CHEP Australia Ltd v Flynn

[2019] NSWDC 614

District Court

New South Wales

• Amendment notes

Medium Neutral Citation:	CHEP Australia Ltd v Flynn [2019] NSWDC 614
Hearing dates:	6 & 7 March 2019
Date of orders:	01 November 2019
Decision date:	01 November 2019
Jurisdiction:	Civil
Before:	Judge Levy SC
Decision:	1. Verdict and judgment for the second defendant on the plaintiff’s claim;  2. The plaintiff is to pay the second defendant’s costs on the ordinary basis unless otherwise ordered.
Catchwords:	MERCANTILE LAW – guarantee of contract for hire of pallets – whether guarantee enforceable; DAMAGES – whether claimed loss included unenforceable penalties – whether claimed loss has been proven: s 5D and s 5E of the Civil Liability Act 2002 (NSW)
Legislation Cited:	Bankruptcy Act 1966 (Cth), s 60(1) Civil Liability Act 2002 (NSW), s 5D, s 5E
Cases Cited:	Luxton v Vines (1952) 85 CLR 352; [1952] HCA 19 Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 20 Helou v PD Mulligan Pty Ltd (2003) 57 NSWLR 74 Helvetic Investment Corporation Pty Ltd v Knight (1984) 9 ACLR 773 Jowitt v Callaghan (1938) 38 SR 512 McCrohon v Harith [2010] NSWCA 67 Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 Pang v Byland Holdings Pty Ltd [2010] NSWCA 175 Re Carey Builders Pty Ltd (1997) 23 ACSR 754 The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 Zorom Enterprises Pty Ltd v Zabow (2007) 71 NSWLR 354; [2007] NSWCA 106
Category:	Principal judgment
Parties:	CHEP Australia Limited (Plaintiff) Anthony Barry Flynn (First defendant) Elizabeth Mary Flynn (Second defendant)
Representation:	Counsel: Mr SA Lees (Plaintiff) No appearance (First defendant) Mr C Simpson (Second defendant)   Solicitors: Law Squared (Plaintiff) No appearance (First defendant) Somerville Laundry Lomax (Second defendant)
File Number(s):	2018/42715
Publication restriction:	None

Judgment

Table of Contents

Nature of case	[1] – [3]
Parties, entities and undisputed factual background	[4] – [22]
Otiose defence by first defendant	[23]
Defence by second defendant	[24]
Issues	[25] – [28]
Evidence	[29] – [41]
Evidence of Ms Tadros – CHEP’s debt recovery officer	[30] – [32]
Evidence of Mrs Flynn – second defendant	[33] – [35]
Affidavit by Mr Sean Radburn – solicitor for second defendant	[36]
Absence of evidence of Company’s trading history	[37] – [41]
Determination of issues calling for decision	[42] – [81]
Construction of the application for commercial credit	[44] – [52]
Enforceability of the guarantee and indemnity	[53] – [63]
Quantum	[64] – [80]
Claim for indemnity costs	[81]
Disposition	[82]
Costs	[83]
Orders	[84]

Nature of case

1. This is an action brought by the plaintiff, CHEP Australia Limited (“CHEP”) against the first and second defendants, Mr Barry Flynn and Mrs Elizabeth Flynn, formerly a married couple, seeking damages together with interest in the sum of $695,296.53, claimed in reliance of a purported guarantee and indemnity.

2. The underlying contract for which CHEP seeks to enforce the guarantee entered into between CHEP and Flynn Transport (NSW) Pty Ltd (“the Company”) as trustee for The Flynn Discretionary Trust (“the Trust”), for the supply and hire of what has turned out to be a considerably large number of timber pallets.

3. Mr and Mrs Flynn were the directors of that Company, which is now in liquidation. Mr Flynn is now bankrupt. As a consequence of Mr Flynn’s bankruptcy, CHEP now only proceeds against Mrs Flynn on the claimed guarantee.

Parties, entities and undisputed factual background

4. In order to understand the factual basis of CHEP’s claim, the defences, and the issues to be determined, it is convenient at this point to identify the relevant actors and parties, and the sequence of their inter-relationships, as follows.

