Cross, E.g. v National Australia Bank Ltd

JUDGMENT No. ....,.,,.,...,..., .,,,,,,,,,,, 229 , 74

C A T C H W O R D S

EQUITY - whether misrepresentation that guarantee and mortgage
required for refinancing - whether guarantee and mortgage void
ab initio.
PEh??&TP - default clause contained in finance lease void as a
penalty - no immediate obligation to pay total rent - agreed payment out of proportion to losses likely to be suffered because of early termination of contract for default - failure to allow lessee rebate in respect of accelerated instalments and residual value for early receipt prima facie penal.
CONTRACTS - provision empowering bank to recover interest on rental arrears at such rate as is determined by the bank from time to time illusory - provision severable - failure of default notice to specify breach rendered notice ineffective to terminate lease.
Jurisdiction of Courts (Cross-Vestinq) Act 1987 (Qld) - S. 4
Acron Pacific Ltd. v Offshore Oil N.L. (1985) 157 C.L.R. 514
AMEV Finance Ltd. v Artes Studios Thorouahbreds Ptv. Ltd.
(1989) 15 N.S.W.L.R. 564

~ n d e l Ptv. Ltd. v Sentry Car Care Ptv. Ltd. (1989) A. & N.z.
Convevancina ReDorts 252 at 253

~iticorp ~ustraiia Ltd. v Hendrv (1985) 4 N.S.W.L.R. 1

Clarke v Ja~an Machines (Australia) Ptv. Ltd. [l9841 1 Qd.R.
404 - - -

D U ~ ~ O D Pneumatic Tyre Co. Ltd. v New Garaqe and Motor Co. Ltd.
rig151 A.C. 79

Esanda v Plessniq (1989) 166 C.L.R. 131
Godecke v Kirwan (1973) 129 C.L.R. 629
O'Dea v Allstates Leasins Svstem (W.A.) Ptv. Ltd. (1983) 152

29 Aoril, 1994
C.L.R. 359 -
Placer DeveloDment Ltd. v The Commonwealth of Australia (1969)
121 C.L.R. 353
Yendex Ptv. Ltd. v Prince Constructions Ptv. Ltd. (1988) 5
B.C.L. 74
Errol Georqe Cross and Patricia Ann Cross
v National Australia Bank Limited
QG 17 of 1992
-

Brisbane

IN THE FEDERAL COURT OF AUSTRALIA ) NO. QG 17 of 1992

QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION 1

BETWEEN: ERROL GEORGE CROSS and

PATRICIA ANN CROSS
Applicants

AND : NATIONAL AUSTRALIA BANK LIMITED
Respondent

AND : NATIONAL AUSTRALIA BANK LIMITED

Cross Applicant

AND: ERROL GEORGE CROSS and
PATRICIA ANN CROSS

Cross Respondents

MINUTES OF ORDERS

JUDGE MAKING ORDERS: Drummond J
DATE OF ORDERS: 29 April, 1994
WHERE MADE: Brisbane
THE COURT:

1.        Orders that the application is dismissed with costs.
2.        Declares that the cross applicant is entitled to judgment against the cross respondents for the amount now due on the guarantee of 21 August, 1990.
3.        Orders that the applicants' caveat in respect of dealings with their Cooroy land be removed.
4.        Declares that the mortgage over the Tewantin land (which has now been sold) and the Cooroy land is a valid security for the company's indebtedness to the respondent.
5.        Orders that, save to the extent referred to in

paragraphs 2, 3 and 4, the cross-claim is dismissed. r

Orders that the applicants shall pay the respondent's costs of the cross-claim up to the making of the applicants' amendment to the defence to the cross-claim.
Orders that the respondent shall pay the applicants' costs of the cross-claim subsequent to the making of the applicants' amendment to the defence to the cross-claim.
Orders that liberty to apply in respect of order number 2.

NOTE: Settlement and entry of orders is dealt with in
Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) No. QG 17 of 1992

QUEENSLAND DISTRICT REGISTRY 1
GENERAL DIVISION 1

BETWEEN: ERROL GEORGE CROSS and

PATRICIA ANN CROSS

Applicants

AND : NATIONAL AUSTRALIA BANK LIMITED
Respondent

AND : NATIONAL AUSTRALIA BANK LIMITED

Cross Applicant

AND: ERROL GEORGE CROSS and
PATRICIA ANN CROSS

Cross Respondents

Corm: Drummond J
Date: 29 April, 1994
Place: Brisbane

REASONS FOR JUDGMENT

For over 25 years Mr. and Mrs. Cross were the
proprietors of what was for a long while a flourishing printing business on the Gold Coast, Gold Coast Printing Co.
Pty. Ltd.. From 1982, they and their company were customers
of the respondent bank. They dealt almost exclusively with
Mr. Newton, an officer of the bank, from then until the end of
1990; another bank officer, Mr. Douglas, was also involved
with Mr. Newton in the applicants' affairs towards the end of
this period. From the end of 1990, a Mr. Padgett was the
officer responsible for overseeing the applicants' accounts.
<

From time to time, they relied on Mr. Newton for general financial advice. In mid-1988 the company purchased expensive equipment with lease finance of over $600,000.00 from the bank, arranged by Mr. Newton, that enabled it to modernise its printing operations. This turned out to be an unfortunate decision, primarily because of its timing. W . Cross acknowledged that it proved much more difficult and costly to commission the equipment than he had anticipated when he made the decision to acquire it. These difficulties were compounded by the coincidence of the air pilots' strike and a trade fair held in Brisbane, both of which had a significant depressing impact on the Gold Coast economy, and by prevailing high interest rates. The company's fortunes went into decline in late 1988/early 1989. This decline continued and the recession started to have its impact on the company's business. At the bank's instigation and in order to reduce the indebtedness of both themselves and their company to the bank, the Crosses sold some residential properties in mid-1991 in a depressed market. The company's decline continued and the bank ultimately put a receiver into the business in June

1991.
Mr. and Mrs. Cross are now facing demands by the bank for $262,442.28 on the personal guarantee up to a maximum liability of $509,614.00, which they gave in respect of the company, being the amount claimed by the bank as owing thereunder as at 22 May, 1992, when its cross-claim was filed,

I '

and for a further $388,264.95 owing on personal guarantees

given by them in respect of the equipment leases which their
company entered into with the bank in mid-1988. With accruing interest, the total amount the bank is now claiming will be substantially in excess of these amounts.
The principal claim for relief made by Mr. and Mrs. Cross in the action is for an order declaring void ab initio the guarantees in respect of the company's indebtedness to the bank up to a limit of $363,026.00 which they gave the bank on 23 April, 1990 and this later guarantee in respect of the company's indebtedness up to a limit of $509,614.00 and a bill of mortgage which they granted to the bank over a property at Tewantin and a property at Cooroy on 23 April, 1990, which, on its face, is available to the bank as security in respect of Mr. and Mrs. Cross' indebtedness on the guarantees. They also seek an account and damages in respect of the sale by the bank as mortgagee of this Tewantin property. The bank has not yet sold the Cooroy land because the applicants have caveated against the registration of any dealings with this land. The applicants acknowledge a maximum indebtedness of $144,095.84

respect of the company's indebtedness on 10 January, 1990 up to the bank on an earlier guarantee they gave to the bank in
to a limit of $247,407.00.

