The High Court in Andrews v ANZ Bank, the class action challenging bank fees, has said that the law of penalties in the Court of Appeal decision in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292 (“Interstar”) was wrong. It is possible now for amounts to be classed as penalties even though they are not cast in the contract as monies payable on breach, because equity looks to the substance of the matter rather than form. In effect the High Court reaffirmed the law of penalties as it existed in 2008 prior to Interstar. The decision in Interstar resulted in contracts being cleverly re-drafted. Fees susceptible to being struck down as penalties were re-drawn in contracts as fees for the provision of additional services or fees payable upon the happening of an event that was not a breach of contract.
Although the decision concerns retail banking fees and charges, it has application to the lending and construction industry.
We do not think the Andrews decision means that a default interest rate can be struck down as a penalty since it has been so well established in the case law before 2008 that such rates can be charged and is therefore a specific exception to the rule.
However it is possible that other payments or withholding of payments in loan, mortgage and funder agreements may be held to be unenforceable as penalties. Where the fee is not payable for the provision of additional services it may be unenforceable unless it is a genuine pre-estimate of the damage that will be suffered by the lender/funder. In the context of funder agreements, a clause providing for the non-payment of fees to the originator as the consequence of some event may be held unenforceable unless it is a genuine pre-estimate of the damage that will be suffered by the funder. Interstar would now be decided differently following the High Court pronouncement of the law.
It is possible that liquidated damages and other provisions in construction contracts may be held to be unenforceable as penalties unless they are a genuine pre-estimate of the damage that will be suffered by the other party.
Provisions in contracts dealing with the payment and non-payment of fees and liquidated damages will need to be re-examined to determine their enforceability in light of the High Court decision