Lachlan v HP Mercantile Pty Ltd

Court of Appeal (NSW)|2015-04-28|Before: Bathurst CJ, Beazley P, McColl JA, Darke J

Background

The appellant had participated in an orchard management scheme in respect of which he entered into four loan agreements with Tumut River Orchard Management Ltd. The respondent is the assignee of the rights of that company under the various loan agreements. The legal proceedings which resulted in the June 2011 settlement had their basis in a dispute between the parties relating to the appellant's indebtedness under the loan agreements.
Clause 5 of the Deed and item 7 of the Schedule to the Deed (the Schedule) provided for the obligation of the appellant to pay the respondent the $300,000 settlement sum by instalments. Clause 3 provided for the respondent's agreement to settle the legal proceedings pursuant to the terms of the Deed and the consent orders. We have already referred to cl 10, which provided for the payment of the Judgment Debt should there be a default in making the agreed instalments which was not rectified after the giving of notice.
Pursuant to cl 6 of the Deed, the respondent released the appellant from all claims in the future. The release was subject to all payments being made pursuant to cl 3 and there being no default that had not been rectified in accordance with the terms of the deed.
Pursuant to cl 7 of the deed, the appellant immediately released the respondent from all claims he had against the respondent either now or in the future in respect of the loan agreements and the orchard management scheme generally.
Order 5 of the consent orders provided that "[the appellant] will pay to the [respondent] the amount of $300,000 in accordance with the payment schedule contained in the Deed". Order 6 provided that if there was a default under the Deed that entitled the respondent to commence recovery action against the appellant, the respondent was granted "leave to immediately enter judgment under its Cross-Claim" in the amount of $1,570,292.12 (less payments made under the Deed) together with interest and costs.
The appellant failed to make the last instalment in accordance with cl 3 of the Deed and item 7 of the Schedule and failed to rectify the default after being given notice to do so in accordance with cl 10 of the Deed.

Issues on the appeal

Two issues were raised on the appeal. First, the appellant contended that his Honour erred in refusing to grant an extension of time in which to comply with the consent orders (appeal grounds 4-8). Secondly, the appellant contended that his Honour erred in finding that cl 10 of the Deed was not a penalty (appeal grounds 1-3).

The extension of time

In this Court, the appellant contended that the primary judge erred in refusing an extension of time on two bases. First, he contended that his Honour had taken into account an irrelevant consideration, in finding that it was necessary to establish an exceptional case to extend time to comply with consent orders that were based on an underlying contract: see Paino v Hofbauer (1988) 13 NSWLR 193. The appellant submitted that Paino was plainly wrong and ought not be followed.
This point had not been taken in the court below and leave is required to raise it on appeal: Suttor v Gundowda Pty Ltd [1950] HCA 35; 81 CLR 418 at 438; Coulton v Holcombe [1986] HCA 33; 162 CLR 1 at 7-8. Leave to argue the correctness of Paino should be granted as it raises an important question of practice and procedure.
The appellant contended that his Honour's error in applying Paino was an error in the exercise of discretion within the principles stated in House v The King [1936] HCA 40; 55 CLR 499. If this error is established, the error would properly be characterised as an error of law in that the primary judge applied a wrong legal test, rather than the taking into account of an irrelevant consideration as submitted by the appellant. However, nothing turns on the characterisation of the error, if established, as both constitute error for the purposes of House v The King.
Secondly, the appellant contended that his Honour had committed House v The King error in that his decision was manifestly unreasonable.

Is Paino plainly wrong?

