[2000] VSCA 222
Lachlan v HP Mercantile Pty Ltd (2015) 89 NSWLR 198
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Catchwords
[2000] VSCA 222
Lachlan v HP Mercantile Pty Ltd (2015) 89 NSWLR 198
Judgment (2 paragraphs)
[1]
Judgment - ex tempore
By an Amended Notice of Motion filed on 11 May 2018, the second defendant seeks an order that order 1 made by the Court on 14 March 2018, being a judgment entered against the defendants in the sum of $754,700.61, be set aside.
The order was made in the absence of the defendants. Accordingly the Court has the power to set aside the order pursuant to Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") r 36.16(2)(b). The order was made in accordance with the terms of a Consent Order that had been made on 24 May 2017. The order was not a default judgment, as defined for the purposes of the UCPR, so the power to set aside under UCPR r 36.16(2)(a) is not enlivened.
The terms of the Consent Order are as follows:
TERMS OF ORDER MADE BY THE COURT BY CONSENT
1. Note that the Plaintiffs and the First and Second Defendants have reached an agreement to settle their differences and these proceedings as between them;
2. The First and Second Defendants jointly and severally agree to pay to the Plaintiffs, by bank cheques the amount of $250,000 in full and final settlement of all the Plaintiffs' claims in the manner set out in orders 3 below;
3. The First and Second Defendants further agree to pay to the Plaintiffs a first instalment of $10,000 on or before 30 June 2017 with the balance of $240,000 agreed to be paid over twelve (12) months in equal monthly instalments of $20,000 on the first day of each and every month with the first instalment payable on 1 September, 2017 and the last instalment payable on 1 August, 2018.
4. In the event the First and Second Defendants duly and punctually perform their obligations under 2 and 3 above, then the proceedings as between the Plaintiffs and First and Second Defendants will be dismissed with no orders as to costs to the intent that each party will pay and bear its own costs and any existing orders for costs will be treated as vacated.
5. In the event the First and Second Defendants fail to duly and punctually perform any of the obligations referred to in 2 and 3 above, then the Plaintiffs will be at liberty to, on the filing of an appropriate affidavit as to quantum, enter judgment in the amount which represents the difference between the Plaintiffs' claim of $769,762.61 in these proceedings (plus interest and costs) and such sums already received by the Plaintiffs or their Solicitor in accordance with 3 above.
6. In the event the First and Second Defendants duly and punctually perform their obligations in 2 and 3 above, the Plaintiffs on the one hand and the First and Second Defendants on the other hand will be taken, by virtue of this clause (which may be pleaded in bar in any proceedings brought in contravention of this clause) to have mutually released each other from all claims, causes, suits, actions and demands arising out of or connected with the subject matter of these proceedings.
THE COURT ORDERS THAT:
1. The proceedings as between the Plaintiffs and the First and Second Defendants to stand adjourned to 10 August, 2018 pending performance or otherwise of the obligations in 2 and 3 above with liberty to restore on two (2) days' notice.
The Consent Order thus embodies a settlement between the parties. The terms of the agreement are noted by the Court. There does not seem to be any dispute that the obligations referred to in paragraphs 2 and 3 of the terms have not been complied with. It seems that payments totalling only $15,000 have been made. On that basis, paragraph 5 of the terms would operate to permit the plaintiffs to proceed to have judgment entered for the amount which represents the difference between the plaintiffs' claim in the proceedings of $769,762.61 (plus interest and costs) and the amount of the sums received in accordance with paragraph 3 of the terms. The plaintiffs exercised that liberty, and order 1 was made by the Court on 14 March 2018 accordingly. However, the second defendant contends that paragraph 5 of the terms is unenforceable as a penalty.
