Sue in Debt
What is debt Liquidated damages = The amount specified by a valid agreed damages clause – If it is invalid, it is a penalty
What is an agreed damages clause A money sum stated in the contract to quantify damages for breach of contract
If there is a breach of an agreed damages clause, person can sue for liquidated damages, or, if it gives a common law right to terminate, can also sue for
loss of bargain damages
1. Is this clause enlivened?
a. Is it a fixed or ascertainable sum?
i. Penalties doctrine not engaged if damage is insusceptible of evaluation and assessment in money terms (Andrews)
b. Is it unconditionally accrued?
i. Yes = May be recoverable by debt because they survive termination (McDonald v Denny)
ii. Onus on D to prove any defence of payment discharged (Young v Queensland Trustees Ltd)
2. Is the clause a penalty? Just because it says ‘penalty’ doesn’t mean it is (Dunlop, 86-87, Lord Dunedin)
a. Is the provision within the scope of the penalty rule?
i. Is the clause only enlivened by breach?
o Even if it is not, as long as Andrews test is satisfied, it will fall under the scope of penalty
ii. Andrews test: Is the clause one that is collateral to a primary obligation & imposes an additional detriment upon failure of the
primary obligation?
o “In general terms, a stipulation prima facie imposes a penalty on a party if it is collateral to a primary stipulation in favour
of a party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the 1 st party an additional
detriment to the benefit of the 2nd party” (216) Being in the nature of a security for an in terrorem of the satisfaction of
the primary stipulation
iii. Ringrow: Breach of contract triggering some further agreed rights/obligations under the contract is also subject to rule against
penalties (not limited to payment of liquidated damages, amount specified by a valid agreed damages clause)
b. If so, is the provision substantively penal?
, i. Test from Paciocco (526, French CJ, Kiefel, Gageler and Keane JJ) : Legitimate interest test
o What are the legitimate interests in enforcing the contract?
o Is the clause out of all proportion with this interest? (Kiefel and French JJ inspired by Mason and Wilson JJ in AMEV)
(Dunlop, 87-88, Lord Dunedin criteria, where relevant)
1. Is the sum stipulated for extravagant and unconscionable in comparison with the greatest loss? If extravagant and
unconscionable, it would be out of all proportion and maybe a penalty (Dunlop)
2. Is the trigger event to cancel the contract trifling or serious? If serious, probably not out of all proportion and
maybe not a penalty (Dunlop)
3. Is it difficult to pre-estimate his loss? If it is difficult to pre-estimate loss, probably not out of all proportion and
maybe not a penalty (Dunlop)
4. Veracity/strength of legitimate interest
o If the provision states a formula, rather than an amount: The question is whether the formula is “appropriate” and
“substantially correct” (Ringrow case)
ii. Balancing exercise: Legitimate interests vs Detriment imposed by clause in question
3. If it’s a penalty, what are the consequences?
a. If clause is only enlivened upon breach, the options are
i. Wholly unenforceable under common law Void for all purpose
ii. Partially unenforceable under equity Compensation can be made to the 2nd party for the prejudice suffered by failure of the
primary stipulation – Penalty only enforced to the extent of that compensation (Andrews)
b. Which is the better option? Still unsettled
c. If suing in debt fails because it is a penalty, D could sue for damages instead (in which case mitigation matters) Mitigation does not
matter if D successfully sues in debt (Ringrow)
i. The amount fixed in a penalty provision does not show intention of the parties with respect to the amount contemplated as P’s loss in
the assessment of the claim at common law (AMEV)
4. If it’s not a penalty, how to recover?
, a. If terminated (McDonald case) Sum must be unconditionally accrued and enforcement cannot be inconsistent with the discharge of the
contract
b. Repudiation & election to continue If D repudiated but P elected to affirm, P can seek contract price as debt Only possible where P can
do their part of the contract without D’s help (White & Carter)
i. White & Carter Councils: Requirement (1) P must be able to perform obligations without D’s cooperation and (2) P must have
‘legitimate interest’ in taking this course of action
ii. Alaskan Trader: Cannot continue with contract if there is no legitimate interest Example of legitimate interest: Damages were
difficult to assess
Sue in damages
1. Identify breach and loss
a. Do this briefly, don’t get into whether it is a condition or warranty
2. Causation:
a. Obligation to take reasonable care or strict obligation?
i. This is based on ‘what was promised’ rather than the reason for breach
b. Strict: Common law (March v Stramare (E&MH) Pty Ltd (1991) 171 CLR 506)
i. ‘But for’ test But for breach happening, incident A would not have happened (Reg Glass case)
ii. Common sense: Did it flow from the breach
iii. Usually cases like: Obligation to pay money, supply obligations, supply of services under a service agreement, under a sale of goods
contract the obligation to supply goods that are reasonably fit for purpose
c. Where ‘but for’ test is insufficient:
i. A break in the chain of causation
ii. Multiple causes
iii. Presumption of causation (Reg Glass): “Once a breach of warranty is established, AND entry was due to the breach, then the loss
suffered is prima facie damages for the breach”
What is debt Liquidated damages = The amount specified by a valid agreed damages clause – If it is invalid, it is a penalty
What is an agreed damages clause A money sum stated in the contract to quantify damages for breach of contract
If there is a breach of an agreed damages clause, person can sue for liquidated damages, or, if it gives a common law right to terminate, can also sue for
loss of bargain damages
1. Is this clause enlivened?
a. Is it a fixed or ascertainable sum?
