Amev-Udc Finance Ltd v Austin [1986] HCA 63;

Amev-Udc Finance Ltd v Austin [1986] HCA 63; - HCA 1986 case summary — Zoe

[52]

26. Immediately before this passage, Lord Denning had stated that he was prepared, if necessary, to hold that the hiring was terminated by a repudiation which was accepted. Subsequently in Financings Ltd v. Baldock (1963) 2 QB 104, at pp 112-113, his Lordship made it clear that the last sentence in the passage in Campbell Discount which we have quoted was relevant only to a case in which there was before termination a repudiation by the hirer of his obligation to pay future rentals and that where there was only a failure to pay instalments which did not go to the root of the contract, giving rise only to a right to terminate pursuant to an express stipulation in the contract, the owner can recover only instalments in arrear, with interest, and nothing else. The point is that when the lessor terminates pursuant to the contractual right given to him for breach by the lessee, the loss which he can recover for non-fundamental breach is limited to the loss which flows from the lessee's breach. The lessor cannot recover the loss which he sustains as a result of his termination because that loss is attributable to his act, not to the conduct of the lessee. It is otherwise in the case of fundamental breach, breach of an essential term or repudiation (see Progressive Mailing House Pty Ltd v. Tabali Pty Ltd [1985] HCA 14; (1985) 59 ALJR 373, at p 379; [1985] HCA 14; 57 ALR 609, at p 619). In the present case, perhaps in deference to the views expressed in Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, it was not argued that the existence of a contractual right on the part of the lessor or owner to terminate for a breach of what is otherwise a non-essential term endowed that term with the character of a condition, though the judgment of Jordan C.J. in Larratt v. Bankers & Traders Insurance Co. (1941) 41 SR(NSW) 215, at pp 225-226 seems to support the proposition. Such an argument was advanced in Financings Ltd v. Baldock, but was not discussed by the English Court of Appeal. However, the point was discussed by Mahoney J.A. in Citicorp Australia Ltd v. Hendry (1985) 4 NSWLR 1, at pp 25-26.

[81]

41. Instead of pursuing a policy of restricting parties to the amount of damages which would be awarded under the general law or developing a new law of compensation for plaintiffs who seek to enforce a penalty clause, the courts should give the parties greater latitude to determine the terms of their contract. In the case of provisions for agreed compensation and, perhaps, provisions limiting liability, that latitude is mutually beneficial to the parties. It makes for greater certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach or termination, and thus enables them to provide for compensation in situations where loss may be difficult or impossible to quantify or, if quantifiable, may not be recoverable at common law. And they may do so in a way that avoids costly and time-consuming litigation. But equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract. The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties (see generally Atiyah, The Rise and Fall of Freedom of Contract (1979), esp. Ch.22).

[84]

DEANE J.: It was said by Lord Selborne L.C. in Jervis v. Berridge (1873) 8 ChApp 351, at p 358 that there "are ... certain cases where a Defendant has incurred ... penalties ... in which the whole locus standi in curia of the Plaintiff (to equitable relief) is dependent on an election, which must be declared by the bill, to forgo legal rights for the sake of equitable remedies" (see, also, Langman v. Handover [1929] HCA 42; (1929) 43 CLR 334, at pp 349 and 356). Regardless of whether one agrees with that precise formulation, it was a fundamental doctrine of equity that relief in Chancery against enforcement of a penalty was only available where the quantum of the damage for which the impugned payment would be compensatory could be ascertained and upon the terms that the claimant did equity by paying the amount of the true damnification. That equitable jurisdiction was to relieve against direct or indirect enforcement. Thus, after penalties became unenforceable at common law, equity did not intervene in the opposite direction to declare that the party asserting unenforceability at common law should be compelled in Chancery to make good the loss actually sustained in any case where common law remedies were inadequate to achieve that result. That being so, the acceptance by the common law of the unenforceability of penalties largely removed the occasion for the exercise of the equitable jurisdiction to relieve against enforcement with the result that the terms upon which equity would grant such relief became ordinarily of but academic or historical interest. The equitable jurisdiction did not, however, cease to exist and the terms upon which equitable relief against penalties would be granted remain directly applicable in those comparatively rare cases in which the party asserting unenforceability is constrained to seek positive relief (whether primary or ancillary) which is purely equitable in character, such as an order for reconveyance. In such cases, it would seem that, in the absence of any statutory injunction against indirect enforcement such as commonly exists in money-lending legislation, such relief should be refused unless the plaintiff, in Lord Selborne's words, elects "to forgo legal rights for the sake of equitable remedies" or, as I would prefer to put it, submits to the terms on which equitable relief is available and does, or undertakes to do, equity by paying the amount of the actual loss sustained (cf. Mayfair Trading Co. Pty. Ltd. v. Dreyer [1958] HCA 55; (1958) 101 CLR 428, at pp 451ff.).