An applicant seeking to set aside an order pursuant to UCPR r 36.16(2)(b) must show that there is a reason why the order should be set aside (see Austress Freyssinet Pty Ltd v Joseph [2006] NSWSC 77 at [25]-[26] per Campbell J (as his Honour then was); cited with approval by Brereton J in Brags Electrics Pty Ltd v Gregory [2010] NSWSC 1205 at [15]) The mere fact that the order was made in the absence of a party is not sufficient. However, if the second defendant's contention is correct, it would be appropriate to set aside order 1 made on 14 March 2018 pursuant to that rule. The order could also be set aside pursuant to UCPR r 36.15(1) as an order made irregularly.
The Court has had the benefit of written submissions from both the second defendant and the plaintiffs, together with further oral submissions in Court today. Before turning to consider the arguments advanced, it is necessary to say something about the dispute the subject of the proceedings.
The dispute arises from a contract for sale of land entered into on 4 August 2014 between the plaintiffs as vendors and the first defendant as purchaser. The property the subject of the contract is in Wrights Road, Drummoyne. The purchase price was $5 million. The deposit was only $100,000. The second defendant guaranteed the first defendant's obligations under the contract. The contract provided that completion was to occur 120 days after the plaintiffs served a development approval upon the first defendant. The plaintiffs served a development approval on 19 December 2014. By their Statement of Claim, the plaintiffs alleged that the date for completion thereby became 20 April 2015. The plaintiffs further alleged that the first defendant failed to complete by that date, or by 13 May 2015 as required by a Notice to Complete, or indeed at any time thereafter. The plaintiff terminated the contract on 13 May 2015 and forfeited the deposit. The plaintiff subsequently resold the property for $4.25 million. That sale was completed on 7 October 2015.
The plaintiffs claim that they were entitled under the contract to keep the deposit and recover from the first defendant the deficiency on resale (after giving credit for the deposit) and reasonable costs and expenses arising from the first defendant's failure to comply with the contract. A total of $769,762.61 was claimed as either an amount due under the contract, or alternatively as damages for breach of the contract. The same amount was claimed against the second defendant pursuant to the guarantee.
The defendants denied that the development approval was in accordance with what was contemplated by the parties and denied that the plaintiffs validly terminated the contract. They denied that the plaintiffs suffered the loss and damage alleged (in both paragraphs 11 and 12 of the Statement of Claim) and denied any indebtedness to the plaintiffs. There was also a plea that the plaintiffs had failed to mitigate any loss suffered. The defendants raised some further matters by way of defence, but it is not necessary to refer to them. No Cross-claim was filed.
The second defendant submitted that paragraph 5 of the terms of the settlement agreement amounts to a penalty because it operates upon default of the obligations to make payments totalling $250,000 to impose a liability in a vastly greater amount. It was submitted that this is not a case where there was a debt owed to the plaintiffs or any acknowledgment of the existence of a debt. Accordingly, it was not a case where a creditor agrees to accept a lesser sum in full discharge of a debt upon certain conditions, but stipulates that if the conditions are not met, the creditor will be entitled to recover the whole amount of the debt (see O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 367.) Put another way, it is not a case where the agreement simply grants an indulgence for the payment of a debt that is due and payable (see Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 518).
The second defendant submitted that the plaintiffs' claim was not to recover a debt but was a claim for damages, the quantum of which was contested. It was pointed out that the sum referred to in paragraph 5 of the terms was not characterised as a debt but was rather described as the amount of "the plaintiffs' claim" in the proceedings.
