Café Du Liban Pty Ltd v Bespoke Garage Pty Ltd

[2017] NSWSC 779

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Café Du Liban Pty Ltd v Bespoke Garage Pty Ltd [2017] NSWSC 779
Hearing dates:	10 May 2017
Date of orders:	16 June 2017
Decision date:	16 June 2017
Jurisdiction:	Common Law
Before:	Beech-Jones J
Decision:	(1)    On or before 31 July 2017 the parties file and serve draft forms of order to give effect to these reasons together with submissions in support which are not to exceed 5 pages; (2)    The proceedings be listed for mention on 6 September 2017 at 9.30am.
Catchwords:	LOCAL COURT APPEAL – agreement for the supply of coffee – agreement for the hire of a coffee machine – customer repudiated the agreements – supplier sued for amounts owing under agreements and outstanding rental payments and price payable for minimum amount of coffee for remainder of term of contract – whether quality of coffee supplied in accordance with terms of contract – whether supply contract subject to a three month probation period – whether clause enabling recovery of price payable for minimum amount of coffee for remainder of term of contract was a penalty – whether clause enabling recovery of rental payments for coffee machine for term of agreement was a penalty – challenge to credit finding on appeal to Local Court – no question of law raised in making credit finding – error of law on part of presiding Magistrate in determining whether contract subject to a probation period – leave granted to raise question of law and fact – held supply contract not subject to probation period – presiding Magistrate erred in addressing whether contractual clauses were penalties – leave granted to raise question of law and fact to enable that to be determined – whether the clause requires the payment of a sum “out of all proportion” to the protection of the legitimate interests of the non defaulting party – whether the totality of the circumstances suggests that the only, or at least predominant, purpose of the clause is to punish the defaulting party – Held clause in supply contract was a penalty – clause in loan contract for hire of coffee machine not a penalty – parties directed to bring in proposed orders to give effect to Court’s reasons.
Legislation Cited:	Local Court Act 2007
Cases Cited:	Amev-UDC Finance Ltd v Austin [1986] HCA 63; 162 CLR 170 Andrews v ANZ Banking Group Ltd [2012] HCA 30; 247 CLR 205 Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 Dranichnikov v Minister for Immigration and Multicultural Affairs [2003] HCA 26; 77 ALJR 1088 Dunlop Pneumatic Tyre Company v New Garage and Motor Company Limited (1914) 1 AC 79 Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; 218 CLR 471 Fox v Percy [2003] HCA 22; 214 CLR 118 IAC (Leasing) Ltd v Humphrey [1972] HCA 1; 126 CLR 131 Jaffarie v Quality Castings Pty Ltd [2015] NSWCA 335 Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd [1906] HCA 87; 4 CLR 672 Legione v Hateley [1983] HCA 11; 152 CLR 406 Lesley-Swan v Owners SP 32725 [2013] NSWSC 1635 Masters v Cameron [1954] HCA 72; 91 CLR 353 Maybury v Atlantic Union Oil Co Ltd [1953] HCA 89; 89 CLR 507 O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; 152 CLR 359 Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; 90 ALJR 835 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; 224 CLR 656 Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 The Australian Gas Light Co v The Valuer General (1940) 40 SR (NSW) 126 The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64
Category:	Principal judgment
Parties:	Café Du Liban Pty Ltd (First Plaintiff) Dorothy Krahe (Second Plaintiff) Bespoke Garage Pty Ltd (Defendant)
Representation:	Counsel: A Moutasallem (Plaintiffs) J Gatland (Defendant)   Solicitors: Unrepresented (Plaintiffs) A R Conolly & Company (Defendant)
File Number(s):	2016/276065
Decision under appeal	Court or tribunal: Local Court of New South Wales Jurisdiction: General Division Citation: 2015/308817 Date of Decision: 19 August 2016 Before: Magistrate S Freund File Number(s): 2015/308817

Judgment

1. The plaintiffs in these proceedings, Café Du Liban Pty Ltd (“Liban”) and Dorothy Krahe, appeal against a judgment entered against them in the Local Court for $66,323.68, with interest, in favour of Bespoke Garage Pty Ltd (“Bespoke”) on 19 August 2016. They also contend that, if they are successful in their appeal, then an order should be made setting aside a fixed sum costs order made against them for $44,000 on 17 February 2017 (the “costs order”).

2. An appeal to this Court from a judgment given by the Local Court in the exercise of its civil jurisdiction is governed by ss 39 to 41 of the Local Court Act 2007 which relevantly provide:

39 Appeals as of right

(1)   A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court may appeal to the Supreme Court, but only on a question of law.

…

40 Appeals requiring leave

(1)   A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court on a ground that involves a question of mixed law and fact may appeal to the Supreme Court but only by leave of the Supreme Court.

…

41 Determination of appeals

(1)   The Supreme Court may determine an appeal made under section 39 (1) or 40:

(a)   by varying the terms of the judgment or order, or

(b)   by setting aside the judgment or order, or

(c)   by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court’s directions, or

(d)   by dismissing the appeal.

3. As I will explain, some aspects of Liban and Ms Krahe’s appeal do not raise questions of law. Where appropriate, I will treat their complaint as an application for leave to raise a ground that involves a question of mixed law and fact (s 40(1)). Counsel for Liban and Ms Krahe, Mr Moutasallem, contended that in the event that the Court finds that the presiding Magistrate erred in law it should, to the greatest extent possible, proceed to resolve the issue raised by the question of law that gave rise to the error rather than remitting the matter to the Local Court for further hearing (s 41(1)(c)). He submitted that in doing so the Court should, if necessary, grant leave to appeal on a question of mixed law and fact (s 40(1)).

4. The considerations affecting a decision to grant leave to appeal under s 40(1) include whether any reason has been shown to doubt the correctness of the impugned part of the Local Court decision and the desirability of avoiding the parties incurring further costs and expense in litigating the matter if it is remitted to the Local Court. However, in an appeal under ss 39 to 41 of the Local Court Act this Court has no power to make any finding of fact (Lesley-Swan v Owners SP 32725 [2013] NSWSC 1635 at [70] to [75]). This means that if, following the determination of any question of law or, with the grant of leave, any question of mixed law and fact, there remains any factual question to be resolved, then the proceedings must be remitted to the Local Court for further hearing.

Background

5. Except for the matters referred to in [10] to [12], [15] to [17] and [21], the following facts are either taken from the presiding Magistrate’s judgment, or were not in dispute. The matters referred to in [10], [12], [15] to [17] and all but for the last sentence of [21], are taken from the affidavit of a director of Bespoke, Mr de Caires. As I will explain, the presiding Magistrate accepted Mr de Caires’ evidence.

6. During the course of 2014, Ms Krahe and her husband, Mr Malas, undertook preparation for the opening of a café. In July 2014, Mr Malas contacted a director of Bespoke, Mr de Caires, about the possible supply of roasted organic coffee beans. The three of them attended a tasting session on 28 August 2014 and another one on 12 September 2014 at a café that used Bespoke’s product.

7. On 28 October 2014, Mr de Caires emailed Mr Malas and Ms Krahe. His email attached two letters which bore the date 13 October 2014. The first letter advised them that the prices on coffee blends were as set out in the other letter. This letter also stated that “I have looked into a couple of machines that would suit your venture and [attach] the options for the supply of these machines on a rental through silverchef that will be contracted through Bespoke Coffee Traders.”

8. The other letter, dated 13 October 2014, commenced by stating:

“Dear Raed and Dorothy

I am very excited to present a letter of offer to you and look forward to hopefully moving ahead with this opportunity.

