Auzcare Pty Ltd v Idameneo

The parties and the 2012 agreements

1. The first applicant Auzcare Pty Ltd is a company which owned and conducted a medical practice in Queensland. Its sole director was the second applicant, Dr Muhammad Azam. By a Deed of Sale of Practice dated 22 August 2012, the applicants sold the medical practice, including all plant and equipment at the premises, to the first respondent Idameneo (No 123) Pty Ltd for a purchase price of $800,000. Idameneo is the trustee of a unit trust which operates medical centres around Australia. On the same date, Auzcare and Idameneo entered into a separate deed entitled "Provision of Services to Incorporated Medical Practitioner" by which Auzcare promised to conduct the medical practice and procure the attendance of, and provision of medical services by, Dr Azam at premises in Queensland operated by Idameneo for a period of ten years, and to pay Idameneo 50% of all money received which was directly referrable to medical services provided by Dr Azam. The obligation to conduct the medical practice and to supply medical services for ten years also appeared in the Deed of Sale of Practice (cl 4.2). There were other obligations relating to the way in which the practice was to be conducted which it is unnecessary to summarise.
2. The consideration for the sale of Auzcare's practice of $800,000 was paid in full on 23 August 2012.
3. The second respondent, Ms Imrana Azam, was Dr Azam's wife. She was not party to either of the agreements referred to above. The primary judge recorded that the $800,000 was deposited into an account of Mrs Azam, and on the same day was transferred from her account to a third party.

The 2012 proceedings and their compromise

1. The primary judge stated at [4]: "Dr Azam worked for Idameneo for about 2 months, but at the end of October 2012 Idameneo commenced proceedings … alleging breach of contract by Dr Azam and Auzcare. It is unnecessary for present purposes to examine the breaches alleged. Put shortly, it was claimed that Dr Azam abandoned his responsibilities to Idameneo, planning to leave the country with the benefit of the $800,000. The breaches were denied and, in the event, were never proven. After negotiations the parties agreed to settle the 2012 proceedings, leading to the settlement deed of April 2013 upon which the present proceedings are based."
2. Idameneo originally only sued Auzcare and Dr Azam. The amended statement of claim filed in 2013 joined Mrs Azam. It alleged against Auzcare and Dr Azam that their breaches had the consequence that "the consideration for the payment of the [$800,000] has wholly failed". It alleged against Mrs Azam that she had received the $800,000 and been involved in its disbursement in circumstances where she either knew or ought to have known that Auzcare and Dr Azam were in breach of their obligations.
3. The 2012 proceedings did not go to trial. This application for leave concerns a Deed of Settlement and Release entered into in April 2013 (the Deed) in which the parties "agreed to settle the [2012] Proceedings without admission and without the need to proceed to final hearing" (recital O).
4. The Deed recited the transactions referred to above, the payment by Idameneo of $800,000, and the fact that Auzcare ceased conducting the medical practice in October 2012. Clauses 2(a) and (b) then provided: "(a) Auzcare, Dr Azam and Mrs Azam each agree and acknowledge that, as at the date of this Deed, they are jointly and severally indebted to Idameneo in the amount of $800,000 by reason of the liability arising pursuant to the causes of action pleaded in the Amended Proceedings (the Debt). (b) Idameneo agrees not to enforce immediately its rights against each of Auzcare, Dr Azam and Mrs Azam in relation to recovering the Debt from Auzcare, Dr Azam and/or Mrs Azam on the basis that Auzcare, Dr Azam and Mrs Azam each hereby acknowledge and agree that: (i) they are each obtaining valuable consideration under this Deed including the valuable consideration that Idameneo is not immediately enforcing its rights to recover the Debt; (ii) they will each respectively provide the mortgages set out at paragraph 2(k) below (the Mortgages); and (iii) should any of Auzcare, Dr Azam and/or Mrs Azam breach this Deed, Idameneo is entitled to enforce its rights under this Deed including recovering the Debt by Idameneo immediately enforcing its rights under each and all of the Mortgages."
5. Clause 2(c) provided that Auzcare and Dr Azam agreed to be bound by a new agreement, based on the earlier agreements but modified in the following ways. Auzcare promised once again to conduct its medical practice and to render medical services at Idameneo's premises (cl 2(d)), but on modified terms, including a slight extension of term. Separate provision was made for ensuring the presence of a chaperone, at the cost of Auzcare or Dr Azam, in order to comply with conditions which at that time had been imposed upon Dr Azam's medical registration (cl 2(f)). Auzcare, Dr Azam and Mrs Azam agreed that they were liable for interest on the $800,000 acknowledged in cl 2(a), and for any costs of enforcing the terms of the Deed (cll 2(i) and (j)).
6. Auzcare, Dr Azam and Mrs Azam were to give mortgages over all real property owned by each of them, including two parcels of land in Queensland, to secure "the monies owed and contingently owed" under the Deed. This appears to have occurred.
7. Idameneo gave Auzcare, Dr Azam and Mrs Azam a release, dependent upon their complying with each of clauses 2(d), (f), (i) and (j), while Auzcare, Dr Azam and Mrs Azam released Idameneo with immediate effect.
8. In late 2013, the 2012 proceedings were discontinued.

