Appellant v Respondents

2 Before the learned Magistrate[1] the facts were agreed between the parties and his Honour was required to determine only the discrete legal issue of whether or not the relevant provisions of the Deed of Settlement were enforceable or whether they constituted a penalty. [2]

Deed of Settlement entered into by way of compromise of a costs review proceeding

3 The Deed of Settlement in issue arose out of past dealings between the appellant, a law practice, and the respondents, who were clients of the law practice. Between 2008 and 2010, a company then known as Legal Practice Management (Vic) Pty Ltd (ACN 116 234 178) ('LPM'), and formerly known as Keelins Lawyers, performed various legal work for some or all of the three respondents (defendants), Simms Corp Hotels & Leisure Pty Ltd, Simms Corp Pty Ltd and Peter Simitzis, and also another corporate entity named Beloti Pty Ltd (together the 'Simms entities'). LPM had rendered bills of costs in taxable form, totalling $137,430.68, for legal work undertaken in the various diverse and complex disputes in which it had been engaged by one or of the Simms entities, but most of the bills remained unpaid.

4 On 7 May 2010, the Simms entities initiated a costs review proceeding in the Costs Court of the Supreme Court of Victoria (proceeding no. SCI 2010 2476) by filing a 'Summons for Taxation' seeking a taxation of the respective bills of legal costs that LPM had rendered to one or more of them. [3] The consequence of them making such an application was that 'the costs review must take place without any money being paid into court on account of the legal costs the subject of the application' and LPM was not permitted to 'commence any proceedings to recover the legal costs until the costs review had been completed': see s 3.4.41(1)(a) and (b) of the Legal Profession Act 2004 (Vic).

5 The costs review was fixed for hearing in the Costs Court in September 2011 and set down with an estimate of 5 days. However, before the matter was heard, the Simms entities and LPM , with the assistance of their respective legal advisers, reached an agreement to settle the costs review proceeding on the terms set out in the Deed of Settlement executed by each of them and dated 21 September 2011.

6 Under the Deed of Settlement, the parties agreed that all of the legal fees rendered, of which an amount of $132,394.12 was outstanding,[4] would be settled by LPM accepting the lesser sum of $80,000 (defined in the Deed of Settlement as the 'Settlement Amount'), to be paid by the Simms entities according to a schedule of regular monthly instalments. Clause 7 of the Deed of Settlement specifically provided that each of the Simms entities 'is jointly and severally liable to pay the Settlement Amount in accordance with the Instalment Plan and each of the Applicants [the Simms entities] is jointly and severally liable in the event judgment is entered against the Applicants in accordance with paragraph 8.'

7 Clauses 8 and 9 of the Deed of Settlement specified separate events of default, one being the failure to pay an instalment and the other being the occurrence of an insolvency event, with each event having the same consequences, as follows:

1. In the event the Applicants fail to make any one or more payments listed in the Instalment Plan, and payment is not received by the Respondent within 5 business days of the date on which that payment was due, regardless of whether or not the Respondent has issued a demand for payment, notice of default or any other notification to the Applicants, then:

(a) The Applicants agree the Respondent is entitled to have judgment entered in its favour against each and every one of the Applicants for the total amount of $132,394.12, less any amounts paid pursuant to the Instalment Plan up to the day of default by the Applicants, plus statutory interest and costs incurred by the Respondent in obtaining judgment, those costs to be allowed on an indemnity basis ('the Judgment Amount'); and

(b) The Applicants agree an affidavit of a solicitor of the Respondent stands as irrefutable proof in any proceeding commenced, or application brought, by the Respondent pursuant to paragraph 8(a) of this Deed of Settlement, of any payments made pursuant to the Instalment Plan and any payments which have not been made in accordance with the Instalment Plan.

1. In the event that any of the Applicants being a body corporate becomes an externally administered body corporate (as defined in the Corporations Act 2001) or an Applicant being a natural person becomes bankrupt or enters into an agreement with his creditors pursuant to the Bankruptcy Act 1966 (Cth), then the provisions of Subclauses 8(a) and 8(b) of this Deed will apply.

8 Following entry into the Deed of Settlement, payments of instalments were made progressively by one or more of the Simms entities. On 6 June 2012, however, Glenn John Spooner was appointed as the liquidator of Beloti Pty Ltd, one of the Simms entities, by order of the Supreme Court of Victoria. On 15 June 2012, Michael Fung and Martin Francis Ford were appointed as receivers and managers to Beloti Pty Ltd. Accordingly, for the purposes of the Deed of Settlement, with Beloti Pty Ltd having been placed in liquidation, and receivers and managers appointed, LPM contended that an insolvency event had occurred under clause 9 and that the provisions of clauses 8(a) and 8(b) of the Deed of Settlement were thereby 'triggered'.

9 On 23 July 2012, LPM, also by then in liquidation,[5] commenced a proceeding in the Magistrates' Court, naming each of the Simms entities other than Beloti Pty Ltd as defendants. The primary ground advanced and relied upon was the fact of the insolvency of Beloti Pty Ltd, by then known as Beloti Pty Ltd (In Liquidation, Receivers and Managers Appointed) and clause 9 of the Deed of Settlement.[6] The plaintiff (appellant) contended that an insolvency event having occurred, clause 9 was enlivened and operated to render the whole of the total amount of $132,394.12, less any payments made by way of instalment, plus statutory interest and costs (on an indemnity basis) incurred in obtaining judgment, due and payable. In its prayer for relief, the plaintiff (appellant) claimed payment of the sum of $87,394.12, being the total amount of $132,394.12 less instalment payments of $45,000,[7] plus interest and costs on an indemnity basis pursuant to clause 8(a).

10 In their Notice of Defence, the defendants (respondents) contended that clauses 8(a) and 8(b) of the Deed of Settlement constituted a penalty and were void and invalid as being against public policy and should be removed from the Deed of Settlement.[8] Further, they said the amount for which judgment was sought cannot be a reasonable estimate of the loss and damage suffered by the plaintiff (appellant) as a result of Beloti Pty Ltd having become an externally administered body corporate.[9]

11 The matter came on for hearing in the Magistrates' Court at Melbourne on 13 February 2013. Each party was represented by counsel, Mr Keith Wolahan for the plaintiff (appellant) and Mr Lionel Wirth for the defendants (respondents). Mr Wolahan informed his Honour that the parties were agreed that 'it's a discrete issue of whether a deed ... - the provision is a penalty or liquidated damages, and that's it. So it's really just a legal issue. The rest is agreed facts.'[10]

12 By the time the hearing took place, further instalments had been paid such that only $20,000 of the Settlement Amount remained unpaid and the plaintiff (appellant) had adjusted the amount it claimed to reflect that.[11] There being no dispute about the facts, the hearing proceeded by way of legal submissions with each counsel addressing his Honour on, their respective legal arguments.

13 Before his Honour, counsel for the plaintiff (appellant), Mr Wolahan, commenced by referring to the principles governing the identification, proof and consequences of penalties in contractual situations that were articulated by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd ('Dunlop Pneumatic Tyre'). [12] Mr Wolahan emphasised Lord Dunedin's third principle as a key consideration in the context of the present case, namely that:

whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach.[13]

14 Further, Mr Wolahan said, following Lord Dunedin's formulation in order for a stipulated sum to constitute a penalty, it must be 'extravagant and unconscionable';[14] it must be out of all proportion with the greatest loss that could be said to have followed from the breach, and the defendants bear the burden of proving that the stipulated sum is a penalty.

