DEPOSIT AND PENALTY
18 In my opinion it is clear that the alteration did not make any difference to the amounts required to be paid under the contract or to the time and circumstances in which they were required to be paid. Both before and after the alteration, Special Condition 14 had the effect that $225,000.00 was payable on exchange of contracts, and a further $225,000.00 was payable "if the purchaser defaults in the observance or performance of any obligation hereunder which is or has become essential".
19 The circumstance that, on the front page, $450,000.00 was said to be the deposit rather than $225,000.00 does not make any difference to this. The circumstance that, on the front page, the balance is said to be $4,050,000.00 rather than $4,275,000.00 also makes no difference to the effect of the contract, because cl.16.7 requires the purchaser on completion to pay "the price (less any deposit paid)"; so the purchaser would still be paying $4,275,000.00 on completion, if only $225,000.00 had been paid as a deposit, even though the balance stated on the front page is $4,050,000.00.
20 Mr. Inatey SC for the purchaser did not contest the above propositions in any significant way; but he submitted that the alteration did make a material change because it had the effect of making the whole $450,000.00 properly characterised as a deposit and therefore not subject to the rules concerning penalties. Alternatively, he submitted that, if the alterations did not make that change, the position both before and after the alteration was that the provision in Special Condition 14 about the second $225,000.00 was a stipulation for damages on default, not for a deposit, and was invalid as a penalty. He relied particularly on Luu v. Sovereign Developments Pty. Limited [2006] NSWCA 40.
21 Mr. Orlov for the vendors submitted that, both before and after the alteration, Special Condition 14 was a provision for payment of a deposit by instalments; and he relied particularly on Ashdown v. Kirk [1999] 2 Qd.R. 1 and Romanos v. Pentagold Investments Pty. Limited (2003) 217 CLR 367 at [19]-[20]. He submitted that in Ashdown, default by the purchaser accelerated the vendors' entitlement to a second instalment of the deposit to the date of default, so that the provision that the instalment be paid on default did not alter its character as a deposit. In a case such as the present, what operated as an earnest for performance of the contract was the purchaser's unconditional promise to pay the balance of the deposit.
22 The case of Luu is closest to the present case, although it is different in respects that could be important; and it is necessary to consider it in some detail. In that case, the front page of the contract in which the price was $6.6 million provided for a deposit of $65,000.00, followed by the words "(10% of the price unless otherwise stated)". Special Condition 5 of the contract provided:
5. In the event that the Purchaser pays less than ten percent (10%) of the purchase price as deposit then if the Purchaser commits a default hereunder the whole of the 10% deposit shall become due and payable notwithstanding that this Contract is not completed. This clause shall not merge on completion and the Vendor shall be entitled to sue for recovery of so much of the 10% deposit that remains outstanding as a debt due by the Purchaser to the Vendor.
23 Later variations of the contract increased the price to $6,810,000.00. The purchaser defaulted, and the vendor claimed $616,000.00, being the difference between $65,000.00 and 10% of $6,810,000.00. The primary judge gave judgment for the vendor for $616,000.00. The Court of Appeal upheld the purchaser's appeal, holding that this amount was not part of the deposit but was a penalty.
24 The leading judgment in the Court of Appeal was that of Bryson JA. At par.[14], Bryson JA noted that the assumption in Special Condition 5 that the deposit was to be 10% was inconsistent with the clear provision on the front page that the deposit was to be $65,000.00; and he held that this clear provision was not overcome by the implication in Special Condition 5 that the deposit was 10%.
25 At par.[24], Bryson JA said this as to the relationship between deposits and penalties:
24 Where parties make an agreement for a sale which is to be completed at some time in the future it is unremarkable and only to be expected that the vendor will require the purchaser to pay some part of the purchase money straight away so as to show that the purchaser is in earnest in committing himself to pay the rest, on the understanding that the purchaser will not get his earnest money back if he does not complete the sale. For contracts of sale of land it has long been customary practice and established law that the purchaser pays a deposit on account of the purchase money when the contract of sale in writing is made, and cannot recover that deposit if he later fails to complete the bargain and pay the rest; whether or not the vendor's losses are actually more or less than the amount of the deposit. Notwithstanding the apparent inconsistency the invalidity of contractual penalties does not apply to contractual provisions for forfeiture of reasonable deposits in sales of land. In New South Wales it has long been usual to require a deposit of 10% of the purchase money, and this practice has not encountered challenge; on the other hand provisions relating to forfeiture of purchase moneys other than a reasonable deposit should be regarded as open to challenge. The assumption that provisions for forfeiture of deposits of reasonable amount are effective underlies statutory provisions for relief against their forfeiture; see s.55 of the Conveyancing Act 1919. The exception from the law relating to penalties relates and relates only to deposits, that is, to payments which truly have the character of earnest money paid on or in relation to entering into the Contract, and although provisions of contracts almost always establish what the deposit is, it is not open to parties to avoid the operation of penalties law by designating a payment or an obligation as a deposit if it does not otherwise have that character.
