Bartercard Ltd v Myallhurst P/L & D Khoury
[1999] QDC 246
•24 September 1999
IN THE DISTRICT COURT
HELD AT BRISBANE
QUEENSLAND
[Bartercard Ltd v Myallhurst P/L & D Khoury]
[Before Forde DCJ]
Plaint No 203 of 1997
BETWEEN:
BARTERCARD LTD ACN 050 542 544
Plaintiff
AND:
MYALLHURST PTY LTD ACN 051 094 387
First Defendant
AND:
DAVID KHOURY
Second Defendant
JUDGMENT
Judgment delivered: 24th September 1999
Catchwords: Termination by non-defaulting party of agreement for breach by defaulting party - windfall to non-defaulting party - penalty clause - O’Dea v Allstate Leasing System (WA) Pty Ltd (1982-83) 153 CLR 359 - Amev v UDC Finance Ltd v Austin (1986) 162 CLR 170 - Esanda Finance Corporation Ltd v Plessig (1988-89) 166 CLR 131 - Associated Distributors Ltd v Hall (1938) 2 KB 83 - Cooden Engineering Co Ltd v Standford (1953) 1 QB 86 - GM & MY Campbell & Co Pty Ltd v Colton & Ors (3886/88 unreported judgment of Full Court of Queensland 18.10.91) - Export Credit Guarantee Dept v Universal Oil Product Co (1983) 1 WLR 399 (HL) - Legione v Hateley (1983) 152 CLR 406 - CRA Ltd & Anor v New Zealand Gold Fields Investments & Anor (1989) VR 870 discussed
Counsel: Mr A Duffy for Plaintiff
Mr M Martin for Defendants
Solicitors: Deirde Payne for Plaintiff
Morgan Conley for Defendants
Dates: 23 August 1999
IN THE DISTRICT COURT
HELD AT BRISBANE
QUEENSLAND
Plaint No 203 of 1997
BETWEEN:
BARTERCARD LTD ACN 050 542 544
Plaintiff
AND:
MYALLHURST PTY LTD ACN 051 094 387
First Defendant
AND:
DAVID KHOURY
Second Defendant
REASONS FOR JUDGMENT -FORDE D.C.J.
Delivered the 24th day of September 1999
Introduction
The plaintiff in this action is Bartercard Ltd (hereinafter referred to as “BCL”). At all material times, it carried on the business of providing services as a record keeper of trade transactions for members, directing members to each other for the purpose of trade processing and maintaining records, administration and facilitating the use of the Bartercard Trading Programme (hereinafter referred as BTP). The first defendant, Myallhurst Pty Ltd, became a member of the BTP. The second defendant, David Khoury, became a guarantor in relation to the credit obtained by Myallhurst pursuant to an agreement between Bartercard and Myallhurst dated 8th day of November 1993 (hereinafter referred as the agreement). The said guarantee was part of a Credit Limit Increase Form (Exhibit 4) signed by Mr Khoury on 5th September 1994. The said agreement is part of Exhibit 1.
Initially, there was a challenge to the authenticity of the signature by Mr Khoury on the guarantee and indemnity aforesaid. This was abandoned shortly after the trial commenced.
As part of the said agreement the Trading Rules and Regulations (hereinafter referred to as “the Rules”) (Exhibit 2) became part of the said agreement pursuant to Clause 7. The only question for determination in this case is whether Rule 34(1a) amounts to a penalty and is therefore void. It has been conceded by the defence that the $250 cash payable within four weeks of the date of Notice of Termination of the agreement pursuant to Rule 35 of the said Rules is otherwise payable and does not amount to a penalty. For completeness, it should be mentioned that the counterclaim had previously been dismissed.
Factual Background
Exhibit 8 is a Practice Direction Stamp Duty 19.1 which describes the attitude of the Office of State Revenue Queensland to Barter trade. It is convenient to set out Clause A thereof, which is part of the preamble, in describing the nature of BTP:
“Barter trade, also known as reciprocal trading or countertrade, is the exchange of goods or services for other goods or services without the need for cash. Bartering between businesses is emerging as a popular method of conducting trade with businesses accepting payment for goods or services in `trade dollars’ (eg Bartercard dollars) or `credit units’. Businesses wanting to take part in reciprocal trading must subscribe as a member to a trade exchange which acts as a clearing house for trade transactions and promotes the members’ goods and services.”
