Seven Sydney v Fuji Xerox

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

1 November 2004 Ex tempore (revised 2 November 2004)

50127/01 SEVEN SYDNEY PTY LIMITED v FUJI XEROX AUSTRALIA PTY LIMITED JUDGMENT (On interest and indemnity costs)

1 HIS HONOUR: I gave judgment in these proceedings on 8 October 2004, holding that the referee's report should be adopted: [2004] NSWSC 902. I directed the parties to bring in short minutes of order to give effect to my reasons. The parties have now brought in competing draft minutes of order and I have heard submissions on the appropriate orders to be made. The parties disagree as to the amount of the judgment that, pursuant to the referee's reasons and my decision to adopt his report, represents the amount of damages sustained by FXA by reason of Seven Sydney's breach of the DC100 lease. The second dispute relates to the costs of the proceedings. In these reasons, I deal firstly with the amount of the judgment. 2 It is accepted that the effect of the referee's reasons which, as I have said, I think should be adopted, is that Seven Sydney repudiated the DC100 lease. On any view that repudiation was accepted when on 2 October 2001 FXA filed its cross-claim seeking damages. The parties have agreed to treat 1 October 2001 as the notional date of termination (through accepted repudiation) for ease of calculation. 3 As at October 2001, there was $41,091.49 due for support services that had been invoiced at various dates between 23 December 2000 and 31 March 2001. It is accepted that each of those invoices required payment within 14 days. There were also due substantial arrears of rental. Some of those arrears did not attract, and some do attract, GST. The parties have no difficulty in calculating the amount of rental (on either basis) due up until the date of termination. 4 The lease dealt, to some extent, with termination. Clause 3(e) dealt with termination by FXA on account of breach by Seven Sydney. Clause 3(f) gave Seven Sydney a contractual right to terminate the lease. I set those terms out: "(e) Xerox may terminate this Agreement if the Customer breaches any of the terms and conditions of this Agreement and then: (i) enter the Customers [sic] premises and take posession [sic] of the System, and (ii) demand immediate payout of, (a) the then unpaid balance of Lease/Rental discounted to their net present value, at the rate of 6% per annum. (b) the residual value (c) administration fee of $100.00, and (d) any other charges due under this Agreement, (e) less the market value of the System. (f) The Customer may terminate this Agreement at any time [sic] payment of:

