Cardiff Capital Pty Ltd v Opal Night Pty Ltd in its own right and as trustee for the Piara Waters Trust
[2019] WASC 131
•2 MAY 2019
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: CARDIFF CAPITAL PTY LTD -v- OPAL NIGHT PTY LTD in its own right and as trustee for the PIARA WATERS TRUST [2019] WASC 131
CORAM: MASTER SANDERSON
HEARD: 16 APRIL 2019
DELIVERED : 2 MAY 2019
FILE NO/S: CIV 1591 of 2018
BETWEEN: CARDIFF CAPITAL PTY LTD
Plaintiff
AND
OPAL NIGHT PTY LTD in its own right and as trustee for the PIARA WATERS TRUST
First Defendant
ALLEN BRUCE CARATTI
CHRISTINA MARCIA CARATTI
Second Defendants
Catchwords:
Practice and procedure - Application for summary judgment - Turns on own facts
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
Counsel:
| Plaintiff | : | Mr R J Lilley |
| First Defendant | : | Dr J T Schoombee & Mr A P Rumsley |
| Second Defendants | : | Dr J T Schoombee & Mr A P Rumsley |
Solicitors:
| Plaintiff | : | Douglas Cheveralls Lawyers |
| First Defendant | : | Alan Rumsley |
| Second Defendants | : | Alan Rumsley |
Case(s) referred to in decision(s):
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30
Morgan Stanley Wealth Management Australia Pty Ltd v Detata [No 3] [2018] WASC 32
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28
Robophone Facilities Ltd v Blank (1966) 1 WLR 1428
MASTER SANDERSON:
This was the plaintiff's application for summary judgment. I have determined the application ought be dismissed and ordinarily I would have provided brief oral reasons for reaching that conclusion. However, the defendants' main point of defence raises an issue which is of some significance in the context of finance arrangements. These reasons are intended to do no more than highlight the important issue which is for future determination.
The relevant facts can be shortly stated. On or about 20 October 2014 the plaintiff advanced the sum of $800,000 pursuant to a written agreement titled 'Loan Agreement' and dated 15 October 2014. The Loan Agreement contained a term which required the first defendant to pay an 'Exit Fee' in an amount of $450,000 payable on the 'Repayment Date'. Both of these terms are defined in the Loan Agreement.[1] But essentially the position was this. The first defendant borrowed $800,000 for a period of 12 months. During that period it did not pay any interest nor was it charged what is sometimes called an 'establishment fee'. What the first defendant was obliged to do was at the end of the loan period repay the plaintiff $1,250,000 – the $800,000 loan plus the Exit Fee. In fact the defendant defaulted on the repayment and certain interest payments were then levied on both the principal sum and the Exit Fee. For present purposes the interest charged on these two amounts can be put to one side. What is significant about this arrangement is that there was no event of default which triggered what is often called a penalty. It is not uncommon in loan agreements to see an interest rate specified which is payable on the sum outstanding from time to time. If a certain event of default occurs – perhaps a missed payment of interest – then a default clause is triggered and interest is levied at a higher rate. When the lender attempts to recover both principal and interest it may well be met with the argument that the default interest rate amounts to a penalty.
[1] Plaintiffs' submissions filed 4 April 2019, pars 15 – 16.
It can be seen immediately there is a difference between that situation and this present situation. No matter what the first defendant did with the loan it was obliged to pay the exit fee. If it had for instance, repaid the loan sum three months after the agreement was entered into it would still have had to pay the same exit fee – there was no reduction for early repayment. The first defendant maintained that the exit fee was a penalty and could not be recovered.
The parties canvassed the authorities in some detail. The starting point was the judgment of Diplock LJ in Robophone Facilities Ltd v Blank (1966) 1 WLR 1428. The relevant Australian authorities are the High Court decisions in Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 and Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30. In Morgan Stanley Wealth Management Australia Pty Ltd v Detata [No 3] [2018] WASC 32 Bank‑Smith J summarised the Australian position with respect to penalties in the following way:
The following can be drawn from the authorities:
(a)the question whether a sum stipulated is a penalty or liquidated damages (that is, a genuine pre‑estimate) is to be judged as at the time of the making of the contract;
(b)the party seeking to be absolved of the liability imposed by the stipulation bears the onus of proving that the stipulation constitutes an unenforceable penalty;
(c)the critical issue is whether the sum agreed was commensurate with the interest protected by the bargain;
(d)the nature of the interest sought to be protected is relevant. The sum agreed may be intended to protect an interest that is different from, and greater than, an interest in compensation for loss caused directly by the breach. It may be intangible and unquantifiable. This is consistent with Lord Dunedin's statement in Dunlop that, 'the essence of liquidated damages is a genuine pre‑estimate of damage'. The reference to 'damage' as distinct from 'damages' is significant;
(e)an interest may be of a business or financial nature;
(f)a sum that is merely disproportionate to the loss suffered does not qualify as a penalty. The penalty must be 'extravagant, exorbitant or unconscionable' and 'out of all proportion' to the interest of the party which it is the purpose of the provision to protect;
(g)the distinction between liquidated damages and a penalty, whilst useful, is not a limiting rule and does not mean that if no pre‑estimate is made at the time the contract was entered into, the sum agreed will be a penalty;
(h)nor does it mean that a sum that reflects or attempts to reflect other types of loss or damage beyond those caused directly will be a penalty;
(i)it may be that a reliable pre‑estimate is not possible or that damage caused by default is of such an uncertain nature that it cannot accurately be estimated or proved. In such a case a stipulated payment agreed by the parties may well be the true bargain and not a penalty;
(j)where pre‑estimation of loss is difficult, precision may not be called for, bearing in mind the question is whether the stipulation is 'out of all proportion' to the interest said to be damaged by default;
(k)the court will not lightly interfere with the bargain struck between the parties. The court requires good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is expressed as an exceptional rule and descriptors such as 'extravagant' and 'out of all proportion' are used in its application;
(l)the ultimate question in determining whether a stipulation is a penalty, is whether it is intended only to punish the defaulting party. Framed another way - does the innocent party's interest in the observance of the principal contractual obligation explain the agreed stipulation as having a purpose other than punishment;
(m)the conventional application of the doctrine of penalties arises when a stipulated sum is made payable upon breach. However, the rule as to penalties is not limited to cases arising out of breach of contract; and
(n)whether a clause is a penalty invites attention to the proper construction of that clause, and the contract as a whole, but it is not solely a matter of contractual construction. The court is not limited to considering the terms of the contract and any background factual matrix evidence that would be admissible for the purposes of contractual construction [417].
Counsel for the defendants relied particularly upon subpars (m) and (n). He also relied on what was said by the High Court in Andrews particularly at [31] – [32] and [46] – [50]. With respect none of this material is decisive in answering the question as to whether or not the Exit Fee in this case is a penalty.
In my view, the position is arguable. Having reached that conclusion it is not appropriate for me to undertake an analysis of the principles. But I would make the point it is for a defendant to establish that a clause complained of is a penalty. The facts and circumstances surrounding the entry of the parties into the contract must necessarily play a part in determining whether or not the penalty doctrine is engaged. That is a further reason for not determining this issue on a summary judgment application.
The plaintiff's application for summary judgment will be dismissed. The costs of the application, including reserved costs, will be costs in the cause.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DG
Associate to Master Sanderson2 MAY 2019
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