Paciocco & Anor v Australia and New Zealand Banking Group Limited

[2016] HCATrans 9

[2016] HCATrans 009

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M219 of 2015
  No M220 of 2015

B e t w e e n -

LUCIO ROBERT PACIOCCO

First Appellant

SPEEDY DEVELOPMENT GROUP PTY LTD (ACN 006 835 383)

Second Appellant

and

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522)

Respondent

FRENCH CJ
KIEFEL J
GAGELER J
KEANE J
NETTLE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 4 FEBRUARY 2016, AT 10.15 AM

Copyright in the High Court of Australia

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friends, MR M.B.J. LEE, SC and MR W.A.D. EDWARDS, for the appellants in each matter.  (instructed by Maurice Blackburn)

MR A.C. ARCHIBALD, QC:   May it please the Court, in these appeals I appear with my learned friends, MR M.H. O’BRYAN, QC and MS C. VAN PROCTOR, for the respondent bank.  (instructed by Ashurst Australia)

FRENCH CJ:   Thank you.  Yes, Mr Jackson.

MR JACKSON:   Your Honours should have copies of our outline of submissions in each matter. 

FRENCH CJ:   Thank you.

MR JACKSON:   May I ask your Honours to take into account also a document which is called the supplementary volume of the appeal book.  It contains the contractual terms, or the essential contractual terms, that were involved which are summarised in the earlier parts of the appeal book but were part of the evidence at the trial.  I thought it might be easier, your Honours, to the extent to which issues of construction to look at the documents in full rather than in part.

FRENCH CJ:   Do you have any difficulty with that, Mr Archibald?

MR ARCHIBALD:   No, if the Court pleases.  I do understand this matter was addressed by the parties when the contents of the books were originally being settled and the parties accepted that this material was not necessary but if my learned friend finds advantage in referring the Court to the material then we have no objection.

FRENCH CJ:   All right.  You have leave to refer to it.

MR JACKSON:   Thank you, your Honours.  Your Honours, as the Court is aware there are two appeals.  M220 is the penalties case under the general law - and may I refer to it as the penalties claims - and M219 is the case based on statutory cause of action against statutory claims.  I propose to deal, if I may, with the two appeals in that order but there are some basic facts common to both and may I go very briefly to those.

Your Honours, the basic facts - and I am referring your Honours to our written submissions in the penalties case - are summarised at paragraph 6 and following in our submissions in that matter and although other fees were in issue in the courts below, the proceedings in this Court relate to fees described as “late payment fees” and although other accounts were in issue in the courts below, the proceedings in this Court relate to the accounts, or dealings between the parties in relation to two credit cards issued by the respondent and they are numbered 9522 and 9629.

The late payment fees were incurred in two periods, as referred to in paragraph 9 of our written submissions in‑chief, on eight such occasions prior to December 2009 and on 18 such occasions after then.  A summary of the position can be seen in the primary judge’s reasons in volume 4 at page 1189 in paragraphs 52 to 58, dealing with the earlier period, and at page 1193, paragraphs 71 to 75, dealing with the later period.

Your Honours, the terms and conditions pursuant to which the late payment fees were imposed were of course contractual, and the terms are set out in annexure 2 of the primary judge’s reasons.  That annexure commences at page 1339 in volume 4 but relevantly at page 1341, about line 45.  May I take your Honours to that?  I will go to line 45 in just a moment, your Honours, but the terms and conditions involved three documents – a letter of offer, a document called “conditions of use” and a booklet which was called a fees and charges booklet.

Your Honours, if I could go then to page 1341, about line 45.  It has got the heading “Card Accounts” and the two numbers are given.  The letter of offer relevantly provided:

Each month you are required to pay:

·the greater of $10 or 2% of the monthly Closing Balance shown on your statement of account, rounded up to the nearest dollar

·or, if the Closing Balance of your statement of account is less than $10, the full closing balance –

by what is described as the due date shown on that statement of account.  And ‑

In addition you will need to pay any Amount Due Immediately on receipt of your statement of account.

Your Honours will see a reference at page 1343, about line 20, in paragraph (a) to:

Banking Fees and Charges booklets, as varied from time to time.

Your Honours, if one goes just to the conditions of use, as set out at page 1342, it can be seen from her Honour’s paragraph 5(1) that there was to be a monthly statement of account.  The statement of account would detail all transactions on the credit card account during the period covered by the account, that is, during the statement period that is referred to in paragraph 5(2). 

I mentioned before the due date.  The reference to a due date can be seen in two places:  in the letter of offer at page 1341, about line 48 that I took your Honours to earlier; and, secondly, in the conditions of use at page 1342, about line 40.  Your Honours will see there, at 14.2:

The account holder must make the ‘Minimum Monthly payment’ shown on each statement of account by the ‘DUE DATE’ shown on that statement of account.

Your Honours, the due date in the ordinary course of events was 25 days from the end of the statement period.  You will see that on page 1342, about line 47.  Your Honours, some amounts, however, were required to be paid more expeditiously than the 25 days.  That occurred if there were “overlimit” or “overdue” accounts.  They are terms defined at the bottom of page 1342, commencing about line 52.

Could I refer your Honours also in relation to such amounts – that is the overdue or over limit amounts – to the last sentence under “Minimum Repayment” on page 1341 about line 55, “In addition you will need to pay”, and also to the definition of “Amounts payable immediately” at about line 35 on page 1342. 

Now, your Honours, the provision for the late payment fee is then found at the top of page 1342 about line 5 on the page:

A fee of $35 will be charged to your credit card account if the “Monthly Payment” plus any “Amount Due Immediately” shown on the statement of account is not paid within 28 days of the end of the “Statement Period” shown on that account.

FRENCH CJ:   That was not conditioned on the amount which had not been paid?

MR JACKSON:   No.  Your Honour, I am going to come to that in a moment.

FRENCH CJ:   Yes.

MR JACKSON:   Your Honours, as appears from the next page, page 1343, about point 7, there was also provision for interest and in this regard the position differed between the two classes of transactions which incurred liability to the Bank.  Those types of transactions – and no doubt your Honours will be familiar with these generally speaking – were purchases which had been paid for by the use of the credit card on the one hand, and the cash advances drawn by the cardholder by the use of the credit card again. 

Now, in relation to the latter, cash advances, interest was payable on each from the time it was made.  In relation to purchases, interest was not payable if payment of the full closing balance on the account was made by the due date – that is the full amount – but if such a payment was not made by the due date, interest became payable on each such purchase from the date it was made.  In addition to interest, the late payment fee would itself attract interest, and that is apparent from clauses (20.1) and (21)(c) which, I think, do not appear in the original appeal books but do appear in the supplementary book and I will take your Honours to that a little later if I may.

Your Honours, the position in relation to the period December 2009 thereafter was similar, and your Honours will see that at page 1346 and following.  The interest rate applicable was 12.24 per cent in late 2009, and your Honours will see that in our written submissions at paragraph 7(d).  The rates varied from time to time.  The amount of the late payment fee, as I said, was $35 in the earlier period but reduced to $20 in the later period and your Honours will see the references to that in paragraph 7(c) of our written submissions in‑chief.

KIEFEL J:   Was there any evidence as to how the reduction came about?

MR JACKSON:   Yes, there was, your Honour.  There was an agreement or understanding amongst banks that there should be a reduction.  I will give your Honour a reference to it later, if I may.  The quantum of the late payment fee, whether the prevailing fee be $35 or $20, was the same whatever be the amount due.  Your Honours will see that referred to in the table in paragraph 11 of our submissions in‑chief where a sample of the late fees – page 4 of that document – is set out there, and your Honours will see the amount due, the days late, the amount of the fee, and one sees that if you take item 17 the $20 was payable for not paying $10 14 days late and your Honours will see the variations that are there set out.

FRENCH CJ:   That last column represents the primary judge’s findings.

MR JACKSON:   Yes, your Honour.  Could I say, your Honours, that one sees in the quite substantial schedules of the primary judge’s reasons that she has dealt with each of the transactions.  These are ones simply we extracted for the purposes of brevity and your Honours will see from footnote 1 where that information may be seen in the appeal books. 

Your Honours, the primary judge held that the late payment fees were penalties, the Full Court held that they were not.  The reasons underlying the Full Court’s approach – and if I might endeavour to summarise them at this point and come to them shortly – were that the test applicable was whether the late payment fees were excessive or out of all proportion to the loss that might be occasioned by failure to pay on the due date and that there were three elements which demonstrated that that was the case, and they were the need for provisioning, the need for regulatory capital and the costs of recovery.

Now, your Honours, the Full Court held that those matters looked at ‑ as at the time of entry into the agreements showed that the late payment fee was not excessive or out of all proportion et cetera.  Now, your Honours, I will deal with each of those matters, of course, but may I just say one thing before proceeding to do so.

Your Honours will see that the conditions of use had provided expressly for recovery of costs in any event.  You will see the provision extracted at page 1343, about line 39 where as part of the conditions of use:

Any reasonable amount reasonably incurred or expended by ANZ in exercising its rights in relation to the credit card account arising from any default (including expenses incurred by the use of ANZ’s staff and facilities) are enforcement expenses and become immediately payable by the account holder.

Your Honour, I will come to this in a little more detail later but the position, in our submission, was one that where, if one is speaking about the matters that might properly be taken into account in determining whether something is a penalty, one should not ordinarily, we would submit, take into account matters for which there is specific provision provided in the contract, but I will come to that.

FRENCH CJ:   Does this pick up things like reminder telephone calls?

MR JACKSON:   Well, your Honour, it would seem hard to say it would not, really.  It has to be reasonably incurred or expended.

FRENCH CJ:   Because it was that sort of thing that was referred to in relation to the collection costs aspect, was it not?

MR JACKSON:   Yes, and the point we seek to make about it is that under the contract, if the money is not paid on the due date, what happens is that interest is or becomes payable.  Any costs incurred that fall within that clause are payable and, in addition, there is payable the late payment fee itself and ‑ ‑ ‑

GAGELER J:   Is the credit card holder in default within the meaning of that clause simply by failing to make a payment on the due date?

MR JACKSON:   Well, your Honour, in our submission, that would be the case.  The reason being that there is a contractual obligation to pay and in both courts below it has been held that that is a breach of contract not to pay.  So, your Honours, the concept of default in a contractual sense would appear to comprehend failure to comply with an obligation to be performed on a certain date.  I should also say, your Honour, I am reminded if you look at the paragraph immediately above is quoted, clause 29(a):

The account holder is in default under the credit card contract if you have not met any of your obligations under this credit card contract.

KEANE J:   Did default give rise to a right to terminate the facility?

MR JACKSON:   Yes.  Yes, your Honour, to put it shortly.  Could I just say this, that ‑ ‑ ‑

KEANE J:   Was that right to terminate lost upon ultimate payment?

MR JACKSON:   Your Honour will see there a reference to clause 29(d):

Upon payment to ANZ, in accordance with this condition, of all amounts owing on the credit card account, the agreement . . . will be terminated without the need for any further notice.

I think that it is what it is saying.  But your Honour will also see that if you look at clause 30, which is extracted on the same page a little further down, there is a:

right to cancel a credit card or refuse authorisation . . . at any time . . . 

if –

Your Honours will see the various matters that are set out there, and your Honours will see at about line 55 on page 1343 the words in brackets:

(for example, if you are in default under the credit card contract –

Your Honours, could I just go then to the question of what is a penalty.  Until the decision of the Full Court in this case, the views which have been adopted in this Court in describing the law for Australia had, in our submission, reflected two aspects.  One was that the tests applicable under the general law for determining whether a contractual stipulation providing for a payment in consequence of breach of contract - the tests were those referred to in the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.

I will come to that case in just a moment, but could I mention the other aspect, and that is the other concept was the concept in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216, paragraph 10. In Andrews at paragraph 10 the Court said that:

a stipulation prima face imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation . . . imposes upon the first party an additional detriment, the penalty, to the benefit of the second party.

Your Honours, if I could just pause for a moment to say that if one goes to the application of those two aspects to the late payment fees, first, it seems absolutely clear that the obligation to pay the late payment fee is collateral to a primary stipulation in favour of the respondent.  It is accessory because the primary stipulation is to pay the monthly payment and any amount due immediately at the specified time and if that amount or those amounts are not so paid then, to use the Court’s words in Andrews, an additional detriment was imposed on the appellant.  The additional detriment was the obligation to pay the late payment fee.  Your Honours, could I move then to the Dunlop Case.

KIEFEL J:   What do you say the position of Dunlop is after Andrews?

MR JACKSON:   I am sorry, your Honour?

KIEFEL J:   What do you say the position of the proposed tests in Dunlop stand after the decision in Andrews?

MR JACKSON:   Your Honour, we say that, so far as the Dunlop tests are concerned, they are ones of most common relevance and, in particular, are apposite to cases of breach of contract.  Now, Andrews goes further, of course, and says that the penalties notion may be apposite to other stipulations.  But Andrews does not, in our submission, take away from the application of the Dunlop Case in cases of the simple kind to which we are referring.  Your Honour, I am going to come back to the references in Andrews to Dunlop and may I do so in just a moment.

Your Honours, could I go then to the Dunlop Case [1915] AC 79. Your Honours will see that at pages 86 and 87 Lord Dunedin – and I am not going to refer only to Lord Dunedin – dealt with the principles applicable. You will see in paragraph 2, towards the bottom of page 86, he said:

The essence of a penalty is a payment of money stipulated as in terrorem of the offending party ; the essence of liquidated damages –

in effect, on the other hand –

is a genuine covenanted pre-estimate of damage –

He went on to say in paragraph 4, at the top of page 87:

To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive.

Your Honours will see that there is the first test set out:

It will be held to be ‑ ‑ ‑

FRENCH CJ:   These are not being proposed as a codification.

MR JACKSON:   No, I do not suggest that for a moment, your Honour.  But they are a reflection of principles pretty well established and described actually as ancient, in a sense, in this case.  Could I just say, your Honours, if one goes to paragraph 4(b):

It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid –

Could I just pause to say this, your Honours:  those circumstances are stated to be one of the most ancient circumstances.  I will come back to that in just a moment, but may I mention also that in paragraph 4(c) it is said:

There is a  presumption (but no more) that it is penalty when –

as here –

“a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage” –

KIEFEL J:   These tests are described by Lord Dunedin as apposite to construction but they are actually characterisation, are they not?

MR JACKSON:   They are, your Honour.

KIEFEL J:   It is not really a question of construction of the terms of the contract, although that is one aspect of the characterisation.

MR JACKSON:   Well, your Honour, one construes the contract, sees what it says and then gives a characterisation to the contractor, as so construed.

FRENCH CJ:   I think the term “the function of the clause” has been used.  I do not know whether that is exchangeable with the notion of purpose.  Perhaps its operation is ‑ ‑ ‑

MR JACKSON:   Probably not entirely synonymous, your Honour.  I say that because, if one looks at the function of the clause, that is a conclusion really about how the clause operates as a practical matter.  It is arrived at by the construction of the contract, of course, in the circumstances.  Having done that, the purpose of it is something which is probably often the same but may not be ‑ and that, of course, depends on whether one is speaking of purpose in any sense subjectively or objectively.

FRENCH CJ:   I am speaking objectively.

MR JACKSON:   Presumably, objectively, your Honour.  If one looks at what its function is, its function is, in a sense, what it does but one gives a legal characterisation – to come back to that phrase – to what it is doing.  The purpose of doing so is to determine whether it falls into one or other legal category.  Of course, that involves defining what the legal category constitutes or is ‑ ‑ ‑

KIEFEL J:   At the top of page 87 reference is made to the construction to be decided “upon the terms and inherent circumstances of each particular contract”.  Could the inherent circumstances comprehend the expectations of the parties and the purpose of the stipulation or provision in question?

MR JACKSON:   Yes, your Honour.  May I say the answer is yes and indicate why?  The phrase “upon the terms and inherent circumstances of each particular contract”, insofar as it uses the latter part of it, seems to contemplate, at least in modern times or more modern times, perhaps two notions.  In speaking of the inherent circumstances it is looking at perhaps the type of contract.  If you take the Clydebank Case referred to in paragraph 2, the case about building some kind of patrol boats for the Spanish navy and delay in doing so, the fact that they were warships that were being built and thus made it difficult to put a kind of value on delay in relation to them is one of the inherent circumstances, I suspect, that is being spoken of there.

