Idameneo (No 123) Pty Ltd v Auzcare Pty Ltd

Judgment

HIS HONOUR: These are proceedings for breach of contract and possession of land under mortgages. The plaintiff, Idameneo (No 123) Pty Ltd ("Idameneo") operates medical centres throughout Australia. The first defendant, Auzcare Pty Ltd ("Auzcare") is a medical practice operated by the second defendant, Dr Muhammad Azam. The third defendant, Mrs Imrana Azam, is Dr Azam's wife. Before me for determination is a separate question whether relevant provisions of the deed upon which proceedings are founded amount to a penalty and, accordingly, are unenforceable.

The question

In Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, 224 CLR 656, the High Court stated the law relating to penalties, by reference to longstanding English authority, at [10]-[11] (662-3): "10 The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach. 11 The starting point for the appellant was the following passage in Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd … : '2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ... 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ... 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: (a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ... (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ... (c) There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage' …" (Footnoted references to authority omitted.)
Put shortly, the defendants' position, put by their counsel, Mr Hyde Page, is that the settlement deed does not compromise a pre-existing debt or provide for a "genuine covenanted pre-estimate of damage". It seeks merely to restore the parties to the status quo ante. It provides for recovery of $800,000 from the defendants in the event of any breach of contract, no matter how minor and no matter how close to the end of the 10 year working relationship between the parties. It meets the characterisation of a penalty restated by the High Court in Ringrow.
Also put shortly, the position of Idamaneo, articulated by its counsel, Mr Lucarelli, centres on the acknowledgement of debt by the defendants in cl 2(a) of the settlement deed and the circumstances giving rise to the deed. His submission was that this is a case of forbearance by Idameneo in respect of an admitted liability of the defendants upon certain conditions, on the basis that in the event of breach of any of those conditions that forbearance is withdrawn and Idameneo is at liberty to recover the acknowledged debt.
Mr Lucarelli referred to O'Dea v Allstates Leasing System (WA) Pty Ltd (1982-83) 152 CLR 359. The facts of that case need not be examined. It is sufficient to say that Gibbs CJ (at 366-7) referred to cases in which a debtor is afforded a measure of relief from payment if certain conditions are met, such as payment by instalments, on the basis that the original debt will become recoverable if those conditions are not met. The Chief Justice said (at 367): "In all the cases of this kind there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full."
Such a case was Cameron v UBS AG [2000] VSCA 222, [2000] 2 VR 108. In that case the plaintiff (respondent) sought to register in Victoria a judgment against the defendant (appellant) in Switzerland for $8.4 million. The defendant disputed the plaintiff's right to enforce the judgment in Victoria, but the parties reached an agreement whereby the plaintiff would accept $1 million, payable by five instalments, in satisfaction of the judgment. In the event of default of payment of any of the instalments the plaintiff was entitled to enforce the judgment. There was default and the plaintiff sought to do so.
The Court of Appeal rejected an argument that the relevant clauses of the agreement amounted to a penalty. Delivering the leading judgment, Phillips JA said at [20]: "Although the defendant was wont in argument to approach this case as if the deed was simply an agreement for the payment by the defendant to the plaintiff of $1 million, that is not what it was; it was a bargain about the enforcement of the Swiss judgment. The sum of $8.4 million for which judgment in Victoria was to be obtained by consent under clause 3 was the sum for which judgment had already been recovered in Switzerland, the judgment which the plaintiff was seeking to enforce in this proceeding as successor to the Swiss Bank in the Swiss proceeding. That sum was quantified before the terms of settlement were entered into; the dispute was only over the plaintiff's right to enforce the Swiss judgment in Victoria, a right asserted in the statement of claim in this proceeding and denied by the defendant in his defence. By the terms of settlement the defendant secured to himself one last opportunity to pay a much lesser sum in full and final satisfaction of what the plaintiff was claiming in Victoria in reliance upon the Swiss judgment. For the opportunity to pay that lesser sum the defendant bargained away any defence he had to enforcement of the judgment in Victoria, consenting to judgment here if he made default in payment of the lesser sum modo et forma. That makes this case quite different from those in which the Courts have refused to lend assistance to the enforcement of a penalty. It is more akin to those cases described by Gibbs, C.J. in O'Dea where the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence: … ."
