Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd

[2017] NSWCA 99

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd; Guan v Linfield Developments Pty Ltd [2017] NSWCA 99

Hearing dates:

30 November and 1 December 2016

Decision date:

17 May 2017

Before:

McColl JA at [1];
Ward JA at [2];
Gleeson JA at [379]

Decision:

In proceedings 2016/104216 (the ACFM appeal)

 

(1)   Appeal allowed in part.
(2)   Set aside orders 4 and 5 of the declarations and orders made on 31 March 2016 and in lieu thereof:
(a)   Order that the plaintiff (Linfield Developments Pty Limited) pay to the sixth defendant (Australia Capital Financial Management Pty Limited) the sum of $360,364.14 plus interest on the sum of $20,360,364.14 at 12% p.a. from 5 August 2014 to 31 March 2016, together with the sixth defendant’s reasonable costs in relation to land tax, insurance rates and utility charges incurred from 5 August 2014 to 31 March 2016 in respect of the Land;
(b)   Declare that the plaintiff is entitled to receive from the first defendant (Shuangxing Development Pty Ltd (in liq) (receivers and managers appointed)), through its receivers and managers, on payment of the sum of $20,000,000, a transfer of the Land in registrable form free from any mortgage, charge or encumbrance other than the plaintiff’s Caveat No. AI792023.
(3)   Order that the appellant pay the first respondent 75% of the first respondent’s costs of the appeal.
(4)   Grant liberty to the first respondent to apply on 3 days’ notice for any further order necessary to effect the transfer of the Auburn Land to it.

In proceedings 2016/104679 (the Guan appeal)

 (1)   Appeal dismissed with costs.

Catchwords:

CONVEYANCING – conditional call option – nature of optionee’s interest under call option – where purchaser of land grants option to third party prior to the purchaser acquiring legal title to the land – whether third party optionee acquires equitable interest in land before purchaser completes contract

 

EQUITY – priority and notice – competing equitable interests in land – test for resolution of priority – whether merits equal – whether conduct not leading to the creation or acquisition of a later equitable interest but only to a failure to protect existing contractual rights in respect of land qualifies as disentitling conduct where such rights would, if exercised, have led to the creation of an equitable interest in that land prior in time to the competing interest – whether conditions can be attached to declaration as to priority

 

EVIDENCE – Jones v Dunkel inference – whether evidence supported drawing of Jones v Dunkel inference – whether findings were open on evidence without need for drawing a Jones v Dunkel inference

 

ADMINISTRATIVE LAW – procedural fairness – whether findings by primary judge that party acted “surreptitiously”, “stealthily”, and engaged in “sharp practice” amounted to a denial of procedural fairness

 

EQUITY – relief against penalties – whether impugned stipulation out of all proportion to loss that might be suffered on happening of insolvency event – time at which penal nature of a non-monetary stipulation is to be assessed

  EQUITY – relief against forfeiture – whether adequate compensation available on happening of insolvency event such as to warrant relief against forfeiture of property

Legislation Cited:

Australian Consumer Law, ss 237, 243
Competition and Consumer Act 2010 (Cth), Sch 2
Conveyancing Act 1919 (NSW), s 129
Corporations Act 2001 (Cth), ss 440D(1)(b), 500(2)

Cases Cited:

Abigail v Lapin (1934) 51 CLR 58; [1934] UKPCHCA 1
AG(CQ) Pty Ltd v A & T Promotions Pty Ltd [2011] 1 Qd R 306; [2010] QCA 83
AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; [1986] HCA 63
Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30
Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328
Armidale Dumaresq Council v M & P (North Coast) Pty Ltd (2005) 64 NSWLR 1; [2005] NSWSC 628
Austin v United Dominions Corporation Ltd [1984] 2 NSWLR 612
Australian Financial Services and Leasing Ltd v Hills Industries Ltd (2014) 253 CLR 560; [2014] HCA 14
Australian Guarantee Corporation (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129
Bailey v Barnes [1894] 1 Ch 25
Barba v Gas & Fuel Corporation of Victoria (1976) 136 CLR 120; [1976] HCA 60
Barlin Investments Pty Ltd v Westpac Banking Corporation (2012) 16 BPR 30,671; [2012] NSWSC 699
Beneficial Finance Corporation Ltd v Multiplex Constructions Pty Ltd (1995) 36 NSWLR 510
Breskvar v Wall (1971) 126 CLR 376; [1971] HCA 70
Butler v Fairclough (1917) 23 CLR 78; [1917] HCA 9
Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 4) (2006) 229 ALR 136; [2006] FCA 446
Carritt v Real and Personal Advance Co (1889) 42 Ch D 263
Cash Resources Australia Pty Ltd v BT Securities Ltd [1990] VR 576
Casquash Pty Ltd v NSW Squash Ltd (No 2) [2012] NSWSC 522
Cavendish Square Holding BV v Talal el Makdessi; ParkingEye Limited v Beavis [2016] AC 1172; [2015] UKSC 67
Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd (2014) 45 VR 79; [2014] VSCA 32
Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd; Hotray Pty Ltd v JKAM Investments Pty Ltd [2014] NSWSC 952
Circuit Finance Australia (Receivers and Managers appointed) (in Liq) v Panella (2011) 16 BPR 30,347; [2011] NSWSC 311
Citicorp Australia v Hendry (1985) 4 NSWLR 1
Clark v Raymor (Brisbane) Pty Ltd (No 2) [1982] Qd R 790
Commissioner for Australian Capital Territory Revenue v Alphaone Pty Ltd (1994) 49 FCR 576; [1994] FCA 1074
Commissioner of Stamp Duties (NSW) v ISPT Pty Ltd (1998) 45 NSWLR 639
Commissioner of Taxes (Qld) v Camphin (1937) 57 CLR 674; [1937] HCA 30
Commonwealth of Australia v McLean (Court of Appeal (NSW), 31 December 1996, Handley and Beazley JJA, unrep)
Cranston v CBFC Ltd (Supreme Court (NSW), Bryson J, 11 June 1993, unrep)
Dunlop Pneumatic Tyre Company Limited v New Garage & Motor Company Limited [1915] AC 79
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Fistar v Riverwood Legion and Community Club Ltd (2016) 91 NSWLR 732; [2016] NSWCA 81
Forder v Cemcorp Pty Ltd (2001) 51 NSWLR 486; [2001] NSWSC 281
Fox v Percy (2003) 214 CLR 118; [2003] HCA 22
Golden Mile Property Investments Pty Ltd (In Liq) v Cudgegong Australia Pty Ltd (2015) 89 NSWLR 237; [2015] NSWCA 100
GPT Re Ltd v Lend Lease Real Estate Investments Ltd (2005) 12 BPR 23,217; [2005] NSWSC 964
Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641; [1937] HCA 58
Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326; [1983] HCA 30
House v The King (1936) 55 CLR 499; [1936] HCA 40
Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2007] NSWSC 406
J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546; [1971] HCA 57
Jessica Holdings Pty Ltd v Anglican Property Trust Diocese of Sydney (1992) 27 NSWLR 140
JM Kelly (Project Builders) Pty Ltd v Toga Development No 31 Pty Ltd (No 5) [2010] QSC 389
Jobson v Johnson [1989] 1 WLR 1026
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
King v AGC (Advances) Ltd [1983] 1 VR 682
Labracon Pty Limited v Cuturich (2013) 17 BPR 32,497; [2013] NSWSC 97
Lapin v Abigail (1930) 44 CLR 166; [1930] HCA 6
Latec Investments Ltd v Hotel Terrigal Pty Ltd (in Liq) (1965) 113 CLR 265; [1965] HCA 17
Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57; [1974] HCA 49
Legione v Hateley (1983) 152 CLR 406; [1983] HCA 11
Lend Lease Real Estate Investments Ltd v GPT Re Ltd [2006] NSWCA 207
Linfield Developments Pty Ltd v Shuangxing Development Pty Limited [2016] NSWSC 68
Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; [2006] NSWCA 40
Moffett v Dillon [1999] 2 VR 480; [1999] VSCA 32
Moratic Pty Ltd v Gordon (2007) 13 BPR 24,713; [2007] NSWSC 5
Paciocco v Australia and New Zealand Banking Group Limited (2014) 309 ALR 249; [2014] FCA 35
Paciocco v Australia and New Zealand Banking Corporation Ltd (2015) 236 FCR 199; [2015] FCAFC 50
Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569; [2016] HCA 28
Palm Gardens Consolidated Pty Ltd v PG Properties Pty Ltd [2009] SASC 311
Philips Hong Kong Ltd v The Attorney General of Hong [1993] 1 HKLR 269
Radoman Pty Ltd v Vexapu Pty Ltd (2008) 13 BPR 24,903; [2008] NSWSC 8
Re Berkeley Applegate (Investment Consultants) Ltd (In Liq) [1989] Ch 32
Re Henderson’s Caveat [1998] 1 Qd R 632
Re Premier Freehold Pty Ltd’s Caveat [1981] Qd R 547
RHG Mortgage Corporation Ltd v Ianni [2016] NSWCA 270
Rice v Rice (1854) 2 Drew. 73; (1853) 61 ER 646
Richardson v Aileen Pty Ltd; Application by D J Hughes [2007] VSC 104
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71
Rimmer v Webster (1902) 2 Ch 163
Riverlate Properties Ltd v Paul [1971] Ch 133
Robinson Helicopter Company Inc v McDermott (2016) 331 ALR 550; [2016] HCA 22
Sahade v BP Australia Pty Limited (2004) 12 BPR 22,149; [2004] NSWSC 512
Shiloh Spinners Ltd v Harding [1973] AC 691
Shropshire Union Railways and Canal Co v The Queen (1875) LR 7 HL 496
SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyd’s Rep 288
Stewart v Atco Controls Pty Ltd (in Liq) (2014) 252 CLR 307; [2014] HCA 15
SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 228 CLR 152; [2006] HCA 63
Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; [2003] HCA 57
Taylor v Johnson (1983) 151 CLR 422; [1983] HCA 5
Taylor v London and County Banking Co [1901] 2 Ch 231
Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171

Texts Cited:

W Ashburner, Principles of Equity (2nd ed, 1933, Butterworth)
J Baker, An Introduction to English Legal History (4th ed, 2002, Oxford University Press)
J Carter et al, “Contractual Penalties: Resurrecting the Equitable Jurisdiction” (2013) 30 Journal of Contract Law 109
GE Dal Pont, Equity and Trusts in Australia (6th ed, 2011, Lawbook Co)
R Derham, “Estoppel by Convention, Part II” (1997) 71 Australian Law Journal 976
J Edelman and E Bant, Unjust Enrichment (2nd ed, 2016, Hart Publishing)
DJ Farrands, The Law of Options and Other Pre-emptive Rights (2nd ed, 2012, Thomson Reuters)
E Henderson, “Relief from Bonds in the English Chancery: Mid-Sixteenth Century” (1974) 18(4) American Journal of Legal History 298
JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis)
F Jordan, Chapters on Equity in New South Wales (6th ed, 1945)
AJ Oakley, “Judicial Discretion in Priorities of Equitable Interests” (1996) 112 Law Quarterly Review 215
JN Pomeroy, A Treatise on Equity (2nd ed, 1892, vol 1)
JN Pomeroy, A Treatise on Equity Jurisprudence (2nd ed, 1892, vol 2)
S Rodrick, “Resolving Priority Disputes Between Competing Equitable Interests” (2001) 9 Australian Property Law Journal 172
C Rossiter, “Relief Against Penalties” in P Parkinson, ed, The Principles of Equity (2nd ed, 2003, Lawbook Co)
AWB Simpson, “The Penal Bond with Conditional Defeasance” (1966) 82 Law Quarterly Review 392
PW Young, ELG Tyler and ML Smith, On Equity (2009, Thomson Reuters)

Category:

Principal judgment

Parties:

Proceedings No. 2016/104216

 

Australia Capital Financial Management Pty Ltd (Appellant)
Linfield Developments Pty Ltd (First Respondent)
Shuangxing Development Pty Ltd (In Liq) (Receivers and Managers appointed) (Second Respondent)

 

Proceedings No. 2016/104679

  Xiuyan Guan (First Appellant)
Shuangling International Development Pty Ltd (Second Appellant)
Shuang Sheng Pty Ltd (Third Appellant)
Linfield Developments Pty Ltd (First Respondent)
Shuangxing Development Pty Ltd (In Liq) (Receivers and Managers appointed) (Second Respondent) (submitting appearance)
Shuangfu Developments Pty Ltd (In Liq) (Receivers and Managers appointed) (Third Respondent)
Australia Capital Financial Management Pty Ltd (Fourth Respondent) (submitting appearance)

Representation:

Counsel:
J Sexton SC with Ms V Whittaker (Appellant in 2016/104216)
A Bell SC with C Freeman (First Respondent in 2016/104216; First Respondent in 2016/104679)
MK Condon SC with P Sharp (Appellants in 2016/104679)

    Solicitors:
Baker & McKenzie (Appellant in 2016/104216; submitting appearance as Fourth Respondent in 2016/104679)
Deutsch Miller (First Respondent in 2016/104216; First Respondent in 2016/104679)
Arnold Bloch Leibler (Second Respondent in 2016/104216; submitting appearance in 2016/104679)
Auyeung Hencent and Day Lawyers (Appellants in 2016/104679)
ERA Legal (Third Respondent in 2016/104679)

File Number(s):

CA 2016/00104216; CA 2016/00104679

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2016] NSWSC 68

Date of Decision:

14 March 2016

Before:

Pembroke J

File Number(s):

2014/346903

HEADNOTE

[This Headnote is not to be read as part of the judgment]

This judgment relates to two appeals from a decision in the Equity Division of the NSW Supreme Court.

