Abraham v Abraham [2015] NSWSC 785 | Case summary

THE OBLIGATION TO PAY INTEREST ON A JUDGMENT DEBT

The first plaintiff claims an award of approximately $75,000 for interest said to have accrued between 23 October 2013 and 7 May 2014.
That interest is said to have accrued on the judgment debt by operation of the Civil Procedure Act 2005 NSW ("CPA"), section 101(1).
CPA s 101(1) provides that, "[unless] the Court orders otherwise, interest is payable on so much of the amount of a judgment (exclusive of any order for costs) as is from time to time unpaid."
The defendants apply, under or by reference to CPA s101(1), for an order "otherwise".
CPA s 101(6) provides that section 101 "does not authorise the giving of interest on any interest payable under this section". Given her reliance on section 101(1) for her claim of interest, the first plaintiff claims no "interest on interest" referable to the time that has elapsed since 7 May 2014.
In summary, the orders made by the Court on 23 October 2013 were to the following effect (with emphasis added): 1. Order 1 embodied a declaration that the first defendant (the registered proprietor of a Strathfield property (the then residence of the first plaintiff) held the property on trust for the first plaintiff. 2. Order 2 ordered that there be judgment for the first plaintiff against the defendants jointly and severally in the sum of $1.8 million. 3. Order 3 ordered that the defendants jointly and severally pay the plaintiffs' costs of the principal proceedings. 4. Order 4 took the form of a reservation of liberty to apply, including liberty "to bring an application for the appointment of a provisional liquidator of the second and third defendants upon non-compliance with the agreement hereunder, and/or an application to enforce the charge in the agreement hereunder." 5. Orders 5 and 6 provided for the defendants to transfer a motor vehicle and mini motorcycle to the first plaintiff.
The Court also noted an agreement of the parties (made "in consideration of the settlement of" the proceedings), the terms of which agreement were contained in paragraphs numbered consecutively from and including "paragraph 7".
In summary, those terms were to the following effect (with emphasis added): 1. paragraph 7 provided that "[subject] to the defendants' compliance with the terms of the Orders and this Agreement, the judgment in [order 2] will not be enforced, before 23 April 2014, and nor will the first plaintiff be entitled to interest on the judgment in respect of the period during which the judgment is not to be enforced." 2. paragraph 8 provided that the defendants would, pending payment of the judgment sum recorded in order 2, pay all interest and charges in respect of all mortgages and loans and other liabilities secured against the first plaintiff's residence (excluding council rates, water rates and any land tax, if applicable) and they would not further encumber the residence, nor draw down or borrow further moneys, under any facility secured against the residence, nor do or omit to do anything which would have the consequence of the total amount of debt secured against the residence being increased. 3. paragraph 9 provided that the first defendant would grant to the first plaintiff a limited power of attorney for the purpose of selling the residence and all dealings with the mortgages of the residence for the purpose of or incidental to sale of the residence. 4. paragraph 10 provided for the first plaintiff to do all things and take all reasonable steps to procure the sale of the residence on or before 23 April 2014 (with a listing of the residence for sale by 1 February 2014). 5. paragraph 11 provided that the first plaintiff was entitled to keep for her own benefit the entire net proceeds of the sale of the residence. 6. paragraph 12 provided that the first defendant would not revoke his power of attorney or do anything to jeopardise or interfere with the sale of the residence by the first plaintiff. 7. paragraph 13 provided that, on or before 23 April 2014, the first defendant would: (i) if the residence had not been sold, procure the discharge of all mortgages and other encumbrances secured against the residence; and (ii) if the residence had been sold, pay to the first plaintiff (or directly to the holders of any mortgage or other security on completion) the amount that was required to be paid to the first mortgagee or other security holders to discharge their mortgage and/or other security on completion. 8. paragraph 14 provided that all payments made to discharge two identified mortgages in compliance with paragraph 13, not being payments of interest and charges that were required to be paid pursuant to paragraph 8, "shall be payments in reduction of the Judgment Sum". 9. paragraph 15 provided that any remaining amount of the Judgment that was payable after clause 13 had been complied with in full "shall be paid to the first plaintiff and the amount of the costs to which the plaintiffs are entitled under [Order 3] shall be reduced by that amount." 10. paragraph 16 provided for five nominated properties (other than the first plaintiff's residence) to be charged with the liability of the defendants for the Judgment Sum. 11. paragraph 17 provided that the defendants agreed to pay the costs of and associated with the lodgment of caveats over those properties. 12. paragraph 18 provided that "[the] intention of the parties by the terms of this agreement and orders includes an intention that: [i] the residence is to be sold; [ii] the first plaintiff is to receive for her own benefit the value of the net sale proceeds of the residence as if it were unencumbered; [iii] in addition the plaintiffs are to be paid the amount of their costs." 13. paragraphs 19-24 contained incidental provisions, including a mutual release of rights.
