Salloway Pty Ltd v Barlow [2019] NSWSC 1234 | Case summary

Determination

It should be stated at the outset that in circumstances where, as described above, the parties to the contract for sale departed from Special Condition 53 and agreed instead to a mortgage over the first plaintiff's North Avoca property, it is necessary to focus upon the terms of the mortgage rather than those of Special Condition 53. I accept the submission made by the defendant to this effect.
The first issue to consider is whether, upon the true construction of the mortgage, in particular clauses Firstly and Sixthly, the fact that the first plaintiff did not receive an EPA satisfaction notice within 12 months of the date of the mortgage had the consequence that the loan to the first plaintiff was forgiven by the defendant. This question of construction is to be answered by the application of the well-established principles that apply to the construction of written commercial agreements (see Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]). In accordance with those principles, the meaning of the terms of the agreement is to be determined by what reasonable business persons would have understood the terms of the contract to mean. In making that determination it is necessary to consider the language employed by the parties as well as the surrounding circumstances known to them, and the commercial purposes or objects to be secured by the contract. Here, the relevant surrounding circumstances include the contract for sale that was entered into 10 days prior to the mortgage, and the Deed entered into on the same day as the mortgage.
Clause Sixthly must of course be read as part of the mortgage as a whole, including clause Firstly which contains the first plaintiff's obligation to repay the principal sum. That obligation is expressed to arise 21 days after the date the first plaintiff receives the EPA satisfaction notice. Clause Firstly is silent as to any time within which that receipt is to occur. However, clause Sixthly (the opening words of which expressly refer to clause Firstly) does make provision in respect of the time within which the EPA satisfaction notice is to be received by the first plaintiff. Clause Sixthly goes on to specify that if the notice is not received within the stipulated time certain consequences follow. One such consequence is the forgiveness of the loan. It can thus be seen that clause Firstly operates subject to clause Sixthly where, as here, the EPA satisfaction notice is not received by the first plaintiff within the stipulated time.
In my opinion, the language of clause Sixthly, read in its context (including clause Firstly which defines the concept of the EPA satisfaction notice), plainly provides that if the EPA satisfaction notice is not received by the first plaintiff within 12 months of the date of the mortgage the loan to the first plaintiff is immediately forgiven. This meaning is supported by the use of the word "then", and is reinforced by the concluding words of the clause which state that the defendant shall provide a discharge of mortgage "upon the anniversary date of this Mortgage". The language unmistakably indicates that if the requisite notice is not received within the 12 month period the loan will be forgiven and the defendant becomes obliged to promptly provide a discharge of the mortgage. I do not think that anything in the surrounding circumstances (including the Deed, which calls for co-operation in respect of the taking of steps to satisfy the EPA), or the commercial purposes or objects of the transaction, indicates that a different meaning was intended.
In my view, reasonable business persons in the positions of the parties to the mortgage would have understood clause Sixthly to operate as described above. For what it is worth, I note that the defendant's solicitor seemed to have that understanding when he wrote the letter sent on 5 September 2014. I do not accept that clause Sixthly ought be regarded as similar in nature to the rent review clauses the subject of United Scientific Holdings Ltd v Burnley Borough Council (supra). Quite apart from the different language employed, the time provision in clause Sixthly serves a different purpose and arises in a context that is markedly different from that present in United Scientific Holdings Ltd v Burnley Borough Council (supra).
It follows from the above that the provision to the first plaintiff of an EPA satisfaction notice after the expiry of the 12 month period is too late to prevent the forgiveness of the loan. The forgiveness occurs as soon as the 12 month period expires without the first plaintiff receiving an EPA satisfaction notice.
Finally, I note that clause Sixthly does not oblige the defendant to provide an EPA satisfaction notice to the first plaintiff within the stipulated time. The time provision in clause Sixthly is concerned not with the time for performance of a contractual obligation, but rather with the time within which a contractually significant event may or may not occur. Nevertheless, the time limit can in a sense be regarded as "of the essence" (see GR Mailman & Associates v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 at 88E-F, and 100D-F). That this is so is certainly implicit in the language of clause Sixthly.
In light of my conclusion concerning the construction of clause Sixthly it is not strictly necessary to consider whether the notice provided to the first plaintiff on 1 December 2014 met the requirements for an EPA satisfaction notice, as set out in clause Firstly. Nevertheless, I will briefly explain why I think that the notice provided met those requirements.
Clause Firstly called for written notification from the EPA that the requirements of the Clean-Up Notice "have been satisfied". (Arguably, Special Condition 53(vi) called for notice of a wider ambit, but as I have said, the relevant provisions are those of the mortgage.) The letter from the EPA dated 28 November 2014 states in terms that after having reviewed all relevant reports the EPA was satisfied that the requirements of the Clean-Up Notice "have now been met".
