O'Dea v Allstates Leasing System (WA) Pty Ltd

152 CLR 359
45 ALR 632

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(Judgment by: Gibbs CJ)

Between: O'Dea
And: Allstates Leasing System (WA) Pty Ltd

Court:

Judges:
Gibbs CJMurphy J
Wilson J
Brennan J
Deane J

Subject References:
Contract

Hearing date: Perth, 23 August 1982,  25 August 1982
Judgment date: 17 February 1983

Canberra

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Judgment by:
Gibbs CJ

By an agreement in writing made on 13 April 1977 the first respondent, Allstates Leasing System (WA) Pty. Ltd. (in the agreement called "the Lessor") leased to Mr. and Mrs. O'Dea and Mr. and Mrs. Granich, who, together, traded as cartage contractors under the name of Granich Geraldton (in the agreement called "the Lessee"), a Mercedes Benz prime mover for a period of thiry-six months. No right was given to the lessee to buy the vehicle and the agreement stated that it was not intended to be a hire purchase agreement (cl. 17). Clause 1(a) of the agreement stated that the lessor leased to the lessee and the lessee took on lease the vehicle: 

"... 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 . . . THEN the LESSOR shall not demand or seek to enforce payment of the entire rent or any balance thereof outstanding otherwise than by the said instalments."

By cl. 6(a) the lessee agreed duly and punctually to pay to the lessor the instalments of rent on the days set forth in cl. 1(a). Clause 12 provided as follows:   

"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 herein 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 or 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 moneys due for unexpired terms shall become immediately due and payable, plus reasonable costs of repossesion.  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."

The agreement contained a number of terms and conditions, varying in importance, which the lessee was bound to observe. Clause 31 provided:   

"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 appraisal value was stated in the schedule to be $13,300.  On the same day M. G. O'Dea Pty. Ltd. guaranteed the due and punctual observance and performance of all the obligations imposed upon the lessee by the agreement. Nothing turns on the form of the guarantee.   

The lessee took possession of the vehicle and made payments of rent which totalled $8,114.28 and which represented the instalments due for the months of April to October 1977 and part of the instalment due for November. After November 1977 no further rent was paid. The first respondent later retook possession of the vehicle and resold it, realizing $20,000 on the sale. To obtain the vehicle it was necessary for the first respondent to pay $7,003.32 to a company which had a lien on the vehicle for repairs.   

The first respondent commenced proceedings in the Supreme Court of Western Australia against Mr. and Mrs. O'Dea, Mr. and Mrs. Granich and M. G. O'Dea Pty. Ltd., claiming $31,436.04 (the difference between the total rent, $39,550.32, payable under the agreement and the amount of the instalments paid) together with interest, and $7,003.32, the amount paid to discharge the lien. In the alternative, damages of $33,650.39 were claimed. Mr. and Mrs. Granich did not enter a defence and judgment was given against them by default; they have together been made the second respondent to this appeal, although it is not clear why their joinder was necessary. At the trial of the issues between the first respondent and the remaining defendants, Mr. and Mrs. O'Dea and M. G. O'Dea Pty. Ltd. (who are the present appellants), it was conceded that the amount of $7,003.32 was recoverable and the sole issue fought was whether the amount of $31,436.04 was a penalty. Counsel for the first respondent suggested that if it became necessary to assess damages that could be done in separate proceedings. The learned trial judge (Wallace J.) held that the sum was not a penalty and gave judgment for the first respondent against the appellants in the sum of $45,294.95 which included interest. An appeal to the Full Court was dismissed. A further appeal has now been brought to this Court.   

The argument on behalf of the first respondent was that the rules which distinguish between a penalty and liquidated damages are simply not relevant to the present case. It was said that the first respondent was suing for the consideration payable under the contract, and was not seeking to recover a sum payable in the event of a breach by the appellants of their contractual obligations, so that the question whether the amount payable was a genuine pre-estimate of damage did not arise.   

