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ARTICLE · 19 DECEMBER 2013

Liquidated damages or penalties: higher threshold for enforceability

Cooper Grace Ward
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The cases are useful when negotiating liquidated damages or any other compensation provisions in commercial agreements.

AustraliaLitigation, Mediation & Arbitration
David Grace
David Grace
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The cases of Andrews and Others v Australia and New Zealand Banking Group Ltd (2012) (Andrews) and Re Pioneer v Energy Holdings Pty Ltd [2013] (Pioneer) significantly expanded the penalty doctrine in Australia.

What should be taken from the cases is that:

  • a court may hold that a provision is a penalty even if it is not triggered by a breach of contract; and
  • provisions requiring compensation to be provided by one party to another should be proportionate to the potential loss suffered.

Express agreement between parties that compensation is reasonable will not necessarily oust the doctrine of penalties.

The cases should be carefully considered when negotiating liquidated damages or any other compensation provisions in commercial agreements.

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