The foundation for their claim for the declaratory relief sought is that they were misled by explicit representations made to them by Mr. Newton on 23 April, 1990 that the guarantee for $363,026 .OO and the mortgage over the Tewantin property and property at Cooroy, both dated 23 April,
1990, were required by the bank in order to make available to
m. and Mrs. Cross' printing company the refinancing of that
company's various debts. They allege that earlier in 1990 Mr. Newton had advised them that the bank had approved in principle refinancing by converting all their company's borrowings into a single loan repayable by periodic instalments of principal and interest over an extended period and at a favourable interest rate. Their attack on the guarantee for $509,614.00 dated 21 August, 1990, was based on similar misrepresentations said to have been made by Mr. Newton on that later date. Mr. and Mrs. Cross' case is that if they had been made aware by the bank that there was a risk that the refinancing of their company's borrowings would not proceed when they gave the bank each of these guarantees and the mortgage, they would not have accommodated the bank in that regard. It is also alleged that the bank, by Mr. Newton, knew at the relevant times in April and August 1990 that Mr. and Mrs. Cross believed that the guarantees and the mortgage were required to ensure that the refinancing said to have been
offered by the bank would be made available, but failed to correct that misconception.
The bank denies that any representation that refinancing would be made available to Mr. and Mrs. Crossr company was ever made. It alleges that it was at all relevant times made clear to Mr. Cross that the bank would not provide any refinancing facility, although it was prepared from time to time to assist the company with increased overdraft

accommodation. The bank alleges that it was in return for providing such further assistance that it took the two guarantees and the mortgage over the Tewantin and Cooroy properties.
Mr. Cross said that he first raised the question of refinancing with Mr. Newton at about the end of 1988 - "a very, very bad year" for the company - when Mr. Newton attended the company's Gold Coast office in late 1988 to discuss the applicants' and the company's financial positions; Mr. Newton then advised that the company's debts should be consolidated and arranged so that they were repayable over a longer time frame. Mr. Cross says he recalls being told that complete financial statements for the company would have to be prepared, which were not then available because of an on-going dispute with the Australian Taxation Office ("ATO"). Mr. Newton says he does not recall any mention of refinancing at this time.

On 24 November, 1988, a temporary overdraft limit of $90,000.00, increased from $60,000.00, was approved by Mr. Newton to meet the company's increased needs. On 9 February, 1989 Mr. Newton says he had discussions with Mr. Cross about his business affairs and recommended approval of an interest only loan of $80,000.00 in the names of the applicants to enable them to provide, by way of loan, working capital for the company. This loan was made and secured by a mortgage over their property at Mudgeeraba. A diary note made by Mr. Newton records that 1987 and 1988 trading figures were not available, but that Mr. Cross undertook to provide them within a month: they had not been prepared because of the battle
with the ATO. There is no mention in the diary note of
refinancing.
On 26 April, 1989 Mr. Newton again saw Mr. Cross.
His diary note records, among other things, that the 1987 and
1988 trading figures had still not been prepared, but that it
was "a good tactic that the figures should not be produced until" the dispute with the AT0 was resolved. What the note describes as "salient figures" were however provided by Mr. Cross. There is no mention in this note of refinancing either.
A further discussion occurred on 26 July, 1989. Mr. Newton's diary note of this is relied upon by the applicants. Mr. Newton says that he went with Mr. Douglas to the Gold Coast office on 26 July, 1989 to discuss the Cross' financial

trading figures for 1989 as well as those for 1987 and 1988 affairs. His note records Mr. Newton's concern that the

were not available, although he noted that this was due to Mr. Cross' reluctance to have this done while the taxation dispute was still on foot. He recorded the "salient figures" as at 30 June, 1989. He noted that Mr. Cross was happy to provide additional security (despite Mr. Newton considering that the security already held was sufficient). This offer was accepted by Mr. Newton, by way of additional security for the it had anything to do with restructuring. I accept Mr. Newton's evidence that the deeds to these two properties were offered by Mr. Cross as security for the increased overdraft and were accepted by Mr. Newton as such.

The next meeting upon which Mr. Cross relies is the meeting of 31 August, 1989 at Mr. Newton's office. Mr. Newton, Mr. Douglas, Ms. Cooper, Mr. Cross and Mr. Cross' daughter Jacqui were present. Mr. Cross says that, along with the possible expansion of the company's business, refinancing was discussed; he says Mr. Newton at this stage conferred in private with Mr. Douglas and then returned to the meeting and said "We can refinance, but it's going to be very expensive, in fact it could be too expensive." In cross-examination, however, Mr. Cross qualified this affidavit evidence. He said that this comment by Mr. Newton was made in response to a suggestion by him that if he could not go ahead with a total refinancing package, he would like to refinance the chattel lease over the forms press.

Mr. Newton recalls a meeting in his office on this date, but his recollection, confirmed by the relevant bank diary note, is that the meeting was concerned with an expansion program, in particular the purchase of a major competitor's business. Mr. Newton says that he has no recollection of refinancing being discussed at all. There is no mention of that in the note. The diary note does again record the bank's interest in getting the company's financial
increased overdraft that he then approved. This security was in the form of a deposit of the title deeds to the Tewantin and Cooroy land, which were to be forwarded by the Cross' solicitors. The diary note also records this:
"Pending restructure of all companies' borrowings as well as that of Mr. and Mrs. Cross, we are to write $130,000.00 Overdraft Limit to regularise the company Account and remove name from Office CL1

record. "

Mr. Newton said that the diary note recorded a discussion in which it was agreed that the overdraft limit would be extended to $130,000.00. He says there was some discussion of refinancing the company's debts at that meeting, but the discussion was in general terms and no assurances were given by him to Mr. Cross concerning the implementation of a refinancing package. Mr. Newton said: "If the borrowing had levelled out at that figure, and if the taxation situation had have been rectified, and if the trading figures were available, we could have moved from there onto restructure."

Mr. Cross says that while he gave these deeds to the bank at the time he got this increased overdraft, they were not provided as security in connection with any transaction with the bank, but that he just wanted "to corral" them with the deeds to all the Cross' other properties over which the bank then held security. When he gave this curious explanation in the course of being cross-examined about his reasons for giving these deeds to the bank, he did not suggest
statements and their continuing non-availability, due to the taxation dispute, which was still unresolved. Mr. Douglas recalls discussions with respect to the acquisition of a competitor's business. He does not recall any talk about refinancing.
Ms. Cooper, in her af fidavit, refers to attending a
meeting at which the acquisition of a competitor was

discussed. It is probable that this was the meeting of 31
August, 1989. She says that "Errol said he needed to get his finances in order and the meeting was concluded on the basis that Max Newton would look at the refinancing proposal so that the company could then look at taking over S.P. Printing" (the competitor). She did not suggest that the talk about refinancing went any further than that.
Discussions in relation to the company's business
fortunes and its financial requirements continued through
1989. On 20 November, 1989 Mr. Newton says that he had a

telephone conversation with Mr. Cross. Mr. Newton recorded in a note that:
"Errol speaks of consolidating all his borrowings and converting them to an interest only loan and with this request we would willingly comply. He accepts our recommendation that a move in this respect should be deferred until such time as decision by Taxation Department is handed down so that any amount he may be required to pay them can be included as part of consolidation process."

Mr. Newton says he had sufficient authority to agree to such a proposal but it would not have been possible to arrange any refinancing at that stage because of the ongoing dispute with the AT0 and lack of knowledge in relation to the ultimate financial requirements of the company. This latter point is confinned by the note which records a discussion about Mr. Crossr difficulties in keeping the company within its $130,000.00 limit and a possible need for increased accommodation.
On 21 December, 1989, as foreshadowed in the discussion on 20 November, 1989, Mr. Cross sought additional accommodation: the existing overdraft limit of $130,000.00 was converted by Mr. Newton to an interest only fully drawn advance and a new $50,000.00 overdraft was established, both facilities being for 12 months. This is all recorded in Mr. Newton's filenote of same date. It must have been understood that further security was required to support this additional funding: Mr. Newton then noted that "a fresh guarantee can be

Cross". Mr. Newton's note also records that: "We have been forwarded to Ashmore Branch for signing by I4r . and Mrs.