At [21], Phillips JA noted that the defendant had denied liability for the $8.4 million in the pleadings and that the settlement deed contained no express acknowledgement of such a liability. His Honour continued at [22]: "In my opinion, when read fairly these terms of settlement did contain, by implication, an acknowledgment by the defendant of his liability for the $8.4 million should there be default, and thus an acknowledgment of liability which, though conditional, was effective when the terms of settlement were agreed. Immediately before the terms of settlement there was a dispute about the enforceability of the Swiss judgment and so about the amount owing by the defendant under it; but, as I see it that dispute was finally resolved by the terms themselves and the deed. From that point onwards, the defendant was acknowledging his liability in respect of the Swiss judgment subject only to this: that if he paid a lesser sum according to clause 2 he could have a release from the larger sum. In those circumstances, according to the cases to which I have referred, the provision in clause 3 for consent to judgment is not a penalty."
In a concurring judgment Winneke P said at [3]: "At the time when the deed was executed, the respondent had a right to enforce an existing debt constituted by the judgment of the Swiss court. By the Deed of Settlement it forebore to exercise that right on condition that the indulgence which it afforded to the appellant, namely to pay a lesser sum over a period of time, was fulfilled. By entering into the deed the appellant implicitly acknowledged that the judgment debt was due and payable by his agreement that, if he did not meet the conditions upon which the indulgence was granted to him, he would submit to judgment in the amount of such judgment debt; thereby giving up any defences which he claimed to have. In my opinion, there is nothing inequitable or penal about such a compromise. In substance it amounts to a concession by the appellant that the debt is owed and will be paid if he fails to meet the terms of the indulgence granted by the respondent. All the advantages of amount and time were with the appellant provided that he complied with those terms. In these circumstances it seems to me to be of little moment that the appellant, prior to the execution of the compromise, was disputing the respondent's claim to enforce the foreign court's judgment, which was the background against which the compromise was made. If the appellant's submission is right, no judgment creditor whose judgment is appealed by the judgment debtor could safely compromise the appeal on terms which reserved to the former the full amount of the judgment debt in the event that the latter failed to meet the terms of indulgences as to amounts and times of payment afforded to him by the creditor."
Also concurring, Buchanan JA said at [28]: "The obligation to pay $8,400,000 was not one which sprang from the deed unheralded. Its genesis lay in the past dealings between the appellant and the respondent's predecessor. In my opinion the case is to be equated with those in which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt. At one end of the spectrum covered by those cases is an undisputed judgment debt. … . Further towards the middle of the range is a sum ascertained in a suit in Chancery before a final decree has been made. … . At the other end of the spectrum, but still within it in my view, is the present case where the debt is the subject matter of a claim which is disputed but is not suggested to be a colourable device." (Footnoted references to authority omitted.)
A similar approach was taken in a number of other cases to which I was referred: Perpetual Trustee Company Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232, Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259, 29 VR 462, Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825 (Davies J). The common thread in those cases, as Mr Hyde Page pointed out, was that each of them arose from a claim in debt, compromised by acceptance of a lesser amount upon payment by instalments or observance of other conditions, the debt being expressly or impliedly acknowledged in the compromise agreement. A somewhat different approach was taken by Pembroke J in Attwells v Marsden [2011] NSWSC 38. There, guarantors had entered into an agreement to compromise a debt in an amount greater than that for which they would have been liable under the guarantee. Nevertheless, in the circumstances of the case Pembroke J found that the agreement was not a penalty because of other benefits conferred by it upon the guarantors ([7] - [10]). His Honour had regard to the "commercial reality of the bargain made by the parties": [17]. Both counsel described this case as a "high watermark" in this line of authority but, as will be seen, Mr Lucarelli relied upon Pembroke J's approach.
For his part, Mr Hyde Page cited Legal Practice Management (Vic) Pty Ltd v Simms Corp Hotels and Leisure Pty Ltd [2013] VSC 734, a decision of Sloss J in an appeal against a magistrate's decision. This also involved a deed of settlement compromising a debt said to be owed to a firm of lawyers for professional services. The deed was in settlement of cost review proceedings, and by it the amount claimed by the lawyers was significantly reduced provided instalment payments were made and certain other conditions were met. However, it was agreed that the lawyers were entitled to judgment for the full amount if, among other things, any of the defendants, related corporate entities, became insolvent. In the event, that is what happened.