There will be three (3) months probation period for trading …”

…”

9. This letter then set out prices per kilogram for various coffee blends. Under the heading “Machine Supply”, the letter stated that “machine supply will be on a two year contract with coffee supply from Bespoke Coffee Traders”. The remainder of the letter provided different options for the supply of two different brands of coffee machines and also included a document entitled “Rental Calculator”, said to have been provided by “silverchef hospitality equipment funding”.

10. In his affidavit sworn 10 May 2016, Mr de Caires stated that he telephoned Mr Malas on 28 October 2014 and spoke to him about the proposal. He said that Mr Malas stated, amongst other things, “I’ve seen your proposal and we are happy with it but we will contact you when we are ready”.

11. In his affidavit Mr de Caires stated that on about 10 February 2015, Mr Malas sent him a text message advising that he and Ms Krahe were “good to go in four weeks”. Mr de Caires responded “sounds good … let me know when is a good time to catch up so we can revise dates, coffees and machines so we have them ready for the opening”.

12. Mr de Caires said that he had a meeting with Mr Malas on 12 February 2015. According to Mr de Caires they discussed the time by which Mr Malas’ café would be ready to commence trading.

13. Mr De Caires stated that on 5 March 2015 he received a call from Ms Krahe who said words to the effect:

“Sergio I’m phoning to confirm that we are going ahead with the Verona RS in white as the Verdi is too small. Can you please prepare proposals and contracts based on that decision. I will send you now the company name and who to make the contract out to.” (emphasis added)

14. The presiding Magistrate set out this exchange in her Honour’s judgment. However, the version of the affidavit included in the Court book has a line through the italicised portion of this conversation. It was accepted that this meant that this portion of this affidavit was not read at the hearing in the Local Court. In the end result, any uncertainty about her Honour’s reliance on the italicised portion of this passage does not affect the outcome of this appeal. I have not had regard to it.

15. Also on 5 March 2015 at 10:31am, Mr de Caires received an email from Ms Krahe advising of an ABN number, a company name, an address and some details.

16. On 9 March 2015, Mr de Caires exchanged text messages with Mr Malas. In his message, Mr de Caires stated that “I’ll prepare contracts and send them through and we can meet on Wednesday”.

17. The next day, Mr de Caires sent an email to Mr Malas and Ms Krahe attaching quotes for the brand of coffee machine that they had requested. His email also stated:

“In addition I have attached the Silverchef rental calculator so you can see the repayments and calculations. If you agree let me know and I’ll prepare the contracts and get the ball rolling with finances so we can get an installation date scheduled. Also as mentioned as you have committed to a 2 year agreement with Bespoke Coffee Traders with the machine supply I will waive bond asked by Silverchef and we as your roasters will make this payment.”

18. There were further emails exchanged on that day and the following days concerning the supply of electric grinders.

19. On 12 March 2015 at 5:23pm, Mr de Caires sent an email to Ms Krahe and Mr Malas attaching what he described as the “Coffee and Equipment Contract as well as an application I will need you to complete”. The email requested that they “look at the contract” and “if all is ok, please let me know if you are available tomorrow so we can sign contracts”. Enclosed was a contractual document entitled “Loan of Equipment – Terms and Conditions” relating to a coffee machine and a grinder (the “Loan Contract”). Also attached was a further document entitled “Customer Application Form” followed by standard terms and conditions concerning the sale of coffee (the “Supply Contract”).

20. At 9:23pm that evening, Ms Krahe sent a text message to Mr de Caires stating, inter alia, “Hey Sergio contracts look fine”. They exchanged texts about meeting to execute the documents.

21. In his affidavit Mr de Caires stated that on Friday, 13 March 2015 at 1:00pm he met with Ms Krahe. He asked her if she had had the “chance to review the contracts”. He said that Ms Krahe said “yes they are fine” and that it “all looks good and really straightforward”. Ms Krahe executed the contracts on behalf of Liban and as guarantor. In cross-examination Ms Krahe agreed that she signed those contracts on that day “without any question” and after having read them.

22. The first supply of coffee took place on or around 17 March 2015. On 19 March 2015, Bespoke supplied the coffee machine and other equipment. However, there were immediate problems. On 27 March 2015, Mr Malas told Mr de Caires that “I don’t think this is going to work out”, complained about the coffee blends and stated “we will not be changing it or using you going forward”.

23. On 19 April 2015, Mr de Caires received a text from Mr Malas stating that:

“I just want to give you heads up that I require you to formally withdraw the contract and any future legal litigation against our company prior to you giving us the grinder. Please note that you offered a three month probation period that we expect you to honour. We will also be holding our rights to transfer the coffee machine to our Silverchef account until we get assurances that our contract be voided and no potential litigation to take place …”

24. In her judgment, the presiding Magistrate did not elaborate upon what happened in the period after this communication. However it is common ground that no more coffee was supplied and a number of invoices for amounts owing under the Supply Contract remained outstanding. Liban retained possession of the coffee machine and the other equipment, but ceased paying amounts to Bespoke. There was a debate in the correspondence about whether there was a probation period.

25. On 12 August 2015, solicitors acting on behalf of Bespoke wrote to Ms Krahe asserting that Liban had repudiated the Supply Contract and that Bespoke accepted the repudiation. The letter asserted that Liban and Ms Krahe were liable under clause 11.3 of the Supply Contract to pay $42,432.00. The letter asserted that Liban and Ms Krahe had defaulted on the rent payments under the Loan Contract. It stated that the contract was terminated under clause 12(a) and that Liban had otherwise repudiated the agreement. The letter sought the return of the equipment and asserted that Liban and Ms Krahe were liable for past instalments and future instalments under clause 12(b) of the Loan Contract totalling $22,391.68. The total amount of Liban and Ms Krahe’s indebtedness was said to be $64,583.20.

26. Nevertheless, the letter offered to compromise the amount claimed from them as follows:

“In relation to the supply of coffee payment of 52 weeks of lost profits based on a supply of 30 kilograms/week at a profit margin of $8/kg being $12,480. The total money payable under the above offer is therefore $13,842.90.”

27. This offer was not accepted. On 21 October 2015, Bespoke commenced proceedings. On 31 October 2015, the coffee machine and a grinder were returned to Bespoke.

The Supply Contract

28. As noted, the Supply Contract consisted of a Customer Application Form with attached standard terms and conditions. The Customer Application Form included the names and details of the customer. It also included an entry “Minimum weekly purchases: 30 kg per week 27.20 Price (per kg)” and identified a particular type of coffee.

29. The definitions in the Standard Terms & Conditions in the Supply Contract defined “Minimum Weekly Purchases” as the “minimum quantity of coffee the Customer must purchase from the Supplier per week as set out in the Customer Application Form”. The terms and conditions of the Supply Contract addressed pricing, delivery, passing of title and defects as well as providing for Ms Krahe’s guarantee. Within those provisions, clause 3.2 conferred on Bespoke the power “at [its] sole discretion [to] vary or adjust the Price upon 4 weeks prior written notice to the Customer”.

30. Clause 11 provided:

“11.   Cancellation or termination

11.1   The Supplier may terminate these terms and conditions or cancel delivery of Goods at any time before the Goods are delivered by giving written notice. On giving such notice the Supplier shall repay to the Customer any sums paid in respect of the Price. The Supplier shall not be liable for any loss or damage whatever arising from such cancellation.

11.2   In the event that the Customer cancels delivery of Goods the Customer shall be liable for any loss incurred by the Supplier (including, but not limited to any loss of profits) up to the time of cancellation.

11.3   In the event this Agreement is either terminated or repudiated by the Customer then the Customer shall be liable for the Supplier’s costs and damages associated with such termination or repudiation and the Customer shall pay the Supplier accumulated loss and compensation for early termination as follows:

(a)   If the agreement is terminated in the first six months = Minimum Weekly Purchases x Price x 52 weeks

(b)   Within 6 – 12 months = Minimum Weekly Purchases x Price x 30 weeks

(c)   Between 12 – 18 months = Minimum Weekly Purchases x applicable price per Kg x 20 weeks.