15 Mr Wolahan contended that the total sum of $132,394.12 stipulated in clause 8(a), less any payments made by way of instalment, was not an ambit or extravagant figure. Rather, he said, that stipulated sum represented the total amount that the plaintiff (appellant) had sought to recover from the Simms entities in their costs review proceeding in the Costs Court, acknowledging that the stipulated sum of $132,394.12 was the sum of 'several bills over several matters'. Further, he said, there was no unconscionability because the parties on each side had legal advisers and their relative bargaining power was equal. He also focussed attention on the provisions of clauses 8 and 9 of the Deed of Settlement, pointing out that the parties had themselves identified the solvency of each of the Simms entities as a live issue between them in resolving the costs review proceeding. He further noted that in their agreement they had addressed the consequences that would follow in the event that one or other of the corporate entities or Mr Simms became insolvent.

16 Counsel for the defendants (respondents), Mr Wirth then outlined the essential propositions he relied upon. First, that the amount claimed was not a 'liquidated sum' of damages in the sense that it was the total amount claimed by the legal practice and was the subject of challenge in the costs review proceeding. Further, he said, the stipulated sum of $132,394.12 was not a genuine pre-estimate of the loss that would be suffered by the legal practice upon a breach or upon the happening of an event such as the insolvency of one of the clients. Rather, he asserted, a late payment of an instalment would cause no loss other than the loss of enjoyment of the money and nothing was inherently lost by the insolvency of one of the payers, even though there was one less solvent payer to call upon.

17 In advancing his contention that the amount claimed was not a liquidated sum, Mr Wirth focussed attention on the fact that the costs review proceeding in the Costs Court was for the taxation of LPM's bills of cost. He said that the costs review or taxation process involved an assessment of quantum rather than a finding of liability to pay the various amounts the subject of the bills rendered by the legal practice to several different but related clients for work undertaken in a number of different proceedings. Further, he said, until such time as the Costs Court determined the matter, the legal practice's claim was essentially a claim for work and labour done, and thus a quantum meruit rather than a fixed sum certain. He added that no determination of quantum ever took place because the parties resolved the matter by agreement.

18 The second feature he pointed to was that under the Deed of Settlement, each of the Simms entities had agreed to pay on behalf of several alleged debtors a total sum that they, or one or other of them, might not have owed at all. That is, he said, the bills of cost were being reviewed because the Simms entities had actively challenged the quantum claimed by the legal practice, and the Deed of Settlement recorded in the recitals that the legal costs were rendered 'in relation to various matters in which [the legal practice] alleged it was engaged by one or more of [the Simms entities] to perform legal work': see recital B (emphasis added).

19 Further, in seeking to have the sum stipulated in clause 8(a) of the Deed of Settlement characterised as a penalty, Mr Wirth observed that at the time of the hearing in the Magistrates' Court, the plaintiff (appellant) had already received instalments totalling at least $60,000,[15] towards the Settlement Amount of $80,000 payable under the Deed of Settlement. However, due to the insolvency of Beloti Pty Ltd, it sought to recover the additional sum of $72,394.12 and not merely the balance of the instalments of the Settlement Amount being $20,000[16] - in effect a claimed loss of $52,394.12 due to the occurrence of the insolvency event. Accordingly, he contended the Deed of Settlement was unenforceable because, based on the decision of the Court of Appeal in Queensland in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114 ('Zenith') to do so would involve the enforcement of a penalty. In other words, he said, to require the defendants (respondents) to pay the stipulated sum of $132,394.12, which was not a genuine pre-estimate of the loss that would be suffered by the solicitors upon a breach constituted by the happening of an insolvency event, rather than the Settlement Amount of $80,000, would constitute a penalty.

20 In the course of his reply, Mr Wolahan adverted to the issue of the multiple bills of costs for several different clients and also to the consequences of insolvency of one of the clients. He said that prior to the entry into the Deed:

there was an issue of musical chairs as to which parties and trying to tie them down and get the money paid. Hence, in the deed to say that if one of the parties becomes insolvent, there's a very real concern for my client because trying to tie them down and saying well who actually owes the money was a very difficult thing and to give that up was a significant cost for my client.[17]

21 Against this background, Mr Wolahan then sought to demonstrate the relativity of the figures, and contended that the difference between the Settlement Amount of $80,000 versus the stipulated sum of $132,394.12, was not extravagant and out of all proportion.

22 Each counsel provided his Honour with a bundle of authorities that they had mentioned in their submissions and at the conclusion of argument. His Honour then stood the matter down to consider his decision.

23 Upon resuming later that day, his Honour announced his decision.[18] In essence, he found that the defendants (respondents) had not acknowledged in any way that the stipulated sum was ever owed by them. That being so, his Honour said, distinguishes the present case from the decisions in some of the Court of Appeal cases such as Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108 ('Cameron') and Birdanco Nominees Pty Ltd v Money [2012] VSCA 64 ('Birdanco') and the decision of Kyrou J in Talacko v Talacko [2009] VSC 533 to which Mr Wolahan had referred him.

24 In those circumstances, in assessing whether the stipulated sum was a penalty, his Honour found, following Lord Dunedin's formulation, that it was necessary for him to look at the parties' agreement itself and the amount sought to be recovered. He noted that the Settlement Amount or debt was $80,000 and judgment was sought for the stipulated sum of $132,394.12 less any amount of instalments paid. His Honour found the difference was in the region of $50,000 which, in his view, was 'an extreme and excessive amount' which he found 'would be an extravagant and unconscionable amount in comparison with the greatest loss that could be conceived.'[19] He added that 'the amount that is sought to be the subject of judgment is, in my view, well outside the boundaries of what could be seen as appropriate given the test I've just read [in the Dunlop Pneumatic Tyre case] ... and rely on.'[20]

25 His Honour dismissed the claim. He also declined the plaintiff's request to enter judgment for the sum of $15,000 then owing by way of unpaid instalments, plus the final instalment of $5,000 that would fall due for payment on 28 February 2013. He ordered that the claim be dismissed and that the plaintiff (appellant) pay the defendants' (respondents') costs of $7,657 with a stay of one month.[21]

Appeal to the Supreme Court on a question of law

26 An appeal lies to the Supreme Court on a question of law from a final order of the Magistrates' Court: Magistrates' Court Act 1989 (Vic), s 109. Any such appeal must be brought in accordance with Part 3 of Order 58 of Chapter 1 of the Supreme Court (Civil Procedure) Rules 2005 (Vic) (the 'Rules').

27 By Notice of Appeal dated 13 March 2013, the plaintiff appealed to this Court against 'the whole of the orders of the Honourable Magistrate McNamara ... in which the Court ordered that the Appellant's claim be dismissed and that the Appellant must pay the Respondents' costs in the amount of $7657 (with a stay of 30 days).'[22] The precise questions of law upon which the appeal is brought were stated as follows:

Whether the learned Magistrate erred in law by finding that clauses 8(a) and 8(b) of the Deed of Settlement ('the Deed') were void for being a penalty?

Whether the learned Magistrate erred in law by failing to find that on the proper construction of the Deed there was an implied acknowledgment by the Respondents that the sum of $132,394.12 was a debt due to the Appellant at the time of entering the Deed?

Whether the learned Magistrate erred in law by wrongly distinguishing the binding authority of the Court of Appeal of the Supreme Court of Victoria in Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108 and instead following the decision of the Court of Appeal of the Supreme Court of Queensland in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114?