In June 2013, Shuangxing Development Pty Ltd (SXG) entered into a contract to purchase land in Auburn (the Auburn land) from RSL Custodian Pty Ltd for $20 million (the Sale Contract). Completion was fixed for June 2014. The purchase price was payable in three tranches.

In December 2013, Linfield Developments Pty Ltd (Linfield) entered into a development agreement with SXG in relation to the proposed residential and commercial development of this land (the Development Agreement).

Under the Development Agreement, Linfield agreed to loan $1 million to SXG and make an amount up to $5 million available to SXG to complete the Sale Contract if SXG requested it. SXG also agreed that SXG would not use or agree to use the land as security for any purpose and would not grant any mortgage, charge or other encumbrance over the Auburn land. SXG also granted to Linfield a call option (the Call Option). If exercised prior to completion of the Sale Contract, Linfield could step into the shoes of SXG as purchaser under a power of attorney and complete the contract for the purchase of the Auburn land. If exercised after completion, Linfield could require SXG to transfer to Linfield the title to the Auburn land. The Development Agreement contemplated that Linfield could lodge a caveat in respect of the land any time after completion of the Sale Contract.

Ms Xiuyan Guan was the sole director of SXG and various other companies (the Guan entities). The Guan entities guaranteed the obligations of SXG under the Development Agreement.

By April 2014 it became apparent that SXG lacked the resources to complete the Sale Contract.

Australia Capital Financial Management Pty Ltd (ACFM) became involved as a potential financier. Between April and June 2014, there were a number of meetings between various representatives of SXG (Ms Guan and Mr Liang), ACFM (Mr Chen and Mr Ting), and Linfield (Mr Ben Lin, Mr Jally Lin and Mr Tanevski).

On 26 June 2014, ACFM entered into a loan agreement with SXG (the Loan Agreement). The Loan Agreement provided for a first registered mortgage to be given to ACFM over the Auburn land upon completion by SXG of the purchase. On 18 July 2014, ACFM and SXG entered into a Deed of Amendment and Restatement.

On 5 August 2014, completion of the Sale Contract occurred (the completion date having been extended through agreement with the vendor, RSL Custodian Pty Ltd). On settlement, ACFM advanced around $20 million to enable SXG to complete the purchase. As mortgagee, ACFM received a transfer in registrable form in respect of the Auburn land. The transfer was not lodged for registration.

On 6 August 2014, Linfield lodged a caveat claiming an estate or interest in the Auburn land as “mortgagee and grantee of a call option”. The caveat prevented registration of ACFM’s mortgage.

On 20 November 2014, an administrator was appointed to SXG, as also were receivers and managers. In January 2015, Linfield took steps to exercise the Call Option, expressly relying on the appointment of the administrator (or, alternatively, the appointment of receivers and managers) to SXG as an Insolvency Event as defined in the Development Agreement.

Linfield brought proceedings in the Equity Division of the Supreme Court against SXG, the Guan entities and ACFM.

The primary judge held, among other things, that: the Development Agreement was valid and enforceable; the Call Option was not a penalty; Linfield had validly exercised the Call Option; both ACFM (as equitable mortgagee) and Linfield (as the grantee of an option) acquired equitable interests in the Auburn land upon completion of the Sale Contract on 5 August 2015; and that ACFM had engaged in disentitling conduct with the consequence that Linfield’s interest took priority over ACFM’s interest. The effect of the orders was that Linfield was entitled to acquire the Auburn land unencumbered by ACFM’s security.

In the ACFM appeal, there were four main issues: first, the date on which Linfield’s equitable interest in the Auburn land arose (grounds 1 and 2); second, whether the primary judge erred in drawing certain inferences about ACFM’s state of mind (ground 6) and whether there was a denial of procedural fairness in the drawing of such inferences (ground 7); third, whether ACFM engaged in disentitling conduct such that Linfield’s later interest in the Auburn land should take priority over ACFM’s earlier interest in that land (ground 3); and fourth, the appropriate relief (grounds 4 and 5).

In the Guan appeal, there were two main issues: first, the time at which the allegedly penal nature of the Call Option should be assessed and the appropriate use of evidence concerning the value of the Auburn land (grounds 12 and 13); second, whether the Call Option was unenforceable as a penalty or whether SXG was otherwise entitled to relief against forfeiture in respect thereof (grounds 10 and 11).

Held, per Ward JA (McColl and Gleeson JJA agreeing at [1] and [379], respectively)

in relation to the ACFM appeal:

as to grounds 1 and 2, and the notice of contention:

(1)   (at [105]) prior to completion of the Sale Contract, no equitable interest in favour of Linfield in respect of the Auburn land arose. As at the time of the grant of the Call Option, Linfield could not have obtained relief in equity against the registered proprietor of the land as a consequence of which the registered proprietor could have been deprived of the land “without any further action or decision” on the registered proprietor’s part.

(2)   (at [98]-[99]; [106]) nor did SXG “deal” with its equitable interest in land as purchaser under the Sale Contract by the grant of the Call Option. The grant of the Call Option conferred on Linfield a contractual right, contingent on certain future events, to step into the shoes of SXG in exercise of a power of attorney.

(3)   (at [109]) once the Sale Contract was completed, the availability of equitable relief in favour of Linfield both to restrain SXG from acting inconsistently with Linfield’s rights and to compel SXG to comply with its obligation to transfer title to the Auburn land to Linfield is not in doubt.

as to ground 6:

(4)   (at [192]) it was open to the primary judge to conclude that ACFM’s conduct amounted to “sharp practice”. This conclusion flowed from the cumulative effect of his Honour’s earlier findings and would stand even without resort to a Jones v Dunkel inference.

as to ground 7:

(5)   (at [199]; [201]; [202]) there was no denial of procedural fairness. The observations made by the primary judge were based on matters clearly ventilated in the course of the hearing and squarely raised on the evidence and in the submissions. ACFM had ample opportunity to put on evidence and make submissions in relation to these observations.

as to ground 3:

(6)   (at [227]) the primary judge did not simply apply a criterion of “sharp practice”. His Honour carefully reviewed the factual circumstances and framed his enquiry by reference to the leading authorities.

(7)   (at [228]; [229]-[257]) the concept of disentitling conduct is not necessarily confined to conduct that leads to the creation or acquisition of a later equitable interest. In an appropriate case (such as the present) the concept of disentitling conduct can extend to conduct which contributes to a failure by the holder of a later interest to have taken steps at an earlier time to protect the rights that it had in relation to the land (and which would, if exercised, have given rise to its interest in the land at an earlier time to the time at which the earlier interest holder obtained its interest in the land).

(8)   (at [258]-[260]) the primary judge did not err in concluding that ACFM’s conduct amounted to disentitling conduct. The conduct of ACFM caused Linfield to act (by not taking action at an earlier time to protect its existing rights) on a false premise (namely, that ACFM would not advance funds without arrangements being put in place for a new development agreement on terms no less favourable to Linfield than the existing one) until it was too late from a practical point of view for Linfield to act otherwise so as to protect its position.

as to ground 4 and 5:

(9)   (at [283]; [278]-[281]) in an appropriate case, a court may require a claimant obtaining priority as a result of disentitling conduct of the holder of the prior interest to “do equity” vis-à-vis the holder of that prior interest through the imposition of conditions.

(10)   (at [285]; [286]-[289]) the discretion of the primary judge miscarried in the sense considered in House v The King (1936) 55 CLR 499 when his Honour refused to impose conditions on the making of the order for specific performance in that although no error of the kinds there described was manifest, nevertheless the result is so unreasonable as to bespeak such an error.

(11)   (at [302]) the appropriate period for which Linfield should bear the interest and holding costs is from 5 August 2014 through to 14 March 2016, when judgment was handed down in Linfield’s favour.

in relation to the Guan Appeal:

as to grounds 12 and 13:

(12)   (at [330]) whether the primary judge could properly have taken into account events beyond the date of entry into the Development Agreement would depend on whether the analysis typical in the case of a secondary stipulation whose subject is money should be adjusted before being applied in a case of a secondary stipulation about particular items of property.

(13)   (at [328]; [331]) even assuming that it is permissible (when applying the penalties doctrine) to look in hindsight to the actual value of the Auburn land at the time when the impugned stipulation is to operate, or to look prospectively at what its value would then likely be, it is not sufficient that the impugned stipulation be lacking in proportion – it must be “out of all proportion” to any legitimate interest that Linfield had in enforcement of the Development Agreement.

(14)   (at [339]) while the primary judge’s reasons were brief, it was not necessary for the purposes of the enquiry before him that the primary judge determine a precise value for the land as at December 2013. What is relevant is that there was evidence on which his Honour could reasonably conduct that, as at the time of entry into the Development Agreement, the price at which the Call Option was exercisable (if exercised prior to the grant of development approval) was not so “extravagant and unconscionable” or “out of all proportion” in the relevant sense.

as to grounds 10 and 11:

(15)   (at [358]) despite the invocation of the doctrine of relief against forfeiture, the Guan appellants largely approached their challenge to the primary judgment by reference to the doctrine of penalties. In any event, compensation would not be available to make good the loss to Linfield of the development opportunities which the Call Option was clearly intended to preserve, such as to call into operation the forfeiture doctrine.

(16)   (at [361]) in circumstances where there is no express obligation in the Development Agreement to avoid commission of an Insolvency Event, and where the Call Option is more comfortably seen as a stipulation, collateral to a primary stipulation in favour of Linfield, imposing on SXG (on the Guan appellant’s case) an additional detriment on the failure of the primary stipulation to the benefit of Linfield, then the penalty doctrine in equity is engaged.

(17)   (at [371]) the Call Option was not penal in operation. It was not “out of all proportion” to the protection of Linfield’s legitimate interests in relation to the proposed development.

INDEX

JUDGMENT

McCOLL JA

[1]

WARD JA

[2]

Introduction

[3]

Background

[11]

The Development Agreement

[12]

Involvement of ACFM as potential financier

[23]

The Loan Agreement

[29]

Security documents entered into with ACFM

[33]

Completion of purchase of the Auburn land and subsequent events

[38]

Commencement of proceedings and exercise of Call Option

[45]

Proceedings at first instance

[48]

Primary judgment

[56]

Appeals

[72]

ACFM appeal

[74]

Grounds 1 and 2 of ACFM’s notice of appeal; ground 1 of Linfield’s notice of contention – the date on which Linfield’s equitable interest arose

[78]

ACFM’s submissions

[83]

Linfield’s submissions

[87]

Determination

[93]

Grounds 6 and 7 of ACFM’s appeal – adverse inferences/findings about ACFM’s state of mind

[110]

Further background

[112]

Ground 6 – Drawing of an adverse Jones v Dunkel inference

[166]

Determination as to ground 6

[173]

Ground 7 – Complaint as to denial of procedural fairness

[194]

Determination as to ground 7

[198]

Ground 3 of ACFM’s appeal – Finding that ACFM engaged in disentitling conduct

[203]

ACFM’s submissions

[204]

Linfield’s submissions

[218]

Determination

[227]

Grounds 4 and 5 – Relief

[263]

ACFM submissions

[264]

Linfield’s submissions

[271]

Determination

[277]

ACFM Appeal – Appropriate relief

[290]

Proposed orders and opposing submissions

[291]

Determination

[300]

ACFM Appeal - Costs

[305]

Guan appeal

[309]

Grounds 12 and 13

[317]

Determination

[323]

Grounds 10 and 11

[340]

Guan appellants’ submissions

[340]

Linfield’s submissions

[345]

Determination

[353]

Conclusion and Orders

[378]

GLEESON JA

[379]

Judgment

1. McCOLL JA: I have had the privilege of reading Ward JA’s reasons in draft. I agree with her Honour’s reasons and the orders she proposes.

2. WARD JA: Late last year this Court heard two appeals arising out of disputes between various parties in relation to the same underlying transaction – the acquisition by Shuangxing Development Pty Ltd (SXG) of land at Auburn (the Auburn land) that was formerly owned and operated by RSL Custodian Pty Ltd as the Auburn RSL Club.

