(b) $500,000 "will be received" (meaning in the circumstances, is payable) out of fees and royalties, unless Dr James breaches cl 2.2 or cl 5, in which case it was payable forthwith (by Dr James from her own resources).
139 The appellants submitted that the whole $700,000 was a sum due suspended only by the covenant not to sue in cl 2.4. Alternatively, the provisions in cll 2.3(b) and 2.4 were merely an acceleration of a due debt and so fell outside the principles of penalties. Alternatively, the sums can be seen as a genuine pre-estimate of damages not shown to be extravagant in the sense discussed by Lord Dunedin in Dunlop at 86 at point 4(1) and in Interstar at 331-334 [142]-[158].
140 As to the $500,000 in cl 2.3(a), this is the payment of consideration. It is untouched by the law of penalties.
141 The only operation of the law of penalties possible in relation to the $500,000 is that by accelerating and changing the mechanism of payment cl 2.4 acts as a penalty. That is what the primary judge concluded.
142 The appellants relied on the decision of this Court in Hunt v Kallinicos [2009] NSWCA 5 at [18]-[22] (per Handley AJA with whom Giles JA and Bell JA agreed). The acceleration principle discussed in Hunt is one which can be stated as follows: if a sum is payable by instalments and it is provided that in the event of one instalment not being punctually paid all fall in and become immediately payable the acceleration is not a penalty: O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; 152 CLR 359 at 366 (Gibbs CJ); Acron Pacific Limited v Offshore Oil NL [1985] HCA 63; 157 CLR 514 at 518 (Mason ACJ, Wilson, Brennan and Dawson JJ); Thompson v Hudson (1869) LR 4 HL1 at 15-16 (Lord Hatherley LC); Wallingford v Mutual Society (1880) 5 App Cas 685 at 696 (Lord Selborne LC) at 702 (Lord Hatherley), 705-706 (Lord Blackburn) and 710 (Lord Watson).
143 On the proper construction of the Settlement Agreement that is not the position here. The sum of $500,000 was agreed to be paid and to be received (and thus be payable) out of a fund of fees and royalties in the future. This stream of income was to come from the successful commercialisation of the first invention. There was nothing in the surrounding circumstances to enable one to view such returns to be a commercial certainty. The obligation to pay $500,000 was, in substance, conditional on money being earned by the commercialisation of the first invention. Upon breach, not of a term being an indulgence by way of part payment, but of other terms, this limited obligation changed into one that was unconditional or absolute to pay a lump sum in full forthwith. As a matter of substance (Interstar at 320 [100]) this was a significant change to the obligation to pay by way of more onerous terms by the transformation of a substantially conditional obligation deferred in performance into an absolute one being immediately performable. The change operated only upon breach. It had no apparent contractual purpose as a pre-estimate of any damage. The contractual purpose of this more onerous operation of cl 2.3, brought about by cl 2.4 to pay a lump sum forthwith rather than to see deductions from a stream of royalties which may not eventuate was only to coerce performance of cll 2.2 and 5. Clause 2.4 insofar as it operated to make the $500,000 payable forthwith was a penalty and thus void and unenforceable.
144 As to the $200,000 provided for by cl 2.3 (b), this sum was not payable except if a breach of cl 2.2 or cl 5 occurred, in which case it was payable forthwith. As with the change to the legal responsibility of Dr James to pay the $500,000, nothing in the commercial background or context or the terms of the Settlement Agreement supports the conclusion that this payment, conditioned on breach, was intended as an agreed pre-estimate or assessment of damages for breach of either cl 2.2 or cl 5. To the contrary, to the extent that the chapeau of cl 2.3 makes the $200,000 legally "due" (subject to cl 2.3 (b) and cl 2.4) it is as part of the consideration for settlement of the Federal Court proceedings. Clause 2.3(b) it can be seen to take its place as a form of encouragement or coercion for the performance of cll 2.2 and 5.
