The Court of Appeal considered the question of whether a fee can be a penalty even when a breach had not occurred. That is, if a large fee is charged in the normal course of the contract, such as where a withdrawal fee is charged, can it be unenforceable as a penalty? The Court of Appeal held that it could not.
At  to  the Court of Appeal set out its reasoning, relying on the decision of the New South Wales Court of Appeal in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd  NSWCA 310:
85 The trial judge held that clause 11 of the Agreement, which provided for the imposition of a withdrawal fee, was not an unenforceable penalty because the doctrine of penalties only applies to contractual terms requiring payment in the event of breach. According to Export Credits Guarantee Department v Universal Oil Products Co, AMEV-UDC Finance Ltd v Austin and more recently, Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd, a term imposing an obligation to pay money on the occurrence of a specified event, other than breach, is not a penalty.
86 The trial judge held that since clause 11 of the Agreement did not provide that withdrawal of an item from auction constitutes a breach, the doctrine of penalties had no application to the term requiring payment of a fee for withdrawing an item from auction. His Honour considered that the distinction between the two types of clauses was firmly established in the case law and it was not open to a judge at first instance to apply the penalty doctrine to the withdrawal fee term in these circumstances.
87 Grounds 3, 4, 5 and 6 of the Amended Notice of Appeal are directed towards the trial judge’s finding that clause 11 was not void as an unenforceable penalty. Mrs Ange contends that the trial judge erred in law in finding that the clause was not void as an unenforceable penalty, failing to find that clause 11 took effect upon breach, failing to find that withdrawal of the paintings by Mrs Ange was in breach of the Agreement and failing to find that the law of penalties was not limited to breaches of contract.
88 The submissions for Mrs Ange on the penalty issue centred on the correctness of the decision in Interstar. In that case, a judge of first instance in the New South Wales Supreme Court held that the doctrine of penalties extended beyond a term providing for the consequences of a breach of contract. The decision of Brereton J was subsequently reversed by the New South Wales Court of Appeal. After examining the conflicting authorities, Allsop P (with whom Giles and Ipp JJA agreed) held that the better view was that the payment complained of must be conditioned on a breach of contract.
89 In written submissions, counsel for Mrs Ange submitted that the Court should find the approach taken by the New South Wales Court of Appeal was plainly wrong and that the reasoning of the primary judge in the matter should be preferred. However, at the hearing of the appeal, Counsel properly acknowledged that the Court of Appeal’s decision was not plainly wrong. He did not abandon the point, but rather suggested that it was a matter that should be dealt with by the High Court (if necessary), rather than an intermediate appellate court.
90 Counsel for Bonhams submitted that there were compelling reasons for following the decision of the Court of Appeal in Interstar and that this Court should not depart from the practice of following the decision of another State’s appellate court on a common law principle.
91 The current state of the law in Australia is that a term of a contract that imposes an obligation on a party to pay money on the happening of a specified event which is not a breach of contract does not constitute a penalty. Primarily, this is because it is not the role of the court to relieve a party from a bad bargain.
92 In Interstar, in reversing the decision of Brereton J, the President of the New South Wales Court of Appeal, Allsop P said:
In my view, the expression of view by the primary judge that the doctrine of penalties (distinguished from relief against forfeiture) in the common law of Australia (using that expression to mean, relevantly here, the general law encompassing common law and equity) was not limited to circumstances of breach of contract was not open to his Honour. The intermediate appellate authorities in Australia, the persuasive view of a unanimous House of Lords, existing High Court authority and other views expressed in the High Court constrained the primary judge (and constrain this court) to limiting the application of the doctrine of penalties to circumstances of breach of contract. If a wider doctrine is to be enunciated in the form of that appearing in  of his Honour’s reasons, it is for the High Court of Australia to enunciate it. This is so not least because of the need to resolve the views of a number of justices of the High Court, including but not limited to a majority of the court in IAC (Leasing).93 The decision of Allsop P is, with respect, careful, considered and comprehensive. The paragraph referred to above clearly represents the present state of the law. It is also consistent with the approach followed by the Full Court of the Supreme Court of South Australia in Diakos v Mason.
94 Accordingly, it is not for this Court to determine that the jurisdiction to set aside a term as a penalty extends to circumstances beyond a breach of contract.I know that reliance is being placed on this decision in ANZ Bank class action in the Federal Court of Australia, because the plaintiffs to that class action are alleging that the doctrine of penalties extends beyond a breach. That is, to the extent that overdrawing, dishonouring, etc is not a breach by the customer, then the fees charged by ANZ are penalties in any event.
95Grounds 3, 4, 5 and 6 are therefore not made out.
It will be interesting to see the outcome of the ANZ class action in light of the decision in Ange.
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