Introduction

3. The first of the two appeals (CA 2016/104216) was brought by Australia Capital Financial Management Pty Ltd (ACFM), the entity which financed the purchase by SXG of the land and took a mortgage and charge over the land as security for the finance it had provided.

4. The second (CA 2016/104679) was brought by Ms Xiuyan Guan, who controlled SXG at the time of the purchase of the land, and various companies with which Ms Guan was associated (the Guan entities) who, with Ms Guan, had guaranteed the obligations of SXG under a development agreement entered into in December 2013 with Linfield Developments Pty Ltd (Linfield) in relation to the acquisition and proposed residential and commercial development of the Auburn land (the Development Agreement).

5. Under the Development Agreement, SXG granted to Linfield a call option (the Call Option) pursuant to which Linfield could, depending on when the option was exercised, either step into the shoes of SXG as purchaser and complete the contract for the purchase of the Auburn land in its name or require SXG to transfer to it the title to the land. In the latter case, the sum payable on exercise of the Call Option depended on whether it was exercised before or after development approval had been granted in relation to the land.

6. After completion of the purchase of the land by SXG on 5 August 2014, and after the appointment on 20 November 2014 of an administrator (and then receivers and managers) to SXG, Linfield took steps to exercise the Call Option. At that time, development approval had not yet been granted in respect of the proposed development of the land and hence the sum payable on exercise of the Call Option was $20 million. SXG, through its receivers and managers, refused to provide a transfer in respect of the land.

7. Linfield then brought proceedings in the Equity Division of the Supreme Court against SXG, the Guan entities and ACFM. In those proceedings, it sought, among other relief, declarations that the Development Agreement was valid and enforceable; that it had validly exercised the Call Option under that agreement; and that its interest in the Auburn land took priority over ACFM’s interest as (unregistered) mortgagee, as well as an order that the Development Agreement be specifically performed. It succeeded in obtaining that relief (Linfield Developments Pty Ltd v Shuangxing Development Pty Limited [2016] NSWSC 68).

8. The primary judge ordered that SXG, through the receivers and managers appointed to it, do all things reasonably necessary specifically to perform the Development Agreement, including the payment of all land tax liabilities and discharge of all statutory and other charges outstanding in relation to the land; the removal or withdrawal of various caveats lodged in respect of the land; and the delivery of a duly signed transfer of the land in favour of Linfield, free from any mortgage charge or encumbrance (other than Linfield’s caveat); and that, on the happening of those events, Linfield pay to SXG by unendorsed bank cheque the sum of $20 million (orders 4 and 5). The effect of those orders was thus that Linfield was entitled to acquire the Auburn land unencumbered by ACFM’s security.

9. ACFM does not in these proceedings contest the making of the order for specific performance in favour of Linfield (although in its pleading at first instance it did not admit any entitlement to specific performance and indeed denied Linfield’s entitlement to any relief at all). Rather, what it maintains (and what it says is the way it attempted to put its case at first instance – see T7.26) is that Linfield should have been required, as a condition of the grant of such relief, to pay interest on the loan that ACFM had advanced for the purchase of the Auburn land, together with an additional amount of around $360,000 which it had also advanced on settlement of the purchase (T 2.30-44). Absent such a condition, ACFM contends that Linfield will obtain the Auburn land “interest-free” and with a “gift” of that additional amount (T 21.34). In the course of the hearing of the appeal, ACFM handed up draft short minutes of the orders it now seeks in order to impose such a condition on any order for specific performance, in respect of which the parties were given an opportunity to make submissions after judgment was reserved. I will consider those submissions in due course (see [291]-[304] below).

10. The appellants in the Guan appeal (the Guan appellants) contend, on the other hand, that the relevant provision of the Development Agreement pursuant to which Linfield exercised the Call Option in respect of the Auburn land (cl 18.6) constituted an impermissible forfeiture of property and was unenforceable, at least on the terms Linfield had propounded. They seek orders setting aside the primary judgment and dismissing with costs the amended statement of claim filed by Linfield on 23 October 2015 or, in the alternative, a declaration that cl 18.8 of the Development Agreement, under which SXG was obliged on exercise of the Call Option to transfer the property to Linfield for the sum of $20 million, is void as a penalty.

Background

11. Ms Guan was the sole director of SXG and a director of each of the Guan entities. On 24 June 2013, SXG, as purchaser, entered into a Contract for the Sale of Land with RSL Custodian Pty Ltd, as vendor, in respect of the Auburn land for the sum of $20 million (the Sale Contract). A deposit of $1 million was payable in three tranches, the first of which ($300,000) being paid by SXG on exchange of contracts. Completion was fixed for 24 June 2014.

The Development Agreement

12. On 20 December 2013, following signed heads of agreement, SXG and Linfield entered into the Development Agreement for the proposed development of residential and commercial lots on the Auburn land. As noted earlier, the Guan entities were parties to the Development Agreement as guarantors of SXG’s obligations.

13. Pursuant to the Development Agreement, SXG was required to complete the Sale Contract for the purchase of the Auburn land for $20 million (cl 4.1). Linfield agreed to make a “Deposit Loan” to SXG in instalments totalling $1 million (the amount of the deposit) (cl 5.2) and SXG agreed to pay the balance of the purchase price due under the Sale Contract on or before 19 June 2014 (cl 5.5). Linfield also agreed to advance an amount up to $5 million to assist SXG to complete the purchase if – which it did not – SXG requested, at least one month before 24 June 2014, that it do so (cl 5.6).

14. Subject to any extensions of time under cl 6.2 (which provided for the deferral of completion by agreement with the vendor and the prior written consent of Linfield), if SXG failed to complete the Sale Contract by 24 June 2014 it was required to repay the Deposit Loan within 5 Business Days of demand (cl  6.1). The Deposit Loan was also repayable within 5 Business Days of demand if the Contract was terminated or rescinded for any reason (cl 6.3) or if the contract was not completed by 24 December 2014 (cl 6.4).

15. If Linfield made demand for repayment of the Deposit Loan, the Development Agreement was automatically to terminate on the date of the demand (cl 6.5) and, pursuant to cl 6.6, SXG was required to pay to Linfield, in addition to repayment of the Deposit Loan, the project costs incurred by it to date and Linfield’s Project Management Fee (amounting to $1,150,000) calculated on the basis of a notional valuation of the project on the date of termination as at $23 million.

16. Linfield was to undertake the planning, design, construction and development of the project at its cost (cl 10); to perform project management services for a fee; and to provide development and marketing services (cl 14). Linfield and SXG were to share equally in Project Income, as defined in cl 1.1, after repayment to Linfield of the costs of the development (and subject to adjustments if, which in the present case it had not, Linfield had advanced money in accordance with cl 5.6).

17. SXG agreed that it “must not use (or agree to use) the Land as security for any purpose” including, without limiting the generality of the clause, that it must not grant any mortgage, charge or other encumbrance over the land (cl 7.1). SXG further agreed that it must not sell, assign, transfer, alienate or otherwise deal with the land other than for the mutual benefit of Linfield and SXG (cl 23.8).

18. The Call Option granted to Linfield under cl 18.6 of the Development Agreement was in the following terms:

18.6   Option

(a)   On the date of this agreement and in consideration of the sum of $1 paid by LFD [Linfield] to SXG (receipt of which is hereby acknowledged) SXG grants to LFD an unconditional Call Option.

(b)   LFD may exercise the Call Option if:

(1)   SXG does not comply with a Default Notice, if the Event of Default is capable of being remedied;

(2)   The Event of Default by SXG is not capable of remedy;

(3)   The Event of Default by SXG is an Insolvency Event.

(c)   The Call Option is exercised by LFD if it serves notice in writing on SXG stating that it exercises the Call Option because of one of the events specified in clause 18.6(b).

(d)   On completion of the transaction in clause 18.6(d), this agreement will be deemed to be terminated and the Participants will have no further claims on each other, except in relation to breaches or entitlements under this agreement occurring before the date of termination.

19. As indicated by cl 18.6(b), the happening of an “Insolvency Event” in relation to SXG, which was defined to include the appointment of an administrator to SXG, was an Event of Default triggering the ability of Linfield to exercise the Call Option.

20. As adverted to earlier, the Development Agreement contemplated that the Call Option might be exercised either before or after completion of the Sale Contract. If the Call Option was exercised after completion of the Sale Contract but before the relevant development approval had been obtained (which is what happened in the present case), Linfield was required, within 10 Business Days of service of the requisite notice under cl 18.6(c), to pay to SXG the sum of $20 million by unendorsed bank cheque (cl 18.8(b)). If the Call Option was exercised after the development had been approved, the option price was to be adjusted in accordance with cl 18.8(c) of the Development Agreement.

21. Pursuant to cl 23.10 of the Development Agreement it was agreed that Linfield had a caveatable interest and that it was entitled to lodge a caveat at any time after completion of the Sale Contract.

22. After entry into the Development Agreement, Linfield paid amounts totalling $700,000 (the first two tranches of the Deposit Loan) and incurred expenses in preparing a development application for the land, including architects’ and other fees in relation to the proposed development.

Involvement of ACFM as potential financier

23. The primary judge found (and the parties do not suggest otherwise) that by April 2014 it had become apparent that SXG did not have the resources to complete the Sale Contract (see [31] of his Honour’s reasons).

24. ACFM had earlier provided finance for another project with which Ms Guan and/or entities associated with her were involved (the Kensington Project). During April to June 2014, there were discussions between Ms Guan and representatives of ACFM and Linfield (to which I will refer in more detail later in these reasons – see [113]-[148] below) in relation to the proposed financing of the purchase by ACFM.

25. ACFM’s proposal for the provision of finance in relation to the Auburn project involved a structure whereby the Auburn land, on acquisition, would become an asset of a unit trust to be established called the Australia Capital Sunlink Property Fund (the ACSP Fund) and that ACFM and SXG (and/or other of the Guan entities) would acquire units in the trust.

26. In the course of those tripartite discussions: it was acknowledged by at least one of ACFM’s representatives (Mr Ouyang “Owen” Chen) that Linfield’s position was that the Development Agreement in place “must STAY” (see the contemporaneous note taken by Linfield’s managing director, Mr Ben Lin, of a meeting held at ACFM on 22 April 2014); ACFM was on notice of Linfield’s rights and SXG’s obligations under the Development Agreement; and it was contemplated that Linfield would enter into a new development agreement with the trustee of the ACSP Fund, the responsibility for the drafting of which documentation was to be assumed by ACFM’s lawyers (see Structure Paper signed on 2 June 2014) ([132] below). (References that follow to Mr Lin are to Mr Ben Lin, not to his father Mr Jally Lin.)

27. There were also some discussions during this period separately between Linfield and ACFM as to the possibility of ACFM financing Linfield’s acquisition of the property if Linfield were to exercise the Call Option. Again, I will refer to those discussions in more detail in due course (see [149]-[155] below).

23. Completion of the Sale Contract did not take place on 24 June 2014 (the date fixed under the Sale Contract). By agreement with the vendor the completion date was extended first to 24 July 2014 and then ultimately to 5 August 2014. Linfield’s consent was not sought to either extension, though it was on notice of and seemingly acquiesced in at least the later extension.

The Loan Agreement

29. On 26 June 2014, by which time there was already a default under the financing arrangements in relation to the Kensington Project, SXG and Shuangfu Development Pty Ltd (Shuangfu), jointly as borrower, entered into a loan agreement with ACFM (Loan Agreement). The facility limit was $45,018,000, of which $19 million was stated to be for the purchase of the Auburn land and the balance related to the refinancing of the Kensington project (to which I adverted briefly at [24] above).

30. The Loan Agreement provided for a standard interest rate at 12% with provision for increases referable to increases in the RBA cash rate and a default interest rate of 12% plus 1% for every week the facility was in default.

31. Under the Loan Agreement a first registered mortgage over the Auburn land was to be granted to ACFM (cl 16; Item 6A(b)), it being noted that the land would be held by the trustee of the ACSP Fund by no later than 8 July 2014 (cl 17).

32. The Loan Agreement provided for ACFM to have a 40% share of the returns received or receivable by the borrower in respect of the borrower’s total unit holding in the ACSP Fund at any given time (cl 7B; Item 4A).

Security documents entered into with ACFM

33. As security for the ACFM loan, SXG entered into a General Security Deed with ACFM, in accordance with cl 16 of the Loan Agreement and Item 6 of the Schedule thereto, under which ACFM was granted a fixed charge over all SXG’s other property (cl 2.1).