5. CHEP, the plaintiff, is a company that operates a business which, amongst other things, provides timber pallets for hire to the logistics and transport industry.

6. On or about 1 May 2007, Flynn Transport (NSW) Pty Ltd, was registered and thereafter carried on the business of a transport company.

7. The Flynn Discretionary Trust was a trust entity which pre-existed the commercial relationship between CHEP and the Company. The Company was its trustee until 30 June 2015.

8. At the inception of the Company, and until 1 February 2016, the first defendant, Mr Barry Flynn, and the second defendant, Mrs Elizabeth Flynn, were husband and wife. In 2016 they divorced and proceeded to sever their financial relationship. Between 1 May 2007 and 12 February 2016, Mr and Mrs Flynn were the only directors of the Company with equal shareholdings.

9. On or about 19 June 2007, the Company completed an application form seeking to obtain commercial trading credit from CHEP. The application form was a standard issue pro forma CHEP document. At that time, on signing the contract with CHEP, Mr and Mrs Flynn completed CHEP’s Guarantee and Indemnity form: T58.4.

10. At the time the application to CHEP for commercial credit was completed, it appears from the face of CHEP’s application form, that the Company had completed it as the trustee for the Trust.

11. In due course, CHEP considered and granted the application, and provided the Company with the commercial trading credit that had been requested. Those parties then entered into a course of numerous commercial transactions, some of which have been documented in the evidence produced by CHEP.

12. Those transactions are the subject of the debt that is claimed to be owed to CHEP. That undischarged debt is the subject matter of the claimed guarantee that CHEP sues upon in these proceedings.

13. On 30 June 2015, shortly before Mr and Mrs Flynn became divorced, her unchallenged evidence was that the Trust vested. In her evidence, Mrs Flynn confirmed that as at late June or early July 2015, she had not taken any steps to inform CHEP that the Trust had vested or had come to an end, and she also confirmed that in that period, she had taken no steps to inform CHEP that the Company’s account with CHEP should be closed: T29.47 – T30.2.

14. Mrs Flynn also confirmed that, as at late June or early July 2015, she had not taken any steps to return to CHEP any pallets that the Company might have had in its possession: T30.7. She also confirmed that at no stage during that period had she taken any steps to inform CHEP that she no longer intended to guarantee the debts of the Company: T27.18 – T27.22; T30.12.

15. On 12 February 2016, following the divorce of Mr and Mrs Flynn, and following orders made by the Federal Circuit Court of Australia in Family Law proceedings, Mrs Flynn resigned as a director of the Company. At that time she also transferred her entire shareholding in the Company to Mr Flynn, who from that time held all the shares. He thereafter continued to conduct the business of the Company as its guiding mind.

16. Following those events, CHEP and the Company continued to transact business in the course of their commercial relationship until early July 2017, and in that time the Company’s indebtedness to CHEP continued to increase. Significantly, those debts were debited to the account of the Company and not the Trust.

17. In those events, some 5,879 or so of CHEP’s pallets, which have been debited to the Company’s account, and which are the subject matter of the purported guarantee in these proceedings, have either been lost or have gone missing and this has given rise to charges.

18. The terms of the contract between CHEP and the Company provided that the lost or missing pallets were nevertheless to be deemed to be still in the possession of the Company, a matter that has attracted significant charges that are claimed as a debt against the Company.

19. The Company in liquidation is unable to discharge its debt to CHEP. As a result, in these proceedings, CHEP has pursued the defendants under a claim of guarantee. The amount of the original debt was $396,063.47, plus accumulating daily charges and interest. At trial, the amount of that claimed debt had accumulated into the updated sum of $695,296.53: T3.31.

20. On or about 3 July 2017 a liquidator was appointed for the Company in connection with a creditor’s voluntary winding-up. Consequently, CHEP has not proceeded with a claim against the Company.

21. On 30 January 2018, CHEP issued a letter of demand to Mr and Mrs Flynn seeking payment of the amount claimed pursuant to the purported guarantee. That demand was not met. On 8 February 2019, CHEP then filed the statement of claim which commenced the present proceedings.