The other approach to the expression “inherent circumstances” is that it is capable of referring your Honours to the tests ordinarily applicable in this Court and elsewhere of construing a contract.  You do not just look at the words, but you look at the circumstances in which the contract is made and, in a sense, the expectations of the parties, which I think was the expression your Honour used to me.  And, your Honour, that is reflected in these two cases.  One is the case about the inability to provide the oil, I think it was, for generation in Western Australia – the electricity generation case, which I see was recently followed in another case in the Court.  I am sorry, it is a long answer to your Honour’s question.

KEANE J:   So it is commercial context.

MR JACKSON:   Yes.

KEANE J:   And the commercial context includes relevantly that one party is a bank whose business is to lend and does it also include that the lender has many borrowers?

MR JACKSON:   Well, yes and no, your Honour.  If one is saying it is a bank then it is likely to have borrowers – it may be a small bank, small or large ‑ ‑ ‑

KEANE J:   Well, borrowers other than the individual customer.

MR JACKSON:   Other than the individual, yes, your Honour.  But, at the same time – I am sorry, I think there was another part of the question your Honour asked me.

KEANE J:   No, no.

MR JACKSON:   Yes, it is, your Honour, and you can see considerations of that kind referred to in the various statutory provisions that are concerned in the statutory claims where some of the considerations to be taken into account in determining, for example, whether there is unconscionability in terms of section 12CB(2), one of those enactments.  You look to see whether the lender is the lender or the person providing the finance is someone who is able to set the terms and things of that kind.

KEANE J:   In such a case, for example in the United States where this kind of claim failed because the Supreme Court regarded the provisions as part of the compensation for the granting of the accommodation – the quid pro quo for the granting of the accommodation – if one recognises a commercial reality that this is a bank that is pricing risk when it lends, if one does not regard the $35 or $20 late payment fee as part of the price of the risk, then as a matter of substance the price of that risk might be reflected in an increase in the cost of funds by way of interest.  If one looks at it that way, is it right to look at the provision for the late payment fee as if it stands alone as an accessory, or is it better to look at it as one of the elements of the costs of accommodation, or the price of accommodation?

MR JACKSON:   Well, your Honour, we are dealing of course with contracts in which there are two parties and one of the parties is a borrower from the other.  In relation to that you have an arrangement whereby the lender has the capacity to fix what it wants to get from the contract.

That gives one a case, in the present case, where you have to pay interest and you pay interest for all the time that you have not made the full amount of the borrowings as at the end of the previous month.  I am putting that shortly and perhaps slightly inaccurately but you do pay interest and you pay interest because the bank accepts that you are allowed to pay it off over time and you pay it on the basis of interest.

Now, your Honours, being a bank means that inevitably there will be some people who do not pay on time and the interest rate continues.  If it be that you find you add to the interest and to any expenses of recovering money, a further sum which has no apparent or identified relationship to the fact that the money was not paid timeously, then it is difficult, with respect, to see that this is simply to be characterised as part of the cost of the money, unless one says really that the penalty notion has no application to cases of that kind.

KEANE J:   Well, no, it is really a question of whether it is, as a matter of substance, correct to characterise the provision as one element of the pricing of the accommodation or to characterise it as secondary to the pricing of the accommodation.

MR JACKSON:   Well, your Honour, it is possible to have multiple characterisations, of course, of the obligation.  One can look at it from one point of view and say it is another bit of what the bank might get.  On the other hand, it is perfectly possible to say that the obligation is to pay at a certain time.  If you do not pay, you have to pay something in addition.

Why I said that one is speaking about a penalty doctrine is that one of the characterisations is a characterisation which, in our submission, attracts the legal notion of being a penalty and that brings into being the notion that has been around for a long time.  Without labouring it, one of the most ancient instances, as referred to there, namely, that the entitlement is fundamentally under a contract to pay money to obtain the money on the due date and interest and that is what you get.

If there is more added to it, and particularly, of course, if there is more that is added to it in circumstances where it is immaterial how long you pay it for, how long the delay was, how much the delay was and so on, that is something which falls within the legal characterisation of penalty and that is why we would submit that if one says in a case like this which is, in our submission, a case, fundamentally simple conceptually, one would be abolishing the notion of penalties in relation to it by adopting the characterisation of it your Honour has referred to.  Your Honours, could I just say this?  You will see in the fifth line under paragraph 4(b) the phrase I used a moment ago:

This though one of the most ancient instances is truly a corollary to the last test.

Your Honours will also see that Lord Parker at page 97 was to the same effect and you will see that, your Honours, at page 97, about point 5 to about point 7.  His Lordship said:

Whether the parties have so agreed or whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case.  There are, however, certain general considerations which have to be borne in mind in determining the question.

He then in effect says what was in 4(a) and 4(b):

If, for example, the sum agreed to be paid is in excess of any actual damage which can possibly, or even probably, arise from the breach, the possibility of the parties having made a bona fide pre‑estimate of damage has always been held to be excluded, and it is the same if they have stipulated for the payment of a larger sum in the event of breach of an agreement for the payment of a smaller sum.

To similar effect, your Honours, with Lord Parmoor, and if I could go to page 101, about point 2 on the page, his Lordship said:

There are two instances in which the Court has interfered when the agreed sum is referable to the breach of a single stipulation.

The second of those is the last paragraph on page 101:

The second instance in which the Courts have sanctioned interference is in the case of a covenant for a fixed sum, or for a sum definitely ascertainable, and where a larger sum is inserted by arrangement between the parties, payable as liquidated damages in default of payment.  Since the damage for the breach of covenant is in such cases by English law capable of exact definition, the substitution of a larger sum as liquidated damages is regarded, not as a pre‑estimate of damage, but as a penalty in the nature of a penal payment.

Your Honours, that view, or those views, were referred to in this Court in the joint reasons for judgment of Justices Isaacs and Rich in Waterside Workers’ Federation of Australia v Stewart (1919) 27 CLR 119 commencing at page 130. Your Honours will see their Honours said at the last paragraph on page 130 – there is a reference there to the third contention and it said that there were two arguments on which it was based. The second such argument was dealt with at page 131, about point 8 on the page. It was said:

As to the second ground, the common law anciently regarded the whole sum as recoverable on breach of the condition.  But relief could in certain cases be obtained from a Court of equity against payment of the whole amount.  For the present purpose it is sufficient to recall the central principle on which that relief was afforded.  In Peachy v Somerset Lord Macclesfield founded the relief on “the original intent of the case, where the penalty is designed only to secure money, and the Court gives him all that he expected or desired.”

Then their Honours referred to the fact that the need to apply for relief to an equity court had been taken away.  Your Honours, in Andrews ‑ ‑ ‑

KIEFEL J:   Just on that case, over the page at page 132 their Honours refer to, in the case on the bond to which they are referring, the need to ascertain “the real intent of the parties”, presumably objectively.

MR JACKSON:   Yes.  That is in the context of what was said immediately before, I think, at page 131, the reference to the original intent of the case where the penalty is designed only to secure money.

KIEFEL J:   Quite so.  It is the expectation that there would only be so much paid to secure the interest of the person granting the bond.

MR JACKSON:   Yes, and the ordinary thing would be that a person lending money gets interest on the money.  That is the ordinary course of it.

KIEFEL J:   Put in the modern terms of the extent or the legitimacy of the interest.

MR JACKSON:   Yes, your Honour, I believe one can put it that way.  Your Honours, could I go back to Andrews 247 CLR 205 for a moment and, in particular, to page 217. Your Honours will see in paragraph 11 where your Honours said:

It has been established at least since the decision of Lord Macclesfield in Peachy v Duke of Somerset that the penalty doctrine is not engaged if the prejudice or damage to the interests of the second party by the failure of the primary stipulation is insusceptible of evaluation and assessment in money terms.  It is the availability of compensation which generates the “equity” –

Your Honours will also see at page 225, in paragraph 40:

While an action in debt for the sum of the bond was the remedy for enforcement of the bond at law, equity looked to what was involved in satisfaction of the condition for which the bond was security.  However . . . unless the failure of the condition was compensible there was no “handle” for equity to intervene.

As appears from footnote 77, that is again a reference to Peachy v Duke of Somerset:

“it is the recompence that gives this Court a handle to grant relief”.

Your Honours, in that case, if one goes also to page 226 at paragraph 41, you will see the reference to Williston and in the second paragraph of the quotation:

A distinction was taken at an early day between bonds ‘where the party might be put in as good a plight as were the condition itself was literally performed’ -

The word “plight” has perhaps changed its meaning a little over time –

and cases ‘where the condition was collateral and no recompense or value could be put on the breach of it’.  In the former case, equity would give relief –

and your Honours will see the remainder of that passage.

GAGELER J:   So does the penalty doctrine on this analysis become an aspect of relief against forfeiture, or analogous to relief against forfeiture?

MR JACKSON:   Analogous to, I think, your Honour, yes.  There are differences of view about the fusion of law and equity and, unless the Court were to give us leave to put in a long supplementary submission, I would not want to get into it particularly now.  But could I just say this – and it does depend where one learnt law I think actually – but the situation is that the need to bring a suit in equity was, as was referred to in the Waterside Workers Case, need to bring a suit in a separate court of equity came to an end, so that the ‑ ‑ ‑

FRENCH CJ:   This is a case of law following equity.

MR JACKSON:   Yes, that is so, your Honour.  The result was that in a court which has jurisdiction the penalties notion is, whether one calls it an equitable or a legal notion, it is one that is applicable by a court having both those jurisdictions.  Now, relief against forfeiture was an apt description of circumstances where a bond had been given to secure, in effect, the larger sum, you were relieved against forfeiture on the bond, but, your Honour, I do not know that one needs to classify it by reference to that these days.  It is simply a notion of the law, in our submission. 

GAGELER J:   I am just reacting to these passages and the references to the underlying equity.

MR JACKSON:   Well, your Honour, that is so.  That is in a sense where the notion comes from if one treats the history as one based on bonds being given to secure money payments.

KEANE J:   Except there does seem to be some difference of play here in the sense that sometimes the language is - when they are talking about penalty as opposed to relief from forfeiture it is spoken of a penalty in the nature of a punishment and the question is can one see the provision as being a punishment, that being its vice.  Then we have the subsidiary rules about is it extravagant as a pointer?  Is the quantum extravagant as a pointer to whether it is a punishment? 

When one is talking about the equitable principles about relief from forfeiture, it is sufficient to establish a title to relief that the payer says “I will pay what is truly owing” and that is sufficient to give rise to the equity.  There does not need to be an inquiry about extravagance and so forth.  So there do seem to be two different kinds of notion at play.

MR JACKSON:   Well, your Honour, we have, although no doubt not in perhaps quite the same words, adopted in effect that notion in our written submissions in the sense that we are saying that if one looks at, for example, 4(a) and 4(b) of the Lord Dunedin ways of putting things, that 4(b) is the way in which you deal with the simple case of you being obliged to pay a larger sum on one day because you did not pay the right amount on the day before.

KEANE J:   It is not about relieving against a forfeiture.  It is not about someone being at risk of forfeiting something for failure to pay on the due day.  It is actually something different, is it not?

MR JACKSON:   Well, it is creating a further obligation.  Now, the relief against forfeiture conception probably comes from the fact that the notion developed in circumstances where, in order to secure – I am sorry, I will start again.  In order to secure a situation where money was paid, a bond for a larger sum was given and that created an obligation to pay a larger sum because you did not comply with the earlier one.

The concept of forfeiture was the obligation to pay the larger sum, that is what you were forfeiting in that sense, and that was what was relieved against.  But what has developed, we would submit, is that there are various circumstances in which the issue whether something is or is not a penalty will arise and that is why, if you look at and take for a moment 4(a) and 4(b) of Lord Dunedin and to similar effect, the other members of the House of Lords, or two other members of the House of Lords in that case, what you see is that 4(a) is dealing with circumstances where you do not have the simplicity of 4(b). 

Paragraph 4(b) is one class of cases and the old, ancient class of case; 4(a) is dealing with circumstances where there are provisions of a different kind and one looks to see what damage might result from a breach of those provisions and you then apply the test in 4(a) to those because it is not simply questions of payment of money sums.

KIEFEL J:   The essential conception in equity was that a party should have no more than the compensation for a non‑payment or here, a late payment, so that when words such as “punishment” are used, are they the conclusion reached where you have claimed more than your just compensation?

MR JACKSON:   Yes, your Honour, but the term “penalty” is one that has been identified as the legal description of the classes of case where provisions are held to be unenforceable and the distinction is drawn between - and I think it is at page 86 of Dunlop – the distinction drawn between what is said has come to be known as liquidated damages, liquidated because a sum of money is stated, damages is because it is payable in those cases on breach, on the one hand, and something that is regarded as a penalty, penalty being in a sense the legal obverse, if I can put it that way, of liquidated damages.

FRENCH CJ:   If its function is deterrence then it is a penalty, not, as it were, restoration of compensation dealing with the effects of a breach.  If it is deterrence then that is the essential element, is it not, of the ‑ ‑ ‑

MR JACKSON:   In terrorem, in the sense that ‑ ‑ ‑

FRENCH CJ:   Well, somebody said people probably not - a lot of people would not be terrified at all ‑ ‑ ‑

MR JACKSON:   Your Honour, some words originally deriving from, for example, Latin have become English in a way.  If I may say so, with respect, “prima facie” - how many times has the Court heard that and that surely can be regarded now as an English ‑ ‑ ‑

FRENCH CJ:   But deterrence is the same concept, is it not?

MR JACKSON:   Yes, it is a deterrent.  It says if you do not pay the amount that you agreed to pay, you have to pay more.

FRENCH CJ:   Is there any risk that by, as it were, isolating the transaction between this appellant and the Bank and calling it the simple case covered by 4(b) one is looking at it contextually without regard to the nature of the institution and the context in which it is operating - in other words, does that simple case in 4(b), did that arise out of cases in which this sort of complexity of institution is involved?

MR JACKSON:   Your Honour, the complexity of the institution and of its transactions is something that, in some cases, can be relevant.  If you look at the Dunlop Case itself it is one where the amount that was payable was for transactions - for entering into transactions where the damage that might be suffered was a reputational damage and ‑ ‑ ‑

FRENCH CJ:   It was disturbing the relationships for the agents?

MR JACKSON:   Yes, indeed.  So, in some cases, it is appropriate to do so.  If you look at the two parties that are involved in that case one can understand that in the business of selling motor vehicle tyres and the relevant accessories to it, that that was an interest where the identity of the parties and their businesses was of some significance.  On the other hand, if one is dealing with a bank, its business is to lend money.  The customer’s business is hardly often described as a business of borrowing money.  The nature of the business of a bank is that it enters into a large number of individual transactions.  There is no particular reason why, in our submission, each transaction is not to be dealt with according to the terms on which it was entered into.

Now, as I said before, your Honours, there may be cases where one has small banks.  There may be cases where in, for example, a medium sized country town or city, suppliers are issued credit cards to customers allowing them to draw on them for the common credit card things.  There may be five of them, there may be 100, and their businesses are of different scales, different sizes.  It should not be a case where to determine whether a provision is a penalty as between the two parties to it, one has to look to see how much, in effect, business of a similar kind is being done by the party advancing the money.

FRENCH CJ:   A bank says, of course, that it operates in a sort of regulatory setting, but that only goes to the – that goes to the capital requirements that it relied upon.

MR JACKSON:   Yes, indeed, I am going to come to that, of course.

FRENCH CJ:   Yes.

MR JACKSON:   But that seems to depend on the validity in the first place of the concept of provisioning.

FRENCH CJ:   Yes, and the way her Honour dealt with that in a ‑ ‑ ‑

MR JACKSON:   Yes.  Your Honours, could I just say that the – I think I was going to go back to Andrews and I was just going to say the last thing about it.  If one goes to page 234, in paragraphs 69 to 77, your Honours will see that there is an apparent acceptance of the principles in Dunlop.  Your Honours, could we say that ‑ ‑ ‑

GAGELER J:   I am sorry, Mr Jackson, in Dunlop, paragraph 4(b) of Lord Dunedin’s judgment was technically dicta, and I think the cases to which you have just referred, any reference to it is also in passing. Do we need to go back to the cases referred to by Lord Dunedin to find an application of this rigid principle?

MR JACKSON:   Well, I have not proposed to go back to those, your Honour.  If your Honours wanted me to, I could perhaps give your Honours ‑ ‑ ‑

GAGELER J:   No, I was really asking whether there has been an application of the paragraph 4(b) principle of which we should be aware.

MR JACKSON:   I think the answer is probably no.  Your Honours will see that in our written submissions we dealt with the cases in this Court and there I think we said that the issue had not been specifically – I am referring, your Honours, to paragraphs 28 and following – 28 to 30 – and your Honours will see in paragraph 29 we said:

Although none of these cases called for consideration of the second Dunlop “test”, none cast doubt upon it ‑

and your Honours will see the quotation that we had there from Ringrow.

