In the recent case of Andrews v Australia & New Zealand Banking Group Ltd (2012) 290 ALR 59 (“Andrews”), the High Court decided that provisions in a contract deemed penal in nature would be unenforceable not just upon breach, but irrespective of whether or not the contract proceeded to completion. In other words, if a clause subjects one party to what looks like an unreasonable detriment, then, according to Andrews, the applicable clause will be unenforceable by the other party in any circumstance.

There is thus the possibility that relief is now available to a party to a contract in respect of a much wider range of clauses and stipulations. With another erosion of what was formally known as the sanctity of contract, such a party may now be emboldened to disclaim, or otherwise seek to extricate itself from, a contact which it had freely entered into but which in hindsight it feels includes overly-onerous obligations.

Such a party will bear, amongst other things, the burden of proving disproportionality, that is, the fee or stipulation complained of is out of proportion to the obligation sought to be secured.

For example, when considering a typical goods rental agreement, damages for the renter’s breach of an essential term are recoverable not just for payments in arrears but the cost of repairs, repossession and re-sale of the goods, any necessary administrative expenses in attending to same, plus interest on all of these. Damages also include rent instalments payable from the date of the agreement’s termination to the end of the term, discounted to allow for their acceleration.

In the light of Andrews, it may be tempting for a renter to assert that any administrative expenses and even the accelerated future rentals are penal in nature. This is because administrative expenses are, for certainty and ease of calculation, often quantified in terms of one or more rental instalments. In terms of Andrews, there is, arguably no reciprocal benefit to the renter. In the case of accelerated (or rebated) rentals, the right to recoup them rests on finance theory and practice, not equitable jurisprudence.

However, it is submitted that the assertion that administrative charges or rebated rentals become penal in nature just because they are pre-quantified rests on a misconception. Management time and effort must be expended to terminate a contract early. Costing such time in terms of rental payments is a convenient measure for both parties. Arguing that a lessor’s claim for the aggregate present values of future rental payments constitutes a penalty ignores the very real finance cost the lessor must meet in order to close out its own funding arrangements.

For more information contact Allan McDougall at a.mcdougall@pigott.com.au