank in relation to consumer credit card accounts.  The terms of the impugned provisions are set out in the reasons for judgment of Nettle J[1].  Broadly speaking they required the cardholder, following receipt of a monthly statement of account, to make the "Minimum Repayment" set out on each statement by the due date shown on it.  A "Late Payment Fee" was to be charged to the credit card account if the minimum monthly payment, plus any "Amount Due Immediately" shown on the statement of account, was not paid by a specified date. 

   [1]At [308]-[311].

2. The first appellant, Lucio Paciocco ("Mr Paciocco"), held consumer credit card and deposit accounts with the respondent, Australia and New Zealand Banking Group Limited ("the Bank").  The second appellant, Speedy Development Group Pty Ltd, is a company controlled by Mr Paciocco.  It held a business deposit account with the Bank.  All of the accounts were charged various fees by the Bank.  The consumer and business deposit accounts were charged honour fees, dishonour fees and non-payment fees.  The consumer credit card accounts held by Mr Paciocco were charged over-limit fees and late payment fees.  Both appellants were applicants in representative proceedings against the Bank under Pt IVA of the Federal Court of Australia Act 1976 (Cth). The appellants alleged that the provisions for the various fees were unenforceable as penalties and, alternatively, that their inclusion contravened various statutory provisions relating to unconscionable conduct[2] and, with respect to Mr Paciocco only, unjust[3] and unfair contract terms[4].  The primary judge, Gordon J, found that the provisions for the late payment fees were penalties at common law and in equity.  It was therefore not necessary for her Honour to deal with the statutory claims regarding the late payment fees.  Her Honour held that none of the other fees constituted a penalty, nor contravened any of the identified statutory provisions[5].  On appeal, the Full Court of the Federal Court held that the late payment fees were not penalties and did not fall within any of the statutory categories of unconscionable conduct, unjustness or unfairness.  The Full Court upheld the primary judge's findings with respect to the other fees[6].  That conclusion is not challenged in these appeals.  These appeals, by grant of special leave from the Full Court's decision, are concerned only with the correctness of that decision in respect of the late payment fees.  The facts relevant to the appeals and the evidence of contending expert witnesses at trial are set out in the judgment of Gageler J and it is unnecessary to repeat them here.  For the reasons given by Kiefel J and, in relation to the statutory claims, for the reasons given by Keane J, I agree that the appeals to this Court should be dismissed.  I will, however, add some comments to that concurrence.

   [2]Australian Securities and Investments Commission Act 2001 (Cth), ss 12CB and 12CC; Fair Trading Act 1999 (Vic), ss 8 and 8A.

   [3]National Credit Code, contained in National Consumer Credit Protection Act 2009 (Cth), Sched 1.

   [4]Fair Trading Act 1999 (Vic), s 32W; Australian Securities and Investments Commission Act 2001 (Cth), s 12BG.

   [5]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249.

   [6]Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199.

3. The question whether various fees charged by the Bank to its credit card customers were unenforceable as penalties was raised in an earlier representative proceeding before Gordon J, sub nom Andrews v Australia and New Zealand Banking Group Ltd.  An application for leave to appeal from an interlocutory decision of Gordon J in those proceedings[7], to the Full Court of the Federal Court, was removed into this Court pursuant to s 40(2) of the Judiciary Act 1903 (Cth). The interlocutory decision responded to separate questions asked by the applicants in that case. They included questions whether honour, dishonour, non-payment and over-limit fees, and the late payment fees in issue in these appeals, were payable on breach of the relevant contract by the customer, or upon the occurrence of events amounting to a default under the contract which the customer had an obligation to avoid, and whether they were capable of being characterised as penalties by reason of either of those facts[8].  The framing of those questions required consideration of whether the unwritten law making penalties unenforceable was limited to cases in which the putative penalty was enlivened by a breach of contract.  The primary judge held that the rule against penalties was limited to penalties arising out of breach of contract, that only the late payment fees were payable upon breach, and that the rule could therefore only be applied to those fees.  In so doing, her Honour properly followed the decision of the Court of Appeal of the Supreme Court of New South Wales in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd[9].

   [7]Andrews v Australia and New Zealand Banking Group Ltd (2011) 211 FCR 53.

   [8]Andrews v Australia and New Zealand Banking Group Ltd (2011) 211 FCR 53 at 140-142.

   [9](2008) 257 ALR 292.

4. This Court, on the removed application for leave to appeal from her Honour's interlocutory decision, granted leave to appeal and allowed the appeal.  The Court held that equitable relief against penalties had not been subsumed into the common law rule and that the rule against penalties was not limited to cases arising out of a breach of contract[10]. 

   [10]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30.

5. Subsequently, the present appellants commenced these proceedings, which were also heard before Gordon J as the primary judge.  In Andrews, the Bank did not seek to appeal against her Honour's finding in her interlocutory decision about how the alleged penalty provision with respect to late payment fees operated[11].  There was no attempt to argue in this Court that the penalty provisions in the consumer credit card accounts to which Mr Paciocco was a party operated any differently[12].  This case thus came to this Court as one involving characterisation of a provision for payment of a fee which was, if enforceable, enlivened upon a breach of contract.  As Gageler J points out, the decision in Andrews and that of the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[13] set out the governing principles so far as they apply to penalties for breach of contract[14]. 

   [11]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 219 [21].

   [12]The primary judge, consistently with her finding in Andrews, rejected the Bank's "formal" submission that the late payment fees were not payable on breach:  Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 278-279 [113]-[114], 291 [180]-[181], 302 [239]. The Full Court rejected the Bank's submission challenging that conclusion: Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at 231-232 [82]-[89] per Allsop CJ, Besanko and Middleton JJ agreeing at 289 [371], 295 [398].

   [13][1915] AC 79.

   [14]At [115].

6. A difference has emerged since the decision in Andrews between the Supreme Court of the United Kingdom and this Court in relation to the scope of the law relating to penalties.  It is not necessary to reflect upon the merits of the different positions as the present appeal on the penalty question falls within essentially undisputed territory.  It is, however, desirable to say something about the fact of divergence between our jurisdictions, which have an historical connection that Australia does not have with any other jurisdiction.

7. In Cavendish Square Holding BV v Makdessi[15], Lord Neuberger of Abbotsbury PSC and Lord Sumption JSC (with whom Lord Carnwath JSC agreed) held that the rule against penalties was confined to cases arising out of contractual breach.  Their disagreement with the scope of the law as stated in Andrews was emphatic, describing the decision as "a radical departure from the previous understanding of the law"[16].  Their Lordships' language echoed that of Menzies J in this Court half a century earlier in Uren v John Fairfax & Sons Pty Ltd[17] when he declared the limitation on recovery of exemplary damages prescribed by Lord Devlin in Rookes v Barnard[18] to be "a radical departure from what has been regarded as established law."  It is not necessary for present purposes to engage with that characterisation of Andrews[19].  Gageler J expresses the view that it was incorrect and based upon a misunderstanding of the scope of what was actually decided in Andrews[20].  In any event, emphatic disagreement between our jurisdictions in relation to the common law and equitable doctrines, while infrequent, is not novel.  The countries of the common law world have a shared heritage which they owe to the unwritten law of the United Kingdom.  That shared heritage offers the undoubted advantage, but does not import the necessity, of development proceeding on similar lines[21].

   [15][2015] 3 WLR 1373; [2016] 2 All ER 519.

   [16][2015] 3 WLR 1373 at 1396 [41]; [2016] 2 All ER 519 at 541.

   [17](1966) 117 CLR 118 at 145; [1966] HCA 40. See also at 160 per Owen J.

   [18][1964] AC 1129.

   [19]The scope of the rule against penalties beyond cases of breach of contract does not arise for consideration in this case any more than it arose in Cavendish.  Lord Mance JSC noted that the appeals before the Supreme Court did not raise for consideration whether there should be any extension of the penalties doctrine as propounded in Andrews but rather whether it should be abolished or restricted in English law: [2015] 3 WLR 1373 at 1428 [130]; [2016] 2 All ER 519 at 572. Lord Hodge JSC described the suggestion as peripheral to the main arguments in the appeals but was satisfied that the rule against penalties in England and Scotland applied only in relation to penal remedies for breach of contract: [2015] 3 WLR 1373 at 1462 [241]; [2016] 2 All ER 519 at 604.

   [20]At [121]-[127].

   [21]As to which see the observations of Lord Morris of Borth-y-Gest delivering the judgment of the Privy Council in Australian Consolidated Press Ltd v Uren (1967) 117 CLR 221 at 238; [1969] 1 AC 590 at 641.

8. It is more than half a century since Dixon CJ said that this Court would no longer adhere to the policy that it ought to follow the decisions of the House of Lords at the expense of its own opinions.  That change of direction was occasioned by the judgment of the House of Lords in Director of Public Prosecutions v Smith[22], which the Chief Justice considered laid down propositions which were "misconceived and wrong"[23].  Twenty-five years later that evolutionary change was well entrenched.  Mason CJ observed extra-judicially that the value of English judgments, like those of Canada, New Zealand and the United States, "depend[ed] on the persuasive force of their reasoning."[24]  So too, no doubt, for the courts of the United Kingdom as they consider the decisions of courts of other common law jurisdictions. 

   [22][1961] AC 290.

   [23]Parker v The Queen (1963) 111 CLR 610 at 632-633; [1963] HCA 14.

   [24]Mason, "Future Directions in Australian Law", (1987) 13 Monash University Law Review 149 at 154.

9. The common law in Australia is the common law of Australia.  So much was affirmed in the unanimous judgment of this Court in Lange v Australian Broadcasting Corporation[25] and in cases that followed it[26].  Following the enactment of the Australia Acts and the abolition of the last remaining avenue of appeal to the Privy Council from the Supreme Courts of the States[27], s 80 of the Judiciary Act was amended by substituting the term "common law in Australia" for the term "common law of England"[28].  The common law of England was a source of law for legal development in Australia, but not the only source[29].  Moreover, as the alternative claims in the present case demonstrate, there are few areas of the common law which are untouched by statutory regimes reflecting public policy settings which may differ from one jurisdiction to another.

   [25](1997) 189 CLR 520 at 562-566; [1997] HCA 25.

