Lecture

• Author: James ALLSOP Chief Justice of the Federal Court of Australia.
• Date: 01 December 2018
• Published date: 01 December 2018

I. Introduction

1 In 1986, Mason and Wilson JJ of the High Court of Australia noted in the decision of AMEV-UDC Finance Ltd v Austin1 that “[t]he doctrine of penalties has pursued such a tortuous path in the course of its long development that it is a risky enterprise to construct an argument on the basis of the old decisions”.2 Almost 30 years later, Lord Neuberger and Lord Sumption of the UK Supreme Court began their reasons in the conjoined appeals of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis3 with similar sentiment, noting that the penalty rule is an “ancient, haphazardly constructed edifice which has not weathered well”.4 As anyone with an interest in history will be familiar, there is often more than one truth in describing how something emerges from the past, and so it is the case with the doctrine of penalties. Two versions of history have led to different choices as to legal doctrine. What remains to be done, however, is to fully fashion a modern doctrine with contemporary social and commercial relevance and utility. But the cases to which I will refer hopefully have begun that task.

2 The final appellate courts in Australia and the UK have recently revisited the law on penalties. In 2012, in Andrews,5 and in subsequent litigation of the matter in 2016 in Paciocco,6 the Australian High Court

considered whether certain banking fees charged to customers of ANZ bank were penalties. In 2015, the Supreme Court of the UK heard two distinctly different cases in dealing with the doctrine. Cavendish concerned the enforceability of certain non-competition provisions in a substantial commercial sale and purchase agreement that delivered to Cavendish the controlling interest in a business founded by Mr Makdessi and described in the reasons as the “largest advertising and marketing communications group in the Middle East”.7 The provisions under scrutiny were provisions that, upon the occasion of their breach, would prevent Mr Makdessi and his business partner as defaulting shareholders from being paid the remainder of the purchase price and require them to sell Cavendish their remaining shares in the business based on a formula that excluded a substantial value for goodwill.8ParkingEye concerned a parking fee charged to Mr Beavis of £85 for overstaying (by nearly one hour) the permitted (and free) parking time (two hours) in a retail carpark run by ParkingEye. Neither was held to be a penalty – an indication of the movement of the modern law to accommodate freedom of contract.

3 The differences between the two courts included the identification of the modern origins of the doctrine – in equity or at common law; and whether the doctrine's application is conditioned on a breach of contract or whether it has a broader application in circumstances where a collateral stipulation provides for a benefit to a party upon the failure of a primary stipulation in favour of that party by way of security for and in terrorem of the satisfaction of the primary stipulation.9

4 I do not propose to engage in debate about the correctness of the reasoning of either court. I leave that to senior academics to fulfil their function in legal discourse in that regard. I would only note that the decision in Andrews was the subject of strong criticism in an article, unusually, co-authored by five very senior contract law academics.10Paciocco, Cavendish and ParkingEye have fared little better.11 Whilst I have some sympathy for some of the criticism, the nature of the

criticism and the approaches of the two courts reveal two important aspects of doctrinal development and legal thinking that are worthy of comment: the futile struggle to define the indefinable; and the extent of the legitimacy and utility in resurrecting from the mists of centuries past doctrine to displace stable (if less than satisfactory) approaches that have sufficed for generations, in preference to reformation of doctrine by reference to contemporary expression of informing concepts.

5 Nor do I propose to take you through all the detail of the various judgments in the Supreme Court and High Court to piece together the precise precedential position. Rather, I wish to examine the position taken by the two courts, the changes they have made, and where we might go from here.

II. Historical approaches to the equitable origins of the penalties' doctrine

6 The historical arguments adopted by the two courts reveal differences in perspective on the way in which the penalty rule evolved from the equitable jurisdiction for relief from conditional defeasible penal bonds.12 The debate is whether the rule can be said to have cast off its equitable origins to such a degree that it can properly be held to be a rule of, and only of, the common law. Central to this question is a difference of view about the legal effect of the Judicature Acts of the 1870s.