It was conceded by the defence that Myallhurst became a member of BCL’s network on or about 8th November 1993. The appropriate application form, which also forms part of Exhibit 1, was signed by Mr Khoury on 21st October 1993. Myallhurst was trading as “Dumaze Lounges”. Mr Khoury was a director of Myallhurst at all material times. BCL provided a credit for Myallhurst to allow it to trade with other members. This has been described as a type of overdraft facility. This was increased from time to time. As at 5th September 1994, there was a need for Myallhurst to increase the current credit limit to $150,000. In order to guarantee the payment of same, Mr Khoury agreed to guarantee Myallhurst and indemnify BCL in respect of debts and liabilities that may be incurred by Myallhurst. It is conceded by the defence that if the relevant clause is held not to be a penalty, that Mr Khoury is liable for the amount claimed in the action. The quantum of the claim is also not disputed. The amount claimed is as follows:
Rule 35 payment $ 250.00
Rule 34 payments owing $140,842.75
TOTAL $141,092.75
Of this total, Myallhurst had received the benefit of goods to the value of $131,087.81. The balance related to cash fees owing. The failure to pay these was the basis for termination by Bartercard.
Relevant Rules
“13. Trade Procedure
BCL will guarantee Transaction Vouchers payable in BCL Trade Dollars only when the procedure for authorisation outlined below is followed:
A.Member must display monthly trading sticker to show a member in good standing.
B.An authorisation number must be secured from BCL Credit Clearance. Authorisations are not required if the purchase amount is less than the amount automatically guaranteed subject to current monthly trading sticker (Transaction Vouchers under $100.00). Unless authorisation is obtained at time of sale, BCL has no obligation to post the transaction. BCL is not obligated to honour authorisations granted due to any misrepresentations made by buyer or seller. BCL reserves the right to refuse to issue an authorisation number approving a transaction under any of the following conditions.
(i) If the buyer does not have sufficient trade dollars or available credit lien to make such purchase;
(ii)If either party is not a member in good standing
C.Transaction Voucher must be properly completed, signed and dated.
D.Selling Member must submit to the BCL Corporate Office (Transaction Vouchers) within (7) days of the transaction date. BCL is not responsible for deposits received seven (7) days after the transaction date regardless of authorisation numbers.”
“26. Disclaimer of Warranty and Liability
BCL makes no representation or warranty either expressed or implied, and disclaims all liability as the fitness, quality, delivery date, merchantability, prices or any terms of any trade transaction. member does hereby indemnify and hold BCL harmless with respect to any claim, debt, or liability whatsoever arising out of any transaction wherein Member is a buyer or seller. Member acknowledges that any trade transaction in which it participates shall be on a voluntary basis.”
“27. Disputes
Trade transaction disputes are only between the buyer and the seller and shall be settled by the parties themselves. BCL has no responsibility other than recording the transaction in the ordinary course of business. BCL is not responsible for use of trade dollars by unauthorised persons nor for transactions that do not comply with the terms of the Agreement. BCL is not a buyer or seller unless it so states in writing.”
“34. Termination
Either party may terminate the Agreement upon five (5) days written notice to the other party. Immediately upon termination, with or without cause, all cash and trade dollar service fees outstanding become due and payable and:
(a)If Member has a negative trade balance (purchase exceed sales) Member must balance the account with trade dollars within thirty (30) days of the termination date and, after the (30) day period immediately pay BCL any remaining negative balance in cash; or
(b)If Member has a positive trade account balance (sales exceed purchases) Member may spend the balance after paying BCL, in advance, the cash service fees on the positive balance. After receipt of cash, BCL Gift Certificates will be issued to the terminated account with a ninety (90 day expiration date. The Gift Certificates may be redeemed with BCL Members in the normal manner of Transaction Vouchers, excepting that each normal manner of Transaction Vouchers, excepting that each and every transaction must have an authorisation number upon redemption issued from BCL Credit Clearance.
