EMCL Pty Ltd v Esanda Finance Corp Ltd
[1998] FCA 1175
•17 SEPTEMBER 1998
FEDERAL COURT OF AUSTRALIA
CONTRACTS – construction and interpretation – vehicle lease financing agreement between financier and lessor – financier appointed as lessor’s agent for disposal of leased vehicles – clause requiring three days’ notice of disposal – whether condition precedent to entitlement to disposal – whether term the breach of which sounds in damages – whether orally varied – whether varied by conduct – whether lessor estopped from relying on clause – clause requiring payment of excess of disposal amount where lease predetermined – basis of calculation of amount
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 applied
Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s LR 109 discussed
United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 followed
Antaios Cia. Naviera SA v Salen Rederierna AB [1985] AC 191 referred to
The Post Chaser [1981] 2 Lloyd’s LR 695 distinguished
EMCL PTY LTD & ANOR v ESANDA FINANCE CORPORATION LIMITED
NO VG 102 of 1998
JUDGE: HEEREY J
DATE: 17 SEPTEMBER 1998
PLACE: MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 102 of 1998
BETWEEN:
AND:
EMCL PTY LTD (ACN 007 347 622)
FIRST APPLICANTFINPAC HOLDINGS LTD
SECOND APPLICANTESANDA FINANCE CORPORATION LIMITED
(ACN 004 346 043)
RESPONDENTBETWEEN:
AND:
ESANDA FINANCE CORPORATION LIMITED
(ACN 004 346 043)
CROSS-CLAIMANTEMCL PTY LTD (ACN 007 347 622)
CROSS-RESPONDENTJUDGE:
HEEREY J
DATE OF ORDER:
17 SEPTEMBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The respondent within seven days file minutes of proposed orders and submissions as to costs.
The applicants file submissions in response within seven days thereafter.
Further hearing be adjourned to a date to be fixed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 102 of 1998
BETWEEN:
AND:
EMCL PTY LTD (ACN 007 347 622)
FIRST APPLICANTFINPAC HOLDINGS LTD
SECOND APPLICANTESANDA FINANCE CORPORATION LIMITED
(ACN 004 346 043)
RESPONDENTBETWEEN:
EMCL PTY LTD (ACN 007 347 622)
CROSS-CLAIMANTESANDA FINANCE CORORATION LIMITED (ACN 004 346 043)
CROSS-RESPONDENT
JUDGE:
HEEREY J
DATE:
17 SEPTEMBER 1998
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
The respondent Esanda Finance Corporation Limited (Esanda) is a financier. Its business includes the leasing of motor vehicles. The first applicant EMCL Pty Ltd (EMCL) carries on a similar business although on a much smaller scale. In 1990 Esanda entered into an agreement called the Master Discount Agreement under which EMCL agreed to assign to Esanda payments receivable under leases it might thereafter grant. Under the Master Discount Agreement EMCL appointed Esanda as its agent to dispose of vehicles at the expiration of leases or earlier termination. Clause 4(c) provided in effect for Esanda to give EMCL three days’ notice prior to any such disposal.
Between 1991 and August 1996 Esanda disposed of many motor vehicles the subject of the Master Discount Agreement but did not give the required three days’ notice to EMCL.
EMCL claims that as a consequence of the failure to give notice Esanda was not entitled to dispose of the vehicles and as a consequence is liable to pay to EMCL the total amount received on the disposals - approximately $64 million.
Esanda does not dispute its breach of cl 4(c) but says that the giving of such notice was not a condition precedent to its right to dispose of the vehicles. Alternatively, Esanda alleges there was an oral agreement to vary cl 4(c) so as to make it sufficient if notice was given on the day of disposal, or a term implied by conduct that it was sufficient if notice was given the day after disposal. Esanda also says EMCL waived its right to rely on cl 4(c) or alternatively is estopped from doing so.
If EMCL is not entitled to the total amount received on disposal, a further question arises as to the calculation of its true entitlement.
