Esanda Finance Corporation Limited v Plessnig

No judgment structure available for this case.

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A9 of 1988
B e t w e e n -
ESANDA FINANCE CORPORATION
LIMITED (formerly ESANDA LIMITED)

Appellant

and
HEINZ PLESSNIG and PATRICIA PLESSNIG

Respondents

WILSON J
BRENNAN J
DEANE J

Esanda(2)

TOOHEY J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 9 AUGUST 1988, AT 10.17 AM

Copyright in the High Court of Australia

C2Tl/l/RB

1

9/8/88

MR B.J. SHAW, QC: If the Court pleases, I appear with

my learned friends, MR I.J. HARDINGHAM and
MR L. FERDINANDY, for the appellant. (instructed
by Mouldens)

MR D.N. ANGEL, QC:

May it please the Court, I appear with

my learned junior, MR N. NIARCHOS, for the respondents.
(instructed by Nicholas N1archos.

WILSON J:

Yes, Mr Shaw.

MR SHAW: If the Court pleases, in April of 1982 Esanda

and the Plessnigs entered into a hire purchase
agreement relating to a truck. That agreement,
which was in the form of an offer to hire which
was accepted by Esanda, appears in the appeal
books at pages 148 to 149 where it is somewhat
difficult to read. It might be a bit easier
to read a blown-up one.

WILSON J:	I have been credited with a copy
MR SHAW:	May we blow the whole Court up?
WILSON J:	We all do have it, Mr Shaw.

BRENNAN J: Except that mine has been left in my chambers.

WILSON J:

We are well equipped, thank you.

MR SHAW:

The Court will see on the front, it is headed
Offer to Hire and it is addressed to Esanda and
it is signed by the Plessnigs. There is an acceptance

down below and there are conditions on the back.
The agreement was a HELBY V MATTHEWS

agreement in a number of relevant senses.

The

first relevant sense is that although it contained

a minimum payment clause, the agreement was

in the form of a hiring agreement with an option

goods until the option was exercised and until

to purchase and gave rise to no interest in the

that time, in accordance with HELBY V MATTHEWS, (1895) AC,

remained a hiring agreement.

(Continued on page 3)

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MR SHAW (continuing): The second sense is perhaps these days,

or until recently at any rate,a little more unusual.
It is an agreement which is governed by the common law and not by statute. That is because of the

amount of money involved. May I simply take the
Court for the moment - - -

WILSON J: And also by the repeal of the HIRE PURCHASE

AGREEMENTS ACT.

MR SHAW:

Yes, it is.

The immediately relevant clauses are

clauses 5 and 6 on the back. I might take the
Court to those and briefly remind the Court what they say. Clause 5 says:

I may at any time terminate the

hiring by returning the goods freight
and charges prepaid. I agree in that
event to pay forthwith and you shall be
entitled to recover from me the
recoverable amount being the total rent
as set out in the Schedule overleaf and
all other moneys payable for the full
period of hire (including your costs
of repossession storage maintenance and
selling expenses) less:
(a) all moneys paid by me to you by
way of deposit and rentals for the goods and
(b) the value of the goods (being the best
wholesale price reasonably obtainable for
them in their then condition as at the
time of your taking possession of them), and

(c) a rebate of charges calculated in
accordance with Clause 13 hereof ... the
amount calculated in accordance with
this Clause is hereinafter called "the
recoverable amount".
6. IF during the hiring I commit any

indictable offence or default in any
payment or connnit any breach of this
agreement or if an order be made or a
resolution passed for winding me up or
if distress or execution for an amount
exceeding $200.00 and be not withdrawn or
satisfied with seven (7) days or if (I being
a company) a receiver or receiver and manager
be appointed of my undertaking assets or
income then and in any such event you shall
become entitled to innnediate possession of the goods and you may without notice to me retake possession thereof and upon such
repossession the hiring of those goods shall
terminate and you may recover from me as
liquidated damages the recoverable amount as
defined in the preceding Clause, and I shall
pay you the recoverable amount forthwith.

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MR SHAW (continuing): In June, July, August and September

of 1983 default was made in payment of the
monthly hire and on 16 September 1983 the truck
was returned by the hirers following a demand
by Esanda for its return. Later.proceedings
were commenced in the District Court of Adelaide
by Esanda to recover from the hirers an amount
calculated in accordance with the provisions
of clause 5.
The amended particulars of claim appear at

pages 11 and 12 of the appeal book. The amended
defence is at pages 155 to 157 and the judgment
of the district court judge, His Honour
Mr Justice Lowry,appears at pagesl58 to 171.
He decided that Esanda should succeed and
judgment was entered for $12,977-odd. The Plessnigs
appealed to the supreme court and the appeal was

heard by the Full Court. It was held unanimously
by the Full Court that there had not been a
voluntary return under clause 5, but that the
relevant clause was clause 6. Of course, those
clauses provide for recovery of the same amount
and the Full Court permitted amendment of the
particulars of claim in order to make a claim
under clause 6. The amended particulars of claim
are at pages 206 to 207 and the amended defence is
at pages 208 to 210 of the appeal book. Those
amendments were made after judgment had been
delivered in the first stage of the hearing before
the Full Court. That judgment in which all members
of the Court concurred is a judgment of
Mr Justice Von Doussa and appears at pages 186 to 205
of the appeal book.
The amendments to the grounds of defence raised

a matter which had been touched on by His Honour in
his judgment, namely the defence that the recovery
of the amount provided for in clause 6 amounted
to a provision for the recovery of a penalty. That
led to amendment of the grounds of appeal. The

amended grounds_ of appeal appear at pages 211 to 217;

the relevant new grounds at page 216. The Full Court,
although it had partly considered the matter, as it
were, reconsidered the matter and came to the
conclusion by a majority that the provision in
clause 6 was a provision providing for recovery of
a penalty.
(Continued on page 5)

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MR SHAW (continuing): The majority decided that accordingly
only proved damages could be recovered, the provision
for recovery of a penalty being unenforceable or void.
The amount of pr.oved damage was $9835-odd, and
accordingly the appeal was allowed and judgment
was entered for that amount, instead of the $12,000 -
whatever it was - for which judgment had been
entered in the district court.
The majority consisted of Chief Justice King

and Mr Justice Mohr and if I might take the Court
to the appeal book, in the judgment of
Chief Justice King which was concurred in by
Mr Justice Mohr - His Honour's judgment commences

at page 220 of the appeal book. At page 222
His Honour sets out clause 6 and in part clause 5, and at page 223, line 14, His Honour says:
If Clause 6 can be justified at all as
a pre-estimate of recoverable damages,
it can be so justified only on the basis
of loss of bargain.

And he goes on to say that that is, in fact, the
appropriate test, and he relies on the judgments

delivered in this Court in AMEV V AUSTIN. He refers
to the report in 68 ALR, but it is also reported in
162 CLR 170.

BRENNAN J: Do you seek to support this as a pre-estimate

of damages? Are we involved with damages at
all under clause 6?
(Continued on page 6)

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MR SHAW:	Our submission will be that really that is not a
useful question. One could support it on that ground
if it were necessary, but we will submit that what it
provides for is recovery of an agreed amount under the
clause on an event provided for in the agreement,
namely, termination following breach. The fact that
the termination follows breach means that the rules against penalties apply, but nevertheless the
agreement is simply an agreement between the parties
for the distribution between them of the consequences of termination.
BRENNAN J:	Though the amount may be recovered even though

there be no breach anterior to the termination?

MR SHAW:

Yes, it certainly might, because the clause provides

that, Your Honour. At page 224, His Honour refers to
AMEV-UDC V AUSTIN and the passages of Chief Justice V.ason
and Your Honour Mr Justice Wilson, Your Honour

Mr Justice Deane and Justice Dawson. in which the .
relevant canparison is stated to be a canparison with the anrn.mt mich

would be recoverable for loss of bargain upon repudiation. In this
respect there is no difference between what His Honour says

and what Mr Justice Von Doussa says. Each of them,
in fact, says that, and each of them relies precisely

the same passages in the same case. Then His Honour
goes on at line 13 of page 224 to say:
I~ however,the clause purports to authorize
the recovery of an amount which exceeds the
loss likely to be suffered and is so
unconscionable or oppressive as to be penal
rather than compensatory in character, it is
void or at least unenforceable as a penalty -

and he again refers to AMEV-UDC V AUSTIN.
(Continued on page 7)

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MR SHAW (continuing) It will be noticed that in that passage

His Honour is referring to a clause purporting to
authorize the recovery of an amount exceeding loss
likely to be suffered. Later His Honour rejects
that formulation of the question and formulates it
differently but, of course, as the Court will realize
from having read the judgments and seen the clause,
the clause does, in fact, not authorize recovery of
any amount in excess of the loss which is there referred to. The defect which His Honour later
finds is not that it permits recovery of more than
such an amount but that it does not provide for
recovery by the hirer of any so-called surplus or profit that the owner may receive on termination.
And then His Honour goes on, at page 225, to

refer to the fact which is undoubted that, on its
face at any rate, the provisions of clause 5 bear
close similarity with something which was approved
of by the Court in IAC (LEASING) LIMITED V HUMPHREY.
That, however, was a case which related to hiring
simpliciter. His Honour refers to that on that
page at lines 17, 18 and 19 and he goes on to say:
The present contract is one of hire

purchase. Such a contract has elements of
sale as well as of bailment -

and he refers to KARFLEX LTD V POOLE and says:

Clause 10 provides that the hirer may elect
"to become the owner of the goods by paying
the total rent and fulfilling my other
obligations", but until then "shall have
no property in the goods and shall be only
a bailee".
That demonstrates, in our submission, that at the
relevant time the fact that there was the option
was irrelevant for the purposes His Honour was

considering because, at that stage, in accordance
with HELBY V MATTHEWS, the agreement was nothing
more than a hiring agreement. Then His Honour
goes on to say, at line 26:
(Continued on page 8)

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MR SHAW (continuing):
If the contract had been fully performed the respondent would have received the total
rent and the appellant would have become
the owner of the vehicle.
That is, of course, only an half-truth. It assumes
full performance in one way and ignores the fact
that the contract might equally well be fully
performed by the hirer terminating the hiring
at some stage through the agreement, as he had
the perfect right to do, and paying the recoverable

clause under clause 5. The agreement was not
an agreement which required the hirer to purchase
and His Honour's assumption that it d1d is, in
our submission, in error although it is, of course,
true that one way in which the contract might
be fully performed is the way in which he refers

to. Then His Honour says:
The maximum loss which the respondent could
sustain in consequence of termination of
the contract was therefore the amount of
any payments of rent in arrears, together
with the total of unpaid future payments
appropriately rebated for acceleration of
payment and the expenses associated with

termination. Any formula which might produce
a benefit to the owner which is disproportionate
to that maximum loss must stand in danger
of condemnation as a penalty.

