State of New South Wales v Schofields Nominee No.5 Pty Ltd

Is clause 26 a penalty?

1. The High Court reframed the law of penalties in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 (Andrews) and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525 (Paciocco). I adopt the summary of the relevant principles articulated in Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231 (Arab Bank) at [69]-[76] (McDougall J, Gleeson JA and Sackville AJA agreeing) and Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd (2017) 18 BPR 36,683; [2017] NSWCA 99 (Australia Capital) at [353]-[376] (Ward JA, McColl and Gleeson JJA agreeing).
2. Broadly, a court must determine: 1. Whether the penalty doctrine is engaged; 2. Whether a clause is a penalty; and 3. If it is a penalty, the appropriate remedy.

Is the penalty doctrine engaged?

1. The State asserts that it breached clauses 24.1(d)(ii) and 25.1(b), because it did not provide the Road Access Conditions by 30 April 2021, and for that reason, the obligation to pay compensation in clauses 24.1(c), 24.1(d)(iii) and 26.10 was triggered. This payment obligation is said to be in addition to the obligation to provide road access, which subsists despite the expiry of the 30 April 2021 deadline. The State asserts that because the payment obligation is triggered by its breach, the penalty inquiry is engaged.
2. Special Condition 24 of the contract relevantly provides: 24. Road Access 24.1 The vendor and purchaser acknowledge and agree that: (a) as at the date of this Contract the Master Lot has unfettered road access to the existing public road system; (b) as a result of the creation of the Land pursuant to the Plan of Acquisition, the Residue Lot will cease to have any road access to the existing public road system which will result in a decrease in the value of the Residue Lot; (c) the purchase price payable by the purchaser under this Contract does not take account of nor compensate the vendor for the decrease in value of the Residue Lot resulting from its severance from the Master Lot or the circumstances described in this special condition and, that if, by the expiry of the Prescribed Period, the Road Access Conditions have not been satisfied in full by the purchaser, in order to compensate the vendor for the decrease in value of the Residue Lot, the purchaser has agreed to pay compensation to the vendor (or then registered proprietor of the Residue Lot) determined in accordance with the provisions of special condition 26; (d) in consideration of the vendor agreeing to enter into this Contract … the purchaser has agreed, in addition to paying the purchase price and performing its other obligations under this Contract, to: (i) grant the 6m Wide Easement to the vendor (as registered proprietor of the Residue Lot) on completion at no additional cost to the vendor in accordance with the provisions of special condition 11; (ii) acquire the Stage 2 School Lot and grant the 18m Wide Easement to the vendor (or then registered proprietor of the Residue Lot) at no additional cost to the vendor (or then registered proprietor of the Residue Lot) and construct and dedicate the Public Road Extension as public road at its own cost, in accordance with the provision of special condition 25; and (iii) pay any compensation to the vendor … determined in accordance with the provisions of special condition 26 if by the expiry of the Prescribed Period [ie by 30 April 2021] the Road Access Conditions have not been satisfied in full by the purchaser.
3. The obligations referred to in clause 24(d) are expanded in the clauses that come sequentially after it: 1. Clause 25, which deals with the promise to provide an easement and complete the road works; and 2. Clause 26, which provides a mechanism for the compensation to be quantified.
4. I consider that for the State to succeed in its construction, it would be necessary to read clause 24(d) in isolation, because read literally by itself, it provides that the State promises to complete the road access "and" pay compensation "if" the road works are not completed by 30 April 2021.
5. For the following reasons, I do not accept that construction is correct. Instead, I consider that the parties' intention was that the State would provide road access by 30 April 2021, or, at Schofields' election following that date, the State would alternatively pay compensation.
6. Any clause must be construed in the context of the contract as a whole, and with regard to "the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract": Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35] (French CJ, Hayne, Crennan and Kiefel JJ); see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [46]-[52] (French CJ, Nettle and Gordon JJ). There need not be ambiguity before evidence of surrounding circumstances is taken into account: Cherry v Steele-Park (2017) 96 NSWLR 548 at [68]-[85] (Leeming JA, Gleeson and White JJA agreeing). Here, as part of those circumstances, it is appropriate to take into account that the parties were commercially sophisticated, with able legal representation, and the contract was negotiated.
7. The parties have expressly agreed that the compensation concerns the "decrease in the value of the Residue Lot", not the impact of delay in obtaining access until the road works were complete. For example, in clause 24.1, the parties agreed that by reason of the bifurcation of the Master Lot, the Residue Lot would lose access to a public road and would reduce in value (clause 24.1(b)), the purchase price did not compensate Schofields for the decrease in value of the Residue Lot resulting from its severance from the Master Lot, and to compensate Schofields for that loss in the "decrease in value", compensation would be payable in accordance with clause 26 (clause 24.1(d)). Had the parties intended that the compensation would be only referrable to the delay in obtaining road access while the State completed those works, then it would have been expected that the contract would have so specified.
8. Further, clause 26 commences with an entitlement of Schofields to issue a notice after 30 April 2021 if the road works are not complete requiring compensation to be paid as calculated under the clause. The valuation mechanism agreed did not relate to Schofields' loss caused by delayed access, but instead, concerned the difference between a "before" and "after" valuation of the Residue Lot. It would make no commercial sense for the parties to have agreed that the State would pay compensation based on the value of the Residue Lot, if instead, the intention was that the State would continue to be obliged to complete the road access works in addition to paying that compensation.
9. Put another way, the State's construction is that it was required to both perform and at the same time, pay compensation for the loss caused by never performing. I do not accept that is a construction that reasonable businesspeople would reach.
10. I do not accept the State's submission that the promise to provide road access continued until it was satisfied, because standard form clause 21.6 provided that normally, time stipulations were not essential. I do not consider that relevant to the question of the proper construction of the obligation to pay compensation. It might be accepted that the obligation to provide the road works continued past 30 April 2021, but that was only until Schofields elected to exercise its right to issue a notice pursuant to clause 26 to demand compensation instead.
11. I do not accept that because the parties used the word, "compensation", they objectively intended the clause to be construed as creating a collateral stipulation, in the sense that it was the agreed "compensation for breach". Instead, clause 24.1(d)(iii) is framed as an alternative primary promise. I consider the parties' objective intention was that the "compensation" was part of the price for the impact on the Residue Lot remaining landlocked.
12. Read as a whole, the proper construction of clauses 24, 25 and 26 means that the State's "consideration" for the purchase of the land, in addition to the purchase price, was to carry out the Road Access Works by 30 April 2021, or if it did not do so and Schofields issued a notice under clause 26, to instead pay compensation. Therefore, that compensation payment must be understood as a primary obligation that would always be required at Schofields' election, unless the State chose to fulfil the Road Access Conditions by April 2021.
13. Schofields submitted that before a notice under clause 26 was issued, the State had a choice to either satisfy the Road Access Conditions or to pay the Compensation Amount due under the contract. Schofields relied on the High Court's decision in O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 (O'Dea) at 367 and 374 (Gibbs CJ), and Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 518 (Mason ACJ, Wilson, Brennan and Dawson JJ), where their Honours held that a clause to terminate a moratorium deed was not penal as there is no penalty where a deed simply affords a qualified "indulgence for the payment of a debt that is due and payable". However, it is unnecessary to conclude whether the Road Access Conditions ought to be characterised as an indulgence; there is no magic in labels.
14. In my view, the completion of the road works is not properly characterised as a "primary obligation" and the compensation obligation is not "collateral (or accessory) to [that] primary stipulation". I do not accept it is an "additional detriment" on the "failure of the primary stipulation". Instead, it is a primary obligation itself. Therefore, I do not consider the penalty doctrine is engaged.

