Golden Oceans (NSW) Pty Ltd v Evewall Pty Ltd
56Finally, in Golden Oceans (NSW) Pty Ltd v Evewall Pty Ltd [2009] NSWSC 674, Rein J held at [67] and [68]:
"[67] The vendor seeks the payment of the balance of the deposit ($174,000) not paid. The purchaser resists that payment on the basis that it is a penalty. Mr Warren referred me to Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40, [2006] NSW Conv R 56-146 and Ianello v Sharpe [2007] NSWCA 61 which support the proposition that the fact that the parties have called a payment 'a deposit' is not determinative of whether an amount is a penalty. However, as Ms Oakley pointed out, the courts have long accepted that a 10% deposit forfeited in the event of a plaintiff's failure to complete is not a penalty: see Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd (1993) AC 573, and see Manufacturers House Pty Ltd v Ashington No 147 Pty Ltd [2005] NSWSC 767 at [54] - [60] and see CCH Conveyancing Law and Practice at [7-220].
[68] In my view the fact that the vendor did not insist on the payment of all the deposit on exchange does not turn the contractual obligation to pay the amount specified as a deposit (and in total 10% of the purchase price) into a penalty."
57The difficulty with Rein J's decision in Golden Oceans is that the judgment does not disclose what date the remaining $174,000 was supposed to be paid, namely, whether it was supposed to be paid on or prior to the completion date.
58A deposit is considered an "earnest of the bargain for its performance that is designed to demonstrate the sincerity of the contracting party who is to pay it". The question of whether the second $25,000 is a deposit or a penalty turns on how it is characterised under the contract. As the authorities demonstrate, this characterisation is a question of construction to be decided upon by the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach.
59In Iannello, special condition 14 provided that the first $225,000 constituted part of the deposit. It was purportedly agreed that in the event of default, the remaining $225,000 would become immediately due and payable and the purchaser would forfeit the sum of $450,000. However, what is important in these cases is the timing stipulated in the contract for when the second payment is due. In Iannello, the remaining $225,000 was due on the date of completion. This allowed Hodgson JA, with whom Santow and Basten JJA agreed, to conclude that the second payment would have maintained no good faith or earnest character, as it would never be payable before the completion date, and thus its only purpose was to penalise the purchaser for defaulting. This meant that despite special condition 14 categorising the remaining funds as deposit money, it was in reality, by virtue of the date that it was due, a penalty.
60The same could be said for Boyarsky, where the second instalment of the deposit was due upon the date of completion and was thus found to be void as a penalty. This specific similarity between Boyarsky and Iannello, is what led Brereton J to find in Boyarsky that the second payment was void as a penalty.
61Turning to Luu, the clause being relied upon in that case obligated the purchaser to pay up to 10 per cent of the purchase price upon defaulting. This clause was designed as a penalty clause aimed at discouraging default. It is not a deposit clause that seeks to foster the payment of further deposit money so that the purchaser can demonstrate continued earnest to fulfil the purchase contract.
62Similarly, both special condition 14 in Iannello and special condition B7 in the present case are to the same effect. That effect, in substance, is that where the full deposit has not been paid, the unpaid deposit money becomes immediately due and payable. These special conditions could thus be characterised as penalty clauses. However, in this case Ms Dalla Costa relies on clause 9.1 and special condition B14 of the purchase contract, which potentially entitles them to "keep or recover the deposit (to a maximum of 10 per cent of the price)" [Emphasis added]. Ms Dalla Costa is not arguing that as a result of default on the part of the purchaser that special condition B7 requires that they be paid the remaining $25,000. Instead, Ms Dalla Costa seeks to recover the unpaid deposit money that was due and payable, and which they argue still carries the characteristics of a deposit payment.
63In this appeal the second payment was due 70 days after the date of the contract, which was 140 days or just over 4 months prior to the completion date of 15 November 2011. Payment of this second sum would have enabled the purchasers to further demonstrate their earnest in complying with the contract and completing the purchase by the later date that was stipulated. In my view the second payment still contains the characteristics of a deposit payment. This factual difference of timing allows this case to be distinguished from Iannello and Boyarsky.
64The Magistrate was correct in deciding that clause 9.1 entitled the vendor to keep and recover the remaining deposit moneys. This meant his Honour did not have to consider the penalty implications of special condition B7. However, if the second payment was due on the completion date, clause 9.1 would have not saved that second payment from being considered a penalty.