So His Honour begins to move away from what he said on page 224 where he spoke of recovery of

an amount. He begins to speak of formulae which
might produce a benefit without saying how.
That might, of course, be a statement which is
intended to be limited in the same way as the
statement on page 224 but it will be seen that,

in fact, His Honour did not mean it in that
way because His Honour takes the final step in
the next passage. His Honour goes on:

(Continued on page 9)

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MR SHAW (continuing):

The contractual formula provides for the
recovery of the total rent subject to
deduction of amounts already paid, an
appropriate rebate in respect of future
payments and the wholesale value of the

repossessed vehicle. Such a formula -
he says -
could well be regarded as a genuine
pre-estimate of the owner's loss on
termination if its operation were limited
to situations in which the aggregate of
amounts already paid and the value of
the vehicle, less expenses of termination,
did not exceed the maximum loss, as
explained above, which could result from
termination and if it were supplemented
by provision for reimbursement to the
hirer of the amount of any such excess.
The contract under consideration does
not so limit the operation of the formula
and makes no provision for reimbursement
of excess. If therefore the contract were
terminated at a stage at which the value
of the repossessed vehicle, less the
expenses of termination and repossession,
exceeded the rebated figure representing
the unpaid amounts of rent, the owner
would receive a benefit in excess of its
loss and perhaps considerably in excess
of its loss. Is the provision therefore
a penalty?

Now looking at that passage, His Honour says at
line 8:
Such a formula could well be regarded as

a genuine pre-estimate of the owner's
loss on termination if ..... and if -

so the:re are two conditions which he states.
But it would seem that there is no difference
between them in any relevant sense because,in fac 4
the formula does only operate in:· ·
situations in which the aggregate of
amounts already paid and the value of
the vehicle, less expenses of termination,
did not exceed the maximum loss -

which is the maximum loss referred to at page 225,
line 29 and the following lines. By that I mean it
only permits recovery in those circumstances. That
His Honour really means that appears from the rest of
the paragraph because what he says is, in effect, if the
value of the vehicle is sufficiently high there_rnay be, as it were,
a windfall s:i.nply by reason of the hiring being terminated.

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WILSON J:

Mr Shaw, does His Honour's statement of the formula

in the first sentence of that paragraph accurately
state the effect of clause 5 in the recoverable
amount?

MR SHAW:	Yes, it does.
WILSON J:	I was wondering whether it does provide for an

appropriate rebate in respect of future payments,
meaning future instalments of hire?

MR SHAW:	Yes, that is (c), S(c).
WILSON J:	But (c) is limited to:

a rebate of charges calculated in accordance
with Clause 13 hereof.
Is that the same - does that include a rebate of future
payments of hire?

MR SHAW:	I am sorry, Your Honour.
WILSON J:	The rebate of charges referred to in clause 13.
MR SHAW:	It includes interest, Your Honour, at 13(a).
WILSON J:	Yes.
MR SHAW:	Then at pages 226 at the bottom and going over to

228, His Honour refers to the fact that the contract

DEANE J:	I do not follow your answer to Mr Justice Wilson.
MR SHAW:	What I was saying, Your Honour, is that - - -

DEANE J: Unless interest is defined as including hiring charges.

MR SHAW:

What is provided, Your Honour, is that if one goes over

to - Your Honour was perfectly right.

DEANE J:

Well, I was not suggesting you were wrong - I just did

not follow what the answer was.

MR SHAW:

Your Honour was right not to follow ..

Clause 13(a)

says:
Where Section 3 of the Schedule overleaf has been
completed - - -

and so on, section 3 is not completed. It says in (b): In any other case the amount stated in the
Schedule overleaf as terms charges when
multiplied by the sum -

as a whole, and then provides the formula. At the
bottom of page 228, after referring to the fact that

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the contract is a contract of adhesion, he says,
right at the very last line on the page:
In my opinion the provision under consideration
is clearly capable, in certain circumstances,
of producing to the owner at the expense of the
hirer a benefit which exceeds any loss which
could result from the termination of the
contract and the repossession of the vehicle.
It cannot therefore be regarded as a genuine
pre-estimate of such loss and is penal in
character.

So the provision is stated to be penal because. so it
is said, the formula produces:~
to the owner at the expense of the hirer
a benefit which exceeds any loss which
could result from the termination.

Now, that benefit is a benefit which arises, in our
submission, simply from ownership of the vehicle, in
case it does arise, andthe clause does not provide for
recovery of an amount in excess of any loss which

might be suffered. Nor is the benefit at the expense
of the hirer when properly understood and what
His Honour is saying is that one can have a penalty where there is a provision in the contract which

provides for termination and which fail to provide
upon termination that if the owner receives more,
taking into account the value of the vehicle, than he
would have received if the total rent had been paid, and
if the contract fails to provide that he must pay
that so-calleq surplus to the hirer and fails to
give the hirer the right to sue for it, then the
absence of that provision amounts to the imposition of
a penalty on tlie hirer.

Now, that conclusion is one which was not

accepted by His Honour Mr Justice Von Doussa. If I
might go over to page 236, he there refers to the

question of the correct comparison. (Continued on page 12)

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Esanda(2)

MR SHAW (continuing): At line 41 says this:

Secondly, counsel demonstrated that if a
termination under Clause 6 occurred close to the
end of the hiring when the defendants had paid,
say, all but one or two instalments, the plaintiff
would recover virtually all the rental payments -

in effect, virtually the whole purchase price - and
as well retain ownership of the prime-mover. Although
by that stage the value of the prime-mover would have

depreciated, it would be far from valueless. On
such a termination the defendants would lose their

"equity" in the prime-mover. The plaintiff would gain
an unexpected windfall at the expense of the
defendants. It is submitted that this possibility

requires the formula for the recoverable amount
to be construed as a penalty.

He then refers to the similarity of the formula with
the formula in IAC (LEASING) V HUMPHREY and at line 23.
says:
In my opinion, the fact that the Offer to

Hire is a hire purchase agreement in which the
rental payments anticipate the progressive payment
in full of the purchase price does not provide a
ground of distinction.

That is a distinction from what was said in IAC (LEASING)
V HUMPHREY.
Until the rental payments were fully paid, the
transaction remained one of hire. The hirers had
the option at any time of terminating the agreement.
They were under no obligation to continue the
hiring for the full 36 months. A variety of
circumstances could have arisen which made it
beneficial to the hirers to terminate the hire.

And then he gives an instance and says that if that happens the recoverable am:runt under Clause 5 would

become recoverable and points out at line 10 that
in certain circumstances that might provide an
excess which was a benefit to the owners and says,
in our submission, correctly:
That is a well recognised consequence of
a hire-purchase agreement of the type in
question -

He refers to HELBY V MATTHEWS & OTHERS and what was
said by Arthur Deane before he became a member of
the Supreme Court of Victoria, in an article on
the Victorian HIRE-PURCHASE AGREEMENTS ACT, which
was the first hire-purchase Act in Victoria.
His Honour goes on:
At common law where an early termination is
brought about by the owner following a
breach by the hirer the same consequence may

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follow. The owner may receive a similar
windfall benefit. It was to overcome the
consequence that an owner might receive a
windfall benefit that the HIRE-PURCHASE
AGREEMENTS ACT 1931 (S.A.), s.4(2)(c),
provided that the excess upon a termination
on default by the hirer was to be paid to

the hirer. However, in the case of a
voluntary return the excess still remained
with the owner.
And His Honour goes on to say that that remained the
position under the later Act. His Honour goes on:
Assuming for the moment that the formula

for the recoverable amount is a reasonable
pre-estimate of damage when applied to
circumstances where an early termination
resulting from a breach of the Offer to Hire
causes actual damage to the owner through the
loss of its bargain, the formula cannot,
in my opinion, be rendered void or
unenforceable as a penalty by the fact that
in other circumstances, where the formula
requires no payment, the owner may on an
early termination receive a windfall benefit.
(Continued on page 14)

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MR SHAW (continuing):
If on termination the payments already
received by the owner plus the value of
the goods at the time of repossession
exceed the total of all rental and other
moneys payable for the full period of
hire suitably rebated to the date of
termination, there is no actual damage

suffered by the owner. The formula does
not in the event require the hirer to
make a further payment. In my view, a
clause that requires no payment in a
particular situation cannot in that
situation be penal.
And His Honour refers to a well-known passage in the
opinion of Lord Dunedin in the DUNLOP V NEW GARAGE
case:
"The essence of a penalty is a payment
of money stipulated as in terrorem of
the offending party ... " -

the emphasis in the reference being that it is the

payment of money stipulated~and so on. His Honour
goes on -
The hirers' position would not be improved
be declaring the "recoverable amount" void

or unenforceable as a penalty. The
owner would still retain the windfall
benefit which followed as an ordinary incident of a hire-purchase agreement
regulated by the common law.

