The law of penalties – Andrews v ANZ Bank

The High Court has held that relief against penalties is not limited to consequences imposed after a breach of contract.

The equitable remedy of relief against penalties has a murky past.  As the High Court has recently observed, a proper understanding of the doctrine requires ‘more than a brief backward glance’.

One controversial element of the doctrine has now been resolved in a claim brought against the ANZ Bank.

John Andrews is the lead applicant in the proceeding funded by IMF against the ANZ Bank, seeking (among other relief) declarations that various fees and charges levied by the ANZ Bank are void as penalties.  At first instance, Gordon J  held that the law of penalties is confined to payments imposed after a breach of contract; without breach the doctrine had no application (see here).

Andrews sought leave to appeal from Gordon J’s decision, and questions in the appeal were removed out of the Full Court of the Federal Court, into the High Court.

At the outset of argument before the Court, Crennan J identified the question in dispute:

CRENNAN J: Does not the question come down to this, and I think it is relatively simple? Whether it is a mistake or a fallacy to reason that equitable relief against penalties required a breach of condition, therefore relief in the context of a contract is only available if there is a breach of contract?

The Court answered that question in the affirmative.  As a result, it upheld the appeal in Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30, holding that breach of contract is not necessary before the penalty doctrine can be invoked.  Gordon J had found that many of the ‘exception fees’ were not breaches of the contract between bank and customer, so had not considered whether they constituted penalties.  That task now awaits on remitter.

The Court (French CJ, Gummow, Crennan, Kiefel and Bell JJ) unanimously held that:

  1. There is no limitation that only a contractual obligation that arises from a breach of contract can invoke the penalty doctrine.
  2. The Court’s jurisdiction to relieve against penalties is equitable.  The concurrent administration of law and equity has not caused the penalty doctrine to disappear from equity.
  3. Whether ‘exception fees’ constitute penalties is a matter of substance and not form. The drafting of contractual terms to render ‘exception charges’ permissible cannot oust the penalty doctrine.

So, what are the limits of the doctrine?

In Andrews v ANZ the Court was limited to answering the specific question of whether the Court could relieve against a payment for a non-breach.  For a broader statement of the law, we need to return to the High Court’s decisions in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 and the joint judgment of Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin [1986] HCA 63, both of which remain substantively unaffected by the decision in Andrews.

Doing the best I can to reconcile those judgments, and the statements in Andrews the following seems to be a summary of the relevant propositions.

  1. For non-monetary penalties, an extravagant and unconscionable difference or oppressive disproportion between the value of what is transferred and the price to be received will constitute a penalty.
  2. A term of a contract requiring the payment of money upon the occurrence of a breach may be held void as a penalty unless the sum payable represents a genuine pre-estimate of the loss occasioned by that breach.
  3. In determining whether a term stipulating monetary payment on the happening of a breach is void as a penalty, or enforceable as liquidated damages:
  • It will be held to be 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;
  • 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;
  • There is a presumption (but no more) that it is 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 damages but others only minor damage.

Applying these principles to obligations imposed on the happening of a non-breach event, it seems that equity will strike down any collateral obligation assessed to be imposed in terrorem, regardless of whether the party subject to the obligation has a contractual responsibility to avoid the occurrence of the event that causes its imposition.  In making that assessment, the touchstone will be whether the obligation imposed is commensurate with the interest protected by the bargain.

The next stage of the proceeding, which will involve the application of the penalty doctrine to non-breach exception fees, will no doubt provide further guidance to the boundaries of the doctrine.


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