28 An outline of submissions was filed on behalf of the appellant dated 21 May 2013. The appellant submitted, essentially for the reasons it had advanced below, that the proper construction of the Deed of Settlement was controlled by the decisions of the Victorian Court of Appeal in Cameron and Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd (2010) 29 VR 462 ('Calcorp'), which it said were relevantly indistinguishable. It contended that the decision of the Queensland Court of Appeal in Zenith is distinguishable or should not have been followed by the learned Magistrate because it is inconsistent with the principles established by the Victorian Court of Appeal.[23]

29 The appellant contended that the learned Magistrate erred in failing to find that on the proper construction of the Deed of Settlement there was an implied acknowledgment of indebtedness by the respondents for the amount of $132,394.12 in clause 8(a). The appellant emphasised the circumstances in which the deed was entered into, pointing out that it arose out of past dealings between the parties concerning the performance of legal work. It also submitted that the compromise reached between the parties reflected a recognition on both sides that if the costs review proceeding had continued, a ruling may have been given that the taxed sum was less than the total sum sought of $132,394.12, or alternatively, that it was more than the Settlement Amount of $80,000.

30 The respondents filed their written submissions on 26 June 2013. In essence, they contended that relevantly there was no present debt for the sum of $137,430.68 or indeed the sum of $132,394.12,[24] such that, to borrow from Buchanan JA in Cameron, the liability of each of the respondents to pay the appellant the stipulated sum 'sprang from the deed unheralded'.[25] The respondents relied on the decision of the Queensland Court of Appeal in Zenith and sought to distinguish the decisions of the Victorian Court of Appeal in both Cameron and Calcorp.

31 On the appeal, the respondents also raised more directly, as a key issue, the question of joint and several liability.[26] Counsel for the respondents, Mr Wirth, referred to the implied acknowledgement of indebtedness contended for by the appellant and he observed that the appellant's argument 'elides over [a] very key issue, which is payable by whom?' He said that consideration of that question had caused him to move his 'focus from merely whether it's a debt at all to the fact that it cannot be said that each and every one of the respondents in this appeal owed anteriorly [sic] to the deed $132,000 to the appellant.'[27]

32 Against that background, on the hearing of the appeal, the oral submissions presented by counsel for the respective parties concentrated on the relevance of the competing authorities to the proper construction of the Deed of Settlement. I consider each of them below.

Relevant principles - the decisions in Cameron, Calcorp, Zenith and Talacko

33 In Cameron, a bank which had recovered judgment in Switzerland against the defendant for the equivalent in Swiss currency of A$8.4 million, [28] sought to enforce the sum due under that foreign judgment in Victoria. The proceeding to enforce the judgment was settled by the defendant agreeing to pay the bank the sum of $1 million in five instalments. But the defendant was late in paying the first instalment and so the bank applied for judgment. At first instance, before a Master, the bank's application, made pursuant to the terms of settlement, to enforce the foreign judgment was dismissed. On appeal, Beach J allowed the appeal and granted the bank's application for judgment in accordance with the terms of settlement. On appeal to the Court of Appeal, the only point argued was whether the provision in clause 3 of the deed, providing for judgment to be entered by consent in the event of default, constituted a penalty and so was unenforceable.

34 The leading judgment was delivered by Phillips JA. By way of background, his Honour referred to the decisions of the High Court in O'Dea v Allstates Leasing Systems (W.A.) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 ('O'Dea'), Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514 and AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170 ('AMEV-UDC') as having 'authoritatively expounded' the law relating to penalties.[29] His Honour summarised the position, stating:

As I understand it, the law as to penalties is that if the parties to an agreement include a provision for the payment of a sum of money by one party to the other by reason of the former's defaulting in the performance of an obligation owed by him or her to the other under the agreement, then payment of that sum can be enforced against the party in default only if that sum is a genuine pre-estimate of the damage likely to be occasioned by the default. If it is not a genuine pre-estimate of damage it is unenforceable as being a penalty - meaning a penalty imposed merely to induce or compel compliance with the obligation which has not been fulfilled and intended therefore to secure for the innocent party a benefit or advantage which is altogether collateral to the purpose of the main agreement (because ex hypothesi it goes beyond mere compensation for the breach).[30]

35 In his Honour's view, the key to the resolution of the appeal lay in the fact that the agreement was a bargain about the enforcement of the Swiss judgment for $8.4m. He said:

In this instance the sum of $8.4m was not agreed as a genuine pre-estimate of damage should the defendant fail to comply with cl 2 in one respect or another; but neither was it a penalty imposed to induce or compel compliance by the defendant with cl 2, and thus to secure some collateral benefit or advantage to the plaintiff. The sum of $8.4m was the sum due and allegedly owing under the Swiss judgment; neither more nor less.[31]

The sum of $8.4m was, he added, 'quantified before the terms of settlement were entered into; the dispute was only over the plaintiff's right to enforce the Swiss judgment in Victoria'.[32]

36 His Honour characterised the case as one where the defendant, seeking the opportunity to pay a significantly lesser sum than the judgment debt, 'had bargained away any defence he had to enforcement of the judgment in Victoria, consenting to judgment here if he made default in payment of the lesser sum modo et forma.'[33] In his Honour's view, this feature made it quite different to those earlier cases in which courts had refused to lend assistance to the enforcement of a penalty, and was more akin to the cases described by Gibbs CJ in O'Dea 'where the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence'.[34] Accordingly, Phillips JA rejected the defendant's submission that the deed contained no acknowledgment of liability. His Honour observed that there was a considerable history between the bank and the defendant which led directly to the terms of settlement and the deed. In those circumstances, he said, 'the consent to judgment can be seen as doing no more than formalising a liability acknowledged, by implication, when the terms of settlement were agreed and the deed was entered into.'[35]

In my opinion, when read fairly these terms of settlement did contain, by implication, an acknowledgment by the defendant of his liability for the $8.4m should there be default, and thus an acknowledgement of liability which, though conditional, was effective when the terms of settlement were agreed. Immediately before the terms of settlement there was a dispute about the enforceability of the Swiss judgment and so about the amount owing by the defendant under it; but as I see it that dispute was finally resolved by the terms themselves and the deed. From that point onwards, the defendant was acknowledging his liability in respect of the Swiss judgment subject only to this: that if he paid a lesser sum according to cl 2 he could have a release from the larger sum. In those circumstances, according to the cases to which I have referred, the provision in cl 3 for consent to judgment is not a penalty.[36]

38 President Winneke agreed with Phillips JA that this was not a case where the question of penalty arises, and he did so for substantially the same reasons that Phillips JA had advanced. Winneke P observed that:

[b]y entering into the deed the appellant implicitly acknowledged that the judgment debt was due and payable by his agreement that, if he did not meet the conditions upon which the indulgence was granted to him, he would submit to judgment in the amount of such judgment debt; thereby giving up any defences which he claimed to have.[37]

His Honour was of the opinion that there was nothing inequitable or penal about such a compromise; indeed, no question of penalty arose. Rather, he said 'this was a case of the kind referred to by Gibbs CJ in O'Dea';[38] namely a case where:

... there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full.'[39]