Schofields' legitimate interests

1. If the above construction is erroneous and the penalty analysis is engaged, then the question is whether the operation of the compensation clause, as at the time of formation (rather than its particular operation in this case), is out of all proportion to the damage to Schofields' legitimate interests in the completion of the Road Access Conditions by 30 April 2021: Arab Bank at [74].
2. Therefore, it is necessary first to determine Schofields' legitimate interests at the time of formation.
3. The concept of a "legitimate interest" or a "positive interest in performance" was considered by the High Court in Paciocco, where a very broad approach was taken to ascertaining such interests. Of significance for this case, Kiefel J (French CJ agreeing) stated at [48] that "there is good reason to leave the assessment of the value of a complex interest as a matter of negotiation between the parties, especially since the court may not be in a position to value the interest itself". Further, Keane J observed at [221] that when the relevant loss is "'very expensive and very difficult … to calculate precisely', the penalty rule has been held to have no application".
4. In Paciocco, the various ways the bank's "complex interest" was explained include: 1. An interest in receiving timeous repayment of the credit it extends, as late payment would impact on the bank's operational costs, loss provisioning and regulatory capital costs: at [58], [69] (Kiefel J, French CJ agreeing). 2. A commercial interest in ensuring that its credit card customers made the minimum monthly payment by the due date, in light of the bank's provisioning, regulatory capital, and operational costs: at [98]-[101], [171]-[176] (Gageler J); and "a commercial interest in avoidance or minimisation of common costs and fixed costs associated with [the bank's] collection activities": at [174] (Gageler J). 3. A "multi-faceted interest in the timely performance of its customers' obligations as to payment": at [271] (Keane J). That included: 1. the ordinary aspects of the business of a bank: at [274]; 2. "maintaining or enhancing" reward for risk assumed by the bank when making credit facilities available to customers: at [277]; and 3. "the freedom the bank obtains, by timely repayment by its customers, to pursue more profitably its business of lending to its customers than would be the case if it is constrained to take into account the effect of defaulting customers upon its revenues": at [278]. 1. The "only legitimate interest" was "repayment of the facility with interest at the agreed rate plus adequate recoupment of any costs imposed on the lender as a result of the customer's failure to adhere to the terms of the facility": at [323]; see also [324]-[326] (Nettle J in dissent).
5. The High Court has not limited what may constitute a legitimate interest, particularly where a breach of a promise is referrable to an impact on interests that may not sound in "ordinary" or "usual" contractual damages or may be difficult to quantify: for discussion see eg JW Carter, Wayne Courtney and GJ Tolhurst, "Assessment of Contractual Penalties: Dunlop Deflated" (2017) 34 Journal of Contract Law 4. Examples of these sorts of legitimate interests include: 1. In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, the interest of the tyre manufacturer in setting a financial consequence for a retailer failing to sell in accordance with a price list was an interest to "prevent the setting up [of] a system of injurious undercutting": at 91-92 (Lord Atkinson). 2. In Clydebank Engineering and Shipbuilding Company v Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6, the Spanish Government had a legitimate interest in having torpedo ships developed on time during a war to protect against injury to the State "sustained by a belligerent, or an intended belligerent": at 19-20 (Lord Robertson). 3. In Cavendish Square Holding BV v Makdessi [2016] AC 1172, the plaintiff who purchased a controlling interest in the defendant's business "had a legitimate interest in the observance of the restrictive covenants" contained in the sale and purchase agreement as the business's goodwill was "critical to its value" and "the loyalty of [the sellers, including the defendant] was critical to the goodwill": at [75] (Lord Neuberger and Lord Sumption, Lord Carnwath agreeing). 4. In Waterside Workers' Federation of Australia v Stewart (1919) 27 CLR 119, the Federation entered into a bond in the sum of £500 on condition that it pay £50 if, and so often as, its members in combination went on strike. It was held that "no one can ever tell how much loss is sustained by not doing business": at 132 (Isaacs and Rich JJ). Consequently, the £50 was liquidated damages and not a penalty. 5. In Australia Capital at [369]-[371], Ward JA (as the President then was, McColl and Gleeson JJA agreeing) considered that a contracting party had a legitimate interest that may not be readily quantifiable in the form of a possible loss of opportunity to develop land and share in the profits of the development.
6. Previously, it had been said that the subjective intention of one party in the inclusion of a clause was irrelevant to the question whether the clause is a "genuine pre-estimate of loss": see eg O'Dea at 400 (Deane J). However, expert evidence of the likely legitimate interests of the party benefitting from the clause at the time of formation may be admissible, as in Paciocco.
