Cafe du Liban Pty Ltd v Bespoke Garage Pty Ltd

Factual and procedural context

1. On 13 March 2015, Liban - and Ms Krahe as its guarantor - entered into two contracts with Bespoke. The first, entitled "Loan of Equipment - Terms and Conditions", was a contract for the hire of a coffee machine and grinder for 24 months (the Loan Contract). It provided that the "intended purpose/permitted use" of the hired equipment was "for the preparation, supply and sale of Bespoke Garage products" and that the equipment could "not be used with any coffee or product other than Bespoke Garage products". Clause 12(b) provided for amounts to be payable if Bespoke terminated the agreement for Liban's breach or deemed repudiation. Those amounts included the "present value of instalments not then due", but no allowance was made for any benefit to Bespoke from retaking possession of the equipment earlier than would have been the case if the loan had run its course.
2. The second contract included Bespoke's standard terms and conditions for the sale of coffee and specified 30 kg per week as the "minimum weekly amount of coffee" (the Supply Contract). In the proceedings in the Local Court and the Supreme Court, the parties assumed that Liban was obliged to purchase this amount. On its face, cl 11.3 required Liban to pay "accumulated loss and compensation" according to an agreed formula if it terminated the contract before 24 months of supply. In the Local Court, the parties litigated on the agreed basis that this period was the duration of the contract. In the Supreme Court, however, the applicants sought to depart from that assumption, so as to argue that the Supply Contract was unlimited in duration but terminable on reasonable notice.
3. Following the execution of the contracts, the relationship between the parties deteriorated very quickly. The first supply of coffee took place on or around 17 March 2015, and the equipment was supplied two days later. By 27 March 2015, Liban, relying on an alleged agreement for a three-month probation period, determined not to continue taking supply of Bespoke's coffee or performing the contracts. There were further communications and, in August 2015, Bespoke purported to accept Liban's alleged repudiation of the Supply Contract, and terminated the Loan Contract for breach.
4. On 21 October 2015, Bespoke commenced the proceeding in the Local Court. As the primary judge observed at Judgment [43]-[45], three substantive issues arose in that proceeding: whether the Supply Contract was subject to a "probationary period" of three months; whether the coffee beans supplied were in accordance with the terms of the Supply Contract; and whether cll 11.3 of the Supply Contract and 12(b) of the Loan Contract were unenforceable as penalties. Deciding each of those issues against Liban, the learned Magistrate awarded Bespoke $42,432 for the claim under cl 11 of the Supply Contract, $22,391.68 for the claim under cl 12 of the Loan Contract, and $1,500 for the cost of repairs to the coffee machine. The resulting judgment for the plaintiff was in the sum of $66,323.68, together with interest and costs, the latter assessed in a subsequent judgment of 19 August 2016 as $44,000: Bespoke Garage Pty Ltd v Cafe Liban Pty Ltd trading as du Liban and Dorothy Krahe (unreported, 19 August 2016, Freund LCM).
5. In the Supreme Court appeal proceeding, the primary judge rejected Liban's argument that the three-month probation period formed part of the Supply Contract (Judgment [55]-[63]); upheld the argument that cl 11.3 of the Supply Contract contained a penalty (Judgment [90]-[94]); dismissed the argument that cl 12(b) of the Loan Contract was penal (Judgment [97]-[108]); and refused to permit the applicants to argue that the Supply Contract was for an unlimited term and terminable on reasonable notice (Judgment [35]-[37]). One consequence of these conclusions was that Bespoke's alternative claim for damages for repudiation of the Supply Contract had to be determined. Doing so, the primary judge held that Bespoke was entitled to recover the lost profit from the sale of the minimum weekly amount of coffee (30 kg) at $8/kg for 52 weeks: Judgment [111]-[115].
6. By their draft notice of appeal, the applicants assert that the primary judge erred in: 1. failing to hold that cl 12(b) of the Loan Contract was a penalty (proposed ground 1); 2. finding that the Supply Contract and Loan Contract were not subject to a probationary period of three months (proposed ground 2); and 3. not allowing the applicants to contend that those contracts were of an unlimited term and could be terminated by reasonable notice (proposed ground 3).