The dispute between the parties about the payment of interest focuses upon the defendants' contentions that: 1. any obligation on their part to pay interest under CPA s 101 (read with order 2 and the terms noted in the agreement, particularly those recorded in paragraphs 7, 13-15 and 18) constitutes a penalty (under the law analysed in Andrews v ANZ Banking Group Limited (2012) 247 CLR 205, especially at 216[10]); and/or 2. an order should, in justice, be made under or by reference to section 101(1) relieving the defendants of any obligation to pay interest, because the judgment debt for which order 2 provided was, on a proper construction of the parties' agreement for compromise, intended as no more than security for performance of the obligation of the defendants to effect a timely discharge of mortgages over the first plaintiff's residence.
Pointing to the statement of intention recorded in paragraph 18 of the formal agreement, and noting that the defendants discharged all mortgages on the residence on 7 May 2013 (approximately a fortnight later than they were required to do on or before 23 April 2014), and that they had paid all interest payable on the mortgages in the meantime, the defendants contend that any obligation to pay the interest claimed by the first plaintiff (for the period between 23 October 2013 and 7 May 2014) must be characterised as penal. On their case, an obligation to pay interest for a period of 6.5 months arising in connection with a breach of the contract of compromise or, perhaps more accurately, an untimely performance limited to a delay of about a fortnight (in circumstances in which the first plaintiff is said to have suffered no loss) is inherently penal.
The first plaintiff does not concede that order 2 (or any underlying agreement) can be characterised as mere security. She says that the sum of $1.8 million must be taken to have been negotiated as a figure designed to embody a compromise of the whole of the dispute between the parties in the principal proceedings, not merely as a pre-estimate of an amount of money required to discharge mortgages over the residence and to pay costs payable to the plaintiffs.
As a matter of arithmetic, the total amount secured by the subject mortgages as at 23 October 2013 was $1,559,256.39, and the plaintiffs' costs were ultimately assessed at $227,357.39.
Any obligation the defendants have to pay interest to the first plaintiff in the present proceedings arises from CPA s101(1), read with the definitions of "judgment", "judgment creditor", "judgment debt" and "judgment debtor" in CPA s3(1) and the terms of the "consent orders" of 23 October 2013.
With emphasis added, CPA s 3(1) defines terms as follows: "Judgment includes any order for the payment of money, including any order for the payment of costs. Judgment creditor means the person to whom a judgment debt is payable. Judgment debt includes: (a) any amount payable under a judgment, and (b) any interest after judgment that is payable on that amount under section 101, and (c) any other amount payable under rules of court without the need for a judgment. Judgment debtor means the person by whom a judgment debt is payable."
CPA s101 is in the following terms (with emphasis added): "101 Interest after judgment (1) Unless the court orders otherwise, interest is payable on so much of the amount of a judgment (exclusive of any order for costs) as is from time to time unpaid. (2) Interest under subsection (1) is to be calculated, at the prescribed rate or at such other rate as the court may order, as from: (a) the date on which the judgment takes effect, or (b) such later date as the court may order. (3) Despite subsection (1), interest is not payable on the amount of a judgment if the amount is paid in full within 28 days after the date on which the judgment takes effect, unless the court orders to the contrary. (4) The court may order that interest is to be paid on any amount payable under an order for the payment of costs. (5) Interest under subsection (4) is to be calculated, at the prescribed rate or at such other rate as the court may order, as from: (a) the date or dates on which the costs concerned were paid, or (b) such later date as the court may order. (6) This section does not authorise the giving of interest on any interest payable under this section. (7) In this section, a reference to the "prescribed rate" of interest is a reference to the rate of interest prescribed by the uniform rules for the purposes of this section."