39 The third member of the Court, Buchanan JA, also agreed that the appeal should be dismissed for the reasons stated by Phillips JA and the President. His Honour focussed on the substance of the transaction, which he characterised as 'a claim based on a foreign judgment [that] was compromised by the appellant agreeing to judgment for the amount of the claim, but obtaining an opportunity to satisfy the claim by paying [a] lesser sum by instalments.'[40] Further, he said the 'substance of the matter was not affected by the manner of its drafting.'[41] A penalty did not arise, in his Honour's view:

because, instead of an acknowledgment of debt in the amount of the claim followed by a provision enabling that obligation to be satisfied by payment of a lesser sum in a specified manner, the deed provided for payment of a lesser sum than the claim followed by an agreement to suffer judgment for the amount of the claim if the lesser sum was not paid.[42]

40 His Honour also adverted to the history of the dealings between the parties, emphasising that the genesis of the defendant's obligation to pay $8.4m lay in the past dealings between him and the bank and he said it was not one 'which sprang from the deed unheralded'.[43] Accordingly, Buchanan JA was of the view that the case 'is to be equated with those in which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt.'[44]

41 The decision in Cameron was followed by a differently constituted Court of Appeal in Calcorp.[45] In Calcorp, a landlord made claims in respect of a compromise recorded in terms of settlement that were entered into by the tenant of the premises and Mr and Mrs Dattilo, who had agreed under the lease to indemnify the landlord for any loss suffered in the event of non-performance by the tenant, for arrears of rent and damages. Under the terms of settlement, the defendants agreed to pay the landlord the settlement sum of $200,000 and provided that on default the landlord would be entitled immediately to payment of a higher amount being 'the full amount of the [landlord's] claim ... in the agreed sum of $262,648.96' together with interest and indemnity costs.[46] The tenant and Mr and Mrs Dattilo made all payments due under the terms of settlement save for the final instalment of $120,000, whereupon the landlord moved for judgment in the County Court in the sum of $376,777.13, comprised of the agreed sum of $262,648.96 less the instalments paid (totalling $80,000), plus legal costs and disbursements of $157,803.54, plus interest.

42 The trial judge had rejected the defendants' argument that clause 4(a) of the terms of settlement, in providing for payment of a greater sum than the compromise amount in the event of default, was a penalty and therefore unenforceable. His Honour found that 'the agreed sum of $262,648.96' provided for in clause 4(a) was a genuine pre-estimate of the amount the landlord was entitled to on its claim and further, that by entering into the terms of settlement, the defendants had implicitly acknowledged that amount as being the landlord's entitlement.

43 On appeal, the tenant and Mr and Mrs Dattilo submitted that the trial judge was wrong in finding that the clause 4(a) amount was not penal. They relied on the Queensland Court of Appeal's decision in Zenith,[47] and contended that:

judged according to Zenith, it was apparent that 'the agreed sum of $262,648.96' referred to in cl 4(a) of the terms of settlement was not due or owing at the time of execution of the terms of settlement - it was simply a sum payable in default of payment of the instalments provided for in cl 2 - and thus, like the larger amount payable in the event of default in payment of the rent in O'Dea v Allstates Leasing, it was penal.[48]

44 In the Court of Appeal the presiding judge, Nettle JA, delivered the leading judgment. His Honour noted at the outset that there was little dispute about the relevant principles, both sides having accepted following the decision of the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd[49] ('Ringrow') that the starting point was Lord Dunedin's formulation of the relevant principles in his judgment in Dunlop Pneumatic Tyre.[50] The relevant question for the Court was, Nettle JA said, one of construction: 'Was it implicit in the terms of settlement that the appellants acknowledged that the sum of $262,648.96 was due, or not?'[51]

45 His Honour found that it was,[52] and he then identified at least six reasons why that was so.

46 First, he said, the obligation to pay that sum is not one which, to adopt the language of Buchanan JA in Cameron, 'sprang from the deed unheralded' - rather, its genesis lay in the past dealings between the parties concerning the leased premises.[53]

47 Secondly, given the admissions made on the pleadings, the only real dispute between both sides was the amount due to the landlord by way of damages for the loss of the lease bargain, the landlord having re-leased the premises to another tenant at a lesser rent; 'so in point of principle, the position was analogous to that in Cameron v UBS'.

48 Thirdly, his Honour was of the view that 'the analogy between this case and Cameron derives strength from the observation of Ashley J' in Australian Management Consultants Pty Ltd v Direct Funding Pty Ltd to the effect that, as a matter of principle, there is:

no essential difference between Terms of Settlement which arise out of a plaintiff's disputed claim to enforce a foreign judgment and terms arising out of a plaintiff's disputed entitlement to a money sum or damages in connection with a commercial dispute. In either event it is open for a defendant, in substance, to acknowledge his liability to a plaintiff by entry into Terms of Settlement.[54]

49 Fourthly, his Honour turned to the proper construction of the terms of settlement, noting, consistently with Lord Dunedin's approach, that they are 'to be viewed against the historical background of the lease and the proceedings'. He focussed attention on clause 4(a) in particular, observing that:

when one sees the amount of $262,648.96 described in the terms as the 'full amount of the Plaintiff's claim in the Proceeding in the agreed sum of $262,648.96', there is an implication that the appellants were thereby acknowledging that the amount of the liability which was in issue on the pleadings was that amount, and thus that the appellants were liable to pay it at that time.[55]

(emphasis in original)

50 Fifthly, Nettle JA found that clause 4(a) of the terms of settlement was analogous to the provision in the terms of settlement considered by Davies J in Perpetual Trustee Co Ltd v Mitchell,[56] which Davies J held to be an acknowledgment of an existing debt and an agreement as to its amount. Accordingly, Nettle JA likewise found that clause 4(a) was 'an acknowledgment of an existing contractual obligation and as to its amount.'[57]

51 Sixthly, his Honour referred to the decision of McMurdo J in Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd,[58] which had distinguished Zenith. Nettle JA observed that the position in that case was in some ways similar to that under consideration in the appeal before him.

52 Justice Nettle then turned to consider the decision in Zenith. He commenced by observing that '[a]t first sight, the decision in Zenith suggests that cl 4(c) was penal'.[59] But after 'closer examination', his Honour then proceeded to distinguish Zenith as being a case that 'turned very much on the terms of the deed of settlement there in issue'.[60] He said:

So far as one can tell, there was no admission on the pleadings, as there was here, as to the existence of an obligation to pay something; and there was nothing in the terms of the deed in Zenith, as opposed to the expression 'agreed sum' which appears in cl 4(a) of the terms of settlement in this case, which implied that the debtor acknowledged the amount which was due. In my view, Zenith was distinguishable on that basis and the judge was right to distinguish it.[61]

53 Later in his judgment, when dealing with the question of whether the claim for costs on an indemnity basis was a penalty, Nettle JA rejected the appellants' contention that it was not enough for the appellants to acknowledge the existence of a contingent liability for indemnity costs. His Honour commented that:

It is plain from the authorities to which I referred that it is sufficient to constitute the acknowledgment of an existing obligation for the purposes of the law relating to penalties that the party who acknowledges that obligation reasonably considers there is a real prospect of facing a liability in that amount.[62]

54 Justices Redlich and Harper concurred in the reasons for judgment of Nettle JA, and in the disposition of the appeal and cross-appeal as he proposed. In his concurrence, Redlich JA added the observation that when they entered the terms of settlement, the defendants here, as in Cameron, 'agreed once and for all to withdraw their defences to the claim' and furthermore to abandon their counterclaim. [63] His Honour found that the terms of settlement, when read fairly, 'did contain by implication an acknowledgment by the appellants of their liability for that sum.'[64]

55 Against that background, it will be seen that the decisions of the Court of Appeal in each of Cameron and Calcorp turned on their particular facts:

• In Cameron, whilst there was no express acknowledgment of the defendant's indebtedness, there was a foreign judgment for a debt - and in the absence of the dispute about whether it could be enforced in Victoria, Mr Cameron owed the full amount claimed by the creditor as a present debt.