BCL reserves the right in its sole discretion to terminate this Agreement without notice for a material singular or cumulative breach of the Agreement.
BCL Plastic Bartercards and unused trade Transaction Vouchers, and any Script and Gift Certificates must be returned immediately upon termination, and no initiation or service or transaction fees will be refunded. Upon termination of the association with BCL, Member shall promptly return to BCL all originals and copies of documents, and property of BCL relating in any way to BCL’s, business and/or BCL Barter Programme.”
“35. Liquidated Damages if Terminated for Cause
A breach of the Agreement damages BCL in a number of ways which are difficult to quantify and which may include, but are not limited to, administrative costs in dealing with the breach, financial injury due to loss of cash and service fees and/or expenditure of funds, such as in collection actions, loss of Member good will towards the BCL’s Barter Programme and BVCL, and loss of trading volume and Members. Because the actual amount of such losses are difficult to identify and difficult to remedy at law, liquidated damages to BCL, Member and BCL agree that, as if Member is terminated for cause i.e. for breach of the Agreement, Member shall pay BCL the sum of $250.00 cash, payable within (4) calendar weeks of the date of notice of termination of the agreement. If Member has a positive trade balance, the liquidated damages must be paid in addition to the requirements of subsection 34(b) above before the trade balance will be converted to Gift Certificates.”
Notice of Termination
By letter dated 7th day of May 1996, BCL demanded payment of the cash fees owing to it. This was the main source of income for BCL apart from the initial subscription. By letter dated 4th day of September 1997 (Exhibit 7) BCL advised Myallhurst that its account had been closed and that it had 30 days in which to pay its cash fees and balance its trade debt. The total amount claimed, including fees, was $141,092.75. That sum included the liquidated damages of $250.
It is common ground that the letter of 4th day of September 1996 was a valid termination notice pursuant to Rule 34 of the Rules. The defendants rely on termination by BCL for a breach by Myallhurst of the Rules. This becomes relevant when one looks at the case law to be referred to.
Exhibit 7 evidences a fact that as at 4th September of 1996, Myallhurst had a negative trade balance of $131,087.81 (Exhibit 3). The difference between that figure and the amount claimed is made up of the transaction fees and the liquidated damages for those mentioned. Membership was terminated on the basis that the cash fees were not rendered to BCL as required. It was at the election of BCL that Rule 34 was then invoked to terminate the agreement. I find that Myallhurst was willing to barter during the thirty (30) days after Exhibit 7 was received.
At the outset, it should be noted that either party may terminate the agreement upon five days notice. For example, if Myallhurst had wished to terminate, it could have done so pursuant to Rule 34. There need be no breach, but any cause whatsoever. The net result is that all cash and trade dollar service fees which are outstanding as at the date of termination become payable. The Member has to attend to the negative trade balance and balance the account with trade dollars within 30 days of the termination and if there is still a negative balance at that point then an equivalent cash sum must be paid to wipe out any negative balance. Conversely, if one has a positive trade balance, then it cannot be redeemed for cash but only by barter dollars. In the event that it is not traded into a nil balance within 30 days, then a gift certificate may be issued by the plaintiff with a 90 day expiration date. The certificates can be redeemed with members in the normal manner of transaction vouchers. The latter situation is not relevant in the present case except by way of a comparison to a negative trade balance. The member, for example, is not entitled to cash if there is a credit trade balance.
It was submitted by the defendants that for the plaintiff to receive a negative trade balance in cash, it would constitute a penalty as it is out of all proportion, extravagant, exorbitant, or unconscionable. See AMEV - UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190; Esanda Finance Corporation Ltd v Plessig (1988-89) 166 CLR 131 at 141; O’Dea v Allstate Leasing System (WA) Pty Ltd (1982-83) 153 CLR 359 at 368, 400).