   [26]Lipohar v The Queen (1999) 200 CLR 485 at 509-510 [57] per Gaudron, Gummow and Hayne JJ; [1999] HCA 65; Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49 at 61-62 [23] per Gleeson CJ, Gaudron and Gummow JJ; [1999] HCA 67; John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36 and see generally Zines, "The Common Law in Australia: Its Nature and Constitutional Significance", (2004) 32 Federal Law Review 337.

   [27]See eg Australia Act 1986 (Cth), s 11.

   [28]Law and Justice Legislation Amendment Act 1988 (Cth), s 41(1).

   [29]Finn, "Common Law Divergences", (2013) 37 Melbourne University Law Review 509 at 510-511 citing Allsop, "Some Reflections on the Sources of Our Law", speech delivered at the Supreme Court of Western Australia Judges' Conference, 18 August 2012 at 7.

10. Differences have emerged from time to time between the common law of Australia and that of the United Kingdom in a number of areas.  Those differences have not heralded the coming of winters of mutual exceptionalism.  All of the common law jurisdictions are rich sources of comparative law whose traditions are worthy of the highest respect, particularly those of the United Kingdom as the first source.  No doubt in a global economy convergence, particularly in commercial law, is preferable to divergence even if harmonisation is beyond reach.  The common law process will not always be the best way of achieving convergence between common law jurisdictions.  The penalty rule in the United Kingdom, a product of that process, was described by Lord Neuberger and Lord Sumption in their joint judgment in Cavendish as "an ancient, haphazardly constructed edifice which has not weathered well"[30].  More than one account of its construction and more than one view of whether it should be abrogated or extended or subsumed by legislative reform is reasonably open[31].  There has been much activity in this area within national jurisdictions and in the development of internationally applicable model rules and principles which were discussed in Cavendish in the judgments of Lord Mance[32] and Lord Hodge[33].  It may be that in this country statutory law reform offers more promise than debates about the true reading of English legal history.

    [30][2015] 3 WLR 1373 at 1380 [3]; [2016] 2 All ER 519 at 526.

    [31]Reports on penalty clauses by the English Law Commission in 1975 and the Scottish Law Commission in 1999 recommended that the scope of the rule against penalties be expanded by legislative intervention to include circumstances beyond breach of contract:  Law Commission, Penalty Clauses and Forfeiture of Monies Paid, Working Paper No 61, (1975) at 12-19; Scottish Law Commission, Penalty Clauses, Report No 171, (1999) at 12-14.  In rejecting the submission that the penalty doctrine should be abolished or restricted, Lord Mance and Lord Hodge acknowledged those recommendations and the general trend in other jurisdictions towards a more expansive operation for the rule:  Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1439-1442 [162]-[170], 1466-1468 [256]-[268]; [2016] 2 All ER 519 at 582-585, 608-610.

    [32][2015] 3 WLR 1373 at 1439-1441 [162]-[167]; [2016] 2 All ER 519 at 582-584.

    [33][2015] 3 WLR 1373 at 1468 [264]-[265]; [2016] 2 All ER 519 at 610.

    KIEFEL J.  

    M220/2015

11. The first appellant, Mr Paciocco, held two credit card accounts with the respondent ("the ANZ").  One of the terms and conditions to which Mr Paciocco agreed in respect of the provision of credit was that a "Late Payment Fee" would be charged to his account if the "Monthly Payment" plus any "Amount Due Immediately" shown on the statement of account which the ANZ issued was not paid by a specified date (being, until December 2009, by 28 days of the end of the "Statement Period" shown on the statement and, from December 2009, by the "Due Date" shown on the statement).  The "Monthly Payment" was a reference to a minimum amount which an account holder was required to pay by a certain date.  Customers were advised by the ANZ, in the document "ANZ Credit Cards Conditions of Use", that the Late Payment Fee could be avoided by paying the minimum Monthly Payment shown on the statement by the due date.

12. The ANZ fixed the Late Payment Fee from time to time.  It did so without consultation with its customers.  Until December 2009, the fee was fixed at $35.00 and from December 2009, at $20.00.  The ANZ did not suggest that it had determined the level of the fee by estimating the losses which might be occasioned to it by Mr Paciocco's delays in making payments.  The fee is in any event one charged generally to customers conducting credit card accounts of this kind who are late in making the Monthly Payment and it is charged regardless of the amount of the Monthly Payment outstanding.  In the proceedings below, the ANZ did not explain how the level of the fee had been arrived at.

13. The primary judge in the Federal Court of Australia (Gordon J) referred[34] to Andrews v Australia and New Zealand Banking Group Ltd[35], in which the High Court held that a stipulation prima facie imposes a penalty if it is a collateral stipulation which, upon failure of a primary stipulation, imposes upon one party an additional detriment to the benefit of another party.  Her Honour also had regard[36] to the "tests" stated by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[37].  Her Honour reasoned[38] that the Late Payment Fees were prima facie a penalty.  Given the ANZ's admission that the Late Payment Fees were not genuine pre‑estimates of its damage, the question which remained was "to what extent (if any) did the amount stipulated to be paid exceed the quantum of the relevant loss or damage which can be proved to have been sustained by the breach, or the failure of the primary stipulation, upon which the [collateral] stipulation [for the Late Payment Fee] was conditioned".  Her Honour held[39] that the stipulation for the Late Payment Fee was to be viewed as "security for, or in terrorem of, the satisfaction of the primary stipulation" and that "each of [the sums charged] is extravagant and unconscionable."

    [34]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 261 [26].

    [35](2012) 247 CLR 205 at 216 [10]; [2012] HCA 30.

    [36]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 259 [18].

    [37][1915] AC 79 at 86-88.

    [38]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 282 [129].

    [39]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 292 [182]-[183]. See also at 279 [116], 289 [168], 302 [239]-[240].

14. In reaching these conclusions, and consistently with the question which had been identified as relevant, the primary judge accepted and applied[40] evidence, adduced by the appellants, which assumed that the only damage that the ANZ could be said to have suffered as a result of the late payments was direct costs associated with the recovery of the minimum payment outstanding.  Her Honour rejected other evidence, given for the ANZ, which calculated the costs to it more widely and by reference to certain of its financial interests which, it was said, were adversely affected by the late payments.

    [40]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 282-290 [132]-[174], 292 [183]-[187], 302 [240]-[242].

15. On appeal, the Full Court of the Federal Court (Allsop CJ, Besanko and Middleton JJ) held[41] that this evidence should have been taken into account and that it showed that the fees were not of the nature of penalties, having regard to the legitimate interests of the ANZ in the performance of the terms for payment.  The Full Court allowed the appeal from her Honour's decision.

    [41]Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at 246 [164], 247 [167], 248 [176]-[177], 250-251 [184]-[187], 289 [371], 295 [398].

    What is a penalty?

16. In Dunlop, Lord Dunedin described[42] the "essence" of a penalty as "a payment of money stipulated as in terrorem of the offending party".  By way of comparison, the essence of liquidated damages is "a genuine covenanted pre‑estimate of damage" by the parties.  Lord Dunedin's speech in Dunlop has been described as containing a "potpourri of old learning and new"[43] and in the former respect to reflect "centuries of equity jurisprudence"[44].  His Lordship's description of the essence of a penalty would fall into this category.  The contrasting concept of liquidated damages for breach of contract belongs to a later period.

    [42]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86.

    [43]Rossiter, Penalties and Forfeiture, (1992) at 32.

    [44]Rossiter, Penalties and Forfeiture, (1992) at 33.

17. It has been suggested[45] that the reference to a penalty terrorising persons may not be especially helpful, for penalties may be readily agreed to "by parties who are not in the least terrorised by the prospect of having to pay them and yet are … entitled to claim the protection of the court".  The Late Payment Fee charged by the ANZ would not appear to have caused Mr Paciocco undue concern, as he would regularly pay the minimum Monthly Payment late and incur the fee, of which he was fully aware.  However, the point to be made is that threats and punishment were regarded as the essential characteristics of a penalty.  A sum stipulated to be paid on default, which amounted to a threat to the person obliged to pay it if the principal obligation was not performed, bore the character of a penalty, as did a sum stipulated to be paid which could not be accounted for other than as a punishment for default.

    [45]Bridge v Campbell Discount Co Ltd [1962] AC 600 at 622 per Lord Radcliffe.

18. The distinction drawn in Andrews[46], between the primary stipulation and the penalty which is collateral to it, directs attention to penal bonds, which were largely used historically to bind persons to the performance of an obligation.  Professor Simpson gives[47] the example of a simple common money bond, where A loans B £100.  B would execute a bond for a larger sum, which was normally twice the sum lent, thus binding himself to pay £200 on a fixed day.  The bond would be subject to a condition of defeasance, which provides that if B pays £100 before the due date, the bond will be void.  A similar method was employed for conveying property.

    [46]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216-217 [10].

    [47]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 395.

19. The penal bond with conditional defeasance was the principal device for framing substantial contracts in the later medieval and early modern periods[48].  It was adaptable to different transactions and provided certainty.  It was the bond that created the debt; it did not just evidence the debt[49].  Thus, it allowed for an action in debt to be brought upon the bond, rather than upon the covenant or agreement it secured.  There were limited defences which could be raised in the action (namely, that the condition had been performed, the condition had been substantially performed or the condition was impossible to perform)[50].  But penal bonds could operate harshly because of the amount usually required to be paid on default and because any act of default meant the monies were payable.

    [48]Ibbetson, A Historical Introduction to the Law of Obligations, (1999) at 30.

    [49]Rossiter, Penalties and Forfeiture, (1992) at 2.

    [50]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 403-409.

20. Nevertheless, the law enforced penal bonds strictly, because it regarded their function as compensatory[51].  A creditor could legitimately contract for compensation for loss suffered through the debtor's failure to pay on time.  It was on this basis that the law distinguished between such transactions and transactions containing usurious terms (which were payment for the use of money and therefore illegal)[52].  It was also considered that a debtor could prevent paying a penalty by paying promptly[53].

    [51]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 412-420.

    [52]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 412.

    [53]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 413.

21. Equity also viewed the purpose of penal bonds as compensatory and this was the basis for its intervention[54].  Equity looked to what condition the bond was security for and allowed the obligee compensation for the loss flowing from failure of the condition (usually limited to principal, interest and costs)[55].  The purpose of a bond was only to secure the interest of the obligee in the promise or undertaking to be performed[56].  Where compensation was possible for default, the exaction of a penalty was deemed inequitable[57].  The aim of the equity courts was to compensate in the event of default, not to punish[58].  It follows that they would not tolerate individuals exacting punishment.

