Capital Finance Australia Ltd v Norton White Services (Vic) Pty Ltd, Cunliffe, Ian
[2009] VCC 830
•26 June 2009
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST – GENERAL DIVISION
Case No. CI-08-02697
| CAPITAL FINANCE AUSTRALIA LIMITED | Plaintiff |
| (ABN 23 069 663 136) | |
| v | |
| NORTON WHITE SERVICES (VIC) PTY LTD | First Defendant |
| (IN ITS OWN CAPACITY AS TRUSTEE OF THE NORTON WHITE SERVICES (VIC) TRUST) (ACN 114 049 188) | |
| and | |
| IAN CUNLIFFE | Second Defendant |
| and | |
| RICHARD THOMPSON | Third Defendant |
| and | |
| PHILIP DAMIEN WHITEMAN | First Third Party |
| and | |
| DENIS PATRICK O’HAIRE | Second Third Party |
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| JUDGE: | HIS HONOUR JUDGE SHELTON |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 17 and 18 June 2009 |
| DATE OF JUDGMENT: | 26 June 2009 |
CASE MAY BE CITED AS: | Capital Finance Australia Ltd v Norton White Services (Vic) Pty Ltd, Cunliffe, Ian; Thompson, Richard; Whiteman, Philip Damien & O’Haire, Denis Patrick |
| MEDIUM NEUTRAL CITATION: | [2009] VCC 0830 |
REASONS FOR JUDGMENT
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Catchwords: Rental agreement for office equipment – breach – whether proof of loss – liquidated or ascertained damages – whether these are a penalty – AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170.
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Schlicht | Koroneos Lawyers |
| For the First and Second | Mr L Magowan | Ian Cunliffe |
| Defendants | ||
| For the Third Defendant | Mr T Purdey | Archer Thompson Lawyers |
| For the First Third Party | No appearance | |
| For the Second Third Party | Mr J Ribbands | Heydon + O’Loughlen |
| HIS HONOUR: |
1 This proceeding is a claim for rental due under a Rental Agreement dated 7 December 2005 made between the plaintiff and the first defendant (“the Rental Agreement”) for the sum of $133,155.28.
The Parties
2 The plaintiff is a finance company. The first defendant, as appears from the Writ, is trustee of the Norton White Services (Vic) Trust. Norton White was a legal partnership, the partners of whom were the second and third defendants. The second and third defendants guaranteed the first defendant’s obligations to the plaintiff under the Rental Agreement. The third defendant retired from the partnership on 30 June 2006, leaving the second defendant as the sole proprietor of Norton White. The second defendant sold his practice to the first third party and the second third party, effective as from 1 May 2007. He remained with the practice as special counsel until March 2008. By then the first third party and the second third party had terminated their business relationship, with O’Haire continuing the legal practice.
3 The first third party was not represented in these proceedings and did not appear at trial.
The Rental Agreement
4 Pursuant to the Rental Agreement, the plaintiff rented to the first defendant two servers, seventeen desktop computer workstations, two photocopiers and a document management system for use in the Norton White legal practice. The Rental Agreement provided for sixty rental payments, each of $3,923.70.
5 It is not in issue that there was default in making the monthly rental payments due in the early months of 2008. On 11 May 2008, the plaintiff arranged for a mercantile agent to repossess the rented equipment as it was entitled to do pursuant to terms of the Rental Agreement. Not all the rented equipment could be repossessed since some of it could not be located.
6 Relevant terms of the Rental Agreement are as follows:
“6.1 We may terminate this Agreement and repossess the Goods (which repossession will itself terminate this Agreement if no prior notice of termination is given) if any of the following events occur:
(a)
(failure to pay Rent Payment) You fail to pay Rent Payment when due;
. . .
6.3 If we terminate this Agreement under clause 6.1, you must: . . .
(b)
pay to us on demand, by way of indemnity for our loss arising from the early termination, the Early Termination Amount;
. . . . . . 7.1
You acknowledge that the Goods remain our property at all times and that your rights under this Agreement are personal and as bailee only, and that you have no authority to deal with, and agree not to purport to deal with, or share or transfer possession of, the Goods. …
. . . 8.1 When this Agreement … is terminated, you must:
(a) at your cost, immediately deliver up the Goods … . . .
(d)
pay to us on demand all other moneys which fell due prior to termination and which remain outstanding and any other moneys payable under this Agreement.
. . . 16 Interpretation In this Agreement, unless the context otherwise requires: . . .
(d)
“Discount Rate” means the rate determined by us equal to not less than 70% of the implicit rate of interest used by us to calculate the Rent Payments under this Agreement.
