AMEV-UDC Finance Ltd v Austin
162 CLR 17068 ALR 185; 1986 - 1104A - HCA
(Decision by: Dawson J)
Between: AMEV-UDC Finance Ltd
And: Austin
Judges:
Gibbs CJ
Mason J
Wilson J
Deane J
Dawson J
Judgment date: 4 November 1986
Canberra
Decision by:
Dawson J
The appellant is a finance company which hired two sets of printing equipment to Lithotone Printing Pty. Ltd. under two separate agreements called leasing agreements. So far as is material, the agreements were in the same terms. Performance of the obligations of the hirer Lithotone (called the lessee) under each agreement was guaranteed by the respondents.
The lessee defaulted in the periodic payment of rent under each agreement and the appellant owner (called the lessor) terminated the lessee's right to possession of the equipment and subsequently retook possession of it, as it was entitled to do under the agreements. The lessor sued, pursuant to the terms of the agreements, for arrears of rent to the date of repossession, the unpaid balance of the total rental for the term of each lease and the specified residual value of the equipment. As the equipment under one of the agreements had been sold, credit was given for the proceeds. Interest was claimed upon the total amount in each instance. In the alternative, the lessor claimed (or was treated by the trial judge as having claimed) damages for the breach of each of the agreements should the amounts claimed pursuant to the terms of the agreements be held to be penalties and for that reason unenforceable.
The amount claimed pursuant to the terms of each agreement was found by the trial judge to be a penalty. This finding was not challenged in the New South Wales Court of Appeal or before us. It is, therefore, the measure of the loss which the lessor is entitled to recover by way of damages which is the question in this appeal.
The loss suffered by the lessor upon termination of the agreements has been agreed, in round figures, to be $206,000 . Disregarding the termination of the agreements, the lessor's loss was much less being in each case only the one instalment of rent which was in arrears at the date of termination. The agreed sum of $206,000 includes arrears of rent, future rental payments discounted to arrive at their value at the date of termination, interest and, in the one case, allowance for the amount by which the proceeds of sale exceeded the residual value. It appears that in the other case the lessor was unable to sell the equipment. Allowance was thus made for the capital component in the rental payments, reflecting the fact that each agreement was in reality a financing arrangement whereby the lessor advanced money for the provision of equipment to the lessee, rather than a simple hiring.
The trial judge took the view that the lessor ought to recover its actual damage upon the termination of each agreement (the loss of the bargain) and ought not to be restricted to loss upon breach disregarding termination (the arrears of rental). He held that this might be done, in reliance upon equitable principles, by granting relief against the penalty provisions upon terms that the lessee compensate the lessor for the loss of his bargain.
An appeal against the decision of the trial judge was upheld by the Court of Appeal (Mahoney and Priestley JJ.A., Hutley J.A. dissenting). The majority denied the availability of discretionary relief and held that the only amount to which the lessor was entitled comprised the unpaid instalments of rent at the date of termination of the agreements together with interest at the rates fixed by the agreements.
Notwithstanding that it is no longer contested that the moneys which each agreement purported to make payable by the lessor upon its termination amounted to a penalty, it is instructive to consider briefly why the trial judge made the finding which he did.
