Imperial Tarmacadam and Asphalting Company Pty Limited v St George Bank Limited [2009] NSWSC 1287 | Case summary

50027/09 IMPERIAL TARMACADAM AND ASPHALTING COMPANY PTY LIMITED -V- ST GEORGE BANK LIMITED EX TEMPORE JUDGMENT 1 HIS HONOUR: This is an application to strike out the plaintiff's Commercial List Reply which was filed on 19 October 2009. 2 It is necessary briefly to describe the claims and cross-claims which have thus far been pleaded in order to put the pleading under attack into context. 3 By Summons and Commercial List Statement, the plaintiff claims $926,415 as monies had and received to the plaintiff's use. It pleads as follows: that it borrowed money from the defendant Bank ("the Bank") under a fixed rate bill acceptance/discount loan facility for $13.5M for a period expiring on 31 March 2008 ("the Varied Loan Facility"); that the Varied Loan Facility was secured by a mortgage over a property at Parramatta; that on 31 March 2008 the Varied Loan Facility expired and the Bank did not demand repayment of the loan; that on about 23 May 2008 the plaintiff sold the property and completed the sale on 14 November 2008; that on and from 11 November 2008 the Bank asserted that it was entitled to "break costs" upon repayment of the loan by the plaintiff and refused to discharge the mortgage unless they were repaid; and that on 14 November 2008 the Bank received settlement proceeds of $14,550,700 of which it appropriated on account of break costs the sum of $926,415. 4 The plaintiff pleads that the Bank was not entitled to retain or be paid any amount by reason of break costs and is obliged to pay that sum to the plaintiff or is liable to account to the plaintiff for it. 5 In its Commercial List Response, the Bank ripostes that on 31 March 2008 the Varied Loan Facility was replaced with a new three year fixed discount rate commercial bill ("the new facility") or was extended for a further three year period ("the extended facility"). It denies the allegation that it was not entitled to retain or be paid any amount by reason of break costs. It pleads in further answer to its denial that it was a term of the new facility or the extended facility that it would be entitled to charge break costs in the following circumstances: a if the plaintiff repaid early all or any part of the total amount owing for the facility before the end of the fixed interest period; or b the total amount owing for the facility became repayable because of the plaintiff's default; or c the plaintiff elected not to rollover any bills discounted under the facility at a fixed rate prior to the end of the fixed discount period. 6 In the Reply to which the present Motion relates, the plaintiff responds to the assertion of contractual entitlement to be paid break fees in the following terms: "The Plaintiff relies on the following facts and assertions:- 1. The Plaintiff says that if, as alleged by the Defendant and denied by the Plaintiff, the Court finds there was a contract in place between the parties as at 14 November 2008 which contained a provision to the effect of that pleaded in paragraph 6 of the List Response, such provision is void or unenforceable as a penalty. 2. Save for the admissions made in the List Response, the Plaintiff otherwise joins issue with the List Response." 7 The Bank has brought a cross-claim. By its Commercial List Cross-Claim Statement, it pleads as follows: that in or about March 2008 the plaintiff requested the Bank to provide the plaintiff with a three year fixed discount rate commercial bill facility, which it provided and the plaintiff freely accepted; that on or about 14 November 2008 the plaintiff requested termination of this facility; that in accordance with this request the Bank terminated the Varied Loan Facility which caused it to incur costs of about $926,415; and that in response to the plaintiff's requests it provided a three year fixed discount rate commercial bill facility from 31 March to 14 November 2008. It pleads further that the reasonable and fair value of what it provided included the break costs. It pleads that if it does not have a contractual right to retain the break costs it is entitled to be paid them as the value of the services provided by it at the request of the plaintiff and freely accepted by the plaintiff. 8 An initial difficulty with the Bank's response was that it failed to plead which of the circumstances, under which it asserts it is entitled to retain the break fee, arose. This was cured by an amendment permitted by leave during the course of argument. The Bank now restricts its contention to entitlement to payment of the break fee on the grounds that the plaintiff repaid early all of the total amount owing before the end of a fixed interest period. 