You do not have to pay penalties!

You do not have to pay penalties!

If you are charged an extravagant fee, as a result of breaching a contract, then you should refuse to make payment without getting legal advice.

When a party to a contract breaks that contract there are consequences.  If the injured party has suffered damages then that injured party can recover those damages from the defaulting party but, penalties cannot be recovered.

If for instance you agree that you will pay your phone bill within a certain time, after receiving an invoice but, you fail to make that payment on the due date, then you have broken that contract. You are in default. But what damage has the phone company suffered as a result of your late payment.  Well, that depends upon the circumstances.  Perhaps there is no real damage suffered at all.  If so, why should you have to pay a fee which amounts to a penalty?

The Australian Consumers Association has raised awareness of fees that are imposed by banks and has made public statements about the illegality of certain fees.

There is potential for courts to rule, that fees such as:

  • late payment charges issued by banks and telecommunication companies and
  • charges contained in utility contracts and hire contracts

are unlawful penalties that cannot be collected or enforced.

A penalty arises when a contract stipulates that upon breach of the contract the defaulting party must pay a sum of money that is out of balance, in an extravagant or unconscionable way, with the actual loss or damage caused by that breach.

If a party to a contract tries to enforce such a penalty against the party in default a court will refuse to enforce the penalty and a true calculation of the damage caused by the default must be made.

Many organizations are aware that the fees that they charge are not enforceable but are nevertheless prepared to continue to charge these fees on the basis that they will deal with any complaints on a case by case basis.  If actively managed this seems to be a strategy that works for the organization.

The recent class action against ANZ bank however highlights the risk that if an institution relies on, what may be, unenforceable penalties as an important revenue stream, there are risks.  It may be wiser to seek to earn that revenue up front in fees for service.

Riba Business Lawyers

Strength Through Knowledge

Franchising, Leasing, Acquisitions

Head office:  34 Duporth Avenue, Maroochydore, Sunshine Coast, Queensland.

Maroochydore:  07  54791488

Brisbane:  31032115

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