Plaintiff v Defendant

Supreme Court of Victoria|2008-07-02|Before: HABERSBERGER J

CONTRACT - Motor vehicle dealership - Offer by manufacturer to pay sales subsidies and allowances to dealer - Conditions imposed on offer - Whether dealer had accrued entitlement to retail incentive payment - Whether provision denying entitlement was a penalty - Whether amount of lost retail incentive out of all proportion to the actual loss suffered by manufacturer from numerous fraudulent claims by dealer for subsidies and incentives.

1 The only issue remaining for determination in this proceeding is the claim by the plaintiff, Harrison Ford Pty Ltd ("Harrison Ford"), for repayment of the sum of $279,062.30, which it paid under protest to the defendant, Ford Motor Company of Australia Limited ("Ford"), in February 2006. The sum in question represented numerous retail incentives, plus GST, paid by Ford to Harrison Ford in the period between 3 August 1998 and 20 October 2004 ("the relevant period"), which Ford had demanded be repaid because it asserted that Harrison Ford had made fraudulent claims in respect of the retail incentives.

2 By an agreement in writing dated 1 November 1990 ("the first dealer agreement"), Ford appointed Harrison Ford as an authorised dealer for the marketing, sale and service of Ford motor vehicles on the terms of the first dealer agreement.

3 By a further agreement in writing dated 1 July 2002 ("the second dealer agreement"), the parties terminated the first dealer agreement and Ford appointed Harrison Ford as an authorised dealer for the marketing, sale and service of Ford motor vehicles on the terms of the second dealer agreement. The non-exclusive Primary Market Area ("PMA") assigned to Harrison Ford under the second dealer agreement was the area in and around Melton.

4 Whilst the terms of the first and second dealer agreements are different, essentially they are to the same effect. Some of the more relevant provisions of the second dealer agreement are as follows:

(a) The Dealer's appointment as an Authorised Ford Dealer is not an exclusive appointment and, subject to Clause 2.2(b), Ford reserves the right to appoint further Authorised Ford Dealers, wholesalers, distributors, sellers, service organisations or agents to market, sell or Service Ford Marketed Products (including the Products) within or outside the PMA.

(b) In making a further appointment as contemplated in Clause 2.2(a), Ford must have regard to:

(i) the number, location and size of Authorised Ford Dealers as are necessary, appropriate and adequate for marketing, sale and Service of Ford Marketed Products within the PMA; and

(ii) a reasonable profit opportunity for the Dealer based on the potential for marketing, sale and Service of Authorised Ford Products within the PMA.

(a) Ford may sell Vehicles to the Dealer and the Dealer may purchase Vehicles from Ford; and

(b) Ford may sell Parts to the Dealer and the Dealer may purchase Parts from Ford or any other supplier.

(a) Products sold by Ford to the Dealer or Designated Wholesaler are sold pursuant to the terms of this Agreement and in accordance with the prices, charges, discounts, allowances, rebates and other terms of sale set out in the relevant Product Price List (to the extent those terms are not inconsistent with the provisions of this Agreement).

(f) The Dealer must not submit or permit to be submitted, any false or fraudulent application or claim, or supporting statement for any:

(i) warranty, campaign or program Service reimbursement or payment;

(iii) refund, credit, rebate, incentive, allowance, discount, reimbursement or any other payment.

(g) The Dealer must not accept and retain any reimbursement or other payment to which it is not entitled.

(h) The Dealer and the Dealership Personnel must not commit any dishonest, fraudulent or other wilfully deceptive or misleading act in the conduct of the Dealer's business relationship with Ford.

To ensure the proper and orderly marketing, sale or Service of Ford Marketed Products, Ford may, in its discretion, issue to Authorised Ford Dealers, Bulletins (including but not limited to Ford Dealer Confidential Bulletins) or amend Bulletins.

(a) If there is an inconsistency between the terms of this Agreement and any Bulletin, the terms of this Agreement will prevail to the extent of the inconsistency.

Ford may, in its discretion, immediately terminate this Agreement if the Dealer:

(f) is fraudulent in connection with the operation of the Dealership Operations;

(b) Unless otherwise provided in this Agreement, any amendment to this Agreement must be in writing and [signed] by the parties referred to in paragraph (a).

(a) Unless as otherwise provided in this Agreement or agreed by Ford and the Dealer, this Agreement terminates and supersedes all prior agreements, arrangements and understandings (if any) concerning the Dealer's appointment as an Authorised Ford Dealer.

5 The following definitions are found in clause 1.1:

Bulletin means any manual, bulletin or other document issued from time to time by Ford prescribing the procedures, practices and standards with which Authorised Ford Dealers must comply in conducting the Dealership Operations and includes the Ford Dealer Bulletin, Warranty and Policy Manual and Sale to Government Bulletin.

Ford Dealer Bulletin means a Ford dealer bulletin issued by Ford pursuant to clause 13.2.

There was no definition of a Ford Dealer Confidential Bulletin.

6 From time to time, Ford offered its dealers a range of marketing and sales subsidies and allowances, such as National Fleet Plan Subsidies, Privilege Club Subsidies, Retail Incentives and Demonstrator Subsidies. However, dealers had no entitlement under their agreements with Ford to receive any subsidies or allowances. It was a matter for Ford what, if any, financial assistance was offered to its dealers.