7. Recently, in QNI Resources Pty Ltd v North Queensland Pipeline No 1 Pty Ltd (2022) 11 QR 648 at [99], Kelly J (Morrison JA and Ryan J agreeing) considered that the process of determining whether a clause is penal, which involves identifying legitimate interests, requires "a tailored inquiry into the commercial circumstances in which the parties entered [into the contract]".
8. Whilst not determinative, evidence of surrounding circumstances going to the purposes sought to be achieved by the parties to the contract through the impugned clause may be relevant in understanding whether a stipulation has a legitimate commercial justification.
9. While Ms Lara Christie, the sole director of Schofields, outlined her opinion of Schofields' legitimate interests as a developer in the context of a group of companies, I do not consider it is necessary to analyse each stated interest for the following reasons.
10. First, I consider the parties had identified and agreed in the contract that Schofields' legitimate interest referrable to the compensation clause was the "decrease in value of the Residue Lot resulting from its severance from the Master Lot"; the agreement was "to compensate the vendor for the decrease in value of the Residue Lot" through the clause 26 process (clause 24.1(c); see also clauses 24.1(a) and (b)). The State therefore accepted in the contract that Schofields was going to suffer an immediate detriment on formation, and that the agreed loss was to be compensated through the contractual regime. While that supports the construction identified above that the penalty doctrine is not engaged, it alternatively amounts to an acknowledgement that Schofields had a legitimate interest to be protected, which was the reduction in the value of the Residue Lot by virtue of it becoming landlocked.
11. I do not accept Mr Dempsey's valuation evidence that the likely value of the Residue Lot would not change between formation and April 2021, even if there was no road access, despite changes in various risks existing or coming home. Instead, I consider the effect of the expert valuers' evidence as a whole was that at the time of formation, it was difficult to value the landlocked Residue Lot as at April 2021 because of many uncertainties. Uncertainty was a reason to agree to a negotiated valuation formula.
12. Secondly, Schofields had a legitimate interest in developing the Residue Lot for profit. It was apparent that at the time of formation, there was uncertainty as to exactly what plan the Department of Planning and Environment was going to adopt, including as to density allowances for developments. There was also some uncertainty about what approach Blacktown Council would take to any rezoning, including density allowances. Schofields was entitled to include some provisioning in the contract for that uncertainty, as it made difficult the assessment of the likely impact on its legitimate interests if a breach occurred. There were other uncertainties as to possible changes to planning laws, interest rates, and the ownership of neighbouring properties. Further, it was necessary for the Council to determine whether the public road would be placed along the 18 metre wide easement or otherwise, which may have required the co-operation of the neighbouring owner, which if not forthcoming, could lead to an application under s 88K Conveyancing Act 1919 (NSW).
13. In submissions, the State accepted that Schofields suffered a legitimate interest of delay in developing the Residue Lot, as it would not be able to obtain development consent for a profitable residential development until there was certainty as to public road access. Further, Mr Docker, senior counsel for the State, conceded that the impact of delay of road access was difficult to quantify because of uncertainties.
14. However, the State asserted that its failure to satisfy the Road Access Conditions by 30 April 2021 did not delay the development of the Residue Lot for long, because at the time of formation any rezoning was expected to be completed by that date, but Schofields failed to pursue such rezoning before that date. But that is the wrong inquiry. The focus is on the time of formation, when Schofields expected to have Road Access by April 2021, and from that time, whether it would be in a position to progress any development. It is unnecessary to consider whether Schofields in fact had progressed rezoning and the attitude of the Department and Council before breach.
15. Schofields had a legitimate business interest in developing the Residue Lot, and that opportunity could not be exploited while there was no road access. That was a "complex interest" and damage to that interest was difficult to quantify, which provides a basis for upholding the parties' negotiated agreement.
16. Finally, I consider Schofields had other business interests relevant to the compensation clause, such as holding costs. The State did not suggest that this was not a legitimate interest. However, the State drew on evidence that the Residue Lot was not encumbered from the date of the completion of the sale of Lot 2 to the State and asserted that there were "very modest" holding costs. I do not accept that merely because Ms Christie determined to structure her companies' finances in a particular way, such that Schofields had reduced exposure and costs at the time of formation, that there was not a legitimate interest as alleged. It does not matter that the value of that component of Schofields' interests was not large at the time of formation; it was another factor to be accounted for in Schofields' "complex interest" in relation to the lack of road access to the Residue Lot.

