Multiplex Constructions v Abgarus Pty Ltd 33 NSWLR 204

Local Court of NSW|2009-10-22|Before: Gibbs J, Barwick CJ

CITATION: Sita Pty Ltd V Lorimer Pty Ltd [2009] NSWLC 14

PARTIES: SITA Pty Ltd Lorimer Pty Ltd

CATCHWORDS: CONTRACT LAW - Penalty Clauses - Ambiguity of Terms

Multiplex Constructions v Abgarus Pty Ltd 33 NSWLR 204 CASES CITED: Ringrow Pty Ltv v BP Australia Pty Ltd [2005] HCA 71 Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36 King v CGU-VACC [2008] NSWSC 306

REPRESENTATION: Mr Raine of Counsel for the Plaintiff Mr Black of Counsel for the Defendant.

1 SITA provides waste disposal bins. Lorimer Timber is a timber business. SITA provided bins for Lorimer under a contract. SITA claims that Lorimer has breached and terminated the contract, and thus must pay the sum sought. Lorimer challenges that claim on two grounds - that the contract is ambiguous, and that the termination clause is a penalty and thus is not enforceable.

2 This judgment is written without the benefit of transcript. Issues

3 There is little in contention factually, and neither party called witnesses at the hearing. The evidence is that there was a signed written contract for a stated period of approximately 11 months, which was a commercial agreement. Fifty-eight days prior to the expiration of the contract, Lorimer gave notice that they would not be renewing the contract. SITA claims that the notice should have been 60 days, or else clause two is triggered. Lorimer denies this claiming ambiguity. Alternatively, Lorimer claims that clauses six and seven are penalty clauses.

Is Clause two ambiguous?
If so, what are the consequences of the ambiguity?
Are clauses six and seven penalty clauses?
If so, what is the consequence of this finding?
1. Ambiguity

5 The key clause (two) is as follows: "Subject to clause 6, this Agreement is for a term from Commencement until Expriy, or, if unspecified, for a term of 5 years from execution ("Term"). SITA will renew the Term for a further 60 months on the same conditions (including automatic renewal)(at SITA's option), unless by written notice: (i) Customer advises SITA not more than 120 days, but not less than 60 days before the end of the Term that it does not intend to renew the Agreement, or (ii) SITA reserves the right to terminate the agreement providing a 30 day notice period."

6 The effect of clauses six and seven (discussed in detail below) is that the contract is terminated if the contract is breached and then 30% of the amount that would have been payable is able to be recovered by SITA. Thus SITA is suing for approximately 30% of the contract rate for next five years. Both parties agree that had the notice been given on day 61, rather than on day 58, clauses six and seven would not have been triggered.

7 There is a helpful summary of the law with respect to the interpretation of commercial contracts in King v CGU-VACC [2008] NSWSC 306 (9 April 2008), an appeal from this court on a similar issue, where eight rules were applied: (1) "The primary duty of a Court in construing a written contract is to endeavour to discover the intention of the parties from the words used of the instrument in which the contract is embodied"; a clause's meaning may be revealed by other parts of the document per Gibbs J (as he then was) in Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109. (2) The Court endeavours to ascertain the meaning of the terms agreed upon objectively - the subjective intentions of the parties are not relevant: see Toll (FGCT) Pty Ltd (formerly Finemores GCT Pty Ltd) v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, and see Equuscorp Pty Ltd v HGT Investments Pty Ltd (2005) 218 CLR 47 at [34]. (3) The process of interpreting terms is a pragmatic process, and "no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements" Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, per Barwick CJ at [35]-[36], [40]-[42]. Commercial contracts should be construed "fairly and broadly, without being too astute or subtle in finding defects" per Lord Wright in Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2 cited with approval by Gibbs J in Australian Broadcasting Commission (supra) pp.109-110. (4) Questions as to meaning are "to be answered in a practical and realistic way, not in a way which adopts an overly fine or theoretical approach that is alien to commercial agreements": McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 176 ALR 711, 729. (5) "There is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning": per Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 348, which His Honour remarked has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. (6) "If the words are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust" per Gibbs J in Australian Broadcasting Commission (supra) and see Waterways Authority of New South Wales v Coal & Allied (Operations) Pty Limited [2007] NSWCA 276 at [38] per Beazley JA (Campbell JA concurring). (7) If the words used give rise to absurdity or inconsistency "words may generally be supplied, omitted or corrected in an instrument when it is clearly necessary in order to avoid absurdity or inconsistency" per Dixon CJ and Fullagar J in Fitzgerald v Masters (1956) CLR 420 at pp.426-7. (8) In resolving an ambiguity "... if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate'", and "it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument" per Gibbs J in Australian Broadcasting Commission (supra)."

