Sigma Pharmaceuticals Pty Ltd v Nuc-One Enterprises Pty Ltd [1998] VSC 204

Supreme Court of Victoria|1998-12-23|Before: Gillard J

For the reasons already stated, as at 14 September 1998 Crampton put beyond doubt any suggestion that he was interested in negotiating an arrangement involving the debts. Further, subsequent to 14 September and up to 28 September, Crampton's conduct again clearly demonstrated that he was not interested in doing any deal concerning the debts. In my view he was not obliged in that period to say that he was not interested. His conduct said it for him. It was obvious and it was not necessary to be said.

His conduct clearly represented that Nuc-One was not interested up to midnight on 28 September 1998.

As late as 1 October 1998 de Alwis was maintaining his position that the plaintiff was not going to pay the $100,000. This was after the guillotine had dropped. There can in my opinion be no question of any representations made by Crampton which induced de Alwis to make that decision. It was his decision and his decision alone which he made for commercial reasons and what he thought was in the interests of his employer. The claim fails.

The law of relief against forfeiture developed in Chancery and was closely allied to the equitable jurisdiction of relieving against penalties.

Equity developed the doctrine to overcome the strict approach at common law with respect to the upholding of bargains. Equity was prepared to grant relief in suitable cases where a contracting party failed to pay money pursuant to a contract relating to land and at law the other contracting party was able to recover the former's interest. In other words, it was to ameliorate the strict enforcement of contractual provisions at law.

The doctrine developed in relation to mortgages and subsequently was applied to leases where the landlord re-entered the premises for failure to pay rent. Legislation was passed as early as 1730 in England to regulate the practice of granting relief in a landlord and tenant relationship.

The equitable jurisdiction was well established by the eighteenth century.

Although the doctrine developed hand in hand with relief against penalties and indeed it can be said that the relief against forfeiture is but part of the general power of equity to relieve against penalties, the fact is that there is a substantial difference between the two areas of law. The differences are conveniently summarised in "The Principles of Equity", edited by Patrick Parkinson at p.311 et seq.

The modern law of relief against forfeiture can be traced back to the speech of Lord Wilberforce in Shiloh Spinners Ltd v. Harding (1973) AC 691.

That case involved the relationship of landlord and tenant and the breach of a covenant to repair.

"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.

... Secondly there were the heads of fraud, accident, mistake or surprise, always a ground for equity's intervention, inclusion of which entailed the exclusion of mere inadvertence and afortiori of wilful defaults."

(Emphasis added)

His Lordship noted what Lord Eldon, LC said in 1811 that the principle "might represent an unjust variation of what had been contracted for". His Lordship was of the view that the argument had "much force".

In regard to the sanctity of contract his Lordship said -

"I would fully endorse this: it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should re-affirm the rights of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word 'appropriate' involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach."

(Emphasis added)

The High Court has considered the principles in three cases after Shiloh Spinners v. Harding. They are Legione v. Hateley [1983] HCA 11; (1983) 152 CLR 406, Ciavarella v. Balmer [1983] HCA 26; (1983) 153 CLR 438 and Stern v. McArthur [1988] HCA 51; (1988) 165 CLR 489.

Whilst the learned High Court judges have not spoken with one voice and with different emphasis it is possible to distil a number of principles with respect to the jurisdiction and its exercise.

The two heads of jurisdiction referred to by Lord Wilberforce are well established. It is clear that the jurisdiction is not confined to those two heads but it is unnecessary to consider that question.

Mr Fajgenbaum, Q.C. relied upon both heads of jurisdiction. Taking the first head of jurisdiction, namely, that the object of the transaction the subject matter of the sale agreement and the insertion of the self-executing clause were essentially to provide security for payment of money he submitted that in the circumstances the court should relieve on terms of paying compensation, the plaintiff from the forfeiture of the property rights in the product.

I am satisfied that the court does have jurisdiction in this case and the question is whether this is an appropriate case to relieve against forfeiture?

Two matters of importance to the question of exercising the jurisdiction are -

(i) the sale agreement contained a term that time was of the essence;

(ii) that Nuc-One terminated the agreement because of the repudiation by the plaintiff in failing to make the payment and the rescission occurred either on 30 September or at the latest 2 October.

In regard to the last matter, even after Nuc-One's solicitors wrote on 30 September referring to the failure to pay, the service of the default notice and the application of clause 2.3 the plaintiff still sought to ignore the obligations under the sale agreement and to meet with Crampton in order to reach a mutually satisfactory arrangement. The plaintiff did not tender the instalment plus compensation until 9 October 1998.