7 In the relevant period, retail incentives were not paid on the sale of all vehicles, but generally only on vehicles that, according to Ford, needed to be moved from dealer stocks. Retail incentives were offered to assist the dealers in selling the nominated older models at lower prices than would otherwise apply. Retail incentives were generally in the range of $500 to $2,500 per vehicle sold, although they could be larger, as for example in the case of a particular model that was not selling well. The amount increased as time passed and the vehicle became older and less attractive to the market. A retail incentive was payable to a dealer when it entered the details of the retail sale on to Ford's computerised Vehicle Information System ("VIS"). The amount of the retail incentive was then credited automatically to the dealer's Parts Account. The terms on which Ford made the retail incentives available from time to time were set out in a series of Dealer Confidential Bulletins ("DCBs"). They contained such matters as the vehicles to which a particular incentive applied, the period during which the incentive was available and the amount of the incentive.

8 A demonstrator subsidy was paid where a dealer acquired a vehicle in its own name for use as a demonstration model and reported that fact to Ford via the VIS. The demonstrator subsidy was intended to encourage the use of demonstrator vehicles by dealers by assisting in meeting the additional costs of doing so, such as registration and insurance. The terms of the demonstrator subsidies were also set out in the DCBs. Once a vehicle was owned by a dealer for the particular minimum period, the dealer became entitled to retain the demonstrator subsidy. The specified minimum period, in the relevant period, was usually 90 days, although on occasions this was reduced to as short as 14 days or one month for certain types of vehicles. There was also a maximum period, which was normally nine months. If the vehicle was reported as being on-sold to a retail purchaser before the minimum retention period had elapsed, the VIS automatically reversed the payment.

9 In appropriate cases, Ford would pay to a dealer both a retail incentive and a demonstrator subsidy in respect of the same vehicle. Moreover, where the demonstrator subsidy was lost because the demonstration vehicle was not retained for longer than the minimum retention period, the dealer was entitled to a retail incentive if there was one applicable to the model in question at the time of the subsequent retail sale.

10 As was pointed out by Mr Justin Shaw, a Dealer Auditor employed by Ford, in his witness statement:

One consequence of the automated payment of Retail Incentives and Demonstrator Subsidies is that Ford Australia is reliant on Dealers correctly entering the details of the sales of vehicles in the VIS computer system.

11 On occasions, however, dealers entered inaccurate details. By Dealer Confidential Bulletin No. 147 Vol 98 ("DCB 147") dated 3 August 1998, Ford advised its dealers as follows:

In late 1996, Dave Reis wrote to all Dealer Principals warning you of the implications of poor disciplines in the reporting of Demonstrator sales. The Company Auditors have alerted me to a recent spate of instances whereby Dealers have been inaccurately (sometimes deliberately) misreporting sales dates in support of retaining the Demonstrator allowances.

This is now to advise you that in instances where the Demonstrator allowances are reversed, resulting from non compliance with the Demonstrator requirements, retail incentives will also be disallowed where previously they may have been alternatively claimed.

In a number of recent instances, Sales Managers have been misreporting sales data without the knowledge of Dealer Principals, and I must ask you to ensure that the disciplines required in receiving Demonstrator support is fully communicated to your sales management team. In this respect I must remind you that fraudulent claiming of incentives is a fundamental breach of the Dealer Agreement which may lead to immediate termination.

12 It is appropriate to mention at this stage a later bulletin, DCB 2005/017 dated 1 January 2005, which whilst not affecting these events directly was referred to by Harrison Ford in its submissions. The subject matter of this bulletin was "2005 Ford Demonstration Program". It stated that a key objective of the program was:

... to ensure that the integrity of the 2005 Ford Demonstrator Program is not compromised so all legitimate users are protected and continue to benefit from the Program's intended function. At all times, Dealers are required to comply with the terms and conditions of the Ford Dealer Agreement and in particular, clause 11.2(f).

Dealers were required to sign and return a document headed "2005 Ford Demonstration Program - Dealer Participation Agreement". Relevantly, the principal of the dealer stated in that document that he wished to participate in the 2005 Ford Demonstrator Program and that he agreed:

to abide by the 2005 Ford Demonstrator Program Rules and Conditions as detailed in Dealer Confidential Bulletin 2005/017 plus all relevant terms and conditions of the Ford Dealer Agreement (in particular clause 11.2(f)) and the following specific items:

I understand that if a Demonstrator Subsidy is reversed as the result of a Ford audit, a fee equivalent to the amount of the Demonstrator Subsidy will be levied. This fee is to compensate Ford for the cost of conducting the audit, the foregone interest on the amount incorrectly claimed and allocated overhead expenses.

13 In late 2004 and early 2005, Ford conducted an audit of Harrison Ford's marketing and sales subsidies and allowances between 15 January 1998 and 28 October 2004. The result of the audit purportedly showed that Harrison Ford had made numerous inappropriate claims for a range of financial incentives and subsidies. As a result of Harrison Ford challenging these findings and, in some cases, providing further documentation, Ford reviewed the result of the audit. A number of points made by Harrison Ford were accepted.

14 Nevertheless, by a letter dated 10 February 2006, Ford gave notice to Harrison Ford pursuant to clause 19.4(f) of the second dealer agreement of the termination of the second dealer agreement effective immediately from the date of the letter. Ford also advised Harrison Ford that the final amount due and payable to it as a result of the audit was the sum of $543,418.53, plus GST of $54,341.85. Most of the pre-GST amount was constituted by the sum of $456,364 on account of demonstrator subsidies and retail incentives.

