The recent High Court case on bank fees, Andrews v
Australia and New Zealand Banking Group Limited  HCA
30, has garnered much media attention. Beyond the
immediate impact on banks' terms and conditions, the decision
has implications for a wide range of contracts, particularly in
other financial services contexts, construction and major projects
IT and services contracts generally.
What is a penalty clause?
Parties to a contract obviously have an interest in keeping the
other side to the bargain. The traditional view is that a penalty
clause penalises a party for breaching the contract by requiring it
to pay a specified sum that is extravagant and unconscionable in
amount in comparison with the greatest loss that could conceivably
be proved to have followed from the breach (for example it is not a
genuine pre-estimate of the damage suffered by the other party). If
a clause is a penalty, it is void.
The High Court has importantly held that a clause can be a
penalty even if it is not triggered by a breach of the
contract. This widens the type of clauses that might fall
foul of the ban on penalties.
The High Court did not state, other than in general terms, when
a contractual stipulation would be a penalty. Generally, it seems a
collateral stipulation can be categorised as a penalty if:
it imposes an additional detriment on a party upon failure of a
it is security for and in terrorem of the satisfaction of the
primary stipulation (meaning it is to force the party to perform
its obligations); and
compensation can be made for the failure of the primary
The collateral stipulation is enforceable only to the extent of
that compensation. So, a payment in respect of non-performance of a
condition which is not the subject of a contractual promise could
be characterised as a penalty if compensation can be made for the
failure to perform that condition.
What are the features that make it less likely that it's a
First, if the sum to be paid under the clause is a genuine
pre-estimate of the loss to be suffered as a result of the
non-observance of the condition, then that can suggest it is not a
Secondly, the High Courts suggested (without firmly determining
the issue) it might not be a penalty if the contractual stipulation
gives rise to an additional obligation. An example of this can be
found in an old case involving film distribution. The exhibitor was
only allowed to show the film once. If it showed the film again, it
had to pay a sum equivalent to four times the original fee. The
court did not characterise this as a penalty, but as an option
which the exhibitor could exercise and pay for, because the
stipulation gave rise to an additional obligation.
What is the significance of the ANZ v Andrews decision?
The significance of the decision is that it may mean that
provisions in contracts which have relied solely on the fact that
the event which triggers them is not a breach of contract so as to
fall outside the penalty regime may no longer fall outside the
penalty regime and will need to be reviewed.
These provisions include:
service level abatement clauses in major projects,
construction, IT and service contracts;
provisions in financial services contracts which apply if the
contract is in arrears or overlimit;
rights to terminate a contract which carry with them the loss
of accrued rights – for example the loss of a future
trailing commission; and
fees payable on contingent events in business and consumer
telecommunications, utilities and financial services contracts such
as early termination fees, switch fees and break costs.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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