The appellant submitted Paino was plainly wrong in that the requirement to establish an exceptional case placed a fetter on the exercise of the Court's discretion.
In Paino, at 198, McHugh JA stated that when a party seeks to set aside or vary a consent order based on contract and the underlying contract itself could not be set aside or varied, "the case would need to be exceptional before the Court would exercise its discretion in favour of an applicant". His Honour added that: "… by itself the failure of the applicant to comply with the terms of a consent order based on a contract could rarely, if ever, be a sufficient ground to vary the order."
The appellant contended that his Honour's reference to the requirement for an exceptional case impermissibly fettered the court's discretion. We do not agree.
Supreme Court Rules 1970 (NSW), Pt 2 r 3, the predecessor provision to UCPR, r 1.12, was held to be "a broad power to relieve against injustice. The discretion so conferred [by the rule] is not readily to be limited by judicial fiat": FAI General Insurance Company Ltd v Southern Cross Exploration NL [1988] HCA 13; 165 CLR 268 at 283 per Wilson J (Deane and Dawson JJ agreeing). Nonetheless, it is well established that a discretion conferred in general terms is to "be exercised judicially and consistently with the judicial process": CDJ v VAJ [1998] HCA 67; 197 CLR 172 at 185, including, "in accordance with principles developed by judicial decisions": Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in liq) [2009] NSWCA 104 at [28].
In Klein v Domus Pty Ltd [1963] HCA 54; 109 CLR 467 Dixon CJ observed at 473, that the real object of the legislature in conferring a discretion in general terms: "… is to leave scope for the judicial or other officer who is investigating the facts and considering the general purpose of the enactment to give effect to his view of the justice of the case."
In that case, which was concerned with an extension of a limitation period under workers compensation legislation, the court refused to interfere with the exercise of discretion of the first instance decision maker in refusing the extension. As Dixon CJ remarked: "[his] decision was to … let the law operate according to its tenor".
In Brisbane South Regional Health Authority v Taylor [1996] HCA 25; 186 CLR 541 at 554, which was also a case involving an extension of a limitation period, McHugh J, after referring to Dixon CJ's observations in Klein, stated that the "justice of the case" required the Court to consider all the relevant facts and circumstances having regard to the scope and purpose of the enactment authorising an extension of time.
Klein and Brisbane South Regional Health Authority concerned extensions of limitation periods permitted by statute. The present case involved a general rule of procedure permitting extensions and abridgements of time. Being a general rule its scope and purpose are broader than usually would be the case with a more specific statutory provision. Hence the observation of Wilson J in FAI General Insurance. However, as the authorities indicate, the discretion is not as large. It is to be exercised having regard to the nature of the extension sought, the circumstances in which the extension is sought, the nature of the dispute between the parties, the legal principles that govern such a dispute and any other relevant circumstance, including whether there is any legislation that relates to the issues between the parties and the scope and purpose of such legislation.
Contrary to the appellant's submission, Paino did not impermissibly fetter the general discretion for which the rule provides. Rather, his Honour's remarks were directed to a case where parties have bound themselves to a contract which underpins the court's orders. In such a case, the court's general discretion is to be exercised in the context of the respect the law gives to parties being held to their bargain. To relieve a party from the bargain they had freely entered, would, as McHugh JA remarked, require an exceptional case. Such an approach does not fetter the discretion of a judicial officer. Rather, it is a statement of an appropriate exercise of discretion in a particular type of case.
Accordingly, whilst it is appropriate that leave be granted to argue the correctness of Paino, we reject the appellant's argument that it is plainly wrong.
The appellant submitted alternatively that Paino was no longer good law given the introduction of the Civil Procedure Act 2005 (NSW), ss 56-58. Section 56 provides relevantly that the overriding purpose of the Act and the Rules is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. Those provisions impose an obligation on the court. Section 58 provides that, in deciding whether to make an order for the management of proceedings, "the court must seek to act in accordance with the dictates of justice". One of the matters to which the court is required to have regard in determining what are the dictates of justice in a particular case is "the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction": s 58(2)(vi).
Sections 56-58 make plain and more prescriptive what was always the case, namely that the processes of the court are to be utilised for proper purposes and in a way that is efficient, cost effective and in accordance with the dictates of justice. Section 58(2)(vi) makes it explicit that the dictates of justice require consideration of the position of both parties. By their terms, ss 56-58 apply to the rules, including UCPR, r 1.12. As Wilson J stated in FAI General Insurance and Dixon CJ explained in Klein, where a discretion is conferred on the court in general terms, the court is required to exercise that discretion so as to "prevent injustice" or in accordance with the judge's view of the justness of the case. These are the same concepts found in ss 56-58. These provisions have not altered the manner by which a general discretion is exercised by the court or altered the scope or purpose of provisions that confer general discretion on the judicial decision maker.
We reject the alternative way in which the appellant advanced this argument.
His Honour's reasons clearly demonstrate that he approached the question of the extension of time with due regard to the facts and not in a way that indicated that he considered his discretion was fettered. Rather he applied the correct test to the question whether time should be extended in accordance with the principles to which we have referred.
It follows that we reject the appellant's arguments on the first issue raised on the appeal and accordingly dismiss grounds 4-8 of the grounds of appeal.

