W.T. Malouf Pty. Limited & Ors. v. Brinds Limited & Anor.

Judges: Hope JA
Glass JA

Samuels JA

Court:
Supreme Court of New South Wales - Court of Appeal

Judgment date: Judgment handed down 8 October 1980.

---

Samuels J.A.

I have had the benefit of reading the judgment of Glass J.A. in which the facts and the relevant provisions of the Income Tax Assessment Act are set out. I would add to that recital only a condensed statement of the critical events which preceded the execution of the deed upon which the plaintiffs sue. Micrae Mining Investments Pty. Limited (``the company'') was incorporated on 29 June 1970 and on the same day 140,000 shares were allotted in various proportions to the plaintiffs. On 30 July 1970 a declaration under sec. 77D(6) was made to the Commissioner by the company which on 5 August 1970 invested the sum of $4,000 in Bamp Mines Pty. Limited. (In respect of this payment no declaration under sec. 77D(3) had, as at 22 October 1971 been lodged.)

On 23 November 1970 the Commissioner wrote to the company the letter which Glass J.A. has set out, offering advice as to how the company might effectively proceed in order to enable the plaintiffs to obtain deductions from income tax in respect of the moneys which they had subscribed. On 18 December 1970 the company invested $20,000 in Mogul Mining No Liability and on 22 September 1971 the Commissioner informed the company that he was satisfied in terms of sec. 77D(7)(b) in respect of the moneys subscribed for shares in Mogul. The Commissioner's office memorandum dated 22 October 1971 indicates that the Commissioner was concerned to ascertain whether the balance remaining in the company of the $140,000 originally subscribed had been, or was in the process of being, invested. It appears that on 1

---

ATC 4493

November 1971 Mr. Chippendale, representing the plaintiffs, indicated that he was still endeavouring to ascertain the position; and an entry on 8 November 1971 records that there having been no further word from Mr. Chippendale it was proposed to make no further enquiries but to issue a notice under sec. 77D(13).

The evidence in the case thus shows that very shortly before the deed was executed on 19 November 1971 the ``inherent circumstances'' (
Dunlop Pneumatic Tyre Company Ltd. v. New Garage & Motor Company Limited (1915) A.C. 79 at p. 87 per Lord Dunedin ) were that the plaintiffs ``were worried about the money'' (this comes from the evidence of Mr. M.W. Malouf) and that the Commissioner had determined to issue or, at the least, was firmly contemplating the issue of the notice under sec. 77D(13) which was in fact issued on 25 November 1971. I add that, of course, as the Commissioner pointed out in his letter of 25 November 1971, 16 months had elapsed since the moneys in question were originally subscribed, and it was this period of inaction (of which the plaintiffs were obviously well aware) which had, presumably, led the Commissioner to issue his notice.

The defendant, having failed to perform its covenant to expend the sum of $120,000, portion of the moneys subscribed, upon the purposes stipulated, the plaintiffs seek to recover the sum provided in cl. 9 of the deed. That is 50 per cent of the amount required to be expended or, in other words, 50 per cent of the amount which, if expended with the approval of the Commissioner, would have become available to the plaintiffs as a tax deduction. If 50 per cent is taken as an average tax rate among the plaintiffs, then the claim is in effect for the whole of the advantage which would have accrued to the plaintiffs had the transaction run to its most favourable possible conclusion.

As Glass J.A. has pointed out, both sides agreed that the principles of law to be applied in the construction of the deed in order to determine whether the provisions of the clause provided for a genuine pre-estimate of damage or amounted to a penalty were to be found in the speech of Lord Dunedin in Dunlop at pp. 86-7. Before examining the tests which his Lordship advanced at p. 87, I point out that in
Campbell Discount Co. Limited v. Bridge (1962) A.C. 600 , Lord Radcliffe at pp. 621-2 said this:

``I believe that 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'.... If 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 identify a penalty, to describe it as in the nature of a threat `to be enforced in terrorem'.... I do not find that that description adds anything of substance to the idea conveyed by the word `penalty' itself, and it obscures the fact that penalties may quite readily be undertaken by parties who are not in the least terrorised by the prospect of having to pay them and yet are, as I understand it, entitled to claim the protection of the court when they are called upon to make good their promises.''

In Dunlop at p. 87, Lord Dunedin formulated the test which both parties seek to apply in this way:

``It will be held to be 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.''

