BANK charges continue to be controversial. The holder of a current account or a credit card may be charged up to £50 for overdrawing or exceeding a credit limit by £1 for a brief time. Yet the bank's costs of processing the relevant payments and overdraft are minimal. In Office of Fair Trading v Abbey National plc. [2009] UKSC 6, [2010] 1 A.C. 696 (noted [2010] C.L.J. 21) the Supreme Court held that the standard terms which allow these “bank charges” to be levied cannot be assessed for “unfairness” under the Unfair Terms in Consumer Contracts Regulations 1999. Might such charges nevertheless attract equitable relief under the doctrine against penalties? Applying the dominant English view that relief against penalties may only be awarded upon a breach of contract (Export Credits Guarantee Department v Universal Oil Products Co. [1983] 1 W.L.R. 399, 402–404 (HL)), Andrew Smith J. held at first instance in Abbey National that such bank charges were incapable of being characterised as penalties. They were levied other than upon breach: [2008] EWHC 875 (Comm), [2008] 2 All E.R. (Comm.) 625 (noted [2008] C.L.J. 466). This point was not pursued in the Court of Appeal or Supreme Court. But in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, (2012) 290 A.L.R. 595, the Australian High Court decided that similar bank charges were indeed capable of being characterised as penalties, even though they did not arise upon a breach of contract. Whether the particular bank charges in Andrews were actually penalties and so unenforceable did not fall for decision; the point was remitted to the court below for resolution at a later date.

In Andrews, the High Court offered the following definition of a penalty (at [10]):

So, if a primary stipulation that Customer should not make purchases beyond his credit card limit with Powerful Bank plc is subject to a further, collateral stipulation that Customer should pay Powerful Bank plc a sum equal to the value of Blenheim Palace upon failure of the primary stipulation (i.e. exceeding his credit card limit), then prima facie the collateral stipulation is a penalty: it is “in the nature of a security for and in terrorem of the satisfaction of the primary stipulation” (Andrews, at [10]). Provided the second party can be compensated for any harm suffered by the failure of the primary stipulation, the collateral stipulation is unenforceable as a penalty. Until the 19th century, this doctrine usually applied to the non-fulfilment of conditions in penal bonds, where there was no breach of contract in the modern sense. And so the High Court held that there is no reason in principle for limiting the penalty doctrine to where there is a breach of contract: whether a stipulation is a penalty is a question of substance.

In England, by contrast, the jurisdiction to give relief against penalties applies only to instances of breach of contract. As Lord Denning noted, this produces an “absurd paradox” whereby the first party is better off if he breaches his contract than if he complies with the bargain he has made: Bridge v Campbell Discount Co. Ltd [1962] A.C. 600, 629 (HL). English law thus prioritises the form of the arrangement over the substance of its terms: as long as the drafting works to impose the penalty other than on breach of contract, the penalty may be demanded simply to “terrorise” a party into satisfying the primary stipulation. This has been criticised by the Law Commission in both England (Penalty Clauses and Forfeiture of Monies Paid, Working Paper No 61 (1975)) and Scotland (Discussion Paper on Penalty Clauses, Discussion Paper No 103 (1997)), but has not led to legislative reform.

Nevertheless, there is clear scope for the English courts to follow the approach taken in Andrews. In Abbey National, Lord Phillips PSC was wary of banks and others being able effectively to convert a penalty into a “price” and so escape the penalty doctrine simply by wording their legal relations to ensure that what in substance are penal sums only become payable upon contingencies other than breach of contract: [2010] 1 A.C. 696, at [83]. The ability to do so is unsatisfactory, and weakens the protection afforded to consumers in particular. It contradicts the fundamental concern of equity to look at the substance of the transaction rather than the mere form of its drafting.

It is important to appreciate the equitable basis of the doctrine against penalties. Although the common law (and later statute) came to follow equity by awarding relief against penalties where money compensation could be made, this merely diminished the need to seek equitable relief; it did not abolish the equitable jurisdiction. In Andrews, relief under the penalty doctrine at common law was unavailable since there was no breach of contract. However, equitable relief is not similarly confined. The equitable jurisdiction is therefore crucial where common law relief will not suffice. It may not suffice where the penalty clause provides for something other than the payment of money. In Jobson v Johnson [1989] 1 W.L.R. 1026 (CA), the defendant purchased shares in Southend United Football Club. Part of the payment was to be by instalments, but the defendant later defaulted. The seller sought specific performance of a stipulation for the buyer to re-transfer shares to the seller upon default for a set price, regardless of the shares' actual value. The Court of Appeal held that the stipulation was unenforceable as a penalty: the defendant was subject to the same liability regardless of the gravity of the breach. Equitable relief was awarded in classical style. The seller was allowed to elect between (a) an order for sale of the shares, and payment of the unpaid instalments and interest out of the proceeds; or (b) inquiries to ascertain the value of the shares, amounts of outstanding charges and the aggregate amount of unpaid instalments. If the amount in (b) were less than the sum presently due from the buyers, then the primary judge's order for specific performance would stand. However, if the amount in (b) were more than the sum presently due, “then the order for specific performance would have to be discharged, since its enforcement would be the enforcement of a penalty”. Such nuanced orders are unavailable at law. The practical reality is that equitable jurisdiction to relieve against penalties is equally alive in England and Australia.

In both jurisdictions, the penalty doctrine derives from two perennial concerns of equity. One is a strong distaste for punishment. The other is good conscience. In Andrews, the Court said that literal enforcement of a penal stipulation would be unconscientious. However, a conscience-based penalty doctrine does not necessarily equate with commercial uncertainty. Although the precise form of equitable relief against a penalty is a discretionary matter, courts are not free to decide whether a stipulation is penal in their discretion: whether a stipulation is penal depends on an objective assessment of the motives and intentions of the parties, and on the terms, purpose, and effect of the stipulation in question. Other features of the doctrine which minimise commercial uncertainty are that: (a) the parties themselves are best placed to know whether a collateral stipulation is to terrorise or incentivise performance; (b) a court will only relieve against a penalty if it is possible to award compensation for the prejudice suffered by the occurrence or non-occurrence of the particular event; (c) the penalty doctrine apparently does not apply to insurance and gaming contracts, where other rules and principles control the amount recoverable on the occurrence or non-occurrence of a stipulated event: AMEV-UDC Finance Ltd v Austin (1986) 162 C.L.R. 170, 199; and (d) under Andrews, the criteria for identifying a penalty, particularly those associated with Dunlop Pneumatic Tyre Co. Ltd. v New Garage and Motor Co. Ltd [1915] A.C. 79 (HL), remain the same.

It is fitting that Andrews, the last equity case in which Gummow J. participated before he retired from the High Court, exemplifies a prominent theme of Gummow J.'s legal career. This is the theme of legal change and continuity. Andrews is an exemplar, because considering the history of relief against penalties enabled the High Court to show that the modern penalty doctrine originates in cases where equity (and later the common law) relieved against penalties without any breach of contract in the modern sense. Legal history also enabled the court to show that equitable jurisdiction to relieve against penalties survived the Judicature Acts and remains vital. Any assumption that when modern courts look to legal history they wish to return contemporary law and society to antique days would be unfounded. In Andrews, traditional doctrine was re-enlivened for application to such modern phenomena as credit card fees. Understanding the legal past may clarify what is the appropriate step for a court to take to further the incremental renewal of the law.