proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. Third, consistent with authorities in the more modern doctrine of unconscionability, relevant considerations include whether both parties are commercially astute, have relatively similar bargaining power and are advised. Compelling reason would be needed why ordinary principles of freedom of contract should not apply to such parties and the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach. Fourth, the fact that a clause substituting one scale of performance for another is designed to deter breach of the former does not mean it is penal. As Lord Hodge noted in Cavendish, many (legitimate) contractual provisions are coercive in nature. Fifth, the justification for the rule against penalties lies in an amalgam of Equity and the common law rule based on public policy. Its essential justification, in the face of the usual (and commercially important) principle of freedom of contract, is that a provision that has its sole or predominant purpose is to punish a contract breaker is contrary to public policy. Sixth, the purpose of the law of contract is to satisfy performance expectations. It follows that the test for a penalty cannot simply involve a narrow comparison between contractually stipulated and alternative court-imposed damages. Only a gross disproportion compels the inference that the substituted obligation is really “punitive”. The threshold, necessarily, is high. Seventh, the fundamental question to be addressed, as Kiefel J observed in Piacocco is whether the substituted obligation is “out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation” or as Keane J observed (drawing on Cavendish), whether the substituted obligation “is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract” which in combination, express the rule in the law of New South Wales which the Court was required to apply. Just what will be considered a “legitimate interest” by the courts remains somewhat unclear, but may include protecting a public/national/central government/local authority interest as was the case in the 1903 case of Clydebank Engineering (the leading English authority prior to Dunlop to which the ‘legitimate interest’ test may be traced back), protecting the interests and reputation of a person or entity such as a bank as in Torchlight, or protecting the reputation/standing of an industry or business sector as in Cavendish. While Torchlight was determined by a New Zealand court, it was decided under the law of New South Wales. There are important and significant differences between the UK and Australia in relation to penalties and while Torchlight provides helpful guidance and an indicator as to how the courts in New Zealand might apply the penalty doctrine to liquidated damages clauses, vis when a liquidated damages provision is negotiated between legally advised, commercially astute parties with similar bargaining power it will be enforceable irrespective of the relationship between the agreed additional financial burden to be borne by the contract-breaker and the compensatory interests of the innocent party, the position in New Zealand remains to be determined in light of recent oversea authority by New Zealand Courts under New Zealand law.