Medfin Australia Pty Limited v Ian Lester Rafter & Ors

Abigroup Limited v Sandtara Pty Limited [2002] NSWCA 45 Allen v Tobias (1957 - 8) 197 CLR 367 AMEV Finance Limited v Artes Studios Thoroughbreds Pty Limited [1989] 15 NSWLR 564 AMEV-UDC v Austin (1986) 162 CLR 170 Campbell Discount Co v Bridge [1962] AC 600 Commercial Bank of Australia v Amadio (1983) 151 CLR 447 CASES CITED: Citicorp Australia Limited v Hendry (1985) 2 NSWLR 1 Clark v State of New South Wales [2006] NSWSC 673 Esanda Finance Corporation v Plessnig (1989) 166 CLR 133 Gomba Holdings (UK) Limited v Minories Finance Limited [1993] Ch 171 (CA) Ringrow Pty Limited v BP Australia Pty Limited (2005) 224 CLR 656 Robophone Facilities Limited v Blank [1966] 1 WLR 1428 Yarra Capital Group Pty Limited v Skylash Pty Limited [2006] VCSA 109

Plaintiff: Medfin Australia Pty Limited PARTIES: First Defendant: Ian Lester Rafter Second Defendant: Macquarie Street Medical Practice Pty Limited Third Defendant: Tiina Lemmik

COUNSEL: Plaintiff: B C Kasep Defendant: A J Wright

SOLICITORS: Plaintiff: NV Legal Pty Limited Defendant: Tonkin Drysdale Partners, Wyong

The plaintiff is a specialist financier providing credit, lease, hire purchase and mortgage funding to medical service professionals such as doctors, dentists and other medical service and related providers. The first defendant is a medical practitioner who had a series of financial transactions with the plaintiff prior to the transactions the subject of these proceedings. The second defendant is a company which carried on business as the provider of medical products designed to enhance health and wellbeing and the third defendant is the sole director of the company.

The plaintiff commenced proceedings claiming sums owing in respect of three loan agreements. The two issues for determination before the court were whether the first and third defendants were guarantors of the first loan agreement and whether certain terms in all of the agreement were so unconscionable or oppressive that their nature was penal rather than compensatory.

The plaintiff and the second defendant entered into a lease agreement no. L2000034443 on or about 29 August 2003. The plaintiff agreed to lease chattels for the fitout of the office (a list of these is Annexure A to the Amended Statement of Claim). The plaintiff claims that the first and third defendants guaranteed the performance of the second defendant under this lease agreement.

In the defence to the Amended Statement of Claim the second defendant did not admit being a party to the first lease agreement (although this admission was made on the first day of the hearing) and the first and third defendants did not admit to being guarantors of the loan. It is, however, admitted by all defendants that the second defendant failed to honour the terms of this lease agreement and that the plaintiff by written notice dated 17 September 2004 terminated the agreement.

Whether or not a party is a guarantor can usually be determined fairly readily by looking at the lease agreement. This was not possible in these proceedings, because the plaintiff's employees had lost their copy of the signed lease agreement. What the plaintiff then sought to do was to point to other evidence which established that the first and third defendants had been guarantors of this agreement.

The evidence of what was negotiated, and what documents were sent to the first and third defendants, is contained in a series of documents in the Agreed Bundle of Documents that is Exhibit A. Mr Dyer, an employee of the plaintiff, completed a document headed "Variation to Approval" on 26 August 2003 in which the name of the borrower was changed to exclude the first defendant (Dr Rafter) "as he is not a director of the company and never was". There is also a notation that in addition to having Dr Rafter's assets and liabilities statement, there is also one for Ms Lemmick. More important, however, was the proposed change from the "existing details", which showed the third defendant (Tiina Lemmick) and first defendant (Dr Rafter) as the guarantors to have Tiina Lemmick as the sole guarantor in the box headed "proposed details". The explanation given was that Dr Rafter was "able to go" as guarantor but he was applying for another large loan and thought that giving this guarantee might ruin his chances. However, the approval officer, Robyn Westgarth, filled in the box for additional conditions on 27 August with the words "Guarantee of Ian Rafter is required as part of this loan."

