PenaltiesAndrews v ANZ and beyond

Ian Bailey SC and Laina Chan

Andrews v ANZ (2012) 290 ALR 595

2 stated questions:

whether the penalty doctrine was limited to cases

respecting breach of contract; NO

whether the trial judge erred in concluding, in effect, that

the absence of contractual breach or obligation or

responsibility on the customer to avoid the occurrence of

an event upon which the relevant fees were charged.

YES

ian bailey SC

laina chan

barristers

Dunlop Pneumatic Tyre Co Ltd v New Garage

and Motor Co Ltd [1915] AC 79

5 maxims:

the essence of a penalty is a payment of money

stipulated as in terrorem of the offending party; the

essence of liquidated damages is a genuine

covenanted pre-estimate of damage.

ian bailey SC

laina chan

barristers

Maxim no 2

The question whether a sum stipulated is penalty or

liquidated damages is a question of construction to be

decided upon the terms and inherent circumstances

of each particular contract, judged of as at the time of

the making of the contract, not as at the time of the

breach.

ian bailey SC

laina chan

barristers

Maxim no 3

Various tests have been suggested:

It will be held to be a penalty if the sum stipulated is

extravagant and unconscionable in amount in comparison

with the greatest loss that could conceivably be proved to

have followed from the breach.

ian bailey SC

laina chan

barristers

Maxim no 4

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.

ian bailey SC

laina chan

barristers

Maxim 5

There is a presumption (but no more) 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 and others

but trifling damage’.

ian bailey SC

laina chan

barristers

Legione v Hateley (1983) 152 CLR 406 at 44

a penalty is in the nature of a punishment for non-

observance of a contractual stipulation and consists,

upon breach, of the imposition of an additional or

different liability.

penalty doctrine was a principle of law and equity had

no part to play.

ian bailey SC

laina chan

barristers

AMEV – UDC Finance Ltd v Austin & anor

(1986) 162 CLR 170 at 191

‘The equitable jurisdiction to relieve against penalties

withered on the vine for the simple reason that it

offered no prospect of relief which was not ordinarily

available in proceedings to recover a stipulated sum

or damages.’ per Mason and Wilson JJ

ian bailey SC

laina chan

barristers

Office of Fair Trading v Abbey National plc

[2010] 1 AC 696

charges that became payable when an account

became overdrawn by reason of the actions of a

customer which caused a cheque to bounce or the

bank allowed the customer to overdraw on their

account or overdraft, were not penalties.

ian bailey SC

laina chan

barristers

Andrews v ANZ

‘In general terms, a stipulation prima facie 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, upon the failure of the primary

stipulation, imposes upon the first party an additional

detriment, the penalty, to the benefit of the second

party. In that sense, the collateral or accessory

stipulation is described as being in the nature of a

security for and in terrorem of the satisfaction of the

primary stipulation.’

ian bailey SC

laina chan

barristers

It appears that the payment of a sum of money

constitutes a penalty if:

The sum of money payable represents an additional

detriment to the benefit of the second party;

The sum of money payable is in the nature of security for

the performance of the primary stipulation; and

The sum of money payable is collateral to the primary

stipulation; and

In those circumstances, the collateral stipulation is prima

face a penalty; but

The penalty is enforceable to the extent appropriate to

provide compensation.

ian bailey SC

laina chan

barristers

French v Macale(1842) 2 Drury and Warren

269 at 275–6

A tenant paid 2 guineas an acre to rent the land from

the landlord and paid a further 2 guineas to till the

land.

This was held not to be a penalty because in effect

the tenant had agreed to pay a sum of money for the

additional right to till the land.

ian bailey SC

laina chan

barristers

Metro-Goldwyn-Mayer Pty Ltd v Greenham

[1966] 2 NSWR 71

The exhibitor agreed to pay a fee for a single

screening of the film.

The exhibitor also agreed to pay for each additional

screening a sum equivalent to 4 times the original fee.

This was held to be not a penalty because the

additional sum payable was for the right for additional

screenings of the film.

ian bailey SC

laina chan

barristers

Paciocco v Australia & New Zealand Banking

Group Ltd (2014) 309 ALR 249

6 step process

Identify the terms and inherent circumstances of the

contract, judged at the time of making the contract.

ian bailey SC

laina chan

barristers

Step 2

Identify the event or transaction which gives rise to the

imposition of the stipulation.

ian bailey SC

laina chan

barristers

Step 3

Identify whether the stipulation is payable upon a breach

of contract (necessary at law but not in equity)

ian bailey SC

laina chan

barristers

Step 4

Identify whether in substance, the stipulation is collateral

to a primary stipulation in favour of one party and the

collateral stipulation, upon failure of the primary

stipulation, imposes upon the other party an additional

detriment in the nature of security for, and in terrorem of,

the satisfaction of the primary stipulation (not applicable

at law).

