The Scope of the Rule Against Contractual Penalties: A New Divergence

Abstract

All major common law countries have a judge-made rule according to which a contractual stipulation of a penalty is unenforceable or void. During the 20th century, it became widely accepted that this rule applies only where the impugned obligation is triggered by a breach of contract or by an event that cannot occur without breach. In Andrews v Australia and New Zealand Banking Group Ltd, the High Court of Australia departed from the common understanding by holding that the penalty doctrine may apply where the event triggering the impugned obligation is not a breach of contract and may occur without breach. This has created a divergence in the common law world. This article discusses the decision and its possible impact in other common law countries.