(d)   Between 18 – 24 months Minimum Weekly Purchases x applicable price per Kg x 10 week[s].

11.4   The Customer acknowledges that the amounts set out in clause 11.3 are fair and reasonable.”

31. Clause 12.11 reserved to Bespoke the “right to review” the terms and conditions. If, following any such review, Bespoke decided there was to be a change “then that change will take effect from the date on which the supplier notifies the customer of such change”.

32. Three matters should be noted about the Supply Contract.

33. First, nothing in the Supply Contract expressly stated that Liban was obliged to purchase the “minimum weekly amount of coffee” referred to in the application form. Throughout the hearing in the Local Court, and in this Court, the parties litigated the matter on the assumption that that was the effect of the entries on the application form and the definitions to which I have referred. That common understanding of the agreement was not sought to be re-agitated on appeal.

34. Second, the terms of the Supply Contract are very much skewed in favour of Bespoke. It had the power to unilaterally vary the terms on which coffee was supplied including the price and the minimum weekly amount.

35. Third, in her judgment the presiding Magistrate assumed that the Supply Contract was for a term of 24 months. However there is nothing in the Supply Contract that makes a reference to any such term. Counsel for Bespoke, Ms Gatland, contended that the existence of such a term could and should be inferred from the commercial connection between the Supply Contract and the Loan Contract, which was for a term of 24 months. Ms Gatland also relied on clause 11.3 which set out a scheme for graduated payments that she submitted depended on what portion of an assumed term of 24 months remained.

36. The parties litigated the matter in the Local Court on the agreed basis that the term of the Supply Contract was 24 months. In this Court, Mr Moutasallem sought to depart from that assumption. He sought to employ the apparently unlimited term of the Supply Contract in support of his argument that the contract was in fact subject to a probation period of 3 months and, if that argument was not successful, contended that the contract should be construed as though it was subject to a term that his client could terminate on reasonable notice (see Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438).

31. On reflection, I do not consider that Liban and Ms Krahe should be allowed to depart from the common assumption in the Local Court that the term of the Supply Contract was 24 months. That assumption was the foundation of the presiding Magistrate’s judgment and to revisit it would effectively require the entire matter to be re‑litigated.

The Loan Contract

38. The Loan Contract consisted of a schedule with three pages of attached terms and conditions. The schedule recorded that the equipment being lent was a coffee machine and a grinder. It stated that the “intended purpose/permitted use” of the equipment was “for the preparation, supply and sale of Bespoke Garage products” and that the equipment lent could “not be used with any coffee or product other than Bespoke Garage products”. The schedule referred to a minimum weekly purchase of 30kgs per week of a particular brand of coffee at a particular price. The schedule also stated that the agreement would begin on the Commencement Date and continue for “24 months unless terminated earlier in accordance with this agreement”.

39. The terms and conditions of the Loan Contract recorded that Bespoke agreed to rent Liban the equipment in the schedule and that the term of the agreement would continue for the term identified in the schedule. Clause 11 of the Loan Contract described various default events including a failure to pay an instalment (sub clause 11(a)).

40. Clause 12 of the Loan Contract provided:

“12   TERMINATION

(a)   If a Default Event occurs, You will be deemed to have repudiated this Agreement and We will then be entitled to terminate the Agreement by written notice to You or by taking possession or attempt to take possession of the Equipment.

(b)   On such termination of this Agreement You will be obligated to pay an amount equivalent to:

(i)   any instalments and any other monies then due but not paid;

(ii)   the present value of Instalments not then due;

(iii)   Our administration costs;

(iv)   Our costs of repossessing or attempting to repossess the Equipment; and

(v)   any other monies payable by You under this Agreement including under clause 13.

(c)   We reserve the right to terminate this contract at any time by written notice, should We, for any reason whatsoever, be unable to or cease supplying you Bespoke Coffee Products. We shall not be liable for any loss or damage whatever arising from such termination.” (CB 246)

41. Clause 13 obliged Liban to return the coffee machine and grinder on termination of the agreement.

The Proceedings Below

42. In the Local Court, Bespoke sought recovery of amounts it claimed were owing under clause 11.3 of the Supply Contract and clause 12(b) of the Loan Contract as well as the costs of repairs to, and repossession of, the coffee machine and other equipment. The presiding Magistrate upheld all of these claims against both Liban and Ms Krahe as guarantor, except the cost of repossessing the coffee machine. For the claim under clause 11.3 of the Supply Contract her Honour awarded the sum of $42,432; for the claim under clause 12 of the Loan Contract her Honour awarded the sum of $22,391.68; and for the costs of the repairs to the coffee machine her Honour awarded $1,500.

43. The details of her Honour’s reasoning are discussed below. At this point it suffices to state that her Honour identified and resolved all three substantive issues that were raised in the proceedings adversely to Liban and Ms Krahe. The first issue was whether or not the Supply Contract was subject to a “probationary period” of three months, that is, whether it contained a term enabling Liban to terminate the Supply Contract within three months of the agreement being entered into. Liban and Ms Krahe submitted that it was and that within that period, specifically on 19 April 2015, they terminated the Supply Contract.

44. The second issue was whether the coffee beans that were supplied were in accordance with the terms of the Supply Contract. Her Honour rejected Liban and Ms Krahe’s contention that they were not.

45. The third issue was whether so much of clauses 11.3 of the Supply Contract and 12(b) of the Loan Contract that required payment of amounts in excess of what was otherwise payable on termination as damages for breach of contract, were “akin to penalty clauses” and “therefore … void and unenforceable”. Her Honour held that both of those clauses were not penalties.

46. Her Honour’s finding that an amount was recoverable under clause 11.3 of the Supply Contract rendered it unnecessary for her Honour to determine an alternative claim made by Bespoke to recover damages for the repudiation of the Supply Contract and the Loan Contract. This is further addressed below.

Ground 7 - Credit Finding

47. Ground 7 of the summons contends that her Honour “erred in making the credit findings at paragraph 39 of the written judgment”.

48. This ground relates to her Honour’s conclusion on the second issue noted above. On behalf of Liban and Ms Krahe it was contended that they were entitled to terminate the Supply Contract because Bespoke did not supply them with an espresso coffee blend as requested and did not supply them with the same blend of coffee as they had tasted during the first and second tastings noted above. It appears to have been accepted that a resolution of this complaint turned upon a resolution of the competing evidence about the coffee tastings of Ms Krahe and Mr Malas on the one hand, and Mr de Caires on the other.

49. In addressing this issue, her Honour outlined the competing evidence of those witnesses on the topic of whether or not Ms Krahe and Mr Malas were satisfied with the quality of coffee that was supplied. In relation to the first tasting session, her Honour accepted Mr de Caires’ evidence that Ms Krahe identified a blend she liked (“tasted wonderful”) and stated that they would proceed with it (“this is the blend we will go with”). Her Honour noted Mr Malas’ evidence that at the first tasting he said “it needs more work”. Her Honour described the evidence concerning a similar dispute about what was said at the second tasting. Her Honour noted that, even though Ms Krahe and Mr Malas asserted that they were not satisfied with the coffee that was sampled, they were not offered and did not seek a third tasting. Her Honour then concluded (at [39]):

“I had the opportunity to hear oral evidence from Mr de Caires, Ms Krahe and Mr Malas in these proceedings. I found Mr de Caires, to be a witness of truth who was consistent and forthright in his answers. On the other hand, I found both Ms Krahe and Mr Malas to be aggressive and argumentative in manner whilst in the witness box. They did not answer the questions put to them by Ms Gatland in a forthright manner and many of their answers in my view were self-serving. Accordingly, I found the evidence of Mr de Caires to be more reliable, frank and trustworthy and I preferred his evidence over the evidence of Ms Krahe and Mr Malas, unless corroborated by other extrinsic material.”