22. The first defendant, Mr Flynn, has not appeared or participated in the proceedings. The second defendant, Mrs Flynn, filed a defence on 3 May 2018 denying the basis of CHEP’s claim against her. On 21 August 2018, she filed a cross-claim against Mr Flynn, who has not taken any active steps either in the proceedings or in respect of the cross-claim filed against him.

Otiose defence by first defendant

23. On 7 March 2019, pursuant to s 60(1)(b) of the Bankruptcy Act 1966 (Cth), during the hearing, the proceedings against Mr Flynn, as the first defendant and as the first cross-defendant, were stayed pending further orders of a court of competent jurisdiction on the ground of a Certificate of Appointment of a Trustee in Bankruptcy for his bankrupt estate: MFI “13”; T71.45. As Mr Flynn is now bankrupt he has not taken any part in the hearing. Mr Flynn’s defence has therefore become otiose.

Defence by second defendant

24. Consequently, CHEP now only proceeds against Mrs Flynn, the second defendant. In her defence to CHEP’s claim under the guarantee, she asserts that the application that was made to CHEP for trading credit was made by the Company in its capacity as trustee of the Trust which has since vested, and not by the Company in its own right. She therefore asserts that the claimed guarantee is void and ineffective. She also disputes the validity of the quantum of CHEP’s claim for damages. She claims some of that calculated sum includes penalties rather than compensatory damages.

Issues

25. At the commencement of the hearing, the parties provided differing formulations of the issues calling for determination: MFI “6”; MFI “2”. In effect, those different formulations essentially coalesced.

26. In my view, notwithstanding the decided authorities that CHEP relies upon, and to which I shall refer where they are considered to be relevant, the pivotal questions which determine the outcome of the proceedings essentially involve factual matters.

27. Those matters are first, in what capacity and with what legal effect did the Company enter into the agreement with CHEP, secondly, for which entity’s obligations did Mrs Flynn give a guarantee and indemnity when she signed CHEP’s application for commercial credit, thirdly, in what capacity did the Company hire CHEP’s equipment the subject of the tendered invoices, namely, whether this was in its own right or as trustee of the Trust, and fourthly, the related question of whether CHEP has satisfactorily proven its claimed loss.

28. The respective positions of the parties on those issues are as follows. Whereas CHEP claims that the guarantee in question is valid and enforceable as against Mrs Flynn for the claimed amount, Mrs Flynn claims that the guarantee is void and unenforceable against her, and on quantum, she points to the chronological evolution of the claimed debt in the 2016 and 2017 period as being the Company’s debt which was incurred after the Trust had vested in 2015, which was after she had ceased being a director of the Company. Mrs Flynn also claims that the charges which base CHEP’s claim are in large part unconscionable and amount to unrecoverable penalties. She also asserts that CHEP has not satisfactorily proven the quantum of its claim.

Evidence

29. The documentary Exhibits tendered comprised a chronology of events (Exhibit “A”) and a court book containing relevant documents (Exhibit “B”). A number of affidavits were also read and oral evidence was called to clarify the affidavit evidence. The oral evidence is summarised as follows.

Evidence of Ms Tadros – CHEP’s debt recovery officer

30. The only witness to give oral evidence in CHEP’s case was Ms Sandra Tadros, CHEP’s debt recovery officer. Her evidence was undisputed. Her affidavits sworn on 4 July 2018 and 6 March 2019 were read. That evidence dealt with formal historical matters such as the terms of trade between CHEP and the Company, and the identification of relevant documents.

31. Her affidavit sworn on 4 July 2018 was largely in the form of legal conclusions and submissions. Her affidavit sworn on 6 March 2019 set out calculations identifying the purported quantum of CHEP’s claim current to that date, at $695,296.53 including all outstanding invoices, lost equipment charges, hiring charges and interest.

