You are on page 1of 8

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note Parties Appellant: Lucio Robert Paciocco & Speedy Development

Parties

Appellant: Lucio Robert Paciocco & Speedy Development Group Pty Ltd Respondent: Australia and New Zealand Banking Group Ltd

Background

Lucio Robert Paciocco (LRP) was the lead applicant, in a class-action brought by roughly 44,000 applicants. 1 These applicants were all holders of accounts with the Australian and New Zealand Banking Group Ltd (ANZ). 2 The applicants claimed that a variety of different fees levied upon these accounts were invalid penalties and not valid liquidated damage clauses. 3 Furthermore, it was claimed these fees were unconscionable and therefore unenforceable. 4

Each of the contracts made between the parties were non-negotiable agreements and the terms that were offered in the documentation were unilaterally provided for by ANZ. 5 It follows that ANZ had the right to vary these terms of its own accord, which it admittedly did frequently. 6

There were a number of fees which constituted the basis of the action brought by

  • 1 Along with his company Speedy Development Group Pty Ltd (SDG); Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35, [1].

    • 2 Similar actions are being brought concurrently against other banks; ibid [2].

    • 3 Ibid.

    • 4 Ibid [4].

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

LRP. The 72 fees could be broken up into two different groups - (1) fees relating to late payment & (2) fees relating to other services – these fees were pursuant to the relevant contractual agreement existing between the two parties. 7 The late fees were contingent on a breach of the primary stipulation of the agreement. 8 Meanwhile the limit, dishonour and honour fees were not levied based on a breach of contract but instead arose in lieu of circumstances other than those of the primary stipulation. 9 Importantly, the nature of these fees was that they were fixed in amount, regardless of the extent or nature of the breach.

Issues

Firstly, is whether the fees in question were able to be properly characterised as penalties; at either common law or equity.

Secondly, whether the fees charged by the ANZ could be construed as a genuine pre-estimate of damage or alternatively as being unconscionable and therefore not legally enforceable. 10

Thirdly, if the fees were found to be unenforceable could the ANZ then seek to rely upon relevant statutory limitations which created a six year limit to actions. 11

Reasoning

The judgement was delivered by Gordon J.

Could these fees be characterised as penalties?

  • 6 The admission of ANZ can be found in Annexure 2 along with other relevant

contractual terms; Ibid.

  • 7 Ibid [2].

  • 8 the primary stipulation is to pay the balance of a payment before a pre- determined due date ; Ibid [4].

  • 9 Ibid [5].

    • 10 Under Australia Securities & Investments Commission Act 2001 (Cth) s12CB

and Fair Trading Act 1989 (Cth) s8A.

  • 11 Limitation of Actions Act 1958 (Vic) s27.

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

In determining whether the fees in question were penalties or not, Her Honour applied the principles stated in the High Court decision of Andrews. 12 In Andrews it was established that the doctrine of penalties could be expanded to situations involving bank fees such as those present in Paciocco. 13

Her Honour initially sought to determine the terms of the contracts in question and then examined the circumstances surrounding the levying of the fees. 14 This was an imperative step in determining if the fees actually related to securing the performance of the primary obligation of the contract or to other unrelated services. 15 This was essential because if the fees related to other services and not the primary obligation it would not constitute a penalty. As it relates to these non-breach events, it is evident from the judgement that equity will move to negate the effect of any collateral stipulation that is assessed to be imposed, in terrorem, regardless of whether there is a contractual responsibility to avoid that event. 16 The second step Her Honour took was to determine if the fee was ‘extravagant, exorbitant and unconscionable’, if it was it would be an unenforceable stipulation. 17

Late Payment Fees: Gordon J found that these fees were penalties at common law and equity, since the fees only arose in cases where the primary obligation of the contract had been breached. 18 Her Honour then found these fees to be extravagant. The amount being charged was deemed important by Gordon J. This was on account of the evidence provided regarding the quantum of loss for

  • 12 Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35,

[13].

13Her Honour laid out the doctrine of penalties as stated in Andrews at [10]: In general terms, a stipulation prima facie imposes a penalty on a party (LRP) if, as a matter of substance, it is collateral to a primary stipulation in favour of a second party (ANZ) and upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second part; Ibid [26].