(a) then the [sic] unpaid balance of Lease/Rental discounted to their net present value, at the rate of 6% per annum (b) the residual value (c) administration fee of $100.00, and (d) any other charges due under this Agreement." 5 Clause 4 of the lease set out what it called "customer obligations". They included, by clause 4(f), an obligation on the part of Seven Sydney to "pay interest at the rate of 15 percent per annum on a daily balance on all overdue balances." 6 It is clear, and I do not think in dispute, that Seven Sydney is obliged to pay interest on the overdue amounts for support services and lease rental installments at the rate of 15 percent from the various dates on which those payments fell due up until 1 October 2001 (the notional, but accepted date on which the lease came to an end by acceptance of repudiation). I will leave it to the parties to work out those amounts. 7 The first real issue in dispute is whether those amounts should carry interest at 15 percent thereafter up until judgment (as FXA contends) or the rate applicable under Schedule J (as Seven Sydney contends). The dispute arises because, Seven Sydney says, termination brought to an end not only the lease but its obligation to pay interest at the contractual rate. It relies on the decision of the Privy Council in F J Bloemen Pty Ltd v Council of the City of Gold Coast [1973] AC 115. 8 That case concerned a building contract. Under the contract, the builder was entitled "to interest on all moneys payable to him, but unpaid, from the date on which payments become due ... ". A question before their Lordships was whether the arbitrator was able to award interest under cl 35(c) (which is the clause to which I have just referred) after the date when the building agreement came to an end by accepted repudiation. Their Lordships said that the builder was not entitled to interest. At 126, their Lordships referred to the decision of House of Lords in Heyman v Darwins Ltd [1942] AC 356. At 127, they referred to the characterisation, in that case, of contractual obligations as "executive" or "substantial" (Lord Macmillan and Lord Wright respectively) and to the proposition, established by Heyman, that such obligations did not survive as effective obligations after an accepted repudiation. Their Lordships applied that reasoning to the case before them and concluded that the arbitrator had no power to award interest at the contractual rate after the date of accepted repudiation. 9 FXA relies on decisions such as that of the High Court of Australia in The Progressive Mailing House Proprietary Limited v Tabali Proprietary Limited (1985) 157 CLR 17. In that case, the High Court held that where a contract was terminated pursuant to a contractual right by reason of events that would have given the terminating party the right to treat it as at an end for repudiation, it was still appropriate to look at the terms of the contract both to ascertain the heads of damages to which the innocent party was entitled and to quantify those damages. This is brought out perhaps most clearly in the reasoning of Brennan J at 48. His Honour said that a promisor could not, by repudiating his obligations, unilaterally alter the legal relationships between him and the promisee. He noted that until the repudiation was accepted, the rights and obligations arising under the contract continued unaffected, referring to the earlier decision of McDonald v Dennys Lascelles Limited (1933) 48 CLR 457, 477. He said that acceptance of the repudiation is an essential element in the cause of the action for damages for executory breach because, as Lord Diplock expressed it in Moschi v Lep Air Services Ltd [1973] AC 331, 350, the secondary action in damages was substituted for the primary executory obligations to perform. 10 Thus, at 50, Brennan J noted that a claim for anticipatory damages survived termination and was available to the innocent party to be measured and quantified according to the obligations of the party in breach. 11 In my judgment, it follows from this that at the very least FXA is entitled to interest on the arrears not only up until the date of termination at the rate of 15 percent per annum, but also from that date to the date of the judgment at the same rate. If it were otherwise, Seven Sydney, by its conduct, would have put itself in a better situation than it would have been in had it continued to perform the lease. It would mean that a party in the position of FXA would be better served by waiting and suing, from time to time. I do not think that the law requires such a charade and I think, notwithstanding what their Lordships said in Bloemen, the trend of authority in the High Court leads to the result that I have indicated. 12 The next question, under this heading, relates to the other components of the damages. 13 As will be seen from cl 3(e) and (f) of the lease, termination (under either sub clause) leads to an obligation on Seven Sydney to pay the discounted value of future rental at the date of the termination, the residual value and certain other amounts. In addition, under clause 3(e), there is an obligation to give credit for the market value of the system. 14 The residual value was fixed under the lease at $131,970. To that must be added 10 percent for Goods and Services Tax. 15 I do not think clause 3(f) is applicable. That clause gave a contractual right to Seven Sydney to terminate by tendering an amount calculated in accordance with its terms. On no view of the facts did Seven Sydney exercise that right. 16 FXA relies, in the alternative, on cl 3(e). It is clear that Seven Sydney had breached the lease. However, there is no evidence that FXA acted in accordance with cl 3(e). There has been no evidence before me of any demand or payment in accordance with sub-paragraph (ii). On the contrary, I think, the better version of events is that once FXA was satisfied that Seven Sydney meant what it said - that it was treating the lease as no longer binding upon it - it acted, by filing its cross-claim, to accept what on any view was (if unjustified, as the referee has found it was) a repudiation. 17 I therefore think that FXA's entitlements fall to be assessed by the common law. The first item is the unpaid balance of installments of rental accruing after the date of accepted termination. They are to be discounted. No challenge has been raised to the discount rate of 6 percent per annum. It has not been said, by reference to the apparent disparity between that rate and the interest rate provided in cl 4(f), that there is any element of penalty involved. 18 The next item is the residual value together with GST. Again, where damages are to be assessed at law rather than by reference to the contract, the residual value is to be discounted to the date of the termination to reflect its value as at that date. Prima facie, that should happen at the contractual rate of 6 percent, which as I have said the parties accept to be appropriate for installments of rental. I note that Seven Sydney submitted that, if cl 3(e) or (f) applied, then the absence of any requirement to discount the residual value meant that the obligation was a penalty. Having regard to my conclusion on this aspect of the claim, I do not need to consider whether this argument is open to Sydney Sydney, or whether it is correct. 19 There is no other charge proved to be due under the agreement other than the administration fee of $100. The market value of the system has been quantified at $200. There was some contention as to that. FXA has made an open offer to Seven Sydney that it may collect the system. In the events that have happened, that is accepted as putting an end to any dispute as to the real value of the system. I would add only that having regard to what Seven Sydney said to FXA in its letter of 30 August 2001, it would be very difficult for Seven Sydney to maintain that the equipment in question had any real, as opposed to nominal, value. 20 I, therefore, summarise the results to which I have come as follows. FXA is entitled to the arrears of support service charges and rentals under the lease up until 1 October 2001, with interest at the rate of 15 percent per annum from the date on which each of those payments fell due up to the date of entry of judgment. FXA is also entitled to the discounted, or net present, value of the future instalments of rental as at the date of termination and to the discounted residual value at the same date; and to its administration fee at $100. It must give credit for the agreed value of the goods. 21 I do not think that the contractual entitlement to interest accrues on those amounts. Reference in cl 4(f) to "overdue moneys" is, I think, a reference to moneys overdue under the agreement. The amounts in question are not overdue under the agreement because, as I have held, they represent damages calculated at law and not a contractual entitlement under cl 3(e) or (f). Those amounts should, therefore, carry interest at the rate applicable under Schedule J up until the date of entry of judgment. 22 I direct the parties to bring in short minutes of order quantifying FXA's entitlement under those reasons, and providing for a sum in respect of which judgment is to be entered. That is to be done no later than Friday 12 November 2004.

