LUONG DINH LUU v SOVEREIGN DEVELOPMENTS PTY LTD & 2 ORS

LEGISLATION CITED: Conveyancing Act 1919 ss.55 & 55(2A).

Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Ashdown v Kirk [1999] 2 Qd R 1 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Brien v Dwyer (1978) 141 CLR 378 Brien v Dwyer [1976] 2 NSWLR 420 CASES CITED: Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co Ltd [1915] AC 79 Freedom v A H R Constructions Pty Ltd [1987] 1 Qd R 59 Howe v Smith (1884) 27 Ch D 89 Mehmet v Benson (1963) 81 WN (Pt 1) (NSW) 188 Mehmet v Benson (1965) 113 CLR 295 PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, 80 ALJR 219 Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367

Appellant - Luong Dinh Luu PARTIES: First Respondent - Sovereign Developments Pty Ltd Second Respondent - Luutin Pty Ltd (In Liquidation) Third Respondent - Ross Anthony Lloyd Martin

COUNSEL: Appellant - D. Allen First Respondent - C.D. Freeman

SOLICITORS: Appellant - J Kekatos Lawyers First Respondent - Falvey & Associates

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40579/2005

HANDLEY JA McCOLL JA BRYSON JA

10 MARCH 2006 LUONG DINH LUU v SOVEREIGN DEVELOPMENTS PTY LTD & 2 ORS Judgment 1 HANDLEY JA: I agree with Bryson JA. 2 McCOLL JA: I agree with Bryson JA. 3 BRYSON JA: This appeal brings under consideration interaction between the law which avoids contractual penalties and the law relating to deposits in contracts for the sale of land. 4 Sovereign Developments Pty Ltd the first respondent as vendor made a contract for the sale of land in writing on 19 December 2003 with Luutin Pty Ltd the second respondent as purchaser. The Contract was in the form of the 2000 edition of the standard form, with special conditions and many attached documents. Obligations of the purchaser under the Contract were guaranteed by the appellant Mr Luong Dinh Luu and by the third respondent Mr Ross Anthony Lloyd Martin. Luutin Pty Ltd failed to complete the Contract and is now in liquidation, and Mr Martin is a bankrupt; only Mr Luu has continued with the appeal, and the vendor is the only respondent which appeared. The address of the land sold was stated in the Contract to be Lot 26 Elkhorn Grove Estate, Port Macquarie, and the land comprised two parcels, Lot 26 DP 878913 said to contain 7.275 hectares and Lot 2 DP 1019665 said to contain 5467 sq m. 5 Provisions on the first page of the Contract relating to price were as follows: Price in words: SIX MILLION SIX HUNDRED THOUSAND DOLLARS Price $6,600,000.00 Deposit $ 330,000.00 65,000.00 (10% of the price, unless otherwise stated) Balance $ 6,270,000.00 6,535,000.00

