4009/06 Integral Home Loans Pty Limited & Anor v Interstar Wholesale Finance Pty Limited & Anor
JUDGMENT
1 HIS HONOUR: On 27 April 2007 I delivered a judgment [[2007] NSWSC 406], with which these present reasons should be read, in which I held that clause 20.3(c) of each LOMA was void as a penalty, and that the two preliminary questions ought to be answered as follows:
(1) Whether, on the true construction of the LOMA, clause 20.3(c) is void as a penalty: Yes.
(2) If the answer to (1) is in the affirmative, whether Integral is entitled to trailer commission, notwithstanding the termination of the LOMA by the defendants: Yes, without prejudice to any argument that Interstar is entitled to deduct the reasonable costs of a replacement manager.
2 I ordered that the defendants pay the plaintiffs' costs of the separate questions, and I expressed the tentative view, without concluding any argument on the issue whether Interstar was entitled to deduct the reasonable costs of a replacement manager, that the holding of the majority in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 suggested that the consequence of clause 20.3(c) being a penalty was that it was absolutely void, so that there would be no room for its enforcement to the limited extent that recovery under it would not be disproportionate to the loss.
3 The parties did not agree upon what orders should be made consequent upon the determination of the separate questions. Integral proposed that Interstar be required to furnish an account of the trailer commission which ought to have been paid, with a view to obtaining a judgment for the unpaid arrears, and that directions be made for submissions on any claim by Interstar for deduction of the cost of a replacement manager. Integral also foreshadowed that, the preliminary questions having been resolved substantially in its favour, it might not be interested in further litigating the dispute as to whether or not Interstar was entitled to terminate the LOMAs. Interstar, on the other hand, simply proposed that it be given leave to file and serve an amended defence and cross-claim and directions be made for the further preparation of the balance of the claim and the cross-claim for final hearing. It opposed any suggestion that any final relief be granted at this stage.
4 As a result, on 2 May 2007, I directed that Interstar serve drafts of its proposed amended defence and cross-claim, an affidavit "setting out with particularity the fees payable pursuant to cl 10 of each LOMA in respect of all settled loans and loan balances to date, on the footing that there is no deduction from them of the type referred to in clause 20.3(b)", and for written submissions on the question as to whether a deduction of that type should apply. Pursuant to those directions, Interstar has served an affidavit of its Chief Financial Officer, Andrew Loddington Hall, sworn 15 May 2007, which deposes that the fees payable pursuant to cl 10 of each LOMA in respect of all settled loans and loan balances in respect of the period from 1 April 2006 to 30 April 2007 on the footing that there is no deduction from them of the type referred to in clause 20.3(b), are, in respect of Integral Home Loans, $163,053.81, and in respect of Integral Financial, $6,789.27.
5 The following issues now require resolution:
· whether Interstar is entitled to deduct, from the trailer commission that it is otherwise obliged to pay, the reasonable costs of a replacement manager; and
· what orders should now be made consequent upon determination of the separate questions, including whether Interstar should have leave to file an amended defence and a cross-claim.
6 Integral contends that Interstar is not entitled in the circumstances to deduct the reasonable costs of a replacement manager from the trailer commission to which Integral is entitled, and that it should have a declaration that it is entitled to continue to receive trailer commission, an order that Interstar remit trailer commission to it as and when it becomes due in accordance with the terms of the LOMAs, and judgment for the outstanding balance of trailer commission unpaid to date. Interstar, on the other hand, submits that it is entitled to deduct the reasonable costs of a replacement manager, and that no final orders should be made at this stage, but merely directions for the future conduct of the balance of the proceedings, including a grant of leave to amend the defence and leave to file a cross-claim.
No deduction of costs of a replacement manager
7 Where a contractual provision is void as a penalty, it is absolutely void, and there is no room for its enforcement on a limited basis - for example, to the extent that recovery under it would not be disproportionate to the loss suffered [AMEV-UDC v Austin]. It follows that cl 20.3(c) is absolutely void.
8 Clause 25 of each LOMA provides that any provision of the LOMA that is held to be invalid, illegal or unenforceable shall be severed, and the remaining provisions not in any way affected or impaired. It follows that clause 20.3(c) is to be severed, and the remainder of the agreement construed without reference to it.
9 It is clause 20.3(b) that authorises, in the circumstances in which it applies, the deduction from trailer commission of the reasonable costs of a replacement manager. The circumstances in which it operates are where there is a termination of the LOMA "pursuant to clause 20.1(b) or (d)". It does not purport to operate in the case of termination pursuant to clause 20.1(c). The severance of clause 20.3(c) - which did purport to operate in the case of termination under clause 20.1(c) - cannot authorise the reading into clause 20.3(b) of a reference to clause 20.1(c), to which it was not originally intended to apply (because such a termination was covered by 20.3(c)). Accordingly, if the termination was pursuant to clause 20.1(c), the operation of clause 20.3(b) is not engaged, and there is no contractual entitlement to deduct the reasonable costs of a replacement manager.