O'Dea v Allstates Leasing System (WA) Pty Ltd
152 CLR 35945 ALR 632
(Decision by: Wilson J)
Between: O'Dea
And: Allstates Leasing System (WA) Pty Ltd
Judges:
Gibbs CJ
Murphy J
Wilson JBrennan J
Deane J
Subject References:
Contract
Judgment date: 17 February 1983
Canberra
Decision by:
Wilson J
On 13 April 1977, Mr. and Mrs. O'Dea and Mr. and Mrs. Granich (the lessee) agreed, pursuant to a written agreement, to lease from Allstates Leasing System (WA) Pty. Ltd. (Allstates) a 1975 Mercedes Benz prime mover. The due and punctual observance and performance of the lease agreement was guaranteed by M.G. O'Dea Pty. Ltd. No separate question concerning the guarantee arises in the case. The appeal to this Court was instituted by Mr. and Mrs. O'Dea and M. G. O'Dea Pty. Ltd. (the appellants) against Allstates as the first respondent. Mr. and Mrs. Granich are together joined as the second respondent but have taken no part in any stage of the proceedings before this Court or in the courts below.
Clause 1(a) of the lease agreement provided as follows:
"The LESSOR hereby leases to the LESSEE and the LESSEE hereby takes on lease the vehicles more particularly described in the Schedule hereto upon the terms and conditions hereinafter contained for a period of 36 months at an entire rental of $39,550.32 which shall be due by the LESSEE to the LESSOR upon the signing of this Agreement PROVIDED THAT if the LESSEE shall duly observe and perform all and singular the covenants and conditions on the part of the LESSEE herein contained or implied and if the LESSEE shall duly and punctually pay on account of such entire rent the following instalments on the days following namely:The sum of $1098.62 per month commencing on the 13TH day of APRIL 1977 up to and including the 13TH day of MARCH 1980 and thereafter the sum of $ - on the day of each and every month commencing on the day of 197 - THEN the LESSOR shall not demand or seek to enforce payment of the entire rent or any balance therof outstanding otherwise than by the said instalments."
The lessee made payments in accordance with cl. 1 until 30 November 1977 but subsequently failed to pay any further instalments. The vehicle was repossessed in May 1978. In the course of repossession the vehicle was found to be subject to a repairer's lien to the amount of $7,003.32, which Allstates verified and paid.
Allstates commenced an action in the Supreme Court of Western Australia claiming first, the sum of $31,436.04 representing the balance of the rent due and payable pursuant to the lease agreement, plus interest and, secondly, the further sum of $7,003.32 being the amount of the lien. At the hearing of the action the appellants' sole defence was that the amount claimed for the balance of the rent was a penalty and so irrecoverable. They do not deny their liability with respect to the cost of removing the repairer's lien. Both the learned trial judge (Wallace J.) and the Full Court (Wickham, Brinsden and Jones JJ.) found, in favour of Allstates, that the sum claimed was not a penalty. In the Full Court, Brinsden J. with whom Jones J. agreed, found the circumstances of this case to be covered by the decision of this Court in Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 and the subsequent discussion of that case in I.A.C. (Leasing) Ltd. v. Humphrey (1972) 126 CLR 131 . Wickham J. would have found that the amount claimed was a penalty if not for the binding authority of Lamson Store.
Apart from cl. (a) regard must also be had to the following clauses:
- "6.(a)
- The LESSEE will during the term hereof duly and punctually pay the instalments of rent on the days set forth in Clause 1(a) hereof to ALLSTATES LEASING SYSTEM (WA) PTY. LTD. at 505 Newcastle Street, Perth, or such other place as directed, the first instalments to be paid upon execution of this lease and the remaining instalments to be paid upon the same day or such other day as arranged with the LESSOR of each succeeding month thereafter until the whole rental hereunder shall have been paid in full.
- ...
- 12.
- In the event that the LESSEE defaults in the punctual payment of any of the instalments of rent as herein provided or in the payment of the insurance premiums as herin provided or defaults in the performance of any of the terms and conditions of this agreement, the LESSOR may immediately retake possession of the vehicle in respect of which such default has occurred, without notice to the LESSEE, with or without legal process, and the LESSEE hereby authorises and empowers the LESSOR to enter the premises of other places where the said vehicle may be found and take and carry away the said vehicle, and, in such eventuality, the LESSEE'S right to the retention and use of the said vehicle shall terminate. All monies due for unexpired terms shall become immediately due and payable, plus reasonable costs of repossession. Provided that the LESSOR at its option may lease the leased vehicle for the account of the LESSEE for the remainder of the term and should the rental therefrom be less than that provided herein the LESSEE shall pay the deficiency. Nothing herein shall release the LESSEE from the obligation to pay the rent as herein provided for the unexpired balance of the term of this agreement plus reasonable costs of repossession.