32. Ms Tadros’ oral evidence identified the following concessions and matters of relevance:

1. She has been CHEP’s in-house bad-debt recovery specialist since 2013: T20.12; T24.12;

2. She confirmed that CHEP has some 18,000 active customers, and it conducted credit checks every week or so to check on the registration status of those companies and their ACN numbers: T24.45 – T25.6;

3. She could not identify or verify the Company name on the InfoTrack Creditor/Watch search documents she had produced: T22.25 – T23.6;

4. She had not arranged those searches. She said CHEP used a New Zealand tracking service in addition to other providers in Australia, but that had not been used in this instance: T23.27 – T23.42;

5. The commercial services she used provided a monitoring service for company and business registration and cancellation: T24.1 – T24.10;

6. Although CHEP has about 18,000 active customers, at the relevant time, it did not have a monitoring system in place to monitor the cancellation or de-registration of the businesses that were CHEP customers: T25.5 – T25.25;

7. On behalf of CHEP, she had issued the first letter of demand to the Company in July 2017, which was at around the time the Company went into liquidation: T25.29 – T25.43;

8. She confirmed that Mr Flynn had contacted her after receiving the letter of demand and he had advised he was trying to locate the pallets in question but he had been unsuccessful in doing so: T26.3;

9. The CHEP pallets do not have identification tracking chips: T26.17. They are not barcoded or numbered, but they do bear the marking “Property of CHEP”: T27.18 – T27.22.

Evidence of Mrs Flynn – second defendant

33. Mrs Flynn, was the only witness to give oral evidence in her defence to CHEP’s claim. Her affidavits sworn on 13 April 2018 and 17 August 2018 were read. Her evidence was undisputed.

34. The oral evidence of Mrs Flynn comprised identification and adoption of her affidavits, followed by cross-examination. She acknowledged that after the Trust had vested in June 2015 she had not taken any steps to inform CHEP that the Trust had come to an end or that she no longer intended to guarantee the liabilities of the Company: T29.45 – T30.12.

35. Mrs Flynn’s unchallenged affidavit evidence was to the effect that in May 2014 she had resigned her employment with the Company, and that following orders made in the Federal Circuit Court on 1 February 2016, in divorce proceedings between the first and second defendants on 12 February 2016, she transferred her shareholding in the Company to her husband and ceased her involvement in the Company. Mrs Flynn also attested to the fact that the Trust ceased trading in the 2011 financial year, and that the Trust had vested on 30 June 2015. Mrs Flynn also explained some formal matters concerning delays in the proceedings which no longer require consideration. Mrs Flynn’s second affidavit dealt with formal matters and annexed documents, not all of which require analysis.

Affidavit by Mr Radburn – solicitor for second defendant

36. Mrs Flynn also relied on an affidavit sworn on 5 March 2019 by her solicitor, Mr Sean Radburn. That affidavit was of a formal and uncontroversial nature, and annexed results of relevant search details for the following entities:

1. The Company, the trustee for the Trust, a discretionary trading trust, had been first registered on 1 May 2007 and that registration was later cancelled from 21 April 2015;

2. Flynn Transport (NSW) Pty Ltd, was an Australian private company registered from 1 May 2007. The search results showed that since 12 February 2016, Mr Barry Flynn held all the shares in that company, including the shares formerly held by Mrs Flynn, and that on 3 July 2017, Worrells Solvency & Forensic Accountants had been appointed as the liquidator for that Company.

Absence of evidence of Company’s trading history

37. The evidence does not disclose any relevant continuous historical documentation of the Company’s trading history with CHEP in the period 2007 to about 2016, particularly as to whether the Company had traded with CHEP in its own right, or as the trustee of the Trust.

38. It appears that Mrs Flynn had resigned from the Company in 2014 before the Trust had vested. Thereafter, the Company remained under the sole control of Mr Flynn, and CHEP continued to trade with the Company. The evidence does not establish whether the Company did so, on the basis of its pre-existing Trust account that it had established with CHEP in 2007, or whether it did so under a new account with CHEP established after the termination of the Trust.