The 2014 proceedings

1. Idameneo commenced the proceedings which have given rise to the current dispute in 2014. It sought judgment in the amount of $800,000 plus interest and fees, and possession of the two Queensland properties. It alleged breaches of the Deed, comprising failure to render medical services, and the imposition of conditions on the registration of Dr Azam that he "could no longer consult, assess, examine or treat any females" (that such a condition had been imposed was admitted in the defence). Idameneo alleged that it had terminated the 2012 transaction documents.
2. The defence alleged that certain provisions in the Deed were unenforceable as penalties. By consent, the separate question identified at the outset of these reasons was heard and determined by the primary judge: Idameneo (No 123) Pty Ltd v Auzcare Pty Ltd [2015] NSWSC 1318. After dealing, uncontroversially, with the factual background and various authorities, the dispositive paragraph of his Honour's reasoning was at [24]: "The present case does involve the compromise of an admitted liability. That admission needs to be understood against the background of the circumstances leading to the settlement deed. As I have said, the 2012 proceedings compromised by that deed alleged the abandonment at an early stage by Dr Azam of his obligations under the agreement with Idameneo, despite the fact that the $800,000 for the sale of his practice had been received and disbursed. By cl 2(a) of the settlement deed the defendants expressly acknowledge their indebtedness in that amount by reason of the liability of each of them pleaded in the 2012 proceedings. The fact that cl 2 is preceded by the words 'without admission' is obscure, but it cannot avoid the effect of the plain words of that paragraph. As Mr Lucarelli put it, the effect of the deed is that the plaintiff agrees to postpone enforcement of that acknowledged debt, and ultimately to forgive it, upon certain conditions. If those conditions are not honoured the defendants lose the benefit of that forbearance and the plaintiff is at liberty to recover the acknowledged debt."
3. Mr Hyde Page, who appeared at first instance and on appeal for Dr Azam and Auzcare, maintained that that reasoning disclosed three errors.
4. First, he said that there was in substance no distinction which could be drawn between the acknowledgement of indebtedness of $800,000 as appeared in cl 2(a) and an agreement to pay $800,000. He relied then upon what had been said in this Court in Fermiscan Pty Ltd v James [2009] NSWCA 355; 261 ALR 408 about the penal operation of clauses whose purpose was to make such an amount immediately payable. He submitted that there was no present debt, notwithstanding the acknowledgement in cl 2(a), because: "the rule against penalties looks to the substance of an agreement rather than its form. As a matter of substance a present debt does not exist unless there is an enforceable obligation to pay money and the obligation is not contingent on future events. That is lacking in this case."
5. Secondly, he submitted that the penalties doctrine was only inapplicable where an agreement made provision for the payment over time of an existing debt. In the Deed, there was no delayed payment of an existing debt at all; rather the essential obligations upon Auzcare and Dr Azam were to provide medical services over the extended term, and it was to ensure the performance of those obligations that the provisions which made the $800,000 payable were directed. As it was put orally, "the purpose of the $800,000 indebtedness is … that it would coerce the provision of 10 years of medical services".
6. Thirdly, it was said that here the Deed compromised claims made in quasi-contract and in equity, rather than in debt. That sufficed, so it was said, to distinguish the position from cases where a creditor had compromised a claim in debt on the basis of an agreed regime of repayment by instalments.