Preliminary matters

1. The present application was fixed for hearing at 2:15 pm on 12 October 2018. On 4 October, Ms Krahe withdrew her solicitor's instructions to act on behalf of the applicants. That solicitor (Mr Ekes) filed a motion, supported by an affidavit sworn on 4 October 2018, seeking leave to file a notice of ceasing to act. By an email to the Registrar of the Court, Ms Krahe then requested that the matter be heard on the papers, "in the interest of mitigating costs, time and further delay" and on the basis that she was not "well enough emotionally to appear" herself. In response, Bespoke maintained that leave to withdraw should be refused or that the matter should proceed as listed on 12 October 2018 with no adjournment. Following a further enquiry from the Court, the parties agreed that the applications for the extension of time, leave to appeal and leave to file the notice of ceasing to act could be dealt with on the papers.
2. Those papers include a draft of the applicant's written submissions, apparently prepared by counsel, and Bespoke's written submissions in response, filed on 4 October 2018. Although Bespoke's written submissions were filed late, we do not accede to Ms Krahe's submission that they be "struck out" on that basis. They are in reply to the applicants' draft written submissions and evidence, and do not raise any new issue or subject not already traversed. By way of evidence, the applicants rely on an affidavit of Ms Krahe sworn on 3 September 2018, and the respondents, on affidavits of Mr Ian Benson sworn on 13 April 2018 and 9 October 2018. Each of those affidavits is taken as read.
3. Another procedural matter is Mr Ekes' application, supported by his affidavit of 4 October 2018. We grant his application for leave to file and serve a notice of his ceasing to act, notwithstanding that he has not served on Ms Krahe a notice of intention in accordance with UCPR, r 7.29(2). As noted above, it was Ms Krahe, not Mr Ekes, who terminated the retainer on short notice, and there are no circumstances rendering it "expedient to retain the solicitor on the record": see Plenty v Gladwin [1986] HCA 55; (1986) 60 ALJR 665 at 666.

Application of penalty doctrine (proposed ground 1)

1. As the primary judge noted at Judgment [97], the amount put in issue by the applicants' attempt to characterise cl 12(b) of the Loan Contract as a penalty is at most $17,555, being the present value of the future instalments payable under that agreement.
2. The primary judge dealt with this question at Judgment [99]-[108]. Applying the different tests enunciated by the members of the majority in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 (as to which see Judgment [72]), his Honour concluded that "Bespoke had a significant interest in Liban continuing to use the coffee machine beyond its receipt of rental payments under the Loan Contract", which consisted in "the profits from the sale of coffee" while the equipment was retained and used: Judgment [107]. He concluded at Judgment [108]: Consistent with Paciocco, as the interest of Bespoke in supplying coffee for use in the coffee machine the subject of the Loan Contract is a "legitimate interest of the non defaulting party" it has not been shown that clause 12 requires the payment of a sum "out of all proportion" to the protection of the legitimate interests of the non defaulting party or that the totality of the circumstances suggests that the clause's only, or at least predominant, purpose is to punish the defaulting party.
3. Challenging that conclusion, the applicants' written submissions assert that, "on a proper construction of clause 12 and its effect, it is clear that the clause's only, or at least predominant purpose was to punish the defaulting party". Those submissions do not suggest that the primary judge addressed the wrong question. Rather, they challenge his conclusions that Bespoke had a commercial interest in the continued use of the coffee machine beyond the rental payments; that that was a legitimate interest; and that, accordingly, cl 11.3 was not shown either to require payment of a sum "out of all proportion" to the protection of legitimate interests or to have a predominant purpose of punishing the defaulting party.
4. There is one respect in which the applicant's argument has some merit. In circumstances where cl 12 of the Supply Contract was directed to protecting Bespoke's interest in supply continuing for the 24-month term of the Loan Contract, the purposes of cl 11.3 of the Loan Contract may not have included the protection of the same interest: cf Paciocco especially at [34] (Kiefel J, French CJ agreeing), [172] (Gageler J), [222] (Keane J), limiting attention to interests protected by the particular stipulation said to be penal. In any event, however, the primary judge's conclusion might separately be justified by the absence of any evidence that Bespoke could have sold or leased the coffee machine again, such that this opportunity would have real value to be brought to account in any damages calculation. Thus, this first proposed ground, involving only $17,555, has questionable prospects of success.

Incorporation of probationary period (proposed ground 2)

1. The primary judge dealt with this question at Judgment [61]-[63]. The applicants argued before the Local Court that Bespoke's letter of offer dated 13 October 2014, stating that there would be a "three (3) month probationary period for trading", formed part of the Supply Contract: Judgment [59], [61]. His Honour correctly proceeded on the basis that this issue was to be resolved objectively and by reference to what the words and conduct of the parties would reasonably be understood to have conveyed. He concluded at Judgment [63]: It is not necessary to determine whether the proposed probation clause is inconsistent with clause 11 of the Supply Contract. Even if it is not, then having regard to the presiding Magistrate's findings of fact, Liban and Ms Krahe did not establish that the signed agreement was part of some "fuller agreement" that included the probation clause. A period of five months passed between the letter of 13 October 2014 and the execution of the written agreement in March 2015. The probation clause was not referred to in any of the discussions or correspondence between the parties in that period. At least one of the apparent purposes of the probation clause was to enable Liban to consider the quality of the coffee that was to be supplied. They had the opportunity to address that in the interim. Further, the circumstances in which the agreement was signed … indicate that the parties intended that the signed agreement constitute the full agreement between the parties. Ms Krahe received drafts of the agreements on the evening of 12 March 2015. She signed them the next day in Mr de Caires' presence after having read them.
2. The applicants' written submissions contend, first, that the primary judge applied "subjective reasoning to the question whether the probationary period provision was a term of the supply agreement" and, secondly, that an objective analysis should have concluded that such a term formed part of the "final agreement entered into between the parties". The first of these submissions finds no support in his Honour's reasons. In the circumstances found by the Magistrate and recited by the primary judge, his reasoning to the conclusion that the parties' presumed intention was for the signed Loan Contract to constitute their full agreement discloses no error. It follows that this proposed ground has little realistic prospects of success.

