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[2019] VSC 171
Supreme Court of Victoria
2019-03-21
ROBSON J
Original judgment source is linked above.
CONTRACT - Notice of default - Service of notice - Whether strict compliance with address for notices required - Notice not given in accordance with notice requirements - Notice invalid.
RELIEF AGAINST FORFEITURE - Consequence of non-observance of statutory notice was the loss of a party's right to buy 20 per cent of units in a unit trust that owns a motel - Held loss of option constituted circumstances where equity would grant relief against forfeiture.
1 Queenfield Pty Ltd (Queenfield) is the trustee of the Travel Inn Motel Unit Trust (Trust) and administers the Trust on behalf of its unitholders.
2 Moishe Gordon, through Gordon Nominees Pty Ltd (GNPL), owned all the 100 units in the Trust. In July 2015, GNPL sold 50 units in the Trust to TLP Nominees Pty Ltd (TLP), a company controlled by the Paolacci family, for $5.25 million.
3 As part of the acquisition of the 50 units by TLP, the parties executed a number of documents. One of the documents was a Deed of Loan dated 1 July 2015 (Deed of Loan). Under the terms of the Deed of Loan, TLP lent $2.1 million to GNPL for a term of two years at an interest rate of 10 per cent per annum. The Deed of Loan was secured by a personal guarantee from Moishe Gordon, a second-ranking registered mortgage over Queenfield's land, and GNPL pledging 20 units in the trust as security.
4 On 2 February 2017, GNPL entered into a Deed of Cancellation and Transfer (Deed of Cancellation). Under the Deed of Cancellation, GNPL transferred to JPA Finance Pty Ltd (JPA) (a company also controlled by the Paolacci family) 20 units in the Trust as consideration for the $2.1 million loan and other obligations under the Deed of Loan being cancelled.
5 On or about 14 February 2017, an option deed was executed that entitled GNPL to purchase back the 20 units from JPA for the sum of $2.3 million plus the vendor's duty, during a period commencing 24 months from the date of the deed and expiring on 30 June 2020[1] ( Call Option Deed).
6 Currently, the 100 units in the Trust are held as follows: GNPL 30 units, TLP 50 units and JPA 20 units.
7 JPA claims that it has validly terminated the Call Option Deed and seeks a declaration to this effect. GNPL denies that JPA has validly terminated the Call Option Deed. Alternatively, GNPL claims that if JPA has done so, GNPL seeks at equity relief against forfeiture of the option to buy back the 20 units.
8 For the reasons discussed below, I find that JPA has not validly terminated the Call Option Deed. If I am wrong in this conclusion, I find nevertheless that GNPL is entitled to relief against forfeiture of the Call Option Deed.
9 Clause 9(a) of the Call Option Deed obliges GNPL to reimburse JPA on demand for JPA's costs, on an indemnity basis, arising out of the negotiation, preparation and execution of the Call Option Deed.
10 JPA claims to have incurred legal fees in connection with the Call Option Deed in the amount of $26,836.70 (inclusive of GST) (the Debt).
11 On 28 February 2017, JPA's solicitors sent an email to GNPL's solicitors attaching an invoice from JPA to GNPL seeking payment of the Debt. Neither GNPL nor its solicitors responded to the demand made on 28 February 2017.
12 On 8 March 2017, JPA again demanded that GNPL pay the Debt pursuant to clause 9(a) of the Call Option Deed.
13 Efron & Associates, on behalf of their client, GNPL, refused to reimburse JPA and queried the amount, saying they were astounded at the fees claimed. They asked for a detailed itemised bill. Efron & Associates claimed that it appeared that the bill contained fees for work outside of the agreed scope. Collins & Collins, acting for JPA, declined to give any further information about the bill.
14 On 15 March 2017, Collins & Collins wrote to Efron & Associates and demanded that GNPL honour its indemnity to JPA under clause 9(a) of the Call Option Deed.
15 On 9 October 2017, JPA served a statutory demand on GNPL in relation to the Debt (Statutory Demand).
16 On 26 October 2017, GNPL deposited the disputed amount into the trust account of its solicitors, Efron & Associates, and informed JPA that GNPL intended to have the matter listed for taxation. The solicitors proposed that the sum be deposited into an independent solicitor's trust account which would be released on mutual instructions of the parties following taxation.
17 Between 26 October 2017 and 1 November 2017, the solicitors for the parties exchanged further correspondence in relation to the Statutory Demand and particularly in relation to GNPL's demand that JPA's legal costs be subject to taxation.
18 By letter dated 1 November 2017, which is part of the correspondence referred to in the preceding paragraph, Collins & Collins, inter alia, requested specific reasons supporting GNPL's claim that it was entitled to a detailed bill of costs and to have its contracted debt to JPA subjected to taxation. Efron & Associates did not respond. Further, GNPL took no action to set aside the Statutory Demand.