One should note that Rule 34 does not talk of liquidated damages, nor is it confined to a situation where a member is in breach of the Rules. It is submitted by counsel for the defendants that the court should not be concerned with the words used but rather the substance and effect thereof: O’Dea’s case op.cit. p400.
Relevant Authorities
O’Dea’s case op.cit. was concerned with an agreement for the hire of a truck for a period of 36 months. Clause 12 provided that if the lessee defaulted in the punctual payment of any of the instalments or in the performance of any terms and conditions of the lease, the lessor was empowered to retake possession of the vehicle. If it did, the lessee’s right to retain and use the vehicle would terminate, and all monies due for unexpired terms plus reasonable costs of repossession would become immediately due and payable. The lessee was also obliged to pay the rent for the unexpired balance of the term of the agreement plus reasonable cost of repossession in any event. The lessee was also obliged to pay by way of indemnity for the capital loss upon sale. It was held that the lessor was not entitled to recover the balance of the entire rent, because the claim constituted a penalty since it arose only upon breach by the lessee of the terms of the agreement and the amount the lessor was entitled to receive was manifestly excessive in comparison with the greatest loss it could possibly suffer.
It was similarly submitted in the present case that the sum claimed by BCL was a “windfall” and was “out of all proportion to the damage likely to be suffered as a result of the breach giving rise to the agreement being terminated.” Gibbs CJ at 368 discussed different classes of cases relied upon the respondent in the case before him. He referred to cases such as Cooden Engineering Co Ltd v Stanford (1952) 1 QB 6; and Campbell Discount Co Ltd v Bridge (1962) AC 600 to “support the conclusion that the provision requiring payment of the balance of the rent is a penalty, unless of course it can be said to be a genuine pre-estimate of damage”. Gibbs CJ further stated:
“The contract did not in my opinion, merely provide for the acceleration of a presently existing debt...When cll.1(a), 6(a) and 12 are read together, it becomes apparent that at the date of the contract there was no presently existing obligation to pay the entire rental....In the circumstances of the present case, the obligation to pay the entire rent arose only by reason of a breach, and the amount which the contract makes payable in that event is either a penalty or liquidated damages.”
In O’Dea’s case it was argued that the question of penalty or no penalty did not assist because it was always possible for the parties to a contract to stipulate that on the happening of an event, one party shall make a payment of a nominated amount of money to the other party. Undoubtedly, as a general proposition, this is correct, and when it happens no question of penalty will arise: “Penalties in Chattel Leases” by R.P. Meagher QC (in “Essays in Equity” by P. Finn p46 at 47) where the learned author refers to Export Credit Guarantee Department v Universal Oil Product Company [1983] 1 WLR 399 (H.L.); Alder v Moore [1961] 2 QB 57 at 65.
Meagher QC at p51 comments:
“The cases in England since 1953, all tend to the conclusion that in so far as such clauses apply to termination of the contract because of the hirer’s breach, the sum payable will be a penalty unless it amounts to a genuine pre-estimate of damage. That was initially decided by the Court of Appeal in Cooden Engineering Co Ltd v Stanford ([1953] 1 QB 86), was affirmed by the House of Lords in Campbell Discount Co Ltd v Bridge ([1962] AC 600), and again by the Court of Appeal in Financings Ltd v Baldock ([1963] 2 QB 104). On the other hand, it has been held that where the termination was due on the election of the hirer, no question of a penalty arose, because all that had happened was that the hirer elected to put an end to his contractual liabilities by payment of a sum for which he had voluntarily made himself liable: see Associated Distributors Ltd v Hall ([1938] 2 KB 83). The correctness of this decision has been queried: see Campbell Discount Co Ltd v Bridge ([1962] AC 600 at 614, 631) and United Dominions Trust (Commercial) Ltd v Ennis ([1968] 1 QB 54 at 64, 67). However, it seems conceptually correct. The English authorities were explicitly accepted by Gibbs CJ, and implicitly by the other members of the court; and they were assuredly correct. The result was that this line of authorities did not assist Allstates, as the payment stipulated for in the contract was one arising on breach.”