The EMCL proposal
The director and sole shareholder of EMCL is Mr James Broderick. Mr Broderick is closely associated with Mr Craig Dunn, who in the mid to late 1980s had been involved in the establishment of schemes for the leasing of luxury motor vehicles by finance companies. In about April or May 1988 Mr Broderick and Mr Dunn were introduced to Mr Ronald Adams, then the General Manager Operations for Esanda. The tax depreciation limits then in force made it uneconomical for Esanda to finance leases for luxury vehicles for terms less than 60 months. Mr Dunn proposed a scheme which would enable Esanda to overcome this difficulty and retain the benefit of the business. EMCL would participate in the scheme and be rewarded by a commission. Initially the proposal was advanced on behalf of Mr Dunn’s company Illingrove Pty Ltd but EMCL was subsequently substituted.
Esanda had a network consisting of a large number of car dealers throughout Australia who were accustomed to obtaining Esanda finance for their customers as well as finance for their own floor plans. Where acquisition of a vehicle was financed by way of lease, the lease provided for the lessee to pay the rent by the instalments and at the times agreed upon. The lease also fixed the residual value, that is to say the estimated value of the vehicle at the expiration of the term. The lessee was not obliged to pay the residual value, nor did he or she have a right to acquire the vehicle for that value. On any disposal of the vehicle at the end of the term, or earlier termination, any shortfall between the net price and the residual value was payable by the lessee. However the expectation was that at the end of the lease period the market price of the vehicle would usually be more than the residual value. This was particularly so in the case of luxury vehicles. If a lessee wished to pay out the residual value normally the lessor would accept such payment and pass title in the vehicle to the lessee. A lessor who kept the vehicle and took the profit for itself would be likely to be shunned and avoided by dealers whose customers had their expectations thus disappointed.
Under the EMCL proposal, the dealer would prepare a lease with EMCL as lessor. Esanda would pay the purchase price to the dealer, statutory charges such as stamp duty, and a commission to EMCL. EMCL did not have to outlay any cash. Monies receivable under the lease would be assigned to Esanda. Title to the vehicle would remain with EMCL but Esanda would manage the lease, in the sense of collecting payments and disposing of the vehicle on expiration of the lease or earlier termination. Operation of a scheme in the way described was, I find, the aim of the parties in entering into the Master Discount Agreement: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348, 352.
Following lengthy negotiations and the obtaining of a clearance from the Australian Tax Office the Master Discount Agreement was executed on 2 January 1990.
The Master Discount Agreement
Clause 2(b) provided that EMCL might during the term of the agreement submit Discount Proposals to Esanda. A Discount Proposal was defined to mean a proposal for the assignment of Receivables to Esanda. “Receivables” were “all monies which a customer pursuant to a Lease of a car from the Lessor [EMCL] covenants to pay to the Lessor pursuant to Clause 2(a) of the Lease” viz “the entire rent … together with the duty thereon … by the instalments and at the times as stated in the relevant Schedule”. By cl 2(d) if Esanda delivered to EMCL a written notice approving a Discount Proposal such delivery was to constitute an irrevocable offer by Esanda to acquire the Receivables the subject of the lease. EMCL might then accept that offer by forwarding within 30 days the original executed stamped lease, an executed Deed of Assignment of the Receivables and other documentation including a copy of the dealer’s invoice and a disbursement authority (cl 2(e)). By cl 3(a) the Discount Consideration payable by Esanda was the net present value of the Receivables calculated on the basis of the discount rate advised to EMCL. The clause gave three examples of the calculation of the Discount Consideration. Each of these took into account a residual value. Although the matter is dealt with in the Master Discount Agreement in a somewhat oblique fashion (in particular the definition of “Receivables” does not include the residual value) it seemed to be common ground that the Discount Consideration paid by Esanda in any particular case would include an allowance for the future receipt of the residual value. In other words, Esanda was paying not only for the income stream constituted by the rental payments, but also the prospect of receiving the residual value. In that context cl 4 dealt with the realisation of residual value. It was in these terms:
“(a)Where the Financier [Esanda] has purchased the Receivables the subject of the Lease the Financier may on behalf of the Lessor [EMCL] and as it’s [sic] duly authorised agent receive the relevant Car upon the expiration of the Period of the Lease or any extension thereof or upon the early termination (whether by virtue of default by the Lessee in the performance of it’s [sic] obligations under the Lease or voluntary return of the Car by the Lessee with the consent of the Lessor and the Financier) of the Lessee’s right to possession of the Car under the Lease AND the Financier shall be entitled as the agent of the Lessor to dispose of the Car at public auction or by private treaty, subject to any conditions which in the interests of such disposal the Financier may think fit.
