Border Printing Services Pty Ltd v Australian Guarantee Corporation Ltd

Re: BORDER PRINTING SERVICES PTY LTD; MERVYN GEORGE HOWES; LOUISE ANGELA
BANDIERA; DAVID PHILLIP STEPHEN and A.D. & L.F. STEPHEN PHOTOGRAPHIC
LABORATORIES PTY LTD
And: AUSTRALIAN GUARANTEE CORPORATION LIMITED
No. QLD G170 of 1986
Penalty - Interest

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Penalty - what constitutes penalty - chattel lease - total rent payable in full at outset, but for which no suit can be brought until failure to make monthly payments - repudiation by hirer - accepted by owner - damages for loss of bargain.

Interest - "unless good cause is shown to the contrary" - obscure provisions in agreement - clauses allowing recovery of sums greater than law allows.

Federal Court of Australia Act 1976, s.51A

HEARING

BRISBANE

#DATE 19:12:1988

Counsel for the Respondent: R.G. Bain

Solicitors for the Respondent: Henderson Trout

ORDER

The claim by the first, second and third applicants against the respondent be dismissed;

The first, second and third applicants pay to the respondent the sum of $38,000;

The first, second and third applicants pay the respondent's costs of and incidental to the claim and cross-claim, to be taxed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

There are five applicants in these proceedings, which have been settled as between the fourth and fifth applicants on the one hand, and the respondent on the other. As to the claim by the first, second and third applicants, that will be dismissed by reason of their failure to appear at the trial.

The only live issue, then, is the cross-claim by the respondent against the first, second and third applicants. They did not appear, but have pleaded to the cross-claim, and it is conceded by Mr Bain on behalf of the respondent that it is necessary to consider the question of penalty raised by that pleading.
The cross-claim is for moneys due under a chattel lease agreement made between the first applicant and the respondent on 12 June 1984 and guaranteed by the other applicants or for damages for breach of the lease, an obligation to pay which is also said to be covered by guarantee. The lease contemplated, to put it loosely, that monthly payments under it would be made for five years concluding on 12 May 1989.
The first applicant soon made default in the monthly payments, and on 17 January 1985, the leased goods were repossessed. On the same date, the respondent received a letter from the first applicant signed by the second applicant advising that no further payments under the lease agreement were proposed to be made. The chattels were sold by the respondent on 2 August 1985 for $9,500; expenses of repossesion total $470.
The lease agreement is framed as a series of promises by the lessee ("I") to the lessor ("you"). Under clause 4 the first applicant agrees -

"(a) to pay to you the total rent described in the Schedule prior to or upon acceptance of my

offer for the whole period of the lease

described in the Schedule."

Reference to the Schedule shows that the total rent is $57,093, and the Schedule also says:

"Total rent is payable in full upon or before

acceptance by you of this offer, provided that you will not if I do not pay the total rent at the time aforesaid exercise any of your rights and powers

contained herein nor shall interest on such rent

accrue so long as I shall pay to you on account of such rent ..."

There follows a stipulation of the monthly amounts of rent, namely $502.15 per month from 12 June 1984 up to and including 12 May 1985, and $1063.90 per month commencing 12 June 1985 up to and including 12 May 1989.

The reference to interest in the part of the schedule just quoted ties in with another part of clause 4 under which the applicant agrees -

"(c) to pay interest at the rate of 18% per annum on any moneys payable hereunder which may from time to time be overdue."

Up to this point, one would perhaps be inclined to say that the effect of the agreement is to make the lessee absolutely liable for the full rent at the outset. However, it was suggested by Mr Bain that it does not have that effect. The expression "will not ... exercise any of your rights and powers contained herein", read strictly, would not necessarily include a right simply to sue for the whole sum if not paid on the due date (12 June 1984), but a broad reading of the words "contained herein" could encompass the right to sue.
If those words should be read in that way, then the lessee's legal position at the date of entry into the agreement is that it is not obliged to make immediate payment of the whole sum, but obliged to pay only the monthly instalments. Some slight support for this reading is obtained from clause 5, which gives a right of repossession if -

"... I do not pay the rent upon or before acceptance by you as aforesaid and thereafter at any time do not make within 3 days of the applicable date

described in the Schedule any monthly payment

therein described ..."

This makes no logical sense, for if the rent is paid on or before acceptance as the schedule requires, there is no need to make any monthly payments; everything will have been paid at the outset. But this part of clause 5 seems to contemplate that the lessee is entitled to keep the goods leased if it makes the monthly payments.
Under clause 8, if the lessee repudiates and that is accepted -

"... my liability to you for the payment of the

total rent specified in the Schedule hereof ...

shall not be affected ..."