34. That ACFM was aware, at the time of entry into the loan and security agreements, of the prohibition on SXG mortgaging the Auburn land, other than in favour of Linfield, is clear from the advice it had earlier received in a letter dated 3 June 2014 from its solicitors, Baker & McKenzie. Relevantly, ACFM was advised, following their solicitors’ review of documents provided to them by Mr Howard Ting of ACFM on 26 May 2014, including the Structure Paper and the Development Agreement, that:

●   SXG has granted a Call Option to Linfield under this Agreement, which allows Linfield to call for the transfer of the property to it, in circumstances where SXG defaults in its obligations under the Agreement, commits an act of insolvency or fails to comply with a default notice issued under the Agreement. This can be exercised prior to Completion of the Contract or after Completion.

…

●   There are a number of provisions in the Agreement that arise on Termination, which we will need to ensure do not trigger (eg. payment of Linfield’s project management costs as at that date) when an agreement to terminate this arrangement and enter into a new arrangement is reached.

●   The Agreement currently prohibits SXG mortgaging the property, other than in favour of Linfield who is permitted to mortgage the property to secure project finance. This will need to be addressed to the extent that mortgage arrangements are proposed to be used as part of the Completion steps.

●   Termination of the Agreement by mutual agreement is contemplated, and provided Linfield agrees to the proposed termination and replacement of this Agreement with a new development agreement, there is nothing in the existing arrangements that should prevent that.

35. Under the Loan Agreement, it was a condition precedent to the drawdown of funds for the Auburn purchase that SXG deposit the sum of $4 million no later than 30 June 2014 to contribute to the settlement and to cover costs for administering, managing and developing the property (cl 18); and that SXG agree to pay any interest to the vendor for possible delayed settlement of the Auburn land.

36. On 18 July 2014, ACFM and SXG entered into a Deed of Amendment and Restatement of the Loan Agreement (Deed of Amendment), pursuant to which SXG executed transfers with respect to the land (the Transfers) in favour of Shuangxing Holding Pty Limited (SXG Holding) to be held as an asset of the ACSP Fund; SXG Holding executed a mortgage over the Auburn land in favour of ACFM as mortgagee (the SXG Holding Mortgage); and SXG and SXG Holding delivered the Transfers and the SXG Holding Mortgage to ACFM in registrable form (subject to payment of stamp duty) (see cl 17(b) of the Loan Agreement and the Deed of Amendment; and Items 6(d) and 6A(b) of the Schedules thereto).

37. The Guan entities and ACFM entered into a Deed of Guarantee and Indemnity at the same time, under which the former guaranteed the obligations of SXG and SXG Holding under the Loan Agreement and other documents.

Completion of purchase of the Auburn land and subsequent events

38. Completion of the purchase of the Auburn land occurred on 5 August 2014. Linfield became aware of that proposed re-scheduled completion date initially through contact with the vendor’s solicitors. After a query had been raised with SXG’s solicitors as to this, Linfield’s solicitors were notified on 22 July 2014 that completion was expected to occur on 5 August 2014. SXG’s solicitors’ letter of 22 July 2014, in which that notification was made, enclosed a copy of the following correspondence with the vendor’s solicitors: their letter of 21 July 2014 to the vendor’s solicitors in which they had advised that “all lending procedures” had been finalised but that the financial adviser would not be able to settle until 8 August 2014; and their subsequent letter of 22 July 2014 advising that their client could actually settle earlier on 5 August 2013 and preferred “to settle all account on the date of settlement as funding is restricted for the time being”.

39. Linfield was not provided with any detailed information at that stage as to the arrangements for the funding of the purchase (though, as will be seen in due course, it had received from ACFM an unsigned copy of a loan agreement on 26 June 2014). By letter dated 24 July 2014, SXG’s solicitors notified Linfield’s solicitors simply that:

…completion will occur on 5 August 2014, all legal formality and obligation will be conducted and complied with as much as practicable. We do not believe your client needs to scrutinise further.

40. On settlement, ACFM advanced the sum of $20,360,364.14 to enable SXG to complete its purchase of the Auburn land and, as mortgagee, ACFM received a transfer in registrable form in respect of the land. That transfer was not, however, lodged for registration on 5 August 2014 (nor were any of the documents by which the land was to be on-transferred to the trustee of the ACSP Fund).

41. In advance of the 5 August settlement date, Linfield’s solicitors had prepared a caveat over the land. Mr Lin deposed that this was the only way that he understood Linfield could protect its rights and interests (see his affidavit at [211]). That caveat was lodged for registration on 6 August 2014 (AI792023) (the Caveat). In the Caveat, Linfield claimed an estate or interest in the land as “mortgagee and grantee of a call option”. Registration of Linfield’s Caveat in advance of the security documents in favour of ACFM prevented ACFM’s mortgage becoming registered.

42. On 15 August 2014, SXG’s solicitors confirmed to Linfield’s solicitors that completion of the sale had taken place. They made allegations of breach by Linfield of the Development Agreement that were said to amount to a repudiation of that agreement but expressly noted that there was no acceptance of that repudiation. There followed further allegations by SXG, this time of misrepresentations having been made by Linfield to Ms Guan. The respective allegations of breach/misrepresentation were denied by Linfield.

43. On 4 November 2014, with Linfield’s consent, the transfer of the land to SXG Holding was registered. Perhaps not surprisingly, given the absence of any sign of the proposed development agreement with the new registered proprietor of the land (SXG Holding), Linfield did not consent to the registration of ACFM’s mortgage.

44. On 20 November 2014, an administrator was appointed to SXG, as also were receivers and managers. On the same day an administrator was appointed to Shuangfu.

Commencement of proceedings and exercise of Call Option

45. Linfield commenced its proceedings in the Equity Division of the Supreme Court by way of summons. On 25 November 2014, leave was granted pursuant to s 440D(1)(b) of the Corporations Act 2001 (Cth) for Linfield to commence the proceedings against each of SXG and Shuangfu.

46. On 20 January 2015, at which time no development approval had yet been given in respect of the land, Linfield served a Notice of Exercise of Option pursuant to cl 18.6(c) of the Development Agreement, expressly relying on the appointment of the administrator, or alternatively of the receivers and managers, to SXG as an Insolvency Event as defined under that agreement. No transfer was provided by SXG, as required pursuant to cl 18.8(a) of the Development Agreement. Nor was an unendorsed bank cheque tendered within the requisite period by Linfield. There was, however, evidence at the hearing (in respect of which confidentiality orders were made by the primary judge) of a loan facility having been arranged in early December 2014 for the purpose of financing the acquisition by Linfield of the Auburn land pursuant to the Call Option; of those arrangements being revised in February 2015; and also of a revised offer of loan facility for that purpose having been provided to Linfield in July 2015.

47. SXG went into liquidation on 2 March 2015.

Proceedings at first instance

48. The matter in due course proceeded by way of pleadings. An amended statement of claim was filed on 23 October 2015, in which Linfield sought an order for specific performance of cl 18.8(a) of the Development Agreement ([33]). An action for damages for breach of contract was also pleaded against the Guan entities, but only if the Court declined to make an order for specific performance (see [34]-[36] of the amended statement of claim). In the alternative, a constructive trust claim was pleaded against the Guan entities but again only if the Court declined to make an order for specific performance (see [37]-[40]).

49. In that alternative constructive trust claim, Linfield alleged that SXG held its interest in the Auburn land subject to a constructive trust in favour of Linfield: first, to the extent of the Contributions (defined in the pleading as the liabilities incurred and moneys “made” – sic., scil paid – by Linfield in reliance on undertaking the project with SXG and the terms of the Development Agreement – see [38] read with [27]-[28]) and the increase in the value of the Auburn land ([40(c)(i)]); or to the extent that the Contributions have increased the value of the Auburn land ([40(c)(ii)]); or to the extent of the value of the Contributions, together with interest and costs ([40(c)(iii)]). Linfield also claimed the value of the Contributions and an entitlement to an equitable charge or lien over the Auburn land to secure the value of the Contributions together with interest and costs ([40(d)]).

50. In the context of the constructive trust claim, Linfield pleaded (at [39]) that ACFM accepted the mortgage (from SXG) with knowledge of the matters pleaded at [23], namely: the terms of the Development Agreement, including the Call Option; Linfield’s interest in the Auburn land as a consequence of the Call Option; and that Linfield had incurred liabilities and expended moneys under the Development Agreement. No relief was sought specifically against ACFM.

51. ACFM, in its defence to the amended statement of claim, asserted, among other things, that: as at 26 June 2014 and at least until 5 August 2014 it understood that Linfield had consented to it taking a first ranking mortgage over the Auburn land and did not have or claim to have an interest in the Auburn land that it would assert against ACFM ([26(b)]); by reason of that, it did not have notice of the Call Option ([26(c)]); and by reason of certain other matters (set out at [23(d),(e) and (f)]), Linfield had provided its consent to ACFM taking a first ranking mortgage over the Auburn land ([26(d)]). ACFM did not admit that SXG was entitled to specific performance of cl 18.8 of the Development Agreement ([33]); denied the allegation that it accepted the mortgage with the knowledge alleged by Linfield ([39]); and denied that Linfield was entitled to the relief claimed against ACFM “or any other relief” ([41]). (On the appeal, as noted earlier, ACFM maintained that its resistance to the enforcement of the Call Option was only as to the terms on which the option could be exercised.)

52. ACFM further pleaded that if, which was denied, Linfield had an interest in the Auburn land in priority to ACFM’s equitable mortgage, Linfield was estopped from departing from (among others) a representation allegedly made by Linfield to the effect that if ACFM financed the purchase Linfield would not assert any of its rights under the Development Agreement against ACFM irrespective of whether a deed of release had been entered into in relation to that agreement (see [42]-[44] of the defence).

53. Further, ACFM raised a claim, based on alleged misleading and deceptive conduct on the part of Linfield, to be entitled to an order pursuant to ss 237(1) and 243 of Sch 2 of the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law) declaring that Linfield’s Call Option ranked behind its mortgage in priority (see [45] of the defence). It filed a cross-claim but did not challenge the primary judge’s dismissal of the cross-claim.

54. The Guan appellants’ defence to the claim made against them raised a variety of issues, including the allegations: that the Development Agreement was void or unenforceable ([23]); that, to the extent that it was valid and enforceable, the Development Agreement was terminated by mutual agreement on or about 2 June 2014 or abandoned on and from about that date ([20(c)]); that Linfield was estopped from asserting an entitlement to rely on such rights it had under the Development Agreement ([20(d)]); and that the Development Agreement was discharged by reason of their acceptance of Linfield’s repudiation ([20(e)]). The Guan appellants alleged that a series of representations had been made ([45]-[51]) giving rise to claims of misleading and deceptive or unconscionable conduct. A defence based on promissory estoppel was also raised. The Guan appellants pursued those matters in an amended cross-claim.

55. SXG’s defence was broadly a series of non-admissions, other than in respect of matters to which it did not plead at all or admissions as to matters relating to non-controversial matters such as: the identity of the parties, the purchase of the Auburn land, the lodgement by Linfield of its caveat and the fact that SXG had not delivered to Linfield a signed transfer of the land.

Primary judgment

56. At the outset I note that in these reasons paragraph references to the primary judgment are as taken from the version published on CaseLaw (that version having rectified the omission of one paragraph number from the certified copy of the judgment). The discrepancy is not material but it explains the different paragraph references in the respective parties’ written submissions.

57. The primary judge found (at [74]) that each of ACFM and Linfield acquired an equitable interest in the land upon completion of the Sale Contract on 5 August 2014. Although there was no express finding to this effect, it appears that his Honour accepted that ACFM’s equitable interest had arisen first on that day (since his Honour went on to determine whether ACFM’s interest ought be postponed to that of Linfield). His Honour noted the possibility that ACFM may have acquired an interest in the land at an earlier time, namely on 26 June 2014 when it entered into the Loan Agreement, but no finding was made to that effect. His Honour concluded that, even assuming that ACFM had acquired an interest on that earlier date, the merits as between Linfield and ACFM were not equal; rather, they favoured Linfield. In that respect, his Honour said (at [74]):

… To start with, the sequence of events that I have explained in paragraphs [47] – [65] above suggests that ACFM perceived an advantage in acting surreptitiously. In late June and July 2014, it commenced to depart from the basis upon which the parties had been proceeding since April. It was no longer interested in the negotiation of a new development agreement between SXG and Linfield or in arranging for the termination of their existing development agreement. And there was no explanation for this departure. One available inference is that ACFM perceived a commercial benefit in ignoring Linfield’s rights and ignoring the past course of dealing – in the hope or expectation that Linfield might retreat or be forced into a position of negotiating from a position of disadvantage.

58. I interpose to note that ACFM takes issue with the primary judge’s description of its conduct as surreptitious, as it does with the other epithets the primary judge attached to its conduct – such as, for example, the reference to ACFM acting “stealthily” (at [78]) (see ground 7 of its grounds of appeal).

