On 4 November 2015, the United Kingdom Supreme Court, the highest court in England, handed down its joint judgment in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Limited v Beavis [2015] UKSC 67 (Cavendish and ParkingEye).

Both cases involved a consideration of the contractual relationships between parties to determine whether the penalty doctrine would apply.

Cavendish involved an arm’s length commercial agreement between sophisticated, well-advised parties for the sale of a controlling stake in a marketing communications group in the Middle East.

ParkingEye involved a dispute as to whether an excess parking fee of £85 was a ‘penalty’.

The decision – the penalty doctrine survives   

The Supreme Court affirmed the following principles of English law:                                                                                

  • The penalty doctrine is a long standing common law principle that should not be abolished or extended.
  • The penalty doctrine will only apply to secondary obligations arising as a result of breach of contract.
  • The ‘true’ test is whether the alleged ‘penalty’ provision imposes a detriment on the breaching party which is out of all proportion to the protection of the legitimate business interests of the innocent party.
  • The ‘legitimate interest test’ is the primary consideration when determining whether the relevant clause is ‘penal’. The Courts are willing to protect the legitimate business interests of parties (which are often negotiated at length in pre-contract negotiations) unless the Courts determine that the purported protection of the legitimate interest will result in an ‘out-of-proportion detriment’,[1] or is ‘extravagant, exorbitant or unconscionable’.[2] 

Though there were five separate judgments, there is a single set of reasons with which a majority of the Court agreed about matters of principle.

A detailed summary of the judgment (including a summary of the facts) is contained in the Supreme Court’s press summary.

Andrews decision not applied

Cavendish and ParkingEye considered fundamental aspects of the penalty doctrine, including the recent decision of the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd[3] (Andrews). Indeed, one submission made to the Supreme Court was that the penalty doctrine ought to be abolished.

The Supreme Court noted that in Andrews, the High Court of Australia ‘concluded that there subsisted, independently of the common law rule, an equitable jurisdiction to relieve against any sufficiently onerous provisions which was conditional upon a failure to observe some other provision, whether or not that failure was a breach of contract’.[4]

The extension of the penalty doctrine in Andrews (that breach is not an essential aspect of the doctrine) was not considered favourably (or adopted) by the Supreme Court. Rather it was viewed as a ‘radical departure’ from the existing law,[5] and a ‘controversial decision’.[6]

The Court considered that Andrews was inconsistent with established and unchallenged English authorities.[7] Four Justices sharply disagreed with the High Court decision in Andrews:

  • disagreeing with the historical reasoning and analysis of the penalty doctrine in Andrews;
  • holding that there was no separate equitable jurisdiction for penalties since 1873; and
  • noting that the High Court’s definition of a penalty is difficult to apply.[8]

The other three Justices considered that any abolition or amendment to the penalty doctrine should be the responsibility of the Law Commission or Parliament.[9]

What it means for Australia

Cavendish and ParkingEye dealt with two separate, but related, issues:

  1. when the law of penalties applies, and
  2. when a provision is considered penal (if the law of penalties applies).

It authoritatively resolves both of those issues under English (and Scottish) law.

In Australia, only the first of those issues was resolved in Andrews.[10]

The second issue – when a provision is penal if the law of penalties applies – is live.

Early next year, the High Court will hear argument in an appeal from Paciocco v Australia and New Zealand Banking Group Ltd,[11] like Andrews a bank fee case.

In the Full Court of the Federal Court, the lead judgment of Allsop CJ took a similar approach to the United Kingdom Supreme Court in Cavendish and ParkingEye.

Similarly, a recent Supreme Court of Queensland case held the obligation to pay 18% interest on outstanding amounts did not amount to a penalty as it was reasonably required to protect the plaintiff’s interests.[12]

It remains to be seen how the High Court will resolve the second issue in the Paciocco case in light of the stance taken by (and commentary from) the Supreme Court. Whilst a decision of the Supreme Court is persuasive in Australia, the High Court is not bound to follow English decisions.