39. In that regard, it is of particular relevance that the invoices upon which CHEP sues, are all addressed to the Company without any mention of the Company as being the trustee for the Trust. The invoices refer to the Company’s ACN and they do not refer to the ABN for the Trust. Notably, CHEP’s “Credit watch” report refers to the Company in its own right, and does not refer to the Trust.

40. CHEP’s establishment documents, namely the application form seeking credit and the Guarantee, refer to the Trust as the applicant. The compelling inference is that, as was submitted on behalf of Mrs Flynn, namely in around 2015, if not beforehand, CHEP’s account details had been changed to reflect that thereafter CHEP traded with the Company in its own right, rather than as trustee of the Trust, because after 30 June 2015, it would have been impossible for CHEP to have traded with a Trust that no longer existed.

41. It is beyond dispute that after the Trust had vested on 30 June 2015, it ceased to exist. In my view, after that date, the Company could not have been incurring financial obligations on behalf of the Trust, even if it claimed to have been doing so. Due diligence by CHEP, as a creditor, ought to have established that fact.

Determination of issues calling for decision

42. The starting point of the consideration required in this case is to recognise the indisputable proposition that a trust is neither a legal person nor a legal entity. Therefore, for a trust to transact business, this must be achieved through the actions of a trustee, being either an individual or a company.

43. The key documents appear in the court book at Exhibit “B”, Tab 8, pp 175 – 178 and Tab 11, pp 224 – 225. They comprise the Application for Commercial Credit (pp 175 – 176) and the Guarantee and Indemnity (pp 177 – 178).

Construction of the application for commercial credit

44. CHEP claims the Company’s application for commercial trading credit forms a valid basis for its claim against the Company, for which the Guarantee applies. CHEP claims that this is so because Mrs Flynn was a director of the Company and she signed the Guarantee.

45. In contrast, and in defence to CHEP’s claim based on the trustee status of the company at the time of the Guarantee relied upon by CHEP, Mrs Flynn points to relevant aspects of the documentation, namely:

1. Under the heading "All Company Applicants Please Complete", the name "The Flynn Discretionary Trust" has been inserted next to the item "Trading Name/Business Name (if any)";

1. The section "All Partnership/Sole Trader/Trust Applicants Please Complete (Delete as applicable)" has been completed by:

1. The insertion of the Company's name next to the item "Trustee Name";

2. The insertion of the Trust's name as the trading or business name;

3. Ticking the "Yes" box next to the question "Does the Applicant trade as a Trading Trust";

4. Ticking the box marked "Discretionary" next to the question "Type of Trust".

3. Under the heading "All Applicants Please Complete", the Applicant's ABN number has been identified as 70 363 022 953. This is the ABN for the Trust. The Company has its own ABN number (19 125 170 765) which was not used in the documentation.

4. At the top of the second page of the document, the bank account name for the Applicant is given as "The Flynn Discretionary Trust".

46. In my assessment, the matters cited in [45] above compellingly and conclusively indicate that when the application for commercial credit was made to CHEP, it was made plain to CHEP that the Company was applying for commercial credit in its capacity as the trustee of the Trust, and not in its own right. In my view, that is so even though the application was signed by Mr Flynn as managing director, and by Mrs Flynn as director and secretary, and as shareholders of the Company.

47. CHEP submitted that it was irrelevant whether the Company purported to enter into the agreement as a trustee for the Trust or in its own right. I do not accept that submission.

48. Whilst CHEP accepts that the name of the Trust appears in the documentation of the agreement, it submitted that is not sufficient to limit the liabilities of the Company under the Guarantee: T56.45. CHEP further submitted that the contractual or guarantee documents should not be construed so as to limit the liabilities of the Company to the liabilities incurred as trustee: T57.20. CHEP also submitted that when Mrs Flynn signed the documents in question, she was giving a guarantee and indemnity for the Company.

49. In my assessment, those submissions should not be accepted because, to do so, would not give appropriate business efficacy to the agreement which, from the surrounding circumstances, clearly identifies the trustee status of the applicant Company where it was plain that the Trust was transacting with CHEP. There was no other purpose in identifying the Trust in the foundation documents except to indicate that liability was to be limited: Helvetic Investment Corporation Pty Ltd v Knight (1984) 9 ACLR 773, at 777 and 778.