These provisions, including the two amounts struck out, were first typewritten, and the figures in italics were handwritten. As will be seen, as first typed the Contract showed the deposit as $330,000.00 which is 5% (and not 10%) of the price, and this was altered by hand to $65,000.00 which is a little less than 1% of the price; and the balance was altered correspondingly. The Contract provided for the vendor's agent L J Hooker Port Macquarie to be the deposit holder. 6 The Contract provided that the completion date was 12 February 2004. The purchaser did not complete the purchase on or by 12 February 2004, and the vendor's solicitors served Notice to Complete the following day, 13 February 2004, requiring completion by 2 p.m. on Tuesday 2 March 2004; this made time of the essence. Again the purchase was not completed, and on 5 March 2004 the parties including the guarantors entered into a Deed of Variation which provided that the completion date was then Friday 19 March 2004, time of the essence; the Notice to Complete was withdrawn and the purchaser was to pay the vendor $68,163.84 explained as interest on the original contract price from 13 February 2004 to 19 March 2004. The purchaser was also to pay the vendor's costs and disbursements and was to authorise the agent to immediately release to the vendor what the Deed of Variation described as "the SIXTY FIVE THOUSAND DOLLARS ($65,000.00) deposit held by L J Hooker Port Macquarie." The contract price was increased to $6,700,000.00. 7 Again the Contract was not completed and the vendor, the purchaser and the guarantors entered into a Second Deed of Variation on 26 March 2004 which provided that the completion date was then Friday 2 April 2004, time of the essence, the purchaser was to pay the vendor $26,983.56 interest, and was to pay legal costs, and the contract price was deemed to have increased to $6,810,000.00. Apart from the provision releasing the deposit to the vendor, neither Deeds of Variation dealt with the deposit. 8 The purchaser did not complete the purchase on or by 2 April 2004 and after some correspondence and brief consideration of proposals the vendor's solicitors served Notice of Termination of Contract on 8 April 2004. 9 The vendor sued the purchaser and the guarantors in the District Court at Sydney by Statement of Liquidated Claim ("SC") issued on 30 June 2004. The claim was to the effect that under the Contract and the Deeds of Variation, and particularly by reason of Special Condition 5 and Printed Clause 9 of the Contract, "... the whole of the 10% deposit became due and payable by the first defendant to the plaintiff" (SC para 13). The calculation of the amount claimed was based on 10% of the contract price as secondly varied that is $681,000.00, less $65,000.00, so that the vendor claimed $616,000.00. The vendor did not claim damages; that is to say, there is no claim that loss has been incurred upon a resale of the land or that its value has fallen below the contract price, so no evidence deals with whether the value of the land is above or below the contract price. The purchaser did not claim relief against forfeiture of its deposit, under s.55(2A) of the Conveyancing Act 1919 or on any other basis. The issues relate to enforceability under the common law of contract and not to equitable rules about penalties, which may relieve against forfeiture of part payments of purchase money which exceed the deposit. 10 The proceedings were heard in the District Court by her Honour Judge Truss who gave reserved judgment on 10 December 2004 and decided the case upon the following issues: (a) Is special condition 5 void for uncertainty? (b) If not, does it constitute a penalty and therefore become unenforceable? 11 The learned Trial Judge decided that Special Condition 5 was not void for uncertainty, and did not constitute a penalty so as to be unenforceable, and gave judgment for the plaintiff for $616,000.00, with interest and with costs. All defendants appealed, Luutin Pty Ltd and Mr Martin did not continue the appeal and after amendment they are now respondents, and Mr Luu became the only appellant by an Amended Notice of Appeal filed on 15 August 2005. The grounds in the Amended Notice of Appeal are: 1. Her Honour erred in holding that the First Respondent was entitled to payment of $681,000.00 as a deposit payable under the contract for the sale of land dated 19 December 2003 between the First Respondent and Second Respondent when in fact the true deposit payable was $65,000. 2. Her Honour erred in failing to [find] that any entitlement on [the] part of the First Respondent to recover from the Appellant and the Second and Third Respondents the sum of $616,000 when the amount … was payable as a penalty and as such was unenforceable.

The first ground of appeal was not clearly expressed and should be understood with the arguments presented on the hearing of the appeal. 12 Before addressing these arguments I set out some of the provisions of the Contract, with observations on them. I have already set out the passage on the first page of the Contract relating to the price and deposit in para [5] of this judgment. Printed Clause 2 includes: 2 Deposit and other payments before completion 2.1 The purchaser must pay the deposit to the depositholder as stakeholder. 2.2 Normally , the purchaser must pay the deposit on the making of this contract, and this time is essential. 2.3 If this contract requires the purchaser to pay any of the deposit by a later time, that time is also essential.

13 Special Condition 5: 5. In the event that the Purchaser pays less than ten percent (10%) of the purchase price as deposit then if the Purchaser commits a default hereunder the whole of the 10% deposit shall become due and payable notwithstanding that this Contract is not completed. This clause shall not merge on completion and the Vendor shall be entitled to sue for recovery of so much of the 10% deposit that remains outstanding as a debt due by the Purchaser to the Vendor. 14 There are anomalies in Special Condition 5. It is difficult to see why Special Condition 5 refers to merger on completion, because if completion took place the whole purchase price would be paid. Special Condition 5 refers to the amount payable if the purchaser commits a default as "the whole of the 10% deposit". The second sentence also refers to suing for the recovery of "so much of the 10% deposit that remains outstanding … ". Special Condition 5 does not expressly provide to the effect that the deposit shall be 10% of the purchase price, but at two places it uses language which assumes that the deposit is 10% of the purchase price. This assumption is inconsistent with the unmistakeably clear provision, on the first page of the Contract, that the deposit is $65,000.00. If the references to a deposit are treated as a misdescription, the inconsistency of Special Condition 5 with the provision on the first page is resolved; and this is a readily available and in my view the correct resolution of this apparent defect in Special Condition 5 - compare Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-110 Gibbs J. When these provisions of the documents are read together there is in my opinion no doubt that the words used by the parties mean that the deposit was $65,000.00; this is stated in plain language and is not to be overcome by implication drawn from language in Special Condition 5 which appears to assume that in some way the deposit is 10% of the purchase price. There are other signs of anomaly; before the handwritten alteration, the figure shown as the deposit was 5%, not 10% of the figure shown as the price. If there were any ambiguity, the meaning conveyed by the handwritten alteration would be given primacy.

