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:

1. 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.

1. 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.

1. 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. 

1. 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 way relating to the counterclaim";

(c)para 4 provides:  "if the Settlement Sum is not received by the Plaintiff in accordance with paragraph 1 of these Terms of Settlement herein, then the Plaintiff shall be entitled to have the proceeding reinstated forthwith and to obtain judgment for the full amount of its claim costs and interest....  less any amounts which the Fourth Defendant might have paid in respect the settlement sum";

(d)para 5 provides:  "Upon payment of the Settlement Sum by the Fourth Defendant in full the Plaintiff hereby forever releases and discharges the Fourth Defendant from all actions, suits, proceedings, claims, demands and costs whatsoever arising out of or in any way relating to the proceeding";

(e)para 7 contains typical provisions permitting the terms to be produced as conclusive evidence of an irrevocable consent to judgment and as to evidence by affidavit from the plaintiff's solicitors as to failure to receive the settlement sum and like matters.

1. Counsel for the fourth defendant submitted that paragraph 4 of the terms of settlement was a penalty provision and thus unenforceable.  He submitted that it provided for payment of a greater sum upon default in payment of a lesser sum and the excess amount was therefore a penalty.  Counsel referred to Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd [1915] AC 78, 87-8; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; NUS International Pty Ltd v The President (Melbourne) Pty Ltd (Supreme Court of Victoria, Hayne J, 24/6/93, unreported); Luciano v CBA (Supreme Court of Victoria, Beach J, 16/5/96, unreported); Wallace Cameron v UBS AG [2000] VSCA 222 and Meagher Gummow and Lehane, Equity:  Doctrines and Remedies (3^rd ed) pp. 444-5).

1. Counsel for the fourth defendant submitted that no antecedent debt had been established, that the only obligation arose under para. 1 of the terms of settlement and that the fourth defendant had not admitted the existence of any liability under the guarantee.  He submitted that, as a matter of substance, para. 4 operated in the case of non-performance of the terms to impose an additional financial obligation in the nature of a punishment and was, as a consequence, penal and unenforceable. 

1. In my opinion the substance of the terms of settlement should be characterised in a way which is different from that advanced by the fourth defendant.  Although the terms of settlement contain an immediate release of the counterclaim the terms of settlement do not discharge the claim of the plaintiff unless and until the settlement sum is paid.  Under para 1 the plaintiff is not accepting the promise of payment in full and final settlement of the proceeding but is agreeing to accept payment on or before 2 December 2000 in full and final settlement of the proceeding. This interpretation is supported by the terms of para 5 which only provide for a release of the plaintiff's claim "upon payment" of the settlement sum.  Counsel for the fourth defendant submitted that even if this analysis was correct and the cause of action of the plaintiff had not merged in the terms of settlement, the penalty argument was still a good one.  I do not accept this submission.  In my opinion the terms of settlement in substance contain an irrevocable consent to judgment for the amount claimed and an indulgence by the plaintiff whereby, if a lesser sum is paid by the stipulated date, the proceeding is settled and at an end. Otherwise the plaintiff's rights in the proceeding are unaffected and the plaintiff is entitled to rely upon para 7 of the terms of settlement to obtain judgment for the amount claimed.

1. This application of the relevant principles is in my view supported by what was said by the Court of Appeal in Wallace Cameron v UBS AG, supra.  In particular, I would refer to what was said by Phillips JA at [22] to [23] and by Buchanan JA at [27] to [28]. 

1. Accordingly there will be an order that the proceeding be reinstated and that there be judgment for the plaintiff against the fourth defendant for the sum claimed .  I will hear submissions about the precise form of the judgment.

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