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18. Hunt will provide a valuation of the Carpark which shows its value at $9,500,000 and warrants that the Carpark is security for a debt owing to a financial institution of approximately $6,500,000 secured by mortgage which contains the normal terms and conditions of mortgages.
3 On 19 September 2007, the defendants' solicitors forwarded to the plaintiffs' solicitors a letter of that date, attaching a draft of the Deed of Release contemplated by clause 3 of the Heads of Agreement, together with draft directors' resignations, share transfer forms and resolutions as contemplated by clause 9. Nothing thereafter appears to have happened until 5 February 2008, when the plaintiffs' solicitors replied, confirming that under the Heads of Agreement the sum of $450,000 was due and payable on 4 February 2008, noting that (under clause 14) if such payment was not made within three days of the due date the plaintiffs may enter judgment for $900,000, asserting that such provision was applicable notwithstanding that no formal deed of release had been completed, requesting delivery of a bank cheque for $450,000 that day, and proposing various apparently minor alterations to the draft deed of release. On 12 February 2008, more than three days after the due date for the payment of the first $450,000 on 4 February 2008, the defendants' solicitors responded, observing that neither the deed nor the share transfers, resolutions or resignations had been executed, and enclosing a personal cheque in favour of Chepan for $450,000 (said to be "in accordance with the agreement between the parties" and "subject to the deed being executed in a form agreeable to all our respective clients"). The plaintiffs' solicitor replied on 13 February, returning the $450,000 cheque, disputing that it had been tendered in accordance with the agreement between the parties, objecting that as a personal cheque the funds were uncleared and did not amount to payment in accordance with the agreement in any event, and noting that any payments tendered unconditionally by way of cleared fund or bank cheque would be accepted in either part or full satisfaction of the judgment which the plaintiffs claimed to be entitled to enter as at 8 February 2008. The letter confirmed that an application had been made to enter judgment.
4 Application having been made to the Registrar to enter judgment in the Registry for $900,000 pursuant to the Heads of Agreement, the Registrar referred the matter to the Court. (NSW) Civil Procedure Act, 2005 s 73 confers on the Court in any proceedings jurisdiction to determine any question in dispute between the parties as to whether and on what terms the proceedings have been compromised or settled between them, and to make such orders as it considers appropriate to give effect to any such determination. Further, s 29 provides:
(1) The court may make orders to give effect to any agreement or arrangement arising out of a mediation session.
5 The first issue is whether the obligation to pay the settlement sum referred to in clause 4 of the Heads of Agreement is an independent obligation, or whether it is conditional upon prior satisfaction of the requirements of clause 3 (that the parties enter into a deed) and clause 9 (that the shareholdings in Rowntree and P & K be transferred). For the first and third defendants, Mr B De Buse submits that it is implicit in the Heads of Agreement that compliance with clause 3 and clause 9 are conditions precedent to the obligation referred to in clause 4.
6 I reject that submission. First, the purpose of clause 1 in the context of this agreement is to ensure that the obligations which the agreement contains are binding and enforceable, whether or not any such further deed as is contemplated by clause 3 is ever entered into. Similarly, the purpose of clause 2 is to ensure - against the risk that the wives, Angela and Kay, might not enter into the more formal documents contemplated by sub-clause 3 - that Mr Kallinicos and Mr Hunt respectively would be liable in that event for damages for breach of warranty of authority. Secondly, clause 4 is not expressed to be subject to or conditional upon any other provision of the agreement. This is to be distinguished, for example, from clause 6 (which makes its consequences conditional on payment in full of the settlement sum), and clause 15 (which is similarly conditional upon payment in full of the settlement sum). Thirdly, clause 4 is, by clause 5, made a provision in respect of which time is essential. It is the only provision in the Heads of Agreement in respect of which time is expressed to be essential. It does not contemplate that that essential time might be extended by reason of any delay in any preceding step. Fourthly, the consent of the first and third defendants to the entry of judgment contained in clause 14 is not expressed to be conditional on any other matter than default in payment by the due date, and does not contemplate judgment in respect of any other matter: it is concerned with and only with enforcement of the obligation to pay the settlement sum.
7 While the correspondence of 19 September 2007 and 12 February 2008 suggests that there might have been some contemplation of a variation of the provisions of the Heads of Agreement in relation to some of the time frames - for example, the preparation and execution of the more formal deed - it does not suggest any contemplation of any variation or extension of time so far as payment of the settlement sum was concerned. Although I do not regard it as a necessary condition of relief, the plaintiffs have in any event proffered an undertaking to perform the obligations said to remain outstanding on their part.
8 The second issue is whether, upon the proper construction of clause 14, the plaintiffs are entitled to judgment for $900,000, or only to $450,000, on the footing that only $450,000 is presently payable under the deed, the second $450,000 not becoming payable until 7 September 2009. This is a question of construction of the phrase "or such balance is at that time outstanding". For the defendants, Mr De Buse contends that the balance presently outstanding is only the amount presently payable, and does not include the second instalment. To my mind, however, what was contemplated by clause 14 was that the plaintiffs would be entitled to enter judgment for the whole debt of $900,000 or such lesser amount as remained after giving credit for payments so far paid. The use of the term "balance" suggests something remaining after payments, rather than the first instalment only of the total debt. Properly construed, I am of the view that clause 14 was intended to accelerate the second payment date in the event of payment of the first instalment not being made punctually. Indeed, the provision would be practically meaningless in allowing a three business day period of grace otherwise: if the obligation on default was to pay only $450,000, then a provision that if the default was not cured in three days the plaintiffs would be entitled to judgment for that sum, would add nothing. Clause 14 really only has work to do if construed as accelerating the second instalment.