In contrast, in O'Dea v. Allstates Leasing System (W.A.) Proprietary Limited (1983) 152 CLR 359, the lease made: "All moneys due for unexpired terms ... immediately due and payable" on repossession. There was a similar provision in the later case of AMEV-UDC Finance Limited v. Austin (1986) 162 CLR 170; see at p 173. In those cases, in one way or another, the judges arrived at a conclusion that what they had to consider was a claim for accelerated rent, although, as in this case, the whole rent was expressed to be payable at the outset.
Clause 8 goes on to say that the lessee must pay the difference between the residual value of the goods and the price realised on sale.
The difference between the drafting of the present lease and that considered in the two High Court cases is such that it is uncertain whether one should rely on those authorities in support of the view that the true interpretation of this lease is not that the whole rent is immediately due at the outset.
As I have indicated, there is a possible reading of the words "any of your rights and powers contained herein" in the schedule as including the right to sue, implicitly conferred. To do so accords better with what may be assumed to have been the parties' real intention. I think I should give the expression that broad construction, although it must be admitted that the opposite view attracted me at first.
The result is that one has a total rent payable in full at the outset, but for which no suit can be brought until there is a failure to make the stipulated monthly payments. That is the same, in substance but not in form, as a provision that the total rent is not payable in full until there is a failure to pay monthly instalments.
The result is that, in accordance with the authorities I have mentioned, the obligation to pay the whole rent which I have deduced by this rather laboured construction is a penalty, and unenforceable, as not being a genuine pre-estimate of the loss. So much was virtually conceded. If the accepted repudiation takes place early, and the clause applies, the lessor can under clause 8 have his cake and eat it too.
The next question is whether any damages are recoverable. In the AMEV-UDC case (above) the High Court held, in rather a similar situation, that the financier could recover no more than the unpaid (past) instalments with interest, not damages for loss of bargain. However, there is an important difference between that case and this. There the owner exercised a contractual right to determine the hiring on failure to pay instalments, whereas here there was repudiation by the hirer, which was accepted by the owner. It was not clearly decided in the AMEV-UDC case that that is a critical difference. Of the majority, Gibbs C.J. merely said that no question arose as to the position if there had been a repudiation (p 174) but Mason and Wilson JJ. said in effect that the lessor could recover the damages sought if there were a "fundamental breach, breach of an essential term or repudiation" (p 186).
Of the other two judges in the AMEV-UDC case, neither favoured the distinction relied on by Mason and Wilson JJ. and Dawson J. expressly rejected it (p 213). Nevertheless, it seems to me right to follow the view of Mason and Wilson JJ. and hold that damages for loss of bargain are recoverable by the respondent.
The Court's task, then, is to compare the cross-claimant's position in the events which have happened with that which it would have enjoyed had it received all the instalments. In the latter event, it would have been entitled to sell the goods on expiration of the term and recover any deficiency on sale - i.e. the difference between the net price obtained and the residual value (clause 12).
As Mr Bain pointed out, it is impossible to assess that figure, because the time at which the sale would have occurred has not arrived and because the goods have already been sold. As I have mentioned, the goods were sold for a net sum of $9,030. They would presumably have realised a lesser sum if sold at the end of the five year lease.
But the problem is apparent rather than real: if the agreement had been carried out as contemplated, in one way or another the respondent would have received the residual value, $13,350, at the termination of the lease; so that one merely compares the value of the payments the respondent has actually received (including the $9,030) with the value of what would have been received (including the $13,350).
On the evidence of Mr D.G. Stirling, as at the date of repudiation (18 February 1985), the value of the unpaid past and future instalments of rental was $39,754.90. He calculated that using a discount rate of 15.66%, which was described as the "internal rate of return" on the agreement and that seems a reasonable percentage. As to the sum received on sale, its value as at the date of repudiation, taking into account costs incurred, was about $8,540; that must be taken off. The residual value ($13,350) discounted to the date of repudiation was calculated at $6,874.06 producing a total sum which I shall round off to $38,000.
The next question is whether any interest should be allowed, and if so how much. The theory on which interest is payable is that the lessee should have met its obligations on the date of acceptance of the repudiation - i.e. it should have paid about $38,000 then. But that was not the sum which was then due under the terms of the lease; it was, rather, the sum then due on the basis that what the lease required to be paid was inexigible. Plainly, the lease's requirement (quoted above) that interest be paid at 18% on any unpaid sum due under it does not apply.
Resort must be had then to the Court's jurisdiction to make an allowance of interest on damages, under s.51A of the Federal Court of Australia Act 1976.
That section came into operation on the 22 November 1984 and therefore applied in this suit. It is unnecessary to set out the whole. The effect of sub-section (1) is to oblige the Court to include interest up to judgment "unless good cause is shown to the contrary".
Some guidance as to the operation of a similar provision - requiring an award of interest unless there was good cause, is to be found in Batchelor v. Burke (1981) 148 CLR 448. The provision was construed as contemplating an award of interest to "compensate the plaintiff for the detriment that he has suffered by being kept out of his money" (p 455). It would seem a little odd to compensate the respondent for its not having received, not the sum agreed to be paid, but another sum assessed as damages on the basis that the agreed sum was not payable.
The form of lease is obscurely drawn on the critical point as to whether the lessor has in truth an absolute right to recover the whole of the rent in advance, as parts of the document seem to say. Further, on the construction I have given it, the clause which was intended to cover precisely the situation which has arisen (clause 8) provides for a sum which should at the date of the agreement have been known to be irrecoverable in law.
I have come to the conclusion that there is good cause within the meaning of s.51A. It is not in the interest of commerce, or litigation about commerce, to encourage the inclusion in standard business forms of provisions of such obscurity, nor to encourage the thought that one may, without disadvantage, include provisions in leases purporting to allow recovery on termination of sums greater than the law allows. That is presumably done on the theory that the lessee may not take the point, but if he does the lessor will still be able to recover a substantial sum by obtaining an award of damages including interest.
The judgment will therefore be for $38,000 with costs.

[1988] FCA 737

19 DECEMBER 1988