145 The absence from the text or context of any indication that the sums in question or the terms in question were, or were part of, a genuine pre-estimate of damage that might flow from any breach of cl 2.2 or cl 5 is important: see Clydebank Engineering & Shipbuilding Company Limited v Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6 at 19; Commissioner of Public Works v Hills [1906] AC 368 at 375-376; and Campbell Discount Co Ltd v Bridge [1962] AC 600 at 622 (Lord Radcliffe). It assists in the conclusion that the contractual purpose of the clause and the objective intention of the parties was not to deal with the consequences of breach, but to coerce performance.
146 Thus construed, and the intended contractual purpose and operation of cll 2.3(b) and 2.4 becoming clear, one does not need to consider the different tests of Lord Dunedin in paras (a) and (c) of point 4 of his statement of principle. An examination of the terms and conditions of the Settlement Agreement in its context leads to the conclusion that no part of cll 2.3 and 2.4 was intended to operate or did operate as a genuine pre-estimate of damages claims to compensate for breach of cl 2.2 or cl 5. Rather cll 2.3(b) and 2.4 were intended to operate and did operate only as coercion to performance.
147 Nevertheless, the parties' put submissions as to the different operation of Lord Dunedin's tests in paras (a) and (c) of point 4 and both sides called in aid my judgment in Interstar.
148 Paragraphs (a) and (c) of point 4 in Lord Dunedin's statement of principle were dealing with two subjects. Paragraph (a) was dealing with breach of one term. That was the position in Interstar, where I discussed at 331-334 [142]-[158] the notions of extravagance and unconscionability as they had been considered by the High Court in AMEV-UDC Finance Limited v Austin [1986] HCA 63; 162 CLR 170, Ringrow and Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7; 166 CLR 131 and this Court in AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564. I expressed the views (at 333 [153]) that the High Court's adoption in Ringrow of Lord Dunedin's statement of principle in Dunlop required para (a) of point 4 to be applied and that that was accurately paraphrased by Brennan J in Esanda Finance v Plessnig at 143 as follows:
"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."
149 Paragraph (c) of point 4 in Lord Dunedin's statement of principle was directed to circumstances where the clause said to be a penalty provides for payment on the breach of more than one provision. Paragraph (c) is to be read with Lord Dunedin's discussion at 88-89 of Lord Watson's speech in Lord Elphinstone v Monkland Iron and Coal Co Limited (1886) 11 App Cas 332, from which speech para (c) had been taken by Lord Dunedin. In Dunlop at 89 Lord Dunedin said:
"I think Elphinstone's Case ... or rather the dicta in it, do go this length, that if there are various breaches to which one indiscriminate sum to be paid in breach is applied, then the strength of the chain must be taken at its weakest link. If you can clearly see that the loss on one particular breach could never amount to the stipulated sum, then you may come to the conclusion that the sum is penalty. But further than this it does not go; so, for the reasons already stated, I do not think the present case forms an instance of what I have just expressed."
150 Thus to apply the presumption in para (c), one examines cll 2.2 and 5 and assesses whether it can be said that breach of either clause could ever amount to the stipulated sum, here $200,000 and $500,000 (in respect of the latter sum recognising that its penal character is its accelerated payment as one lump sum).
151 The primary judge examined cll 2.2 and 5 and said the following at [157] and [168]:
"[157] Further, it is apparent that breaches of each of the clauses in question - 2.2 and 5 - may be serious, may be trivial or may occupy some intermediate ground between those extremes. But the stipulated sum of $200,000 is payable regardless of the nature, characterisation (as serious or trivial) or consequences of any such breach. Thus, in my view, the presumption to which Lord Dunedin referred arises and should be applied.
…
[168] There was no attempt made in the evidence to relate the financial impact of the operation of cl 2.4 (insofar as it concerned the First Amount) to any quantification of the likely damages flowing from breaches of cll 2.2 or 5. Again, the operation of cl 2.4 takes no account of the fact that breaches of those clauses may be serious, trivial or somewhere in between."