ian bailey SC

laina chan

barristers

Step 5

If the answer to steps 3 and 4 above is ‘yes’, identify

whether the sum stipulated is a genuine pre-estimate of

damage or extravagant and unconscionable in

comparison with the greatest loss that could conceivably

be proved.

ian bailey SC

laina chan

barristers

Step 6

If the sum stipulated is not a genuine pre-estimate of

damage and is extravagant and unconscionable in

comparison with the greatest loss that could conceivably

be proved, the sum stipulated is unenforceable to the

extent that the stipulation exceed that amount.

ian bailey SC

laina chan

barristers

Cavendish Square Holding BV v Talai El

Makdessi [2015] UKSC 67

English law cannot take the same path as Andrews v ANZ

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

In the first place, although the reasoning in Andrews was

entirely historical, it is not in fact consistent with the

equitable rule as it developed historically.

The equitable jurisdiction to relieve from penalties arose

wholly in the context of bonds defeasible in the event of

the performance of a contractual obligation.

It necessarily posited a breach of that obligation.

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

Secondly, if there is a distinct and still subsisting equitable

jurisdiction to relieve against penalties which is wider than

the common law jurisdiction, with three possible

exceptions it appears to have left no trace in the

authorities since the fusion of law and equity in 1873 …

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

Thirdly, the High Court’s redefinition of a penalty is, difficult to apply to the case to which it is supposedly directed, namely where there is no breach of contract.

It treats as a potential penalty any clause which is ‘in the nature of a security for and in terrorem of the satisfaction of the primary stipulation.’

By a ‘security’ it means a provision to secure ‘compensation …for the prejudice suffered by the failure of the primary stipulation’.

This analysis assumes that the ‘primary stipulation’ is some kind of promise, in which case its failure is necessarily a breach of that promise.

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

If for example, there is no duty not to draw cheques

against insufficient funds, it is difficult to see where

compensation comes into it, or how bank charges for

bouncing a cheque or allowing the customer to overdraw

can be regarded as securing a right of compensation.

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

Finally, the High Court’s decision does not address the

major legal and commercial implications of transforming a

rule that controlling remedies for breach of contract into a

jurisdiction to review the content of the substantive

obligations which the parties have agreed.

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

provisions for termination upon insolvency, contractual

payments due on the exercise of an option to terminate,

break-fees chargeable on the early repayment of a loan

or the closing out of futures contracts in the financial or

commodity markets, provisions for variable payment

dependent on the standard or speed of performance and

‘take or pay’ provisions in long-term oil and gas purchase

contracts, to take only some of the more familiar types of

clause.

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

The potential assimilation of all of these to clauses

imposing penal remedies for breach of contract would

represent the expansion of the courts’ supervisory

jurisdiction into a new territory of uncertain boundaries,

which has hitherto been treated as wholly governed by

mutual agreement.

ian bailey SC

laina chan

barristers

per Lord Neuberger and Lord Sumption (with

whom Lord Carnwath agreed) at [42]

in relation to the concept of partial enforcement ‘the

difficulty about this approach was pointed out by the

potential assimilation of all of these to clauses imposing

penal remedies for breach of contract would represent the

expansion of the courts’ supervisory jurisdiction into a

new territory of uncertain boundaries, which has hitherto

been treated as wholly governed by mutual agreement.

ian bailey SC

laina chan

barristers

Per Lord Hodge at [249]

When the court makes a value judgment on whether a

provision is exorbitant or unconscionable, it has regard to

the legitimate interests, commercial or otherwise, which

the innocent party has sought to protect

ian bailey SC

laina chan

barristers

Per Lord Hodge at [255]

the correct test for a penalty is whether the sum or

remedy stipulated as a consequence of a breach of

contract is exorbitant or unconscionable when regard is

had to the innocent party’s interest in the performance of

the contract.

ian bailey SC

laina chan

barristers

Per Lord Hodge at [255]

Where the test is to be applied to a clause fixing the level

of damages to be paid on breach, an extravagant

disproportion between the stipulated sum and the highest

level of damages that could possibly arise from the

breach would amount to a penalty and thus be

unenforceable.

ian bailey SC

laina chan

barristers

Per Lord Hodge at [255]

In other circumstances the contractual provision that

applies on breach is measured against the interest of the

innocent party which is protected by the contract and the

court asks whether the remedy is exorbitant or

unconscionable’

ian bailey SC

laina chan

barristers