9 It is necessary briefly to set out provisions of the Varied Loan Facility which was on foot at the date of the plaintiff's repayment. The terms are contained in a letter of offer signed by the parties and accompanying General Standard Terms. There was no debate between the parties before me as to which of the facilities applied and, in any event, for the present purposes the terms of the facilities are materially the same. 10 The letter of offer contains terms under a heading Commercial Acceptance - Fixed. It provides for the Bank to accept bills of exchange drawn by the plaintiff when it requests the Bank in writing to do so. Under the heading Indemnity the letter contains the following provision: "You must pay us an amount equal to the face value of each bill we accept under this facility not later than 10.00 am on the day the bill falls due for payment at the completion of the term to maturity. You also indemnify us against, and therefore you must pay us on demand for, any other liability, loss or costs we incur or suffer in connection with our acceptance of bills under this facility. If you elect not to rollover any bills discounted during a period in which the discount rate has been fixed, you must, in addition to your indemnification obligations, pay us any break costs (see the "Break costs" clause in the General Standard Terms). If you do not pay any amount you owe us when it is due (including any amount payable under this "Indemnity") you must pay interest on that overdue amount at the default rate . The "Default Interest" clause in the General Standard Terms explains how we calculate default interest." 11 Part B of the General Standard terms contains the following provisions: "3.4 I you repay early the total amount owing , you must pay, at the time of repayment, all interest accrued on the amount repaid. 4. Break Costs 4.1 Whenever the interest rate or discount rate for a facility is a fixed rate a "break costs event" is taken to have occurred if: (a) you repay early all or any part of the total amount owing for that facility before the end of a fixed interest period ; or (b) the total amount owing for that facility becomes repayable because you are in default; or (c) you elect not to rollover any bills discounted under a bill facility at a fixed discount rate prior to the end of the fixed discount period. If a break costs event occurs we may suffer loss (which we call our "break costs "). Our break costs is an amount equal to our reasonable estimate of our loss (if any) arising from a break costs event . This loss usually arises because of changes in market interest rates or discount rates between the start of the fixed interest period (or, in the case of a fixed discount rate, the start of a fixed discount period ) and when the break costs event occurs. 4.2 We calculate break costs using the break costs method . The break costs method is a calculation of the difference, if positive, between an amount calculated by reference to the rate equivalent to our cost of funds at the start of the fixed interest period (or, in the case of a fixed discount rate, the start of the fixed discount period ) and an amount calculated by reference to the rate equivalent to our cost of funds at the time of the break costs event, over the remainder of that fixed interest period (or in the case of a fixed discount rate, over the remainder of the fixed discount period ). This is then discounted back to the net present value at the rate equivalent to our cost of funds at the time of the break costs event ." 12 The defendant's attack on the Reply is that the break costs provision in cl 4 of the General Standard Terms cannot as a matter of law amount to a penalty because: a the law of penalties, in its standard application, is attracted only 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, and here the break costs are payable on early repayment, which is not a breach of contract: see Ringrow Pty Limited v BP Australia Pty Limited [2005] 224 CLR 656 at [10]; Interstar Wholesale Finance Pty Limited v Integral Home Loans Pty Limited [2008] NSWCA 310 at, amongst others, [106], [114], [115], [126] and [139]; and b clause 4 provides a mechanism on its face intended to compensate the Bank for a real loss and only operates when such a loss has been sustained as a consequence of early repayment and therefore cannot be a penalty; see Ringrow Pty Limited v BP Australia Pty Limited at [11]. 13 The test for striking out of a pleading has often been stated and need not be repeated in any detail here. It was not the subject of much debate between the parties before me. What is required is not a view that the moving party for striking out is ultimately likely to succeed or has a strong case, it must show that the case made is so untenable that the party making it cannot possibly succeed or is obviously or almost incontestably likely to fail. 14 The plaintiff challenges the proposition that as a matter of construction cl 4 of the Varied Loan Facility is not enlivened by a breach of contract. 15 It puts that the substance of the provision is, in effect, one which concerns breach in that the Varied Loan Facility contemplates a fixed period and that, whether described as breach or not, the substance of it is that the plaintiff is penalised for acting other than in accordance with what is the contemplated course of events under the Varied Loan Facility. It also puts that the law is not as the Bank would have it and prays in aid what was said by Hely J at first instance in Ringrow Pty Limited v BP Australia Limited [2003] FCA 1297; 203 ALR 281 at [97] to the following effect: "The modern rule against penalties is a rule of law: AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 191; 68 ALR 185. The sphere of operation of the penalties doctrine is limited to payment of agreed sums or transfer of property upon a breach of contract: Rossiter, Penalties & Forfeiture , 1992, p 66. A clause providing for a payment of an agreed sum on termination of a contract (in itself not an event of breach) is still within the reach of the penalties doctrine if one of the grounds on which the agreement may be terminated is breach: O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 367; 45 A;R 632; Lanyon, "Equity and the Doctrine of Penalties" (1996) 9 JCL 234 at 235.