Once the jurisdictional question is satisfied, the issue comes down to deciding whether the circumstances are appropriate for the grant of the relief.

The following factors are relevant to that exercise and particularly relevant to the present case -

(i) "It is only in exceptional circumstances that specific performance will be granted at the instance of a purchase who is in breach of an essential condition" per Mason and Deane, JJ in Legione supra at p.448; Ciavarella v. Balmer [1983] HCA 26; (1983) 153 CLR 438 at 454.

(ii) In considering the exercise of the jurisdiction it must not be overlooked that the contract is a commercial one, entered into at arm's length by person's who are able to look after their own interests and the jurisdiction should not be used to re-form contracts - per Deane and Dawson, JJ in Sterne's Case supra at p.526.

(iii) That to establish exceptional circumstances where the contract has been validly rescinded for breach of a term which is essential, the party seeking relief must show conduct amounting to unconscionable conduct on the part of the vendor. See Ciavarella supra and Shiloh's case.

(iv) Unconscionable conduct does not have to be exceptional because the exceptional aspect to the jurisdiction is that a court will be reluctant to interfere "with the contractual rights of parties who have chosen to make time of the essence of the contract" per Deane and Dawson, JJ in Sterne's case supra at p.526.

As their Honours said - 'The circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable - or more accurately, unconscientious - conduct.'

(v) "The circumstances which may make the case exceptional to warrant relief in favour of a purchaser who is in breach of an essential term ordinarily there must be something 'such as fraud, mistake, accident or surprise before relief will be granted'. These elements do not, however, exhaust the scope of unconscionable or unconscientious behaviour; they are referred to in this context to emphasise that a strong case must be made out to warrant departure from the general approach, which is to hold the parties to their bargain." - Deane and Dawson, JJ, Sterne's case supra at p.526.

(Emphasis added)

Although Mason, CJ dissented in Stern's case his statement of principle concerning the unconscionable conduct is supported by other authorities. His Honour said at p.503 -

"The doctrine is a limited one that operates only where the vendor has, by his conduct, caused or contributed to a situation in which it would be unconscionable on the vendor's part to insist on the forfeiture of the purchaser's interest."

The present case concerns a commercial agreement entered into at arm's length and does not relate to an interest in land.

Mr Fajgenbaum, Q.C. submitted that the doctrine did apply to contracts generally where they concerned transfer of proprietary or possessory rights - see Scandanavian Trading Tanker Co v. Flota Petrolera (1983) 2 AC 694 and Mr Bick of counsel for the defendants did not seek to contest the submission.

A number of cases have recognised that the doctrine can apply to contracts dealing with the transfer of proprietary or possessory rights.

In two cases involving forfeiture of shares no argument was put that the jurisdiction could not extend to shares. See Sparkes v. Company of Proprietors of the Liverpool Waterworks [1807] EngR 191; (1807) 13 Ves Jun 428, 33 ER 354; Prendergast v. Turton (1841) 1 Y and CCC 98, 62 ER 107; and Rule v. Jewell (1881) 18 Ch. D 662. I also refer to Jobson v. Johnson (1989) 1 WLR 1026, B.I.C.C.Plc. v. Burndy Corporation (1985) Ch. 232 and Esanda Finance Corporation v. Plessnig [1989] HCA 7; (1989) 166 CLR 131 at 151.

But it is a matter of substantial weight that it is a commercial contract where parties are able to look after their own interests.

In Sport Internationaal v. Inter-Footwear Ltd (1984) 1 WLR 776, the Court of Appeal in England noted that the jurisdiction has never been extended to "ordinary commercial contracts unconnected with interests in land and, though it may be that there is no logical reason why, by analogy with contract creating interest in land, the jurisdiction should not be extended to contracts creating interest in other property, corporeal or incorporeal, there is, at the same time, no compelling reason or policy that we can see why it should be."

Putting aside the question of jurisdiction, on any view the fact that it is a commercial contract is a matter of substantial weight when considering the exercise of the jurisdiction.

As Oliver, LJ said in the Sport Internationaal case at p.788 -

"Here were two commercial concerns, locked in litigation, advised by counsel and solicitors. They could not be more at arm's length. One can hardly conceive of a case in which certainty is more important than in a contract putting an end to litigation. The fact that part of the subject matter was the use of a trade mark underlines the need for both certainty and for avoidance of delay, for, if the licence is determined, the licensor will wish to know at once, particularly in the case of an exclusive licence, whether he is entitled to preserve or to build up his good will by entering upon the territory himself or granting licences to others."