15 The sum of $65,000.00 paid on exchange of contracts is not only designated by the parties as the deposit for the purpose of their Contract in a completely clear manner; it has the character of a deposit in that it is earnest money paid at the time of making the Contract; to be altogether literal, it is the deposit because it was deposited. The same cannot be said of any money payable on the happening of some later event as provided for by Special Condition 5. The Trial Judge's disposition of the question of penalty was based on treating the sum payable under Special Condition 5 as itself a deposit. In my opinion that sum is not a deposit. Only a deposit falls within the exemption from penalties law, not any other payment of 10% of the purchase price. Her Honour applied 10% to the purchase price as increased by the second variation. I am unable to see Her Honour's reason for doing this, but this was not the subject of challenge or appeal. 16 Although I do not regard this part on the argument presented as altogether clear, in my understanding the first ground of appeal was intended to raise a contention that as the true deposit is $65,000.00, Special Condition 5 is void for uncertainty and cannot be enforced. The appellant's counsel contended that it is not possible to give meaning to Special Condition 5 and that it can have no operation and hence that it did not give rise to the obligation to pay money which the vendor claimed to sue on.

17 The Trial Judge took the approach which it is appropriate to adopt in the construction of a commercial document notwithstanding lack of clarity in expression, and rejected the submission that Special Condition 5 was void for uncertainty. The Trial Judge said: (Red 25) "… I consider that it should be read as meaning that in the event of payment of a deposit of less than ten per cent of the purchase price, in the event of default, the vendor is entitled to recover, as a debt, an amount representing ten per cent of the contract price, … less the deposit actually paid." In my opinion this reading is correct. Special Condition 5 requires the purchaser to pay 10% of the purchase price if the purchaser commits a default under the Contract. 18 Special Condition 5 is also lacking in clarity in that it does not state clearly to whom the money referred to is to be paid if it becomes due and payable before completion. It may be intended that, as with other provisions relating to the deposit, it should be paid to the agent. The second sentence could be read as dealing only with an entitlement to sue after the Contract is completed, and as not giving a right to sue in the events which have happened, in which the Contract was not completed. On a reasonable reading however, the two references to completion do not prevent Special Condition 5 from being understood as meaning that, whatever remedies there may be in other situations, the vendor has a right to sue for the amount referred to after the Contract has been terminated. Special Condition 5 does not indicate clearly that when according to its terms "the whole of the 10% deposit" becomes due and payable any smaller amount earlier paid as deposit is, or is not to be deducted when establishing how much becomes due and payable. On a reasonable reading, it should be implied that the amount earlier paid is to be deducted. 19 I would not uphold the first ground of appeal. 20 I turn to the second ground of appeal relating to penalty. Special Condition 5 turns on the concept of the purchaser committing a default, and it is necessary to consider what that means. The contractual obligations imposed by the Contract on the purchaser are few, and they vary in importance. The first is the obligation in Printed Clause 2 to pay the deposit to the vendor's agent as stakeholder; this was complied with. Next is the obligation in Printed Clause 4 to serve the form of transfer at least 14 days before the completion date. Obligations of the purchaser relating to completion are in Printed Clauses 15 and 16: 15 Completion date The parties must complete by the completion date and, if they do not, a party can serve a notice to complete if that party is otherwise entitled to do so. 16 Completion … s Purchaser 16.7 On completion the purchaser must pay to the vendor, by cash (up to $2,000) or settlement cheque , the price (less any deposit paid) and any other amount payable by the purchaser under this contract (less any amount payable by the vendor to the purchaser under this contract). 16.8 … 16.10 On completion the deposit belongs to the vendor.