reluctant to fully review this Company's requirements until such time as a decision is reached by Taxation Department on a running argument . . . about a superannuation Fund"; it refers again to the bank's concern at the continuing non-availability of the company's trading figures and also records Mr. Newton's comment : "I am sure the need to review this file for one reason or another will rear its head within the next six
months. " Mr. Newton says that because of "increasing indebtedness of the company to the bank", a further guarantee was required from Mr. and Mrs. Cross and a guarantee of $247,407.00 was provided on 10 January, 1990. This is the guarantee in respect of which Mr. and Mrs. Cross acknowledge that they are indebted to the bank.
In my view, from late 1988 to early 1990 only general discussions with respect to a possible restructuring of the company's borrowings took place and then only intermittently. No promise or representation was made in that regard to Mr. Cross in this period. Mr. Cross confined this in cross-examination: he said that Mr. Newton and he "basically made a firm promise to one another as to what we would do in April of 1990". He also said he did not allege that Mr. Newton promised any refinancing before then. It is also apparent that during this 18 month period to early 1990, increasing amounts of finance were made available by the bank to the applicants' company in exchange for further security,

viz., the mortgage over the property at Mudgeeraba for the interest only loan of $80,000.00, the mortgage by deposit of

the Tewantin and Cooroy title deeds for the $130,000.00 overdraft and later again, the further guarantee of $247,407.00 for the increased assistance.
In April 1990 Mr. Cross says that Mr. Newton
attended the Gold Coast office and explained that, to enable
the refinancing to proceed, additional security was required
over the properties at Cooroy and Tewantin the deeds to which Mr. Cross had previously given to the bank. It was for this reason Mr. Cross says he and Mrs. Cross signed the mortgage of those properties and the $363,026.00 guarantee on 23 April, 1990. Both Mr. Newton and Mr. Douglas diarised the discussions at this meeting. The main topic, according to both sets of notes, was Mr. Cross' need for still more financial support because of the current poor trading performance of the business. Once again, the question of the provision of financial statements for the company for the 1987 to 1989 years was discussed; both notes record a promise by Mr. Cross to have them prepared promptly. (Mr. Newton's note refers to the partial resolution of the taxation dispute.) In neither note is there any mention of anything that might possibly relate to talk about refinancing or restructuring the company's borrowings, although both notes are quite detailed and record a wide ranging discussion over a number of topics. Mr. Cross' request for additional funding was acceded to: Mr. Newton's note concludes with a direction to the bank's lending

officer to establish a $50,000.00 overdraft and a further $250,000.00 overdraft on bill finance. The note records that

the company was indebted to the bank at that time to the extent of over $160,000.00 and that a further $100,000.00 accommodation was designed to cover both the additional indebtedness and the front end interest costs that would apply in relation to the bill finance. There was also discussion about Mr. Crossr willingness to sell various of his properties to reduce the indebtedness to the bank, although he did not
want to do that just then because of the depressed state of the property market. Mr. Newton does not recall any discussion of refinancing at this meeting. In his affidavit, he says "The only refinance discussed at the meeting was the refinancing of the overdraft and the fully drawn advance by the Bill Facility in order to provide a lower interest rate."
I do not understand him here to be contradicting what he
elsewhere says about there being no discussion about refinancing at the meeting. Rather do I take him to be saying that the arrangements involving the provision of additional funds to the company at Mr. Cross' request made at that meeting could be regarded as involving the refinancing of the company's borrowings on overdraft in the way then agreed. Mr. Douglas does not recall any discussion about any refinancing proposal at the meeting.
Ms. Cooper supports Mr. Cross' account of this
meeting in that she says there was fairly detailed discussion
between him and the two bank officers about the refinancing of

meeting to provide "certain financial information about the the company's borrowings. She says she was asked at this

company" so that the amount needed for refinancing could be ascertained. However, it appears from her cross-examination that the financial information she gathered at this meeting was not for that purpose, but rather for the preparation of a cash flow projection to which there is reference in Mr. Douglas' diary note: this projection was prepared, according to the note and to what Mr. Douglas said, as an interim aid to evaluating Mr. Crossf request for the increase in the company's borrowings which Mr. Newton ultimately approved at that meeting. He says that it was to support this funding increase that he required the further guarantee of $363,026.00 and the formal mortgages over the Cooroy and Tewantin properties.

Between April and August 1990 Mr. Cross says that he and Ms. Cooper were regularly in contact with Mr. Newton and Mr. Douglas who sought information in relation to the financial position of the company to enable the refinancing to be finalised. Mr. Douglas says that he regularly contacted the company by telephone after April 1990 for the purpose of checking the cash flow predictions against the actual figures, but did not mention any proposed refinancing. In his diary note of the 23 April meeting, he recorded that the cash flow to June 1990 obtained at that meeting was prepared as an interim measure pending compilation of an extended forecast.

After April 1990, the company's need for further funding continued. By July 1990 Mr. Newton says that the overdraft was twice the approved limit. He also says he was told in this period that Mr. Cross had listed his Gold Coast properties for sale.

In August 1990 the guarantee of $509,614.00 was signed by M r . and Mrs. Cross. Mr. Cross says that this was signed when Mr. Newton told him, on a visit to the Gold Coast office with Mr. Douglas on 21 August, 1990, that "more paperwork was needed to be signed to enable the refinancing package to proceed". He says he does not recall and does not believe that there was any discussion about the company's overdraft at this meeting and that while Mr. Newton may well have organised an increase in the overdraft at that time, it was not at his instigation. He said that he and his wife would not have signed this second guarantee if he had not believed that it was required for the purpose of facilitating the refinancing of the company's borrowings and that if he had known that it would operate as a security in respect of the company's existing debts, he would have declined to sign and would have gone to another lending institution for assistance. He did not explain how, in view of the company's then high level of debt, poor trading record and the fact that the respondent bank held all his significant assets as security for the company's existing indebtedness, he would have been able to persuade another lender to provide the assistance the company then needed to keep trading. He makes no mention of

borrowing limits and that it was still encountering serious the fact that the company was then well in excess of its trading difficulties and urgently needed further financial
assistance from the bank.

Mr. Douglas' diary note made the next day records that the purpose of this visit was "to discuss excesses and to determine the company's on-going requirements". Mr. Douglas says that he went with Mr. Newton to speak with Mr. Cross on
this occasion because he was very concerned at the company's deteriorating financial position. He says he was terse with Mr. Cross. The promised financial statements had still not been prepared, although the dispute with the AT0 was over, and he was told that they would not be prepared before Christmas. He impressed on Mr. Cross the fact that the company could not fund its borrowings and that the urgent sale of assets and reduction of borrowings from sale proceeds was the only course acceptable to the bank. His diary note records that the delay in doing this was unreasonable and that Mr. Cross should attend to the matter forthwith. It also records that while various of Mr. Cross' properties had been listed for sale for some time, they were not being actively or realistically marketed and that the sale of the properties was "now imperative to reduce debts and interest costs". There is no reference in his diary note to any discussion of refinancing other than the following: "Amalgamation of Leasing was looked at. However, due to the competitive Interest rate at inception, prospect was not viable."

Mr. Newton does not recall any discussion about refinancing, save with respect to the possibility of amalgamating the company's leases, which he said would then have been an imprudent course because of the difference between current interest rates and the rates by reference to which those leases had been agreed. He says that "No promise or assurance was made about refinancing at that time and such refinance still could not have taken place in any event
because financial figures had not been provided by Mr. Cross." The 21 August, 1990 visit resulted in the overdraft limit being increased from $50,000.00 to $200,000.00. Mr. Newton says the further guarantee was required to support this further increase. Mr. Newton wrote to Mr. and Mrs. Cross on 3 September, 1990 advising approval of the $150,000.00 increase in the company's overdraft, an increase which was to be cleared by 31 December, 1990. Under the heading "Security",
the letter includes the following: "As agreed security for the Overdraft Facility will be Guarantee and Indemnity for $509,614 given by Errol George and Patricia Anne Cross supported by" four registered mortgages, including that over the Tewantin and Cooroy properties and the registered debenture given by the company itself. The letter concludes with the comment: "We trust these arrangements meet your requirements." Although Mr. Cross said he had not himself sought any increase in the company's overdraft at the meeting of 21 August, there is no suggestion from Mr. Cross that, on receipt of this letter, he protested about the bank taking the

mention of his having given the guarantee in connection with

were then made available by the bank and about there being no new guarantee solely to support the increased loan funds that

the finalisation of the refinancing arrangements which he says had long been approved by the bank. The absence of any

written complaint and of any suggestion at all from m. Cross in his evidence before me that he then protested that the bank was going back on what he now says were its earlier clear

promises to refinance the company's indebtedness is obviously
significant in evaluating the claim Mr. Cross now makes.
The company's fortunes continued to deteriorate after August 1990. By late October 1990 the drawings on the overdraft were approaching the $200,000.00 limit. Mr. Cross and Ms. Cooper visited Mr. Newton at his office to discuss the account. Restructuring of the company's debts was discussed at this meeting; however, no reference to a promise of refinance can be extracted from the evidence. Nor does Mr. Cross suggest that any such promise was then made. Mr. Newton records in his diary note that "Err01 speaks of consolidating his lending (such to incorporate lease commitments), through outside Financier. He was counselled that to do this at the very least he would require to be able to produce last three yearsr trading figures and even then, may have difficulty in locating a Financier prepared to take him on. No offer of our participation in this scheme was made. " Mr. Cross does not suggest any commitment was made or repeated with respect to

the bank refinancing him. The diary note contains yet again a
record of the bank's concern at not seeing the trading figures
for the company.
While it is clear that through 1989, right up until the end of 1990, there was discussion from time to time between Mr. Cross and bank officers, including Mr. Newton, about the refinancing of the company's indebtedness including its equipment lease liabilities, the bank's witnesses say those discussions never progressed at any time to the stage where any promise or anything that Mr. Cross might reasonably take to be such a promise was ever made on behalf of the bank that it would be prepared to do that for the company. Their evidence has the support of their contemporaneous diary notes. Mr. Crossr evidence that the bank quite early committed itself to refinancing the company's indebtedness and procured the two guarantees and the mortgage of the Tewantin and Cooroy land by affirming its willingness to do that conflicts with the evidence of the bank officers. It is inconsistent with the documentary evidence which indicates that these three securities were given in exchange for additional loan funds which the company sought from time to time when it was experiencing very difficult trading conditions and which it needed to stay in business. The correspondence that Mr. Cross himself sent to the bank in the first part of 1991 is also inconsistent with the case which he has now attempted to set up to defeat the bank's claims on the two guarantees and the mortgage. In his facsimile of 18 February, 1991 to Mr.

