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[2005] HCA 71
High Court of Australia
2005-11-17
Hely J, Gleeson CJ, Heydon JJ
Original judgment source is linked above.
T E F Hughes QC with T D F Hughes for the appellants (instructed by Stojanovic Solicitors)
B W Walker SC with M Walton SC and D R Sibtain for the respondents (instructed by Corrs Chambers Westgarth)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
Contract - Penalty - Agreement to purchase service station from distributor of fuel - Collateral agreement requiring fuel to be purchased exclusively from distributor - Breach of collateral agreement - Termination of collateral agreement by distributor pursuant to contractual power - Option to buy back service station exercisable by distributor on termination of collateral agreement - Whether option void and unenforceable as a penalty - Whether exercise of option oppressive or extravagant and unconscionable compared with genuine pre-estimate of damage - Relevance of proportionality to penalty questions.
"The valuer shall be instructed to determine the market valuation of [BP Lansvale] … and in making the determination shall have regard to all factors the valuer considers relevant but shall not include in the determination of the market valuation of [BP Lansvale] any allowance for any goodwill attaching to any business conducted at [BP Lansvale]."
The duration of the option was five years and three months: cl 1.3.
"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 …
(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]."
"The [respondent] and [appellant] acknowledge and agree that:
(a) the [respondent] is prepared to sell [BP Lansvale] on the basis of continued operation of the business of a retail fuel outlet operating as a going concern at the property under the POSA for a period of 5 years and the Liquidated Damages reflects the expected returns to the [respondent] under the POSA over that 5 year period …"
The "Liquidated Damages" referred to were those stipulated by cl 40.2 of the Contract for Sale of Site and cl SC1.3 of the POSA. They rested on an assumed financial benefit to the respondent of $289,531 over the five year life of the POSA. It was provided that if the POSA were terminated in the first year, the sum of $289,531 would be payable by the appellant; if in the second year, 80 percent of that sum, and so on.
"One must assess the proportionality (if any) between the interest sought to be vindicated by the stipulation impugned as penal and the means contractually devised for that purpose. If there is a manifest disproportion, the stipulation is presumptively a penalty … The exercise to be undertaken in such a case requires a precise definition of the interest requiring vindication in case of breach."
It submitted that the only legitimate commercial interest which the respondent was entitled to protect by the agreements it entered with the appellant, and in particular the Option Deed, was to preserve BP Lansvale as an outlet for the sale exclusively of BP petroleum products during the five year term of the POSA. A sufficient vindication of the respondent's interest would have been a contractual requirement for the appellant to grant a lease of BP Lansvale to the respondent for the unexpired balance of the term of the POSA after it had been terminated for breach. The appellant submitted that a comparison of the consideration payable to the appellant for the transfer back to the respondent with the real value of BP Lansvale at that time revealed that the option was penal. It also submitted that a want of proportionality was revealed by the fact that if the POSA were terminated for a trivial breach in the first month of its term, thus ending the respondent's obligation to supply petroleum to the appellant, the option would overhang the property for another five years and two months. The appellant "would have to 'sit out' that period with [its] effective use of the site virtually sterilised. Such an outcome would be grossly disproportionate to the breach".
"[The respondent] has the right to acquire [BP Lansvale] under [the Option Deed] … If [the POSA] is terminated and [the respondent] has exercised its right to acquire [BP Lansvale] under the [Option Deed], the Liquidated Damages will not be repayable [scil payable] to [the respondent] under clause SC1.3."
The appellant submitted that it followed that if the respondent relied on its right to liquidated damages before it relied on its right to exercise the option, it would be "securing a double 'remedy' for the same breach". The appellant also complained that the Full Court had not dealt with this point.
"[E]quity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract." (emphasis added)
Nothing in either passage supports the need to inquire into whether there is proportionality between the impugned provision and the legitimate commercial interests of the party relying on it.
"The agreement does not provide for the payment of a lump sum upon the non-performance of any one of many obligations differing in importance. It has reference to a single obligation, and the sum to be paid bears a strict proportion to the extent to which that obligation is left unfulfilled. There is nothing whatever to shew that the compensation is [inordinate] or extravagant in relation to the damage sustained."
This reasoning did not require there to be a strict proportion; it merely relied, as a step towards the conclusion that the compensation was not inordinate or extravagant, on the fact that the compensation bore a strict proportion to the unfulfilled obligation.
"[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 characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach[23]."
"The option was part of the consideration for the original conveyance of [BP Lansvale]: see special condition 38 of the [Contract for Sale of Site] … The option encumbered the original conveyance. Had the option not been part of the consideration, the purchase price would have been higher."
Ringrow Pty Ltd
BP Australia Pty Ltd
(2003) 203 ALR 281
(2004) 209 ALR 32
(1983) 152 CLR 359
(1985) 157 CLR 514
(1986) 162 CLR 170
(1988) 165 CLR 489
(1989) 166 CLR 131
(1989) 15 NSWLR 564
(1976) 133 CLR 507
(1994) 33 NSWLR 551
(1975) 132 CLR 216
(1953) 88 CLR 476
(1994) 182 CLR 272
(1997) 189 CLR 520