Is compensation clause out of all proportion with the impact on Schofields' interests?

1. If, judged at the time of formation, the compensation clause will always require the State to pay an amount out of all proportion with the impact on Schofields' legitimate interests, then it will amount to a penalty.
2. The compensation clause requires a market valuation of the Residue Lot in two hypothetical situations, as detailed further below. The parties appear to have been doing the best they could to envisage the most likely situations that might exist in April 2021, by providing a compensation mechanism to account for the difference between Schofields' owning the Residue Lot with road access and without road access; Schofields may have wanted to sell at that date.
3. The parties agreed that valuation is an art not a science, which requires the exercise of judgments and the forming of opinions, about which uncertainty is likely. The differences in the valuers' opinions and qualifications on those opinions demonstrates that it would not have been possible at the time of formation to determine with precision a compensation sum. It is not suggested that the parties had access to expert reports from town planners or valuers when they agreed to the compensation regime. Instead, it appears that the agreed compensation regime was a compromise that both sides adopted in good faith, without knowing the precise likely result of the compensation mechanism operating after 30 April 2021.
4. I reject the State's submission that it is necessary at this step of the penalties analysis to consider the expert evidence prepared for the trial that attempts to value the impact of the non-satisfaction of the Road Access Conditions, including with the benefit of town planner expert evidence. There is no authority that requires parties to engage in that level of detail in agreeing on a formula for damages, where there is no obvious and usual measure of damages for the particular breach: see in contrast AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 and O'Dea.
5. Because of the difficulty in precisely quantifying the impact on Schofields' legitimate interests as to the decrease in the value of the Residue Lot and the impact on other commercial interests identified above, I consider this is a case where a negotiated and agreed compensation regime cannot be said to be out of all proportion with the damage to the interests sought to be protected.
6. Therefore, for the reasons above and the analysis below, I consider that clause 26 is enforceable and the only remaining issue is whether the valuers' determination complied with that clause or ought to be set aside.

Scaling down of clause so damages or compensation are appropriate?

