Esanda Finance Corporation Ltd v Plessnig

Esanda Finance Corporation Ltd v Plessnig - [1989] HCA 7 - HCA 1987 case summary — Zoe

[23]

is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term. Earlier in their reasons their Honours had discussed the first of these circumstances. After referring to the decisions of the House of Lords in Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda [6] and Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [7] , they said [8] : In both these decisions, in conformity with the doctrine's historic antecedents, the concept is that an agreed sum is a penalty if it is "extravagant, exorbitant or unconscionable": Clydebank [9] ; Dunlop [10] . This concept has been eroded by more recent decisions which, in the interests of greater certainty, have struck down provisions for the payment of an agreed sum merely because it may be greater than the amount of damages which could possibly be awarded for the breach of contract in respect of which the agreed sum is to be paid: see Cooden Engineering Co. Ltd. v. Stanford [11] . These decisions are more consistent with an underlying policy of restricting the parties, in case of breach of contract, to the recovery of an amount of damages no greater than that for which the law provides. However, there is much to be said for the view that the courts should return to the Clydebank and Dunlop concept, thereby allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach: see Robophone Facilities Ltd. v. Blank [12] ; U.K. Law Commission, pars. 33, 42-44. A similar view was expressed in Elsley v. J. G. Collins Insurance Agencies Ltd. [13] , where Dickson J., in delivering the judgment of the Supreme Court of Canada, said: It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression. 1. (1972) 126 C.L.R. 131. 2. (1983) 152 C.L.R. 359. 3. (1986) 162 C.L.R. 170. 4. (1986) 162 C.L.R., at p. 193. 5. [1905] A.C. 6. 6. [1915] A.C. 79. 7. (1986) 162 C.L.R., at p. 190. 8. [1905] A.C., at pp. 10-11, 17. 9. [1915] A.C., at p. 87. 10. [1953] 1 Q.B. 86, at p. 98. 11. [1966] 1 W.L.R. 1428, at pp. 1447-1448; [1966] 3 All E.R. 128, at pp. 142-143. 12. (1978) 83 D.L.R. (3d) 1, at p. 15.

[26]

In the Full Court the Chief Justice, with whose judgment Mohr J. agreed, noted that, upon superficial examination, the formula prescribed in cl. 5 for determining the "recoverable amount" corresponded generally to the criteria sanctioned by Walsh J. in I.A.C. (Leasing) [16] and by Mason and Wilson JJ. in AMEV-UDC [17] . However, his Honour distanced himself from a close adherence to those criteria by observing that they were set in the context of cases dealing with leases of chattels containing no element of purchase whereas the present case involved a hire-purchase agreement. With all respect to his Honour, it may be doubted whether, at least in the present case, any real significance attaches to the distinction between a contract of hire and one of hire-purchase, although it is a distinction upon which counsel for the respondents relied in the appeal to this Court. Clause 10 of the agreement contains an option to purchase, providing that the hirer may elect to become the owner of the goods by paying the total rent and fulfilling his other obligations to the owner, but that until then he shall have no property in the goods and shall be only a bailee. It is clear from that clause that until the exercise of the option the respondents had no proprietary interest in the prime mover. Nor were they bound to make the thirty-six instalments; they were free to terminate the agreement at any time. It may be noted that in AMEV-UDC [17] Mason and Wilson JJ. did not draw any distinction between a leasing contract and a hire-purchase agreement. In any event, if one leaves aside for the moment the reference to wholesale rather than retail value, the loss of any potential proprietary interest in the vehicle held by the respondents would seem to be compensated for in the formula defining the "recoverable amount". It will be remembered that the formula provided for the total rent (inclusive of repossession, storage, maintenance and selling costs) to be offset not only by all moneys paid as rent and an appropriate rebate of the terms charges but also by the value of the goods, being the best wholesale price reasonably obtainable for them in their then condition at the time of repossession. The respondents by their default forfeited any right to an option to purchase the vehicle.