19 Clause 7.1 of the Call Option Deed permitted JPA to terminate the Call Option Deed where a defined 'Insolvency Event' occurred in relation to GNPL. Clause 7.1 provided:
If an Insolvency Event occurs in relation to GNPL, or the Guarantor as the case may be, before GNPL exercises the Call Option in accordance with clause 3.2 this will constitute a breach of this Deed in an essential respect and JPA may at any time terminate this Deed by written notice to GNPL.
20 The term 'Insolvency Event' is defined at clause 1.1 of the Call Option Deed and specifically includes any failure by GNPL to comply with a statutory demand issued pursuant to s 459F(1) of the Corporations Act 2001 (Cth).
21 Without notifying GNPL that JPA intended to exercise its right under clause 7.1 of the Call Option Deed to terminate, on 6 November 2017, JPA purported to do so by sending a letter by facsimile transmission and by email to Efron & Associates.
22 On 17 November 2017, JPA's solicitors received a letter from Efron & Associates claiming that both the termination of the Call Option Deed on 6 November 2017 and the Statutory Demand were invalid.
23 JPA contends that GNPL has taken no further action in respect of challenging the termination of the Call Option Deed on 6 November 2017. JPA maintains that the Call Option Deed has been validly terminated and accordingly GNPL no longer enjoys any rights pursuant to it.
24 In this proceeding, JPA seeks a declaration that the termination of the Call Option Deed on 6 November 2017 was valid and effective, and that the obligations of the parties under the Call Option Deed are now at an end.
25 GNPL, in response, claims that the notice of termination was not served in accordance with the notice provisions of the Call Option Deed and accordingly the Call Option Deed has not been terminated. Further, GNPL submits that if the Call Option Deed has been terminated at law, then equitable relief against forfeiture should be granted.
26 GNPL accepts that service of the Statutory Demand and GNPL's subsequent non-compliance would have triggered a right in JPA to exercise clause 7 to terminate the Call Option Deed, but as mentioned, claims that JPA has not validly done so.
Any notice, demand, consent or other communication (a Notice) given or made under this Deed:
(a) must be in writing and signed by the sender or person duly authorised by the sender;
(b) must be addressed and delivered to the intended recipient at the address or fax number below or the address or fax number last notified by the intended recipient to the sender after the date of this Deed:
....
ii. To GNPL:
Gordon Nominees Pty Ltd
C/- Efron & Associates
Address: Suite 10, Level 1
600 Lonsdale Street
Melbourne VIC 3000
Facsimile: 03 8640 0777
28 The purported notice of termination was sent on 6 November 2017. The notice was contained in a letter. The letter was sent to Efron & Associates by facsimile transmission.
Collins & Collins
Lawyers
Our ref: JPA002-004
6 November 2017
Oren Polichtuk
03 8640 0777
By Facsimile Transmission
Copy by email to: oren@efronlaw.net
Dear Oren
Re: Notice of Termination.
....
JPA hereby terminates the Call Option Deed with immediate effect pursuant to section 7.1 of the Call Option Deed
.....
30 The letter was signed by Alex Collins of Collins & Collins Lawyers.
31 GNPL contends that the notice of termination was not given or made by being addressed to GNPL as required by clause 10 of the Call Option Deed. Rather, the notice was addressed to Oren Polichtuk.
32 In Tricontinental Corporation Ltd v HDFI Ltd ('Tricontinental v HDFI'),[2] the New South Wales Court of Appeal addressed a claim by a lender against a surety where the contract of surety included specified provisions as to giving notices of default and of demand before liability arose under the surety agreement. The surety agreement provided express provisions governing the giving of notices and the like. The surety agreement provided for notice to be given to Selkis Pty Ltd (Selkis) at an address in Perth. By mistake, the notice was given to Selkis at the offices of Mr Chan, who was associated with Selkis in Sydney.
33 Waddell AJA held that the condition as to notice had not been met and that accordingly a precondition to liability was not met. Samuels JA agreed with Waddell AJA, adding that '[i]t seems to me to follow from Ankar that it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed, or it has not. If it has, performance enlivens the obligation to which the stipulation is a condition precedent. If it has not, the obligation does not arise.'[3]
34 Kirby P dissented. Kirby P said that in circumstances where the notice was sent by post to Mr Chan (who was closely associated with the surety company Selkis), the failure to serve the notice at the required address in Perth was no more than the most technical breach of the terms of the security.[4] He held that in the circumstances of the case, the failure to serve the notice at the specified address and other failures were 'trivial' and did not permit the respondent to escape its obligations under the surety agreement.[5]
35 GNPL, in this proceeding, relied on Bond v HongKong Bank of Australia Ltd ('Bond v HK').[6] In that case, a guarantee was given by Mr Alan Bond to three banks in respect of the obligations of a principal debtor, Larobi Pty Ltd (Larobi). Larobi had acquired the debts of Dallhold Investments Pty Ltd (Dallhold), Mr Bond's private company. Dallhold and Mr Bond were also associated with MEQ Nickel Pty Ltd (MEQ Nickel). The guarantee provided for an 'Address for Service of Notices'. The address specified by the guarantor to be included in the guarantee was the address in Brisbane of MEQ Nickel. At the time of drafting the guarantee, that address was Level 5, 46 Edward Street, Brisbane QLD 4000.