15 On 17 February 2006, Harrison Ford commenced this proceeding seeking a declaration that the termination letter dated 10 February 2006 was not a valid or effective notice under clause 19 of the second dealer agreement and an injunction restraining Ford from taking any step under or pursuant to that letter to terminate the second dealer agreement. On 20 February 2006, it obtained an interlocutory injunction to that effect. On 23 February 2006, Harrison Ford paid the total sum, including GST, of $597,760.38 to Ford, of which the sum of $279,062.30 was paid under protest. This amount represented $253,693, in respect of retail incentives, plus GST thereon. In its statement of claim delivered on 10 March 2006, Harrison Ford also claimed to be entitled to judgment for the sum of $279,062.30. It pleaded that it was entitled to retain this amount as the demand by Ford for repayment of the retail incentives was a penalty and therefore unenforceable by it.

16 Shortly prior to the matter coming on for hearing, the parties settled the principal issue. Accordingly, on 4 February 2008, the Court declared by consent that Ford was entitled to terminate the second dealer agreement and that it was terminated on 10 February 2006. Harrison Ford also consented to orders that its claim for relief in connection with the termination of the second dealer agreement be dismissed, that it pay to Ford damages in the amount of $45,155.68, plus interest on that amount fixed at $10,055.49, and that it pay Ford's costs of the claim and counterclaim in connection with the termination of the second dealer agreement issue, including reserved costs. The damages of $45,155.68 represented the agreed costs of the audit conducted by Ford of Harrison Ford's claims for financial incentives and subsidies. Thus, the only remaining issue for determination was Harrison Ford's claim for judgment in the sum of $279,062.30.

17 As part of the settlement of the termination issue, the parties also reached agreement on certain facts relating to the remaining issue. Harrison Ford agreed that the demonstrator subsidies, in the sum of approximately $203,000, which were repaid to Ford with an admission of liability, were "reversed resulting from non compliance with the demonstrator requirements within the meaning of bulletin 147 ... constituted by the deliberate misreporting of sales dates and other particulars of the relevant vehicles ...". It was further agreed that the concession about the deliberate misreporting of sales dates included the dates of the retail sales. Ford relied on the witness statement of Justin Shaw dated 16 October 2006, as amended by the deletion of a number of paragraphs on the ground that they were no longer relevant, and his supplementary witness statement dated 2 December 2007. In the first statement, Mr Shaw explained the dealings between the plaintiff and the defendant, and set out the results of the audit conducted by him of Harrison Ford's sales records. All of the relevant transaction documents examined in the audit, including the relevant DCBs, were also put into evidence without objection. The witness statement of Mark Winslow was, however, objected to by Harrison Ford. I will deal with this objection when considering the submissions concerning the penalty argument. Neither of the defendant's witnesses was cross-examined by the plaintiff and no evidence was led on behalf of Harrison Ford.

18 What was involved in Harrison Ford's conduct was illustrated by an examination during the hearing of one particular transaction. By DCB 2002/013 dated 16 January 2002, Ford advised its dealers that "a one month minimum retention period for Demonstrator and Service Loaner vehicles has been introduced on all AU11 Falcon Passenger Demonstrator and Service Loaner vehicles until last unit sold". The amount of the demonstrator subsidy was $700. By DCB 2002/022 dated 1 February 2002, Ford advised its dealers of the latest retail incentives, including a $1,000 incentive for Falcons "March to October build 2001 plate XR8 ... until last unit sold". An AU11 Falcon included the XR8 model. On 4 February 2002, Harrison Ford sold an AU11 Falcon XR8, identified as Single Item Dealer Order ("SIDO") number 127137, to a customer "KW". However, Harrison Ford falsely reported that vehicle as being purchased by it on 4 February 2002 as a demonstrator. By DCB 2002/045 dated 1 March 2002, Ford advised its dealers that the retail incentive on all AU11 2000 and 2001 plate XR8 Falcons was now $2,500. Later in March 2002, after the expiration of the minimum retention period of one month, Harrison Ford falsely reported that it had on-sold vehicle SIDO 127137 to KW. It claimed to be entitled to retain the demonstrator subsidy of $700 and the retail incentive of $2,500. At the hearing, Harrison Ford accepted that it was not entitled to either payment, but maintained that it was entitled to the retail incentive of $1,000, applicable to the actual sale of the vehicle in question to KW on 4 February 2002.

19 Other examples of Harrison Ford's wrongful conduct were simpler in that, although the reported date of the retail sale was falsely delayed in order to allow for the fraudulent claim of a demonstrator subsidy, the amount of the retail incentive did not change between the actual date of the retail sale and the falsely reported later date of that sale. Whilst Harrison Ford acknowledged that it was not entitled to the fraudulently claimed demonstrator subsidy, it did claim that it was entitled to the retail incentive applicable at the time of the actual retail sale. This was said to be, on average, about $1,500.

20 It was common ground that all of the repaid retail incentives making up the figure of $253,693 were associated with a false demonstrator subsidy claim as described above. Nevertheless, Harrison Ford pleaded in its statement of claim that Ford had "properly and correctly" paid to it retail incentive payments totalling $253,693. It further pleaded that Ford had wrongly contended that, pursuant to DCB 147 (and only pursuant thereto), Harrison Ford was liable to repay it the reclaimed incentives totalling $253,693 plus GST.