[36]

By cl. 6 of the parties' hire-purchase contract, the owner (the appellant) is authorized in the event of any breach by the hirer (the respondents) to retake possession of the goods hired, and thereby to terminate the hiring and to recover "as liquidated damages" a sum calculated by the formula prescribed by cl. 5 and described as "the recoverable amount". The recoverable amount includes an amount which compensates the owner for his loss of instalments of rental which would have become payable if the hiring had not been terminated. Rental instalments are expressed to be "payable during the hiring" and the hirer agrees to pay the rent until the hiring is determined: cl. 2. The right to be paid those instalments is therefore lost on the termination of the hiring. But is the owner's right to be paid future rental instalments lost because of the hirer's breach, which may be a trifling breach, or because of the owner's election to terminate the hiring? Under the general law a party who breaches a condition in a contract or who commits a fundamental breach of or repudiates a contract - a party who commits what I shall call a repudiatory breach - is exposed to the loss of all his future contractual rights and to liability to compensate an innocent party for loss of his bargain; but a non-repudiatory breach does not expose the party in default to that liability in the absence of a stipulation in that behalf. If a hire-purchase contract confers on the owner a contractual right to terminate the hiring for any breach, that right is distinct from and cumulative upon the owner's general law right to terminate the contract for a repudiatory breach. In such a case the source of the right to terminate the hiring is the contract. A stipulation which confers the right to terminate the hiring for any breach does not transform the non-essential terms into conditions and therefore the contract may remain on foot after the hiring is terminated. Whether a term which is commercially non-essential can be elevated effectively to the level of a condition by appropriate drafting is a problem which does not now arise: see Lombard North Central Plc. v. Butterworth [22] .

[40]