[86]

3. By reason of the conditions upon which special leave to appeal was granted, it is not now in dispute that, conformably with the decision of the Court in O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [1983] HCA 3; (1983) 152 CLR 359, the contractual obligation to make each of the impugned payments upon termination for breach pursuant to cl.7 constituted a penalty and was unenforceable at common law. As Mr. Bainton Q.C. (who appeared for the lessor) forcefully pointed out, however, that does not avoid the need to pay some attention, as a step along the path of determining the consequences of unenforceability in the circumstances of the present case, to the proper basis upon which the relevant payments were unenforceable as penalties. In that regard, two points need to be made at once. The first is that in the present case, as in O'Dea, the contractual liability to pay the penalties did not arise merely upon breach of a provision of the contract. It arose upon the election by the lessor to exercise its contractual right to terminate (under cl.7 of each lease agreement) upon the ground of that breach. The second point is that, in determining whether the amounts payable by the lessee upon such termination are properly to be seen as a genuine pre-estimate of loss or as a penalty, relevant loss is not restricted to the loss flowing immediately and merely from the actual breach of contract; it includes the loss of the benefit of the contract resulting from the election to terminate for breach (see I.AC (Leasing) Ltd. v. Humphrey [1972] HCA 1; (1972) 126 CLR 131, at pp 141-142; O'Dea, at pp 373, 379, 387; Campbell Discount Co. Ltd. v. Bridge (1962) AC 600, at pp 632-633; Cooden Engineering Co. Ltd. v. Stanford (1953) 1 QB 86, at pp 103-104; but cf. Mahoney J.A. in Citicorp Australia Ltd. v. Hendry (1985) 4 NSWLR 1, at pp 24-25, 29-30). Whatever their precise rationale might be, those two points indicate that the rules relating to the unenforceability of a contractual penalty extend to at least some cases where the actual liability to pay arises directly and immediately upon some event other than breach of contract and where the relevant measurable loss sustained by the party to whom the impugned payment is to be made flows from that other event and not merely from breach of contract. And that is as one would expect it to be.

[87]

4. The common law rules relating to the unenforceability of penalties were derived from equitable principles determining the availability of relief in Chancery. Like all rules with true equitable foundations, they are concerned with substance rather than form. It would, for example, have been out of accord with equity's concern with substance for the availability of equitable relief against the enforcement of a performance bond (i.e. a money bond subject to conditional defeasance) to have depended upon whether it was possible to identify some implied contractual warranty of which the failure to perform or pay constituted a technical breach of contract on the part of the plaintiff. In fact, of course, equity observed no such limitation upon its jurisdiction to grant relief. It granted relief against the enforcement of such a bond by a common law action in debt regardless of whether the failure to bring about or prevent the event which precluded fulfilment of the condition of defeasance constituted a breach of contract at common law. Indeed, the equitable jurisdiction to grant such relief preceded the evolution of general common law notions of liability for breach of contract which occurred with the development of the action in assumpsit. Nor, in my view, did equity ever commit itself to what would, as Lord Denning pointed out in Bridge (at p.629), have been the "absurd paradox" that "it (would) grant relief to a man who breaks his contract but (would) penalise the man who keeps it". The reasons why such a paradox would be unacceptable to equity transcend the fundamental notions of justice to which Lord Denning referred (ibid.). They go to the very basis of equitable jurisdiction. Equity followed and built upon the common law, adding its remedies by way of enforcement of the common law in some cases and granting its relief against the harshness of the operation of the common law in others. It was not, however, subversive of the common law. It would have been contrary to the underlying thesis of the equitable jurisdiction to prevent unconscionable advantage being taken of the harshness of the common law to have made the existence of legal fault in the plaintiff, as distinct from legal liability, a prerequisite of entitlement to relief or to have made the contumacy of the plaintiff's conduct giving rise to legal liability a ground for equitable relief against the liability. A fortiori, it would have been unreasonable for the common law itself, in withdrawing its remedies to enforce what equity regarded as a penalty, to have added a limitation that common law unenforceability did not extend to any case where the person burdened by the penalty was innocent of common law fault in the form of breach of contract. It is true that one can point to judicial statements, including some recent statements of high authority, which support the contrary view that a contractual clause will not be unenforceable as a penalty unless it provides for payment upon breach of contractual duty (see, in particular, Tool Metal Manufacturing Co., Ltd. v. Tungsten Electric Co., Ltd. [1955] UKHL 5; (1955) 1 WLR 761, at p 767; [1955] UKHL 5; (1955) 2 All ER 657, at p 662; Export Credits Guarantee Department v. Universal Oil Products Co. (1983) 1 WLR 399, at pp 402-404; (1983) 2 All ER 205, at pp 223-224). Such broad statements appear to me, however, to have generally been made in a context where the grounds for declining to hold that a penalty was involved are properly to be seen as more narrowly confined: e.g., that the alleged penalty represented part of the agreed royalty payments for a non-exclusive licence under letters patent (Tool Metal Manufacturing); that the relevant contractual liability was pursuant to an indemnity agreement and corresponded with the loss incurred (Export Credits Guarantee Department); or, in a highly debatable area, that the alleged penalty was the price of a right or option to terminate exercisable by the party liable to make the payment (see, e.g., Associated Distributors, Ltd. v. Hall (1938) 2 KB 83; Lombank, Ltd. v. Kennedy and Whitelaw (1961) N.ILR 192, at pp 214-215; Bridge, at pp 613-614; but cf. Bridge, at pp 631 and 633; the dissenting judgment of Lord MacDermott L.C.J. in Lombank, at pp.206-209 and the comments of G.H.L. Fridman in (1963) 26 MLR, 198). I do not see any of those general statements as binding this Court. For my part, for the reasons given above, I am not prepared to accept them as correctly stating the position either in equity or at common law. As I have indicated, the restriction of equitable relief or common law unenforceability to the case where it is possible to identify a technical breach of contract on the part of the party claiming relief or unenforceability would, in my view, be contrary to historical fact, general principle and basic common sense.