The cases to which counsel for the first respondent referred in support of his argument that there can be no question of penalty in the present case seem to me to fall into two classes. In the first class of case, if a sum of money is payable by instalments, and it is provided that in the event of one instalment not being punctually paid the whole sum shall immediately become payable, the acceleration of payment is not a penalty: The Protector Loan Co. v. Grice (1880) 5 QBD 592 ; Wallingford v. Mutual Society (1880) 5 App Cas 685, at pp 696, 702, 705-706, 710 . Similarly there is no penalty where it is agreed to charge a certain rate of interest on condition that if payment is made punctually the rate will be reduced (Astley v. Weldon (1801) 2 Bos & Pul 346, at p 353 (126 ER 1318, at p 1322) ) or where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt: Thompson v. Hudson (1869) LR 4 HL 1, at pp 15-16, 27-28, 30 ; Ex parte Burden; In re Neil (1881) 16 ChD 675 . In all the cases of this kind there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full.   

The second class of case arises where the parties have stipulated that a sum shall become payable on a certain event which, although brought about by the party required to make the payment, does not involve a breach of contract. It has been held that where there is a contract for the payment of a certain sum in a certain event, and that event has happened, the sum is payable and no question of penalty versus liquidated damages arises: In re Apex Supply Co. (1942) Ch 108, at p 119 ; Alder v. Moore [1961] 2 QB 57 , at p 65 . Difficulties have arisen in the application of this principle to contracts of hire purchase which provide that in the event of termination a sum representing all or part of unpaid instalments will be paid by the hirer to the owner. There was some controversy as to the position when the owner's right to terminate the contract and receive payment arose on the happening of any of a number of events, some of which were breaches and some of which were not, but it has now been settled in England that in such a case where the agreement is terminated by reason of a breach committed by the hirer, the sum payable will be a penalty unless it is a genuine pre-estimate of the loss suffered by the owner by reason of the breach: Cooden Engineering Co. Ltd. v. Stanford [1953] 1 QB 86 ; Campbell Discount Co. Ltd. v. Bridge [1962] AC 600 ; Financings Ltd. v. Baldock [1963] 2 QB 104 . I respectfully agree with that conclusion. If, however, the agreement is terminated by the hirer himself, e.g. because he is unable to keep up his payments, it has been held that the question whether the sum payable is liquidated damages or a penalty does not arise, since what has occurred is that the hirer has exercised his option to put an end to the contract on paying a certain sum, and the sum for which he has made himself liable must be paid: Associated Distributors Ltd. v. Hall [1938] 2 KB 83 . Conflicting opinions have been expressed as to the correctness of that decision (see Campbell Discount Co. Ltd. v. Bridge (1962) AC, at pp 614, 631, 633 ; and United Dominions Trust (Commercial) Ltd. v. Ennis [1968] 1 QB 54 , at pp 64, 67 ) but the question whether it was correct does not fall for consideration in the present case.   

In Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] AC 79 , at pp 86-87 , Lord Dunedin said:   

"The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach."

Similarly, in my opinion, the question whether the rules which relate to the distinction between penalties and liquidated damages are applicable must be judged as at the time of the making of the contract in question. The question is "not of words or of forms of speech, but of substance and of things", to use the words cited by Lord Radcliffe in Campbell Discount Co. Ltd. v. Bridge (1962) AC, at p 624 .   

In the present case, the event upon which the outstanding balance of the instalments became payable was a breach by the lessee of its obligations, under cl. 6(a), duly and punctually to pay the instalments of rent on the days set forth in cl. 1(a). The present case therefore does not fall within the second class of cases on which the first respondent relied - it is not a case in which under the contract money became payable on a certain event which was not a breach of the contract. On the contrary, the reasoning in such cases as Cooden Engineering Co. Ltd. v. Stanford and Campbell Discount Co. Ltd. v. Bridge supports the conclusion that the provision requiring payment of the balance of the rent is a penalty, unless of course it can be said to be a genuine pre-estimate of damage.   

