TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)

Contracts - General contractual principles - Construction and interpretation of contract - Penalties and liquidated damages - General principles - Public utility.

Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1904] UKHL 3; [1905] AC 6; Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1914] UKHL 1; [1915] AC 79; Esanda Finance Corporation Limited v Plessnig and Another [1989] HCA 7; (1989) 166 CLR 131; AMEV-UDC Finance Limited v Austin [1986] HCA 63; (1986) 162 CLR 170, O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359; Robophone Facilities Ltd v Blank [1966] 1 WLR 1428; Philips Hong Kong Ltd v The Attorney General of Hong Kong (1993) 61 BLR 41; Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504, followed.

Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, referred to.

Appellant: G Griffiths QC, P Vickery QC, G L Sealy

Judgment Number: [2005] TASSC 133

v LEIGHTON CONTRACTORS PTY LTD (ACN 000 893 667)

2 Counsel to be heard further with respect to final orders.

v LEIGHTON CONTRACTORS PTY LTD (ACN 000 893 667)

1 The issue raised on this appeal is whether a clause in the deed of agreement entered into by the parties is one providing for the payment of liquidated damages or constitutes a penalty rendering it unenforceable.

2 On 24 June 1999 the parties contracted for the design, construction and maintenance of roadworks requiring the realignment of a highway to bypass the town of Hagley. Amendments were required to the terms of the agreement because of the potential effects of the original design and implementation on an historic site. Delay and ensuing costs were the subject of complex proceedings between the parties, one of which concerned the status of the Deed, cl 11, which provided for the payment of $8,000 per day in the event of non-completion of the construction by an identified date. The appellant, relying on the terms of the Deed, withheld from the respondent the sum of $8,000 per day from 21 April 2001 until 29 November 2001. At the commencement of the hearing, the respondent successfully amended its pleadings to aver that cl 11 was unenforceable since it constituted a penalty. An evidentiary issue raised by the amendment was whether it was for the respondent to place before the Court material sufficient to establish the status of the impugned clause or whether, on the evidence at large, the learned primary judge was permitted to make a finding adverse to the appellant.

"... the sum of $1,832,000.00, purportedly deducted as liquidated damages by the [appellant], [was] a penalty"

"... the [appellant] pay the same to the [respondent], together with interest thereon, amounting to $503,676.00."

4 The grounds of appeal raise the following issues:

(1) the principles, objective or otherwise, which govern the interpretation of such a term and whether it is the wording of the Deed or its consequences which determine its status;

(2) the effect of equality in the negotiating process;

(3) the onus placed on a party alleging the term to be a penalty;

(4) the status of a public authority which derives its revenue for a particular project, not from its own, but from a separate public resource, and its capacity to determine anticipated loss, independently of precise quantification.

5 The overall cost of the project was $30m which was to be paid by the Commonwealth of Australia to the appellant, either as a reimbursement or by way of progress payments.

6 The learned primary judge determined that the respondent had not complied with certain terms of the Deed and their implementation and found there to have been a delay of some 229 days, but that the claimed loss could not be determined by recourse to a particular clause he determined to be a penalty clause.

(a) If the Date of Construction Completion has not occurred by the Date for Construction Completion, the Contractor must pay liquidated damages at the rate of $8,000 for every day after the Date for Construction Completion until the Date of Construction Completion or this Deed is terminated, whichever is first.

(b) The amount referred to in clause 11.6(a) is a genuine pre-estimate of the Principal's damages if the Contractor does not achieve Construction Completion by the Date for Construction Completion.

(c) The amount payable under this clause 11.6 will be a debt due from the Contractor to the Principal."

8 The learned primary judge thought it to be "a fair observation that ... the nature of the relationship between the State and a large corporation such as Leighton does not suggest any relevant imbalance in bargaining power."

