O'Dea v Allstates Leasing System (WA) Pty Ltd
152 CLR 35945 ALR 632
(Judgment by: Deane J)
Between: O'Dea
And: Allstates Leasing System (WA) Pty Ltd
Judges:
Gibbs CJ
Murphy J
Wilson J
Brennan J
Deane J
Subject References:
Contract
Judgment date: 17 February 1983
Canberra
Judgment by:
Deane J
The issues between the parties to this appeal and the context in which those issues arise appear from the judgment of Wilson J. Except to the extent necessary for discussion, I shall refrain from restating them.
The agreement between Allstates Leasing System (WA) Pty. Ltd. (Allstates) and Mr and Mrs Granich and Mr and Mrs O'Dea, trading as Granich Geraldton, (the lessees) provided (cl. 1(a)) for the "lease" by Allstates to the lessees of a prime mover for a period of thirty-six months "at an entire rental of $39,550.32" which was stated to be due upon the signing of the agreement subject to a proviso that, if the lessees duly observed and performed "all and singular the covenants and conditions" and duly and punctually paid thirty-six monthly instalments of $1098.62 commencing on 13 April 1977, Allstates would not "demand or seek to enforce payment of the entire rent or any balance thereof outstanding otherwise than by the said instalments". As a matter of substance, the rent which the lessees promised to pay under the agreement was the consideration for the possession and use of the prime mover during the agreed term of the hiring. The equation between the thirty-six months of that agreed term and the thirty-six equal monthly instalments of rent indicated a relationship between monthly instalment and monthly period which would, in my view, have sufficed to relieve the lessees of any obligation to pay further rent if Allstates, which remained the owner of the prime mover, had wrongfully deprived them of possession and use of it. If those primary terms of the agreement had stood alone with no provision as to "default" or if Allstates had not resorted to the default provisions contained in a subsequent clause of the agreement, a failure by the lessees to pay an instalment of rent would have resulted in the "entire rental" becoming payable. In that event, the lessees would, if they had honoured the obligaton to pay the "entire rental", have remained entitled to the possession and use of the prime mover and, to the extent that it is appropriate to use the word "rent" to describe a hiring charge for an item of personality, the payment could properly have been seen as conforming to that description.
Clause 12 of the agreement operated only in the event of default by the lessees followed by an election by Allstates to take advantage of the terms of the clause by retaking possession of the prime mover. In such circumstances, which are the circumstances which have occurred, the lessees lost all right to the possession and use of the prime mover and all "moneys due for unexpired terms" became "immediately due and payable, plus reasonable costs of repossession". In addition, Allstates became entitled (cl. 31) to sell the prime mover at the best price it could reasonably obtain and to recover from the lessees any amount by which the agreed "appraisal" value of $13,300 exceeded the sale price. If any regard at all is had to substance, it would be a misuse of language to describe the obligation under cl. 12 immediately to pay the "moneys due for unexpired terms" as an obligation to pay rent. The obligation to pay those moneys without any entitlement to the possession or use of the machine was an obligation immediately to pay an amount of money upon default which was calculated and described by reference to, but was distinct and quite different in substance from, the amounts which would have been payable as rent if no default had occurred.
The last payment of an instalment of rent made by the lessees in the present case was on 30 November 1977 when an amount of $5,000 was paid. After that payment, all instalments up to and including the October instalment had been paid and $423.94 had been paid towards the November instalment which was overdue. By the end of 1977, default had also been made in the payment of the whole of the December instalment. Allstates refrained, at that time, from electing to exercise the right of repossession which it enjoyed under cl. 12 of the agreement. While the provisions of cl. 12 remained dormant, the result of the lessees' default in payment of instalments was that the balance of the total rent was payable under cl. 1(a).
