At first instance (Andrews v Australian and New Zealand Banking Group  FCA 1376) the plaintiffs were largely unsuccessful. Justice Gordon followed Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd  NSWCA 310 and held that the law of penalties had no application to contractual payments that arose upon the occurrence of an event which was not a breach of contract. Only late payment fees were capable of being characterised as a penalty because they were triggered by a breach (namely, a failure to pay within the stipulated time), whereas honour fees, dishonour fees, overlimit fees and non-payment fees were not penalties because they were not incurred as a result of breach of contract.
On appeal, the High Court overruled Interstar and emphasised that it is the substance of the clause which matters, not the form. The Court confirmed that the equitable doctrine against penalties still exists. This arose in a context where express contractual promises to perform were uncommon and the usual means of drafting a contract was as a ‘bond upon a condition’. Consequently, equity is capable of providing relief from stipulations which are drafted in a permissive manner but which are substantively the same as clauses which provide for penalties upon breach.
Nonetheless, the High Court noted that parties may legitimately put an ‘alternative stipulation’ in their contract which allows for a higher payment if further services or rights are provided by one party. It affirmed Metro-Goldwyn-Mayer Pty Ltd v Greenham  2 NSWR 717, which involved a contract for the hiring of films to exhibitors for public showing. The standard form contract conferred the right to one screening at a particular time, and if the exhibitor wished to make additional showings, he was obliged to pay a sum which was four times the original fee. A majority of the NSW Court of Appeal decided that this additional payment was not a penalty.
The decision has now been remitted back to the Federal Court for determination. Although the judgment appears to be an expansion of the previous law, it may be that its effect is less radical than it first appears, because of the exception carved out for ‘alternative stipulations’. It remains to be seen whether bank fees will, in fact be penalties.
KATY BARNETT teaches law at the University of Melbourne.