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

152 CLR 359
45 ALR 632

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(Judgment by: Brennan J)

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

Court:

Judges: Gibbs CJ
Murphy J
Wilson J

Brennan JDeane 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:
Brennan J

The first two appellants are two of the lessees, or hirers, of a Mercedes Benz prime mover under a lease agreement with the first respondent, the lessor. The third appellant is the guarantor of the lessees' performance of their obligations under the lease agreement. In an action brought in the Supreme Court of Western Australia by the lessor against the lessees and their guarantor, the lessor recovered a judgment for $45,294.95, the principal component of which was $31,436.04, being the unpaid balance of the "entire rental", or hiring charge, specified in cl. 1(a) of the lease agreement. Clause 1(a) of the lease agreement reads:   

"The LESSOR hereby leases to the LESSEE and the LESSEE hereby takes on lease the vehicles more particularly described in the Schedule hereto 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 $1088.62 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."

Clause 6(a) contains a covenant for the due and punctual payment by the lessees of the instalments of rent. In breach of cl. 6(a) default was made. Only $8,114.28 was paid. The last payment was made on 30 November 1977. The default enlivened the provisions of cl. 12:   

"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 repossession.  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."

In mid-January 1978 the lessor took the first step to repossess the vehicle. A letter was sent to the lessees. The letter was not produced at the trial, but I assume that the letter demanded possession. Then the lessor was informed by Diesel Motors Ltd. that that company had carried out repairs on the vehicle and that it claimed a lien in the amount of $7,003.32 for the cost of repairs and parts. The lessor paid out the repairer and repossessed the vehicle on or shortly after 3 May 1978. On 5 September 1978 it wrote to the lessees and the guarantor demanding immediate payment of the balance of the entire rental outstanding. As that sum was not forthcoming, on 15 September 1978 the lessor sued to recover the sum and interest. It also sued for the $7,003.32 paid to Diesel Motors Ltd. Wallace J. at first instance and the Full Court on appeal upheld the lessor's claims for the entire rental outstanding, interest thereon and $7,003.32 paid to Diesel Motors Ltd. Wallace J. rejected the defence of the lessees and their guarantor that the claim for the balance of the entire rental was a claim for a penalty. The question whether it was a claim for a penalty was the sole issue at the trial; the lessor declined to claim damages in the event of failure of its claim for the balance of the entire rental. The same question was the sole issue in the present appellants' appeal to the Full Court, and in their further appeal to this Court. In the Supreme Court it was thought that Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. (1906) 4 CLR 672 was an authority indistinguishable in principle from the case in hand and that that case required the defence of penalty to be rejected.   

There are two arguments for the proposition that the claim for the unpaid balance of the entire rental is a claim for a penalty. First, it may be argued that default by the lessees exposes them to a greater pecuniary liability than that originally imposed, for the lessees become liable to pay immediately an amount which they would otherwise be entitled to pay by monthly instalments. Secondly, it may be argued that the lessor's right to recover the unpaid balance of the entire rental (cl. 1(a)) or "All moneys due for unexpired terms" (cl. 12) on default by the lessees is in the nature of a penalty when, under cl. 12, the lessor may retake possession of the vehicle. They are distinct arguments and may be considered separately.  

Acceleration of Payment

The entire rental is the price of the hiring, which the lessees bound themselves to pay. If cl. 1(a) or cl. 12 simply requires the lessees on default to pay what they were already bound to pay in performance of the agreement, the acceleration provisions in cll. 1(a) and 12 could not be held to impose a penalty. In Thompson v. Hudson (1869) LR 4 HL 1, at p 28 , Lord Westbury said:   

"It is impossible to hold that money due by contract can be converted into a penalty. A penalty is a punishment, an infliction, for not doing, or for doing something; but if a man submits to receive, at a future time and on the default of his debtor, that which he is now entitled to receive, it is impossible to understand how that can be regarded as a penalty."

In The Protector Loan Co. v. Grice (1880) 5 QBD 592 , at p 596 , Brett L.J. stated the true rule to be that "if a larger sum is to be paid upon default, it is a penalty; a stipulation to pay upon default a sum not larger than the total amount is not a penalty". Griffith C.J. followed The Protector Loan Co. v. Grice in Lamson Store Service, holding that the rule was applicable to the contract in the latter case. His Honour thought that that contract entitled the lessor to receive a sum being ten years' rent but subject to a stipulation that the sum might be paid in annual instalments. To accelerate on default payment of the sum already due by the hirer was said to impose no fresh or increased liability (1906) 4 CLR, at pp 683-684 .   

