Diakos v Mason
[2010] SASCFC 37
•24 September 2010
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
DIAKOS v MASON
[2010] SASCFC 37
Judgment of The Full Court
(The Honourable Justice Duggan, The Honourable Justice Gray and The Honourable Justice Kelly)
24 September 2010
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - PENALTIES AND LIQUIDATED DAMAGES - GENERAL PRINCIPLES
EQUITY - GENERAL PRINCIPLES - UNCONSCIONABILITY, UNCONSCIONABLE DEALINGS AND OTHER FORMS OF EQUITABLE FRAUD - GENERALLY
Appeal following a trial in the District Court with respect to a claim in contract - respondent was a tenant in a retail shopping centre owned by the appellant - to allow the appellant to redevelop the shopping centre, the parties entered into a deed agreement concerning the temporary relocation of the respondent's business - whether Judge in error in finding that a clause in the relocation deed which required payment of $250,000.00 did not amount to a penalty - whether Judge in error in rejecting allegation that respondent had acted unconscionably.
Held: appeal dismissed - clause of relocation deed, properly construed, imposed an obligation on appellant to pay $250,000.00 on the failure of an occurrence of a specified event - clause not a penalty clause - claim of unconscionable conduct was advanced at trial on a different basis to that advanced on appeal - in any event, the evidence suggests that a claim of unconscionability should be rejected.
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266; O’Dea v All States Leasing System (WA) Pty Ltd (1983) 152 CLR 359; Legione v Hateley (1983) 152 CLR 406; Commercial Bank of Australia v Amadio (1982) 151 CLR 447; Australian Competition & Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301; Campbell Discount Co Ltd v Bridge [1962] AC 600; Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481; Wade v Australian Railway Historical Society (SA Division) t/as Steamranger (2000) 77 SASR 221; Coulton v Holcombe (1986) 162 CLR 1; Jones v Dunkel (1959) 101 CLR 298; First East Auction Holdings Pty Ltd v Mimi Ange [2010] VSC 72, considered.
WORDS AND PHRASES CONSIDERED/DEFINED
"penalty clause"
DIAKOS v MASON
[2010] SASCFC 37Full Court: Duggan, Gray and Kelly JJ
DUGGAN J: In my view the appeal should be dismissed. I agree with the reasons prepared by Gray J.
GRAY J.
This is an appeal following a trial in the District Court with respect to a claim in contract.
Introduction
Phillip Mason, the plaintiff and respondent, conducted a post office and newsagency business on leased premises at Prospect Road, Prospect. He sued George Diakos, the defendant and appellant, seeking payment pursuant to the terms of a relocation deed. An issue in the trial was whether a clause of the relocation deed, requiring payment of $250,000.00, amounted to a penalty and as such was unenforceable. The trial Judge concluded that the term did not amount to a penalty. Another issue in the trial concerned an allegation that Mr Mason should be refused relief as he acted unconscionably. The Judge rejected this allegation. The Judge’s conclusions on these two issues were the subject of complaint on the appeal.
Background
In about 1976 Mr Diakos acquired the Prospect Road premises. The premises comprised a supermarket and specialty shops. Mr Mason leased one of the speciality shops from Mr Diakos at which he conducted the post office and newsagency business. Mr Diakos decided to substantially redevelop the entire premises. It appears that Mr Diakos had agreed with Coles Myer that it would operate a Coles supermarket as the principal tenant at the redeveloped site. The redevelopment works required the temporary relocation of Mr Mason’s post office and newsagency business. It was Mr Diakos’ plan that once the redevelopment was completed, the post office and newsagency business would again occupy a speciality shop at the premises. These plans led to negotiations between Mr Diakos and Mr Mason.
Mr Diakos, an architect, was an experienced businessman. He controlled an entity, Sokaid Pty Ltd, which held land and premises nearby on Prospect Road. The negotiations involved the suggested temporary relocation of the post office and newsagency to the Sokaid premises while the redevelopment took place. Once completed the post office and newsagency would return to the redeveloped premises. An agreement was reached. Almost 12 months later a relocation deed was executed. The dispute at trial related to the meaning and effect of the relocation deed.