Then His Honour goes on to deal with a criticism
of the formula which arose because it refers to the
wholesale value of the vehicle and to hold that

that did not constitute the formula a penal one,

as had been recognized by the majority at page 226,

lines 5 to 16. So the sole ground of difference
between the majority and minority was this question
about whether or not something was a penalty when the
criticism lay not in what it imposed but in what it
failed to deliver.
If I might now go to the outline of our

submissions, which I shall endeavour to follow
more or less, paragraph_l simply sets out the
final passage in the judgment of His Honour

Mr Justice King where His Honour comes to the
conclusion that the provision is a penalty, and
of course, that has to be read in the light of the
earlier passages that we referred to, but that short
passage does, in our submission, neatly state what
His Honour saw as the ground of his decision-

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the reference 1 to 6 means lines 1 to 6. The
next part of our outline consists in a number of submissions which the Court might well regard as trite. If they did, we have no objection to that,
so long as they regard them as also right, and they
are, in our submission, right, and the reason they are
referred to is this, that one of the reasons why
His Honour Mr Justice King came to the conclusion he
did was, or arose~ in our submission, out of a failure
to appreciate the context of the law in which the
question arose and to fail to lift his eyes from
asking himself is it penal, by that I mean, is
it a genuine pre-estimate of damage and if it is
a genuine pre-estimate of damage it must be penal,
and that is that, and in our submission, if the

question is stated like that propositions which
would be true if properly understood became untrue, and
it is to understand what the proposition is about,
payments in terrorem and genuine pre-estimates
of damage mean, that these other areas of the law
are referred to in our outline.

BRENNAN J:

Mr Shaw, can I just say I am still having some

difficulty in coming to grips with the notion of
pre-estimates of damage under clause 6. It seems
to me that there are many provisions in clause 6
which have nothing to do with breach or damage.
(Continued on page 16)

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MR SH.AW: Yes, indeed.

BRENNAN J: And, in that event, are we concerned - say, for

example, an indictable offence is conrrnitted. It
may be triable surra:narily but none the less an
indictable offence is conrrnitted these consequences

follow. How do we, then, fit the operation of
clause 6 into the framework that you are dealing
with in clauses 2 and 3 of your - - -?

MR SHAW:

Your Honour, there is, perhaps, another side to

what You· Honour has just asked me. There is,
at the bcttom of the case, a twofold difficulty

about the idea o·f pre-estimates of damage.

His Honour comes to the conclusion he comes to
by reference, not to any element of damage at all.

He refers not to damage but benefits so that in

that sense His Honour, too, goes outside the idea

of damage but it is perfectly true that clause 6
operates in a number of circumstances in which there

has been no breach of the contract at all by the

hirer just as clause 5 operates in a circumstance

in which there has been no breach and,in our submission,

the way in which the question comes in is this:

although clause 6 provides for payment of

an agreed amount upon termination and, although

there is, to speak generally, no obstacle to

any provision in any contract saying, "I agree to

pay you X" - the parties may contract to do that

for no consideration under a deed or for little
or inadequate consideration under a contract not

under seal and, if they do, to speak in a general

sort of a way, the law will enforce the promise
and no question arises of the law saying, "I will
not enforce the promise so long as there are present
either the element of consideration which is necessary
to give rise to an enforceable obligation or a seal."

However, it has been said that if an amount is
payable directly on breach, then that amount whatever
it may be will not be recoverable if the amount is
fixed in an attempt to inflict punishment on the
person who has the obligation if he does not observe

it and in order, simply, to secure performance
of that obligation by the threat of greater pain if the obligation is not observed and it has been said
in SHEVILL and AMEV-UDC V AUSTIN that if one has a
provision in a contract which provides for a payment
on termination of the contract, if the termination
arises in some circumstances in consequence of a
right given to terminate by the contract, that right
arising out of a breach by the other party, then
the payment, although agreed to be made upon
termination, is nevertheless subject to the rule
against penalties because the obligation to pay,

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although it arises directly out of the termination,
arises indirectly out of the breach but, in those
circumstances, it is said that one tests whether
or not the amount is penal in character by
comparing the amount payable with the amount which
would be payable as damages in consequence of an
accepted repudiatory breach or by comparison with
the loss flowing from termination or loss of the
bargain.
(Continued on page 18)

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MR SHAW (continuing): Now, that being so, although it is

true that the amount which is payable is not damages
but an amount simply payable on an event - that
event being termination - and there being no
obstacle to the parties agreeing between themselves
how any losses arising from that event shall
be distributed between them - in the sense that
one party may agree to bear them all and the
other party none, or there may be different
adjustments made - nevertheless, one has to ask
oneself in respect of an amount, "Does an amount
which is provided to be paid, does that amount
exceed the loss which arises from termination?"
because if it does it may be penal in character.
The way in which the question of damages comes
in is because of the use, in the rule against
penalties, of damages as a measuring stick and
the reference in the rule to pre-estimates
of damage. That is how the matter comes in,
it is submitted.
Your Honours, there is some, what one might

say, "logical tension", I think Your Honour
Mr Justice Deane said in AMEV V AUSTIN or perhaps it was His Honour Mr Justice Dawson. In either
case there is some difficulty in fitting the
way in which the matter was approached in SHEVILL
with the clear acceptance by the Court of the
test of the kind that I have outlined, that is
reference to loss on termination. But that seems
to be the way in which the two lines of authority
are reconciled but we would not for a moment
suggest that Your Honour was wrong; rather we would submit that Your Honour was right when
Your Honour says, "Look, that amount is an agreed
amount payable under the contract on ·an event
which is not, innnediately at any rate, a breach".

It is an amount agreed to be paid on

termination and what it seeks to do is to distribute

the consequences of that termination in the
circumstances, in this case, to the hirer.

(Continued on page 19)

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MR SHAW (continuing):

The first proposition which is in

clause 2 of the outline is simply that there are
many clauses which do regulate the amount of
damages which may be recoverable on breach which
are enforceable and are not true pre-estimates of

damage. The first case, that is DAVIS V PEARCE
PARKING, is simply a case which says that a party may agree that if the other party commits a
negligent breach of contract he will not be entitled

to recover any damages at all. Now everybody
knows that that may be agreed to. Everybody knows
that when courts are faced by clauses which are
said to have that effect they scrutinize them
closely and give them restricted interpretations.
But no-one doubts, as is clearly stated in the
passage that it is referred to, the parties may
agree to that if they want to and have clearly

stated that they want to. So that in those
circumstances one has a clause which clearly enough
confers a benefit in relation to damage on one
party and a detriment on the other, but clearly, too,
that is not a penalty. And yet one would have
thought that His Honour Mr Justice King's reasoning

would require him to say that was a penalty. He
obviously could not.

SUISSE ATLANTIQUE, (1967) 1 AC 361, is

a well-known case. I do not refer to it for the
usual reason. What happened in that case was that
the charter party had provided that damages for
detention should be calculated in all circumstances
under the demurrage clause and it was held that
that clause limited the amount of damages recoverable
to the agreed amount, or when I say "limited", fixed
the amount of damages to the agreed amount. And_at
page 395, Viscount Dilhorne, just above the letter D
says:
In my view, the demurrage provisions are not to be regarded as limiting the

respondents' liability.

By that he means, they do not impose an upper limit
and leave the damages to be proved up to that limit.
What he means, as appears from the rest of the passage,
it fixes the damages at an agreed amount. His
Lordship goes on:
In the circumstances of this case it
lll?Y be that the amount of the demurrage
payments bears little relation to the
loss the appellants claim to have suffered.
In CHANDRIS ..... Mr Justice Devlin said that
the sum produced by demurrage "is generally
less than damages for detention" and that a
demurrage clause is merely a clause

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providing for liquidated damages for
a certain type of breach.
So that again it is clear enough that one may
have an agreed damages clause which is not a genuine
pre-estimate of damage and everybody knows it is
not a genuine pre-estimate of damage and it may
nevertheless be completely enforceable and the last
example is, I think, the case which is generally

known as SECURICOR NO (2) and that was a case
in which the clause was a clause which limited the
amount of damages in the sense that Viscount Dilhorne
referred to, namely, fixed it at a low amount - in

that case it was a 1000 pounds. And the innocent
party was entitled to recover proved damage up
to but not in excess of a 1000 pounds, although the
damage which in fact flowed from the breach, which

was the loss of a vessel, was greatly in excess
of the 1000 pounds which had been fixed.
So that when one sees the propositions about the contrast between amounts fixed as recoverable
in terrorem and amounts fixed as genuine pre-estimates

of damage, one must not be deceived into thinking
that any amount which the parties know is not a
genuine pre-Pstimate of damage will be uneforceable
because that is clearly not so.
(Continued on page 21)

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MR SHAW (continuing):

The second proposition in clause 3 of

the outline refers to circumstances in which benefits
may properly accrue to innocent parties and in
which everybody knows that benefits will accrue
following on breach by the other party and yet the
clauses providing for those benefits are held to

be valid. The first example is the simple example
of the forfeiture of a deposit on rescission of a
contract of sale of either land or goods, for example.