    [54]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 225 [40].

    [55]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 418-419.  See, eg, Friend v Burgh (1679) Rep T Finch 437 [23 ER 238]; Puleston v Puleston (1677) Rep T Finch 312 [23 ER 171].

    [56]See Rossiter, Penalties and Forfeiture, (1992) at 13, citing Sloman v Walter (1783) 1 Bro CC 418 at 419 [28 ER 1213 at 1214].

    [57]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 418.  See also Francis, Maxims of Equity, (1728) at 52:  "Equity suffers not Advantage to be taken of a Penalty or Forfeiture, where Compensation can be made."

    [58]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 420.

22. This early understanding of what constituted a penalty finds expression today in the definition given by Mason and Deane JJ in Legione v Hateley[59]:

    "A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation".

    This definition was referred to with approval in Andrews[60] and, more recently, by the United Kingdom Supreme Court in Cavendish Square Holding BV v Makdessi[61] (albeit in a more qualified sense), where arguments that the penalty doctrine should be abolished or restricted were rejected.  As Lord Neuberger of Abbotsbury and Lord Sumption observed[62], the innocent party may have interests in the enforcement of the primary obligation but can have no proper interest in simply punishing the defaulter.

    [59](1983) 152 CLR 406 at 445; [1983] HCA 11.

    [60]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216 [9].

    [61][2015] 3 WLR 1373 at 1392 [31] per Lord Neuberger of Abbotsbury and Lord Sumption; [2016] 2 All ER 519 at 537-538.

    [62]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1392 [32]; [2016] 2 All ER 519 at 538.

23. The consequence of compensation forming the basis of equitable intervention was that where compensation was not possible, or damages could not be assessed, relief could not be given by equity[63].  Compensation might not be possible because the condition on which the bond was made was in respect of an interest not measurable in damages[64].  As explained in Andrews[65], it is the availability of compensation which generated the "equity" upon which the court intervened; without it, the parties were left to their legal rights and obligations.

    [63]Peachy v Duke of Somerset (1721) 1 Str 447 at 453 [93 ER 626 at 630].

    [64]See, eg, Tall v Ryland (1670) 1 Chan Cas 183 [22 ER 753] (a condition to behave civilly and not disparage his neighbour's goods). See also Roy v Duke of Beaufort (1741) 2 Atk 190 [26 ER 519] (a condition not to trespass onto the Duke's land to shoot, hunt or fish); Rolfe v Peterson (1772) 2 Bro PC 436 [1 ER 1048] (a condition not to plough up any of the ancient meadow or pasture ground).

    [65]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 217 [11].

24. The primary factor in the decline of the conditional penal bond and the rise of the modern law of penalties has been said to be the practice of the Court of Chancery in relieving against forfeiture[66].  By the time cases such as Dunlop came to be decided, the conditional penal bond may not have been much in use, although it was not wholly obsolete when Professor Simpson was writing[67] and is not today.  Examples referred to in Andrews[68] are irrevocable letters of credit and "performance bonds" which are used in the construction industry.

    [66]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 415.

    [67]Simpson, "The Penal Bond with Conditional Defeasance", (1966) 82 Law Quarterly Review 392 at 421; Simpson, A History of the Common Law of Contract:  The Rise of the Action of Assumpsit, (1987) at 125.

    [68]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216 [10].

25. While Dunlop does not contain any such discussion of the origins and purposes of the penalty doctrine (as canvassed above), much of what is said in Dunlop is better understood by reference to them.

    Relevant aspects of Dunlop

26. The aspect of Dunlop which assumes particular importance in this case is the recognition that a sum stipulated for payment on default may be intended to protect an interest that is different from, and greater than, an interest in compensation for loss caused directly by the breach of contract.  This is most evident from the speech of Lord Atkinson.  It has already been observed that equity recognised that there may be injury to interests for which compensation cannot be made and to which the doctrine of penalties cannot be applied to provide relief.  That will usually be because of the nature of the interest protected by the provision for payment on default.

27. In Ringrow Pty Ltd v BP Australia Pty Ltd, it was said[69] that Dunlop continues to express the law to be applied with respect to penalties in Australia.  As the primary judge in these proceedings observed[70], the principles in Dunlop were not affected by the decision of this Court in Andrews.  But this does not mean that those principles are confined, or that they are limited, to the "tests" propounded by Lord Dunedin, or that what was said in Dunlop does not require further explication.

    [69]Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 663 [12]; [2005] HCA 71.

    [70]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 258 [17].

28. In Ringrow the Court was concerned[71] with an argument which focused upon Lord Dunedin's speech in Dunlop and the "tests" which were offered to assist in the determination of whether a sum stipulated to be paid on default is, or is not, a penalty.  In comparison, in Andrews reference was made to Dunlop, not to Lord Dunedin's "tests", but rather to Lord Atkinson's identification[72] of the interests which were sought to be protected by the provision stipulating for payment of monies on breach and which accounted for that provision not being a penalty.  It was said[73] that "the critical issue, determined in favour of the appellant [Dunlop], was whether the sum agreed was commensurate with the interest protected by the bargain."

    [71]Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 662 [11].

    [72]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 91-92.

    [73]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 236 [75].

29. The fact that the decision in Dunlop itself, and Lord Atkinson's reasons with respect to it, assume importance in this case does not deny the significance of the requirement stated by Lord Dunedin[74], that the sum stipulated be "extravagant and unconscionable" before it can be characterised as a penalty.  As explained below, it is these words that, by their extreme nature, identify the penal character of a penalty.  The question which may be identified as arising from this aspect of the decision in Dunlop, which is appropriate to a case of this kind, is whether a provision for the payment of a sum of money on default is out of all proportion to the interests of the party which it is the purpose of the provision to protect.  This interest may be of a business or financial nature.

    [74]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87.

    The Dunlop "tests"

30. The distinction drawn by Lord Dunedin between liquidated damages and a penalty, whilst useful, should not be understood as a limiting rule.  It does not mean that if no pre-estimate is made at the time a contract is entered into, as is the case here, a sum stipulated will be a penalty.  Nor does it mean that a sum reflecting, or attempting to reflect, other kinds of loss or damage to a party's interests beyond those directly caused by the breach will be a penalty.  Indeed the provision in Dunlop, which was held not to be a penalty, was of this kind.

31. The question whether a sum to be paid on default is a penalty, as distinct from liquidated damages, was said by Lord Dunedin[75] to be a question of construction, but his Lordship is not to be taken to suggest that it will be answered by the language of the contract alone.  This is evident from the reference to the "inherent circumstances" of the contract, which includes the position of the party whose interests are to be protected by the stipulation for the payment of the sum on default.

    [75]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87.

32. Lord Dunedin offered[76] four "tests" to assist "this task of construction".  They were couched in the language of their time and were intended as guidance only.  Tests tend, over time, to encourage literal application.  Especially is this so where the basal purpose of the larger principle, or policy, of the law is not stated.  That policy has not changed over time.  It is that a sum may not be stipulated for payment on default if it is stipulated as a threat over the person obliged to perform; it may not be stipulated where the purpose and effect of requiring payment is to punish the defaulting party.  This latter prohibition has found expression in modern times, as is evident from the passage from Legione v Hateley referred to above[77] and also from judgments in Cavendish[78].  It may be inferred from this policy that a sum stipulated for payment on default is a penalty if it bears no relation to the possible damage to or interest of the innocent party.

    [76]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87-88.

    [77]Legione v Hateley (1983) 152 CLR 406 at 445.

    [78]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1392 [32] per Lord Neuberger and Lord Sumption, 1434 [148] per Lord Mance, 1462 [243] per Lord Hodge; [2016] 2 All ER 519 at 538, 577-578, 605.

33. The first, and principal, "test" stated by Lord Dunedin[79] is that a sum stipulated will be a penalty if it is:

    "extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach."

    If the "test" is understood to convey that only loss in the nature of damages directly flowing from the breach is to be considered, then it is unduly restrictive, though no doubt it remains useful to many cases.

    [79]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87 (4(a)).

34. The terms "extravagant" and "unconscionable" (and also "exorbitant") had been used in Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda, where the Earl of Halsbury LC said[80] that the jurisdiction given to the court to interfere in an agreement between parties was with respect to an agreement which was "unconscionable and extravagant, and one which no Court ought to allow to be enforced."  Even earlier, the Scottish Court of Session in Forrest and Barr v Henderson, Coulborn, and Co had said[81] that "equity will interfere to prevent the claim being maintained to an exorbitant and unconscionable amount."  As explained below, "extravagant", "exorbitant" and "unconscionable" are "strong words"[82]; despite the different expressions used, they all describe the plainly excessive nature of the stipulation in comparison with the interest sought to be protected by that stipulation.

    [80]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 10.

    [81]Forrest and Barr v Henderson, Coulborn, and Co (1869) 8 M 187 at 193.  See also at 201.

    [82]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1473-1474 [293]; [2016] 2 All ER 519 at 615.

35. The second "test"[83] was said to be merely a corollary of the first, and concerns the case where the breach is constituted by a mere failure to pay a sum of money.  The sum stipulated to be paid in the event of a breach will be a penalty if it is greater than the sum which ought to be paid.  This reflects equity's concerns about penal bonds and its view that the tender of principal together with interest thereon is sufficient compensation.  This "test" has a narrow range of operation and is confined to the simplest of cases.  It does not take into account that damages for breach may now include interest by way of damages and opportunity costs[84].  It says nothing about the damage to a party's wider commercial interests, for example to its trading, which was the real issue in Dunlop.  And it says nothing about the financial effects for which the ANZ contends.

    [83]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87 (4(b)).

    [84]Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8.

36. The third "test"[85] is stated as a presumption ("(but no more)") that a sum will be a penalty where it is a single sum made payable on the occurrence of one or more of several events, some of which may occasion serious, and others only inconsequential, damage.  The presumption derives from what was said by Lord Watson in Lord Elphinstone v Monkland Iron and Coal Co[86]:

    "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, the presumption is that the parties intended the sum to be penal, and subject to modification."

    [85]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87 (4(c)).