(b)If the net proceeds of any disposal (after allowing for all costs and expenses relating to the receipt by the Financier of the Car and its disposal, including storage) pursuant to Clause 4(a) exceed the Residual Value of the Car or exceed the net present value of the outstanding rentals if the disposal takes place following early termination of the Lease, then the Financier shall account to the Lessor for one half of the amount of the excess but shall be entitled to retain the balance as a commission on sale of the relevant Car.
(c)Notwithstanding anything herein contained, the Financier may not dispose of a Car upon the expiration of the Period of the Lease or any extension thereof or following an early termination unless the Financier gives the Lessor not less than three (3) days prior written notice of the proposed disposal.”
By cl 6 EMCL was required to appoint Esanda as its agent and attorney in the form contained in sch 7. The deed of appointment was also executed on 2 January 1990. EMCL appointed Esanda as its “sole and exclusive agent and its true and lawful attorney to perform all or any of the acts … required to be done or executed as the case may be by the Lessor pursuant to the Master Discount Agreement”. Esanda’s powers included the power “to sue for and recover all Receivables payable by the Lessee under the Lease Agreement” (cl 2(k) of the agency agreement) and “to execute all such other documents and to do all such other deeds, acts and things as the Financier may deem expedient for the full or more beneficial exercise of any of the rights power [sic] remedies authorities or discretions of the Financier hereunder or under the Lease Agreement” (cl 2(l) of the agency agreement). The agency was revocable, but revocation was to have no effect as regards any acts of Esanda committed by it after receipt of notice of revocation in relation to any lease entered into prior to the date of revocation: cl 6.
By cl 8(c) it was provided that EMCL made no warranty as to the creditworthiness of any customer. Thus EMCL bore no credit risk.
EMCL and Finpac
On 27 July 1990 EMCL executed an agreement with the second applicant, a New Zealand company called Finpac Holdings Ltd (Finpac). Clause 2 of this agreement provided that EMCL might from time to time offer to sell to Finpac all its right title and interest in goods identified in such offer subject to the rights of Esanda under the Master Discount Agreement. According to Mr Dunn, under the Finpac agreement EMCL in fact sold its rights in respect of all the vehicles which became subject to the Master Discount Agreement. The rights were sold for between $100 and $200 per vehicle.
The role of Finpac in this case is a puzzling one. Esanda were formally notified of the Finpac agreement when it was made. Indeed one element of the scheme from the beginning involved EMCL not only remaining the owner of the vehicles but onselling its ownership rights to some entity other than Esanda. For reasons which I do not understand, Mr Dunn in several affidavits in interlocutory applications asserted that EMCL was the owner of the vehicles concerned. He was sternly criticised by counsel for Esanda for this. Yet, as I have mentioned, Esanda obviously knew the true position, Mr Dunn would have known that, and there seems to have been no point, at least for the purposes of the present case, in Mr Dunn asserting the contrary. There was considerable debate as to the true ownership of Finpac, its relationship with Mr Dunn and EMCL and its interest in these proceedings. In the event, halfway through the trial Finpac was joined as an applicant.
I do not think Finpac or the Finpac agreement have any bearing on the issues which I have to decide.
Conduct subsequent to the Master Discount Agreement
Following upon the execution of the Master Discount Agreement on 2 January 1990 there were discussions both internally at Esanda and between Esanda and EMCL as to how the scheme would operate in practice. These discussions are relevant to the issues of variation, waiver and estoppel. The following account includes a number of events as to which there were disputed versions. In coming to my findings I have found the Esanda witnesses, and in particular Mr Hands and Mr Nayna, generally preferable to Mr Dunn and Mr Broderick. In particular, the Esanda version is more consistent with contemporaneous notes and other documents.
In January and February there were a number of Esanda internal meetings which discussed the procedures to be adopted. One issue raised was why it was necessary for the three days’ notice prior to disposal under cl 4(c).
