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Penalties
Andrews 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 brea...
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 ...
Maxim no 2
 The question whether a sum stipulated is penalty or
liquidated damages is a question of construction to be
de...
Maxim no 3
 Various tests have been suggested:
 It will be held to be a penalty if the sum stipulated is
extravagant and...
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 stipula...
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
comp...
Legione v Hateley (1983) 152 CLR 406 at 44
 a penalty is in the nature of a punishment for non-
observance of a contractu...
AMEV – UDC Finance Ltd v Austin & anor
(1986) 162 CLR 170 at 191
 ‘The equitable jurisdiction to relieve against penaltie...
Office of Fair Trading v Abbey National plc
[2010] 1 AC 696
 charges that became payable when an account
became overdrawn...
Andrews v ANZ
 ‘In general terms, a stipulation prima facie imposes a
penalty on a party (the first party) if, as a matte...
It appears that the payment of a sum of money
constitutes a penalty if:
 The sum of money payable represents an additiona...
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...
Metro-Goldwyn-Mayer Pty Ltd v Greenham
[1966] 2 NSWR 71
 The exhibitor agreed to pay a fee for a single
screening of the ...
Paciocco v Australia & New Zealand Banking
Group Ltd (2014) 309 ALR 249
 6 step process
 Identify the terms and inherent...
Step 2
 Identify the event or transaction which gives rise to the
imposition of the stipulation.
ian bailey SC
laina chan...
Step 3
 Identify whether the stipulation is payable upon a breach
of contract (necessary at law but not in equity)
ian ba...
Step 4
 Identify whether in substance, the stipulation is collateral
to a primary stipulation in favour of one party and ...
Step 5
 If the answer to steps 3 and 4 above is ‘yes’, identify
whether the sum stipulated is a genuine pre-estimate of
d...
Step 6
 If the sum stipulated is not a genuine pre-estimate of
damage and is extravagant and unconscionable in
comparison...
Cavendish Square Holding BV v Talai El
Makdessi [2015] UKSC 67
 English law cannot take the same path as Andrews v ANZ
ia...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 In the first place, although the reasoning...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 Secondly, if there is a distinct and still...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 Thirdly, the High Court’s redefinition of ...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 If for example, there is no duty not to dr...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 Finally, the High Court’s decision does no...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 provisions for termination upon insolvency...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 The potential assimilation of all of these...
per Lord Neuberger and Lord Sumption (with
whom Lord Carnwath agreed) at [42]
 in relation to the concept of partial enfo...
Per Lord Hodge at [249]
 When the court makes a value judgment on whether a
provision is exorbitant or unconscionable, it...
Per Lord Hodge at [255]
 the correct test for a penalty is whether the sum or
remedy stipulated as a consequence of a bre...
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...
Per Lord Hodge at [255]
 In other circumstances the contractual provision that
applies on breach is measured against the ...
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The Law of Penalties - ANZ v Andrews and beyond

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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

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The Law of Penalties - ANZ v Andrews and beyond

  1. 1. Penalties Andrews v ANZ and beyond Ian Bailey SC and Laina Chan
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 16. Step 2  Identify the event or transaction which gives rise to the imposition of the stipulation. ian bailey SC laina chan barristers
  17. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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