It is true that the EPA letter went on to state that the EPA considered that no further action was necessary "at this stage" in relation to the waste on the land (other than a request that certain information be included in any Planning Certificate in respect of the land). The door was thus left open to the possibility of future regulatory actions in relation to the waste. However, that would be the case regardless of whether the requirements of the Clean-Up Notice had been satisfied. The fact remains that the EPA letter was written notification from the EPA that it was now satisfied that the requirements of the Clean-Up Notice had been met. In my view, that was all that clause Firstly required for an EPA satisfaction notice.
The next issue to consider is whether clause Sixthly is unenforceable as being in the nature of a penalty. In Andrews v Australia and New Zealand Banking Group Ltd (supra) the High Court said (at [10]): In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessary) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessary stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.
The High Court further stated in that case (at [12]): It should be noted that the primary stipulation may be the occurrence or non-occurrence of an event which need not be the payment of money. Further, the penalty imposed upon the first party upon failure of the primary stipulation need not be a requirement to pay to the second party a sum of money.
The High Court went on to hold that the scope of the doctrine of penalties was not limited to situations involving breaches of contract (see at [46]-[50]).
In the present case, the defendant submitted that clause Sixthly was a collateral stipulation in the nature of a security for and in terrorem of the satisfaction of the primary stipulation contained in clause Secondly. Clause Secondly obliged the defendant, at her own cost, to "do all acts and things and take all steps required by EPA to ensure that the EPA satisfaction notice is issued by EPA." Given the definition of the EPA satisfaction notice found in clause Firstly, the obligation included doing what is required to satisfy the requirements of the Clean-Up Notice. (The defendant assumed a similar obligation to the second plaintiff under clause 2 of the Deed. In essence, that obligation was to do what was required to ensure that an EPA satisfaction notice was issued by the anniversary date of the mortgage.) The plaintiffs did not suggest that the defendant had failed to discharge her obligations under clause Secondly, and the defendant adduced evidence (which was not challenged) to show what was done to satisfy the requirements of the EPA.
Clause Secondly does not in my view oblige the defendant to actually procure the issue of an EPA satisfaction notice. Despite the use of the word "ensure", I do not think that the defendant bound herself to achieve that result, which is ultimately not something within her power. The clause rather requires the taking of all steps (or at least, by implication, all reasonable steps) required towards the achievement of the result.
The essence of the defendant's argument is that clause Sixthly, which operates to extinguish the defendant's right to repayment of the loan if the EPA satisfaction notice is not received by the first plaintiff within 12 months, is intended to punish the defendant in the event that she fails to do what is required by clause Secondly. It is put that clause Sixthly hung over the defendant in terrorem as a negative incentive to perform her obligations under clause Secondly.
It may be accepted that if the defendant failed to discharge her obligations under clause Secondly, there would be an increased likelihood of clause Sixthly operating so that the loan would be forgiven. It can thus be seen that the presence of clause Sixthly provides an incentive to the defendant to discharge her obligations under clause Secondly. Viewed in this way, clause Sixthly might be regarded as a stipulation collateral to the primary stipulation in clause Secondly, such that the penalties doctrine is engaged (see Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99 at [361]).
The question remains as to whether the asserted collateral stipulation should be characterised as penal. In Paciocco v Australia and New Zealand Banking Group Ltd (supra) Kiefel J (with whom French CJ agreed) stated at [29], in relation to stipulations that operate to require the payment of a sum of money, that the sum must be "extravagant and unconscionable" or "out of all proportion to the interests of the party which it is the purpose of the provision to protect" before it can be characterised as a penalty. At [34] Kiefel J stated that in this context words such as "extravagant" and "unconscionable" all describe "the plainly excessive nature of the stipulation in comparison with the interest sought to be protected by that stipulation".
In Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [158] Gageler J stated: To ask whether a stipulation serves merely to secure the enjoyment of a collateral object is to ask whether the conclusion objectively to be drawn from the totality of the circumstances is that the only purpose of the stipulation was to punish: to impose a detriment on a contracting party in the event that a principal contractual stipulation is not observed, in order to deter non-observance of that principal stipulation.
Gageler J continued (at [164]): And as the facts in Clydebank and Dunlop again both sufficiently illustrate, the fact that the amount of a payment stipulated to be made on breach of contract is set at a level which provides a negative incentive - even a very strong negative incentive - to perform the contract is not enough to justify the conclusion that the stipulation served only to punish. The prospect of paying compensatory damages to be assessed by a court in the event of breach itself provides a negative incentive to perform a contract. The relevant indicator of punishment lies in the negative incentive to perform being so far out of proportion with the positive interest in performance that the negative incentive amounts to deterrence by threat of punishment.
