The High Court case of Andrews v ANZ Banking Group Ltd1 may have profound impact on the commercial world, since many liquidated damages clauses in commercial contracts or product disclosure statements drafted in accordance with case authorities overturned in Andrews v ANZ could potentially become unenforceable as penalty clauses.

The Pre-Andrews v ANZ Position

Generally, if a liquidated damages clause is found to be a penalty clause, the Court will provide relief against the penalty by refusing to enforce the clause and limiting the amount recoverable to actual damage suffered.Prior to Andrews v ANZ, drafters of liquidated damages clauses have generally been following the New South Wales Court of Appeal authority of Interstar Wholesale Finance v Integral Home Loans2. It was widely understood that a liquidated damages clause could never be found to be a penalty clause if the liquidated sum is not payable upon the breach of contract. That understanding is no longer correct after Andrews v ANZ.

Andrews v ANZ – the findings

Andrews v ANZ arose out of representative proceedings in the Federal Court of Australia commenced by a lead plaintiff, Mr Andrews, on behalf of approximately 38,000 group members against ANZ in relation to certain fees charged by ANZ on its customers.

The Federal Court was asked to determine specific separate questions as to whether the following five types of fees charged by ANZ were capable of being characterised as a penalty:

  • honour fees – charged where a customer authorises a payment for which there are insufficient funds in their account, and ANZ honours the payment;
  • dishonour fees – charged where a customer authorises a third party to direct debit their account and payment is not made because there are insufficient funds in the account;
  • non-payment fees – charged where a customer authorises a periodical payment that is not made because there are insufficient funds in the account;
  • overlimit fees – charged where a customer exceeds the credit limit on their credit card; and
  • late payment fees – charged where a customer does not pay monthly payments or other amounts due on a credit card within a specified time frame.

At first instance, the Federal Court followed and held that the honour fees, the dishonour fees, non-payment fees and overlimit fees were not capable of being characterised as penalties because they were not payable upon a breach of contract.

The High Court unanimously overturned the Federal Court’s decision and held that those fees were capable of being characterised as penalties.

Whether the fees are in fact penalties is a matter undecided by the High Court and remitted back to the Federal Court. We currently await a decision from the Federal Court.

The High Court’s decision was made on the basis that while the Federal Court was correct to follow Interstar,Interstar was wrongly decided because:

  • the rule against penalties is a rule of equity, not a rule of law;
  • equity can intervene to provide relief against penalties irrespective of whether there is a breach of contract; and
  • the limitation on the rule against penalties imposed by the New South Wales Court of Appeal in Interstar does not exist.

Two other limitations remain

The post Andrews v ANZ litigation and drafting of liquidated damages will likely focus on two other limitations on the applicability of the rule against penalty, which were preserved and confirmed by the High Court in Andrews v ANZ.

The first is if the loss or damage suffered is incapable of evaluation or assessment in money terms, the rule against penalties cannot apply and relief against penalty cannot be granted3. An example is where a union agrees to pay liquidated damages to employers if and so often as its members in combination should go on strike, the actual loss or damage suffered as a result of the union's members going on strike was held to be incapable of evaluation or assessment4.

The second limitation, which may have a more profound impact on the litigation and drafting of liquidated damages clauses than the first, is that if a payment is made for a party to obtain an additional right or further accommodation, it cannot be a penalty5. By way of an example, in Metro-Goldwyn-Mayer Pty Ltd v Greenham6, under the contract, a film exhibitor was allowed to screen a film once for a fixed amount; but if the film was screened more than once, the exhibitor had to pay four times the fixed amount. The majority of the New South Wales Court of Appeal held that the second fee was not a penalty, but rather, a fee for the exhibitor to enjoy an additional right - the exercise of an option to screen the film more than once.

The practical impact

For those who wish to rely upon liquidated damages clauses, it is essential to ensure that every liquidated damages clause in commercial contracts and/or product disclosure statements is checked to see whether they may potentially be unenforceable in light of Andrews v ANZ.

It would be sensible for players in the commercial world to engage skilled lawyers to revise their liquidated damages clauses to:

  • make it expressly clear that the parties agree and acknowledge that the payment is for an additional or further accommodation, thereby maximising the chance of the clause attracting the protection of the second limitation discussed above; and
  • where relevant, make it expressly clear that the parties agree and acknowledge that that loss or damage as a result of the non-fulfillment of a condition could not be compensated in money terms, thereby maximising the chance of the clause attracting the protection of the first limitation discussed above.