Clifford Chance

Update: The Law on Penalties

28 July 2016

The High Court of Australia on 27 July 2016 delivered its decision in Paciocco v Australia and New Zealand Banking Group Ltd, its latest consideration of the penalties doctrine.

The majority of the High Court found that in assessing whether a clause is a penalty, the court is to have regard to the legitimate interests of the innocent party in the enforcement of the clause. This echoes the approach taken recently by the UK Supreme Court and emphasises the freedom of parties to conclude bargains which include mechanisms for the protection of commercial interests in accordance with their risk appetites and without being constrained by the requirement to prove financial loss.

In respect of the late payment fee charged by the bank, the majority found that the costs of provisioning for losses, regulatory capital and collection were legitimate interests of the bank.  This justified the late payment fee.  It was not determinative that the late payment fee was disproportionate to the actual loss suffered and did not represent a genuine pre-estimate of damages.

Whilst the decision is clear, the reasoning may give rise to further debate as the High Court delivered five separate judgments which seek to reconcile the decision in Paciocco with the previous authorities in relation to penalties, including the seminal decision of Dunlop, the High Court's own decision in Andrews and the landmark decision of the UK Supreme Court in Cavendish v Makdessi (a case in which Clifford Chance (London) acted).

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