1. On the assumption that clause 26 is a penalty, because it is out of all proportion with the impact on Schofields' interests, I consider what remedy ought to be granted.
2. The State pleaded that the compensation provisions were either unenforceable, or only enforceable to the extent of the compensation payable to Schofields for its "loss or prejudice" from the non-fulfilment of the Road Access Conditions. It said, either way, an order ought to be made that the State pay Schofields the appropriate compensation or damages. Schofields did not, in these proceedings, seek an order for damages for breach of contract on the possibility that clause 26 was unenforceable at common law.
3. It might appear that, based on its pleading seeking an order that it pay Schofields a sum of money, the State accepted that it bore the onus of proving the appropriate amount of equitable compensation or damages, and Mr Docker accepted that is what the pleading indicated. However, no submissions were made by either party as to the issue of onus.
4. While the State positively submitted that a scaling down approach was appropriate, referring to Andrews, it was not explained why the equitable doctrine of penalties should be applied, rather than the common law approach. In Andrews, the High Court considered that "[i]f compensation can be made … 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": at [10]. The Court subsequently referred to a "scaling down exercise", by which a court of equity would tailor specific relief "to ensure adequate compensation, but no more": at [60]. The Court also referred to a determination of a "just amount" being payable, and noted the historical practice of referring that assessment to a master, assessor or a jury: at [58]-[59]. However, I was not directed to any decision of this Court where the "scaling down" approach was applied, following Andrews, to a penalty enlivened on breach of contract: cf Café Du Liban Pty Ltd v Bespoke Garage Pty Ltd [2017] NSWSC 779 at [113]-[116] (Beech-Jones J), which was cited by the State as an example of "scaling down", but is properly read as a case where common law damages for repudiation were awarded following a finding that the impugned contractual clause was penal. I also note that there is no general practice in this Court of leaving the assessment of compensation or damages to another time.
5. Despite the State's pleading, I do not accept that any equitable penalty doctrine is applicable in this case. The substance of the State's case is that the contractual compensation obligation has been triggered by its breach of the Road Access Conditions. I consider that the common law penalty doctrine provides a complete answer to the issues between the parties, and there is no work for any additional equitable penalty doctrine to do: see Australia Capital at [359]-[360]; Arab Bank at [73]-[74]; Paciocco at [124]-[125].
6. Nevertheless, as noted above, the State submitted that there are two ways to achieve a scaling down or assessment of damages. Its submissions focused on an assessment of contractual damages suffered by reason of its admitted breach of failing to satisfy the Road Access Conditions on time.
7. The State submitted that the damages enquiry was the difference in the value of the Residue Lot as at 30 April 2021 in situations where the Road Access Conditions were either satisfied or not satisfied. The valuers agreed that if road access and rezoning to R3 was completed by 2021, then the value of the Residue Lot was $26,320.00. However, they did not value the land if there was road access, but rezoning had not occurred.
8. A further issue is the value if the road conditions were not satisfied. However, the State submitted that when determining the value where the conditions were not satisfied, it should not be assumed that the Residue Lot will remain without road access indefinitely, but rather ought to be valued on the basis of road access being provided at some unspecified future date.
9. As noted above, I do not accept the construction that the State was obliged to both complete the Road Access Conditions and pay compensation. However, below I assume the State is correct and: 1. The construction I prefer is wrong, and the obligation to satisfy the Road Access Conditions continues until completed; and 2. The compensation clause is a penalty, and damages for breach of the Road Access Conditions must be determined.
10. Contractual damages are generally determined at the time of breach once and for all, even though circumstances may change in the future: see eg Chand v Commonwealth Bank of Australia [2015] NSWCA 181 at [163] (Ward JA, Bathurst CJ and Beazley P agreeing); Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158 at [142]-[143], [147] (Payne JA, White and McCallum JJA agreeing). The State did not advance submissions as to how the future completion of the Road Access Conditions ought to be factored into the damages calculation, for example, by applying a discount on damages found for that contingency. Further, it led no evidence about when the Road Access Conditions will be satisfied, or even when the State expects to complete them. The parties tendered an agreed fact that plans for a development consent for neighbouring land depicted roads, including those contemplated in the Road Access Conditions. However, that fact does not provide any evidence of the likely timing of completion. While the valuers did consider discount rates for risks of between 7% and 12%, they were not referrable to a valuation at 30 April 2021 with the hope of road access in the future. Without clear evidence or expert evidence on the matter, it is difficult to determine what, if any, discount ought to be applied once a valuation is arrived at.
11. There was a large volume of evidence from the parties' competing valuers about various possible situations affecting valuation. I consider most of that evidence was irrelevant, as it did not value the relevant loss. In fact, the State made the following submission: It is not possible to use the valuation evidence to determine the difference in value of the Residue Lot as at 30 April 2021 because of the breach for the following reasons: (a) only question 8 in the [joint valuers' report] asks for an "as is" market value at or around the relevant date. Mr Dyson's value does not seek to identify the contribution of the absence of the dedication of the [roads] on the value and includes other factors which are not the consequence of the breach, such as the need for construction of the public road and services within the 18mWE, issues relating to the sighting of a road on the 18mWE and the possibility of a zoning review which is not said to be caused by the breach. Mr Dempsey in answer to this question valued the Residue Lot on the assumption that it had been rezoned to R3, which is neither the current situation nor the counterfactual; and (b) there is no evidence about what the value of the Residue Lot would be at the date of breach with the benefit of the dedication of the [roads] and without a rezoning.
12. Further, I consider that Schofields' decision not to lodge an application to rezone is not a reason to reduce the loss caused by the State's delay in satisfying the Road Access Conditions. It is not unreasonable for Schofields, a developer, to wait for road access works to be completed before lodging a rezoning application. I note the pleading by the State that Schofields had an obligation to apply for rezoning was abandoned.
13. Mr Docker also accepted that the State ought to have sought to prove the relevant loss for any scaling down exercise, and made a suggestion that leave ought to be granted to both parties to prove the appropriate loss.
14. To the extent that was an application to lead further evidence in relation to the equitable penalty analysis, I refuse it. The State commenced these proceedings in 2021 and it would not accord with the overriding purpose of the Civil Procedure Act 2005 (NSW) to extend it to allow a further tranche of expert evidence and further hearing time. This is particularly so in light of the fact that shortly before the fourth day of the hearing, the State sought and was granted leave to have the valuer experts prepare a further report answering further questions. The State did not take the opportunity then to prepare further evidence it now considers necessary for a case based on the equitable penalty doctrine outlined in Andrews.
15. However, as noted above, I do not consider the equitable doctrine has any operation here.
16. Despite the State's pleading seeking an order that it pay Schofields common law damages for breach of contract, I consider Schofields would need to bring such a claim if the compensation clause is penal. It has not sought to do so in these proceedings. It is therefore unnecessary here to determine that any damages are payable by the State to Schofields.