The introductory words of CPA s101(1) are a source of power in the Court to make an order countermanding an obligation otherwise imposed by CPA s 101(1) to pay interest on a judgment. However, they are not the exclusive source of such a power. The Court generally retains control of its own processes, including proceedings for the enforcement of a judgment debt. Leaving aside its inherent jurisdiction to stay proceedings (eg, as an abuse of process, illustrated by Walton v Gardiner (1993) 177 CLR 378 at 392-396), the Court has statutory powers to grant a stay, including powers under CPA s67 and s 61 of the Supreme Court Act 1970 NSW ("SCA").
CPA s67 is in the following terms: "67. Stay of proceedings Subject to rules of court, the court may at any time and from time to time, by order, stay any proceedings before it, either permanently or until a specified day."
SCA s61 is a product of the Court's adoption of a Judicature Act system of administration upon commencement of the Supreme Court Act and cognate legislation on 1 July 1972. It is in the following terms: "61 Defence or stay instead of injunction (1) The Court shall not restrain by injunction any proceedings pending in the Court. (2) Every matter of equity on which an injunction against the prosecution of proceedings in the Court might formerly have been obtained, whether on terms or conditions or not, may be relied on by way of defence in the proceedings. (3) Where any person, whether a party to proceedings in the Court or not: (a) would formerly have been entitled to apply to the Court to restrain the prosecution of the proceedings, or (b) is entitled to enforce by attachment or otherwise any judgment or order in contravention of which the proceedings are taken, the Court may, on application by the person, stay the proceedings either generally or to such extent as the Court thinks fit. (4) This section does not affect the powers of the Court to stay proceedings otherwise than pursuant to this section.
As explained by Brereton J in In the matter of Prismex Technologies Pty Limited; Colin Lindsay Taggert v John Matyear [2013] NSWSC 292 at [39]-[63], SCA s 61 is a source of jurisdiction in the Court to decline to enforce an order of the Court where it would be inequitable to do so at the time when enforcement is sought.
Having reviewed Harvey v Hall (1873) LR 16 Eq 324, Mullins v Howell (1879) 11 Ch Div 763, Purcell v FC Triggell Limited [1971] 1 QB 358, Thwaite v Thwaite [1981] 3 WLR 96 and Ramsey v Ramsey [1983] FLC 91-301, his Honour wrote as follows, in paragraph [49] of his judgment: "On those authorities, it seems to me…that Courts have a discretion to decline to enforce their orders where it would be inequitable to do so at the time when enforcement is sought. The necessary corollary is that, pursuant to (NSW) Supreme Court Act 1970 s61, the Court may stay further proceedings, including enforcement, where there is an equitable objection to doing so. Previously - that is to say, before Judicature and the Supreme Court Act, a Court of Equity would have restrained the plaintiff by injunction from proceeding or issuing enforcement. The effect of s61 is that that should now be done by a stay in the proceedings 'either generally or to such extent as the court thinks fit'".
Absent a countervailing order, the judgment for $1.8 million awarded in favour of the first plaintiff against the defendants by order 2 of the "consent orders" of 23 October 2013 was sufficient to enliven in the defendants an obligation, under CPA s101(1), to pay interest on the judgment. Absent a countervailing order, the obligation to pay interest became, by force of the legislation and without more, an incident of the judgment debt for $1.8 million payable by the defendants to the first plaintiff.
Interest began to accrue on the judgment from the time of judgment and continued to accrue until, on 7 May 2014, the debt was satisfied. The defendants' obligation to pay interest did not spring up only after the time of judgment or contingently upon the defendants' non-performance of contractual obligations. The first plaintiff's agreement to forego an entitlement to interest was (as paragraph 7 of the parties' agreement provided) conditional upon "the defendants' compliance with the terms of the Orders and this Agreement".
Where proceedings are resolved by or with the benefit of consent of the parties based on a contract of compromise, care needs to be exercised in distinguishing between: (a) a judgment or order made by the Court; and (b) a formal notation by the Court of an inter partes agreement associated with a determination of the proceedings. Different considerations might apply to the different elements of a settlement of proceedings.
Whatever affinity there may be between a judgment or order made by the Court and an underlying, or associated, agreement between parties to the proceedings, a judgment or order made "by" or "with" the consent of the parties must be viewed, primarily, as a public act of the Court, not merely a private transaction between affected parties.
It is, at least, debateable whether (under the Court's Judicature Act system of court administration) the equitable doctrine governing relief against penalties applies directly to a judgment or order of the Court.
