Subject to Review? Consideration, Liquidated Damages and the Penalty Jurisdiction

Abstract

The paper examines relationship between what seem to be basic principles in contract law: consideration need not be adequate and the rule against penalties applies only to sums payable on The 'reluctant inspiration' lies in recent Australian case of Andrews v. Australia and New Zealand Banking Group Ltd, which establishes that absence of or an obligation to avoid occurrence of an event upon which a sum becomes payable, does not render such sum incapable of being characterized as a penalty. This decision constitutes an unexpected divergence from position in most other common law jurisdictions. What are its practical implications? Should we even engage in historical arguments given that penalty jurisdiction evolved at time where law did not recognize enforceable promises to perform? The paper commences with broad observations regarding enforceability of liquidated damages clauses, increasingly commercial approach to evaluating whether a pre-estimate of loss is genuine and necessity to treat sums payable on as part of commercial bargain. The more liberal attitude with regards to amount (i.e. higher sum that can be stipulated), more limited effect of rule against penalties. A liberal approach does not affect contract breaker’s ability to invoke rule but his ability to succeed. In combination with description of performance, price and limitation of liability (if any), sums payable on often point towards a transaction-specific risk allocation. In many instances such sums come dangerously close to primary obligations. And courts do not, as a matter of principle, review primary obligations. Once this is acknowledged, it becomes even more difficult to justify any attempts to expand scope of penalty jurisdiction beyond payments triggered by breach. After confronting some of historical arguments made by court in Andrews, paper analyzes recurring attempts to extend judicial review of contractual payments by creating hybrid stipulations – sums that are neither payable on nor in return for contractual performance. A difficult theoretical exercise awaits: should we create artificial divisions between contractual payments to establish whether they can be reviewed? Or should we finally acknowledge that all sums payable under a contract are part of commercial bargain? On one hand, doctrinal integrity may point towards need to vigorously defend present form of rule against penalties, including its (seemingly) strict limitation to sums payable on breach. On other, some arguments made in Andrews and in other recent cases highlight theoretical inconsistencies of its current formulation. After all, breach/no breach dichotomy can also be regarded as a device for avoiding judicial scrutiny. At present, on basis of Andrews alone it appears incorrect to use an institution that prohibits deterrence from to review commercial substance of contracts. The rule against penalties reflects general equitable principle not to enforce oppressive or unconscionable transactions. It does not reform commercially imprudent transactions. Given its exceptional nature, penalty jurisdiction should be exercised sparingly – even with regards to sums payable on breach. Once sums payable on are regarded as part of commercial bargain, it is more difficult to subject them to review. If, however, payment is unrelated to of a contractual promise, it comes dangerously close to being a contractual promise. Any review seems unacceptable.