9 The parties had conducted extensive negotiations and detailed consideration had been given to the precise terms of the agreement. Each had obtained external and expert advice as to its respective interests and responsibilities. The appellant had sought specific legal advice on the terms of the "compensation" term and accepted that advice, in part based on a conservative and problematic assumption concerning the status of a public authority in its formulation and quantification of the clause. The learned primary judge used as a commencing point calculations prepared by Mr Holland, the manager of the National Highways program, which had been reviewed by a Mr Cantillon, a consultant retained by the appellant and who gave evidence at trial. The document evidencing the calculations had been discovered by the appellant, but not relied upon as part of its case. Those calculations, providing a daily total of $7,985 were, in the words of Mr Cantillon, intended:

"... to provide an estimate of the actual loss to the Principal on a daily basis for such delays. The calculation included an estimate of actual direct costs to be incurred by the Principal in the event of delay. It did not include loss by way of interest on the Principal's capital outlay, which on $30 million at 5% pa amounts to approximately $4,000 per day."

10 His Honour then considered a different set of calculations also prepared by Mr Holland which showed a daily rate of actual costs amounting to $3,065 with a provision of "interest on idle capital" as $3,000 per day, which he observed to be "far more modest".

11 The learned primary judge commented on the former calculations and their evidentiary basis in the following terms, at par238:

"The figures in that estimate are extremely high in themselves (eg, OHS and secretarial assistance, $2,400 per week) and the number of hours contemplated totally speculative in some cases. An allowance of two hours per day every day for legal advice is even more speculative. I infer that Mr Holland's original calculations in respect of direct costs were inflated to produce a figure of $8,000. A firm called Evans & Peck produced the final figure for the Principal but no one from that organisation was called to give evidence as to how the calculation was made"

and having considered authorities relevant to public utilities without anticipated direct loss of revenue, concluded:

"In the present case, it does not appear that any estimation was made in respect of the Principal's loss other than direct costs of supervising an over-run contract and it is my view that these costs are extravagant and exorbitant as they are totally disproportionate to the likely actual costs anticipated to be incurred. Furthermore, the evidence is that the costs of the project were fully funded by the Commonwealth Government and the State has not been exposed to either its capital cost or the costs incurred after the Date for Construction Completion. In these circumstances I am of the view that the estimate of $8,000 for each calendar day of delay was not a genuine pre-estimate of the likely damage to the State resultant upon the late opening of the bypass and is unconscionable."

12 Clause 11.6 provided for an amount of "liquidated damages at the rate of $8,000" per day. The issues of potential loss, quantification and the status of a public utility had been a matter of consideration by the appellant through its officers and advisers.

13 The advice of Clayton Utz, who advised the appellant, addressed the question of a public utility and loss in cautious terms. Effect was given to that advice in the formulation of the figure of $8,000 and a reduction of an earlier suggested figure. The respondent did not raise its inclusion in the Deed as a matter of concern and no amendment was sought during the negotiating stage. Evidence was given at trial that a Mr Collins, an officer of the respondent, had reviewed the contract for the respondent prior to execution and had raised no question of reasonableness in his advice to the managing officers of Leighton. The calculation of $7,985 referred to by the learned primary judge was stated in the proof of evidence of Mr Cantillon, upon which he was cross-examined, and which provided:

301 The calculation of the daily sum for liquidated damages referred to in the Project Deed was carried out as follows:

Site Running Expenses (telephone, courier, postage, etc)

302 The calculation was reviewed by me and adopted by DIER, with the total daily sum eventually included in the project Deed as the daily sum to be deducted in favour of the Principal for the contractor's delays on Project Completion.

303 The calculation was intended to provide an estimate of the actual loss to the Principal on a daily basis for such delays. The calculation included an estimate of actual direct costs to be incurred by the Principal in the event of delay. It did not include loss by way of interest on the Principal's capital outlay, which on $30 million at 5% p.a. amounts to approximately $4,000 per day.

304 In my experience of large road projects, the daily estimate was within the range which could be normally expected for this scale of project.

305 Leighton, who I knew to be an experienced construction contractor, during the contract negotiation period, did not attempt to challenge the estimate or to seek any clarification or amendment in relation to it."

14 The respondent had agreed to a sum of damages for its potential default in an initial amount of a daily rate of $3,590 for the period of three months from the date of the Deed and thereafter for $7,170.

15 The respondent amended its pleadings on the first day of trial to include that of the plea of penalty. It had shown no earlier concern. The executed Deed provided for the payment of the sum of $8,000 as liquidated damages and as the learned primary judge stated at par233, the respondent "... acknowledge[d] that the burden of establishing that the sum deducted is a penalty lies upon it".

(1) It did not appear that any estimate was made of potential loss other than direct costs of supervising an over-run.