Following the negotiations, the agreement mentioned above was entered into between Mr Mason’s family trust, Mr Diakos and Sokaid. The agreement was signed by Mr Mason on 30 August 2005 and by Mr Diakos on 5 September 2005. The agreement addressed the essential terms of the relocation and return. It was agreed that the post office and newsagency was to operate from the nearby premises owned by Sokaid. The agreement included a lease between Mr Mason’s family trust and Sokaid of the nearby premises from the date of relocation to the date of return to the redeveloped premises. The agreement also set out the terms and conditions of a proposed lease between Mr Mason and Mr Diakos following the proposed return to the redeveloped premises. In that respect there was to be a 10 year lease with two five year options to renew. A clause of the agreement said to be of relevance to the present dispute was in the following terms:
The Lessor undertakes not to lease premises in the development to another Newsagent or Lotto Agent.
The Lessor warrants that Coles Myer will be the anchor tenant (a Coles Supermarket) in the new development no later than 31st December 2006. Penalty payable by the Lessor to the Lessee shall be an amount of $250,000 including GST. Naturally this is conditional upon the Lessee vacating the existing premises before the 1st of October 2005.
During the year 2006, Mr Mason and Mr Diakos entered further negotiations, which culminated in Mr Mason entering into the earlier referred to relocation deed on 5 September 2006. The deed addressed the relocation to the Sokaid premises as well as the return to the redeveloped premises. The deed included the following clause:
This Deed contains the entire agreement between the parties in respect of the subject matter of this Deed. This Deed supersedes any prior agreement or understanding (if any) between the parties and there is no collateral or other form of agreement between the parties in relation to the subject matter of this Deed.
Relevant to the current dispute is clause 4 of the relocation deed, entitled “New Lease at the Centre”. Clause 4.11 is in the following terms:
Provided Mason vacates the Current Premises by 1 November 2005, Diakos agrees to pay to Mason the sum of $250,000.00 (including GST) if the Coles Supermarket planned for the Centre does not commence trading by 31 December 2006.
Coles Supermarket did not commence trading at the redeveloped premises by 31 December 2006. Mr Mason made a claim under clause 4.11 of the deed for payment of the sum of $250,000.00. He made two claims for other payments under the deed. These further claims are no longer the subject of dispute. Mr Diakos refused to pay the claim, asserting that clause 4.11 was unenforceable as it was a penalty. He also claimed that Mr Mason acted unconscionably.
The Trial
The trial proceeded before a Judge of the District Court. It was agreed that Mr Diakos would be dux litis. Mr Diakos and Mr Mason both gave evidence. The Judge, on the question of credibility and reliability, concluded:[1]
I found the plaintiff to be a more impressive witness overall than the defendant who was somewhat vague and imprecise about dates and events. There was, in the event, little difference between them as to the events in question. Where there was dispute I prefer the evidence of the plaintiff.
[1] Mason v Diakos [2009] SADC 55 at [7].
At trial there was a challenge to the admissibility of the August 2005 agreement. Ultimately the agreement was admitted for a limited purpose, namely as relevant to the alleged unconscionability on the part of Mr Mason. This ruling was challenged on appeal. The Judge took the view that the agreement had no relevance to the interpretation of the relocation deed. Mr Diakos contended that the agreement disclosed the real intent of the parties and was relevant to the construction of the relocation deed. In particular it was said that clause 4.11 of the deed should be construed so as to have the same effect as the clause in the August 2005 agreement extracted earlier. The Judge rejected Mr Diakos’ contention.
The Judge then addressed the meaning and effect of clause 4.11 of the relocation deed. The Judge first considered whether any terms should be implied into the deed and in that respect applied the test approved by the High Court in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.[2] The Judge reasoned:[3]
There is no express obligation or covenant in the deed requiring the defendant to have Coles commence trading by 31 December 2008. Nor, in my view, could such an obligation be implied into the deed as is apparently contended by the defendant.
…
It is not necessary to imply a term requiring the defendant to have Coles commence trading by 31 December 2008 in order to give business efficacy to the deed. The deed is plainly effective without it. It cannot be said that the term sought to be implied is “so obvious that it goes without saying”. Such a clause would significantly alter the effect and substance of the deed by imposing a substantial primary obligation on the defendant with a corresponding course of remedies available to the plaintiff should that obligation be breached.
Further, an implied term that Coles must commence trading by 31 December 2006, does not sit well with clause 4.6 of the deed. That clause expressly addresses the event of the centre not being completed within 13 ½ months after the plaintiff moved into the temporary premises.