He reached his conclusion by the application of the decision of this Court in O'Dea v. Allstates Leasing System (WA) Pty. Ltd. (1983) 152 CLR 359 . That case concerned the lease of a truck upon terms not dissimilar from those contained in the leasing agreements in the present case. The lease was terminated and the truck was repossessed by the lessor upon default in the payment of rent by the lessee. The action was brought to recover, amongst other amounts, rent for the balance of the entire term of the agreement. In answer to the claim that the liability for the lessee's accelerated rental payments was a penalty, the lessor pointed to a provision in the agreement (and there was an equivalent provision in the agreement in this case) making the entire rental for the whole of the term payable on the signing of the agreement. What was evidently intended by this provision was the creation of a present debt which could be paid, as a matter of indulgence, by instalments. Reliance was placed upon the decisions in The Protector Loan Co. v. Grice (1880) 5 QBD 592 ; Wallingford v. Mutual Society (1880) 5 App.Cas. 685; Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 . However these authorities were held to be inapplicable because, upon its true construction, the leasing agreement did not create a debitum in praesenti solvendum in futuro. That clearly was so in O'Dea (and is so in the present case) where the provision relied on by the lessor entitled him to terminate the lease and take possession of the goods upon the failure of the lessee to pay an instalment of rent, with the expressed consequence that a sum equal to the whole of the balance of the rent for the entire term became payable. Because such a term operates upon the premature termination of the lease, it can hardly be construed as the withdrawal of an indulgence to continue paying the rent by instalments. There no longer being any lease, it is, strictly speaking, inaccurate even to refer to the amount payable as rental, even as accelerated rental payments, although it is convenient to continue to do so.
This Court in O'Dea (and the trial judge in this case) held that the acceleration of rental payments did in fact and in law amount to a penalty. Indeed, in O'Dea it was not argued to the contrary once the relevant provision was found to be capable of being so construed. The provision was a penalty because no credit was given for the value of the vehicle which was repossessed and because the right to terminate the lease and claim the balance of the entire rent was exercisable in a number of events, some of which would have given rise to trifling damage only, as well as default in the payment of rent. Similar provision was made in the present case. Nevertheless it seems clear that in O'Dea the Court would have regarded the accelerated rental payments as a penalty even if they had been payable only upon default in the payment of instalments of rent. Gibbs C.J. put it this way at p 369:
"The first respondent became entitled under the contract to receive the accelerated payments of the rental without any rebate and to receive back the vehicle sooner than would otherwise have been the case without giving credit for its value and in these circumstances the amount receivable by the first respondent was manifestly excessive in comparison with the greatest loss that it could possibly suffer as a result of the default in payment of the instalments."
No great attention was paid in O'Dea to one aspect of the matter to which the argument in the present proceedings does give relevance. Under the agreement, the lessee's liability to pay the balance of the entire rent arose, not upon breach of the agreement, but upon the termination of the lease. That is the position in this case. Disregarding authority, the view is at least tenable that the liability to pay the balance of the entire rental in those circumstances does not arise upon breach, but upon the happening of an event, namely, termination of the lease, albeit an event which the lessor is contractually entitled to bring about upon breach. If that were the correct view, it might be said that no question of penalty could arise because the liability to make the accelerated payments did not arise upon breach. That conclusion has been rejected in the cases to which I shall refer in a moment, but the reasoning upon which the rejection has been based is not without its inconsistencies. For in determining whether the liability amounts to a penalty or not - whether it amounts to a genuine pre-estimate of damage - comparison is made not with the loss which flows to a lessor from a default in the payment of rental instalments, which is confined to arrears of rent, but with the loss which flows to the lessor upon termination, which is the loss of his bargain. This loss may well extend to the loss of the balance of the entire rental, provided there is an appropriate rebate for early recovery and allowance is made for the proceeds of the goods repossessed to the extent that they exceed the residual value specified. Thus termination is treated as the equivalent of breach for one purpose and not another.
The view that a sum payable, not upon breach, but upon the exercise of a contractual right, cannot amount to a penalty was put by Jenkins L.J. in a dissenting judgment in Cooden Engineering Co. Ltd. v. Stanford [1953] 1 QB 86 in relation to a hire-purchase agreement which contained a clause providing for payment of the full amount of the instalments of hire upon the termination by the owner of the agreement for default in payment of the instalments. Jenkins L.J., at p 102, relied upon a line of reasoning in the cases which commenced with a judgment of Salter J. in Elsey & Co. Ltd. v. Hyde, only reported, apparently, in Jones and Proudfoot's Notes on Hire Purchase Law, 2nd ed. (1926) at p 107. Salter J. adverted to the question of the damage suffered by reason of a hirer falling into arrears in his payments of hire under a hire-purchase agreement containing a minimum hire clause and said:
"The fact that the hirer is in arrear with his payments will not entitle the owner to any damages for depreciation of these things. The reason that they have suffered is that they have secondhand goods put on their hands before they have received very much money in respect of them. That is not the result of the hirer's breach of contract, in being late in his payments, it is the result of their own election to determine the hiring, and it appears to me, even in this case, there is no question of penalty at all, and there is no question whether the sum paid shall be regarded as liquidated damages or a penalty."
