Penalties, banks and such-like Down Under

Contract law enthusiasts might take heart from today’s long-awaited decision of the High Court of Australia on penalties, Paciocco v ANZ Group Ltd [2016] HCA 28. Essentially four of their Honours (French CJ, Kiefel, Keane and Nettle JJ) say things consistent with Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, decided last November in the UKSC and noted here on this blog: namely, that the test for a penalty is now whether the agreed sum fulfils some legitimate interest in the victim in obtaining performance.  There is agreement to differ on another point (ie whether the penalties doctrine goes beyond breach of contract — the Aussies say it does, we say it doesn’t): but that issue wasn’t raised in Paciocco, and in mentioning it French CJ was merely pointing out that the common law isn’t necessarily one-size-fits-all. This point aside, London and Canberra are singing from a broadly similar hymn-sheet.

The question at stake was late payment fees on credit card accounts — in this case a straight charge of $20. By a majority (Nettle J dissenting) it was held not penal. Advantage banks.

Penalty clauses revamped

The law on penalty clauses, a bugbear to commercial lawyers for some time, has been re-written by the Supreme Court. The court declined to abolish the doctrine — mainly for the rather unconvincing reason that other European jurisdictions all had restrictions on liquidated damages stipulations, that English lawyers shouldn’t be bad Europeans, and that the Council of Europe thought them a Good Thing.

But the court did rationalise the law, saying that essentially the question is whether the amount stipulated for is wholly disproportionate to the interest of the claimant in protecting his right to performance. If it isn’t, then the clause has the green light. This should be a relief to commercial lawyers, who provided they don’t go completely bananas in setting the amount payable now have some guarantee that the courts won’t allow the other party to come snivelling that the provision is a technical penalty.

Hence in one case a seller of a business can validly forfeit a goodly proportion of the selling price if he breaks a noncompete agreement; and in the other (more homely) case a parking operator can set a substantial charge for overstaying. Neither is an objectionable penalty.

See Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 (4 November 2015), available on BAILII.