Bartercard Ltd v Myallhurst Pty Ltd

[2000] QCA 445

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(Judgment by: Davies JA)

Bartercard Ltd
vMyallhurst Pty Ltd

Court:

Judges:
Davies JAThomas JA
Ambrose J

Subject References:
CONTRACTS
CONSTRUCTION AND INTERPRETATION OF CONTRACTS
PENALTIES AND LIQUI-DATED DAMAGES
GENERAL PRINCIPLES
respondent operated business facilitating trade bar-tering between members
appellant company's membership terminated in circumstances where it had a negative trade dollar balance
whether contractual provision requiring payment of negative trade dollar balance in actual currency amounted to a penalty
where appellant received goods and services of substantial value
whether windfall to respondent
whether 30 day period for trading out of debt inadequate
genuine pre-estimate of the loss when precise estimation impossible

Case References:
Acron Pacific Ltd v Offshore Oil NL - (1985) 157 CLR 514
AMEV-UDC Finance Ltd v Austin - (1986) 162 CLR 170
Campbell Discount Co v Bridge - [1962] AC 600
CRA Ltd & Anor v New Zealand Goldfields Investments & Anor - [1989] VR 873
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd - [1915] AC 79
Esanda Finance Corp Ltd v Plessnig - (1988) 166 CLR 131
Export Credits Guarantee Department v Universal Oil Production Co - [1983] 2 All ER 205
O'Dea v Allstates Leasing System (WA) Pty Ltd - (1983) 152 CLR 359

Hearing date: 8 August 2000
Judgment date: 27 October 2000

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Judgment by:
Davies JA

[1] I have had the advantage of reading the reasons for judgment of Thomas JA. I agree with him that the appeal must be dismissed for the reasons which he gives and for the additional reasons referred to below. There are two related matters upon which I would like to make some further comments.

[2] The first is that this case, on one view, illustrates the arbitrary nature of the doctrine of penalties as now understood. It now appears to be accepted that where a right to terminate a contract and to receive a payment arises on the happening of any of a number of events some only of which are breaches of contract ^[1] it is only where the termination is in consequence of breach that the question of penalty can arise. ^[2] It may also be accepted that, in the present case, it was terminated for breach; that is clear from the respondent's letters of 7 May and 4 September 1996. But it is at least as likely that the real reason for the respondent terminating the agreement, thereby making the total sum claimed payable, was not so much default in payment of transaction fees of a few thousand dollars but because the appellant's negative trade balance was over $130,000. ^[3] Had the respondent terminated the agreement upon five days notice because of that, or for no reason at all, as it could have under r34, no question of penalty would have arisen because having a negative trade balance was not a breach of the agreement and the termination consequently could not have been for breach. ^[4]

[3] If the application of the doctrine of penalties to the facts of the case has the consequence that the question is whether the contingent obligation under r34(a) to pay the amount of any negative trade balance was a genuine pre-estimate of damages for breach that is, in my view, to characterize that provision in a way which was not intended. When looked at in the context of the scheme as a whole its true character was, as I shall endeavour to show, consideration contingently payable by a departing member, in the event that the value of its purchases exceeded that of its sales, in order to depart from the scheme. The obligation thus recognized the need for such payments if the scheme as a whole were to continue successfully notwithstanding such departures.

[4] The second related matter upon which I wish to comment is the appellant's primary submission that r34, in the circumstances of this case, amounted to a penalty against the appellant because the respondent suffered no loss or at least so little that payment to it of the amount of the appellant's negative trade balance constituted a windfall to the respondent. That submission, in my opinion, involved a misconstruction of the agreement in the context of the barter scheme as a whole.

[5] The successful operation of the scheme, and consequently the financial success (perhaps even survival) of the respondent, depended on the continuing capacity of its members to trade with each other within and with others outside the scheme. This, in turn, required that members' trade sales within the scheme be more or less balanced by their trade purchases; for those who maintained, for any sustained period, a substantial positive trade balance would have their liquidity to trade outside the scheme substantially reduced and those who maintained, for any sustained period, a substantial negative trade balance would have their liquidity to trade inside the scheme thereby substantially reduced. There were, consequently, provisions in the agreement aimed at preventing those occurrences: for example that requiring the respondent to use its best endeavours to solicit trade for its members and that requiring members to honour and accept purchases from other members, in the latter case acknowledging that failure to honour such purchases resulted in damage accruing to the respondent.

[6] More importantly there would be a real loss to continuing members of the scheme, to the financial viability of the scheme and consequently to the respondent if a member were permitted to depart from the scheme without paying its negative trade balance. At first sight that might appear to be a loss to that member or those members who sold the departing member goods or services and thereby acquired corresponding positive trade balances. But that is to assume that relevant events would have stood still after those transactions occurred, an assumption which in most cases is unlikely. Those persons and others would have continued to trade, those persons by the time of the above departure might themselves have acquired negative trade balances and the likelihood is that it would by then have been extremely difficult to identify those persons to whom corresponding positive trade balances could be traced. If the rules had provided for some complex tracing mechanism, which would no doubt have required the keeping of much more complex accounts than were apparently kept - a simple running account for each member with the respondent - and payment to those persons so traced, no question of penalty could have arisen. If it arose at all, it did so only because payment was required to be made to the respondent.

[7] There are obvious practical reasons why the parties chose the course which they did when a member was to depart from the scheme; that is that the amount of its negative trade balance be paid to the respondent. In the first place the keeping of accounts sufficient to enable the tracing of those who, at the time of the person's departure would have positive trade balances which together accounted for the negative trade balance of the departing member would be very time consuming and expensive thereby adding a substantial cost burden to the scheme. Secondly treating that negative balance as a liability owed in part to each of a number of members, assuming them all to be continuing members, leaving it to them to recover their proportionate share would be plainly unwielding and unsatisfactory. And thirdly it may be that some of the members, to whom a corresponding positive trade balance could be traced, might also have left the scheme. So the solution chosen by the parties, of providing that it be a debt owing to the respondent and leaving it to the respondent in turn to ensure that the scheme would continue satisfactorily, was a sensible practical solution. It would have been as unacceptable to the continuing members, especially those with positive trade balances, as it would have been to the respondent, to permit a member with a negative trade balance to depart the scheme without being liable to repay that balance in cash.

[8] As already mentioned, it was plainly in the respondent's self-interest to keep the scheme going successfully. One way in which it sought to achieve this, unsuccessfully in the case of the appellant, was to extend trade credit to members, within the scheme, to permit them to commence or continue to trade. Another was provision in the rules for the establishment of a bad debt reserve fund although there was no evidence before the Court as to whether any such fund had been established or the basis upon which it would be. But it was not unreasonable to think that those entering the scheme were prepared to take the risk that, because it was in the respondent's self-interest to do so, it would ensure as best it could that there was both sufficient liquidity within the scheme and a sufficient variety of traders within it to enable it to continue successfully notwithstanding the departure, from time to time, of members; and it was in their interest to ensure that the respondent was sufficiently funded to achieve this.

[9] Consequently any amount which might become payable pursuant to r34(a) is more readily characterized as part of the consideration contingently payable by a member to ensure the continuity of the scheme than as a pre-estimate of damages for breach. But on no view does the respondent receive a windfall by payment of the amount due under that clause because, if it is not paid, the respondent's business is at risk of failing. Looked at as a pre-estimate of that contingent loss it is impossible to say that it is out of all proportion to it. ^[5]