• In Calcorp, the amount claimed by the landlord was unpaid rent, outgoings and the difference between the rent that would have been paid by that tenant and the tenant who replaced it following the early termination of the lease. The total claim was for $262,648.96. The parties settled the proceeding for $200,000 to be paid by the defendants in a number of instalments, with the balance of the full amount of the landlord's claim in the proceeding 'in the agreed sum of $262,648.96' becoming immediately due and payable in the event of a breach. However, each of the defendants was prima facie liable for that liquidated sum and, had the case been tried and their defences failed, each would have been the subject of a judgment debt for the amount claimed.

56 The Queensland case of Zenith, on the other hand, involved what was essentially a claim for work and labour done. The applicant had sued the first respondent for money claimed under a contract for engineering work, and the respondents had filed a defence disputing liability, along with a counterclaim alleging bad work. After some negotiations, the action was settled with the first respondent being required to pay $55,000 by instalments 'in full settlement of the plaintiff's claim and the defendant's counter-claim',[65] which sum was substantially less than the full amount of $72,567.13 claimed, plus interest and costs. The second respondent guaranteed the payment of the money under the deed.

57 Five instalments were payable under the deed. Payments were not made in a timely way and after the fourth instalment was paid, the applicant applied for judgment on the basis of clause 4 of the deed, which provided as follows:

If any payment is not made on the due date, in respect of which time is agreed to be of the essence, the Plaintiff will be entitled to enter judgment against the Defendant for the full amount claimed in the Amended Claim plus interest and costs.[66]

Notwithstanding that the due date for payment had passed, the plaintiff nevertheless proceeded to pay the fifth (and last) instalment.

58 At first instance, the application was dismissed on the basis that the default provision constituted a penalty. On appeal, the applicant argued that the case fell within the category described by Gibbs CJ in O'Dea[67] of those cases 'where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt.'[68]

59 The Queensland Court of Appeal (Pincus JA, White and Chesterman JJ) was satisfied that the question raised was of sufficient significance to warrant the grant of leave. In the leading judgment, delivered by Pincus JA, with whom White and Chesterman JJ agreed, his Honour pointed out that the quotation from O'Dea was 'difficult to treat as apt in the present case'[69] because whilst the claim was made for an alleged debt, it was disputed - and as the case had settled, the amount properly due was never established. In these circumstances, Pincus JA observed, '[i]t cannot be said, then, that it has been shown that the sum claimed in the action was a debt, part of which the applicant agreed to accept in full discharge.'[70] His Honour then posed the question: 'Does the O'Dea rule cover a case where the larger amount which has to be paid in default of payment of the instalments of the agreed smaller sum, cannot be held to have been a debt?'[71]

60 His Honour commenced by reviewing some of the early cases concerning penalties that were considered in O'Dea and the current state of the law as set out in Professor Rossiter's chapter on relief against penalties in The Principles of Equity (Lawbook, 1996), [72] and proceeded to answer the question as follows, stating:

Here the stipulated sum was neither in form nor in substance a present debt; it was merely an amount claimed. That is, the case is one in which the obligation sought to be enforced was one to pay a much larger sum than that agreed to be due, upon default in payment of agreed instalments of the latter: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1914] UKHL 1; [1915] AC 79, at 87, para 4(b). And as the learned primary judge pointed out, the additional amount which would, if cl 4 of the deed is enforceable, become payable bears no rational relationship to the loss the applicant suffered by late payment of an instalment.[73]

Accordingly, his Honour found that in the present case the stipulated sum was 'neither in form nor in substance a present debt; it was merely an amount claimed.'[74] Further, his Honour agreed with the trial judge that 'the additional amount which would, if cl 4 of the deed is enforceable, become payable bears no rational relationship to the loss the applicant suffered by late payment of an instalment' and agreed with the trial judge's view that cl 4 is unenforceable, as a penalty provision.[75]

61 In a concurring judgment, White J commented to similar effect, noting that '[i]t seems clear that the amount claimed in the pleading which was disputed in the defence and counterclaim could not be characterised as a "present debt, a debt actually due and owing"'.[76]

62 As was noted earlier, in Calcorp, the Victorian Court of Appeal distinguished Zenith, with Nettle JA (with whom Redlich and Harper JJA agreed) commenting that the decision in that case 'turned very much on the deed of settlement there in issue'.[77] In so distinguishing Zenith, Nettle JA, in a footnote to his judgment, also drew attention to the basis on which McMurdo J had distinguished Zenith in Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd ('Perpetual Trustee').[78] For convenience, I have set out that passage below. Justice McMurdo stated:

The present case is thereby distinguishable from Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd, where proceedings to recover an alleged debt were compromised by the defendant's agreement to pay a lesser sum with a right in the plaintiff to enter judgment for its claim if the lesser sum was not paid. In that settlement, there was no acknowledgment of a debt as the plaintiff had claimed. Pincus JA said that in that case 'the stipulated sum was neither in form nor in substance a present debt; it was merely an amount claimed'. With the concurrence of White and Chesterman JJ, he said that the law was correctly stated in Professor Rossiter's chapter on relief against penalties in The Principles of Equity:

Where a stipulated sum is presently due and owing as a debt and the creditor grants the debtor an indulgence to pay the debt by instalments, it is not a penalty for the creditor to provide, as a condition of granting the indulgence, that the indulgence will be withdrawn if the debtor defaults in the payment of an instalment. However, this principle ... has no application where, having regard to the substance and notwithstanding the form of the transaction, the stipulated sum is not owing as a present debt.[79]

63 The Perpetual Trustee case involved a dispute between a landlord, and two defendants, the first being the lessee of premises and the second, the guarantor of its performance. Following a mediation of two proceedings, a 'Heads of Agreement' was entered into by the parties. That document recorded an acknowledgment by the defendants of their present indebtedness to the landlord in a total sum of $585,416, and provided for that debt to be satisfied by payment of a lower sum over time. At a later date a Settlement Agreement was also entered into, recording that the parties had reached agreement to settle their proceedings and that they had agreed to 'formalise the terms of the Heads of Agreement on the terms set out in this document.'[80] The Settlement Agreement also included an acknowledgment of indebtedness by the defendants jointly and severally.

64 On the hearing of the plaintiff's application for summary judgment, the defendants relied upon the Dunlop Pneumatic Tyre case. They argued that the provision in the Settlement Agreement by which the whole amount of their original debt to the landlord would become payable in the event of any non-performance of the Settlement Agreement constituted a penalty, because 'the amount of the Debt is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach'.[81] They contended that 'any debt owed to the plaintiff prior to the settlement became replaced by the entitlement to payments according to the Heads of Agreement and subsequently the Settlement Agreement'[82] and thus clause 2.7 of the Settlement Agreement constitutes a penalty insofar as it requires them to pay a far higher sum in the event of a failure to pay the discounted sum or otherwise perform the Settlement Agreement.

