It’s said that you can’t shut the stable door after the horse has bolted, but this presumes that there is only one door. If there is a gate on the field around the stable, then the horse can be successfully corralled by shutting the second door, even if the first door is left wide open. And in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, the High Court effectively shut a ‘second door’ to prevent the penalties doctrine from escaping. The ‘doors’ are the two questions a court must ask when establishing whether a clause is a penalty and thus void or unenforceable:
- Is this a clause to which penalties doctrine applies?
- On the facts, is this clause a penalty?
The first door had been left ajar in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, potentially allowing the penalties doctrine to invalidate (at least partially) a wider range of clauses. This post will focus on the penalties doctrine rather than on the statutory claims of the appellants. It is suggested that after Paciocco there will only be a very small number of cases where plaintiffs can successfully challenge contractual clauses as void or unenforceable penalties. The Court’s findings regarding the question of whether a specific clause was a penalty indicate that the second door has been closed so that only the tiniest crack remains. This will be a relief for organisations such as banks and utility companies as they will have greater latitude to charge late payment fees. And it will provide particular relief for construction contractors, who were concerned that abatement provisions (often used in PPP or Public Private Partnerships) and time bar provisions would be penalties pursuant to Andrews. Continue reading