On 27 February 1990 Mr Nayna telephoned Mr Broderick to discuss this and other issues which he had been delegated to raise with EMCL. He had a list of such items and against the item relating to cl 4(c) he wrote “EMCL is agreeable to amend cl 4(c) of the Master Agreement to provide notice on the date of disposal”. He believes he made that note on the list after speaking to Mr Broderick. Mr Nayna was a candid and intelligent witness. I find that he and Mr Broderick made such an agreement, notwithstanding that Mr Broderick denied it.
On 19 April 1990 Mr Hands wrote to Mr Broderick a letter (CB 196) on behalf of Mr Grant, the Esanda National Marketing Manager Dealer Finance. The letter stated as follows:
“Since our last advices to you we have progressed to the point where we are close to launch date in Victoria.
In considering the various procedural and systems issues that have arisen in the course of setting things up, we have found the need to change some aspects which have proved either impractical or necessary to an efficient operation.
We have progressively discussed most of these changes with you and the purpose of these advices is to formally record operating or procedural changes to the Master Agreement dated 2nd January, 1990.
…
Clause 4(c)
The Lessor is to be advised of disposal of a vehicle (payout) no later than one day after the receipt of any outstanding funds (payment amount).”
The letter concluded:
“Would you please acknowledge your acceptance of the contents of this letter by signing the duplicate copy and returning it to the above address.
Should you have any queries relative to these advices, please contact Mr John Hands”.
EMCL did not return a signed duplicate to Esanda.
Mr Broderick’s evidence was that the letter came as a “bombshell” to him (T112). He had not been aware that these matters were being discussed. If they were, he said, they would have been discussed with Mr Dunn rather than himself. Upon receiving the letter, Mr Broderick faxed it to Mr Dunn and discussed it with him. Mr Dunn told him that they would not make any alterations to the Master Discount Agreement. Mr Broderick relayed that message to Mr Hands (T110):
“I said that and I said I wouldn’t be signing the duplicate and returning it to him and his comment to me was, ‘Well, that won’t be my concern from now on because I’m leaving Esanda and going to the bank.’”
Mr Hands’ version was that he never received a response from EMCL to his letter of 19 April. He said that he followed it up until the time that he left Esanda at the end of 1990. He believes that he raised the matter a couple of times with Mr Broderick on the telephone although he does not have notes of such calls. He recollects being given a holding answer, such as “we’re looking at that” (T193). Mr Hands was quite emphatic in his denial that Mr Broderick told him that there would be no changes to the Master Discount Agreement. Mr Hands testified (T193):
“If that happened I would immediately go to my boss, Doug Grant, and flag it as a major issue and all sorts of things would have happened from there. So as far as I’m concerned that didn’t happen.”
Mr Hands also denied having said words to the effect that because he was leaving Esanda, the Master Discount Agreement was no longer his concern. He said that while he would no longer have had responsibility for it, it still would have been his concern (T193). In any case he did not leave Esanda until the end of 1990.
On 24 October 1990 Esanda sent the following letter to Mr Broderick (CB 259):
“We have not yet received your confirmation of the operating and procedural changes to the Master Agreement as set out in our letter of 19th April, 1990.
The facility has been launched for some months, and we would appreciate receiving the signed duplicate copy of our letter of 19th April, 1990, in confirmation of the changes.
Your early attention to this matter would be appreciated.”
The letter was signed by an Esanda employee for Mr Grant. A note in Mr Hands’ handwriting attached to an Esanda file copy of the letter said: “Reply to this still not received from EMCL” (emphasis in original). Mr Hands could not say when he wrote that note, only that it was written after 24 October.
On 14 December 1990 Mr Dunn and Mr Broderick attended a meeting with Mr Grant and Mr Alan Rees of Esanda to discuss stamp duty issues. Mr Dunn’s evidence was that Mr Rees left the meeting early. He said he believed it was for an appointment in relation to some form of study Mr Rees was undergoing. On Mr Dunn’s version, Mr Grant then asked Mr Dunn about his response to the 24 October letter. Mr Dunn told Mr Grant that there would be no changes to the Master Discount Agreement. He cannot recall Mr Grant’s response. Mr Broderick generally agreed with Mr Dunn’s evidence on this issue.
Mr Rees denied having left the meeting early. He specifically recalls showing Mr Dunn and Mr Broderick out of Mr Grant’s office and into the foyer at the conclusion of the meeting. Moreover, he said that although he was undertaking a bachelor of business course at the time, there were no classes in December. He has no recollection of Mr Grant and Mr Dunn discussing the 24 October letter. He took quite detailed notes of the meeting (CB 263) but they make no reference to such a discussion.