59. His Honour considered (at [75]) that the forensic decision of ACFM not to read the affidavits of the two senior officers of ACFM who were involved in the relevant negotiations (Messrs Chen and Ting) enabled him more readily to draw an unfavourable inference against ACFM (citing SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Lloyd’s Rep 288 at 293 (Gleeson CJ and Handley JA)). The primary judge went on to say (at [76]-[79]):

The following facts tell against ACFM. They formed part of a written submission provided to ACFM on the first day of the hearing. The clarity with which Linfield’s responsive case on priority was set out made it unnecessary for there to be a formal pleaded reply. I did not require it and senior counsel for ACFM consented to this course. The case on priority between ACFM and Linfield was conducted by reference to those matters. I am satisfied that each has been established:

(a)   at all material times ACFM was aware of the existence and terms of the development agreement;

(b)   those terms included clause 7.1 by which SXG agreed that it ‘must not use (or agree to use) the Land as security for any purpose’ including, without limiting the generality of the clause, that it ‘must not grant any mortgage, charge or other encumbrance over the Land’. The terms also included clause 11.6 headed ‘Alienation of Interests’ and 11.7 headed ‘Mortgaging of Interests’;

(c)   ACFM had received specific advice from Baker & McKenzie on 3 June 2014 in relation to the development agreement and the constraints which that agreement presented for any involvement by ACFM;

(d)   ACFM was aware that Linfield had paid $700,000, representing 70% of the deposit on the property and had been working hard at its own expense to progress the development application for the project;

(e)   ACFM knew that Linfield expected that, if its development agreement were to be superseded, Linfield and ACFM would have to agree to the terms of a new development agreement as part of any new financing arrangement;

(f)   ACFM knew that Linfield expected that the terms of a new development agreement would be first agreed between the parties before a new financing arrangement;

(g)   ACFM entered into its loan and security arrangements with SXG in the knowledge that doing so entailed a breach by SXG of the existing development agreement and in circumstances where that development agreement had not been terminated nor the terms of a new development agreement agreed;

(h)   ACFM departed from the conventional basis upon which the parties had been proceeding, namely that any financial participation by ACFM which involved it taking security over the land would necessarily require formal termination of the existing development agreement and execution of a new development agreement on terms satisfactory to Linfield.

From a commercial perspective, and having regard to the evidence, it seems reasonable to infer that by late June 2014, ACFM had concluded that it did not want to share any profits from the proposed development with Linfield; did not want to reimburse Linfield for the substantial expenses which it had incurred; and wished to improve its own security and negotiating position as against Linfield. It chose to run the risk of taking a mortgage from SXG with knowledge that the grant of mortgage would constitute a breach of SXG’s obligation pursuant to clause 7.1 of its development agreement with Linfield.

ACFM acted stealthily - despite the candid discussions between Ben Lin, Howard Ting and Owen Chen in April and May 2014 and the apparent recognition by ACFM at that stage that it was necessary or appropriate for Linfield’s existing development agreement to be terminated and a new agreement entered into. And the unexplained absence of Howard Ting and Owen Chen from the witness box merely reinforced the inference of sharp practice. I accept Ben Lin’s evidence, which was plausible, and in the circumstances, understandable, that ‘ACFM gave Linfield comfort that it would be receiving a new development agreement’. He added, equally credibly in the circumstances, that he ‘trusted that ACFM would front up with the new development agreement’.

Having changed its mind, ACFM did not give Ben Lin full, frank and honest information, including advance notice, about the loan agreement on 26 June 2014, the amended loan agreement on 18 July 2014 and the proposed settlement on 5 August. When Ben Lin became aware that settlement had occurred, he caused Linfield to lodge a caveat preventing registration of ACFM’s mortgage. If he had been fully aware of the arrangements between SXG and ACFM before 5 August 2014, there might have ensued the very renegotiation of the development agreement on which the parties had embarked in apparent good faith in April. There was no necessarily insuperable obstacle to such a renegotiation from Linfield’s perspective. It was just a question of terms. But ACFM did not want to pay the price and instead attempted to ‘freeze out’ Linfield.

60. His Honour approached the priority question on the basis that the crux of Linfield’s case, though not pleaded as such, was an allegation of conventional estoppel, recording (at [80]) Linfield’s concluding contention in its case in reply that:

ACFM departed from the conventional basis upon which the parties had [been] proceeding, viz. that any financial involvement by ACFM involving it taking security over the Land would as a necessary component first require termination of the existing Development Agreement and agreement being reached with Linfield as to satisfactory terms of a new development agreement.

61. His Honour accepted (at [81]) that ACFM did not cause Linfield to enter into the Development Agreement in which its right to an interest in the land was embodied but held (at [82]) that ACFM’s conduct caused Linfield to act on a false premise and resulted in it suffering detriment.

62. Applying what was referred to as a broader, more overarching statement of principle than that circumscribed by the factors that had earlier been articulated by the primary judge in Circuit Finance Australia (Receivers and Managers appointed) (in Liq) v Panella (2011) 16 BPR 30,347; [2011] NSWSC 311 at [13], his Honour held (at [85]) that the facts of the present case were sufficient both to ground a conventional estoppel against ACFM and to justify Linfield’s equitable interest being treated as having priority over the interest of ACFM. In so doing, his Honour expressly adopted (at [83]) the approach set out by Bryson J in Cranston v CBFC Ltd (Supreme Court (NSW), Bryson J, 11 June 1993, unrep) at pp 30-31.

63. His Honour adopted (at [85]) Linfield’s submissions that: there was tangible conduct by ACFM which caused it to act or not to act on a false premise (referring to the test in Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326; [1983] HCA 30); from 2 June 2014 all parties proceeded on the conventional basis or footing that, if there were to be a new funding agreement put in place which would see ACFM or its nominated entity assuming some interest in the property, that would be on the basis set out in the Structure Paper signed on that date (see [132] below); and that the execution of the Loan Agreement on 26 June 2014 and subsequent amended documentation and related security documents represented a departure from that conventional basis by both SXG and ACFM in circumstances that were relevantly unconscionable (if that be a necessary element for conventional estoppel) and obviously caused a detriment to Linfield.

64. His Honour concluded (at [86]) in this regard that:

I add, to the extent that it is necessary to do so, that the facts that I have found demonstrate unconscionability by ACFM. I acknowledge that in principle, parties to commercial arrangements do not have to safeguard the interests of each other. ACFM could have made clear from the outset that it was not interested in the renegotiation of Linfield’s development agreement with SXG and that, if SXG chose to deal with ACFM in breach of the development agreement, Linfield would have to look to its remedies against SXG. But that would have been impractical and ACFM adopted a different course – on which it proceeded until late June. And Linfield acted to its detriment. ACFM should not now be permitted to resile from the basis on which the parties had been dealing with each other. The equities are not equal. In my view, ACFM has forfeited the priority to which its equitable mortgage and charge would otherwise have been entitled.

65. His Honour then proceeded (at [87]-[89]) to deal with ACFM’s defence and cross claim based on estoppel and misleading and deceptive conduct, saying that there was no factual basis for a finding of such conduct against Linfield and that ACFM did not rely upon Linfield’s representation and conduct to act to its detriment. There is no cross-appeal from those findings.

66. As to the penalty argument propounded by the Guan appellants, his Honour found it difficult to see anything at all extravagant or unconscionable about the terms or operation of the Call Option (at [91]). His Honour made clear that he was assessing whether the clause was penal in character as at the time of entry into the contract (citing Allsop CJ in Paciocco v Australia and New Zealand Banking Corporation Ltd (2015) 236 FCR 199; [2015] FCAFC 50 at [95] (Paciocco (FCAFC)). The primary judge concluded (at [94]) that, on its face, and as a matter of substance, cl 18 was fair and reasonable and that both Linfield and SXG stood to benefit from it; a conclusion which alone led his Honour to reject the penalty argument.

67. His Honour went on to add (at [97]) that, in any event, he was not satisfied that the value of the Auburn land was more than $20 million as at 20 December 2013. His Honour noted (at [97]) that the valuer called by the Guan appellants (Mr Sukkar) had valued the land (on a highest and best use basis) between $21.7 million and $24.3 million as at that date, based on a risk factor rate of 22% but that Mr Sukkar accepted that a reasonable and competent valuer could equally have chosen a risk factor rate of 25%, which would have produced a valuation of between $19.7 and $22.3 million. His Honour considered that this also was alone fatal to the penalty case – “at least, the case based on the value of the land at the time of entry into the agreement”.

68. His Honour also considered (at [98]) that there were other difficulties with Mr Sukkar’s valuation – “in particular his methodology, not to mention his unwarranted enthusiasm” – and did not consider it appropriate to value the land (as Mr Sukkar had done) on a highest and best use basis in December 2013 “given the numerous uncertainties that pertained to the development”. Even if such a methodology were appropriate, his Honour said (at [101]) he was not satisfied that there was a proper foundation to accept several of the critical assumptions on which Mr Sukkar’s report relied.

69. His Honour considered (at [110]) that most of the remaining issues raised by the Guan appellants could be resolved on the basis of his findings of fact and conclusions as to credibility. On the issue of credibility, his Honour was scathing of Ms Guan’s credit throughout. By contrast, as to Mr Lin the primary judge said (at [16]):

Ben Lin was Linfield’s only factual witness and is its sole director. He is obviously a clever young man. Mrs Guan said he was ‘too smart’ but I do not agree. He was a good witness who was cross-examined over three hearing days and remained at all times cool-headed, articulate, impressive and precise. The principal effect of his lengthy cross-examination was to reinforce his evidence and enhance its plausibility. The manner in which he gave his evidence and the content of the many emails which he sent, suggest that he is cautious, prudent and scrupulously careful.

70. As to the construction issue raised in relation to the guarantee (which turned on the use of the word “guarantors”), his Honour considered that there was no ambiguity in the relevant clause (cl 21.1) and held (at [114]) that, in context, the word “guarantors” referred both to Ms Guan (the “Guarantor”) and to the entities defined in the Development Agreement as the “Corporate Guarantors”.

71. Finally, as to relief, his Honour said (at [116]):

Nor is there any occasion for denying Linfield the relief to which it is entitled, or for qualifying that relief, because ACFM advanced $20,360,364 to SXG. The insolvency of SXG means that, after payment of the $20 million due by Linfield pursuant to the exercise of its option, and the deduction of expenses, ACFM will be out of pocket. But as I have reiterated, ACFM is the author of its own misfortune. And I have found that it acted unconscionably. Its sharp practice was designed to advance its own commercial interests and prejudice those of Linfield. It has lost its priority and must bear the consequences. There is no occasion for equity to ameliorate those consequences.

Appeals

72. At the outset of the hearing of the respective appeals leave was granted pursuant to s 500(2) of the Corporations Act 2001 (Cth) to each of ACFM and the Guan entities to proceed against SXG in liquidation. A similar application by the Guan entities in relation to Shuangfu was not pressed on the basis that the outcome of the appeal will have no practical significance to that entity. SXG filed a submitting appearance in the Guan entities’ appeal on 31 August 2016, submitting to the making of all orders sought and the giving or entry of judgment in respect of all claims made, save as to costs. It filed an unconditional appearance in the ACFM appeal but took no active role in that proceeding other than to make written submissions after judgment was reserved as to the proposed orders ultimately sought by ACFM.

73. I turn now to the respective appeals, in the order in which they were argued before the Court.

ACFM appeal

74. In its written submissions, ACFM described its appeal as concerning the priority between two competing equitable interests in the land, namely, its interest under the unregistered charge and mortgage over the land granted to it by SXG and Linfield’s competing interest arising pursuant to the Call Option granted by the Development Agreement.

75. In its oral submissions, ACFM stressed that this was not a competition between ACFM and Linfield about legal title to the Auburn land nor was it a contest between Linfield and anyone claiming an interest in the fee simple in the land (T 5.15). Rather, ACFM maintained that the issue was as to Linfield’s ability to obtain the fee simple to the land “without recognising that it was only able to do that because ACFM had advanced the purchase price on terms that it receive interest and that its interest be secured” (T 5.38). Such a stance sits somewhat uncomfortably with ACFM’s contention that its equitable interest should not have been postponed to that of Linfield, since if its mortgage was, and remained, entitled to priority then the consequence would be that it could register and enforce that mortgage against the Auburn land for the whole of the sum secured by the mortgage (see the discussion at T 24.19 – 35). Since ACFM’s unregistered mortgage also secures funds provided by it in relation to the Kensington Project (in which Linfield has no involvement and in respect of which SXG was already in default at the time the ACFM mortgage was granted), if ACFM’s interest as mortgagee arose earlier in time (as is the effect of his Honour’s findings) but (contrary to his Honour’s conclusions) retained its priority, then Linfield would be placed in the position where, in order to obtain unencumbered title to the Auburn land, it would (or might, depending on the composition of any then outstanding debt for which the mortgage stands as security) need to discharge debts owing by SXG relating to the Kensington Project.

