On 27 July 2016, the High Court of Australia held in Paciocco that a late payment fee imposed by the ANZ in respect of two credit card accounts was not void as a penalty. The Court considered the test to apply in determining whether a sum paid on default is to be characterised as a penalty is whether such a sum is “out of all proportion” to the interests of the party which it is the purpose of the provision to protect. These interests may be of a business or financial nature. Importantly, the test is not confined to loss in damages resulting directly from the breach.
In Arab Bank, the NSW Court of Appeal was called to consider whether a 2% “default interest rate” could amount to a penalty.
Applying Paciocco, the Court held that:
(a) that the appropriate time to consider the consequences of breach to determine whether a provision operated as a penalty is not at the time of breach but at the time of contract; and
(b) at the time of contract, a number of consequences may have been foreseen to have arisen in the event of a default including the possibility that costs would be incurred monitoring the loan with a view to determining whether it would be classed as “impaired” for the purposes of the Australian Prudential Regulation Authority Standard APS 220. The cost of the making of provisions against impaired loans was also identified; and
(c) while the precise costs of the provisions could not be foreseen, enough was known to conclude that the stipulated default rate of 2% could not be regarded as extravagant or unconscionable and out of all proportion to the interests of the Bank which the provision was designed to protect.