GAGELER J:   There was one other question I wanted to ask, Mr Jackson, and that is you drew our attention to table 11, or the table in paragraph 11 in your submissions where you have included the actual loss to the Bank as assessed by the primary judge.  If one were to attempt to apply paragraph 4(b) of Lord Dunedin’s enumerated test, how do you deal with that loss?  Do you just ignore it?  Do you say that that is the equity?  Somehow the plaintiff has to bring in 50 cents or $5.50, as the case may be, and then he is entitled to the relief?

MR JACKSON:   Well, your Honour will see that the primary judge, I think, assessed the loss at $3 and that was ‑ I have forgotten the exact words her Honour used, but she said it was by taking a figure, I think, of $2.50 and rounding it up to $3, so the penalty would be in the $32 or $17, as the case might be.  I think your Honours will see in our notice of appeal in the matter and the orders that we seek, it involves going back in effect to the primary judge’s judgment on this issue.

GAGELER J:   But if you applied paragraph 4(b) rigidly and the late payment fee had been set at $3, would you not say that is a penalty?

MR JACKSON:   Well, your Honour, that issue is a little complicated by the fact that there was an entitlement to obtain not just the interest but also any of the expenses, and the figure of $3 really refers to the expenses, so that to that extent it would not be a penalty.

KIEFEL J:   But is not clause 4(b) in Dunlop referring to an action on a bond where it was not contemplated that interest could be recoverable and there was no notion in those days of costs associated with recovery.  All you were entitled to was the sum stipulated for the condition of the bond.

MR JACKSON:   Your Honour, I am not certain about the “no costs”.  The position was until Hungerfords, I think in Australia at least, that one was not entitled to damages as such for non‑payment of money except in circumstances where there was provision for interest in the agreement, and where there was provision for interest, or where there was a statutory provision allowing it, that was payable.

But so far as costs are concerned, your Honour, in terms of legal terms of the proceedings, in our submission, there is no reason why, in courts that awarded costs, costs could not be obtained and it has certainly been the case in all relevant courts in Australia that one could recover costs ‑ ‑ ‑

KIEFEL J:   You mean at least by the time of Dunlop interest and costs were recoverable, although the ancient case to which his Lordship refers would not have contemplated either of those.

MR JACKSON:   Well, that is so, your Honour.  In the absence of an agreement as to interest, or I think Lord Tenterden’s Act, there would not be an entitlement to interest but costs, your Honour, might depend on the court in which one was suing at the time.  Your Honours, could I say that consistently, in our submission, with the views that are expressed in, for example, the Dunlop Case, in our submission, hardly surprisingly, the primary judge took the view that the late payment fee was one payable on breach of contract.  Your Honours will see that in volume 4 at page 1206, paragraph 114, about line 42, and the rejection of the contention that:

the stipulation was not a fee payable upon a further period of credit necessarily extended –

Your Honours, that issue was pursued by the respondent in the Full Court and it failed there too.  That is in volume 4 at page 1451, paragraph 89, and your Honours will see that his Honour said:

I agree with the primary judge’s characterisation of the fee and the provision for it as one payable upon breach of contract, or as a collateral or accessary stipulation, as security for, or in terrorem of, the primary stipulation:  timely repayments according to the terms of credit.

Now, your Honours, both the primary judge and the Full Court took that view that seems, prima facie, to satisfy the requirements of both the Dunlop test and also the words used in Andrews. I said the primary judge had said that also. You will see that in paragraph 4 of her reasons at page 1175. Now, your Honours, if one comes to the question why those tests would not result in there being a penalty here, we have said in our written submissions in paragraph 13 in‑chief that we submit this is a very simple type of case; if you do not pay the amount due by the due date you are liable to pay interest on purchases.

The cardholder only got the benefit of the interest‑free period if the whole amount was paid, not just the minimum monthly balance, and you have to pay an additional lump sum unrelated, in our submission, either in concept or in quantum to the amount unpaid and also unrelated to the period for which it remains unpaid.  I said it was unrelated in concept, your Honours.  It was admitted that the late payment fee had not been fixed by any genuine pre‑estimate of damage.  You will see that referred to by the primary judge in volume 4 at page 1211, paragraph 129.

KIEFEL J:   This is the paragraph upon which the Full Court placed so much emphasis?

MR JACKSON:   The Full Court said that ‑ ‑ ‑

KIEFEL J:   This showed that it was not a forward‑looking estimate.

MR JACKSON:   Your Honour, could I just say this:  I am going to come to the Full Court’s dealing with this issue in just a moment.  May I say first of all about it that what the primary judge said was it was a case that fell within the concepts referred to in Dunlop, paragraph 4(b), but also those referred to in Dunlop in paragraph 4(c)?  If I could just go back to Dunlop for a moment at page 87? You will see paragraph 4(b), which I have taken your Honours to, and then also the presumption in 4(c) that it is a:

penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage” –

Having arrived at a position where the late payment fee was one that satisfied both those matters, what the primary judge was then doing was to look to see if anything had been produced which would demonstrate that that presumption did not apply.  In that regard, the first thing was that, as paragraph 129 does make apparent, it was admitted that it was not a genuine pre‑estimate of damage.  In those circumstances, her Honour says, well, that being so:

the question left to be determined is to what extent (if any) did the amount stipulated to be paid exceed the quantum of the relevant loss or damage which can be proved to have been sustained by the breach, or the failure of the primary stipulation –

and she refers back to paragraph 48.

NETTLE J:   But in referring there to a genuine pre‑estimate of damage, her Honour is referring to a subjective estimation of damage rather than something which is objectively revealed by the construction or characterisation of the contract, is she not?

MR JACKSON:   Your Honour, I think that is right in this sense, but I am not – I am not sure I quite, with respect, accept the word is subjective because what seems to being said is that you have to look to see, in effect, what damage could be occasioned by these breaches.  In a sense, I suppose one looks at it from the point of view of the Bank, one looks at it from the point of view of the appellant, but in the end the test is one of looking at the circumstances of the contract, so it is objective in that sense, I think, your Honour.

NETTLE J:   That is the way the judge is to be taken, looking at it objectively ex ante.

MR JACKSON:   Yes.  What she is really saying is that this was not something which was calculated by reference to any objective criteria.  It is just a figure that was selected.  There is no attempt to explain how it was arrived at.  It is just a figure.  So one has to look to compare it with what damage might be sustained.

NETTLE J:   So she was doing what the Lords did in Clydebank?

MR JACKSON:   Yes, in a sense, your Honour, although of course in Clydebank the nature of the vessel and the purpose for which it might have been used was something that would make it difficult to say what damages would be arrived at.

NETTLE J:   No, I meant only that there was evidence which they took into account that the shipbuilder had suggested the amount of liquidated damages.

MR JACKSON:    Yes, I am sorry, your Honour.  I misunderstood what your Honour was putting to me.

KIEFEL J:   Are you saying that the approach her Honour is taking at paragraph 129 is to hold that there is a penalty and then proceed to assess the extent of relief?

MR JACKSON:   Yes, your Honour.  That is what she is doing there.  That is made a little more clear in some passages to which I am coming in just a moment.

KIEFEL J:   In relation to the admission, of course, I think there was reference in the Full Court to the fact that the admission was that there was not an exercise undertaken as a pre‑estimation, but that of course does not mean that it is of itself a penalty.  Is not it possible to, even though there was no pre‑estimation actually undertaken to have done so hypothetically after the event by saying at the time of the contract experience teaches us that here are the costs and expenses associated with late payment and thus rebut the presumption?

MR JACKSON:   Yes.  It was perfectly possible to do that, your Honour.

KIEFEL J:   But you say it was not undertaken?

MR JACKSON:   We say that what was arrived at was not something that satisfied those criteria.

KIEFEL J:   But is that not what Mr Inglis’ evidence was directed to?

MR JACKSON:   It was sought to be directed to.  I am going to come to each of the three elements of it, your Honour.  I think the first of those is provisioning, to which I will come shortly, if I may.

KIEFEL J:   But, in any event, you are going to explain to us why her Honour’s reference, which the Full Court placed so much weight upon, as looking at what the relevant loss and damage was, did not go to the question of whether there was a penalty but rather went to the question which follows, which is what the compensation truly was.

MR JACKSON:   Yes, because what she was saying was that this was something that fitted both within 4(b) and 4(c).  The question is whether the presumption that one sees in 4(c) has been rebutted.  The question was whether it had or had not and she held that it had not.

NETTLE J:   Does she not look at the actual damage or what should have been the actual damage in order to see whether the presumption is rebutted?

MR JACKSON:   Yes, she does.

NETTLE J:   So it is not exactly at that point that she determines it is a penalty.  She does not do that until after she has checked the presumption against the actual damage?

MR JACKSON:   Quite so, your Honour.  Yes, I think that is right.  Your Honours, I have said it was – the fee was unrelated in concept and also in quantum to the amount unpaid.  It is unrelated in quantum to the amount unpaid.  I have taken your Honours to the table we have, for example, in paragraph 11.  It is also unrelated to the period for which the amount is – the period during which the amount remains unpaid.

FRENCH CJ:   Just on that, once you are in default with a minimum payment then under the terms of the contract it is immediately payable thereafter, is it not?  So the next month rolls around, it is still immediately payable but you get another $35 fee if you have failed to pay the minimum amount due that would have accumulated in addition to that.

MR JACKSON:   Yes, you have to pay the amount due, in effect, plus any amount immediately payable and if you do not pay those then another late payment fee.

FRENCH CJ:   So if you incurred nothing more in the month that followed your failure to pay the minimum amount due and all that was owing at the end of that month was the amount that you should have paid a month earlier, you get another $35?

MR JACKSON:   Yes.  Now, your Honours, could we just say that in our written submissions at paragraph 21 in‑chief, we have sought to make the point that the doctrine of penalties is one that should be able to be easily understood and is one which should have a relatively straightforward application in the transactions to which it applies. 

We seek to make the point, your Honours, in paragraphs 22 and 23, that there is not simply one test.  There are horses for courses, as it were, and that is made clear, we would submit, in Dunlop itself, by each of the three members of the House of Lords who dealt with the issue.  Your Honours, we also – without repeating them, make the points in various paragraphs - 41 and 42 of our written submissions.

But could we say that for the reasons set out in paragraph 43 - if I could take your Honours to that for a moment - there are good reasons for retaining the second Dunlop test.  Your Honours will see there that it provides a simple answer to the simple case where failure to pay a contracted sum of money on time creates a liability to pay a further sum and the Full Court’s approach, in our submission, creates unnecessary complication and should not be adopted.  Your Honours, we would say it is simply not the case that the second test in Dunlop should be treated as an application of the first.

Your Honours, could I turn then to the application of the first, because that is, in effect, what the Full Court did.  It treated the question as being whether the amount of the late payment fee was extravagant or exorbitant or unconscionable and it held that they did not satisfy that test for three reasons because they would cover three things:  provisioning; the need for regulatory capital; and the costs of recovery of the amounts unpaid.

The Full Court also thought that the judge had erred by looking at the matter from the point of view of the losses suffered by the respondent in consequence of the breach, as distinct from looking at the position at the time of contracting.  The Full Court referred to this on a number of occasions.  I will not take your Honours to each of them, but could I just say if your Honours look at paragraph 26 at page 1436, paragraph 52 at page 1443 and paragraph l47 at page 1465, your Honours will see that the Full Court made that comment and regarded it as a kind of fatal flaw in the approach taken by the primary judge.

Your Honours, I propose to deal with each of the three matters, provisioning and the other two, in just a moment, but could I deal first with the issue that I last mentioned, namely, did the judge err in the time as at which she looked at the matter?  Could we commence by making a submission, with respect, that this is, we would submit, an issue of really compelling triviality in the present case, and I say that, your Honours, by saying that we are not looking at one‑off or, to use a fashionable word, bespoke contracts.

What is under consideration here are contracts in common form where the issue giving rise to the imposition of the late payment fee is non‑payment on the due date each month.  The amount of the late payment fee was the same no matter how much was unpaid or for how long it was unpaid, and it becomes very difficult, we would submit, with respect, to see what practical difference is involved between assessing the likely losses looked at at the time of entry into the agreement compared with those at the time of breach. 

Your Honours, could we note in that regard that if one goes to our learned friend’s submissions on the statutory claims and to paragraph 34 of the respondent’s submissions, you will see that in the fourth sentence of paragraph 34 it says:

Second, the nature of ANZ’s interests and the foreseeable losses protected by the late payment fee did not differ between the date of contract and the date of a particular late payment.

That is elaborated upon.  It is dealing with the statutory claims, of course, and that, in our submission, reflects the reality of the matter.  You are dealing with contracts that involve lending money month by month and for fees that are imposed month by month and we would submit that it is very difficult to see what are the practical differences involved in the two different types.

One would ask, if one does look at the three types of loss relied on in the present case, why would any different conclusion be arrived at by reference to the earlier rather than the later date?  Difficult to see that one would arrive at any different conclusion.  The second thing, your Honours, is that the Full Court treated evidence of actual loss as being irrelevant.  Your Honours will see that in the Full Court’s reasons at paragraph 116, page 1457.  Your Honours will see about five lines from the bottom of the page:

This is the balance of the enquiry as to whether the stipulation is penal.  It is not assisted by knowing what the damages from this particular breach or failure were.  As Lord Davey said in Clydebank at 17, it was “perfectly irrelevant and inadmissible for the purpose of shewing the clause to be extravagant . . . to admit evidence . . . of the damages which were actually suffered . . . ”.

Now, your Honours, if I could just say the context in which that observation was made was one in which the ships might have been used successfully, might have been lost, in the Spanish‑American War over Cuba.  One can understand that in saying it would seem irrelevant in the case of warships to be able to say, well, we might have been able to head them off at the pass and torpedo some American ships in Louisiana or something of that kind.  So that is the first reference.  The second reference, your Honours, is paragraph 147, and your Honours will see in paragraph 147 that the – I will not read out the paragraph but towards the end you will see it is said in the last three lines:

It was for this reason that Lord Davey in Clydebank –

et cetera.  But, your Honours, it may well be that in cases like Dunlop it would be difficult to prove the actual damage for each breach but it does not mean that that is the case in every case and it certainly does not apply in simple cases of this kind.  It also does not sit well, in our submission, with what was said in the Privy Council in its advice in Philips Hong Kong Ltd v The Attorney‑General of Hong Kong [1993] 1 HKLR 269 and at page 280, about line 30, Lord Woolf said:

The fact that the issue has to be determined objectively, judged at the date the contract was made, does not mean what actually happens subsequently is irrelevant.  On the contrary, it can provide valuable evidence as to what could reasonably be expected to be the loss at the time the contract was made.

May I invite your Honours to note the way in which the Privy Council put that as to what could reasonably be expected to be the loss at the time the contract was made.  One is not talking about matters of complete speculation.  One has to look to see what could reasonably be expected to be the loss at the time the contract was made.

The third point, in our submission, is that the judge did not actually make that error.  I need to go to the Full Court’s reasons in a little detail in that regard.  Could I commence at the top of page 1443, the last part of paragraph 50 of the Full Court’s reasons.  Perhaps I should start at paragraph 50, page 1442, where his Honour said:

Central to her Honour’s approach was her conclusion, drawn from para 4(c) of Dunlop . . . that the provision was prima facie a penalty; and her conclusion as to the relevance of para 4(b) of Dunlop that given the fee was payable for the non‑payment of a sum of money, the question was whether the sum was greater than the sum which ought to have been paid . . . The rebuttal of that presumption arising from para 4(a) of Dunlop and the enquiry required by para 4(b) of Dunlop was, her Honour said at [139], to be executed by undertaking an enquiry –

which your Honours will see there set out.  One sees then at paragraphs 52 and 53, pages 1443 and 1444, the Full Court saying that the judge was undertaking an ex post rather than the required ex ante analysis.  But if one looks at the passages quoted at paragraph 50 of the Full Court at the top of page 1443, you will see that the judge was there referring to earlier parts of her own reasons, namely, paragraphs 48 and 126 to 130.

May I deal with them in that order?  Paragraph 48 is at page 1188.  You will see in paragraph 48 that the judge is speaking about the extent to which there is unenforceability and J48 has to be read with the two preceding paragraphs under the heading “Loss and Damage” – that is 46 and 47 – and the last sentence of paragraph 46 is rather against the view that the judge misunderstood the concepts.