65 His Honour rejected this argument stating that it:

overlooks the fact that within both the Heads of Agreement and the Settlement Agreement, there was an acknowledgment by the defendants that they were jointly and severally indebted to the plaintiff for the Debt. In substance, they agreed to pay the amount for which they acknowledged their indebtedness unless they met the conditions of the settlement.[83]

Accordingly, McMurdo J found the case was of the kind referred to by Gibbs CJ in O'Dea.

66 His Honour also adverted to the need to look at the substance of the matter rather than 'the manner of its drafting' as reiterated by Buchanan JA in Cameron[84]. Further, he said, following the decision of the High Court in Acron Pacific Limited v Offshore Oil NL,[85] in determining whether a contractual term is a penal provision, the court must consider its operation in the light of the legal rights and obligations which the document itself creates or confirms, rather than in light of the circumstances existing before its execution. Accordingly, he found 'the operation of clause 2.7 of the Settlement Agreement must be considered in light of the debts acknowledged as owing within the document itself.'[86]

67 His Honour rejected the defendants' argument that the effect of clause 3.1 of the Settlement Agreement was that the debt did not remain owing but was replaced by their promise to pay the discounted debt. He said that it 'ignores the substance of the transaction, which was that the creditor [landlord] agreed to accept a lesser sum than the amount acknowledged to be owing if the debtors complied with the conditions of settlement.'[87] Accordingly, his Honour found the provision was not a penal one.

68 More recently, in Talacko v Talacko[88] ('Talacko'), the Victorian Court of Appeal followed and applied Cameron, and distinguished Zenith, in a context where the Court was asked to consider whether a provision of a settlement agreement requiring the appellant to pay equitable compensation in the event of breach constituted a penalty. At first instance, Kyrou J found that each of the respondents was entitled to enter judgment against the appellant for equitable compensation under clause 6 of the settlement agreement in an amount (including interest) of €5.036 million.[89]

69 On appeal, the appellant contended that his Honour had erred in rejecting his submission that clause 6 was a contractual penalty and therefore unenforceable. In advancing that argument, the appellant relied on the decision in Zenith. In a joint judgment, Neave and Harper JJA, with whom Tate JA agreed, dealt with the penalty argument, stating:

If one accepts that a substantive claim to the property in question underpins Jan's [the appellant's] resistance to the respondents' opposing assertion of right, his protest that clause 6 of the settlement agreement imposes a penalty has superficial attraction. Assume, by way of illustration, that Jan does have a substantive claim, never explicitly or by implication abandoned, to the property in dispute; a claim which is in dispute but which a court might well uphold. Assume further that he and his opponents in litigation are parties to an agreement by which a portion of that property is to be transferred by him to those on the other side of the dispute; but which also includes a requirement that - on breach by him of his obligations under it - he must not only forego those claims but also give up to the innocent party all the property over which his claim was made. That requirement might well be held to be a penalty.[90]

But that is not this case. It is true that Jan's legal title to some at least of the properties is, it seems, good according to the local law, he being the only member of the family who at the relevant time met the qualifications for ownership. But his position changes if there is no substance to the proposition that he has, or at all events at the time he entered into the settlement agreement had, a beneficial interest, overriding that of his siblings, in the property in question. And although counsel for the appellant has bravely clothed the skeletal frame of his case with the vestments of beneficial ownership, these, when subjected to examination, dissolve as floss before a candle.[91]

70 The appellant also alleged that Kyrou J had incorrectly drawn an analogy between the circumstances in Talacko and Cameron, but the Court of Appeal disagreed.[92] Furthermore, Neave and Harper JJA were of the opinion that Zenith could be distinguished from both Talacko and Cameron. Their Honours said:

In Cameron, as in the present case, there was a 'considerable history' from which the court could draw the compelling inference - even stronger in this case than in Cameron - that the provision attacked as being a penalty was not intended 'merely to induce or compel compliance' with a contractual obligation, but rather was not only 'central to the main purpose of the bargain' but also part of an implied admission that the so-called 'penalty' was in truth a sum of money or the fulfilment of an obligation independently owed to the party not in breach. These factors were not present in Zenith. There, the context in which - the historical setting against which - the settlement was reached did not allow the drawing of an inference such as that which, in Cameron, the Court was entitled to draw.

If we are wrong in concluding that Cameron may be distinguished from Zenith, then we would in any event follow Cameron. Not only is it a decision of this Court, but in our opinion it was correctly decided.[93]

71 Their Honours also endorsed Kyrou J's analysis of the relevant authorities. In his judgment, Kyrou J referred to the trend in recent High Court cases supporting the parties' freedom to enter into contracts.[94] In particular, his Honour pointed to the observations of Mason and Wilson JJ in AMEV-UDC and of the High Court in Ringrow as indicating that the courts are becoming less inclined to strike down contractual clauses as penalties.

72 Following the Court of Appeal's judgment in Talacko, the appellant, who was unsuccessful, sought special leave to appeal to the High Court. On the hearing of the application for special leave, counsel for the appellant pointed to the divergence in the respective approaches taken by the Victorian Court of Appeal in the decisions in Cameron and Calcorp, and that of the Queensland Court of Appeal in Zenith.[95]

73 The High Court (French CJ and Hayne J) refused leave, on the basis that the decisions of the trial judge and of the Court of Appeal, which held that the provision in question was not a penalty, 'turned in part on the facts of the particular case and are not attended by sufficient doubt to warrant the grant of special leave.'[96] Further, their Honours observed:

Any question about what are said to be the differing approaches of the Court of Appeal of the Supreme Court of Victoria and the Court of Appeal of the Supreme Court of Queensland in Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108 and Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114 would not fall for consideration.[97]

Construction of the Deed of Settlement - are clauses 8(a) and 8(b) of the Deed of Settlement void as a penalty?

74 I turn now to consider the question of whether clauses 8(a) and 8(b) of the Deed of Settlement are void as a penalty.

75 Under Lord Dunedin's formulation, the question of construction is 'to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach'.[98] In O'Dea, Gibbs CJ added that the question of whether a contractual provision amounts to a penalty 'depends on all the surrounding circumstances existing at the time of the making of the contract as well as on the terms of the contract itself'.[99]

76 In the present case, the Deed of Settlement was entered into against the background of the costs review proceeding that had been commenced by the four Simms entities. As was noted above, prior to the entry into the Deed of Settlement, no one of the respondents could be said to have owed, jointly or severally, the sum of $137,430.68, or indeed the sum of $132,394.12, to the appellant.

77 In the proceeding before the learned Magistrate, counsel for the appellant, Mr Wolahan, acknowledged that there was some difficulty in identifying who or which entity actually owed the money to the legal practice. That acknowledgment reflects the essence of the matters recorded in recital B to the Deed of Settlement.

78 On the appeal, however, the appellant sought to address this difficulty by contending that the respondents had acted as a group, with Mr Simitzis being the sole director for each of the relevant companies. Mr Wolahan observed that this group activity was readily demonstrated when the Simms entities moved to challenge the quantum of the bills the legal practice had rendered, by filing only one Summons for Taxation in the Costs Court naming each of them as applicants, rather than issuing four separate proceedings. He said Mr Simitzis also executed the Deed of Settlement on behalf of each of the Simms entities.

79 In my view, whatever be the relationship between the Simms entities, it is not possible to now re-characterise the various individual transactions as being 'whole of group' transactions, and thereby impute joint and several indebtedness to each of them retrospectively. When the Deed of Settlement was entered into, none of the respective Simms entities were liable for the whole of the stipulated sum of $132,394.12 and recital B effectively acknowledged this.