I find that in the present case, termination by BCL occurred as a result of the breach by Myallhurst in failing to pay the cash fees (Exhibits 6, 7). The amount due as at the date of termination apart from the negative balance was $10,004.94.
It can be seen that a hirer who wishes to return goods will be better off if he commits a breach of contract rather than he would be if he exercised his option to terminate: Meagher op.cit. p52. In the present case BCL terminated the contract consequent upon the breach by Myallhurst.
Meagher, Gummow and Lehane in discussing Alder v Moore in the text “Equity Doctrines and Remedies” 3rd Ed. para 1817 stated:
“The reasoning in this case provided the basis for the decision by the House of Lords in Export Credits Guarantee Dept v Universal Oil Products Co [1983] 2 All ER 205, that a provision in a contract for payment of money by one party on occurrence of a specified event, rather than on breach by him of a contractual obligation, is not a penalty because it is not a payment agreed in advance in respect of a breach. Only if the payment bears that character does the next question arise, namely, whether it is a “genuine” pre-estimate of the damage arising from the breach. Accordingly, the House held the equitable doctrine not to be attracted to an arrangement whereby the defendants had promised to reimburse the plaintiffs for moneys paid by the plaintiffs to a banking consortium under a guarantee by the plaintiffs of liabilities of third parties to the consortium. The events which led to the plaintiffs making demand upon the defendant commenced with the third parties defaulting on their obligations to the consortium, but the sum claimed by the plaintiffs from the defendant was simply a debt due under an indemnity made operative by occurrence of an event provided for, which event was not a breach of contract by the defendant.
The reason given for this limitation upon the scope of the equitable doctrine was that the courts have never relieved a party from a contract on the mere ground that it proves to be onerous or imprudent. See also GM & MY Campbell & Co Pty Ltd v Colton & Ors (Full Court of Queensland No 3886 of 1988 Unreported 18th October 1991) Ambrose J, p12.
Counsel for BCL submitted that the amount claimed was not liquidated damages at all, apart from the $250. He submitted that Rule 34 payments were not conditioned upon breach as such, but upon termination of membership, because when a member ceases to be a member, Rule 34 provides the mechanism for bringing the account back to zero. It was not an attempt to make a true estimate of a loss in accordance with such cases as O’Dea, but rather a contractual obligation occurring upon the happening of an event. Those submissions seem to be consistent with the authorities referred to.
It should be remembered that in O’Dea’s case, Gibbs CJ observed that it was not a case in which under the contract money became payable on a certain event which was not a breach of contract (at p368). I find that the present case is one where the amount owing by way of a negative trade balance became payable on termination which may not necessarily have been a breach of the contract. In other words, Myallhurst itself may have wanted to terminate the contract. As has happened of course, it was a breach of contract by Myallhurst and Bartercard thereby terminated the agreement and that aspect is relied upon by the defendants in interpreting the contract.
For example, in Cooden Engineering Co Ltd v Standford (1953) 1 QB 86, it was held that where an agreement is terminated by reason of a breach committed by the hirer, the sum payable will be a penalty unless it is a genuine pre-estimate of the loss suffered by the owner by reason of the breach, even though damage and the right to terminate the contract and receive payment arose on the happening of any number of events, some of which were breaches and some of which were not: Somervell LJ in Cooden Engineering Co Ltd v Standford at 96 stated:
“But it cannot, I think, follow as a matter of law that a sum exigible for a breach or breaches cannot in law be a penalty because it is made payable in the happening of some other event which is not a breach.”
Hodson LJ, in agreeing with Somervell LJ, stated at 116:
“... and it seems to me unreal to speak of a remedy arising from the right to determine as opposed to a remedy arising from the breach. It is said that the right to determine arises in clause 11 not only in cases of breaches great or small, but also in a number of other events which have nothing to do with breach of contract, and accordingly since the law as to penalties for breach is inapplicable as such in these numerous instances, so it cannot be applied to that part of the clause to which it might otherwise be appropriate. I am unable to accept this contention, which seems to involve that a draftsman of a written contract can always draw his document in such a way as to defeat the common law by incorporating in the same clause provisions dealing with the right to determine the contract on the occurrence of an infinite number of events only one of which is a breach of contract.”
