Penalties Versus Late Payment Fees Under Australian Law

A recent decision by the High Court of Australia settles the question of whether contractual late payment fees constitute impermissible penalties. In allowing the fees in question, the High Court reaffirmed the freedom of contract and held that courts should refrain from interfering in contracts unless the fee in question is out of all proportion to the loss suffered, and not a genuine pre-estimate of the loss likely to be suffered by the party not in breach. The decision provides guidance for banks, non-bank lenders, as well as businesses that have contracts which charge fees upon breach of contract.

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The proceedings were initiated by a customer of ANZ (Australia and New Zealand Banking Group Limited, commonly called ANZ: the fourth largest bank by market capitalisation in Australia) who alleged that a number of late payment fees on consumer credit cards charged by ANZ were unenforceable on the basis they were a penalty under common law or were in breach of various State and Commonwealth statutes amounting to unconscionable conduct and unfair contract terms and/or an unjust transaction. The case was appealed to the High Court, which found the ANZ fees allowable and ultimately held that a fee would be considered a penalty only where the sum is extravagant and unconscionable to the loss of the party not in breach. The High Court details what interests comprise “legitimate business interests” for assessment of what charges constitute an allowable fee versus a grossly disproportionate penalty.

Consult with your Ally Law member firm to determine whether your contractual charges and fees are allowable under the law. Ally Law member firms have lawyers skilled in the nuances of the law and best practices in contract and debtor/creditor law under the laws of every jurisdiction. For more information about Ally Law member firm services in this area, contact us at yourally@ally-law.com.

Article by Michael Wirth of Ally Law member firm Kemp Strang.