There are also obligations to make adjustments on completion in Printed Clause 14. 21 Printed Clause 9, which is significantly headed "Purchaser's default", provides among other things: 9 Purchaser's default If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can - 9.1 … 9.3 sue the purchaser either - 9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination , to recover - s the deficiency on resale (with credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this clause); and s the reasonable costs and expenses arising out of the purchaser's non-compliance with this contract or the notice and of resale and any attempted resale; or 9.3.2 to recover damages for breach of contract. 22 Each party makes a contractual promise to complete by the completion date, and is in breach of the contractual promise if the party fails to do so; yet the Contract, and each party's entitlement to claim performance of the Contract, continue thereafter, but may be ended by notice to complete followed by termination. 23 The word "default" used in Special Condition 5 "commits a default" appears at several other places in the Contract; I have mentioned the heading of Printed Clause 9. The word is also used in Special Condition 1(b) (party in default if declared bankrupt etc.), in Special Condition 7(a) (which refers to interest where the Contract is not completed "… for any reason other than default or delay by the Vendors …"), in Special Condition 8(b) (which relates to the operation of the guarantee "in the event that the Purchaser defaults in its obligations under this Contract …"); and it may appear elsewhere. The word "default" is an apt word to refer to any failure to comply with a contractual obligation, and there is nothing in Special Condition 5, or in the use made of the word "default" in the context of Special Condition 5 or elsewhere, to indicate that "default" is limited to more serious defaults, such as failure to comply with the Contract in an essential respect which gives rise to the right of the vendor to terminate under Printed Clause 9. As Printed Clause 9 shows, where the Contract refers to failure to comply in an essential respect, appropriate language is used. There is no corresponding limitation in Special Condition 5, and in the ordinary meaning of the words used in Special Condition 5 the provision about money becoming due and payable comes into effect if the purchaser commits any default under the contract. That is to say, a wide range of relatively trivial and relatively serious events can precipitate the obligation, from the altogether unimportant such as being a day late in serving the form of transfer document, and through a range of matters some of which are also unimportant and some of which are very serious, such as failing to serve a transfer at all, failing to complete on a contractual date without that time having been made of the essence, and failing to complete when time has been made of the essence. No matter how trivial or how serious, all produce the same obligation to pay the balance to 10% of the purchase price.

24 Where parties make an agreement for a sale which is to be completed at some time in the future it is unremarkable and only to be expected that the vendor will require the purchaser to pay some part of the purchase money straight away so as to show that the purchaser is in earnest in committing himself to pay the rest, on the understanding that the purchaser will not get his earnest money back if he does not complete the sale. For contracts of sale of land it has long been customary practice and established law that the purchaser pays a deposit on account of the purchase money when the contract of sale in writing is made, and cannot recover that deposit if he later fails to complete the bargain and pay the rest; whether or not the vendor's losses are actually more or less than the amount of the deposit. Notwithstanding the apparent inconsistency the invalidity of contractual penalties does not apply to contractual provisions for forfeiture of reasonable deposits in sales of land. In New South Wales it has long been usual to require a deposit of 10% of the purchase money, and this practice has not encountered challenge; on the other hand provisions relating to forfeiture of purchase moneys other than a reasonable deposit should be regarded as open to challenge. The assumption that provisions for forfeiture of deposits of reasonable amount are effective underlies statutory provisions for relief against their forfeiture; see s.55 of the Conveyancing Act 1919. The exception from the law relating to penalties relates and relates only to deposits, that is, to payments which truly have the character of earnest money paid on or in relation to entering into the Contract, and although provisions of contracts almost always establish what the deposit is, it is not open to parties to avoid the operation of penalties law by designating a payment or an obligation as a deposit if it does not otherwise have that character. 25 This following passage from Mehmet v Benson (1963) 81 WN (Pt 1) (NSW) 188 at 191 (Jacobs J) shows the view which has long been held and acted on in New South Wales: In my view a provision for forfeiture of instalments under a contract for the sale of land, even when possession has been given under the contract, is in the nature of a penalty and the person penalized will be entitled to relief in equity unless there are contrary circumstances which would make it inequitable to grant such relief even upon terms.

