O'Dea v Allstates Leasing System

High Court of Australia|1977-04-13|Before: Deane JJ, Wallace J

The application of the above principles to the present case leads to the conclusion that the provisions of cl. 12 impose a penalty. There is nothing at all in the contract to suggest that those provisions represent a genuine or a reasonable pre-estimate of damages which Allstates would sustain in the event of breach by the lessees. They are applicable on the occurrence of any default in the punctual payment of an instalment of rent or of an insurance premium or in the performance of any one of a large number of terms and conditions ranging from the trivial to the serious. They could result in an unreasonable windfall to Allstates and an unconscionable burden upon the lessees in the event of breach of the most trivial condition. Thus, if breach occurred immediately after the commencement of the agreement, Allstates would be entitled to retake possession of the prime mover and to recover, pursuant to cl. 12, the amount necessary to bring its total receipts from the lessees to $39,550.32 for a hiring period that might be measured in hours or days. It follows that, if the matter be approached in accordance with what I consider to be established principle, it is apparent that the provisions of cl. 12 requiring that the lessees pay to Allstates all "moneys due for unexpired terms" are unenforceable for the reason that they impose a penalty. As I have said, I consider that, upon the proper construction of the agreement as a whole, the obligation under cl. 1(a) to pay rent attributable to future periods did not survive the election by Allstates to invoke the provisions of cl. 12 and terminate the hiring. If I be mistaken in that regard however and the provisions of cl. 1(a), upon their proper construction, required the payment of "rent" attributable to future periods notwithstanding that Allstates had terminated the hiring pursuant to cl. 12, I am of the view that cl. 1(a), in those circumstances, required payment of a sum on breach which as a matter of substance was neither rent nor liquidated damages but a penalty.

I turn to a consideration of the Lamson Store Case [1] . The agreement in that case was for the lease or hire, for the term of ten years, of a patented cash cable tramway system, having fourteen "stations", for the conveyance of money and dockets in a store. The lessor was the Lamson Company. The lessee was the Wilkins Company. Clause 2 of the agreement provided that the Wilkins Company would pay to the Lamson Company an annual rental determined on the basis of £6.10s. sterling "per annum per station". Clause 6 provided that "the said annual rental" was to be paid in advance. Clause 8 provided that the system and every part of it remained the property of the Lamson Company and that "in case of a breach of any of the conditions or agreements to be observed or performed on the part of the lessees, or in case the said system shall be taken from the lessees or attached by process of law by proceedings in bankruptcy or insolvency or otherwise, the whole of the rent for the remainder of the term shall immediately become due, and the lessors may forthwith without notice or demand enter upon the said premises where the said system may be, and take possession of the said system and remove the same forcibly, if necessary, ". During the first year of the term of the agreement, the Wilkins Company was ordered to be wound up. It was common ground that that brought into operation the provisions of cl. 8. Griffith C.J. (with whom Barton J. agreed) held that the liability under cl. 8 to pay forthwith the whole of the rent was not a penalty against which equity would grant relief and that the Lamson Company was entitled to prove in the winding up of the Wilkins Company for the full amount of rent which it would have been entitled to receive if the hiring agreement had run its full term. O'Connor J., who dissented, held that the obligation imposed by cl. 8 was a penalty in respect of which the Wilkins Company was entitled to relief.

The starting point in the chain of reasoning that led Griffith C.J. to conclude that no penalty was involved was his view that, on its true construction, the agreement created an absolute obligation to pay ten years' rent in any event with a provision that it might be paid in annual instalments. The Chief Justice stated that he assumed, without deciding, that "the amount of future rent payable under cl. 8 of the agreement is to be regarded in the same way as if it had been called "liquidated damages" " and that the question whether that amount was truly liquidated damages, and as such not to be interfered with by the Court, or was truly a penalty which covered the damage if proved but did not assess it, was to be determined by reference to whether the sum stipulated for could or could not properly be regarded as a genuine pre-estimate of the creditor's probable or possible interest in the due performance of the principal obligation (see per Lord Dunedin, Public Works Commissioner v. Hills [2] ). In concluding that the amount was not a penalty, the Chief Justice was plainly influenced by his view that, since the appliance the subject of the hiring agreement was "newly invented", "it might reasonably have been desired by the lessors, and have been in the contemplation of both parties when fixing the amount of the rent and the conditions of the lease, that a fair opportunity should be given for the public use of the invention in its entirety, for a considerable time, on suitable premises, and by persons carrying on a business in which its advantages would commend it to the public, and so be likely to induce future purchases from the patentees [3] ". If his Honour's view in that regard did, in truth, form a basis of the conclusion that the amount of the required payment represented a genuine pre-estimate of damages, it would offer grounds for distinguishing the Lamson Store Case from the present. Upon close analysis of his judgment, however, it appears to me that the possible importance, to the Lamson Company, of the exhibition of the invention was not critical to the Chief Justice's decision. In particular, his Honour's statement that he was unable to distinguish the case before him from that of The Protector Loan Co. v. Grice [4] leads me to think that the learned trial judge and the members of the Full Court of the Supreme Court in the present case were correct in concluding that the reasoning in theLamson Store Case supported the conclusion that no penalty was involved in the circumstances of the present case.