i. Penalties doctrine not engaged if damage is insusceptible of evaluation and assessment in money terms (Andrews)
b. Is it unconditionally accrued?
i. Yes = May be recoverable by debt because they survive termination (McDonald v Denny)
ii. Onus on D to prove any defence of payment discharged (Young v Queensland Trustees Ltd)
2. Is the clause a penalty? Just because it says ‘penalty’ doesn’t mean it is (Dunlop, 86-87, Lord Dunedin)
a. Is the provision within the scope of the penalty rule?
i. Is the clause only enlivened by breach?
o Even if it is not, as long as Andrews test is satisfied, it will fall under the scope of penalty
ii. Andrews test: Is the clause one that is collateral to a primary obligation & imposes an additional detriment upon failure of the
primary obligation?
o “In general terms, a stipulation prima facie imposes a penalty on a party if it is collateral to a primary stipulation in favour
of a party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the 1 st party an additional
detriment to the benefit of the 2nd party” (216) Being in the nature of a security for an in terrorem of the satisfaction of
the primary stipulation
iii. Ringrow: Breach of contract triggering some further agreed rights/obligations under the contract is also subject to rule against
penalties (not limited to payment of liquidated damages, amount specified by a valid agreed damages clause)
b. If so, is the provision substantively penal?
, i. Test from Paciocco (526, French CJ, Kiefel, Gageler and Keane JJ) : Legitimate interest test
o What are the legitimate interests in enforcing the contract?
o Is the clause out of all proportion with this interest? (Kiefel and French JJ inspired by Mason and Wilson JJ in AMEV)
(Dunlop, 87-88, Lord Dunedin criteria, where relevant)
1. Is the sum stipulated for extravagant and unconscionable in comparison with the greatest loss? If extravagant and
unconscionable, it would be out of all proportion and maybe a penalty (Dunlop)
2. Is the trigger event to cancel the contract trifling or serious? If serious, probably not out of all proportion and
maybe not a penalty (Dunlop)
3. Is it difficult to pre-estimate his loss? If it is difficult to pre-estimate loss, probably not out of all proportion and
maybe not a penalty (Dunlop)
4. Veracity/strength of legitimate interest
o If the provision states a formula, rather than an amount: The question is whether the formula is “appropriate” and
“substantially correct” (Ringrow case)
ii. Balancing exercise: Legitimate interests vs Detriment imposed by clause in question
3. If it’s a penalty, what are the consequences?
a. If clause is only enlivened upon breach, the options are
i. Wholly unenforceable under common law Void for all purpose
ii. Partially unenforceable under equity Compensation can be made to the 2nd party for the prejudice suffered by failure of the
primary stipulation – Penalty only enforced to the extent of that compensation (Andrews)
b. Which is the better option? Still unsettled
c. If suing in debt fails because it is a penalty, D could sue for damages instead (in which case mitigation matters) Mitigation does not
matter if D successfully sues in debt (Ringrow)
i. The amount fixed in a penalty provision does not show intention of the parties with respect to the amount contemplated as P’s loss in
the assessment of the claim at common law (AMEV)
4. If it’s not a penalty, how to recover?
, a. If terminated (McDonald case) Sum must be unconditionally accrued and enforcement cannot be inconsistent with the discharge of the
contract
b. Repudiation & election to continue If D repudiated but P elected to affirm, P can seek contract price as debt Only possible where P can
do their part of the contract without D’s help (White & Carter)
i. White & Carter Councils: Requirement (1) P must be able to perform obligations without D’s cooperation and (2) P must have
‘legitimate interest’ in taking this course of action
ii. Alaskan Trader: Cannot continue with contract if there is no legitimate interest Example of legitimate interest: Damages were
difficult to assess
Sue in damages
1. Identify breach and loss
a. Do this briefly, don’t get into whether it is a condition or warranty
2. Causation:
a. Obligation to take reasonable care or strict obligation?
i. This is based on ‘what was promised’ rather than the reason for breach
b. Strict: Common law (March v Stramare (E&MH) Pty Ltd (1991) 171 CLR 506)
i. ‘But for’ test But for breach happening, incident A would not have happened (Reg Glass case)
ii. Common sense: Did it flow from the breach
iii. Usually cases like: Obligation to pay money, supply obligations, supply of services under a service agreement, under a sale of goods
contract the obligation to supply goods that are reasonably fit for purpose
c. Where ‘but for’ test is insufficient:
i. A break in the chain of causation
ii. Multiple causes
iii. Presumption of causation (Reg Glass): “Once a breach of warranty is established, AND entry was due to the breach, then the loss
suffered is prima facie damages for the breach”