(2) The costs were extravagant and exorbitant as they were disproportionate to the likely actual costs.

(3) There had been no exposure to potential loss since the project was fully funded by the Commonwealth.

17 Ground 2(e) of the notice of appeal claims error in that the learned primary judge found:

"... on the evidence that Leighton had discharged its burden of proving that the sum payable as Agreed or liquidated damages was exorbitant, extravagant or alternatively was unconscionable."

18 The burden of establishing those findings remained with the respondent. But if those findings were supportable by the evidence as a whole, and absent misapplication of legal principle, the critique of onus ought fail. The respondent was entitled to rest its case on evidence obtained through discovery and cross-examination. It ran the risk of failure in failing to provide sufficient evidence, but was not required to prove matters independently of those derived from the opponent's case.

19 This was not a case where a trial judge felt unable to make a positive finding because of inadequacy of evidence and was thereby precluded from making a finding which favoured the party making the assertion or plea. It was not a case where the learned trial judge was required to draw an inference adverse to the respondent for any failure to adduce additional evidence or, at least, consistent with the principles stated in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 that a particular or potential witness uncalled was not likely to assist the party. The real critique advanced by the appellant is the failure to draw inferences of fact adverse to the respondent when assessing the evidence as a whole. As Young CJ stated in Cook's Construction Pty Ltd v Brown & Anor [2004] NSWCA 105; [2004] 49 ACSR 62 at par33:

"If on the other hand the person bears the onus and has a witness which he or she does not call then the Court takes that into account when assessing the evidence as a whole. As good an illustration as any of that point is the judgment of Hodgson JA in Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572 at 576-7. It is that second aspect of the rule that is really relevant in the present case and it is with respect inaccurate to tag it as a Jones v Dunkel point. However, the tag 'Jones v Dunkel' does not detract from the point her Honour was making that she can take into account when a witness is not called by a person who bears the onus when she is evaluating whether the onus of proof has been established."

20 Here the learned primary judge was required to determine the import of the Deed, cl 11.6. He had evidence as to how the figure had been reached, he examined its components, considered the critique of their making, accepted that it had not been questioned by the respondent during negotiations and had opinion evidence that, given the scale and cost of the project, it was not unreasonable. He did not express himself as being unpersuaded but, rather, concluded that it was disproportionate, unconscionable and, given eventual payment by another, did not reflect potential loss. Recourse to the principles stated in Jones v Dunkel (supra) does not avail the appellant. Nevertheless the question of onus requires careful consideration of whether the evidence as a whole permitted positive satisfaction that the clause constituted a penalty. Alone, ground 2(e) cannot be sustained, but impacts on whether positive findings made by the learned primary judge were permitted.

21 Ground 2 of the notice of appeal claims error in fact and/or in law on the part of the learned primary judge:

"2) The learned trial judge erred in fact and / or in law in holding or finding that the rate agreed upon between the Appellant and the Respondent for liquidated damages, as provided for in cl 11.6 of Volume 1 of the Project Deed, constituted a penalty, by:

(a) analysing the individual components of the sum of $8,000, as subjectively assessed by the agents of the State, instead of engaging in an objective analysis by comparing that sum as a whole with the greatest loss that could have been conceivably suffered by the State in the event of delay in completion of the Project Works;

(b) wrongly failing to consider or take into account the uncontradicted evidence that the calculation of the Principal's loss of use of its capital was $4,000 per day, as if the parties were not entitled to take this component into account in arriving at an enforceable sum for liquidated damages;

(c) wrongly failing to take into account the following relevant considerations, namely:

(i) the sum payable as Agreed or liquidated damages under the Project Deed by the Principal to Leighton in respect of delay caused by the Principal was $7,170 per day;

(ii) Leighton, by its contract manager, had reviewed the sum payable to the Principal as Agreed or liquidated damages in the event of delay to Project completion caused by Leighton, and raised no issue as to the level of the Agreed or liquidated damages, either internally within Leighton or with the Principal in the course of negotiating the terms of the Project Deed;

(iii) that the relationship between the State and Leighton was such that there was no imbalance in bargaining power between them [Reasons 234], a matter relevant to his Honour's finding of unconscionability."