21 After some discussion at the start of the hearing, by consent Harrison Ford amended its statement of claim to include an alternative claim that in the relevant period Ford made offers to pay retail incentives to Harrison Ford in respect of certain vehicles, upon sale of each vehicle by Harrison Ford, "at the rate applicable at the date of sale" and that in acceptance of the offers from time to time, Harrison Ford made sales of vehicles in respect of which retail incentives had been offered by Ford, and reported such sales to Ford. Harrison Ford then pleaded as part of the alternative claim that Ford wrongly contended that, pursuant to DCB 147 (and only pursuant thereto), Harrison Ford was not entitled to be paid the retail incentives in respect of the relevant sales of the vehicles.

22 In respect of both the initial claim and the alternative claim, Harrison Ford pleaded that Ford was not entitled to retain the sum paid under protest or to deny that Harrison Ford was entitled to be paid the appropriate retail incentives because DCB 147 did not impose any such obligation on Harrison Ford. It was further pleaded that if any obligation was imposed by DCB 147 then it was a penalty and therefore unenforceable.

23 Because neither party had carried out the necessary adjustments to the figure of $253,693 to take account of the reductions to the amount of some of the retail incentives when claimed for the earlier correct date, it was agreed that Harrison Ford would claim a declaration about the issue raised by the alternative claim, with the calculation of the amount to be made later, if required. The declaration sought by Harrison Ford was as follows:

A declaration that the plaintiff is entitled to be paid retail incentives with respect to the sale of vehicles, at the rate applicable at the date of sale, in respect of which claims made for demonstrator subsidies were reversed by the defendant by reason of non compliance with the demonstrator requirements within the meaning of DCB 147.

24 Further, it was accepted by Harrison Ford that, even if it was successful in its initial claim, the figure of $253,693 would have to be reduced by the total of any differences between the retail incentive payable on the falsely reported date of the retail sale and the retail incentive applicable at the time of the actual retail sale. As I have said, neither side had carried out that calculation. Although Harrison Ford suggested that the amount in question was "likely to be small", there was no evidentiary basis for this assertion.

25 Mr Riordan SC, who appeared with Ms Neskovcin of counsel for Ford, submitted that Harrison Ford's alternative claim was its real claim. He submitted that it was beyond doubt that Ford had been entitled to demand the repayment of the falsely claimed demonstrator subsidies and retail incentives. In each case, the claims for both the demonstrator subsidy and the retail incentive were fraudulent. With the former, there had been no such transaction and with the latter, the date of the retail sale had been falsely reported as later in time than it actually was in order to allow the fraudulent claim for a demonstrator subsidy to be made and also, in some cases, to claim a larger retail incentive payment. Mr Riordan further submitted that what Harrison Ford was, in reality, now seeking to do was to make a fresh claim for the retail incentives based on the actual dates of sale. However, such a claim was, he submitted, barred by the terms of DCB 147. The offer to pay a retail incentive was, after 3 August 1998, subject to the condition or qualification that it would not be paid where it was linked with a false claim for a demonstrator subsidy. Thus, he submitted, no question of a penalty arose.

26 As stated above, the main argument relied on by Harrison Ford in support of its claim to be entitled to the sum of $279,062.30, or such lesser sum as was found to be owing for retail incentives, was that the provision relied on by Ford, namely DCB 147, was a penalty. However, Mr O'Callaghan SC, who appeared with Mr Archibald of counsel for Harrison Ford, submitted that, in any event, as a matter of construction, DCB 147 did not mean that Harrison Ford was not entitled to the retail incentives. Although some of the points made in the written outline of submissions were not pressed in the hearing, several arguments about the proper construction of DCB 147 remained.

27 First, Mr O'Callaghan submitted that it was relevant that DCB 147, unlike the later DCB 2005/017, did not require a response from the dealer. Thus, there was no requirement in DCB 147 that the dealer agree to be bound by the terms of the Ford Demonstrator Program by signing and returning a Dealer Participation Agreement containing an acknowledgment that the dealer understood that if a demonstrator subsidy was reversed the alternative claim for the retail incentive would be disallowed. Although Harrison Ford did not dispute that it received DCB 147, it was submitted that it was a unilateral document which was never specifically accepted by the dealer. It was further submitted that Ford could not impose contractual obligations by "issuing" them in the form of unilateral bulletins at its sole discretion without requiring the dealer to adopt or agree to the new obligations.

28 I do not agree with this submission. It seems to me that once DCB 147 was sent and received by Harrison Ford in August 1998, thereafter every claim by it for a demonstrator subsidy and associated retail incentive was subject to the terms of that bulletin. That was the offer made by Ford, which the dealer could accept, but not change. Further, it is not material, in my opinion, that after the relevant period, Ford adopted a different method of dealing with the problem of false claims. Moreover, the argument that there was no contractual relationship between Ford and Harrison Ford arising out of DCB 147 was contrary to one of the plaintiff's subsequent submissions concerning penalties. This was, that the provisions for incentives in all DCBs were promissory, even if they could be amended or withdrawn before the dealer acted on them, but that once acted upon by the dealer, and their conditions were satisfied, Ford was contractually obliged to pay the incentives and the dealer was contractually entitled to receive them. I agree with this submission. I also agree with the plaintiff that it is not material whether the obligation to pay the incentive is seen as part of the dealer agreement or as a separate contract for the sale of a particular vehicle. However it is categorised, any conditions purporting to affect the entitlement to payment of the retail incentives, such as DCB 147, must be contractual.