[88]

5. On the other hand, it is plain that the equitable and common law rules relating to penalties do not apply to every obligation to make a payment of money on the occurrence, or default of occurrence, of a specified event. They do not, for example, apply to policies of insurance where other rules inspired by comparable considerations of public policy operate to restrict the maximum amount payable in some circumstances. Nor do they apply to an obligation to pay money under a wagering or gaming contract where enforceability falls to be determined by reference to the special mix of legislative and common law rules applicable to such arrangements. While the rules relating to penalties developed as part of the broad equitable jurisdiction to relieve against forfeiture (see Lord Wilberforce in Shiloh Spinners Ltd. v. Harding (1973) AC 691, at pp 722ff.), they are properly to be seen, under a Judicature Acts system, as distinct rules dealing with a particular category of case. The general area in which they are applicable is where there exists a contractual liability (whether under seal or for consideration) to pay or forfeit an amount or amounts either on or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the party liable to make the payment in the sense that it is his or her responsibility to ensure that the specified event does or does not occur and where the stipulated payment contains an element of compensation for the economic loss or damage which might be sustained by the other party by reason of the particular occurrence or default. It is within that general area that a liability to pay or forfeit money may be discerned, as a matter of substance, as going beyond any genuine pre-estimate of damage and as representing a penal sanction or security against the occurrence or non-occurrence of an event which the obligor and obligee have seen as falling within the responsibility of the obligor. There, the particular rules relating to penalties are applicable to determine the enforceability of the liability to pay or forfeit the designated amount regardless of whether there was any distinct contractual condition or warranty that the event would or would not occur. There, if the liability is unenforceable as a penalty and the quantum of damage sustained is ascertainable, a court can give a monetary recompense or compensation for what the obligee primarily expected or desired, namely, the occurrence or non-occurrence of the particular event (cf. Pomeroy's Equity Jurisprudence, 5th ed. (1941), vol. 2, 432ff; Peachy v. Duke of Somerset (1721) 1 Str 447, at p 453 (93 ER 626, at p 630); Davis v. Thomas (1831) 1 Russ & M 506, at p 507 (39 ER 195, at p 195)).