Mr Grant gave evidence that he believed that the operational matters dealt with in the 19 April 1990 letter had already been agreed between Mr Dunn and Mr Adams. He said that the 24 October letter was written on his behalf by a junior employee without his knowledge. As far as he was concerned, the matters had already been resolved. He accordingly denied having raised the 24 October letter at the end of the meeting with Messrs Dunn, Broderick and Rees.
I do not accept the evidence of Mr Dunn and Mr Broderick as to the meeting of 14 December.
Although EMCL maintained that it said that there would be no changes in terms of the April 19 letter, Mr Dunn admitted that a number of the suggested alterations were in fact adopted in practice (T75-76). The letter did not simply suggest alterations solely for the benefit of Esanda. Some of them were for the parties’ mutual benefit, such as the requirement for an original insurance policy.
On 26 July 1994 Esanda consented in writing to a minor amendment to the Master Discount Agreement to the effect that EMCL only had to deliver an executed deed of assignment if and when requested by Esanda. EMCL sought the advice of counsel as to whether such an amendment would take the Agreement outside the protection of the Australian Tax Office ruling. Counsel’s advice was that it would not do so. After advice from its own tax advisers, Esanda consented to the amendment.
From February 1995 Esanda sent to EMCL a number of letters advising that leases had been predetermined (SCB 246-267). Esanda argued that the letters alerted EMCL to the fact that leases had been predetermined without the three days’ notice, so that by its conduct EMCL consented to such a method of notification. At least it did not complain until 1997. Mr Dunn contended that each letter in itself constituted a three day notice. I do not accept that.
The scheme ends
Due to a change in the tax legislation in 1996 operation of the scheme was no longer feasible. On 21 August 1996 Esanda advised EMCL that it had suspended all writing of EMCL leases until further advice. It later became evident to EMCL that some leases had been predetermined without its knowledge.
On 15 December 1997 EMCL wrote to Esanda (CB 823) pointing out that it had not given EMCL three days’ notice pursuant to cl 4(c) of the Master Discount Agreement, and asking Esanda to account to it for “our one half share of the excess proceeds of sale over the net present value for leases that you as our agent have consented to early termination”.
Correspondence followed, the essence of which was that Esanda took the position that EMCL was not entitled to any share of the “predetermination penalty charged to the lessee on pre-determination of the contract” (CB 870) and that cl 4(b) had been waived. By a letter dated 13 March 1998 (CB 885) EMCL formally terminated the agency pursuant to cl 6(b) and claimed the full amount of proceeds received by Esanda for disposals as follows:
Upon normal expiration of leases $29,894,716.19
Disposal prior to normal expiration $34,153,736.09
$64,048,452.28
Esanda replied by letter dated 17 March (CB 930). In essence it asserted that the assignment to Esanda included the residual value indemnity for expired leases and that Esanda received no more than what it bought. There had been no sale for a value over the residual value under cl 4(b) and therefore no excess. As to repossession and voluntary returns, no excesses above the net present value had been received. As to “early payouts”, the letter stated:
“There is no agreement between the parties concerning profit on early payouts; Esanda paid EMCL for the rental and residual value indemnity and EMCL assigned them to Esanda as its absolute property and notified the lessees accordingly. As Esanda’s absolute property it compromised its debts with the lessees for early payment by the lessees.”
At the commencement of the hearing Esanda’s position still was that predeterminations were not covered by cl 4(b) but towards the end of the trial counsel for Esanda accepted that EMCL or its assignee was entitled to 50 per cent of the excess where predeterminations occurred (T166).
Questions for determination
Counsel agreed that I should answer a number of questions. These appear in the subsequent sub-headings.
Is cl 4(c) of the Master Discount Agreement a condition precedent to the entitlement of Esanda to sell the vehicles the subject of the Agreement, or is it a term the breach of which sounds in damages?