That is HOWE V SMITH. The second set of examples
are contracts for sale,in the first case of land and,
in the second case, of goods which are rescinded
following breach by the purchaser: The consequence is that the vendor regains title and, if he resell
and if his resale is at a price in excess of the
contract price originally fixed in the contract between
him and the defaulting party, nevertheless he, the
vendor, may retain that surplus and that is simply -
everybody knows that. Perhaps not everybody, but lots
of people know that.
That is the land; that is the consequence of that

provision in the transfer of land - Table A of the

seventh schedule. The consequence is stated at that
page in VOUMARD, and the authority cited is, amongst
others, EX PARTE HUNTER, where Lord Eldon says that

that is so. The next reference is to the SALE eE GOODS
ACT, and WARD V BIGNALL, where the same consequence is
said to follow in the case of goods, in consequence
of the provisions of section 47 of the SALE OF GOODS ACT
which, of course, has its parallel in other States

and in the English Act. Then a point is made which
wasmade by His Honour Mr Justice Von Doussa at page 238.
All the commentaries on the early hire purchase

legislation state that, in default of legislation, the
very consequence which His Honour the Chief Justice
rejects was well known to follow and one of the major
purposes of the hire purchase legislation was to
provide a legislative remedy for that situation. If
I might perhaps refer to Dean in 10 ALJ 432, His Honour
says - I suppose he was not then His Honour, but later

became His Honour:
The view which the law has taken of the usual
hire purchase agreement has always refused to
recognise that the hirer had any interest in
the chattels hired until he had completed all

his payments. The usual form of the agreement
made any other view impossible. In addition,
those who prepare these agreements on behalf
of the owner have kept pace with judicial
decisions so that the rights of the hirers

were not given much consideration. The
advent of the finance company has aggravated

this tendency. No recognition has usually been
given to the view that it would seem just that
as the hirer continues to make his payments
he should acquire rights commensurate with the

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amounts paid, and the rights of the owner

should correspondingly dwindle. Every
lawyer is familiar with cases in which a
hirer, who has paid the greater part of his
purchase price, has by misfortune or mistake
made a triffling default in punctual payment
and has had his goods seized and thereby lost
both the goods and the money.
Then he goes on to say that legislation has been passed to remedy that and goes on to say, in the next paragraph, how the Victorian Act does it.
(Continued on page 23)

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MR SHAW (continuing):

The other citations are simply

parallels in other States. So that the consequence

which the majority in the Full Court saw as a consequence am::)Unting to a penalty is in fact a
consequence well recognized by commentators
and by the legislatures as one which was to find
a remedy, if at all, only in legislation and, of
course, there is no relevant legislation here.

Then, we go on to refer to the historical

source of what is now, apparently, a conunon law
rule about penalties and provisions providing for
their recovery, they being unenforceable or void.
We point out, as the examination of the question

in the judgment in O'DEA's case, that the in all the judgments in AMEV-UDC V AUSTIN, and
historical foundation of the doctrine was the
inequitous power to relieve against penalties or

forfeitures. We suggest that that being so,
it would be surprizing if the rule,which has now
become a rule at law, could apply in circumstances

in which equity could never give relief. We submit
that the circumstances here are,in fact,just such
circumstances because there are no circumstances,
it is submitted, in which relief could ever be
given, whatever stage of the historical development
one looks at, against recovery of the recoverable
amount which is provided for in clause 6. That is
because whenever any amount is recoverable, that
is because one has come to a positive answer in
working out the sum and there is therefore
recovery of a real loss.

So far as the provision goes in providing for recovery of the recoverable amount, if one comes to a negative answer, because there is
what has been called a surplus windfall, or
whatever, to the owner, there could be no relief
against recovery of the recoverable amount because
ex hypthothesi there is not any which is recoverable.
There might perhaps be relief against termination

nf the hiring, forfeiture of all sorts of things -
there might - but not against recovery of the
recoverable amount. It is submitted that that raises

very substantial doubts about whether the historical foundation of the rule can provide any justification
for the conclusion which has been come to by the
majority in the supreme court.
Perhaps I might say that the historical foundation

of the rule is extensively explored by the judgments
of the Chief Justice and Your Honour Mr Justice Wilson
and by the judgment of Your Honour Mr Justice Deane and

the judgment of His Honour Mr Justice Dawson in

AMEV-UDC V AUSTIN. Although different conclusions
were come to about what ought to be done in that
particular case, for present purposes, everybody
is agreed.

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The next proposition is a proposition

looking at the matter as a matter of English.
Perhaps if I could just hand this up to the Court.
It is a photostat of the page of the Oxford English Dictionary containing the entry relating to "penalty".
(Continued on page 25)

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MR SHAW (continuing):

It, I think, says nothing surpr1s1ng

and indeed uses words which find an echo in the
judgment of Mr Justice Mason and Your Honour
Justice Wilson in AMEV V AUSTIN.

WILSON J:

Which of the paragraphs do you think most

appropriate, Mr Shaw?

MR SHAW:	Paragraph 2, Your Honour.
WILSON:	I thought it might have been paragraph 3(c).
MR SHAW:	That is simply produced in order to make the first

sentence of paragraph 5 amount to more than a mere
asse~tion by me. What we would also submit is that
when one is speaking about penalties in the context·
of rule against penalties, one is really talking
about as the penalty, not the provision which contains
an agreement to pay a particular sum, but the sum
itself which may or may not be a penal sum, and if
that be so then, in our submission, as a matter of
English, it is surprising to say that something is

a penalty or provides for recovery of a penalty when

what it does is not, so far as is relevant,
provide for the recovery of anything, but simply
fail to provide that a payment should be made
by, in this case, the owner to the hirer.
We go on, in paragraph 5, to simply make that point at the end, that the real defect which the
Full Court founded its decision on is simply that there is no provision in the contract enabling the

hirer to sue the owner for the windfall, and our
submission is that that cannot be a penalty in any
ordinary meaning of the words, and by this we simply
mean to say it does not follow from that that the
rule against penalties does not go further than that,

but one ought to start off with the pre-disposition
to think that the rule is indeed a rule against
penalties and, if it is, then we would submit that

this extension of the rule extends the rule to
something which cannot, in any ordinary meaning
of the word, be a penalty.
We go on to say, what is more, if it was
suggested in any circumstances that equity could
relieve against forfeiture of the hiring, for example,
the contract does not purport to regulat that at all

and I suppose the other point about the ordinary·
meaning of English words is that - and this is a
point that I made to Your Honour Justice Brennan
earlier - it does seem odd to say that the provision
in clause 6 is a provision which fails to provide
a proper pre-estimate of damages, or damage, or loss,

when what is being said is it fails to make provision
for payment over of a surplus or windfall, or
whatever one likes to call it.

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Then in paragraph 6 of our summary we go on to
submit that in fact the authorities show that a
penalty can only be something which in its recovery

is penal. The first passage we refer to is in
DUNLOP V NEW GARAGE, (1915) AC 79, at page 86, in
proposition 2, the passage which is referred
to by Mr Justice Von Doussa, at the bottom of the page:
The essence of a penalty is a payment of money stipulated as in terrorem of the
offending party.

And passages by some of the other members of the

House of Lords have the same effect. In
LEGIONE V HATELEY, 152 CLR 406, at page 445, 1n
the joint judgment of the Chief Justice and
Your Honour Justice Deane, at the top of the page
Your Honours say:

(Continued on page 27)

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MR SHAW (continuing):

A penalty, as its name suggests, is
in the nature of a punishment for non-
observance of a contractual stipulation;
it consists of the imposition of an additional
or different liability upon breach of the
contractual stipulation ..... On the other
hand, forfeiture involves the loss or
determination of an estate or interest
in property or a proprietary right.

Then Your Honours go on to say, about half-way
down that paragraph, that there is:
a real distinction between "penalty" and
"forfeiture" -

but the terms have been used in a way which blurs

the distinction. Then we go to a series of statements
which have been accepted in England as correctly

stating the law. They are all either, or derived

from, statements by Lord Diplock. The first
case is ROBOPHONE FACILITIES LTD V BLANK,

(1966) 1 WLR 1428 or (1966) 3 All ER 128. At

page 141, about four lines from the bottom, of Appeal, said:
The right of parties to a contract to make
such a stipulation is subject, however,
to the rule of public policy that the court
will not enforce it against the party in
breach if it is satisfied that the stipulated
sum was not a genuine estimate of the loss
likely to be sustained by the party not
in breach but was the sum in excess of
such anticipated loss and thus, if exacted,

would be in the nature of a penalty or punishment
imposed on the contract-breaker.

So, it is a sum which, if exacted, would be in
the nature of a penalty or a punishment.
His Lordship goes on to say that the rule against
penalties ought to be restricted in its application
and parties should be left free to make contracts
in the terms they wish and that the Court should
not be astute to strike down penalty clauses.
Between the lettes Hand I, His Lordship says:
The onus of showing that such a

stipulation is a "penalty clause" lies on
the party who is sued on it.

And.then he says that you can satisfy that 1n
various ways.

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The next reference is EXPORT CREDIT GUARANTEE DEPARTMENT V UNIVERSAL OIL PRODUCTS.