22 The learned primary judge used the terms "extravagant", "exorbitant", "totally disproportionate", "not a genuine pre-estimate" and "unconscionable" to characterise cl 11 as a penalty. In doing so he adopted the terminology used by the House of Lords in a line of authorities commencing with Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1904] UKHL 3; [1905] AC 6; and repeated in Public Works Commissioner v Hills [1906] AC 368; Webster v Bosanquet [1912] AC 394 and Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1914] UKHL 1; [1915] AC 79. Those terms were approved by the High Court in the more modern cases of Esanda Finance Corporation Limited v Plessnig and Another [1989] HCA 7; (1989) 166 CLR 131; AMEV-UDC Finance Limited v Austin [1986] HCA 63; (1986) 162 CLR 170. The words are often used as an aggregate and, allowing for changes of usage, describe differing conceptual approaches to the test. Those conceptual approaches have been made more complex by the addition of terms such as "in relation to any possible amount ... within the contemplation of the parties" (Dunlop (supra)), "greater and unreasonably or inequitably so", and "true damages reasonably assessed" (Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504). The terms encapsulate the following propositions:

(1) A comparison between the sum provided for in the event of a breach and the greatest loss which could conceivably be proven in the light of the total amount of the contract as a whole.

(2) Comparison between the sum provided and the nature of the breach. If any breach activates the operation of a "damages" term, irrespective of its import, then it might more readily be regarded as penalty (Esanda Finance Corporation Ltd v Plessnig (supra), Brennan J at 143; Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332).

(3) Equivalence of bargaining power at the time of agreement or whether one party was subject to unreasonable pressure in performance (Dunlop (supra)).

(4) The potential outcomes to which the clause was directed (Robophone Facilities Ltd v Blank [1966] 1 WLR 1428).

(5) The means, if any, used in the compilation of the sum provided for (Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (supra); De Francesch Builders Pty Ltd v Riley & Anor [2000] WASC 301).

(6) The import of the contract provision for "damage" is to be considered at the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v Hills (supra); Webster v Bosanquet (supra)).

23 It is not necessary here, as suggested by learned counsel for the appellant, to determine whether the term "unconscionable" affords separate bases for consideration of penalty (AMEV-UDC Finance Ltd v Austin (supra) per Mason and Wilson JJ at 190). The High Court was recently invited to reconsider the historic approach to the "penalty" as stated in Dunlop (supra), but in their joint judgment, Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ stated in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 at par12:

"Neither side in the appeal contested the foregoing statement by Lord Dunedin of the principles governing the identification, proof and consequences of penalties in contractual stipulations. The formulation has endured for ninety years. It has been applied countless times in this and other courts eg O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 at 368, 378, 399, 400; Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514 at 520; AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170 at 190; Stern v McArthur [1988] HCA 51; (1988) 165 CLR 489 at 540 and Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7; (1989) 166 CLR 131 at 139, 143, 145. In these circumstances, the present appeal afforded no occasion for a general reconsideration of Lord Dunedin's tests to determine whether any particular feature of Australian conditions, any change in the nature of penalties or any element in the contemporary market-place See eg AMEV-UDC Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170 at 190 suggest the need for a new formulation. It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where reconsideration or reformulation is in issue O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 at 400; cf at 392; AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564 at 566, 574."

24 The use of varying forms of terminology is subject to important constraints. The first is that the various tests of construction are intended as conceptual guides, rather than "closed" terms. In Dunlop, Lord Dunedin said, at 86 - 88:

"The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract ...

To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive."

25 In O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359, Deane J considered the above statement and explained, at 400:

"Properly understood, that statement is unobjectionable: whether or not a provision of a contract imposes a penalty must be determined by reference to the true operation of that provision. That question must however be determined as a question of substance which cannot be foreclosed by statements of the parties in their agreement, no matter how genuine they may be, as to their intention in stipulating the sum. The parties to an agreement may have subjectively intended to make a pre-estimate of damages in the event of breach. If, however, that pre-estimate is either extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach or, judged as at the time of making the contract, is unreasonable in the burden which it imposes in the circumstances which have arisen, it is a penalty regardless of the intention of the parties in making it."