Those statements must be read in light of the observation by Gibbs CJ referred to in para 21 hereof.
In other words, Hodson LJ did not distinguish between a claim to receive payment of the sum of money because of a right to determine arising from breach of contract and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine. The latter involves giving the non-defaulting party the right to accept the repudiation of the contract by the defaulting party and then to sue for damages. The law does recognise this incongruity:
“I take the law to accept on incongruity in holding that an owner’s damages at law for a non-repudiatory breach are limited to losses caused by the breach alone while holding that a clause which imposes a liability on the hirer to pay the losses caused by the exercise of a power to terminate a hiring upon breach is not a penalty.”: Brennan J in Esanda Finance Corporation op.cit. At 147 where he summed up the effect of the AMEV-UDC case.
The significance of the agreement being terminated by the hirer himself, is because if he is unable to keep up his payments, it has been held that the question whether the sum is payable is liquidated damages or a penalty does not arise, since what has occurred is that the hirer has exercised his option to put an end to the contract on paying a certain sum and a sum for which he has made himself liable and must be paid: Associated Distributors Ltd v Hall (1938) 2 KB 83. Rule 34 envisages a member terminating the agreement quite apart from any breach.
Counsel for BCL relies upon a decision of CRA Ltd & Anor v New Zealand Gold Fields Investments & Anor [1989] VR 870. The facts in that case were that a clause in a joint venture agreement relating to a gold mining project provided that if a party should be in default for more than 60 days after receipt of a notice to remedy, the non-defaulting party was entitled to require the defaulting party to sell its interests to the non-defaulting party at fair market value less 5%. A party may default and the other party could elect to require the defaulting party to sell its interest in accordance with the clause. The defaulting party contended that the discount was an unenforceable penalty, and that the buyer price should be the fair market value. It was held that the clause did not impose a penalty as the purpose of the clause was neither to compensate the non-defaulting party nor to punish the defaulting party. It was directed to deal with a default in a fashion most conveniently suited to overcoming it in the interests of the progress of the joint venture project. Tadgell J said at 875:
“That is not to say that it (the clause) is unconcerned to provide a measure of inducement not to default. It is primarily directed, in my view, to dealing with and accommodating a default in a fashion most conveniently suited to overcoming it in the interests of the progress of a joint venture project.”
Reference was made by his Honour at 875 to the decision of Legione v Hateley (1983) 152 CLR 406 at 445:
“A penalty, as its name suggests, is the nature of a punishment for non-observance of a contractual stipulation. It consists of the imposition of an additional or different liability upon breach of the contractual stipulation (see generally, O’Dea v All State Leasing System (WA) Pty Ltd (1983) 152 CLR 359.”: See also Esanda Finance Corporation op.cit. p153, Meagher et al para 1816.
His Honour continued:
“By `an additional or different liability’, their Honours presumably meant a liability additional to or different from that which ordinarily arise to pay liquidated or unliquidated damages ordinarily assessed by way of compensation of breach of contract.”
His Honour remarked that the relevant clause requiring the defendant to sell to the joint venture at a fair market value less 5% was not concerned so much with the imposition of a liability as with the resolution of an impasse.
I find in the present case that Clause 34 was not so much concerned with the imposition of liability but rather with providing some inducement to Myallhurst to balance the account. It should be noted that with the case of CRA Ltd it was only after a default for 60 days that the non-defaulting party had the right to exercise its option requiring the defaulting party to sell to the non-defaulting party, its participating interest at the then fair market value less 5%. In the present case, Rule 34 gives the defaulting member 30 days to balance the account and after that period to pay the negative balance in cash.