Whether the trial judge's decision was "manifestly unreasonable"

The second basis upon which the appellant challenged the exercise of the trial judge's discretion was the contention that, regardless of the correctness of Paino, his Honour's decision was "manifestly unreasonable" such that it required appellate intervention in accordance with the principles in House v The King. This submission was confined to the last limb of the statement in House v The King at 505, namely that the exercise of the discretion against him was, on the facts, "unreasonable or plainly unjust". He also submitted that, if Paino were correct, the case was "exceptional" such that the discretion under r 1.12 ought to have been exercised in the appellant's favour.
As the primary judge pointed out, at [30], the initial failure to make the payment was the result of the appellant's own error and there was no obligation on the respondent to protect him from his own error. Further, the appellant had subsequently failed to make the payment, notwithstanding that the respondent had given him notice to rectify the default in accordance with the terms of the Deed. His Honour noted, at [31], that the situation called for prompt action on the appellant's part. The appellant had sufficient information available to him within the time permitted by the notice to rectify the default yet he failed to do so.
None of this demonstrates that the exercise of the discretion was unreasonable or plainly unjust. The appellant had an opportunity to rectify his default and failed to do so. His Honour was not prepared to find that the respondent contributed in any material way to that failure: see at [36]. There was no error in that finding. The position might have been different if cl 10 of the Deed was a penalty but, for the reasons that follow, that is not the case.

Is cl 10 a penalty provision?

On the appeal, the question as to whether or not cl 10 constituted a penalty was limited to the question whether, in the Deed, the appellant acknowledged that the amount identified as the "Judgment Debt" was a present debt. If there was such an acknowledgement, the appellant accepted that the issue as to whether cl 10 constituted a penalty did not arise. There was no such express acknowledgement. The question therefore was whether there was an implicit acknowledgement that the Judgment Debt was a present debt, as the primary judge found.
The appellant submitted that upon the proper construction of the Deed, the only present debt was the obligation to pay the sum of $300,000. He submitted that the effect of cl 10 of the Deed in providing that, upon a failure to rectify a default, "then the Judgment Debt … shall immediately become due and payable" was that the only present debt acknowledged in the Deed was the sum of $300,000. The Judgment Debt did not arise unless and until there was an unrectified default.
In support of this construction of cl 10, the appellant pointed out that there was no reference in the definition of Judgment Debt to the loans that were the subject of the appellant's alleged indebtedness to the respondent. Nor was there anything in recital O that linked the loans to the Judgment Debt.
The primary judge rejected the appellant's argument. His Honour, at [64], considered that: "… the case seems to me to be one where a creditor agrees, on certain conditions, to accept part payment of a debt in full discharge, but stipulates that if the conditions are not met, the full amount of the debt (implicitly acknowledged by the debtor to be the Judgement Debt) is payable. It is well established that the doctrine of penalties does not apply in such a situation."
His Honour's conclusion was correct. In O'Dea v Allstates leasing Systems (WA) Pty Ltd [1983] HCA 3; 152 CLR 359 at 367 Gibbs CJ explained that there is no penalty where a creditor agrees to accept payment of a specified sum in full discharge of a debt on the basis that certain conditions are met but the agreement stipulates that if the conditions are not met, the creditor is entitled to recover the whole sum: see also Wilson J at 380 and Brennan J at 386. In Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; 157 CLR 514, the plurality observed at 518 that there will be no penalty where a deed "simply grant[s] an indulgence for the payment of a debt that is due and payable".
These principles have been discussed and applied at both the trial and intermediate appellate level in various jurisdictions. The primary judge observed, at [46], that the present case was different from many cases on the point for two reasons. First, the agreement reached by the appellant and the respondent did not provide for a judgment in a higher amount which would not be enforced if certain conditions were met: compare In the matter of Prismex Technologies Pty Limited; Colin Lindsay Taggert v John Matyear [2013] NSWSC 292; Attwells v Marsden [2011] NSWSC 38; Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825. Secondly, there was no express acknowledgement by the appellant in the deed of the judgment debt as being presently owing: see for example Perpetual Trustee Co Ltd v Apsley Specialist Centre Pty Ltd [2010] QSC 232.
However, as his Honour pointed out at [46], an express acknowledgement is not necessary: Cameron v UBS AG [2000] VSCA 222. Cameron involved the attempted enforcement of a foreign judgment that was resisted by the appellant. In settlement of the enforcement proceedings, the appellant agreed to pay a lesser sum in satisfaction of the full amount of the foreign judgment claimed by the respondent. Phillips JA, with whom Winneke P and Buchanan JA agreed, considered at [20] that the case was akin to the cases described in O'Dea where the sum payable upon default was already due and owing and the opportunity to pay a lesser sum on conditions was being offered by way of an indulgence. His Honour stated, at [22]: "In my opinion, when read fairly, these terms of settlement did contain, by implication, an acknowledgement by the defendant of his liability for the $8.4 million should there be default and thus an acknowledgement 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."
Phillips JA concluded that the terms of the settlement did not constitute a penalty. In his separate reasons, Buchanan JA observed, at [28], that: "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."
In Australian Management Consultants Pty Ltd v Direct Mortgage Funding Pty Ltd [2003] VSC 202, Ashley J considered that there was no essential difference between a case such as Cameron, where there was a disputed claim to enforce a foreign judgment, and the matter before him where terms of settlement arose out of the plaintiff's disputed entitlement to a money sum or damages in connection with a commercial dispute. His Honour stated, at [52]: "In either event it is open for a defendant, in substance, to acknowledge his liability to a plaintiff by entry into terms of settlement."
His Honour's observations were cited with approval by Nettle JA in Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259 at [20].
The appellant submitted that this case was similar to Zenith Engineering Pty Ltd v Queensland Cane and Machinery Pty Ltd [2000] QCA 221. In Zenith, a disputed claim for monies was settled on terms that a sum less than the claim be paid by instalments. If an instalment was not paid on time, the creditor was entitled to enter judgment for the full amount. Time was expressed to be of the essence. Pincus JA, at [4], observed that as the claim had been settled, the amount owing under the claim was never established. There was therefore no debt, merely an amount claimed. Accordingly, his Honour considered that that the case did not fall within the cases described in O'Dea. In his Honour's view, at [9], the case was one: "… in which the obligation sought to be enforced was one to pay a much larger sum than that agreed to be due, upon default in payment of agreed instalments of the latter."
It was relevant to Pincus JA's conclusion that the additional amount payable bore no rational relationship to the loss the applicant suffered by late payment of an instalment.
The appellant submitted that the position was the same in this case, namely, the Judgment Debt was not a present debt but merely an amount claimed and that the primary judge had wrongly distinguished Zenith.
In the present case, the respondent claimed in its cross-claim amounts outstanding under the various loan agreements. The amount claimed was $1,325,090 together with interest. His Honour, at [58], calculated that with interest, the total amount claimed to be owing to the date of the Deed was a sum approximately $20,000 more than the sum stipulated in the Deed as the Judgment Debt. His Honour, at [59], considered that the Deed and the consent orders embodied a compromise of that dispute. His Honour considered that the effect of recital O was an unconditional acknowledgement by the appellant of the debt obligations under the four loans.
If his Honour was correct in having regard to the recitals, including recital O, then he correctly distinguished this case from Zenith.