26 The second constriction concerns the capacity of the parties to determine their own contract. In Robophone Facilities Ltd v Blank (supra), Diplock LJ, in a passage cited by the learned primary judge, said at 1447:

"Nevertheless the courts would be doing an ill turn to those to whom the rule about 'penalty clauses' is designed to protect if they were to apply it so as to make it impracticable for parties to agree at the time when they enter into a contract upon a fair and easily ascertainable sum to become payable by one party to another as compensation for the loss which the latter will sustain as a consequence of its breach. It is good business sense that parties to a contract should know what will be the financial consequences to them of a breach on their part, for circumstances may arise when further performance of the contract may involve them in loss. And the more difficult it is likely to be to prove and assess the loss which a party will suffer in the event of a breach, the greater the advantages to both parties of fixing by the terms of the contract itself an easily ascertainable sum to be paid in that event. Not only does it enable the parties to know in advance what their position will be if a breach occurs and so avoid litigation at all, but if litigation cannot be avoided, it eliminates what may be the very heavy legal costs of proving the loss actually sustained which would have to be paid by the unsuccessful party. The court should not be astute to descry a 'penalty clause' in every provision of a contract which stipulates a sum to be payable by one party to the other in the event of a breach by the former."

27 That view was repeated by Mason and Wilson JJ in their joint reasons for judgment in AMEV-UDC Finance Ltd v Austin (supra) at 190, in the following terms:

"However, there is much to be said for the view that the courts should return to the Clydebank and Dunlop concept, thereby allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach."

That statement of principle has been further approved by the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd (supra).

28 In this case the learned primary judge correctly identified the relevant principles. The error claimed is one of application.

"2) The learned trial judge erred in fact and / or in law in holding or finding that the rate agreed upon between the Appellant and the Respondent for liquidated damages, as provided for in cl 11.6 of Volume 1 of the Project Deed, constituted a penalty, by:

(a) analysing the individual components of the sum of $8,000, as subjectively assessed by the agents of the State, instead of engaging in an objective analysis by comparing that sum as a whole with the greatest loss that could have been conceivably suffered by the State in the event of delay in completion of the Project Works;

(d) wrongly finding that, by reason that the Principal was to have been reimbursed by the Commonwealth government for all the costs of the project:

(ii) the sum payable as Agreed or liquidated damages was not a genuine pre-estimate of the Principal's loss at the time of entry into the Project Deed, and / or was unconscionable."

30 The test of whether a contractual term constitutes a penalty or an estimate of potential loss is objective. The learned primary judge adopted the following approach:

(1) Clause 11 provided for a daily penalty of $8,000 in the event of delay.

(2) An estimate of loss was prepared prior to the execution of the deed which amounted to $7,985. It was reasonable to accept that it formed the basis of the amount provided.

(3) Examination of the components comprised in the estimate did not withstand scrutiny because:

(a) representatives identified in the assessment were "charged out" at rates equivalent to an annual recoupment of between $330,000 and $430,000;

(b) the calculation assumed costs incurred over six days, whereas the deductions made by the appellant of $56,000 per week were for 7 days and as such amounted to a surcharge;

(c) some items such as OHS/secretarial amounting to $2,400 per week were extremely high and amounted to speculation;

(d) allowance for possible legal advice was speculative;

(e) charge out rates for all other personnel were "extremely high ... extravagant and speculative".

(4) There were other estimates, such as the second Holland calculation of a daily rate of $3,065 which were significantly lower.

(5) No evidence was called from the consulting firm, Evans and Peck, which might show how the calculation was arrived at.

(6) No estimate other than one assessing "direct supervising [of] an over-run contract" had been made.

(7) The State had not been exposed to either loss of capital or payment of interest because the project was funded by the Commonwealth.

(8) Inference permitted by the above was that "the original calculation was inflated to produce the figure".

(9) It followed (from 3, 6 and 8), that there had been no "genuine pre-estimate".

(10) It followed (from 3, 4 and 7, together with 9), that the figure of $8,000 was extravagant, exorbitant, disproportionate and unconscionable.