The plaintiffs appeared to accept that in order for paragraph 5 of the terms not to be regarded as a penalty, the agreement needed to embody an acknowledgment, either express or implied, of a debt "which was ultimately compromised in the settlement". The plaintiffs further seemed to accept that there was no express acknowledgment of a debt in the settlement agreement. Rather, it was submitted by reference to cases such as Cameron v UBS AG (2000) 2 VR 108; [2000] VSCA 222 ("Cameron") and Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd (2010) 29 VR 462; [2010] VSCA 259 ("Calcorp") that the agreement contained an implicit acknowledgment of a debt in the amount referred to in paragraph 5 of the terms. The plaintiffs referred in particular to the judgment of Buchanan JA in Cameron at [28] and submitted that the amount did not "spring unheralded" from the agreement, but rather could be seen as an amount referable to the plaintiffs' loss under the contract. The plaintiffs place some emphasis on the admissions contained in the defences filed by the defendants, including as to the existence of the contract for sale, its terms as to the vendor's rights upon default, and the first defendant's failure to complete. It was submitted that the circumstances of the settlement agreement were such that the provisions of the agreement could not be said to be punitive. Finally, it was submitted that by their entry into the settlement agreement itself, the defendants implicitly acknowledged that the plaintiffs were entitled to the amount referred to in paragraph 5 of the terms. It was thus put that the case is similar to Calcorp and is distinguishable from Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2001] 2 Qd R 114; [2000] QCA 221 ("Zenith").
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 (see Auzcare Pty Ltd v Idameneo (No 123) Pty Ltd (2015) 91 NSWLR 581; [2015] NSWCA 412 at [21]).
Paragraph 5 of the terms of the agreement provides that if the defendants fail to punctually perform their obligations to make a series of payments over a 13-month period, totalling $250,000, the plaintiffs will be at liberty to procure entry of a judgment for the difference between the plaintiffs' claim of $769,762.61 (plus interest and costs) and the amount of payments received by the plaintiffs. On any view, the judgment amount will be well in excess of $500,000, and thus at least double the amount of the required payments.
The provision bears all the hallmarks of a stipulation designed to compel performance of other obligations under the agreement. In my opinion, it is a stipulation that prima facie imposes a penalty, in accordance with the general test formulated by the High Court in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 at [10]. It cannot, in my view, be considered to involve a genuine pre-estimate of liquidated damages for any loss that would be suffered by the plaintiffs by reason of any breaches by the defendants of their payment obligations under the terms.
There is clearly no express acknowledgment of an existing debt in the terms of the agreement. I did not understand the plaintiffs to contend to the contrary. I therefore agree that paragraph 5 of the agreement should be held to be a penalty unless in the circumstances there is an implied acknowledgment by the defendants that the amount referred to in paragraph 5 is a debt owed to the plaintiffs. In that event, the agreement could be seen as one that provides for an indulgence in relation to the payment of an existing debt, and thus fall within the principle referred to earlier that was enunciated in O'Dea v All States Leasing System (WA) Pty Ltd (supra).
I have previously had occasion to consider many of the relevant authorities, including those especially relied upon here by counsel, concerning the question whether there is an implicit acknowledgment of a debt (see Lachlan v HP Mercantile Pty Ltd [2014] NSWSC 356 at [47]-[56]; affirmed in Lachlan v HP Mercantile Pty Ltd (2015) 89 NSWLR 198; [2015] NSWCA 130). I have given further consideration to those cases today. I accept that it is open to a defendant, in substance, to acknowledge its liability to a plaintiff, by entering into of terms of settlement (see Australian Management Consultants Pty Ltd v Direct Mortgage Funding Pty Ltd [2003] VSC 202 at [52]).
The plaintiffs submitted that, as in Cameron, the amount referred to in paragraph 5 of the terms did not spring from the agreement "unheralded". I accept that the amount has its genesis in the prior dealings between the parties; namely, the contract for sale and the ensuing litigation. However, unlike Cameron, it is not a case where there was a debt pursuant to a foreign judgment, and the issue in the litigation concerned the enforcement of the judgment in the local jurisdiction (see at [3] and [19]-[21].) The observations made by Buchanan JA in that case at [28] and in particular its final sentence need to be read in that light. The plaintiffs accepted that the circumstances of the present case are somewhat unlike those in Cameron.
As I have mentioned, the plaintiffs submitted that the present case is akin to Calcorp. That case involved terms of settlement which contained an agreement by the defendants to pay $200,000 in instalments, in default of which the plaintiff was entitled to enter judgment for the full amount of the plaintiff's claim "in the agreed sum" of $262,648.96, less amounts paid, plus interest and costs.