In the present case I do not think there are any circumstances which would make relief from the forfeiture inequitable, because I think that any unfairness, which might otherwise be caused to the defendant, can be met by the imposition of suitable terms. Before dealing with these terms, I should state my conclusion that the initial deposit in this case of £3,000 goes beyond a deposit as an earnest of the bargain between the parties and must be regarded to the extent to which it exceeds a normal deposit, as an instalment of purchase money.

In my view a normal deposit is ten per cent. I realize that upon one view I should have expert evidence of what usually is the course of business in regard to the amount of deposits, but it seems to me that to require such evidence, when so many contracts are observed in these courts and generally in the community, with a deposit of ten per cent, is to substitute rigidity for reality in one's approach to the matter.

The decision of Jacobs J. was reversed in the High Court of Australia: (1965) 113 CLR 295; but not on this ground. 26 Howe v Smith (1884) 27 Ch D 89 shows that the view that provisions for forfeiture of deposits are effective has been treated as the law for a long time; see discussion by Cotton LJ at 94-95 and by Fry LJ at 100-102, where there are references to Ancient and Medieval sources as well as to the law of his Lordship's time. On the function of deposit as an earnest of performance see Brien v Dwyer (1978) 141 CLR 378 at 385 and 386 (Barwick CJ), 406 (Aickin J.). See too the same case in the Court of Appeal [1976] 2 NSWLR 420 at 424-425 (Hutley JA) referring to earlier expositions. Australian authorities relating to the forfeiture of deposits, and the distinction from provisions which provide for forfeiture of part payments of purchase money which are not deposits, were collected by McPherson J. in Freedom v A H R Constructions Pty Ltd [1987] 1 Qd R 59 at 64-66. 27 In Ashdown v Kirk [1999] 2 Qd R 1 the Court of Appeal of Queensland enforced a provision in a contract for the sale of land which provided for a split deposit to be paid by two instalments and also provided that if the vendor terminated the contract "... the vendor may recover from the Purchaser as a liquidated debt the deposit or any part of it which has not been paid by the Purchaser." At page 8 McPherson JA said: A deposit is considered an "earnest" of the bargain or its performance ( Brien v. Dwyer (1978) 141 C.L.R. 378, 385) that is designed to demonstrate the sincerity of the contracting party who is to pay it. For that reason, it is ordinarily beyond the reach of equitable relief against penalties or forfeiture, at least if it is not excessive or unconscionable in amount, of which in Queensland the equivalent of 10 per cent of the purchase moneys is ordinarily considered the upper limit: Freedom v. A.H.R. Constructions Pty Ltd [1987] 1 Qd.R. 59. 28 This is not a case where the deposit was payable by instalments, as in Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367 and Ashdown v Kirk.

29 In Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, 80 ALJR 219 at paras [10]-[12], p222 the High Court of Australia stated, on the law of penalties: [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 [1915] AC 79 at 86-85: 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 a 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 a 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" Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 342 per Lord Watson.