Nor, in my opinion, is the present case within the first class of cases cited by counsel for the first respondent. The contract did not, in my opinion, merely provide for the acceleration of a presently existing debt. In the argument for the first respondent much reliance was naturally placed on the provisions of cl. 1(a) of the contract, and it was said that the first respondent's claim was based entirely on that clause, and could succeed even if no breach of the contract were proved. If cl. 1(a) was read in isolation, it might create a present debt for the entire rental, although it would allow the lessee the indulgence of paying the sum due by instalments, provided the payments were duly and punctually made. In other words, there might then be debitum in praesenti, although selvendum in futuro, and, if so, such authorities as The Protector Loan Co. v. Grice (1880) 5 QBD 592 would apply. But the contract must be viewed as a whole, and not in fragments. When cll. 1(a), 6(a) and 12 are read together, it becomes apparent that at the date of the contract there was no presently existing obligation to pay the entire rental. The obligation was to pay the instalments, and if there were a default in payment of the instalments the whole became payable. The clauses, read together, had the effect that the entire rent only became payable in the events specified in cl. 12 - including default in punctual payment of the instalments. In the circumstances of the present case the obligation to pay the entire rent arose only by reason of a breach, and the amount which the contract makes payable in that event is either a penalty or liquidated damages.   

Counsel for the first respondent did not dispute that if the question whether the sum was a penalty or liquidated damages falls for decision the sum must be held to be a penalty. Of course, a lessor is entitled to be compensated for the loss which he is likely to suffer on the premature termination of a hiring. However, the outstanding balance of the entire rental could not in the circumstances possibly represent a genuine pre-estimate of the loss which would be caused to the first respondent by a breach of the contract. In the event of a breach the first respondent was entitled to repossess and resell the vehicle, but it was not bound to account to the lessee for any amount received on a resale, even if it exceeded (as it did) the appraisal value. The first respondent became entitled under the contract to receive the accelerated payments of the rental without any rebate and to receive back the vehicle sooner than would otherwise have been the case without giving credit for its value and in these circumstances the amount receivable by the first respondent was manifestly excessive in comparison with the greatest loss that it could possibly suffer as a result of the default in payment of the instalments. Moreover, the entitlement of the first respondent arose on a number of events, including any default in performance of the terms and conditions of the contract, some of which, by their nature, could lead only to trifling damage.   

I have no doubt in principle that the provisions requiring the payment of the entire rent amounted to a penalty. It remains however to consider some Australian decisions, and in particular Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 which the Supreme Court felt bound to follow. In that case, the lessors leased to the lessees for a term of ten years a patented apparatus, and the lessees agreed that they would not discontinue the use of the apparatus or use it elsewhere than on specified premises. The agreement by cll. 2 and 6 provided for payment of an annual rental in advance and by cl. 8 provided that in case of a breach by the lessees of any of the conditions of the lease, or in case the apparatus should be taken from the lessees or attached by process of law by proceedings in bankruptcy or insolvency or otherwise, the whole of the rent for the remainder of the term should immediately become due and the lessors might forthwith take possession of and remove the apparatus. The lessees (a company) were wound up and it was held by a majority of this Court, reversing the Supreme Court, that the lessors were entitled to prove for the whole of the amount of the ten years' rent. The judgment of the majority was delivered by Griffith C.J. The learned Chief Justice first dealt with the effect of cl. 8 in so far as it provided that the whole of the rent should be payable on breach of a condition of the lease, other than a default in payment of an instalment of rent, and held that the sum stipulated for was a genuine pre-estimate of damage (1906) 4 CLR, at pp 681-683 ). In reaching this conclusion he was influenced by the fact that:   

"... it might reasonably have been desired by the lessors, and have been in the contemplation of both parties when fixing the amount of the rent and the conditions of the lease, that a fair opportunity should be given for the public use of the invention in its entirety, for a considerable time, on suitable premises, and by persons carrying on a business in which its advantages would commend it to the public, and so be likely to induce future purchases from the patentees"

(1906) 4 CLR, at pp 681-682. He then turned to the stipulation for acceleration of the payment of rent in the event of default of payment in any instalment, and said (1906) 4 CLR, at p 683: 

"... Is it a mere agreement of demise for a term of years at a yearly rent, not creating any absolute obligation to pay rent for more than one year, so that the obligation may be terminated by abandoning the demised premises, with a collateral stipulation that an amount equal to ten years' rent shall be payable on default in payment of that one year's rent? Or is it an agreement creating an absolute obligation to pay ten years' rent in any event, with a provision that it may be paid in annual instalments? If the first contention is the right one, there is no doubt that the decision appealed from is correct. If the latter is the true construction, there was a debitum in presenti solvendum in futuro."