(e) “Early Termination Amount” means the sum of: (i) The Rent Payments (net of GST) which, but for the termination, would have been payable by you under this Agreement as from the date of early termination to the end of the Term (inclusive of any unamortised brokerage or commission), reduced to a present value as at the date of termination by applying the Discount Rate to such Rent Payments;
. . .”
7 The plaintiff forwarded to the first defendant a Notice of Termination and Demand dated 19 June 2008, stating that the plaintiff had terminated the Rental Agreement and demanding the sum claimed in this proceeding of $133,155.28. The letter stated that this sum was made up as follows:
“Outstanding Balance $ 102672.05 Arrears $ 7593.57 Overdue Interest $ 171.83 GST $ 9839.77 Less Interest Rebate ($ 6954.66) Less Proceeds of Sale ($ 167.28) Total Payable $ 133155.28”
8 By virtue of Clause 6.1 of the Rental Agreement however, the repossession on 11 May 2008 had the effect of terminating the Rental Agreement then. The sum payable at that date was $132,697.37 using the same method of calculation as in the preceding paragraph, mutatis mutandis, and it was not in dispute that this was the appropriate sum the plaintiff should be claiming.
Defences
9 Mr Magowan, on behalf of the first and second defendants, submitted that there were two defences to the plaintiff’s claim open to the defendants. He was joined in his submissions by counsel for the third defendant and the second third party.
No Proof of Loss
10 Mr Magowan submitted that the plaintiff had not proved its case on damages and therefore at best was entitled to an award of nominal damages.
11 He relied on the evidence of Phillip Duxbury, manager in the Lost Recoveries Department of the plaintiff and the person in charge of the defendants’ account. He gave evidence that the plaintiff had repossessed at least ten computers, one photocopier and one scanner. Mr Magowan submitted that there was no evidence before me upon which I could rely as to what had occurred to this equipment.
12 As appears from the Notice of Termination and Demand of 23 June 2008, an allowance of $167.28 was made for the proceeds of sale of the repossessed equipment. The plaintiff initially relied upon an invoice from Gray’s Auctions dated 2 June 2008 which referred to three items. Mr Duxbury admitted that the first two items were not relevant and that the third item which was described as a pallet containing approximately ten CRT monitors, four low- grade computers and one low-grade server probably did not refer to any of the repossessed equipment.
13 Mr Magowan submitted that, in the circumstances, the plaintiff was not able to prove the amount of its damages. He relied upon ‘McGregor on Damages’ (7th ed. Sweet & Maxwell, 2008, page 297) where it is stated:
“A claimant claiming damages must prove his case. To justify an award of substantial damages he must satisfy the court both as to the fact of damage and as to its amount. If he satisfies the court of neither, his action will fail, or at the most he will be awarded nominal damages where a right has been infringed. If the fact of damage is shown but no evidence is given as to its amount so that it is virtually impossible to assess damages, this will generally permit only the award of nominal damages. …”
14 He also relied upon the comment of Brooking J in JLW (Vic) Pty Ltd v Tsiloglou & Ors [1994] 1 VR 237, at 242 and 243:
“… Whether a tribunal of fact is at liberty to award substantial damages depends upon the nature of the loss in the particular case and the evidence led in it. Bowen v Blair depends on its own facts, and I have no doubt that the Full Court did not intend to lay it down that, regardless of the nature of the loss alleged and the evidence led on damages, the court must always award substantial as opposed to nominal damages if satisfied that substantial loss has been incurred even though it cannot make any rational assessment of the amount of the loss or any rational assessment of what must have been the minimum loss sustained. …
. . .
Where the action is for damages for breach of contract and the plaintiff fails to prove any actual loss he may fall back on an award of nominal damages.”
And at page 245:
“… I entertain no doubt that the general proposition that if damage is proved the court must regardless of the circumstances make some assessment of the damages cannot be sustained. … I would respectfully agree with the view expressed by Pincus J. that if the evidence called by the plaintiff fails to provide any rational foundation for a proper estimate of damages the court should simply decline to make one.
… .”
15 The short answer to this submission is, in my view, that Clauses 6.3(b) and 16(d) and (e)(i) of the Rental Agreement are, in effect, a code which provides what liquidated or ascertained damages are payable should there be termination. I am reinforced in this view by the fact that the Rental Agreement provides, in Clause 7.1, that at all times the equipment remained the property of the plaintiff. Further, there is no obligation imposed upon the plaintiff to sell the repossessed equipment and then account to the defendants for the proceeds. Theoretically, the plaintiff could have retained the repossessed equipment. If it did so, there is no provision in the Rental Agreement requiring it to make an allowance to the first defendant for its reasonable value.