After an extensive review of authority, Sloss J upheld the magistrate's decision that the relevant clauses of the deed of settlement constituted a penalty. This was on the basis that, at the time the deed of settlement was entered into, none of the defendants "could be said to have owed, jointly or severally, the amount claimed": [76]. In addition, there was "some difficulty in identifying who or which entity actually owed the money to the legal practice": [77]. Sloss J accepted the magistrate's finding that in the settlement deed "there was no express or implied acknowledgment of the indebtedness for the stipulated sum claimed": [87]. That stipulated sum "was neither in form nor substance a present debt", but "merely an amount claimed for work and labour done, that was disputed, and the amount contended to be due was never established because the case was settled": [86]. Generally, her Honour relied upon a Queensland decision to similar effect in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2000] QCA 221, [2001] 2 QdR 114, which she analysed at [56] - [61] of the judgment.
Mr Hyde Page relied upon this decision, which he submitted was analogous to the present case. Here also, he said, the three defendants are sought to be made jointly and severally liable for a lump sum without examination of their "respective and individual faults". Further, the defendants had disputed their liability in respect of the $800,000 in the 2012 proceedings, and the fact that that amount is expressed as a debt in the settlement deed does not affect its characterisation as a penalty. He noted that cl 2 is preceded by the words "without admission," adding that it is clear from the authorities that the doctrine of penalties looks at the substance of the agreement. He emphasised what he described as the indiscriminate operation of cl 2(a) and cl 2(b), whereby it would make no difference to the size of the imposition upon the parties whether the breach was negligible or substantial or at what stage during the 10 year period it occurred.
He argued that the present case does not fall within the O'Dea, Cameron line of authority. The settlement deed compromises proceedings for damages, not debt, and its purpose is not the partial recovery of a debt. Rather, the threat of recovery of $800,000 is used as a sword of Damocles over the defendants, designed to ensure their compliance with the terms of the revised sale and service agreements.
This is an unusual case, which certainly differs factually from Cameron and the other like cases to which I have referred. However, after careful consideration, I am persuaded by the submissions of Mr Lucarelli that those factual differences are immaterial. The present case does involve the compromise of an admitted liability. That admission needs to be understood against the background of the circumstances leading to the settlement deed. As I have said, the 2012 proceedings compromised by that deed alleged the abandonment at an early stage by Dr Azam of his obligations under the agreement with Idameneo, despite the fact that the $800,000 for the sale of his practice had been received and disbursed. By cl 2(a) of the settlement deed the defendants expressly acknowledge their indebtedness in that amount by reason of the liability of each of them pleaded in the 2012 proceedings. The fact that cl 2 is preceded by the words "without admission" is obscure, but it cannot avoid the effect of the plain words of that paragraph. As Mr Lucarelli put it, the effect of the deed is that the plaintiff agrees to postpone enforcement of that acknowledged debt, and ultimately to forgive it, upon certain conditions. If those conditions are not honoured the defendants lose the benefit of that forbearance and the plaintiff is at liberty to recover the acknowledged debt.
The background to the deed elucidates the commercial reality of the bargain, to adopt the expression used by Pembroke J in Attwells v Marsden. In that case, in a passage relied upon by Mr Lucarelli, his Honour said at [11]: "It is irrelevant that, prior to reaching the agreement embodied in the consent orders, the legal liability of the Guarantors was limited to $1.5 million plus further lesser amounts. The Guarantors were legally advised. By the consent orders, they negotiated and agreed to the formulation of new rights and liabilities that bound them. They asked the court to make orders reflecting their agreement. Those orders reflected a new "bargain" which was freely entered into by them. An exception from that freedom to contract, so as to attract judicial intervention to set aside a bargain on which parties of full capacity have agreed, requires good reason: Ringrow Pty Limited v BP Australia Pty Limited [2005] 224 CLR at [31]-[32]."
In these circumstances, Mr Lucarelli pointed out, it is strictly not a breach of the settlement deed (incorporating the amended sale and service agreements) which gives rise to that liability. Rather, the breach removes the contractual barrier against the plaintiff's enforcement of an existing admitted liability. Referring to the expressions used by Buchanan JA in Cameron at [28], quoted above, the defendants' obligation to pay the $800,000 does not spring from the deed "unheralded." Nor could the defendants' acknowledgment of that liability be described as a "colourable device."
This being so, Legal Practice Management v Simms is distinguishable and not decisive of the present case. Nor can the defendants draw comfort from the assertion that in cl 2(a) the three of them are said to be jointly and severally liable, without specification of the basis of liability of each of them. Plainly enough, in the 2012 proceedings the liability of Auzcare and Dr Azam was not relevantly distinguishable, and Mrs Azam's liability was elucidated in the manner which I have described above. Clause 2(a) expressly refers to that liability arising pursuant to the causes of action pleaded in those proceedings.
Accordingly, in all the circumstances, I find that the relevant clauses of the settlement deed do not amount to a penalty. If necessary, I shall hear the parties on costs.

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Judgment (5 paragraphs)

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