8 The effect of these rules is that in a commercial setting, it does not matter that Lorimer was not aware of the impact of clauses 2, 6 and 7, or that they subjectively believed that the contract was for a period of 11 months only See exhibit 2 and 3. It does not matter that the writing of the contract is so small, magnification is necessary to make out the terms, or that it was signed by an operations manager of a timber wholesaling yard, rather than a commercial lawyer, or that that the contract was not read by Lorimer or that a further five year period seems harsh and unfair. Further, it does not matter that the contract was stated on the cover to be for a period of 11 months (from17 Jan 2008 to 19 Dec 2008). Finally, it does not matter that the contract was, on my understanding, for the sum of approximately $835 per month See annexure H to exhibit One. which was fully paid for the 11 months, leading to a claim for a further approximately $18,000 for breach calculated at 30% of a further five years. 9 The effect of these rules is that it is not for the court to go seeking an ambiguity where there is not one, in a case where the terms of the contract are apparently unfair in an effort to ameliorate the hardship to be suffered by the defendant.

10 SITA argues that the contract ought be interpreted so that due to the failure to give notice in the window of 120 days and 60 days of the initial 11 month term, the contract was automatically renewed for a further term of five years See exhibit One, clause 9. . On first reading, that was also my interpretation of the term.

11 However Mr Black, for Lorrimer, put forward an alternative interpretation which he says shows the clause to be ambiguous. He breaks up the first sentence of clause two as follows:

…this Agreement is for a term
from Commencement until Expriy,
or,
if unspecified
for a term of 5 years from execution ("Term"). 12 The argument is that the first use of the word "term" in line 1 above is different from the word "term" in line 5, in that the latter is subject to definition by a controlling word, and the former is not. In other words, if the length of the contract is unspecified, it is for five years and is a "Term", but if it is not it remains a "term". Another way of putting this is that the controlling word "Term" only applies to the second use of the word "term". The consequences of this is that it is only if the length of the contract is unspecified, that the window of opportunity is limited, and thus that Lorimer's 58 day notice suffices.

13 Lorimer supports this contention with the following submissions:

The use of the word "further" and "renew" in the second sentence suggests that it only refers to a period of another five years. This only makes sense if the initial agreement is unspecified, and thus for a period of five years.
If the contract had been for a short period (say six weeks), it would have been impossible to give more than 60 days notice, so the first sentence must be establishing two regimes - one for unspecified contracts, and the other for specified contracts.
The natural and normal meaning of the words permits multiple interpretations. 14 SITA contends that the agreement is not ambiguous, that the capital "T" "Term" applies to both specified and unspecified lengths of agreement, and that is the clear objective application of the words. The words "further" and "renew" do no more than mean that an extension of the contract occurs.

15 I have carefully considered the wording of the clause two of the contract, and have weighed the arguments of both parties, each of which have been put fairly, and are arguable. Indeed, I found myself at the hearing, and at the time of writing this judgment, agreeing with each counsel as the arguments were put and re-read. I am also mindful not to be seeking an ambiguity where none exists to ameliorate what appears to be a harsh contractual outcome.

16 However, in my view there is an ambiguity in clause two. If the intention was to cover both fixed and unspecified contracts by the second sentence, then the word "Term" ought to have been clearly linked to both uses of the word "term". As it stands it could apply to either the second use of the word "term" or to both uses of the word "term". The use of the word "further" in the second sentence does support the interpretation preferred by Lorrimer. In my view this is a case where both meanings are fairly open. Although one preferred by SITA is more obvious on first reading, the second preferred by Lorimer is not an unrealistic, pedantic, subtle, "astute" or unlikely construction This terminology is from North v Marina [2003] NSWSC 64 (3 March 2003) per Campbell J at 75.

17 I ought note that in my view the example of a six-week contract does not assist. Hypothetical situations that make the clause absurd - in that notice could not be given within 60 days - are only relevant if the factual situation presents itself for determination - King v CGU-VACC [2008] NSWSC 306. Here, there is no suggestion that the clause was for a period of other than approximately 11 months. 2. The consequences of ambiguity

18 As a general rule, where there is a contentious term of a contract that is ambiguous, the contract ought to be interpreted in favour of the party who did not prepare the contract - "verba cartarum fortius accipiuntur contra proferentem" or "the words of documents are to be taken strongly against the one who puts forward". In North v Marina [2003] NSWSC 64 Campbell J summarized the position as follows:

63 It is this approach to the maxim which results in the principle that a deed is construed against the grantor: In Re Stroud [1849] EngR 996; (1849) 8 CB 502 at 529[1849] EngR 996; , 137 ER 604 at 615 per Wilde CJ; Neill v Duke of Devonshire (1882) 8 AC 135 at 149 per Lord Selbourne LC; Swann v Fonnereau (1796) 3 Ves Jun 41 at 48, 30 ER 883 at 887 per Sir Richard Arden MR; Johnson v Miro Hotels Pty Ltd [1984] ANZ ConvR 397 at 400 per Mitchell ACJ. The rationale for this view is explained in Cruise's Digest of the Laws of Real Property (4th edition, 1835) title 32, chapter 20, section 13:

"a deed is always construed most strongly against the grantor, verba chartarum fortius accipiuntur contra proferentem, et quaelibet concessio fortissime contra donatorem interpretanda est. For the principle of self-interest will make men sufficiently careful not to prejudice themselves, by using words of too extensive a meaning. And all manner of deceit is hereby avoided in deeds; for people would always affect ambiguous expressions, if they were afterwards at liberty to put their own construction on them."

19 There is no issue that the contract was drafted by SITA. Given my findings as to ambiguity, the application of the contra proferenten maxim is that the interpretation preferred by Lorimer is to be applied, and thus the notice provisions in the second sentence of clause two do not apply to this contract as it was for a fixed term. 20 There is a further reason for preferring the defendants proposed construction of clause two. As Gibbs J stated in Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate", to use the words from earlier authority cited in Locke v. Dunlop (1888) 39 Ch D 387, at p 393 , which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case (1880) 16 Ch D 681, at p 686 .

21 The plaintiff's construction in my view would lead to a result that is unreasonable and unjust. 22 Accordingly, clauses six and seven are not triggered, and the plaintiff's claim is dismissed. 3. Penalty Clause

23 It is not strictly necessary to turn to this issue given my findings above, however I will do so for purposes of completeness, and lest my reasoning be found wanting in relation to ambiguity. . The key terms of the contract are clauses six and seven: 6.1 SITA may terminate this agreement immediately, without notice if….

7.1 Pursuant to clause 6, SITA may by notice require the Customer to pay within 7 days….

(a) an amount equal to 30% of total fees and charges that would have been payable by Customer under the Agreement from the date of breach until the end of the Term…

7.2 Customer acknowledges that amounts calculated under clause 7 are reasonable and represent a bona fide per-estimate of SITA's loss in the event of Customer's default.

24 There is recent summary of the law of penalties in the case of Ringrow Pty Ltv v BP Australia Pty Ltd [2005] HCA 71 at 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. 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: "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 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 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'"

25 The onus of showing that a clause is a "penalty clause" lies on the defendant in this case: Multiplex Constructions v Abgarus Pty Ltd 33 NSWLR 204 at 527. The time for assessment as to whether the contracted offends the penalty clause rules, is at the time of making of the contract. In this case, the contract occurred approximately 12 months before the breach. The penalty clause rules are an exception to the general rule that the courts will not intervene to set aside bargains to which parties of full capacity have agreed. 26 I am satisfied that the clause is a penalty clause. The plaintiff has not produced any evidence to show the reality of any loss at the 30% mark, and they were notified that the defendant did not intend to continue the contract at day 58. Arguably, given that the onus lies on the defendant, they do not have to produce any evidence. However, the plaintiff had 58 days to place the bins anywhere else, or dispose of them, or otherwise. Had they been given 61 days notice, they would have been in virtually the same position. The 30% could not possibly be a genuine predetermined estimate of loss. It is extravagant and unconscionable. It is more than just disproportionate. The real damage as a result of breach was likely to be trifling given the notice, and given the entire contract. The lump sum payable bears no resemblance to any imaginable loss. 27 When the contract was formed, I am satisfied on balance that a lump sum calculated at 30% of a five year extension triggered by a failure to notify within sixty days of an 11 month first time bears no resemblance whatsoever to any calculable loss.

28 As was stated in Savage v Programmed Maintenance Services [2001] NSWCC 184 at 94 " I hold the view that if, when all indicia are weighed, it looks like a duck, and quacks and waddles like a duck then the probabilities are that it is not a swan."

29 In this case when all the indicia are weighed clauses six and seven look like, quack like and waddle like a penalty provision. I find that they are a penalty. 30 I note that no reliance was placed by the plaintiff on to the purported "contracting-out" of the penalty provision in clause 7.2.

31 The consequences of breach are that the courts will not permit the party seeking to rely on the clause to enforce it.

32 Having found that the contract is ambiguous, and contains a penalty clause, the claim is dismissed. 33 I propose making an order for costs that follow the cause - that is that the plaintiff pays the defendant's costs as agreed or assessed (28 days). However, I will hear the parties if they seek a variation from this order. Magistrate David Heilpern 22 October 2009

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Judgment (38 paragraphs)

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Cases Cited (15)