Forestry Commission (NSW) v Stefanetto

133 CLR 507
8 ALR 297

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(Judgment by: Mason J)

Between: Forestry Commission (NSW)
And: Stefanetto

Court:

Judges: Barwick CJ

Mason JJacobs J

Subject References:
Contract

Hearing date: 17 November 1975
Judgment date: 19 February 1976

Sydney

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Judgment by:
Mason J

On 30th June 1974 the appellant Commission and the respondent entered into a written agreement by which the respondent agreed to construct for the appellant a gravel road twenty-three miles in length through the Imlay Forest, near Eden, for $803,459. The respondent made default in performance of his obligations under the agreement thereby bringing into operation the provisions of cl. 43.1 of the general conditions of contract which were specifically incorporated in the agreement. This clause entitled the appellant by notice in writing to call on the respondent to show cause why certain powers conferred by the clause should not be exercised.

Apparently the appellant served such a notice upon the respondent, for it is now common ground that there occurred the preliminary conditions essential to the exercise by the appellant of its right, conferred by cl. 43.1(a) of the general conditions of contract, to "take over the whole or any part of the work remaining to be completed". The appellant in fact exercised this right on 3rd January 1975.

The relevant part of cl. 43.1 is in these terms:

"... the Principal, without prejudice to any other rights that he may have under the Contract against the Contractor, may -

(a)

take over the whole or any part of the work remaining to be completed and for that purpose and insofar as it may be necessary exclude from the site the Contractor and any other person concerned in the performance of the Works; or

(b)

cancel the Contract, and in that case exercise any of the powers of exclusion conferred by sub-par. (a) of this paragraph. If the Contractor notifies the Superintendent in writing that he is unable or unwilling to complete the Works, or to remedy the default, refusal or neglect stated in the notice in writing referred to in the first paragraph of this subclause, the Principal may act in accordance with the provisions of sub-par. (a) or sub-par. (b) of the last preceding paragraph, as he thinks fit."

The consequences which flow from an exercise of the right given by cl. 43.1 are set out in cl. 43.3 which is in the following terms:

"If the Principal elects to exercise the power conferred on him by sub-par. (a) of the third paragraph of sub-cl. 43.1 he may complete the whole or any part of the work remaining to be completed and for that purpose may let a contract or contracts for the work remaining to be completed or, as the case may be, for any part of that work or may employ any person or persons other than the Contractor to carry out that work or, as the case may be, the part of that work. The Principal may take possession of and permit other persons to use any materials, Constructional Plant and other things on or about the site which are owned by the Contractor and as are requisite and necessary for the purposes of any such contract or any such employment.

The Contractor shall have no right to any compensation or allowance for any action taken by the Principal pursuant to this subclause, other than a right to require the Principal to maintain in good working order the Constructional Plant referred to in the preceding paragraph. On completion of the work all Constructional Plant and the surplus of the materials and other things so taken possession of will be handed over to the Contractor, but without payment or allowances for the fair wear and tear they may have sustained in the meantime PROVIDED HOWEVER, that if there is a deficiency as referred to in sub-cl. 43.4 and if the Contractor fails to make good that deficiency, the Principal may retain in his possession the said Constructional Plant, materials and other things until the deficiency is made good pursuant to the provisions of sub-cl. 43.4."

At the time of the taking over of the work by the appellant the respondent had on the site plant and machinery belonging to him and also plant and machinery which was the subject of hire-purchase or leasing agreements in his favour. The plant and equipment was extensive and was of considerable value.

The appellant having claimed to be entitled to possession of the whole of this plant and equipment, the respondent commenced an action in the Supreme Court of New South Wales. In this action Needham J. made a declaration that the provisions of cl. 43.3 are in the nature of a penalty and that the respondent was entitled to relief therefrom. His Honour also declared that the appellant was not entitled to retain plant and equipment not owned by the respondent (1975) 1 NSWLR 332. The arguments advanced by Mr. Handley for the appellant have not persuaded me that his Honour was incorrect in reaching this result.

It would, I think, be a bold step to construe cl. 43.3 as conferring upon the appellant the right to take and keep possession of plant and equipment not owned by the respondent in the legal sense of that word, being plant and equipment owned by third parties which was on lease or on hire-purchase to the respondent. Under a hire-purchase agreement it is the vendor, not the hirer, who is the owner of the goods and who is correctly so described as a matter of legal terminology, notwithstanding that the hirer has an "equity" in the goods which by statute may amount to a proprietary interest for certain purposes. Likewise, under a bailment or lease agreement, it is the bailor or lessor, not the bailee or lessee, who is the owner of the goods and who is properly so described.

It may be that on some occasions a person who has a limited or possessory interest in chattels is popularly referred to as the "owner" of them or is said to "own" them, but I can see no justification in the present context for attributing to cl. 43.1 such a meaning. Indeed, the context tells strongly against such a usage. As Needham J. observed (1975) 1 NSWLR, at p 337 , there is a contra-distinction between cl. 43.3 when it refers to "constructional plant" which is "owned by the contractor" and other provisions such as cl. 16.1 which deal with constructional plant brought on to the site without limiting that plant to plant which is owned by the contractor.