Douglas, Mr. Cross complains about the treatment he had received from the bank from October 1990. In the course of
this letter he says:
"In early March [i.e. of 19911 I intend to do either of 2 things: (1) Totally refinance our endeavour as I asked you and Max to do for me in October of '90 or (2) Sell my company for its debts to your bank (2

Printers are already interested). ..."

In a detailed letter of complaint headed in Mr. Crossr hand "Report to Mr. Phi1 Padgett - 15/3/91" which Mr. Cross sent to Mr. Padgett in April 1991 in which he sought to persuade the bank at that time to make refinancing available, he again referred to his request for refinancing, but only as a request that was made "as far back as last October 90". The failure to complain about the bank reneging on the promise he now says it made in early 1990 to refinance the company's indebtedness and the failure to complain about being misled into providing the guarantees and the mortgage by the bank in the belief that that was required to ensure that refinancing would be made available in letters which Mr. Cross wrote in early 1991 to complain about the harsh treatment he says he was receiving from the bank is inconsistent with the case he now seeks to make out. Mr. Douglas says that it was only after the bank began exercising its powers of sale over the Cross properties in mid-1991 that he first heard of the allegation by Mr. Cross that he had been promised a refinancing package and had been misled by this into executing

security documents.
The case is, I think, essentially a simple one. There was ongoing talk of refinancing that commenced in late 1988 and continued through 1989, 1990 and into 1991. Such discussions continued after Mr. Newton ceased to have responsibility for the company's account in November 1990. But the parties never got to the stage of discussing details. Moreover, nothing was finalised by way of what was to be involved in the refinancing proposals by the end of 1989. I think the reason for this is probably twofold: firstly, Mr. Cross was given increased overdraft accommodation that met the company's financial needs whenever he sought it and I think that he therefore did not feel under any pressure to be impelled, as a matter of urgency, into pressing the bank to agree to the restructuring of his indebtedness, at least until early 1991, by which time his company was in serious difficulty. Secondly, while Mr. Newton was, up to the end of 1989, willing to commit the bank to a restructuring of the kind Mr. Cross had in mind in accordance with the bank's ordinary requirements, he saw the provision by Mr. Cross of full financial accounts as essential to enable that to go forward. He mentioned the need for this information to Mr. Cross in the context of discussing refinancing, but accepted that there was a good reason associated with the company's
involvement in litigation with the AT0 why the company did not want to generate such documentation. However, the absence of these accounts did not prevent the bank continuing through

1989 and 1990 to assist Mr. Cross on an ad hoc basis: M r .
Newton had an arrangement with Mr. Cross whereby what the bank regarded as "salient details" of the company's trading operations were provided by the company to the bank at the latter's request from time to time. While the notion that there would be a general refinancing of the company's
pressing importance for Mr. Cross was the company's worsening
indebtedness remained a live one as between Mr. Cross and ~ r .
2 2

position under the various impacts that I have referred to. By late 1989, Mr. Cross' concern was to keep the company going. To do this, he needed more and more accommodation from the bank. This was forthcoming for a long while, for well into 1991, even though the company's trading history from 1988 was one of unremitting decline. The reason for this is probably the good history of the company over a long period as a trading business and the high regard that Mr. Newton had for Mr. Cross as a customer. The business had been running for many years with a good trading history and he says he had no reason to doubt Mr. Crossr explanation for the drop in sales. But the bank provided this ongoing assistance at a price: the guarantees and the mortgage in question were required by the bank in return for providing each lot of further accommodation. Each time additional overdraft accommodation was provided, it was given to cover the company's then existing indebtedness beyond the then current overdraft limit and to provide, in addition, further working capital. The liability of Mr. and Mrs. Cross under each of the two

the company's indebtedness to the bank made up of its then guarantees in question was measured precisely by the extent of
existing indebtedness, plus the additional accommodation that
was then granted to the company.

It is clear that from early 1991 Mr. Cross tried hard to persuade the bank to agree to a refinancing and matters ultimately came to a head when Mr. Paget put up a restructuring proposal at Mr. Crossf behest that would have
involved a total liability by the bank to Mr. Cross and his companies of $1.78M in March or April 1991. This led to the bank requiring an external accountant's report, which showed that the company's future was irredeemably bleak. The appointment of the receiver followed soon afterwards, in June 1991. On 25 June, 1991, the bank demanded payment by Mr. and Mrs. Cross on the guarantees. But the bank did nothing either by positive action or by silence to mislead Mr. Cross into thinking that the need for him and his wife to give either of the guarantees or the mortgage now attacked had anything to do with refinancing of the company's indebtedness.
In my view Mr. and Mrs. Cross gave the guarantees and the mortgage in circumstances where Mr. Cross, acting for himself and Mrs. Cross, well knew that that was the price for the bank's continued assistance that was necessary to keep the company alive in what was for it a long and very bleak trading period. Any expectation by Mr. Cross that there would eventually be a refinancing of the company's borrowings had

Mrs. Cross in connection with the provision of these

nothing to do with this. That Mr. Cross acted on behalf of

securities was not in issue. Mrs. Cross says, moreover, that she was content throughout the whole of the time the company operated to leave the financial side of the business to her husband.
The application must be dismissed with costs.

THE CROSS-CLAIM
By cross-claim, the bank claims:

(a) on the guarantee of 21 August, 1990 for $262,442.28 as the amount due by the applicants thereunder at the date of the cross-claim. This amount is made up of the total indebtedness of the company at that time, less the proceeds of sale of certain of the applicants' properties which the bank held as security for this indebtedness and which it had sold by then;
(b) an order that the applicants' caveat in respect of dealings with their Cooroy land be removed;
(c) a declaration that the mortgage over the Tewantin land (which has now been sold) and the

company' S indebtedness to the bank; Cooroy land is a valid security for the
alternatively,

(d)

a declaration that the certificates of title in respect of the Cooroy land are held by the bank as equitable mortgagee, by deposit, as security for repayment of the company's indebtedness to the bank; and

(e)

a further $388,264.95, being the amount owing when the cross-claim was filed on guarantees given by the applicants in respect of the company's liability under its equipment leases to which I have already referred.
No argument was advanced against the bank's

entitlement to any of the relief claimed other than that claimed on the applicants' guarantees given by them in connection with the company's equipment leases, apart from the argument advanced in support of the attack made by the applicants in the application on the guarantee of 21 August, 1990 and the mortgage of the Tewantin and Cooroy lands. This attack having failed, the bank is entitled to judgment on its cross-claim against the applicants for the amount now due under the guarantee of 21 August, 1990, for an order that the caveat be removed (relief which I am empowered by S. 4 of the Jurisdiction of Courts (Cross-Vestinu) Act 1987 (Qld) to grant: see Andel Ptv. Ltd. v Sentrv Car Care Ptv. Ltd. (1989)

A. & N. 2. Conveyancing Reports 252 at 253) , a declaration that mortgage no. K312697B is valid and is held by the bank as
security for all loans and other financial accommodation
provided by it to the company.