16 It puts that "the universe of standard application" is not settled and that it cannot be said that it is incontestable that a provision of the nature of cl 4 falls within either the standard or non-standard application of the law of penalties. 17 The plaintiff further contests the proposition that cl 4 necessarily provides a mechanism which compensates the Bank only for a real loss and does not operate so as to give the Bank only a genuine pre-estimate of its loss. 18 I am not satisfied that the Bank's position is so incontestably correct and the plaintiff's position so incontestably incorrect that what the plaintiff wishes to put is bound to fail, untenable and cannot possibly succeed or is obviously or almost incontestably bad. 19 The authorities to which I have been referred do not deal with the points which have arisen. What is meant by a "breach of contract" in the law of penalties is, in my view, not necessarily settled. In Ringrow Pty Limited v BP Australia Limited, at first instance Hely J contemplated that a clause providing for payment of an agreed sum on termination of contract (in itself not an event of breach) (which is the case here) is still within the reach of the penalties doctrine, if one of the grounds upon which the agreement may be terminated is breached. In my view, that proposition arguably allows the plaintiff to put the contention which it wishes to make in its reply. 20 Despite the force in what Mr Sirtes SC on behalf of the defendant put, I am not satisfied to the requisite level that cl 4, in all of its applications, necessarily always involves a genuine pre-estimate of loss. As Mr Newlinds SC on behalf of the plaintiff pointed out, whether the break costs will or will not amount to a genuine pre-estimate may depend on the facts. There have been many admonitions with respect to the caution which must be given to striking out a case where there is any live factual contest. 21 It seems to me that to strike out the pleading and preclude the plaintiff from making the contentions it wishes to make will not serve the overriding purpose in s 56(1) of the Civil Procedure Act 2005. The contentions which the plaintiff wishes to make, if put at trial, will not in any way materially involve an addition to the expense or time that the hearing will take. In addition, whether cl 4 ultimately has the effect of compensating the Bank for a real loss will be the subject of evidence in any event given the way in which the Bank intends to prosecute its cross-claim. 22 I draw attention to paragraph 62 of Practice Note No. SC Eq 3, which applies to this List, that as a general rule applications to strike out or for summary judgment will not be entertained and that practitioners should expect strictness in declining to entertain such applications. 23 Whilst I consider that this application was appropriate to be entertained given the significance of the issues which it raises, I do not consider that the Bank has met the necessary threshold to succeed in its application to strike out the reply. 24 Additional to the substantive points made, Mr Sirtes SC took objection to the form of the reply as not providing sufficient material for the Bank to know what the plaintiff's contentions on penalty are. It is not necessary to deal with that submission given that the defendant has been given leave to amend its Commercial List Response, and the plaintiff will have to file an amended reply in any event. When it does so, the plaintiff may consider an improvement to the form of the pleading. 25 The Motion is dismissed. 26 The Bank is to pay the plaintiff's costs. **********

Imperial Tarmacadam and Asphalting Company Pty Limited v St George Bank Limited

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Cases Cited (4)

Cited By (2)