Similarly, Lord Halsbury, in Clydebank Engineering,[23] said: "The very reason why the parties do in fact agree to such a stipulation is that sometimes, although undoubtedly there is damage and undoubtedly damages ought to be recovered, the nature of the damage is such that proof of it is extremely complex, difficult and expensive". And Lord Parmoor observed in Dunlop:[24] "... when competent parties by free contract are purporting to agree a sum as liquidated damages there is no reason for refusing a wide limit of discretion. To justify interference there must be an extravagant disproportion between the agreed sum and the amount of any damage capable of pre-estimate".
17 In the present case it is self-evident that the market in which the respondent operated was materially different from one in which banks and like institutions lend money. In the latter case there would probably be acceptable industry benchmarks as to the cost of money and the prevailing interest rates against which one could establish, with relative ease and accuracy, the loss to the lender arising from its inability to use its money caused by the borrower's default in repayment. But the respondent operated in a completely different market. It was, as I have said, a short term money market where the loans, effectively, were unsecured and where the cost of borrowing was, on any view, unusually high, if not exorbitant. In those circumstances, it would be a complex and expensive exercise to seek to establish, with any sort of precision, what damage is likely to flow from a failure by the appellants to repay the principal on the due date. Thus, the default amount that has been struck by agreement of both parties probably obviated a "minute and somewhat complex system of examination which would arise if you were to attempt to prove the damage".[25] In those circumstances, as I have indicated, the courts are even more reluctant to grant relief on the basis that the agreed damages clause is a penalty.
18 Given the terms of these particular agreements and their intended operation, as I have described, I am not persuaded that it is reasonably arguable that the default clause is so out of proportion with the loss that it is likely to flow from the appellants' breach that it can be properly characterised as being oppressive.
19 The appellants nevertheless claimed that, even if the default rate was not oppressive, it would be unconscionable for the respondent to enforce it and, for that reason, it should be treated as a penalty. Thus, there was some argument before us as to whether unconscionability is a separate basis for treating an agreed default sum as a penalty. The respondent contended that Lord Dunedin in Dunlop did not regard oppression and unconscionability as separate bases for characterising an impugned provision as a penalty. In particular, the respondent pointed to Lord Dunedin's use of the conjunctive "and" when he spoke of the sum stipulated for being "extravagant and unconscionable in amount". I consider, however, that the better view is that, in Australia, unconscionability is a separate ground for striking down an agreed default provision as a penalty. That this is so seems to have been recognised by Mason and Wilson, JJ.A. in the passage of their joint judgment in AMEV-UDC to which I have referred earlier.[26] In that case, their Honours spoke of relief against provisions that are (either) unconscionable or oppressive and went on to identify the degree of disproportion between the amount of the agreed sum and the loss likely to accrue from the breach as a factor relevant to "oppression". The circumstances which their Honours said might render it unconscionable to enforce a default provision were essentially limited to those that arose from the nature of the relationship between the parties, rather than from the amount of the default sum. In Amev Finance, Clarke, J.A. followed this approach in the sense that he considered that the agreed default sum may be struck down as a penalty if it is oppressive or if it would be unconscionable to enforce it. Relevantly, his Honour said that "contractual terms providing for the payment of agreed liquidated damages should be struck down as a penalty ... if the agreed sum be either extravagant in amount or imposes an unconscionable or unreasonable burden upon a party".[27]
20 I note, however, that the recent High Court decision of Ringrow Pty Ltd v BP Australia Pty Ltd[28] is silent on the question whether unconscionability is a separate basis for striking down a default provision in a contract as a penalty. In that case, the court[29] refused to strike down the option clause because, it said, it could not be concluded that it was "oppressive, or was unconscionable and extravagant in comparison with the [relevant] loss". Their Honours said that Dunlop "continues to express the law applicable in this country" and left open "any substantial reconsideration or reformulation ... to a future case where reconsideration or reformulation is in issue".[30] It will be recalled that, in his speech, Lord Dunedin does not appear to contemplate "unconscionability" as a separate basis for striking down the default provision.