That case
turned, in part, on acceptance of statements
of principle by Lord Justice Diplock in a largely

unreported case. EXPORT CREDIT GUARANTEE is

in (1983) 2 All ER 205. At page 212,
Mr Justice Staunton at first instance - the
report, in fact, contains a report of the judgments
both at first instance, in the Court of Appeal

and in the House of Lords. At page 212 there
is reference to what was said by Lord Justice Diplock
in the PHILIP BERNSTEIN case and, just above the
letter C, a quotation commences from His Lordship's
judgment:

(Continued on page 29)

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MR SHAW (continuing):

'In the ordinary way a penalty is a sum
which, by the terms of a contract, a
promiser agrees to pay to the promisee
in the event of non-performance by the
promiser of one or more of the obligations
and which is in excess of the damage
caused by such non-performance. Where
there is such a stipulation in a contract,
then the question arises whether that
provision is a genuine pre-estimate of
the damages which will be sustained on
a breach, in which case it is enforceable,
or whether it is a penalty, in which case the court will grant relief against it and refuse to allow the promisee to recover more than
the actual damage which he has sustained.'

And, at the letter G, His Lordship says:

'The ordinary rule which the courts
apply is that contracts should be enforced,
pacta sunt servanda, unless they can be brought within that limited category of cases in which, for reasons of public
policy, the court refused to give effect
to the agreement of the parties. One
limited class and well-known class is the
class of penalty, but up till now it has
been restricted to cases where there is a
prior agreement by the parties to the
contract as to an amount to be paid by a
party in breach to the other party in
respect of that breach.'
And then. His Honour goes on to say that relief is
not to be given against contract simply because they
are improvident and, at page 215F,

Lord Justice Waller,in the Court of Appeal, cites the beginning of the passage which was cited by Mr Justice Staughton below and accepts it and, at page 217, Lord Justice Slade, between the letters
Hand I, refers with approval to what is said by
Lord Justice DipLock in the PHILIP BERNSTEIN case and which was cited by Lord Justice Waller and goes on to say, beside the letter J:
It is implicit in this statement of principle that, in the ordinary way, a penalty is a
sum which, by the terms of a contract made
between A and B, A agrees to pay to Bin the
event of non-performance by A of one or more
of A's obligations under that contract with B,
and which is not a genuine pre-estimate of the
damage which is likely to be suffered by Bin
the event of such breach.

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And then. at page 224A, Lord Roskill, in a judgment concurred in by the other members of the House of
Lords, says this:
My lords, one purpose, perhaps the
main purpose, of the law relating to
penalty clauses is to prevent a plaintiff recovering a sum of money in respect of a
breach of contract committed by a defendant
which bears little or no relationship to
the loss actually suffered by the plaintiff
as a result of the breach by the defendant.

And then he goes on at the letter D to say it was wicked of anybody to rely on PHILIP BERNSTEIN because it was unreported but, nevertheless, what
Lord Justice Diplock says is correct.
In PHOTO PRODUCTION LTD V SECURICOR TRANSPORT

LTD, (1980) AC 827, Lord Diplock, in a passage which commences at page 848, commencing in the
paragraph beside the letter D, analyses obligations
under contracts into primary obligations, secondary
obligations and anticipatory second obligations, an
analysis which is helpful or not, depending on whether
one likes that sort of thing.

(Continued on page 31)

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MR SHAW (continuing): At page 850, beside the letter E,

His Lordship says:
My Lords, an exclusion clause is

one which excludes or modifies an
obligation, whether primary, general
secondary or anticipatory secondary,
that would otherwise arise under the
contract by implication of law. Parties
are free to agree to whatever exclusion
or modification of all types of
obligations as they please within the
limits that the agreement must retain
the legal characteristics of a contract;
and must not offend against the equitable
rule against penalties; that is to say, it
must not impose upon the breaker of a
primary obligation a general secondary
obligation to pay to the other party a
sum of money that is manifestly intended
to be in excess of the amount which would
fully compensate the other party for the
loss sustained by him in consequence of
the breach of the primary obligation.

So all the statements of principle look to payment of the penalty as an essential characteristic of
it. And if I could perhaps add to those citations,
a statement by Lord Justice Denning in STOCKLOSER V
JOHNSON, (1954) 1 QB 476, at page 488 to 489. At
the very end of the first paragraph of the judgment,
His Lordship says:
There is, I think, a plain distinction between penalty cases, strictly so called,
and cases like the present.
It is this: when one party seeks to

exact a penalty from the other, he is
seeking to exact payment of an extravagent

sum either by action at law or by

appropriating to himself moneys belonging to the other party, as in COMMISSIONER OF

PUBLIC WORKS V HILLS. The claimant
invariably relies, like Shylock, on the
letter of the contract to support his
demand, but the courts decline to give him
their aid because they will not assist him
in an act of oppression.
Then he refers to COODEN ENGINEERING CO V STANDFORD. What the court below has done is to say that Antonio
would have suffered a penalty, not only if the
pound of flesh were taken from him, but if Shylock
got fat in consequence of the contract. In our
submission, that is a very odd suggestion and is not

one which accords with authority at all. Then in

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paragraph 7 of the summary we simply make the
point that if the test is to be applied, the right
comparison is with loss on bargain. I shall not
explore that any more then simply to state it.
It was something accepted on all sides below and has

the approval of this Court in AMEV V AUSTIN. And
then in the last proposition we refer to the
fact that, as is clearly established by
HELBY V MATTHEWS, the contract here remained a
contract of hiring until the option was exercised
and anyway, once the contract of hiring was terminated,
whatever interest the hirer had in the goods, if he
had any, which he did not, but if he did, whatever
he had was gone - it was over, the goods were the

owners. And, in our submission, any benefit the
owner derives from that ownership cannot be a penalty.
It derives simply from his ownership which, as we
would submit, in this case he had never surrendered.
(Continued on page 33)

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MR SHAW (continuing):

The parallel is strictly, in our

submission, if one has to have a parallel, with
the case of the sale of goods or land where the
contract is brought to an end, the interest of
the purchaser ceases and the owner resells. If
he does not resell and there is a surplus, and
the land is more valuable, he is entitled to keep
it, no question of penalty arises. The context
is not one of penalty at all. All one has, in
our submission here,is an agreement in a
certain event that the hirer will bear the
consequences of termination and the amount is
not fixed in a way which renders any payment
possible to be made under the clause in excess
at all of the loss arising from termination.

BRENNAN J:

Mr Shaw, if one looks at this,as you say it

should be looked at, as a HELBY V MATTHEWS contract,
here is a leasing by an owner of a chattel for
a stipulated time at a stipulated monthly rental.
During the period of the rental there is a

termination of the contract and according to
clause 6 the amount that is then paid is all
the rentals as to be paid for the whole of the
period, though the lessee does not at that time
have possession of that which he was paying rental

for. Now, if then one leaves out of account
S(b), that is the value of the goods, would you
contend that the clause. could be supported?

MR SHAW:

No.

BRENNAN J: Then we come down to this, do we, that clause S(b),

the value of the goods, is regarded as security for
the payment of the whole of the rental?

MR SHAW:	No.
BRENNAN J:	No?

MR SHAW:	What there is is a hiring with an option.
BRENNAN J:	We can neglect the option, can we not?
MR SHAW:	Yes. The clause says that if the hiring is
determined an amount is to be paid by the hirer
calculated in a certain way.
BRENNAN J:	But the way is for the payment of all the rent after the period when the hiring was terminated?
MR SHAW:	Yes, making allowance for the value of the goods.

BRENNAN J: Yes.

MR SHAW:	And in those circumstances, it is submitted that
the consequence that is provided is that if, because

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the value of the goods is too low,the owner will
not receive what he would have received if the
hiring had gone to its conclusion, then an amount
has to be paid to take into account the value of
those rental payments, plus the value of the

goods. But if one - - -

BRENNAN J:	Why should the loss then be the hirer's loss in those circumstances?
MR SHAW:	Because it has been agreed, Your Honour.

(Continued on page 34)

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BRENNAN J: Is it an actual loss that he suffered?

HR SHAW: It is a loss in prospect, yes.

BRENNAN J; ~t it is a question of a hiring agreement which he

has resolved to terminate.

MR SHAW:	That is perfectly true, Your Honour.
BRENNAN J:	And because he has resolved to terminate it, he

is no longer entitled to the rental from m:mth to month.

MR SHAW:	And the goods.
BRENNAN J:	And the goods.
MR SHAW:	Yes.

BRENNAN J: Well, he reduces the goods into his own possession

and he says, "I still want the rent from month to month."
Why should he have it?

MR SHAW:

Your Honour, what he says is - if one has, if one goes

back to

page 1 - "I am entitled to have the value of

the goods and there is to be a rebate of charges."

In our submission, as was said in IAC (LEASING) V

HUMPHREY, that provides a genuine estimate of loss

and is simply a distribution between the hirer and the

owner of the consequences of termination.

BRENNAN J: Did IAC have to do with future payments of rental?

MR SHAW:

I think so, Your Honour.

It is in 126 CLR 131 and

at page 140 in the last two lines of the page
His Honour Mr Justice Walsh says:
In the circumstances, I do not think that any question really arose as to whether the provisions in clause 4 for the payment of future instalments
constituted a penalty or not. But if, as a
result of the manner in which the parties

conducted the case at the trial, it must be

that this provision did not constitute a penalty. taken to arisen for decision, my opinion is

That conclusion would be required if the agreement ought to be construed in the way in which the majority of this Court construed the
agreement under consideration in LAMSON .....
that is, as an agreement to pay a total rent,
being the sum of the monthly instalments,
subject only to such adjustments as were
specified in the agreement.