36 Before execution of the guarantee, the banks were informed that Dallhold and its related companies, including MEQ Nickel, proposed to change their address to Level 8, Waterfront Place, 1 Eagle Street, Brisbane. Soon after execution of the guarantee, this change occurred. Thereafter, substantial correspondence passed from Dallhold and its related companies to the banks from the new Waterfront Place address.
37 The notice of demand the subject of the proceedings was purportedly served on the guarantor at the Waterford Place address, and was not served at the Edward Street address specified in the guarantee.
38 The banks argued that the appellant, Mr Bond, had notified another address for service (as was allowed pursuant to the notice clause of the guarantee), being the Waterfront Place address. While this argument was accepted by the trial judge, it was rejected by Gleeson CJ.
39 The appellant argued that the address for service remained the address set out in the instrument of guarantee, that is to say, Level 5, 46 Edward Street, Brisbane. No attempt was made to serve the notice at that address. The Chief Justice, noting the trial judge's observation that this point was quite unmeritorious, stated that 'Nevertheless, if the point is technically correct, then the appellant is entitled to the benefit of it'.[7]
Provisions of this kind can sometimes produce apparently harsh results: Tricontinental Corporation v HDFI Ltd.[9] However the language of cl 16.1(c) is mandatory. There is no room for saying that near enough is good enough.
41 Kirby P also recognised the unmeritorious nature of the argument about service. Nevertheless, he said he was bound by the decision in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd ('Ankar')[10] and in Tricontinental v HDFI. (Ankar is not concerned with questions of notice but rather with the release of a surety's obligations of a hirer of machinery to the owner of the machinery where the owner had failed to observe the terms of the guarantee.)
42 JPA submits that the authorities that require strict compliance with notice provisions are those where a notice is a prerequisite or condition precedent to a cause or right of action. In this case, JPA submits that the purpose of clause 7.1 is to give notice of the exercise of a right to bring the Call Option Deed to an end. That is, the notice is not a prerequisite to enlivening a right which JPA wishes to exercise, but rather, the notice merely conveys that a right is being exercised. JPA submits that this is not a case that fits within the statement by Waddell AJA in Tricontinental v HDFI and cited with approval by Kirby P in Bond v HK, where he said:[11]
The clear intended purpose of the provision is to provide a mechanism whereby the liability on the part of [the guarantor] can be established in a way which is unambiguous and certain .... where it is essential in commercial dealing that provisions of this kind should be applied strictly so that the parties know where they stand.
43 JPA submits that here the parties knew where they stood by reason of the notice which was received by the intended recipient (GNPL's solicitor) and which was acknowledged as received by GNPL's director, Mr Gordon. (Mr Gordon, in his affidavit of 13 November 2018 ('Gordon Affidavit'), deposed that he was shocked when GNPL was served with a purported termination notice on 6 November 2017.)
44 JPA submits that there can be no doubt from the content of the 6 November 2017 letter that it was the intention of JPA to terminate the Call Option Deed because of an Insolvency Event by GNPL.
45 JPA contends that the strict approach to the notice requirements demonstrated in Tricontinental v HDFI and Bond v HK is not always adopted by the courts and refers to Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd ('Pan Foods').[12] In Pan Foods, ANZ was entitled to declare that the moneys owing by the customer were immediately due and payable, where a defined 'Event of Default' had occurred by the customer. ANZ did this by giving a notice demanding payment. Under the general conditions of the loan agreement, a notice from the bank to the customer was to be given by an authorised representative of the bank in writing.
46 The Court accepted that this condition required that the notice be physically handed over, which in this case it had been. Callinan J, with whom the majority (Gleeson CJ, McHugh and Hayne JJ) agreed, held that Winneke P had correctly covered the questions of adequacy of the notice and its delivery to Pan, when his Honour had concluded that 'the form of the notice, the manner of its address to Pan and its contents and schedules logically sufficed to satisfy the requirements of the clause' on notice.[13] I do not take that decision as a finding that a notice that did not comply with the requirements of the relevant contract would nevertheless be validly given.
