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[1989] HCA 7
High Court of Australia
1987-08-20
Gaudron JJ, Toohey JJ, Mohr J, Doussa J
Original judgment source is linked above.
High Court of Australia Wilson, Brennan, Deane, Toohey and Gaudron JJ. Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7
ORDER Appeal allowed. Set aside the judgment of the Full Court of the Supreme Court of South Australia dated 20 August 1987 and in lieu thereof order that the appeal to that Court be dismissed with costs. Order that the appellant pay the respondents' costs of this appeal.
In April 1982 the appellant advanced the finance necessary to enable the respondents to acquire possession of a secondhand Scania prime mover which was for sale for a cash price of $44,000. Initially, the respondents sought finance over a four year period but were told by an officer of the appellant that because of the age of the vehicle the money would only be available over a three year term. The transaction was completed by the execution of a hire-purchase agreement between the appellant as owner and the respondents as hirers. The total rent, payable by thirty-six monthly instalments each of $1,878.78, amounted to $67,636.08. The last-mentioned figure was reached by taking the cash price of $44,000 and adding $792.00 stamp duty and terms charges of $22,844.08.
The respondents acquired the vehicle with a view to engaging in the transport industry. Unfortunately, they encountered difficulties in the conduct of their business, including the cost of repairing and maintaining the vehicle and recovering moneys owing to them by consignors. They failed to pay the monthly instalments of rent due in June, July and August 1983. On 16 September 1983 the respondents delivered the prime mover to a location nominated by the appellant. In the courts below the parties were at issue over the question whether the vehicle was voluntarily returned by the respondents (as contended for by the appellant) or repossessed by the appellant (as contended for by the respondents). That issue was resolved against the appellant and is not in contest in this appeal. On termination, the appellant called for tenders for the purchase of the vehicle and it was sold for $27,000.
Thereafter the appellant made a claim against the respondents for moneys due under the agreement. Failing satisfaction, the claim proceeded in the District Court of Adelaide. The particulars of the claim, as amended at the trial, were as follows: $ $ Total amount of rent payable under the___agreement 67,636.08 Plus expenses incurred in consequence of termination - cost of storage 38.00 repossession costs and valuation 35.00 73.00 67,709.08 Less - instalments and other amounts 24,891.58 paid sale proceeds 27,000.00 rebate calculated in accordance with cl. 13 of agreement 6,517.08 58,408.66 Balance owing 9,300.42 Plus interest 3,676.85 total $12,977.27 The learned trial judge found the appellant's claim proved and entered judgment for $12,977.27.
The respondents appealed to the Full Court of the Supreme Court of South Australia. By majority (King C.J. and Mohr J., von Doussa J. dissenting), the appeal was allowed, their Honours holding that the agreed method of calculating the sum payable by the respondents in the event of termination of the agreement for breach was unenforceable by reason of it being a penalty. Consequent on that conclusion, the Court entered judgment for the appellant in the sum of $9,835.01, this being the arrears of hire at the date of the termination of the contract plus interest.
Special leave to appeal to this Court was limited to the question whether in all the circumstances the Full Court was correct in characterizing the "recoverable amount" prescribed by cl. 5 of the agreement as a penalty. Special leave was refused in relation to a proposed ground of appeal that the respondents' failure to pay several instalments of rent amounted to a repudiation of the agreement; we therefore proceed on the basis that the respondents did not repudiate the agreement.
The material provisions of the agreement are the following:
terms and conditions by which I the within Hirer by my signature on the face hereof agree to be bound: -
(a) all moneys paid by me to you by way of deposit and rentals for the goods, and
(b) the value of the goods (being the best wholesale price reasonably obtainable for them in their then condition as at the time of your taking possession of them), and
(c) a rebate of charges calculated in accordance with Clause 13 hereof.
[T]he amount calculated in accordance with this Clause is hereinafter called "the recoverable amount".
(b) the amount stated in the Schedule overleaf as terms charges when multiplied by the sum of all the whole numbers from one (1) to the number which is the number of complete months in the period of the hiring still to go (after the early return repossession or early completion as the case may be) and divided by the sum of all the whole numbers from one (1) to the number which is the total number of complete months in the period of hiring.
