The penalties regime in Australia and England: a ‘shared, difficult future’?

A hands-on approach to the interpretation of contract clauses by the courts is creating a challenging environment for parties seeking to agree on a contract, according to Professor Sarah Worthington of the University of Cambridge.

Professor Sarah Worthington

Professor Worthington, Downing Professor of the Laws of England and Co-Director of the Cambridge Private Law Centre, presented the James Merralls Visiting Fellowship in Law public lecture on 21 September at Owen Dixon Chambers.

In her lecture, Professor Worthington explored the tension between the court’s responsibility to uphold the freedom that parties have to contract on their own terms and to protect parties from “exorbitant” or “unconscionable” contractual requirements.

This is perhaps nowhere better illustrated than in the area of penalties. The penalty doctrine can render certain contractual clauses unenforceable if they are found to impose too high a price on the failure to perform certain contractual obligations.

This may seem justifiable in the pursuit of what is fair and reasonable. But Professor Worthington said courts should be careful before intervening in what has been agreed between contracting parties. The lack of a clear rationale for intervention has resulted in an “unexplained judicial liberalism” and lack of clarity in the law of penalties.

Professor Worthington drew out lessons from recent decisions of the UK Supreme Court in Cavendish Square Holding BV v Makdessi (2015) and the Australian High Court in Andrews v ANZ Banking Group Ltd (2012) and Paciocco v Australia and New Zealand Banking Group Limited (2016).

She said these decisions represent a “turn in the road”, and a departure from the previous authority on penalties in Lord Dunedin’s judgment in Dunlop Pneumatic Tyre Co v New Garage and Motor Co (1914).

Professor Worthington explained that in Andrews the court ruled that a contractual provision can be a penalty even if there has not been a breach of contract. The case involved a class action challenge of certain bank fees by 38,000 ANZ members. Although there was no breach of contract, as had previously been required under Lord Dunedin’s judgment in Dunlop, the High Court found the fees could be characterised as penalties.

According to the Cambridge professor, recent decisions in Paciocco, Makdessi and Andrews highlight that the approach for determining whether a clause is in fact a penalty has shifted from the technical analysis of clauses, for example where breach is required, to a more practical, commercial approach.

But in practice the courts’ new approach creates a difficult environment for those seeking to enter into a contract.

“If seven Supreme Court judges can’t agree, this is not the kind of rule we can expect commercial parties to abide by, or their lawyers to advise on,” Professor Worthington said.

“I would venture to suggest although neither the Australian High Court nor the UK Supreme Court has formally abolished the penalties rule, in creating this profound ambiguity they have in substance achieved the same means.

“The vestiges of the jurisdiction remain, and they remain without a clear rationale for their existence. This will inevitably create problems for the future, I suggest, but given the direction of travel in both jurisdictions, it will at least be a shared, difficult future.”

This lecture will also be held in Sydney on Thursday 29 September.

Professor Worthington has taught Commercial Law: Issues and Policies as part of the Melbourne Law Masters. To learn more about a Melbourne Law School Masters in Commercial Law, visit our webpage.

By Emma Jukić

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