CTHHCA

IAC (Leasing) Ltd v Humphrey

[1972] HCA 1

High Court of Australia|1972-07-01|Before: Walsh JJ, McTiernan J, Walsh J, Virtue J

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At a glance

Source facts

Court

High Court of Australia

Decision date

1972-07-01

Before

Walsh JJ, McTiernan J, Walsh J, Virtue J

Source

Original judgment source is linked above.

Judgment (34 paragraphs)

[1]

High Court of Australia Barwick C.J. McTiernan and Walsh JJ. IAC (Leasing) Ltd v Humphrey [1972] HCA 1

[2]

ORDER Appeal allowed with costs. Order of the Supreme Court of Western Australia set aside and in lieu thereof order that judgment in the action be entered for the plaintiff in the sum of $17,852 with costs applicable to the sum of $10,000.

[3]

The facts including the relevant parts of the agreement between the parties and the circumstances of this case are fully set out in the reasons for judgment prepared in this appeal by my brother Walsh. I agree with his conclusion that no question of a choice between a penalty or a pre-estimate of damages arises in relation to any of the cll. 4, 6, or 7 of the hiring agreement of 6th December 1967. In my opinion, those clauses involve an attempt to ensure that the initial cost of the tractor and its attachments, plus the appellant's "profit" on its hiring, should be recovered by means of the total rental paid and retained, plus on the appropriate occasion the difference between the estimated depreciated value of the tractor and its attachments and their actual recovered value, whether achieved by sale following redelivery or repossession, or by valuation in cases where in either of those events it was not sold. I have spoken of total rental paid and retained because cl. 7 in the circumstances it covers contemplates credit being given to the respondent, in the event that the actual value of the tractor and its attachments exceeds the estimated depreciated value. This description of the effect of these clauses clearly indicates in my opinion that no question arises whether the obligation to indemnify the appellant is a penalty.

[12]

Clause 4 provided for the acceleration of the liability to pay rent instalments and for the right of the lessor to retake possession of the equipment, upon the occurrence of a number of specified events. The rent instalments not then accrued due were to be payable "rebated to reflect their then value, ascertained by applying an interest rate of ten per cent per annum to each such instalment over the period by which the date for payment thereof is by virtue of this clause brought forward". The events upon which the clause might become operative were, (1) the ascertainment by the lessor that the lessee had made a false statement in or in relation to the agreement or had been or was convicted of an indictable offence or sentenced to imprisonment; (2) default continuing for fourteen days in payment of any rent instalments; (3) the committing of an act of bankruptcy; (4) the issue or levying of execution or distress against the lessee's goods or land; (5) the declining of an insurance proposal in respect of the goods or the cancelling of any insurance cover; (6) failure within fourteen days after notice to make good any default in payment of money, other than rent, payable under the agreement; (7) the breach of certain provisions of cl. 3; and (8) doing or committing any other act or thing likely to endanger the safety, condition or safe-keeping of the equipment. The subclauses of cl. 3 to which cl. 4 referred contained covenants to the following effect: (a) to keep the equipment in good order and condition; (c) to insure it; (d) to prevent it being used or kept in any manner which would permit the insurer to decline a claim arising out of theft fire or accident; (g) to notify the lessor in writing of loss or damage to the equipment; (h) without consent not to sell or encumber the equipment or to assign the lessee's rights under the agreement; (i) not to conceal the equipment or to part with possession of it without consent or to alter it or any identifying number or mark; (j) to produce it for inspection or test on request; (k) to comply with all requirements of the law relating to the equipment and the premises in which it was kept and to pay fees and charges payable in respect of it; (m) to use it only for a purpose that has been specified or in accordance with its normal usage; (o) not to remove it without consent; (p) to notify the lessor in writing of any change in the lessee's address; and (w), to the effect stated above.

[25]