In the same case, Keane J stated (at [257]): Courts of equity regarded a collateral provision designed to provide an incentive to perform a principal obligation as objectionable on the ground that its enforcement was unnecessary to give the promisee the benefit of the substance of the transaction. Such a collateral provision might be described as operating "in terrorem", because of its evident tendency to deter the promisor from non-performance.
It can thus be seen that attention needs to be given to the interest or interests sought to be protected or advanced by the impugned stipulation. This factor was important in the decision in the seminal case of Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79, in particular in the speech of Lord Atkinson at 91-3 (see also Andrews v Australia and New Zealand Banking Group Ltd (supra) at [75] and Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [28] and [270]).
It should be added that the question whether a stipulation ought be characterised as penal calls for an analysis focused upon the time when the contract was made (see Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd (supra) at 86-7; Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [62]). Further, it appears that the Court may receive evidence going to the purposes sought to be achieved by the parties to the contract (see Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 at [225]).
In the present case, the impugned stipulation appears in a mortgage that was entered into in connection with a contract for the sale of land between the second plaintiff as purchaser and the defendant as vendor. The contract for sale envisaged a mortgage between those parties, on terms including those set forth in Special Condition 53. It appears that the mortgage loan was to be provided by the defendant on completion of the contract for sale, and it can be inferred that it was intended to be a form of vendor finance.
The evidence of the defendant's solicitor shows that the second plaintiff was not able to provide the envisaged mortgage, so a mortgage over the first plaintiff's North Avoca property was offered instead. That was acceptable to the defendant. As it turned out, the contract for sale and the mortgage loan (together with the Deed) settled contemporaneously on 15 November 2013. The first plaintiff acknowledged receipt of the principal sum of $250,000, and that amount was applied as an allowance by the defendant against the purchase price of the land.
It is clear from the terms of Special Condition 53 and later the terms of the mortgage, in particular clause Sixthly, that the requirement to repay the mortgage loan of $250,000 was to depend upon whether a notice in respect of the EPA Clean-Up Notice was received within 12 months of the date of the mortgage.
In broad terms, the sum of $250,000 may be viewed as an additional amount that would be paid to the defendant provided an EPA satisfaction notice was received by the first plaintiff within 12 months. Put another way, the total amount (or price) to be received by the defendant would be either $1.3 million or $1.55 million, depending upon whether such a notice was received by the first plaintiff within that time. This way of looking at the transaction is broadly consistent with the position put by Mr Reid to Mr Willcox in negotiations in October 2013 (see [9] above).
Clause Sixthly of the mortgage can thus be seen as an integral part of the agreements reached between the defendant and the plaintiffs for the setting of the consideration to be paid in respect of the transfer of the land. The amount of consideration was agreed to vary depending upon whether an EPA satisfaction notice was received by the first plaintiff within 12 months. If that event occurred, the defendant would receive the higher amount of $1.55 million; if the event did not occur, the defendant would receive the lower amount of $1.3 million (about 16% less).
The land the subject of the sale was contaminated, and had come under the attention of the EPA. There was uncertainty as to what actions might ultimately be required to be undertaken to address the problem. At the time the agreements were entered into an extant Clean-Up Notice, issued to the current owner, remained unsatisfied. Whilst satisfaction of the requirements of the Clean-Up Notice would not necessarily foreclose future regulatory actions in relation to the waste on the land, it might go at least some way towards providing comfort to, or reducing the uncertainty facing, a purchaser of the land. It seems to me that there existed a rational commercial basis for a prospective purchaser of the land to offer to pay a substantial additional amount if it could be shown that the EPA was satisfied that the requirements of the Clean-Up Notice had been met.
The terms of the notice meant that this could not occur for at least some months, and well after the contractual date for completion of the sale. There was of course no certainty that the EPA would be so satisfied, either at all or by any particular time. I note, in this regard, that the solicitors for the respective parties discussed how long it might take for the EPA to make its decision. This discussion seems to have occurred on about 1 November 2013, in the context of settling the terms of the contract for sale. It appears that the defendant's solicitor suggested that 6 months would be an adequate time, and the plaintiffs' solicitor suggested 12 months. The plaintiffs' solicitor thereupon drafted a clause in substantially the same terms as that which became Special Condition 53(viii). Special Condition 53(viii) was later reproduced in almost identical terms in clause Sixthly of the mortgage.
Clause Sixthly was the product of negotiations between the parties in relation to the consideration to be paid to the defendant for the transfer of the land. It was an integral element in the structure of the transaction which proceeded on the basis that the amount of consideration may vary depending upon whether an EPA satisfaction notice was received by the first plaintiff within 12 months. In the circumstances that existed in relation to the transaction, there was a rational commercial basis for a provision in terms of clause Sixthly which effectively made payment of an additional amount to the defendant contingent upon a defined event occurring within a certain period of time.