If one goes to the second group of paragraphs referred to in paragraph 50 – that is, her Honour’s paragraphs 126 to 130 – you will see those on page 1209.  If one looks at paragraph 126, your Honours, there seems no error in the way in which the judge stated the test.  Paragraphs 127 and 128 do not really, with respect, go anywhere one way or the other, and then when one goes to paragraph 129 and 130, your Honours, as is apparent from the reference in paragraph 129 to paragraph 48 to which I took your Honours earlier, her Honour is dealing with the question of quantum of compensation and that is, of course, a question of damage, and we make that point in paragraphs 46 to 48 of our written submissions.

Could I just say, your Honours, that it is apparent that what should be done from the point of view of compensation in a case like this is to work out what is the damage otherwise incurred.  Your Honours could see, if I could go for a moment to the Court’s decision in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at paragraph 10 first of all at page 662, your Honours will see that the Court said:

The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract‑breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre‑estimate of the damage likely to be caused by the breach.

You see then reference to Dunlop. And at page 667, paragraph 27, perhaps if I go to the third line of paragraph 27:

The principles of law relating to penalties require only that the money stipulated to be paid on breach or the property stipulated to be transferred on breach will produce for the payee or transferee advantages significantly greater than the advantages which would flow from a genuine pre‑estimate of damage.

So, her Honour is, in effect, working out what are the damages that might reasonably be incurred from a breach of the contract.

Your Honours, could I go then go to the concept of provisioning – one of the three concepts that was relied on by the Full Court.  The nature of the concept of increase in loss provisions – may I emphasise all one is talking about here are books of accounts, what happens in the Bank’s books of account, whether they be the balance sheet or profit and loss account.  The nature of the increase, the concept of increase in loss provisions was discussed by the primary judge at paragraph 144, page 1214.  You will see in paragraph 144 the judge describes what is “provisioning” and also in paragraph 145:

When accounting for a provision, two changes are reflected in the accounts.  First, the asset ANZ is currently recognising on its balance sheet (the amount the customer owes) is reduced to the level that ANZ expects to recover, that is, to its fair value.  Second, a loss is recorded in ANZ’s profit and loss account as an expense or cost, representing the reduction (impairment) in the asset value.  It is concerned with measurement of a present or current cost, not a future cost.

The judge’s summary of Mr Inglis’ evidence, to which I will come in a moment, your Honours, in our submission, was correct.  Could I refer particularly to paragraph 148 where that appears to accord with what the judge had said in paragraph 145.  But at paragraph 150 the judge said:

Are loss provisions then a cost to be considered in assessing the extravagance or otherwise of an Exception Fee?  While a loss provision may well be a “cost” in an accounting sense, it does not represent a loss or damage incurred as a result of an Exception Fee Event.

Your Honours, in our submission, she was perfectly correct in saying that, whilst it might be a loss in an accounting sense, it is not loss or damage incurred as a result of non‑payment by the due date.

KIEFEL J:   Is that a reference to causation or is it a reference to the nature of the loss?

MR JACKSON:   The latter, your Honour, I think.

KIEFEL J:   Or both?

MR JACKSON:   Or both, perhaps, yes.  But could I just say this, your Honour, that all we are talking about is the Bank’s books of account.

KIEFEL J:   But everything goes into the books of account.  All your costs go into the books of account.  Why is this not a cost?

MR JACKSON:   Your Honour, we are talking about position, of course, ultimately as between the Bank and ourselves.  In relation to that could I just say this, that if the provisioning cost was a loss, it was not a loss distinguishable from the debt itself?  A provision could only represent a proportion of the debt, including interest, which represents the estimate of inability to recover.

NETTLE J:   But it does reduce its profit for the year?

MR JACKSON:   Yes.

NETTLE J:   That is an actuality because it is bound to record that provision and carry the appropriate amount to its profit and loss account.  Its income for the year is down.  That is a cost; a real loss.

MR JACKSON:   Yes.

NETTLE J:   That is an actuality.  Because it is bound to record that provision and carry the appropriate amount to the profit and loss account its income for the year is down.  That is a cost, a real loss.

MR JACKSON:   Your Honour, could I put it this way?  In our submission, what it is, your Honour, is an estimate or a probability that not all the debt will be recoverable and your Honours will see that classification in both the expert witnesses - Mr Inglis, page 445 in volume 2; Mr Regan in his report at page 289 in volume 1. 

FRENCH CJ:   What proportion of the outstanding amount is recorded in the provision?

MR JACKSON:   Your Honour, quite a complicated formula was used.

FRENCH CJ:   Yes, but it is a proportion?

MR JACKSON:   Yes.  I am going to show your Honours the formula in just a – I am sorry, I am going to show your Honour what it was in a moment, if I may.  Could I just – may I delay it for just a moment.  What I was going to say was this that what one sees is an amount of provisioning based on the possibility that the debts will not be repaid.  Certainly it is right to say that it goes into the profit and loss account and determines, in a sense, how much profit the Bank has made during the year but if one looks at it from a point of view of working out what damage has been sustained by the Bank, the first thing we would say about it, your Honours, is it is not a loss distinguishable from the debt itself.  It could only ever represent some proportion of the debt reflecting the estimate of irrecoverability.

KIEFEL J:   Do you say that it is no more than a record of the fact of the amount not recovered?

MR JACKSON:   Yes, your Honour, I do.  It is artificial, we would say, to suggest, for example, that the Bank could sue for the provisioning cost in circumstances where the debt was still outstanding and might still be repaid. 

KIEFEL J:   To be distinguished, for example, from the amount which the Bank might lose by not being able to invest the amount not recovered?

MR JACKSON:   Yes, I am going to come to that, too.

FRENCH CJ:   You value the risk of loss – is this conceptually correct that you value – you put a value on the risk of loss by looking at the amount outstanding and the probability of it, you will not get any of it back and there is a kind of product and that you get some proportion of the amount outstanding that is the expectation value of loss, if you like, and that is then shown in the books as a provision.

MR JACKSON:   Yes, and, of course, if you do get paid, the provision is relevantly reversed. 

FRENCH CJ:   Yes.

KIEFEL J:   But you do not have to set aside a specific sum representing that estimated loss?

MR JACKSON:   No, these are accounting entries, your Honour, and they ‑ ‑ ‑

FRENCH CJ:   It records a kind of risk exposure. 

MR JACKSON:   Yes, that is what it is, your Honour.  It is an estimate of risk - the judge said, your Honours see at paragraph 150:

A provision is merely an accounting entry, which is made to reflect the fact that it is estimated that some proportion of a group of outstanding loans will be unable to be collected.

Now, your Honours, could I just say this that if one treats the provision in cost as being a cost, a real cost in one sense, then we would submit that it would be artificial to suggest - and I think I may have said this before - that the Bank could sue for the provisioning cost in circumstances where the debt was still outstanding and might still be repaid or that it could be sued for in addition to a debt which was irrecoverable – I am sorry, I put that badly - in order that it could be sued for in addition to the debt.

NETTLE J:   But why would that be so?  The bank would still have its action for the recovery of the amount of the principle and what it would say is that, “By reason of your breach of contract, you have imposed on me an annual charge of so much which otherwise I would not have incurred”.

MR JACKSON:   But, your Honour, there is no annual charge.

NETTLE J:   But there is, is there not?

MR JACKSON:   I am sorry, is your Honour talking about the penalty fee or the ‑ ‑ ‑

NETTLE J:   No, the provisional cost which must be carried to the profit and loss account.

MR JACKSON:   But there is no actual loss.  You get back all the money that you have lent; you get it back and that provisioning cost is then gone.  That is why, your Honour, it goes certainly to make up what is for any year the profit and loss – for whatever purpose that might be used for but, at the same time, it does not mean that there is some cost as distinct from the debt itself.  It would be a really bizarre situation, your Honour, if someone had been able to be sued, for example, for what one could describe as the provisioning cost and then paid the amount of the debt.  Well, could they then request that the provisional cost of judgment be set aside?

GAGELER J:   Is it critical to this part of your argument to equate a genuine pre‑estimate of damage with a genuine pre‑estimate of recoverable damages in an action at common law?

MR JACKSON:   Well, in a sense, your Honour, yes, I think that is it because what one is speaking of in the context of the language used and the context of non‑payment of money, leaving aside other cases – another case that might be of, say, the 4(a) type – but in the case of non‑payment of money the ordinary remedy is that you get a judgment for the money, you get judgment for interest, you get a judgment if you are able to establish it for other damages.  Now, ordinarily speaking, the two Hadley v Baxendale classes of recoverability would apply.

Your Honours, could we just say also that if protecting against the cost of provisioning was part of the legitimate business of the Bank, as the Full Court said at paragraph 164, page 1469, the interest that was being protected is the interest in the debt being repaid, and that is the same interest as that to which common law damages for breach speak.  Could we refer your Honours in that regard to our written submissions in reply, paragraphs 3 and 4(a)?

KEANE J:   But does not the bank have a legitimate interest in protecting its profit and loss account in the sense that it is a more attractive proposition for people to lend to or invest in, given that the profit and loss account is better rather than worse?

MR JACKSON:   Well, your Honour, as a broad proposition that may be right, but it does involve a question of legitimacy for what purposes?  Well, certainly for business purposes the bank complies with whatever accounting standards or other legislative or quasi‑legislative requirements there are and, in that sense, it has got an interest in complying with them.

But in determining the nature for legal purposes of a payment that is required to be made, your Honour, one does have a situation where, in our submission, you have to look at it from two points of view.  Is it as between the Bank and the client of the Bank something which is payable in the sense of it being in terrorem, et cetera, and if it falls within that category that is also a legitimate requirement which is imposed on the Bank.  You adopt the word “legitimate”, your Honour, but legitimacy involves a number of different contexts.  So, your Honours, I do not know that I can answer that more fully but that is what we would submit.

KIEFEL J:   You say the Full Court at paragraph 164 is referring to the kind of legitimate interest which was referred to in Cavendish in the House of Lords, whereas what you are referring to as applicable here is something much simpler and referable to the expectation of the parties.

MR JACKSON:   Yes, your Honour, yes.  The expression used in 164 “legitimate object of commercial interest” ‑ ‑ ‑

KIEFEL J:   Is that drawn from Cavendish?  I do not suppose we need to go to that.

MR JACKSON:   Somewhat similar.

KIEFEL J:   Similar terminology.

MR JACKSON:   Yes, I am going to come to Cavendish in due course, but one does need to say about Cavendish that cases of this kind appear to be recognised as penalties in Cavendish as distinct from a number of passages in the main judgment and elsewhere.  Your Honours, if the provisioning cost is a loss, in our submission, it is not a loss distinguishable from the debt itself.  A provision could only represent a proportion of the debt representing the extent of irrecoverability.  Your Honours, could I go for a moment to the evidence?

NETTLE J:   I am sorry, Mr Jackson, you say it could not be distinguishable from the debt, but is it not distinguishable in the sense that when you talk about the debt you are talking about the capital sum of the debt whereas what they are talking about is the costs on revenue account imposed upon them because you did not comply with the terms of the contract?

MR JACKSON:   Well, your Honour, when one says costs on revenue account, what is involved in the provisioning, and leave aside the costs of recovery, if I could put it that way, the costs of provisioning is a reflection of the possibility the money might not be paid.  Now, your Honour, one asks what is the interest and the interest is in having the money paid.  That is why we say, your Honour, that there is not any distinction to be drawn between the money and the fact that you make provision for the possibility that it will not be paid.

NETTLE J:   Do they not say it is not just an interest in having it paid, it is an interest also in having it paid timeously, because if you do not pay it timeously we are obligated to create a provision which, by reason of its entry ultimately in the profit and loss account, detracts from our earnings?

MR JACKSON:   Well, your Honour, if one puts it in a simple form and takes the transaction by itself, one has a profit and loss account which, if it is paid, will go up; it is talking about a possibility.  The amount of provisioning will go down.  It may be that in particular cases there is no need for provisioning because someone pays an amount that was otherwise thought to be irrecoverable.

NETTLE J:   I understand that.  That is a different point though.  You will come to that later, surely.

MR JACKSON:   Yes.  Your Honour, could I just go on to say that you will see ‑ perhaps I should give the reference ‑ that the provision is, according to Mr Inglis, a provision was an estimate of losses from credit that in the future will not be repaid.  You will see that at page 445 in volume 2, Mr Regan at page 289, about line 15.  But it was acknowledged that the provisions of which Mr Inglis was speaking were not individual provisions but were calculated across pools of many, many customers.  Your Honours can see that in volume 2 at page 473 to 474, in paragraphs 5.17 to 5.18, and your Honours will see how it is done and as it says at 5.18:

it is not an individual provision as it is driven by the data on the account together with the Bank’s experience across its customer portfolio –

allocations to pools and so on, and your Honours will see:

The B1 component of the Collective Provision is calculated –

as your Honours will see in the manner there set out.  Now, your Honours, because the provision was always the result of the behaviour of many people, it might go up and down, depending on that behaviour.  The behaviour included a range of things, not just late payments.  Your Honours will see that referred to at paragraph 5.8 on page 470 and you will see the lists of things that are set out there, including those at paragraph (f) on page 471.  There was only, as he said at paragraph 5.42 at page 481, that it is if:

all other behaviours being equal –

the need for provision will increase ‑

when a Late Payment Event occurs.

Your Honours, if one put it simply, if one customer was late in paying but another made an early payment it is conceivable the total provision would remain the same because they would cancel each other out.  In our submission, there is always a missing link in the approach taken in this regard, and that is, it depends on the assumption that it can be said of any one payment that it would cause the provision to be increased.  In the context in which one is speaking, if I could take just three cases –Ringrow and Andrews in this Court and Dunlop – all are concerned with damages and that which is causally connected with the breach.  In our submission, neither of those criteria would be satisfied.

If one looks at the particular case, the conclusion that was arrived at was that there was a cost per late payment in terms of provisioning of between $2,091 and $6,969.  If one looks at the credit balance of the second credit card alone, which was $4,000, the higher figure of $6,969 exceeded it.  Your Honours, it is difficult to see, with respect, that it could be conceivable that a provisioning cost would arise from late payment on a credit card which was more than the amount of the debt which the provisioning cost was meant to estimate the recoverability risk of doing it.  I am sorry, I did not give your Honours a page reference for those figures.  Can I give your Honours that in just a moment?  One sees them in the report.

Your Honours, there was also evidence called from Mr Regan on our side of the matter.  He was asked to assess – your Honours will see this at page 270 in volume 1 – the amount it would take to restore the ANZ to the position it would have been in if the appellant had not paid late on the occasions on which he was charged a late payment fee.  That seems to be a fairly standard way of describing how one calculates the damage.  He was asked to comment on the differences between his methodology and Mr Inglis’ methodology. 

His view of loss provisions was that they were not estimates of actual costs at all, but rather estimates of those cardholders who would never pay their balance, as distinct from being estimates of actual costs.  You will see that at volume 1, page 271, lines 38 to 42.  That was an opinion as to the appropriateness of the methodology used by Mr Inglis.  The Full Court, at paragraph 153 on page 1466, said that his:

evidence as to damage was irrelevant as to the assessment of extravagance or exorbitance. 

The evidence that he gave was evidence which related to that very question.  He said that Mr Inglis’ approach to it was incorrect.

In our submission, the primary judge was correct in her view that the provisioning costs should be rejected and for the reasons which she gave that they were no more than entries in the accounts of the Bank which did not, in fact, reflect the damage caused to the Bank by the breach of contract.  Your Honours, if one is looking to make a comparison of the damage caused, surely one is looking to see what is the comparison between the actual loss likely to have been sustained and the amount that is payable on the occasion of breach that is claimed to be a penalty.

Your Honours, the Full Court dealt with the provisioning issue at paragraphs 161 to 164 at page 1468.  Your Honours will see at paragraph 162, that the impairment to the value was treated:

as a real cost, as a form of loss against which the obligee bank has a legitimate interest in protection . . . That increased risk is translated into a lower worth of the lending -

which became - in paragraph 164 your Honours have gone to already:

a legitimate business cost –

and a loss, it said, which had been incurred.  Your Honours, we would submit that the question whether something is or is not a penalty is an issue arising between borrower and lender.  One can understand, perhaps, that if the Bank were selling off - were being sold – or if it was selling off its credit card business that the value shown in its books for its estimate of the value of outstanding debts might be relevant to a potential purchaser, but to translate to the position, vis-à-vis customer, where a different question is being asked, in our submission is not easy.