- ...
- 31.
- On the goods being received into the LESSOR'S possession consequent upon the expiration of the period of the Lease or any extension thereof or consequent on the LESSOR'S having retaken possession pursuant to Clause 12, the LESSOR shall as soon as practicable, sell the goods by Public Auction or to or through traders dealing in goods of a similar description (hereinafter called 'the trade') at the best price the LESSOR can reasonably obtain and the LESSEE agrees to pay the LESSOR on demand additionally to any rentals and other monies payable to the LESSOR and by way of indemnity for the capital loss so suffered the amount (if any) by which the appraisal value stated in the schedule below exceeds the disposal price after allowing for any costs and expenses incidental to such disposal. In the event of any dispute the average of three valuations by 'the trade' shall be accepted by the parties as the value of the said goods."
The appellants' precise defence to the claim is that cl. 12, which in terms entitles Allstates to bring this action for the balance of the moneys due under the agreement, amounts to a penalty and is therefore unenforceable. If that question is shown to be a relevant one, it will fall to be determined by the proper construction of the contract in its entirety in the light of all the circumstances. In essence the task of a court in such a case is to discern the true intention of the parties: is the clause under challenge a genuine pre-estimate of damage, or is it a penal sanction imposed on the observance of the agreement by the lessee? The relevant principles for distinguishing between a genuine pre-estimate of damage and a penalty are well established; they are conveniently summarized in the form of propositions by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] AC 79 , at pp 86-87 . It is unnecessary to detail them here because, as will appear, that distinction is not the real problem in this case. Here Allstates raises the more fundamental issue of whether that question really arises at all.
I turn first to a brief description of the case advanced in support of the appeal. In support of their contention, the appellants rely on the effect of cll. 12 and 31 as evidenced by their operation in the present circumstances. The contract binds the lessee to the observance of a wide range of terms and conditions which vary greatly in importance. They range from the obligation to pay the instalments of rent punctually to the duty to keep and maintain the vehicle in good order and condition by washing and cleaning as the same may be required. Clause 12 provides for the consequences of any default, no distinction being drawn by reference to the degree of seriousness which the default may exhibit. Upon a default the lessor may immediately retake possession of the vehicle without notice to the lessee, with or without legal process; in that event, the lessee's right to the retention and use of the vehicle shall terminate. All moneys due for unexpired terms shall become immediately due and payable, plus reasonable costs of repossession. The clause also provides the lessor with the option of leasing the vehicle for the account of the lessee for the remainder of the term, whereupon the lessee shall pay the amount of any deficiency that may result. The clause does not advert to the possibility of a surplus by reason of the vehicle being leased at a higher rental; in that event, presumably, the lessor is intended to benefit.
Three points of significance to the construction of the agreement arise from cl. 12. The first is that the lessor, if it is going to exercise its rights under that clause, must repossess the vehicle. This is an essential condition precedent to the accelerated liability of the lessee to pay the moneys due for unexpired terms. The second is that no discount is allowed for the acceleration in payment of those moneys. The third is that the lessor is not obliged to attempt a leasing for the unexpired term of the original lease in order to mitigate the loss otherwise accruing to the lessee by reason of the default.
Clause 31, as may be seen, provides that the lessor, having retaken possession pursuant to cl. 12, shall sell the vehicle as soon as practicable at the best price it can reasonably obtain. Should that price, less any costs and expenses incidental to the sale, fail to reach the appraisal value of the vehicle stated in the schedule, the lessee will pay to the lessor on demand the amount of the deficiency "by way of indemnity for the capital loss so suffered". In the present case, the appraisal value is stated in the schedule as $13,300.00. The clause makes no provision for the consequences of a capital gain arising on the sale of the vehicle by reason of the net sale price exceeding the appraisal value; the lessee can derive no benefit from such an eventuality. It is common ground that, following its repossession of the vehicle in May 1978, Allstates sold the vehicle at a price of $20,000.00.
It requires little argument to demonstrate that this agreement could operate to the extreme disadvantage of the lessee. One can suppose circumstances in which the default occurs very early in the term of the lease. The vehicle can then be repossessed at a time when little depreciation would have occurred. The lessor would receive both the entire rental and possession of the vehicle. In direct contrast to the agreement which was under consideration in I.A.C. (Leasing) Ltd. (1972) 126 CLR 131 , the amount of the rental is not subject to any adjustment to allow for the accelerated payment, nor is the lessee entitled to any credit for the amount by which the value of the vehicle when repossessed exceeds its appraisal value. Subject, therefore, to any merit which the argument advanced on behalf of Allstates may be found to possess, these features of the agreement afford strong support to the appellants' defence to the claim. It is to Allstates' argument that I now turn.