This line of reasoning was, however, rejected by the majority, Somervell and Hodson L.JJ., in Cooden Engineering Co. Ltd. v. Stanford, Hodson L.J. remarking at p 116:
"My difficulty is to see the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine."
The decision in Cooden Engineering Co. Ltd. v. Stanford was approved in Campbell Discount Co. Ltd. v. Bridge [1962] AC 600 , and applied in Financings Ltd. v. Baldock [1963] 2 QB 104 , and was clearly accepted by the majority in O'Dea. See also Brady v. St. Margaret's Trust Ltd. [1963] 2 QB 494 ; United Dominions Trust (Commercial) Ltd. v. Ennis [1968] 1 QB 54 ; Lessors (Aust.) Pty. Ltd. v. Westley (1964-5) NSWR 2091. However, treatment of the termination of an agreement upon breach in the same way as the breach itself for the purpose of determining whether a stipulated payment is capable of amounting to a penalty has no extended application. It would seem clear that a provision calling for the payment of money by one party on the occurrence of a specified event, rather than upon breach by that party, cannot be a penalty: Campbell Discount Co. Ltd. v. Bridge; Export Credits v. Universal Oil Co. [1983] 1 WLR 399 ; [1983] 2 All ER 205 .
Thus the trial judge in this case was constrained by authority to find that the amounts claimed by the lessor pursuant to the leasing agreements were to be treated as amounts payable upon breach rather than amounts due upon an event other than breach, namely, the termination of the agreements by the lessor pursuant to its contractual right to do so. And since upon any view the lessor's potential loss - whether flowing from the breach itself or from the subsequent termination of the agreements - was obviously exceeded by the amounts stipulated, the trial judge was also bound to reach the conclusion that the amounts were penal in character. The relevant provisions could not be a genuine pre-estimate of damage giving the lessor, as they did, the entire rent for the whole term of each leasing agreement together with the agreed residual value.
It is, of course, clearly established that a penalty clause does not preclude the recovery of actual loss arising from breach of contract and that the quantum of damages is to be assessed upon ordinary principles. Recovery was allowed by the law in either of two ways. There was a right to sue for the penalty (i.e. in debt) or to sue for damages for breach of contract disregarding the penalty (i.e. in assumpsit ). In an action for the penalty, the recovery of proved damages was limited to a maximum amount equal to the penal sum fixed, however many breaches might be assigned. See Wall v. Rederiaktiebolaget Luggude [1915] 3 KB 66 , at pp 72-73. The limit is now provided in New South Wales by ss 33 and 34 of the Imperial Acts Application Act 1969 (NSW), which replaced the English legislation 8 & 9 Wm.III c.11 s 8 (dealing with penalties for the non-performance of covenants or agreements) and 4 & 5 Anne c.3 ss 12, 13 (dealing with money bonds). The effect of that legislation was to regularize the position which had been reached at common law by the end of the seventeenth century in deference to the relief available in equity, but it seems to have played little direct part in the development of the relief afforded by the courts even if it may be said to be reflected in the decisions. See Betts v. Burch (1859) 4 H & N 506, at p 511; 157 ER 938, at p 940; Wall v. Rederiaktiebolaget Luggude at pp 72-73. The distinction between the right to sue upon the penalty and recover proved damages and the right to sue for damages disregarding the penalty has ceased to be of any real practical importance save, perhaps, in relation to the debate whether, even in an action for damages in disregard of a penalty clause, the penal sum provides a limit to recovery. See Cellulose Acetate Silk Co. v. Widnes Foundry (1925) Ltd. [1933] AC 20 , at p 26; Robophone Facilities Ltd. v. Blank [1966] 1 WLR 1428 , at p 1446; [1966] 3 All ER 128 , at p 142; Elsley v. J.G. Collins Ins. Agencies Ltd. (1978) 83 DLR (3d) 1, at pp 14-15; W & J Investments Ltd. v. Bunting (1984) 1 NSWLR 331. It is unnecessary to pursue that question here.
