Exit fee not a penalty
The British Columbia Court of Appeal has held that an exit fee payable to a broker on default under a loan was not a penalty under the common law or s 8 of the Interest Act. The court applied the test of the House of Lords in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd and asked whether the 0.67% fee was a genuine pre-estimate of damages, holding that it was open to the trial judge to find that it was: Bankers Mortgage Corporation v Plaza 500 Hotels Ltd [2017] FICR 15.
The court said that where a single lump sum is made payable by way of compensation on the occurrence of one or more or all of several events, some serious and others less so, there is a presumption (but no more) that it is a penalty. That presumption may be displaced.
There was no discussion of the recent contretemps between the UK Supreme Court and the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, Cavendish Square Holding BV v Makdessi [2015] UKSC 67; [2015] 3 WLR 1373; [2016] 2 All ER 519, and finally in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28; 90 ALJR 835.
In Andrews, the High Court held that there subsisted, independently of the common law rule, an equitable jurisdiction to relieve against any sufficiently onerous provision which was conditional upon a failure to observe some other provision, whether or not that failure was a breach of contract. It applied the Dunlop test of whether the detriment was a genuine pre-estimate of loss.
The effect of Andrews was that a provision is a penalty if it is a detriment arising on breach or non-performance of a primary or secondary obligation and is unconscionable and extravagant compared to the greatest loss the innocent party could conceivably prove
In Cavendish Square, the Supreme Court said Andrews was "a radical departure from the from the previous understanding of the law", which was that a provision is a penalty if it is a detriment arising only on breach of a secondary obligation and is unconscionable and extravagant compared to the greatest loss the innocent party could conceivably prove.
However, Cavendish Square itself departed from the previous law in holding that a detriment is a penalty if it is out of all proportion to any legitimate interest of the innocent party in the enforcement of the secondary obligation. This is instead of its being unconscionable and extravagant compared to the greatest loss the innocent party could conceivably prove.
It must be noted, though, that the notion of legitimate interest itself comes from Dunlop, which held that the innocent party's legitimate interest in that case was measured by the greatest loss if could conceivably prove
However, Cavendish Square itself departed from the previous law in holding that a detriment is a penalty if it is out of all proportion to any legitimate interest of the innocent party in the enforcement of the secondary obligation. This is instead of its being unconscionable and extravagant compared to the greatest loss the innocent party could conceivably prove.
In Paciocco, the Australian High Court defended its decision in Andrews but adopted the Supreme Court's "legitimate interest" test in place of the "genuine pre-estimate of loss".
The result is that it is more difficult for a detriment to be a penalty in the UK than in Australia because in the UK a penalty is only on a secondary obligation..
Singapore adheres to the UK position, with Allplus Holdings Pte Ltd v Phoon Wui Nyen [2016] SGHC 144 referring only to Cavendish as to the penalty doctrine applying to secondary obligations, without any mention of Andrews. Allplus also applied the "legitimate interest" test. In 2015, before Cavendish was delivered, the Singapore Court of Appeal applied the "genuine pre-estimate of loss" test and did not have occasion to consider the primary/secondary obligation issue in Andrews.
For the time being, Hong Kong follows Dunlop and the "genuine pre-estimate of loss" test, with neither the Court of Appeal nor Court of Final Appeal having had occasion to revisit the issue since Ip Ming Kin v Wong Siu Lan CACV [2013] HKCA 252. The District Court referred to Cavendish in Tictas System Automation Ltd v Explorer Travel Ltd [2016] HKDC 1581 but followed Ip Ming which did not need to consider the primary/secondary obligation issue in Andrews.
New Zealand appellate courts have not considered the issue of penalties since Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614 (CA), before the contentious developments, and recited the standard Dunlop test.
Read the full head note note on Ford's International Commercial Reports here: [2017] FICR 15.