[2] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283.
[3] Mason v Diakos [2009] SADC 55 at [55], [57]-[58].
The Judge concluded:[4]
I conclude that the sum of $250,000 was payable by the defendant on the happening of two events. The first was that the plaintiff vacated the premises by 1 November 2005. The second was that Coles did not commence trading by 31 December 2006. It is uncontentious that the first event occurred. It is further uncontentious that Coles did not commence trading by 31 December 2006. Non-occurrence of the second of those events did not give rise to a breach of any express or implied term of the deed. In particular, the plaintiff did not have any claim for damages for breach of the deed if Coles did not trade in the centre by 31 December 2006 or any other date for that matter.
Accordingly, it is my view that clause 4.11 is not a penalty clause. The clause does not impose contractual terms on the defendant or indeed the plaintiff. Rather, it specifies the payment of an amount on the happening of the two events referred to above. It is not a question of penalty or liquidated damages for breach of a contractual obligation.[5]
[4] Mason v Diakos [2009] SADC 55 at [59]-[60].
[5] O’Dea v All States Leasing System (WA) Pty Ltd (1983) 152 CLR 359 and Legione v Hateley (1983) 152 CLR 406.
At trial a claim that Mr Mason had acted unconscionably was also advanced. The Judge in that respect observed:[6]
Whilst the submissions on this point were couched in terms of a representation it must be that the defendant is asserting that the plaintiff has acted unconscionably. This is not a case where a party was induced to enter into a contract by a misrepresentation rather it appears to be an assertion that the plaintiff has unconscionably exploited his position. If that were the case then the court does have equitable jurisdiction to grant relief. In order to obtain such relief it is necessary for the defendant to establish, inter alia, that he was under a special disability or disadvantage, that the plaintiff knew or is likely to have known about his special disability/disadvantage and that the plaintiff proceeded to exploit this unconscionably in order to force the defendant to enter into the deed. [7]
The Judge rejected the claim:[8]
The defendant in this matter is an architect and an experienced property developer. He does not therefore have disabilities such as illiteracy or lack of education. He had the benefit of legal advice. His lawyers drafted the deed.
The defendant’s disadvantage was a situational disadvantage rather than a constitutional disadvantage. He had spent significant time and resources to redevelop the centre and the plaintiff was the remaining impediment to that redevelopment. There must however be something more than commercial vulnerability, no matter how extreme, to elevate disadvantage into special disadvantage attracting the intervention of the courts.[9]
In my view there is no warrant to grant equitable relief in the circumstances of this matter. The defendant’s situational disadvantage arose principally, if not solely, due to the defendant’s own actions. He commenced arrangements for the redevelopment of the centre without reaching agreement with the plaintiff and indeed assigned the lease to the plaintiff without reaching such arrangements. He could have entered into agreement with the plaintiff on different terms on a number of occasions including on the basis of the plaintiff’s memorandum of July 2004. Further, at the time the defendant executed the deed on 5 September 2006 the plaintiff had moved to the temporary premises some 11 months earlier and the redevelopment had commenced. The plaintiff’s bargaining power together with his ability to force the defendant to enter the deed was thus considerably reduced. Finally, the defendant was aware, at the time he signed the deed, that it was unlikely that Coles would move into the shopping centre by 31 December 2006 but nevertheless signed it.
In any event the representation relied upon by the defendant concedes that the plaintiff was entitled to negotiate reasonable terms and conditions for the relocation of the business. What is reasonable is somewhat in the eye of the beholder as the extensive negotiations in this matter demonstrate. It is clear from the evidence that the plaintiff at all times was attempting to safeguard the viability of his new business and to obtain some protection should the centre not be completed within the time frame indicated by the defendant. This was not an unreasonable concern particularly in light of subsequent events. The plaintiff had genuine and realistic concerns about the detriment he would suffer from being in temporary premises and sought to address these in the negotiations. Further given the defendant’s prior representations as to the commencement and completion time for the redevelopment there was, in my view, nothing unconscionable about the negotiation of, agreement to or enforcement of clause 4.11. Had matters transpired as represented by the defendant then Coles would have been in occupation of the premises some months prior to 31 December 2006.
I therefore decline to grant relief as sought by the defendant in relation to the claim of unconscionability.
[6] Mason v Diakos [2009] SADC 55 at [66].