In assessing damages the approach favoured by the cases is, as I have said, to restrict recovery to the loss actually flowing from the relevant breach, disregarding any loss occasioned by the termination of the agreement, unless, of course, the breach amounts to a repudiation of the agreement (including for this purpose fundamen tal breach) in which case the injured party is entitled to treat the agreement as at an end and to recover damages for the loss of his bargain. There being no repudiation in this case, the result of that approach is to restrict the lessor to the recovery of the one instalment of rent in arrears in respect of each lease at the time the agreements were terminated, together with any interest payable upon those amounts. However, the actual loss suffered by the lessor was upon termination of the agreements and amounted to the loss of the bargain in each case, including the loss of the capital component in the unpaid instalments of rent.
It is to my mind hardly satisfactory to say, as it is said, that that loss flowed, not from the breaches, but from the lessor's action in terminating the agreements, for, whilst that is so, the lessor was doing something which was contemplated by the parties in the agreements which entitled him to take that course. There is no reason in logic or in principle why, if the agreement can provide for the lessor to take that step, it cannot, if the parties so intend, provide for the step to be taken at no loss to the lessor. It is logical enough to say that if the agreement provides for the lessor to recover more than the loss of his bargain, the provision is to be treated as a penalty because, whilst not strictly speaking a provision for stipulated damages upon breach, it is the equivalent and occurs as a consequence of breach. But it does not follow that if the provision is struck down as a penalty, the lessor should be restricted to damages as upon breach disregarding the termination of the agreement, which is not what he was attempting to provide for in the first place. Moreover, if, as is logical but is not done, the provision for loss upon termination of the agreement were to be compared in amount with the loss flowing from a breach not amounting to a repudiation, it would almost certainly be markedly more and for that reason a penalty even though a genuine pre-estimate of the lessor's damage upon the exercise of his contractual right to terminate the agreement. It is not done because the result is obviously unsatisfactory, but I shall return to that point shortly.
In Campbell Discount Co. Ltd. v. Bridge, upon the relevant clause providing for minimum hire upon termination of a hire-purchase agreement being held to be a penalty, the case was remitted to the county court to assess the damage which the hire-purchase company had sustained. There was nothing in that case which would indicate that the owner was not entitled to be compensated for the loss of his bargain and that was the basis upon which damages were assessed . Indeed, Lord Devlin expressly rejected any restrictive approach saying, at p 633, that:
"If a hire-purchase agreement is terminated before its natural end and the car is returned to or retaken by the owner, it will usually have depreciated in value and be worth less than the cash price paid for it. This will cause loss to the owner if the depreciation exceeds in value that part of any instalments paid as is to be counted as return of capital. The possibility of such an excess is a contingency against which the owner is entitled to protect himself. If the sum payable on termination under clause 9(b) 'by way of agreed compensation for depreciation of the vehicle' could be justified as a genuine pre-estimate of that excess, it would, I think, be recoverable under the agreement, whether the termination was the result of a breach or of the exercise of the option or of some other event. Viewed in relation to a breach, it would represent a pre-estimate of one head of the damage flowing from the breach; and an agreement genuinely liquidating one head of damage is, I think, just as good as one which liquidates the whole."
Nevertheless, in Financings Ltd. v. Baldock the case of Campbell Discount Co. Ltd. v. Bridge was treated, as were the previous cases of Yeoman Credit Ltd. v. Waragowski (1961) 1 WLR 1124; [1961] 3 All ER 145 and Overstone Ltd. v. Shipway [1962] 1 WLR 117 ; [1962] 1 All ER 52 , as a case in which the breach amounted to a repudiation giving a right at common law to treat the contract as rescinded and to sue for the loss arising upon rescission.