If the contract in the present case were construed as imposing an absolute obligation to pay three years' rent on the signing of the contract with a provision that that debt might be paid in monthly instalments, the rule stated by Brett L.J. would govern the present case, as it was held to govern Lamson Store Service. But the debt created by cl. 1(a) is not a debt to be paid on the signing of the contract; it is a debt payable by instalments over thirty-six months; it does not otherwise become payable in full unless there be a default. In Lamson Store Service, Griffith C.J. did not think it material that the debt created by the agreement of the parties was payable in futuro. If the result in the present case depended upon the acceptance of that opinion, I should wish to consider whether it should now be followed.   

There seems to be an air of commercial unreality in a time of high interest rates to hold that a debt which a creditor is not entitled to recover except by instalments over a period is to be equated with a debt which the creditor is entitled to recover immediately but which he agrees to receive by instalments over such a period. In the latter case, the value of the debt is greater than the value of the instalments payable over the period (cf. McGain v. Federal Commissioner of Taxation (1965) 112 CLR 523 ; (1966) 116 CLR 172 ); in the former case the value of the debt is the value of the instalments by which it is payable. I do not think that the question is concluded by anything that Walsh J. said in I.A.C. (Leasing) Ltd v. Humphrey (1972) 126 CLR 131 , where the leasing contract contained a clause providing for acceleration upon the occurrence of any one of a number of specified events. In that case, partly because the conduct of the proceedings did not raise the question and partly because the terms of the contract provided for a rebate for early payment and an adjustment which precluded the lessor from making a profit out of the lessee's default (1972) 126 CLR, at pp 140-142 , the question was not discussed.   

Although the opinion expressed by Griffith C.J. in Lamson Store Service on this question may require re-examination, it should not be re-examined finally in this case. The result in this case does not depend upon the acceleration of the payment of all thirty-six instalments; rather, the result depends upon the qustion whether all of those instalments are payable if the lessor repossesses the vehicle.  

Liability to Pay and Repossession

For the purposes of this argument, it may be assumed that the acceleration of the payment of the entire rental is not a penalty, but is merely a mode of payment of the sum ($39,550.32) which is the true hiring charge specified in cl. 1(a). As that sum is agreed to be "due by the LESSEE to the LESSOR upon the signing of (the) Agreement", it is payable in performance of the agreement, not as damages for breach of that agreement.   

Much of the argument in the Supreme Court and in this Court has focussed upon the question (derived from the question proposed by Griffith C.J. in Lamson Store Service (1906) 4 CLR, at p 681 ) whether the moneys to be paid in accordance with cl. 12 "can or can not be regarded as a 'genuine pre-estimate of the creditor's probable or possible interest in the due performance of the principal obligation'". That question assumes that the moneys to be paid in accordance with cl. 12 are payable as liquidated damages. That is the same assumption as Griffith C.J. made in Lamson Store Service (1906) 4 CLR, at pp 681-682 :   

"I proceed to apply this rule to the present case, assuming, though not deciding, for present purposes, that the amount of future rent payable under clause 8 of the agreement is to be regarded in the same way as if it had been called 'liquidated damages'."

That assumption will presently be considered. It served well enough to dispose of the case in Lamson Store Service, for his Honour held that the amount of future rent which became immediately payable upon breach fairly represented a pre-estimate of the damages which the lessor was likely to suffer by the breach. It was immaterial to the result in that case whether the ground on which the challenged provisions were held not to provide for a penalty was that those provisions did not provide for the payment of damages or that the sum payable was no greater than could be supported as a genuine pre-estimate of damage. The latter ground, which determined Lamson Store Service has no application on the facts of the present case.   

In finding that the amount of future rent represented a pre-estimate of damage, Griffith C.J. had regard chiefly to the novelty of the apparatus the subject of the hiring agreement, and the advertising benefits which the owner was likely to derive from its use by the hirer. The apparatus was a patented cash cable tramway system for the conveyance of money and dockets. His Honour said (1906) 4 CLR, at pp 681-682 :   

"The subject-matter of the agreement was a newly invented appliance, the subject of a patent which the lessors were desirous of introducing to public notice. By the agreement it was stipulated that the apparatus should remain their property during the term of ten years unless the option to purchase were exercised within thirty days. Regarding the matter from the point of view of the parties at the date of the agreement, 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. The agreement contains stipulations apt for all these purposes, to which I will directly refer in detail."