Mr. Pullin, counsel for Allstates, submits that the question whether the sum claimed is or is not a penalty does not arise. That question would arise, in his submission, only if the claim was one for liquidated damages. Here, however, the lessor has sued to enforce the principal obligation imposed on the lessee under the lease. It relies on cl. 1 (a), which provides that the entire rental of $39,550.32 "shall be due by the LESSEE to the LESSOR upon the signing of this Agreement". The provision permitting the lessee to discharge that obligation by the payment of instalments spread over the term of the lease is an indulgence which is liable to be withdrawn upon any default. The obligation to pay the entire rental lies at the heart of the agreement between the parties. Mr. Pullin argues that, unless the Court is to assume a general responsibility to review bargains which might be thought to be oppressive, there is no basis on which it should intervene.
The principle underlying Allstates' argument that the agreement provided merely for the acceleration of payment of an existing debt in the event of the lessee's default was expounded by Lord Hatherley L.C. in Thompson v. Hudson (1869) LR 4 HL 1, at pp 15-16 in the following terms:
"... where there is a debt due, and an agreement is entered into at the time of that debt having become due and not being paid, in regard to farther indulgence to be conceded to the debtor, or farther time to be accorded to him for the payment of the debt, or in regard to his paying it immediately, if that be a portion of the stipulations of the agreement, or at some future time which may be named, and the creditor is willing to allow him certain advantages and deductions from that debt, as well as to extend the time for its payment, if adequate and proper security in the mind of the creditor be afforded him as his part of the bargain in respect of which he is to make these concessions, then it is perfectly competent to the creditor to say: 'If the payment be not made modo et forma as I have stipulated, then forthwith the right to the original debt reverts, and it is to be open to me to proceed with reference to the original debt, and to exercise all those powers which I possess for compelling payment of the original debt; in other words, I am entitled to be replaced in the position in which I was when this agreement, which has been now broken, was entered into.'"
A clear application of this principle is to be found in the decision of the Court of Appeal in The Protector Loan Co. v. Grice (1880) 5 QBD 592 and of the House of Lords in Wallingford v. Mutual Society (1880) 5 App Cas 685 .
The same principle also appears to have played a large part in the decision in this Court of Griffith C.J., with whose judgment Barton J. agreed, in Lamson Store (1906) 4 CLR 672 . As I have noted, it was the authority of this decision which constrained the Full Court to find in favour of Allstates. It was a case in which the lessor furnished the lessee's store with a patented cash cable tramway system for the conveyance of money and dockets, under a hiring agreement. The lessor was to instal the system and to bear the cost of repairs and risk of damage or loss by fire; the lessee was to lease the system for ten years at an annual rental payable in advance and to maintain the system in operation continuously on the named premises. Upon any breach of any of the conditions of the agreement by the lessee, or in the event of the bankruptcy of the lessee, the agreement provided that the lessor might forthwith repossess the system and the whole of the rent for the remainder of the term should immediately become payable. Two months after the installation of the system, the lessee was made subject to a winding up order. The lessor sought to prove in the winding-up for the whole ten years' rent remaining unpaid. At first instance, the claim was rejected, without prejudice to the lessor's right to prove for rent actually due and for damages. The lessor appealed successfully to the High Court, although O'Connor J. dissented. The learned Chief Justice emphasized the substantial interest of the lessor, as the holder of patent rights in the system, in its full and fair exhibition in the particular premises for the term of the lease. He construed the agreement as one which provided for the payment by the lessee of a total rent, amounting to ten years' rent, in any event. He considered the decision in The Protector Loan Co. to be indistinguishable; the fact that the Court of Appeal was concerned with an already existing debt as contrasted, in Lamson Store, with a debt which was created only by agreement of the parties and was payable in futuro was thought to be immaterial.
The decision in Lamson Store was the subject of a passing reference, apparently with approval, by Walsh J., with whom the other members of the Court agreed, in I.A.C. (Leasing) Ltd. (1972) 126 CLR, at p 141 . I need not examine the latter case in any detail because the agreement the subject of that case provided for the rebate of any accelerated payments and for the lessee to receive the benefit of any sum by which the value of the equipment on repossession exceeded the appraisal value. It was in the light of those considerations that Walsh J. concluded that the provisions of cl. 4 of the agreement should not be held to constitute a penalty, for the reason that "the agreement provides its own limitation upon the ability of the lessor to gain a large profit by reason of the equipment being repossessed after a relatively short period" (1906) 4 CLR 672 .
He said also that a similar conclusion would be required if the agreement "ought to be construed in the way in which the majority of this Court construed the agreement under consideration in Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 , that is, as an agreement to pay a total rent, being the sum of the monthly instalments, subject only to such adjustments as were specified in the agreement".