21 In the circumstances, however, it is unnecessary to determine the question whether unconscionability constitutes a separate ground for striking down an agreed default sum as a penalty[31] because I consider that neither the burden of the impugned amount nor the relationship between the parties was such as to render unconscionable the enforcement of the default clause by the respondent.
Attack on his Honour's reasoning
22 I mention for completeness the appellants' criticism of his Honour's comparison between the notional annualised fee, expressed as a percentage of the principal, and a like extrapolation of the default charge for the purpose of determining if the latter was impermissibly extravagant. It was said that there were significant differences between the "annual" fees and the "annual" default rates and that, therefore, "the factual premise upon which the learned Judge proceeded was not established by the evidence". Whilst it may be accepted that there is a significant variation as between the several fees charged by the respondent and as between the several default sums, as well as between the fees and the default sums, I think that the comparison undertaken by his Honour was not irrelevant to the determination of the question whether the default provision was, in truth, a penalty. Putting aside the question whether it was appropriate to "annualise" the respective sets of figures, I consider that, for the reasons I have given, it was relevant to have regard to the respondent's earnings on the loans for the purpose of seeing if the default amount is unduly extravagant.
Conclusion on penalty issue
23 In the circumstance, I would reject the appellants' claim that it is reasonably arguable that the default provisions in the six loan agreements are penalties and, thus, unenforceable.
Respondent's allegedly wrongful appropriation of payment
24 I now turn to consider the appellants' claim that the respondent erred in the manner in which it appropriated the various payments made by the first appellant under the loan agreements and that, as a consequence, has overstated in the Apportionment Table[32] the amount due to it. It is convenient to consider this claim together with the appellants' application for leave to rely on the second appellant's affidavits of 6 December 2004 and 24 November 2005 to which reference has been made earlier. The appellants seek to rely on this material to establish that the appropriations were wrongly made by the respondent. In my view, the appellants' claim that the respondent made the appropriation on an impermissible basis is misconceived. If that be so, then there is no purpose in giving the appellants leave to rely on the affidavits, even if one were to disregard the problem that they contain no fresh evidence, and no sensible explanation has been provided for the failure to raise this complaint or to produce this material before the court below.[33]
25 In support of their claim that the respondent had wrongfully appropriated the payments, the appellants contended that the respondent was required to appropriate the money in accordance with the rule in Clayton's Case,[34] namely, by appropriating each consecutive payment to the earliest outstanding loan - the "first in first out" rule. Instead, it was said, the respondent wrongfully appropriated the payments first to interest and then to principal. In my view, however, the rule in Clayton's Case has no application here. The operation of the rule was explained in that case by Sir William Grant M.R. in the context of a current, or running, or blended, account that was in existence between the parties, such as a bank account. In those circumstances, his Lordship said:[35] "[t]here is no room for any other appropriation than that which arises from the order in which the receipts and payments take place and are carried into the account. Presumably, it is the sum first paid in that is first drawn out. It is the first item on the debit side of the account that is discharged or reduced by the first item on the credit side; the appropriation is made by the very act of setting the two items against each other." But it is clear enough that the rule is "a mere rule of evidence and not an invariable rule of law"[36] and, as Lord Halsbury said in Cory Brothers & Co. Ltd v. The Owners of The Turkish Steamship "Mecca" ("The Mecca"),[37] the rule has no operation where the payment in question was properly appropriated by the creditor (or debtor) or where there are distinct and separate debts.
