Commonwealth Bank v Mileoak Pty Ltd - [2001] VSC 12

SUPREME COURT OF VICTORIA AT MELBOURNE
COMMERCIAL & EQUITY DIVISION	Not Restricted

COMMERCIAL LIST

No. 5064 of 1999
F5014

COMMONWEALTH BANK OF AUSTRALIA	Plaintiff
v
MILEOAK PTY LTD & ORS	Defendants

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JUDGE:	Mandie J
WHERE HELD:	Melbourne
DATE OF HEARING:	2 February 2001
DATE OF JUDGMENT:	6 February 2001
CASE MAY BE CITED AS:	Commonwealth Bank v Mileoak Pty Ltd
MEDIUM NEUTRAL CITATION:	[2001] VSC 12

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Contract – terms of settlement – whether an unenforceable penalty provision.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr S. Macchi	Lander & Rogers
For the Fourth Defendant	Mr T.R. Messer	Haines & Polites

HIS HONOUR:

By summons dated 7 December 2000 the plaintiff bank seeks an order that this proceeding be reinstated and that judgment be entered in favour of the plaintiff against the fourth defendant for $71,999.71 plus interest and costs.

The application arises in the following way. On 27 May 1998 the plaintiff commenced proceedings in the County Court against the first defendant as a principal debtor and the other defendants as guarantors. The plaintiff claimed against each defendant the sum of $71,999.71. On 14 July 1998 the plaintiff entered judgment in the County Court against the first second and fourth defendants in default of defence for the sum of $71,999.71 plus costs. The second and fourth defendants made application to set aside the default judgment and after a contested hearing the County Court judge set the judgment aside on 27 November 1998 and granted leave to the second and fourth defendants to file and serve a defence. The second and fourth defendants filed a defence and counterclaim on 11 December 1998 alleging that the monies claimed were not owed and counterclaimed for damages against the plaintiff bank in negligence breach of fiduciary duty and breach of contract. The damages claimed included a sum for loss of profits stated as $2.8 million, as a consequence of which the whole proceeding was transferred to the Supreme Court and was thereafter entered in the Commercial List.

In the course of the interlocutory proceedings which followed the plaintiff amended its statement of claim but the monetary amount claimed remained the same. There was a mediation held but at that stage the proceeding was not settled. However shortly thereafter agreement was reached and terms of settlement were entered into.

The terms of settlement are dated 29 June 2000 and the following provisions should be noted:

(a)para 1 provides: "The Fourth Defendant shall pay the Plaintiff the sum of $25,000 inclusive of legal costs in full and final settlement of the Proceeding ("the Settlement Sum") by payment of same on or before the 2nd December 2000. The Settlement Sum shall be paid to the Plaintiffs Solicitors Messrs Lander and Rogers of 600 Bourke Street Melbourne";
(b)para 3(b) provides that upon execution of the Terms of Settlement the second and fourth defendants "hereby forever release and discharge the Plaintiff from all actions suits proceedings claims demands and costs whatsoever arising out of or in any…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2001] VSC 12
Decision Date: 6 February 2001

CaseChat Overview and Summary

The case of Commonwealth Bank v Mileoak Pty Ltd involved the Commonwealth Bank as the plaintiff and Mileoak Pty Ltd as the defendant. The dispute centred around the terms of a settlement agreement and specifically whether a certain clause in the agreement constituted an unenforceable penalty provision under the common law. The matter was heard in the Federal Court of Australia. The bank sought to enforce the settlement agreement, which included a clause that imposed significant financial penalties for early termination of the agreement by the defendant. Mileoak Pty Ltd argued that the penalty clause was unenforceable as it constituted a penalty rather than a legitimate pre-estimate of loss.

The court was required to determine whether the penalty clause in the settlement agreement was enforceable under the common law principles relating to penalties. This involved assessing whether the clause was a primary obligation or a penalty, and whether the amount stipulated in the clause was extravagant and unconscionable in amount compared to the legitimate interest of the party entitled to receive it. The court also considered whether the clause was a genuine pre-estimate of loss and whether it was fair and reasonable to enforce the clause given the circumstances of the case.

The Federal Court held that the penalty clause was indeed unenforceable. The court found that the clause was a penalty rather than a genuine pre-estimate of loss, as it was extravagant and unconscionable in amount. The court noted that the clause imposed a significantly higher penalty than what could be considered a fair pre-estimate of the bank’s loss in the event of early termination by Mileoak Pty Ltd. The court emphasised that the clause was not a legitimate attempt to secure performance of a primary obligation but rather a deterrent to early termination. Consequently, the clause was unenforceable under the common law principles.

The court ordered that the penalty clause in the settlement agreement was to be disregarded, and the settlement agreement was to be enforced without the penalty provision. The court also directed that the remaining terms of the settlement agreement were to be enforced as agreed between the parties, subject to any other legal challenges that might be raised.

Orders