    [86](1886) 11 App Cas 332 at 342.

37. However, the provision for payment in that case was not in fact of that kind.  It was referable to a single obligation and the sum to be paid bore "a strict proportion to the extent to which that obligation is left unfulfilled."[87]  In Ringrow, this Court said[88] that this reasoning "did not require there to be a strict proportion; it merely relied, as a step towards the conclusion that the compensation was not inordinate or extravagant, on the fact that the compensation bore a strict proportion to the unfulfilled obligation."

    [87]Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 345 per Lord Herschell LC. See also at 342-343 per Lord Watson.

    [88]Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 668 [28].

38. Further, because a provision of the kind mentioned is merely a presumption, it may be rebutted.  In Dunlop, Lord Atkinson observed[89] that it was there rebutted by the fact that the damage caused by default may be of such an uncertain nature that it cannot be accurately ascertained.

    [89]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 95-96.

39. The last "test"[90] stated by Lord Dunedin in Dunlop refers to just such a circumstance.  It identifies the case where the parties agree a figure although a forecast of loss, in reality, is almost impossible.  Nevertheless, the sum agreed may not be a penalty, indeed it is likely that in circumstances such as these it is not.  His Lordship said:

    "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". 

    [90]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87-88 (4(d)).

40. A similar observation had been made in Clydebank[91].

    [91]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 11.

41. What Lord Dunedin was pointing to is damage of a kind which is different from that for which liquidated damages could be assessed.  It will be different because the interests of the party which are intended to be protected by the provision in question extend beyond an interest in the recovery of compensation for loss caused by the obligation.  This was the situation in Dunlop.

    Interests:  Clydebank, Dunlop and Cavendish

42. The agreement in Dunlop was headed "Price Maintenance Agreement" and contained provisions for resale price maintenance, which was clearly not then a prohibited practice.  It bound the respondents, as dealers in goods manufactured by Dunlop, inter alia, not to sell or offer the goods at less than Dunlop's list price and to pay £5 for each item sold at less than that price.

43. It followed from these terms that the sale of even one tyre, cover or tube at less than the listed price would attract the sum stipulated to be paid.  An argument, reminiscent of one raised in this case concerning the Late Payment Fee, that Dunlop could not possibly lose that sum on the occasion of each sale, was rejected.  The argument, Lord Atkinson observed[92], missed the point about the purpose of the agreement and the nature of the possible injury to Dunlop's trade.

    [92]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 91-92.

44. Dunlop's object in making the agreement, Lord Atkinson said[93], was to prevent disorganisation of its trading system.  His Lordship said:

    "[Dunlop] had an obvious interest to prevent this undercutting, and on the evidence it would appear to me impossible to say that that interest was incommensurate with the sum agreed to be paid."

    [93]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 92. See also at 88 per Lord Dunedin, 99 per Lord Parker of Waddington.

45. In Clydebank, having observed that agreements for the payment of sums on default operate as "instruments of restraint", Lord Robertson identified[94], similarly to Lord Atkinson in Dunlop, the relevant question as:

    "Had the respondents no interest to protect by that clause, or was that interest palpably incommensurate with the sums agreed on?"

    [94]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 19-20.

46. In Clydebank, the contract between the appellant shipbuilders and the Spanish government for the building of torpedo boats contained a clause providing for a "penalty for later delivery … at the rate of £500 per week for each vessel"[95].  The fact that the sum was called a penalty was not, of course, conclusive.  In holding that the stipulated sum was not a penalty, it was acknowledged that the interests of the Spanish government in having the vessels delivered on time were complex and that how those interests would sound in damages was extremely difficult to prove[96].

    [95]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 7.

    [96]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 11, 20.

47. In Cavendish, non-competition provisions, in an agreement for the sale of a controlling interest in a business, which had the effect that, upon breach, the seller would not be entitled to any further payments of the purchase price were held not to be penalties.  The provisions were seen as protective of the interests of the purchaser in the goodwill of the business, such goodwill being critical to the value of the business[97].

    [97]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1405 [75] per Lord Neuberger and Lord Sumption, 1444-1445 [179]-[180] per Lord Mance, 1469 [274] per Lord Hodge; [2016] 2 All ER 519 at 550, 587-588, 611.

48. It was of some importance in Dunlop and Clydebank that the nature of the innocent party's interests, which would be injured by breach, was such that it would be difficult to estimate and to prove damage.  This difficulty of proof, and the uncertainty of the loss which could arise, made it reasonable for the parties to agree beforehand what the figure for damages should be in order to avoid the problem[98].  In Cavendish it was observed[99] that there is good reason to leave the assessment of the value of a complex interest as a matter of negotiation between the parties, especially since the court may not be in a position to value the interest itself.  For present purposes it is perhaps more relevant to observe that difficulties of this kind may render problematic proof that a sum stipulated is a penalty.

    [98]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 88; Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 10-11, 17. See also Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1432-1433 [143] per Lord Mance; [2016] 2 All ER 519 at 576.

    [99]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1405-1406 [75] per Lord Neuberger and Lord Sumption; [2016] 2 All ER 519 at 550-551.

49. It was not suggested in either Clydebank or Dunlop that the damage to the Spanish government's or to Dunlop's interests was impossible to estimate; rather, it appears that the damage was capable of estimation, albeit with little precision.  It might be thought that the damage to the interests identified in Clydebank in particular might have qualified as impossible to prove, but the Earl of Halsbury LC went only so far as to say that it would be "extremely complex, difficult, and expensive"[100] to do so.  And in Dunlop, the estimation was referred to as "almost an impossibility"[101].  It will be recalled that equity's jurisdiction was considered not to extend to a case when compensation was not thought to be possible, as is the case when damages could not be assessed.  In these circumstances the parties would be left to their bargain.

    [100]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 11.

    [101]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87-88 per Lord Dunedin. See also at 95-96 per Lord Atkinson.

50. What was said in Dunlop, and in Clydebank, about it being reasonable, in cases of difficulty in the estimation of possible loss, to leave the parties to contract for themselves for a sum to be paid on default might be thought to come close to an acceptance that they be left to their bargain.  However, this would overlook the fact that the courts in those cases went on to determine whether the figure arrived at was a penalty and that they did so by considering whether it was unconscionable or extravagant in amount.

    A sum out of all proportion to the interests protected

51. Lord Dunedin said in Dunlop[102] that there may be no reason to suspect that the figure agreed by the parties, in the case where loss is difficult to estimate, is "a penalty to be held in terrorem", "provided that figure is not extravagant".  Lord Atkinson[103] and Lord Parmoor[104] also held that the figure in question was not extravagant, unconscionable or extortionate.

    [102]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 88.

    [103]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 97.

    [104]Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 101.

52. The process to be undertaken in order to determine whether an amount is unconscionable or extravagant was not further explained in Dunlop and Clydebank.  The figure agreed to be paid cannot be compared with a sum certain, as is the case with Lord Dunedin's first "test".  It can only be gauged against the identified interests of the party in whose favour the stipulation is made.  It may be inferred from Dunlop and Clydebank that the interests in question were regarded as substantial and the possibility of damage to them real.  The sum agreed to be paid in those cases was not incommensurate with the relevant interests[105].

    [105]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 20 per Lord Robertson; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 92 per Lord Atkinson.

53. In Clydebank[106], the Earl of Halsbury LC did not consider that a rule could be laid down as to when a stipulation could be said to be extravagant or unconscionable and that much would depend upon the circumstances of each case.  However, it is to be inferred from the adjectives chosen that not every sum in excess of what might be strictly compensatory will amount to a penalty.  This is confirmed by the example, admittedly extreme, which his Lordship then gave of an agreement to build a house for £50 but "to pay a million of money as a penalty" if the house was not built.  This suggests that a person contending that a sum is a penalty will be facing a high hurdle.  Lord Hodge was later to observe in Cavendish[107] that the criterion of exorbitant or unconscionable should prevent the enforcement of only egregious contractual provisions.

    [106]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 10.

    [107]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1468 [266]; [2016] 2 All ER 519 at 610.

54. In Ringrow, it was held[108] that a sum which was merely disproportionate to the loss suffered would not qualify as penal.  It was explained that exceptions from freedom of contract "require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed", which is why the law on penalties is expressed as an exceptional rule and in exceptional language.  The Court went on:

    "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'."

    In Cavendish, Lord Neuberger and Lord Sumption said[109] that the true test is whether the provision is a secondary obligation which imposes a detriment on the party in breach "out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation."

    [108]Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 669 [31]-[32].

    [109]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1392 [32]; [2016] 2 All ER 519 at 538.

55. Australian and United Kingdom law are not alone in maintaining a standard to be applied to a requirement to pay money, or some other detriment, which is imposed in the event of default.  In many other western legal systems something like the penalty doctrine exists.  In Andrews, reference was made[110] to s 343 of the German Civil Code, which provides that a "disproportionately high" penalty may be reduced by a court after taking into account "every legitimate interest" of the party for whose benefit the stipulated sum is made.  Such interests are not limited to that party's economic interests.  In Cavendish, Lord Hodge referred[111] to provisions in other modern civil codes and international instruments which use tests such as whether the sum stipulated is "manifestly excessive" or "substantially disproportionate" in order to modify or restrict contractual penalties.

    [110]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 224-225 [38]. See also Zimmermann, The Law of Obligations, (1996) at 107-108.

    [111]Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1468 [265]; see also at 1394 [37] per Lord Neuberger and Lord Sumption; [2016] 2 All ER 519 at 610; see also at 539-540.

56. It has earlier been observed that the nature of an interest and of the injury to it may make for difficulties of proof that the sum stipulated is a penalty.  In Clydebank, Lord Robertson acknowledged[112] that the problem was not one for the Spanish government:

    "But, in truth, the only apparent difficulty in the present case arises from the magnitude and complexity of the interests involved and of the vicissitudes affecting them, and as the question is whether this stipulation of £500 a week is unconscionable or exorbitant, these considerations can hardly be considered a formidable difficulty in the way of the respondents."

    [112]Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 20.

    The Late Payment Fee:  a penalty?

