The Law Handbook 2024

Chapter 7.4: Taking action as a consumer 719 damages rather than specific performance. Where the goods are rare or have some special quality, the court is more likely to order specific performance. Prohibition on penalties for a breach of contract Quite frequently, parties to a contract agree on a sum that is to be paid on breach of contract by either of the parties. It is common for the deposit to be agreed on as the amount to be forfeited if a breach of contract occurs by the contract not going ahead. If the amount agreed on by the parties represents a genuine pre-estimate of what is likely to be the loss suffered on breach of contract, then the courts endorse this agreement. It should be noted that if the actual loss owing from the breach of contract is more than the amount agreed on, then the party suffering the breach has to forego the amount by which the actual loss exceeds the pre-estimate. On the other hand, if the amount of damages owing from the breach is less than the amount agreed on, the party in breach of contract still has to pay the agreed amount. If the amount agreed on takes the form of a penalty for breach of contract, rather than a genuine pre-estimate of loss, the courts will restrict the person suffering the breach to their actual loss and will not enforce the penalty. The actual loss may be more or less than the amount agreed on. The case of Andrews v ANZ Banking Group Ltd [2012] HCA 30 establishes the broad reach of the rule against penalties and makes clear that the rule cannot be avoided through contractual drafting alone. The case establishes that the doctrine applies to any fee that in substance is designed to secure the performance of a contractual obligation, irrespective of whether the fee is actually triggered by a breach. Whether a sum is a penalty depends on the parties’ intentions; but the courts have laid down some guidelines: 1 the expression used in the contract by the parties will not be decisive. For example, if the parties described the sum to be paid on breach of contract as a genuine pre-estimate of damages, and in all the circumstances it is apparent to the court that the sum is really a penalty, then the court will disregard the language used; 2 if the sum is extravagant in comparison to the greatest loss that could flow from the breach, then it will be regarded as a penalty. It is not enough for the sum to be disproportionate, it must be ‘all out of proportion’. This should be assessed at the time of entering into the contract, rather than comparing the sum with the actual loss incurred; 3 where the obligation is, for example, to pay a certain amount of money and it is provided that failure to do so will mean that a higher sum of money is payable, then that will usually be regarded as a penalty. An agreement to pay a sum of money with a rebate for a prompt payment will be valid but a penalty for late payment is usually invalid; 4 if there is a range of contract breaches, each of which producing differing amounts of loss and yet one sum is provided for breach of contract, then that sum is likely to be regarded as a penalty; and 5 consideration of the actual loss incurred is only relevant after the sum is found to be a penalty, in order to determine compensation to the penalised party. The ‘indirect consequences’ incurred as a result of a breach of an obligation can be taken into account, not just direct loss incurred. In Paciocco v ANZ Banking Group [2016] HCA 28, the High Court found that a credit card late payment fee was not penal as it protected the bank’s legitimate commercial interests, including loss provision costs, regulatory capital costs and collection costs. This is despite the fee not representing a genuine pre-estimate of the loss that might be caused by a particular breach. This decision signals that courts will be reluctant to interfere with contractual provisions of this kind and will take a broad view of the legitimate commercial interests that the provision seeks to protect. See Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79; Paciocco v ANZ Banking Group [2016] HCA 28. Small claims: VCAT’s Civil Claims List Overview of legislation For over 40 years, Victoria has had a small claims jurisdiction for the speedy, low-cost resolution of small claims. Initially this was under the Small Claims Act 1973 (Vic) (‘ Small Claims Act ’), then the Fair