It is common ground that the resolution of the dispute between the parties is to be found in the common law. The Hire-Purchase Agreements Act 1960 S.A. was repealed by the Consumer Transactions Act 1972 S.A. and that Act does not relevantly apply to a hire-purchase transaction the value of which (excluding credit charges) exceeds $10,000.
The question for decision in this case is a narrow one. It is whether cl. 6 of the agreement, in authorizing in the event of a termination of the contract in consequence of the hirer's default the recovery by the owner of an amount determined in accordance with cl. 5, is penal rather than compensatory in character. We are not concerned with the characterization of a clause which provides for the payment of a sum of money on the happening of a specified event other than a breach of contractual duty, a question which was considered in Export Credits Guarantee Department v. Universal Oil Products Co. [1] .
The Court has considered the doctrine of penalties on a number of occasions in recent years: I.A.C. (Leasing) Ltd. v. Humphrey [2] ; O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [3] ; AMEV-UDC Finance Ltd. v. Austin [4] . In considering whether a term of a contract is penal in character rather than a genuine pre-estimate of damage, Mason and Wilson JJ. observed in AMEV-UDC [5] that the test:
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.
As O'Dea [14] and AMEV-UDC show, the fact that the "recoverable amount" payable by the respondents under cl. 6 is payable upon termination of the agreement consequent upon breach, rather than in respect of the breach alone, does not mean that the clause escapes the scrutiny of the law relating to penalties. But it does mean that in determining whether the "recoverable amount" is a genuine pre-estimate of loss or a penalty, "relevant loss is not restricted to the loss flowing immediately and merely from the actual breach of contract; it includes the loss of the benefit of the contract resulting from the election to terminate for breach ": AMEV-UDC [15] per Deane J.; see also pp. 181, 194, 205-206, 210. The respondents' submission to the contrary must be rejected.
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.
The Chief Justice rightly drew from the character of the agreement as one of hire-purchase the conclusion that the maximum loss which the appellant could sustain in consequence of the termination of the hiring was the amount of any payments of rent in arrears, together with the total of unpaid future payments appropriately rebated for acceleration of payments and the expenses associated with termination. His Honour acknowledged that the formula in cl. 5 could well be regarded as a genuine pre-estimate of such a loss in all cases save where the aggregate of rent already paid together with the value of the vehicle, less expenses of termination, exceeded the maximum loss capable of being sustained by the owner. After stressing the imbalance in bargaining power between the parties with consequent potential advantage to the appellant, the Chief Justice concluded that the failure of the formula to ensure that any excess resulting from the calculation of the recoverable amount be refunded to the respondents conferred a penal character upon cl. 6. As we have said, Mohr J. agreed with the Chief Justice.
We are unable to accept their Honours' process of reasoning. It overlooks the principle that the payment of an agreed sum is a penalty only if it is "out of all proportion" or "extravagant, exorbitant or unconscionable": AMEV-UDC [18] ; see also O'Dea [19] , per Deane J. The reasoning of the majority places too much emphasis upon the superior bargaining position of a finance company, resulting in a conclusion that the mere possibility of unfairness lurking in the formula contained in cl. 5 is sufficient to characterize cl. 6 as a penalty. The adoption of such a criterion fails to allow for the latitude that necessarily attends the conception of a genuine pre-estimate of damage. The clause is to be construed from the point of view of the parties at the time of entering into the transaction. The character of a clause as penal or compensatory is then to be perceived as a matter of degree depending on all the circumstances, including the nature of the subject-matter of the agreement. The vehicle in the present case was a secondhand prime mover, such that the appellant would not grant to the respondents the requested term of four years and therefore limited the term of the hiring to a period of three years. The possibility that in the event of a termination upon default the moneys paid by the respondents, together with the value of the vehicle on repossession (less costs of repossession), would exceed the total rent appropriately rebated would seem to us to be unlikely. If the hiring were terminated early in the term the payments of rent would be likely to be matched by the diminution in value of the vehicle engaged in heavy haulage in the transport industry. It could only happen, if at all, later in the term when a substantial amount of rent had been paid and the vehicle retained a saleable value of some significance. The mere possibility in these circumstances of an excess is not sufficient, in our opinion, to render cl. 6 unenforceable as a penalty.