Counsel for the defendants submitted that the reason that Tadgell J did not regard the claim as a penalty was that it was “directed to accommodating a default in a fashion most conveniently suited to overcoming in the interest of (SIC) the progress of the joint venture project.” Taking five (5) per cent off the market value to allow for expenses, it was submitted by the plaintiff’s counsel, is to be contrasted with the present case of a windfall to BCL. Myallhurst was willing to trade, I find, for 30 days after receiving the notice of termination. Another member may have presented vouchers requiring Myallhurst to supply furniture. BCL would have merely recorded the transaction. However, by failing to balance the books, Myallhurst has got the benefit to date of the goods received.
Counsel for BCL in the present case presented a similar argument to that of counsel in O’Dea’s case referred to at 366 by Gibbs CJ:
“The argument on behalf of the first respondent was that the rules which distinguish between a penalty and liquidated damages are simply not relevant to the present case. It was said that the first respondent was suing for the consideration payable under the contract, and was not seeking to recover a sum payable in the event of a breach by the appellants of their contractual obligations, so that the question whether the amount payable was a genuine pre-estimate of damage did not arise.”
That argument was rejected by Gibbs J at 367 at least in respect of hire purchase arrangements. In so far as it related to a present debt it was accepted. Gibbs J applied the principles referred to previously in Cooden Engineering Co Ltd op.cit.; see also Protector Endowment Loan & Annuity Co v Grice (1880) 5 QBD 592. There was no present debt due to BCL as at the date of termination. It became due only upon failure by Myallhurst to achieve a nil balance by barter trade within 30 days. The following seems apposite to the present case:
“The traditional view has been that where a present debt is due and payable but by reason of an indulgence given by the creditor it is payable either in the future, or in a lesser amount, provided that certain conditions are met, no penalty is involved. The failure of the conditions does not mean that the creditor becomes entitled to damages; the sum was always owed, and nothing penal is exacted when the debtor no longer has an answer to an immediate claim for payment in full. On the other hand, where a debt is due and payable at a certain time a proviso that if payment is not then made a greater sum shall become due is seen by equity as purely security for performance of the principal obligation. Therefore it treats the excess payments as a penalty.” Meagher et al, op.cit. para 1816
Reliance was placed on Rule 13 by counsel for BCL. Although this Rule refers to the fact that BCL will guarantee transaction vouchers, BCL does not guarantee any negative balance by a member. It attempts to provide a sanction by rule 34(1) if the negative balance is not attended to upon termination. The clause in CRA Ltd v NZ Goldfields op.cit. was seen by Tadgell J in the following terms:
“That is not to say it is concerned to provide a measure of inducement not to default”. (p.875)
Meagher et al states at para 1816:
“Nor is there a penalty where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if they are not met he will be entitled to recover the full debt: Thompson v Hudson (1869) LR 4 HL 1 at 15-16, 27-8, 30. Such provisions do not impose a penalty merely because they operate to withdraw an incentive for observance by the defaulting party of the terms of the agreement; they will be penal if, as a matter of substance, they impose upon the defaulting party some additional or different financial obligation or burden in the nature of a disincentive or punishment for breach.”
In the CRA Ltd case, the clause was “not concerned so much with the imposition of a liability as with the resolution of an impasse” (p.875). See also Forestry Commission of New South Wales v Steffanetto (1975) 133 CLR 507 at 515. It should be remembered that the clause in the CRA Ltd case an option was granted to the defaulting party enabling it to recover 95% of the market price in lieu of “walking away” from its obligations. The present case is quite different to the examples referred to. Myallhurst has had the benefit of a credit balance with BCL which has allowed it to obtain goods from other members. The efficacy of the scheme is dependant upon compliance with the rules. An imprudent contractual obligation does not mean that the plaintiff can avoid its liability.
Another case relied upon by the defendants is Esanda Finance Corporation v Plessig op.cit. That case was not concerned with the characterisation of a clause which provides for the payment of a sum of money on the happening of a specified event other than a breach of a contractual duty. In distinguishing the facts before the court from other cases more apposite to the present position, Wilson and Toohey JJ referred to Export Credits Guarantee op.cit. This case has been discussed earlier but is illustrative of the cases relevant to the present case as distinct from the facts in Esanda Finance Corporation op.cit. 403 E-H:
“But it is not and never has been for the courts to relieve a party from consequences of what may in the event prove to be an onerous or possibly even a commercially imprudent bargain ... The appellants accepted those terms which provided for the right of recourse to arise upon the happening of a specified event, and that specified event has now happened.”