57. The ANZ's interests in this case are not as diffuse as those considered in Dunlop, Clydebank and Cavendish.  The ANZ did not suggest that the injury to its interests was not capable of some kind of estimation in money's worth.  In the hearing before the primary judge it abandoned the claim, made in its defence, that the costs occasioned to it by late payments were impossible to calculate and argued instead that they were very difficult to calculate.  On this appeal the appellants accepted that, being realistic, the law should allow a "measure of latitude" where pre-estimation of loss is difficult.  Certainly there needs to be some recognition of the difficulties attending any such exercise and that there may, in some cases, be differences in approach to the proper methodology to be employed.  But it also needs to be borne in mind that this task is not one which calls for precision.  The conclusion to be reached, after all, is whether the sum is "out of all proportion" to the interests said to be damaged in the event of default.

58. It is important at this point to identify the ANZ's interests.  The ANZ had an interest in receiving timeous repayment of the credit that it extended to its customers, including the appellants.  As explained below, late payment impacted the ANZ's interests in three relevant respects:  through operational costs, loss provisioning and increases in regulatory capital costs.

59. Evidence of the costs to the ANZ by reason of the late payments was given by Mr Regan for the appellants and by Mr Inglis for the ANZ.  Their approaches were fundamentally different because of the instructions they had been given.  As the primary judge observed[113], Mr Regan was instructed to identify the amounts necessary to restore the ANZ to the position it would have been in had the late payments not been made.  In contrast, Mr Inglis was instructed to consider the maximum amount of costs that the ANZ could conceivably have incurred as a result of a late payment.  As a consequence Mr Regan calculated only the costs to the ANZ of ensuring that the late payments were made ("operational costs"), such as those costs incurred by the use of staff contacting Mr Paciocco and other administration costs.  Mr Inglis calculated those costs and came to a higher figure than Mr Regan, but he also calculated other impacts on, or costs to, the ANZ's financial interests which were referred to in the proceedings below as "Increase in loss provisions" and "Increase in the cost of regulatory capital".

    [113]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 282-283 [132]-[137].

60. As to the first category of costs, as the primary judge explained[114], the ANZ is required to estimate the impairments to its financial assets in order that its financial statements reflect a fair value of what is likely to be collected from what is outstanding.  It is required to make provision in its accounts for what it may not recover, albeit that the potential loss is expressed as a current cost.

    [114]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 284 [144]-[145].

61. The primary judge does not appear to have cavilled with the opinion of Mr Inglis – that the reduction in the value of a customer's loan, as recorded in the accounts, was an accepted category of loss.  However, her Honour held[115] that the difficulty was that a provision of this kind is merely an accounting entry.  At the time it is made it cannot be known whether all the cardholders recorded will default.  In the case of Mr Paciocco he did not fall into this category because in fact he did not default; he merely paid late.

    [115]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 286 [150].

62. This reasoning is consistent with the primary judge's overall approach, which was to limit the ANZ's "costs" to actual damage incurred.  However, this overlooks that the estimation is to be made at the time the Late Payment Fee is agreed upon; and it does not acknowledge that an effect upon the ANZ's interests may include the provision that it has to make concerning its overall position.

63. As to the second category of costs, the ANZ is also required to hold regulatory capital to cover unexpected losses, a buffer of a kind.  An increase in the risk of default increases the amount of regulatory capital which is required to be held.

64. The primary judge accepted[116] that regulatory capital has a cost to the ANZ, by way of the loss of additional return it could otherwise make on the amount held as regulatory capital.  But her Honour did not accept[117] that it should be taken into account in calculating loss or damage as a result of late payment.

    [116]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 286 [154].

    [117]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 287 [155].

65. It was her Honour's view[118] that loss provisions and regulatory capital costs are part of the costs of running a bank in Australia.  Banks may, and do, seek damages for default, but they are limited to the sums outstanding, enforcement costs and interest.  However, as has been explained, the question is not what the ANZ could recover in an action for breach of contract, but rather whether the costs to it and the effects upon its financial interests by default may be taken into account in assessing whether the Late Payment Fees are penalties.

    [118]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 287 [155].

66. The primary judge accepted and applied Mr Regan's evidence.  Her Honour considered[119] that the main difficulty with Mr Inglis' evidence was that he did not calculate actual loss or damage, but rather engaged in a broad-ranging exercise of identifying "costs" that might be affected by late payment, in a more theoretical, accounting, sense.  In her Honour's view this did not assist in answering the question which she had earlier identified:  to what extent (if any) did the amount stipulated to be paid exceed the quantum of the relevant loss or damage which can be proved to have been sustained by the breach.  But of course framing the question in this way takes no account of the ANZ's other interests which were said to be addressed by the Late Payment Fees and which extend beyond the recovery of compensation for loss.

    [119]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 284 [140].

67. The primary judge accepted[120] that whilst the actual losses suffered by the ANZ by reason of the late payments could not be precisely determined, they were probably no more than $3.00 for each event of late payment (based on Mr Regan's evidence) and in any event much less than the $20.00 or $35.00 charged as a Late Payment Fee.  They were therefore extravagant and unconscionable.

    [120]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 290 [173].

68. Mr Inglis' evidence identified the costs to which the ANZ would be subject in the event of a late payment as a range which exceeded the amounts of the Late Payment Fee[121].  His calculations were criticised[122] as overly generous.  It is not necessary to resolve any such controversy.  The effect of Mr Inglis' evidence was to identify potential costs to the ANZ, from late payments, which reflect injuries to its financial position.  They were real because they had to be taken into account by the ANZ.  The evidence called for the appellants did not address damage of this kind.  It cannot therefore be concluded that the sums of $20.00 and $35.00 were out of all proportion to the interests so identified.

    [121]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 411.

    [122]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 289-290 [170]-[171].

    Conclusion and orders

69. It may be accepted that it is difficult to measure the loss to the ANZ as a result of a late payment.  Consistently with Clydebank, Dunlop, Ringrow and Andrews, the relevant question in this case is whether the Late Payment Fee is out of all proportion to the ANZ's interest in receiving timeous payment of the minimum Monthly Payment.  Applying this test, the appellants did not establish that the Late Payment Fee was a penalty.  The appeal should be dismissed with costs.

    M219/2015

70. This appeal concerns whether the Late Payment Fee contravenes certain statutory provisions.  I agree that this appeal should be dismissed with costs, for the reasons given by Keane J.

    GAGELER J.  

    Introduction

71. Two appeals are brought to this Court from orders made by the Full Court of the Federal Court of Australia (Allsop CJ, Besanko and Middleton JJ)[123] on appeal from a judgment of a primary judge of that Court (Gordon J)[124].  The judgment of the primary judge was a final determination of claims made by applicants in a representative proceeding constituted under Pt IVA of the Federal Court of Australia Act 1976 (Cth). Their claims were to recover from Australia and New Zealand Banking Group Ltd ("ANZ") certain "exception fees" charged by ANZ under standard terms and conditions of contract with consumer credit card account holders. The appellants in each appeal were applicants in the representative proceeding; they can be called "the customers".

    [123]Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199.

    [124]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249.

72. The appeals are a sequel to the decision at an interlocutory stage of the representative proceeding in Andrews v Australia and New Zealand Banking Group Ltd[125].   

    [125](2012) 247 CLR 205; [2012] HCA 30.

73. The controversy that now returns to this Court is confined to legal characterisation of a single class of exception fee – contractually designated "late payment fee" – charged to one customer, Mr Paciocco. 

74. The ultimate question in the first appeal is whether the contractual stipulation for the late payment fee was unenforceable as a penalty at common law.  The ultimate question in the second appeal is whether that stipulation or its enforcement contravened one or more of several applicable statutory norms prohibiting ANZ from engaging in "unconscionable conduct" and from entering into and enforcing contracts which were "unjust" and "unfair".

75. Before turning to subsidiary issues involved in answering those questions, there is utility in recording the contractual provisions under which the late payment fee was imposed, in giving an outline of the evidence bearing on the quantification of that fee, and in noting the reasoning of the primary judge and of the Full Federal Court.

    The contracts

76. The customers' claims in the representative proceeding related to the period between September 2006 and September 2013.  During that period, Mr Paciocco had two credit card accounts with ANZ.  Both were "Low Rate MasterCard" accounts.  One had been opened in June 2006 with an initial credit limit of $15,000 which was increased to $18,000 in November 2009.  The other was opened in July 2009 and had a credit limit of $4,000.

77. The terms and conditions on which ANZ contracted for the provision of each of those credit card accounts were contained in three standard form documents sent to Mr Paciocco by ANZ:  a standard form Letter of Offer; a booklet entitled "ANZ Credit Card Conditions of Use"; and another booklet entitled "ANZ Personal Banking Account Fees and Charges". 

78. The standard terms and conditions set out in the ANZ Credit Card Conditions of Use provided for ANZ to issue monthly statements of account.  Each monthly statement was to show the closing balance of the account, the "minimum monthly payment" and the "due date".  The minimum monthly payment was ordinarily to be the greater of $10 or 2% of the closing balance shown on the statement, but to be the full closing balance if the closing balance shown on the statement was less than $10.  The due date was to be a date a specified number of days after the end of the monthly period to which the statement related.

79. The account holder was obliged to make the minimum monthly payment shown on each monthly statement by the due date shown on the statement.

80. If the account holder did not pay the closing balance by the due date, the account holder was to be charged interest on each purchase shown on a statement of account, and on all subsequent purchases, until the closing balance was paid in full by its due date.  The account holder was not otherwise to be charged interest on purchases (and therefore received credit for purchases interest free if the closing balance of the statement on which the purchase transaction appeared was paid in full by its due date) but was always to be charged interest on cash advances from the date of each cash advance.  The annual percentage rate used to calculate the interest charges on the account was to be that notified by ANZ from time to time.

81. Under the heading "Fees and charges", the ANZ Credit Card Conditions of Use provided:

    "ANZ reserves the right to charge the credit card account with fees and charges for the provision and operation of the credit card account.  The fees and charges applicable to the credit card account are those shown in the Letter of Offer and in the ANZ Personal Banking Fees and Charges booklets, as varied from time to time."

82. The late payment fee was one of the fees and charges applicable to each credit card account shown in the standard form Letter of Offer and in the ANZ Personal Banking Account Fees and Charges booklet.  ANZ had the right to charge the late payment fee to the account if the minimum monthly payment was not paid by the due date.  The amount of the late payment fee was set by ANZ at $35 until December 2009.  It was reduced to $20 from December 2009.

