Australian contract law has long been understood as allowing liquidated/preset damages to be recovered in the event of breach provided the amount payable was not a “contractual penalty”
Recent Australian case law has clarified a major issue in relation to whether the “contractual penalties” doctrine only applies where there is a breach of contract leading to the claim for agreed damages/payments. Often a contract deals with this by the use of a formula.
The case of Ringrow Pty Ltd v BP Australia Pty Ltd [1][2005] HCA 71; (2005) 224 CLR 656; (2005) 222 ALR 306; (2005) 80 ALJR 219 (17 November 2005)[2] suggests that despite its age the law remains as set in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (“Dunlop”).
In short the issue is whether the provision for liquidated damages is “Out of all proportion” with the loss actually suffered.
Whether a clause amounts to a penalty depends on all circumstances at the time of making the contract as well as on the terms of the contract itself. A liquidated damages clause will be enforceable as long as it is a “genuine pre-estimate” of damages and is not designed to terrorise the defaulting party into performance.
Establishing a mere disparity between the loss suffered due to breach and the amount of damages stipulated for the breach is not, of itself, sufficient to amount to a penalty. The stipulated damages must be “extravagant or unconscionable” and out of all proportion to the loss actually suffered, or, as otherwise worded, involve a degree of disproportion sufficient to point to oppressiveness.
Where a contractual provision is void as a penalty, it is absolutely void and cannot be enforced to the extent that recovery under it would not be disproportionate to the loss suffered; Intergral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd (No. 2) [2007] NSWSC 592 at [7].
Onus of Proof on Enforcer
The party asserting invalidity of a contractual provision as being a penalty bears the onus of proving the same assertion; McRoss Developments v Caltex Pretroleum Pty Ltd (2004) 11 BPR 21,615; [2004] NSWSC 183.
Is Breach of Contract necessary?
The main issue which has been the subject of court attention in recent years is whether a breach of contract is required to trigger the doctrine.
In a number of cases in New South Wales and Victoria in recent years the courts restricted the application of the principle, that contractual penalties were unenforceable, to situations involving breach of contract.
However, the High Court of Australia in Andrews & ors v ANZ Banking Group Limited [2012] HCA 20 [“the Bank Fees Case”] rejected the view that the law of penalties is restricted to the situation of contract breach only and held that other contractual stipulations and entitlements could be the subject of the doctrine to do with unenforceability of contractual penalties. The case has been remitted to the Federal Court of Australia to determine on the facts whether particular bank fees charged constitute a penalty.
As mentioned above, the amount required to be paid stipulated must be ‘out of all proportion’ to the actual damages suffered for there to be a penalty.
The case of City of Sydney v Streetscape & Mr Obeid[3] neatly notes current Australian judicial approach to penalty provisions.
The summary position is that care needs to be taken when considering liquidated damages/fees clauses, and that the law to do with contractual penalties may apply even in circumstances not involving breach of contract.
The Upshot
Parties entering into contracts using formula based calculations for determination of liquidated damages, fees and the like should seriously consider their intent and whether any formula used is appropriate to the situation before them. Merely relying on internal assumptions or assertions of one party, may be inadequate[4].
If you have issues concerning fees and damages provisions in your standard contracts or amounts being claimed from you, feel free to contact me.
[1] Applied in RYKERS & RYKERS v ANDERSON FAMILY SETTLEMENT [2009] NTMC 049 http://www.nt.gov.au/justice/ntmc/judgements/20090918ntmc049.htm
[2] http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2005/71.html?query=title(ringrow)
[3] City of Sydney v Streetscape Projects (Australia) Pty Limited & Anor [2011] NSWSC 1214
[4]Andrews v ANZ Bank [2011] FCA 1376 Gordon J
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| Gregory Ross | Partner Level 28, BT Tower 1 Market Street Sydney NSW 2000 t: (02) 9265 3070 f: (02) 9261 5918 w: www.eakin.com.au |
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| The above information is not to be considered as advice in respect of any particular circumstance . . | |