He concluded (38) that the agreement expressed a clear intention that a sum equal to the rent for ten years should be paid by the lesses in any event, and that the case was indistinguishable from The Protector Loan Co. v. Grice. He added (1906) 4 CLR, at p 684:   

"... It is true that in that case the consideration was a debt already existing. Here, on the other hand, the only debt is created by agreement of the parties, and is payable in futuro. But for the reasons already given I do not think that this difference is material."

The reasons to which he referred appear to have been that there would be nothing unreasonable, in the circumstances, in stipulating for a receipt of the rent for the whole term, and that it would be competent to the parties further to stipulate that in the event of a breach there should be no deduction for acceleration of payment. O'Connor J., who dissented, distinguished The Protector Loan Co. v. Grice. He said (1906) 4 CLR, at p 692:   

"... If in this case the whole amount of rent was actually due on the signing of the contract the provisions of clause 8 might well be regarded as providing merely for acceleration of payment within the principle expounded by Lord Hatherley (in Thompson v. Hudson (1869) 4 LRHL 1 ), but, as I have already pointed out, the whole amount of rent was not then due under the agreement. No more than the annual instalment could become due in the first year. Under these circumstances the facts necessary to make the principle of the Protector Loan Co. v. Grice applicable do not exist."

He added that the stipulation for payment of the rent was in reality one for compensation for breaches of the covenant and, that, not being a genuine estimate of possible damage, it was a penalty.   

This decision was followed in Western Electric Coy. (Australia) Ltd. v. Ward (1933) 51 WN(NSW) 19 and Re Mutual (Q'ld) Knitting Mills Pty. Ltd. (In liq.) (1959) Qd R 357 . It was distinguished in Lessors (Aust.) Pty. Ltd. v. Westley (1964-65) NSWR 2091 on the ground, amongst others, that in that case there was no agreement to pay a lump sum and indeed the agreement there appears to have been deliberately framed to avoid a primary obligation to pay a lump sum. In Wanner v. Caruana (1974) 2 NSWLR 301 the case was again distinguished. The mortgage in that case contained a clause relating to payment of principal and interest with a proviso that, in the event of any monthly instalment being in default for fourteen days, the whole of the balance of the principal sum and other moneys due thereunder with interest thereon at the rate of ten per cent per annum should immediately become due and payable for the balance of the term. It was held that the proviso was void as a penalty. Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 was distinguished on two grounds. One ground of the distinction was that the proviso, which purported to make the mortgagors liable to pay unaccrued and unearned interest, was not a provision for the acceleration of future instalments of an agreed present debt. A further ground of distinction was that in Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. "the equipment which was the subject of the hiring agreement was of such a nature that it was reasonable to attribute to the lessor a commercial desire to have the advantage of his equipment actually being in use during the agreed term" and that this led the majority in that case to hold that the provision for the advancement of the future rent in substance "amounted to a single quantification of the damage which would be suffered by the lessor, in the event of a default on the part of the lessee so that the term did not run its full contractual period", and that there was no similar commercial advantage to the mortgagees in the instant case (1974) 2 NSWLR, at p 305 . Finally in I.A.C. (Leasing) Ltd. v. Humphrey (1972) 126 CLR 131 this Court was concerned with an agreement for a lease whereby it was agreed that the lessee would pay an entire rent equal to the total of eighteen monthly instalments provided in the agreement, subject however to adjustment of rent as provided in cl. 4. That clause provided that if during the lease the lessee should (inter alia) default in payment of any instalment, and the default should continue for fourteen days, there should forthwith become due and payable any rent instalment then accrued due but not paid, and the total of the rent instalments not then accrued due, "rebated to reflect their then value, ascertained by applying an interest rate of ten per cent per annum to each such instalment over the period by which the date for payment thereof is by virtue of this clause brought forward". The clause further empowered the lessor to retake possession of the equipment leased, and another clause provided that in certain circumstances credit should be given to the lessee for the amount by which the actual value of the equipment at the time of the termination of the agreement exceeded its appraisal value. The main judgment of the Court was delivered by Walsh J., who considered that in the particular circumstances of the case, to which he referred at p. 140, no question really arose as to whether the provisions in cl. 4 for the payment of the future instalments constituted a penalty. However, he said that if the question did arise for decision, in his opinion the provision did not constitute a penalty. He said (1972) 126 CLR, at p 141 :   