[7] Commercial Bank of Australia v Amadio (1982) 151 CLR 447.
[8] Mason v Diakos [2009] SADC 55 at [67]-[71].
[9] Australian Competition & Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301.
The Appeal
As mentioned earlier it was submitted on the appeal that clause 4.11 of the relocation deed was unenforceable as it amounted to a penalty. It was further contended that, as a consequence of Mr Mason’s unreasonable conduct, the Court should not have enforced the deed.
The jurisdiction to set aside a term imposing a penalty applies only to terms requiring payment in the event of a breach of the relevant contract. The doctrine of penalties has no application to a stipulation which provides for the payment of an agreed sum on the happening of a specified event other than a breach of contract.[10] In Export Credits Guarantee Department v Universal Oil Products Co,[11] the House of Lords held that a term of a contract imposing an obligation on a party to pay money on the occurrence of a specified event which is not a breach of the contract, is not a penalty, as the question as to whether the amount payable is a genuine pre-estimate of the loss likely to arise from a breach of contract, does not arise.[12] The reason given for the limitation on the scope of the doctrine is because it has never been the function of the courts to relieve a party from a bad bargain.[13] The principle espoused in Export Credits was accepted by the High Court in AMEV-UDC Finance Ltd v Austin.[14]
[10] See Campbell Discount Co Ltd v Bridge [1962] AC 600 at 613-614 (Viscount Simonds), at 614-615 (Lord Morton of Henryton). The correctness of this view was affirmed by the House of Lords in Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 at 402-403, which was subsequently accepted by the High Court in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170.
[11] Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399.
[12] Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 at 402.
[13] See AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 184 (Mason & Wilson JJ) citing Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 at 402-403.
[14] AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 184 (Mason & Wilson JJ), 211 (Dawson J); cf at 198 (Dean J); see also Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292 at [106]. Adapted from First East Auction Holdings Pty Ltd v Mimi Ange [2010] VSC 72 (Hargrave J) at [151].
The test for implying a term into a contract is set out in BP Refinery (Western Port) Pty Ltd v Hastings Shire Council.[15]According to that test, the following conditions, which may overlap, must be satisfied: [16]
-it must be reasonable and equitable;
-it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
-it must be so obvious that “it goes without saying”;
-it must be capable of clear expression;
-it must not contradict any express term of the contract.
Applying this test, no basis for implying terms in the present proceeding has been established.The relocation deed is effective without implying a term requiring Mr Diakos to have Coles commence trading by 31 December 2008. Further, such a term is not so obvious that “it goes without saying”, particularly having regard to clause 10, which stipulates that the deed is an entire agreement.
[15] BP Refinery (Western Port) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266.
[16] BP Refinery (Western Port) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283.
Clause 4.11 of the relocation deed imposed an obligation on Mr Diakos to pay $250,000.00 on the failure of an occurrence of a specified event. The failure of the event did not involve or amount to breach of contract. In these circumstances the contractual obligation to pay was not a penalty. The question as to whether the amount payable was a genuine pre-estimate of the loss likely to arise from a breach of contract did not arise. Mr Diakos struck a bargain. It is not the role of the court to relieve Mr Diakos from his bargain “on the mere ground that it [proved] to be onerous or imprudent”.[17]
[17] AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 184 citing Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 at 403.
Clause 10 of the relocation deed as earlier extracted provided that the deed was an entire agreement. There is no ambiguity about the terms of the deed.
In reaching these conclusions, I have considered the terms of the 2005 agreement. In my view the terms of that agreement, rather than detracting from the above conclusions, reinforce them. The 2005 agreement provided a warranty by Mr Diakos that Coles Myer would “be an anchor tenant (a Coles Supermarket) in the new development no later than 31st December 2006”. If this warranty were to be breached Mr Mason would, in all probability, have been entitled to treat the agreement as repudiated. The warranty formed no part of the relocation deed. This demonstrates that there was a commercial justification for the terms of clause 4.11 creating the obligation to pay on the occurrence of the specified event.
It is relevant to record that the relocation deed was drawn by Mr Diakos’ solicitor and then forwarded for signature to Mr Mason’s solicitor. Mr Mason signed the relocation deed in July 2006 and it was promptly returned to Mr Diakos’ solicitor. Almost two months elapsed before Mr Diakos executed the deed.