50. In his written submissions, Counsel for Liban and Ms Krahe, Mr Moutasallem, contended that this paragraph reveals that the presiding Magistrate abandoned the caution advised by Gleeson CJ, Gummow and Kirby JJ in Fox v Percy [2003] HCA 22; 214 CLR 118 at [30] (“Fox v Percy”) against “too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses”. Mr Moutasallem referred to the approval given in Fox v Percy to the practice of making findings of fact based on “contemporary materials, objectively established facts and the apparent logic of events” (at [31]). In oral submissions, Mr Moutasallem also submitted that the above extract from the judgment incorrectly characterised the manner in which each of Mr de Caires, Ms Krahe and Mr Malas gave evidence. He contended that a review of the transcript reveals that the presiding Magistrate reminded both Mr de Caires and Mr Malas that they had to answer the questions that were asked of them in cross-examination, but a similar admonition was not given to Ms Krahe.

51. There are two difficulties with these contentions. The first is that a review of the entirety of her Honour’s judgment reveals that, to a substantial degree, her Honour did base her credibility finding on a consideration of contemporaneous materials, objectively established facts and the logic of events. In that part of the judgment that preceded the above extract, her Honour set out the competing evidence of the witnesses in light of the chronological events as they unfolded. In the passage that immediately followed the above extract, her Honour did likewise in relation to a related dispute about whether Bespoke eventually agreed to provide one coffee grinder or two. On that issue, her Honour noted that the documentary materials, including the Loan Contract, favoured Mr de Caires’ version.

52. Second, as the making of an erroneous or even perverse finding of fact does not raise any question of law (Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 at 282), it must follow that a failure to apply the preferred approach stated in Fox v Percy does not raise any question of law. The passages from Fox v Percy relied on were stated in the context of the determination of an appeal by way of re-hearing (Fox v Percy at [22]) and a discussion of various other forms of appeal (at [20]), which did not include an appeal on a question of law.

53. Ground 7 does not raise a question of law. Further, it would be an exercise in futility to grant leave under s 40(1) to raise a question of mixed law and fact. The subject matter of ground 7 only concerns a question of fact.

54. It follows that I reject ground 7.

Grounds 5 and 6: Probation Period

55. Ground 5 of the summons contends that the presiding Magistrate erred in finding that the contracts were not subject to a probation period of three months. Ground 6 of the summons contends that her Honour erred in law when “her Honour failed to address the submission of the appellants/plaintiffs that based on the evidence of the respondent/defendant he was aware of the existence of the probation period”. These grounds can be dealt with together.

56. As noted, the first issue raised by the pleadings that her Honour addressed was whether Liban and Ms Krahe could terminate the Supply Contract within the “three (3) months probation period” referred to in the letter of 13 October 2014. In his written submissions in the Local Court, Mr Moutasallem submitted that the letter dated 13 October 2014 was “part of a contract” between the parties. He submitted that the fact that written agreements were signed in March 2015 did not, of itself, mean that the terms offered in the letter of 13 October 2014 were not also terms of the contract between the parties. His written submissions also addressed a submission made on behalf of Bespoke namely that, if the letter of 13 October 2014 had any effect as an agreement, it only fell within the so-called third category identified in Masters v Cameron [1954] HCA 72; 91 CLR 353 (“Masters v Cameron”) and was thus “not intended to have, and therefore [did] not have, any binding effect of their own” (Masters v Cameron at p 361)

57. In that part of her judgment that dealt with the issue, the presiding Magistrate identified as a preliminary issue “whether the letter [dated 13 October 2014] constituted an ‘offer’ in a legal sense and whether it was capable of [forming a] binding contract which could be accepted by the other party, in this case Ms Krahe and Liban”. Her Honour then referred to the various categories of agreements described in Masters v Cameron at pp 360-362, that is, agreements reached between parties “who have been in negotiations” but who “also agree that the matter of their negotiation shall be dealt with by a formal contract” (at 360).

58. Her Honour then stated as follows:

“30.   On its face the letter dated 13 October 2014, cannot, on any view be considered a ‘concluded bargain’. There were many terms that were not addressed between the parties. For example how often and when and in what quantity the coffee beans would be supplied and what the make and model of the coffee machine would be. Moreover, if I was to accept the evidence of Ms Krahe and Mr Malas, that they were expecting a third tasting and were not happy with the blend presented to them at the Second Tasting, not even the blend of coffee to be supplied had been agreed at this time. Accordingly I am satisfied on the balance of probabilities that it was not a ‘concluded bargain’ or offer capable of being accepted.

31.   …..

32.   Accordingly I am satisfied on the balance of probabilities that the contracts entered into between the parties on 13 March 2015, namely the Loan Contract and the Supply Contract were upon the terms and conditions as they were executed and did not contain the additional term of a probation period as submitted by the first and second defendants.” (emphasis in bold in original; emphasis in italics added)

59. Unfortunately, this reasoning did not address Liban and Ms Krahe’s case in relation to the Supply Contract. They did not contend that the letter of 13 October 2014 was “a concluded bargain” in its own right, much less one that fell within any of the categories of agreement referred to in Masters v Cameron. Instead they contended that only so much of the letter as referred to a probation period was a term of the agreement between the parties. On that approach, the fact that the letter did not embody sufficient terms to make it contractually enforceable in its own right was not determinative of whether, ultimately, the probation period referred to in the letter formed part of the agreement between the parties for the supply of coffee.

60. Ground 6 of the Summons asserts an error on the part of the presiding Magistrate in failing to address Mr de Caires’ evidence that “he was aware of the existence of the probation period”. Mr de Caires’ subjective knowledge of that matter was irrelevant. However, as argued, this ground was directed to the failure of the presiding Magistrate to address Liban and Ms Krahe’s case in respect of the probation period. It follows that ground 6, as argued, should be upheld. As just explained, her Honour did not address their case on this issue. Such a failure amounts to an error of law at least in the form of a failure to afford natural justice (Dranichnikov v Minister for Immigration and Multicultural Affairs [2003] HCA 26; 77 ALJR 1088 at [24] per Gummow and Callinan JJ). Put differently, the question of law that arises is whether the presiding Magistrate’s findings in respect of the absence of any contractual effect of the letter of 13 October 2014, considered alone, disposed of this aspect of Liban and Ms Krahe’s case. The answer to that question is that it did not and therefore this aspect of their case was not addressed.

61. The next question that arises is what relief should follow from this ground being upheld. There also remains to be considered ground 5 of the summons which seeks a finding that the Supply Contract was subject to a probation period. As noted, at the hearing Mr Moutasallem submitted that, in the event this Court upheld this complaint, it should resolve the relevant issue for itself and vary the terms of the judgment rather than remit the matter to the Local Court for a further hearing pursuant to s 41(1)(c)). This submission should be accepted because the matter can be addressed based on the presiding Magistrate’s findings of fact which included an acceptance of Mr de Caires’ evidence. Accordingly I will grant Liban and Ms Krahe leave to appeal on a mixed question of law and fact in respect of ground 5 and determine whether the probation period referred to in the letter of 13 October 2014 formed part of the Supply Contract.