Useful guidance to this question is provided by English cases where sellers of goods seek to be excused from non-performance by reason of force majeure, or other contractually stipulated circumstances excusing non-performance, despite a failure to give notice required by terms of the contract. In Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s LR 109 the House of Lords was concerned with two clauses in the Grain & Feed Trade Association standard shipping contract. One clause (cl 21) provided that in case of prohibition of export by the Government of the country of origin or certain other specified events such as blockade or hostilities preventing fulfilment, the contract “shall be cancelled”. The clause went on to state that in the event of shipment proving impossible by reason of any of the enumerated causes, “sellers shall advise buyers of the reason therefor”. The other clause (cl 22) provided that sellers should not be responsible for delay in shipment occasioned by any “Act of God, strike, lockout [etc]… or any cause comprehended in the term ‘force majeure’”. If delay in shipment was likely to occur for any of the above reasons, the shippers “shall give notice by telegram, telex or teleprinter … within 7 consecutive days of the occurrence, or not less than 21 consecutive days before the commencement of the contract period, whichever is later” .
In dealing with cl 21 Lord Wilberforce, with the concurrence of a majority of the House, said (at 113):
“Whether this clause is a condition precedent or a contractual term of some other character must depend on (i) the form of the clause itself, (ii) the relation of the clause to the contract as a whole, (iii) general considerations of law.”
In relation to (iii) his Lordship referred to:
“… the approach, which modern authorities recognise, of treating such a provision as having the force of a condition (giving rise to rescission or invalidity), or of a contractual term (giving rise to damages only) according to the nature and gravity of the breach. The clause is then categorised as an innominate term. This doctrine emerged very clearly in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] 2 QB 26 in relation to the obligation of seaworthiness, and [other authorities referred to]. In my opinion the clause may vary appropriately and should be regarded as such an intermediate term: to do so would recognise that while in many, possibly most, instances breach of it can adequately be sanctioned by damages, cases may exist in which, in fairness to the buyer, it would be proper to treat the cancellation as not having effect. On the other hand, always so to treat it may often be unfair to the seller, and unnecessarily rigid.”
As to cl 22, Lord Wilberforce held that on the facts notice had been given in time. His Lordship considered however (at 116) that existing authorities
“… support the view [that the sellers were not entitled to the protection of the clause] on the ground that cl. 22 is a complete regulatory code in the matter of force majeure, and that accurate compliance with its stipulation is essential to avoid commercial confusion in view of the possibility of there being long strings of buyers and sellers.”
Reference should also be made to United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904. The question in that case was whether or not stipulations as to time in rent review clauses should prima facie be viewed as being of the essence. Their Lordships held that they should not. In United Scientific Viscount Dilhorne, Lord Simon of Glaisdale and Lord Fraser of Tullybelton cited with approval the following extract from Halsbury’s Laws of England (4th ed, vol 9, par 481, p 338):
“The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence unless: (1) the parties expressly stipulate that conditions as to time must be strictly complied with; or (2) the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered to be of the essence”.
Thus, in relation to all types of contracts, there is a displaceable presumption that time is not of the essence. I disagree with the submission of counsel for EMCL that stipulations as to time are prima facie of the essence of a contract.
Turning now to cl 4(c), although EMCL’s argument has some support in the literal words of the clause (“Notwithstanding anything herein contained, the Financier may not dispose of a Car …”) I think its construction is commercially unrealistic (see Antaios Cia. Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock). It would mean that the parties are taken to have intended that even if there were one day’s delay in the notice, Esanda would have paid out a substantial sum of money, not infrequently in excess of $100,000, but would not receive back any of the residual value. In other words Esanda would not be receiving what it had paid for. And EMCL, which had not outlayed any money at all, would receive a windfall quite unrelated to any calculable loss it might be able to establish – or even if it could not show any loss at all.
Conversely, Esanda’s construction means that, in any given case, it would be open to EMCL to show what loss it had in fact suffered by not getting notice. For example EMCL might argue that had it received three days’ notice, it might have tendered for the vehicle itself. It may be that, as counsel for Esanda put it, given the commercial setting of motor vehicle financing, Esanda could show that it would have refused EMCL’s tender for the vehicle and would have disposed of the vehicle under its irrevocable power of attorney. On the other hand it may be that EMCL could make out a case that it had lost the benefit of further leasing business it might have obtained on a rollover. All that need be said however is that EMCL’s actual loss flowing from Esanda’s breach of cl 4(c) in the case of any given vehicle is either nil or a circumscribed amount readily capable of proof or disproof. Thus I would reject a construction which would give EMCL, in the case of every breach, the total amount received by Esanda – an amount far in excess of any loss EMCL could have suffered.
