The final installment of Maurice Blackburn’s class-action against ANZ over credit card late payment penalty fees was finally decided by High Court on the relative strength of the expert evidence called by either side in the epic battle.
The law firm recorded a major victory in 2012 (after two Federal Court hearings) when the High Court ruled that a contractual breach is not a necessary precondition for the classification of the resulting financial consequences as a penalty.
Its Andrews case thus established that a “collateral stipulation which, upon failure of a primary stipulation, imposes upon one party an additional detriment to the benefit of another party” – for example, an additional fee for the privilege of making the payment late – can equally constitute a “penalty”.
In Paciocco, the court had to decide – on appeal from a decision of the Full Court of the Federal Court rejecting the plaintiff’s claims – whether in fact the charges levied upon the Andrews’ plaintiffs reflected the bank’s potential loss or whether they were “extravagant, exorbitant or unconscionable” or “out of all proportion to it” and therefore unenforceable.
The Maurice Blackburn contention was that the payment had the “character of a penalty” because the 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, $100 or $1000.
Given the direct finance cost to the bank of a late payment was accepted at just $3 – although ANZ argued it was “in excess of $5″ – the plaintiffs asserted the bank could not justify the charges as a “genuine pre-estimate of its loss”.
The bank however relied on indirect overheads caused by payment delinquencies to establish reasonable proportionality of the additional contractual charges.
Its star witness was Paul Inglis – the bank’s “Head of Payments Industry” – who swore accounts in arrears contributed to the overall level of capital required and with it the costs of funding that capital reserve. And – he explained – balance sheet impairment has to be provisioned as a current cost.
ANZ had a commercial interest, Inglis reasoned – without any formulations that supported his theory – “in ensuring its credit card customers, as a cohort, made minimum monthly payments by the due date”.
The Maurice Blackburn expert on the other hand – Californian chartered accountant Greg Regan – confined his attention to the increase in operational costs incurred within the bank’s collection department.
In a 4 – 1 decision, the High Court accepted the bank’s and Inglis’ contentions.
“The question is not what ANZ could recover in an action for breach of contract, but rather whether the costs and the effects upon its financial interests by default may be taken into account in assessing whether the late payment fees were proportionate”.
Without any evidence on the plaintiff’s side challenging Inglis’ economic argument, the court’s majority held they had failed to prove the late payment fees of between $20 and $35 were “out of all proportion” to the bank’s legitimate interests”.
Perhaps not considering Inglis’ argument would carry any weight, the plaintiffs weren’t in a position to demonstrate whether or not the increased cost of capital and balance sheet impairment being trumpeted formed any part of the ANZ’s thinking when it had set the $35 fee.
As for statutory relief under ASIC Act and the ACL, the majority held ANZ could not be said to have taken advantage of Mr Paciocco in a way which would meet the statutory descriptions of “unconscionable conduct”, “unjust transactions” or “unfair terms”. He was not claimed to have been treated “in any way less favourably than he would have been treated by any other supplier of credit card facilities”.
The sole dissenting voice was that of Justice Geoffrey Nettle who ruled that in the context of the standard-form credit contract and ANZ’ far superior bargaining power, Paciocco had no opportunity to negotiate the terms.
In such circumstances the lack of proportionality between late payment fees and the (up to in his view) $6.90 cost and its loss measured against the sum it which might conceivably have been recoverable as damages for contract breach, justified a conclusion that the fee was a penalty.
This case has not closed the door on finance charges litigation but rather, has clarified the parameters within which a successful future case must fall.