31 The conclusion was, with due respect, an incorrect application of principle. Our reasons for reaching a differing outcome are:

(1) The figure of $8,000 was not arbitrarily chosen and figures were adjusted to justify that selection. It was reasonable for the appellant to consider the possibility of delay or breach. It was reasonable to provide for a contractual remedy. The contract itself provided for the expenditure of public money amounting to over $30m. There would be a need to supervise works of rectification or to ensure efficient compliance. Delay in completion would impact on a public utility. Quantification of that impact would be problematic. The first calculation of Holland attempted to include an interest loss equivalent and Mr Cantillon referred to that loss equivalent as amounting to some $4,000. The calculations were no more than an attempt to provide a general basis for the assessment of an overall figure. The State was negotiating with a large corporation, well experienced in work of the nature subject to the contract, and an equivalent "breach" clause calculated at the comparable figure of $7,170. The respondent did not question the calculation during negotiations or at the time the agreement was concluded.

The integrity of the person who compiled or reviewed the calculations was not impugned at trial. If there were errors (especially since they did not take into account "loss of public amenity"), they could not be said to be "non genuine". The calculations involved a projection of costs for a period of two years into the future. Expensive delay might require expensive advice and involve the transfer of administrative or other resources from the State to accommodate difficulties caused by the delay in providing for the maintenance of existing infrastructure during that period. The Commonwealth had committed itself financially only to the date of "Construction Completion" specified in the Deed and not beyond. In fact, the evidence established that the State had paid the costs incurred by the principal during the delay period. The real critique advanced by the appellant on the issue of "onus" (ground 2(e)) was that the respondent had elevated material obtained through discovery and cross-examination to a status central to the appellant's cause, successfully assailed it and diverted the learned trial judge from the proper application of principle to a secondary issue. That approach, added to which was a criticism of the failure of the appellant to call a representative of Evans and Peck to explain or justify the figure reached, resulted in error in the reasoning process.

(2) The learned primary judge correctly recognised that "loss of revenue by reason of the delay is not in itself a proper reason for claiming that the State could suffer no damage other than ... direct costs" but gave that fact no weight. His Honour cited the authority of Clydebank (supra) and set out extracts of the advice provided by the Privy Council in Philips Hong Kong Ltd v The Attorney General of Hong Kong (1993) 61 BLR 41:

"Here the Government in its evidence provides an explanation as to how the liquidated damages were calculated. So far as the missing of Key Dates was concerned, the amount of damages was calculated by applying a formula to what was anticipated would be the value of the interfacing contracts. (The actual value of the contracts was higher.) In the case of delay in completion of the whole of the Philips contract the calculation was partly based on a formula applied to the total value of the Philips contract in accordance with a manual of instructions for contracts of this nature which the Government had prepared. This was a perfectly sensible approach in a situation such as this where it would be obvious that substantial loss would be suffered in the event of delay but what that loss would be would be virtually impossible to calculate precisely in advance. In the case of a governmental body the nature of the loss it will suffer as the result of the delay in implementing its new road programme is especially difficult to evaluate. The Government reasonably adopted a formula which reflected the loss of return on the capital involved at a daily rate, to which were added figures for supervisory staff costs, the daily actual cost of making any alternative provision and a sum for fluctuations. Except for the 'alternative provision', the appropriate figures were calculated by reference to the estimated final contract sum."

and the statement of Cole J in Multiplex (supra):

"Thirdly, if the arguments addressed by the builder are correct in relation to works of a public nature, such as dams or major road works, where traditionally such public works do not yield a cash flow, or any cost of capital incurred in the works is, for instance in the case of a dam related to a water supply, to be recouped over a defined period of time at a defined interest rate, delay in completion of construction would simply defer commencement of that recoupment period such that it could be said, on one view, that delay caused the proprietor no loss. Conceptually I do not think it is correct to say that public works, because they may not yield a cash flow, cannot result in damages to the state or public authority if delay in construction occurs. Whilst the example may be peripheral to the one being here considered, it demonstrates that, at least in some instances, an appropriate measure of liquidated damages is the cost of capital tied up for the period of delay. I regard it as an inadequate answer, in the case of a public work, to say that if the work were delayed say six months, no damage is suffered, and no liquidated damages could be validly agreed, because there was no delay in receipt of cash flow, and there was mere deferment of a planned recoupment of capital and interest costs over time."

However he did not apply that principle in his assessment of the propriety or otherwise of the figure of $8,000. Some component for loss of public utility or delay in access to infrastructure ought to have been considered, not in the evaluation of the components of the "direct costs", but as a separate matter.