76. The grounds on which ACFM appeals are as follows:

1.   The primary judge erred in finding that the First Respondent (Linfield) acquired an equitable interest in the property known as … (the Auburn Land) upon completion of the contract for sale of the Auburn Land on 5 August 2014.

2.   The primary judge ought to have found that the equitable interest asserted by Linfield in support of its claim for specific performance was acquired on either:

(i)   20 January 2015 when Linfield purported to exercise a call option to purchase the Auburn Land; or

(ii)   alternatively, on 20 November 2014 after the appointment of administrators, receivers and managers to Shuangxing Development Pty Ltd; or

(iii)   alternatively, after the Appellant (ACFM) acquired its equitable interest in the Auburn Land as equitable mortgagee and chargee.

3.   The primary judge erred in finding that ACFM engaged in disentitling conduct such that Linfield’s later equitable interest in the land, arising from its call option, has priority over ACFM’s earlier interest as equitable mortgagee and chargee.

4.   The primary judge erred in finding that Linfield need only tender the sum of $20 million in order to exercise its call option.

5.   The primary judge ought to have found that, if ACFM did engage in disentitling conduct, then nevertheless Linfield’s right to specific performance was conditional upon it compensating ACFM for advancing the sum of $20,360,364.14 on 5 August 2014 to complete the purchase of the Auburn Land.

6.   The primary judge erred in drawing adverse inferences against ACFM by reason of ACFM not calling witnesses.

7.   The primary judge erred in finding that:

(i)   ACFM “perceived an advantage in acting surreptitiously”,

(ii)   ACFM “acted stealthily”;

(iii)   Mr Chen of ACFM “was not speaking honestly” to Mr Lin of Linfield;

(iv)   ACFM provided a “disingenuous” response to Mr Lin; and

(v)   ACFM engaged in “sharp practice”,

in circumstances where:

(i)   no submissions to that effect were made by Linfield; and

(ii)   the primary judge did not inform ACFM that he was contemplating making such findings.

77. By notice of contention filed on 11 November 2016, Linfield contends that the primary judge’s decision ought be affirmed:

… on the basis that (and the primary judge should alternatively have held that) the equitable interest of the first respondent in the Auburn Land arose on entry into the Development Agreement, and took priority for this reason over that of the Appellant.

Grounds 1 and 2 of ACFM’s notice of appeal; ground 1 of Linfield’s notice of contention – the date on which Linfield’s equitable interest arose

78. The first two grounds of appeal, and Linfield’s notice of contention, raise the issue as to the date on which Linfield acquired its equitable interest in the Auburn land.

79. The primary judge found (at [72]-[73]) that Linfield’s equitable interest arose on completion of the Sale Contract on 5 August 2014 because, from that time, Linfield had the right, enforceable in equity, to require SXG to deliver to it a duly signed transfer of the land in registrable form free from mortgage, charge or encumbrance upon the payment of $20 million.

80. His Honour accepted (at [68]) that, generally speaking, a conditional call option would create an interest in land at the time of the grant of the option and it would not be necessary to wait until the condition had been triggered or the option exercised for the equitable interest to arise. His Honour also accepted (at [69]) that Linfield had acquired a valuable contractual right prior to completion of the Sale Contract, which was enforceable in equity by injunction against SXG.

81. However, his Honour did not accept that, in circumstances where the Call Option had been granted by SXG prior to completion of its purchase of the Auburn land, Linfield had an equitable interest in the land which would have entitled it to restrain the registered proprietor (i.e., RSL Custodian Pty Ltd) from dealing with the land if it were otherwise justified in so doing (see [69]-[70]), such as where there had been some breach by SXG of the Sale Contract and a consequent termination of that contract.

82. In terms of the description given by White J (as his Honour then was) of the contingent equitable interest of the grantee of a call option from the registered proprietor (in GPT Re Ltd v Lend Lease Real Estate Investments Ltd (2005) 12 BPR 23,217; [2005] NSWSC 964 at [62]), the primary judge in the present case said (at [71]) that no equitable interest in the land had been carved out of or imposed on the registered proprietor’s legal estate.

ACFM’s submissions

83. ACFM does not dispute that, as from the time that Linfield exercised the Call Option on 20 January 2015, Linfield acquired an equitable interest in the land. Its principal contention is that this is the earliest time that Linfield’s equitable interest could have arisen because until a valid exercise of the Call Option (in accordance with cl 18.8 of the Development Agreement) Linfield would not be entitled to an order for specific performance of the kind claimed in the proceedings, namely, an order that SXG deliver up to it an executed transfer in respect of the land. ACFM says that it was not until then that Linfield’s interest was commensurate with the interest for which it sought relief in the proceedings.

84. ACFM’s alternative contention (see ground 2(ii)) is that his Honour ought to have found that Linfield’s equitable interest was acquired on 20 November 2014 after the appointment of administrators, receivers and managers to SXG. That alternative contention is based on that which ACFM accepts is a possibility, namely, that, since cl 18.6(b)(3) of the Development Agreement permitted Linfield to exercise the Call Option after the appointment of an administrator to SXG, from that time a court of equity would have granted Linfield relief of a kind such as to give rise to an equitable interest in the land.

85. ACFM argues that the primary judge (at [72]) wrongly equated Linfield’s interest, for the purposes of the priority contest, with its broad contractual right to lodge a caveat after completion of the Sale Contract. It seeks to distinguish the cases referred to by the primary judge (at [68]) in support of the general proposition that a conditional call option creates an interest in the land at the time of the grant of the option (Jessica Holdings Pty Ltd v Anglican Property Trust Diocese of Sydney (1992) 27 NSWLR 140; Re Henderson’s Caveat [1998] 1 Qd R 632; Re Premier Freehold Pty Ltd’s Caveat [1981] Qd R 547; Forder v Cemcorp Pty Ltd (2001) 51 NSWLR 486; [2001] NSWSC 281; GPT Re; Lend Lease Real Estate Investments Ltd v GPT Re Ltd [2006] NSWCA 207; Radoman Pty Ltd v Vexapu Pty Ltd (2008) 13 BPR 24,903; [2008] NSWSC 8) on the basis that in those cases the condition to which the option was subject was one which the parties were obliged to bring about or which it was contemplated would be brought about by the parties – as opposed to the present case where the option was conditional upon events the occurrence of which it was the objective intention of the parties to avoid (relevantly, the financial failure of SXG).

323. As the High Court noted (at [21]) in Ringrow, there are cases in which the penalties doctrine has been applied in such a situation. MGL notes (at [18-100]) that “the analysis typical in the case of a secondary stipulation whose subject is money must be adjusted before being applied in a case of a secondary stipulation about particular items of property”. But there is a difficulty here. As also pointed out in MGL (at [18-220]) the penalty doctrine “focuses attention exclusively on the penal stipulation and its purpose” whereas the doctrine of relief against forfeiture “calls attention to the forfeiture, how it occurred, its effects, and the propriety of allowing it to stand”. In circumstances where the former doctrine is sought to be applied in factual circumstances that also might attract the latter doctrine, a tension arises. The penalties doctrine requires characterisation of an impugned stipulation by reference to the circumstances as at the time of entry into the contract (Dunlop at 86; Paciocco (FCAFC) at [95]; [103]; [147]; [148]; [173]; [187]; Paciocco (HCA) at [62]; [169]; Arab Bank at [74]) but the forfeiture doctrine focuses upon the nature of a forfeiture which occurs ex hypothesi after the time of entry into the contract.

324. The question then becomes: if the penalties doctrine is applied where the alleged additional burden which is imposed on a party is a transfer of property (forfeiture in the looser sense used by the Guan appellants) rather than money, does the traditional approach to timing apply? In other words, is the Court confined to looking at the circumstances and value of the relevant property only as at the date of entry into the contract?

325. In Ringrow, assuming that the penalties doctrine applied and also assuming certain factual findings were made out, the High Court noted (at [21]) that “one relevant comparison [in assessing whether the impugned stipulation was penal] would be between the price payable … on retransfer … and the actual value of what is transferred”. Applying that approach to the facts, the Court suggested (at [21]) that “a suspicion would arise that what was retransferred might be worth more than the price to be paid for it”. However, the Court immediately recognised (at [21]) that “a mere difference is not enough, let alone a suspicion of a difference” as the comparison called for “something ‘extravagant and unconscionable’ in the value of what is transferred compared to the price to be received”.

326. In my opinion, the approach in Ringrow applies to the present case. Even assuming that it is permissible (when applying the penalties doctrine) to look in hindsight to the actual value of the Auburn land at the time when the impugned stipulation is to operate, or to look prospectively at what its value would then likely be, it is not sufficient that the impugned stipulation be lacking in proportion – it must be “out of all proportion” (Ringrow at [32]). That is not the case here, for the reasons I explain in dealing with grounds 10(a) and 11(a)-(d) below.

327. Furthermore, the remarks in Ringrow must now be viewed in light of the decisions of Andrews and the Paciocco (HCA). Those decisions emphasise the importance of characterising a penal stipulation as at the time of entry into the contract. In Arab Bank, McDougall J (with whom Gleeson JA and Sackville AJA agreed) identified (at [74]) the following proposition as having been confirmed by the majority in Paciocco (HCA):

The analysis is to be made at the time, and taking into account the circumstances applicable, when the contract was made; not at the time of breach; the analysis is prospective, not retrospective (or as is said in some judgments, is ex ante, not ex post).

330. In light of this, any contention that the primary judge erred in concluding that the question as to whether the clause constituted a penalty was to be assessed by reference to the circumstances pertaining at the date of entry into the Development Agreement must be rejected. Whether his Honour could properly have taken into account events beyond that date would depend on whether, as the authors of MGL postulate, the analysis typical in the case of a secondary stipulation whose subject is money should here have been adjusted before being applied in a case of a secondary stipulation about particular items of property. I note that both Arab Bank and Paciocco (HCA) were penalty cases in which a stipulation concerning money was impugned. They were not cases in which a stipulation required the transfer of real property pursuant to a call option.

331. In any event, even if the primary judge could be said to have erred in looking only to the circumstances pertaining at the date of entry into the Development Agreement and no later (grounds 12(a)-(b)), I am not convinced that the impugned stipulation in this case was out of all proportion to any legitimate interest that Linfield had in enforcement of the Development Agreement (grounds 10-11).

332. Accordingly, grounds 12(a)-(b) are not made good.

333. As to the complaints made in relation to the primary judge’s non-acceptance of Mr Sukkar’s valuation evidence, I note that Mr Sukkar valued the Auburn land as at December 2013 at between $21.7 million and $24.1 million; as at June 2014 at between $28.4 million and $31.2 million; and as at November 2014 between $35.85 million and $39.6 million. The primary judge was not satisfied on the evidence that, as at 20 December 2013, the value of the Auburn land was more than $20 million (at [97]). His Honour reached that conclusion on the basis of Mr Sukkar’s concession in cross-examination that reasonable minds could differ as to the risk factor rate to be chosen and that Mr Sukkar had accepted that a reasonable and competent valuer could equally have chosen a rate of 25% (which would have brought the valuation of the land down to between $19.7 million and $22.3 million) (at [97]).

334. As to the first of the complaints made by the Guan appellants, I do not read the primary judge’s reasons as amounting to a rejection of Mr Sukkar’s opinions on the basis of a comparison of the respective experts’ experience. His Honour certainly noted (at [100]) that Mr Rowlands was significantly more experienced than Mr Sukkar but, as I read his Honour’s reasons, the preference for the former’s opinion as to the value of the land at December 2013 was based on his Honour’s conclusion as to the more appropriate methodology for valuing the property and the concession made by Mr Sukkar that a reasonable and competent valuer could equally have chosen a risk factor rate that would have led to a much reduced valuation.

335. As to the second of the complaints, the primary judge identified (at [101]) a number of matters in respect of which Mr Sukkar’s report rested on critical assumptions (time for development approval, number of units that might be approved, the adoption of a 22% risk factor, the internal rate of return, the existence of pre-sales, and the impact of flooding and the easement). His Honour said (at [101]) he was not satisfied that there was a proper foundation to accept several of those assumptions.

336. True it is that the primary judge did not proffer reasons for his lack of satisfaction as to each of the matters listed as included in those critical assumptions. It is relatively clear, however, that the basis on which his Honour expressed a lack of satisfaction was that, as at December 2013, there were “numerous uncertainties that pertained to the development, including the absence of development approval” ([98]). His Honour went on to say (at [98]) that: “[i]nnumerable possibilities and countless combinations and permutations relating to design, layout, density and cost remained to be resolved”. His Honour also explained why he was not satisfied as to the appropriate level of risk factor (namely that reasonable experts could conclude otherwise). In those circumstances the complaint as to adequacy of reasons cannot be sustained. As to the complaint in relation to the lack of explanation for a finding as to the impact of his Honour’s view as to those assumptions on the valuation at November 2014, this did not arise if (as I consider to be the correct view) the question whether the clause was penal in nature was to be assessed as at the date of entry into the Development Agreement.