Moreover, notwithstanding the lack of three days’ notice, the Master Discount Agreement as a whole plainly contemplates that Esanda would have the ability to pass title to the lessee or some other purchaser pursuant to its agency which is, for relevant purposes, irrevocable. It seems unthinkable that a sale without the three days’ notice would be ineffective to pass title. So notice in this case, or the lack thereof, does not have the important significance that it holds in the English shipping cases which deal with commodities sold and then onsold again and again in strings of contracts. In such a setting time limits must be strictly complied with so that each seller and reseller knows where it stands: The Post Chaser [1981] 2 Lloyd’s LR 695 at 699. Here the situation is quite different.
I answer this question: A term the breach of which sounds in damages.
Was there an oral variation of cl 4(c) made on 27 February 1990 to provide for notice on the day of a disposal?
As already mentioned, I prefer Mr Nayna’s evidence to that of Mr Broderick. Although Mr Nayna has no independent recollection of his call to Mr Broderick, there is no reason to doubt the content of a note he made either contemporaneously or soon after the call. There would be no reason for him to write that EMCL “is agreeable” to the amendment unless that were the case.
Although Mr Broderick was quite emphatic in his denial of never having spoken to Mr Nayna on the telephone, except perhaps to arrange a meeting, he did concede that it was possible that he may have forgotten. Given that the events occurred over eight years ago, I am more inclined to rely on notes made at the time rather than an uncorroborated negative recollection.
I answer this question: Yes.
Alternatively, was there a variation to cl 4(c) to be inferred from the conduct of the parties that notice was required no later than one day after the date of disposal?
In the event that the Master Discount Agreement was not orally varied by the conversation between Mr Nayna and Mr Broderick on 27 February 1990, I find that a variation can be inferred from the conduct of the parties. As already indicated, I prefer the evidence of the Esanda witnesses.
EMCL argued that it would never have altered the Master Discount Agreement for fear of losing the protection of the taxation ruling. In particular, it relied on opinions given by Mr Leibler in 1993. However that assertion is contradicted by the evidence. First, EMCL signed a written alteration to the Master Discount Agreement on 26 July 1994, albeit on legal advice that that would not affect the taxation ruling. More significantly, a number of the alterations suggested in the April 19 letter were in fact adopted. Those alterations, including the one in respect of 3 days’ notice, were nothing more than what Esanda described them as, viz “operating or procedural changes”.
I find that a variation to the Master Discount Agreement is to be inferred from the conduct of the parties in 1990 that notice was to be given no more than one day after disposal, as specified in the 19 April 1990 letter.
That conduct was further confirmed in 1995, when EMCL received predetermination letters notifying it of disposals yet failed to alert Esanda to the fact that it had not received 3 days’ notice. I reject Mr Dunn’s evidence that he thought that the letters provided 3 days’ notice of disposal. The words of the letters could not have been clearer: “We wish to advise that the following EMCL Pty Limited lease has been predetermined.”
I answer this question: Yes.
If no agreement was made, is EMCL estopped from relying on the terms of cl 4(c) because the conventional basis on which the parties dealt with each other was for notice to be given after disposal?
The modern law of estoppel is authoritatively laid down in Legione v Hateley (1983) 152 CLR 406, Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, and Commonwealth v Verwayen (1990) 170 CLR 394.
I hold that EMCL is estopped from relying on the terms of cl 4(c). The parties dealt with each other from 1990 to 1997 on the assumption that Esanda was not required to give 3 days’ notice of disposals. Moreover, by telling Esanda (through Mr Nayna) that EMCL was agreeable to changing cl 4(c), or at least by failing to respond to the 19 April 1990 letter, EMCL represented to Esanda that it would not rely on that clause. Esanda relied on that representation and acted to its detriment (or at least potential detriment) by disposing of vehicles without complying with the terms of the clause. In the circumstances, an appropriate remedy is for EMCL to be estopped from relying on cl 4(c).
I answer this question: Yes.
What is the basis of calculation of the “excess” payable under cl 4(b) of the Master Discount Agreement in respect of leases which have been “predetermined”?