"... That 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. 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. It could be urged, in support of that construction, that the agreement was expressed to be an agreement to lease the equipment for a term of eighteen months 'at an entire rent equal to the total of the instalments provided in the schedule subject however to adjustment of such rent as provided in Clause 4'." 

 

He went on to say that even if the agreement ought to be read as one in which the liability under cl. 4 to pay instalments, rebated as provided therein, at a time earlier than the time when they would have become payable in the ordinary course of time was a liability which would fall upon the lessee in consequence of a breach of the agreement the provisions should not be held to be a penalty. This was because the agreement provided "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". On the first aspect of the case Walsh J., speaking obiter, assumed, but did not consider for himself, the correctness of Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. The second issue, whether the clause was a genuine pre-estimate of damage, depended on the particular provisions of the lease there under consideration, which are quite distinguishable from those of the present case.   

The question whether a contractual provision amounts to a penalty depends on all the surrounding circumstances existing at the time of the making of the contract as well as on the terms of the contract itself, and it is therefore not always possible to apply a decision given upon one contract to another case even though that case concerns a contract in identical terms (see Lombank Ltd. v. Excell [1964] 1 QB 415 ). In Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. there was a particular circumstance on which the majority of the Court relied, namely the commercial importance to the lessor of the continued use of the patented apparatus. That circumstance was regarded as important in relation to the agreement in so far as it provided the consequence of a breach of conditions other than default in payment of an instalment, but I find it difficult to understand how, as a matter of logic, it could be relevant to the question whether there was a present debt for the entire rent. In my opinion the principle of cases such as The Protector Loan Co. v. Grice (1880) 5 QBD 592 applies only where there is a present debt, a debt actually due before the breach which accelerated the payment, and with all respect I would prefer the reasoning of O'Connor J. to that of Griffith C.J. and would hold that in that case there was no present debt for the entire amount. It makes commercial sense that parties may validly agree that payment of a present debt at a reduced rate, or at a future time, or by instalments, will be accepted if, but only if, certain conditions are observed. There is, however, a crucial difference between such an agreement and one under which a sum, originally payable only by instalments, is made payable in full immediately if the instalments are not duly paid. If Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. cannot be confined to its own special facts I would decline to follow it.   

For these reasons I consider that the provisions of the contract which required payment of the entire rent amounted to a penalty and that the first respondent's claim to recover $31,436.04 could not succeed. The first respondent is, however, entitled to recover such unpaid instalments as were due before it retook possession of the vehicle and such damages as may be proved to have been occasioned by the breach of the conditions of the lease. Notwithstanding the suggestion of counsel that the damages might be assessed in fresh proceedings, it seems to me that the proper course is to refer the matter back to the Supreme Court to enable an assessment of damages to be made.   

I would allow the appeal. For the order made by the Full Court I would substitute an order setting aside the judgment of Wallace J. and ordering: (a) that judgment be given in favour of the plaintiff against the third and fourth-named first defendants and the second defendant in an amount to be assessed, with no order as to costs; and (b) that the matter be remitted to a single judge of the Supreme Court to enable him to decide such questions as are raised by the parties in relation to the recovery of instalments of rent due before the retaking of possession, the assessment of any damages and the payment of interest and to fix the amount to be assessed (which will include the sum of $7,003.32 and any interest thereon).