Mantoufeh v Enterprise Finance Solutions Pty Ltd

JUDGMENT 1 HIS HONOUR: The plaintiff, Mr Mantoufeh, appeals the judgment of the Local Court, his Honour Magistrate Marsden, issued on 17 November 2008 in favour of the defendant, Enterprise Finance Solutions Pty Ltd ("Enterprise"). Mr Mantoufeh alleges that the judgment, or more correctly the reasons for judgment, is erroneous in point of law: s 73 of the Local Courts Act 1982. 2 The alleged error of the learned magistrate is said to be that judgment issued in relation to a suit for a "debt", arising from a contract, in circumstances where the amount owing, if it be owing, is for damages and not debt. The distinction between debt and damages is one derived from the history of the common law. Mr Mantoufeh submits that Enterprise was required to sue for damages and as a consequence of its failure so to do was not entitled to judgment before the Local Court. He seeks that the judgment be set aside. 3 The facts are in very short compass. Mr Mantoufeh contracted with Enterprise, by which contract Enterprise provided Mr Mantoufeh with equipment under a lease or hiring contract and for which Mr Mantoufeh was to pay a hiring fee. The fee was described as "rent" and the contract document was referred to as the "Rental Plan". Mr Mantoufeh defaulted on payments, which, expressly, were described as "fundamental and essential terms". Enterprise elected to rescind the contract and sued for amounts said to be owing under the contract. Before the learned Magistrate there were issues as to the authenticity of the signatures on the contract, which issues do not concern this Court. 4 The relevant provisions of the contract were in the following terms: " 9. Essential Terms 9.1 The following terms are fundamental and essential terms: (a) that you pay all Rental Instalments on time (clause 3); (b) that you insure the Equipment (clause 7); (c) that you do not cease or threaten to cease carrying on business; (d) that you or the Guarantor do not become insolvent; (e) that you do not attempt to sell, dispose of or encumber the Equipment in any way (clause 6.1(b)); (f) each of the customer warranties contained in clauses 4(a) and (b) are and remain correct; and (g) that any Guarantor executes this Rental Plan effectively and is not discharged (clause 31). … 10. Default 10.1 An event of default occurs if you do not perform on time any of your obligations under these terms and conditions, other than any of the essential terms referred to in clause 9.1, and fail to rectify such failure to perform within seven (7) Business Days of written notice from us requesting its remedy. 11. Termination 11.1 We may give you notice terminating this Rental Plan if there is a breach of any essential term specified in clause 9.1, or if you commit an event of default in accordance with clause 10.1. 11.2 If we terminate this Rental Plan under clause 11.1, you must immediately: (a) return the Equipment to us at a place specified by us failing which you will pay to us the Early Termination Value; (b) pay to us all moneys then payable under this Rental Plan; (c) pay to us as liquidated damages the present value of future Rental Instalments (excluding any part of such instalments which relates to maintenance and/or service charges paid and accrued) payable for the balance of the Term, calculated by applying the Discount Rate to each such instalment plus any applicable GST (to the extent not already included); (d) pay to us any early repayment or break costs incurred by us to a third party in pre-paying any funding arrangements in connection with us purchasing the Equipment and renting the Equipment to you and the early termination of this Rental Plan; and (e) pay to us on demand the amount of any loss reasonably incurred by us in terminating the Rental Plan. 11.3 Following any termination of this Rental Plan we must take all reasonable steps to mitigate our loss (for example, by offering the Equipment for resale or by attempting to re-rent the Equipment). Provided you have paid the moneys due to us under clause 11.2 we will refund to you any amount mitigated (after deducting all costs and expenses we incur in mitigating our loss). 11.4 Any termination of this Rental Plan or any payment by you does not affect any other rights we have under these terms and conditions." 5 An analysis of the reasons for judgment of the learned magistrate reveals that the issue of the distinction between "debt" and "damages" was a matter raised before the learned magistrate. It was submitted to the Local Court that the distinction was of significance because, if the amount owing be a debt and not damages, Mr Mantoufeh could not complain of a failure to mitigate: State Bank of South Australia v Macintosh (Supreme Court of New South Wales, Young J, 31 May 1995, unreported). That submission was repeated before this Court. However, there was no issue between the parties as to the manner in which the amount owing was to be calculated. 