29 Secondly, Mr O'Callaghan submitted that the focus and burden of DCB 147 was compliance with the conditions for demonstrator subsidies, not setting out conditions for entitlement to retail incentives. He pointed to the following aspects of the wording of DCB 147: the subject matter of the bulletin as set out in the heading of the document was "Dealer Demonstrators"; the whole of the first paragraph dealt with demonstrator sales and demonstrator allowances; virtually all of the second paragraph dealt with demonstrator requirements and the reversal of demonstrator allowances where they had not been complied with; there was the reference to "receiving Demonstrator support" in the third paragraph; and, in any event, the meaning of the general words of that paragraph was to be understood from the preceding context. It was further submitted that the matter should be viewed as one of substance and not form,[1] and that the language and substance of DCB 147 was inconsistent with Ford's assertion that it set out a pre-condition to the dealer's entitlement to a retail incentive of compliance by the dealer with the requirements for claiming demonstrator allowances.

30 Whilst DCB 147 undoubtedly concentrated on the false reporting of demonstrator sales, one cannot ignore, in my opinion, that it was specifically stated in the second paragraph of the bulletin that retail incentives would also be disallowed where there had been false claims for demonstrator subsidies, and that the alternative claim for the retail incentive would no longer be allowed. Further, I see no reason why the statement at the end of the third paragraph that "fraudulent claiming of incentives is a fundamental breach of the Dealer Agreement" does not apply to the retail incentives as well as the demonstrator subsidies. Moreover, it seems to me that concentration on the substance, and not just the form, of DCB 147 supports Ford's position.

31 Next, Mr O'Callaghan submitted that Ford had not shown that there was any requirement that the date of the retail sale be correctly reported to Ford in order for Harrison Ford to be entitled to the retail incentive. He submitted that DCB 147 did not say that the dealer had to enter the sale of the vehicle on the VIS on the actual date of sale, nor that the correct date had to be entered on the VIS. Thus, there was nothing in DCB 147 to disentitle the dealer to the retail incentive merely because the entry of the date was wrong. Mr O'Callaghan then submitted that DCB 147 was, therefore, directed towards clawing back payment, or denying an entitlement to payment, of the retail incentive which had accrued to the dealer. He submitted that the entitlement to payment accrued upon the dealer making a retail sale of a vehicle in respect of which there was a current offer by Ford to pay a retail incentive in respect of that particular model of vehicle. Mr O'Callaghan further submitted that the language used in DCB 147 was redolent of a penalty. He drew attention to the words "reversed" and "disallowed" in the bulletin and to the use of the word "reversed" in both the audit report and the witness statement of Mr Shaw. It was therefore argued that DCB 147 was not to be construed as establishing that compliance with the requirements for the demonstrator subsidy was a pre-condition to an entitlement to receive a retail incentive.

32 I cannot accept this submission, in circumstances where it is clear from the agreed facts that the only reason why the date of the retail sale was wrong was to enable the dealer to make the fraudulent claim for a demonstrator subsidy. Ford is not relying on DCB 147 to deprive Harrison Ford of retail incentives simply because the date of the retail sale was not entered on the VIS on the actual date of sale or because the date was mistakenly entered as a result of an innocent mistake. On the contrary, Ford, having sent out DCB 147 to warn its dealers of the consequences of making fraudulent claims, is simply rejecting the claim to the retail incentive because the date was an essential part of the fraudulent scheme and it was falsely delayed. Ford is also resisting Harrison Ford's attempt, in the alternative, to receive the retail incentive by making a belated claim based on the correct date of sale. It is neither here nor there, in my opinion, that in some cases the additional result of the fraudulent scheme was that the retail incentive payment was greater than it would otherwise have been. Thus, it is not relevant that the number of such examples was likely to be small, as suggested by Harrison Ford.

33 Further, I do not consider that the words used affect the issue one way or the other. By virtue of the automatic nature of the crediting of bonus payments, any subsequent disclosure of the falsity of those claims will result in the need to reverse or disallow the earlier credits to the dealer's accounts. But this says nothing, in my opinion, about whether or not the dealer was entitled to those payments or credits in the first place. Secondly, it is not correct, in my opinion, that Harrison Ford had an entitlement to the retail incentives which DCB 147 purported to claw back. By the wording of its third paragraph, DCB 147 was making it clear to dealers that Ford was not prepared to pay fraudulently claimed incentives, whether they were demonstrator subsidies or retail incentives. Further, clause 11.2(f), (g) and (h) all impose the obligation not to make a fraudulent claim, which is exactly what Harrison Ford was doing when it reported the false date of the retail sale. It was not a case of an innocent mistake.

34 I therefore consider that, as counsel for Ford submitted, the answer to this dispute is to be found in the analysis of the relevant facts and the terms of the offer made by Ford to pay retail incentives to dealers after 3 August 1998, when DCB 147 was issued. I agree that Ford was entitled to repayment of the falsely claimed demonstrator subsidies and retail incentives on any number of grounds such as fraud, misleading and deceptive conduct or money had and received. I also agree that this means that Harrison Ford's real claim is the alternative claim which is, in effect, that it would have been entitled to the retail incentives if, initially, it had made honest claims for them based on the actual dates of the retail sales. But, in my opinion, that claim must fail because Ford's offer to pay retail incentives was, after 3 August 1998, subject to the condition that the claim for a retail incentive was not linked with a fraudulent claim for a demonstrator subsidy, and Harrison Ford cannot satisfy that condition. An alternative way of viewing Harrison Ford's claim is, in my opinion, that it must fail because there was no offer by Ford of the kind suggested by Harrison Ford, which entitled it to a retail incentive. This was an offer which Harrison Ford could accept by selling a vehicle to which a retail incentive applied and then making an alternative or fresh claim for that incentive based the second time on the actual date of the retail sale, after its first fraudulent claim based on the falsely delayed date of sale had been discovered by Ford to be false and demand had been made for repayment of the fraudulently claimed retail incentive. Either way, as there was no offer accepted by Harrison Ford it has no accrued entitlement to the retail incentives. However it is viewed, in my opinion, the question is simply what was the offer made by Ford to pay retail incentives? No issue arises as to whether Ford's demand for repayments of the fraudulently dated retail incentives or its denial of Harrison Ford's claim to be entitled to the retail incentives was a penalty.