The evidence indicates that Allstates activated the provisions of cl. 12 in "the middle of January" 1978 when it wrote to the lessees demanding possession of the prime mover. The effect of that letter was to bring to an end any right of the lessees to possession and use of the machine. The lessees were liable to pay to Allstates all "moneys due for unexpired terms . . . plus reasonable costs of repossession". The "moneys due for unexpired terms" which became payable under cl. 12 included, at most, the equivalent of the instalments which would, if there had been no breach, have been payable in respect of the monthly period commencing 13 January 1978 and of subsequent monthly periods. There is room for arguing that those instalments, which had already become due and payable under cl. 1(a) upon the lessees' breach, were thereafter payable under both cl. 1(a) and cl. 12. As I have indicated however, I consider an amount payable under cl. 12 upon termination of the hiring to be different in its character from rent payable under cl. 1(a) as consideration for the hiring. To the extent to which the provisions of cl. 1(a) and 12 might otherwise have overlapped, the provisions of cl. 12 were paramount. Upon Allstates exercising its rights under cl. 12, the amount equivalent to the instalments attributable to the unexpired period of the original term ceased to be due and payable under cl. 1(a) as rent and became due and payable under cl. 12 as a consequence of the lessees' breach.
It follows from the above that the balance of the November instalment and the December instalment remained due and payable under cl. 1(a) and did not become due and payable under cl. 12. Those instalments of rent were attributable to periods during which the lessees had retained, as against Allstates, the possession and use of the prime mover. No question of relief against a penalty arises in relation to them (see I.A.C. (Leasing) Ltd. v. Humphrey (1972) 126 CLR 131 , at p 140 ). An amount equal to the balance of the agreed "entire rental" became payable under cl. 12 upon the breach by the lessees and the election by Allstates to invoke the provisions of that clause and to retake possession of the prime mover. The ultimate issue between Allstates and the appellants is whether the lessees were relieved of the liability to pay that amount by reason that it was an unenforceable penalty. In the Supreme Court of Western Australia, the learned trial judge and the Full Court held that they were not. The members of the Full Court stated that they were of the view that they were "compelled" so to hold by the decision of this Court (Griffith C.J. and Barton J., O'Connor J. dissenting) in Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 which, as they pointed out, had been referred to with apparent approval by Walsh J. (with whom Barwick C.J. and McTiernan J. agreed) in I.A.C. (Leasing) Ltd. v. Humphrey (1972) 126 CLR, at p 141 ). It will subsequently be necessary to refer, in some detail, to the Lamson Store Case. Before so doing, it is convenient to approach the question from the viewpoint of what I see as being the relevant general principles.
The ordinary rule is that an obligation which is imposed upon one party to a contract to pay a sum of money to another on breach of contract will only be enforceable if the sum to be paid is properly to be characterized as damages as distinct from a penalty. Counsel for Allstates submitted that the question of damages or penalty did not arise in the present case because the sum to be paid was the balance of the agreed figure for thirty-six months' hire and represented the agreed consideration for the hiring and not an amount payable as the consequence of breach. It seems to me that what has been said above answers this argument. Once Allstates elected to terminate the hiring and retake possession of the machine pursuant to the provisions of cl. 12, its rights against the lessees in respect of moneys attributable to the unexpired term of the hiring which it had terminated were the rights conferred by cl. 12. The amount payable under that clause was not the balance of the agreed payment for thirty-six months' hiring. It was not a payment for hire at all: it became payable as a consequence of the lessees' breach when Allstates elected under cl. 12 to terminate the hiring by depriving the lessees of possession and use of the machine which was the subject of the hiring.
A similar argument to that advanced by counsel for Allstates in the present matter was advanced and rejected in Cooden Engineering Co. Ltd. v. Stanford [1953] 1 QB 86 in respect of an obligation to pay, upon repossession, the balance of instalments under a motor vehicle hire purchase agreement pursuant to a clause whose effect was not dissimilar to that of cl. 12. Somervell L.J. disposed of the argument in the following terms with which I agree (1953) 1 QB, at p 97 :
"It was further argued that the question of penalty or a reasonable pre-estimate of damage did not arise because the sum to be paid was the balance of the agreed figure for 30 months' hire, notwithstanding that the right to determine could on the clause be exercised if there was one day's delay in the first instalment. This cannot be right. One may take as an example a sale of 1,200 tons of coal for 6,000 pounds, the coal to be delivered by monthly instalments of 100 tons, 500 pounds to be paid within seven days of each delivery. It is further provided that if payment is not made within that period the seller shall be free of all obligations as to further deliveries. If the contract went on to provide that the buyer should be liable to pay the cost of the outstanding instalments for subsequent deliveries which he would ex hypothesi not receive, I cannot see how this way of arriving at the sum to be paid could affect the question whether it was a reasonable pre-estimate of damage or a penalty."