62. A determination of whether a particular statement or promise forms part of the agreement “turn[s] upon what [the] words and conduct [of the parties] would be reasonably understood to convey, not upon actual beliefs or intention” (Equuscorp Pty Ltd v Glengallan InvestmentsPty Ltd [2004] HCA 55; 218 CLR 471 at [34]; “Equuscorp”). The signing of the Supply Contract ordinarily conveys the acceptance by the parties that it embodies the terms of the agreement (Equuscorp at [35]). Any attempt to have recourse to a term outside the signed agreement must fall within the “established categories” of exceptional circumstances in which the Courts will recognise contractual obligations extraneous to the written agreement (Equuscorp at [35]). The only relevant category of exception relied on by Liban and Ms Krahe was one of those identified in Maybury v Atlantic Union Oil Co Ltd [1953] HCA 89; 89 CLR 507 at 517, namely, that where it is “established that the writing was intended to contain only part of a fuller agreement” which contains the proposed term. Even that category cannot be invoked if the proposed term contradicts the terms of the written agreement (Equuscorp at [36]).

63. It is not necessary to determine whether the proposed probation clause is inconsistent with clause 11 of the Supply Contract. Even if it is not, then having regard to the presiding Magistrate’s findings of fact, Liban and Ms Krahe did not establish that the signed agreement was part of some “fuller agreement” that included the probation clause. A period of five months passed between the letter of 13 October 2014 and the execution of the written agreement in March 2015. The probation clause was not referred to in any of the discussions or correspondence between the parties in that period. At least one of the apparent purposes of the probation clause was to enable Liban to consider the quality of the coffee that was to be supplied. They had the opportunity to address that in the interim. Further, the circumstances in which the agreement was signed as set out at [15] to [21] indicate that the parties intended that the signed agreement constitute the full agreement between the parties. Ms Krahe received drafts of the agreements on the evening of 12 March 2015. She signed them the next day in Mr de Caires’ presence after having read them.

64. I reject ground 5 of the summons.

Grounds 1, 2 and 3: Clause 11 of the Supply Contract

65. Ground 1 of the appeal contends that her Honour erred in finding that clause 11.3 of the Supply Contract was not a penalty clause. Ground 2 contends that her Honour misapplied the law with respect to penalty clauses in finding that clause 11.3 was not a penalty clause. Ground 3 contends that her Honour erred in law in failing to address Liban and Ms Krahe’s submission that clause 11.3 of the Supply Contract was a penalty clause because the amount sought to be recovered pursuant to the clause was well in excess of the profit that would have been made had that agreement not been terminated. These grounds can be dealt with together as they all concern the Supply Contract. However, before doing so it is first necessary to outline the state of the law concerning contractual penalties.

Contractual Penalties

66. For present purposes it suffices to describe a penalty as a clause which is “in the nature of a punishment for non-observance of a contractual stipulation” and which “consists of the imposition of an additional or different liability upon breach of the contractual stipulation” (Legione v Hateley [1983] HCA 11; 152 CLR 406 at 445 per Mason and Deane JJ; Andrews v ANZ Banking Group Ltd [2012] HCA 30; 247 CLR 205 at [9]; “Andrews”). This case is not concerned with equity’s power to grant relief in respect of forfeitures imposed as a consequence of the occurrence or non-occurrence of an event that is not a breach of contract or the responsibility of the party the subject of the forfeiture to avoid, that being the topic the subject of the decision in Andrews (at [12], [45] to [46] and [78]).

67. On any view the starting point of any analysis of whether a contractual clause specifying an amount or formula for payment on breach is a penalty is the following extract from the speech of Lord Dunedin in Dunlop Pneumatic Tyre Company v New Garage and Motor Company Limited (1914) 1 AC 79 at 86‑87 (“Dunlop Pneumatic”):

"2.   The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ...

3.   The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ...

4.   To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

(a)   It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ...

(b)   It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ...

(c)   There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage'.

On the other hand:

(d)   It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties ...”

68. In Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; 224 CLR 656; (“Ringrow”) at [12] Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ stated that Dunlop Pneumatic “continues to express the law applicable in this country” while leaving open a “more substantial reconsideration … to a future case”. Their Honours confirmed that “in typical penalty cases, the Court compares what would be recoverable as unliquidated damages with the sum of money stipulated as payable on breach” (at [21]). Further, their Honours reiterated that the “law of penalties” is “an exception from the general rule” that parties are free to bargain on the terms of their agreements such that the supposed penalty must be “out of all proportion” to the loss which flows from the breach (at [32]) before the clause is found to be a penalty.

69. To an extent, the reconsideration of Dunlop Pneumatic contemplated by Ringrow was undertaken in Andrews and in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; 90 ALJR 835; (“Paciocco”). For present purposes it is sufficient to direct attention to Paciocco as it concerns contractual penalties and incorporates the analysis in Andrews.

70. In Paciocco, French CJ, Kiefel, Gageler and Keane JJ upheld a finding by the Full Federal Court that a standard fee imposed by a bank on credit card accounts when the account was in debit and the minimum monthly payment was not made was not a penalty. Nettle J dissented. The Full Federal Court had overturned a finding of the trial judge that the payments were penalties. The trial judge had only allowed the bank to defend the fees by adducing evidence as to the direct costs occasioned when minimum payments remained outstanding and had rejected evidence concerning the affectation of the bank’s wider “financial interests” from the defaults (at [14] and [68]). The latter consisted of provisioning costs being the amounts included in ANZ’s accounts “representing reductions in the value of customer accounts attributable to [the] risk of default” (at [99]), regulatory capital costs, being the costs incurred in funding capital required to be held by the “applicable prudential standards … as a buffer against unexpected losses” (at [100]) and a proportion of the fixed and common costs of the bank’s collection unit (at 101]).

71. The majority in Paciocco accepted that the test of whether a clause of a contract constitutes a penalty is not to be answered by the “language of the contract alone” but instead extends to the “inherent circumstances” of the contract including the “position of the party whose interests are to be protected by the stipulation for the payment of the sum on default” (Kiefel J at [31] with whom French CJ agreed at [2]) and see Gageler J at [146] and Keane J at [243]).

72. However, the majority in Paciocco did not agree on the relevant test. According to Kiefel J, with whom French CJ agreed (at [2]), the relevant test is whether the contractual provision involves the “payment of a sum of money on default … out of all proportion to the interests of the party which it is the purpose of the provision to protect” which may be interests of a “business or financial nature” (at [29]; see also Andrews at [75]). However, Gageler J formulated the relevant inquiry as “whether the conclusion objectively to be drawn from the totality of the circumstances is that the only purpose of the stipulation was to punish” (at [158]). To similar effect, Keane J stated that “[o]nly in cases where gross disproportion is such as to point to a predominant punitive purpose have agreed payments payable on breach of contract been struck down as penalties” (at [221]).

73. The dissentient, Nettle J, did not accept that the proper inquiry is whether an “obligation is properly to be conceived of as a punishment as such”. Instead, his Honour held that the relevant test is whether “an obligation to make a payment on breach of a contractual or other principal obligation is of an amount which is grossly disproportionate to the foreseeable consequences of the breach” (at [330]). His Honour considered that in a “straightforward” case the Dunlop Pneumatic “tests” are “perfectly adequate” whereas in “more complex types of cases” it may be necessary to have regard to “considerations beyond a comparison of the agreed sum and the amount of recoverable damages” (at [322]). His Honour held that the late fee in Paciocco was an example of a “typical penalty case” as referred to in Ringrow and thus the correct approach was to consider “whether the late payment fee was out of all proportion to the amount recoverable as unliquidated damages” (at [343]) which his Honour found that it was (at [371]).

74. Each of the judgments in Paciocco addressed the relevance and status of the above passage from Dunlop Pneumatics. I have already referred to Nettle J’s description of the significance of Dunlop Pneumatics. Otherwise, five matters on that topic should be noted.