47 Kirby J stated that the arguments advanced on behalf of Pan sought to import into the construction of the notice clause the same strict approach which had produced such artificialities in the case of commercial agreements which compensated sureties. Kirby J did not favour such an approach. He said that:[14]
In my view, such documents should be construed practically, so as to give effect to their presumed commercial purposes and so as to not to defeat the achievement of such purposes by an excessively narrow and artificially restricted construction.
48 Despite the observations of Kirby J, it appears to me that the other members of the Court were satisfied that the conditions on service of the notice, as provided in the relevant clause, were in fact satisfied.
49 JPA also refers to MLW Technology Pty Ltd v May ('MLW v May').[15] In that case, Gillard AJA (with whom Winneke P and Buchanan JA agreed) addressed the issue of whether a notice requiring the defendant, Mr May, to buy certain shares pursuant to an agreement between the plaintiffs and Mr May, complied with the contractual requirements of such a notice. Gillard AJA approached the matter by considering what the notice would have conveyed to Mr May in the context of his knowledge of the agreement and its terms. His Honour concluded that the notice would have conveyed the information required to be included in the notice, even though the notice did not expressly include all the information that it was required to contain. Gillard AJA stated:
The law should strive to uphold a contract wherever possible to avoid the reproach of being the destroyer of bargains. The principle applies not only to contracts but also to the actions of businessmen. The point has been recently reinforced in the House of Lords in relation to a notice given pursuant to a contract by Lord Steyn in Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd. That case concerned a lease and the validity of a notice to determine the lease. The notice wrongly stated the date of termination and the question arose whether it was effective. The Court of Appeal, adopting a strict approach, held that it was not. On appeal, the House of Lords by a majority held that it was sufficient. Lord Steyn formulated a number of propositions and stated with respect to proposition 2 the following:
"(2) The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene."
"... the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and terms of clause 7(13) the question is simply how the reasonable recipient would have understood such a notice."
His Lordship noted that the law had moved on from a strict technical approach and said:
"Since then there has been a shift from strict construction of commercial instruments to what is sometimes called purposive construction of such documents. ... It is better to speak of a shift towards commercial interpretation. About the fact of the change in approach to construction there is no doubt."
"In determining the meaning of the language of commercial contract, and unilateral contractual notices, the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language." [16]
50 A valid notice did trigger an obligation of Mr May to purchase the plaintiffs' shares.
51 A further issue was whether the notice was sent to Mr May. It was addressed to Mr May and underneath his name was the name of a company of which he was director. Gillard AJA held that Mr May understood the notice as being sent to him and expressly acknowledged as such.
52 In this case, the notice was given to Mr Oren Polichtuk, a solicitor in the employ of GNPL's solicitors, and not to GNPL.
53 JPA also refers to the decision of Kennedy J in Yan & Anor v Zhang,[17] where her Honour addressed whether effective written notice of breach had been given:
54 Her Honour applied the principles referred to by Gillard AJA in MLW v May and more recently by the Victorian Court of Appeal in Salta Constructions Pty Ltd v St George Bank,[19] where the Court cited and applied the approach adopted by Gillard AJA in MLW v May, of ascertaining whether the relevant notice conveyed what it was required to convey bearing in mind the recipient's knowledge of the contract and its terms.
55 Her Honour considered whether a notice sufficiently conveyed notice of the alleged breach of contract. Her Honour applied the approach adopted by Lord Steyn in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd,[20] of ascertaining what the notice would have conveyed to the recipient bearing in mind the recipient's knowledge of the relevant contract.
56 JPA submits that clause 10(b) of the Call Option Deed simply required that the notice be addressed and delivered to the intended recipient at the 'address or fax number below'. The notice was in fact addressed to the specified fax number - 'Facsimile: 03 8640 0777'.
57 On this basis, the only respect in which the notice does not comply with clause 10(b) is that it was not addressed to 'GNPL', but rather to 'Mr Oren Polichtuk', a solicitor employed by Efron & Associates, who had been acting for GNPL in the dispute with JPA that had triggered the notice.
58 In my view, the decision of Gillard AJA in MLW v May and the subsequent decisions mentioned above concern whether information required under the contract to be given to the recipient had in fact been given, in view of the recipient's own knowledge about the contract. The issue before me is different, being whether a notice has been given in accordance with a contractual agreement where it was not addressed to the intended recipient but to a solicitor acting for the intended recipient. Further, I am required to consider the principles adopted in Tricontinental v HDFI and Bond v HK, which deal with triggering sureties' obligations under a guarantee, and decide whether those principles should be extended to a notice which, if valid, has the effect of terminating GNPL's option to acquire units in the Trust.