Where an agreement of the kind in the present case contains a provision, as it usually does, enabling the lessee to terminate the lease himself by returning the goods with a consequent liability to compensate the lessor, often in the form of accelerated payments of rent, no question of penalty arises because the termination does not arise upon breach but upon the act of the lessee. In that circumstance (notwithstanding the forceful dissenting views of Lord Denning in Campbell Discount Co. Ltd. v. Bridge), the lessor may require full compensation as provided even if, were it payable upon breach, it would constitute a penalty: see Associated Distributors, Ltd. v. Hall [1938] 2 KB 83 . It is, to say the least, anomalous that a lessee should be encouraged to fall into arrears and provoke repossession by the lessor, rather than to act within the terms of the agreement by bringing it to an end himself. As Lord Denning observed in Campbell Discount Co. Ltd. v. Bridge at p 629, it is absurdly paradoxical to grant relief to a man who breaks his contract and to penalise another who keeps his. And from the lessor's point of view, he may be constrained to encourage circumstances amounting to a repudiation rather than to bring an unsatisfactory situation to an end in accordance with his contractual right to do so.
But the more fundamental reason why the decided cases are unsatisfactory is that to which I have already adverted. It lies in the inconsistency in the reasoning which supports them. That inconsistency is demonstrated in the acceptance by the cases that it is permissible for a lessor to provide for genuine compensation for the loss of his bargain upon repossession, notwithstanding that if he fails in his attempt and the provision is held to be a penalty his recovery of his actual loss will be restricted to the loss flowing from the breach disregarding the valid termination of the agreement by the repossession. Thus it was held in I.AC (Leasing) Ltd. v. Humphrey (1972) 126 CLR 131 , that there was no penalty where there was provision for the payment, upon repossession, of the rental instalments not then accrued due, rebated to reflect their then value, ascertained by applying an interest rate of ten per cent per annum to each such instalment over the period by which the date for payment thereof is by virtue of this clause brought forward together with provision for the set-off against the amount due by way of rent of any excess of the proceeds of the leased equipment over the "appraisal value" specified in the agreement.
Yet if a provision stipulating a payment by way of accelerated rent or the like upon repossession is to be regarded as payable upon breach rather than upon termination of the agreement for the purpose of characterizing it as a penalty and if upon the provision being characterized as a penalty the only recovery permitted is for the breach and not for the loss of the bargain (assuming no repudiation), there can be no justification for having regard to the loss arising from termination in determining whether the provision is a genuine pre-estimate of damage or a penalty. Yet that is what is done. And it is done because otherwise the lessor would effectively be prevented from providing for the recovery of his loss upon repossession even in accordance with a provision which constituted a genuine attempt to calculate that loss. That would be an unwarrantable interference with the freedom of the parties to a contract to determine for themselves the course which their agreement should take upon the failure of one party to perform his obligations under it. Cf. Robophone Facilities Ltd. v. Blank at p 1446; p 142 of All ER, per Diplock L.J. The point is given emphasis when it is recognized that agreements of this kind take the form of a "lease" because, for reasons arising from the law relating to money-lending, hire-purchase and taxation, it is mutually advantageous to the parties to adopt that form. In reality the lessor lends money which is expended upon the capital cost of the goods and it is contemplated that the lessor will recover that capital cost in the rental payments, subject to any residual value (often minimal) which the goods may subsequently have.
The incongruity of restricting a lessor, relegated to pursuing his right to damages, to his loss upon breach in disregard of any loss flowing from the termination of the agreement is something which I am unable to accept unless I am compelled to do so.