[90]

7. The assertion by equity of jurisdiction to relieve against penalties did not involve any general objection to an agreement by one party to a contractual relationship to compensate the other for loss sustained by the other on the occurrence of an event seen by the parties as falling within the area of responsibility of the party liable to pay compensation. What equity objected to was the unconscionable inflation of the amount to be paid in circumstances where the quantum of damages was ascertainable. Indeed, by denying relief except on terms that compensation be paid for the loss actually sustained, equity had from the first recognized that it would be at least as unjust or unconscionable to deprive one party of compensation for the true loss caused by the event for which the parties had agreed that compensation was to be paid (e.g. non-performance of an act upon the performance of which the defeasance of a money bond was conditioned) as it would be to force the other party to pay an amount which was demonstrably and unconscionably excessive. Procedural questions aside - and those were substantially resolved by statute - there was no reason in principle or justice why the common law should render completely unenforceable an obligation which the rules of equity, which it was following, effectively enforced sub modo up to the amount of the true damnification. It is unnecessary here to essay a detailed examination of the process, beginning in the seventeenth century, by which the common law, in part supplemented and in part instigated by statute, accepted equitable principles in relation to the enforcement of penalties. It suffices that I indicate in essentially summary fashion some conclusions which a consideration of the cases and of the helpful academic writings on the point has led me to reach in relation to that process. The fusion of law and equity would, no doubt, have effectively resolved any real tension between the equitable and common law rules relating to penalties. In fact, as will be seen, any such tension had largely been resolved by the time of the enactment of the Judicature Acts by the Parliament of the United Kingdom.

[91]

8. In its development of rules relating to penalties, the common law truly proceeded analogously with equity. Its concern was with the extent to which penal clauses might be enforced by common law action rather than with their intrinsic validity. Thus, for example, in the case of money bonds, the device originally employed by the common law courts was to grant the defendant in the common law action an indefinite stay of proceedings (an "imparlance") but only on tender of principal, interest and costs. The adoption by the common law of substantive rules of relief corresponding with those of the Courts of Chancery was impeded by the limitations of common law remedies and procedures. For example, a common law judgment in debt (on the penal covenant) limited to the amount of damage actually sustained was likely to be inadequate in a case where the penalty was intended to be compensatory for what might be a series of distinct breaches of contract or performance: if judgment could only be obtained in an action on the penal clause for the amount of loss sustained by a breach which had already occurred, the right of action to enforce the penalty under the clause would at least arguably have passed into rem judicatam precluding further enforcement of the penalty to compensate for subsequent breach. Indeed, there is some disagreement among scholars (see, e.g., A.W.B. Simpson, "The Penal Bond with Conditional Defeasance", Law Quarterly Review, vol. 82 (1966), 392, at p.419; R.W. Turner, The Equity of Redemption, (1931), p.33) about whether there was common law acceptance of the unenforceability of penal clauses, as distinct from a procedural refusal to enforce them, before the time when the position was, to some extent, regulated by the Administration of Justice Acts of 1696 (8 and 9 William III c.11 s.8) and 1705 (4 and 5 Anne c.3 ss.12 and 13) (see now, as regards New South Wales, the Imperial Acts Application Act 1969 (N.S.W.), ss.33 and 34). The effect of the statute of 1696, as subsequently applied and developed by common law courts, was summarized by Bailhache J. in Wall v. Rederiaktiebolaget Luggude (1915) 3 KB 66, at p 72: "in an action upon a bond (and this includes a penalty clause in a contract) conditioned for the performance of a contract the plaintiff must assign a breach, or as many breaches as he thinks fit, of the condition, and though he is entitled on proving a breach to judgment for the full amount of the penalty he can only recover by execution the amount of the damages proved to have been sustained by the breach or breaches (i.e. of the condition) assigned. The result of suing for the penalty (i.e. "in archaic phraseology to sue in debt" (Wall's Case, at p.73)) is therefore that the plaintiff recovers proved damages, but never more than the penal sum fixed" (emphasis added). Regardless of whether the statutory provisions are seen as essentially substantive or as essentially procedural, it would seem plain enough that, under that effect and instigation, the general position was established by the mid-eighteenth century that a contractual obligation to make payment of a penalty was unenforceable at common law but only to the extent that the amount payable exceeded the quantum of relevant loss or damage which could be proved to have been actually sustained. That being so and notwithstanding some judicial statements to the contrary (see Diplock L.J. in Financings Ltd. v. Baldock (1963) 2 QB 104, at p 120; but cf. Diplock L.J. in Financings, at p 121), a penal clause is not void at common law. Nor is it even completely unenforceable. Common law unenforceability, while ab initio (see Kirby P. and Priestley J.A. in Citicorp Australia Ltd., at pp.23, 24, 39), is limited to the extent to which liability under the clause exceeds the true damnification (see Astley v. Weldon (1801) 2 Bos. & Pul. 346, at p 353 [1801] EngR 108; (126 ER 1318, at p 1322); Wilbeam v. Ashton [1807] EngR 20; (1807) 1 Camp 78 (170 ER 883); Lord Elphinstone v. Monkland Iron and Coal Co. (1886) 11 App.Cas. 332, at p 346; Elsley v. J.G. Collins Ins. Agencies Ltd. (1978) 83 DLR (3d) 1, at p 15).