337. Finally, as to the third of ACFM’s complaints (namely, the criticism of Mr Sukkar’s reliance upon the highest and best use valuation methodology), the fact that Mr Rowlands accepted that the methodology was a permissible one to adopt is not determinative of the issue. The primary judge explained why, as at December 2013, he did not consider it appropriate for such a methodology to be used. I am not persuaded that this was an incorrect conclusion to be reached on the evidence, bearing in mind that it was supported by Mr Rowlands’ view as to the essential weakness in that methodology.

338. As to Mr Sukkar’s reliance on comparable developments to reach an ‘as is’ site value (on the assumption there was no development approval), again this was a question of weighing the expert evidence.

339. While the primary judge’s reasons were brief, it was not necessary for the purposes of the enquiry before him that the primary judge determine a precise value for the land as at December 2013; nor was his Honour asked to do so in the context of any assessment of damages (as the Guan appellants point out). What is relevant is that there was evidence on which his Honour could reasonably conclude that, as at the time of entry into the Development Agreement, the price at which the Call Option was exercisable (if exercised prior to the grant of development approval) was not so “extravagant and unconscionable” or “out of all proportion” in the relevant sense such as to warrant a conclusion that the Call Option was penal in its operation.

Grounds 10 and 11

Guan appellants’ submissions

340. Going back to the penalty issue, the Guan appellants point to the fact that the relevant clause (variously identified as cl 18.6 or cl 18.8) might have been triggered by any breach of the Development Agreement, however trivial, subject only to the Default Notice procedure. They argue that the transfer of the property required by that clause was unrelated to the damage that might be suffered by Linfield on the occurrence of such an event of default.

341. They further argue that where the Call Option was exercisable under cl 18.8(b) (that is, before completion of the Sale Agreement) this was in circumstances where Linfield had security under cl 9 for whatever sums might be payable to it under the Development Agreement and where Linfield retained any accrued right to sue for damages against SXG and the Guarantors pursuant to cl 18.6(d). The Guan appellants refer to the analysis by Kiefel J (as her Honour then was) in Paciocco (HCA) (at [21]) as to the history of equity’s intervention in this area and emphasise that historically it was the availability of compensation which generated the equity upon which the court intervened. They argue that in the present case the ability to appropriate SXG’s interest as registered proprietor was an additional right conferred on Linfield independent of any claim for damages and argue that the availability of compensation was such that equity could properly intervene.

342. Reference is made to Luu v Sovereign Developments Pty Ltd (2006) 12 BPR 23,629; [2006] NSWCA 40 where Bryson JA considered (at [31]) that a special condition which required that, on default, the purchase price be augmented by 10% had no discernible connection with damages or pre-estimate of damage flowing from the default; his Honour there noting that the same sum was payable on the occurrence of defaults different kinds, some of which might occasion only trifling damage.

343. The Guan appellants place considerable weight on the value of the Auburn land for development purposes and on the comparison between the option price payable prior to completion and how the option price was to be calculated if the Call Option were exercised after development consent had been obtained (cl 18.8(c)). They point to the significant development contemplated by the Development Agreement and argue that at the time of entry into the Development Agreement the parties must have contemplated that a substantial period might elapse before the development approval was granted and that the value of the Auburn land might increase in the meantime. They refer in this regard to the uncontradicted evidence of Mr Sukkar to the effect that the market was rising as at December 2013.

344. The Guan appellants point to the lack of a mechanism, in circumstances where the Call Option was exercised prior to completion of the Sale Contract, to compensate SXG for the loss of the true value of its interest in the land as amounting to the imposition of an additional detriment on SXG and the extraction of a corresponding additional (potentially windfall) benefit for Linfield.

Linfield’s submissions

345. Linfield emphasises the high hurdle that it has been recognised must be met in order to set aside a commercial bargain, because it is an exception to freedom of contract (referring to what was said by Middleton J in Paciocco (FCAFC) at [400]-[401]). In that case, Allsop CJ referred (at [147]) to “the prospective assessment of compensation commensurable with the interest of the obligee protected by the bargain” (see [95], [103], [148] and [187] of his Honour’s reasons). Thus Linfield submits that it is not a question of proving damage from a particular breach after the event, that being the basis on which it says the Guan appellants proceeded before the primary judge.

346. Linfield also emphasises that the relevant contractual provision will not be a penalty (at law or in equity) unless it is established by the party contending that it is a penalty that the provision was “extravagant and unconscionable” in amount in comparison with the greatest loss that could be conceivably proved (Dunlop at 86-87), namely something that is “out of all proportion” to the potential loss (Ringrow at [32]; reaffirmed Paciocco (HCA) at [32], [54], [57], [69], [154] and [156]).

347. Linfield argues, by reference to Mr Sukkar’s valuation of the land as at December 2013, that the price payable on exercise of the Call Option prior to completion of the Sale Contract was not “out of all proportion” to Linfield’s greatest potential loss. It points to its obligations as at the date of the grant of the Call Option (to pay $1,000,000 by way of Deposit Loan for the deposit; to advance a further loan up to a maximum of $5,000,000 if called upon to do so within a specified period; and to incur expenses incurred in the preparation of the development application and conduct of the project (which were estimated at $2,068,078 – see Mr Lin’s affidavit 11 December 2015 at [68])). Thus Linfield argues that, accepting the top end of the range of values assessed by Mr Sukkar ($24,100,000) as at December 2013, Linfield’s prospective loss on the happening of the insolvency event was that it would be obliged to pay $20,000,000 on exercise of the Call Option together with the above expenditure (an amount of up to $3,968,078); or, if the lower end of the range were to be taken, the difference would be an amount of $6,368,078.

348. Linfield argues that there was thus no potential windfall gain to it as a consequence of the Call Option rights as at the date of entry into of the Development Agreement. Linfield points out that the analysis becomes even less favourable to it if Mr Sukkar’s risk rate factor is increased to 25% and if the “highest and best use methodology” is not adopted.

349. Linfield argues that the penalty doctrine is not concerned with whether SXG was or would be adequately compensated “for the loss of its rights as owner” (referring to the Guan appellants’ submissions at [47]; [49]); rather, the question is whether the clause provides an additional stipulation which is out of all proportion to Linfield’s maximum conceivable loss. In that regard, it submits that opinions expressed by Mr Lin and others as to the value of the Auburn land after entry into the Development Agreement are irrelevant.

350. Linfield argues that the formula in cl 18.8(b) (operative where there was no development application approved) required Linfield to pay to SXG the purchase price and absorb each of the expenses referred to above, which it submits reinforces the non-penal nature of the clause.

351. Linfield asserts that the obvious commercial objective of the Call Option was, relevantly, to protect Linfield by ensuring that it did not lose the valuable opportunity of the benefit of the Auburn land after expenditure of a significant amount of money and the events which triggered the option (as set out in cl 18.6(b)). It points out that not any breach would trigger the Call Option; rather, the events which would trigger the option pursuant to cl 18.6(b) were an Insolvency Event or an Event of Default incapable of remedy or which, if capable of remedy, SXG did not remedy). Further, it says that a right to sue a company in administration or liquidation is not a remedy.

352. As to the Guan appellants’ submission that there is no nexus between such other losses (beyond its entitlements and accrued rights to damages preserved by cl 18.6(d)) as Linfield might suffer and the receipt of the Auburn land at a pre-arranged fixed value, Linfield argues that it had a legitimate interest in the acquisition of the Auburn land in order to earn its contracted profit share consequent upon a development of the land and submits that it was this interest that the Call Option was designed to protect.

Determination

353. In recent years there has been a divergence between our ultimate appellate Court and that in the United Kingdom as to the scope and nature of the penalties doctrine and the relief available following a determination that a clause is penal (see the decisions of the High Court in Andrews and Paciocco (HCA) and the decision of the Supreme Court of the United Kingdom in Cavendish Square Holding BV v Talal el Makdessi; ParkingEye Limited v Beavis [2016] AC 1172; [2015] UKSC 67).

354. The historical origins of judicial intervention in respect of penalties have been traced both in academic writing (see, for example, AWB Simpson, “The Penal Bond with Conditional Defeasance” (1966) 82 Law Quarterly Review 392; Edith Henderson, “Relief from Bonds in the English Chancery: Mid-Sixteenth Century” (1974) 18(4) American Journal of Legal History 298; Sir John Baker, An Introduction to English Legal History (4th ed, 2002, Oxford University Press) at 325-326; Chris Rossiter, “Relief Against Penalties” in P Parkinson, ed, The Principles of Equity (2nd ed, 2003, Lawbook Co) at 291-296; MGL at [18-005]-[18-020]) and in various judgments (see, for example, Austin v United Dominions Corporation Ltd [1984] 2 NSWLR 612 at 625-628; Citicorp Australia v Hendry (1985) 4 NSWLR 1 at 39-40; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 186-190; 197-200; 201-203; [1986] HCA 63; Andrews at [33]-[45]; Paciocco (HCA) at [16]-[25] (Kiefel J)).

355. In the present case, the Guan appellants contend both that the relevant clause is properly characterised as a penalty (grounds 10-13) and, in the alternative, that SXG was entitled to relief against forfeiture of its interest in the Auburn land (ground 10(b)).

356. While the two areas of law have undeniable historical and conceptual similarities (see generally, MGL at [18-215]-[18-225]), there remains a “real distinction” between the respective doctrines (Legione v Hateley at [32]).

357. Generally speaking, all cases involving a question of penalties require consideration of three broad issues: first, whether the penalties doctrine is engaged; second, whether the impugned stipulation is penal; and, third, the consequences of a determination that a stipulation is penal. By contrast, in a case involving the doctrine of relief against forfeiture, it is necessary first to identify whether relief is sought pursuant to statute (for example, under s 129 of the Conveyancing Act 1919 (NSW)) or the general law and, if the latter, whether the provision for forfeiture is either meant to secure performance of a primary stipulation or whether reliance on the forfeiture by the party entitled to its benefit is coloured by fraud, accident, mistake or surprise (Shiloh Spinners Ltd v Harding [1973] AC 691 at 722). There then follows a series of questions: first, as in the context of penalties, as to the availability of compensation capable of restoring the status quo ante; second, whether the plaintiff is in fact ready, willing, and able to perform its side of the bargain and to pay the required compensation; third, whether there exists any equitable defence or other discretionary reason why relief should be refused; and, finally, the question of the appropriate relief arises (see generally, MGL at [18-270]). In both situations, the burden rests with the party in the position of the Guan appellants to demonstrate that the impugned stipulation was a penalty (or, alternatively, constituted an impermissible forfeiture of property) in respect of which equity will grant relief.

353. Despite the invocation of the doctrine of relief against forfeiture in ground 10(b) of the grounds of appeal, the Guan appellants largely approached their challenge to the primary judgment by reference to the doctrine of penalties. The conclusion that I have reached in relation to the claim for relief against penalties (set out below) is that the clause is not penal in operation for the reason that the option price is not out of all proportion to the legitimate interests of Linfield intended to be protected by the impugned stipulation (in particular to the maximum conceivable loss that it might be expected could be suffered as a result of the occurrence of an Insolvency Event). As to the claim for relief against forfeiture, I do not accept that compensation is available to make good the loss to Linfield of the development opportunities which the Call Option was clearly intended to preserve, such as to call into operation the forfeiture doctrine.

354. Turning first to whether the penalties doctrine is engaged at all, at first instance in Paciocco v Australia and New Zealand Banking Group Limited (2014) 309 ALR 249; [2014] FCA 35 (Paciocco (FCA)), Gordon J, then in the Federal Court, proposed (at [15]) a framework for resolving a case involving penalties, which is, with respect, a useful point of reference. Her Honour posited (at [15] in questions 3 and 4) the anterior analysis, namely the “identification of those criteria by which the penalty doctrine is engaged” (Andrews at [15]); the relevance of that being that at common law the penalties doctrine is engaged where there is an anterior breach of contract whereas the equitable doctrine of penalties can apply where the primary stipulation to which a penalty is collateral consists of the occurrence or non-occurrence of an event which is neither a breach of contract nor another event which it is the responsibility or obligation of the party subjected to the penalty to avoid (see Paciocco (HCA) at [119] Gageler J).