7 The English approach which reflects the broadly accepted position in Australia before Andrews is to apply the doctrine in the common law of contract in the remedy for breach of contract. The Australian approach extends to reforming the contract in its operation, by flexible equitable relief, absent breach, although the availability of compensation is the source of the equity. Both approaches, however, are constructed around the necessary presence of related contractual provisions: primary, and secondary or accessorial or collateral provisions.

8 The differences also perhaps reveal a greater role for equitable modes of thought in legal doctrine in Australia, and an unwillingness to shorten the historical roots of modern law to the positivist 19th century, where a greater emphasis on rule-based structure may be perceived in comparison to the earlier centuries. The echo of this can perhaps be

seen in the different approaches to the law of unjust enrichment and restitution in England and Australia.13

9 Some historical reflection on the doctrine of penalties is also important in order to understand the unsatisfactory attempts by the courts at certain times to define into certainty the heart of the doctrine, a heart which does not admit of definition. This indefinability comes from the value-based composition of that heart – a refusal of the courts to countenance oppression, private punishment, or unconscientious arrangements as a matter of legal policy. To put the matter thus is not to state a general rule about intervention in the bargains of parties; but rather, it is to express an informing norm or conception by reference to which rules are formed. Once this heart of the doctrine is appreciated, it becomes easier to understand that whilst rules can give form and structure, and thus some certainty, to the doctrine, they can never suffice as an exhaustive expression or definition of it. Just as one cannot define beauty or style, one cannot define unfairness, abuse of power or unconscionability.

10 As we shall see, both courts have moved away from a long-accepted structure based on the dichotomy of genuine pre-estimate of damages and penalty and the structure of Lord Dunedin's tests in Dunlop14 to a more evaluative approach involving the assessment of the legitimacy of the parties' commercial and other interests inspired by Lord Atkinson in Dunlop15 and the Earl of Halsbury LC in Clydebank.16

11 Normative values lie at the heart of the doctrine because (as with many legal principles) the doctrine is seeking to vindicate the human and experiential in the law – the law's humanity. This sometimes is lost sight of in the grasping for certainty by use of abstracted or theoretical rules in taxonomical structures in order to define doctrine in concrete form. These almost dialectical relationships: between the experientially human, and the abstracted; between the evaluation of circumstance and context, and the application of the abstracted de-contextualised rule to the particular; and between value-based

principle, and defined rule, underlie all law and provide for its organic growth, tolerable stability, and capacity to adapt to social change.17

A. A short introduction to the history of the penal bond with conditional defeasance

12 The absence until recent centuries of a mutual promise-based contract law of modern recognition did not reflect a lack of importance of the promise and the bargain in human exchange in medieval times. The promise and the bargain were vindicated in different ways. Commerce has always been sophisticated. The commercial engagement, the experiential, gave rise to the need for rules reflecting decent human behaviour.

13 The penal bond was employed as a means of regulating interlocking promises in commerce.18 Delivered as a deed, the obligor confessed himself to be obliged to the obligee. The bond could be sued on in debt. The bond (the instrument) created the debt, not the underlying promise. The bond could be simple and absolute, or it could be conditional. The latter could be used to regulate or enforce unilateral or bilateral undertakings or promises. The obligor was obliged to pay £x on y date, but if the undertakings or stipulations or promises were performed, the bond would be void. If there were any complexity in the mutual engagement, an indenture under seal would be entered into setting out the terms of the agreement. Each party would execute a penal bond of even date in the event of non-performance of their obligations in the indenture, or of any relevant stipulation within his ken.19

14 One can see the framework for simple or sophisticated commercial transactions based on promise, stipulation and performance. One can see certainty and due enforcement by the

unequivocal nature of the penal sum, and the requirement for strict performance.20

15 The vindication of values of fairness and control of oppression grew in the development of the jurisdiction in Chancery to relieve against penal bonds in certain respects. By Tudor times, medieval mechanisms such as the...