50. There was no ambiguity on the credit application form. It could not be clearer that the Company was opening an account with CHEP on behalf of the Trust. That situation is different to the circumstances of the authority relied upon by CHEP where the identity of a purchase was not specified in the accompanying guarantee: Pang v Byland Holdings Pty Ltd [2010] NSWCA 175.

51. CHEP asserts that the respective different uses of ACN and ABN numbers on the documents, is insufficient to limit liability in this case: T61.8. I do not accept that submission. To do so would be to ignore the qualifying text in the application form that clearly refers to the Company’s status as trustee for the Trust.

52. The critical question is whether the debt was incurred by the Company and not as trustee of the Trust. On that question, I find that the debt claimed by CHEP was incurred by the Company in its own right, and not in its capacity as trustee for the Trust.

Enforceability of the guarantee and Indemnity

53. An assessment must be made of the objective intention of the parties when they entered into the guarantee. This is because there is a distinction between debts that are incurred by a trustee in its own right and debts that are incurred in the course of the administration of a trust.

54. CHEP submitted the guarantee and indemnity in question was not limited to the liabilities and obligations incurred by the Company as trustee of the Trust. In developing that argument CHEP argued that were it otherwise, CHEP would have had the practical problem of not knowing which entity it was transacting with. In this case, that difficulty as raised by CHEP is met by the fact that the relevant forms clearly indicate by reference to the ABN number given, that it was transacting with the Trust. CHEP did not tender its pre-2016 account data or statements to show if the position was otherwise.

55. I consider that the compelling factual conclusion which arises in this case is that, as was submitted on behalf of Mrs Flynn, the makers of the guarantee only intended to guarantee the obligations of the trustee to the extent that such obligations were incurred as trustee of the Trust.

56. That factual conclusion is compelling because of the appearance of the name of the Trust as the applicant on the application form. This must mean that the guarantors must have intended to guarantee the obligations incurred in relation to the Trust. It is untenable to assume or to infer that the makers of the guarantee intended that the reference to “the Trust” should be construed to mean “the Company”.

57. I consider that the above conclusion is also compelling because CHEP’s application form makes it clear that the trading account on which the Company proposed to trade with CHEP was in respect of a trust, as cited at [45] above.

58. To the extent that there may be ambiguities in the interpretation of the guarantee as to whether it either does, or does not, extend to obligations of the Company in its own right and not as trustee, the application of the contra proferentem rule of construction requires that CHEP’s document be interpreted against its interests in the litigation. The same principle applies where the guarantee is said to be an indemnity.

59. The Guarantee and Indemnity form signed, sealed and delivered by Mr and Mrs Flynn on 19 June 2007 recited the fact that CHEP had been requested to provide credit or other financial accommodation to The Flynn Discretionary Trust. That document identified the Trust as the applicant for credit. It was in consideration of that application that the guarantee was signed by Mr and Mrs Flynn. CHEP then provided the requested financial accommodation.

60. However, the fact is that the Trust stopped trading in 2011 and the Trust ceased to exist when it vested on 30 June 2015. The Trust’s ABN was cancelled when the Trust vested. The final tax return of the Trust was filed in 2011: Exhibit “B”, Tab H, pp 216 – 223. It follows that, thereafter, CHEP was providing commercial credit to the Company in its own right, and not in its capacity of trustee of the Trust, the former applicant. No credit could have been provided to the Trust after it ceased to exist.

61. Whilst it is true, as Mrs Flynn conceded, CHEP was not advised that the Trust ceased to exist on 30 June 2015, it appears that CHEP did not conduct due diligence on that matter when it continued to extend credit to the Company.

62. The guarantee relied upon by CHEP as against Mrs Flynn was given by her in respect of her obligations under The Flynn Discretionary Trust. I accept the submission made on behalf of Mrs Flynn that, as the Trust is not a legal entity, it could not seek or obtain credit from CHEP or owe CHEP any obligations. Accordingly, there were no obligations that arose in order for the guarantee to apply.