As to the bank's cross-claim against the applicants on the equipment lease guarantees, by amendment to their pleadings made at the start of the trial the applicants' raised the following issues as answers to this particular claim by the bank: firstly, that clause 22 of each of the company's equipment leases is void either as a penalty or as illusory. Secondly, that the bank repudiated each equipment lease by purporting to terminate it by notice to the company on 11 June, 1991 without first giving the company the notice specifying the breach required by clause 22(a) of each equipment lease. Senior counsel for the applicants explained that the real issue which the applicants sought to raise by the repudiation allegation was that no money ever became due by the company under clause 22 of each lease because the bank failed to comply with the condition precedent in clause 22(a) to the generation of such a liability by failing to give proper default notices to the company.

Clause 22 provides:
"Default by Lessee

(a) If -

(i)

the Lessee shall fail to pay any rent or other moneys or instalment of moneys

payable under the provisions of this
Agreement within seven days after the same has become due for payment; or
(ii) the Lessee shall fail to perform or observe any obligation or condition on the part of the Lessee to be performed or observed under this Agreement and if such failure or breach is capable of remedy shall have failed to remedy the same within fourteen days after notice so to do; or
(iii)the Lessee shall without the concurrence of the Bank make any composition or arrangement or assignment with or for the benefit of the Lessee's creditors; or
in the case of the Lessee being a company

(iv) any steps or proceedings are taken to
have the Lessee wound up or to appoint a Receiver or Receiver and Manager or an Official Manager of the affairs of the Lessee or in the case of the Lessee being an individual or firm a sequestration order is made against the Lessee or any member thereof or the Lessee or any member thereof presents a petition for his own bankruptcy; or

(v) any insurer having the Goods insured or holding any insurance in respect of the operation or use of the goods cancels any such insurance or disclaims liability by reason of misstatement in any proposal for such insurance; or
(vi) any distress or execution be threatened or levied upon or against the Goods or if the Goods be claimed or seized by the Lessor or owner or any encumbrancer of the land or premises on which the Goods are kept,

then and in any such event notwithstanding that the Bank may have waived some previous default or matter of a nature hereinbefore referred to and upon notice in writing being given by the Bank to the Lessee specifying the breach the following provisions shall have effect:
(aa) the portion of the total rental then remaining unpaid shall immediately become due and payable to and recoverable by the Bank without further demand to the Lessee,

(bb) the Lessee shall pay to the Bank interest on the portion of the rental remaining unpaid and any other moneys payable under the provisions of this Agreement from the date the moneys become payable until the date of payment at such rate as is determined by the Bank from time to time,
(cc) if the Lessee pays to the Bank the total of the amounts referred to in paragraphs (aa) and (bb) and remedies his breach of any other obligation or condition herein contained on the Lessee's part to be performed and observed within fourteen days of the date of the notice specifying the breach then the Lessee shall in such circumstances be entitled to the use of
the Goods for the remainder of the Leasing term subject to him performing and observing the obligations and conditions on his part to be performed and observed; and

(dd) if the Lessee does not pay the amount specified within paragraphs (aa) and (bb) or does not remedy the breach within fourteen days of the date of the notice specifying the breach then the Leasing shall at the expiration of the said period immediately determine and the Lessee shall forthwith deliver the Goods at the Lessee's own expense to the Bank and in accordance with any directions given by the Bank and in default thereof the Bank may repossess and retake the Goods and for that purpose the Bank by its servants and agents may enter upon the premises or other location whereon the Goods or any part thereof are situated or whereon the Bank or its agents or servants reasonably suspect that they are situated and for the purpose of such entry break open any inside or outside gate door or fastening and detach and dismantle the Goods from any part of the premises to which they may be affixed.
All costs and expenses (including costs or damages payable to any other person) incurred by the Bank in exercising or attempting to exercise its rights under this sub-clause (a) shall be paid by the Lessee to the Bank on demand.

(b) (i) In the event of the Leasing being determined pursuant to the provisions of sub-clause (a) of this clause the Bank shall within three months of the date upon which the Goods come into the possession of the Bank either:

(a)

sell or otherwise dispose of the Goods by auction or private treaty and in such manner and as the Bank may determine; or

(b)

have the Goods valued by a dealer in similar goods to the Goods or by a licensed or other expert valuer selected in either case by the Bank.
(ii) If the net proceeds of such sale or the value of the goods as certified by the dealer or valuer is less than the Residual Value then the Lessee shall by way of additional consideration for the Leasing pay to the Bank the difference between the Residual Value and the net proceeds or the value of the Goods within fourteen days of such difference being notified in writing by the Bank to the Lessee.
(iii)If the net proceeds of such sale or the value of the Goods as certified by the dealer or valuer is greater than the Residual Value then the amount of the excess shall after deduction therefrom of any moneys due by the Lessee to the Bank be paid to the Lessee."

In June 1991 the bank demanded by notice dated 11 June, 1991 payment from the company of rentals that had fallen due but had not been paid and also, in reliance on clause 22 of each of the equipment leases, payment of all remaining rentals that would thereafter have fallen due under the lease. So far as this part of the cross-claim is concerned and subject to one qualification, the parties conducted the case on the basis that, if for any of the reasons pleaded in the

not entitled, in reliance on the acceleration provisions in applicants' amended defence to the cross-claim, the bank was

clause 22 of each lease, to demand payment by the company of all the rentals that would fall due under each of the equipment leases which were to run until, in two cases, 17 July, 1993 and, in the other case, 10 August, 1993, then the bank's claim on the applicants as guarantors in respect of each of those leases should fail. Each of the lease guarantees contains a promise that the applicants as guarantor
"hereby guarantees to the Bank the payment when demanded in writing from the Guarantor of all rent and other moneys now or hereafter to become owing or payable to the Bank by the Lessee under the said lease ...". In view of this promise, the applicants' obligation is, I think, to pay only that which the company has failed to pay. See The Modern Contract of Guarantee, Phillips and OrDonovan, 2nd Ed., at p. 8 and pp. 276-277. The qualification on what I have said about the way the parties conducted their case with respect to the bank's cross-claim on the equipment lease guarantees is this: at the very end of his argument in reply to the submissions put on behalf of the applicants, senior counsel for the bank submitted that, on any view, each of the three leases has long since come to an end, either pursuant to clause 22(a), paragraph (dd) of each lease or by discharge by mutual agreement or by abandonment: all the leased goods were sold, in September-October 1991, apparently by the bank. Counsel then submitted that the bank was entitled, at the very least, to judgment against the applicants on the lease guarantees for

the arrears of instalments that had accrued up to the dates of sale of the equipment, on 11 September and 15 and 17 October, 1991. The evidence before me does not enable any conclusion

to be reached on just how many instalments had accrued due under each lease prior to the sales or even whether the leases had come to an end prior to those sales. Counsel for the bank did not seek to re-open his case, a course that would have had little chance of success in the face of the certain objection
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that would have come from the applicants to this last-minute
change in direction by the bank.
THAT CLAUSE 22 IS AN UNENFORCEABLE PENALTY
Under clause 22(a) the company could come under an obligation to pay the accelerated rental in circumstances not involving any breach of the lease by the company: see, e.g., sub-clause (v). That it was not suggested by the bank that this was sufficient to prevent clause 22, insofar as it operated to accelerate payment of all rentals where the company did breach the lease by failing to pay a rental instalment on time, from being capable of amounting to a penalty was a course justified by AMEV Finance Ltd. v Artes Studios Thorouahbreds Ptv. Ltd. (1989) 15 N.S.W.L.R. 564 at 571.
Clause 22 operates in the following way with respect
to default by the company in paying rental instalments. If

the company fails to pay an instalment within seven days of it falling due:

(a)

The bank must give written notice to the company "specifying the breach": clause (a);

(b)

Upon the giving of such notice, the portion of the total rental then remaining unpaid

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immediately becomes due and payable to the bank: clause (a), paragraph (aa); in addition,