16 Further, the second defence submitted by Mr Magowan appears to be predicated on the basis that damages were liquidated or certain.
17 In any event, should I be wrong in concluding that damages for breach of the Rental Agreement are liquidated or ascertained, even if there were a duty to mitigate, the only evidence as to the value of the rented equipment was that of Mr Duxbury, who stated that the value of second-hand photocopiers and computers about three years’ old was “very negligible”. At best, the defendants would only be entitled to a minimal sum in respect of the resale value of the equipment.
Loss as Punitive
18 Mr Magowan submitted that the “Early Termination Amount” referred to in Clause 16(e) is not a genuine pre-estimate of the plaintiff’s loss but is rather punitive. In a written submission he states:
“One asks rhetorically what are Capital’s losses:
(a) Capital is entitled to the return of its unpaid principal and commission; (b) Capital is entitled [to] interest from the date of advance to the date of termination, such interest being made up of Capital’s costs of borrowings and its profit margin; and (c) Capital is also entitled to its profit margin for the balance of the agreement. Yet the plaintiff claims loss of $133,155.28. This figure purports to be calculated in accordance with clause 16.4 (which it does not, see below), a clause which is vague and uncertain and leads to the windfall gain to Capital and a punitive result to the Defendants. Any award of this Honourable Court will include a component of unpaid principal which will become immediately payable to Capital. Capital can thus pay out its own funding now. Yet, at its discretion, Capital seeks ‘now less than 70%’ of the undefined ‘implicit rate of interest used by us to calculate the Rent Payments’ for the balance of the Rent Payments (its DCR rate of 6.10%). This cannot represent Capital’s loss profit (for this to be so, the 8.75% would need to be made up of Capital’s funding 2.62% and Capital’s profit of 6.10%, when in reality the reverse in (sic) probably true).”
19 This defence was not pleaded by the first and second defendants. Mr Duxbury was unable to give any evidence as to the funding arrangements of the plaintiff in respect of the Rental Agreement. No expert evidence was called by the first and second defendants on this issue. In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, at 193 and 194, Mason and Wilson JJ stated, with respect to liquidated damages provisions:
“Instead of pursuing a policy of restricting parties to the amount of damages which would be awarded under the general law or developing a new law of compensation for plaintiffs who seek to enforce a penalty clause, the courts should give the parties greater latitude to determine the terms of their contract. In the case of provisions for agreed compensation and, perhaps, provisions limiting liability, that latitude is mutually beneficial to the parties. It makes for greater certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach or termination, and thus enables them to provide for compensation in situations where loss may be difficult or impossible to quantify or, if quantifiable, may not be recoverable at common law. And they may do so in a way that avoids costly and time- consuming litigation. But equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction 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. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties’ freedom to settle for themselves the rights and liabilities following a breach of contract. …”
20 In the circumstances, and bearing in mind the approach suggested by the High Court, together with the fact that the second and third defendants were practising lawyers, the first and second defendants have not satisfied me that the formula contained in the terms of the Rental Agreement as to what is to occur in the event of default is punitive.
21 There was no dispute before me as to the validity of the guarantees given by the second defendant and the third defendant.
22 In an agreement dated 17 May 2007 between the second defendant and the third defendant, the second defendant agreed to indemnify the third defendant against all claims by or liabilities to third parties in relation to the Norton White practice. The second defendant in evidence admitted that this provision covered the present claim.
23 Thus, I am satisfied as to the liability of the defendants to the plaintiff in the sum of $132,697.37. I also find that the third defendant is entitled to be indemnified in full by the second defendant.
Third Party Proceedings
24 The second defendant seeks indemnity from the third parties. He relies on four documents.
25 Firstly, there are Heads of Agreement which he states were prepared by the third parties. The second defendant stated that this document was provided to him in February or March of 2007. This provided for the first and second third parties to take over the Norton White practice in which the second defendant would not be a principal but an employee with the title of “special counsel”. It provided for “the merged entity” to take over the second defendant’s obligations to the plaintiff.
26 The second defendant states that there was then an agreement prepared by the third parties which was headed “For Discussion Purposes Only”. This was discussed at a meeting between the second defendant and the third parties on 23 March 2007. The second defendant states that at this meeting the main discussion was with respect to his remuneration as an employee which was reduced. He stated that a few amendments were made to this agreement and although it was still headed “For Discussion Purposes Only”, it was executed by all parties and dated 23 March 2007. It provided for the merger of the two businesses to come into effect on 1 May 2007. Clause 14 of this agreement provided:
“The merged business will take over the monthly financial commitments
of Norton White as at the merger date and as itemised in Schedule 4.”