(See, also, as to the need to identify the substance of the transaction, Campbell Discount Co. Ltd. v. Bridge [1962] AC 600 , at p 624 ; and, generally, as to the underlying principles, per Dixon J., McDonald v. Dennys Lascelles Ltd. (1933) 48 CLR 457 , at pp 474-479 .)
Subject to what is said hereunder, the principles applicable in deciding whether a sum stipulated to be payable by one party to a contract to another party upon breach is recoverable as liquidated damages or irrecoverable as representing a penalty are, in my view, set out in convenient form in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] AC 79 , at pp 86-88 . They need not be repeated in detail. As Lord Radcliffe commented in Campbell Discount Co. Ltd. v. Bridge (1962) AC, at pp 621-622 , "the line of demarcation is drawn in its simplest form . . . if one says that a sum cannot be legally exacted as liquidated damages unless it is found to amount to 'a genuine pre-estimate of loss'" . . . "(i)f it does not amount to such a pre-estimate, then it is to be regarded as a penalty, and I do not myself think that it helps to indentify a penalty, to describe it as in the nature of a threat 'to be enforced in terrorem'" (see, also, Public Works Commissioner v. Hills [1906] AC 368 , at pp 375-376 ). The question is one "not of words or of forms of speech, but of substance and of things" (per Lord Davey, Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 , at p 15 ). "The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages" by reference to "the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach" (per Lord Dunedin, Dunlop Pneumatic Tyre Case (1915) AC, at pp 86-87 ). There is a presumption (but nothing more) that it is a penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage" (per Lord Dunedin (1915) AC, at p 87 , quoting Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. (1886) 11 App Cas 332, at p 342 ). It will be a penalty "if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach" (per Lord Dunedin (1915) AC, at p 87 ). In that regard, a pre-estimate of damages will not, for the purposes of determining whether a stipulated sum is a penalty, be regarded as "genuine" if it be unreasonable (see the Dunlop Pneumatic Tyre Case (1915) AC, at pp 91, 97, 99, 102 ; the Cooden Engineering Case (1953) 1 QB, at pp 97, 103, 104, 108, 113-114 ).
In what is written above, I have omitted the statement to be found in many cases, including Lord Dunedin's judgment in the Dunlop Pneumatic Tyre Case (1915) AC, at p 86 , to the effect that "the question whether a sum stipulated is penalty or liquidated damages is a question of construction". Properly understood, that statement is unobjectionable: whether or not a provision of a contract imposes a penalty must be determined by reference to the true operation of that provision. That question must however be determined as a question of substance which cannot be foreclosed by statements of the parties in their agreement, no matter how genuine they may be, as to their intention in stipulating the sum. The parties to an agreement may have subjectively intended to make a pre-estimate of damages in the event of breach. If, however, that pre-estimate is either extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach or, judged as at the time of making the contract, is unreasonable in the burden which it imposes in the circumstances which have arisen, it is a penalty regardless of the intention of the parties in making it.
The application of the above principles to the present case leads to the conclusion that the provisions of cl. 12 impose a penalty. There is nothing at all in the contract to suggest that those provisions represent a genuine or a reasonable pre-estimate of damages which Allstates would sustain in the event of breach by the lessees. They are applicable on the occurrence of any default in the punctual payment of an instalment of rent or of an insurance premium or in the performance of any one of a large number of terms and conditions ranging from the trivial to the serious. They could result in an unreasonable windfall to Allstates and an unconscionable burden upon the lessees in the event of breach of the most trivial condition. Thus, if breach occurred immediately after the commencement of the agreement, Allstates would be entitled to retake possession of the prime mover and to recover, pursuant to cl. 12, the amount necessary to bring its total receipts from the lessees to $39,550.32 for a hiring period that might be measured in hours or days. It follows that, if the matter be approached in accordance with what I consider to be established principle, it is apparent that the provisions of cl. 12 requiring that the lessees pay to Allstates all "moneys due for unexpired terms" are unenforceable for the reason that they impose a penalty. As I have said, I consider that, upon the proper construction of the agreement as a whole, the obligation under cl. 1(a) to pay rent attributable to future periods did not survive the election by Allstates to invoke the provisions of cl. 12 and terminate the hiring. If I be mistaken in that regard however and the provisions of cl. 1(a), upon their proper construction, required the payment of "rent" attributable to future periods notwithstanding that Allstates had terminated the hiring pursuant to cl. 12, I am of the view that cl. 1(a), in those circumstances, required payment of a sum on breach which as a matter of substance was neither rent nor liquidated damages but a penalty.