(c) The company also then becomes liable to pay to the bank interest on any arrears of rental and also on the portion of the total rental the payment of which has been accelerated by force of paragraph (aa) at such rate as is determined by the bank from the date all such moneys became payable until the date of payment: clause 22(a), paragraph (bb).
The company is liable to make all these payments irrespective of whether, notwithstanding the company's default in failing to pay a rental instalment on time, the lease continues or whether it comes to an end in accordance with the subsequent provisions of the clause. I reject the bank's submission

that the company ceases to be liable to make these payments if it pays the instalments that

fell into arrears and provoked the issue of the default notice within 14 days of receipt of that notice or in the event that the lease determines, whereupon, so it was said, the
company is only liable to make such payment (if
any) as falls due under clause 22(b);
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(d) If the company pays to the bank the arrears of rental plus the portion of the total rental remaining unpaid at the date of the giving of the notice of default plus interest on both sums determined in accordance with paragraph (bb) within 14 days of the date of the notice of default, then the company becomes entitled to the use of the goods for the remainder of the leasing term without any further payment: clause 22(a), paragraph (cc). In this event, the accelerated payments have the same rental character as the monthly instalment insofar as both lots of payments are made in return for the company having the continued use of the leased goods;
(e) However, if the company does not pay all these amounts within 14 days of the date of the default notice, then the lease determines at

becomes entitled to possession of the leased the expiration of that period and the bank
goods: clause 22 (a), paragraph (dd) . In this event, the accelerated payments will not have the character of rent since the company will have to pay them but will no longer have, in return, the right to use the leased goods. Cf. O'Dea v Allstates Leasina Svstem (W.A. I Ptv. Ltd. (1983) 152 C.L.R. 359 at 396;
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(f)

In the event that the lease comes to an end in this way, the bank must, within three months of the date of recovering possession of the goods, either sell them or have them valued: clause 22(b) (i);

(g)

If the sale proceeds of the goods (or their value) is less than the residual value fixed in the lease, then the company must pay to the bank, in addition to the other payments, the deficiency between the sale proceeds of the goods (or their value) and the residual value, but if the sale proceeds of the goods (oz their value) exceeds the residual value, then the bank must pay the amount of the excess to the company: clause 22(b)(ii) and (iii).

Although by clause 3, the rental which that
provision binds the company to pay is declared to be a total

date specified in Item 10". Clause 3 goes on to make this rental, that total rental is to be paid by the lessee "at the obligation imposed on the company subject to the bank itself

being bound to "accept payment of the rental by the instalments which instalments shall be paid as specified in Item 10". Item 10 in the Schedule in each lease provides only for the payment of stipulated instalments of rental, monthly in advance. I therefore read clause 3 as imposing an obligation on the company to pay the whole of the rent (which
3 5

in the case of the lease of the off-set press was $61,317.60) which obligation is to be performed by paying the $61,317.60 in the 60 monthly instalments described in Item 10 in the Schedule to that lease. I do not think there is any justification for reading clause 3 in this standard form of bank lease as providing for a rental of $61,317.60 to be paid forthwith on commencement of the lease with the lessee being given the indulgence of being able to pay by monthly instalments, provided he does so timeously. Thus the obligation to pay this total rent only arises if the company defaults. See O'Dea at 369, 386.
It was submitted that the clause is a penalty and cannot be regarded as a genuine pre-estimate of damages because it provides for the total outstanding rental to be accelerated, on default, without the company being entitled to any rebate in respect of the interest component in those accelerated rentals.

The basic principles to be applied in determining whether a contractual provision is a penalty are those stated in Lord Dunedin's speech in Dunlor, Pneumatic Tvre Co. Ltd. v New Garaae and Motor Co. Ltd. [l9151 A.C. 79: see O'Dea v Allstates Leasinq Svstem 1W.A.) Ptv. Ltd. (1983) 152 C.L.R. 359 at 378, 399 and AMEV Finance Ltd. v Artes Studios Thoroucrhbreds Ptv. Ltd. (1989) 15 N.S.W.L.R. 564 at 571-572. These principles are set out at [l9151 A.C., pp. 86-88 and include the following:
"2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. ...
3. The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach. ...
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

(a)

It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. ...

(b)

It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. ...

(c)

There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling

damage ' . . .

On the other hand:

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties
... .

Where, as here, the provision said to be a penalty

is one that provides a mechanism for early termination of a

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contract for breaches ranging from the serious to the trivial, the question raised by paragraph 4(a) of Lord Dunedin's comments is not whether the agreed payment is out of proportion to the damages likely to be suffered by the innocent party as a result of the breach, but rather whether the agreed payment is out of proportion to the losses likely to be suffered by that party from the early termination of the contract. See AMEV Finance at 573-5 and Esanda Finance Corp. Ltd. v Plessniq (1989) 166 C.L.R. 131 at 140. Since this is the relevant comparison, the fact that clause 22 empowers the bank to terminate the lease for trivial as well as serious breaches has little significance: see AMEV Finance at 574.
I note that, while the bank outlayed a total of $646,670.00 to buy the goods it leased to the company, the company appears to have paid, at most, 36 instalments totalling $11,851.96 per month under the three leases, a return to the bank of $426,670.56 to the date of default. It got a further $212,553.00 from the sale of the goods in

October 199 1. The company defaulted because it was in
financial difficulties. Just such a situation was in the contemplation of the parties when they entered into this money-lending agreement in the form of a lease. For all practical purposes, the bank cannot, by the exercise of all its rights under the leases, recover even the full amount of principal it outlayed back in 1988. But in determining whether a provision is penal, regard is only ever had to the causes of action available to the innocent party in the event
3 8

of early termination; regard is not paid, for this purpose, to the loss that party is likely in fact to suffer from early termination. See Citicor~ Australia Ltd. v Hendrv (1985) 4 N.S.W.L.R. 1 at 29.
The maximum loss the bank could suffer from early termination under clause 22, quantified at that date, would comprise the total principal of $646,670.00 outlaid in 1988 in buying the goods (less such part of those principal moneys recouped in instalments paid up to termination and also less a rebate on the outstanding principal moneys for early receipt, this being in effect a money lending transaction) plus the interest component of the unpaid instalments that would have fallen due but for termination (less a rebate for early

receipt) .
Clause 22, in terms, entitles the bank to recover,
on the company's failure to pay an instalment on time, each of
these components, together with arrears of rental, but without

the residual value. Before the clause will amount to a any discount for early receipt of the future instalments or

penalty, it is not enough that the sum made up of these components exceeds the discounted sum: the excess must be such as to justify the sum payable under clause 22 being described as extravagant or unconscionable in comparison with the discounted sum. See AMEV Finance at 576-7 and Plessniq at 141-2. There is a considerable degree of flexibility necessarily involved in the concept of a genuine pre-estimate
3 9

of damages, if the Court is not to assume, under the guise of striking down penalties, extensive power to rewrite contracts. Moreover, "The question whether a contractual provision amounts to a penalty depends on all the surrounding circumstances existing at the time of the making of the contract as well as on the terms of the contract itself, and it is therefore not always possible to apply a decision given upon one contract to another case even though that case concerns a contract in identical terms." OrDea at 373.
But if a termination clause in a finance lease that provides for the acceleration of payment of future instalments and the residual value upon default by the lessee fails to allow the lessee a rebate in respect of the accelerated instalments and residual value for early receipt by the lessor, that must I think be regarded as a prima facie indication that the clause is a penal sanction against breach by the lessee and not a genuine pre-estimate of the damages the lessor is likely to suffer from the early termination of

the lease for breach by the lessee. See Citicor~ Aust. Ltd. v
Hendry (1985) 4 N.S.W.L.R. 1 at 34-35 (the authority of this passage is not impaired by what was said about other aspects of this decision in AMEV Finance) and AMEV Finance at 579. There is no evidence before me that serves to displace the prima facie penal character of clause 22 of each lease.
It is true that the leases were entered into at a time of rising interest rates. That was one of the causes of the company's financial problems. It would therefore necessarily be difficult for the parties then to have assessed, with any degree of accuracy, what allowance should be made for the losses that the bank might suffer from early termination of the lease. There is no evidence as to the fluctuations in interest rates that may have been anticipated when the leases were entered into in 1988. But it is unlikely that such fluctuations over a period as long as the five year t e n of the leases would be of such magnitude as to deprive the failure of clause 22 to provide for a rebate to the company for early receipt of the accelerated instalments and the residual value, of its significance as an indicator that the clause is penal in its operation.
Clause 22 is also I think penal insofar as paragraph (aa) entitles the bank to immediate payment of the whole of the future instalments of rental if the company is eight days late in paying the first or any subsequent instalment. The bank is entitled, as a result of that default by the company,

interest and principal repayments it would only receive, in to receive immediately an amount equal to the total of the

advance of that default, over the balance of the five years of the lease's life from the date of default. That shows that the clause, in this respect, is capable of conferring on the bank benefits so disproportionate to any losses it could conceivably suffer from not receiving the first or a subsequent instalment for eight days after the due date that it is a penal sanction against the company breaching its obligation to pay each instalment on time. The position would be otherwise if the company's obligation under clause 3 was to pay the total of all rentals at the outset, but with it having the indulgence of being able to pay by instalments, so long as it paid each on time: in such case, an acceleration provision is still not regarded as a penalty because, on default, the lessee does not come under an obligation to pay anything additional to what he has been obliged to pay from the outset. See : OrDea at 368-9, 380 and 386; Acron Pacific Ltd. v Offshore Oil N.L. (1985) 157 C.L.R. 514 at 518, 519, 520.
THAT CLAUSE 22 IS ILLUSORY