26 In the present case, there is "room" for appropriation of the payments as made by the respondent for a number of reasons. First, there was no account current (or running account) between the parties. A running account, as Dawson, Gaudron and McHugh, JJ. explained in Airservices Australia v. Ferrier:[38] "is merely another name for an active account running from day-to-day, as opposed to an account where further debits are not contemplated. The essential feature of a running account is that it predicates a continuing relationship of debtor and creditor with an expectation that further debits and credits will be recorded. ... Thus, a running account is contrasted with an account where the expectation is that the next entry will be a credit entry that will close the account by recording the payment of the debt... ." The evidence in this case makes it apparent that the parties conducted their affairs on the basis that each of the six loans constituted a separate transaction,[39] as distinct from a current account. Similarly, each loan was subject to separate documentation, and the communications between the parties relevantly bear out that they treated each loan as being independent of the other loans. Thus, for example, the communication from the respondent to the first appellant of 29 May 2002 makes it apparent that each of the loans referred to in that letter was treated separately from the others. A like observation can be made in respect of the respondent's e-mails to the first appellant of 3 September 2002 and 15 October 2002 and the first appellant's memorandum to the respondent of 11 October 2002. Secondly, and perhaps more importantly, the payments were plainly appropriated by the respondent in accordance with clause 8(b) of the deeds, namely, first against interest and then against the principal.
27 In the circumstances, therefore, the appellants' reliance on Clayton's Case as demonstrating wrongful appropriation of the payments by the respondent is plainly misconceived. It follows, as I have said, that there would be no point in giving the appellants leave to rely on the two affidavits in question.
Sundry matters
28 There are two further matters that were raised by the appellants that should be dealt with. The first was the contention that the first appellant has an arguable set off (of approximately $50,000) against the respondent's claim for the moneys due under the deeds. It was said that the right to the set off arises because the respondent wrongfully debited amounts by way of default interest against at least two of the remaining loans. It was claimed that the respondent had no entitlement to such interest because it was "unenforceable" and was paid under a mistake of law. Consequently, the argument ran, the first appellant can set off these amounts against what is due to the respondent in respect of the six loans and, therefore, the respondent was not entitled to the impugned judgment sum.
29 I think that there are sound reasons why this claim should be rejected. First, it was not contended that even if the appellants have an arguable case for a set off this means that the respondent would not be entitled to the judgment for the balance. Secondly, and assuming that the default amounts were debited by the respondent as the appellants contend, no reason was advanced why the respondent was not entitled to make the impugned appropriations. If it is assumed that the appellants would claim that the default interest was a penalty and, thus, unenforceable, then such a claim would have to be rejected for the reasons that are relevantly the same as those that I gave for concluding that the default "interest" payments in respect of the six loans were not penalties.
30 The second matter relates to the breach by the appellants of their
undertakings to this Court to which I have referred earlier. Contrary to the undertakings, on 2 October 2005, the first appellant gave a fixed and floating charge over its assets. The documentation was executed on its behalf by the second appellant. By summons dated 25 November 2005, the respondent sought various orders against the appellants as punishment for the contempt. It seems clear enough on the material that, upon being informed of the breach in late November 2005, the second appellant caused the charge to be removed, and in his affidavit of 30 November 2005 swore that, at the time of executing the charge, he had forgotten that the undertaking had been given. He said that he did not intend to the breach and apologised for doing so. The respondent's summons came on for hearing at the same time as the appeal and, by consent, the hearing of it was adjourned pending completion of argument on the principal appeal. In the event, the respondent did not seek any orders under its summons. Although it is difficult to accept the second appellant's explanation for the breach, I consider it appropriate, in the circumstances, that, given the respondent's practical approach to the matter, and for the purpose of finalising it, the summons be dismissed. Subject to hearing the parties I consider that the appellants should pay the respondent's costs of and incidental to the summons.
Conclusion as to appeal
31 For the reasons I have given, I would refuse the appellants leave to rely on the affidavits of the second appellant of 6 December 2004 and 25 November 2005. I would dismiss the appellants' appeal and the respondent's summons of 25 November 2005 and, subject to hearing the parties, make consequential costs orders in favour of the respondent.