Bartercard Ltd v Myallhurst Pty Ltd

[2000] QCA 445

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(Judgment by: Thomas JA)

Bartercard Ltd
vMyallhurst Pty Ltd

Court:

Judges: Davies JA

Thomas JAAmbrose 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:
Thomas JA

[10] This is an appeal by a company ("Myallhurst") and its guarantor against a money judgment in favour of Bartercard Ltd ("Bartercard"). The main point at issue is whether the judgment against Myallhurst, and in turn against the guarantor, was based upon a contractual term that amounted to a penalty.

[11] Bartercard operates a business which facilitates trade bartering between its members. Myallhurst was a member which between 1993 and 1995 used Bartercard's facilities to sell its products or services to other members, and to buy products or services from members. It bought items of considerably greater value than it supplied to other members.

[12] The nature of Bartercard's activity has been considered in rulings of the Commission of Taxation and a Practice Direction from the Office of State Revenue Queensland. The following short extract from the latter conveniently describes the general nature of the activity:

"Barter trade, also known as reciprocal trading or countertrade, is the exchange of goods or services for other goods or services without the need for cash. Bartering between businesses is emerging as a popular method of conducting trade with businesses accepting payment for goods or services in 'trade dollars' (eg Bartercard dollars) or 'credit units'. Businesses wanting to take part in reciprocal trading must subscribe as a member to a trade exchange which acts as a clearing house for trade transactions and promotes the members' goods and services."

[13] The system is not confined to one on one bartering. It permits credit obtained by one member in relation to another to be used in payment of goods or services provided by other members. Bartercard in effect provides a credit entitlement to permit trading to commence and this was described in evidence as a type of overdraft facility. Myallhurst which ran the furniture business of "Dumaze Lounges" applied for and was granted increases in this facility from time to time. In September 1994 it desired to increase its current credit limit to $150,000, and this was done upon the execution by the second appellant of a guarantee in respect of debts and liabilities of Myallhurst to Bartercard.

[14] The use of transaction vouchers other than between members is discouraged by cl15 of the rules. The evidence suggests however that some money value attaches to credit entitlements, and that a credit entitlement of $130,000 might be sold for up to $78,000 in real currency.

[15] Bartercard's claim consisted of three components -

There was and is no issue in relation to Bartercard's entitlement to payment of the first two items. The sole point of defence is the allegation that cl34(a) of the rules (which are incorporated into the contract) is void as a penalty.

[16] As earlier indicated, Myallhurst used the bartering facilities in such a way that it obtained considerably more benefits from other members than it supplied to other members. By November 1995 its "purchases" had exceeded its "sales" by $130,907.80.

[17] After that time Myallhurst engaged in no further transactions either of sale or purchase with Bartercard members under the Bartercard system. It also failed to pay the Bartercard fees that had fallen due. A demand for the payment of such fees in May 1996 produced no result. Finally on 4 September 1996 Bartercard issued a termination notice in reliance upon cl34 of the rules. That clause states:

" 34. Termination

Either party may terminate the Agreement upon five (5) days written notice to the other party. Immediately upon termination, with or without cause, all cash and trade dollar service fees outstanding become due and payable and:

(a)

If the Member has a negative trade balance (purchase exceed sales) Member must balance the account with trade dollars within thirty (30) days of the termination date and, after the (30) day period immediately pay BCL any remaining negative balance in cash; or

(b)

If Member has a positive trade account balance (sales exceed purchases) Member may spend the balance after paying BCL, in advance, the cash service fees on the positive balance. After receipt of cash, BCL Gift Certificates will be issued to the terminated account with a ninety (90) day expiration date. The Gift Certificates may be redeemed with BCL Members in the normal manner of Transaction Vouchers, excepting that each and every transaction must have an authorisation number upon redemption issued from BCL Credit Clearance.

BCL reserves the right in its sole discretion to terminate this Agreement without notice for a material singular or cumulative breach of the Agreement.

BCL Plastic Bartercards and unused trade Transaction Vouchers, and any Script and Gift Certificates must be returned immediately upon termination, and no initiation or service or transaction fees will be refunded. Upon termination of the association with BCL, Member shall promptly return to BCL all originals and copies of documents, and property of BCL relating in any way to BCL's, business and/or BCL Barter Programme."

[18] Myallhurst did not take advantage of the opportunity to eliminate or even reduce the debit balance by earning credits through the supply of goods to other members during the ensuing 30 days. In the event the account remained as it was prior to the notice of termination and Bartercard sued in reliance upon cl34.

[19] It was submitted on behalf of Myallhurst that a member with a positive balance in its account cannot, upon terminating its membership, convert this to cash. The member is instead provided with "Gift Certificates" which must be used within a period of 90 days. A contrast is then drawn with the position of a member who leaves the organisation with a negative trade balance. If the member fails to trade out within 30 days so as to bring the balance back to zero, the negative trade balance in Barter dollars must be paid in cash. However this is so whether the termination is effected by the member or by Bartercard. A member knows upon joining that before leaving it will have an opportunity of redeeming its debits by barter, but that if it fails to do so the debit balance will be payable in ordinary currency. In the context of a scheme based on the notion of barter, instability would arise unless an ultimate balance between supply and purchase could be maintained. There is nothing immediately surprising in the system which has been described, or in the particular provisions to which reference has been made.

[20] The submissions on behalf of Myallhurst however are that the contract was terminated for Myallhurst's breach in failing to pay fees, and that the only loss suffered by Bartercard in respect of such breach was that loss of fees. Bartercard's entitlement to what is in effect the redemption by Myallhurst of its debits in cash was said to be a complete windfall. The submission is that such a provision is "out of all proportion, extravagant, exorbitant or unconscionable" ^[6] , and that it is not a genuine pre-estimate of damage ^[7] .