I turn to a consideration of the Lamson Store Case (1906) 4 CLR 672 . The agreement in that case was for the lease or hire, for the term of ten years, of a patented cash cable tramway system, having fourteen "stations", for the conveyance of money and dockets in a store. The lessor was the Lamson Company. The lessee was the Wilkins Company. Clause 2 of the agreement provided that the Wilkins Company would pay to the Lamson Company an annual rental determined on the basis of 6 pounds 10s. sterling "per annum per station". Clause 6 provided that "the said annual rental" was to be paid in advance. Clause 8 provided that the system and every part of it remained the property of the Lamson Company and that "in case of a breach of any of the conditions or agreements to be observed or performed on the part of the lessees, or in case the said system shall be taken from the lessees or attached by process of law by proceedings in bankruptcy or insolvency or otherwise, the whole of the rent for the remainder of the term shall immediately become due, and the lessors may forthwith without notice or demand enter upon the said premises where the said system may be, and take possession of the said system and remove the same forcibly, if necessary, . . . " . During the first year of the term of the agreement, the Wilkins Company was ordered to be wound up. It was common ground that that brought into operation the provisions of c. 8. Griffith C.J. (with whom Barton J. agreed) held that the liability under cl. 8 to pay forthwith the whole of the rent was not a penalty against which equity would grant relief and that the Lamson Company was entitled to prove in the winding up of the Wilkins Company for the full amount of rent which it would have been entitled to receive if the hiring agreement had run its full term. O'Connor J., who dissented, held that the obligation imposed by cl. 8 was a penalty in respect of which the Wilkins Company was entitled to relief.
The starting point in the chain of reasoning that led Griffith C.J. to conclude that no penalty was involved was his view that, on its true construction, the agreement created an absolute obligation to pay ten years' rent in any event with a provision that it might be paid in annual instalments. The Chief Justice stated that he assumed, without deciding, that "the amount of future rent payable under cl. 8 of the agreement is to be regarded in the same way as if it had been called 'liquidated damages'" and that the question whether that amount was truly liquidated damages, and as such not to be interfered with by the Court, or was truly a penalty which covered the damage if proved but did not assess it, was to be determined by reference to whether the sum stipulated for could or could not properly be regarded as a genuine pre-estimate of the creditor's probable or possible interest in the due performance of the principal obligation (see per Lord Dunedin, Public Works Commissioner v. Hills (1906) AC, at pp 375-376 ). In concluding that the amount was not a penalty, the Chief Justice was plainly influenced by his view that, since the appliance the subject of the hiring agreement was "newly invented", "it might reasonably have been desired by the lessors, and have been in the contemplation of both parties when fixing the amount of the rent and the conditions of the lease, that a fair opportunity should be given for the public use of the invention in its entirety, for a considerable time, on suitable premises, and by persons carrying on a business in which its advantages would commend it to the public, and so be likely to induce future purchases from the patentees (1906) 4 CLR, at pp 681-682 . If his Honour's view in that regard did, in truth, form a basis of the conclusion that the amount of the required payment represented a genuine pre-estimate of damages, it would offer grounds for distinguishing the Lamson Store Case from the present. Upon close analysis of his judgment, however, it appears to me that the possible importance, to the Lamson Company, of the exhibition of the invention was not critical to the Chief Justice's decision. In particular, his Honour's statement that he was unable to distinguish the case before him from that of The Protector Loan Co. v. Grice (1880) 5 QBD 592 leads me to think that the learned trial judge and the members of the Full Court of the Supreme Court in the present case were correct in concluding that the reasoning in the Lamson Store Case supported the conclusion that no penalty was involved in the circumstances of the present case.