After referring to the several stipulations which were calculated to ensure that the owners' novel apparatus would be fully and fairly exhibited to the public during the ten year period, his Honour concluded (1906) 4 CLR, at pp 682-683 :   

"The damages for a breach of any of these conditions would be problematical, to this extent at least, that a jury could not be directed to assess them upon any fixed arithmetical basis. I think they might fairly be the subject of a pre-estimate of damages made by the parties."

In the present case, however, the leasing of the vehicle is attended by none of the factors which led Griffith C.J. to hold that the hirer was entitled to sue for and retain the whole of the ten years' rental as liquidated damages. The subject-matter of the leasing agreement in the present case is a vehicle the use of which by the lessees confers no advantage upon the lessor. The distinction between the present case and Lamson Store Service does not lie in the lessor's right to repossess on default: a similar right was conferred on the hirer in Lamson Store Service, though Griffith C.J. did not find it necessary to refer to it. Having regard to what the Chief Justice though to be the principal advantage which the contract conferred on the hirer in that case, namely, the right to a fair and full exhibition of the novel apparatus, the lessor's right to dismantle and take away the apparatus was hardly a material benefit which the lessor could turn to account. Not so in the present case. The factual distinction between the present case and Lamson Store Service lies in the fact that the lessor here has an advantage in retaking possession of the vehicle from the hirer; in Lamson Store Service the lessor had an advantage in the continued use of the apparatus by the hirer.   

It is necessary to retrace our steps and examine whether we should adopt in this case the assumption made by Griffith C.J. that "the amount of future rent . . . is to be regarded in the same way as if it had been called 'liquidated damages'". The unpaid balance which becomes payable on default under cl. 1(a) or the "moneys due for unexpired terms" which becomes immediately due and payable under cl. 12 are part of the entire rental which the lessees undertook to pay as the price of the hiring. Neither cl. 1(a) nor cl. 12 is drawn as a provision for liquidated damages; or, for that matter, as a provision relating to damages at all. Neither clause purports to create or impose a new pecuniary liability, but only to accelerate the time for payment of moneys already "due".   

Although the time for payment of the entire rental is accelerated on and by reason of a default in punctual payment of an instalment (cll. 1(a), 6 and 12) or on and by reason of a default in performance of another term or condition (cl. 12), the entire rental is and remains simply the price of the hiring. Leaving aside for the moment the difference between an obligation to pay the entire rental by instalments and an obligation to pay immediately the balance of the entire rental (cl. 1(a)) or the "moneys due for unexpired terms" (cl. 12), the obligation to pay the entire rental is not imposed on and by reason of the lessees' default. If, after a default which enlivened cl. 12, the lessor sued to recover the unpaid balance of the entire rental, leaving the lessees in possession of the vehicle, the lessees could not point to the right to repossess to transform their debt payable under the contract into damages for its breach. The balance of opinion in this Court has favoured the view that no question of penalty arises unless the obligation to pay arises upon breach of contract. In I.A.C. (Leasing), Walsh J. said (1972) 126 CLR, at p 143 :   

"... there has been a preponderance of opinion in favour of the view that it is only when a provision operates so that the event upon which an obligation is placed upon a party to pay a sum of money to another party to a contract is the breach by the former party of a term of the contract, that the question arises whether an obligation arising upon that event is a penal provision." 

 

The mere obligation to pay the entire rental cannot be characterized as penal. What gives to that obligation the flavour of a penalty is the lessor's right, in the event of a default by the lessees, to repossess the vehicle. If the lessor was to repossess the vehicle and recover the entire rental, he would have both the price of the hiring and possession of the vehicle which was to be hired. That would be inconsistent with the respective rights of the parties under the agreement if the agreement should be duly performed. The contract was to be performed by the lessees paying the entire rental to the lessor and by the lessor allowing the lessees possesson and use of the vehicle for thirty-six months. Clause 12 confers upon the lessor in the event of and by reason of a default by the lessees a right to recover both the moneys due for unexpired terms and possession of the vehicle, so that the lessor becomes entitled to more than it would be entitled to if no default occurs. However, cl. 12 leaves the lessees with the right to retain and use the vehicle until the lessor actually takes the vehicle and carries it away. The lessor is not bound upon a default by the lessees to repossess the vehicle before the expiry of the hiring period; it may choose not to do so. Unless the lessor repossesses the vehicle, there is no ground for denying it the right to payment of the entire rental to which it is entitled under the agreement.   

