Saturday, April 27, 2013

The Scope of the Jurisdiction to Grant Relief against a Penalty Clause

In Andrews v Australia and New Zealand Banking Group, the High Court of Australia has considered an important question of contract law: is the jurisdiction to grant relief against a penalty clause confined to a sanction triggered by an event that can be characterised as a breach of contract, or does it extend to a sanction triggered by other events? The Supreme Court of India had occasion to consider exactly this question about two years in BSNL v Reliance, but unfortunately did not do so. We have commented on that decision here.

Simplifying the facts for the purposes of analysis, customers of the ANZ Banking Group [“ANZ”] challenged certain payments that they were required to make for banking services. This fell into, mainly, three classes: a late payment fee [“Late Payment Fee”], payable if a customer is late in making a scheduled payment; “honour” fees payable by a customer who overdraws his account and interest on these fees [“Honour Fee”]. At first instance, Gordon J. found that the Late Payment Fee was payable as a consequence of breach of contract by the customer (in not making the scheduled payment), but that the Honour Fee was not. The question was whether this meant that no relief could be granted against the payment of the Honour Fee. In English law, this was traditionally the position, established by the speeches delivered in the House of Lords in Export Credits Guarantee Department v Universal Oil Products [1983] 1 WLR 399. The result was that a sanction triggered by an event that was not a breach of contract did not attract the penalty rules.

The High Court of Australia rejected that analysis in an instructive judgment, of which the following is a brief summary. The word “condition”, like “rescission”, has a variety of meanings in contract law. One meaning, of course, is an important or fundamental term of a contract the breach of which entitles the other party to withhold further performance and terminate the contract. Used in this sense, condition is contrasted with warranties and innominate terms. But the word “condition” is not used in this sense in the cases in which the penalty rules were established.  In those cases, there was typically a bond, which would be forfeited on the happening or non-happening of a certain event. That event was called a “condition”. It could be a promise by the other party (in which event the bond would be forfeited on breach) but it could also be an event that was not a promise by the other party. In Campbell v French, Lord Kenyon gave this example: a bond to be forfeited if the “Pope of Rome visits London tomorrow” is perfectly good, since the event is, although unlikely, not impossible. The example demonstrates that “condition”, in this sense, did not mean “promise” and that relief granted against forfeiture, naturally, could not have been confined to a breach of promise. As the High Court points out, equity granted relief provided the non-performance of the condition secured by the bond could be compensated by an award of money. If the bond secured a money condition, the court of equity intervened by ordering the defendant to pay the principal amount, interest and costs; if it secured a non-money condition, the court of equity would direct an issue of quantum damnificatus to assess the loss. In neither case was there any basis for the suggestion that equity would intervene if the bond secured a promise but would not intervene if it secured something else. The High Court points out that the emergence of assumpsit did not introduce the breach limitation, because the relief granted by the common law courts in this action mirrored the relief granted by the courts of equity but did not substitute it. In other words, the equitable relief retained its identity; the common law courts simply gave relief too.

One question that arises from the judgment of the High Court of Australia is this: if the penalty rules are not limited to a breach of contract, when do they not apply? The High Court gives a tentative answer to this, by pointing out that it would be necessary to examine whether the Honour Fee was payable as a security for the performance of an obligation or as the price of “further accommodation” by the ANZ Group. Professor Peel points out in a case note in the Law Quarterly Review ((2013) 129 LQR 152) that this distinction “seems simply to move some of the problems associated with the breach limitation to a different place”.

The Indian law on this point remains unresolved. In BSNL v Reliance, Mr Gopal Subramanium argued that clause 6.4.6 was a payment triggered by an event other than breach and that the penalty rules did not, therefore, apply. As we have discussed in our post, the Supreme Court did not decide this point. Section 74 opens with the words “when a contract is broken”, suggesting that it does not apply to an event other than breach. However, as the authors of the 2nd edition of Pollock and Mulla point out at page 328, section 74 does not exhaust the equitable jurisdiction of the court to relieve against penalty clauses. That jurisdiction was exercised with respect to some stipulations before section 74 was amended in 1899, and nothing in the amendment suggests that it was taken away. The question, therefore, remains open and one hopes the Supreme Court will answer it when the opportunity next arises.


vswami said...

Second Para -which is the third of the 3 classes referred to ?- unless 'interest' spoken of under 'honour fee'is a class by itself?
In this context, one remembers to have come across instances in which an overdraft facility-which is normally granted for 'working capital', also on the condition that all business receipts /collections should routed through the same overdraft account-being misused. Say,used for an extraneous or unauthorized purpose- e.g. investment in tax free bonds; despite banks being supposed to keep monitoring closely such accounts.What the law/case law says, or practice is ?- in other words,the consequence will be a mere 'penalty' or withdrawal of the facility itself?
A closer study of such intricate facets by law experts may be worth an attempt!

vswami said...


Going by one's limited knowledge /understanding,the concept of 'equity' is simply as old as the 'common law'; in a manner of speaking,equity itself is a common law doctrine, not separate or identifiable by any clear line of demarcation.should that be so,some of the observations made wprt the Australian case law will require a further study in proper light and with due focus.

In the public domain, one finds any number of useful material; for instance,- @