6 Further, before this Court, the plaintiff submitted that the significance of the differentiation also affected any submission that may otherwise be able to be made that the damages were, in truth, a penalty. In fact, no evidence was adduced before the learned magistrate on the issue of mitigation or relevant to the amount owing being a penalty and not damages. Instead, Mr Mantoufeh relied on the distinction between debt and damages, submitted that Enterprise had sued in debt (and not damages), the amount owing was not a debt and the proceeding should be dismissed. 7 The learned magistrate, referring to Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (in Liq) [1936] HCA 6; (1936) 54 CLR 361, held that there were two requirements in an action to recover a debt, namely, that the contract must impose an obligation to pay a certain or ascertainable sum of money; and, the right to payment of the sum must have accrued, and held that each of those requirements had been met. Further, the learned magistrate held that consideration for the payment must have already been given and that too had been satisfied. The learned magistrate held that the amount owing was a debt and was payable. Debt or Damages 8 With great respect to the learned magistrate, the foregoing definition of "debt", relied upon by his Honour, pays insufficient attention to the distinction between primary and secondary obligations arising in contract. It also pays insufficient attention to the express terms of the contract, set out above. The foregoing is not intended to be a criticism of the magistrate. The distinction is, to say the least, arcane and/or esoteric. Its origins derive from the distinction between dependent and independent obligations and the history of assumpsit and the writ of debt. 9 This judgment is not an appropriate occasion for a treatise on the history of modern contract law. But some history (albeit somewhat misleadingly simplistic) is necessary. The use of the term "contract", in the more modern sense (i.e. after the 1600s), occurred only after the replacement of the older actions based on covenants and contracts (in its previously understood meaning). Before 1200, the Royal Writ of praecipe was used to enforce covenants (usually relating to land) and required a document under seal. At about the same time the Writ of Debt was utilised by the courts to order the payment of the sum of money that was owed and had been withheld. Debt, in that sense, was more in the nature of a property right than a breach of promise. 10 Where proceedings are for debt, the plaintiff does not need to prove that payment has not been made. It is for the defendant to prove that payment has been made and the debt has been fully satisfied. Historically breach of the covenant was not a defence to the writ, but was an independent wrong for which different proceedings arose. It is because of the difficulties with the law relating to both Covenant and Debt, that the law developed indebitatus assumpsit. The last mentioned would bar an action in debt on the same contract: Slade v Morley (1597-1602) B & M 420 and see generally J. W. Carter, Breach of Contract, 2nd ed (1991) The Law Book Company Limited, particularly at [122]. 11 The modern law of contract has developed to the point where the modern presumption is that promises and obligations in a contract are dependent. Payment is dependent upon performance and vice versa. Thus, in a modern contract, a seller of goods could not sue for the purchase price without the delivery of goods (or, depending upon the contractual terms, an attempt at, or readiness and willingness to deliver). Nevertheless, there are still circumstances where obligations are independent. Often this arises in formal deeds. But even with respect to deeds, the modern presumption is that promises are dependent, not independent. The difference between dependent and independent obligations was expressed (albeit in relation to a deed) in the following terms: "Where each of two parties to an indenture makes a covenant with the other, and the two covenants are not in terms connected, the question may arise whether they are independent (in the sense that each party is bound to perform his covenant irrespective of whether the other performs his) or dependent (in the sense that one party is not bound to perform, or to continue to perform, his covenant unless the other has performed, or does perform, his, previously or concurrently or subsequently).... An implication of intention that the performance of one covenant shall be conditional on the performance of the other arises whether nature of the covenants is such that any breach of either of them would necessarily be regarded by reasonable men as absolving the other party from performing his covenant. But the question is in every case one of intention." ( Newcombe v Newcombe (1934) 34 SR (NSW) 446, per Sir Frederick Jordan CJ, Stephen and Maxwell JJ concurring.) 