By conferring on the lessor the right in the event of the lessees' default to recover both possession of the vehicle hired and the entire price of the hiring before the hiring period expires, cl. 12 provides an incentive for the due and punctual performance of the lessees' obligations - pecuniary and other - by imposing a liability to forfeiture. The lessees may lose both possession and use of the vehicle for the remaining period of thirty-six months and that proportion of the entire rental which is attributable to the hiring period remaining after repossession. Although a stipulation as to the price payable for the sale of hiring of goods is not itself in the nature of a penalty, a stipulation which provides for the forfeiture on breach by the buyer or hirer of both the price and the consideration for which it is payable is in the nature of a penalty and equity will relieve against it. The foundation of the jurisdiction to relieve against forfeiture is that the stipulation for the forfeiture is really in the nature of a penalty (Pitt v. Curotta (1931) 31 SR (NSW) 477, at pp 480-481 ). In The Protector Loan Co. v. Grice (1880) 5 QBD, at p 595 Baggallay L.J. said:   

"The doctrine in equity is stated by Lord Macclesfield, L.C., in Peachy v. Duke of Somerset 2 W. & T.L.C. (5d) 1100, at p. 1108. : (1) 'The true ground of relief against penalties, is from the original intent of the case, where the penalty is designed only to secure money, and the Court gives him all that he expected or desired;' but it has been long established, that relief in equity is also given where the penalty is intended to secure the performance of a collateral object: Sloman v. Walter 2 W. & T.L.C. (5d) 1112. . Familiar instances of the relief afforded in equity, may be found in those cases where a default has occurred in repayment of a loan secured by a mortgage . . ."

Clause 12 is in the nature of a penalty, for the lessor who exacts the full measure of his entitlement under that clause receives more than the damages he would suffer by reason of many of the defaults which enliven that clause. The agreement in the present case differs from the agreement considered in I.A.C. (Leasing), which contained provisions preventing the lessor from gaining a large profit if he should repossess the leased equipment. Walsh J. contrasted the agreement in I.A.C. (Leasing) with an agreement exhibiting the features of the present agreement, saying (1972) 126 CLR, at p 141 :   

"The fact that those provisions could operate upon breaches varying greatly in their seriousness and in their likely consequences might suggest a conclusion that the imposition of such a liability as a consequence of a breach, followed by a termination of the contract, could not be a genuine pre-estimate of damage. Such a conclusion might be warranted if the lessor might regain the possession and the right of disposal of the equipment when only a small part of the term of the lease had gone by and might do this in consequence of a minor breach, which would really have little damaging effect upon the value of the equipment, and if the lessor might thus receive in those events a large profit not related to any damage which had actually been suffered."

In this branch of its jurisdiction equity relieves against forfeiture of the purchase money (other than the deposit) paid by a defaulting purchaser under a contract of sale of land when the vendor rescinds for breach (McDonald v. Dennys Lascelles Ltd. (1933) 48 CLR 457 ; Mayson v. Clouet [1924] AC 980 ) and relief has been granted in like circumstances in the case of a contract for the sale of chattels (Stockloser v. Johnson [1954] 1 QB 476 ). In those cases, however, the consideration for which the price was payable - title to the land or chattels - failed totally; in the present case, part of the consideration - the possession and use of the vehicle for part of the hiring period - has been enjoyed. That circumstance does not preclude the grant of equitable relief, whatever be its significance for a common law action to recover money or property which has been forfeited under a stipulation in the nature of a penalty (cf. Palmer v. Temple (1839) 9 Ad & E 508(112 ER 1304) ; McDonald v. Dennys Lascelles Ltd. (1933) 48 CLR, at p 470 ). Equity may mould a decree relieving against the exaction of a forfeiture under such a stipulation according to the exigencies of the case, as Jacobs J. said in Forestry Commission of NSW v. Stefanetto (1976) 133 CLR 507 , at p 524 :   

"A court of equity can mould its relief so that the substantial purpose of its doctrine of relief against forfeiture and penalties is achieved. It can leave the contractual right to use the plant and materials unaffected and can avoid that part and that part only of the agreement between the parties which is, or may be, open to challenge under the equitable doctrine."

The conditions upon which a party is granted relief will vary according to whether the stipulation conferring the right to forfeit is to secure the payment of money or some other stated result (see per Lord Wilberforce in Shiloh Spinners v. Harding [1973] AC 691 , at pp 722-723 ).   