And then he goes on and says something about that

construction. Then His Honour goes on:
But even if the agreement ought to be read as
one in which the liability under clause 4
to pay instalments, rebated as provided therein,

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at a time earlier than the time when they would have become payable in the ordinary course of time was, so far as is relevant,
a liability which would fall upon the
lessee in consequence of a breach of the
agreement, I am of opinion that the provisions
of clause 4 should not be held to constitute

a penalty. The fact that those provisions
could operate upon breaches varying greatly
in their seriousness and in their likely
consequences might suggest a conclusion that
the imposition of such a liability as a
consequence of a breach, followed by a
termination of the contract, could not be a

genuine pre-estimate of damage. Such a
conclusion might be warranted if the lessor
might regain the possession and the right of
disposal of the equipment when only a small
part of the term of the lease had gone by and
might do this in consequence of a minor breach,
which would really have little damaging effect
upon the value ofthe equipment, and if the
lessor might thus receive in those events a
large profit not related to any damage which had
actually been suffered. But the agreement
provides its own limitation upon the the
ability of the lessor to gain a large profit by
reason of the equipment being repossessed
after a relatively short period. If the period
has been short and in the equipment has not
suffered any substantial deterioration by reason
of the breach it is reasonable to suppose, looking
at the matter as at the date of the making of
the agreement, that the actual value at the date
of termination of the agreement will be
substantially in excess of the appraisal value.
That excess will be set off against the rebated
instalments which the lessee will be required
to pay. Expressing this in another way, it will
be only if it turns out in fact that there has

been such a depreciation in the value of the
equipment that this does not exceed the
appraisal value, that is, the value which has
been estimated as the value the equipment will
have at the expiration of the lease period, that
clause 4 will impose an obligation upon the lessee
to pay the ..... amount of all the instalments.
(Continued on page 37)

C2T22/2/VH	36	9/8/88
Esanda(2)

MR SHAW (continuing):
If the actual value exceeds the appraisal
valoe, the lessee will be relieved,
either wholly or in part, of his
obligation with respect to instalments
which have not yet become payable at the
date when the lease is terminated.
Your Honours, in AMEV V AUSTIN, 162 CLR 170,
at page 194, Their Honours Justice Mason and
Justice Wilson said:
Our rejection of the appellant's arguments
should not be taken as throwing any doubt
on the right of the owner or the lessor to
recover his actual loss on his early
termination of a hire-purchase agreement or
chattel lease, pursuant to a contractual
right, for the hirer's non-fundamental
breach, under a correctly drawn
indemnity provision.

Your Honour will see that in that passage but to a hire purchase agreement, and Their Honours
go on:
The validity of such a provision was
upheld in I.A.C. (LEASING) -

V HUMPHREY -
and is supported by the comment of
Gibbs CJ in O'DEA that "a lessor is
entitled to be compensated for the loss

which he is likely to suffer on the
premature termination of a hiring" -

and then refers to support for that to be found

for that in England and in SHEVILL, and if one
turns over, Your Honours, to page 197, in the
judgment of Your Honour Justice Deane, five
or six lines down the page, Your Honour says:
The second point is that, in determining
whether the amounts payable by the lessee
upon such termination are properly to be
seen as a genuine pre-estimate of loss
or as a penalty, relevant loss is not
restricted to the loss flowing
immediately and merely from the actual

breach of the contract; it includes
the loss of the benefit of the contract
resulting from the election to terminate
for breach -

C2T23/l/HS	37	9/8/88
Esanda(2)

then there is citation of authority in support
of that and Your Honour further develops that
point at pages 205 to 206 - the last paragraph
on the page, and going over to page 206 down to
the end of Your Honour's judgment. And in judgment
of His Honour Justice Dawson, he too accepts that
approach and at page 210, about half-way down the
page, His Honour says:
For in determining whether the liability
amounts to a penalty or not - whether it
amounts to a genuine pre-estimate of damage -
comparison is made not with the loss which
flows to a lessor from a default in the
payment of rental instalments, which is
confined to arrears of rent, but with the
loss which flows to the lessor upon
termination, which is the loss of his
bargain.

His Honour also, elsewhere in the judgment,

expands upon that. So that, in our submission,
there is substantial authority for the view that

that loss is indeed recoverable. We would submit
that -

GAUDR0N J: Does that mean, Mr Shaw, that there is no
necessity to take account of any mitigation or
any - perhaps that is the wrong word -
advantage which would normally accrue in the
ordinary course of the contractor's business?
You see, when you have loss of bargain damages
in the sale of land you bring in on one side the
value actually obtained or the value that could
be obtained.

(Continued on page 39)

C2T23/2/HS 38 9/8/88
Esanda(2)

MR SHAW:

Some sensible e~timate of the damage.

GAUNDRON J: This seems to suggest that you bring no similar

item into account in these cases. That is to
say nothing for the benefit of having the capital -
if it is relevant to look at the capital - when
the capital value of the truck came back into
your client's business.

MR SHAW: Clearly, Your Honour, our clause does provide

for that.

GAUNDRON J:

I am not too sure.

Your clause provides for

a rebate for accelerated payment of hiring less
the value of the truck.

MR SHAW:	And the value of the truck is to be taken into account, yes.
GAUNDRON J:	I am not too sure that I see any necessary

relationship between those two items as a calculation
referable to damage but, of course, that may

be neither here not there. At the end of the
day your client has, let us say, $20,000 with
which to go and make another bargain and that
does not seem to be taken into account.

MR SHAW: Your Honour, the position is, in our submission,

that parties can provide what they want in their
contracts subject, so far as is relevant, only
to the penalty rule and the penalty rule,again
so far as is relevant, is not the rule which
says relief may be given against the exaction
of a penalty but the rule which says if you hM1'e provided
for exaction of a penalty, that provision is
void or unenforceable, whatever it is. Obviously,
the question of relief could not arise here because
the circumstances are not such in which relief
is available because there is a positive result.

What one simply has is this circumstance

that, if one makes a calculation,one discovers
that it might be that in some circumstances,
not this, but in other circumstances, the owner
might end up with having received payments of
hire for a considerable period, say, under the
agreement, and also with, for some reason or
other, a very valuable truck which has not deteriorated
in value for some reason - say those sorts of trucks have become very valuable, or whatever

it may be. The criticism which is made is, "Well
look, your clause does not provide for payment
to the hirer of what is called, for present purposes,
a windfall or surplus", or however one might describe

it. The only question is,. "Could that possibly
be a penalty?" and our submission is it could
not because that is not what a penalty is and
these cases show it to be so.

C2T24/l/SDL	39	9/8/88
Esanda(2)

Of course, it is true that the hire purchase
legislation provided in a situation such as this
for payment of the surplus to the hirer and that
sort of provision will be found, for example,
in section 15 of the HIRE-PURCHASE AGREEMENTS
ACT, 1960, which I have just handed up, in

section lS(l)(a)(ii) and lS(l)(b). But it was
necessary that there be legislation in order
to produce that result and the criticism, and
the only criticism made by Chief Justice King

and Mr Justice Mohr is the failure to provide
this affirmative obli~ation on the owner to pay an amount to the hirer or, if you like, to give
the hirer a right to sue the owner in some
circumstances.
Now, in our submission, that is just something

which the rule of penalties has absolutely nothing
to do with and the absence of such a provision
cannot render a provision which, in other
circumstances, enables recovery of a sum to itself

be a penalty because in all circumstances in
which that is recoverable it represents, as the
authorities show, a proper distribution of actual
loss.
So we would submit that Their Honours went

wrong in a fundamental way; that what
Justice Von Doussa said was correct and that
the appeal should be allowed. If the Court
pleases.

WILSON J:

Thank you, Mr Shaw.

Yes, Mr Angel?

(Continued on page 41)

C2T24/2/SDL	40	9/8/88
Esanda(2)

MR ANGEL:

May it please. the Court, I hand up our written

submissions.

WILSON J: Yes, thank you. Yes, Mr Angel.

MR ANGEL: Thank you, Your Honour.

Your Honour, my learned

friend has referred to the agreement in question
and if I may start with that before coming to

our submissions. My friend has invited the
Court's attention to clauses 5 and 6 and I will not reread those. I do take the Court to the
schedule which is headed"Offer to Hire'and in
the right-hand column, we start with a cash price

of $44,000. The Court will see that to that has
been added the terms charges of $22,844.08 making

a total rent figure. The Court will also note
that there was no deposit paid in this contract.
The repayment scheme is then set forth on the
left-hand side where the rent instalments payable
during the hiring comprise 36 payments of an equal
sum. So, those payments represent both a proportion of cash price and terms charges.
If we then go to the conditions on the reverse side of the document, I take the Court to condition 2:
The deposit stated in the Schedule shall
constitute the consideration for the option
to purchase contained in clause 10.

Now, I have just directed the Court's attention to

the fact that there is no deposit. When we then
go to clause 10, it will be seen and, in our submission, it is very significant, that the
payment scheme is interwoven and is part of the

consideration for the option. The clause reads:
I may elect to become the owner of the goods by paying the total rent and
fulfilling my other obligations to you -

so the payment scheme is inextricably bound to the
option unlike some hire purchase contracts where
there is an option that is exercisable on a final
payment or some separate consideration but here
the consideration is inextricably woven to the
hiring. I will come back to clauses 5 and 6 a
little later.
May it please the Court, I take the Court to

paragraph 2 of our sunn:nary. That reads, whether
clause 6 is a penalty depends, amongst other things,
upon whether the recoverable sum under clause 5 is
a genuine pre-estimate of the appellant's loss
caused by the respondent's breach.

C2T25/l/SH	41	9/8/88
Esanda(2)

Now, we have deliberately put in there,

inter alia. We say that is not the only test
and we submit that my friend's submission about
the restrictive nature of the law of penalties
is,with respect, not in accord with O'DEA's case,
with AMEV and with FINANCINGS V BALDOCK and
CAMPBELL DISCOUNT V BRIDGE.