Whether a contractual obligation constitutes a penalty against which the Court will grant relief under the general law is a question of construction which focuses upon substance rather than form and upon the intentions of the parties (viewed objectively rather than subjectively) at the time the contract was made: O'Dea v All States Leasing System (WA) Pty Limited (1983) 152 CLR 359 at 368 and 399-400; Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131 at 142. The embodiment of a contract in a judgment or order of the Court introduces a new element. Principles governing the processes of the Court, and the finality of judgments of the Court, come into play.
Once a judgment is given or an order is made by the Court, even "by consent", it has an operation independent of any underlying contract. A judgment or order by consent generally operates as a res judicata: K.R. Handley, Spencer Bower and Handley's Res Judicata (LexisNexis, London, 4th ed, 2009), paragraphs [2.16]-[2.19] and [5.20]; Land Enviro Corp Pty Ltd v HTT Huntley Heritage Pty Ltd (2008) 72 NSWLR 160. A consent judgment is incapable of being reversed or varied on appeal, save in exceptional circumstances: Newcrest Mining Limited v Thornton (2012) 248 CLR 555 at 571[35], citing Nau v Kemp & Associates Pty Ltd (2010) 77 NSWLR 687 at 696 [29].
If an underlying contract is impeached (eg, because made by a lawyer with a want of authority to bind a party), a judgment or order of the Court might be set aside, inter alia, as having been made irregularly, illegally or against good faith: Harvey v Phillips (1956) 95 CLR 235 at 242-243; Uniform Civil Procedure Rules 2005 NSW ("UCPR"), rule 36.15(1); Dimarti v Dimarti [2015] NSWSC 97 at [18]-[19].
Express powers in rules of court for the setting aside and variation of judgments and orders (gathered in UCPR Part 36 Division 4) are predicated upon an assumption that a judgment or order of the Court is valid unless and until set aside: Cameron v Cole (1944) 68 CLR 571 at 590; NSW v Kable (2013) 252 CLR 118 at 130, 132-134 and 140. That assumption is fundamentally inconsistent with the notion, applied under the general law, that a contractual obligation that constitutes a penalty is unenforceable or, perhaps, void: Citicorp Australia Limited v Hendry (1985) 4 NSWLR 1 at 39-40; AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170 at 175, 190-194 and 203.
A contention that a provision in a contract of compromise, embodied in a judgment or order of the Court, is unenforceable as a penalty may need to grapple with the reality that a requirement of the general law governing penalties, that questions of construction focus upon substance rather than form, may require substantial weight to be given to a decision by parties to embody an obligation in a judgment or order of the Court, not merely in an ancillary, inter partes agreement. As part of an overall arrangement affecting parties, an obligation imposed in the form of a judgment or order rather than simply as a term of an agreement might not readily be characterised as something less than a primary obligation (a collateral obligation or a mere security for performance of another obligation) for the purpose of determining whether it is penal. Form may be a strong indicator of substance where parties have deliberately engaged a formal procedure in recording an agreement to settle proceedings.
A contention by a party that a proposed judgment or order, sought to give effect to a contract of compromise of proceedings, might be penal could, if disclosed to the Court at the time of settlement, result in a refusal on the part of the Court to lend its aid to the parties' agreement, at least as formulated.
In an appropriate case, equitable principles might be applied by analogy in the process of enforcement of a judgment or order because, as Brereton J has demonstrated, the jurisdiction of the Court extends to staying a judgment or order it would be inequitable to enforce. In the current proceedings, the jurisdiction to grant a stay also merges with that under the introductory words of CPA s101(1) to countermand the operation of the subsection.
A "consent order" giving effect to a contract of compromise can, generally, be impeached on any ground upon which an underlying contract can be impeached: Harvey v Phillips (1956) 95 CLR 235 at 242-244. However: (1) where a party seeks to set aside or vary a consent order based on contract, and the underlying contract itself cannot be set aside or varied, the case would need to be exceptional before the Court would exercise any discretion in favour of the applicant (Lachlan v HP Mercantile Pty Limited [2015] NSWCA 130 at [20]-[21], affirming Paino v Hoffbauer (1988) 13 NSWLR 193 at 198); (2) where the making of an order sought to be set aside or varied has been attended by an independent exercise of substantive judgment on the part of the Court, a want of proximity between the parties' contract and the Court's order might put enforcement of the order beyond the operation of private law principles; and (3) where a consent judgment or order creates a present debt, coupled with an agreement by a judgment creditor to accept part payment of the debt as full discharge if certain conditions are met, and a stipulation that, if the conditions are not met, the full amount will be payable, there is no scope for a finding of penalty (O'Dea v All States Leasing System (WA) Pty Limited (1983) 152 CLR 359 at 367, applied in Lachlan v HP Mercantile Pty Limited [2015] NSWCA 130 and cases noted at [40]-[50]).