Resolution of the application for leave

1. Nothing in this application for leave turns upon the broader questions concerning the nature and extent of the doctrine of penalties considered in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; 247 CLR 205 and Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67. It can and should be determined in accordance with the narrow basis on which the written and oral submissions have been articulated. Each of Mr Hyde Page's submissions is addressed in turn.
2. First, the distinction between an acknowledgment of an existing debt and a promise to pay an amount is basal. The effect of cl 2(a) of the Deed was to bind the parties to the Deed to that acknowledgment. It was not seriously contended that the clause did not give rise to an estoppel by deed.
3. The law of penalties draws an important difference between a forbearance in relation to an existing debt, and promises whose effect is to compel performance. As Gibbs CJ said in O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 374: "It makes commercial sense that parties may validly agree that payment of a present debt at a reduced rate, or at a future time, or by instalments, will be accepted if, but only if, certain conditions are observed."
4. His Honour explained the point at 367: "In all the cases of this kind 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."
5. That reasoning was confirmed in Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 518 where Mason ACJ, Wilson, Brennan and Dawson JJ said: "Of course, there is no penalty if the provisions of the moratorium deed simply grant an indulgence for the payment of a debt that is due and payable".
6. The fundamental difference between an acknowledgement of an existing debt which is the subject of an indulgence, and provisions whose purpose is to compel performance of a new obligation, is the reason for the findings that provisions in deeds implicitly acknowledged an existing debt in Cameron v UBS AG [2000] VSCA 222; 2 VR 108 at [3] and [21] and in Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259; 29 VR 462 at [17]. It also supplies a reason for the different outcomes in Fermiscan and Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221; [2001] 2 Qd R 114: in the latter cases there was no such acknowledgement.
7. All these cases, save for Fermiscan, were considered in the joint judgment of Bathurst CJ, Beazley P and McColl JA in Lachlan v HP Mercantile Pty Ltd [2015] NSWCA 130, which was heard and determined while the primary judge was reserved. As in the present appeal, the appellant in Lachlan relied on Zenith and the respondent relied on Cameron and Calcorp. The joint judgment observed that while there was in Cameron and Calcorp an implicit acknowledgement of a debt, there was in Zenith "no debt, merely an amount claimed": at [47]. Turning to the particular facts before them, their Honours then concluded that there was an admission of a present debt, with the result that a clause requiring the payment of the whole of debt was not penal. Their Honours concluded at [56]-[58]: "Recital O was an unconditional affirmation by the appellant of the debt obligations under the Loans and of the existence of a current and continuing obligation to repay those debts. This was an admission that the amounts claimed under the loans were present debts. Upon its proper construction, having regard to the reference to the loans in recitals C, F, I and L, the reference in recital N to the claimed debt and the admission contained in recital O, cl 10 operated so as to make payable, upon default of the payment of the agreed lesser sum, a greater sum defined in the Deed as the Judgment Debt and specified in the Schedule to be the sum of $1,570,292.12. In other words, the recitals and in particular recital O contained an admission of a present debt. Accordingly, cl 10 of the Deed did not constitute a penalty and we dismiss grounds 1-3 of the grounds of appeal" (emphasis added).
8. Fermiscan is quite different. The respondent in that case acknowledged in the settlement agreement that the applicants were entitled to certain documents and information taken from her computers in the execution of a warrant: at [86]. However, there was no acknowledgement by her of any pre-existing money obligation, whether express or implied. The deed made provision for the payments of $500,000 and $200,000, but on terms that turned on breaches of various other clauses. Wholly consistently with the decisions referred to above, the provisions were found to be penal by Allsop P for the following reasons (at [143]-[144], emphasis added): "The obligation to pay $500,000 was, in substance, conditional on money being earned by the commercialisation of the first invention. Upon breach, not of a term being an indulgence by way of part payment, but of other terms, this limited obligation changed into one that was unconditional or absolute to pay a lump sum in full forthwith. As a matter of substance (Interstar at [100]) this was a significant change to the obligation to pay by way of more onerous terms by the transformation of a substantially conditional obligation deferred in performance into an absolute one being immediately performable. ... Clause 2.4 insofar as it operated to make the $500,000 payable forthwith was a penalty and thus void and unenforceable. As to the $200,000 provided for by cl 2.3 (b), this sum was not payable except if a breach of cll 2.2 or 5 occurred, in which case it was payable forthwith. As with the change to the legal responsibility of Dr James to pay the $500,000, nothing in the commercial background or context or the terms of the settlement agreement supports the conclusion that this payment, conditioned on breach, was intended as an agreed pre-estimate or assessment of damages for breach of either cll 2.2 or 5. To the contrary, to the extent that the chapeau of cl 2.3 makes the $200,000 legally 'due' (subject to cll 2.3 (b) and 2.4) it is as part of the consideration for settlement of the Federal Court proceedings. Clause 2.3(b) it can be seen to take its place as a form of encouragement or coercion for the performance of cll 2.2 and 5."
9. Thus it may be seen that the absence of the pre-existing debt which was the subject of an indulgence was expressly relied on in holding that the provisions were penal.
10. It was not suggested that Lachlan should not be followed. In our view, it is plainly correct. The present case is a fortiori. Auzcare and Dr Azam expressly and unambiguously acknowledged a debt of $800,000. Moreover, the express acknowledgement was given in circumstances where there was no dispute that the money was received by them, nor that both breached the original agreements with Idameneo shortly thereafter, and were faced with a claim of money had and received for the whole of the purchase price. As in Lachlan, it follows that the provisions whose breach rendered the acknowledged indebtedness payable immediately are not penal. That is, in essence, the dispositive reasoning of the primary judge.
11. The force of Mr Hyde Page's second submission lies in the fact that, if Auzcare, Dr Azam and Mrs Azam had performed their obligations under the Deed over the extended term, then the debt would have been released and Idameneo would never be repaid. His essential point was that in those circumstances, it was clear that the provisions making the $800,000 due were in substance directed to compelling the performance of those obligations.
12. There is nothing in this point. Once it be observed that there was a pre-existing debt of $800,000 owed by Auzcare, Dr Azam and Mrs Azam, then the parties were free to negotiate ways in which that debt might come to be discharged. It may readily be inferred from the documentation that Idameneo regarded it as being of value to it to have Dr Azam working in its premises and paying to it half of the money received from medical services rendered by him. Just as it would have been open to the parties to have agreed, in a way that does not contravene the law of penalties, to Auzcare and Dr Azam paying off their indebtedness over 10 years, so too it is open for them to agree to a discharge of indebtedness on terms involving the provision of medical services.
13. Mr Hyde Page's third submission is also readily resolved. Again, there was an acknowledgement of debt, in a formal document executed by the parties, whose binding effect is not otherwise challenged. Auzcare and Dr Azam (and Mrs Azam) are bound by cl 2(a). The nature of the cause of action which was compromised giving rise to the acknowledgement of debt cannot undermine the effect of the acknowledgement. This is the opposite of the position noted in Lachlan at [47] by reference to Zenith, where there was "no debt, merely an amount claimed".

Orders

1. For those reasons, although there should be a grant of leave, this interlocutory appeal should be dismissed, with costs. The result will be that the proceedings will return to the primary judge. The formal orders of the Court will be: 1. Grant leave to appeal. 2. Direct the appellants to file a notice of appeal in accordance with the "Proposed Notice of Appeal" in the white book. 3. Appeal dismissed. 4. The appellants (Auzcare and Dr Azam) to pay the costs of the appeal (including the costs of the application for leave to appeal) of the first respondent Idameneo.

Amendments 14 November 2016 - [20] - "acknowledgement" replaced by "acknowledgment" 32 - "to pay to the" replaced by "to pay the" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 November 2016