First Ground: Debt or Damages?
35 Section 459E permits a person to serve a statutory demand on a company relating to a single debt or to two or more debts that the company owes to the person that is or are due and payable. A liability to pay unliquidated damages for breach of contract to compensate an innocent party for loss is not a debt.
36 Counsel for Hansmar Investments submitted that clause 9.3 conferred on Permanent a right to sue it either for the "deficiency on resale" and reasonable costs and expenses in effecting a resale, or for damages for breach of contract. Counsel submitted that whilst clause 9.3.1 might be characterised as entitling the vendor to recover liquidated damages by action, it did not create a debt.
37 I accept that moneys payable by the defaulting purchaser under clause 9.3.1 are properly characterised as liquidated damages. Earlier versions of the standard form of contract for the sale of land made express provision to that effect.
38 In Jampco Pty Ltd v Cameron (No. 2) (1985) 3 NSWLR 391, Young J (as his Honour then was) considered clause 16 of the 1972 edition of the standard form of contract for the sale of land. It provided that if the purchaser defaulted, the deposit should be forfeited to the vendor who should be entitled to terminate the agreement and thereafter "either to sue the purchaser for breach of contract or to resell the property as owner and the deficiency bracket, if any, arising on such resale and all expenses of and incidental to such resale, or attempted resale on the purchaser's default shall be recoverable by the vendor from the purchaser as liquidated damages …"
39 Young J noted (at 392-393) that the clause conferred on the vendor an election either to claim damages in accordance with general law principles, or to claim liquidated damages being the deficiency on resale and expenses of resale on the purchaser's default. His Honour (at 393) characterised the latter claim as a claim "under the contract" as distinct from a claim for breach of it. His Honour noted that whilst a cause of action for "common law damages" arose at the date of breach, a cause of action for liquidated damages under clause 16 did not arise until the date of resale. Hence, pre-judgment interest would only run from the date of resale.
40 In Rothenberger Australia Pty Ltd v Poulsen (2003) 58 NSWLR 288, Barrett J considered the nature of liquidated damages where a policy of insurance excluded cover in respect of claims for liquidated damages, but not in respect of claims for unliquidated damages. In considering the distinction between liquidated and unliquidated damages, his Honour said:
"[27] The relevant distinction, in my view, is that between agreed compensation calculated and quantified in a way specified in or ascertainable from the contract itself and damages to be assessed according to the ordinary principles for determining damages for breach of contract. The distinction is illustrated by cases in which the purchaser under a contract for the sale of land defaults and the vendor, as a result, may sue for damages for breach of contract in the ordinary way or, if he or she prefers, take advantage of a provision of the contract permitting the vendor to resell and to recover from the purchaser any deficiency on resale together with expenses of resale. A sum recovered by a vendor who pursues the latter course is properly regarded as involving the recovery of a 'liquidated sum' (see Tiplady v Gold Coast Carlton Pty Ltd (1984) 8 FCR 438), while the damages recovered by a vendor who takes the
former course are 'unliquidated damages' or, in the words of Young J in Jampco Pty Ltd v Cameron (No 2) (1985) 3 NSWLR 391 at 393, 'breach of contract damages'. The difference between the two is that 'liquidated damages' are recoverable in satisfaction of a right of recovery created by the contract itself and accruing by reason of breach, while 'unliquidated damages' are compensation as assessed by the court for loss occasioned by breach. … "
41 His Honour considered an argument that "liquidated damages" were the fruits of success in any action upon a "liquidated claim". Historically, proceedings for a debt or liquidated demand were conducted differently from proceedings for the recovery of unliquidated damages. For example, judgment could be signed immediately in default of appearance. In Alexander v Ajax Insurance Co Ltd [1956] VLR 436, Sholl J exhaustively reviewed the types of claim covered by the phrase "debt or liquidated demand (in money)". His Honour said (at 445):
" Perhaps the best statement which can be attempted of the meaning of the expression 'debt or liquidated demand (in money)', as used in 1851, is that it covered any claim:-
(a) for which the action of debt would lie;
(b) for which an indebitatus (or 'common') count would lie - including those cases formerly covered by the quantum meruit or quantum valebat counts, notwithstanding that the only agreement implied between the parties in such cases was for payment at a 'reasonable' rate;
(c) for which covenant, or special assumpsit , would lie, provided that the claim was for a specific amount, not involving in the calculation thereof elements the selection whereof was dependent on the opinion of a jury. "
42 After referring to the three species of claim in debt, indebitatus assumpsit, and covenant or special assumpsit, Barrett J said in Rothenberger Australia Pty Ltd v Poulsen (at [26]):
" [26] In the light of this historical analysis, it cannot be correct to say that anything recovered upon a 'liquidated demand' is 'liquidated damages'. Probably the most commonly encountered form of recovery upon a 'liquidated demand' is recovery of a debt. By no stretch of the imagination can recovery of a debt be said to entail recovery of any form of damages. But it may be correct to say that anything other than a debt recovered upon a 'liquidated demand' is 'liquidated damages', whether recovered upon an indebitatus count or upon a claim formerly classified as a claim in covenant or special assumpsit where, in Sholl J's words, 'the claim was for a specific amount, not involving in the calculation thereof elements the selection whereof was dependent upon the opinion of the jury'. And it is certainly correct to say that a sum recovered in circumstances where a contract actually provides for the payment of that
sum by way of compensation for breach is 'liquidated damages'. "
43 His Honour's observation that recovery of a debt could not entail recovery of any form of damages (that is, liquidated or unliquidated), was not necessary for his Honour's decision. It was said in the context of his Honour rejecting an argument that everything which could be recovered on a liquidated demand was liquidated damages. Clearly, many debts are not recoverable as liquidated damages. However, with respect, the statement that recovery of a debt cannot entail recovery of any form of damages is not self-evidently correct.
