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It is a well-established rule of contract law that a fee or charge that is payable by a party to a contract as a result of that party breaching the contract must not be clearly over and above the amount that is required to properly compensate the innocent party for the damage they have suffered as a result of the breach. A fee or charge under a contract will generally be “void” and unenforceable as a “penalty” where its purpose is to punish a party for breaching the contract, rather than to compensate the other, innocent party for loss suffered as a result of the breach. Until the decision in Andrews, the law held that, as a general rule, any “fee” payable upon breach of the contract could only be found to be a “penalty” and was therefore void and unenforceable.
The decision in Andrews concerned a class action brought by a number of ANZ customers, who claimed that a range of fees imposed by the bank were void and could not be enforced, as they were “penalties” and were therefore contrary to the law of contract. The judge at first instance found against the claimants, and stated that most of the fees in question could not be penalties, since they were not charged by the bank in response to a breach of the contract between the bank and the relevant customer. The claimants appealed.
In Andrews, the High Court ultimately decided that a fee or charge under a contract can be a penalty even where it is not payable on breach of the contract.
The High Court held that, in order to work out whether or not a fee or charge under a contract is a “penalty”, the purpose of that fee or charge must first be established. If the purpose of the fee or charge is to ensure or guarantee the other party’s ongoing performance of key obligations under the contract (that is, if it is a “stick” as opposed to a “carrot”), that fee or charge may be found to be a penalty and therefore void if it is shown to exceed a genuine pre-estimate of the cost to the innocent party of the defaulting party’s obligations under the contract. However, if a charge or fee is shown to be a fee that is genuinely payable for the provision of additional services or “accommodation” by the other (innocent) party, it will not be a penalty even if it is a sizeable additional charge.
The decision in Andrews has potentially far-reaching consequences for contracts in a vast array of industries, from building, construction and leasing through to banking, logistics and retail. Contractual clauses that provide for additional fees and charges to be paid in specified circumstances not involving a breach of the contract by the person who is required to pay them may now be held to be penalties. Many contractors and companies will need to re-consider their contractual terms, the situations in which they levy additional fees and charges, and the way in which additional fees and charges are calculated.