It was argued for the respondents that the formula was not a genuine pre-estimate of the appellant's loss of bargain because it allowed credit only for the best wholesale value of the vehicle and not the best price reasonably obtainable. Von Doussa J. addressed this issue at some length in his reasons for judgment and we are in general agreement with those reasons. We find it sufficient to observe that the appellant was not in the business of selling secondhand vehicles by retail and it was not unreasonable to anticipate the loss it would be likely to suffer in the event of breach by assuming a sale of the repossessed vehicle to a dealer.
Finally, we should mention a proposition advanced for the appellant that in principle the doctrine of penalties can only apply to clauses which compel a party in the given circumstances to make a payment. The doctrine, it was said, can have no application in a case where the complaint is that a clause fails to recognize an entitlement in a party to some kind of refund. Even if the proposition be correct, as to which it is unnecessary to express an opinion, it does not follow that no relief is available in such a case. It may be, for instance, that in some circumstances equity will grant relief against forfeiture of the excess, at any rate if the hirer has a proprietary or possessory interest in the property: B.I.C.C. Plc. v. Burndy Corporation [20] . Again, this is an area into which there is no need to stray.
We would allow the appeal, set aside the decision of the Full Court and restore the decision of the trial judge. Special leave to appeal was granted on condition that the appellant pay the respondents' costs of the appeal to this Court in any event.
One of the tests stated by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [21] to assist in ascertaining whether a stipulated sum is a penalty is whether the sum "is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach". To apply this test, it is necessary to identify the breach prescribed by the clause which imposes the supposed penalty and to ascertain the measure of loss which might follow from that breach. If the stipulated sum is payable on the occurrence of any breach of the contract, whether serious or trifling in its consequences, there is a presumption that the sum is a penalty [21] .
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] .
In this Court, no clear opinion has emerged as to the effect for the purpose of the law of penalties of a loss suffered by an innocent party in consequence of his exercise of a contractual power to terminate for breach of a non-essential term. In AMEV-UDC Finance Ltd. v. Austin [23] , a hirer of equipment defaulted in paying an instalment of rent on the due date whereupon the owner, in exercise of a contractual power, terminated the hiring and demanded payment of a sum calculated in accordance with a contractual formula: the whole unpaid balance of the total rent payable under the hiring agreement subject to certain adjustments representing the difference between the residual value of the equipment specified in the agreement and the sale price of the equipment. The hirer was found not to have repudiated the agreement. As the clause entitling the owner on termination of the hiring to the whole unpaid balance of the total rent without discount was held to impose a penalty (see O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [24] ), the issue for determination was whether the owner was entitled to no more than the instalments unpaid at the date of termination together with interest as damages for the hirer's breach or whether the owner was entitled to enforce the hirer's contractual obligation to pay up to the amount of any loss sustained by the owner in consequence of the termination of the hiring. A sharp division of opinion appeared in the answers given by the majority (Gibbs C.J., Mason and Wilson JJ.) and by the minority (Deane and Dawson JJ.). The majority held that the owner was entitled only to the former relief: the minority held that the owner was entitled to the latter relief.
Gibbs C.J., agreeing with the decision of the English Court of Appeal in Financings Ltd. v. Baldock [25] , which had held the owner's damages for non-repudiatory breach to be limited to instalments in arrears at the date of termination with interest, said [26] :
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.