On 29 August 2003, Tina Lemmick sent 13 pages which she described as "the signed documents" to John Dyer. Up the top of the page is a fax line showing that the cover sheet (which is sent on letterhead for the second defendant) with the time (6.10 am) and the page number (no. 1). Only two others of the total of thirteen pages faxed by Ms Lemmick have survived. The first of these is page number 9; this went through the fax at 6.13 am and is a Privacy Act statement signed by the first and third defendants whose typed names both appear in the section "guarantors'. Indeed, since Dr Rafter held no position in this company, the only reason his signature could appear on the document would be in his capacity as guarantor. The other surviving page is page 11, and it contains details about insurance which are of little assistance.

It was the evidence of Ms Lemmick that as well as faxing this document, she agreed that she posted the signed original to the plaintiff. She said that she had not kept a copy of the document that she signed. She did not admit to having signed in the capacity of guarantor. She could not explain why she signed as a "guarantor" in the space provided in the Privacy Act statement.

The next step was that this signed document forwarded by the defendants was completed by the plaintiff's officers. Mr Dyer then sent the a letter enclosing this document as follows: "Macquarie Street Medical Practice Pty Limited Ground Floor 139 - 141 Macquarie Street Sydney NSW 2000

I would like to take this opportunity to thank you for choosing MEDFIN for your recent financial transactions. Please find the enclosed authorised copy of your contract for your records.

Should you have any questions with regard to this transaction, please call and I will be more than happy to assist…" (p. 205 of Exhibit A) 10. The attachment the plaintiff asserts was attached to this document is a 12 page lease agreement; a generic document of this kind is set out in Exhibit A between pages 206 - 217. Two of the pages in this document are the Privacy Act document (page 213) and insurance document (page 214) which are the two surviving signed pages with the 29 August faxline from the second defendant (pages 247 and 248 of Exhibit A).

11. The first and third defendants did not, in their evidence or affidavits, deny receipt of this letter enclosing the "authorised copy" of the financial agreement.

12. The last link in the chain is that all of the documents exhibited to the affidavits of Adam Willits and John Dyer consistently name the first and third defendants as guarantors and the second defendant as a party to the first lease agreement.

13. There is additional evidence about the signing of a guarantee in the form of admissions on oath by the first and third defendants in a prior application in these proceedings. When the plaintiff commenced proceedings, a defence was not filed and the plaintiff obtained a default judgment. The first and third defendants swore affidavits in support of an application to set aside this judgment.

14. Dr Rafter swore an affidavit on 21 September 2005 in which he made the following admissions: 10. "I do not dispute having guaranteed the obligations of the second defendant to the plaintiff pursuant to the Lease Agreement identified in the First Claim set out in the Liquidated Statement of Claim. Nor do I dispute that the second defendant had defaulted in the making of various payments due under that Lease Agreement. The plaintiff has not provided me with any statement detailing the manner in which the amount it claims from my co-defendants and me has been calculated. I wish to have the opportunity to obtain those details and to rely upon such defence as to quantum as my solicitor advises me is available to me and to my co-defendants.

12. In relation to the third Claim made in the Statement of Liquidated Claim, I do not dispute having entered into a facility known as a Med-E Credit facility with the plaintiff."
13. Ms Lemmick also swore an affidavit to set aside the judgment on 21 September 2005. She referred to the affidavit sworn by Dr Rafter and said she relied upon "the matters deposed to" by him, which includes the above paragraphs.

In cross-examination both Dr Rafter and Ms Lemmick claimed that these admissions did not mean that they had conceded they were guarantors. They both conceded however that they knew the purpose of the affidavit was to set aside judgment and to set out their position in relation to the sums claimed, and that nowhere in the affidavits had either of them denied giving a guarantee for the obligations of the second defendant.

Both Dr Rafter and Ms Lemmick were asked what documents or other information they had in their possession when they gave instructions for the preparation of these affidavits. Both claimed to have relied upon their memory. No information was provided to refute the evidence that they had received the letter from Mr Dyer enclosing the "authorised" copy of the contract. When Ms Lemmick was asked what she thought Dr Rafter had meant when he did not dispute liability, she said this was because it "wasn't relevant" and that this was why he did not dispute liability.