35 Nevertheless, as the parties devoted considerable time to the penalty argument, I turn to briefly consider their submissions, on the assumption that, contrary to the conclusion I have reached, Ford's disallowance of the retail incentives took away an accrued entitlement on the part of Harrison Ford. I consider that Harrison Ford bears the burden of demonstrating that DCB 147 was a penalty.[2]

36 Counsel referred to the joint judgment of the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd,[3] where it was stated that:

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.

Their Honours went on to describe the following passage from Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[4] as "the starting point"[5] for the appellant in that case:

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"[6].

37 In Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd,[7] Brereton J, after referring to the same passage from Ringrow, continued as follows:

However, the "standard application" of the doctrine is not its sole application, and Lord Dunedin's statements of principle are not complete or universal in relation to penalties, as the Court of Appeal has observed in Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40. First, it is not limited to obligations to pay a monetary sum, but extends to obligations to transfer property .... Secondly, it is not limited to cases in which the dichotomy of penalty or genuine pre-estimate of damages arises, ...

38 Mr O'Callaghan correctly submitted, in my opinion, that the alleged claw-back was consequent upon a breach of contract. He referred to the retention of the demonstrator subsidies, contrary to clause 11.2(g) of the second dealer agreement, as a breach giving rise to the application of the law concerning penalties. Some other breaches which counsel could have referred to, but did not, were the breaches of sub-clause 11.2(f) by the making of a false or fraudulent claim for a retail incentive; the breach of sub-clause 11.2(g) by the accepting and retaining of the falsely claimed retail incentives to which it was not entitled; and the breach of sub-clause 11.2(h) by committing the dishonest, fraudulent or wilfully deceptive or misleading act of claiming retail incentives based on dates deliberately misreported in order to also claim a false demonstrator subsidy.

39 Finally, Mr O'Callaghan submitted that the provision for clawing back payment, or an entitlement to payment, of the retail incentive which had accrued to the dealer was penal, not compensatory. He referred to a number of factors which, he submitted, demonstrated the penal character of the provision.

40 First, Mr O'Callaghan submitted that there was no pre-estimate of loss. There was "not even a gesture towards estimating the damage"[8] in DCB 147. It was submitted that the only loss contemplated in DCB 147 was the improperly claimed demonstrator subsidies. Counsel further submitted that rather than estimating loss, the unashamed intention of DCB 147 was to secure and procure compliance with the requirements for demonstrator subsidies, and that accordingly it transparently operated to intimidate, deter and punish non-compliance with the demonstrator requirements.

41 Secondly, Mr O'Callaghan submitted that the claw-back had no connection with loss. There was no connection between the retail incentive and any loss flowing from the wrongful claim by the dealer of a demonstrator subsidy, much less the amount of such an incentive (which might vary) and the amount of any loss. It was submitted that the absence of a pre-estimate of loss arose because of the difficulty in applying that notion to an amount which bore no connection to the conceivable loss.

42 Thirdly, Mr O'Callaghan submitted that the claw-back was greater than the amount that was not repaid. Here, it was submitted, the obligation in respect of the demonstrator subsidy was not to retain it, that is, to repay that sum of money. However, the sum stipulated by the claw-back provision, being the reversal of the demonstrator subsidy plus the retail incentive, was greater.

43 Fourthly, Mr O'Callaghan submitted that the claw-back had no connection with the nature of the breach, in that a breach of the demonstrator requirements could be trivial (innocent delayed reporting of date) or more serious (falsity of use as demonstrator). It was pointed out that for numerous transactions involving demonstrator subsidies, no retail incentive was involved and therefore there was none to be clawed back. Mr O'Callaghan therefore submitted that this gave rise to a presumption that the provision was penal. It was submitted that, although that presumption could be overcome where there was sufficient evidence that the potential loss was immeasurable, there was no cogent evidence in this regard adduced by Ford. Mr O'Callaghan submitted that Mr Winslow's evidence was not admissible because it was so brief and vague and conclusory, but that, if it was admissible, no weight should be placed on it. He contrasted the lack of evidence in this case with the "elaborate" evidence in Dunlop[9] about the way in which the party would be damaged by the relevant conduct, including the departure of an agent to a competitor. He also referred to the detailed evidence considered by the Queensland Court of Appeal in Bartercard Ltd v Myallhurst Pty Ltd.[10]

44 Fifthly, Mr O'Callaghan submitted that the amount of the claw-back (being the retail incentive in addition to the demonstrator subsidy) was out of all proportion to the actual loss (being the amount of the demonstrator subsidy which was paid). It was pointed out that the amount of the retail incentives in question of $253,693 was greater than the amount of demonstrator subsidies of approximately $203,000. Further, not only had the demonstrator subsidies been repaid but Ford had also received damages for the costs of the audit in the sum of $45,155.68, plus interest. That smaller sum was a more likely estimate of the amount of damage suffered by Ford. Mr O'Callaghan further submitted that the consequence was that whilst any profit made by the dealer on the transaction was reduced, possibly even to the point of making a loss, Ford had recovered the demonstrator subsidies and its costs of undertaking the audit.