In the light of these observations, I take the law to accept an incongruity in holding that an owner's damages at law for a non-repudiatory breach are limited to losses caused by the breach alone while holding that a clause which imposes a liability on the hirer to pay the losses caused by exercise of a power to terminate a hiring upon breach is not a penalty. It may be appropriate to reconsider this incongruity in some later case and, if that is done, it may well be necessary to canvass the correctness of some earlier decisions of this Court. For the moment I adopt, in common with the other members of the Court, the view that the owner's loss consequent upon the termination of the hiring for non-repudiatory breach is to be taken into account in determining whether the recoverable amount prescribed by cl. 5 is a penalty. It is implicit in this view that a contractual power to terminate a hiring is not itself a penalty though the fact of termination is relevant to the determination whether a pecuniary liability then imposed on the hirer is a penalty: O'Dea v. Allstates [42] . Depending on the circumstances, the exercise of such a contractual power might be oppressive to the hirer and productive of a windfall profit for the owner. This consideration draws attention to equity's jurisdiction to grant relief against the unconscionable exercise of legal rights to which reference will presently be made. For the moment, assuming that the power to terminate the hiring for a non-repudiatory breach is effectively exercised, the question is whether the amount of the hirer's liability imposed pursuant to cl. 6 is extravagant or unconscionable in comparison with the greatest losses that could conceivably be proved to have followed the breach and the termination.
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.
In the Full Court of the Supreme Court of South Australia, King C.J. with the concurrence of Mohr J. (von Doussa J. dissenting) nevertheless held that the formula prescribed by cl. 5 resulted in the imposition of a penalty. His Honour would have accepted the formula as being a genuine pre-estimate of the owner's loss on termination, but only:
if its operation were limited to situations in which the aggregate of amounts already paid and the value of the vehicle, less expenses of termination, did not exceed the maximum loss which could result from termination and if it were supplemented by provision for reimbursement to the hirer of the amount of any such excess. His Honour held that the formula resulted in the imposition of a penalty because: The contract under consideration does not so limit the operation of the formula and makes no provision for reimbursement of excess. In my respectful opinion, there are flaws in each of the grounds on which his Honour held the recoverable amount to be a penalty. First, the formula has no operation except where the value of the repossessed goods is insufficient to meet what are otherwise the net losses of the owner. Where the formula produces no debit balance, the contract imposes no liability on the hirer: no penalty is imposed. Secondly, if one leaves aside any question of relief against an unconscionable exercise of the power to terminate, an owner who terminates the hiring in exercise of its contractual power to do so is entitled to all the rights of an owner freed from the hirer's right to possess the goods and the hirer's right under cl. 10 to acquire ownership of them "by paying the total rent and fulfilling my other obligations". The owner is under no obligation to account for the value, or proceeds of sale, of his goods to another who had but no longer has an interest in them. If the owner, having extinguished the rights of the hirer, makes a profit by selling or rehiring the goods, the absence of a stipulation requiring it to account for the profit does not convert a stipulation which requires the hirer to compensate the owner for any loss into a stipulation imposing a penalty.
However, the assumption which underlies the notion of "profit" or "loss" in this context is that the owner's loss is not recouped unless the amount put back in its pocket equals the outlays it has made in acquiring the goods - the "cash price" mentioned in the present contract - together with interest and other charges up to the time of repossession and the costs associated with repossession and sale. That assumption is correct if the contract is treated, in substance if not in form, as a moneylending transaction; but it is not correct if the contract is treated, in substance as well as in form, as a hiring contract conferring an option to purchase. A non-repudiatory breach of a hire-purchase contract does not give rise to those losses which would not arise but for the owner's election to terminate the hiring under a contractual power. In Financings Ltd. v. Baldock [43] , where the owner terminated the hiring in exercise of a contractual power upon non-payment of a rental instalment, Diplock L.J., holding the owner's damages to be limited to losses occasioned by the hirer's breach prior to termination, pointed to the consequences of treating the contract as a mere hiring agreement:
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.
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.
In the present case, the hirers did not seek relief against the exercise by the owner of its contractual rights. Had they done so, it is unlikely that they would have succeeded. The hirers had defaulted in the payment of four successive monthly rental instalments and, at the time of repossession, $7,048.46 of a total sum of $31,939.26 which had become payable was outstanding. The owner gave the hirers a reasonable opportunity to make good their default but they did not take that opportunity. The goods - a prime mover - were sold for $27,000 which was insufficient to meet the unpaid balance of the owner's outlays, interest, charges and expenses. A recoverable amount of $9,300.42 became due. This amount, together with interest at 15 per cent per annum under cl. 4(c), was the basis of the owner's claim in the action.
