The reformulation of the penalty doctrine: Where to from here?

Recent case law has brought the common law contractual penalty doctrine under scrutiny and has created uncertainty. Traditionally, the penalty doctrine has only ever applied in situations where there has been a breach of contract. The Australian High Court reformulated the penalty doctrine in Andrews v Australia and New Zealand Banking Group Ltd. This reformulation extended the application of the penalty doctrine to instances other than breach of contract. As the penalty doctrine is found in almost all common law countries, this decision has not gone unnoticed and has received heavy criticism. The United Kingdom Supreme Court, in Cavendish Square Holding BV v Makdessi, commented on the decision of Andrews v Australia and New Zealand Banking Group Ltd and disapproved of the reformulation, given the many problems associated with extending the doctrine. These problems include infringing upon the freedom of contract as well as requiring the judiciary to review the substantive fairness of parties’ agreements. This is not the role of the courts. The courts role is supervisory only. Despite these substantial criticisms, the Australian High Court proceeded to confirm the decision in Andrews in Paciocco v Australia and New Zealand Banking Group Limited. In this more recent High Court decision, French CJ suggested statutory reform as the appropriate way forward. This paper argues that in light of the historical formulations of the penalty doctrine, the High Court in Andrews was not justified in stating that the doctrine had always applied in instances other than breach of contract. Further, the High Court should have explained their reasons for extending the penalty doctrine when the principles of contractual construction had not changed for over a century. This paper also analyses the different conclusions reached in the Supreme Court decision in the United Kingdom, where the traditional application of the doctrine was upheld. Given the shared jurisdictional history with respect to the penalty doctrine, the different findings are perplexing. Proposed reforms to the doctrine, in light of French CJ’s comment, are also considered and evaluated. This paper concludes that consideration of the parties’ bargaining positions when deciding if a payment is a penalty is a relevant factor in other jurisdictions and a beneficial reform that should be adopted by the Australia courts