The ratio of that part of the decision was that where there has been no repudiation by the hirer, and the owner has exercised his power to determine the hiring because the hirer was in arrears with his payments, any loss occurring after the determination will have resulted, not from the hirer's breach of contract in being late in his payments, but from the owner's election to determine the hiring [27] . Very similar reasoning was accepted by this Court in Shevill v. Builders Licensing Board [28] , a case in which a lessor exercised a power of re-entry when the lessee fell into arrears in the payment of rent. Mason and Wilson JJ. said [29] : The point is that when the lessor terminates pursuant to the contractual right given to him for breach by the lessee, the loss which he can recover for non-fundamental breach is limited to the loss which flows from the lessee's breach. The lessor cannot recover the loss which he sustains as a result of his termination because that loss is attributable to his act, not to the conduct of the lessee. It is otherwise in the case of fundamental breach, breach of an essential term or repudiation: see Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. [30] . In rejecting a submission that equity would condition the granting of relief against a penalty by requiring the guilty party to compensate the innocent party for loss incurred consequent on termination for non-fundamental breach, their Honours said [31] : it would now be inconsistent with modern authority for equity to condition its relief by imposing on the obligor a liability to pay damage which flows, not from the obligor's breach of contract, but from the obligee's act in exercising his contractual right to terminate for non-fundamental breach. If, for the purpose of applying the Dunlop [32] test, regard is had solely to the damages which the majority in AMEV-UDC [33] held to flow from the hirer's breach, a stipulation for liquidated damages to be paid by a hirer on termination of the hiring for non-repudiatory breach which imposes a liability to pay for losses flowing from the termination should be treated as imposing a penalty. However, a further examination of AMEV-UDC shows that a majority of the Court said that that is not the law. Deane J., in dissent, held that the loss against which the supposed penalty was to be measured to determine whether it was in truth a penalty included the loss sustained upon termination. His Honour, accepting the explanation for this proposition advanced by the majority in Cooden Engineering Co. Ltd. v. Stanford [34] , said [35] : In essence, that explanation is that, at least for the purposes of the rules relating to penalties, the loss sustained by reason of the exercise of a contractual right to terminate upon breach in a case such as the present is to be seen as flowing from the breach. The point was clearly made by Hodson L.J. in Cooden [36] when he expressed his difficulty in seeing "the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine": see also Somervell L.J. [37] . In that context and notwithstanding the support for the contrary view which can be found in some cases, I am unable to accept that the common law would found upon that very distinction between breach and termination to reduce the extent to which a penalty clause can be enforced below the actual amount of the loss sustained upon termination for breach. Dawson J., also in dissent, perceived a logical but not a legal distinction between loss flowing from non-repudiatory breach and loss flowing from termination pursuant to a contractual power, observing [38] : Moreover, if, as is logical but is not done, the provision for loss upon termination of the agreement were to be compared in amount with the loss flowing from a breach not amounting to a repudiation, it would almost certainly be markedly more and for that reason a penalty even though a genuine pre-estimate of the lessor's damage upon the exercise of his contractual right to terminate the agreement. It is not done because the result is obviously unsatisfactory, but I shall return to that point shortly. And [39] : if a provision stipulating a payment by way of accelerated rent or the like upon repossession is to be regarded as payable upon breach rather than upon termination of the agreement for the purpose of characterizing it as a penalty and if upon the provision being characterized as a penalty the only recovery permitted is for the breach and not for the loss of the bargain (assuming no repudiation), there can be no justification for having regard to the loss arising from termination in determining whether the provision is a genuine pre-estimate of damage or a penalty. Yet, his Honour said, "that is what is done". If that is so, losses flowing not from the breach alone but from the termination as well are taken into account in determining whether a pecuniary liability is a penalty. Mason and Wilson JJ. expressed, albeit obiter, a view which bears out Dawson J.'s observation. First, their Honours did not regard termination as an event supervening on an antecedent breach and, on that account, to place post-termination loss outside the purview of the law relating to penalties. Their Honours said [40] : If the option [to terminate] is exercised on the occasion of the hirer's breach of contract, it accords with principle and authority to say that the sum is payable in respect of the breach of contract and is a penalty, unless it is a genuine pre-estimate of the damage. Although their Honours held that losses caused by the termination of the contract were not to be included in the owner's damages, they thought it right to take them into account in determining whether a pecuniary liability imposed by the contract is a penalty. Their Honours said [41] : Our rejection of the appellant's arguments should not be taken as throwing any doubt on the right of the owner or the lessor to recover his actual loss on his early termination of a hire-purchase agreement or chattel lease, pursuant to a contractual right, for the hirer's non-fundamental breach, under a correctly drawn indemnity provision. 1. [1963] 2 Q.B. 104. 2. (1986) 162 C.L.R., at p. 175. 3. [1963] 2 Q.B., at pp. 111-112, 115, 122-123. 4. (1982) 149 C.L.R. 620. 5. (1986) 162 C.L.R., at p. 186. 6. (1985) 157 C.L.R. 17, at p. 31. 7. (1986) 162 C.L.R., at p. 191. 8. [1915] A.C. 79. 9. (1986) 162 C.L.R. 170. 10. [1953] 1 Q.B. 86. 11. (1986) 162 C.L.R., at p. 204. 12. [1953] 1 Q.B., at p. 116. 13. [1953] 1 Q.B., at pp. 96-97. 14. (1986) 162 C.L.R., at p. 213. 15. (1986) 162 C.L.R., at p. 215. 16. (1986) 162 C.L.R., at pp. 184-185. 17. (1986) 162 C.L.R., at p. 194.

[42]