In the present case, the relief sought by the appellants is against the exaction of the unpaid balance of the entire rental, the lessor having repossessed the vehicle. However, the lessees had the right to use the vehicle until it was repossessed on or shortly after 3 May 1978. Had the lessees performed their part of the agreement until that time, the lessor would have received the monthly instalments appropriate to that period of the hiring. Those instalments, being thirty-six aliquot parts of the entire rental and becoming payable each month during the thirty-six months of the hiring, cannot be thought to contain any element of penalty. The lessor is entitled to no less than the instalments which it would have received if the lessees had not defaulted during the period when the vehicle was in their possession (cf. Hyundai Heavy Industries Co. v. Papadopoulos [1980] 1 WLR 1129 ; [1980] 2 All ER 29 ).   

But the "moneys due for unexpired terms", i.e. for the hiring period after repossession of the vehicle, stand in a different position. Possession of the vehicle for those unexpired terms having been retaken by the lessor, the lessees are entitled to relief against the exaction of so much of the entire rental as is attributable to that period so that the lessor shall not recover or be entitled to retain both the whole of the entire rental and possession of the vehicle. If it be possible to identify an amount as attributable to that period, relief against the exaction of that amount falls within the principle expressed by Dixon J. in McDonald v. Dennys Lascelles Ltd. (1933) 48 CLR, at p 478 :   

"Although the parties might by express agreement give the vendor an absolute right at law to retain the instalments in the event of the contract going off, yet in equity such a contract is considered to involve a forfeiture from which the purchaser is entitled to be relieved (see the judgment of Long Innes J. in Pitt v. Curotta (1931) 31 SR (NSW), at pp 480-482 )."

Even if cl. 1(a) had not itself attributed each monthly instalment, being instalments of the same amount, to a month of the hiring period, it would have been appropriate nevertheless to divide the entire rental by thirty-six and to attribute each of thirty-six aliquot parts of the entire rental to a month of the hiring period. The lessees are entitled to relief against the recovery of the equivalent of the monthly instalments payable in respect of the hiring period after the vehicle was repossessed in May 1978. They are entitled to this relief on a ground analogous to but not precisely the same as the ground on which they relied at the trial. The lessor sued for the entire rental in reliance upon the terms of the contract. The lessees and their guarantor pleaded that the amount claimed by the lessor was claimed pursuant to cl. 12 and was an irrecoverable penalty. At the trial, the issue was simply whether the rule which refuses to sanction legal proceedings to enforce a stipulation for a penalty for breach of contract applied. Effect has been given to that rule by courts of common law as well as by the courts of equity since the statute 8 & 9 Will. 3, c. 11, s. 8 (see In re Newman; Ex parte Capper (1876) 4 ChD 724 ; cf. Campbell Discount Co. Ltd. v. Bridge [1962] AC 600 , at p 622 ). In my opinion, that rule has no application to the liability to pay each of the thirty-six monthly instalments. Those instalments are payable not by reason of a breach of the agreement but in performance of the lessees' obligations thereunder. However, an analogous equitable rule, relieving against forfeiture of amounts so payable, entitles the lessees to relief from the liability to pay an amount equal to the instalments payable in respect of the hiring period after the date of repossession.   

The liability of the guarantor in respect of the instalments payable up to the date of repossession is established by reason of the lesses having defaulted in paying in full the instalments for which they became liable before the date of repossession: see Hyundai and Lep Air Services Ltd. v. Rolloswin Ltd. [1973] AC 331 . But in respect of the "moneys due for the unexpired terms" after the date of repossession, the guarantor is relieved from liability according to the relief granted to the lessees. The principle stated by Rich J. in McDonald v. Dennys Lascelles Ltd. as to a guarantor's liability for instalments of the purchase price under a contract of sale of land is no less applicable to the guarantor's liability for that part of the entire rental which is attributable to the hiring period after repossession. Rich J. said (1933) 48 CLR, at pp 467-468 :   

"Once it is decided, as upon the authority of Mayson v. Clouet [1924] AC 980 I think it must be decided, that as between purchaser and vendor the vendor cannot retain, let alone recover, an overdue instalment of purchase money after the contract has come to a premature end even by his own fault, I think it follows that no guarantee of such an instalment could be enforced by the vendor."

It follows that the appeal by both the lessees and the guarantor should be allowed. The judgment of the Full Court should be set aside and in lieu thereof it should be ordered that the appeal to the Full Court be allowed. The judgment of Wallace J. should be set aside. The lessor is entitled to judgment for the $7,003.32 paid to Diesel Motors Ltd., for the unpaid instalments which became due prior to the date of repossession, for any damages for the lessees' breach of contract which the lessor may be able to establish and for interest. These issues should be remitted for decision by a single judge who should assess the whole amount due by the lessees and the guarantor. There should be no order for the costs of the trial, but the appellants should have the costs of both appeals.