59 The notice to terminate, if correctly given, resulted in the immediate loss by GNPL of a valuable right. In those circumstances, I consider the notice is more akin to a notice that enlivens a person's obligation to pay a guaranteed sum, than a notice where the question is one of whether the recipient had been informed of certain facts. Accordingly, I hold that the notice was not given in accordance with the Call Option Deed and the option under the Call Option Deed has not been lost to GNPL.
60 In case I am wrong in this conclusion, I will address GNPL's alternate claim for the equitable remedy of relief against forfeiture.
61 GNPL submits that the option to acquire units in the Trust prima facie constitutes a proprietary interest sufficient to attract the equitable remedy of relief against forfeiture.
62 GNPL submits that relief may be awarded against forfeiture of proprietary interests other than leases (which are the most common case), such as other possessory interests in personal property.[21]
63 The general nature of the jurisdiction was reviewed by Lord Wilberforce in Shiloh Spinners Ltd v Harding ('Shiloh'),[22] where his Lordship said:
There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re-entry clauses; but other instances are found in relation to copyholds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the self-limitation to be imposed or accepted on this power. There has not been much difficulty as regards two heads of jurisdiction. First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate and also costs (Peachy v Duke of Somerset (1721)1 Stra 447 and cases there cited) ....
Secondly, there were the heads of fraud, accident, mistake or surprise, always a ground for equity's intervention, the inclusion of which entailed the exclusion of mere inadvertence and a fortiori of wilful defaults.
64 In Legione v Hateley ('Legione's case'),[23] the High Court held that the court had jurisdiction to relieve a defaulting purchaser against the forfeiture of his interest in land even though he had failed to comply with a condition whereby time was of the essence. Gibbs CJ and Murphy J relied upon the two principal bases which Lord Wilberforce had expounded in Shiloh. Mason and Deane JJ favoured the view that the basis of the jurisdiction was relief against unconscionable conduct.[24]
The true ground of relief against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the Court gives him [the oblige] all that he expected or desired....
66 Mason and Deane JJ went onto say:[27]
...The principle as expressed by Lord Macclesfield was modified and extended by Lord Thurlow L.C. who, in Sloman v. Walter, expressed it in this way:
"The rule, that where a penalty is inserted merely to secure the enjoyment of a collateral object, the enjoyment of the object is considered as the principal intent of the deed, and the penalty only as accessional, and, therefore, only to secure the damage really incurred, is too strongly established in equity to be shaken."
It is, however, doubtful whether these comments, appropriate as they may have been to relief against penalties, were intended to apply with equal force to all cases of relief against forfeiture. There is more to be said for the view that when the equitable jurisdiction is invoked to relieve against a forfeiture which is not in the nature of a penalty, equity looks to unconscionable conduct, as Farwell J. indicated in Mussen's Case, in the passage already quoted, especially when unconscionable conduct is associated with fraud, mistake, accident or surprise.
A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation (see, generally, O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd). On the other hand, forfeiture involves the loss or determination of an estate or interest in property or a proprietary right, e.g., a lease, in consequence of a failure to perform a covenant. When non-payment of rent or a fine is made the occasion for forfeiture of an estate or interest in property it may be proper to treat the forfeiture as being similar in character to a penalty because it is designed to ensure payment of the rent or fine. There is, however, a real distinction between "penalty" and "forfeiture" and it is unfortunate that the terms have been frequently used in a way which blurs it. The claims made by the purchasers in Steedman v. Drinkle and Brickles v. Snell were for relief against the "forfeiture" of instalments of purchase money. The relevant contracts, like the modern contract of sale, permitted the vendor to "forfeit" instalments of purchase money. In this situation, despite the use of the word "forfeit", relief is granted on the footing that the contractual provision entitling the vendor to retain the instalments is in substance a penalty, or in the nature of a penalty, because it is designed to ensure payment of the entire purchase price and it exceeds the damage which he suffers by reason of the purchaser's default.
67 In Stern v McArthur,[28] Deane and Dawson JJ applied the general approach enunciated by Mason and Deane JJ in Legione's case and regarded that principle as applying to all the circumstances which were outlined by Lord Wilberforce in Shiloh. These cases demonstrate an acceptance of the general principle of equity that a court may relieve against the detriment caused by unconscionable conduct, particularly when it is associated with fraud, accident, surprise or mistake.[29] Ultimately, a court of equity will relieve against forfeiture if there is an equity which justifies it doing so.
68 The essential question subsequently identified by the plurality in Tanwar Enterprises Pty Ltd v Cauchi ('Tanwar')[30] is whether the use of legal rights is, in all the circumstances, unconscientious, and whether that unconscientious use of legal rights, if unchecked, would forfeit an interest of the claimant for relief. What is involved is, therefore, (1) identification of the right or rights that would be forfeited; (2) identification of the legal rights, exercise of which would affect the forfeiture; and (3) identification of the reasons why the exercise of those legal rights would be unconscientious.