12 The foregoing, as earlier stated, is in the context of a deed and, therefore, does not, as forcefully, rely on the ordinary contractual presumption of modern times, namely, that a simple contract presumes mutual obligations, rather than independent obligations: see, inter alia, Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32; Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435. Notwithstanding the qualification and distinction between deeds and contracts, the passage of Jordan CJ stands as one of the better expositions of the discriminating features of dependent and independent obligations. 13 The learned magistrate, as earlier stated, referred to the judgment of the High Court in Westralian Farmers, supra. Because Enterprise rescinded the contract, the starting point for the effect of such a discharge is the judgment of the High Court in McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457 in which, in a classic passage, the Court said: "When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach." ( McDonald , supra, per Dixon J, at 476-477.) 14 While care must be taken with the use of the term "rescinded" (or other grammatical forms of the word) (see Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22; (2008) 236 CLR 342 at [2], per Gleeson CJ, Gummow, Heydon, Crennan and Kiefel JJ.), and the reference in the foregoing to damages does not apply to discharge on account of frustration, the foregoing is now recognised as the classical statement on the rights of a party upon rescission. While some academic debate has occurred as to the true delineation between accrued rights and other rights, there can be no doubt that damages are a secondary obligation and "survive" the discharge of the contract. 15 The rationale for the discharge of rights and obligations was best explained, conceptually, by Lord Diplock in Moschi v Lep Air Services Ltd; Lep Air Services Ltd v Rolloswin [1973] A.C. 331. Moschi was a "guarantee" case and, therefore, historically, sounded in damages, not debt (even where it was a debt that was guaranteed): see Moschi at 352.2 (per Lord Simon of Glaesdale) and at 347-348 (per Lord Diplock). The conceptual explanation of Lord Diplock must commence with the passage, perhaps trite, but classically stated: "The law of contract is part of the law of obligations. The English law of obligations is about their sources and the remedies which the court can grant to the obligee for a failure by the obligor to perform his obligation voluntarily. Obligations which are performed voluntarily require no intervention by a court of law. They do not give rise to any cause of action.

(i) Punctual payment is expressly described as a "fundamental and essential term" (otherwise its ordinary use, see, Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57 and, in the Court of Appeal, Gardiner v Agricultural And Rural Finance Pty Ltd [2007] NSWCA 235); (ii) Default, in a non-essential term or obligation, if not rectified within seven business days, was an event of default; (iii) Breach of any essential term (including failure to pay rental instalments on time) permitted Enterprise to rescind the contract; (iv) Rescission, in accordance with the foregoing, required Mr Mantoufeh to return the equipment that had been hired, to pay all money then payable under the rental plan and pay, " as liquidated damages ", the present value of future rental instalments, and other obligations; (v) Enterprise was required to take all reasonable steps to mitigate its loss. 18 As earlier stated, the calculation of the amount payable is not in dispute in these proceedings (and probably, because of the nature of the appeal, could not be) and was not in dispute before the learned magistrate. The phrase "as liquidated damages" is the description given, to the amount of the present value of payments due into the future by the parties in the contract. Past due payments, on the other hand, were not executory, were due and payable and were an accrued right under the contract. It is difficult, in those circumstances, to categorise the payment for which Enterprise sued in the Local Court as anything other than "liquidated damages". The parties are capable of agreeing to a proper categorisation of the payment under the contract, which gives rise to that payment. 19 Special rules are sometimes said to arise in relation to hiring contracts for a specified period, because the provision of the equipment is consideration for the entire hiring fee that is then payable by instalments. It is unnecessary to examine this issue in any detail, but the schedule to the Rental Plan is consistent with such an approach. 