  • 14 Ibid [110].

  • 15 The obligation was to pay back an amount; Ibid [4].

  • 16 In terrorem is a latim maxim that means “in fear”. In this instance the phrase

referred to stipulations which created a disincentive to not fulfilling the primary

obligation of the contract; Ibid [15].

  • 17 Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company

Limited [1915] AC 79, 86-87.

  • 18 The obligation was to repay the amount on time; Ibid [4].

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

breaches of the primary obligation. ANZ’s losses for each of these breaches was assessed to be no more than $3, far below the $35 fee amount charged, which now seemed penal in nature. 19 The amount was therefore not a genuine pre- estimate of damage resulting from breach, which made the fees unconscionable and therefore unenforceable. 20 Moreover, it didn’t seem to matter how late the repayment was made or how large the balance amount was, the disproportionate nature of the fees levied were the same.

Other Service Fees: Her Honour came to the conclusion that these fees had no demonstrated relationship to securing the performance of the primary obligation and further that they would not arise due to a breach of contract. The application of the penalty doctrine was found to not stand where the fees were tied to some ‘other service’ and therefore these were not penal in nature. 21

Limitations: Finally, in relation to the issue regarding limitation provisions the court found that ANZ was not able to rely on the limitations provision since LRP acted under a ‘mistake of law’. 22 Upon applying the reasoning of the Kleinwort Benson case the six-year period was deemed to only begin once LRP was aware of the mistake and it didn’t matter that it was a mistake of law and not mistake of fact. 23 The court determined that this realisation only happened upon the commencement of the Andrews Trial in September 2010. 24

Analysis

Paciocco principally reiterated the doctrine of penalties in common law and equity recently re-formulated by the High Court in Ringrow 25 and Andrews. 26 Moreover, the court explored the more expansive boundaries created by the

  • 19 The applicant provided this information through expert evidence; Ibid [173].

  • 20 Ibid [15].

  • 21 Ibid [5].

  • 22 ANZ unsuccessfully tried to argue that acting under a mistake of law

prevented the use of Limitation of Actions Act 1958 (Vic) s27; Ibid [365].

  • 23 Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349, 416-418.

  • 24 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205

  • 25 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, 12.

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

Andrews High Court regarding the modern application of the doctrine which provided guidance that it could now pertain to certain commercial arrangements, such as those between banks and their customers. 27

Historically, there has been a lot of difficulty in making sense of the convoluted nature of the doctrine of penalties. 28 Prior to Paciocco judicial guidance on these difficulties had been quite sparse and the handful of decisions between Andrews and Paciocco had not provided any insight on these issues.

Throughout Paccioco, Gordon J sought to explore the tacit differences between the penalty doctrine at common law and in equity and acknowledged that the doctrine in equity had not yet been subsumed into the common law. 29 The difference as affirmed by Gordon J is that, for a stipulation to be a penalty at law there needs to be an actual breach of a contractual term, conversely in equity no such breach is necessary as long as the Andrews test is satisfied. 30 However, Her Honour remarked upon exploring the application of the two that they are not to be thought of as being completely unconnected. 31 Paciocco therefore was a significant and necessary case to provide some clarity on the uncertainties thrown up by the expansion of the equitable penalty doctrine from Andrews.

Her Honour elucidated the point that whilst the two doctrines will enliven differently, there are still similarities present. 32 Fees such as those in Paciocco will not be considered penalties unless exorbitant or extravagant in terms of the size of the loss relative to the fee. 33 It follows that the party that would suffer loss due

10.

  • 27 Ibid.

  • 28 A decision which itself raised a lot of difficult questions about the expansion of

the doctrine; Paula D. Baron, ‘The Doctrine of Penalties and the Test of

Commercial Justification’, (2008), 32 UWA Law Review, 2.

  • 29 Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35,

13.

  • 30 Reiterating the principles stated by Lord Parker in Dunlop Pneumatic Tyre

Company Limited v New Garage and Motor Company Limited [1915] AC 79, 97;

Ibid [19].

  • 31 Ibid [14].

  • 32 Ibid.

  • 33 Ibid [14].