45 Mr Riordan first submitted that the law of penalties only applied where the sum stipulated to be paid was "extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach".[11] He drew attention to the illustration mentioned by Lord Dunedin immediately after the passage just quoted. It was the "extreme" example given by Lord Halsbury in Clydebank Engineering and Shipbuilding Company v Castaneda[12] about a person agreeing to build a house in a year and agreeing that if he did not build the house for 50 pounds he would "pay a million of money as a penalty". As Chernov JA said in Yarra Capital Group Pty Ltd v Sklash Pty Ltd,[13] it would seem evident from this example that Lord Dunedin thought that "the disproportion between the agreed sum and the likely loss at least must be significant before the former is regarded as impermissibly extravagant or unconscionable".

46 Further, the High Court in Ringrow affirmed the statement by Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin[14] that an agreed sum should only be characterised as a penalty if it is "out of all proportion" to damage likely to be suffered as a result of breach:

... The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships. As Mason and Wilson JJ observed in AMEV-UDC Finance Ltd v Austin:

"[T]here is much to be said for the view that the courts should return to ... allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterised as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach."

Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged "extravagant and unconscionable in amount". It is not enough that it should be lacking in proportion. It must be "out of all proportion". ...[15] [Footnotes omitted]

47 Secondly, Mr Riordan submitted that proof that the amount claimed was a genuine pre-estimate of damage did not require the promisee to establish that "it had actually calculated the amount by reference to the likely loss that it may suffer by reason of the promisor's breach or that there was an arithmetic relationship between the two amounts".[16] He further submitted that the Court may have regard to the difficulty and expense that would be involved in establishing the quantum of the damage that might arise by reason of the breach. In Yarra Capital,[17] Chernov JA said:

That difficulty and expense in estimating damages for breach is a relevant consideration in determining if the agreed sum is a penalty has been recognised in a number of cases.

His Honour then quoted a number of statements to this effect from Kemble v Farren,[18] Clydebank Engineering and Dunlop.

48 Thirdly, Mr Riordan submitted that, in considering whether DCB147 was a genuine pre-estimate of loss, the Court should have regard to all of the circumstances at the time of DCB 147, not just the loss sustained from each misreported sale. He argued that, whilst the loss and damage sustained by reason of a single misreported sale might not be proportionate to the amount claimed, if that sale was looked at in isolation, if the misreporting of sales was systematic, concealed and prolonged, Ford might not be fully compensated for its loss.

49 I do not agree with a number of the submissions advanced on behalf of Harrison Ford. It is simply not correct, in my opinion, that there was no connection between the retail incentive and any loss flowing from the wrongful claim by the dealer of a demonstrator subsidy. Without the false reporting of the date of the retail sale, there could be no fraudulent claim for the demonstrator subsidy. Moreover, in some cases part of the loss suffered by Ford was the loss of use of the excessive amount claimed for the retail incentive as a result of the false reporting of the date of the retail sale.

50 It is also not correct, in my opinion, that the only loss contemplated in DCB 147 was the improperly claimed demonstrator subsidies. It was surely obvious to both Ford and its dealers in August 1998 that delaying the reported date of the retail sale could mean that a greater retail incentive was created to a dealer's account than would otherwise have been the case.

51 Nor was it correct, in my opinion, that an innocent delayed reporting of the actual date of the retail sale could lead to the consequences suggested by Harrison Ford. In my opinion, DCB 147 was not concerned with innocent mistakes but only with false or fraudulent or dishonest claims.

52 Finally, it was not correct, in my opinion, to assert that Ford's actual loss was limited to the amount of the demonstrator subsidy and then to compare the failure to repay the demonstrator subsidy with the reversal of both the demonstrator subsidy and the retail incentive and to use the fact that the latter is greater than the former as illustrating the penal nature of the claw back. The correct comparison is between the amount of the retail incentive and the loss suffered by Ford from the fraudulent claims for demonstrator subsidies and retail incentives, after the demonstrator subsidy has been repaid.

53 This brings me to the question of the admissibility of Mr Winslow's evidence. Mr Winslow said in his witness statement dated 26 February 2008 that he was the Vice President, Marketing and Sales, for Ford. He said that the Ford distribution network was designed to provide for dealers to operate in their assigned geographic areas so that each dealer was able to maintain a viable business as well as competing on equal terms with other dealers. As I understand the plaintiff's position, so far this evidence was regarded as uncontroversial. It was the remainder of his witness statement that was said to be objectionable. In paragraph 6, Mr Winslow stated:

The subsidies and incentives and in particular Demonstrator Subsidies, which are offered by Ford, from time to time, are offered to all dealers on the same terms. There would be a clear competitive advantage afforded to a dealer, which had improperly claimed a Demonstrator Subsidy for a vehicle. The effect that an improper competitive advantage would have on competing dealers and on the Ford Dealership network is dependent on the period over which the improper claims are made. The economic effect of improper claims on Ford, by reason of its impact on fair trading between dealers and the Ford dealership network is, and was in 1998, unable to be measured.