75. First, the principles concerning penalties are not confined to or limited to the “tests” stated in Dunlop Pneumatic (at [27] per Kiefel J and [318] per Nettle J).

76. Second, the four tests stated by Lord Dunedin in Dunlop Pneumatic do not have the “character or effect of an operative legal rule” (at [147] per Gageler J and [318] per Nettle J).

77. Third, at least for the majority, to the extent that the first “test” stated by Lord Dunedin in Dunlop Pneumatic, refers to only “loss in the nature of damages directly flowing from the breach” then it is “unduly restrictive” (at [33] per Kiefel J with whom French CJ agreed at [2]). Instead, as noted, consideration can be given to the business or financial interests of the non defaulting party (Kiefel J at [29]). To similar effect, Gageler J held that, while the inquiry posited by the first “test” will often be probative of whether the only purpose of the provision is to “punish”, it will not always be decisive (at [160]). Keane J rejected that what is involved is a comparison between the “impugned payment and what might be recovered by litigation” (at [282]). Instead, his Honour found that a genuine pre-estimate of loss can encompass items of loss which are too remote to be compensable (at [283]). As noted, Nettle J held that the first test from Dunlop Pneumatic is determinative in a “straightforward case”.

78. Fourth, the second “test” from Dunlop Pneumatic was held to have a “narrow range of operation” and to be “confined to the simplest of cases” as it does not take into account the fact that damages can include interest, opportunity costs and damage to a “party’s wider commercial interests” (at [35] per Kiefel J). Similarly, according to Nettle J the second test “represents a possible, but not always necessary, application of the broader principle” expressed in the first test (at [337]).

79. Fifth, the third “test” from Dunlop Pneumatic is only a presumption and can be rebutted if there is evidence that “the damage caused by default may be of such an uncertain nature that it cannot be accurately ascertained” (at [38] per Kiefel J). An instance of this is envisaged by the fourth “test” (at [39]) which is applicable to “damage of a kind which is different from that for which liquidated damages could be assessed” (at [41] per Kiefel J). According to Gageler J the reference to “presumption” in the above passage from Dunlop Pneumatic does not mean that there is any shift in any evidentiary or persuasive onus (at [149] per Gageler J).

80. Paciocco confirms that the above passage from Dunlop Pneumatic has continuing relevance, although an application of the “tests” stated by Lord Dunedin is not determinative as to whether a contract clause providing for the payment of an amount constitutes a penalty. However, the differences between the majority judgments in Paciocco means that there is not an authoritative test as to the circumstances in which a contractual clause will constitute a penalty. Instead there are two tests namely whether, according to French CJ and Kiefel J, the impugned clause requires the payment of a sum “out of all proportion” to the protection of the legitimate interests of the non defaulting party or whether, according to Gageler and Keane JJ, the totality of the circumstances suggests that the clause’s only, or at least predominant purpose, is to punish the defaulting party. It is to be expected that in most cases the application of both tests will produce the same result. Further, in applying those tests, the first test stated in Dunlop Pneumatic continues to be relevant. However, a consideration of the loss which follows from the breach is not confined to damages recoverable from breach. It extends to considering unquantifiable losses, forms of damage that are otherwise too remote to be recoverable in an action for damages and damage to the wider financial interests of the non defaulting party, all considered prospectively at the time of the entry into the contract.

The Presiding Magistrate’s Reasons for Upholding Clause 11.3 of the Supply Contract

81. In the Local Court, Liban and Ms Krahe argued that a determination of whether clause 11.3 was a penalty required a comparison between the sum recoverable under that clause and the amount recoverable as damages for the early termination of the Supply Contract on the hypothesis that the contract would run for the full two years. They relied on the statement in the letter noted in [26] that the profit margin for the sale of the coffee was $8 per kilogram and contended that the maximum damages recoverable for the balance of the contract was $24,960.00. Although in his evidence Mr de Caires asserted that the profit was a “little bit higher”, in its submissions to the presiding Magistrate, Bespoke embraced that figure as part of its alternative damages case for repudiation of the Supply Contract in the event that clause 11.3 was found to be a penalty. Further, the parties appeared to have proceeded on the basis that a profit of $8 per kilogram was what was envisaged at the time the contract was entered into. To the extent necessary I will do likewise.

82. Her Honour dealt with the contention that both clause 11.3 of the Supply Contract and clause 12(b) of the Loan Contract were penalties together. In relation to the Supply Contract, her Honour noted Mr Moutasallem’s submission that the amount sought was greater than the profit that Bespoke could have been expected to make over the assumed two-year balance of the contract. Her Honour also recorded Mr Moutasallem’s submission that clause 12 of the Loan Contract could not be a genuine pre-estimate of damages because it effectively absolved the plaintiff of its duty to mitigate its loss, a matter I will return to. Her Honour then referred to various authorities, including Dunlop Pneumatic, Ringrow and Paciocco.

83. Her Honour concluded as follows:

60.   The case law in my view is clear. A penalty clause is the imposition of an amount which is greater than any amount which would be payable under a contract by way of damages for non-performance. In this case:

a)   the Supply Contract and the Loan Contract were both for a term of two years. In this case the payment due for non-performance arising from the termination for breach of the Supply Contract is less than the amount payable over the full term of the contract; and

b)   In relation to the Loan Contract, the amount payable is merely the total amount of the instalments the Plaintiff was obliged to pay to a third party.

61.   As I am satisfied that neither can be described as ‘extravagant and unconscionable’ in amount or ‘out of all proportion’, it follows that neither Clause 11 of the Supply Contract, or Clause 12 of the Loan Contract are penalty clauses and therefore both are valid and enforceable terms.”

Clause 11.3 of the Supply Contract

84. In support of ground 1 of the appeal, Mr Moutasallem submitted that, as the characterisation of whether or not a clause of a contract is a penalty is a question of construction and, as the proper construction of a contract is a question of law, it follows that the presiding Magistrate’s determination that clause 11.3 of the Supply Contract is not a penalty raises a question of law. Ms Gatland disputed this. Ms Gatland contended that the analysis urged upon the presiding Magistrate and in this Court by Mr Moutasallem of comparing the maximum amount of damages that might be recoverable with the amount recoverable under clause 11.3 involved an evaluative exercise which does not in itself raise a question of law.

85. The proper construction of an instrument or contract that is wholly in writing is a question of law (Jaffarie v Quality Castings Pty Ltd [2015] NSWCA 335 at [32]). However, to the extent that the task of determining whether the clause was a penalty involves ascertaining the “inherent circumstances” of a contract (see [71]) then it involves the making of findings of fact (The Australian Gas Light Co v The Valuer General (1940) 40 SR (NSW) 126 at 146.9 per Davidson J). Further, to the extent that a determination of whether a clause is a penalty involves a comparison of the amount of damages recoverable for breach against the amount payable under the impugned clause and a determination of whether the latter is “out of all proportion” to the former then it involves the making of a finding of mixed law and fact rather that answering a question of law.

86. It is unnecessary to consider this further because of the strength of grounds 1 and 2 of the appeal which are directed to the presiding Magistrate’s approach to Liban and Ms Krahe’s case, rather than to the ultimate correctness of her Honour’s conclusion. The statement by her Honour in the extract set out above at [83] that a “penalty clause is the imposition of an amount which is greater than any amount which would be payable under a contract by way of damages for non-performance” was a sufficiently accurate statement of the applicable law. This statement reflects the first “test” stated by Lord Dunedin in Dunlop Pneumatics (see [67]). While Paciocco limits the significance of that “test” (see [75ff]), it is still relevant and it was the basis upon which the parties argued the matter in the Local Court. In particular, in seeking to uphold the validity of clause 11.3 of the Supply Contract, Bespoke did not point to any potential damage to its wider commercial or financial interests from a repudiation of the Supply Contract. Instead, it only relied on the financial costs that flowed directly from the repudiation of that agreement.

