From: Elisabeth Peden <>
To: Tettenborn, A <>
Date: 08/07/2009 01:35:05 UTC
Subject: RE: Penalty clauses and unconscionability

FW: Penalty clauses and unconscionability

John Carter and I have written a paper - available on SSRN - in which we look at penalties and deal with the issue of the menaing of 'unconscionability'. Of course in Dunlop, the PC uses that word, but not in the 1915 English meaning of the word, rather than something else that might be found in Australian law today for example.  

In AMEV-UDC Finance Ltd v Austin Mason and Wilson JJ state ((1986) 162 CLR 170 at 194; 68 ALR 185.):

The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties ...

A few cases have suggested in passing that inequality of bargaining power is a basis on which to strike down an agreed damages clause.(See eg Phillips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 41, where the Privy Council suggested that ‘situations where one of the parties to the contract is able to dominate the other as a choice of terms of a contract’ would be an exception to the normal operation of the penalty principles. See also State of Tasmania v Leighton Contractors Pty Ltd [2005] TASSC 133 at para [31]: ‘The question was whether, given the nature of the contract, its complexity, value and the bargaining strength of the parties the amount of $8000 was, in all the circumstances, a penalty as of the date of the agreement.’)

Recently, a majority of the Victorian Court of Appeal suggested that:

[T]he better view is that, in Australia, unconscionability is a separate ground for striking down an agreed default provision as a penalty. That this is so seems to have been recognised by Mason and Wilson JJ in the passage of their joint judgment in AMEV-UDC… (Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109 at para [19] per Chernov JA, with whom Warren CJ agreed)

On the particular facts there was no need to decide the issue, as the judges were not of the view that the relevant clause would have been considered unconscionable.

The reasoning that the existence of unconscionability may be sufficient to strike down a penalty clause is radical (in Australian law at least). Under statute or as part of the application of vitiating factors, such as unconscionability, inequality of bargaining power can be used to strike down a contract as a whole, rather than one particular term that seems to operate unfairly for one party. In the penalty context, inequality of bargaining power may explain why the amount chosen is excessive. Thus, it is the fact that good faith underlies those rules that they may sometimes operate to prevent exploitation of a superior bargaining position. But that is quite different from saying that consideration of inequality of bargaining power is an integral part of the penalty rules.

Dr Elisabeth Peden | Professor | Faculty of Law | The University of Sydney
Tel: +612 9351 0233| Fax: +612 9351 0200 | E-mail: 
Faculty of Law F10, Eastern Avenue, University of Sydney NSW 2006 Australia | CRICOS Provider No: 00026A

From: Tettenborn, A []
Sent: Wed 8/07/2009 3:08 AM
Subject: FW: Penalty clauses and unconscionability

From: Davis, Kevin []
Sent: 07 July 2009 17:36
Subject: Penalty clauses and unconscionability

I am wondering whether anyone on the list has come across decisions in which common law courts have seriously questioned whether the traditional rule against enforcing penalty clauses, as opposed to doctrines of more general application such as unconscionability, should be used to analyze the enforceability of stipulated remedies.

I am just finishing up a comment on the decision in Birch v. Union of Taxation Employees, Local 70030 (2008), [2009] 93 O.R. (3d) 1 (C.A.), leave to appeal to the Supreme Court of Canada denied May 7, 2009, in which the Ontario Court of Appeal did just that.  The issue was whether a union is entitled to enforce a fine against strike-breaking members pursuant to provisions in the union constitution.  What I found interesting about the decision is that the Court of Appeal could have refused to enforce the fine on the grounds that it was penalty.  Instead, following an approach suggested in obiter by Justice Sharpe in an earlier decision called Peachtree, the court focused its enquiry on whether the clause was unconscionable (and the majority concluded that it was). Has anyone come across similar decisions (particularly from outside Canada)?


Kevin Davis
Beller Family Professor of Business Law
New York University School of Law
40 Washington Square South Room 335
New York, NY 10011
tel: 212 992-8843
fax: 212 995-4760

There's a very interesting English case showing much the same tendency, Murray v Leisureplay plc [2005] I.R.L.R. 946, [2005] EWCA Civ 963. A senior executive had a highly lucrative golden parachute arrangement that applied if he was fired (including wrongly). It was much more than the loss of earnings he would suffer -- or at least than the amount he would recover. The employers fired him; he sued for the severance, whereupon the employers sought to argue as against their own employee that the clause was a penalty (!!!). The first instance court sided with the employers on the usual "genuine pre-estimate" rhetoric: the Court of Appeal reversed. Although the case was strictly speaking argued on penalties, unlike the Ontario case you mention, the CA was in no doubt that even a non-genuine-pre-estimate amount could be recovered if there was nothing unconscionable or outrageous about the contract.