(3) An interest component was identified both in the first Holland figures (interest on idle capital - $3,000 per day) and the evidence of Mr Cantillon that the "Liquidated Damages Estimate":

"... did not include loss by way of interest on the Principal's capital outlay, which on $30 million at 5% pa amounts to approximately $4,000 per day."

The calculation, even if confined to "notional interest", would nevertheless provide a guide or confirm the approach suggested in the above (2).

(4) Another formula could have been used by the appellant's advisers which included cost of maintenance of the existing road, infrastructure costs and transfer of other resources during the delay period which, even excluding interest costs, might have been unexceptional.

(5) The learned primary judge was not engaged in an assessment of past loss or an award of damages after the event. He was undertaking a task which required a different methodology. The question was whether, given the nature of the contract, its complexity, value and the bargaining strength of the parties, the amount of $8,000 was, in all the circumstances, a penalty as of the date of the agreement. The test was objective as of that date. The test was whether as of that date, allowing for potential incurred costs, public utility or loss of amenity, diversion of resources and future dealings with, or responses by, the Commonwealth, loss of capital or its equivalent, the sum was so disproportionate that it provided not for "liquidated damages" but operated as a penalty which placed the then contracting party in terroram. The contract was for an amount of $30m with the potential for complexity, delay and potential cost variations, all matters shown at trial to be real.

32 The application of principle was not consistent with the evidence. The reasoning had been diverted by the elevation of the original calculations to a central component of the appellant's cause.

33 Ground 2(c) claims error in failure to take into account:

"(i) the sum payable as Agreed or liquidated damages under the Project Deed by the Principal to Leighton in respect of delay caused by the Principal was $7,170 per day;

(ii) Leighton, by its contract manager, had reviewed the sum payable to the Principal as Agreed or liquidated damages in the event of delay to Project completion caused by Leighton, and raised no issue as to the level of the Agreed or liquidated damages, either internally within Leighton or with the Principal in the course of negotiating the terms of the Project Deed;

(iii) that the relationship between the State and Leighton was such that there was no imbalance in bargaining power between them [Reasons 234], a matter relevant to his Honour's finding of unconscionability;

34 The Deed evidenced that the respondent was liable to pay an amount of $7,170 per day for delay. His Honour did not refer to this clause in his reasons dealing with the penalty issue. That is not to say that he did not consider the matter, but rather gave no weight to its import. His reasons for judgment extend to some 153 pages and encompassed material provided at trial over some seven months. In any event, ground 2(c)(i) alone would not warrant a finding of error.

35 No issue was raised by the respondent's officers or managers during the course of negotiations. It was a relevant circumstance, but the comments made with respect to ground 2(c)(i) equally apply. The learned trial judge did refer to there being no "imbalance in bargaining power". There is no merit to ground 2(c)(iii).

37 The ground of appeal relevant to this issue states that the learned primary judge erred in:

"(d) wrongly finding that, by reason that the Principal was to have been reimbursed by the Commonwealth government for all the costs of the project:

(i) the Principal suffered no loss, even though the uncontradicted evidence was that the Principal was solely liable to Leighton in respect of the obligations it assumed under the Project Deed, and in the first instance the Principal met and paid all of the direct costs it incurred in conducting the Project."

38 The precise terms of the funding arrangements made between the appellant and the Commonwealth remain unclear. The Deed required the appellant to make progress payments during the period of construction. Whether the Commonwealth would automatically reimburse the State for all costs, including over-runs, was not clear from the evidence. Whether the State was required to have recourse to its own financial resources pending reimbursement by the Commonwealth, is likewise uncertain. But accepting that at the time of execution of the Deed the State was entitled to receive full and timely reimbursement, the fact remains that the State was required to be accountable for the expenditure of public money, irrespective of source. Accountability and diligent financial management entitled it to seek reasonable compensation for delay or default. That in itself does not make an appropriate clause a penalty. Public utility does not of itself disentitle the State or public authority from seeking, by way of damages, compensation for loss, the components of which are incalculable. Delay or breach of a particular term of agreement might result in loss or harm to public convenience such as transportation costs, provision of temporary or substitute infrastructure, continued maintenance of alternate services or increased administrative costs. The provision of public money does not change the character of a compensatory provision into one of penalty simply because the expenditure is to be paid by another public authority. The test of disproportionality applies equally to public and private institutions in consideration of whether a "breach" clause ought be regarded as a penalty.