In our submission, the result of the Full Court’s decision is that to determine whether a stipulation is a penalty one will have to go to the position of each bank, each bank lender.  There will have to be questions – I have said this already, I think, your Honours – questions arising whether the bank is large or small and an examination of each issuer of a card.  In our submission, that takes away the simplicity that one sees from the operation of the tests suggested in paragraphs 4(a), 4(b) and 4(c). 

Your Honours, I mentioned I would give your Honours the reference of where those figures came from.  It is volume 2 at page 615 and your Honours will see the table where he is speaking of the maximum conceivable cost and your Honours will see the range going up to $7,799.

GAGELER J:   Did that feed into the average figure of $23 that finally gets recorded in Chief Justice Allsop’s judgment?

MR JACKSON:   I am sorry?

GAGELER J:   At paragraph 163 there is reference to an “average” figure as revealed by Mr Inglis’ evidence.

MR JACKSON:   I am sorry, your Honour, I have not picked up what your Honour ‑ ‑ ‑

GAGELER J:   The bottom line of his calculations appears to have been an average calculation of $23 per late payment event, I think.

MR JACKSON:   Your Honour will appreciate that he calculated on two different bases, and I have gone to where he looked at the maximum conceivable provisions, and that is the higher one, and then if one goes to Annexure 3 which is at page 1353 ‑ ‑ ‑

GAGELER J:   Column F, I think.

MR JACKSON:   I am sorry, your Honour, I have lost the column.  Yes, I am sorry, your Honour, $23 in the left column under “Provision”. 

GAGELER J:   Yes.

MR JACKSON:   Now, that comes, I think, from the other calculation where ‑ ‑ ‑

KIEFEL J:   That is the regulatory capital cost calculation.

MR JACKSON:   This is the provision - your Honour will see at page 1353 the first heading is “Provision Costs” and the next one is ‑ ‑ ‑

KIEFEL J:   I see, yes, I was looking at F not B.  Thank you.

MR JACKSON:   Your Honour, can I give your Honour an answer to that question after lunch?  I am afraid I think I am doing it on my feet otherwise.

NETTLE J:   But the $23 average is calculated on the method to be, is it, that is to say, only for late payment after you take out the other costs.

MR JACKSON:   Yes.  Your Honours, could I come then to the question of regulatory capital?  Now, Mr Inglis conducted a number of statistical exercises to reach the views which are ultimately summarised in his third report which is in volume 2 at page 629 and you will see a table numbered 6‑2.  In that your Honours will see that there are two subheadings in italics about lines 18 and 29.  One of them is “Costs that may have been incurred in connection with a Late Payment Event” and the other is “Maximum cost the Bank could conceivably have incurred as a result of a Late Payment Event”. 

The costs that may have been incurred were $2.90 in 2006 and more in later years and you will see on the second basis the maximum cost the Bank could conceivably have incurred as a result of a Late Payment Event in terms of regulatory capital was $129 in 2006 and 2007 and again more in later years. 

Your Honours, the regulatory capital costs were really in the nature of opportunity costs and that is referred to by Mr Regan at the bottom of page 292 and the top of 293 in volume 1.  What is being spoken of is the increase in the percentage of capital that the Bank had to hold in reserves and not let out, the assumption being that holding the money in reserves would earn less than it would earn if it were able to be otherwise lent.  The need to hold additional capital in reserve was directly attributable to increases in provisioning and you will see that in Mr Inglis’ first report in volume 2 at page 524 at paragraph 6.53:

An increase in the B1 Provision (or Impaired Asset Expense) is a charge to the Bank’s profit and loss account.  The result of the profit and loss account (after tax) is recorded each month in the retained earnings account . . . shareholder funds are a principal component of Tier 1 capital.  Thus, the Impaired Asset Expense causes a reduction in the available capital that can be used as the Tier 1 capital component of the Bank’s capital base, and the Bank requires additional capital to maintain the required capital adequacy ratio. 

Your Honours, we would say if the provisioning costs could not properly be regarded as attributable to any late payment on the basis of the submissions we have already made, the same result would follow for the regulatory capital costs, because one follows the other.  It is unsurprising, we would submit, that the primary judge viewed them as following the fate of provisioning costs.  The issue was dealt with very briefly by the Full Court in volume 4 at page 1470 in paragraph 167 where his Honour said:

That provisions and regulatory capital are part of the costs of running a bank, does not detract from the point that, as part of that operation, a cost may arise (and be the subject of a compensating fee) from a breach, or failure of a stipulation, of a contract.  Regulatory capital returns less than other capital.  If a breach of contract can cause the need to supplement that capital and thereby withdraw funds from circulating capital, that is a loss worthy of compensation, and an interest worthy of protection.

Then at paragraph 169:

That ANZ does not seek to recover these costs in the ordinary course is not to the point.  The fee is to be assessed by reference to the economic interest to be protected and the greatest possible loss.

Could we say, your Honours, given that the regulatory capital cost is fundamentally a loss of profit case, when an amount was paid late, interest was also charged, so that the Bank was in fact earning income; indeed, income which it would not have earned if the amount was paid on time.

As you will see from Mr Regan’s evidence at volume 1, page 293, the Bank actually held reserves 4 per cent above the minimum percentage, which was a buffer against the need to obtain additional capital.  Your Honours, that was not a matter that was responded to by the other side’s expert.  You will see that at volume 2, at page 682.

Your Honours, we would submit that the evidence fell short of establishing that any late payment could give rise to a loss of profit claim by the Bank.  Now, the ordinary economic measure of loss caused by loss of use of money is interest, and of course, here, interest was payable.

KIEFEL J:   It may not have been paid.  Was it paid?  You only offset if interest was in fact paid.

MR JACKSON:   Well, the interest, your Honour, would be added to the account and then forms part of it and then has to be paid in due course, in a sense.  It does form part of it, so, ultimately, payable and paid.

Your Honours, I was going to say that a case which illustrates the proposition I was seeking to make a moment ago that the ordinary measure of loss for loss of the use of money is interest is a decision of Justice Heerey in the Federal Court in Garraway Metals Pty Ltd v Comalco Aluminium Ltd (1993) 114 ALR 118. It is a case we referred to in our reply submissions in paragraph 4(a) and footnote 5.

Your Honours, may I deal with it very briefly?  As is apparent from the opening words of the judgment at page 118, there were two amounts for which Comalco had been held liable to Garraway and the issues in the case and the parties’ contentions appear at page 119, line 4, to the bottom of the page and in particular, your Honours, about line 34:

Comalco accepts in principle that it is liable to reimburse Garraway Metals for interest expenses incurred and interest foregone.  However, Comalco says it is not liable for profit which would or might have been made had the judgment funds been available –

Now, your Honours, the judge at pages 126 to 132 discussed the calculations of compensation for non‑payment of money.  You will see the heading towards the bottom of page 126, and he then proceeded at page 132 to - under the heading “Applying Hungerfords”:

There is of course no novelty in an award of damages for loss of profits.

He referred to typical examples and said:

But what is said by Garraway Metals in the present case is that it should be awarded damages assessed by reference to trading profits it would have earned from money wrongfully withheld by Comalco and money paid away as a result of Comalco’s contravention of the Act.

His Honour then said in the penultimate paragraph on the page that the court encounters special factors:

where the damages are sought to be quantified by reference to lost trading profits . . . These arise from the inherent nature of money.

Money is a uniquely versatile and useful commodity.  On the assumption that money wrongfully withheld by a defendant would have been “put into the business” by a plaintiff, to what use would that money be put?

Then he gave examples:

more trading stock, in purchasing plant, in engaging more staff, in increasing advertising, in any combination of those uses or in a myriad of other ways.

Your Honours will see the last sentence on that page.  Could we say, if one looks here and says what might the ANZ have done with the money it put into regulatory capital, well there are a large number of things it could do.  It could, if it wanted to, apply the money in bonuses to staff that they thought had been performing well in another area of its business.  Your Honours will see, if one goes to page 133, at the top of the page:

As the present case shows, even when a particular application of money is retrospectively selected . . . the answer to the question whether any profit (and if so how much) would have been earned will depend on a number of further assumptions.

His Honour arrived at the conclusion, at line 32:

I think the compensation Garraway Metals is entitled to recover is to be quantified as “the value of the injury arising from the loss of the use of the money” . . . The appropriate quantification is interest, the ordinary economic measure of the loss of use of money.

GAGELER J:   Mr Jackson, in this case it seems to me that Garraway suffered an actual loss in the sense of a loss of profit.  It was held, though, not to fall within either limb of Hadley v Baxendale.  What if Garraway had contracted with Comalco to be compensated for the loss of profit in the event of breach, would that have been a penalty on your submission?

MR JACKSON:   Probably unlikely, your Honour, because if you looked at the contract one would be in a situation where perhaps the first limb of Hadley v Baxendale would have been applicable.  In the present case, for example, why would a person in the position of the appellant be expected to know that on making a late payment that this would bring about provisioning and regulatory capital costs – would or might bring them about?  That was one of the matters that was referred to in Garraway, I think, at the first few lines on page ‑ ‑ ‑

GAGELER J:   That would have, or possibly would have, engaged the second rule in Hadley v Baxendale, presumably, such knowledge?

MR JACKSON:   Yes, that is right.  But the first rule might be the rule applicable, what your Honour was putting to me.  Now, it may be, your Honour, if one takes a situation falling within the description of Andrews, the general description, that a case of that kind may prima facie be a penalty, but it may be able to be demonstrated that it is not a case that actually should fall within it, within the concept.

In the present case, this is the simple case – and I have said that many times, I know – the simple case of paying money on the occasion of breach, and this is a case where, to use the words of Justice Heerey, the ordinary economic measure, the loss of use of money, is interest and there was a provision for interest becoming payable in those circumstances, becoming and continuing to be payable in those circumstances.  Your Honours, could I come to the third element of ‑ ‑ ‑

FRENCH CJ:   That might be a convenient moment, Mr Jackson.

MR JACKSON:   Yes, your Honour, in terms of time, I expect to be perhaps an hour and a quarter.

FRENCH CJ:   Yes, all right, thank you.  The Court will adjourn until 2.15.

AT 12.41 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.14 PM:

FRENCH CJ:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, before I move on could I just say we have given the Court a document headed “Appellants’ note on the chronology of expert evidence”.  There are two reasons for that.  One is that the order in which the various reports and so on came is not quite as set out in the appeal books.  This document sets out what each of them did and at what stage each of them was.  That is the first reason.  The second reason is really in relation to paragraph 4 of that document where one of your Honours asked me about the $23 average figure in relation to provisioning costs that one sees referred to by the Full Court at paragraph 163 on page 1464 in volume 4.  The Full Court there said:

Mr Inglis made various calculations on a forward looking basis.  The primary judge set out in annexure 3 the magnitude of the (average) costs of provisions from the actual late payments based on his evidence of $23.

It seems really to have been, in a sense, something that was backward looking rather than forward looking.  It does not appear to have been a forward‑looking assessment.  You will see – but, your Honours, otherwise the material is set out in the document.

Could I turn then, your Honours, to the question of recovery and operational costs and may I say something first about the circumstances in which the issues arose?  Your Honours will see in paragraph 175 of the primary judge’s reasons at page 1221 that her Honour recorded the fact that the respondent was abandoning a contention which had been based on Mr Inglis’ evidence:

that the costs that might be occasioned to ANZ by late payment of a card account would be very difficult to calculate precisely.

That is the first thing.  The second thing was, your Honours, that the findings of the judge as to recovery costs were based on an assessment of what, if any, aspects of three categories of operational costs could properly be taken into account in assessing likely costs arising from a late payment event.  Those three categories were collections costs, inquiry costs and product costs.

Now, each of those topics was addressed in both lay and expert evidence.  Mr Regan’s reports at page 294 in volume 1, he had set out at some length his view about why Mr Inglis’ calculations were mistaken and that was fundamentally on the basis that they were not directed at any likely costs arising from the conduct of the appellant or the conduct of his account, and also that they took into account operational costs, for example, premises, computer costs, technology, IT structure, the resources that already existed and needed to exist for other purposes.

Could I refer your Honours to his evidence for just a moment in volume 1 at page 296?  You will see, for example, paragraph 54.  Your Honours will see that he discusses at considerable length in paragraphs 48 to 60, as appears from page 294, about line 30, the criticisms which he makes of Mr Inglis’ approach at that stage. 

Now, your Honours, could I just say that one sees, without going to the detail of that, that he concludes with the “reality check”, as he describes it, at page 298 in paragraph 60, where he said that:

Mr. Inglis estimates that the Collections cost per Late Payment Event could range as high as $31.  As a reality check, this number is self‑evidently too high, since if each of the 2,526,867 Late Payment Events did cost $31 per Event the total cost would be more than $78 million, which substantially exceeds the $21 million that he determined was the amount incurred by ANZ for its Consumer Cards in its Collections Business Unit for both Late and Overlimit Events for FY 2009. 

Your Honours will see that when he adjusted it only to late payment events it still was very considerably above the relevant figures.  That criticism, in effect, had the consequence that the evidence was filed by ANZ as to the actual likely costs arising from the conduct of the appellant’s account, and that included a witness providing actual costings of collection, who was Mr Rinaldi, the Retail Manager of the Customer Connect Team in the Operations Group at the ANZ. 

As I mentioned a moment ago, three categories of operational costs were addressed in the evidence:  collections costs, inquiry costs and product costs.  Your Honours will see at page 422 in volume 1, a page which folds out.  The joint report included a table which set out the competing calculations as to the operational costs, and if your Honours were to look at the second shaded line from the top you will see the heading “Operational Costs” and you will see under that heading that there are various costs referred to, including “Collection Costs”, “Enquiry Costs” and “Product Costs”.  These relate to events so far as the appellant’s accounts are concerned and so far as the two cards are concerned, and you will see in the case of each of those amounts the contention on the part of – and I am looking at the top line - Mr Inglis on the one hand, Mr Regan on the other.

Now, your Honours, Mr Regan had amended his part of the document a little in evidence because of the emergence of the fact during cross‑examination of Mr Rinaldi that collections calls were being made from a call centre in the Philippines from 2012.  That is referred to by the primary judge at page 162 and, your Honours, one can see at volume 1, page 221, Mr Regan explaining in his oral evidence when evidence was being given by two experts together, at page 222, lines 15 to 48, effectively what he said was that from 2012 he was using the lower Philippine figures. 

Now, these are calculations, your Honours will recall, of what costs were occasioned by the various breaches and your Honours will see that the document to which he was referring is the document at page 746 in volume 2, which your Honours is so hard to read that we had it expanded.  The Court has copies, I think – or it is about to have copies.

Your Honours will see, if I can go to the left column, where it has the dates of various late payments fees, a fee for 4 September 2006, the first item listed there.  You will see, if one compares that with the 6 May, the item listed at No 15, LP11, and follows those across one sees that the amount for post‑collection cost figures differs significantly because the amount of the cost was significantly reduced because of the use of the Philippines call centre.

Your Honours, one sees that, after hearing the various experts, the primary judge accepted Mr Regan’s calculations in his adjusted table, which is that document to which I have just referred.  They form the basis of her ultimate findings in the table, part of her judgment, at page 1353.  Your Honours will see the final column entitled “Finding - Loss and Damage.”

Your Honours, essentially, we would submit this involved the acceptance of Mr Regan’s approach over that of Mr Inglis for a number of reasons.  Both the experts and Mr Rinaldi were cross‑examined.  The judge, at page 1217, in volume 4, paragraphs 156 to 164, explained why she preferred the approach of Mr Regan.  She noted, and if I can endeavour to summarise what is at 156 to 164, that Mr Regan assessed:

the actual variable or incremental costs incurred by ANZ as a result of the Exception Fee Events.  As such, some operational costs were excluded by Mr Regan because they did not vary by reason of the Exception Fee Events –

and they ought to be disregarded.  Secondly, she made some factual findings on evidence as to likely call length of collections and wage costs which, in part, were based on evidence at the collections activity and the latter part was actually in the Philippines, which reduced the incremental collection costs rather dramatically thereafter.

Thirdly, as to inquiry costs, her Honour recorded an acknowledgment by Mr Inglis that those costs did not result from late payment events and were properly excluded by Mr Regan.  You will see her Honour refers to that at page 1218 at paragraph 163.  As to product costs, the judge accepted that his calculations properly excluded recovery of large amounts of general overhead expenses that bore no relation to the exception fees or various exception fee events which gave rise to them. 

A good example, if I could take your Honours to it for a moment, was what appears in paragraph 164 at page 1218.  There was an inter‑group expense of $195 million in the 2009 financial year for the costs to ANZ of the loyalty points program for credit cards which existed to entice – and I do not mean that in any bad sense of the term – customers, not as a result of or in any way related to any likely exception fee event.