87. However, in applying the test that the presiding Magistrate posed for herself, her Honour compared the amount payable under clause 11.3 with the “amount payable over the full term of the contract” instead of the “amount payable under a contract by way of damages for non-performance”. In the case of at least this fixed term contract for the supply of coffee beans by a reseller such as Bespoke, prima facie the amount recoverable as damages for repudiation was the profit margin on the lost future sales of the coffee beans over the remaining term of the contract and not the full price (The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 at 81). As noted, Bespoke framed its alternative case for damages for repudiation on that basis.

88. In applying the test in the manner stated in [60(a)] of her Honour’s reasons, her Honour erred in law. On no view of the law of penalties was a comparison between the amount recoverable under clause 11.3 with the total amount payable for the rest of the life of the contract either determinative or, in this case, even relevant. Instead the relevant inquiry was a comparison between the amount recoverable under clause 11.3 with the amount recoverable for damages for repudiation and any other forms of loss or damage that might be occasioned to Bespoke from the termination of the Supply Contract. As stated, no loss of that latter kind was pointed to by Bespoke.

89. It follows that I uphold grounds 2 and 3 of the appeal. Her Honour posed the incorrect legal test and in doing so did not address Liban and Ms Krahe’s case.

90. This leaves ground 1. Consistent with what I have stated, I will approach ground 1 by granting Liban and Ms Krahe leave to appeal on a question of mixed law and fact so as to enable this Court to determine, based on the facts found or otherwise agreed, whether or not clause 11.3 of the Supply Contract is a penalty.

91. As noted, at no stage in the Local Court did Bespoke point to any potential damage to its wider commercial interests from a repudiation of the Supply Contract in seeking to uphold the validity of clause 11.3. It follows that the only “interest” of Bespoke that was sought to be protected by clause 11.3 was the receipt of profits from the sale of coffee under the Supply Contract. On any view a relevant inquiry in those circumstances is that posited by the first “test” stated by Lord Dunedin in Dunlop Pneumatic.

92. The present case is concerned with that part of clause 11.3 which concerns the contract being repudiated within the first six months; ie sub-clause 11.3(a). The most disadvantageous circumstance for Bespoke during that period is a contract terminated or repudiated on the first day of the agreement. In that event, the amount recoverable under clause 11.3 is $42,432.00 whereas the maximum profits that could have been earned over the full two years of the agreement are $24,960.00. The margin of the former over the latter becomes that much greater the later the termination occurs within the six month period referred to in sub-clause 11.3(a). By the end of the six month period the amount recoverable under clause 11.3 is still $42,432.00 whereas the profits that could have been earned over the remaining 18 months of the agreement are $18,720.

93. Consistent with Ringrow and Dunlop Pneumatic, I consider that the amounts recoverable under clause 11.3(a) of the Supply Contract are “out of all proportion” or “extravagant or unconscionable” when compared “with the greatest loss that could conceivably be proved to have followed from the breach”. When it is also considered that clause 11.3 is engaged in circumstances where the purchaser validly terminates the Supply Contract and Bespoke retains a power to unilaterally alter the price and terms of the contract it follows that sub-clause 11.3(a) requires the payment of a sum “out of all proportion” to the protection of the legitimate interests of Bespoke (Paciocco at [29] per Kiefel J with whom French J agreed at [2]). Further, a consideration of the totality of the circumstances suggests that the only, or at least predominant, purpose of sub-clause 11.3(a) was to punish Liban for bringing about the termination of the Supply Contract within its first six months (Paciocco at [158] per Gageler J and at [221] per Keane J).

84. Accordingly, I find that clause 11.3 is a penalty to the extent that it is engaged in the circumstances referred to in sub-clause 11.3(a).

85. It follows that I uphold grounds 1, 2 and 3 of the appeal.

Ground 4: Clause 12 of the Loan Contract

96. Ground 4 of the appeal contends that her Honour erred in finding that clause 12 of the Loan Contract was not a penalty.

97. In the Local Court, Bespoke recovered $4,836.64 under sub-clause 12(b)(i) of the Loan Contract in respect of instalments that had not been paid and $17,555,03 under sub-clause 12(b)(ii) being the present value of all future instalments payable under the Loan Contract. Liban and Ms Krahe contended that the latter aspect of the claim involved an attempt to enforce a term that was void as a penalty. Their argument in support of that contention and her Honour’s reasons for rejecting it are set out above. The reference in [61] of her Honour’s reasons to Bespoke’s obligations to a “third party” is to a chattel mortgage that it entered into in respect of the coffee machine. In oral evidence Mr de Caires agreed that the machine was worth around $7,000.00 and that Bespoke was required to make payments totalling approximately $15,000 on its mortgage over the coffee machine.

98. In his written submissions, Mr Moutasallem contended that [60(b)] of the presiding Magistrate’s reasons was affected by the same error as [60(a)], namely, it elided the distinction between the greatest amount of damages recoverable for breach of the Loan Contract and the total payments that would have been made under the Loan Contract. He submitted that this approach overlooked the fact that on termination Bespoke retained ownership of the coffee machine and Bespoke could have resold it or leased it again. I accept this aspect of his submissions. While this complaint was not raised as a ground of appeal in its own right it was clearly raised in the written submissions. The failure of the presiding Magistrate to address this aspect of Liban and Ms Krahe’s case warrants a grant of leave to appeal to raise a question of mixed law and fact so as to allow the substantive issue raised by ground 4 to be determined.

99. In submitting that clause 12 of the Loan Contract is a penalty, Mr Moutasallem relied on O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; 152 CLR 359 (“O’Dea”). In O’Dea, a clause that enabled the lessor of a truck to recover the full amount of the remaining instalments payable under a lease for a truck where the lessees’ defaulted and the lessor recovered possession of the truck was found to be a penalty. The clause did not require the Lessor to account for the resale value of the truck. The clause was engaged in the event that the lessee defaulted in the payment of rent but also by other defaults some of which only gave rise to minimal damage to the lessor.

100. Mr Moutasallem pointed to the following passage from the judgment of Gibbs CJ in O’Dea (at [10] to [11]):

“Of course, a lessor is entitled to be compensated for the loss which he is likely to suffer on the premature termination of a hiring. However, the outstanding balance of the entire rental could not in the circumstances possibly represent a genuine pre-estimate of the loss which would be caused to the first respondent by a breach of the contract. In the event of a breach the first respondent was entitled to repossess and resell the vehicle, but it was not bound to account to the lessee for any amount received on a resale, even if it exceeded (as it did) the appraisal value. The first respondent became entitled under the contract to receive the accelerated payments of the rental without any rebate and to receive back the vehicle sooner than would otherwise have been the case without giving credit for its value and in these circumstances the amount receivable by the first respondent was manifestly excessive in comparison with the greatest loss that it could possibly suffer as a result of the default in payment of the instalments. Moreover, the entitlement of the first respondent arose on a number of events, including any default in performance of the terms and conditions of the contract, some of which, by their nature, could lead only to trifling damage.

I have no doubt in principle that the provisions requiring the payment of the entire rent amounted to a penalty.”

101. The outcome in O’Dea may have been different had the clause in question allowed a discount for the present value of the outstanding payments as at the date of termination and also allowed for the lessee to have the benefit of the excess of the net sale price over a bona fide estimate of the residual value (IAC (Leasing) Ltd v Humphrey [1972] HCA 1; 126 CLR 131 at 141-145).