The "recoverable amount" prescribed by cl. 5 is a balance struck by debiting the hirer with certain items and crediting him with others. The items debited consist in "the total rent and all other moneys payable for the full period of hire (including costs of repossession storage maintenance and selling expenses)", from which are deducted all moneys paid by the hirer, the wholesale value of the goods repossessed and "a rebate of charges calculated in accordance with Clause 13 hereof": cl. 5. The cl. 13 rebate represents the interest or terms charges attributable to the portion of the original hiring period which is still to go at the time of termination. On termination of the hiring, the owner loses the right to receive future rental instalments and may incur costs in repossessing, storing, maintaining and selling the goods the subject of the contract, but he acquires possession of the goods and a discharge of the hirer's option to purchase them. The owner's loss on termination is the balance of the "cash price" which it has outlaid to acquire the hired goods (see cll. 1 and 2 and the "Hirer's Declaration" embodied in the "Offer to Hire") to the extent to which it has not been recouped, unrecouped interest earned and administration charges incurred up to the time of termination and the costs associated with repossessing and selling the hired goods less the value of the repossessed goods. If the loss is recovered on termination, the owner's capital is available for alternative investment and its outgoings are covered. Clauses 5 and 13 contain a formula which so quantifies the recoverable amount as to equate it with the net loss suffered by the owner, assuming that the value of the goods which the owner repossesses and sells to a third party is properly set at "the best wholesale price reasonably obtainable for them in their then condition as at the time of taking possession of them": cl. 5(b). As the owner is a finance company which outlays money to acquire goods selected by the hirer and is not a retailer of goods, the best wholesale price obtainable on repossession cannot be said to be an extravagant and unconscionable under-estimate of what the owner is likely to obtain if it sells the goods after termination of the hiring.

[46]

The business nature of the transaction is that of moneylending, and accordingly clauses are inserted by the finance company in the contract of hire in an endeavour to ensure that upon breach by the hirer of his obligation to pay an instalment of hire, the finance company shall be entitled, not only to terminate the contract of hire, but also to recover from the hirer sums which bear no relation to the damages appropriate to a breach of a genuine contract of hire. But hire-purchase finance companies cannot eat their cake and have it. If they choose to conduct their business by entering into contracts of hire of chattels, instead of entering into moneylending contracts secured by chattel mortgages, their legal rights will be governed by the terms of the contracts into which they enter and by the general principles of law applicable to contracts of that nature. If a clause which requires the hirer to pay the owner for losses occasioned by termination for breach under a contractual power is not a penalty provision, the reason must be that the court regards that clause and the clause authorizing the owner to terminate the hiring, to repossess and sell the goods and to recover the net losses then outstanding as provisions to secure the owner's interests as a moneylender, as well as to secure the due performance of the hirer's obligations. The right to recover post-termination losses is needed to secure the owner's return of the money lent with interest and the recoupment of the owner's costs and expenses. The owner's rights to terminate the hiring, to repossess and sell the goods and to recover the recoverable amount can hardly be supported as a stipulation for the payment of a genuine pre-estimate of damage caused by any non-repudiatory breach of the hirer's obligations, but they can be seen to be security for the due performance of the hirer's obligations and the protection of the owner's interests as a moneylender. In other words, if it be right to uphold a stipulation for the payment of post-termination losses as a stipulation for the payment of liquidated damages, the corollary is that the transaction be treated in much the same way as a chattel mortgage and the contractual power to terminate, repossess and sell be treated merely as security for the repayment of the moneys lent with interest and recoupment of the owner's costs and expenses. 1. [1963] 2 Q.B., at pp. 117-118.

[47]

If a hire-purchase contract is so regarded, equity may grant the hirer relief against an exercise by an owner of its contractual right to terminate, repossess and sell the hired goods in the event of a non-repudiatory breach of the contract because the contractual right may be seen as a penalty designed to secure money and a court of equity can give the owner all that he is entitled to as a moneylender. The jurisdiction was asserted in Peachy v. Duke of Somerset [44] and was discussed in Shiloh Spinners Ltd. v. Harding [45] ; Legione v. Hateley [46] ; and Stern v. McArthur [47] ; and see Stockloser v. Johnson [48] ; and Starside Properties Ltd. v. Mustapha [49] . In B.I.C.C. Plc. v. Burndy Corporation [50] , it was held that there is jurisdiction in equity to grant relief against forfeiture of a possessory or proprietary interest in personal property (see per Dillon L.J. [51] ) and those are the kinds of interests held by a hirer who has committed no repudiatory breach. Under the general law, the hirer is entitled to continued possession of the goods and, if payment of rental instalments entitles him to purchase the goods, he acquires a proprietary interest in the property which is susceptible of protection in equity. Though he has no legal title to the goods until he has fulfilled the conditions prescribed by the contract (but cf. Wickham Holdings Ltd. v. Brooke House Motors Ltd. [52] ) his contractual right to acquire the title by fulfilling those conditions may be protected. It is neither necessary nor possible to state exhaustively the circumstances in which equity will intervene to protect a hirer's possessory or proprietary interests against an exercise of the owner's contractual rights. The circumstances will be identified more clearly as the jurisdiction to grant relief is argued and exercised in particular cases. This is not one of them. For the moment, it is sufficient to note that there are two factors which are of general relevance. First, the deliberation and seriousness of the hirer's breach and, secondly, the likelihood of the owner, by exercise of its contractual rights, making a windfall profit which the owner is not contractually required to account for to the hirer.

