Watch out for penalty clauses in contracts

If your contracts contain fees imposed for breach or that apply upon termination, be mindful that special treatment is now given to “penalty” clauses, which may be deemed void or unenforceable. Generally, parties are free to negotiate contracts and determine what terms best apply to them. However, in the recent decision of Andrews v Australia and New Zealand Banking Group Ltd 2012 (“Andrews”) the High Court has expanded the penalty doctrine.

Penalty clauses

Before the Andrew’s decision, a penalty clause in a contract arose where it stipulated an amount payable that: (a) had the nature of “punishment”, and (b) exceeded a genuine pre-estimate of loss or damage. These clauses would be void and unenforceable (“Penalty Doctrine”).

In the Andrews decision, the High Court ruled unanimously that the Penalty Doctrine is not confined to where there are payments due to a breach of contract. It could also apply to termination where there is no breach of contract, or for amounts payable in certain circumstances including late payment fees or fees that are charged for an additional service provided to a party.

Andrews case

In the Andrews case, ANZ entered into contracts with customers containing clauses that imposed cheque dishonour fees, overdrawn account fees and fees charged where credit card payments were in excess of approved limits. The High Court found that in these circumstances there was no breach of contract by the customers because ANZ had a discretion whether to allow the accounts to be overdrawn, and customers had 25 days to pay the late payment fees before there was a breach.

ANZ argued that the fee was not a penalty, but instead was an additional charge in connection with the operation of the account for their increased risk when payments were not made within the stipulated timeframe. However, the High Court did not accept that the late payment fee was an additional charge in connection with the operation of the account and held that the additional fees were penalties.

Impacts

Organisations should review and evaluate contracts containing clauses that impose fees on their customers, with consideration given as to whether or not the fee is either to secure payment of a primary obligation by the party, or truly a fee for further services.

If a fee is to secure performance of an obligation under the contract, it will only be enforceable if it is a genuine pre-estimate of the damages suffered by the party’s non-performance. If the fee is truly for further services, it will not constitute a penalty.

If you’re concerned that any contract you issue or enter into contains a “penalty” clause, please feel free to speak with LAWYAL Solicitors for advice.

contract-law

By Leonie Chapman, Principal Lawyer and Director, LAWYAL Solicitors

The content of this article is a general guide only. Specialist advice should be sought about your specific circumstances. Seek advice here

© LAWYAL Pty Ltd

About Leonie Chapman

LAWYAL Solicitors, your dependable online law firm. For loyal, accurate and affordable legal advice, without having to leave your home or office!
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