[12] Neither side in the appeal contested the foregoing statement by Lord Dunedin of the principles governing the identification, proof and consequences of penalties in contractual stipulations. The formulation has endured for 90 years. It has been applied countless times in this and other courts eg O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 368, 378, 399, 400; Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 520; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190; Stern v McArthur (1988) 165 CLR 489 at 540 and Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 at 139, 143, 145. In these circumstances, the present appeal afforded no occasion for a general reconsideration of Lord Dunedin's tests to determine whether any particular feature of Australian conditions, any change in the nature of penalties or any element in the contemporary market-place (See eg AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190) suggests the need for a new formulation. It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where reconsideration or reformulation is in issue ( O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 400; CF AT 392; AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564 at 566, 574). 30 In my respectful view this passage is not to be understood as a departure from authorities other than Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co Ltd [1915] AC 79, or as derogating from the authority of and learning in the cases to which their Honours referred, particularly those in the footnotes to their Honours' para [12]. In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Mason and Wilson JJ made an extensive review of the doctrine of penalties, including the history of its development and the interaction of Law and Equity at pp 186-194. Lord Dunedin's observations were spoken of by their Honours as the starting point; they were not treated as exhaustive statements of the law. It is not to be expected that questions will often present a clear dichotomy between one side and the other side of Lord Dunedin's para [2]. It must be a very rare occurrence that a contract stipulates that a payment of money is in terrorem of an offending party, and the essence of a penalty will usually be present when it can be understood that a provision requiring a payment exists to coerce a party into compliance and not to redress a breach; a literal stipulation that the payment is in terrorem is not required. 31 A difficulty of applying Lord Dunedin's para [2] to the present facts is the absence of any relation between what Special Condition 5 requires and damages payable to the vendor. The requirement under Special Condition 5 that on default the amount which the Contract required to be paid on exchange is to be augmented up to 10% has no discernible connection with damages; it brings about an increase in the part of the purchase price which the purchaser is obliged to pay before completion, but this does not recompense the vendor in any way for the default, and when and if the Contract is completed the vendor receives the contract price and nothing in respect of the default. As well as having no connection with damages, the amount has no discernible connection with any pre-estimate of damage flowing from the default; there is nothing more than a proportion of the purchase price, not even a gesture towards estimating the damage which a default would cause. Then too (echoing Lord Dunedin's para [4(c)]) the same sum is payable on the occurrence of defaults which can be of several different kinds, some of which may occasion only trifling damage, while failure to complete may well (but will not necessarily) occasion serious damage. Special Condition 5 operates quite differently to a provision requiring payment of damages or liquidated damages; its operation is to the effect that if there is a default the purchaser has to increase the part of the purchase price which is subject to the risks to which his deposit is subject. This lacks any connection with damages at all, and falls to be tested as a penalty without resort to the dichotomy in Lord Dunedin's para [2]. Penalties are not encountered exclusively in appositions with liquidated damages. 32 The question whether the provisions of an agreement impose a penalty is determined as a matter of substance rather than of mere form: see Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 520 (Deane J.)

33 Counsel for the respondent commented on what he said was the absence of evidence which he said the appellant had the onus of giving on at least two matters. One comment was that the appellant and Mr Martin did not give evidence to the effect that they understood that the deposit was 1% of the sale price; nor were witnesses called for the first respondent asked about this. The Trial Judge noted that this was so. However in my opinion this was not a subject upon which evidence should or could have been given. The terms of the parties' written Contract establish what the deposit was, and the understanding of the parties was relevant only insofar as it was expressed in their Contract. Counsel also observed to the effect that the onus was on the appellant of adducing evidence to show that the first respondent did not make a genuine pre-estimate of its damages. This too is not in my opinion a subject on which evidence was admissible; it should be decided upon the indications (such as they are) in the parties' Contract. It would be an impossible test that the appellant should have the burden of showing what estimate of damage the first respondent made, and of showing that it was not a genuine pre-estimate. The question is to be decided by reference to the circumstances which existed at a time when the Contract was made; PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615. 34 The references in Special Condition 5 to the deposit in the context of the obligation to pay up to 10% of the purchase price on default are confusing elements which do not, in my judgment, affect the essential character of the obligation as an additional payment which the purchaser must make if the purchaser is in any way in default. Where the additional payment was not made and, as in this case, the Contract has been terminated and the vendor sues for it as a debt, its character as a penalty, quite unrelated to any damage or loss incurred by the vendor, is in my opinion quite clear. If an attempt is made to consider it as a pre-estimate of damage, it is obvious that it is a grossly excessive amount in relation to some of the defaults upon which it may become payable, such as late delivery of the draft transfer, while for others, such as delay in completion or failure to complete by an essential time, the lack of any relation between a percentage of the purchase price and a pre-estimate of damage for breach demonstrates, to my mind, the absence of any justification. 35 Counsel for the first respondent referred extensively to the application by the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd of the principles which their Honours there stated. The facts of that case did not relate to payment of any money penalty, but to the provisions of an option taken by the vendor of a service station for its repurchase on breach of a condition, and for the determination of the price of the repurchase so as to exclude goodwill from the price on repurchase. The facts are so remote from the present facts that their Honours' detailed treatment of them, and consideration of the argument of proportionality which was presented in that case, do not in my view throw any light on the law which the Court of Appeal should now apply. 36 In my opinion the Court of Appeal should uphold the second Ground of Appeal, and should order: 1. Appeal allowed with costs. 2. Set aside orders 1, 2 and 3 of the orders of Judge Truss of 10 December 2004. 3. In lieu thereof give judgment for the defendants with costs.

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