355. In Paciocco (HCA), the reasons of Gageler J (at [118]-[127]) lend support to an interpretation of Andrews as envisioning a common law penalties doctrine, applicable in most circumstances, modified by a flexible equitable doctrine in certain circumstances. Such an interpretation is consistent with that adopted by Gordon J in Paciocco (FCA) at first instance (at [13]-[32]) and with the approach adopted in this Court in the recent decision of Arab Bank, a case in which the alleged penalty was triggered by a breach of contract (though I note the criticism of such an approach - see, for example, J Carter et al, “Contractual Penalties: Resurrecting the Equitable Jurisdiction” (2013) 30 Journal of Contract Law 109).

356. In circumstances where there is no express obligation in the Development Agreement for SXG to avoid the commission of an Insolvency Event (though implicitly it was one that the parties did not want to occur) and where the Call Option (exercisable in the circumstances contemplated in cl 18.8) is more comfortably seen as a stipulation, collateral to a primary stipulation in favour of Linfield, in the sense considered in Andrews, imposing on SXG (on the Guan appellants’ case) an additional detriment on the failure of the primary stipulation to the benefit of Linfield then the penalty doctrine in equity is engaged.

357. Turning then to the question whether cl 18.8 is a penalty (which corresponds to question 5 of the framework proposed (at [15]) in Paciocco (FCA)), it should be noted that the principles for determining whether a clause constitutes a penalty (as distinct from the principles relating to the consequences of amounting to a penalty) do not relevantly differ depending upon whether the penalties doctrine is engaged at law or in equity (see Arab Bank at [73] and [74]).

358. Relevantly, Lord Dunedin’s proposition that “the essence of a penalty is a payment of money stipulated as in terrorem of the offending party” (Dunlop at 86) remains a useful starting point (see also, Legione v Hateley at [32]). In Andrews, the Court described (at [10]) a penalty as being “in the nature of a security for and in terrorem of the satisfaction of” a primary stipulation (see also Paciocco (HCA) at [51]-[56] (Kiefel J); [165] (Gageler J); [259] (Keane J); cf Cavendish at [28]; [31]; MGL at [18-025]). In Paciocco (HCA), Gageler J described (at [166]) a penalty as being a stipulation that had “no purpose other than to punish”. To similar effect in the same case, Keane J identified (at [253]) the “real objection” to a penalty clause as a matter of public policy as being that “it is no part of the law of contract to allow one party to punish the other for non-performance”.

359. The High Court has endorsed the continuing relevance of the decision in Dunlop on numerous occasions (see, for example, Ringrow at [12]; Arab Bank at [71]-[73]). That said, in Paciocco (HCA), Kiefel J (as her Honour then was) noted (at [32]) that Lord Dunedin’s proposed “tests” (Dunlop at 87-88) were “couched in the language of their time and were intended as guidance only” and that tests “tend, over time, to encourage literal application” (see also the warning sounded at [18-070]) in MGL). Similarly, Gageler J denied that the Dunlop propositions were “rules of law” (Paciocco (HCA) at [143]; [147]).

360. Characterisation is “a legal question which does not depend upon an evidentiary inquiry into the parties’ motivation or subjective intention, purpose or calculations” (Paciocco (HCA) at [243] (Keane J)). In Andrews, the High Court described (at [75]) the critical issue determined in Dunlop as being “whether the sum agreed was commensurate with the interest protected by the bargain”. In Cavendish, the correct approach for identifying a penalty was said (at [48]) to be as follows:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests [in Dunlop] would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations. [my emphasis]

366. Earlier, in Paciocco (FCAFC), Allsop CJ had adopted a similar approach in the Full Court of the Federal Court. In remarks quoted (at [151]-[153]) with approval by Lord Mance in Cavendish, Allsop CJ said the following (at [103]):

The object and purpose of the doctrine of penalties is vindicated if one considers whether the agreed sum is commensurate with the interest protected by the bargain: Andrews (HC) at [75]; Dunlop at 91-93; Clydebank at 15-17, 19 and 20; Public Works Commission v Hills at 375-376. This is not to say that the enquiry is unconnected with recoverable damages; but the question of extravagance and unconscionability by reference, as Lord Dunedin said in Dunlop, to the greatest loss that could conceivably be proved to have followed from the breach, is to be understood as reflecting the obligee’s interest in the due performance of the obligation: Public Works Commission v Hills at 375-376. One only needs to reflect on the facts of Dunlop and the justification for the payment that was found to be legitimate to appreciate these matters.

367. The different approaches of the High Court to this question in Paciocco (HCA) may be summarised as follows. Kiefel J (as her Honour then was), with whom French CJ agreed (at [2]), identified (at [29]) the test as being “whether a provision for the payment of a sum of money on default is out of all proportion to the interests of the party which it is the purpose of the provision to protect” and noted that this interest “may be of a business or financial nature”. Gageler J framed the enquiry (at [166]) in terms of whether the impugned stipulation “is properly characterised as having no purpose other than to punish”, stating that this compelled “a more tailored” enquiry than the legitimate interest approach adopted in Cavendish. His Honour expressly noted (at [166]) that this was not to say that the differently framed enquiries “might not lead to the same result”. Keane J stated (at [270]) that “the question to be addressed in order to distinguish a penalty from a provision protective of a legitimate interest” was “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract”. Nettle J, though in dissent as to the application of the relevant principles, took a broadly similar approach to that of Keane J. His Honour said (at [319]) that “the Andrews and Cavendish formulations accord with Dunlop” and viewed (at [322]) the matter as turning on whether the case was a straightforward case in which the Dunlop tests would be perfectly adequate to resolve the issues on appeal, or whether the case “should be seen as one of the more complex types of cases referred to in Cavendish which necessitate considerations beyond a comparison of the agreed sum and the amount of recoverable damages”. His Honour concluded (at [334]) that there was “no reason why the matter should not be determined in accordance with the Dunlop tests” and proceeded on that basis.

368. With that in mind, it is necessary, first, to identify the interests which are sought to be protected by the impugned stipulation; and, second, to ask whether the impugned stipulation was a stipulation collateral or accessory to another stipulation (the primary stipulation) which imposed an additional detriment upon SXG to the benefit of Linfield in the sense that (consistently with Andrews) it was in the nature of a security for and in terrorem of the satisfaction of the primary stipulation in a manner that (consistently with Paciocco (HCA) and Cavendish) was out of all proportion to the interests of Linfield intended to be protected by the primary stipulation.

369. As the judgments in both Cavendish and Paciocco (HCA) make clear, in identifying the legitimate (or “commercial” - see Paciocco (HCA) at [172]-[176] (Gageler J)) interests of Linfield in the present case, one is not precluded from looking beyond Linfield’s interest in compensation for loss caused directly by the failure of the primary stipulation.

370. The submissions by the Guan appellants that a breach founding an Event of Default might be trifling and might not cause SXG to lose control over the Auburn land and that, conversely if SXG’s breach was repudiatory, Linfield would be entitled to loss of bargain damages, do not in my opinion properly take into account that if (as here occurred) there was an Insolvency Event (or, which did not occur, a non-remediable event of default), then Linfield would be in the position where it might lose the opportunity to develop the land and share in the profits of that development (in circumstances where it had already invested considerable funds and effort towards the proposed development). The loss of that opportunity would not be recoverable as damages arising from the fact that SXG had failed to avoid the commission of an Insolvency Event, nor could it be assumed that such loss would be readily quantifiable.

371. In the circumstances, I am not persuaded that his Honour erred in concluding that the Call Option was not penal in its operation. In my opinion it was not disproportionate (or “out of all proportion”) to the protection of Linfield’s legitimate interests in relation to the proposed development, even though with the benefit of Linfield’s efforts in progressing the proposed development application at the time of entry into the Development Agreement it might readily have been appreciated that the value of the land might increase in the period between that date and the date on which any development approval were to be granted (at least to some extent). Contrary to the submission made by the Guan appellants, the impugned stipulation does secure Linfield’s interest in the project in the sense that Linfield would not then lose the benefit of the opportunity to progress the development project and to obtain the benefits from a successful development project, which opportunity it would necessarily lose if the project were not able to be pursued through no default of its own but through SXG’s insolvency. The fact that it might choose instead to sell the property for reward is not to the point.

372. As I have concluded that the impugned stipulation does not constitute a penalty, the issues as to what consequences would flow had it been identified as penal and as to the divergent views taken in Australia (see Andrews and Paciocco (HCA)) and England (Cavendish) do not arise. For completeness, however, I note that insofar as the Guan appellants contend (at ground 10(a)) that, were the clause properly characterised as a penalty, it would have been “void”, this is not the case (cf Citicorp Australia Ltd v Hendry at 39-40 (Priestley JA); Integral Home Loans at [8] (Brereton J)). A penal clause is not void ab initio; rather, it is unenforceable (AMEV-UDC at 189, 191-2 (Mason and Wilson JJ); 195, 203 (Deane J); Jobson v Johnson [1989] 1 WLR 1026 at 633 (Nicholls LJ); Andrews at [10]; Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd (2014) 45 VR 79; [2014] VSCA 32 at [55]; Paciocco (HCA) at [122] (Gageler J); [330] (Nettle J)). In equity, the pre-Judicature position was stated (at 357) concisely by Ashburner (see W Ashburner, Principles of Equity (2nd ed, 1933, Butterworth)) as follows:

Relief was granted before the Judicature Act in two ways. First, the court … recalled the penalty, if it had been exacted. Secondly, the court restrained the prosecution of an action at law … to recover the penalty

373. Pomeroy provides (at 593) some further explanation (see John Norton Pomeroy, A Treatise on Equity (2nd ed, 1892, vol 1)):

The original practice in such cases was for the court of equity to retain the bill, direct an issue to ascertain the amount of damages, and to grant relief upon payment of the damages thus assessed by the jury. … While the two jurisdictions at law and in equity were kept distinct … the form of the remedy in which relief was obtained against a penalty was that of a suit brought by the debtor party to procure the agreement to be surrendered up and cancelled … upon payment of the debt or damages; and this decree would often be accompanied by an injunction restraining an action at law upon the agreement brought or threatened by the creditor party.

374. The modern position in Australia is confirmed (at [10]) in Andrews:

If compensation can be made … for the prejudice suffered by the failure of the primary stipulation, the collateral stipulation and the penalty are enforced only the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.

375. This approach was recognised earlier in the dissenting judgment of Deane J in AMEV-UDC at 195:

[It] was a fundamental doctrine of equity that relief in Chancery against the enforcement of a penalty was only available where the quantum of the damage for which the impugned payment would be compensatory could be ascertained and upon the terms that the claimant did equity by paying the amount of the true damnification. … The equitable jurisdiction did not … cease to exist and the terms upon which equitable relief against penalties would be granted remain directly applicable in those comparatively rare cases in which the party asserting unenforceability is constrained to seek positive relief (whether primary or ancillary) which is purely equitable in character, such as an order for reconveyance. In such a case … such relief should be refused unless the plaintiff … submits to the terms on which equitable relief is available and does, or undertakes to do, equity by paying the amount of the actual loss suffered.

376. Thus if the impugned stipulation were to have been properly characterised as penal it would be “unenforceable at common law” (Paciocco (HCA) at [122] (Gageler J)) except (assuming that compensation is available) to the extent that equity would permit “scaling”; and if positive relief which was purely equitable in character were to be sought in respect of that penal stipulation then, as Deane J noted (at 195) in AMEV (to which Gageler J in Paciocco (HCA) at [124] referred with apparent approval), it would (or might) be necessary for the obligor to submit to any terms on which equitable relief were to be made available. In any event, this issue does not presently arise.

377. For the reasons set out above, the Guan appellants’ appeal should be dismissed with costs.

Conclusion and orders

378. I therefore propose the following orders:

In proceedings 2016/104216 (the ACFM appeal)

1. Appeal allowed in part.

2. Set aside orders 4 and 5 of the declarations and orders made on 31 March 2016 and in lieu thereof:

1. Order that the plaintiff (Linfield Developments Pty Limited) pay to the sixth defendant (Australia Capital Financial Management Pty Limited) the sum of $360,364.14 plus interest on the sum of $20,360,364.14 at 12% p.a. from 5 August 2014 to 31 March 2016, together with the sixth defendant’s reasonable costs in relation to land tax, insurance rates and utility charges incurred from 5 August 2014 to 31 March 2016 in respect of the Land;

2. Declare that the plaintiff is entitled to receive from the first defendant (Shuangxing Development Pty Ltd (in liq) (receivers and managers appointed)), through its receivers and managers, on payment of the sum of $20,000,000, a transfer of the Land in registrable form free from any mortgage, charge or encumbrance other than the plaintiff’s Caveat No. AI792023.

3. Order that the appellant pay the first respondent 75% of the first respondent’s costs of the appeal.

4. Grant liberty to the first respondent to apply on 3 days’ notice for any further order necessary to effect the transfer of the Land to it.

In proceedings 2016/104679 (the Guan appeal)

1. Appeal dismissed with costs.

379. GLEESON JA: I agree with Ward JA.

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Decision last updated: 17 May 2017