39 Here the respondent was responsible to the appellant for loss occasioned by delay. That loss was calculated in advance and irrespective of whether another would reimburse for that loss, the responsibility remained as between the parties to the agreement (Joyner v Weeks (1891) 2 QB 31) and the test of "penalty" or "damages" is that of purpose rather than cause (The National Insurance Company of New Zealand Limited v Espagne [1961] HCA 15; (1961) 105 CLR 569). Although it might be dangerous to determine a legal principle by analogy in cases where compensation is also payable by another pursuant to contract (The National Insurance Company of New Zealand Limited v Espagne (supra), Redding v Lee [1983] HCA 16; (1983) 151 CLR 117), the general principle that payment or indemnity by another does not alter the responsibility of persons in breach of tortious or contractual harm to make recompense for loss (The National Insurance Company of New Zealand Limited v Espagne (supra)) remains. In turn, the fact that another public authority or agency of the State will eventually bear the cost of default or breach does not render a compensatory agreement into one of penalty. Assumption by another of payment for loss does not entitle a contractual party to avoid responsibility for breach of a term or condition (Haviland v Long (Dunn Trust Ltd Third Parties) [1952] 2 QB 80; St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85). Reimbursement of an organisation for the cost of rectification following contractual breach by a public authority does not entitle the offending party to claim that there had been no loss to the organisation (Design 5 v Keniston Housing Association Ltd (1986) 34 BLR 92).

40 The general proposition that a term will be held to be penalty if it stipulates a sum greater than the sum which ought to have been paid (Kemble v Farren [1829] EngR 590; 6 Bing 141) is one grounded in public policy. One manifestation stated by Lord Diplock in Robophone Facilities Ltd v Blank (supra) was:

"But however anomalous it may be, the rule of public policy that the court will not enforce a 'penalty clause' so as to permit a party to a contract to recover in an action a sum greater than the measure of damages to which he would be entitled at common law is well established, and in these days when so often one party cannot satisfy his contractual hunger à la carte but only at the table d'hôte of a standard printed contract, it has certainly not outlived its usefulness."

41 Recompense by another public authority remains an impost on public money. There is no "unjust enrichment" at the expense of another. The principles of public policy and expenditure referred to in Design 5 (supra), combined with those applicable to third party obligations, govern the interpretation of the agreement here.

42 Even if the above represents an incorrect statement of principle, the questions of loss and onus have significance. The learned primary judge concluded, as part of his reasoning, that the terms of the Deed, cl 11, amounted to a penalty since it was an artificial construct not a genuine pre-estimate of likely damage to the appellant because the "costs of the project were fully funded by the Commonwealth". The evidence established that the Commonwealth, through a public officer, Mr Holland, the manager of the National Highways program, had some involvement in the formulation of the Deed, including calculation of potential damages. That being the case, it was for the respondent, in support of his pleading of "penalty", to affirmatively demonstrate that the Commonwealth would pay all the costs of the project, irrespective of delay or breach. It was for the respondent to demonstrate that the Commonwealth would reimburse the appellant for any internal or departmental costs in supervising the project for a more extended period. It was for the respondent to show that the Commonwealth would not withhold future payments, or portion thereof, from the appellant for its failure to properly protect the expenditure of public money through failure to require a compensation provision, or that it had not insisted on, or at least been indifferent to, the insertion of a compensation clause. If the respondent relied upon the contention that the clause amounted to a penalty because there could not be loss to the party, then it was required to establish such as a basis.

43 The respondent's contention is that the learned primary judge's reference to Commonwealth reimbursement is but a factor in his assessment of whether the estimate of $8,000 was disproportionate to the "likely costs anticipated to be incurred" as shown by use of the commencing word "Furthermore". Accepting such to be the case, the factor remains but a component of the reasoned conclusion. Alone, the error might not warrant the upholding of the appeal, but considered together with the issue of unconscionability and genuineness of the pre-estimate, it constitutes appellate error.

44 Grounds 2(a), (d)(i) and (ii) are sustained, and the appeal ought be upheld. Counsel are requested to assist in the formulation of the appropriate orders.