69 In this case, the consequence of GNPL not paying JPA's legal costs (or rather not meeting the notice of demand) is the loss of the option. Regrettably, no evidence was led as to the value of the loss of the option. If the lost value far outweighed the unpaid bill, those facts may have had some bearing on whether or not relief against forfeiture would be granted. In accordance with the discussion of Mason and Deane JJ in Legione's case, the relevant issue is one of forfeiture. On the other hand, the loss arose out of a provision that was intended to recover an outstanding debt.
70 In any event, the issue here facing the Court is whether it is unconscionable for GNPL to lose its option, as it has not paid the outstanding legal costs.
71 GNPL states that, in the event the Court is willing to provide relief against forfeiture, it is willing to undertake to the Court whatever the Court requires with respect to protecting JPA's rights under clause 9(a) of the Call Option Deed.
72 Where the party against whom relief is claimed has caused or contributed to the circumstances rendering it unconscientious for that party to rely on its legal rights then it is usually easy to see why relief might be granted. But it is not necessary that the party against whom relief is claimed should have caused or contributed to the relevant circumstances. As the plurality pointed out in Tanwar,[31] 'cases falling within the heads of mistake or accident will not necessarily be the result of activity by_'_ that party. Further, as their Honours had said earlier,[32] 'legal rights may be acquired by conduct which pricks no conscience at the time'. What is important is whether 'at the time of attempted enforcement, it then may be unconscientious to rely upon the legal rights so acquired'.[33]
73 GNPL submits that the Court should grant relief against the termination of the Call Option Deed and the forfeiture of GNPL's right to repurchase the units, given the circumstances set out in the Gordon Affidavit[34] and the mistake (if demonstrated) both in fact and law as to whether it had complied with the Statutory Demand. The only prejudice identified by JPA is its legal costs of making the present application.[35]
74 GNPL submits that JPA contributed to the circumstances relied on by JPA to terminate the Call Option Deed. In particular, GNPL contends that, pursuant to the Legal Profession Uniform Law Application Act 2014 (Vic) ('Uniform Law'), it was a 'third party payer' entitled to obtain from Collins & Collins sufficient information in relation to the legal expenses to allow GNPL to consider making, and if thought fit to make, an application for a costs assessment under s 198(6) of the Uniform Law.
75 GNPL asks what damages or adverse consequences are suffered by JPA as a result of GNPL's failure to comply with the Statutory Demand. On one hand, JPA did not receive the legal fees. On the other hand, the legal fees have been paid into a trust account pending a costs assessment. GNPL has demonstrated its ability to pay the legal fees.
76 GNPL submits that the insolvent event relied upon by JPA was at the lower end of the scale of insolvent events defined by the Call Option Deed, which included going into liquidation, having a receiver, administrator or liquidator appointed, or entering a scheme of arrangement.
77 If the termination is allowed to stand, what is the magnitude of GNPL and JPA's respective losses? JPA's loss is none other than it did not receive immediate payment of a disputed amount of money.[36] On the other hand, GNPL's loss if the termination were to stand is the loss of its ability to exercise the option and to restore itself from a position of minority to a position of equality with respect to control of the Trust.[37]
78 GNPL submits that the only condition that ought be placed upon a grant of relief of forfeiture ought to be that GNPL be required to secure the disputed sum, either by means of payment into a jointly controlled trust account, or by the granting of security over it pursuant to the Personal Property Securities Act 2009 (Cth), pending compliance by Collins & Collins with the requirements of s 198(6) of the Uniform Law and GNPL determining whether it seeks to make a cost assessment and, if so, the outcome of that cost assessment.[38]
Submissions of JPA on the question of relief against forfeiture
79 JPA submits that there is a doubt as to whether relief against forfeiture is available in this case, because the interest sought to be preserved is not proprietary in nature. JPA submits that that issue need not be resolved, because GNPL has not satisfied the necessary proof of unconscionable conduct on the part of JPA.
80 JPA submits that both JPA and GNPL have referred the Court to the statements of principle in Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd ('Auburn Shopping Village')[39] and O'Shea v Athanasakis ('O'Shea').[40] JPA submits that GNPL has sought to recast or modify the recognised test by formulating new 'more important questions'.[41]
81 JPA submits that the 'reformulation' is misconceived and does not accord with the principles in Auburn Shopping Village and O'Shea but instead seeks to reverse the burden of persuasion from establishing 'unconscionable' conduct by JPA to a test whereby the Court looks to answer the question of which party will be most harmed by the insistence upon JPA's legal right to terminate.
82 JPA submits that is not the test to be applied. Justice Forster observed in O'Shea that the ultimate question is:[42]
...whether the conduct of the party against whom relief against forfeiture is sought can properly be characterised as unconscionable or unconscientious, independently of whether such conduct consisted of causing or contributing to the circumstances leading to the forfeiture of an interest, or whether such conduct consisted of strictly insisting upon legal rights.