44 A clause similar to clause 9.3 of the contract in this case, and similar to clause 16 of the 1972 edition of the standard form of contract considered in Jampco Pty Ltd v Cameron (No. 2), was also considered by the Queensland Court of Appeal in C G & M Pty Ltd & Ors v AHR Constructions Pty Ltd [1992] ANZ ConvR 370. Thomas J, with whom Mackenzie J agreed, said of the equivalent clause in the Queensland contract (which also provided for the deficiency on resale and expenses to be recoverable as liquidated damages) that it was a "claim [for] money due under contract, where such claim has a strong resemblance to one for damages for breach of contract" (at 372).
45 These and later cases (particularly AHR Constructions Pty Ltd v Maloney [1994] 1 Qd R 460 and J Boag & Son Brewing Pty Ltd v Bridon Investments Pty Ltd (2001) 10 Tas R 26) have considered the nature of the vendor's duties in exercising his contractual right to recover money as liquidated damages on re-sale. That is not the question before me. Suffice it to say that the better view of the authorities is that the duty on a vendor on exercising his power of re-sale under the clause is not strictly characterised as a duty to mitigate damages, or as a duty analogous to that of a mortgagee exercising the power of sale, but arises under an implied contractual term that the vendor act reasonably, which duty is "akin to the common law duty to mitigate loss" (Butt, The Standard Contract for Sale of Land in New South Wales, 2 ed, para 9.174 ff).
46 Unlike the provisions considered in these cases, clause 9.3.1 does not expressly provide that the vendor can recover the deficiency on resale and expenses as liquidated damages. Even if it did, the cases show that a claim for liquidated damages payable under a contract can properly be characterised as a claim for money due under the contract.
47 If a contract provides that if A breaches the contract A will pay B $1,000, if that is a genuine pre-estimate of loss, and if A does breach the contract, then, it is hard to see why it would not be correct to say that A was indebted to B in the sum of $1,000. The fact that the money was payable as the result of A's breach of contract does not alter the fact that as a result of A's promise to pay liquidated damages, in the events which happened, it has a contractual liability for an ascertained sum. As Thomas J said in C G & M Pty Ltd & Ors v AHR Constructions Pty Ltd, the claim resembles a claim for damages, but is a claim for money due under the contract. That is the language of debt.
48 In Alexander v Ajax Insurance Co Ltd [1956] VLR 436, Sholl J, quoting from Chitty on Pleading, 5th ed (1831) vol 1 pp 123-124, said that the action of debt had come by the middle of the 19th century to cover claims for money due "upon legal liabilities, or upon simple contracts, express or implied … whenever the demand is for a sum certain, or is capable of being readily reduced to a certainty. … but it is not sustainable when the demand is rather for unliquidated damages than for money, unless the performance of the contract were secured by a penalty in which case debt may be supported for the penalty and the real demand is to be ascertained according to the provisions of the 8 and 9 Wm. III, c. 11. "
49 Section 8 of the statute of 8 and 9 Wm. III, c. 11, provided that in an action on a bond or for any penal sum, the plaintiff could assign as many breaches as he should see fit, and the jury would assess damages for those breaches. If the defendant paid the amount of damages as assessed and costs, execution of the judgment for the bond or penal sum was stayed. (See generally, Austin v United Dominions Corp Ltd [1984] 2 NSWLR 612 at 625-627).
50 If a sum stipulated as a penalty for breach of contract could be recovered as a debt, (subject to a stay of execution on the judgment or intervention by equity), it is not obvious why the stipulation of a sum enforceable as a genuine pre-estimate of damage, and not a penalty, should not be recoverable as a debt. However, the forms of action were abolished by the Common Law Procedure Act 1852 (UK) and I have not been able to ascertain whether such a claim as the present could have been declared in debt. Many of the indebitatus counts were also for the recovery of a debt. The distinction usually drawn was between debt and unliquidated damages.