80 By settling the costs review proceeding and entering into the Deed of Settlement, the respective parties avoided the need to argue about matters such as the quantum of each of the bills and which of the respective entities was liable to pay them. The parties recorded the terms of their compromise in the Deed of Settlement. But it was only when the Deed of Settlement was entered into that each of them became (at least arguably) 'jointly and severally liable' to pay the Settlement Amount and in the event that judgment was entered, the stipulated sum or 'Judgment Amount'.

81 In my view, the circumstances that apply in the present case are not akin to the class of cases Gibbs CJ described in O'Dea - and thus also differ from those under consideration by the Court of Appeal in Cameron and in Calcorp.

82 In Cameron, Phillips JA identified the key to the appeal as being that the deed was 'a bargain about the enforcement of the Swiss judgment.' He said the sum of $8.4m 'was quantified before the terms of settlement were entered into; the dispute was only over the plaintiff's right to enforce the Swiss judgment in Victoria'.[100] In the present case, however, it cannot be said that the stipulated sum of $132,394.12 that was expressed to be payable on default by each of the Simms entities, was 'already due and owing' by each of them prior to the entry into the deed and 'the chance to pay a lesser sum or on terms [was] being afforded as a privilege or indulgence'.[101] If, under the Deed of Settlement, each of them became liable to pay the stipulated sum of $132,394.12, then, to adopt the language of Buchanan JA in Cameron, that liability 'sprang from the deed unheralded'. [102]

83 When read fairly, the Deed of Settlement under consideration here, unlike that in Calcorp, does not contain an implied acknowledgment of present indebtedness on the part of each of the Simms entities for the stipulated sum of $132,394.12 as at the date of entry into the Deed of Settlement. This was not a case like Cameron, where it could be said each of the Simms entities had implicitly acknowledged an existing indebtedness of a larger sum that was quantified, and already due and owing.

84 Under clause 1 of the Deed of Settlement, when read with clause 7, the Simms entities, jointly and severally, agreed to pay, and the legal practice agreed to accept, the Settlement Amount of $80,000, payable by way of instalments.

85 In respect of the larger stipulated sum, its quantum or perhaps more correctly the quantum of the respective bills of costs was collectively the subject of challenge by each of the Simms entities. In those circumstances, when regard is had to the defining features of cases in the category referred to by Gibbs CJ in O'Dea, to which the equitable doctrine preventing recovery cannot apply, it will be observed that here there was no 'original debt' due and owing. Thus, the legal practice could not demonstrate that it had agreed to accept payment of part of its debt in full discharge if the terms of the Deed of Settlement were complied with, but otherwise it would 'be entitled to recover the original debt'.[103]

86 Accordingly, in my view, the circumstances of the present case are more closely analogous with those under consideration by the Queensland Court of Appeal in Zenith. Here, as there, the stipulated sum was neither in form nor substance a present debt. Rather, the stipulated sum was merely an amount claimed for work and labour done, that was disputed, and the amount contended to be due was never established because the case was settled.

87 In the present case, the learned Magistrate found, in my view correctly, that there was no express or implied acknowledgment of the indebtedness for the stipulated sum claimed. He then turned to consider whether or not the amount claimed under clause 8 was a penalty. He referred to the relevant test outlined by Lord Dunedin in the Dunlop Pneumatic Tyre case.[104]

88 His Honour noted that the differential between the $80,000 agreed to be paid by instalments and the total sum of $132,394.12 was at least $50,000, and he regarded that as 'an extreme and excessive amount'.[105] He found 'it would be an extravagant and unconscionable amount in comparison with the greatest loss that could be conceived,' the sum sought to be made the subject of the judgment being 'well outside the boundaries of what could be seen as appropriate' given Lord Dunedin's test.[106] Accordingly, his Honour found that the sum sought to be made the subject of the judgment is a penalty and should not be ordered, it being 'extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved' as having followed from the breach.[107] His Honour dismissed the plaintiff's claim with costs.

89 In circumstances where the relevant breach under clause 9 was the appointment of external administrators to Beloti Pty Ltd, I agree that the increase in liability from $80,000 to effectively the sum of $137,430.68,[108] or indeed the sum of $132,394.12,[109] constituted a penalty, and the learned Magistrate was correct to dismiss the appellant's claim.

90 Accordingly, I would answer the questions of law upon which the appeal is brought as follows:

Question 1: Whether the learned Magistrate erred in law by finding that clauses 8(a) and 8(b) of the Deed of Settlement ('the Deed') were void for being a penalty?

Answer: The learned Magistrate did not err in law by finding that clauses 8(a) and 8(b) of the Deed were void for being a penalty.

Question 2: Whether the learned Magistrate erred in law by failing to find that on the proper construction of the Deed there was an implicit acknowledgment by the Respondents that the sum of $132,394.12 was a debt due to the Appellant at the time of entering the Deed?

Answer: The learned Magistrate did not err in law. On the proper construction of the Deed there was no implicit acknowledgment by the Respondents that the sum of $132,394.12 was a debt due to the Appellant at the time of entering the Deed.

Question 3: Whether the learned Magistrate erred in law by wrongly distinguishing the binding authority of the Court of Appeal of the Supreme Court of Victoria in Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108 and instead following the decision of the Court of Appeal of the Supreme Court of Queensland in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114?

Answer: The learned Magistrate did not err in law. The circumstances of the present case are more closely analogous with those considered by the Queensland Court of Appeal in Zenith and his Honour was correct to follow Zenith and to distinguish the decisions of the Victorian Court of Appeal in Cameron and Calcorp.

91 I will make orders accordingly and dismiss the appeal. I will hear from the parties on the question of costs.

[1] His Honour, Magistrate G.L. McNamara.

[2] There was no formal statement of agreed facts; rather the hearing in the Magistrates' Court appears to have proceeded on the basis of an agreed bundle of documents which included the pleadings and the Deed of Settlement, together with copies of relevant cases.

[3] The Costs Court is established within the Trial Division of the Supreme Court. Amongst other things, the Costs Court is specifically empowered to hear and determine costs reviews under Division 7 of Part 3.4 of Chapter 3 of the Legal Profession Act 2004 (Vic): see s 17D(1_), Supreme Court Act_ 1986 (Vic).

[4] See Submissions for the Appellant dated 21 May 2013, Court Book, 103 [4].

[5] LPM went into liquidation at some point after it had entered into the Deed of Settlement and before the proceeding in the Magistrates' Court was commenced.

[6] That is, of the two default provisions (clauses 8 and 9), the plaintiff relied only upon clause 9. Whilst the Simms entities had failed to make various payments as and when required by the Instalment Plan, there were no longer any instalment payments due or outstanding at the date the Magistrates' Court proceedings were issued, and accordingly, the plaintiff did not rely on clause 8: see Submissions for the Appellant dated 21 May 2013, Court Book, 104 [6]. However, since the Magistrates' Court proceedings were issued, the Simms entities have failed to make several payments that became due after the proceeding was issued, such that the sum of $20,000 was outstanding when the written submissions were filed on the appeal: see Submissions for the Appellant dated 21 May 2013, Court Book, 105 [7].

[7] The instalment payments were those set out in clauses 4(i)-4(x) of the Deed, Court Book, 2.

[8] Notice of Defence dated 10 August 2012, Court Book, 9 [9A].