[55]

There is nothing in the actual provisions of cl. 6 which would cause the clause to operate as a penalty in the circumstances postulated as the basis of the respondents' primary argument (i.e. where the agreement is terminated by the owner for breach by the hirers at a time when the wholesale value of the repossessed goods after the expenses of repossession and realization exceeds unpaid past and rebated future instalments of "rent"). As has been mentioned, the provisions of cl. 6 would not, in those circumstances, entitle Esanda to recover any amount on account of future rent or in respect of the costs of repossession or resale. The operation of the clause would be that Esanda was entitled to terminate the hiring of its vehicle and, as owner, take possession of it. It could scarcely be, and has not been, suggested that such an operation of the provisions of the clause, upon breach by the hirers of the terms of the agreement for hire, was penal in nature. Yet that is effectively all that cl. 6 would authorize or effect. It is true that the overall agreement could, on one conceivable construction of its terms, have led to a windfall profit for Esanda in those hypothetical circumstances. The reason for that is not, however, to be found in the provisions of cl. 6. It lies in the combination of the failure of the agreement to require Esanda to account for any excess upon realization and the fact that the right to "elect to become the owner of" the vehicle conferred by cl. 10 was exercisable by Mr. and Mrs. Plessnig by payment of outstanding past and rebated future rent and fulfilment of their "other obligations to" Esanda. If the requirement of fulfilment of "other obligations" were construed as referring not only to then outstanding obligations but as requiring that there had been no past breach of the agreement, the practical effect of the requirement would be that the right to "elect to become the owner of" the vehicle was lost upon any breach. On that construction, the operation of the overall agreement could be harsh and unfair in the hypothetical circumstances. For example, the right to become the owner of the vehicle could be lost at a time when the vehicle remained of very substantial value and but one instalment of "rent" remained unpaid. If such circumstances had occurred and that somewhat unlikely construction of cl. 10 had prevailed, questions might have arisen about what, if any, relief was available to Mr. and Mrs. Plessnig against any such harsh and unfair operation of the agreement. It may have been argued that the provision to the effect that Mr. and Mrs. Plessnig could only exercise the right to become the owner of the vehicle if they had performed all their "other obligations to" Esanda was itself void as a penalty notwithstanding that it did not impose any obligation to make a payment in cash or in kind. Alternatively, it might have been argued on behalf of Mr. and Mrs. Plessnig that they were entitled, under principles of unjust enrichment operating in all the circumstances of the case, to recover from Esanda the amount of any excess received by it upon sale of the vehicle or that they were entitled to relief against the loss of the right to become the owner upon payment of the appropriate amount under cl. 10. It is, however, unnecessary to pursue those questions. The postulated circumstances did not arise. At the time of repossession, the vehicle was worth substantially less than the total of the unpaid past and rebated future instalments of "rent". Mr. and Mrs. Plessnig neither sought nor desired to exercise the right to become its owner by payment of the appropriate amount under cl. 10. More important for present purposes, the possibly harsh and unfair operation of the agreement in those postulated hypothetical circumstances would not be the result of the provisions of cl. 6.

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Judgment (73 paragraphs)

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