(Continued on page 43)

C2T25/2/SH	42	9/8/88
Esanda(2)

MR ANGEL (continuing):

We say that that restrictive view

of the law of penalties simply cannot live with
a more recent authority.
Secondly, in that paragraph we have referred

to loss and we have also referred to the breach
and, in our submission, it is very important
and a matter not always done, with respect, in
some of the cases to identify what loss we are
talking about and what breach. Now, as we say
in clause 3 of our submission, clauses 5 and 6
seek to enable the appellant to indemnify itself
against its loss of bargain in the event of any
breach, however trivial. Again, we submit that
that is significant and I will come back to it.
But, in our submission, the penal nature of

the operation of these provisions, bearing in
mind that the law of penalties is approached
as a matter of substance not as a matter of the
letter of the law, and there is plenty of authority
on that, we say that the operation of these clauses
is penal because of the interaction between the
retention of the past payments, part of which are
attributable to interest, part to principle and
part in consideration of the option; secondly,
the forfeiture of the option itself, the loss of
that option, combined with the additional payment

payable pursuant to clause 6. So, in our

pre-estimate of the loss may or may not exceed.

submission, it is not just the fact that the facets of the provision as a matter of substance.
In our respectful submission, that was the approach

of this Court in O'DEA. It was the substance of
the agreement, not the ~tter of it and such
matters as the failure to mitigate, that Your Honour
Justice Gaudron referred to, were taken into

account. They were taken into account by
Your Hounour Justice Wilson in O'DEA, but I will
come back to the detail of that later. So, the

fundamental parting point between us and the
appellants in this case is that the law of penalties
is not as restricted as my friend has submitted.

Then, in.paragraph 4 of our submission we

state what is a fairly obvious proposition, I think,
that apart from the contractual provisions itself,
as a matter of general law loss of bargain damages
can only flow from a repudiatory breach, a
fundamental breach or a breach of an essential term.
It is then in paragraphs 6 and perhaps 7 that we
come to the more controversial area of the case law.
So far as paragraph 5 is concerned, my friend has
not specifically mentioned this, but when leave was
granted for this appeal to proceed, a specific

C2T26/l/JM	43	9/8/88
Esanda(2)

ground of appeal claimed at the time was that the

breach was repudiatory. But the Court, as a
condition of granting leave to this Court, did
not leave that argument open to my friend and
the appeal proceeds on the assumption that the
failure to pay the instalments was non-repudiatory.
I just mention that.
I pass to clause 6 of our submission. Clause 6 which enables cancellation of breach on any term,
that is, enables cancellation outside the general
law of discharge by breach, does not thereby make
every term fundamental breach whereof sounds

in damages for loss of bargain. So, it follows
from that, in our submission, that the relevant
comparison, contrary to what Justice King held
in the court below, that the contrary comparison
is between the amount expressed to be payable,
which is around the mark of loss of bargain
damages, and the damage is recoverable for the
actual breach, which is the non-payment of the
rent.

So, we come back, in our submission, to

a comparison really - perhaps it is a question
of treat it as a question of causation, but we
say that this is consistent with SHEVILL's case,

AMEV-UDC and in O'DEA. wa say it is consistent with the majority in
(Continued on page 45)

C2T26/2/JM	44	9/8/88
Esanda(2)

MR ANGEL (continuing):

The only way, in our submission, the

appellants can get around this is for them to
submit that clause 6 of itself makes every term in
the contract fundamental. Now this was recognized
by Justice Wilson and the Chief Justice in AMEV,
that it could be drafted around, if you like, in
a passage my friend has already read to the Court,
that in a properly drafted provision this can be
accomplished. But our submission to that is twofold.
First, we say that this particular clause does
not accomplish that and secondly, that if on the
face of it it does it is bad for a penalty by

reason of that very fact in the circumstances. I
put that submission based on the discussion of
these matters in a paper delivered by Dr Francis
Reynolds in the text of Finn,'Essays on Contract':
This paper is chapter 6 in the book but is misnamed
chapter 7 in the index, I am afraid, and I hope
there has not been any confusion.
In our submission, the approach of Dr Reynolds

in this chapter may be usefully contrasted with
the more restrictive approach of Mr Goode in his
article in 104 LQR, in a case note on AMEV. But
we submit that Dr Reynolds has pointed the way in
this chapter and he is speaking about discharges
by breach as a remedy. And if I can take up his
article at page 189, under the heading "Indirect
Control of Exercise of the Right" - that is to

cancel for breach. And at pages 189 and more
particularly page 190, he discusses what he calls
indirect methods that courts have used - various
techniques, courts have used to stop the abuse

of cancellation for breach of contract. And he
refers to three basic techniques at page 190, the
third paragraph. There are at least three
techniques and he refers to the "condition warranty
technique~' Then he refers to the second technique
that he calls the "Hong Kong Fir case" and we note
that my friend has placed great reliance on

Lord Diplock in the course of his submissions. We

say Lord Diplock is, with respect, a little out on
a limb on his secondary obligations in contract.
We say that that approach really did not survive
the Holmes Pollock debate on whether there were
contractual obligations after termination.
But at all events that is another approach. That

was a more restrictive view and the courts following
that view said it was much more difficult to terminate.

(Continued on page 46)

C2T27/l/SR	45	9/8/88
Esanda(2)

MR ANGEL (continuing): Then, the third approach, he refers to

on page 191 at the last paragraph, whether the conduct
of the party was repudiatory. Then he, significantly,
in our submission, at the top of page 192 says:
Now, it may be assumed that the power to
treat the contract as discharged under the
second and third techniques can only rarely be

exercised unfairly -

that is because of the restrictive nature of the
ability to cancel, but he then goes on to say -
The first technique, however, potentially
allows a contracting party to escape from
the contract on a technicality - depending,
of course, on how ready the courts are to
detect conditions.

Then, over on to page 193, the first fresh paragraph, he

refers to other matters , - other ways the courts
have used to control contracts:

Waiver, estoppel, election and so forth.

And on the following page 194, having discussed indirect
methods and techniques the courts have used over the

years, he comes to the direct control method. He
asksthe question whether:
direct control on the exercise of contractual
rights is justified and practicable.

Then on page 195, this is the third paragraph:
These are isolated instances which suggest
that there may be room for a more general rubric
permitting the court to intervene in some cases.
There ahe other instances, which often use the
notion that a power shoul~ be exercised in good
faith and consistently with its purpose. If

it is thought that there should be the possibility
of such intervention on a general basis, the
first question is by what technique (if one
assumes a general statute to be unlikely) this
could be achieved. There seems little doubt that
some application or extension of the equitable
jurisdiction to relieve against the unconscionable
exercise of legal rights ..... would be required.
There is English precedent for this in the decision
of Justice Lloyd in THE ALASKAN TRADER, where he held that the right to refuse to accept a breach
and sue for a liquidated sum ..... was limited in
the last resort:
"There comes a point at which the court will

cease, on general equitable principles, to allow
the innocent party to enforce his contract according
to its strict legal terms."

C2T28/l/VH	46	9/8/88
Esanda(2)

MR ANGEL (continuing):

Then we invite the Court's attention

to the comment in footnote 55:
There are suggestions that the penalty rules might be reformulated along
s imi la r lines in CITICORP V HENDRY and
AMEV -

and we say that AMEV has taken the

law of penalties along that route. I will come

back to AMEV later. Then over on to page 196,
towards the end of that first paragraph there is
the sentence commencing half-way across the page:
This however does not mean such
equitable intervention is inadmissible

altogether, even in England; even

less so in Australia. I will not enter
into dispute on the question whether any
such jurisdiction should be associated
with that to relieve against forfeiture
and more generally with that regarding
the unconscionable exercise of rights;
or as to whether the jurisdiction to
relieve against forfeiture is confined
to the property rights and if not how much

further it goes. To do that one needs
to be steeped in equity to a degree to
which I have no pretence. My point here
rather is that, even when the problem is
viewed purely from the contract side,
there may well be situations where the
traditional role of equity can in some form
legitimately be invoked to modify strict
contract rights to a limited extent.

Just pausing there, in our submission, in the
present case, there are proprietary rights involved.
There is the immediate possessory right of the
hirer to start with, but we say that by virtue of

the option having the payment scheme as part of its
consideration that the loss of the option again is
forfeiture of a proprietary right, but

Dr Reynolds is going even further. He says even
if there are no proprietary interests at all
the court may still intervene, and we say that
AMEV is authority for that, properly understood,
and we say that the Chief Justice below has
overstated the position, but I will come back to

that. Then proceeding lower down on page 196:
The next question is whether the jurisdiction
should be applied only to contractual terms
which are conditions, or whether it should
be extended to express provisions, such as
cancelling and withdrawal clauses.

C2T29/1/HS

47

9/8/88

Esanda(2)	(Continued on page 47A)
MR Af-TGEL (continuing):	So, if I may come back to paragraph 6

of our surrnnary, first we submit that as a ma~cer
of construction clause 6 simply does not make
automatically every term a condition or fundamental.
I mean, some of the terms of the hire agreement,
for example, are such things as a change of address
without notification. But, in all events, we say
that even if, as a drafting technique, that has
been accomplished, we say that as a matter of
substance the Court would see past that and
nevertheless still approach the matter from the
same angle. But, in substance what is happening
here is there is a provision whereby the loss of
bargain damages or an equivalent can be had for
a very trivial breach and therefore the relevant
comparison is as we have stated it in paragraph 6
of our surrnnary.
Now, if I can take the Court to the appeal

book and in particular the judgment of the
Chief Justice at pages 223 and 224.

BRENNAN J:

Mr Angel, is it material to your argument that

clause 6 may be activated when there is no
breach at all?