27 Schedule 4 however only read as follows:
“SCHEDULE 4
Monthly Financial Liabilities of Norton White
Error! Objects cannot be created from editing field codes.”
28 The second defendant stated that his recollection was that the draft agreement he took to the 23 March 2007 meeting contained a list of the rented items. He stated that he would not have signed the agreement on 23 March 2007 had he realised they were not included in Schedule 4. He further stated that he did not realise the omission from Schedule 4 until some time after 23 March 2007.
29 The merged business was carried on in the premises of the third parties from 1 May 2007 and the rented equipment was moved to their premises and used by the third parties. In the second half of 2007, the rental payments due to the plaintiff were made by the third parties. The second defendant was an employee of the third parties during this period and it would have been quite inconsistent for him, rather than the third parties, to have still been responsible pursuant to the Rental Agreement for the equipment which was in the third parties’ premises. Neither third party gave evidence before me and so the second defendant’s evidence is uncontradicted.
30 In all the circumstances, I have no difficulty in concluding that the third parties, pursuant to the 23 March 2007 agreement, assumed the liabilities of the second defendant to the plaintiff.
31 In particular, so far as the second third party is concerned, a Deed of Release was entered into between the second defendant and the second third party on 11 March 2008. It recites:
“A.
Cunliffe sold his practice (Norton White Melbourne) to O’Haire and Philip Whiteman with effect from 1 May 2007 for the purchase consideration set forth in an Agreement dated 23rd March 2007 (“the Sale Agreement”).
B.
Under the Sale Agreement, Cunliffe was to continue to be employed by a legal practice associated with O’Haire and Philip Whiteman.
C.
O’Haire and Philip Whiteman have previously terminated their business relationships.
D.
Cunliffe and O’Haire have now agreed to terminate their business and employment relationships as provided by this Deed.”
32 In paragraph 8(d) it states:
“O’Haire hereby indemnifies Cunliffe in respect of the various contracts and obligations that O’Haire and Philip Whiteman agreed in the sale agreement to take over. …”
33 Finally, to put the matter completely beyond doubt so far as the second defendant and the second third party are concerned, they entered into an agreement after the issue of this proceeding, described as a “Deed of Indemnity” and dated 6 November 2008, which recites:
“A By agreement dated 23 March 2007 [“the Sale Agreement”], Cunliffe, inter alia, sold his legal practice (Norton White Melbourne) to O’Haire and commenced employment with O’Haire. The sale included certain equipment rented from Capital Finance Australia Limited ABN 23 069 663 136 [“Capital Finance”]. B. By Deed dated 11 March 2008 [“the Deed of Release’], Cunliffe and O’Haire, inter alia, agreed to terminate their business relationship. C. By terms of settlement dated 14 August 2008 [“the Terms of Settlement”], Cunliffe and O’Haire agreed to settle certain disputes between them arising out of the Deed of Release. D. By Writ and Statement of claim filed 7 July 2008 in County Court Proceedings No CI-08-02697, Capital Finance claims from, inter alia, Cunliffe the sum of $133,155.28 together with costs and interest [“the Capital Finance Claim”]. E. O’Haire has agreed to indemnify Cunliffe in respect of the Capital Finance Claim in accordance with the terms of this Deed.”
34 In Clause1 of this Deed, it states:
“O’Haire INDEMNIFIES Cunliffe against all loss, damage and/or liability (including legal costs calculated on an indemnity basis) arising from the Capital Finance Claim.”
35 Mr Ribbands, who appeared for the second third party, submitted that Clause 1 of the Deed did not require his client to indemnify the second defendant. He stated that had this been intended, Clause 1 should have read along the lines:
“O’Haire indemnifies Cunliffe against all loss, damage and/or liability howsoever arising, including the plaintiff’s claim against the defendant in this proceeding or howsoever otherwise arising from the Capital Finance claim.”
I see no merit in this submission. The effect of Clause 1 is, in my view, abundantly clear.
Summary
36 The plaintiff is entitled to judgment against the defendants in the sum of $132,697.37.
37 The third defendant is entitled to indemnity from the second defendant.
38 The second defendant is entitled to be indemnified by the first third party and the second third party and with costs on an indemnity basis by the second third party pursuant to Clause 1 of the 6 November 2008 Deed.
39 I will make orders in accordance with these conclusions.
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