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Are “Penalty” Fees in Your Contract Enforceable?

A fee can be a penalty when it does not:

• reflect a ‘genuine pre-estimate’ of the loss likely to be suffered when a negative event triggers a right to payment. i.e. is the fee excessive when compared against the greatest loss suffered by the person claiming the fee.
• protect fee recipient’s legitimate interests.

The High Court recently considered whether late payment fees charged by a bank on credit cards were a penalty and therefore be unenforceable.

The Court decided the bank had a legitimate interest in timely repayment, which allowed it to pursue its business of lending to customers. The evidence did not establish the fee was excessive. – Paciocco v Australia and New Zealand Banking Group Ltd

The Court will:

• Consider the party’s legitimate interests to be protected, not the amount that might be recovered in an action for damages.
• Determine the assessment as at the time the parties enter into the contract.
No contract is the same.
Circumstances change with the nature of each transaction and the position of each party to the agreement. When determining the validity of a fee the Court takes into account a number of factors. The law constantly changes.
Business and Finance agreements should include fair conditions for all parties. Timely legal advice for new or revised business or finance documents that include terms, conditions and consequential fees can avoid multiple claims and resolve disputes speedily.

Be mindful of fees being at risk of being unenforceable because they are deemed a ‘penalty’ at law. Documents including the word “penalty” will attract close scrutiny.