O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359
Contract; remedies for breach; pre-estimate of damages; penalties.
Facts: O'Dea leased a truck from Allstates Leasing System (ALS) for a period of 36 months. The monthly rental payable by O'Dea was $1,098. The lease provided that if O'Dea was late with any payment, ALS could immediately recover possession of the truck and claim all the monies due for the remainder of the lease. O'Dea defaulted on the rental after seven months. ALS took possession of the truck and sued O'Dea for over $31,000, being the difference between the installments already paid and the total due under the remainder of the lease.
Issue: Was the total amount claimed by ALS a penalty?
Decision: The amount claimed was a penalty rather than a genuine pre-estimate of damages and was therefore not enforceable.
Reason: The agreed terms allowed ALS to claim immediate payment of all the rental money for the entire contract and to get back the truck without giving credit for its value. This arrangement was 'manifestly excessive in comparison with the greatest loss it [ALS] could possibly suffer as a result of the breach'. The term thus amounted to a penalty.
Note: In later cases the courts have also said that a sum payable is a penalty if it is out of all proportion to the likely damage, or is extravagant, exorbitant or unconscionable.