[93]

10. On the approach that a payment cannot be a penalty unless it arises on breach of contract, one conceivable view in the present case is that, for the purposes of the common law rules relating to penalties, the true damnification is restricted to the loss arising directly and immediately from the actual breach of contract and does not extend to the loss arising upon termination consequent upon the breach. A more qualified and possibly more rational, though anachronistic, view would be that the amount recoverable in the action on the penalty (i.e. the old action in debt) was controlled by the amount which could have been recovered in an action for damages for the breach (i.e. the old action in assumpsit). Either view lies ill indeed, however, both with the fact that the event upon which the penal obligation was conditioned in the present case was termination upon breach and not the mere breach and with the position that the loss against which the impugned payments were compensatory, in that it is the loss against which they were to be measured for the purpose of determining whether they constituted a penalty, included the loss sustained upon termination. On that approach, the explanation for such a payment being a penalty only if it exceeds the loss sustained upon termination upon breach and notwithstanding that the contractual obligation to make it arises only on termination would seem to be that advanced by the majority of the English Court of Appeal in Cooden Engineering. In essence, that explanation is that, at least for the purposes of the rules relating to penalties, the loss sustained by reason of the exercise of a contractual right to terminate upon breach in a case such as the present is to be seen as flowing from the breach. The point was clearly made by Hodson L.J. in Cooden (at p.116) when he expressed his difficulty in seeing "the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine" (see also Somervell L.J. at pp.96-97). In that context and notwithstanding the support for the contrary view which can be found in some cases, I am unable to accept that the common law would found upon that very distinction between breach and termination to reduce the extent to which a penalty clause can be enforced below the actual amount of the loss sustained upon termination for breach. Were it otherwise, the common law would be guilty of propounding a paradox as illogical as that which Lord Denning rightly denounced in Bridge (see above) as too "absurd" to be countenanced by equity. That paradox, which has been adverted to in the foregoing, would be: although no distinction is drawn between a payment contingent upon breach and a payment contingent on termination in determining whether the relevant payment is within the penalty area (i.e. a clause may be penal regardless of whether the sum in question is payable on breach or on termination); and although no distinction is drawn between loss flowing from breach and loss consequential upon termination in determining whether the relevant payment is penal or a genuine pre-estimate; and although a liability to pay an amount by way of compensation for the loss upon termination for breach (including loss of bargain) will not be unenforceable at all if the amount represents a genuine pre-estimate of that loss; yet in determining the pro tanto enforceability of a penalty clause the loss recoverable is limited to that resulting from breach and excludes the loss flowing from termination (that loss being the very loss for which the parties intended to provide compensation).

[98]

The effect of that passage is that there is a prima facie assumption that the consequences which flow from the exercise of an express contractual right to terminate on breach are governed by "the ordinary law applicable to the avoidance of contracts for breaches of essential promises". It appears to me that that assumption was not negatived in the present case. The application of that assumption leads to the conclusion that the lessor was entitled to recover the loss it sustained upon termination of the contract on the same basis as if breach by the lessee giving rise to the lessor's right to terminate was a breach of an essential promise. It is true that there is a degree of tension between that conclusion and the reasoning accepted by the majority of the Court in Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 (cf. the judgment of Mahoney J.A. in the New South Wales Court of Appeal in Shevill, unreported, 19 December 1980). In Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. [1985] HCA 14; (1985) 59 ALJR 373, at pp 389-390; [1985] HCA 14; 57 ALR 609, at pp 637-638, I alluded, in passing, to the difficulty I have with the decision in Shevill. The approach adopted in the judgments in that case seems to me, with all respect, to lie ill with modern notions of causation and remoteness in the law of contract (cf., for example, Koufos v. C. Czarnikow Ltd. [1967] UKHL 4; (1969) 1 AC 350, at p 385; Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at pp 466, 471-472) while the actual decision confounds long established practice and understanding of real property lawyers in New South Wales in relation to the consequences of termination of a real property lease upon the exercise by the lessor of a contractual right of re-entry upon breach (cf. Mahoney J.A. in Citicorp Aust Ltd. v. Hendry). It suffices, for present purposes, to say that, at least to the extent that Shevill might be seen as being in conflict with the prima facie assumption enunciated by Jordan C.J. in Larratt, I would not at present be prepared to extend its authority outside the area of such termination of a real property lease. I would, however, stress the tentative character of my views in that regard. Indeed, if the outcome of the present appeal had turned upon this aspect of the matter, it may have been thought desirable that the respondents should be given a further opportunity to make submissions in relation to it.