Is the expert determination binding?

1. For the reasons above, I consider that Schofields validly engaged the compensation clause and the parties were required to use the contractual machinery to determine the appropriate sum to be paid by the State.
2. The State asserts that the machinery miscarried, and the valuers did not carry out their contractually mandated function.

Contractual valuation method

1. The contractual valuation machinery is set out in clause 26 of the contract. Clause 26.1 provides: If on expiry of the Prescribed Period the Road Access Conditions have not been satisfied in full by the purchaser, the vendor may at any time thereafter give a notice to the purchaser requiring the Compensation Amount to be determined in accordance with this special condition 26 (Compensation Assessment Notice).
2. Clause 26.2 stipulates, inter alia, that if Schofields gives a Compensation Assessment Notice, then both it and the State are required to appoint a valuer to determine "the Before Valuation and After Valuation".
3. The "Compensation Amount" is defined as "the amount by which the Before Valuation exceeds the After Valuation (if any) plus GST".
4. "Before Valuation" means: … the current market value of the Residue Lot, as at the date on which both Valuers have been appointed in accordance with special condition 26, assuming: a. if: i. the Residue Lot has not been rezoned from a special purpose or public purpose zoning (however described), the Residue Lot will be deemed to be zoned R3 Medium Density Residential Zone at a density of 150 dwellings per hectare; or ii. the Residue Lot has been rezoned from a special purpose or public purpose zoning (however described), the Residue Lot will be assessed based on its zoning as at the date on which both Valuers have been appointed in accordance with special condition 26; and b. the Road Access Conditions have been satisfied in full by the purchaser.
5. "After Valuation" means: … the current market value of the Residue Lot on an "as is" basis, as at the date on which both Valuers have been appointed in accordance with special condition 26, except that the Residue Lot will be deemed to be zoned as public open space.
6. Pursuant to clause 26.4, valuers appointed in accordance with clause 26.2 are required to: (a) act as an expert and not as an arbitrator; (b) call for and consider any written submissions [by the parties] without being bound by them and will determine the Before Valuation and After Valuation in accordance with the Valuer's own judgment; and (c) jointly confer regarding the determination of the Before Valuation and After Valuation.
7. Clause 26.5(a) provides: If … the Valuers agree upon the Before Valuation and After Valuation they shall jointly deliver their determination which shall be in writing and shall state the basis (including all supporting documentation) on which the Before Valuation and After Valuation have been agreed; or
8. Clause 26.9 provides: The Compensation Amount determined in accordance with this special condition 26 … based on the Before Valuation and After Valuation determined and agreed by the Valuers … will be final and binding on the vendor and purchaser.

Legal principles

1. Whether an expert determination is binding depends on whether the expert has performed the task stipulated by the contract. In Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 (Legal & General), McHugh JA explained at 335-336: By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. … as between the parties … the valuation can stand even though it was made negligently … but a valuation which is the result of the mistake in application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract? … The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract."
2. See also Holt v Cox (1997) 23 ACSR 590 at 597 (Holt v Cox) (Mason P, Priestley JA agreeing); AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 at [51]-[54] (Nettle JA, Maxwell P and Bongiorno AJA agreeing); Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd [2002] NSWCA 180 at [74] (Giles JA).
3. The expert may have to form a view on the construction of the contract in order to perform their task. In that event, the question is also whether the parties agreed to be bound by the expert's construction of the contract: Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367 (Belvino) at [78], [81] (Bathurst CJ, Beazley P and McColl JA agreeing). In Belvino, the expert had to consider three matters which were "all matters of judgment and were peculiarly within the qualification of the expert" and then to apply these matters to a formula. "By contrast, the construction of the formula was an objective matter outside of the expertise of such a person": at [84].
4. Parties will likely not be bound by a valuer's incorrect construction of the contract, nor by an expert determination based on an incorrect interpretation of the contract: Strike Australia Pty Ltd v Data Base Corporate Pty Ltd (2019) 19 BPR 39,621; [2019] NSWCA 205 at [49] (Basten JA) and [140]-[145] (Ward JA).