In the Full Court of the Supreme Court of South Australia the owner's award was reduced to the instalments in arrears, $7,048.46 together with interest, solely on the ground that cl. 6 imposed a penalty. Once it is accepted that it is right to have regard to the owner's losses on termination in determining whether the recoverable amount is "extravagant and unconscionable", the hirer's attack on cl. 6 is limited to two points: the adoption of the best wholesale price rather than the retail price as the amount to be credited to the hirer in calculating the recoverable amount and the absence of any liability on the part of the owner to account to the hirer for any surplus over the amount due under cl. 5 resulting from the sale of the goods repossessed. For the reasons given, neither of these points stamps the recoverable amount with the character of a penalty. Having failed to sustain their attack on cl. 6, the hirers must be held liable to pay the recoverable amount.
The issue in the present case is whether particular provisions of a hire-purchase agreement ("the agreement") between the appellant finance company ("Esanda") as owner and the respondents ("Mr. and Mrs. Plessnig") as hirers relating to the hire and prospective purchase of a secondhand prime mover are void for the reason that they constitute a penalty. The relevant facts and the material provisions of the agreement are set out in the judgment of Wilson and Toohey JJ. Like their Honours, I have come to the conclusion that the provisions of the applicable clause (cl. 6) of the agreement are not penal in nature and that the appeal must therefore be allowed. Since my reasons for that conclusion differ somewhat from those of their Honours, it is necessary that I indicate what they are.
According to its terms, cl. 6 entitled Esanda, on the happening of certain events including default of payment or other breach of the agreement, to terminate the hiring and repossess the vehicle. It purportedly conferred upon Esanda, "upon such repossession", the right to recover "as liquidated damages" from Mr. and Mrs. Plessnig "the recoverable amount as defined in" cl. 5, namely, the total of unpaid past and future instalments of "rent" and the expenses of repossession and realization, less the total of the wholesale value of the goods and the relevant "rebate of charges" in relation to future instalments of rent. That right of recovery would have content only in a case such as the present where the wholesale value of the repossessed vehicle at the time of repossession was less than the total of outstanding past and rebated future instalments of rent and the costs of repossession and realization. Otherwise, "the recoverable amount as defined in" cl. 5 would be nothing.
The question whether particular provisions of an agreement defining the rights and liabilities of the parties upon termination for breach purport to impose a penalty must be determined as a matter of substance. If such provisions do no more than impose upon the defaulting party an obligation to pay an amount (whether specified or to be calculated in accordance with a nominated formula) which represents a genuine pre-estimate of the damage (including loss of bargain) which the innocent party will sustain by reason of the breach and consequent termination, the provisions will not impose a penalty. Nor will they impose a penalty merely because they operate to withdraw an incentive for observance by the defaulting party of the terms of the agreement. Such provisions will not be penal unless their operation is, as a matter of substance, to impose some additional or different financial obligation or burden upon the defaulting party in the nature of a disincentive or punishment for breach: cf. Acron Pacific Ltd. v. Offshore Oil N.L. [53] .
There are two particular aspects of the agreement upon which Mr. and Mrs. Plessnig base their claim that the provisions of cl. 6 are penal in nature and therefore void. The first is the absence of any provision which would require Esanda to make some refund to Mr. and Mrs. Plessnig in circumstances where (unlike the present) the value of the repossessed goods exceeded the total of unpaid past and rebated future instalments of "rent" and the expenses of repossession and realization. The second is that cl. 6, by adopting the recoverable amount as defined by cl. 5, allows credit only for the wholesale, as distinct from the retail, value of the repossessed goods. Apart from those two particular aspects, it was not suggested that the provisions of cl. 6 constitute a penalty. Indeed, it is difficult to see how they could since, in a case of termination by the owner (Esanda) for breach by the hirers (Mr. and Mrs. Plessnig), the formula for calculating the recoverable amount represents, apart from those two particular aspects, an obviously fair method of estimating in advance the owner's likely damages including loss of bargain: it rebates future rental charges by, in effect, reducing them to present value and it provides for a deduction of the present value of the repossessed goods: cf. Ziegel, "Measuring Damages for Breach of a Chattel Lease", [1988] Lloyd's Maritime and Commercial Law Quarterly, 276, at pp. 280-282. I turn to consider the two particular aspects of the agreement upon which the argument that cl. 6 imposes a penalty is founded.