54 Mr O'Callaghan submitted that as Mr Winslow was, in 1998, a regional manager for Ford for South Australia and the Northern Territory, he would not have known the facts on which this statement was based. He also submitted that Mr Winslow's untestable assertion about the economic effect being unable to be measured defied credulity in light of the fact that in DCB 2005/017 Ford "made a pretty good attempt at defining precisely what it was it was being compensated for, in the anticipated events". No reference was there made to the impact on the dealership network. Instead, only the cost of conducting an audit, the foregone interest on the amount incorrectly claimed and allocated overhead expenses had been mentioned.

55 I do not accept the criticisms of Mr Winslow's evidence. It seems to me that in paragraph 6 of his witness statement he is really only stating what would have been obvious to the parties in August 1998. There can be no doubting that a dealer would gain a clear competitive advantage from fraudulently claiming a demonstrator subsidy in respect of a vehicle which was never used as a demonstrator vehicle. Thus, in the case of the sale to KW of vehicle SIDO 127137 on 4 February 2002, Harrison Ford could have offered a lower price than other dealers knowing that it would be receiving the benefit of the fraudulently claimed demonstrator subsidy of $700. Further, it seems obvious to me that this improper competitive advantage could have an effect on the Ford Dealership network to the detriment of Ford, but that this effect was not capable of measurement.

56 It is not a valid argument, in my opinion, to point to the changed wording used in DCB 2005/017 as throwing doubt on Mr Winslow's assertion that the economic effect on the Ford Dealership network is, and was in 1998, unable to be measured. As Harrison Ford's counsel pointed out, there was no reference in that bulletin to the impact on the dealership network. Rather, all that it sought to do was to point to certain losses that Ford could suffer as a means of justifying the imposition of a levy of "a fee equivalent to the amount of the Demonstrator Subsidy". It was not suggested that those losses were a means of measuring the economic effect on the dealership network of the loss of confidence by dealers that they were able to compete on equal terms with other dealers, if they remained in the Ford dealership network. I therefore reject the objections to Mr Winslow's evidence.

57 DCB 2005/017 indicates that there are losses which could be suffered by Ford as a result of a dealer making fraudulent claims for demonstrator subsidies and retail incentives, which are capable of an approximate measurement after the event. It seems to me that the possibility of these types of losses would have been understood by the parties in August 1998 when Ford issued DCB 147 which, on the given assumption, operated to deprive a dealer of its accrued entitlement to a retail incentive. The parties could well have contemplated that fraud, by its very nature, is concealed and is often only detected with difficulty and after some time has passed. Thus, the foregone interest on the amount incorrectly claimed is important. It would also have been understood that detecting fraudulent claims would be costly to Ford both in terms of the cost of the audit itself and in wasted management time.

58 In this case, we do know that, apart from the question of the potential damage to its network, Ford would have suffered a loss from the inability to use the amount of each demonstrator subsidy which it was misled into paying to Harrison Ford (totalling some $203,000). Given that DCB 147 was dated 3 August 1998, payment for some of these fraudulent claims could have been made possibly up to seven and a half years before the repayment by Harrison Ford on 23 February 2006. That figure would not be insubstantial, in my opinion.

59 Secondly, Ford would have suffered a loss from the inability to use the excessive amount of each retail incentive which it was misled into paying to Harrison Ford (an unknown amount). Given that the onus is on Harrison Ford to show that DCB 147 was a penalty, it seems to me that the fact that this amount is unknown cannot work to its advantage. I do not understand why it did not attempt to prove its assertion that the number of examples of an increased retail incentive was "likely to be small". Instead, I am left in the situation where the only transaction examined in any detail at the hearing involved an increase of $1,500 in the retail incentive as a result of the false report of the date of the retail sale. If there were a number of such cases, then the loss from the inability to use the money paid in respect of these fraudulently claimed retail incentives could become significant.

60 Further, there would be a loss suffered by Ford in wasted management time dealing with these false claims, apart from the direct cost of the auditors' time and expenses. As stated above, in respect of this last item, Harrison Ford consented to judgment in an agreed amount.

61 In the circumstances, it does not seem to me that the repayment of some unknown sum approaching but somewhat less than $253,693, plus GST, can be described as being out of all proportion to the actual loss suffered by Ford. Nor do I consider that, in the circumstances, it is unconscionable for Harrison Ford not to be entitled to retain the fraudulently claimed retail incentives. Therefore, even if, contrary to my opinion, DCB 147 has the effect of depriving Harrison Ford of an accrued entitlement to the applicable retail incentive, I do not consider that that provision is a penalty.

62 For all of the above reasons, Harrison Ford's claim for judgment for the sum of $279,062.30 must be dismissed.

[1] See the authorities referred to in Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2007] NSWSC 406, [70] (Brereton J).

[2] AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564, 578 (Clarke JA, with whom Kirby P and McHugh JA agreed); Challenge Finance Ltd v Forshaw (No 4) (1995) 217 ALR 264, 271 (Young J); Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2007] NSWSC 406, [13] (Brereton J).

[3] [2005] HCA 71; (2005) 224 CLR 656, 662 [10] (Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ).

[6] Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332, 342 (Lord Watson).

[8] Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; (2006) 12 BPR 23,629, [31] (Bryson JA, with whom Handley and McColl JJA agreed).

[9] [1914] UKHL 1; [1915] AC 79, 91 (Lord Atkinson).

[10] [2000] QCA 445 (Davies and Thomas JJA, and Ambrose J).

[11] Dunlop Pneumatic Tyre [1914] UKHL 1; [1915] AC 79, 87.

[13] [2006] VSCA 109, [12] (Chernov JA, with whom Warren CJ agreed).

[16] Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109, [13] (Chernov JA).

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