Potential to be a penalty?
A recent decision of the High Court of Australia also has implications for the enforceability of time bars. In Andrews v ANZ3 the High Court confirmed that, in Australia, a clause can be characterised as ‘penal’ even where the application of the clause is not triggered by a breach of contract.
This being the case, a time bar (which may not necessarily be linked to a ‘breach’ of contract, and could be linked to a simple failure to do something within a prescribed period) could, in principle, be characterised as a penalty.
Whether the time bar clause in question operates as a penalty (and therefore unenforceable at law) is a separate issue. The test for whether a clause is penal is due to be considered by the High Court shortly in the appeal in the case of Paciocco v ANZ.4
In that case, the Full Federal Court held that certain over-limit fees could not be categorised as penalties as they were not, “extravagant, exorbitant or unconscionable”. If an amount is not extravagant (i.e. out of all proportion to the possible loss), it is taken to be a “genuine pre-estimate of loss” and is not a penalty.
A clause will be extravagant (and penal) if not “commensurate with the interest protected by the bargain”.5