Leases under the Master Discount Agreement ended by:
the period of the lease expiring,
the vehicle being voluntarily returned,
the vehicle being repossessed upon default, or
the lease being predetermined.
Leases were said to have been predetermined when the lease was determined by agreement between Esanda and the lessee prior to the expiry of the term fixed by the lease. Often this would occur when the lessee wished to trade in the leased vehicle for a new one.
In the case of predetermination Esanda would calculate a payout figure. This was
(a) the sum of:
(i) rentals accrued, due and unpaid with interest thereon;
(ii) total future rentals; and
(iii) the residual value,
(b) less a rebate in respect of accelerated rentals and the residual value,
(c) plus a “predetermination fee”.
The rebate took account of the fact that Esanda was receiving the amounts due under the lease early. In this manner, Esanda calculated the present value of these accelerated payments. Different methods of calculation were used to calculate the rebate depending on whether the rental payments were regular or irregular.
The “predetermination fee” was said to compensate Esanda for administration costs, the cost of new business and fluctuation in interest rates. The amount of the predetermination fee varied from time to time. In the current car leasing market it is five per cent of the rebate. No part of the predetermination fee on early payouts of leases under the Master Discount Agreement has ever been paid to EMCL.
Under the Master Discount Agreement, if the disposal of the vehicle takes place following early determination of the lease the “excess” under cl 4(b) is arrived at by taking
“the net proceeds of any disposal (after allowing for all costs and expenses relating to the receipt by [Esanda] of the Car and its disposal, including storage)”
and deducting therefrom
“the net present value of the outstanding rentals.”
In its further amended defence Esanda pleaded that, in the case of predeterminations, Esanda was entitled to the whole of the net payout amount (par 3(b)(iii)). Alternatively, it said that EMCL was entitled to $391,071.09, which represented one half of the predetermination fees charged by Esanda on early payouts (par 14A(b)).
As already noted, during the course of the trial Esanda conceded that it was not entitled to the whole of the net payout amount. Nevertheless counsel appeared to maintain the argument that 50 per cent of the “excess” in cl 4(b) referred to 50 per cent of the predetermination fee.
I do not accept that argument.
There is no reference in cl 4(b) or elsewhere in the Master Discount Agreement to the “predetermination fee”. It was a sum unilaterally fixed by Esanda without reference to EMCL. It was calculated or estimated by reference to matters other than the net present value of the outstanding rentals (and the residual value).
I answer this question: As per cl 4(b) but without any allowance for “predetermination fee”.
Accordingly there will need to be a separate assessment of the amount due to EMCL pursuant to cl 4(b) in respect of the leases which have been predetermined.
How much is due to Esanda on its cross-claim?
EMCL concedes that it engaged in self help by keeping the proceeds of sales of several vehicles in the amount of $856,819.40, which should have been paid to Esanda. It says, however, that Esanda should not succeed on its cross-claim for as long as there remains an injunction restraining EMCL from dealing with those monies (T228-229). I do not understand this argument. EMCL does not raise any substantive reason as to why the money should not be paid to Esanda. The injunction was merely to protect the money until such time as its ownership was determined.
Orders
I will give counsel leave to bring in minutes of proposed orders. While EMCL fails on its primary claim for $64 million, and is liable for the monies withheld, some amount is due to it. That amount should be agreed upon or appropriate directions given for its ascertainment.
Costs
At the request of Esanda I will reserve the question of costs for further argument. Esanda wished to make submissions as to “the basis on which costs ought to be paid” – presumably a reference to indemnity or solicitor and client costs. However there is also the question of EMCL’s costs on its claim in relation to the 50 per cent issue. Also there may be room for argument – I say no more at the moment – as to whether Esanda should recover any costs at all given that its conduct in initially denying EMCL any share in the excess in respect of predeterminations might be said to have provoked this litigation.
I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey
Associate:
Dated: 17 September 1998
Counsel for the Applicants: Mr P K Searle Solicitors for the Applicants: Daly & Kernahan Counsel for the Respondent: Mr K Hargrave QC with Mr D Gilbertson Solicitors for the Respondent: Corrs Chambers Westgarth Date of Hearing: 11-14 August 1998 Date of Judgment: 17 September 1998
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