In The Protector Loan Co. v. Grice, the plaintiffs had lent a sum of 50 pounds to the debtor. The debtor covenanted to pay the principal together with interest, negotiation expenses and a premium for the insurance of the debtor's life by quarterly instalments over a term of five years. The debtor's bond, of which the defendant was a guarantor, provided that all instalments became payable on the failure to pay any single instalment. Default having been made in payment of an instalment, the plaintiffs brought an action claiming the entire balance of unpaid instalments. It was held by the Court of Appeal, reversing Bowen J. at first instance, that no penalty was involved. The principle underlying the decision would seem to have been accurately stated by Bramwell L.J. (1880) 5 QBD, at p 595 who confessed that he had "some difficulty in seeing that Bowen J. was wrong", when he said (1880) 5 QBD, at p 596 :
"Apart from the authorities which bind us, I do not quite assent to the principle upon which this doctrine is founded. A definition of the principle may possibly be that where a sum is payable as a punishment for a default, or by way of security, and the realization of that sum is not within the original intention of the parties, the sum is a penalty; but when it forms part of the original intention, that upon default a sum otherwise payable at a future period, shall become forthwith payable, it is no longer a penalty."
It is unnecessary, for the purposes of the present appeal, to consider whether the mere acceleration of a payment upon breach can constitute a penalty if the nature of the payment remains unchanged (cf. 22 Am. Jur. 2d, Damages, s. 228). As a matter of principle, there is plainly much to be said for the view that it can. In both the present case and the Lamson Store Case the nature of the relevant payment upon breach with consequential loss of any right to possession or use was as different in character to the payment which would have been made if the hirer had retained the right to possession and use of the equipment or machine as was the payment described in the above-quoted comments of Somervell L.J. calculated by reference to the price of coal which was not delivered to a payment for coal actually supplied. To the extent to which either the Protector Loan Co. Case or the Lamson Store Case is authority for any general principle precluding a finding that a payment under cl. 12 in the present case was a penalty, they accord neither with the principle that the question whether a sum is a penalty is a question of substance and not of mere form nor with the approach adopted in subsequent cases (see, e.g., Campbell Discount Co. Ltd. v. Bridge [1962] AC 600 ; Anglo Auto Finance Co. Ltd. v. James [1963] 1 WLR 1042 ; [1963] 3 All ER 566 ; United Dominions Trust (Commercial) Ltd. v. Ennis [1968] 1 QB 54 ; Charterhouse Leasing Corp. Ltd. v. Sanmac Holdings Ltd. (1966) 58 DLR (2d) 656 ) and should not be followed. I am conscious of the fact that my conclusion in that regard does not lie well with the comments of Walsh J. in I.A.C. (Leasing) Ltd. v. Humphrey (1972) 126 CLR, at p 141 . Those comments were not, however, essential to the actual decision in that case and there is nothing in his Honour's judgment to indicate that any submission had been made challenging the correctness of anything that was said in the judgment of Griffith C.J. in the Lamson Store Case. Apart from them, the decision in the Lamson Store Case, which was a decision of a court of three justices including one dissentient, has not been subsequently relied upon in judgments in this Court. While it has been applied in at least two cases in State Supreme Courts other than the present (Western Electric Coy. (Australia) Ltd. v. Ward (1933) 51 WN (NSW) 19; Re Mutual (Q'ld) Knitting Mills Pty. Ltd. (In liq.) (1959) Qd R 357 ), most of the references to it in cases in such courts have been for the purpose of distinguishing it (see, e.g., Lessors (Aust.) Pty. Ltd. v. Westley (1964-65) NSWR 2091 ; Wanner v. Caruana (1974) 2 NSWLR 301 ).
In the result, I would uphold the appeal and set aside the judgment in the amount of $45,294.95 in Allstates' favour against the appellants. It is common ground that Allstates is entitled to retain judgment in the amount of $7,003.32 against the appellants on account of the amount it had to pay a third party in order to effect a discharge of a lien held by that third party over the prime mover. Prima facie, Allstates is also entitled to claim the sum of $1,773.30 representing the balance of the November 1977 instalment and the whole of the December 1977 instalment, any further instalments due before the retaking of possession and any additional amount of damage which it has actually sustained (see Public Works Commissioner v. Hills (1906) AC, at pp 376-377 ). While the approach was taken by the parties that the question of actual damage should be left to be determined in separate proceedings, I consider that, in all the circumstances, the preferable course is that suggested by Wilson J and I agree with the orders which he proposes .