It is, I think, essential to bear in mind that what is being considered is whether the stipulated sum is a genuine pre-estimate of damage, that is to say, an estimate of the compensation which the promisee might be able to recover upon breach. It seems to me that this is plainly indicated by the language chosen by Lord Dunedin, that is to say, ``the greatest loss that could conceivably be proved to have followed from the breach''. Moreover, some years earlier, Lord Dunedin himself in
Commissioner of Public Works v. Hills (1906) A.C. 368 at p. 375 had stated ``... that the criterion of whether a sum - be it called penalty or damages - is truly liquidated damages, and as such not to be interfered with by the Court, or is truly a penalty which covers the damage if proved, but does not assess it, is to be found in whether the sum stipulated for can or cannot be regarded as a genuine pre-estimate...'' (I

---

ATC 4494

have added the emphasis). It is significant that here his Lordship characterizes a penalty as a provision which does not ``assess'' the damage; and this is, to my mind, language appropriate to consideration of the amount of compensation which might be recovered upon breach.

The same reasoning runs through the speech of Lord Radcliffe in Campbell Discount. At p. 622, his Lordship said:

``Is it plausible to say that we have in this `agreed compensation for depreciation' a genuine pre-estimate of damages? The first difficulty is to know for what it is to be taken as damages, for until one can identify the obligation and the possible consequences of its breach, one does not have anything against which to measure the stipulated sum which is claimed as liquidated damages.''

Lord Dunedin's test was advanced as one means of ascertaining whether or not the sum in question was a ``genuine convenanted pre-estimate of damage'', and it must be applied in that context. Hence the inquiry does not directly concern the maximum benefit to be acquired by performance, but the amount of compensation recoverable upon breach. No doubt in the ordinary case of breach of contract the damages recoverable for breach will be equivalent to the advantage which performance would have yielded. But that measure is not strictly applicable here. In the present case there were two conditions which had to be satisfied before the plaintiffs could obtain their maximum benefit. One was the defendant's performance of its covenant, and the other was a written declaration of satisfaction by the Commissioner. The second event depended upon the exercise of a discretion whose operation could not be predicted with certainty. It follows, to my mind, that any estimate (or assessment) of the damage flowing from the defendant's failure to lay out the moneys, made at a time when the Commissioner had not declared his hand, would necessarily have to take account of the possibility that the Commissioner might not have furnished the approval upon which the success (from the plaintiffs' point of view) of the whole transaction depended. Even ``the greatest loss that could conceivably be proved etc.'' regarded, as it must be, as an estimate of damage, would be subject to a discount for that possibility. I do not see therefore how any genuine pre-estimate of damage could be assessed as equivalent to the whole of the tax deduction, because to make such an assessment would be to ignore the possibility of an adverse decision by the Commissioner, and that contingency cannot be laid aside.

It follows that any genuine pre-estimate of damage would demand assessment on the footing that what the plaintiffs had lost by the defendant's breach was not the whole of the tax deduction, but the value of their chance of obtaining it. And the value of the chance of winning a prize must be less than the value of the prize itself. As I understood the arguments both sides accepted this view of the matter. But the flaw in the plaintiffs' argument seems to me to lie in equating ``the greatest loss that could conceivably be proved'' with the whole of the tax deduction which they might have got had all contingencies been resolved in their favour. That, however, is not an acceptable approach:
Chaplin v. Hicks (1911) 2 K.B. 786 . The adverse contingency cannot be ignored, and Lord Dunedin's use of the word ``conceivably'' cannot exorcize it. In this area even the best chance imaginable is less than certainty.

So far I have not considered the impact upon the pre-estimate of damage of the ``inherent circumstances'' at the time the deed was executed, of which account must be taken. When one does so it becomes readily apparent that in weighing up ``the possible consequences of breach'' (to use Lord Radcliffe's words) the damages recoverable would require substantial discount to accommodate the threat which the Commissioner's attitude plainly offered to the success of the scheme. At all events, no measure of compensation could conceivably have failed to make significant allowance for this contingency. That being so, an estimate which ignored it (as the terms of cl. 9 do) would not be a genuine pre-estimate of damage.

I add three further comments. It may be useful to rely upon the
Clydebank Engineering case (1905) A.C. 6 where the nature of the damage likely to be sustained on breach is such that proof of it is ``extremely complex, difficult and expensive'': see per Lord Halsbury at p. 11.

---

ATC 4495

But looking at that passage in its context it cannot be said that considerations of that kind have any application to the present case.

Secondly, the words ``extravagant and unconscionable'' in Lord Dunedin's test appear as elements in the formulation of one test designed to establish that a stipulated sum is a penalty. But it does not follow that that conclusion cannot be drawn unless the elements of extravagance and unconscionability are shown. It may be established otherwise, without recourse to those characteristics, that the sum is not a genuine pre-estimate, as I think it has in the present case. And the comparison is to be made not between the sum stipulated and the maximum benefit which might be derived if all contingencies were resolved in the promisee's favour, but between that sum and a genuine pre-estimate of damage.

Finally, a genuine pre-estimate means a pre-estimate which is objectively of that character; that is to say, a figure which may properly be so called in the light of the contract and the ``inherent circumstances''. It will not be enough merely that the parties honestly believed it to be so.

I would dismiss the appeal with costs.

Order:

Appeal dismissed with costs.