Quite apart from indications of this kind to be gathered from the provisions of the general conditions of contract, there are considerations arising from the very subject matter of the agreement which suggest strongly that the respondent's construction of the clause is incorrect. If it were correct it would bring about the result that the taking by the appellant of possession of the respondent's plant and equipment would result in a termination of his limited or possessory interest in the goods by reason of the presence in hire-purchase and lease agreements of conditions which entitle the vendor or lessor to terminate the agreement in the event that there is a parting with possession of the goods.

Accordingly, I am of the opinion that his Honour was correct in thinking that cl. 43.1 did not entitle the appellant to take and retain possession of plant and equipment in which the respondent had a limited or possessory interest only under hire-purchase agreements and lease agreements.

Although the appellant argued at first instance that the jurisdiction to relieve against penalties did not extend to provisions relating to property, as distinct from provisions which sounded in the payment of money, this argument was not pressed before us. Here the appellant conceded that the courts have jurisdiction to relieve against contractual provisions resulting in the forfeiture of property on the footing that they constitute a penalty, but went on to submit that the clause in question was not such a provision.

The appellant's concession was well founded because the equitable doctrine of relief against forfeiture is consistently applied so as to protect property and proprietary interests, the granting of relief against penalties being no more than a special application of the general doctrine (Kreglinger v. New Patagonia Meat and Cold Storage Co. Ltd. [1914] AC 25 , at p 35 ). The distinction between a penalty (when it takes the form of an obligation to pay a sum of money in the event of a breach of contract) and liquidated damages is that the latter is a genuine pre-estimate of loss or damage (Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] AC 79 , at p 86 ), whereas the former is not. Except in so far as it throws some light on the character of the penalty this distinction has little relevance to the provision now in question. The purpose of the provision is not so much to provide compensation for loss which the principal may sustain as a result of the contractor's breach of contract, but to enable the principal to complete the contract works which the contractor has engaged to execute. If the provision were limited in its operation to the attainment of this objective, it might be impossible to characterize it as a penalty, so long at any rate as the advantage which the principal might derive from the use of the contractor's materials, plant and equipment was to be taken into account in arriving at the contractor's entitlement or liability under, or by virtue of, the contract.

However, there are two reasons why this character cannot be assigned to the power conferred upon the appellant by cl. 43.3. First, the power to take possession is not confined to possession for the purpose of executing the contract works. As I read the clause, the appellant could take and retain possession of the materials, plant and equipment until completion of the contract works without using them at all. Secondly, the clause specifically denies to the respondent any compensation or allowance for the use or deprivation of the materials, plant and equipment. It may be that there are additional reasons for arriving at a similar conclusion but it is unnecessary to explore them for enough has already been said to demonstrate that the power may be exercised arbitrarily and capriciously so as to prejudice and penalize the respondent and that the power is not one which is so confined as to enable the appellant to complete the contract works on a footing whereby the respondent receives some credit or allowance for the use or deprivation of his property.

I have not discovered in the authorities referred to in argument any support for a contrary view. True it is that in Emden and Gill's Building Contracts and Practice, 7th ed. (1969), p. 302, the distinction is drawn between clauses which forfeit the builder's property absolutely and clauses which allow the employer to use the builder's property for the purpose of completing the contract. This passage should be understood as differentiating between the forfeiture of the builder's property which, although expressed to be by way of liquidated damages, in truth constitutes a penalty, and a provision which does no more than entitle the employer to use the builder's property for the exclusive purpose of completing the contract of work on the footing that the builder receives some credit or allowance, when no question of penalty arises.

The observations of Lord Cranworth L.C. in Ranger v. Great Western Railway Co. (1854) 5 HLC 72 , at pp 108-110 (10 ER 824, at pp 839-840) were directed to a different situation. There the contract conferred upon the railway company a power to seize and appropriate plant belonging to the contractor. Lord Cranworth said (1854) 5 HLC, at p 108 (10 ER, at p 839) :

"The question is, whether, having taken possession, they became absolutely entitled to all which they seized, or whether the whole provision is not to be regarded as mere machinery for enabling them to complete the works, at the risk and cost of the appellant. I think the latter is the true construction of the clauses."

His Lordship went on to say (1854) 5 HLC, at p 110 (10 ER, at p 840) :

"I have come to the conclusion that the true meaning of this part of the contract is, that the Respondents, though at liberty to seize and appropriate the plant belonging to the appellant, were yet bound to account for its value in settling their accounts with him."

The absence here of any obligation on the part of the appellant to account for the value of plant and equipment seized distinguishes this case from Ranger's Case.

The other authority to which I should refer is Bysouth v. Shire of Blackburn and Mitcham (No. 2) (1928) VLR 562. The contract there provided that upon determination by the council the materials and plant in or upon the works should become the property of the council. By a majority, the Full Court of the Supreme Court held that the forfeiture of the contractor's property was a penalty, there being no provision that the value of the materials and plant should be taken into account in determining the financial position of the parties.

That situation differed from the present circumstances, so it was argued, in that here there is no provision for the forfeiture of property - no more is involved than the possession and, perhaps, the use of materials, plant and equipment by the principal. However, as Needham J. pointed out, if the principle on which Bysouth's Case was decided be correct, as in my opinion it is, it can make no difference that the contractor is deprived not of property but of possession. The deprivation is none the less a penalty, though not as severe. There is in my view no convincing basis for distinguishing the present case.

For these reasons I would dismiss the appeal.