Thursday, May 5, 2011

Calcorp (Australia) Pty Ltd and Ors v 271 Collins Pty Ltd [2010] VSCA 259 - contractual penalties in terms of settlement

The matter of Calcorp (Australia) Pty Ltd and Ors v 271 Collins Pty Ltd [2010] VSCA 259 (Calcorp) was an appeal from the judgment of O'Neill J in the County Court. The appeal was heard by Nettle, Redlich and Harper JJA of the Court of Appeal. Nettle JA gave the main judgment.

The proceeding arose from the entry of judgment in the County Court of Victoria under terms of settlement which previously compromised that proceeding. The appellant claimed that the entry of judgment under the terms of settlement for the full amount which the respondent claimed in the original proceedings was a penalty. The County Court held that this was not a penalty and the Court of Appeal agreed with the County Court's judgment to this extent.

The appellant Calcorp (Australia) Pty Ltd was a lessee to a lease. The respondent lessor was 271 Collins Pty Ltd. The Dattilo's (also appellants) were guarantors to the lease. The lessee entered into a lease of 5 years from February 2006 and in September 2006 the lessee ceased paying rent. The lessor re-entered the premises in February 2007 and leased the premises to another lessee for a reduced rental. The lessor issued proceedings against the lessee and guarantors for arrears plus the difference between the rental paid by the new lessee and the rental which would have been paid by the defaulting lessee but for the breach. The lessee counterclaimed saying that the re-entry was wrongful and caused loss of stock, fixtures and fittings and thereby the lessee suffered loss and damage caused by that wrongful re-entry.

The proceeding was compromised on terms of settlement dated 28 November 2008 which provided for the payment of $200,000 by installments, the last installment being a payment of $120,000 on or before 10 June 2009. There were other relevant terms (set out at [6]), including:

Clause 4:
If for any reason whatsoever the Defendants fail to make any payment required to be made by 5pm on the due date as set out in paragraph 2 of these Terms (‘Defendants’ Default’), the Plaintiff shall be entitled immediately and without further notice to the Defendants to enter judgment in this Proceeding against the Defendants or any of them for:
(a) the full amount of the Plaintiff’s claim in the Proceeding in the agreed sum of $262,648.96 (less the total of any payments actually made by the Defendants); (b) plus interest (at the rates from time to time fixed under the Penalty Interest Rates Act 1983); and
(c) the full amount of the Plaintiff’s costs of and incidental to its conduct of the Proceeding (including the costs of entering judgment) calculated as the total of all costs and disbursements paid by the Plaintiff to its solicitor and/or counsel as evidenced by the tax invoices rendered by the Plaintiff’s solicitor and counsel.
Clause 5:
In the event of the Defendants’ Default, the Defendants, by their execution of these Terms, irrevocably consent to the Plaintiff entering judgment against them in the Proceeding for the amounts as set out and calculated in accordance with paragraph 4 of these Terms. In the event of the Defendant’s (sic) Default, the Defendants shall make no objection to any such entry of judgment against them by the Plaintiff and these Terms may be produced by the Plaintiff in absolute bar of any objection made or proceeding to set aside the judgment instituted by the Defendants and any such proceeding to set aside shall be forever stayed. 
Clause 8:
Upon the Plaintiff being paid the total amount of $200,000.00 as provided in paragraph 2 of these Terms, the Plaintiff for itself, its successor and assigns forever releases and discharges the Defendants from and against any and all complaints, claims, suits, demands, proceedings, costs, expenses, obligations and causes of action of whatever nature which the Plaintiff now has or may have or which but for its execution of these Terms might have against the Defendants arising out of or relating to or in any way connected with the Claim made by the Plaintiff against the Defendants in the Proceeding.
The lessee defaulted in the final payment of $120,000 and the lessor applied for judgment for the whole amount of its claim under clause 4. The lessee objected to this saying that insofar as paragraph 4(a) of the Terms of Settlement provided for payment of a greater amount than clause 2, it was penal and therefore unenforceable.