63. On the fundamental question is the construction of the guarantee, which I find was only in relation to those obligations incurred as trustee of the Trust, I find that after the Trust vested in 2015 it ceased to exist. It was therefore not possible for the Company to incur any obligations to CHEP in its capacity as trustee of the Trust after the Trust had ceased to exist. I therefore find that the Guarantee in question is void and an ineffective means by which CHEP seeks to recover the debt owed to it by the Company.

Quantum

64. All of the invoices that CHEP has sued upon in these proceedings relate to 2016 and thereafter. This was at a time when the obligations of the Company could not have been incurred in its capacity as the trustee of the Trust. The invoices were all addressed to the Company without any reference to the Trust. The invoices all used the Company’s ACN and did not refer to the ABN of the Trust.

65. Accordingly, in those circumstances, I find that the invoices are not incurred by the Company in its capacity as trustee of the Trust, and as such, they cannot be the subject of the guarantee upon which CHEP has sued Mrs Flynn.

66. Before leaving the question of quantum, it remains necessary to analyse the elements of the claim. I record that the documentation relied upon by CHEP involved what was described as a massive amount of transactions referenced in a series of elaborate schedules which counsel for CHEP sought to explain in light of a small discrepancy that became apparent on reviewing them. Counsel for CHEP described the discrepancy as de minimus.

67. An alternative and preferable view is that the error revealed in the calculations based upon those materials raises questions of incorrectness and unreliability. That is a point of some significance in the assessment of damage where, as counsel for CHEP acknowledged, CHEP bears the onus of proof on the causation of its claimed loss: s 5D and s 5E of the Civil Liability Act 2002 (NSW). In that context, I consider that the inferences which CHEP seeks, namely that the bulk of CHEP’s claim has been proven (T72.4 – T72.22), leaves me with some disquiet over the accuracy and the reliability of CHEP’s calculations for the reasons that follow.

68. An aspect of CHEP’s quantum claim appears to involve what I consider to be a penalty component which CHEP invokes pursuant to clause 10(d) of the contract: T72.31 – T73.34. Counsel for CHEP acknowledged that it was staggering that nothing had been done by CHEP to bring the claimed accumulating liabilities to a head earlier, so that instead, CHEP’s claim had accumulated into a lost equipment charge of $626,773 without reasonable attempts at mitigation of that claimed loss: T73.36 – T75.17. It was submitted that the charges involved a substantial element of what should be seen to be a penalty.

69. Whether or not a contractual provision amounts to a penalty is to be determined by a construction of the contract and the inherent circumstances, including whether the sum sought as compensation was extravagant, unconscionable or out of all proportion to the interests of the recipient and bears little relationship to the actual loss or damage suffered: Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 20, at [78]; Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, at [29]-[32] and following.

70. Mrs Flynn submits, correctly I find, that: the parties did not have equal bargaining capacity where CHEP, the subsidiary of a large corporation presented standard terms to a small family business; CHEP has not provided reliable evidence that it has formally declared that its equipment is lost as provided by clause 10(c) of the agreement; and the amount claimed is out of all proportion to the amount involved in replacing the equipment, being timber pallets of apparently simple construction using relatively inexpensive materials. I find that those matters attract the application of the test for assessing whether the charges involve a penalty component, as identified in the preceding paragraph.

71. The invoices claimed an amount of $46,713.88. Interest was claimed at 8.71 per cent to 6 March 2019 in the sum of $7,058.19. The lost equipment charge for pallets that apparently no longer exist amounts to $155,312.50, and “ongoing hire charges” for that equipment no longer in existence amounts to $486, 212.84.

72. Mrs Flynn does not dispute the quantum of the first two of the abovementioned items, but she asserts the remainder of the charges should be seen as being unrecoverable penalties.

73. Mrs Flynn submits, correctly in my view, that must be so in the circumstances of the present case where there is no satisfactory evidence of the value of the pallets, said to be $35.50, and there is no satisfactory evidence for the assertion that 4,375 pallets are lost, the compensatory component of damages is unproven. This is not a case where such evidentiary gaps can be filled by making assumptions arrived at on the balance of probabilities, as discussed in cases such as The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54, at [80]-[84], [138], [153], [161]. To do so on the facts of this case would be to engage in unwarranted and unsupportable speculation: Luxton v Vines (1952) 85 CLR 352; [1952] HCA 19.

