The Law of Penalties

The law of penalties generally applies to liquidated damages clauses, but also applies generally where a contract requires a defaulting party to pay a sum exceeding a genuine pre-estimate of the damage arising from breach.[1] The penalties rules makes any penal provision unenforceable. This is an exercise of a “supervisory jurisdiction” to relieve against provisions so unconscionable or oppressive as to be penal, and not to rewrite contracts imprudently made.[2]

The relevant considerations in making that determination include the degree of disproportion between the stipulated sum and the relevant loss and the nature of the parties relationship. Grocon Constructions v Juniper Developer endorsed the view that it is harder for a large well-advised party to succeed in characterising a clause as penal than a smaller entity that has signed a contract of adhesion determined by a larger party.[3] This approach draws a fair balance between freedom of contract and the public interest in protecting a weaker party from an oppressive burden.[4] Courts often refer to the need exercise caution in finding significant disproportion or extravagance, as distinct from a genuine attempt to agree damage likely to flow from the breach.[5]

This approach largely aligns with assessing whether the clause is “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach", to use some of the words of Lord Dunedin in Dunlop Pneumatic Tyre.[6] or disproportionate to the loss likely to be suffered by the respondent. Saxby Bridge considered a finance broker who was appointed exclusively to arrange a $15.7 million loan, and who was to be paid approximately $157,000 in total.[7] Giles JA, in the leading judgment, held that requiring the defendant to pay the $157,000 if they breached exclusivity and obtained a loan from a third party was not a penalty where that act deprived the broker from the opportunity to earning the fee.[8] A similar approach has been taken in Queensland to the exclusive appointments of real estate agents.[9] A clause which requires the transfer of property rather than the payment of a sum may still be regarded as a penalty.[10] It also appears applicable to a forfeiture of property rather than transfer, and the deprivation of accrued contractual rights.[11]

In 2012, the High Court clarified that the rule against penalties was not restricted solely to a liability triggered upon a breach of contract and could apply to fees characterised in other ways.[12] In 2016, in Paciocco, the High Court applied the rule to late payment fees on credit cards and found that they were not a penalty based on the expert evidence available.[13] It was held that the bank was entitled to set fees proportionate to all loss arising from late payments, even if such loss was too remote to be recoverable from a court upon breach.[14] Courts have also held that lending contracts containing a higher default rate are not always penalties per se, but effective rates above 50% per annum are often a penalty.[15]

[1] Ringrow P/L v BP Australia P/L [2005] HCA 71; (2005) 224 CLR 656, [10].

[2] AMEV-UDC Finance v Austin (1986) 162 CLR 170, 193 (Mason and Wilson JJ).

[3] Grocon Constructions (Qld) v Juniper Developer (No 2) Pty Ltd [2015] QCA 291.

[4] AMEV Finance v Artes Studios Thoroughbreds (1989) 15 NSWLR 564, 577.

[5] Ibid, 576-7.

[6] Dunlop Pneumatic Tyre Co v New Garage and Motor Co (1915) AC 79, 87.

[7] R J & M Bezzina Pty Ltd v Saxby Bridge Mortgages [2004] NSWCA 211.

[8] Ibid.

[9] Edwards v Massey (1947) St R Qd 226.

[10] Wollondilly Shire Council v Picton Power Lines (1994) 33 NSWLR 551, 555.

[11] Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292; [2008] NSWCA 310, [104]; Kay v Playup Australia [2020] NSWCA 33.

[12] Andrews v ANZ Banking Group (2012) 247 CLR 205; [2012] HCA 30.

[13] Paciocco v ANZ Banking Group [2016] HCA 28.

[14] Ibid, [68], [162]-[172], [283],

[15] Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328, [95]; Acqumore Credit Equity Pty Ltd v Hung [2021] NSWSC 1681; KF Garty Pty Ltd as Trustee for the Tiger Trust v Prasad & Ors [2025] QSC 91, [54].