[10] Transcript of proceedings, Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013 ) 2 (lines 8-10); Court Book 12 (lines 8-10)

[11] As at 13 February 2013, instalments 4(xv), (xvi) and (xvii) were outstanding and the final instalment 4(xviii) was not due for payment until 28 February 2013. The appellant (plaintiff) claimed payment of the sum of $72,394.12, being the total amount of $132,394.12 less instalment payments of $60,000, plus interest and costs.

[12] [1914] UKHL 1; [1915] AC 79, 86-88; approved by the High Court of Australia in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656, 662 [10] (Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ). See also Birdanco Nominees Pty Ltd v Money [2012] VSCA 64 where the Court of Appeal (Maxwell P, Redlich and Robson JJA) cited the passage with approval.

[13] Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1914] UKHL 1; [1915] AC 79, 86-87.

[15] And possibly $65,000: see fn 16 below.

[16] Or possibly $15,000: see Mr Wirth's submissions in Transcript of proceedings, Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013) 15 (line 38); Court Book, 25 (line 38). Mr Wolahan also contended that at the time of the hearing there was $15,000 outstanding, and by 28 February 2013, $20,000: Court Book 43 (line 23).

[17] Transcript of proceedings, Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013) 27 (lines 31-36); Court Book, 37 (lines 31-36).

[18] No separate reasons were given, other than those delivered orally by His Honour: see affidavit of Jeremy Michael Feiglin sworn on 13 March 2013, Court Book, 96-101.

[19] Transcript of proceedings, Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013) 32 (lines 38-39); Court Book, 42 (lines 38-39)

[20] Transcript of proceedings, Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013) 32 (lines 44-45) - 33 (lines 1-2); Court Book, 42 (lines 44-45) - 43 (lines 1-2).

[21] Notice of Order Made dated 13 February 2013, Court Book, 49.

[23] Submissions for the Appellant dated 21 May 2013, Court Book, 102-103 [2].

[24] Submissions for the Respondents dated 25 June 2013, Court Book, 115 [5]-[6]. The sum of $137,430.68 was the total of the tax invoices rendered, whereas $132,394.12 was the total sum outstanding.

[25] [2000] VSCA 222; (2000) 2 VR 108, 117 [28].

[26] At the outset, Mr Wirth foreshadowed that he would seek to tender an affidavit from his instructing solicitor exhibiting the various tax invoices that were the subject of the summons in the Costs Court. However, after referring to the various passages in the transcript of the proceeding at first instance, where he had pointed to the fact that there were several bills, that the bills were usually directed to one of the respondents only and that there was an issue about who or which entity was liable, he did not press the tender.

[27] Transcript of proceedings, Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Supreme Court of Victoria, S CI 2013 01217, Sloss J, 8 August 2013), 38 (lines 25-29).

[28] The judgment had been obtained by Swiss Bank Corporation but UBS AG, its successor, sought to enforce the judgment. I will not distinguish between these two entities and simply refer to them throughout as 'the bank'.

[29] Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108, 113 [17].

[38] [1983] HCA 3; (1983) 152 CLR 359, 367.

[39] Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108, 109-110 [4]. Footnote 2 of this judgment further stated: '[s]ee also Meagher, Gummow and Lehane, Equity: Doctrines & Remedies, 3rd ed, (1992), pp 444-5, para [1816]; NUS International Pty Ltd v President Melbourne Pty Ltd (unreported, Hayne J, 24 June 1993) at 10-11'.

[45] (2010) 29 VR 462.

[46] Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd (2010) 29 VR 462, 464 [6].

[47] [2000] QCA 221; [2001] 2 Qd R 114.

[48] See Nettle JA's summary of their argument set out at (2010) 29 VR 462, 465 [12].

[49] [2005] HCA 71; (2005) 224 CLR 656.

[50] The principles formulated by Lord Dunedin (at 85-88) were applied by the High Court of Australia in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656, 662-663 [11]-[12], 665 [21], 667 [27] and 669 [32].

[51] Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd (2010) 29 VR 462, 466 [16].

[54] Ibid 467 [20], quoting Australian Management Consultants Pty Ltd v Direct Funding Pty Ltd [2003] VSC 202 (17 June 2003), [52].

[55] Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd (2010) 29 VR 462, 467 [21].

[56] [2010] NSWSC 825, [28]-[30].

[57] (2010) 29 VR 462, 467 [22].

[58] [2010] QSC 232, [25].

[59] Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd (2010) 29 VR 462, 468 [24].

[65] Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114, 115 [1] (Pincus JA).

[67] [1983] HCA 3; (1983) 152 CLR 359, 367.

[68] Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114, 115 [3].

[72] CJ Rossiter, 'Relief Against Penalties' in Patrick Parkinson (ed), The Principles of Equity (Lawbook, 1996).

[73] Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114, 117 [9].

[76] Ibid 117 [13] quoting O'Dea v Allstates Leasing Systems (W.A.) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359, 374 (citation omitted).

[77] (2010) 29 VR 462, 468 [24].

[78] [2010] QSC 232, [25].

[79] Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232, [25] (citations omitted) quoting CJ Rossiter, 'Relief Against Penalties' in Patrick Parkinson (ed), The Principles of Equity (Lawbook, 1996) 296, 308 (emphasis added by McMurdo J in his reasons for judgment). Note that the final sentence of this quotation did not appear in the passage cited by Pincus JA in Zenith.

[80] Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232, [6].

[81] Ibid [21]. The 'Debt' is a reference to the entire amount of the arrears which had been claimed in the proceedings.

[84] [2000] VSCA 222; (2000) 2 VR 108, [27].

[85] [1985] HCA 63; (1985) 157 CLR 514, 519.

[86] [2010] QSC 232, [24].

[87] [2010] QSC 232, [28].

[89] [2009] VSC 533.

[90] See, eg, Zenith Engineering Pty Ltd v Queensland Crane & Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114.

[91] [2011] VSCA 71; (2011) 31 VR 340, 355 [55]-[56].

[92] In their joint judgment, Neave and Harper JJA noted that Zenith did not appear to have been cited in Cameron, judgment in Zenith having been given on 6 June 2000, whereas the judgment in Cameron was not delivered until 23 November 2000.

[93] [2011] VSCA 71; (2011) 31 VR 340, 360 [79]-[80].

[94] [2009] VSC 533, [244]-[246].

[95] See Talacko v Talacko [2011] HCATrans 301.

[98] Dunlop Pneumatic Tyre case [1914] UKHL 1; [1915] AC 79, 86-88.

[99] [1983] HCA 3; (1983) 152 CLR 359, 373.

[100] Cameron v UBS AG [2000] VSCA 222; (2000) 2 VR 108, 114[20].

[103] O'Dea v Allstates Leasing Systems (W.A.) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359, 367.

[104] [1914] UKHL 1; [1915] AC 79, 87 (the relevant test is set out at 87, [4(a)]).

[105] Transcript of proceedings Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013), 32 (line 39); Court Book 42 (line 39).

[106] Transcript of proceedings Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013), 32 (lines 39-45) - 33 (lines 1-2); Court Book 42 (lines 39-45) - 43 (lines 1-2).

[107] Transcript of proceedings Legal Practice Management (Vic) Pty Ltd (in liq) v Simms Corp Hotels & Leisure Pty Ltd & Ors (Magistrates' Court, 13 February 2013), 33 (lines 13-16); Court Book 43 (lines 13-16).

[108] The sum of $137,430.68 was the total of all of the tax invoices rendered by the legal practice.

[109] The sum of $132,394.12 was the outstanding amount for which the legal practice sought payment.