On the appeal it was submitted by counsel for Mr Diakos that he had been poorly advised by his solicitors. There was no evidence to support this assertion. Whether the terms of the relocation deed were commercially disadvantageous could not be determined without having considerably more information about the surrounding circumstances and, in particular, Mr Diakos’ negotiations and agreement with Coles Myer.
It was accepted that the following summary by the Judge of her understanding of this aspect of Mr Diakos’ case as presented at trial was accurate:[18]
The Plaintiff, prior to his purchase of the business, represented to the defendant that he would relocate to The Terraces based on existing lease conditions. He relied on this representation and proceeded with the re-development including the negotiation and relocation of all other tenants of the premises. The plaintiff resiled from the representation and it is unconscionable that he be allowed to do so. Accordingly, equity should uphold the plaintiff’s promise and declare both clause 4.11 and clause 3.8 void ab initio.
[18] Mason v Diakos [2009] SADC 55 at [18].
It appears that at trial the claim based on unconscionable conduct was advanced by reference to the Amadio[19] principles. On appeal it was acknowledged that these were not the applicable principles and that the claim should properly be considered by reference to the principles enunciated in Waltons Stores.[20]
[19] Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
[20] Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.
Even if it was appropriate to allow the claim to be advanced on a different basis on appeal,[21] the claim should be rejected. As discussed above, Mr Diakos was an architect with experience in business. He embarked on a substantial redevelopment of a valuable suburban shopping site. He had legal advice at all relevant times. His solicitors drew the deed of relocation. He had ample opportunity to consider the terms of the deed and to consider the signing of it. The evidence does not suggest that there was anything more than an arms length commercial negotiation between experienced business people, both of whom were legally advised.
[21] The manner in which the case on appeal is conducted by the parties ought not depart from the manner in which the case was conducted at trial, and generally, the appeal arena is not the appropriate forum to raise new argument: See University of Wollongong v Metwally (No 2) (1985) 59 ALJR 481 at 483, where Gibbs CJ, Mason, Wilson, Brennan, Deane and Dawson JJ observed:
It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.
See also Wade v Australian Railway Historical Society (SA Division) t/as Steamranger (2000) 77 SASR 221; Coulton v Holcombe (1986) 162 CLR 1.
In these circumstances the allegations of unconscionable conduct should be rejected.
Residual Matters
The grounds of appeal asserted that an error was made by the trial Judge in respect to frustration. Nothing was put to support this ground of appeal in either written or oral submissions. A review of the proceedings confirms that there is no substance in regard to this complaint.
An argument was advanced that a Jones v Dunkel[22] inference should have been drawn against the plaintiff, as he failed to present his wife as a witness. In my view the circumstances identified by the trial Judge[23] fully justified the approach taken. In my view there is no substance to this complaint.
[22] Jones v Dunkel (1959) 101 CLR 298.
[23] See Mason v Diakos [2009] SADC 55 at [50]-[51], where the Judge reasoned:
The defendant requested that I draw an adverse inference for the failure to call Mrs Mason to give evidence about the meeting between the plaintiff and defendant on 20 August 2006 [counsel on appeal agreed that this should read 2005]. Whilst it may have been helpful to have Mrs Mason’s evidence, the defendant’s evidence on the topic of what was or was not discussed at that meeting is so unclear that I am uncertain what inference I am being invited to draw. The usual inference is that the evidence would not have assisted the plaintiff. Presumably in these circumstances the defendant invites the inference that Mrs Mason would have negatived the plaintiff’s evidence that the amount of $250,000 was discussed and the circumstances in which it was discussed. The defendant’s evidence on this topic was however so unsatisfactory that it is not possible for me to say what he contends was discussed at that meeting. In his evidence in chief he appears to have agreed that it was discussed and yet, in cross-examination and re-examination he resiled from this.
In any event it is not necessary to resolve this issue because plainly, at some stage, the defendant and plaintiff agreed a payment of $250,000 if Coles did not move into the premises by 31 December 2006. No matter how reluctantly the defendant agreed to that payment and no matter what the timing or circumstances of that agreement it culminated in the inclusion of clause 4.11 in the deed. The circumstances in which the clause was negotiated do not assist in its interpretation.
Conclusion
I would dismiss the appeal.
KELLY J: I would dismiss the appeal. I agree with the reasons of Gray J.
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