Ms Lemmick agreed she had faxed a copy of the document she signed to the plaintiff, and said she had posted the original and did not keep a copy of the counterpart she signed, but she stopped short of claiming that she never received the "authorised" document and Mr Dyer's evidence that this was sent was not challenged. She agreed she signed documents for the company in relation to the agreement and said she had guaranteed the loan "as a director" because "I am a director, I have obligations". She could not explain why she had signed a Privacy Act document to permit the obtaining of her personal financial status other than by saying "I only signed as a director."

Dr Rafter said that while he did not dispute having signed the guarantee in his affidavit "I didn't admit it either" and said that at the time he was distracted because his brother had just died. His affidavit does recite in paragraph 3 that his brother died on 9 May 2005 and that he was preoccupied with other litigation in the months following. However, he did consulted a solicitor about filing a defence on 29 July 2005, at which time both he and his solicitor must have started to give some thought to the defences.

If Dr Rafter and Ms Lemmick did have a copy of the agreement they signed, and it showed no guarantee from one or both of them, it would have been the end of the guarantee claim for one or both of them. The only reason for not producing such a document would be that they had never received it or that, like the plaintiff, they had lost it. However, their evidence stopped short of such a claim. They challenged the fax number under which the documents bearing their signature was attached, and Dr Rafter claimed that the reference number of L200034443 "could have been added afterwards", but they did not claim never to have received the document or challenge the evidence of Mr Dyer that he sent a copy of the "authorised" agreement to them.

On the balance of probabilities I am satisfied that, notwithstanding the plaintiff being unable to produce the agreement entered into by the parties, the plaintiff has established that both Dr Rafter and Ms Lemmick entered into the guarantees. It is the unchallenged evidence of the plaintiff that the agreement would not have been entered into without guarantees from both of them, that documents containing the signatures of both Dr Rafter and Ms Lemmick were faxed to the plaintiff and that the plaintiff subsequently sent them an "authorised" copy of the agreement.

Although I am satisfied that the plaintiff has led sufficient evidence to establish this issue, I should note my findings in relation to the defendants' failure to produce their copy of the agreement they signed. The fact that the plaintiff's employees have lost their copy of the agreement entered into by the plaintiff and the defendants does not entitle the defendants to fail to produce their copy of the agreement as it is a discoverable document in this litigation. In the absence of a similar claim that they either never had this document or that they lost it (neither of which claims were made) they cannot purport to tell the court what they say was in the document without producing it. A court will draw inferences where a party has a document relevant to the proceedings but fails or refuses to produce it: Allen v Tobias (1957 - 8) 98 CLR 367. The law in relation to documentary evidence which is destroyed or withheld was exhaustively analysed by Johnson J in Clark v State of New South Wales [2006] NSWSC 673 and I gratefully borrow his Honour's explanation of these inferences at [102]. The obligations of discovery, even the informal discovery that took place in this litigation, do not permit a party to withhold a document such as the agreement which would reveal conclusively whether or not they entered into a guarantee, in circumstances where the parties are giving oral evidence about its contents. Accordingly, I would be entitled to draw the inference that the signed agreement in the possession of the first and third defendants would not, if produced, assist their case.

The first and third defendants have failed in their first submission that they are not liable for the amount in the first claim because they were not guarantors of the lease agreement.

The claim in relation to lease agreement L2000034443 is also challenged on the basis that the relevant clause of the agreement relating to the quantum claimed (clause 16) is a penalty. This is dealt with in further detail below.

The plaintiff and the second defendant entered into a lease agreement No. L2000036892 on or about 5 December 2003 under which the plaintiff agreed to lease the first defendant chattels.

The first defendant, Dr Rafter, has in his affidavit of 22 February 2007 admitted his liability under the terms of the second lease agreement, apart from the claim that clause 16 is a penalty. I have dealt with this argument in paragraphs 29 ff below.

The third claim arises out of a Med-E credit facility entered into by the plaintiff and the first defendant on or about 17 October 2003. This facility was terminated by the plaintiff on 17 September 2004 as a result of default which is now admitted by the first defendant in his affidavit of 22 February 2007.