O'Connor J., in Lamson Store, found the principle expressed in The Protector Loan Co. (1880) 5 QBD 592 to be inapplicable because on the view he took of the agreement there was no existing debt for the whole amount of ten years' rent due prior to the breach. This conclusion made it necessary for him to consider whether the provision requiring the immediate payment of the whole of the rent for the remainder of the term notwithstanding the repossession of the system could be regarded as a "genuine pre-estimate of the creditor's probable or possible interest in the due performance of the principal obligation", applying the test enunciated by Lord Dunedin in Public Works Commissioner v. Hills [1906] AC 368 , at pp 375-376 . Recognizing that the agreement entitled the lessor to demand the whole rent for ten years and at the same time to deprive the lessee of the consideration for which it was payable, he answered the question in the negative.
The appellants seek to distinguish the decision in Lamson Store on the basis that the right of the lessor to repossess the system was not material to the decision. There was no evidence to show whether that right had been exercised and the point is not mentioned in the judgment of the Chief Justice. All that appears is that the lessor sought to prove in the winding up the debt which in the view of the majority was established by the agreement. In order to evaluate the submission, it is necessary to examine the basis of the claim in the present case.
It seems to me that Lamson Store is an authority applicable to this case only if Allstates' claim proceeds on the basis that cl. 1(a) established a present liability in the lessee for the entire rent subject to an indulgence in the form of a proviso permitting payment by instalments and that default in the payment of those instalments entitled the lessor to withdraw that indulgence and sue immediately for the entire rental. Such a cause of action might well be established by reference solely to cl. 1(a) of the agreement. The question of penalty or liquidated damages would not then arise. But it is quite clear that Allstates' claim did not proceed on this basis. If it had done so, there would have been no question of repossession of the vehicle. The obligation to pay an entire rent supplies the consideration for a lease of the vehicle for a period of three years. The only clause which entitles Allstates to repossess the vehicle at an earlier time is cl. 12. Given a repossession pursuant to cl. 12, the respective rights of the parties are wholly governed by that clause and cl. 31. The lease is terminated, the lessee no longer having any right to the retention and use of the vehicle. The clause does not purport to operate to withdraw the indulgence of deferred payment of rent which is the subject of the proviso to cl. 1(a). Significantly, it makes no reference to rent. On the contrary, it says, "All moneys due for unexpired terms shall become immediately due and payable." In my opinion, it is this provision which supplies the basis to Allstates' claim.
It follows from this conclusion that the decision in Lamson Store does not govern the present case. It is therefore unnecessary to consider the alternative submission advanced by Mr. Malcolm on behalf of the appellants that its correctness should be re-examined.
It remains, then, to consider whether the acceleration provision in cl. 12 can be considered to be a "genuine pre-estimate of the creditor's (Allstates') probable or possible interest in the due performance of the principal obligation": Public Works Commissioner v. Hills (1906) AC, at pp 375-376 or whether it is a penalty inserted "merely to secure the enjoyment of a collateral object": Sloman v. Walter (1783) 1 Bro CC 418, at p 419 (28 ER 1213, at p 1214) , per Lord Thurlow L.C. Bearing in mind that the possible defaults that may activate the powers of the lessor under cl. 12 encompass both trivial and serious breaches without distinction in the remedy and that the clause may operate at any time during the currency of the lease with no provision for rebate of future instalments or for crediting the lessee with any capital gain represented by the amount by which the value of the vehicle on repossession exceeds its appraisal value, it is in my opinion quite impossible to conclude that the clause reflects on the part of the parties a genuine pre-estimate of damage. It is a penalty against which the lessee is entitled to relief. Such a conclusion finds support in the reasoning of O'Connor J. in Lamson Store (1906) 4 CLR 672 , and by reference to the contrasting provisions which led Walsh J. to a different conclusion in I.A.C. (Leasing) Ltd. (1972) 126 CLR 131 . Indeed, I understood Mr. Pullin to acknowledge, very frankly and fairly, that such a conclusion was inevitable if his consideration argument were to fail.
Of course, this conclusion does not mean that the lessee cannot be liable to Allstates, in addition to the amount of $7,003.32 which the latter paid to release the repairer's lien on the vehicle, for the arrears of rent payable in respect of the period prior to repossession and perhaps for damages. At no stage in the proceedings has Allstates made a specific claim for arrears of rent. A claim for damages was made but was abandoned at the hearing for reasons which it is unnecessary to mention. Mr. Pullin has indicated his readiness should the claim for accelerated rental fail, to institute fresh proceedings and it is acknowledged by Mr. Malcolm that there is no estoppel operative in that regard. However, in my opinion the preferable course is for the Court to remit the matter to the Supreme Court, leaving Allstates to take such action as it wishes by way of amendment of the claim or otherwise. There should of course be judgment in any event for Allstates in the sum of $7,003.32.
For these reasons, I would allow the appeal in part, set aside the decision of the Full Court and remit the matter to the Supreme Court. The appellants should have their costs in the two appeals.