[21] On the other hand, so far as the notion of windfall is concerned, it must be noted that it is far clearer that Myallhurst would be the beneficiary of a complete windfall if it were able to depart from its relationship with Bartercard without having to pay for the $131,087.81 value of goods obtained from other members. It was not indebted to those other members because it had paid for such goods by means of the overdraft facility granted by Bartercard. If it does not have to redeem the credits by real payment, it will have obtained substantial benefits without having had to pay for them.

[22] The learned trial judge, Forde DCJ, held that it could not be said, in circumstances where Myallhurst had received these substantial benefits that the clause operated in a way that was oppressive to it. That is obviously correct.

[23] For as long as Myallhurst remained a member and for a further 30 days after notice of termination it could discharge the balance of its account by bartering within the system. By 1995 it had received goods and services of considerable value and it was obliged to pay for them. It cannot complain that by reason of its failure to pay its cash fees its membership was terminated. It was only the manner in which Myallhurst was entitled to discharge its obligation that was affected by Bartercard's eventual termination of the relationship. Even then, Myallhurst could have traded out the debit in the agreed period after termination. Counsel for Myallhurst however submitted that the 30 day period in which to do so was too short. When asked if 12 months would have been enough he responded that a question of degree was involved, but that 30 days was too short a time. There is in my view nothing illusory or unrealistic about an opportunity to redeem debits by sales over a 30 day period, and there is no sound basis for a court to condemn cl34(a) as penal on the basis that the opportunity for Myallhurst to redeem was inadequate.

[24] If the positions of the respective parties are examined in isolation, it is possible to see an element of windfall for Bartercard in the result. But that circumstance is not conclusive of the question whether the clause which enables that result to be obtained is a penalty. A windfall is the possible product and often the deliberate product of a contract, and such a consequence is not of itself determinative of the question whether a term is a penalty. The many cases ^[8] on this subject suggest that the court is concerned with proper construction "to be decided upon the terms and inherent circumstances of each particular contract, judged of (sic) as at the time of the making of the contract" ^[9] , although Deane J has expressed a reservation about the use of subjective intention ^[10] . Commonly and naturally the question of unreasonableness in the burden that the term imposes is heavily influenced by analysis of the situation or viewpoint of the payer. To the extent to which this viewpoint is examined in the present case, Myallhurst's burden is no more than paying for the value of the goods which it obtained from its membership in the system.

[25] It is true that the contract does not place Bartercard under a converse liability to account in cash to a member who has a positive trade balance. However the business survival of Bartercard depends upon the scheme continuing to function. The scheme would inevitably fold up if members could join, obtain benefits, and then submit to termination of membership without having paid or being obliged to pay for the benefits. Bartercard of course did not supply the goods, but it has a genuine interest in maintaining the scheme and its own entity. It is a difficult matter to put a price on the maintenance of such an interest, but I am unable to say that cl34(a) demands an unreasonable price. In the final analysis, in order to maintain equilibrium Bartercard must be in a position from which it can top up deficits of this kind. The conversion of a barter dollar deficit to a cash deficit in the event of a member failing to provide sufficient barter dollar credits in 30 days may fairly be described as a genuine pre-estimate of loss. Even if it is the maximum in the available range of estimates, it is within the available limit within which parties may contract without interference from the courts. As Lord Dunedin observed in the leading decision which is still referred to with substantial approval ^[11] :

" It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties (Clydebank Case [1905] AC 6 at p11 per Lord Halsbury; Webster v Bosanquet [1912] AC 394 at p398 per Lord Mersey)."

[26] The surveillance of courts over contracts is not based upon any underlying approval or disapproval of incentives or disincentives, which are a natural part of commercial arrangements. The Victorian decision of CRA Ltd & Anor v New Zealand Goldfields Investments and Anor ^[12] instances the upholding of a clause entitling the non-defaulting party to buy out the interest of the defaulting party at less than fair market value. It was held that no penalty was involved, as the purpose of the clause was neither to compensate the non-defaulting party nor to punish the defaulting party, but simply to deal with a default in a fashion most conveniently suited to overcoming it in the interests of the progress of the joint venture project ^[13] . There is in any event nothing in the present case in the nature of a punishment for non-observance of a contractual stipulation. Neither is the pre-estimate extravagant, unconscionable or "judged as at the time of making the contract, ... unreasonable in the burden which it imposes in the circumstances which have arisen" ^[14] .

[27] In the AMEV-UDC Finance case ^[15] Mason and Wilson JJ recognised the desirability of courts allowing parties greater latitude in determining the terms of their contract than had been permitted at various times during the evolution of this part of the law. Their Honours observed:

"Equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term."

Their Honours continued:

"The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract. The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties." ^[16]

The present case reveals no aspect of unconscionability, oppression or undue advantage. The learned judge at first instance correctly declined to identify the relevant contractual term as a penalty.

[28] It is unnecessary to discuss the matter at greater length. The above considerations are in my view the essential ones that lead to the conclusion that cl34(a) is not void as a penalty. It is also unnecessary to deal with an alternative point raised below and only faintly argued here on behalf of Bartercard to the effect that the right to the payment arose not by reason of Myallhurst's breach, but by reason of termination of the contract, which, it submitted was a provision for payment of money on the occurrence of a specified event rather than upon breach ^[17] . There is authority that such provisions are not penalties because they do not provide for an agreed payment in advance in respect of a breach ^[18] .

[29] The appeal should be dismissed with costs to be assessed.