The third claim like the other two claims, is challenged on the basis that clause 16 of each agreement, which contains a formula for the pre-estimation of damages in the event of default, is penal in nature.

The claim that clause 16 of the agreement is penal in nature

The calculations for the quantum of each of the claims are set out in an affidavit of Jamie Walter Taylor sworn 22 November 2005. Mr Taylor was not required for cross-examination.

The defendants sought to demonstrate the onerous nature of the sums claimed by comparing what the plaintiff would have received under the agreement with what the plaintiff, through Mr Taylor's calculations, was seeking. The amount asserted to be penal for the first agreement was the difference between these sums (ie the difference between $195,283.21 and 167,748.69). The figures for the other two agreements are the difference between $184,965.62 and $166,570.99 for the second agreement and $51,323.97 and $45,560.03 for the third agreement.

The defendants relied upon Citicorp Australia Limited v Hendry (1985) 4 NSWLR 1 to assert that this kind of accelerated payment of future rentals by a lessee in breach of a lease may constitute a penalty despite provision in the contract for a rebate. (I note that the agreements in these proceedings also contain rebate provisions, which Mr Willits explained were applied if the default happened because of some tragedy or mishap, such as death of a spouse or the surgery burning down). The penalty clause in Citicorp increased the interest rate from 10% to 24%. The Court of Appeal considered that the provisions in the agreement were not a genuine pre-estimate of damages and that the purpose of the clause was to act as a sanction against a breach. Kirby P, agreeing with Mahoney JA that the law relating to penalties was not satisfactory, expressed the wish that the High Court should take the opportunity to reconsider this body of law because his Honour was far from convinced that the result which followed was just or that it conformed with sound commercial practice and business sense (at 23).

The approach taken by the Court of Appeal in Hendry came under review when in 1986 the High Court handed down AMEV-UDC v Austin (1986) 162 CLR 170. In AMEV Finance Limited v Artes Studios thoroughbreds Pty Limited [1989] 15 NSWLR 564, Clarke JA referred to his earlier decision in Citicorp as being "in error" (at 574) because it had failed to take account of the manner in which the principles concerning penalties had been applied in the series of cases cited by Deane J in AMEV-UDC v Austin (1986) 162 CLR 170. The correct test to apply was whether the pre-estimate of damages was "out of proportion with, or much greater than, the losses likely to be caused to the innocent party by the premature termination of the contract following upon the other party's breach" (per Clarke JA at 574). That determination will be based on the comparison between the agreed sum and the likely damages flowing from the early termination, and if the sum payable on termination is a reasonable pre-estimate of the loss, it will not be stuck down as a penalty. The onus of establishing that a provision is penal in nature rests with the party bringing the assertion: Robophone Facilities Limited v Blank [1966] 1 WLR 1428 at 1447 per Diplock LJ.

The decision of the High Court in AMEV was explained by Chernov JA (with whom Warren JA agreed) in Yarra Capital Group Pty Limited v Skylash Pty Limited [2006] VCSA 109 at [11] - [13]. The court's role was not to rewrite contracts imprudently made but to relieve against provisions that were so unconscionable or oppressive that their nature was penal rather than compensatory. The test to be applied would depend on a number of circumstances including not only the alleged disproportion in the sum recovered but also the nature of the relationship between the contracting parties. The question of whether the sum stipulated is a penalty is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, when considered at the time of entering into the contract and not at the time of the breach. The court fundamentally had to strike a balance between freedom to contract and public interest concerns.

The High Court has emphasised that for a clause to be considered a penalty it must be judged "extravagant and unconscionable in amount" (Ringrow Pty Limited v BP Australia Pty Limited (2005) 224 CLR 656 at 620).