I do not think I am compelled to do so. Even upon the basis that the relevant provisions in this case are penalties and that damages must be assessed as upon breach, it does not appear to me that damages must be assessed without regard to the fact of the lessor's exercise of his right to terminate the agreements and that they must be confined to the amount by which the payment of rent was in arrears at the date of termination. The lessor would, of course, have been able to recover damages for the loss of his bargain if there had been a repudiation of the agreements by the lessee but the Court of Appeal rejected a submission that repudiation had occurred and there was no challenge to that finding before us. However, that does not, to my mind, mean that the termination of the agreements by the lessor upon the breaches which occurred has no further relevance in the assessment of damages.
In Westralian Farmers Ltd. v. Commonwealth Agricultural Service Engineers Ltd. (1936) 54 CLR 361 , Dixon and Evatt JJ. said at p 379:
"When the parties themselves have provided for the determination of the contract on a given contingency, the consequences flow altogether from their contractual stipulation and are governed by their intention, either actual or imputed."
I can see no reason why, if, as in the present agreements, it was evidently intended by the parties to provide for compensation to the lessor for damage flowing to him as a result of termination consequent upon breach, the law should not give effect to that intention. If it cannot do so by reference to the stipulated amounts because they are penalties, there is no reason why it should not do so by way of unliquidated damages. The result is similar to that which ensues upon the acceptance of the repudiation of a contract but it occurs because of the agreement between the parties rather than the application of general principles. And just as the parties to a contract may agree that an otherwise non-essential term is to be treated as essential, thus giving an extended application to the doctrine of repudiation, there does not appear to me to be any reason why they should not be able to prescribe, subject to the law relating to penalties, the measure of compensation payable upon termination for breach of an inessential term.
In Larratt v. Bankers & Traders' Insurance Co. (1941) 41 SR(NSW) 215, Jordan C.J. adopted this approach when he said at pp 225-226:
"Where it (i.e. the contract) is avoided by virtue of an express right of avoidance, the consequences which flow from an avoidance depend on the intention of the parties, actual or imputed, and, in the absence of some express or implied indication of intention to the contrary, are governed by the ordinary law applicable to the avoidance of contracts for breaches of essential promises: Westralian Farmers Case."
That statement may go too far in the light of Shevill v. Builders Licensing Board (1982) 149 CLR 620 where it was affirmed that termination of a lease under a provision for re-entry upon breach, not amounting to a repudiation, does not entitle the lessor to sue for the loss of rental for the remainder of the term. It was said that the damage, if any, flowed from the action of the lessor in terminating the lease and not from the breach on the part of the lessee. But in Shevill there was no provision in the lease for the recovery of any loss flowing to the lessor upon re-entry; and the case does not deal with the situation where such a provision is made and the recovery of loss upon termination is within the contemplation of the parties. If a lease may provide for termination upon a breach amounting to something less than repudiation, there is no reason in principle why it should not also provide that it be at no loss to the lessor. This, I think, was recognized by Gibbs C.J. in Shevill when he said at p 629:
"It would have been easy, although inequitable, to provide that in any of the circumstances mentioned in cl.9(a) the lessor would be entitled to damages for loss of the benefits which performance of the covenants of the lease would have conferred on him in the future."
Of course, what may have been inequitable in the circumstances of that case would not necessarily be inequitable in other circumstances and it should be borne in mind that the law relating to penalties would relieve in a situation where a sum was stipulated by way of sanction rather than compensation. Also, equity is able to intervene where an unfair advantage is taken by one party of another so that the bargain is unconscionable. Wilson J. also referred to the same point made by Gibbs C.J. in Shevill when he said at p 637:
"It is one thing to be able to rid oneself of an unsatisfactory tenant; but it is quite another, requiring a clear expression of intention, to be able to hold the evicted tenant liable for whatever damages might be suffered as a result of the premature termination of the tenancy."
In The Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. (1985) 59 ALJR 373; 57 ALR 609 , it was held that the termination of a contract in the exercise of a contractual power to do so for breach may render the party in default liable in damages for loss of the bargain in the same way as rescission upon repudiation or fundamental breach. Of course, in that case it was recognized, upon the authority of Shevill, that it is necessary "... that the exercise of the power is consequent upon a breach or default by the defendant which would attract an award for such damages": see Mason J. at p 379; p 619 of ALR. That qualification, however, in no way precludes and rather suggests that damages for loss of the bargain upon termination for something less than repudiation or fundamental breach should be recoverable if such was the intention of the parties .