Recitals in Deeds

A recital is part of a deed or agreement, usually set out as a statement or series of statements prior to the operative part of the deed or agreement. It can serve a variety of functions, including providing the factual background to the transaction and stating the parties' intentions or object in entering into the transaction: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603. In that case, Campbell JA, in a detailed review of the authorities, examined the manner in which recitals may be used for the purposes of the construction of the deed or agreement in which they appeared.
As his Honour pointed out, at [380], although not part of the operative provisions of the deed or agreement, a recital may be used as an aid to construction. There is well established authority that a recital can be used to construe a provision of a deed or agreement that is ambiguous. Relevantly for present purposes, his Honour further observed, at [380] (4), that recent authorities supported the proposition: "… that recitals can provide a means of proving background facts that are themselves legitimate aids to construction. They can be at the least an admission by the party to the deed of the truth of the matter stated, under the general law concerning evidence." (citations omitted).
In the present case, cl 10 specified that upon default in the payment of the agreed instalments, the Judgment Debt immediately became due and payable. There was, as already stated, no cross-reference between the Judgment Debt and the loans which formed the basis of the cross-claim. If there were nothing more in the Deed, there may have been an argument that this case was like Zenith.
However, there was reference in the recitals to the loans that were the subject of the cross-claim. Recital N identified the litigation between parties and what it encompassed. The cross-claim was characterised as a claim "for recovery of the amounts owing under the Loans". That was a statement of the relevant factual background to the parties' agreement contained in the operative part of the Deed. It was a statement that monies were claimed to be presently owing.
Recital O was an unconditional affirmation by the appellant of the debt obligations under the Loans and of the existence of a current and continuing obligation to repay those debts. This was an admission that the amounts claimed under the loans were present debts.
Upon its proper construction, having regard to the reference to the loans in recitals C, F, I and L, the reference in recital N to the claimed debt and the admission contained in recital O, cl 10 operated so as to make payable, upon default of the payment of the agreed lesser sum, a greater sum defined in the Deed as the Judgment Debt and specified in the Schedule to be the sum of $1,570,292.12. In other words, the recitals and in particular recital O contained an admission of a present debt.
Accordingly, cl 10 of the Deed did not constitute a penalty and we dismiss grounds 1-3 of the grounds of appeal.
It follows that the appeal should be dismissed with costs.