Departure from assumed construction (proposed ground 3)

1. The primary judge dealt with this question at Judgment [35]-[37]. His Honour concluded that the parties' common assumption that the Supply Contract had a 24-month term was "the foundation of the presiding Magistrate's judgment" and that "to revisit it would effectively require the entire matter to be re-litigated". Thus, he rejected the application to argue on the appeal from the Local Court that the Supply Contract was instead terminable on reasonable notice.
2. In their written submissions to this Court, the applicants contend that the primary judge erred in refusing to allow them to make that argument for two reasons: first, because the term of the Supply Contract depended on a pure question of law; and, secondly, because his Honour found that the contents of a letter of offer dated 13 October 2014, and referring to a two-year period of supply, could not inform the terms of the parties' final agreements.
3. The merits of this argument may be dealt with shortly. As the primary judge accepted that cl 11.3 of the Supply Contract was a penalty, in the end, the argument was only relevant to Bespoke's alternative claim to loss-of-bargain damages over a two-year period for breach of that contract: Judgment [111]-[115]. If the contract could be terminated on reasonable notice, those damages would depend on the period of notice that would have been reasonable in the circumstances existing at the time the notice would have been given: Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 444 (McHugh JA, Priestley JA agreeing), 454 (Clarke JA). That being a question of fact on which the parties could have led evidence, the primary judge did not err in refusing to allow the applicants' argument to be made for the first time on appeal: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438.

Delay and prejudice

1. As already noted, the application for leave to appeal was filed nine months out of time. The applicants seek to explain that delay as due to the negligence of their former legal representative, Andrew Stewart. In her affidavit, Ms Krahe maintains that on 23 November 2017 she instructed him to file a summons seeking leave to appeal from the judgment of the primary judge. On 24 November 2017, Liban did file a summons in the Supreme Court purporting to commence a fresh appeal, but the orders sought and grounds of appeal were identical to those in the summons filed on 14 September 2016, and dealt with by the primary judge by final orders made on 20 September 2017. The November 2017 summons was not served on Bespoke and did not come to its notice before early December 2017. It was then dismissed on 9 February 2018.
2. Ms Krahe gives conflicting evidence as to when she first became aware of that fact. On the one hand, she says she was advised by the registry on 12 March 2018 that the summons had been dismissed. On the other, she maintains that Mr Stewart advised her in about April that the appeal had failed because he filed a summons appealing the wrong decision. She then says that between April and early July Mr Stewart "was being evasive and informed us that he would rectify the issue". We should observe here that none of this evidence has been tested in cross-examination and Mr Stewart has not been given any opportunity to put his version of events. For present purposes, it suffices to say that Ms Krahe's evidence provides no satisfactory explanation for why the application for leave to appeal was not made in April 2018, even if the prior delay was due to the matters described above.
3. Bespoke has also incurred costs in seeking to enforce its judgment. First, in November 2017, it served a notice of its intention to enforce an equitable charge granted by Ms Krahe on 20 October 2016; and it served a bankruptcy notice on Ms Krahe and a statutory demand on Liban. Secondly, it responded to proceedings commenced by Ms Krahe or Liban: the purported fresh appeal proceeding was dismissed with costs on 9 February 2018; and the proceeding to set aside the statutory demand was dismissed with costs on 14 February 2018. Thirdly, in March 2018, the applicants filed a motion in the underlying proceeding seeking to pay the judgment debt by instalments. An instalment order was made. That order was not complied with. Bespoke applied to lodge an objection against the order. On 24 May 2018, Campbell J extended the time for its doing so, declared that the instalment order had ceased to have effect, and ordered Ms Krahe to pay the costs of that application. Fourthly, Ms Krahe applied in the Federal Circuit Court to set aside the bankruptcy notice. That application was not served on Bespoke. In its absence, an order was made extending the time for compliance with the notice, which order was also not served on Bespoke. When Bespoke's solicitors became aware of these events in May 2018, they successfully moved on 5 June 2018 for orders that the application be dismissed with costs. Finally, on 6 June 2018, Bespoke filed and served a creditor's petition against Ms Krahe. The evidence asserts that there have been "several hearings" in relation to that petition, but does not indicate the current position.

Determination

1. In the circumstances outlined above, an extension of the time to seek leave to appeal is not in the interests of justice. The application for leave to appeal raises no question of principle and, although ground 1 is reasonably arguable, the amount in issue is likely to be less than the costs Bespoke has incurred in seeking to enforce judgment in the period prior to August 2017. Ms Krahe's explanation for the nine-month delay, especially from April 2018, is not satisfactory, particularly where Bespoke continued to incur costs and there were failures to serve documents on it.
2. Accordingly, the Court makes the following orders: 1. Mr Ekes' application for leave to file and serve a notice of ceasing to act is granted. 2. The application for extension of time in which to seek leave to appeal is refused. 3. The summons seeking leave to appeal is dismissed. 4. The applicants are to pay the respondent's costs of the summons.

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: 18 October 2018