23 November 2008


In this case the wholesaler (Interstar) terminated its agreement with the originator (Integral). The originator fee payable under the agreement constituted both the commission and management fees. The agreement did not distinguish between the two, but did provide that if the agreement was terminated the originator would still be entitled to the trail less the cost of appointing a replacement manager. However, if the termination was on the grounds that:

  • The Originator or Originator’s Representative had engaged in any proven deceptive or fraudulent activity in relation to an Application or a Settled Loan or;
  • Interstar considered, in its reasonable opinion, that the Originator or Originator’s Representative had engaged in deceptive or fraudulent activity in relation to an Application or a Settled Loan,

Then no further originator fee would be payable. This clause was relied on in terminating the agreement and so Integral lost its entitlement to all further trail.
The ability to cut off all commissions on all loans as a result of a single deceptive or fraudulent activity taken by an originators representative, is no doubt a very harsh term. There are three possible grounds to attack the clause and have it declared void. These are:

  1. That the clause is a penalty.
  2. That the clause represents an unconscionable bargain.
  3. Relief against forfeiture.

Integral attacked the clause on the sole ground that it was a penalty and was successful at first instance (before the trial judge). This was overturned on appeal. The appeal court held that a term of a contract that imposes an obligation on a party to pay money (or not to pay money as here) on the happening of a specified event, which is not a breach of contract does not constitute a penalty. Interstar’s opinion that the Originator had engaged in fraud was not a breach of contract and so by clever drafting, the clause fell outside the ambit of the law of penalties.

However, the unanimous decision strongly hinted that the outcome would have been different had the case been couched in terms of unconscionability or relief against forfeiture.
It should be noted that this decision has now been held to be incorrect by the High Court in Andrews v ANZ Bank. It is possible now for amounts to be classed as penalties even though they are not cast in the contract as monies payable on breach, because equity looks to the substance of the matter rather than form. In effect the High Court reaffirmed the law of penalties as it existed in 2008 prior to this case.

Click here to read the full judgment

It should be noted that this decision has now been held to be incorrect by the High Court in Andrews v ANZ Bank. It is possible now for amounts to be classed as penalties even though they are not cast in the contract as monies payable on breach, because equity looks to the substance of the matter rather than form. In effect the High Court reaffirmed the law of penalties as it existed in 2008 prior to this case.

Kate resize

Kate Cooper joined Bransgroves Lawyers in 2006 and has been a partner since 2009. Kate specialises in Supreme Court litigation in the fields of mortgage enforcement, professional negligence and originator/funder disputes. She has an extensive transactional practice including, origination deeds, aggregation deeds, commercial and construction lending and mortgage securitisation.

Read more about Kate Cooper