Could a clause be void and unenforceable by reason of being a
Do you issue contracts in which a fee is either imposed for a
breach of the contract or that may arise for termination of the
contract? Generally, commercial contracts are construed and applied
in accordance with their terms as the parties are free to determine
the terms between them. However, special treatment is given to
"penalty" clauses within a contract as such clauses may
be void and unenforceable. The recent High Court decision of
Andrews v Australia and New Zealand Banking Group Ltd 2012
("Andrews") expands the penalty principle and the
implications of this decision for your contracts are discussed
What is a penalty?
Prior to the Andrew's decision, a penalty in a contract
arose where a contract stipulated an amount that is payable by one
party to the other in the event of a breach that:
is in the nature of a "punishment"; and
exceeded what would be regarded as a genuine pre-estimate of
loss or damage.
In circumstances where a clause contained these elements, that
clause would be void and unenforceable. This is often referred to
as a penalty doctrine.
The High Court in the Andrews decision for the first time ruled
unanimously that the penalty doctrine is not confined to where
there are payments due to a breach of contract. In the Andrews
decision, the High Court held that the penalty doctrine could also
apply to other scenarios in an agreement such as termination of
contract provisions where there is no breach and where an amount is
payable simply due to contractual entitlements for fees to be paid
in certain circumstances. These circumstances may include late
payment fees or fees that are charged for an additional
accommodation or service provided to a party.
In this case, ANZ entered into contracts with customers
containing clauses that imposed fees as a consequence of events
such as cheques being honoured or dishonoured, overdrawn accounts
and credit card payments in excess of approved limits. The High
Court found that there was no breach of contract by the customers
ANZ had a discretion as to whether or not to allow the accounts
to be overdrawn;
Customers had 25 days to pay the late payment fees before there
was a breach.
In considering whether the clauses were a penalty, the High
Court did not accept that the late payment fee was an additional
charge in connection with the operation of the account, being the
increased risk to ANZ when repayments were not made within the
stipulated timeframe. The additional fees were held to be
Impact of the decision on contracts
The outcome of the Andrews decision means that organisations
should review and evaluate contracts containing clauses that impose
fees on their customers. For example, consideration needs to be
given as to whether or not the fee in an agreement is:
to secure payment of a primary obligation by the party subject
to the fee; or
truly a fee for further services.
If it is to secure performance of an obligation, it will only be
enforceable if it is a genuine pre-estimate of the damages suffered
by that party's non-performance of the contract.
If the fee is truly for further services it will not constitute
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).