In https://www.youtube.com/watch?v=TVVSSbLUm0g, Ian Bailey SC and Laina Chan barristers, discuss the developments in the law of penalties since ANZ v Andrews. They also consider the approach of the Supreme Court in the UK in the first of a series of Chatz with Bailey SC and Chan in Cavendish Square Holding BV v Talai El Makdessi [2015] UKSC 67. This is the powerpoint that accompanies the chatz

1. Penalties
Andrews v ANZ and beyond
Ian Bailey SC and Laina Chan

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Step 2
 Identify the event or transaction which gives rise to the
imposition of the stipulation.
ian bailey SC
laina chan
barristers

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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