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.
The second basis for the argument that cl. 6 constituted a penalty was, as has been said, that the credit allowed for the repossessed vehicle in calculating the recoverable amount defined in cl. 5 is determined by reference to wholesale, rather than retail, value. There is, in my view, no substance in that argument. Esanda was not in the business of retailing vehicles. It has not been suggested that it should be seen as able or required to mitigate damages by a re-letting of the equipment: cf. Keneric Tractor Sales Ltd. v. Langille [54] . An appropriate measure of the amount to be credited in respect of the value of the repossessed vehicle for the purpose of estimating the loss Esanda would be likely to sustain in the event of breach was the amount it could expect to recover upon sale of the repossessed vehicle to a dealer.
I would allow the appeal and substitute, for the orders of the Full Court, orders dismissing the appeal to that Court with costs. In accordance with the condition upon which special leave to appeal to this Court was granted, Esanda should pay Mr. and Mrs. Plessnig's costs of the appeal to this Court.
The issue raised in the present appeal is whether cl. 6 of a hire-purchase agreement ("the agreement") between Esanda Finance Corporation Ltd. (formerly Esanda Ltd.) ("the appellant") and Mr. and Mrs. Plessnig ("the respondents") constitutes a penalty. The facts and the relevant provisions of the agreement are set out in the joint judgment of Wilson and Toohey JJ. I need only refer to them in general detail.
The matters which are said to constitute the clause a penalty are four in number: 1. The clause makes no provision for refund to the respondents of any surplus arising on resale of the goods the subject of the agreement; 2. The clause allows for the crediting of the wholesale rather than the retail value of the goods the subject of the agreement; 3. A clause providing for payment of loss of bargain damages in relation to a hire-purchase agreement (other than in consequence of a repudiatory or fundamental breach) is a penalty; and 4. A clause providing for payment by the hirer to the owner in the event of early termination of a hire-purchase agreement is not a genuine pre-estimate of loss of bargain damages unless it takes account of the duty to mitigate loss.
I agree with Deane J., for the reasons that his Honour gives, that the first two matters do not constitute cl. 6 a penalty. In my view, by reason of the manner in which cl. 6 operates, neither the third nor the fourth matter serves to constitute cl. 6 a penalty.
The agreement is in familiar form, reflecting the nature of a hire-purchase agreement as an agreement for the provision of finance taking the form of an agreement for the hire of goods with an option for the hirer to become owner of the goods. The bargain constituted by the present agreement involves a promise by the respondents to pay instalments "during the hiring" and, in some circumstances, to pay a further amount in the event of early termination of the hiring. The agreement contemplates that there may be early termination by early completion, early termination at the election of the respondents and early termination at the election of the appellant on specified grounds, including upon default by the respondents in payment of instalments. In each case the total of the agreed rental payments is rebated in accordance with cl. 13 of the agreement. In the case of termination by election the amount payable is the same whether the agreement is terminated at the election of the appellant or the respondents. Breach and damage flowing from breach are irrelevant to its calculation. None the less, the clause operates in an area in which the rules relating to contractual penalties have been seen to have application: see O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [55] ; AMEV-UDC Finance Ltd. v. Austin [56] , especially per Deane J. [57] .
In AMEV-UDC this Court considered a contractual provision obliging a lessee to pay certain amounts in the event of early termination of a chattel lease. In that case termination was effected at the election of the lessor upon the lessee's breach. Mason and Wilson JJ. [58] expressed the view that an owner could "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". Deane J. [59] noted that "in determining whether the amounts payable by [a] lessee upon such termination are properly to be seen as a genuine pre-estimate of loss or as a penalty, relevant loss is not restricted to the loss flowing immediately and merely from the actual breach of contract; it includes the loss of the benefit of the contract resulting from the election to terminate for breach". I agree with these observations but prefer to express the relevant consideration (whether in relation to a chattel lease or a hire-purchase agreement) in terms of an assessment or calculation of the value to the owner or the hirer of the performance of the primary obligation according to its terms: see Public Works Commissioner v. Hills [60] ; O'Dea [61] , per Wilson J.