The argument here is based upon the provision in clause 22(a), paragraph (bb) which empowers the bank to recover interest from the company on any arrears of rental and on the accelerated future rentals from the due dates until the payment of those sums "at such rate as is determined by the bank from time to time". It was not suggested that this

benchmark rates. This is a clear example of a provision which expression could be read as a reference even to the bank's own

reserves the fixing of a substantial obligation entirely to the discretion of the bank as one of the two contracting parties. It is therefore illusory: see Placer Development Ltd. v The Commonwealth of Australia (1969) 121 C.L.R. 353 at 356 and 359-361; Godecke v Kirwan (1973) 129 C.L.R. 629 at 646-7.
4 2

it cannot be said that the parties did not intend to contract unless effect could be given to this particular stipulation as to interest: although it is capable, depending on the rate the bank in its uncontrolled discretion elects to apply, of imposing a heavy burden on the company, it is marginal to the basic objects which each party sought to achieve by the lease agreement, viz., access by the company to the leased goods in return for payment to the bank of the cost to it of acquiring those goods and of interest thereon at the rate agreed at the outset and built into the instalment payments. I would therefore regard the provision in clause 22(bb) relating to the payment of interest as severable. The remainder of clause 22 would thus operate and oblige the company, in the events which have happened, to pay arrears of rental and accelerated future instalments of rental, but for the fact that the clause is void as a penalty.
~ u t

THAT NO NOTICE SUFFICIENT TO BRING CLAUSE 22 INTO OPERATION
WAS EVER GIVEN BY THE BANK TO THE COIWANY

The only notice given by the bank to the company capable of meeting the requirements of clause 22 is that dated 11 June, 1991. It can be inferred that the sums stated in
this notice as then due by the company in respect of each of the three leases include instalments of future rental accelerated in reliance upon clause 22(a), paragraph (aa) of each of the leases. The notice is headed "Formal Demand" and it is addressed to Gold Coast Printing Co. Pty. Ltd.. It reads as follows:
"National Australia Bank Limited being the Lessor under Chattel Lease Agreements mentioned in the Schedule hereto ... herebv aives notice that Gold Coast Printing Co. Pty. Ltd. is in default of the said Chattel Lease Agreements in that the conditions set out in Clause 22 have occurred and that such default has continued up to the date of this Notice and
NATIONAL AUSTRALIA BANK LIMITED hereby demand of Gold Coast Printina Co. Ptv. Ltd. the immediate payment of each S& referrgd to below being the amounts now owing to the Bank by Gold Coast Printing Co. Pty. Ltd. which sums are secured to the Bank by certain securities mentioned in the Schedule hereto which were given to secure any amount payable as therein set out
AND FURTHER TAKE NOTICE that unless the said sums
and further interest due and accruing thereon all costs charges and expenses which may have been or may be incurred in the exercise or attempted exercise or enforcement of any power right remedy conferred upon the said National Australia Bank Limited by the said securities be paid to the Bank within fourteen (14) days . . . the said National Australia Bank Limited will take such steps as it may be advised to exercise all or any of the rights powers remedies given to it under the said

securities . . . "

The schedule to the notice lists each of the three
leases by identification number, the sum claimed as due as at
the date of the notice in respect of each lease, each lease

leases, a date described as the "guarantees for leasing date". agreement date and then, in respect of each of the three

These dates are the dates on which each of these guarantees was executed.

There are numerous objections to this notice being regarded as one sufficient to trigger clause 22. In terms of that clause, acceleration of instalments otherwise due after the date of the notice occurs only upon the giving by the bank to the company of written notice "specifying the breach". The bank's notice makes no attempt to identify any breach by the company of any of the lease agreements; instead, it asserts that the company is in default in a way not identified otherwise than by the assertion that "the conditions set out in clause 22 have occurred". The notice goes on to make a demand not justified by the provisions of clause 22 insofar as it demands payment within 14 days of all costs charges and expenses which may have already been incurred and which may be incurred only in the future in the enforcement or attempted enforcement of any rights conferred upon the bank by "the said securities", none of which costs are specified in the notice. It goes on to advise the company that the bank will, without further notice, exercise all of its remedies under those securities if its demands are not met. The expression "the said securities" can, I think, only be read as a reference to the guarantees referred to in the schedule to the notice.

The giving of a notice in writing specifying a breach by the company of the lease is the essential pre-

of all instalments which would only otherwise become due at condition to the bank acquiring the right to require payment

future monthly intervals; it is also an essential pre- condition to each lease automatically coming to an end prior to expiry of its five year term and to the vesting in the bank of the right to repossess and sell the leased goods. There is no justification for attempting to give the words of this

provision in the bank's own standard form of lease anything . -
other than their plain meaning.
The notice referred to in clause 22 is intended to

serve two purposes:

(a)

to communicate to the lessee the election by the lessor to accelerate instalment payments pursuant to paragraph (aa); and

(b)

to give the lessee notice of what he must do to avoid automatic determination of the contract under paragraph (dd), where the notice is given under a provision of clause (a), paragraphs ( ) - ( v ) that is, based on a default by the lessee that is capable of being remedied by him, i.e., when the notice is given in reliance upon paragraphs (i) or (ii) of the clause.

The notice cannot, in my opinion, serve either purpose unless it meets the requirement that it specifies the breach. See Yendex Ptv. Ltd. v Prince Constructions Ptv. Ltd. (1988) 5 B.C.L. 74 and cf. Clarke v Jaoan Machines (Australia1
Ptv. Ltd. [l9841 1 Qd.R. 404 at 413. Where the breach relied on involves the failure of the lessee to pay a sum of money, Clarke shows that an error in specification of the correct sum will not necessarily be the end of the matter; but it is only in that event that any latitude is I think allowed to the lessor in giving a notice that unequivocally meets the requirements of the clause in specifying the relevant breach.
The deficiencies in the bank's notice of 11 June, 1991 in comparison with what clause 22 required are so great that it was ineffective to bring the provisions of paragraph (aa) and following of clause 22 into operation. The notice is
not one "specifying" any breach of clause 22; it is at best for the bank a notice of demand for payment of that which can become due only after a notice specifying a breach has first been given. It really reads as a notice intended to warn the company that, if it does not pay what is demanded, the bank will enforce the guarantees given in respect of the company's debts, rather than as a notice of default given to complete
the bank's entitlement to payment of the accelerated rental instalments. It follows that the company never became liable to the bank, prlor to the determination of each of the leases, to make accelerated payments of instalments even though those amounts appear to be included in the amounts of which payment

is demanded in the notice. Having regard to the way the case
was argued, that is sufficient to defeat the bank's cross- claim in respect of the lease guarantees given by the applicants.
There will therefore be judgment for the cross- respondents on the cross-claim in respect of the equipment lease guarantees. Although the bank is entitled to judgment on its cross-claim in respect of the guarantee given by Mr. and Mrs. Cross on 21 August, 1990, the only issues raised by the cross-claim that were in contention in those proceedings were issues concerning the equipment lease guarantees in respect of which the Crosses were entirely successful. The Crosses should pay the bank's costs of the cross-claim up to the making of their amendment to the defence to the cross- claim but they should have the costs of the cross-claim thereafter.
~t is necessary to calculate the amount now due by the Crosses on the guarantee of 21 August, 1990 before formal judgment can be pronounced. I will therefore direct that by 6 May, 1994 the bank file an affidavit to be sworn by one of its officers deposing to the amount then due by the Crosses and showing how that amount is calculated. I further direct that the bank serve a copy of this affidavit upon the solicitors for the Crosses forthwith upon filing the original. The hearing will be adjourned to 16 May, 1994 at 9.15 a.m. when formal judgment will be given for the bank on the cross-claim