74. Mrs Flynn submitted that in terms of quantum, the sum claimed for a 21 month hire period between July 2017 and March 2019 amounts to a little over three times the asserted value of the equipment being hired where CHEP knew the equipment was lost and could not be returned by the liquidator. In my view, those charges have the hallmarks of unconscionability.

75. Accordingly, in my view, I am satisfied that a significant portion of CHEP’s monetary claim involves an unrecoverable penalty component. I am unable to rationally dissect out a claimable component. To attempt a quantum meruit assessment as claimable compensation would in this case involve impermissible guesswork. I am therefore left with the conclusion that had CHEP’s Guarantee been found to be enforceable as against Mrs Flynn, the amount of the recoverable loss has not been satisfactorily proven: s 5D and s 5E of the Civil Liability Act.

76. Whilst Mrs Flynn did not plead the penalty point as a defence, she did plead that CHEP was not entitled to recover any hiring charges after the appointment of the liquidator: T84.38. In response to that proposition CHEP argued that the appointment of the liquidator did not alter Mrs Flynn’s liability under the Guarantee.

77. CHEP’s reliance on authority for that proposition, namely cases such as Jowitt v Callaghan (1938) 38 SR 512, Re Carey Builders Pty Ltd (1997) 23 ACSR 754 and Helou v PD Mulligan Pty Ltd (2003) 57 NSWLR 74, must be considered and distinguished in light of the construction of the foundation documents and what I have found to be the objective intention of contracting and guaranteeing parties when they entered into the underlying transactions, where the Company had transacted in its capacity as trustee for the Trust and the credit account and accommodation was styled as being for the Trust.

78. In any event, as already observed, the evidence does not permit a reasoned differential calculation of claimable damages either before or after the appointment of the liquidator: Zorom Enterprises Pty Ltd v Zabow (2007) 71 NSWLR 354; [2007] NSWCA 106, at [84]

79. CHEP’s submissions do not take the last-mentioned factor into account. Instead, as counsel for Mrs Flynn correctly submitted, CHEP’s schedules involving pallet movement analysis involve extrapolations that are based on uncertain factual assumptions that involve unexplained arithmetic and unproven interest calculations (T80.28 – T82.15) which equate to hiring charges equivalent to 200 per cent interest (T83.47), which bears little proportional relationship to what must be seen as the relatively minor cost of the timber pallets, a factor to be taken into account when assessing proper compensation.

80. Fair compensation must take into account what is fair to the defendant as well as to the plaintiff, and a defendant is not liable to pay compensation which exceeds the loss suffered: McCrohon v Harith [2010] NSWCA 67, at [65]. To recover damages for more than a nominal amount, evidence must be introduced to affirmatively establish assessable losses: McCrohon v Harith [2010] NSWCA 67, at [95]. In this case, the evidence does not reasonably equip the Court with the necessary material to make an assessment of the true extent of the claimed loss.

Claim for indemnity costs

81. In light of the above findings, the question of indemnity costs as claimed by CHEP, does not arise for determination.

Disposition

82. For the above reasons, CHEP has failed to establish its claim against Mrs Flynn. She should therefore have a judgment in her favour against CHEP.

Costs

83. As Mrs Flynn has succeeded in obtaining a judgment in her favour against CHEP on CHEP’s claim made against her, she should have an order that CHEP pay her costs of the proceedings on the ordinary basis unless a party can show an entitlement to some other costs order.

Orders

84. I make the following orders:

1. Verdict and judgment for the second defendant on the plaintiff’s claim;

2. The plaintiff is to pay the second defendant’s costs on the ordinary basis unless otherwise ordered.

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Amendments

04 November 2019 - [77] Delete "Whilst" from commencement of paragraph.

[80] Punctuation.

Decision last updated: 04 November 2019