Amendments 22 September 2015 - Paragraph numbers amended in Headnote. 22 September 2015 - Typographical corrections at [27] and [30] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 September 2015

Solicitors: Horton Rhodes Lawyers (Appellant) Versace McKenzie Lawyers (Respondent) File Number(s): 2014/286899 Decision under appeal Court or tribunal: Supreme Court of NSW Jurisdiction: Equity Division Citation: Lachlan v HP Mercantile Pty Limited [2014] NSWSC 356 Date of Decision: 31 March 2014 Before: Darke J File Number(s): 2009/287584

[This headnote is not to be read as part of the judgment] The appellant entered into four loan agreements with Tumut River Orchard Managements Ltd. The respondent, the assignee of the rights of that company, sought to recover the amounts outstanding on the loans. Legal proceedings between the parties were settled by the entry of the parties into a Deed of Release and Assignment (the Deed). The Deed provided that the appellant was to pay the respondent $300,000 in instalments and that, should there be an unrectified default in the making of the payments, the respondent was entitled to enter judgment for $1,570.292.12, being an amount defined in the Deed as the "Judgment Debt". Consent orders were made giving effect to this agreement. The appellant defaulted in making the last instalment payment and failed to rectify the default following notice. The respondent filed a notice of motion in the Supreme Court seeking judgment for the amount of the Judgment Debt. The appellant, by notice of motion, sought an extension of time to pay the final instalment under r 1.12 of the Uniform Civil Procedure Rules 2005 (NSW). He also submitted that the finding in Paino v Hoffbauer (1988) 13 NSWLR 193, that a case would need to be "exceptional" for a court to exercise its discretion to vary a consent order based on a contract that itself could not be varied, was in error and should not be followed. Further, he contended that cl 10 of the Deed, which provided for the payment of the Judgment Debt, was unenforceable as it amounted to a penalty. Darke J refused an extension of time and held that cl 10 did not constitute a penalty. Those two findings formed the basis of the appeal. Per the Court: (1) Paino v Hofbauer does not impermissibly fetter the Court's general discretion, and the trial judge was not in error in having regard to it. [27]. House v The King [1936] HCA 40; 55 CLR 499; FAI General Insurance Company Ltd v Southern Cross Exploration NL [1988] HCA 13; 165 CLR 268; CDJ v VAJ [1988] HCA 67; 197 CLR 172; Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in liq) [2009] NSWCA 104; Klein v Domus Pty Ltd [1963] HCA 54; 109 CLR 467; Brisbane South Regional Health Authority v Taylor [1996] HCA 25; 186 CLR 541. (2) Sections 56-58 of the Civil Procedure Act 2005 (NSW) do not alter the manner in which a general discretion is to be exercised by the court, nor do they alter the scope or operation of provisions which confer a general discretion on judicial decision makers. [30]. (3) In refusing the application for an extension of time, the primary judge did not exercise his discretion in a manner that was manifestly unreasonable or plainly unjust. [34]-[36]. House v The King [1936] HCA 40; 55 CLR 499. (4) Clause 10 of the Deed was not a penalty provision as the appellant implicitly acknowledged in the Deed that the Judgment Debt was a present debt. [37]-[51]. O'Dea v Allstates Leasing Systems (WA) Pty Ltd [1983] HCA 3; 152 CLR 359; Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; 157 CLR 514; Perpetual Trustee Co Ltd v Apsley Specialist Centre Pty Ltd [2010] QSC 232; Cameron v UBS AG [2000] VSCA 222; Australian Management Consultants Pty Ltd v Direct Mortgage Funding Pty Ltd [2003] VSC 202; Calcorp (Australia) Pty Ltd v 271 Collins Pty Ltd [2010] VSCA 259. (5) The primary judge was correct in using recitals as an aid in construction of the deed to determine that the debt was a present debt. [52]-[59]. Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407.

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