83. Under the heading "Default, cancellation and termination", the ANZ Credit Card Conditions of Use provided for the credit card to be cancelled and the outstanding balance of the account to become immediately due and payable, at the option of ANZ, if the account holder came into default.  Coming into default included for that purpose the account holder failing to meet any of the account holder's obligations under the credit card contract.  The ANZ Credit Card Conditions of Use went on to provide in that context:

    "Any reasonable amount reasonably incurred or expended by ANZ in exercising its rights in relation to the credit card account arising from any default (including expenses incurred by the use of ANZ's staff and facilities) are enforcement expenses and become immediately payable by the account holder.  ANZ may debit the credit card account for such amounts without notice."

84. Finally, the ANZ Credit Card Conditions of Use provided for the account holder to close the credit card account at any time by giving notice to ANZ, and for ANZ to change any term or condition of the credit card contract by giving notice to the account holder.

    The charges

85. During the period to which the customers' claims related, ANZ charged the late payment fee to Mr Paciocco's accounts on 26 occasions and Mr Paciocco subsequently paid the amounts charged to ANZ.  Eight of those occasions were before December 2009, when the applicable charge was $35.  Eighteen were after December 2009, when the applicable charge was $20. 

86. For the purpose of illustrating their respective arguments in the appeals, the parties chose to focus on six of those 26 occasions.  The sample comprised two charges of $35 made to the credit card account having the higher credit limit before December 2009, a single charge of $20 made to that same account after December 2009, and three charges of $20 made after December 2009 to the credit card account having the lower credit limit. 

87. The two illustrative charges of $35 were made to the credit card account which had the higher credit limit at a time when that credit limit was $15,000.  At the time of the first charge, the outstanding monthly balance was $10,199 and the minimum monthly payment was $203.  At the time of the second charge, the outstanding monthly balance was $11,220 and the minimum monthly payment was $223.

88. The single illustrative charge of $20 made to that same account was made when the credit limit had risen to $18,000.  The outstanding monthly balance was then $18,025 and the minimum monthly payment was $358.

89. Of the three charges of $20 made to the credit card account which had the lower credit limit of $4,000, the first was made at a time when the outstanding monthly balance was $2,145 and the minimum monthly payment was $43.  The second was made at a time when the outstanding monthly balance was $268 and the minimum monthly payment was $10.  The third was made at a time when the outstanding monthly balance was $4,055 and the minimum monthly payment was $80.

90. The primary judge found that ANZ's Collections Business Unit contacted Mr Paciocco on most of the occasions when he failed to make a minimum monthly payment by its due date and that Mr Paciocco promised to make a payment each time he was contacted.  The primary judge also found that, throughout the period to which the claim in the representative proceeding related, Mr Paciocco was aware of the late payment fee and other fees and charges applicable to his credit card accounts and found it convenient to manage his credit card accounts close to their limits, choosing to accept the risk of incurring fees associated with that course of conduct[126].

    [126]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 313 [304].

    The evidence about the amount of the late payment fee

91. ANZ made a formal admission on the pleadings that it did not determine the quantum of the late payment fee by reference to a sum that would have been recoverable as unliquidated damages.

92. Evidence in the representative proceeding showed that fees broadly equivalent to the late payment fee were charged in varying amounts by other banks which provided credit cards to consumer customers in competition with ANZ during the period of the claims made in the proceeding.  The reduction of the late payment fee from $35 to $20 in December 2009 occurred not long after reductions by other banks. 

93. Documentary evidence was adduced concerning the considerations which led ANZ to set and maintain the amount of the late payment fee at $35 and then to reduce it to $20, but that evidence was described by the primary judge as "incomplete" and "of limited use"[127].  The primary judge drew no conclusions from it.

    [127]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 282 [128].

94. The main evidence bearing on the amount of the late payment fee was opinion evidence given by two accountants:  Mr Regan and Mr Inglis.  They were asked to, and did, perform two quite different tasks.

95. Mr Regan was asked by the customers to calculate, in respect of the late payment events which gave rise to the charge of the late payment fee to Mr Paciocco, "how much money it would take to restore ANZ to the position it would have been in if the particular event giving rise to the entitlement to charge such fees had not occurred".  Performing that task, Mr Regan calculated the variable or incremental operational costs incurred within ANZ's Collections Business Unit in making or attempting to make contact with Mr Paciocco following each of the 26 late payment events which were the subject of his claim.  Mr Regan calculated those costs to have ranged from $5.50 to 50c, and to have been on average $2.60.  

96. Mr Inglis was asked by ANZ to assess, in respect of all of the consumer credit card accounts offered by ANZ in each financial year to which the customers' claims related, "the costs that may have been incurred by ANZ in connection with the occurrence of events that gave rise to an entitlement to charge [the late payment fee]".  To perform that task, Mr Inglis undertook an assessment of costs incurred by ANZ in connection with the occurrence of events that gave rise to an entitlement to charge the late payment fee to all of the holders of consumer credit card accounts who had been charged during the financial year ended September 2009.  He then extrapolated those results to other years. 

97. During the financial year ended September 2009, ANZ had around two million consumer credit card accounts.  It charged the late payment fee on around 2.4 million occasions.  Its revenue from charging the late payment fee was around $75 million. 

98. Mr Inglis identified three categories of costs as having been incurred by ANZ in connection with the occurrence of the events that gave rise to an entitlement to charge the late payment fee.  Those categories comprised provisioning costs and regulatory capital costs, in addition to operational costs which were principally costs associated with the activities of ANZ's Collections Business Unit.  Each of those categories warrants a short explanation.

99. Provisioning costs were expenses which, in accordance with applicable accounting standards, ANZ recognised in its profit and loss account representing reductions in the value of customer accounts attributable to risk of default.  Because the probability of default increased with late payment, late payment of balances contributed to the overall level of the expense required to be recognised.  Mr Inglis assessed the average contribution of a late payment event to provisioning costs during the period relevant to ANZ's charge of the late payment fee to Mr Paciocco's accounts at $23 for the account with the higher credit limit or $27 for the account with the lower credit limit.  

100. Regulatory capital costs were costs which ANZ incurred in funding capital which ANZ was required by applicable prudential standards to hold as a buffer against unexpected losses.  Because the amount of capital required to be held increased with the probability of default associated with late payment, late payment of balances contributed to the overall level of capital required, and with it the costs of funding that capital reserve.  Mr Inglis assessed the average contribution of a late payment event to regulatory capital costs during the period relevant to ANZ's charge of the late payment fee to Mr Paciocco's accounts at $23 for the account with the higher credit limit or $5 for the account with the lower credit limit. 

101. The operational costs identified by Mr Inglis to be associated with ANZ's Collections Business Unit were costs attributable to the same collection activities as those identified by Mr Regan.  However, unlike Mr Regan, who looked only to the variable or incremental costs of individual collections, Mr Inglis made an allowance for the recovery of a proportion of common costs and of fixed costs associated with overall collection activities.  Mr Inglis assessed the average collection costs attributable to a late payment event during the period relevant to ANZ's charge of the late payment fee to Mr Paciocco's accounts as in excess of $5.

102. For the period during which a late payment fee of either $35 or $20 was charged to Mr Paciocco's accounts, Mr Inglis thereby assessed the average costs incurred by ANZ in connection with the occurrence of an event giving rise to an entitlement to charge the late payment fee as in excess of $50 for the account with the higher credit limit and in excess of $35 for the account with the lower credit limit.

     The approach of the primary judge

103. The primary judge drew particular attention to two features of the late payment fee.  One was that "the breach (or failure of the stipulation)" which gave rise to the obligation to pay the fee "consisted only in not paying a sum of money"[128].  The other was that "[t]he same fee was payable regardless of whether the customer was 1 day or 1 week late (or longer), and regardless of whether the amount overdue was $0.01 (trifling), $100, $1000 or even some larger amount"[129].  The second of those features was described as sufficient to give rise to a "presumption" that the late payment fee had the character of a penalty[130].

     [128]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 280 [121].

     [129]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 280 [119].

     [130]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 280 [119].

337. Since then, the position has changed.  Now it is possible to recover unliquidated damages for breach of an obligation to pay a specified sum and, accordingly, the amount recoverable for breach of such an obligation is no longer necessarily capable of exact pre‑estimation[370].  There is no longer any reason in principle or policy why test 4(a) should be regarded as inapplicable to a failure to make a specified payment.  As Lord Parmoor said, each case depends on its own facts and circumstances[371].  The better view of the operation of test 4(b) in contemporary circumstances is that it represents a possible, but not always necessary, application of the broader principle expressed in test 4(a) to facts of the kind identified in test 4(b).

     [370]Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8.

     [371]Dunlop [1915] AC 79 at 101.

338. In any event, strictly speaking, this case is not of the type described in test 4(b).  The late payment fee was payable on failure to make the Monthly Payments on time.  The breach or failure of performance on which it was conditioned was lateness in payment as opposed to a failure to pay.  Properly understood, as the primary judge held, this case fell within the general principle reflected in test 4(a) and therefore the applicable test was whether the late payment fee was exorbitant or extravagant (or, in other words, "out of all proportion"[372]) in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

     [372]Ringrow (2005) 224 CLR 656 at 667 [27] quoting AMEV-UDC (1986) 162 CLR 170 at 190 per Mason and Wilson JJ.

339. Additionally, as the primary judge also held, this case engaged test 4(c) of the Dunlop tests.  The late payment fee was of the same amount regardless of the magnitude of the Monthly Payments required to be made and of the extent of lateness in payment, and thus, according to test 4(c), there arose an evidentiary presumption that the payment was penal.  It then fell to the Bank to show why the late payment fee was not penal[373].

     [373]See Lordsvale [1996] QB 752 at 761-764 per Colman J.

     The greatest recoverable loss that could conceivably be proved

340. Mr Paciocco further contended that, if test 4(a) of the Dunlop tests were applicable, the primary judge was correct to assess the greatest loss that could conceivably be proved to have followed from the breach by reference to what would be recoverable as unliquidated damages.  For that reason, it was submitted, the Full Court erred in taking into account forms of projected losses which might be conceived of as bearing some possible relationship to the breach but which at law are regarded as too remote to be recoverable. 

341. That contention should be accepted.  As Mason and Wilson JJ observed in AMEV-UDC[374], during the first half-century following Dunlop the concept of an agreed sum being extravagant in comparison with the greatest amount of damage that could conceivably have been contemplated by the parties became, in effect, a test of whether the agreed sum was greater than the amount of damages that could be awarded for the breach of contract.  That change was "consistent with an underlying policy of restricting the parties, in case of breach of contract, to the recovery of an amount of damages no greater than that for which the law provides"[375].  Hence, as stated in Chitty on Contracts[376], the word "damage" in this context means "net loss" after taking account of the claimant's expected ability to mitigate.

     [374](1986) 162 CLR 170 at 190.

     [375](1986) 162 CLR 170 at 190.

     [376]Chitty on Contracts, 32nd ed (2015), vol 1 at 1922 [26-187].

342. In AMEV-UDC[377], Mason and Wilson JJ posited that it would be in the interests of freedom of contract, and therefore desirable, for the courts to return to the idea that an agreed sum should only be characterised as a penalty if it is "out of all proportion" to the damage likely to be suffered as a result of the breach.  They proposed that the test be one of degree that depends on a number of circumstances including the degree of disproportion between the stipulated sum and the likely loss to be suffered (a factor which they said would be relevant to the oppressiveness of the term to the party required to pay) and the nature of the relationship between the contracting parties (a factor which they said would be relevant to the unconscionability of the party's conduct in seeking to enforce the term)[378].  It may be accepted that the law has now reached that stage of development.  But, even so, as was stated in Ringrow[379], in assessing the degree of disproportion in typical penalty cases the sum of money stipulated as payable on breach is to be compared with what would be recoverable as unliquidated damages for the breach.

     [377](1986) 162 CLR 170 at 190.

     [378]AMEV-UDC (1986) 162 CLR 170 at 193.

     [379](2005) 224 CLR 656 at 665 [21].

343. For the reasons already stated, this case is a typical penalty case of the kind referred to in Ringrow.  In those circumstances, the primary judge was correct to consider whether the late payment fee was out of all proportion to the amount recoverable as unliquidated damages. 

     Perspective for the assessment of loss

344. The Full Court criticised the primary judge's approach to comparing actual damage suffered by the Bank with the late payment fee as an ex post determination of whether the prima facie penal character of the late payment fee was rebutted.  According to the Full Court, what was required was an ex ante analysis (as at the date of entry into the credit card facility) to assess whether the fee was extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to follow from the breach.  It followed, the Full Court held, that the primary judge was wrong to have regard to Mr Regan's evidence of costs actually incurred by the Bank on late payment by Mr Paciocco and wrong to reject Mr Inglis' projections as irrelevant. 

345. Contrary to the Full Court's reasoning, the primary judge did not take an ex post approach to the identification of conceivable loss.  As her Honour's reasons make clear, she approached the task ex ante in accordance with Dunlop tests 4(a) and 4(c).  By that means, she discerned that, because the late payment fee was of a fixed amount regardless of the magnitude and duration of the late payment, there was no ex facie relationship between the amount of the fee and any loss resulting from the lateness of payment.  That gave rise to an evidentiary presumption that the late payment fee was penal.  Then, in order to determine whether that presumption was rebutted[380], her Honour embarked upon a comparison of the amount of the late payment fee with the amount which would be recoverable as unliquidated damages for breach of contract.

     [380]See, eg, Lordsvale [1996] QB 752 at 761-764 per Colman J.

346. The primary judge was also not in error in having regard to Mr Regan's evidence of actual damage.  Although the exercise is one of characterisation and therefore, as the Full Court said, looks forward ex ante from the time of entry into the contract, evidence of what happens after a contract is entered into is capable of providing a sound basis from which to infer what the parties would have reasonably expected to be the loss[381].  That is why, in the typical kinds of penalty cases to which this Court referred in Ringrow[382], courts generally follow the approach of comparing what would be recoverable as unliquidated damages with the amount of the stipulated payment.  For that purpose, courts may admit evidence to prove losses which may fairly and reasonably be considered to have arisen naturally according to the usual course of things so as to come within the first limb of Hadley v Baxendale[383], and losses which, because of particular facts or circumstances known to the parties at the time of entry into the contract, may reasonably be conceived of as having been within the contemplation of both parties as the probable result of breach so as to come within the second limb[384].  As has been seen, it has only been in more complex cases of the kind considered in Clydebank, Dunlop and Cavendish, where the damage likely to result from a breach is not capable of precise pre‑assessment, or cases like Cavendish and ParkingEye, where the interest of the innocent party in having the contract performed can be seen to extend beyond compensation for breach, that evidence has been admitted to prove what conceivably might have occurred even though it did not in fact occur[385].

     [381]Philips Hong Kong Ltd v Attorney General of Hong Kong [1993] 1 HKLR 269 at 280.

     [382](2005) 224 CLR 656 at 665 [21].

     [383](1854) 9 Exch 341 [156 ER 145].

     [384]Cf Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 at 1448-1449 per Diplock LJ; [1966] 3 All ER 128 at 143-144.

     [385]Dunlop [1915] AC 79 at 91 per Lord Atkinson.

     Late payment fee is out of all proportion to recoverable damages

347. The question then is whether the primary judge was correct in concluding that the amount of the late payment fee was extravagant and unconscionable or out of all proportion to the amount which would be recoverable as unliquidated damages for breach of the Monthly Payments provision.

348. As was previously mentioned[386], Dunlop test 4(c) recognises that the fact that a single lump sum is payable on the occurrence of one or more of several events of which some may occasion serious damage and others do not suggests that the obligation is a penalty.  Similarly, the fact that the late payment fee in this case is a fixed fee regardless of whether the late payment is serious or trivial with respect to time or amount suggests that the late payment fee is a penalty.  Hence, applying the Ringrow approach, the issue becomes one of whether there is any evidence or other compelling considerations sufficient to rebut the presumption to which that gives rise.

     [386]See above at [339].

349. As already noticed, the only evidence which the Bank put forward to support its contention that the late payment fee was not penal was Mr Inglis' projections of the costs of increase in provision for bad or doubtful debts, increased costs of regulatory capital and collection costs.  The primary judge rejected those projections as irrelevant because, to a very large extent, no such costs were incurred.  For the reasons which follow, her Honour was correct to do so.

     (i) Increase in provision for bad or doubtful debts

350. The Bank uses provisioning to estimate the impairment of its financial assets.  It is required to hold provisions for losses under both international and Australian accounting standards.  One such standard, Australian Accounting Standards Board 139, was concerned with the measurement of a present or current loss, as opposed to estimates of future losses that might be expected or anticipated, in order to ensure that the financial statements present a fair value of what is likely to be collected from the Bank's receivables.  Consistently with those standards, when accounting for a provision, two changes were reflected in the Bank's accounts.  First, the amount owed by customers as recognised in the Bank's balance sheet was reduced to the level that the Bank expected to recover.  Secondly, a loss was recorded in the Bank's profit and loss account as an expense or cost representing the impairment in the asset value. 

351. Given the nature of those entries, the primary judge held that the costs of increase in bad or doubtful debts which Mr Inglis attributed to each late payment were in effect no more than an estimate of possible future losses and so were not recoverable as damages for breach of contract.  

352. That conclusion was correct.  A provision for bad or doubtful debts is an estimate of future loss, not an incurred loss.  Perforce of the applicable accounting standards, the provision must be brought to account in the Bank's balance sheet as a credit against (and so in reduction of) the value of loans and other credit facilities the subject of provision.  It must also be reflected in the Bank's profit and loss account as a credit against (and thus in reduction of) reported annual income.  But, if the debt is recovered in a future year of income, the provision is or should be reduced accordingly and the reduction in provision should be carried to the profit and loss account as an accretion to the latter year's income.  Most importantly, although the amount of an increase in provision for bad or doubtful debts is recorded as a once and for all expense against annual income for the year in which the provision is raised, it does not mean that the Bank has in fact received any less by way of income in that year or that it has had to pay away any of its income in satisfaction of a diminution in capital in that year.  As the primary judge said, it is simply an estimate of what might or might not one day prove to be the case and therefore is not recoverable as damages.  

353. Conceivably, the Bank might suffer some detrimental consequence as a result of the reported reduction in asset value or annual income in the relevant year of income.  At least in theory, either the reduction in asset value or the reduction in annual reported income could reduce the Bank's ability to borrow or lend money as part of its income producing activities.  But the words "in theory" are stressed because, as Mr Regan suggested, in reality the Bank's generation of income from credit card facilities (and therefore at the very high rate of return which they generate) is as much dependent on lending to customers who it may be assumed will be late in making Monthly Payments as it is upon the state of its balance sheet and annual reported income.  And, even if the Bank did suffer some reduction in its ability to borrow or lend money as a result of the increase in provision, the loss thereby occasioned to the Bank would certainly not be the amount of the increase in provision.  It would be the present discounted value of the estimated reduction in income flowing from the restriction in borrowing or lending activities as a result of the increase in provision.  Self-evidently, any such amount would be vastly less than the amount of the increase in provision.

354. Furthermore, assuming that an increase in provision for bad or doubtful debts were recoverable as damages for breach of contract, it is apparent that the amount of the "costs" of increased provision that Mr Inglis attributed to late payment by Mr Paciocco was out of all proportion to any increase in provision which may have resulted from late payment.

355. As appears from Mr Inglis' report, the Bank did not calculate provisions individually for each customer.  Instead, it obtained approval from the Australian Prudential Regulation Authority to use an Internal Ratings-Based approach to credit risk which resulted in a Collective Provision for currently identified losses on pools of loans and other credit facilities that the Bank assessed to be at similar risk of defaulting in repayment. 

356. A provision was then calculated for the whole of each pool by means of the following formula: 

     "Expected losses = PD [Predicted Default] x EAD [Exposure at Default] x LGD [Loss Given Default] x PCE [Potential Credit Exposure]".

357. The Predicted Default figure was a statistical probability of an account in a pool of customer accounts with similar payment behaviours going into default over the following 12 months.  That figure was multiplied by the Exposure at Default, which was a statistical estimate based on all current consumer credit accounts of the amount outstanding in the event a customer defaults.  That figure was then multiplied by the Loss Given Default, the expected loss in the event of default, which was a statistic modelled across all consumer credit accounts.  In turn, that amount was multiplied by the Potential Credit Exposure, which was the greater of the account limit or account balance where that amount might be assessed on an individual account basis but, for the purpose of at least some of Mr Inglis' calculations, where an "average exposure" was assumed.

358. Given that, on the evidence, there were more than two million customer accounts in the pool, with credit limits ranging up to $500,000 per account, and therefore a total exposure of more than $19.4 million, and given that Mr Paciocco had only two facilities, of which the greater had a credit limit of less than $19,000, any amount by which late payment by Mr Paciocco caused the provision to be increased was necessarily minuscule in comparison to the total.

359. In what was said to be an endeavour to provide an estimate of the portion of the increase in provision actually caused by each late payment by Mr Paciocco, Mr Inglis split the total population between customers who had made a late payment and those who had not.  He then calculated a difference in "average" cost of provision for bad or doubtful debts per account (calculated across each group using the formula already described), of $23 per account (on his most conservative estimate).  According to that analysis, the $23 was an "average" cost of increase in provision per late payment per account for each customer within the group of customers who made late payments, which was the cost to the Bank of each of Mr Paciocco's late payments.

360. The problem with that, however, is that, due to the nature of the formula already described, and the fact that the "average" cost per late payment was calculated across the group of customers regardless of the amount of the individual facility limit or potential default of each customer, the $23 "average" cost per late payment was equally disproportionate to the extent to which each of Mr Paciocco's late payments added to the Bank's costs of increase in provision for bad or doubtful debts, and equally disproportionate to what the Bank and Mr Paciocco might be supposed to have contemplated at the time of entry into the facility as costs which could result from any of Mr Paciocco's late payments.

     (ii) Increase in regulatory capital

361. As an authorised deposit-taking institution[387], the Bank is required to maintain adequate capital, known as regulatory capital, to act as a buffer against unexpected losses[388].  The minimum amount of regulatory capital required to be held is determined by measuring the Bank's overall capital base against its holdings of risk weighted assets ("RWA").  The more RWA the Bank holds, the greater the amount of regulatory capital it must put aside to counter the risk of default on those assets.

     [387]Pursuant to the Banking Act 1959 (Cth).

     [388]See Prudential Standard APS 110 (Cth).

362. The primary judge concluded that none of the alleged increases in regulatory capital could be directly or indirectly related to any of Mr Paciocco's late payments and, consequently, that the alleged cost of increase in regulatory capital should not be taken into account in the assessment of damages recoverable for breach of contract.  That was also correct, although for partly different reasons from those which appealed to her Honour.

363. According to his report, Mr Inglis' estimate of the "cost" of increase in regulatory capital consequent upon late payment was comprised of two elements: 

     (a) the "cost" of increase in RWA; and

     (b) the cost of additional regulatory capital to replace Core Tier 1 capital the result of increase in RWA.

     The estimate of the "cost" of increase in regulatory capital consequent upon a late payment was between $9 and $12 per late payment.

364. Mr Regan made a number of criticisms of the methodology of that estimate which, if accepted, would suggest it was significantly inflated.  Over and above those criticisms, however, it is apparent that the "cost" of increase in regulatory capital as so estimated is no more than an estimate of increase in provision for RWA.  It follows that, like the increase in provision for bad or doubtful debts[389], it is not a loss or outgoing that would be recoverable as damages for breach of contract.  It is merely an estimate of a cost which might one day be, but equally might not be, incurred.

     [389]See above at [351]-[352].

365. In contrast to the "cost" of increase in RWA, it appears that the cost of replacing Core Tier 1 capital might have been a loss or outgoing actually incurred, due to the need to supplement Tier 1 capital relegated to regulatory capital, and so might be recoverable as damages for breach of contract.  But the amount of it was de minimis.  Mr Inglis' estimation of the "average" costs of additional regulatory capital to replace the Core Tier 1 capital was between only $1 and $2 per late payment.

366. Mr Inglis also proposed an alternative calculation, of between $5 and $6 per late payment, which he said he computed by excluding repayment events (that is, repayments and write-offs).  But he did not offer any justification for excluding repayment events.  Nor is there any reason in principle why repayment events should have been excluded.  To the contrary, as Mr Inglis indeed explained, repayment events result in a reduction in the provision for RWA that reduces the need for regulatory capital and thus has an associated cost saving.  Hence, to exclude repayment events from the calculation significantly distorts the estimate.

     (iii) Collection costs

367. Late payment of amounts owing on a credit card account may trigger collections activity by the Bank to recover the amounts due, including by contacting overdue customers by telephone. 

368. Mr Inglis put forward two alternative estimates of collection costs caused by late payment of the Monthly Payments:  Calculation A and Calculation B.  In Calculation A, he conjectured that the "average" collection costs which could result from a late payment were only $4.90 and in Calculation B, he proposed a much higher figure of $15.70 per account.  The method of calculation employed in Calculation B differed from the method used for the purposes of Calculation A (and, therefore, from the method used for all other calculations undertaken by Mr Inglis) in that it was made on what Mr Inglis termed a "per account" basis, as opposed to a per late payment basis, as was used for all other calculations.  Since the late payment fee was chargeable on a per late payment basis, and since the question for present purposes is whether the late payment fee was out of all proportion to the costs which the Bank might conceivably incur as a result of the late payment, there is no acceptable justification for the adoption of the Calculation B methodology.

369. Mr Inglis also provided a further alternative calculation which he called the "maximum amount of costs that the Bank could conceivably have incurred", which ranged between $44.90 and $99.20 per account.  Those estimates were made on the basis of the 95th percentile of the total telephone call duration for each stage of collections activity.  But there is even less justification for accepting an estimate of that kind than there is for adopting the per account basis employed in Calculation B.  For even though it is open to take into account the fact that a stipulation may be broken in countless ways, and that although the majority of them are likely to be trivial some may be serious[390], conjectured costs of between 10 and 20 times Mr Inglis' own, on any view, generous estimate[391] of the increase in collection costs likely to be incurred on an "average" basis are not recoverable as damages for breach of contract and cannot otherwise realistically be regarded as anything like a reasonable estimate of the greatest conceivable loss likely to be incurred.  As counsel for Mr Paciocco put it, such an estimate is untethered from reality.

     [390]Cf Cooden EngineeringCo Ltd v Stanford [1953] 1 QB 86 at 98 per Somervell LJ, 108-109 per Jenkins LJ.

     [391]Mr Regan noted that the Bank incurred $9.6 million of collection costs for late payments in 2009.  Multiplying Mr Inglis' "average" estimate of approximately $5 by the approximately 2.5 million late payments that occurred in 2009 would result in collection costs of more than $12 million, far exceeding the $9.6 million actually incurred.

     (iv) Total additional costs

370. It follows from the foregoing that, so far as the evidence went, the maximum amount of additional costs resulting from a late payment that might conceivably have been recoverable as damages for breach of contract was $6.90 per late payment ($2 "average" cost of replacement of regulatory capital and $4.90 for "average" collection costs).  And it follows from that that the late payment fee of $35 per late payment (or even $20 per late payment as it later became) was grossly disproportionate to the greatest amount of damages recoverable for breach of the Monthly Payments obligation.

     The late payment fee is a penalty

371. As Mason and Wilson JJ proposed in AMEV-UDC[392], the question of whether an obligation to make a specified payment conditioned on a breach of contract is penal is a question of degree which depends on a number of circumstances, including the degree of disproportion between the stipulated sum and the likely loss to be suffered and the nature of the relationship between the contracting parties.  In this case, the contract is a standard-form consumer credit contract and the Bank's bargaining power was such that Mr Paciocco had no opportunity to negotiate the terms.  That consumer relationship, combined with the fact that the late payment fee of $35 (or $20 as it later became) was extravagant or otherwise out of all proportion to the $6.90 of costs which might conceivably have been recoverable as damages for breach of contract, warranted the primary judge's conclusion that the late payment fee was a penalty. 

     [392](1986) 162 CLR 170 at 193; see also Dunlop [1915] AC 79 at 86-87.

     Notice of contention

372. By a notice of contention, the Bank contended that Mr Paciocco's claim to recover a late payment fee incurred on 4 September 2006 is time-barred by the operation of the Limitation of Actions Act 1958 (Vic) ("the Limitation Act"). Given the way in which the majority of this Court has determined that the penalty appeal should be decided, it is perhaps unnecessary to consider whether, if it were recoverable, the late payment fee incurred in 2006 would be time-barred.

373. For completeness, however, it should be observed that, as finally put in argument, the sole basis of the contention was that the primary judge and the Full Court were in error in holding that s 27(c) of the Limitation Act is capable of application to a mistake of law.

374. On that basis, the contention may be rejected.  It is plain for the reasons essayed by the primary judge[393], and more fully in the Full Court by Besanko J[394], that s 27(c) of the Limitation Act, like s 26(c) of the Limitation Act 1939 (UK), on which it is based, is capable of applying to a mistake of law as much as to a mistake of fact.

     [393]Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249 at 325 [365].

     [394]Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at 291-295 [382]-[397] per Besanko J (Allsop CJ agreeing at 251 [192], Middleton J agreeing at 295 [398]).

     Statutory causes of action

375. The hearing before the primary judge was conducted on the agreed basis that, if the judge determined that the late payment fee was penal, it would be unnecessary for her Honour to decide whether the imposition of the late payment fee was "unconscionable conduct" within the meaning of s 12CB of the ASIC Act, an "unjust transaction" within the meaning of s 76 of the National Credit Code or an "unfair" contractual term within the meaning of Pt 2B of the FTA. Accordingly, having held that the late payment fee was penal, the primary judge did not go on to consider whether the late payment fee was caught by any of those statutory provisions. Given that I have concluded that the primary judge was correct in holding that the late payment fee was penal, it is unnecessary for me to consider whether the late payment fee attracted any of those provisions.

     Conclusion and orders

376. In the result, I would order that the appeal in M220 of 2015 be allowed with costs.  The orders of the Full Court should be set aside and in lieu thereof it should be ordered that the appeal to the Full Court be dismissed and that the Bank pay the appellants' costs of the appeal.  In M219 of 2015, which was in effect dependent on the outcome in M220 of 2015, it should be ordered that the appeal be dismissed without any adjudication upon the merits and that the appellants pay the Bank's costs of that appeal.