In their application to the present proceedings, these principles are consistent with the description of a penalty, upon which the defendants rely, found in Andrews v Australia & New Zealand Banking Group Limited (2012) 247 CLR 205 at 216-217[10]. There the High Court wrote as follows: "In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation."
I am not satisfied that, on their proper construction, read as a whole and viewed in substance, the notations and orders made on 23 October 2013 involve any imposition on the defendant of a penal obligation. On the contrary. The judgment debt created by Order 2, together with the incidental obligation to pay interest that arose under CPA s101(1) and accrued from the time of judgment, was a primary, not a secondary, obligation imposed on the defendants, in the character of a present debt, albeit subject to an agreement for interest to be foregone by the first plaintiff upon a timely performance by the defendants of their obligations. The judgment was not merely security for performance of the agreement. It had an independent, primary character.
I do not accept, as the defendant would have it, that the judgment debt for which order 2 provided was intended to serve only as security for the defendant's due performance of an obligation to service, and to discharge in a timely manner, the mortgages charged against the residence which, by virtue of order 1, the first plaintiff was declared to own beneficially.
The "intention of the parties" identified in paragraph 18 of their agreement is recorded as "inclusive" of an intention that the first plaintiff receive the benefit of a sale of the residence as if unencumbered. That is consistent with an intention that she also receive the benefit of a judgment for $1.8 million as a freestanding entitlement, independent of the value of the mortgages (securing, as at 23 October 2013, a debt of $1,559,256.39) to be discharged.
The defendant's obligation to pay interest on that judgment arose, not by virtue of an express agreement on the part of the parties, but by virtue of CPA s101(1), conditional relief against the operation of which was afforded by the agreement contained in paragraph 7 of the parties' agreement.
The obligation to pay interest did not arise, by virtue of an inter partes agreement, upon breach of the agreement or as a punishment imposed on the defendants. It arose, by virtue of legislation, upon judgment being given. Its purpose was to compensate the first plaintiff for delay in payment of the judgment debt, not to punish the defendants. Interest accrued from the outset subject to a conditional, inter partes agreement that the obligation to pay interest would not be enforced in the event of the defendants' timely performance of specified obligations. That agreement did not displace, rise above, or render collateral, the court order that created the judgment debt upon which, by virtue of the legislation, interest accrued from the time limited by CPA s 101.
The agreement in paragraph 14 (for reduction of the principal sums owed on mortgages on the residence to serve as payments in reduction of the judgment debt) operated to the advantage of both parties in that it both reduced the indebtedness of the defendants (to their bank and the first plaintiff) and enlarged the equity available to the plaintiff as the beneficial owner of her residence. It did not render the defendants' liability under the judgment, or to interest on the judgment, a collateral obligation.
Nor did the agreement (in paragraph 15) for the balance of the judgment sum, after the discharge of mortgages, to be paid to the first plaintiff and to be applied in reduction of the entitlement of the plaintiffs (including, but not limited to the first plaintiff) to have their costs paid.
The amount of the judgment was the product of a compromise of competing contentions referable to several parcels of land, not merely the first plaintiff's residence. It might have been negotiated with an eye half-focussed on the amount of the mortgage debts secured against the title to the residence, or so the defendants might have reasoned themselves towards a settlement. However, viewed objectively, the judgment debt (including accruing interest) to which they consented was a primary obligation, not a collateral one or mere security for performance of another. Enforcement of the obligation to pay interest is not inequitable. It is but enforcement of the parties' bargain, unattended by a penalty.
All things considered, in my opinion the first plaintiff is entitled to an order, as she seeks, for the payment to her of interest accrued in the sum of $75,396.88

Abraham v Abraham

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (6 paragraphs)

Parties

Cases Cited (16)