Your Honours will see that the evidence accepted by the judge was to the effect that the late payment fees were set at a level many times the actual recoverable loss referable to collection costs.  We refer to this in paragraph 10(d) of our written submissions.  That, in our submission, was an application by the judge of the Dunlop test, looking to see what actual losses might properly be regarded as flowing from breaches of this kind, and the amount that she found was the loss was far below the amount of the fee.

Your Honours, could I come then to the bases on which the Full Court rejected the judge’s findings in relation to collection costs.  Could I mention first two aspects?  Your Honours will see at page 1466 in paragraph 153 of the Full Court’s reasons that the Full Court made references to its earlier findings about the correct perspective to be adopted.  It was said:

Mr Regan’s evidence as to damage and other evidence –

unless that could be seen as addressing a prospective inquiry –

Mr Regan’s evidence as to damage was irrelevant as to the assessment of extravagance or exorbitance.

Well, your Honours, we then appeared to reject, as your Honours will see at the top of page 1467, his evidence on the basis that it could not be used for a purpose different from that for which it was propounded.  Your Honours, we referred, in our written submissions, in paragraphs 52 and 53, to a submission that this was erroneous and, your Honours, the approach of rejecting evidence as to the actual incremental cost incurred by the ANZ by reason of the appellant’s late payments does sit rather unhappily with Philips Hong Kong Ltd v The Attorney General of Hong Kong [1993] 1 HKLR at 280 about line 30, the passage to which I referred your Honours earlier in the Privy Council.

Your Honours, in the ordinary experience one might think that one indication of what loss might have been perceived as being possibly sustained would be to see what actually is sustained when losses of this kind are involved.  Your Honours, could I just say also, as we submitted earlier we are looking at contracts of a repetitive nature and the breaches capable of occurring in rather similar situations once a month, as it were.

Your Honours, it is very difficult to see, we would submit, that there is likely to be a very significant difference between what one might perceive at the time of entry into the contract and what one might perceive at the time of breach.  If I may mention again, without taking your Honours to it, an element of reasonableness is involved as was indicated in the way in which Lord Woolf gave the advice to the Privy Council in the passage to which I referred a moment ago.

We would submit also that the Full Court really did not direct any attention to the detailed reasoning of Mr Regan as to why Mr Inglis’ approach was methodologically unsound even for its own purposes.  Could I refer again to what was said by him in volume 1 at pages 294 to 312?  In particular, he explained why it was not possible to attribute certain types of costs to any particular late payment event because they are not made greater by the occurrence of any particular late payment.  Could I refer to the judge’s reasons at paragraph 164 page 1218?

Your Honours, remaining with the Full Court’s reasons at paragraphs 171 to 177, could we just say, recalling that collection costs were but one of the three categories of what the Bank contended were operational costs, one can see that the first sentence, in our submission, at paragraph 171 at page1471 is not correct.  The primary judge did not accept that all the operational costs were a cost.  Rather she accepted only that collection costs fell into that category.  Your Honours can see that at paragraphs 160 to 164 of the primary judge’s reasons at page 1218.  In particular, she rejected the inquiry costs on the basis that Mr Inglis had acknowledged they did not result from late payments.  Your Honours, the second thing is that she rejected the product costs - this is at paragraph 164 - on the basis that they were overheads which were not increased because of any particular late payment. 

Now, your Honours, could we also say that the Full Court considered the structural costs or the product costs should have been taken into account.  That is paragraphs 173 and 175 in the Full Court.  Those alone were not major.  They appear to have been less than a dollar, on Mr Inglis’ view, which you will see in volume 2 at page 456 and at page 456 you see about line 25 product costs and they come up to a dollar, or a little less in some years. 

Your Honours, could we also say that, in our submission, the approach taken by Mr Regan was consistent with authority and we have referred in paragraphs 47 and 48 of our written submissions to the fact that it seems apparent enough from Dunlop, from AMEV, from Ringrow, from Andrews, that the first test in paragraph 4(a) of Dunlop requires comparison of the alleged penalty with causally related losses recoverable by way of common law damages, at least in the case where breach of contract is involved.

Your Honours, that exercise involves considering likelihood and remoteness and the Full Court appears to have substituted Mr Inglis’ methodology in identifying the maximum amount of costs that ANZ could conceivably have incurred as a result of a late payment, however remote those costs might be and irrespective as to whether they would be recoverable.  I leave aside the particular provision for recoverability for the moment.

GAGELER J:   So, on your case, it is only the variable costs or incremental costs that are recoverable, not any part of the fixed costs of setting up the infrastructure for recovery across the range of customers.

MR JACKSON:   Yes, your Honour, otherwise and pursuant to contractual provision, and could I come to that in just a moment.  What I mean by that, your Honour, is this, that this was a contract in which there was provision for there to be payment of recovery costs, in effect, to put it shortly, well, costs occasioned by a breach.

If that be the case, then one has a situation where there is provision for interest, there is provision for the payment of the costs of recovery contractually, and then there is in addition to that the late payment fee, and it would be and is inappropriate in circumstances of that kind to treat the late payment fee as one which is to cater for the matters that are dealt with by the contractual provision for expenses before recovery costs.  So that, if one is looking to see what it is covering, it is not covering things for which there is other provision in the contract.

KIEFEL J:   But could you not also say that it means that because late payment fee covers those costs the Bank could not recover them under their costs provision?

MR JACKSON:   Well, your Honour, it would be difficult to say that, with respect, because one is looking for – I mean, the Bank may choose not to recover, of course, but having said that the situation that you have is a bank, let us say, is suing under the contract.  It sues for the money it has not been paid, it sues for interest on that sum, it also sues for the costs incurred in recovery.  Those are the things they are entitled to contractually.  The interest may in fact include interest on the costs of recovery. 

But if it is then suing for the late payment fee, and the question is whether the late payment fee is something that is to be considered as a penalty, then the question arises what is the justification for the late payment fee and one assumes, in our submission assumes correctly, that the late payment fee is not dealing with things otherwise dealt with specifically in terms of the agreement.  Your Honour, I do not know if I can answer it more than that but that is what our submission would be.  That is what an additional sum is for something in addition to what else is provided for.

NETTLE J:   You do not even get to the accountant’s evidence to suggest an ex ante construction on the terms of the contract and the circumstances at the time of creation that gets you to that point.

MR JACKSON:   Well, your Honour, I think the answer to what your Honour put to me is yes.  What we would say is that you have to look to see what the contract provides for, having found what it provides for – I mean…..specifically of course – having looked at that you then see that there is another fee which is payable.  One asks what the other fee is for, it is not for the things that are specifically provided for, and then the question arises because that fee becomes payable on breach, what is it for, in effect? 

One asks the question because of the existence of the law as to provisions which are penal and in seeking to see what it is for the appropriate approach is to say other things are already covered, so why is one looking at costs which are the subject of a specific provision?  Your Honour, I am sorry, I have given you a long answer to that.

Could we just say, your Honours, one can see in effect the nature of the error of the Full Court in this regard.  If one looks, for example, at paragraphs 175 to 176 at page 1472, one can see at the bottom of page 1472 there it says:

if one recognises that calls could last from 1 minute to over 20 minutes with the average call for the 19^th quintile of customers being 20 minutes, the cost of collection (looking forward) might be seen to exceed the fee.

But could we just say that that proposition is, with respect, unsound and for a number of reasons.  The first is that Mr Inglis considered only those late payments which were actually referred to collections, not the vast majority which were not.  We have given the references to that in our written submissions, paragraph 51, footnote 37.

The evidence of what actually happened was open to be accepted by the primary judge, and the evidence was that the average call length to the appellant was under seven minutes and that the one call which was 21 minutes covered three different exception fee events and that was acknowledged by Mr Inglis in his evidence in volume 1 at page 227, line 15 and 228, line 5, and the average call length was much lower than that - I miscalculated, your Honours – at 4.84 minutes.  You will see the reference in our written submissions, paragraph 51, footnote 36.

Your Honours, Mr Regan’s calculations of the actual collection costs attributable to calls made to us on the incremental basis, even ignoring the adjustments – I am sorry, your Honours, I will start again.  If one leaves out of account that the amount went down after the Philippine call centre in 2012, the position was that in the period before that when the higher rates were charged, the amount per call was in the range of 85 cents and $3.16.  You will see references to that at page 422 in volume 1.

Could I come back then to a matter I raised a short time ago with your Honour Justice Nettle?  One should not lose sight of the fact that the nature of the inquiry undertaken in adopting the Dunlop test is a process of construction of the provisions assisted by presumptions of tests and so on.

The role of the tests is as, in a sense, tools in the process of contractual construction in the ascertainment of – and in a discussion I had with your Honour Justice Kiefel earlier today – the true operative character of the clauses.  That does not operate in a vacuum, and in looking to see how it does operate one does have to look to the nature of the other provisions of the agreement as distinct from the obligation to pay the low payment fee itself.

Could I in that regard take your Honours to the supplementary volume that we have supplied?  Could I just invite your Honours to look at the index for a moment?  You will see that it includes the various documents, the terms and conditions.  I need only take your Honours to the terms and conditions which appear relevantly at page 1653.  Your Honours will see there on page 1653 the terms of clause (29) and, in particular, (29)(a) and (29)(c).  I took your Honours briefly to them earlier in the extracted form.

If one looks at the contract as a whole, a contract including these provisions, it becomes difficult, in our submission, to say that the late payment fee was objectively intended to compensate the bank for those kinds of costs at all.  Your Honours, the position would seem to be that it is compensating, if at all, for something else and the collection costs falling within (29)(c) should not be taken into account in favour of the notion that they go against the concept that the late payment fee was a fee which was not penal.

May I come next, your Honours, to the decision of the Supreme Court of the United Kingdom in Cavendish Square Holding [2015] 3 WLR 1373. At the outset one can note three things about Cavendish Square.  First, what was being considered by the Supreme Court was a so‑called commercial justification test which seems to have emanated from the earlier decision of Justice Colman in Lordsvale Finance v Bank of Zambia and of the Court of Appeal in England and Wales in two subsequent cases.  Your Honours will see those referred to at page 1390, paragraph 27.

Now, those cases had been conducted – the cases before the Supreme Court were conducted on the basis that the persons imposing the various charges had a legitimate interest in observance of the contractual terms, breach of which triggered payment of the impugned sums but that interest extended beyond recovery of loss attributable to the breach.  Your Honours will see that referred to at page 1402, paragraph 66 and 1413, paragraphs 97 to 98. 

Your Honours, the second point is that the Supreme Court appears to have been conscious in varying degrees of consciousness that the Australian law as developed here was different from English law and your Honours will see that at page 1395, 41.  Your Honours the commercial justification case or test does not appear to have been followed, in our submission, or adopted in Australia except perhaps to the extent to which the Full Court adopted it in this case. 

The third point, your Honours, is that Cavendish was not speaking to the simple case like this, a simple case of a damages clause.  Could I, in that regard, take your Honours to a number of references in the decision which appear to make it clear that the simple test was able to be applied?  The first of them, your Honours, is in the joint reasons of Lord Neuberger and Lord Sumption at page 1387, paragraph 22.  You will see after the opening remarks at about letter G, their Lordships say:

The four tests are a useful tool for deciding whether these expressions can properly be applied to simple damages clauses in standard contracts.  But they are not easily applied to more complex cases.

Secondly, your Honours, if one goes to paragraph 25 at page 1389 it is said:

The great majority of cases decided in England since the Dunlop case have concerned more or less standard damages clauses in consumer contracts, and Lord Dunedin’s four tests have proved perfectly adequate for dealing with those.

Your Honours, if one goes then to page 1391, paragraph 28, you will see on page 1391 between letters A and B:

the penal character of a clause depends on its purpose, which is ordinarily an inference from its effect . . . A damages clause may properly be justified by some other consideration than the desire to recover compensation for a breach.  This must depend on whether the innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation flowing directly from the breach in question.

Then, the issue is adverted to also at page 1392 in paragraph 32 where it said:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract‑breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.  The innocent party can have no proper interest and simply punishing defaulter.

If I could go to the last three lines on that page:

In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect Lord Dunedin’s four tests would usually be perfectly adequate to determine its validity.  But compensation is not necessarily the only legitimate interest ‑

et cetera.

KIEFEL J:   On one view, could it be said that the facts in Dunlop’s Case, particularly as expounded by Lord Atkinson, actually identified something closer to a Cavendish situation, where what was recognised was a legitimate interest in the protection of their trade interests, rather than the simple contract but nevertheless the rules were devised to deal with it.

MR JACKSON:   Well, your Honour, what your Honour says is right in the sense, I think, that if one looks at what Lord Atkinson said - and that does not appear to be put in quite the same way as in the other speeches - but what Lord Atkinson said does rationalise why one could not regard it as a penalty in that case.  Amongst other things, you have a situation where the reason for doing it is to protect a commercial interest where damages would be difficult to prove and matters of that kind and really it is putting in a sense in round terms, without (a), (b), (c) and (d), what is said in Lord Dunedin’s speech.  So, two ways of looking at it but the reflection of it in, let us say calling it a legitimate commercial interest is really to put in other words what one sees in, for example, paragraph 4(a) of Lord Dunedin.

GAGELER J:   But it is not focusing simply on the incremental cost to the service provider caused by the breach.  I think it was not in Dunlop and was not in Cavendish.  It went beyond the incremental costs.

MR JACKSON:   No, your Honour.  Well, your Honour, that is true but it really supports, in our submission, the submission we are making that there is not just one test.  There are, to use the phrase again, “horses for courses”.  One can see that if one goes to Dunlop in that kind of case.  There is one type of case, there is another type of case and so one sees the 4(a) type of case, to put it very briefly and a little inexactly, being in Cavendish, one sees Dunlop itself being that class of case perhaps and one sees that Cavendish itself recognises that there are the simple cases where it is appropriate to apply the kind of tests that are set out in Dunlop.

GAGELER J:   Do you accept that in this respect, or in the respect that you took us to, for example, at paragraph 28 of the joint reasons for judgment in Cavendish, that there is an identity, or at least a similarity between the current English approach and the Australian approach, or are you suggesting that there has been a divergence when it comes to this question?

MR JACKSON:   Your Honour, first there are differences, obvious differences, because Cavendish seems to say issue arises on breach.  It does not arise in relation to provisions where there is no breach and Andrews seems to go beyond that but, your Honour, this is a breach case.

GAGELER J:   Yes.

MR JACKSON:   Now, when one comes to breach cases, what one sees is that Cavendish seems to have a fairly broad view of what is a legitimate interest, but it is really speaking of a legitimate interest in cases which are not the simple case of non‑payment of money under – they call them standard type contracts.  When one comes to that class of case, it may be that Andrews has the effect that the law in Australia generally speaking is broader, but on the question of whether there is a penalty in what I call the 4(b) type of case, a simple case, there does not seem to be a very significant difference.

GAGELER J:   So, if we go to the 4(a) case, and not a Cavendish but the companion case, ParkingEye, you say that would be decided in the same way in Australia?

MR JACKSON:   Well, it is ‑ your Honour should be telling me, with respect.

NETTLE J:   It comes later.

GAGELER J:   I am asking you because it would be difficult for it to be decided in the same way, given your submissions on how 4(a) should be applied in the present case, I think.

MR JACKSON:   Yes.  Your Honour, it does seem to be something of an outlier, in our submission.  One can understand how there might be an inclination to decide the case that way but it is, in our submission, something of a surprising result and it seems the kind of thing and one would say, well, this is the penalty; if you want to arrange your affairs so that you pay this you have got to do it differently.

NETTLE J:   Mr Jackson, could I ask you one question please at this point?  Putting aside the application in the case just referred to, which you might say was erroneous but in any event would not agree with, would it be fair to say that the overarching and more informing principle of all this is the Cavendish test and that the rules in Dunlop are simply the application of that test to particular kinds of costs?

MR JACKSON:   Well, your Honour, I do not know that it is right, with respect, to say that there is an overarching test in circumstances where, coming from Cavendish Square, Cavendish Square itself recognises that, for example, the Dunlop tests themselves are appropriate tests to a large number of cases.  When one sees observations such as overarching used in Cavendish it is really speaking of the types of case of which it is a type, as distinct from all types of cases, in our submission.

NETTLE J:   Thank you.

MR JACKSON:   Your Honour, could I just add something to that.  One sees, for example, in Andrews, I think in paragraph 10, the statement of the approach in this country and that speaks in broad terms.  If one is looking for an overarching principle, that is the principle, the application of it to different cases will involve, in effect, subprinciples, as it were.