102. While a number of cases since O’Dea have found that a clause providing that, upon a lessee’s default, they are liable for the payment of the balance of rental instalments without allowing any credit for the value of the hired goods is a penalty (see for example Amev-UDC Finance Ltd v Austin [1986] HCA 63; 162 CLR 170), O’Dea does not establish a rule that that is always the case. In O’Dea, Gibbs CJ stated that the question of “whether a contractual provision amounts to a penalty depends on all the surrounding circumstances existing at the time of the making of the contract as well as on the terms of the contract itself” (at 373). According to his Honour, this meant that it is “therefore not always possible to apply a decision given upon one contract to another case even though that case concerns a contract in identical term” (at 373).

103. None of the judgments in Paciocco raise any doubt about the reasoning and outcome in O’Dea. To the contrary, passages from O’Dea were referred to with approval in Paciocco (at [157] per Gageler J, at [243] and [254] per Keane J and [318] per Nettle J). That said, nothing in O’Dea suggests that the lessor in that case suffered any form of damage to its wider financial interests from the lessee’s default as the bank was found to have suffered in Paciocco. However, such a case was discussed in O’Dea, namely, Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd [1906] HCA 87; 4 CLR 672 (“Lamson Store Service”).

104. In Lamson StoreService an agreement for a ten year lease of a patented cable tramway system provided that, on a breach by the lessee or the lessee’s bankruptcy, the lessor would retain the leased items and the entire balance of the rent became due and payable. Griffith CJ and Barton J concluded that the clause was not a penalty. In doing so they construed the agreement as creating a present debt that was payable in instalments such that the penalty doctrine had no application (at 684 per Griffith CJ and at 686 per Barton J). O’Connor J dissented (at p 693).

105. In O’Dea, Gibbs CJ (at 370), Wilson J (at 381), Brennan J (at 389) and Deane J (at 402), contrasted the interest that the lessor in Lamson StoreService had in the continuing use of the leased goods with the lack of any such interest in the hirer of the truck in that case. Gibbs CJ and Deane J concluded that the judgment in Lamson Store Service turned upon an acceptance that a contract providing for the payment of the entire rent discharged by instalments could not constitute a penalty and in that respect it should not be followed (at 374 per Gibbs CJ and 403 per Deane J). Brennan J, however, reconciled the outcomes in Lamson Store Service and O’Dea as follows (at p 389):

“Having regard to what [Griffiths CJ in Lamson Store Service] thought to be the principal advantage which the contract conferred on the hirer in that case, namely, the right to a fair and full exhibition of the novel apparatus, the lessor's right to dismantle and take away the apparatus was hardly a material benefit which the lessor could turn to account. Not so in the present case. The factual distinction between the present case [ie O’Dea] and Lamson Store Service lies in the fact that the lessor here has an advantage in retaking possession of the vehicle from the hirer; in Lamson Store Service the lessor had an advantage in the continued use of the apparatus by the hirer.”

106. Consistent with Paciocco, the advantage that the lessor in Lamson Store Service had “in the continued use of the apparatus by the hirer” is a wider commercial or financial interest of the kind which can be protected by a contractual provision that might otherwise be considered a penalty. A clause which protects that interest serves to protect the “legitimate interests of the non defaulting party” and is not one which has the only or at least predominant purpose, of punishing the defaulting party.

107. In this case, Bespoke had a significant interest in Liban continuing to use the coffee machine beyond its receipt of rental payments under the Loan Contract. As stated, the terms of the Loan Contract obliged Liban to only use Bespoke’s coffee beans when it used the coffee machine that was supplied under that contract (see [38]). The repudiation of the Loan Contract by Liban damaged Bespoke’s financial interests in that it lost the profits from the sale of coffee that would have ensued if Liban had retained and used the machine with coffee supplied by Bespoke. To adopt the analysis of Brennan J in O’Dea, Bespoke as the “lessor had an advantage in the continued use of the apparatus by the hirer” (at 389) in that it would lead to purchases of its coffee in amounts that could have exceeded the minimum weekly amount provided for in the Supply Contract.

108. Consistent with Paciocco, as the interest of Bespoke in supplying coffee for use in the coffee machine the subject of the Loan Contract is a “legitimate interest of the non defaulting party” it has not been shown that clause 12 requires the payment of a sum “out of all proportion” to the protection of the legitimate interests of the non defaulting party or that the totality of the circumstances suggests that the clause’s only, or at least predominant, purpose is to punish the defaulting party.

109. Accordingly I reject ground 4.

Disposition and Costs

110. The end result is that Liban and Ms Krahe’s challenge to the presiding Magistrate’s determination of the first two issues noted in [43] to [46] fails. In relation to the third, Liban and Ms Krahe’s challenge to the determination in relation to the third issue so far as it concerns clause 11.3 of the Supply Contract succeeds but fails in relation to clause 12 of the Loan Contract.

111. The conclusion that clause 11.3 of the Supply Contract was a penalty leaves undetermined Bespoke’s alternative claim for damages for Liban’s repudiation of that agreement. Even if the parties were content for this Court to finalise the matter, it follows from what has already been stated that if the determination of any part of that claim requires the making of findings of fact then it would have to be remitted to the Local Court for further hearing.

112. In its Statement of Claim, Bespoke claimed recovery of lost profits by reason of the repudiation of the Supply Contract for a period of 52 weeks. The claim was pleaded in the alternative to the claim for recovery under clause 11.3 of the Supply Contract. As noted, in its written submissions in support of this claim, Bespoke sought lost profits calculated at $8 per kilogram. However, the amount sought in the written submissions was for 104 weeks representing the “two year term of the Supply Contract”.

113. As noted, in the Local Court and in this Court Mr Moutasallem embraced the profit figure of $8 per kilogram as part of his clients’ case that clause 11.3 of the Supply Contract was a penalty. As the profit figure of $8 per kilogram was eventually common ground between the parties it follows that the resolution of this claim does not require the making of any further findings of fact and this Court can resolve it.

114. In resisting the alternative claim for lost profits under the Supply Contract, Mr Moutasallem made two points to the Local Court. First he contended that, to the extent that Bespoke sought damages on this claim calculated over 104 weeks, the claim was inconsistent with the pleaded case. Second, Mr Moutasallem contended that this claim does “not represent a genuine estimate of ... damages” as Bespoke “will not be required to expend the time and energy required to facilitate the transaction”.

115. Mr Moutasallem’s second argument must be rejected. Just as Bespoke could not recover for the extra time and effort expended in dealing with Liban’s repudiation, Bespoke’s entitlement to lost profits on the sale of coffee is not reduced because Mr de Caires does not have to expend time and effort in sourcing coffee for supply. As for the first argument, at no point did Bespoke apply to amend its Statement of Claim to make a claim for damages on a different basis to that pleaded. It should be held to its pleaded case. Accordingly, in respect of this claim Bespoke is entitled to recover an amount of damages representing a loss of $8 per kilogram of coffee for the minimum weekly amount calculated over 52 weeks.

116. The parties will need to prepare calculations and proposed orders to reflect these reasons. As part of that process they should file submissions addressing the appropriate order for costs of proceedings in this Court and whether the above findings give rise to a basis for setting aside the costs order made in the Local Court. In their submissions, the parties should indicate whether they are content to have these matters determined on the papers. If they wish to be heard further on these issues the Court can only hear the matter in the week commencing 4 September 2017. To that end, the matter will be listed for mention on Wednesday, 6 September 2017. The mention date can be vacated if the parties do not require it.

117. Accordingly the Court orders that:

(1)   On or before 31 July 2017 the parties file and serve draft forms of order to give effect to these reasons together with submissions in support which are not to exceed 5 pages;

(2)   The proceedings be listed for mention on 6 September 2017 at 9.30am.

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Amendments

09 February 2018 - Reference to "clause 11.3" in [108] amended to read "clause 12"

Decision last updated: 09 February 2018