Where the parties to a hire-purchase agreement stipulate events within the general responsibility of the hirer (see AMEV-UDC [62] ) which will give rise to a right to early termination the further stipulation of an ensuing indebtedness on the part of the hirer in an amount which is a genuine pre-estimate or an amount calculated by a method giving a substantially accurate assessment of the difference between the value of the benefit which would accrue to the owner from the complete performance of the hiring and the value of the benefit (if any) accruing from early termination cannot, in my view, be characterized as a penalty: see, in relation to assessment of damages generally, Buchanan v. Byrnes [63] , per Griffith C.J.
Ordinarily, in the case of a hire-purchase agreement, the major component of the difference in relevant values will be the difference between the outstanding component of the purchase price outlaid for the goods the subject of the agreement (which component would be recouped from instalments payable during the remainder of the agreed period of hire) and the value of those goods at the date of early termination. Leaving aside charges payable by reason of repossession (as to which there is no present issue), cl. 6 operates to disclose an indebtedness which is neither more nor less than this difference.
The instalments payable under the agreement are calculated by reference to the purchase price paid for the goods and the terms charges referable to the agreed period of hire. In order to ascertain the outstanding component of the purchase price as at the date of early termination it is necessary that there be some formula for the apportionment of instalments already paid as between terms charges and purchase price. For the latter purpose it is necessary that there also be a formula for the ascertainment of that proportion of the total terms charges referable to the actual period of hire. So long as the formulae involve no imposition of additional terms charges or terms charges for a period extending beyond the time at which the outstanding component of the purchase price is reasonably to be regarded as available to the finance company there can be no question of their operating in a manner penalizing the hirer.
The rebate formula in cl. 13 of the agreement allows for the ascertainment of the terms charges referable to the period from termination until the hiring would have terminated if the agreement had run its course. When that amount is deducted from the total charges (i.e. purchase price plus total terms charges) there is ascertained an amount which is the sum of the purchase price and the terms charges referable to the actual period of hire. The amount which is disclosed by the deduction of the instalments paid is the outstanding component of the purchase price.
The benefit which accrues to an owner upon early termination of a hire-purchase agreement is possession of the goods the subject of the agreement freed from the hiring obligation and the option for the hirer to become owner. As a hire-purchase agreement is in substance an agreement for the provision of finance (to which the hiring is merely the formal or legal incident) the value of that benefit is taken into account by the deduction of that value from the outstanding component of the purchase price.
There is only one other matter which might be regarded as a benefit accruing to the owner by reason of early termination. Assuming prompt payment of the moneys payable by the hirer in consequence of the operation of cl. 6 of the agreement there is an accelerated availability of moneys representing the outstanding component of the purchase price: see Yeoman Credit Ltd. v. McLean [64] . See also O'Dea [1] where Brennan J. noted a number of matters pertinent to the accelerated payment of a debt due in futuro. If the sum payable upon early termination included an amount for terms charges referable to the remainder of the hire period (or any part period after the moneys are reasonably to be regarded as available to the owner) then, in my view, a contractual provision which allowed no account for that accelerated availability would not represent a substantially accurate assessment of the difference in value between performance of the primary obligation according to its terms and early termination. However, where, as here, the sum payable on early termination is the difference between the outstanding component of the purchase price and the value of the goods, the accelerated availability of that money is not properly characterized as a benefit. Its payment merely puts the owner in a position to earn income which would otherwise have been received if the hiring agreement had been performed according to its terms.
Because of the manner in which cl. 6 operates (i.e. by reference to the difference in value between performance of the primary obligation according to its terms and early termination) the question of mitigating loss is irrelevant to its characterization as a penalty. On the analysis that I prefer those matters usually comprehended in the duty to mitigate loss are more appropriately analysed in terms of benefit accruing to an owner by reason of early termination.
Esanda Finance Corporation Ltd
Plessnig