26 Subsequently, at par.[34], he said this on the question whether Special Condition 5 provided for a penalty:
34 The references in Special Condition 5 to the deposit in the context of the obligation to pay up to 10% of the purchase price on default are confusing elements which do not, in my judgment, affect the essential character of the obligation as an additional payment which the purchaser must make if the purchaser is in any way in default. Where the additional payment was not made and, as in this case, the Contract has been terminated and the vendor sues for it as a debt, its character as a penalty, quite unrelated to any damage or loss incurred by the vendor, is in my opinion quite clear. If an attempt is made to consider it as a pre-estimate of damage, it is obvious that it is a grossly excessive amount in relation to some of the defaults upon which it may become payable, such as late delivery of the draft transfer, while for others, such as delay in completion or failure to complete by an essential time, the lack of any relation between a percentage of the purchase price and a pre-estimate of damage for breach demonstrates, to my mind, the absence of any justification.
27 It appears from these passages that there are two possibly significant differences between that case and this one. First, Bryson JA was able to say that the front page made it clear that the deposit was $65,000.00, and that the Special Condition in that case related to something which the contract was not treating as a deposit. Second, the amount in Special Condition 5 was payable on any default, no matter how trivial, so that its character as a penalty was clear.
28 On the first matter, in the present case the reference to deposit on the front page is expressly qualified by reference to Special Condition 14; so it is not possible to say that the front page makes it clear that the second $225,000.00 is not part of the deposit. It can also be said that this is clearer in the altered form of the contract, where the front page refers to the deposit as being $450,000.00 or 10% of the price.
29 The second matter is not directly relevant to the question of whether the second $225,000.00 is a deposit; but rather is relevant to the question whether, accepting it is not a deposit, it is or is not a pre-estimate of damages. That is a question on which Mr. Orlov did not address submissions; and in my opinion, accepting that the obligation to pay the second $225,000.00 would only arise in circumstances where the vendors have lost their bargain, nevertheless it cannot be considered a pre-estimate of damages. The first $225,000.00, which was undoubtedly a deposit, would be greatly in excess of expenses that could be lost in connection with the terminated contract; and there is no evidence to suggest that the loss of the bargain would involve other loss, for example because of some problem in effecting a re-sale for a similar price. In fact, it appears that the re-sale was for a higher price; and although this is not directly relevant, it tends to confirm that there was no reason to anticipate that a later re-sale would be for a substantially lesser price.
30 In those circumstances, the Court should conclude that, if the second $225,000.00 is not part of a deposit, provision for its payment would be a penalty and not enforceable. On that basis, the significance of the second difference from the case of Luu disappears.
31 Returning to the first possible point of distinction between Luu and the present case, in my opinion the statement of principle in the last sentence of par.[24] of the judgment in Luu is correct; so that the name which the parties have chosen to give to a payment is not determinative of whether or not it is a deposit. It is necessary also to look at the character of the payment and/or the obligation to make it. The first point of distinction between Luu and the present case relates only to the name the parties have chosen to give to the payment; and in my opinion the nature of the obligation to make the payment is more important in determining its character than the name chosen by the parties; although I do accept that in some cases the name could be relevant, particularly where a deposit is payable by instalments.
32 On that approach, in my opinion the obligation to make the second payment of $225,000.00 is not an obligation to pay a deposit or part of a deposit. There never would be a time when this second $225,000.00 (as such) would be paid so as to show that the purchaser is in earnest in committing himself to pay the rest. On the contrary, the only time when Special Condition 14 obliges the purchaser to pay this sum is when the purchaser has demonstrated that he is not in earnest, and indeed the termination of the contract means that he would not be able to complete the contract. The obligation to pay the second $225,000.00 is inconsistent with the characteristics of a deposit. In my opinion, this would equally be so whichever version of the front page was operative.
33 I do not think cases concerning payment of deposits by instalments suggest to the contrary of this. In those circumstances, there will in the normal course of performance of the contract come a time when money is paid and counts as showing the purchaser is in earnest in committing itself to pay the rest. It does not tell against this analysis that the obligation to pay may be accelerated in the event of default. Nor do I think that an unconditional promise to pay an amount on default can itself count as a deposit: that is the very sort of promise that will normally amount to a promise to pay a penalty, unless the amount in question is a genuine pre-estimate of damages.
34 Accordingly, in my opinion the alteration concerning the deposit did not affect the meaning or effect of the contract, so that a contract did come into existence. The vendors were entitled to forfeit the $225,000.00 paid on exchange; but they were not entitled to be paid the second $225,000.00, because it was a penalty.