20 In any event, the agreement expressly confers on the payment the category of "liquidated damages", as the amount payable as compensation for the non-payment of amounts due into the future and payable as a result of the termination. Leaving aside any special rule relating to contracts of hire, such a payment is not an accrued right that had arisen prior to the termination. The proper characterisation of the amount owing under clause 11.2 of the Rental Plan (when referring to the present value of future instalments) is that the amount is damages and not debt. Pleading before the Local Court 21 Having arrived at that conclusion, it does not necessarily follow that Mr Mantoufeh must succeed. The pleading before the Local Court is a Statement of Claim governed by the terms of the Uniform Civil Procedure Rules 2005 ("UCPR"). The primary prayer for relief is in the following terms: "The Plaintiff sues the Defendants for monies owing for [or] under a Rental Plan in the amount of $23,928.78." Nothing in the foregoing suggests that the claim is for a debt, and not damages arising by the express agreement of the parties, the source of which is the contract referred to as the Rental Plan. 22 Mr Mantoufeh relies on a description in the second prayer for relief, which is a claim for interest. That second prayer for relief claims interest "as set out below" and then inserts a table with four headings, being, "Period", "Days & Rate", "Debt Amount", and "Interest". It is the use of the term "Debt Amount" upon which Mr Mantoufeh relies in his submission that the proceedings were for a debt and not for damages. Further, reliance is placed upon the terms of UCPR 6.3 to evidence the continuing distinction between a debt and any other liquidated claim: see UCPR 6.3 (a). 23 As to the second aspect, there continues to be a distinction between a debt and other liquidated claim. But UCPR 6.3 is not evidence of that distinction. UCPR 6.3 requires an originating process for a debt or other liquidated claim to be a statement of claim, as distinct from a summons. The use of the term "other", contrary to the submission summarised above, suggests that a debt is a form of liquidated claim. Nothing however turns on that proposition. In fact, the proceedings before the Local Court were commenced by statement of claim and were therefore commenced as prescribed and no irregularity has occurred. 24 As to the fundamental proposition, a proper construction of the Statement of Claim necessarily results in the submission failing at the outset. The primary prayer for relief is "for monies owing" under the contract. The reference to "Debt Amount" is a reference to the interest payable pursuant to the provisions of s 100 of the Civil Procedure Act 2005. The provisions of s 100 allow a court, in proceedings for the recovery of money, including debt or damages, to include interest on "any amount for which judgment is given". Interest may be ordered under s 100 only after a court ascertains that monies are owed. At that point, the amount would be a debt. The description of the monies owing as "Debt Amount" is an accurate description of the monies owing as damages, once the court has determined that the monies are, in fact, owing. Moreover, the use of the term " Debt Amount", in what is, at best, a particular of the calculation of interest, does not determine that the whole proceedings are for a debt, as distinct from damages. Conclusion 25 In order for the appeal to succeed, Mr Mantoufeh must establish that the judgment below is "erroneous in point of law". That requires demonstration of legal error, not merely an erroneous ruling, and the error must vitiate the judgment below. In that sense, the error must be material to the outcome of the decision from which the appeal arises: Hamod v Suncorp Metway Insurance Ltd [2006] NSWCA 243 at [11]; Leichhardt Municipal Council v Seatainer Terminals Pty Ltd (1981) 48 LGRA 409 at 419, cited with approval by Handley JA in Yates Property Corp Pty Ltd (in liq) v Darling Harbour Authority (Paddy Markets Case) (1991) 24 NSWLR 156 at 177. 26 The view to which the Court has come involves the finding that the Local Court has erred in law. However, that error involved wrongly categorising the amount claimed as a debt, as distinct from a claim for liquidated damages. But that error did not affect the result. If, as in my view would have been correct, the Local Court were to have characterised the claim as one for liquidated damages, and at the same time characterised the Statement of Claim as seeking monies owing under the contract (including liquidated damages), no different result would have ensued. As a result, these proceedings must be dismissed. 27 As earlier stated, Mr Mantoufeh chose, as a forensic tactical decision, not to adduce evidence (or put submissions) on either the issue of mitigation, or on the issue of penalty. There has been no denial of natural justice, as there has been an adequate opportunity to prepare and to present the case Mr Mantoufeh sought to put. 28 The Court makes the following orders:

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