Proper construction of the valuation method

1. The State asserts that the appointed experts failed to comply with their contractual valuation process for two reasons. 1. First, it is said they used the wrong methodology for the After Valuation, because they "ignored the underlying zoning and its potential as a residential development site, and therefore failed to value the Residue Lot on the basis of knowledgeable and prudent parties" and also "failed to consider the topography of the Residue Lot at all or by reference to the sales listed" as comparables, because some of them are not comparable. Instead, it is said that the valuers ought to have considered the physical attributes of the land and the current zoning but also the "highest and best use", which meant the Residue Lot had the potential for future rezoning to R3 Medium Density Residential zoning. 2. Secondly, it is said they failed to "state the basis (including all supporting documentation) on which [the valuations] had been agreed", because they did not disclose how they reached their agreed values so the parties can determine whether the contractual mandate had been followed, and did not attach all the documentation on which they relied.
2. I do not accept the State's construction of the mandate. What was required in the process was simple. Once appointed, it was expected that within 60 days, the valuers would have carried out the valuation, including by considering the submissions of the parties, and conferring (otherwise they could be replaced pursuant to clause 26.6(b); see also clause 26.5(b)).
3. There was no express requirement that they prepare a written determination of their own valuations separately before they conferred.
4. In circumstances where the valuers agreed on the value, what was required was: 1. A joint written determination; and 2. A statement of the basis, and a statement of all supporting documentation, on which they had agreed.
5. If they did not agree, then they were to provide a determination in the same format, and then agree to appoint a "Determining Valuer": clause 26.5(b). That Determining Valuer had a different task, and was required to engage in a different process and produce a different outcome. Pursuant to clause 26.6, that Determining Valuer needed to: 1. Consider "any evidence submitted by the Valuers in respect of their assessments"; 2. Act as an expert and not an arbitrator, but choose a valuation in the range of the two valuations provided by the two valuers; and 3. Give a determination "and detailed reasons in evidence of the determination in writing".
6. It is in the context of the whole contract that the agreed valuation determination must be considered. The State appropriately accepted that there was a "low standard" that needed to be satisfied for the joint valuation to be accepted. I consider that there was no requirement for the valuers to provide reasons for their determination (unlike the Determining Valuer). Nor was it necessary to attach all documentation they took into account. Instead, all that was required was for the valuers to deliver a joint agreed written determination that stated the basis on which the valuation was agreed and stated the supporting documentation.
7. I consider the valuers here did that. They indicated the methodology they used, namely a valuation based on comparable sales which they "discussed and adjusted". They attached a list of those properties they considered appropriate to compare and adjust. There was no need for them to explain the reasoning process about the properties they considered comparable, nor how they carried out adjustments in reaching their final agreed valuation.
8. I do not accept that it can be inferred that the valuers did not consider the "highest and best use", or the topography of the Residue Lot or those comparable properties they identified. They had been provided with submissions from the parties that provided extensive information about the nature of the land, which they indicated they had considered. It can be expected that each valuer appointed by each party would ensure that the information supplied by their clients was appropriately considered.
9. I do not accept that there was a need for the valuers to explain in any more detail how they reached their agreement. I reject the State's submission that this case bears any similarity to J Family Motel Group Pty Ltd v Baset Super Pty Ltd [2024] NSWSC 1251 (Rees J). In that case, the valuers were engaged as experts bound by the expert code of conduct and therefore required to give reasons.
10. Therefore, the State has not demonstrated that there is an error by the valuers sufficient to deprive their agreed valuation of validity. Neither is the valuation invalidated by negligence, error or mistake, such that it is not in accordance with the contract: Legal & General at 335-336; Holt v Cox at 597.

If valuation not in accordance with contract?