In the circumstances, I do not think that any question really arose as to whether the provisions in cl. 4 for the payment of future instalments constituted a penalty or not. But if, as a result of the manner in which the parties conducted the case at the trial, it must be taken to have arisen for decision, my opinion is that this provision did not constitute a penalty. That conclusion would be required if the agreement ought to be construed in the way in which the majority of this Court construed the agreement under consideration in Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. [1] , that is, as an agreement to pay a total rent, being the sum of the monthly instalments, subject only to such adjustments as were specified in the agreement. It could be urged, in support of that construction, that the agreement was expressed to be an agreement to lease the equipment for a term of eighteen months "at an entire rent equal to the total of the instalments provided in the schedule subject however to adjustment of such rent as provided in Clause 4". But even if the agreement ought to be read as one in which the liability under cl. 4 to pay instalments, rebated as provided therein, at a time earlier than the time when they would have become payable in the ordinary course of time was, so far as is relevant, a liability which would fall upon the lessee in consequence of a breach of the agreement, I am of opinion that the provisions of cl. 4 should not be held to constitute a penalty. The fact that those provisions could operate upon breaches varying greatly in their seriousness and in their likely consequences might suggest a conclusion that the imposition of such a liability as a consequence of a breach, followed by a termination of the contract, could not be a genuine pre-estimate of damage. Such a conclusion might be warranted if the lessor might regain the possession and the right of disposal of the equipment when only a small part of the term of the lease had gone by and might do this in consequence of a minor breach, which would really have little damaging effect upon the value of the equipment, and if the lessor might thus receive in those events a large profit not related to any damage which had actually been suffered. But the agreement provides its own limitation upon the ability of the lessor to gain a large profit by reason of the equipment being repossessed after a relatively short period. If the period has been short and if the equipment has not suffered any substantial deterioration by reason of the breach it is reasonable to suppose, looking at the matter as at the date of the making of the agreement, that the actual value at the date of termination of the agreement will be substantially in excess of the appraisal value. That excess will be set off against the rebated instalments which the lessee will be required to pay. Expressing this in another way, it will be only if it turns out in fact that there has been such a depreciation in the value of the equipment that this does not exceed the appraisal value, that is, the value which has been estimated as the value the equipment will have at the expiration of the lease period, that cl. 4 will impose an obligation upon the lessee to pay the (rebated) amount of all the instalments. If the actual value exceeds the appraisal value, the lessee will be relieved, either wholly or in part, of his obligation with respect to instalments which have not yet become payable at the date when the lease is terminated.

[26]

There remains for consideration the question whether or not, having regard to the terms of the agreement and to all the surrounding circumstances, the provision of cl. 7 which requires the respondent to pay any amount by which the appraisal value exceeds the actual value of the equipment is enforceable. Now this provision does not purport to be one which provides a preestimate of damage which might be sustained by reason of a breach of the agreement. If the respondent committed no breach at all but kept the equipment for the full term of the lease and then delivered it up to the appellant and if its actual sale price or valuation should be less than the appraisal value, the respondent would be obliged to pay the difference, in accordance with cl. 6 of the agreement. If the equipment realised more than the appraisal value, the respondent would obtain no benefit, in a case in which cl. 6 operated. Both in cl. 6 and in cl. 7, the payment by the respondent of any amount by which the actual value is less than the appraisal value is expressed to be by way of indemnity for the capital loss sustained by the appellant. In my opinion the agreement in cl. 7 for the payment of that amount is not an agreement in respect of which it is appropriate to ask the question whether it constitutes a penalty or is a genuine assessment of damages caused by breach of the agreement. We were referred to several authorities dealing with the circumstances in which that question must be resolved and with the rules that have been formulated for answering it. I shall refer to some of the recent cases on this subject. They indicate in my opinion that, although the rules of this branch of the law are not in all respects finally settled, there is no accepted principle which would make unenforceable the indemnity agreement contained in cl. 7. There has been a conflict of judicial opinion on the question whether a provision, which is so expressed that it may operate in the same manner in cases in which there is a breach of contract and in other cases where there is not any breach, can be affected by the rules of law relating to penalties. The view has prevailed in England that those rules may be applied in appropriate circumstances to make such a provision unenforceable, in so far as it operates, in the events which happen, as a consequence of a breach of contract, notwithstanding that the same results may be attached by the agreement to acts or events which involve no breach: see Bridge v. Campbell Discount Co. Ltd. [1] . in which the opinion of the majority of the Court of Appeal in Cooden Engineering Co. Ltd. v. Stanford [2] was approved. But there has been a preponderance of opinion in favour of the view that it is only when a provision operates so that the event upon which an obligation is placed upon a party to pay a sum of money to another party to a contract is the breach by the former party of a term of the contract, that the question arises whether an obligation arising upon that event is a penal provision. Thus if a sum has become payable because a party has exercised an option given by the agreement, the exercise of which is conditional upon a payment, the view has been taken that the question of a penalty does not arise. See the differing opinions stated in Bridge's Case [3] and see United Dominions Trust (Commercial) Ltd. v. Ennis [4] .

IAC (Leasing) Ltd v Humphrey - [1972] HCA 1 - HCA 1972 case summary — Zoe