(Counsel addressed on costs of the application.) 23 HIS HONOUR: FXA seeks indemnity costs in respect of part of the proceedings before the referee and thereafter. It relies on an offer of compromise served on 11 March 2003. That offer of compromise offered to settle on the basis that in substance Seven Sydney pay FXA $750,000 on FXA's cross-claim, that Seven Sydney's proceeding be dismissed, and that Seven Sydney pay FXA's costs. It is clear, on the conclusions to which the referee has come and that I have thought should be adopted, that the result in favour of FXA is substantially more favourable than that offered by the offer of compromise. 24 Seven Sydney points to the chronology of the proceedings before the referee and to the fact that the case took a somewhat different turn after the offer of compromise was served. It is necessary to note a number of matters from the report, including that there had been a preliminary hearing on 25 November 2002 "to determine the likely utility of testing the DocuColor 100" (report para 4). There were then directions hearings, including one on 4 December 2002, at which the referee directed Seven Sydney make the DC100 available for collection by FXA to perform the testing (report para 5). The referee noted that the timetable for testing had not been resolved by 9 December 2002, so that a further directions hearing was needed (report para 7). On 14 December 2002, some agreement was reached as to the testing (both in Sydney and in the ACT) (report paras 8 and 9). The recommissioning at the premises of Seven Sydney occurred in January/February 2003 and the referee had a view on 11 February 2003 (report para 10). 25 The hearing of evidence commenced on 17 February 2003 (ie before the offer of compromise was served) and continued until 24 March 2003 (ie after the offer of compromise was served) (report para 12). 26 Preparation for the testing of the machine in the ACT took place in April/ May 2003 and the testing itself continued thereafter (report paras 14 and 15). The hearing resumed on 12 June 2003, at which time FXA relied upon affidavits sworn after the prior adjournment and, as I understand it, relating to the testing process (report para 16). 27 It is apparent from the report that the testing was of very great significance in the referee's mind. I have referred to this in my reasons given on 8 October 2004, and I do not propose to repeat what I there said. It is equally apparent from the report that the evidence that related to the testing and that, therefore, was not available until after the expiry of the offer of compromise, was relied upon by the referee (see, for example, s 3.8 of the report commencing at page 126). 28 Mr Simpkins SC, who appears for Seven Sydney, therefore submits that matters took a distinctly different turn after the offer of compromise was served. 29 In this context, it may be significant to note that on 14 August 2003 FXA's solicitors wrote a letter that was said to be "without prejudice except as to costs" to Seven Sydney's solicitors. That letter referred to the amount outstanding, which it said was then in excess of $1.2 million, and proposed settlement on the basis of a judgment in favour of FXA in the sum of $800,000 together with costs. In other words, the claim was $50,000 more than that proposed by the offer of compromise. On any view, however, it was substantially less than the amount to which, following from my decision to adopt the report, FXA's entitlement was to be quantified. 30 The question turns on Pt 52A r 22(4). It is accepted that the offer of compromise was made in accordance with Pt 22. It is accepted, as I have noted, that the outcome is more favourable to FXA (the offering party) than the terms of offer. The question is whether I should "otherwise order". The only basis propounded is that, as I have said, the testing process and the evidence relating to it occurred after the expiry of the offer. 31 I do not regard that as a basis for otherwise ordering. It is clear that the testing process had been propounded, and an arrangement to put it in place had been made, well prior to the service of the offer of compromise. It is clear that FXA took the view that the testing process was likely to resolve the matter in its favour, as it would appear to have been the principal proponent of the testing process. Be that as it may, each party was well aware of its case in relation to the machine. Each party must have been aware, on its case (assuming it to have some confidence in the credibility of its case), of the outcome that the testing process was likely to reveal. Although it is undoubtedly correct to note that the testing process was significant, each party should have had a reasonable comprehension, on its own evidence, of the likely outcome of the testing process. 32 It does not seem to me that the testing process turned the case into something substantially different to the case that had been argued. What it did was provide, in a way that the referee found extremely significant, a demonstration that the case of one party (FXA) was to be preferred to that of the other (Seven Sydney). They were all matters that, in my judgment, the parties should have been well aware of well before the offer of compromise was made. 33 It might conceivably be different if the proposals for the testing process had come, as it were, out of the blue and after the offer of compromise was made. But the chronology that is apparent from the report, to which I have referred in brief, demonstrates that this is not so. 34 I therefore conclude that FXA is to have its costs of the proceedings (including of its cross-claim) and that, pursuant to Pt 52A r 22(4), those costs are to be payable on an indemnity basis as and from the date of service of the offer of compromise, namely, 11 March 2003.

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