To the same effect and open to the same comment was the observation of Deane J. in Tabali that "... where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach exist concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate will not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract expressly or impliedly so provides ...": see p 390; p 637 of ALR. It is consistent with that observation to say that where a contractual power to terminate an agreement is exercised upon breach, damages for loss of the bargain should be recoverable, not only where the breach amounts to repudiation or is fundamental, but also where it is intended by the parties that such loss should be recoverable. And if it is the intention of the parties, it will not be correct to say that the loss was due solely to the act of the party terminating the agreement. It will be attributable also to the breach because it was contemplated by the parties as something for which damages should be recoverable: see Sotiros Shipping Inc. and Aeco Maritime SA v. Sameiet Solholt (1983) 1 Lloyd's Rep 605, at p 607.
In this case there was a clear expression of intention that the lessee should bear the damage suffered by the lessor as a result of the premature termination of the lease upon breach. It was an intention primarily expressed by way of a provision for stipulated damages which proved to be unenforceable because it was a penalty. But there is, to my mind, no reason why the intention should not be given effect in accordance with ordinary principles and by reference to the same events, namely, breach and termination, by way of proved damages. To do so is to engage in a reasoning process which is entirely consistent with the method employed to determine that the offending provision was a penalty, which was to compare it with a genuine pre-estimate of damage flowing, not from breach, but from termination upon breach. And it is to recognize the right of the lessor to provide contractually for the recovery of his loss upon termination so long as he does not do so by way of penalty.
In Anglo Auto Finance Co. Ltd. v. James [1963] 1 WLR 1042 ; [1963] 3 All ER 566 , a minimum hire clause was held to be a penalty and Willmer L.J. remarked at p 1047; p 569 of All E.R.:
"I would only add this. Clause 5(b) is the only clause which deals with the question of compensation in the event of the termination of the hiring. No clause is contained in the contract purporting to deal with depreciation or deterioration of the vehicle. Had such a clause been inserted (and assuming, of course, that it did not amount to a penalty clause), it may be that the plaintiff company would have been entitled to recover something considerably more. But here the company has sought to protect its rights only by the insertion of this clause, which I hold to be a penalty clause."
For my part I am unable to see why the intention of the parties concerning payment of compensation upon termination should be disregarded merely because the provision which they make fails as a penalty. Just as actual loss is recoverable upon breach, even where there is a stipulation which is unenforceable as a penalty, there is no reason to my mind why actual loss should not be recoverable upon termination in the same circumstances. As Willmer L.J. recognized, the parties to an agreement may provide additionally for such matters as depreciation or determination of the goods. It is, therefore, a matter of the intention of the parties, and it can hardly be said that the failure to make a genuine pre-estimate of the loss accruing upon termination is inconsistent with an intention to recover actual loss upon termination any more than the failure to make a genuine pre-estimate of damages upon breach is inconsistent with an intention to recover actual damage upon breach. Whilst these matters were not, perhaps, specifically adverted to during argument, the issue was the measure of damages which, in my view, sufficiently raised them.
It is unnecessary to examine whether, in reliance upon equitable doctrines, relief against a penalty may be granted upon terms. That appears to have been, as I have said, the view of the learned trial judge in holding that the lessor was entitled to damages for the loss of his bargain in each case. It is a view which was rejected by the Court of Appeal in this case and in the later case of Citicorp Australia Ltd. v. Hendry (1985) 4 NSWLR 1. Having regard to the conclusion which I have reached, I have no need to examine that view and to consider whether, because of the development of the common law and following the fusion of law and equity, relief against penalties is any longer discretionary.
I would allow the appellant its appeal and damages in the sum of $206,000.