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

to a breach may only enforce the stipulation to the extent which it reflects a genuine pre-estimate of damage, if it is possible to actually estimate. 34 However, a party cannot get around this limitation by creating a stipulation that would enliven without a breach of contract since the equitable doctrine is not confined to stipulations that arise from a breach of contract. 35 It would also apply to a collateral stipulation imposing an additional detriment which is, in terrorem, pursuing the completion of the primary situation. 36

The biggest question that seems to arise out of Paciocco, according to Tyree & Sneanan, is how the broadening of the equitable doctrine will affect the structure of future commercial arrangements. 37 The shift towards expanding the doctrine could elicit uncertainty from commercial entities as to whether potential contractual partners could utilise the doctrine to relieve themselves of obligations created, once it suited them to do so. 38 The potential for equitable interference into contractual agreements could restrict the freedom to contract and would directly contradict the maxim of ‘equity being a shield not a sword’. So it will be interesting to see how wide-reaching the ambit of the equitable doctrine will become. The type of expansions that the penalties doctrine has undergone has been said to give equity its vitality. 39

Therefore, it would follow that the courts of equity enforcing the doctrine must walk a legal tightrope. The courts must balance the need for intervention in cases where there is a clear disparity of power between the parties involved but they must also duly respect the ability of entities to create commercial agreements freely. 40 The concern purported by Hepburn is that although the

  • 34 This follows the maxim that ‘equity is equality’ which invokes the idea that

in order for a remedy to be equitable, there must be an equal distribution of the

losses proportionate rightful claim as per Public Trustee v Christian Aid Society [1979] Ch 218, 225-226; Ibid [30].

  • 35 Ibid [26].

  • 36 Ibid [27].

  • 37 Alan Tyree and SC John Sheahan, ‘Bank Fees’, (2014) 25 Journal of Banking

and Finance Law and Practice 43.

  • 38 Justice Julie Ward, ‘Penalties and the Protection of Freedom of Contract’,

(Paper presented at the Banking and Financial Services Law Association

Conference, New Zealand, 2010) 1.

  • 39 Justice Michael Kirby, ‘Overcoming Equity’s Isolationism’, (2009) 3 Journal of

Equity, 11.

  • 40 There was a clear imbalance of power in this case since ANZ was able to

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

courts are well-versed in the application of the law, they may not be able to avoid unnecessarily subverting freely created agreements entered into by parties having full capacity. 41 The question which then arises upon the expansion of the doctrine, is whether now all stipulations will be deemed penalties if they cause an amount to be payable to the obligee and are not exact estimates of the extent of potential loss? The courts of equity are therefore tasked with a precarious balancing act in which an exercise of discretion and great judicial restraint is necessary in order to achieve satisfactory outcomes for all parties.

Bibliography

A Articles/Papers/Reports

Baron, Paula, ‘The Doctrine of Penalties and the Test of Commercial Justification’, (2008), 32 UWA Law Review 2.

Hepburn, Samantha, ‘Equity and Infatuation’, (1993) 18 Alternative Law Journal 208.

unilaterally set the terms of the contract and had the ability to vary them as they wished; Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35, 43.

41 Samantha Hepburn, ‘Equity and Infatuation’, (1993) 18 Alternative Law Journal 208, 41.

Ashish Joseph 42646798 LAWS3113 Trusts A Case Note

Kirby, Michael, ‘Overcoming Equity’s Isolationism’, (2009) 3 Journal of Equity 1.

Tyree, Alan and Sheehan, SC John, ‘Bank Fees’ (2014) 25 Journal of Banking and Finance Law and Practice 43.

Ward, Julie, ‘Penalties and the Protection of Freedom of Contract’, (Paper presented at the Banking and Financial Services Law Association Conference, New Zealand, 2010).

B Legislation Australia Securities & Investments Commission Act 2001 (Cth). Fair Trading Act 1989 (Cth). Limitation of Actions Act 1958 (Vic).

C Cases

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR

205.

David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353.

Dunlop Pneumatic Tyre Company Limited v New Garage Motor Company Limited [1915] AC 79.

Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349.

Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA

35.

Public Trustee v Christian Aid Society [1979] Ch 218. Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, 12.