What is an amount that is extravagant and unconscionable? A good example is the analogy given by Diplock LJ in Robophone at [1447]: "… the courts would be doing an ill turn to these whom the rule about 'penalty clauses' is designed to protect if they were to apply it so as to make it impracticable for parties to agree at the time when they enter into a contract upon a fair and easy ascertainable sum to become payable by one party to another as compensation for the loss which the latter will sustain as a consequence of its breach. It is good business sense that parties to a contract should know what will be the financial consequences to them of a breach on their part, for circumstances may arise when further performance of the contract may involve them in loss. And the more difficult it is likely to be to prove and assess the loss which a party will suffer in the event of a breach, the greater the advantages to both parties of fixing by the terms of the contract itself an easily ascertainable sum to be paid in that event. Not only does it enable the parties to know in advance what their position will be if a breach occurs and so avoid litigation at all, but if litigation cannot be avoided, it eliminates what may be the very heavy legal costs of proving the loss actually sustained which would have to be paid by the unsuccessful party. The court should not be astute to decry a "penalty clause" in every provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach by the former." 36. This passage was cited with approval by Mason and Wilson JJ in AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170.

The principal basis upon which a claim is made that these clauses amount to a penalty is that the plaintiffs are recovering a higher sum than they would otherwise have done. Other arguments, such as whether the fitout furniture and medical instruments were sold for a fair price at auction, or whether the plaintiff could have given a rebate to the defendants for hardship purposes, were explored in cross-examination but not put to me in any argument, possibly because the evidence of Mr Willitts on these issues was that the goods were sold for estimates advised by the auctioneer and the rebate system for emergencies (eg the surgery burning down) was available if requested.

The increase pointed to by the defendants is neither disproportionate nor unconscionable in the manner described by the High Court in AMEV-UDC Finance Limited v Austin as being a prerequisite. There is no basis for the assertion by the defendants that the clause was imposed in terrorem (and I note that in Campbell Discount Co Limited v Bridge [1962] AC 600 at 622 Lord Radcliffe queried whether such a term was not anachronistic). There is no evidence of unconscionable dealing by reason of the first or third defendants suffering any special disadvantage (Commercial Bank of Australia v Amadio (1983) 151 CLR 447). The first defendant was no unsophisticated consumer; he had a history of dealing with the plaintiff. Nor does the identification of the penalty, whether examined by the 'mechanical' approach of comparing the losses or the 'unconscionability' approach by looking at the circumstances (AMEV Finance Limited v Austin at 193 - 4 per Mason & Wilson JJ) demonstrate that the amount payable pursuant to clause 16 is anything other than a pre-estimation of the value. The issue is not the abstract and mechanical evaluation of the clause in question but the particular circumstances of the case: Esanda Finance Corp v Plessnig (1989) 166 CLR 133.

Taking all of the above circumstances into account, the amount claimed in the lease agreement and the facility are not extravagant but a reflection of the plaintiff's damages as pre-estimated following the defendants' breaches of the agreement.

The agreements upon which each of the first, second and third claims are based each contain a clause making provision for the payment of the plaintiff's legal costs on an indemnity basis in the event of default.

In Abigroup Limited v Sandtara Pty Limited [2002] NSWCA 45, Stein JA at [9] noted: "It is, of course, correct that a court if not bound to give effect to any extra curial contract as to costs when exercising its discretion to award costs. It does not follow, however, that the discretion takes over from the contract and the exercise of discretion against giving effect to the contract precludes enforcement of the contract as to costs ." 42. Counsel for the plaintiff has also drawn my attention to Gomba Holdings Limited v Minories Finance [1993] Ch 171 (CA) at 194 where the Court of Appeal in England considered that the court's discretion as to costs should be exercised so as to correspond with contractual entitlements where a claim is made under a contractual provision for cost to be payable on an indemnity basis.

43. I did not receive any submissions on this issue on behalf of the defendants.

44. I accept the plaintiff's submission that my discretion as to cost ought to be exercised consistently with the provisions set out in the first and second lease agreement and in the facility and accordingly I make an order for costs to be paid on an indemnity basis.

45. The parties did not address me on the subject of interest. For these reasons I have granted a liberty to apply or, if the interest can be mathematically agreed, for the parties to bring a short minutes of order reflecting the interest claimed.

1. Judgment for the plaintiff in the sum of $362,459.05.
2. The parties have leave to bring in short minutes of order reflecting the interest on the judgment sum or alternatively, liberty to apply in relation to any arguments concerning interest.
3. Defendants pay plaintiff's costs on an indemnity basis.
4. Exhibits retained for 28 days.

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