Quoted with approval by Lord Templeman in the House of Lords in the same case, op. cit. at p.794.

The fact that it is a weighty matter was adverted to by Deane and Dawson, JJ in Stern's case at p.528.

As already stated, Mr Fajgenbaum, Q.C. submitted that the court had jurisdiction to grant relief because the object of the transaction was to secure the payment of money. I have accepted that that is so.

He also submitted that the jurisdiction was founded on the fact that there was fraud, accident, mistake or surprise. In my opinion neither fraud, accident, mistake or surprise has been established and I do not consider the exercise of the jurisdiction under that head.

The argument put by Mr Fajgenbaum with respect to the second head concerned Crampton's conduct in leading Sigma to assume that compliance with the default notice was not required. As a matter of fact, I do not accept that conclusion.

In support of the exercise of the jurisdiction Mr Fajgenbaum, Q.C. relied upon a number of matters. They are -

(i) the plaintiff wishes to continue its trading relationship and is merely asking for an extension of time in which to pay the $100,000 plus compensation.

I am prepared to accept that that is so.

(ii) That if the plaintiff is deprived of its property it will suffer a substantial loss because of the stock it has in hand, it wishes to keep trading and has already spent or committed to spend $371,,369 on promotion.

With respect to the stock held for Valiente, no doubt under the distribution agreement it can supply the stock to it when requested.

For the purposes of the argument I am prepared to accept that it may not be able to sell its Sigma stock.

(iii) That Nuc-One suffers no loss from the non-receipt of money between 28 September and 9 October.

That assertion is not strictly correct. It has raised a loan with the bank. It is an inference that Nuc-One and/or Valiente would be liable for interest. However, I do accept that any damage would be small.

In addition, the plaintiff may suffer some loss by reason of the fact that it has already paid out $200,000 on 3 April 1998 and since then, because of the winter season, has not been able to make many sales.

Mr Fajgenbaum, Q.C. says that Nuc-One can be fully and adequately compensated for any loss it may suffer by the payment of money which the plaintiff is prepared to pay.

As against the arguments put on behalf of the plaintiff, Mr Bick submitted on behalf of the defendant, Nuc-One, that relief against forfeiture should not be granted and relied upon the following matters -

(i) Nuc-One did not contribute to the plaintiff's breach of contract;

(ii) the plaintiff's breach was substantial;

(iii) the plaintiff's breach was wilful and deliberate, designed to achieve the collateral purpose of putting pressure on Nuc-One to contribute to the debts of Valiente;

(iv) that the consequences for Nuc-One and also the other company, Valiente, are severe;

(v) that the plaintiff's behaviour as evidenced by de Alwis in seeking to achieve unilateral variation of two contracts by deliberate breach of one of them is such that it should not be entitled to relief from forfeiture.

Other than the assertion that the consequences for Nuc-One and Valiente are severe, which in my opinion is exaggerated and could be overcome by suitable compensation, I do agree that the matters relied upon by Nuc-One are significant and weighty.

In my opinion Nuc-One is not entitled to relief from forfeiture.

In coming to that conclusion I accept the submissions of Mr Bick concerning the weight to be attached to the factors he has listed.

But in addition, there are a number of other factors of considerable weight.

First of all, clause 2.3 was inserted in the contract at the request of Crampton early in the negotiations and accepted by de Alwis.

Secondly, de Alwis fully understood the effect of breach of failure to comply with the provision, and was fully aware after he received the notice of default the consequences of breaching the sale agreement.

Thirdly, the breach of the sale agreement did not come about because of any inadvertence, mistake, surprise or carelessness but came about because of the wilful and deliberate act by de Alwis, who at all times was fully aware of the consequences of what he was doing.

Fourthly, there is no evidence of fraud, deception, surprise or misleading conduct on the part of Crampton who throughout sought to exercise the legal rights of Nuc-One.

Fifthly, it was a commercial transaction entered into by parties at arm's length and well able to look after their own interests and it is of the utmost importance in commercial transactions that parties fully appreciate and understand their rights and obligations and know where they stand - see Scandanavian Trading Tanker Co case supra at p.704.

Sixthly, even after the guillotine had dropped, the plaintiff ignored the consequences and continued to adopt a line which was in breach of the sale agreement without in any way attempting to remedy the breach.