9 The third issue, then, is whether clause 14 so construed is void as a penalty. On the one hand, it is conditioned on breach (in the sense that it operates only "in the event that payment is not made within three business days of the due date"), and it does not contain any discount for the circumstance that the second instalment would, as a result of its operation, be accelerated. These are common characteristics of a penalty. Were the matter untrammelled by authority, I would incline to the view that such a condition is a penalty. But I do not think that course is open on the authorities.
10 The starting point is that where a sum of money is payable by instalments, upon default the creditor is entitled to sue for the unpaid instalments, but (in the absence of a valid acceleration clause) not for future instalments. However, a provision which has the effect of granting to a debtor an indulgence to pay by instalments a debt which is presently due, but revokes that indulgence in the event of a default is not void as a penalty.
11 In Wallingford v Mutual Society (1880) 5 App Cas 685, the House of Lords expressed the view that in a mortgage bond, given to secure the due payment by instalments of a sum due, a provision making the total sum due enforceable on any default was not to be considered a penalty. Lord Selborne LC said (at 696):
These mortgage bonds were given to secure the £6000, which sum was treated as advanced, although money did not pass, and also the premiums, which would become due by instalments according to the rules of the society; and the payment of which under those rules was liable to be accelerated, if any of the instalments were not punctually paid. I cannot think that such an acceleration of payments has anything in common with a penalty. It was a contract for certain payments which were debita in praesenti although solvenda in futuro ; and, being such, it is consistent both with principle and with authority to hold, that if the party who ought to have paid them, or any of them, at the proper time failed to do so, the default was his own, and the time might lawfully be accelerated for the other payments which were originally deferred.
12 In The Protector Endowment Loan & Annuity Co v Grice (1880) 5 QBD 592, the Court of Appeal, reversing a judgment of Bowen J, held that where a guarantor had signed a bond which provided for the repayment of a debt by instalments over five years, but that if there were any default in payment of any single instalment the balance of instalments were at once payable, was not a penalty. The basis of that decision, though not entirely clear, appears to be expressed by Brett LJ (at 596):
The contract is that the borrower shall repay £70, there is no other debt, and no other sum is mentioned. It is an agreement to repay by quarterly instalments; but if default should be made, then the whole sum of £70 was to become payable at once. In my opinion the stipulation to pay immediately is not to be treated as a penalty; but a stipulation to pay a large sum upon default would be a penalty, and could not be recovered: Sterne v Beck 1 De G J & S 595; 32 LJ (Ch) 682; and Thompson v Hudson Law Rep 4 H L 1 shew what the true rule is; if a larger sum is to be paid upon default, it is a penalty; a stipulation to pay upon default a sum not larger than the total amount is not a penalty.
13 Protector Loan Co v Grice was applied by the High Court of Australia in Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR 672. More recently, it was discussed by the High Court in O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359. Gibbs CJ (at 366-7) characterised the cases in which it might be said that no question of penalty arose into two classes, the first of which his Honour described as follows:
In the first class of case, if a sum of money is payable by instalments, and it is provided that in the event of one instalment not being punctually paid the whole sum shall immediately become payable, the acceleration of payment is not a penalty: Protector Loan Co v Grice (1880) 5 QBD 592; Wallingford v Mutual Society (1880) 5 App Cas 685 at 696, 702, 705-6, 710. … 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.
14 His Honour however (at 374), confined the operation of Protector Loan Co v Grice to a case where there was a present debt actually due before the breach which accelerated the payment. Wilson J (at 380) explained Protector Loan Co v Grice and Wallingford v Mutual Society as applications of the principle in Thompson v Hudson that where there was a debt due and it was agreed to accept payment of it by instalments, then, in certain circumstances, it was not a penalty where the indulgence was withdrawn upon default. Brennan J (at 387) expressed some reservations about Protector Loan Co v Grice and the judgment of Griffith CJ in Lamson Store Service, but concluded that the latter should not be re-examined finally in the case before him, which turned ultimately on other considerations. Deane J (at 403-404) was of the view that Protector Loan Co and the Lamson Store case should not be followed, but his Honour was the only one of the Justices to go so far. In my view, therefore, the state of authority in the High Court is that, on the present question, Protector Loan Co and Lamson Store remain authoritative.
15 Returning to clause 4, that clause immediately created a liability on the part of Hunt and Randall to pay a sum of $900,000, called the settlement sum. Elsewhere it is clear that the settlement sum refers to the whole $900,000 - for example, the use of the words "on payment in full" of the settlement sum in clause 15, and a similar reference in clause 6. Sub-clauses (a) and (b) provide for when that liability is to be discharged, but not when it is created. Accordingly clause 4 creates a present debt of $900,000, payable in two instalments. In other words, to borrow the Latin phrase from Wallingford's case, it is debita in praesenti, solvenda in futuro. In those circumstances, acceleration of the obligation to pay the second instalment is not void as a penalty.
16 It follows that, in my opinion, the plaintiffs are entitled to the relief they seek. My orders are: