A restatement of relief against contractual penalties (II): A framework for applying the Australian and English approaches

Abstract

This article provides an analytical restatement of the law of penalties in Australia
\nand England. It demonstrates that in applying the penalties doctrine, a three-stage framework
\ncan be adopted. The first stage is to ask whether the impugned contractual clause attracts the
\noperation of the penalties doctrine (this was the issue considered by the High Court of
\nAustralia in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30,
\n(2012) 247 CLR 205). If the penalties doctrine is applicable the second stage is to consider
\nwhether the impugned clause is punitive in character (this was the issue subsequently
\nconsidered by the High Court in Paciocco v Australia and New Zealand Banking Group Ltd
\n[2016] HCA 28, (2016) 333 ALR 569). If the impugned clause is punitive the final stage of
\nanalysis is to consider the consequences that should flow from a finding that a clause is a
\npenalty. By providing a restatement of the Australian and English approaches at each stage of
\ninquiry, the key convergences and divergences between the two jurisdictions become clear.
\nThe key divergences exist at the first and third stage of the inquiry. In Australia, unlike
\nEngland, a breach of contract is not required to enliven the penalties doctrine. Rather, it
\nsuffices under Australian law that A’s contractual right to a fixed remedy exists to secure the
\nhappening of some other contractual stipulation (being either a contractual duty or, in rare
\ncircumstances, a non-promissory condition). The second key divergence is the consequence
\nof a finding that a clause is a penalty. In Australia, the penalties doctrine provides for a pro
\ntanto enforcement of A’s right to a fixed remedy so that it is not punitive in operation.
\nEnglish law has staunchly rejected that such an approach is possible. However, there is one
\nsignificant convergence. Both Australia and England have recently adopted a deferential
\n‘legitimate interest’ standard at the second stage of inquiry in order to assess whether an
\nimpugned clause is punitive in character.