Zenith Engineering P/L v Qld Crane and Machinery P/L & Anor [2000] QCA 221

[1] PINCUS JA: This is an application for leave to appeal against a judgment of Judge Wylie QC given in the District Court. The question for his Honour was whether the applicant could recover a sum said to be due under a deed of settlement and a guarantee. The applicant sued the first respondent for money claimed under a contract to carry out engineering work. A defence was filed disputing liability for certain of the sums making up the applicant's claim and counter-claiming for alleged bad work. After negotiations the case was settled. The deed of settlement required the first respondent to pay the sum of $55,000 by certain instalments "in full settlement of the plaintiff's claim and the defendant's counter-claim". The claim as finally pleaded in the action was $72,567.13, so that the amount of the settlement was substantially less than the claim. The second respondent guaranteed payment of the money under the deed.

[2] There were five instalments to be paid under the deed; the first and second were paid on time, but the third, fourth and fifth (and last) instalments were paid late. After payment of the fourth instalment, the applicant applied for judgment on the basis of cl 4 of the deed, reading as follows:

"If any payment is not made on the due date, in respect of which time is agreed to be of the essence, the Plaintiff will be entitled to enter judgment against the Defendant for the full amount claimed in the Amended Claim plus interest and costs".

Judge Wylie QC dismissed the application, on the ground that the default provision constituted a penalty.

[3] The point sought to be raised on appeal is that, so the applicant argues, the case falls within the category of those:

"... where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt". (O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 at 367)

The question is of sufficient significance, in my opinion, to warrant the grant of leave, particularly as it seems likely that a similar form of settlement agreement has been used in other instances.

[4] The quotation from O'Dea's case set out above, defining a set of circumstances to which the equitable doctrine preventing recovery of penalties cannot apply, speaks of a creditor agreeing to accept "payment of part of his debt". That expression is difficult to treat as apt in the present case; there was a claim made for an alleged debt, but it was disputed. The amount properly due was never established, because the case was settled. It cannot be said, then, that it has been shown that the sum claimed in the action was a debt, part of which the applicant agreed to accept in full discharge. Does the O'Dea rule cover a case where the larger amount, which has to be paid in default of payment of the instalments of the agreed smaller amount, cannot be held to have been a debt?

[5] In The Protector Endowment Loan and Annuity Company v Grice [1880] 5 QBD 592 (discussed in O'Dea's case) the defendant Grice had guaranteed liabilities to the loan company. The principal debtor was required to pay by instalments a sum calculated to cover the principal of a loan, interest and certain other monies; there was an acceleration clause. The essence of the reasons in the Court of Appeal was that such an acceleration clause does not constitute a penalty, because it does not require payment of "an additional sum of money ... for the purpose of inducing persons to fulfil their contract" (595). A few months later, a similar conclusion was reached in a House of Lords case: Wallingford v Mutual Society [1880] 5 App Cas 685.

[6] In Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd [1906] HCA 87; (1906) 4 CLR 672, certain property was hired to the respondents for 10 years at £91 per year, payable annually. Clause 8 of the agreement had the effect that if there was any breach of the agreement, then the whole rent for the remainder of the term should immediately become due and the appellants were entitled to take the hired property back. The case was argued on both sides as dependent upon the doctrine of penalty, although described by the Chief Justice as being a question of construction (679). Pursuing this view of the matter, the Chief Justice held that the substance of the agreement was that it created "an absolute obligation to pay ten years' rent in any event, with a provision that it may be paid in annual instalments" (683); so there was no penalty. This result was apparently thought to follow from the Protector Loan case (684).

[7] In O'Dea's case the Lamson Store case was discussed and Gibbs CJ criticised the Court's reasoning, and in particular the reliance on the Protector Loan case:

"In my opinion the principle of cases such as The Protector Loan Co v. Grice applies only where there is a present debt, a debt actually due before the breach which accelerated the payment ...". (374)

Deane J was also critical of the Lamson Store case. His Honour appears to have been doubtful of the correctness of what was accepted as a principle in the Protector Loan case (403). He remarked:

"It is unnecessary, for the purposes of the present appeal, to consider whether the mere acceleration of a payment upon breach can constitute a penalty if the nature of the payment remains unchanged ... As a matter of principle, there is plainly much to be said for the view that it can. In both the present case and the Lamson Store Case the nature of the relevant payment upon breach with consequential loss of any right to possession or use was as different in character to the payment which would have been made if the hirer had retained the right to possession and use of the equipment or machine as was the payment described in [certain comments] calculated by reference to the price of coal which was not delivered to a payment for coal actually supplied". (emphasis added)

[8] It appears to me that this Court should, in accordance with the views just set out, be wary of extending the Protector Loan principle beyond the sort of case to which it refers, one in which there was an admitted debt payable by instalments with a provision for acceleration. It should be added that the character ascribed to such an agreement will not necessarily be that which its terms stipulate; as the O'Dea case illustrates, the question of penalty or no is to be determined in accordance with the substance of the arrangements between the parties, which might not accord with the language chosen by ingenious drafters: see the cases referred to in Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514 at 520.

[9] In my opinion the law as it presently stands is correctly stated in Professor Rossiter's chapter on relief against penalties in "The Principles of Equity" (1996), edited by Professor Parkinson:

"Where a stipulated sum is presently due and owing as a debt and the creditor grants the debtor an indulgence to pay the debt by instalments, it is not a penalty for the creditor to provide, as a condition of granting the indulgence, that the indulgence will be withdrawn if the debtor defaults in the payment of an instalment. However this principle ... has no application where, having regard to the substance and notwithstanding the form of the transaction, the stipulated sum is not owing as a present debt". (296)

Here the stipulated sum was neither in form nor in substance a present debt; it was merely an amount claimed. That is, the case is one in which the obligation sought to be enforced was one to pay a much larger sum than that agreed to be due, upon default in payment of agreed instalments of the latter: Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1914] UKHL 1; [1915] AC 79 at 87, para 4(b). And as the learned primary judge pointed out, the additional amount which would, if cl 4 of the deed is enforceable, become payable bears no rational relationship to the loss the applicant suffered by late payment of an instalment.

[10] I agree with the primary judge's view that cl 4 is unenforceable, as a penalty provision.

[11] It should be added that neither counsel, at the hearing of the application, desired to be heard any further, if leave were granted. I would grant leave to appeal and dismiss the appeal. I would order the applicant to pay the costs of the proceedings in this Court.

[12] WHITE J: I have read the reasons of Pincus JA. I agree with his Honour that this is an appropriate case in which to grant leave particularly as it is likely that the terms set out in the settlement deed are in a form likely to be used by other parties to litigation who reach settlement.

[13] It seems clear that the amount claimed in the pleading which was disputed in the defence and counterclaim could not be characterised as a "present debt, a debt actually due and owing", (O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 at 374).

[14] Accordingly the conclusion reached below that clause 4 was unenforceable being a penalty was correct.

[15] I agree with the orders proposed by Pincus JA.

[16] CHESTERMAN J: I agree with the orders proposed by Pincus JA and with his Honour's reasons.