65While it is not strictly necessary to dispose of this appeal I have added some comments regarding the tension between contractual deposits and the equitable jurisdiction for relief against penalties. Clause 9 of the standard contract of sale is used in most conveyancing contracts in New South Wales and other states in Australia. However, the contrasting decisions to which I have referred to earlier in this judgment, create uncertainty.
66Purchasers who do not have the funds to pay the traditional 10 per cent upfront deposit, but who can pay the deposit by instalments may be unable to enter contracts for the purchase of land if they cannot adopt an instalment method. On the other hand, vendors who wish to induce purchasers into contracts by allowing payment of the deposit through instalments risk losing their contractual clause 9 entitlement to the full 10 per cent deposit, as a subsequent payment may be held by the Court as constituting a penalty.
67The general position on penalties in Australia, that developed from Lord Denning's comments in Financings Ltd v Baldock [1963] 2 QB 104 (CA), is more far reaching than real property transactions. The general position is that an express termination clause, which was exercised in the present case, will potentially not entitle a party to payment of damages; as such damages will likely be considered a penalty. As Gibbs CJ held in Shevill v Builders Licensing Board [1982] HCA 47 at [8], 149 CLR 620 at 627:
"... [I]t does not follow from the fact that the contract gave the [innocent party] the right to terminate the contract that it conferred on it the further right to recover damages as compensation for the loss it will sustain as a result of the failure of the [other party's performance] for the rest of the [contractual] term."
68There are several propositions seeking to explain this present state of the law. The first is a causation argument, which says that when a vendor, lessor or other provider terminates a contract as a result of the other party's breach, that person cannot recover anything greater than what is associated with the breach. This is because any later consequential loss suffered is a result of that person's termination, not the actions of the other party that committed the minor breach.
69Another argument for non-entitlement to damages, which is similar to what was submitted by counsel for Mr Rana (at [33] above), was adopted by Lord Denning in Financing Ltd v Baldock at 110 and 113:
"It seems to me that when an agreement of hiring is terminated by virtue of a power contained in it...[the terminating party] can recover damages for any breach up to the date of termination but not for any breach thereafter, for the simple reason that there are no breaches thereafter...[A] repudiation being itself a breach which took place before the termination, it is within the class of breaches for which the owners can recover damages according to the principle I have already stated. But if there is no repudiation and simply, as here, a failure to pay one or two instalments (the failure not going to the root of the contract and only giving a right to terminate by virtue of an express stipulation in the contract), the owners can only recover the instalments in arrear, with interest, and nothing else: for there was no other breach in existence at the termination of the hiring."
70None of these arguments are entirely satisfactory. It is not commercially sound practice that in everyday contracts, whether they be in conveyancing or otherwise, where the parties have agreed that a certain breach will entitle the innocent party to terminate and seek particular damages, that those parties are not able to be awarded those damages, for which they are duly entitled to under the common law. The relief afforded against penalties interferes with the fundamental freedom of parties to contract. Canada has adopted a different approach. In Canada it does not matter if the contract is terminated via repudiation or a termination clause. As Wilson J stated in Keneric Tractor Sales Ltd v Langille [1987] 2 SCR 440, (1987) 43 DLR. (4th) 171, at [25]:
"... damages should be assessed in the same way in both cases. Repudiation may be triggered by either the inability or the unwillingness of a party to perform his contractual obligations. The same is true of a breach of contract that gives rise to a right to terminate; it may be the result of inability or unwillingness to perform. The breach and the repudiation are merely subdivisions within a general category of conduct, i.e., conduct which gives the innocent party the right to treat the contract as terminated. Thus, there is no conceptual difference between a breach of contract that gives the innocent party the right to terminate and the repudiation of a contract so as to justify a different assessment of damages when termination flows from the former rather than the latter. General contract principles should be applied in both instances".
71The different reasoning and arguments on this subject matter are outlined and explained in greater detail in John Randall's article "Express Termination Clauses in Contracts" (2014) 73(1) Cambridge Law Journal 113. The learned author says at 136-137:
"As a matter of principle, the Canadian position appears to have greater merit than the Anglo-Australian. It is undesirable and unattractive that important commercial rights be made to depend on artificial and lawyerly distinctions between the event giving rise to the right to terminate and the consequent termination itself, which will generally follow quite quickly. The Canadian rejection of this approach has the great merits of realism and clarity."
72As previously stated in this appeal by applying the current law on this topic it is my view that the second $25,000 payment is recoverable by Ms Dalla Costa on the basis it should be characterised as deposit money. This ground of appeal fails.