The leading judgment was delivered by Nettle JA (as his Honour then was) with whom Redlich and Harper JJA agreed. Nettle JA held that the terms of settlement contained an implicit acknowledgment that the sum of $262,648.96 was due to the plaintiff (see at [17]-[23].) At [19] his Honour noted that "there was no dispute about the existence of the lease, or the appellants' default in payment of rent and outgoings under the lease, or even the amounts which the appellants had failed so to pay." His Honour stated that, effectively, the only dispute was as to the amount due to the respondent by way of damages for the loss of the lease bargain, and so, in point of principle, the position was analogous to Cameron.
I interpolate that the present case is different. Whilst some matters are admitted on the pleadings, the defences also make it clear that the entirety of the plaintiffs' monetary claims are disputed, and contain specific denials of any indebtedness to the plaintiff. That is so even if the Statement of Claim pleads that the plaintiffs are owed specific amounts pursuant to the provisions of the contract that operate upon the purchaser's default.
At [21], Nettle JA placed some emphasis on the words "in the agreed sum of $262,648.96". Viewing those words in the context of the historical background of the lease and the proceedings, his Honour found that there was there:
"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."
Those words are not present in paragraph 5 of the terms in this case. Paragraph 5 employs the expression "the plaintiffs' claim of $769,762.61 in these proceedings".
In my opinion, these differences are significant. It seems to me that the present case is more akin to Zenith, a case that was itself distinguished in Calcorp (at [24]).
In Zenith, the deed of settlement required the defendant to pay $55,000 by certain instalments "in full settlement of the plaintiff's claim and the defendant's counter-claim". The deed further provided that if a payment was not made on the due date, the plaintiff would be entitled to enter judgment "for the full amount claimed" (which was $72,567.13), plus interest and costs.
The Queensland Court of Appeal upheld the primary judge's conclusion that this provision constituted a penalty. Pincus JA, who wrote the leading judgment, stated at [9] that "the stipulated sum was neither in form nor in substance a present debt; it was merely an amount claimed". White J, to similar effect, stated at [13] that the amount claimed in the pleading, which was disputed in the defence and counter-claim, could not be characterised as a "present debt, a debt actually due and owing".
As in the present case, there was no admission on the pleadings as to the existence of an obligation to pay something, and there were no words in the agreement similar to the expression "agreed sum" that was present in Calcorp. Unlike the position in Lachlan v HP Mercantile Pty Ltd (supra), I do not discern anything of significance to distinguish the present situation from that in Zenith. I appreciate, of course, that these cases are merely examples of other situations in which the question arose as to whether there had been an implicit acknowledgment of a debt. The question remains one of construction of the agreement reached between the plaintiffs and defendants in this case.
Having considered the terms of the agreement, viewed in the context of the contract for sale and the proceedings (including the pleadings of the parties), I am unable to conclude that the agreement embodies an implicit acknowledgment on the part of the defendants of an existing debt. The language speaks instead of an amount claimed by the plaintiffs in the proceedings. I do not think that the defendants, by entering into the agreement in the circumstances, have in substance acknowledged a liability to pay that amount.
For the above reasons, it is my view that the second defendant has established grounds for setting aside the order for judgment that was made on 14 March 2018. The term of the agreement upon which the order was based is in my view a penalty, and is thus unenforceable. It is appropriate to set aside the order under UCPR rule 36.16(2)(b). The order could also be set aside under UCPR rule 36.15 (1) as an order made irregularly. It is not necessary to deal with certain other aspects of the Amended Notice of Motion which, in any event, do not appear to have ultimately been pressed.
The Court will also order that the costs of the Notice of Motion follow the event. Accordingly, the plaintiffs will be ordered to pay the second defendant's costs of the Notice of Motion and Amended Notice of Motion.
[2]
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Decision last updated: 25 June 2018