[1906] A.C., at pp. 375-376. 2. (1906) 4 C.L.R., at pp. 681-682. 3. (1880) 5 Q.B.D. 592.

In The Protector Loan Co. v. Grice, the plaintiffs had lent a sum of £50 to the debtor. The debtor covenanted to pay the principal together with interest, negotiation expenses and a premium for the insurance of the debtor's life by quarterly instalments over a term of five years. The debtor's bond, of which the defendant was a guarantor, provided that all instalments became payable on the failure to pay any single instalment. Default having been made in payment of an instalment, the plaintiffs brought an action claiming the entire balance of unpaid instalments. It was held by the Court of Appeal, reversing Bowen J. at first instance, that no penalty was involved. The principle underlying the decision would seem to have been accurately stated by Bramwell L.J. [5] who confessed that he had "some difficulty in seeing that Bowen J. was wrong", when he said [6] :

Apart from the authorities which bind us, I do not quite assent to the principle upon which this doctrine is founded. A definition of the principle may possibly be that where a sum is payable as a punishment for a default, or by way of security, and the realization of that sum is not within the original intention of the parties, the sum is a penalty; but when it forms part of the original intention, that upon default a sum otherwise payable at a future period, shall become forthwith payable, it is no longer a penalty. 1. (1880) 5 Q.B.D., at p. 595. 2. (1880) 5 Q.B.D., at p. 596.

It is unnecessary, for the purposes of the present appeal, to consider whether the mere acceleration of a payment upon breach can constitute a penalty if the nature of the payment remains unchanged (cf. 22 Am. Jur. 2d, Damages, s. 228). As a matter of principle, there is plainly much to be said for the view that it can. In both the present case and the Lamson Store Case the nature of the relevant payment upon breach with consequential loss of any right to possession or use was as different in character to the payment which would have been made if the hirer had retained the right to possession and use of the equipment or machine as was the payment described in the above-quoted comments of Somervell L.J. calculated by reference to the price of coal which was not delivered to a payment for coal actually supplied. To the extent to which either the Protector Loan Co. Case or the Lamson Store Case is authority for any general principle precluding a finding that a payment under cl. 12 in the present case was a penalty, they accord neither with the principle that the question whether a sum is a penalty is a question of substance and not of mere form nor with the approach adopted in subsequent cases (see, e.g., Campbell Discount Co. Ltd. v. Bridge [7] ; Anglo Auto Finance Co. Ltd. v. James [8] ; United Dominions Trust (Commercial) Ltd. v. Ennis [9] ; Charterhouse Leasing Corp. Ltd. v. Sanmac Holdings Ltd. [10] ) and should not be followed. I am conscious of the fact that my conclusion in that regard does not lie well with the comments of Walsh J. in I.A.C. (Leasing) Ltd. v. Humphrey [11] . Those comments were not, however, essential to the actual decision in that case and there is nothing in his Honour's judgment to indicate that any submission had been made challenging the correctness of anything that was said in the judgment of Griffith C.J. in the Lamson Store Case. Apart from them, the decision in the Lamson Store Case, which was a decision of a court of three justices including one dissentient, has not been subsequently relied upon in judgments in this Court. While it has been applied in at least two cases in State Supreme Courts other than the present (Western Electric Coy. (Australia) Ltd. v. Ward [12] ; Re Mutual (Q'ld) Knitting Mills Pty. Ltd. (In liq.) [13] ), most of the references to it in cases in such courts have been for the purpose of distinguishing it (see, e.g., Lessors (Aust.) Pty. Ltd. v. Westley [14] ; Wanner v. Caruana [15] ).

[1962] A.C. 600. 2. [1963] 1 W.L.R. 1042; [1963] 3 All E.R. 566. 3. [1968] 1 Q.B. 54. 4. (1966) 58 D.L.R. (2d) 656. 5. (1972) 126 C.L.R., at p. 141. 6. (1933) 51 W.N. (N.S.W.) 19. 7. [1959] Qd R 357. 8. [1964-65] N.S.W.R. 2091. 9. [1974] 2 N.S.W.L.R. 301.

In the result, I would uphold the appeal and set aside the judgment in the amount of $45,294.95 in Allstates' favour against the appellants. It is common ground that Allstates is entitled to retain judgment in the amount of $7,003.32 against the appellants on account of the amount it had to pay a third party in order to effect a discharge of a lien held by that third party over the prime mover. Prima facie, Allstates is also entitled to claim the sum of $1,773.30 representing the balance of the November 1977 instalment and the whole of the December 1977 instalment, any further instalments due before the retaking of possession and any additional amount of damage which it has actually sustained (see Public Works Commissioner v. Hills [16] ). While the approach was taken by the parties that the question of actual damage should be left to be determined in separate proceedings, I consider that, in all the circumstances, the preferable course is that suggested by Wilson J and I agree with the orders which he proposes.

High Court of Australia Gibbs C.J. Murphy, Wilson, Brennan and Deane JJ. O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3

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