83 JPA submits that whilst the questions now posed by GNPL appear similar to (but are not identical to) the questions posed by the High Court in Legione's case[43] and Forster J in O'Shea,[44] GNPL seeks to take the focus away from whether the conduct of JPA was unconscionable and place the emphasis on the consequences to GNPL of the termination of the Call Option Deed. JPA submits that the focus of this Court should be firmly on whether it was unconscionable of JPA to terminate the Call Option Deed as it did.
84 JPA submits that the answer to that question is plainly no. The only conduct identified by GNPL as disentitling was an alleged breach by the plaintiff's solicitor of s 198(6) of the Uniform Law. JPA submits that there was no such breach, because not only did GNPL have sufficient information to consider making an application for a costs assessment, it had already resolved to do so. The letters from Efron & Associates to Collins & Collins dated 26 October 2017 and 17 November 2017[45] make plain that GNPL had decided to tax JPA's legal costs and would not release the funds held in trust until a time after the taxation of those costs.
85 Further, JPA submits that the solicitors for GNPL well knew what had been involved in the negotiation process leading to the execution of the Call Option Deed. They had been provided with a detailed summary letter from Collins & Collins dated 6 February 2017[46] and knew from their own participation in the negotiation process what had occurred. The right to information in s 198(6) of the Uniform Law does not prevent a 'third party payer' from seeking an assessment of costs, nor does it excuse such a person from paying costs pending assessment.
86 JPA contends that GNPL elected not to pay the costs 'on demand' in compliance with clause 9 of the Call Option Deed and made the forensic and tactical decision not to seek to set aside the Statutory Demand. JPA says that there was no mistake on GNPL's part, but rather a conscious election not to pay unless and until a specified event had occurred (namely an assessment of costs), which only they could bring about.
87 JPA submits that Reardon v Hall & Wilcox[47] contains a useful guide as to what is 'sufficient information' for the purposes of the Uniform Law. Whilst McDonald J was interpreting the Legal Profession Practice Act 2004 (Vic) (now repealed), in that case he found that:
The test of sufficient information is not directed to the question of whether the information provided allows for a definitive assessment of whether fees charged are reasonable for the services provided. Rather, the information provided must permit a non-associated third party payer to make an assessment of whether there is a proper basis for commencing a costs review.[48]
88 JPA contends that it was GNPL's own conduct that brought about the breach of the Call Option Deed and the right to terminate. JPA says that the breach must be viewed in the context of ongoing disputes and litigation between the parties in the period from March 2017 to October 2017, which are in part described in the decision of Randall AsJ in Gordon Finance Pty Ltd v Queenfield Pty Ltd.[49]
89 JPA submits that there was nothing unconscionable about JPA insisting on payment in accordance with the Call Option Deed and terminating the Call Option Deed when GNPL refused to pay other than on alternative terms or upon the condition that the costs first be taxed. JPA submits that it was GNPL's own decision to depart from the negotiated and agreed terms of the Call Option Deed.
90 JPA says that this is not a case where some 'injustice' has occurred as a result of unconscionable conduct by JPA. JPA says, to the contrary, GNPL was entirely in control and responsible for the forensic and tactical decisions it elected to make and the course it decided to take culminating in a breach of the Call Option Deed and termination. JPA submits that 'relief against forfeiture does not authori[s]e a court to reshape contractual relations into a form the court thinks more reasonable or fair where subsequent events have rendered one side's situation more favourable'.[50]
91 JPA says that its legal costs have not been paid as agreed. Further, JPA submits that it has lost the benefit of interest which would have accrued under the former loan arrangements, because it agreed to enter into the Call Option Deed in consideration of the terms agreed therein.
92 JPA contends that GNPL has suffered no loss. GNPL has received the benefit of the loan funds originally advanced and now constituting the consideration for the units transferred to JPA. It has avoided the requirement to pay interest and principal on the funds borrowed. It has also avoided being in default of the original loan agreement. It retains the disputed legal costs in its solicitor's trust account.
93 In considering whether to grant relief, the Court will consider whether the penalty or consequence imposed through a breach is a genuine pre-estimate of the loss suffered as a result of the breach, or whether the penalty or consequence is imposed as an incentive to the other party to observe the contract.
94 In my opinion, the penalty of terminating the Call Option Deed falls into the category of a penalty designed to enforce compliance with the contract. The right to terminate was not a genuine pre-estimate of any expected loss to JPA.
95 In my opinion, it would be unconscientiousness for GNPL to lose the right to restore its shareholding to 50 per cent, in circumstances where it has shown its bona fides by paying the disputed sum into its solicitor's trust account. I shall grant relief against forfeiture on condition that the disputed sum is paid to JPA within seven days of this judgment.