I was going to give one further reference in Cavendish Square and that is the judgment of Lord Hodge, at page1464, paragraph 249, where at about letter B he said:

Where the obligation which has been breached is to pay money on a certain date, the innocent party’s interests are normally fully served by the payment of the stipulated sum together with interest and the costs of recovery –

which is, in a sense, what we suggest.  Your Honours, the present case is one where the legitimate commercial interests, which the bank seeks to say should be taken into account, are ones which as such do not appear to have been appealing – and I am not speaking about the particular things.  But you will see the four references that I have given to Clydebank, which deal with the question of payment of breaches by non‑payment of money, there does not appear to be any serious suggestion in that case that, in a case having the simplicity, in our submission, of a case like this that it is a case where there is some other interest than recovering the money that is owed.

KEANE J:   What about the interest in keeping the interest rate lower because you have a provision that incentivises timeless payment?

MR JACKSON:   Your Honour, the only evidence of that is the possibility that that could be the case raised in the speech of the Chief Justice in the Federal Court.  Where does one find anything to suggest that that was in fact the case and where, in the case of any lender, one would need to have something to demonstrate that there was a relationship between the rate of interest and the continuance of the rate of interest, the imposition of the interest, as in this case, and the quantum of the late payment fee.  It is not, with respect, just a matter of inference that the late payment fee had a relationship to the interest that was payable.

Your Honours, could I endeavour to say this?  The present case, in our submission, does not really turn on commercial justification considerations.  Rather, it is a case where the interest protected is the interest in obtaining the money that is payable on breach.  It is the standard damages case, as it were.  In our submission, if the Court were minded to apply Cavendish‑type principles, we would submit the Cavendish‑type principles would involve finding that the provision for the late payment fee was a penalty in accordance with what we would submit is established principle.  So far as the notice of contention is concerned, may we deal with that in the course of our reply?  Your Honours will see the orders that we seek in relation to the penalties case in volume 4 at page 1612.

May I move then to the statutory claims?  The claims made arise under three regimes to which I will come in just a moment.  The issues were not, in the end, dealt with by the primary judge in relation to late payment fees because her Honour had held they were penalties and your Honours will see that in volume 1, page 1245 at paragraph 278.

The primary judge did deal with, but dismissed, the statutory claims we had made in respect of the fees other than late payment fees.  The Full Court also dismissed the statutory claims in respect of fees other than late payment fees, and that is not an issue in this Court; we do not challenge that.  But the Full Court, however, also dismissed our claim in respect of late payment fees, and that was an issue which it was required to decide because it had allowed the bank’s appeal on the penalty issue in relation to such fees.  Your Honours, I am sorry for that long introduction to it, but there we are.

But there was an important difference between the late payment fees and the other fees in issue in the court below.  The difference was that the other fees were capable of being characterised as a price for a service.  On the other hand, the late payment fee was payable upon and by reason of breach, and that was a breach consisting of a failure to pay money on time in circumstances where interest was also payable contractually on the unpaid money and the costs were recoverable.

Could I go, your Honours, first to the unconscionable conduct claim under the Australian Securities and Investments Commission Act 2001 under section 12CB. If your Honours go to our submissions in‑chief on the statutory claims, the provisions follow the submissions themselves. Section 12CB can be seen – the pages are numbered one and following at the top right‑hand corner – on page 2. Your Honours will see that section 12CB(1) provides:

A person must not, in trade or commerce, in connection with the supply or possible supply of financial services to a person, engage in conduct that is, in all the circumstances, unconscionable.

Your Honours, could I interpolate this:  this version was in force until the beginning of 2012 and covered about half of the late payment fees.  There was an amended version which, in effect, split the same provisions between 12CB and 12CC thereafter.  The differences do not matter, in our submission.  But there are several features that can be noted in relation to section 12CB.  The first is that it is clear that the term “unconscionability” is not constrained by the ambit of the concept of unconscionability under the general law, and that is made apparent by the terms of section 12CA(2).  Section 12CA refers to unconscionability under the general law but does not apply to 12CB.

The second thing is, your Honours, that in determining whether conduct is unconscionable in the sense used in section 12CB(1) one is to look at all the circumstances.  One sees that in the words of the provision.  Thirdly, the circumstances to which regard may be had include those listed in section 12CB(2).  In the later period that had become 12CC.  Now, amongst the circumstances to which regard is to be had is that referred to in 12CB(2)(b) and that is:

whether, as a result of conduct engaged in by the supplier, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier –

Now, if one goes to the Full Court’s reasons – if I could take your Honours there for just a moment ‑ your Honours will see at page 1513 in paragraph 330 there is a reference at the bottom of the page, saying:

The question whether the conduct of ANZ was unconscionable should be looked at from the perspective of all the circumstances.  These circumstances, within reason, would include an assessment of the legitimacy of the fee from the perspective of the bank’s business – including questions of provisioning and costs of regulatory capital.

Now, as a general proposition, your Honours, the fact that one has to look at all these circumstances is not something that one would cavil with but it does rely on the legitimacy of reference to provisions and the costs of regulatory capital and paragraph 332 makes that apparent.  The judge then sets out the test to be applied at paragraph 334.  He said there that the appellant:

would have to demonstrate that from any reasonable perspective the fees were exorbitant.

Your Honours, that is not the statutory test.  If I could take your Honours to our written submissions ‑ ‑ ‑

FRENCH CJ:   What was the basis of the attack, how was it encapsulating the pleading or that part of it which mattered at the end?

MR JACKSON:   Well, the basis of the attack was to say if you took into account the obligations and treated the various provisions of the section 12CB as relevant, that the conclusion should in the end be drawn that the provision for that payment fee was something that was unconscionable in terms of 12CB(1).

Now, many of the aspects that are referred to are ones where it is true to say no one suggested – or no one suggests now, in any event – that, for example, 12CB(2)(d) was applicable in the sense of undue influence or pressure being used and so on, but the core thing in the end was it was not reasonably necessary ‑ ‑ ‑

FRENCH CJ:   So it is (a) and (b), is it?

MR JACKSON:   Yes.

KIEFEL J:   Is (b) appropriate to a case of failure to pay money when it speaks of compliance with conditions?

MR JACKSON:   Well, it is, in our submission, your Honour.  It is appropriate because the consumer is required, because of the terms on which the provision is made; the consumer is obliged to comply with the condition.  The condition is that there be paid a sum in addition to the amount owing, interest and costs of recovery, and that is not something that was – the question was whether that was reasonably necessary for the protection of the legitimate interests of the supplier.

KIEFEL J:   But are not conditions necessary for the protection of the legitimate interests of a supplier more aligned to the circumstances in Cavendish for which you say should be distinguished from simple contract cases concerning payment of money?

MR JACKSON:   Well, your Honour, no doubt.  Could I put it this way?  Section 12CB(2)(b) is a provision which applies to all the contracts of the kind the scope there referred to.  Now, it may have different applications to different types of contract and different types of provision, but it certainly is not a provision which is intended, in our submission, to have a narrow operation and there is no reason why it could not apply both on the one hand to provisions of the 4(a) kind, to put it shortly, and provisions of the 4(b) kind.  You can have a differential application to them.  There is no reason why the simple case should be excluded.  The simple case may raise the issue very starkly indeed.

KEANE J:   Is it a legitimate interest of the lender to provide an inducement or an incentive to performance of the contract?

MR JACKSON:   Well, your Honour, that is why, in one sense, provisions that say that the interest rate is X but is X minus if you pay on time are ones that are generally regarded as good, if I can put it that way, but if one has a situation where you are not doing that but you are just saying, you have to pay X, whatever be the nature of the breach, however long it takes, then it does not seem to be something that is necessary for the protection of the legitimate interest.  It is just a provision under which you get money on the happening of an event and, your Honour, it is sophisticating it, if I can use that expression, to describe it as something that is in the legitimate interests of the supplier.

GAGELER J:   Is it in the legitimate interests of the supplier to seek to recover its overheads?

MR JACKSON:   The answer, your Honour, is yes, I think, but of course it depends on what they are.  As a general proposition, the answer may be yes.  Normally speaking, if I can put it this way, your Honour, those costs being overheads may or may not be recoverable at law.  The question will always arise as to whether there is specific provision for them on the one hand, in which case one would be looking at provisions of this kind and also, in the absence of specific provision, whether they are something that can be attributable under one or other of the Hadley v Baxendale rules and perhaps Hungerfords v Walker too.

But questions would arise and as to what overheads and what consequences flow from that and I referred to Garraway earlier, simply as an example of the fact that the usual result is an entitlement to interest which there was already.  So, your Honour, I have to give a mixed‑meal answer, if I can put it that way to your Honour’s question.

If I could take your Honours to our written submissions in paragraphs 22 and 23, the test that has been adopted at paragraph 334, namely, that it would have to be demonstrated that from any reasonable perspective the fees were exorbitant, is a test which differs from and is more favourable to the respondent than section 12CB(2)(b), and that after 2002 is 12CC(1)(b). 

Your Honours, if one goes to the Full Court’s reasons also at paragraph 337, your Honours will see that at 337 it is said that the fees could be justified, in effect, not irrationally, and – I am sorry, your Honours, I should have said 336.  At page 1516 about line 15 it said:

Though the fees, from one perspective, may be seen to be high in the eye of the consumer, they were openly charged and can be justified, not irrationally, in the manner contained in Mr Inglis’ reports.

Could we just say this, your Honours, that Mr Inglis’ reports were directed to a forward‑looking analysis and the propriety of the adoption of that course for statutory unconscionability does seem to have its difficulties with section 12CB(4).  Your Honours will see that section 12CB(4) says that:

For the purpose of determining whether a person has contravened subsection (1) in connection with the supply or possible supply of financial services to another person:

(a)the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention –

That is a different time, of course, from the time of entry into the contract.  Section 12CB(4) - it became (3) in the later version - your Honours, does seem to say in quite clear terms that the court must not have regard to circumstances that were not reasonably foreseeable at the time of the alleged contravention, and that is the time at which the late fee is imposed.  Your Honours, at that time it is impossible to predict whether provisioning or regulatory capital was likely to be required.

One goes then to the reasons of the Full Court at paragraphs 337 and following on page 1516.  Paragraph 337 refers to the primary judge’s finding of unconscionability but, your Honours, could we just say that that finding was in relation to fees other than the late payment fee because her Honour did not deal with it.

One then sees the passage at paragraphs 338 to 340.  Your Honours, paragraphs 338 and 340, leaving 339 for the moment, appear related – that is, they relate to fees other than the late payment fees.  But 339 seems to indicate that if you treat Mr Regan’s approach as correct in relation to late payment fees and treat it as being a forward‑looking analysis, then the fee was in fact a penalty.  Your Honours, there is a degree with respect to obscurity in this, but if I could say this:  it does not seem to be against us in any way.

FRENCH CJ:   What is the unconscionable conduct, by the way?  Is it the inclusion of the late payment fee in the contract or is it the debiting of the fee?

MR JACKSON:   Your Honour, to use the words of 12CB(2)(b), it is the requirement to comply with the condition.  So it would seem to be, on the one hand, the contract.  The issue, in effect, comes into being, however, as a practical matter at the time of the late payment fee.

FRENCH CJ:   Of course, yes.

MR JACKSON:   The various remedies that are provided for are remedies that could deal with either aspect of it.

FRENCH CJ:   To rewrite the contract, for example.

MR JACKSON:   Rewrite the contract or prevent the fee being required to be paid.  Now, your Honours, in our submission, the question whether the late‑payment fees were unconscionable, in terms of 12CB(1), should have been dealt with in our submission on the basis to which we have referred in our written submissions in paragraphs 35 and 36. 

Could I just say, your Honours, in relation to paragraph 35, in effect, the Full Court’s decision was that it was not unconscionable to charge a late payment fee, not being a price for any service being provided, but rather an amount payable upon breach of contract, not an agreed pre‑estimate of loss - your Honours will see the remainder of paragraphs 35 and 36. 

Could I go then, your Honours, to the unjust transactions under the National Credit Code, the provision of which is section 76.  Section 76 can be seen at the page numbered 21, the top right‑hand corner.  Section 76(1) gives the court a power to reopen a transaction if satisfied that the contract was unjust.  The time at which the question whether the transaction was unjust is to be looked at on this occasion at the time the contract was entered into.  Reasonable foreseeability is required as at that time and your Honours will see the terms of section 76(4) in that regard.  It requires reasonable foreseeability at the time the contract was entered into.

Now, your Honours, once again a wide range of factors is to be taken into account, and your Honours will see section 76(2), and one sees, for example, section 76(2)(m):

whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider –

Could I say, your Honours, that the Full Court dealt with unjust and unfair transactions, the third category, together and may I refer to the unfair provisions first before going to what the Full Court said.  The unfair provisions, your Honours, can be seen in the Fair Trading Act relevantly at page 27 of these additions.  “Unfair term” is defined by section 32W and it says that:

A term . . . is to be regarded as unfair if, in all the circumstances, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer. 

An unfair term is void, that is section 32Y, and, your Honours, the criteria for determining whether a term is unfair is set out in section 32X and could I refer particularly to section 32X(c) provision:

penalising the consumer but not the supplier for a breach or termination of the contract –

Now, your Honours, the Full Court’s decision may be seen relevantly at page 1520, paragraph 352, and, your Honours, what is said in relation to unfair contracts is at paragraph 358.  Your Honours will see:

The provisions were clearly disclosed.  In most instances, the fees could be avoided.  No trickery took place.  Although set by the bank in contracts of adhesion, the contracts were terminable at the will of the customer; and the fee could be avoided by the conduct of the customer that was not unreasonable – keeping to her or his contractual limits. 

Your Honours, could we refer in that regard to our written submissions at paragraph 43, and your Honours will see we submit that the Full Court did not really deal with the claim that late payment fees were unfair terms.  Nor did it give consideration to how section 32W applied to sums exacted upon breach of contract by one party, and your Honours will see, from a passage to which we referred, it simply said if you keep your contractual limits that is okay.  That is a form of words referring, in our submission, to concepts ultimately irrelevant to the late payment fees. 

Your Honours will see what we say in paragraph 44.  There is an imbalance because the supplier is put in a position where it can profit from breaches of contract without any quid pro quo and the significance of the imbalance is demonstrated by the lack of any meaningful relationship between the amount of the late payment fee and the reasonably foreseeable loss which might result from late payment.

In relation to section 76, your Honours will see the observations of the Full Court at paragraphs 359 and 365.  Could we refer in that regard to our submissions in paragraph 39 where we make the submission that the consideration of section 76 focused on the proposition that the fee was a price which could be avoided by paying on card.  But the late payment fees, in our submission, had a character fundamentally different from that of the other fees under consideration.

In relation to the statutory claims, your Honours will see in volume 4 at page 1607 that the relief which is sought is that the matter be remitted to the Full Court for further consideration because, in a sense, we say the Full

Court has not really applied the provisions of the Act to the circumstance.  Of course, if the Court were minded to go further, we would not object in the matter, but your Honours will see what we have sought.  Could I just say, though, also that the issues arising under the statutory claims is, as I submitted earlier, one that the Court would not have to engage in if it were in our favour on the penalties issue.  Your Honours, those are our submissions.

FRENCH CJ:   Thank you, Mr Jackson.  Mr Archibald.

MR ARCHIBALD:   If the Court please, I propose first to make submissions in relation to the penalty appeal brought by the appellants.  That is M220.  Then I would propose to address the Court on the issues arising on the statutory claim appeal brought by the appellants.  That is M219.  And then I propose to ask Mr O’Bryan to address the Court on the notice of contention which we raise in the penalty appeal.

Going to the penalty appeal, the doctrine which falls for consideration has two key concepts – penalty and genuine pre‑estimate of damage or loss – and I wanted to say something about those elements before proceeding to the detail of the argument on the appeal.

The essence of a penalty, in our contention, is that the impugned provision be found to be punitive in character.  Certainly, the word “penalty” conveys that but if one focuses upon the concept it must be found that the function and object of the clause in question is to be punitive and, indeed, that is the formulation of this Court in Andrews at paragraph 9. I might just remind the Court of that paragraph; Andrews 247 CLR 205, paragraph 9 is at page 216. The Court there adopted and repeated the formulation of Sir Anthony Mason and Sir William Deane in Legione saying that:

as the term suggests, a penalty is in the nature of a punishment ‑ ‑ ‑

FRENCH CJ:   Does that mean anything more than ‑ that its purpose or function is to deter breach or deter the conduct to which it is directed?