That principle is relevant to the present case. It may be said that the specified event viz. termination has occurred in the present case pursuant to Rule 34(1). However, consideration must be given to the reasons for termination discussed in paras 15-24 ibid. Wilson and Toohey JJ said in Esanda Finance Corporation op.cit. at 140:
“As O’Dea (49) and AMEV-UDC show, the fact that the “recoverable amount” payable by the respondents under cl. 6 is payable upon termination of the agreement consequent upon breach, rather than in respect of the breach alone, does not mean that the clause escapes the scrutiny of the law relating to penalties. But it does mean that in determining whether the “recoverable amount” is a genuine pre-estimate of loss or penalty, “relevant loss is not restricted to the loss flowing immediately and merely from the actual breach of contract; it includes the loss of the benefit of the contract resulting from the election to terminate for breach...”: AMEV-UDC (50) per Deane J.; see also pp. 181, 194, 205-206, 210"
See also Brennan J at 147-148.
It becomes necessary to consider, therefore, the submission by BCL that:
“The rule 34 payments are not conditioned upon breach as such. They are conditioned upon termination of membership because when a member ceases to be a member, rule 34 provides a mechanism for bringing their account back to zero.” (Transcript p44 l1).
It was submitted by the plaintiff that the amount claimed was “not purporting to be an estimate of loss” but part of a contractual obligation.
The amount repayable by the defendants under Rule 34(a) is payable upon termination of the agreement consequent upon breach in the present case, “rather than in respect of the breach alone” (Esanda Finance Corporation p.140). I find that Rule 34(a) cannot escape scrutiny as a penal clause. This question can only be answered by assessing the relevant rule as at the date of formation of the said agreement: Re Jigrose Pty Ltd (1994) 1 QdR 382 at 387.
The test to be applied in the present case can be found in AMEV-UDC op.cit. at 139:
“(it) is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term.”
BCL has not advanced any money to Myallhurst. It has provided a credit arrangement under the BTP. It has no obligation to provide an equivalent number of barter dollars to the BTP. This is one factor to consider in determining the oppressive nature of the Rule. When one considers the relationship between the parties, the fact is that Myallhurst got the benefit of credit, obtained goods and failed to make good the negative trade balance. I find that a Court should not re-write the agreement and set aside a term of a contract when in fact Myallhurst has received a substantial benefit.
In Elsley v JG Collins Insurance Agencies Ltd (1978) 83 DLR (3d) 1 at p15 Dickson J in a judgment of the Supreme Court of Canada said:
“It is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression.”
This case was referred to by Wilson and Toohey JJ op.cit. 140.
The recovery by BCL may be seen as a “windfall” but it does not follow that it is oppressive to the defendants. The amount is no larger than the benefit which had accrued to Myallhurst as at the date of termination (subject to cash fees payable): Legione v Hateley op.cit. 445. I find, therefore, that it is not an unconscionable nor oppressive term as Myallhurst received goods to the value of $131,087.81 (Exhibit 3). The additional fees are consequent upon its other contractual obligations and it is not suggested they are penal in nature. There was no additional sum payable over and above the credit received notwithstanding it may induce the member to balance the account. If an additional sum were payable it could be categorized as penal: The Protector Annuity Loan Co op.cit. 595‑6.
The fact that Rule 34(a) is an inducement to cause members to meet their obligations does not mean that it is a penalty: CRA Ltd op.cit. p875. There must be some inducement to members for the BTP to operate effectively. Also, Myallhurst had the option to trade out within a specific period.
Orders:
1.Judgment for the plaintiff in the sum of $141,092.75 against the first and second defendants together with interest at the rate of ten per centum from 8th April, 1997.
2.Order that the defendants do pay the plaintiff’s costs including reserve costs (if any) to be assessed.
0
4
0