Australia: The penalty doctrine after Andrews - some practical guidance at last

A federal court decision just handed down provides welcome guidance about the application of the penalty doctrine post Andrews.


The law of penalties remains a hot topic because of the High Court decision in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205.

That case significantly changed the accepted understanding of the penalty doctrine in Australia by ruling that a provision can be penal even if it is not triggered by a breach of contract. As was explained in Andrews, a stipulation imposes a penalty on a party (the first party) if it is collateral to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party (Andrews Test).

The consequences of that decision are potentially broad with the penalty doctrine applying in ways it could not before. In addition to banking arrangements, the doctrine can now apply to many provisions commonly used in commercial agreements, such as time-bars in construction contracts, take-or-pay clauses and abatement regimes in performance based contracts. Andrews has not only broadened the potential reach of the penalty doctrine, it has raised many difficult questions as well, such as:

  • Will courts be as willing to strike down commercial bargains freely made between sophisticated commercial parties?
  • Where there is no breach of contract, how will a party prove its loss?
  • What will be the event triggering the loss?

(See Andrews v ANZ - One year on and still no certainty)


Until the decision of the Federal Court in Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35, handed down mid-week, judicial guidance has been sparse. Prior to Paciocco, Andrews had been referred to in only a handful of subsequent decisions, most of which did not analyse the difficulties thrown up by Andrews in any detail. Further judicial guidance was sorely needed.


Now in Paciocco Gordon J has considered some of the issues raised by Andrews in detail. Significant points in Paciocco relating to the penalty doctrine are:

  • The Andrews Test operates differently at law and in equity.
  • Breach of a contractual term is a necessary element of the penalty doctrine at law but not in equity. The penalty doctrine in equity can apply where there is no contractual breach, provided that the Andrews Test is met – i.e. if there is a collateral stipulation which imposes upon the other contracting party an additional detriment in the nature of a security for, and in terrorem of, satisfaction of a primary stipulation.
  • While the circumstances necessary to enliven the common law doctrine are different from those necessary to enliven equity, a stipulation will not constitute a penalty at law or in equity unless it is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved.
  • The party harmed by the breach or the failure of the primary stipulation may only enforce the stipulation to the extent of that party's proved loss. Both equity and the law will operate so as to ensure that the only money that the affected party gets is that which would compensate for the financial prejudice occasioned by the actual failure of the stipulation. The previous position under the common law, where a penalty was held void and then it was up to the defendant to prove the true value of their loss seems to have been subsumed into this new approach. However, the difference between the two approaches may be more theoretical than real.
  • The "operative distinction" described in Andrews is very important. In Paciocco a key issue was whether the requirement to pay the fees in question was (1) security for performance by the customer of other obligations to ANZ or (2) a fee charged in accordance with pre-existing arrangements according to whether ANZ chose to provide further accommodation to the customer upon its request, or refused that request for further accommodation.


The fees in question were seen as falling into two broad groups – (1) late payment fees (Late Fees) and (2) honour, overlimit and dishonour fees (Service Fees). (Certain other non-payment fees were dealt with on a basis unrelated to Andrews, and are not considered here.)

Late Fees

The Late Fees related to consumer credit cards. In brief, the Late Fees were charged by ANZ if the amount shown on the statement of account was not paid by the due date. Under the relevant contract with ANZ the customer was required to pay that amount by the due date.

The Federal Court found that the Late Fees constituted a penalty at common law and a penalty in equity. The liability to pay the Late Fee was contingent upon a breach of contract and, further, was collateral to a primary stipulation (to make a payment by a particular date) in favour of ANZ. That collateral stipulation, upon failure to pay by the due date, imposed upon the customer an additional detriment in the nature of a security for, and in terrorem of, the satisfaction of the primary stipulation which was extravagant, exorbitant and unconscionable.

The Late Fees were found to be extravagant and unconscionable on the basis that they were way in excess of the maximum conceivable loss that might be suffered by ANZ. A Late Fee of $35 was payable regardless of whether the customer was one day or one week late (or longer), and regardless of whether the amount overdue was trifling or a large amount. (At law there is a presumption that a stipulated sum is a penalty when a single lump sum is payable on the occurrence of one or more events, some of which may cause serious and others but trifling damage). The Court assessed the quantum of ANZ's loss at between 50c and $5.50, depending on the fee.

Service Fees

The Service Fees were found to be of a different character.

In broad terms, the Service Fees were charged by ANZ in relation to a withdrawal or payment request from a customer that would result in the overdrawing of the customer's account or their credit limit being exceeded.

None of them constituted a penalty at common law or a penalty in equity. The liability to pay each of those fees was not contingent upon a breach of contract, nor collateral to a primary stipulation in favour of ANZ. The liability to pay each arose as a result of, and in exchange for, something more than and different from what had been agreed in the primary stipulation.

ANZ was not bound to meet the customer's request. The liability to pay the fee arose in exchange for a further service or accommodation from ANZ. The provision which entitled ANZ to charge the Service Fee did not impose a fee to be regarded as security for performance by the customer of other obligations to ANZ. Rather, it was a fee charged in accordance with pre-existing arrangements according to whether ANZ chose to provide something more and further to the customer. The Services Fees fell on the right side of the operative distinction described in Andrews.

Legal drafters should keep this distinction in mind. The penalty doctrine cannot apply where a stipulation is in return for a further service or accommodation.


Paciocco makes it clear that the law of contract normally upholds the freedom of parties to agree upon the terms of their future relationships. Exceptions to the general rule of freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. The penalty doctrine is an exception from the general rule. However, as the High Court has noted, Courts should not be too ready to invoke the penalty doctrine lest they impinge on parties' freedom of contract.

Nevertheless, inequality of bargaining power can be a relevant consideration. In Paciocco it was found that ANZ was able to impose the Late Fees because of the inequality of bargaining power between ANZ and its customer. There was no agreement between people contracting on equal terms. This was an element in the Late Fees being found to be extravagant and unconscionable.


Given the potential wide application of the penalty doctrine post Andrews, it is hoped that further clear judicial guidance on the doctrine is delivered soon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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