AMEV-UDC Finance Ltd v Austin

162 CLR 170
68 ALR 185; 1986 - 1104A - HCA

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(Decision by: Gibbs CJ)

Between: AMEV-UDC Finance Ltd
And: Austin

Court:

Judges:
Gibbs CJMason J
Wilson J
Deane J
Dawson J

Hearing date: 19 February 1986
Judgment date: 4 November 1986

Canberra

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Decision by:
Gibbs CJ

The facts of this case are fully set out in the judgment of Mason and Wilson JJ., which I have had the advantage of reading, as well as in the helpful judgment of Priestley J.A. in the Court of Appeal.  The respondents are sued on guarantees, but the extent of their liability is measured by that of the principal debtor, the lessee under two lease agreements made with the appellant as lessor. Each agreement provided (by cl.1) that the full amount of the total rent should become due forthwith upon the execution of the agreement but that, provided that the lessee paid the instalments specified in the schedule on the due dates therein specified or within seven days thereafter, the lessor would accept payment of the total rent by such instalments.  Clause 1 further provided that on default in the payment of any instalment on the due date and upon such default continuing for the space of fourteen days and upwards the lessor was entitled by notice in writing to the lessee to declare the whole unpaid balance of the total rent to be payable forthwith and in that event the same was to become payable.  The lessee undertook (by cl.6(b)) to pay interest at specified rates on any moneys payable under the lease which might from time to time be overdue.  Clause 7 of each agreement provided that if (inter alia) the lessee failed to pay any instalment within seven days of the due date or any other moneys payable thereunder immediately upon the lessor making demand therefor, then (inter alia): 

"(ii)

the Lessee's right to use and to the possession of the goods hereunder may be terminated by the Lessor by notice in writing to the Lessee whereupon the whole unpaid balance of the Total Rent shall be payable forthwith by the Lessee to the Lessor."

Not all of the events mentioned in cl.7 amounted to breaches of the contract. The effect of cll.10 and 11 of the lease was that (inter alia) on the termination of the lease the lessor became entitled to dispose of the goods leased and if the net proceeds of disposal were less than the residual value stated in the schedule the lessee was obliged forthwith after demand to pay the amount of any deficiency to the lessor in addition to the whole unpaid balance of the total rent and any other moneys payable by the lessee under the agreement.  The lessee fell into arrears in payment of the instalments of the rent and the appellant gave notice of termination under cl.7(ii).  It was held in the Supreme Court, on the authority of O'Dea v. Allstates Leasing System (WA) Pty. Ltd. (1983) 152 CLR 359 , that the provision requiring the lessee to pay the full balance of the unpaid rent to the appellant was in the circumstances a penalty. Before us it was conceded that this conclusion was correct, as it clearly was.  Rogers J., at first instance, assessed damages on the basis that the appellant was entitled to receive, in addition to the arrears of rent at the date of the termination of the hiring, and the amount of any deficiency on the disposal of the goods, the present value of future rentals as at the date of the termination of the hiring.  He said that even though the provision in the lease was a penalty it was not to be completely disregarded, and that to restrict the appellant's right to damages to rentals which had accrued prior to termination might mean that the equitable power to relieve against penalties would work an injustice to the appellant.  The Court of Appeal by a majority (Mahoney and Priestley JJ.A., Hutley J.A. dissenting) held that the appellant was entitled to receive the sum of unpaid instalments of rental at the date of termination or repossession with interest and remitted the proceedings to the commercial list for further hearing.

The question for decision in the present case is a narrow one.  We are not required to consider the effect of Export Credits Guarantee Department v. Universal Oil Products Co. [1983] 1 WLR 399 ; [1983] 2 All ER 205 , where it was held that a clause which provided for payment of money on the happening of a specified event other than a breach of contractual duty owed by the contemplated payor to the contemplated payee was not a penalty.  We are not concerned with the question whether a penalty clause restricts a plaintiff to the amount of the penalty even though the plaintiff disregards the penalty clause and sues for damages and the actual damage exceeds the amount of the penalty.  It was accepted before us that the lessee had not repudiated the agreements, and no question arises as to what the position of the appellant would have been if there had been a repudiation by the lessee or if the appellant had availed itself of other remedies possibly open to it.  The sole question is what damages is the appellant entitled to recover in the present circumstances where the lessee, in breach of the contract, but without repudiating it, failed to pay the instalments when they became due and the appellant exercised its right to determine the hiring.

The answer to that question is that the appellant is in the position of a plaintiff in an ordinary action for damages for breach of contract.  Since no question of remoteness arises in the present case the appellant is entitled to recover such damages as it can prove that it has sustained as a result of the breach.  It is true to say, as Rogers J. said, that the lessor is entitled to recover its actual damage.  However, it is the actual damage which flowed from the breach which alone can be recovered.  If authority is required for that elementary proposition, it is sufficient to refer to Campbell Discount Co Ltd. v Bridge [1962] AC 600 , at pp 614, 617, 625; O'Dea v Allstates Leasing System (WA) Pty Ltd, at p 374; and Export Credits Guarantee Department v Universal Oil Products Co., at p 403; p 224 of All ER

The application of this principle to an agreement of hire purchase was considered by the English Court of Appeal in Financings Ltd. v. Baldock [1963] 2 QB 104 .  In that case the hirer of a truck failed to pay instalments that were due and the owner put an end to the hiring and took possession of the truck.  It was held that a clause which provided that in such an event the hirer should pay an amount which with the instalments already paid would equal two-thirds of the total hiring cost was a penalty clause and that the owner could recover damages only for any breach up to the date of termination and not thereafter. Accordingly the owners were entitled only to the instalments in arrears with interest up to the date of judgment.  The ratio of that part of the decision was that where there has been no repudiation by the hirer, and the owner has exercised his power to determine the hiring because the hirer was in arrears with his payments, any loss occurring after the determination will have resulted, not from the hirer's breach of contract in being late in his payments, but from the owner's election to determine the hiring:  see at pp.111-112, 115, 122-123.  That case has since been followed by the Court of Appeal in England in a number of cases and by Moffitt J. in Lessors (Aust.) Pty. Ltd. v. Westley (1964-65) NSWR 2091, at p 2098.  Very similar reasoning was accepted by this Court in Shevill v. Builders Licensing Board (1982) 149 CLR 620 , a case in which a lessor exercised a power of re-entry when the lessee fell into arrears in the payment of rent .

It was submitted on behalf of the appellant that the result reached by the Court of Appeal in the present case was unjust.  It was said that the leasing agreements were in substance financing transactions.  It was pointed out that since the property leased was by its nature likely to fall steeply in value once it had been used, the appellant was likely to suffer considerable financial detriment if the hiring came to an end after a comparatively short period since in those circumstances the right to recover any deficiency below the residual value would probably not recompense the appellant.  The answer to these submissions is that the appellant chose to enter into an arrangement of that kind, and to determine the hiring, and that its election to do so caused this loss.

The appellant cannot successfully seek to rely on general equitable principles which relate to the relief against penalties when those principles have long since hardened into definite rules governing the position of parties to a contract which contains a clause imposing a penalty for breach. It is well established in the modern law that the liability of a party who has broken a contract which contains a penalty clause is to pay the damages that have resulted from the breach.  In the present case, the additional damage in respect of which the appellant seeks to recover did not result from the breach; it resulted from the determination of the hiring which the appellant itself chose to bring about.

For these reasons in my opinion the Court of Appeal was correct in holding that the appellant was entitled to recover no more than the unpaid instalments of rental together with interest.  I would accordingly dismiss the appeal .