O'Neill J in the County Court proceeding rejected this argument along the following lines, set out at [10]:
His Honour considered that ‘the agreed sum of $262,648.96’ referred to in clause 4(a) of the Terms of Settlement was a genuine pre-estimate of the amount to which 271 Collins was entitled on its claim for arrears of rent, outgoings and damages for the difference in rent between the original lease and the new lease; and, further that, by entering into the Terms of Settlement, the appellants had implicitly acknowledged the amount as being 271 Collins’ entitlement. 
The Court of Appeal considered that the question of whether the terms of settlement imposed a penalty depended on whether the $262,648.96 in clause 4(a) was a present and acknowledged debt (at [15]):
Both sides also accepted, therefore, that, if the Terms of Settlement properly construed comprised an acknowledgment by the appellants that the appellants were obligated to pay the ‘agreed sum of $262,648.96’ as at the date of execution of the terms, that amount was not a penalty and the obligation imposed by clause 4(a) to pay it (in the event of default of payment of the instalments provided for in clause 2) was enforceable. If, on the other hand, upon the proper construction of the Terms of Settlement, there was no agreement that the sum of $262,648.96 was owing as at the date of execution of the Terms of Settlement, and clause 4(a) was merely a stipulation for payment of that amount in the event of default of payment of the instalments of debt provided for in clause 2, it was penal and so, therefore, unenforceable.
The Court of Appeal dismissed the appeal, saying that it was implicit in the terms that the appellant acknowledged a present debt of $262,648.96 owing for which judgment was entered. The detailed reasons of Nettle JA are as follows (at [17] to [23]):
17 In my view, it was implicit in the Terms of Settlement that the appellants acknowledged that the sum of $262,648.96 was due. Several considerations lead me to that conclusion. 
18 To begin with, to adopt and adapt the language of Buchanan JA in Cameron v UBS AG, the obligation to pay that sum is not an obligation which sprang from the deed unheralded. Its genesis lay in past dealings between the appellants and the respondent concerning the leased premises.
19 Secondly, although the existence of the obligation had not been established by judgment by the time of execution of the terms, there was no dispute about the existence of the lease, or the appellants’ default in payment of rent and outgoings under the lease, or even the amounts which the appellants had failed so to pay. Nor was there any dispute that, in consequence of their default, the respondent had re-entered the premises and brought the lease to an end. All of those things were admitted on the pleadings. Effectively, the only dispute was as to the amount due to the respondent by way of damages for the loss of the lease bargain and so, in point of principle, the position was analogous to that in Cameron v UBS.
20 Thirdly, the analogy between this case and Cameron v UBS derives strength from the observation of Ashley J in Australian Management Consultants Pty Ltd v Direct Financing Pty Ltd, that:
As a matter of principle it seems to me that there is no essential difference between Terms of Settlement which arise out of a plaintiff’s disputed claim to enforce a foreign judgment and terms arising out of a plaintiff’s disputed entitlement to a money sum or damages in connection with a commercial dispute. In either event it is open for a defendant, in substance, to acknowledge his liability to a plaintiff by entry into Terms of Settlement.
21 Fourthly, the Terms of Settlement are to be viewed in context against the historical background of the lease and proceedings, so that, when one sees the amount of $262,648.96 described in the terms as the ‘full amount of the Plaintiff’s claim in the Proceeding in the agreed sum of $262,648.96’, there is an implication that the appellants were thereby acknowledging that the amount of the liability which was in issue on the pleadings was that amount, and thus that the appellants were liable to pay it at that time. Why else describe the sum of $262,648.96 as an agreed sum for which the respondent would be entitled to enter judgment on its claim if the appellants defaulted in payment of the instalments provided for in clause 2?
22 Fifthly, although not the same, clause 4(a) of the Terms of Settlement is analogous to the provision considered by Davies J in Perpetual Trustee Co Ltd v Mitchell, whereby the debtor acknowledged that, in the event of default in payment of agreed instalments, the creditor would be entitled to enter judgment for $1,047,837.83 (being the amount owing under the Loan Agreement as at 22 January 2010). Just as Davies J held that to be an acknowledgement of an existing debt and an agreement as to its amount, it appears to me that clause 4(a) of the Terms of Settlement was an acknowledgment of an existing contractual obligation and as to its amount.
23 Sixthly, the position here is also in some ways similar to the situation in Perpetual Trustee Company Ltd v Aspley Specialist Centre Pty Ltd, where there was an acknowledgment of the existence of a debt and agreement that the plaintiff be at liberty forthwith to enter judgment for the full amount of it if specified instalments of it were not paid timeously. In that case, the total amount of the debt and the total amount of the instalments were the same, as opposed to the position here where the total instalments if paid would have been less than ‘the agreed sum of $262,648.96’. But, practically speaking, the time value of money meant that the obligation in Perpetual to pay the total amount at once was more burdensome than the obligation to pay it off by instalments over time.

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