Corrs Chambers Westgarth, Sydney

Recently, the High Court of Australia departed from the previously accepted position in Australia—as well as in most other common law jurisdictions—in ruling that breach of contract is not necessary to attract the operation of the law of penalties. Although the decision was made in the context of a class action to recover bank fees, the principle is not so confined. Any party entering into a contract governed by Australian law (or considering doing so) must now consider whether any agreed fees or stipulations may be penal. Such concerns are particularly pertinent for performance-based or outcome-based contracts (PBCs) where payment depends on the outcome of the product delivery or service delivery, or contains KPI (key performance indicator) provisions with accompanying incentive or abatement regimes (or both). This article discusses the High Court’s decision and its likely implications for Australian contract law in general and for performance-based contracts. In considering the implications of the decision, it is important to note that the Australian penalty doctrine is heavily rooted in English law and it is therefore possible that this decision is the first of many around the world.

Twenty-five years ago, it was observed: “The intrusion of equity into commercial relationships has not always been favourably regarded.”2 Similar sentiments apply to the High Court of Australia’s decision in Andrews v. Australia and New Zealand Banking Group Ltd.3 It has been popularly reported as a bank fees case. But the effect of the decision is far broader. It casts a shadow over all long-term services contracts (which, after all, is what usually gives rise to a banker-customer relationship) and performance-based or outcome-based contracts. After Andrews, it is not just liquidated damages provisions that must be scrutinised for falling foul of