[107]

8. He reached his conclusion by the application of the decision of this Court in O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [1983] HCA 3; (1983) 152 CLR 359. That case concerned the lease of a truck upon terms not dissimilar from those contained in the leasing agreements in the present case. The lease was terminated and the truck was repossessed by the lessor upon default in the payment of rent by the lessee. The action was brought to recover, amongst other amounts, rent for the balance of the entire term of the agreement. In answer to the claim that the liability for the lessee's accelerated rental payments was a penalty, the lessor pointed to a provision in the agreement (and there was an equivalent provision in the agreement in this case) making the entire rental for the whole of the term payable on the signing of the agreement. What was evidently intended by this provision was the creation of a present debt which could be paid, as a matter of indulgence, by instalments. Reliance was placed upon the decisions in The Protector Loan Co. v. Grice (1880) 5 QBD 592; Wallingford v. Mutual Society (1880) 5 App.Cas. 685; Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. [1906] HCA 87; (1906) 4 CLR 672. However these authorities were held to be inapplicable because, upon its true construction, the leasing agreement did not create a debitum in praesenti solvendum in futuro. That clearly was so in O'Dea (and is so in the present case) where the provision relied on by the lessor entitled him to terminate the lease and take possession of the goods upon the failure of the lessee to pay an instalment of rent, with the expressed consequence that a sum equal to the whole of the balance of the rent for the entire term became payable. Because such a term operates upon the premature termination of the lease, it can hardly be construed as the withdrawal of an indulgence to continue paying the rent by instalments. There no longer being any lease, it is, strictly speaking, inaccurate even to refer to the amount payable as rental, even as accelerated rental payments, although it is convenient to continue to do so.

[117]

14. It is, of course, clearly established that a penalty clause does not preclude the recovery of actual loss arising from breach of contract and that the quantum of damages is to be assessed upon ordinary principles. Recovery was allowed by the law in either of two ways. There was a right to sue for the penalty (i.e. in debt) or to sue for damages for breach of contract disregarding the penalty (i.e. in assumpsit). In an action for the penalty, the recovery of proved damages was limited to a maximum amount equal to the penal sum fixed, however many breaches might be assigned. See Wall v. Rederiaktiebolaget Luggude (1915) 3 KB 66, at pp 72-73. The limit is now provided in New South Wales by ss.33 and 34 of the Imperial Acts Application Act 1969 (N.S.W.), which replaced the English legislation 8 & 9 Wm.III c.11 s.8 (dealing with penalties for the non-performance of covenants or agreements) and 4 & 5 Anne c.3 ss.12, 13 (dealing with money bonds). The effect of that legislation was to regularize the position which had been reached at common law by the end of the seventeenth century in deference to the relief available in equity, but it seems to have played little direct part in the development of the relief afforded by the courts even if it may be said to be reflected in the decisions. See Betts v. Burch (1859) 4 H & N 506, at p 511; [1859] EngR 585; 157 ER 938, at p 940; Wall v. Rederiaktiebolaget Luggude at pp 72-73. The distinction between the right to sue upon the penalty and recover proved damages and the right to sue for damages disregarding the penalty has ceased to be of any real practical importance save, perhaps, in relation to the debate whether, even in an action for damages in disregard of a penalty clause, the penal sum provides a limit to recovery. See Cellulose Acetate Silk Co. v. Widnes Foundry (1925) Ltd. (1933) AC 20, at p 26; Robophone Facilities Ltd. v. Blank (1966) 1 WLR 1428, at p 1446; (1966) 3 All ER 128, at p 142; Elsley v. J.G. Collins Ins. Agencies Ltd. (1978) 83 DLR (3d) 1, at pp 14-15; W & J Investments Ltd. v. Bunting (1984) 1 NSWLR 331. It is unnecessary to pursue that question here.

At a glance

Court

Decision date

Before

Source

Judgment (144 paragraphs)

Amev-Udc Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170 (4 November 1986)

Parties

Legislation Cited (2)

Cases Cited (12)