Crosses shall, by 11 May, 1994 file and serve on the for the amount set out in the bank's affidavit unless the

solicitors for the bank a statement disputing the amount so claimed against them and setting out their reasons for disputing the correctness of the bank's calculations. In that event, I will decide what is the amount for which the bank is entitled to judgment against the Crosses on this guarantee.
I certify that the preceding 47 pages are a true copy of the reasons for judgment herein of the Honourable Mr. Justice Drummond.
Associate: dd

Date: 29 April, 1994

Counsel for the applicants: A.J.H. Morris Q.C. and
J.H. Bryson
Solicitors for the applicants: Robinson and Robinson

Counsel for the respondent: P.R. Dutney Q.C. and
R.I.M. Lilley
Solicitors for the respondent: Sly & Weigall Cannan &
Peterson
Date of Hearing: 18-20 May, 1993

Clarke v Ja~an	Machines (Australia) Ptv. Ltd. [l9841 1 Qd.R.
404	- - -
D U ~ ~ O D	Pneumatic Tyre Co. Ltd. v New Garaqe and Motor Co. Ltd.

IN THE FEDERAL COURT OF AUSTRALIA )	NO. QG 17 of 1992
QUEENSLAND DISTRICT REGISTRY	)
GENERAL DIVISION	1

JUDGE MAKING ORDERS:	Drummond J
DATE OF ORDERS:	29 April, 1994
WHERE MADE:	Brisbane
THE COURT:

IN THE FEDERAL COURT OF AUSTRALIA )	No. QG 17 of 1992
QUEENSLAND DISTRICT REGISTRY	1
GENERAL DIVISION	1

For over 25 years Mr. and Mrs. Cross were the proprietors of what was for a long while a flourishing	printing business on the Gold Coast, Gold Coast Printing Co.
Pty. Ltd.. From 1982, they and their company were customers
of the respondent bank. They dealt almost exclusively with
Mr. Newton, an officer of the bank, from then until the end of
1990; another bank officer, Mr. Douglas, was also involved
with Mr. Newton in the applicants' affairs towards the end of
this period. From the end of 1990, a Mr. Padgett was the
officer responsible for overseeing the applicants' accounts.

respect of the company's indebtedness on 10 January, 1990 up	to the bank on an earlier guarantee they gave to the bank in
to a limit of $247,407.00.
The foundation for their claim for the declaratory relief sought is that they were misled by explicit representations made to them by Mr. Newton on 23 April, 1990 that the guarantee for $363,026 .OO and the mortgage over the Tewantin property and property at Cooroy, both dated 23 April,

On 24 November, 1988, a temporary overdraft limit of $90,000.00, increased from $60,000.00, was approved by Mr. Newton to meet the company's increased needs. On 9 February, 1989 Mr. Newton says he had discussions with Mr. Cross about his business affairs and recommended approval of an interest only loan of $80,000.00 in the names of the applicants to enable them to provide, by way of loan, working capital for the company. This loan was made and secured by a mortgage over their property at Mudgeeraba. A diary note made by Mr. Newton records that 1987 and 1988 trading figures were not available, but that Mr. Cross undertook to provide them within a month: they had not been prepared because of the battle
with the ATO.	There is no mention in the diary note of
refinancing.

viz., the mortgage over the property at Mudgeeraba for the	interest only loan of $80,000.00, the mortgage by deposit of
the Tewantin and Cooroy title deeds for the $130,000.00 overdraft and later again, the further guarantee of $247,407.00 for the increased assistance.
In April 1990 Mr. Cross says that Mr. Newton attended the Gold Coast office and explained that, to enable the refinancing to proceed, additional security was required

mention of his having given the guarantee in connection with	were then made available by the bank and about there being no new guarantee solely to support the increased loan funds that	the finalisation of the refinancing arrangements which he says had long been approved by the bank. The absence of any
written complaint and of any suggestion at all from m. Cross in his evidence before me that he then protested that the bank was going back on what he now says were its earlier clear

Douglas, Mr. Cross complains about the treatment he had	received from the bank from October 1990. In the course of
this letter he says:

the company's indebtedness to the bank made up of its then	guarantees in question was measured precisely by the extent of
existing indebtedness, plus the additional accommodation that was then granted to the company.
It is clear that from early 1991 Mr. Cross tried hard to persuade the bank to agree to a refinancing and matters ultimately came to a head when Mr. Paget put up a restructuring proposal at Mr. Crossf behest that would have

(d)	a declaration that the certificates of title in respect of the Cooroy land are held by the bank as equitable mortgagee, by deposit, as security for repayment of the company's indebtedness to the bank; and
(e)	a further $388,264.95, being the amount owing when the cross-claim was filed on guarantees given by the applicants in respect of the company's liability under its equipment leases to which I have already referred.

A. & N. 2. Conveyancing Reports 252 at 253) , a declaration that	mortgage no. K312697B is valid and is held by the bank as
security for all loans and other financial accommodation provided by it to the company.
As to the bank's cross-claim against the applicants on the equipment lease guarantees, by amendment to their pleadings made at the start of the trial the applicants' raised the following issues as answers to this particular claim by the bank: firstly, that clause 22 of each of the company's equipment leases is void either as a penalty or as illusory. Secondly, that the bank repudiated each equipment lease by purporting to terminate it by notice to the company on 11 June, 1991 without first giving the company the notice specifying the breach required by clause 22(a) of each equipment lease. Senior counsel for the applicants explained that the real issue which the applicants sought to raise by the repudiation allegation was that no money ever became due by the company under clause 22 of each lease because the bank failed to comply with the condition precedent in clause 22(a) to the generation of such a liability by failing to give proper default notices to the company.

(b) (i) In the event of the Leasing being determined pursuant to the provisions of sub-clause (a) of this clause the Bank shall within three months of the date upon which the Goods come into the possession of the Bank either:	(a)	sell or otherwise dispose of the Goods by auction or private treaty and in such manner and as the Bank may determine; or
(b)	have the Goods valued by a dealer in similar goods to the Goods or by a licensed or other expert valuer selected in either case by the Bank.

the arrears of instalments that had accrued up to the dates of sale of the equipment, on 11 September and 15 and 17 October,	1991. The evidence before me does not enable any conclusion
to be reached on just how many instalments had accrued due under each lease prior to the sales or even whether the leases had come to an end prior to those sales. Counsel for the bank did not seek to re-open his case, a course that would have had little chance of success in the face of the certain objection

(a)	The bank must give written notice to the company "specifying the breach": clause (a);
(b)	Upon the giving of such notice, the portion of the total rental then remaining unpaid

date specified in Item 10". Clause 3 goes on to make this rental, that total rental is to be paid by the lessee "at the	obligation imposed on the company subject to the bank itself
being bound to "accept payment of the rental by the instalments which instalments shall be paid as specified in Item 10". Item 10 in the Schedule in each lease provides only for the payment of stipulated instalments of rental, monthly in advance. I therefore read clause 3 as imposing an obligation on the company to pay the whole of the rent (which

(a)	to communicate to the lessee the election by the lessor to accelerate instalment payments pursuant to paragraph (aa); and
(b)	to give the lessee notice of what he must do to avoid automatic determination of the contract under paragraph (dd), where the notice is given under a provision of clause (a), paragraphs ( ) - ( v ) that is, based on a default by the lessee that is capable of being remedied by him, i.e., when the notice is given in reliance upon paragraphs (i) or (ii) of the clause.

Crosses shall, by 11 May, 1994 file and serve on the	for the amount set out in the bank's affidavit unless the
solicitors for the bank a statement disputing the amount so claimed against them and setting out their reasons for disputing the correctness of the bank's calculations. In that event, I will decide what is the amount for which the bank is entitled to judgment against the Crosses on this guarantee.

Date:	29 April, 1994
Counsel for the applicants:	A.J.H. Morris Q.C. and J.H. Bryson
Solicitors for the applicants:	Robinson and Robinson

[1994] FCA 229

29 Apr 1994

Counsel for the respondent:	P.R. Dutney Q.C. and R.I.M. Lilley
Solicitors for the respondent:	Sly & Weigall Cannan & Peterson
Date of Hearing:	18-20 May, 1993