The additional amount the subject of clause Sixthly is the $250,000 principal sum under the mortgage. The amount is denied to the defendant if the event does not occur within the specified time. However, I am not prepared to hold that this amount is extravagant and unconscionable, or out of all proportion to the interests of the plaintiffs in the transaction (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [29]). Those interests are not confined to the interest in being compensated for any loss suffered as a result of a breach of clause Secondly (see Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd (supra) at [369]). The additional amount can be seen to be the product of a commercial judgment made by one side of the transaction, and acceptance of that amount by the other side of the transaction, in circumstances where there was uncertainty about what might unfold, after completion of the contract, in relation to the contamination on the land.
Neither can clause Sixthly be regarded as plainly excessive in comparison with the interest sought to be protected by it (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [34]). As I have sought to explain, there was an evident commercial justification for such a provision from the point of view of the plaintiffs. Indeed, it can be said that there was a commercial justification for the provision from the point of view of the defendant. Clause Sixthly, read with clause Firstly, clearly defined the circumstances in which the defendant would be entitled to payment of the additional amount following the completion of the sale.
It may be accepted that clause Sixthly itself provides an incentive to the defendant to discharge her obligations under clause Secondly (see [46] above). However, in my view it cannot be concluded that the only purpose of clause Sixthly is to punish (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [158] and [164]). In light of the circumstances I have already referred to, I cannot accept that the purpose (or even the predominant purpose) of clause Sixthly was merely to punish the defendant in the event that she failed to discharge her obligations under clause Secondly. Again, clause Sixthly was intended to define the circumstances in which the defendant would be entitled to payment of the additional amount following the completion of the sale. Further, it should not be overlooked that the happening of the event upon which payment of the additional amount depended was itself dependent upon the defendant taking steps to satisfy the Clean-Up Notice. Whilst clause Secondly imposed obligations upon the defendant in that regard, she was in any event obliged by the applicable legislation to take those steps.
Neither can it be said that enforcement of clause Sixthly is not necessary in order to give the plaintiffs the benefit of the substance of the transaction (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [257]). Clause Sixthly cannot be divorced from its central role in relation to the working out of the consideration to be paid in respect of the transfer of the land.
For these reasons, I do not think that clause Sixthly should be regarded as being in the nature of a security for and in terrorem of satisfaction of clause Secondly.
It follows from the above that clause Sixthly should not be characterised as penal. Clause Sixthly remains enforceable in accordance with its terms.
The final matter to consider is whether the Court should exercise its equitable jurisdiction to grant relief against forfeiture. In this regard, the defendant contends that the jurisdiction is engaged because the primary object of clause Sixthly of the mortgage is to secure performance of the defendant's obligations under clause Secondly. Whilst I accept that clause Sixthly operates to provide an incentive to the defendant to perform those obligations (see at [46] above), it should be apparent from what I have already said (at [56]-[64] above) that the primary object of clause Sixthly was not to secure performance of clause Secondly but was rather to operate, in conjunction with clause Firstly, for the purpose of ascertaining whether the defendant would be entitled to be paid the additional $250,000 component of the consideration for the transfer of the land.
In any event, even if the jurisdiction was engaged, I would not see this as an appropriate case to grant relief in the nature of relief against forfeiture to relieve the defendant from the consequences of the operation of clause Sixthly.
As the defined event did not occur within the stipulated time, clause Sixthly operates in its terms to effect a forgiveness of the mortgage loan and require the defendant to provide a discharge of the mortgage. No exercise by the first plaintiff of a contractual right under the mortgage is involved (see Elderslie Property Investments No 2 Pty Ltd v Dunn [2007] QSC 372 at [66]; Hampton v BHP Billiton Minerals Pty Ltd [No 2] [2012] WASC 285 at [240]). Moreover, the fact that the defined event did not occur within time was in no way the fault of the plaintiffs.
The clause operates, in essence, to deny the defendant's entitlement to payment of the additional $250,000 component of the consideration. It encapsulates the bargain struck by the parties as to the circumstances in which the additional amount would or would not be payable. It is unfortunate from the defendant's point of view that the EPA satisfaction notice was not able to be given to the first plaintiff until about two weeks after the expiry of the stipulated period. Further, it can be accepted that no loss was suffered by either of the plaintiffs as a result of that delay, which I also accept was not due to default on the part of the defendant. Nevertheless, I do not think that it is unconscientious on the part of the first plaintiff to insist on its strict legal rights under clause Sixthly. By doing so, the first plaintiff is seeking to uphold a freely made commercial agreement, the terms of which (including clause Sixthly itself) were negotiated with the assistance of solicitors. The parties must be taken to have been aware of the provisions of clause Sixthly which clearly state that if the EPA satisfaction notice was not received within 12 months, the loan would be forgiven and the mortgage would be discharged. For these reasons, the defendant's claim for relief against forfeiture also fails.

Salloway Pty Ltd v Barlow

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