(a) The Court declares that the Call Option Deed dated 14 February 2017 between the plaintiff and the defendant was not determined by the plaintiff's notice of determination dated 6 November 2017 and is still subsisting.
(b) The Court orders that the defendant be relieved from any forfeiture of the said Call Option Deed by reason of the said notice of determination upon condition that the defendant do within seven days from the date hereof pay to the plaintiff the sum of $26,836.70, being the legal fees incurred by the plaintiff company in connection with making the making of the Call Option Deed.
(c) I order that there should be a stay on this order in respect of forfeiture until the said sum is paid by the defendant to the plaintiff.
97 Rather than ordering that the plaintiff pay the costs of the originating motion and that the defendant pay the costs of the application for relief against forfeiture, I shall order that each party bear their own costs.
[1] See paragraphs 12-15 (inclusive) of the affidavit of John Paolacci sworn 18 October 2018 ('First Paolacci Affidavit') together with Exhibits 'JP-2' (Deed of Cancellation & Transfer), and 'JP-4' (Call Option Deed) which also annexes the Agreement for sale of Unit Trust units.
[2] (1990) 21 NSWLR 689 ('Tricontinental v HDFI').
[6] (1991) 25 NSWLR 286 ('Bond v HK').
[10] [1987] HCA 15; (1987) 162 CLR 549 ('Ankar').
[11] Tricontinental v HDFI (1990) 21 NSWLR 689, 718F.
[12] [2000] HCA 20; (2000) 170 ALR 579 ('Pan Foods').
[15] [2005] VSCA 29 ('MLW v May').
[16] Ibid [78] (emphasis added) (citations omitted).
[17] [2018] VSC 694 ('Yan v Zhang').
[18] Ibid [111]-[114] (citations omitted).
[19] [2014] VSCA 289; (2014) 45 VR 245 ('Salta v St George Bank'), [28]-[30].
[21] Company shares are examples of other types of property that may form the subject matter of relief against forfeiture: J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane's Equity Doctrines & Remedies (LexisNexis Butterworths, 5th ed, 2015) 597 [18.320]. Relief may also be awarded against the forfeiture of possessory rights of a bailee of goods: Esanda Finance Corp v Plessnig [1989] HCA 7; (1989) 166 CLR 131, 151. Other examples include patents: BICC Plc v Burndy Corp [1985] 1 All ER 417; or rights to participate in the proceeds of litigation: Nutting v Baldwin [1995] 2 All ER 321. See also Federal Airports Corporation v Makucha Developments Pty Ltd [1993] FCA 315; (1993) 115 ALR 679.
[22] [1973] AC 691, 722-3.
[23] [1983] HCA 11; (1983) 152 CLR 406 ('Legione's case').
[27] Legione's case [1983] HCA 11; (1983) 152 CLR 406,444-5 (citations omitted).
[30] [2003] HCA 57; (2003) 217 CLR 315, 320 [5], 324 [19] ('Tanwar').
[31] Tanwar [2003] HCA 57; (2003) 217 CLR 315, 329 [39].
[34] At paragraph 20, Mr Gordon states that he was 'shocked' to be served with a termination notice. See also paragraph 27 of the Gordon Affidavit.
[35] See paragraph 8 of the affidavit of John Paolacci sworn on 27 November 2018 ('Second Paolacci Affidavit').
[36] Transcript of Proceedings (5 December 2018) 107.
[39] [2018] NSWCA 114 ('Auburn Shopping Village'), [23]-[30].
[40] [2009] NSWSC 1150 ('O'Shea'), [63]-[87].
[41] Transcript of Proceedings (5 December 2018) 96.
[42] O'Shea [2009] NSWSC 1150, [87].
[43] Legione's case [1983] HCA 11; (1983) 152 CLR 406, 449.
[44] O'Shea [2009] NSWSC 1150, [88].
[45] Exhibits 'JP-11' and 'JP-13' to the First Paolacci Affidavit.
[46] Exhibit 'JP-12' to the Second Paolacci Affidavit.
[49] [2018] VSC 341; see exhibit 'JP-1' to the Second Paolacci Affidavit.
[50] Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489, 503 (Mason CJ).
JPA Finance Pty Ltd
Gordon Nominees Pty Ltd [2019] VSC 171
(1990) 21 NSWLR 689
(1991) 25 NSWLR 286
(1987) 162 CLR 549
(2000) 170 ALR 579
(2014) 45 VR 245
(1989) 166 CLR 131
(1993) 115 ALR 679
(1983) 152 CLR 406
(1988) 165 CLR 489
(2003) 217 CLR 315
(2016) 50 VR 117