51 Guidance can be obtained from the recent decision of the Court of Appeal in Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471. There, the Court of Appeal held that a company was not unable to pay its debts as and when they became due and payable, where it had entered into forward contracts for the sale of commodities, the market had moved against it, and it faced highly probable claims for substantial damages. The company had not thereby incurred a debt, although its financial position had become untenable. In the course of reaching this conclusion, the Court considered an argument based upon a "default clause" in the company's forward sale contracts. The position was summarised by Bryson JA (at [13]) as follows:
" It is necessary to look at the operation of NACMA standard terms and conditions relating to default to understand what would be the consequence of a default. It would of course be an event of default if the time for completion of a forward sale contract arrived and the Company did not deliver the goods. (There would also be and I take it there actually were deemed defaults in the circumstances set out in the Default clause when the Company went into Administration and suspended payments of debts, and also when in association with the Administration it held a meeting of creditors, and again when it went into liquidation.) When a default happens, purchasers have the right to sue for damages on default. A purchaser would also have the right to follow the machinery in the Default clause, give written notice which would require compliance within a reasonable time, in the circumstances a very short time and more or less forthwith, and then purchase on the market "against the defaulter" (in the words of the Contract), meaning that the purchaser could claim against the Company the amount of money which would make good the loss, the difference between the two prices. "
52 After observing that an entitlement to damages for breach of a contract did not create a debt, his Honour observed (at [14]):
" Entitlement to purchase against the defaulter after notice and to have the defaulter make good the loss on such purchase in accordance with the Default clause could well create a debt within the meaning of the Default clause, because the amount would be clearly ascertainable and not a matter for assessment (see Alexander v Ajax Insurance ) [1956] VLR 436; [1956] ALR 1077), but there would only be a debt on completion of the events referred to, which include giving notice and purchasing against the defaulter … "
53 Similarly, Basten JA said (at [66]):
" … If the white cottonseed contracts required the Company to purchase white cottonseed at a fixed price, the Court would be entitled to consider whether the Company could pay for those purchases when they fell due. On that hypothesis, payment would have been contingent upon delivery, but the amount was a liquidated sum and the date for payment was fixed. By contrast, where the existing agreements required the sale of white cottonseed, the Company had then incurred no debt. It had an obligation (which it may not have been likely to meet) to deliver goods at a particular price on a particular date. However, if it failed to purchase the necessary supplies and defaulted, no liquidated debt would arise until the purchasers took further steps, namely to obtain white cottonseed from alternative sources, at a price which was not then known. "
54 Gzell J was also of the view that a claim under the default clause in a forward sales contract would constitute a debt once notice was given under that clause (at [73]).
55 In Box Valley Pty Ltd v Kidd, upon the vendor's default, the vendor would be liable for damages representing, prima facie, the difference between the contract price and the market value of the goods at the time they ought to have been delivered (Sale of Goods Act 1923 (NSW), s 53(3)). The contract included a specific term whereby the "defaulter" would be liable to pay the difference between the contract price and the price at which the purchaser purchased in the market following the vendor's default. Such a clause would properly be characterised as one for the payment of liquidated damages following breach, being "agreed compensation calculated and quantified in a way specified in or ascertainable from the contract itself" (Rothenberger Australia Pty Ltd v Poulsen at [27]), resulting in payment of a liquidated sum. It is not conceptually different from the obligation in clause 9.3.1 of the contract for sale of land whereby after a purchaser's default, a vendor who elects to exercise his contractual right of resale, is entitled to recover the loss on resale and expenses from the defaulting purchaser. The Court of Appeal said that if the contractual default clause were invoked, the vendor's liability under it would be a liability in debt.
56 In my view, where, under a contract, a person promises to pay a specific or readily calculable sum which does not depend upon an assessment, albeit that the sum is payable as liquidated damages for breach of contract, the person's contractual liability is properly characterised as giving rise to a debt in that sum.
57 Clause 9.3.1 does not contain an express promise by the purchaser to pay the deficiency on resale, and the reasonable costs and expenses arising out of the purchaser's non-compliance with the contract, or the notice, and of the resale, where the vendor resells the property within twelve months after termination. However, the purchaser's agreement that the vendor can sue for such a sum creates a debt, provided that the sum is ascertainable and does not depend upon an assessment.
58 There are two parts to clause 9.3.1: payment of the deficiency on resale, and reasonable costs and expenses. The calculation of the deficiency on resale should readily be able to be made. However, ascertaining what reasonable costs and expenses are recoverable may well involve a matter of assessment.
59 Even so, I consider that a claim for a sum due under clause 9.3.1 is a claim in debt. As Sholl J observed in Alexander v Ajax Insurance Co Ltd (at 440), claims on the common money counts for the payment of a reasonable price for goods or labour where no price or rate has been fixed are nonetheless liquidated demands even though there is an element of opinion involved in the assessment of what price is reasonable. A liability on such a quantum meruit claim is a debt for the purposes of the insolvent trading provisions of the Corporations Act. (Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; 57 ACSR 147 at [77]-[79]).
60 In the present case, no claim is made for costs and expenses. It suffices to say that the calculation of the debt involves no element of opinion or assessment. It is simply the difference between the contract price between Permanent and the plaintiff less the deposit, and less the price on resale.
61 In my view, the claim in the statutory demand is a claim for a debt within the meaning of s 459E.