Seventhly, Nuc-One validly terminated the agreement by rescinding it for breach of an essential term.

Finally, and in my view a matter of significance is that looking at the behaviour of both parties it cannot be said that Nuc-One through Crampton was guilty of any unconscionable conduct which would make it contrary to good conscience that Nuc-One should be permitted to enforce its legal rights.

The fact was that de Alwis on behalf of the plaintiff was seeking to re-make their contractual relationship. The plaintiff had failed in its endeavours in April 1998 to get Crampton to agree to a set off of monies, that from July onwards de Alwis was determined to change the contractual relationship and in this regard was prepared to ignore the terms of the sale agreement to get his way.

He now seeks to come to court to seek equity and in my opinion the plaintiff has failed to establish any equity which would entitle it to relief against forfeiture.

In this regard I repeat what I have said in previous cases involving commercial relationships. That is, that parties to a contract must appreciate, "That a contract is a contract is a contract." Even though its full meaning and import may not be appreciated at the time of its execution the parties are bound by it. Too often in the commercial world a party to a contract later realises that it is not to his liking and seeks to and does ignore it, varies it unilaterally or seeks to pressure a change. It cannot be over-emphasised that what they agreed to, they are bound by.

It would only be in exceptional circumstances that a court would grant relief from forfeiture in relation to a commercial contract. And then only when it was established that there was an equity in the parties seeking relief against forfeiture. The plaintiff has failed to establish any equity in it for relief.

It follows that the plaintiff has failed to establish any ground for relief and its proceeding will be dismissed.

Nuc-One has sought a number of heads of relief.

It was agreed at trial that if the plaintiff failed then the question of orders to be made on Nuc-One's cross-claim would be the subject of submissions.

I am prepared to hear the parties in relation to the matters pleaded.

However, it is appropriate for me to make a number of observations which I hope will be of assistance to the parties.

First, in my opinion Nuc-One is entitled to a declaration with respect to the effect of the application of clause 2.3 and further, a declaration to the effect that the sale agreement has been validly rescinded.

If there is any evidence that the plaintiff is seeking to exercise any rights with respect to the product then there may be grounds for the granting of an injunction.

This brings me to the two claims made for damages.

Nuc-One claims damages as a result of the rescission of the sale agreement. The particulars assert an entitlement to the $100,000 instalment due on 11 September 1998, the loss of the use of the money and what is described as consequential economic loss as a result of the non-payment.

Clearly there has been a breach of the sale agreement and secondly, Nuc-One has validly rescinded it.

In accordance with the general principle, all rights which have accrued up to the date of rescission can be enforced. See Mcdonald v. Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457 at p.476-7. As a general proposition the rescinding party is entitled to damages.

But this brings me to the question whether the terms of the sale agreement provide alternative remedies to Nuc-One. In other words, was it the common intention of the parties that if Nuc-One exercised its rights pursuant to clause 2.3 then it elects to recover the property rather than the instalment not paid.

In my opinion there is a strong argument that by accepting the property back Nuc-One elects to pursue that remedy and not seek the payment of the instalment.

The court seeks to determine the presumed common intention of the parties which means both parties and not one party. If the reasonable bystander at the date of execution of the agreement posed the question - "Well, if the instalment is not paid and the property is returned is Nuc-One entitled to both the instalment and the property?" - in my opinion the most probable answer based upon common sense would be - "No".

No doubt the parties will seek to make submissions in respect to that issue.

Nuc-One has also pleaded a number of causes of action based upon breach of s.52 of the Act which relate to what the plaintiff is doing with respect to the supply and sale of the products.

If Nuc-One wishes to proceed with these claims then it will be necessary to hear from the parties with respect to the evidence in support of these claims. As presently advised I am not aware of any evidence which supports these claims.

Subject to any submissions from counsel, it appears to me that an order should be made that the plaintiff's proceeding be dismissed with costs.

I will hear the parties with respect to orders on the cross-claim brought by Nuc-One.

The principle has been applied in Australia. See Barnes v. Queensland National Bank Ltd [1906] HCA 26; (1906) 3 C.L.R. 925.

Mr Fajgenbaum, Q.C. referred to what Gummow, J said in Demagogue Pty Ltd v. Ramensky [1992] FCA 557; (1992) 110 ALR 608 concerning misleading conduct being constituted by acts, omissions, statements or silence. His Honour at p.617 quoted with approval what Professor Butt explains in his work "The Standard Contract for Sale of Land in New South Wales" as follows -

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