MR ARCHIBALD:   The first point is that it is to punish and by reason of having the characteristic of punishment it lacks the character of being compensatory.  The foundation of the characterisation of punitiveness is that it fulfils the function of acting in terrrorem.

FRENCH CJ:   That is to say by way of deterrents.

MR ARCHIBALD:   Well, yes, to ‑ ‑ ‑

FRENCH CJ:   We are not talking retribution here.

MR ARCHIBALD:   Well, no, but it is to seek to achieve performance of a primary stipulation by the mechanism of what I will call the threat presented by the punitive provision.  So, the object of the punitive provision is to seek to compel, coerce, achieve, observance of the primary stipulation not to achieve the money sum for which the impugned provision provides, if it is punitive, but to have a different operation.  Now, that operation is not always brought about and does not always succeed and, therefore, there are cases for recovery of the punitive sum.  But, yes, it is to deter, but it is punitive deterrents rather than non‑punitive deterrents.  Cavendish, I do not want to be taken as seeking for the purposes of this appeal to be advancing an argument that that element need necessarily be found in the clauses before this Court, but Cavendish identifies provisions which have a deterrent effect but are non‑punitive.

All that that draws attention to is the particular kind of deterrents of which the cases commonly speak is that form of deterrents which is calculated to conduce to the performance of the primary provision and not to have an operation in the impugned provision that will perform any compensatory function at all.  It is not the compensation the party wants, it is the observance of the primary provision.

GAGELER J:   So what would you say about ParkingEye?

MR ARCHIBALD:   It would be good law here; it is good law here on the facts.  If one finds those circumstances ‑ and none of that involves, in our submission, any jettisoning of the tests applied on an orthodox basis in Australia in favour of some notion of commercial justification, if that is thought to involve some modification of the principles otherwise applied here and endorsed by Ringrow and including Andrews.

GAGELER J:   So, in your submission, as I am understanding it, you can have deterrence which is not punitive.

MR ARCHIBALD:   Yes.

GAGELER J:   What is it that makes deterrence not punitive?

MR ARCHIBALD:   That the subject matter of the clause lacks the elements of ‑ and I will use the Dunlop language ‑ extravagance and unconscionability ‑ to use perhaps Ringrow language ‑ is not out of all proportion.  But once the fee may be seen to have those characteristics, it is non‑punitive and therefore non‑penal but its provisions may still be such as to encourage performance of the primary provision without being punitive in the sense of in terrorem.

FRENCH CJ:   Is that any more than the proposition which I think is reflected in some of the discussion in the UK Law Commission Report back in 1975, whenever, that the threat of damages for breach, if you breach, is a deterrent in the general sense outside the framework of a penalty clause.

MR ARCHIBALD:   All pricing, other than pricing in a perfectly competitive market, does have some element which will impact upon the conduct of the demand side of the market.

FRENCH CJ:   Well, that is the case of a double effect clause.  The punitive clause is one which is not a genuine pre‑estimate of damages, you would say.

MR ARCHIBALD:   Well, yes, I will come to that notion in a moment, but it is drawing attention to the requirement that the clause be seen to have and only to have that function.

KIEFEL J:   Would you agree that a non‑punitive clause is where the sum agreed is commensurate with the interest protected by the bargain?

MR ARCHIBALD:   Yes.

KIEFEL J:   That is the language of Andrews referring to Lord Atkinson in Dunlop at paragraph 236.

MR ARCHIBALD:   Yes, exactly so, yes.  But to embrace that is to recognise the interest, and to conclude that the subject ‑ ‑ ‑

KIEFEL J:   Well, it requires identification of the interest.

MR ARCHIBALD:   Identification of the interest and defined commensurability, and as that admirable formulation is dealt with in numbers of the cases, the converse is the good way of expressing it.  Is the clause incommensurate with the interest and incommensurability is achieved where it fastens upon a punitive function rather than some compensatory function.

KIEFEL J:   How would you identify the interests of the Bank here?

MR ARCHIBALD:   Here, we identify it as, for the purposes of this particular clause, the interest in protecting against the consequences of non‑timely payment, which in the case of a financial institution, the case of this financial institution, are shown to give rise to costs that would not otherwise be incurred, costs because of tardiness.  Not costs because of non‑payment at any time but the circumstance of failure to achieve timely payment.

It is the tardiness that throws up the necessity under the accounting standards and prudential conduct of a business to make additional provisions which would not otherwise be made.  The necessity under the regulatory regime – Basal III and other elements – to make increments to the regulatory capital that would not otherwise have to be made because of tardy payment and the effect on the risk‑weighted assets, all of which flow immediately and without more – and regardless of whether there is ultimately payment, and similarly the occasioning of other costs such as incremental and structural collections costs, all of those flow simply from tardiness, no more, and that at least is the interest here.  One might, if one expressed it at a more general level, add to those analyses, but those core fundamentals are sufficient, in our contention in the present case, amply to justify the fee.

KIEFEL J:   On that basis, the quantum of those costs then becomes somewhat critical to the Bank’s case.

MR ARCHIBALD:   Well, the existence of those costs, but the quantum looked at on a forward‑looking basis at the time of the contract, and not just forward looking.  An integer of the test of extravagance is the comparator, and the comparator is, in the hallowed Dunlop language, the maximum conceivable loss.  Now, one does not take that to a farcical extreme.

But one is not looking to a prediction of the average likely lost, one is looking at some sort of notion of what the conceivable loss, what the upper levels of loss, may be.  Therefore one looks to quantum which may attend the range, not the average, not the minimum and not the ultra maximum, but one is looking at the top of the range and, yes, therefore for purposes of assisting a conclusion as to whether the role of this clause is punitive or non‑punitive, one assesses the position in that regard.

That is where the expert evidence comes in, assessing a range, not non‑foreseeable elements, but just assessing a series of different scenarios that cover the spectrum of what may occur.  Once one fastens on a particular scenario, the costs that are identified, all of the same costs, will be incurred at each level, but they may differ in quantum.  But they all follow in the ordinary course if those are the events that occur, and so in that way one has an analysis which if it matters comfortably fits both within notions of causation and within notions of contractual law of remoteness.  But one does look at quantum, yes.

Now, coming, if I may, to the second key notion, the notion of a genuine pre‑estimate of damage, we submit that the learned Chief Justice in the Full Court was correct to regard that expression as a descriptive phrase, the work of which is really to do no more than to explain and identify a sum that is not punitive in character, that is not extravagant.  It is not a test in itself and it is really drawing attention to the corollary of a feature of punitiveness – namely, that the clause will not be compensatory.  That is what is captured, descriptively, in the notion of a genuine pre‑estimate of loss.  The Chief Justice dealt with this in his Honour’s reasons at paragraph 25, page 1436, volume 4.  At line 29, in the middle of the paragraph:

The requirement for extravagance and unconscionability and its distinction from a genuine pre-estimate of damage must require the latter concept to be a broad objective one, not limited to a clause expressly said to be a genuine pre‑estimate of damage or containing a sum actually fixed in amount by reference to contemporaneous considerations concerned with such.  Rather, if extravagance and unconscionability, on the one hand, and a genuine pre‑estimate, on the other, are to operate as the relevant universe of discourse, the latter must be a descriptive phrase used to explain a sum paid upon breach of a term or pursuant to a collateral stipulation upon the failure of the primary stipulation that is not extravagant and not out of all proportion –

His Honour returned to the topic in his Honour’s reasons at paragraphs 96 to 101 on pages 1453 to 1454.  We draw attention especially to his Honour’s observation at paragraph 100 that a genuine pre‑estimate of damage is – and this is line 23 – “the reflex of a penalty”.  So it is not a test in itself.  It is helpfully assisting an understanding of the characteristics of a clause that is not a penalty.  But the real question where penalty is alleged is whether the clause is penal, not whether it is a genuine pre‑estimate of loss, which is the observation of Lord Neuberger and Lord Sumption in Cavendish Square, paragraph 3, page 1392F.

So, one does not set out to answer the question of penalty by examining whether the clause is a genuine pre‑estimate of loss.  It follows from that proper characterisation of that notion that a clause may be labelled a genuine pre‑estimate of loss regardless of whether it is the product of an actual process of negotiation between the parties directed to determining the likely loss or the maximum likely loss that may flow upon breach.

One does not look to the pre‑contractual activity of the parties to understand whether there is something that can be called a genuine pre‑estimate of damage.  It is an objective question of construction and by reason of answering the question as to punitiveness one answers the question as to whether the clause may be described as a genuine pre‑estimate. 

My learned friend made reference this morning to the trial judge’s paragraph 129.  We submit that her Honour there was misunderstanding, misconceiving the notion of a genuine pre‑estimate of loss and that led her on into the error which took her immediately to the question of what was the actual loss from the actual late payment events. 

While I will return to the topic a little later, it also follows from what we have submitted so far that the admission by the Bank, to which reference has been made, was a correct admission of what was the fact but those facts were irrelevant to the question whether the fee was a penalty.  The Bank did not admit that the clause was not a genuine pre‑estimate of damage.  What the Bank admitted was that the fee amount had not been arrived at through a process of estimation of a likely damage that may flow from breach of the timely payment requirement.  That was all that was admitted.

KIEFEL J:   Was there any evidence, although it may have been rendered unnecessary by the plea you just referred to about whether it was possible to estimate on an individual basis by appropriate software whatever ‑ ‑ ‑

MR ARCHIBALD:   Not directly.  Maybe one gleans it passim from what Mr Inglis did but certainly the case of what Mr Inglis did was to identify at a specific account level the impact of a late payment event.  Account by account - and I will take the Court to this tomorrow - analysis at particular account level then brought into a pool for purposes of aggregation and then referred back to a particular account level for the purposes of identifying the consequences.

KIEFEL J:   I am really referring to whether it is possible to calculate loss on individual basis by looking at what could have been charged to the customer for delay at a rate of interest for a period of time, that sort of thing.

MR ARCHIBALD:   Well, in response to Mr Regan’s work, Mr Inglis did a second exercise.  His first was forward looking across a range of scenarios.  His second exercise was to take the actual late payment events and identify in respect of Mr Paciocco the cost occasioned by those late payment events.  So, it was done, it was done specifically with Mr Paciocco and the results of that exercise are in the evidence and I will take the Court to that site.  I think the answer to your Honour’s question is yes, on the material it could be done and on the evidence it was done. 

NETTLE J:   The provisions for capital and doubtful debts were not done on any basis other than an average, were they, across the relevant cohort?

MR ARCHIBALD:   I think that is not quite right, parts of it were done on average which is only to say the exercise was conservative.  Take the collections that the telephone call ‑ ‑ ‑

NETTLE J:   No, no, no, I am talking about provisions for capital and doubtful debts - put aside the collection cost.

MR ARCHIBALD:   No, they are not averages.  For each scenario they reflect on the actual bank records the impact of a late payment event in the scenarios adopted. 

NETTLE J:   I am sorry, we are perhaps at cross‑purposes, but they were not calculated, or were they, on any basis other than particular cohorts into which this borrower was allocated by reason of the Bank’s assessment of his credit risk?

MR ARCHIBALD:   I think that is not so.  What was done first was to calculate at a particular account level, and before we get to the examination of Mr Paciocco’s actual late payment events it is, so to speak, a postulated customer in a particular position – a customer who has an outstanding balance of X dollars who pays late on a particular date, that kind of analysis. 

That specific account analysis is then put into a pool because that person will be seen to have certain credit risk characteristics and the person is put into the pool of persons who have the same characteristics for the first part of the analysis and then beyond that one then takes that account out again.  So it is not quite an average but it is true that at one point at least there is a pooling which treats a particular customer who is in the same position as other customers having the same characteristics. 

NETTLE J:   Just to clarify, am I correct in saying that one applies the formula to work out the cost - the consequence of having to make an increase in provision for doubtful debts one uses the exposure averaged over the whole of the cohort rather than the exposure for the particular creditor - borrower under question?

MR ARCHIBALD:   Yes, I think that part of the analysis is so, but it is not the totality of the analysis.

NETTLE J:   Yes, thank you.

MR ARCHIBALD:   The next observation is that once one has the notion of a requirement of punitiveness, when asked the question how does one establish punitiveness the answer on the authorities is that you look to whether the clause is extravagant or unconscionable having regard to the maximum conceivable loss.  What the law has done in substance is to have selected as unerringly indicative of punitiveness that quality, namely, that the clause be out of all proportion to the maximum conceivable loss, taken as the means of answering the question posed by the principle. 

Of course, there are cognate expressions, there are observations that the language of extravagance and unconscionability may be outdated.  I think Lord Sumption, I saw in the transcript in Cavendish Square, said it was Edwardian English for “outrageous”.  There may be something in that, but the language of being out of all proportion is accurate, convenient and current.  That may be a satisfactory way of proceeding to understand the test that is selected and that is the language adopted by this Court in Ringrow, paragraph 32.

So, one understands from these fundamentals that the penalty doctrine is not countenancing overcompensation of a particular degree, not, we would submit, because of an abhorrence of the common law in respect of overcompensation but because what is required here is overcompensation of a particular degree which betrays the function of punitiveness, and that is when one hits the point at which the penalty doctrine cuts in.

Our friends in their written submissions in the penalty appeal at paragraph 35 contended that the jurisdiction to relieve against penalties exists to prevent one party taking unconscientious advantage of the other in the process of agreeing the measure of loss.  We submit that is not the foundation.  First, it is fastening upon some substantive notion of a genuine pre‑estimate of loss.  We submit it does not have a substantive content.  Secondly, it is departing from the objective approach of the law in this field to examine a subjective process of negotiation in order to identify whether the doctrine is or is not engaged.

It is to be observed, of course, that the doctrine here operates regardless of the equality and bargaining power, or the relativities between parties.  It applies as much between sophisticated parties as between one party that is sophisticated and the other who is not.  The use of the expression “unconscionable” in the phrase to which I have been referring does not signify that it is an aspect of equitable doctrines of the kind that protect the vulnerable and weak from the strong and predatory.  It is not performing that function.  The notion of unconscionability in respect of the clauses in question is no more than the indicator of punitiveness. 

Now, against that background, one comes to the appellant’s contention that here the second test in Dunlop was engaged and was dispositive without more.  In our submission, the second test was not engaged by the circumstances of this case and was certainly not in any event to have any conclusory influence on the question of penalty.

In light of what we have submitted is the essence of the doctrine as to penalty - the punitive notion and the adoption of the test as to extravagance - one can see that the so‑called first test in Dunlop has an overarching or comprehensive function or operation as a guide, and I will no doubt use the formulation of a test, but it is to be understood really as guidance and no more.  But it is, in respect of the first guide, a comprehensive guide as to the way in which one will determine whether the clause is penal in the requisite sense.

The second guide, the 4(b) guide, if one will, addresses a particular case by way of example of the types of circumstances, the range of circumstances which the first test may encounter in its application.  It is not a standalone alternative test having a discrete operation without intersection with the first test.  The second test, in our submission, is precisely as Lord Dunedin himself said in his Lordship’s speech in Dunlop - it is “truly a corollary to” - his Lordship’s expression was “the last” meaning ‑ ‑ ‑

FRENCH CJ:   I think the case referred to in support of the second proposition ‑ ‑ ‑

MR ARCHIBALD:   Kemble or Wallis?

FRENCH CJ:   ‑ ‑ ‑ involved an amount to be paid across a variety of possible contraventions of the one contract, some of which might be as trivial as non‑payment of £3.6s.8p. to the comedian who gets £1,000, so that there was a reference to a larger sum for a default to a smaller sum but it was in the context, I think, of the, as it were, indiscriminate operation of the penalty provision.

MR ARCHIBALD:   Yes, yes, and I mean the paradigm case, plainly the paradigm case of the proper operation of the second test is in the case of money bonds.  Now, no doubt extinct in a commercial or practical sense but it was one of the most ancient examples, as his Lordship said, because its origin was in the medieval circumstances where usury laws applied and there were ways in which persons of commerce formulated arrangements in order to secure performance of obligations that were undertaken and money bonds were a classic case of that.

It was a time of usury when there could not be interest and all of that has changed now.  In practical terms the sphere of operation of the second test is now much diminished but when it does operate, if it still operates, it is operating because it satisfies the first test, because one can discern from the contracting question that the provision which requires the payment of a larger sum as against the original sum is performing a punitive function and

therefore of necessity is not compensatory in character.  Would that be a convenient time to the Court?

FRENCH CJ:   Yes.  The Court will adjourn until 10.00 o’clock tomorrow morning.

AT 4.13 PM THE MATTER WAS ADJOURNED
UNTIL FRIDAY, 5 FEBRUARY 2016