1. If that conclusion is wrong, and the joint valuation is not in accordance with the contract, then there is an issue as to what remedy ought to be provided.
2. The State seeks either that a new valuer carry out the task, or the valuers be asked to carry out the task in accordance with its proper construction.
3. I do not accept clause 26.7 provides a basis for a new valuation as suggested. That clause provides: If a Valuer or Determining Valuer: (a) fails to accept the appointment to act; or (b) fails to determine the Before Valuation and After Valuation within 60 days after accepting the nomination to act, then either party may request the API President to appoint replacement Valuer or Determining Valuer as the case may be to determine the Before Valuation and After Valuation.
4. The proper construction of clause 26.7(b) is that a new valuer can be appointed when a valuer has failed to provide a valuation that purports to be in accordance with the contract within 60 days. That is evident from the fact that the clause does not refer to issues of error. Instead, the clause deals with situations where a valuer has been chosen by a party and fails to provide a valuation in time. That has not occurred here.
5. The State alternatively seeks that the valuation be remitted to the valuers to carry out the task in accordance with the contract. I accept that would be the appropriate course based on the authorities, which can be briefly summarised as follows: 1. Where contractual machinery for the determination of a valuation under a contract has failed, the Court may supply the required machinery itself: Sudbrook Trading Ltd v Eggleton [1983] 1 AC 444 at 483-484 (Lord Fraser of Tullybelton); Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 616-617 (Brennan J); Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd [2008] VSC 478 (Candoora) at [14] (Hargrave J). 2. However, where there is no "failure", it is unlikely the Court ought to impose alternative machinery: see eg Candoora at [15].
6. Here, I consider that the machinery remains capable of working if the valuers are asked to provide a valuation in accordance with the proper construction of special condition 26: see eg United Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2014] NSWSC 1289 at [212]-[213] (Hammerschlag J, as his Honour then was) (overturned on appeal on the basis of the construction of the particular clause that could still operate if one valuer failed to comply with the mandated task, not on principle: [2015] NSWCA 363). This is not a case where clause 26 can no longer operate, despite the error made by the valuers.
7. Had it been necessary, I would have required the valuers to carry out the valuation in accordance with the contract.

Schofields' misleading or deceptive conduct and estoppel cases

1. On the contingency that the Compensation Amount was found to be a penalty, Schofields alleged that the State engaged in misleading or deceptive conduct by representing that Schofields was entitled to compensation for the diminution in value of the Residue Lot and that the amount would be determined by the agreed compensation regime. It also said that, implied from the express representations, the State represented that it would abide by the terms of the contract, the determination of the valuers was final and binding, and it would not contend that the compensation clause was unenforceable.
2. Schofields made very limited written submissions on its misleading and deceptive conduct case, and none in relation to the State's proportionate liability defence. No submissions on these issues were advanced orally. Nevertheless, Schofields did not abandon the claim.
3. Schofields' unchallenged evidence is that it relied upon those representations when entering into the contract and proceeding to transfer the Residue Lot to the State. Schofields submits that those representations have proven to be false, and because Schofields gave up the opportunity to refuse to enter into the contract and instead be paid pursuant to the Just Terms Act, it has suffered loss in the sum of the valuers' joint determination.
4. The question is whether the State can be liable for misleading Schofields about the legal enforceability of the compensation clause and representing that it would not challenge the clause, even if it was penal. However, whether or not the clause was a penalty is a matter for a Court considering the legal tests and public policy.
5. I do not accept that the State made any relevant representation as alleged. In particular, I do not accept that the State made any representation that it would "take no steps to have [the compensation provisions] invalidated". The contract was a bespoke, negotiated agreement and it might be expected that the vendor would include reference to the representations that it says were made at the time of contract. In fact, the purchaser does give various warranties (see, for example, clause 6), none of which relate to whether it would challenge the compensation provisions. Further, the parties agreed in clause 21.1 that "[the] Contract is governed by the Laws of New South Wales, Australia" without purporting to either exclude the operation of the penalty doctrine or restrict a party's ability to contend that the compensation provisions are penal.
6. Schofields pleaded an alternative estoppel case based on the "same representations". No oral submissions were made in support of this claim. As I have not found that the State made any such representations, it is unnecessary to deal with any other component of the claim. However, for similar reasons to above, I do not consider it could have been unconscionable for the State to resile from a representation not to challenge the compensation clause, in circumstances where the law of penalties concerns public policy.
7. Schofields fails on these claims in its cross-claim.

Costs

1. Schofields has been successful in demonstrating that it is entitled to the compensation that has been determined pursuant to clause 26 and the valuers' joint determination. There is no reason why costs ought not follow the event.
2. In reaching that conclusion, I have considered the fact that Schofields failed in its misleading or deceptive and estoppel claims. I consider that those claims were minor and peripheral, and no hearing time was taken in argument in relation to them.

Orders

1. For the reasons above, the appropriate orders are: 1. Statement of Claim dismissed. 2. Order the cross-defendant to pay the Compensation Amount as pleaded in the Further Amended Statement of Cross-Claim filed 10 August 2023, and interest, pursuant to special condition 26 of the Schofields' Contract. 3. Plaintiff to pay the first defendant/cross-claimant's costs of the proceedings as agreed or assessed. 4. Grant liberty to the parties to apply for an alternative costs order within seven days of today's date, setting out the application and any evidence and submissions of no more than 3 pages upon which they rely. 5. Should such an application be made for an alternative costs order, the responding party is to provide evidence and submissions of no more than 3 pages opposing any alternative costs order within seven days of receiving the first application. 6. The Court will determine any such alternative costs application on the papers, if appropriate.

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