MR ANGEL:

In our submission, that does not arise for

decision in this case. That is really covered,
Your Honour, in clause 1 of our submission, that if a provision provides for a payment both on
breach and in the absence of breach, the fact that
it is activated on breach and the claim is based
on breach is sufficient to attract the law of
penalties. Whether the aspect of the non breach
is a penalty is a question that does not arise
in this case. But the importance, in our submission,
is that it does not make fatal the argument that
penalties apply.

TOOHEY J:

Mr Angel, on your submission, does clause 6 fail

unless on its proper construction it gives the
owner of the goods no greater rights than would
the formula set out in paragraph 6 of your
submission?
(Continued on page 50)

C2T31/l/JM	49	9/8/88
Esanda( 2)

MR ANGEL:

I think I can answer Your Honour's question this

way, that we say clause 6 fails for a variety of
reasons. It is really a combination of 6, 7 and 8.
They are alternatives. First we say that - and our
most extreme position, we admit, is in paragraph 6,
that is, that the relevant comparison is as we have
set out.
If clause 6 is to be treated as collecting together all the provisions of the agreement as
essential provisions we, nevertheless, say it is
still penal and we say that in paragraph 6 of our
submission and 8.

TOOHEY J:	But why is it penal?
MR ANGEL:	It is penal if it is a condition for two reasons.

First, we say that because, as a matter of substance,
you look at the whole effect of the forfeiture, that·
is, the retention of the past payments, the nature
of those payments, the loss of the vehicle, the loss
of the option plus the payment under clause 6, that
that combination of factors renders the termination
an unconscionable burden upon the hirer and the
authority for that is O'DEA's case and, in particular,
Justice Murphy and Justice Deane at page 400, where
account was taken not just of the comparison between
damages and recoverable sum but the overall effect of
the transaction and whether it cast a burden on the
hirer, the party who lost the rights under the cancelled
contract.

TOOHEY J: Yes, I understand that. I rather drew from clause 6

the proposition, that is clause 6 of the submission,
that clause 6 of the agreement would be penal if it
went any further than making the equation that is
implicit in paragraph 6 of the submission. In other
words, if it did any more than provide for the
payment of money equal to the damages recoverable
for breach then, in your submission, it was penal.

(Continued on page 51)

C2T32/l/SH	50	9/8/88
Esanda(2)

MR ANGEL:	That is so, that is so.
TOOHEY J:	So, on that argument, you would not need to go as

far you had gone a moment or two ago to take into
account a whole variety of factors, including loss
of the vehicle, loss of the option to purchase, and
so on.

MR ANGEL:

That is so, that is so, and the Chief Justice in the

court below adverted to this. Our position in
paragraph 6 of our summary is our most extreme in
the sense of driving the law of penalties furthest,

in one sense, in the application of the rule. But
so far as whether, at the end of the day, it is a
penalty, we clearly come home, because one is
comparing the damages from the breach alone compared
to loss of bargain damages and, of course, they cannot
square. But then we have the intermediate position
in paragraph 7 of our submission which is dependent
upon clause 6 creating every provision a condition or
essential term.

Now, if I could take the Court to the

Chief Justice's judgment in the court below, at
page 223 of the appeal book, and this is a passage
read by my learned friend:
If Clause 6 can be justified at all as a
pre-estimate of recoverable damages, it can
be so justified only on the basis of loss of
bargain. It is expressed to apply,
however, to the retaking of possession of the
property in consequence of any breach of the contract ..... whether or not such a breach is repudiatory or fundamental in character. If therefore the relevant comparison is between the amount expressed to be payable under the formula in the contract on the retaking
of possession and termination of the contract,
and the damages recoverable for breach of
contract, the conclusion that the provisions
enbodying the formula amount to a penalty

is inescapable.

And that is what Your Honour Justice Toohey was just
speaking of. But, of course, the Chief Justice then
r~jects that as the relevant comparison.
It seems clear on the authorities, however,
that that is not the relevant comparison where
the contract authorizes the owner to retake
possession of the property and to terminate the

contract. The judgment of the judges of the
High Court in AMEV-UDC V AUSTIN put that point
beyond doubt.

We, with respect, do not accept that statement, because
if that were the case, the case would have possibly gone
the other way.

C2T33/l/VH	51
Esanda(2)
MR ANGEL (continuing):	We particularly rely on the fact

that in AMEV, Justices Mason and Wilson accept
that the damages in that case flowed from the

breach rather than for loss of bargain. And we
refer to the joint judgment at page 191 and in
particular the second-last paragraph, the last
sentence:
However this may be, it would not be
inconsistent with modern authority for
equity to condition its relief by imposing
on the obligor a liability to pay damage
which flows, not from the obligor's
breach of contract, but from the obligee's
act in exercising his contractual right
to terminate for non-fundamental breach.

So there is a basic acceptance of the proposition
that it is only where the breach is fundamental
that one gets back to this damages for
loss of bargain.

WILSON J:

Do not we say somewhere, or I may be confusing it

with another case, that a properly drawn clause
may nevertheless - - -

MR ANGEL:

That is correct and then in a dictum - with respect,

we say it is a dictum. Later in the same case
Your Honours do come to that point and if I can
take the Court now to page 193, in the last
paragraph after there is a reference to the policy
restricting parties to certain damages. If we go
down to just past half-way down that paragraph, the
sentence commencing "but" in the right-hand side
of the page:
But equity and the common law have
long maintained a supervisory
jurisdiction, not to rewrite contracts
imprudently made, but to r,elieve
against provisions which are so

unconscionable or oppressive that their nature is penal rather than
compensatory.
(Continued on page 53)

C2T34/l/SR	52	9/8/88
Esanda(Z)
MR ANGEL (continuing):

The test to be applied in drawing that distinction is one of degree and will depend on a number of
circumstances, including (1) the degree of
of disproportion between the stipulated sum and
the loss likely to be suffered by the plaintiff,
a factor relevant to the oppressiveness of the
term to the defendant, and (2) the nature of
the relationship between the contracting
parties, a factor relevant to the unconscionability
of the plaintiff's conduct in seeking to enforce
the term.
And then over on the next page there is the
paragraph previously read by my friend:
Our rejection of the appellant's arguments should not be taken as throwing any doubt on
the right of the owner or the lessor to recover
his actual loss -

his actual loss -
on his early termination of a hire-purchase
agreement or chattel lease, pursuant to a
contractual right, for the hirer's non-fundamental
breach, under a correctly draw indemnity
provision.

We note that that passage refers to the"actual loss'.
In the present case clause 6 purports, in a funny
sort of way, to give the owner a substituted
performance. But that is not what they are
entitled to. They are not entitled to performance
when they have cancelled the agreement. They are
entitled to their actual loss, that is, their
loss of profit from the bargain, which may not
be the same. They then go on to say:

The validity of such a provision was upheld
in IAC (LEASING) and is supported by the
cormnent of Gibbs CJ in O'DEA -

but again there is this thread ~unning through
that passage of whether - and at this stage we
say that that is just dictum in so far as they
say such a clause would be supportable, firstly,
we say, consistently with Dr Reynolds that a mere
matter of handiwork, with a pen does not get
round the law of penalties by merely creating
fundamental breaches out of any trivial breach of
the agreement. And, in so far as it can be correctly
drawn, we say that this clause does not achieve that

anyway. It has got to spell it out much more clearly.

TOOHEY J:

How could it spell it out on your approach,

Mr Angel, except by some sort of general proposition
empowering the owner to recover damages for the

C2T35/l/JM	53	9/8/88
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breach that had been committed ? It seems to me
to be implicit in your argument that a clause
like clause 6 could never have any sort of
specific formula providing for taking into account
of payments that had been made, payments that were outstanding, interest and so on, because
that formula always contains the risk that it
is going to be unduly harsh in a particular case.
(Continued on page 55)

C2T35/l/JM	54	9/8/88
Esanda(2)

MR ANGEL:: That is true, Your Honour, but the

difficulty of drawing a penalty clause that survives

is no reason for striking a penalty down. But
I am not quite sure whether Your Honour's question
is directed at the question of 11 breach or no breach"
or whether it is a fundamental or non-fundamental
breach or whether Your Honour is speaking more
of the question of comparing the loss flowing to
the recoverable sum stipulated.

TOOHEY~ I was not thinking of fundamental breach,

necessarily,

but I was thinking of breach.

MR ANGEL:

In our submission, in order to make every term

of a contract a condition, that has to be very
clearly spelt out.and the flexibility of the Australian
courts that is referred to by Dr Reynolds and which
he apparently admires compared with the more rigid
cases such as the LUNA PARK case, the treatment of Chief Justice Jordan of breach in that case
English position, in our submission, is accurate.
which is in tmst of the student textbooks where they
speak of the degree of seriousness of the breach,
to enable and warrant cancellation.
Generally the courts have had a very flexible

approach and, in our submission, in order to get
around that and to make the matter more rigid the
parties seeking to rely on such a clause has to

very clearly spell that out. In the clause here,

it does not say in express terms, "Every single
provision of this agreement, however breached,
whether accidentally or deliberately or otherwise,
gives a right of termination." It does not spell
it out.
But as I have said, if the Court is against

me on that, we say, in any event, the Court can
still look at the substance of the matter and get
around it by an application of a broader view of

penalties, the one adumbrated by Dr Reynolds.

DEANE J:	But, of course, you only get into the penalty area in clause 6 by treating the termination not as an event but as something tied to the breach and
as flowing naturally from the breach because if
the termination is treated as a distinct
event you are prima facie not in the area of penalties
at all.

C2T36/1/ND	55	9/8/88
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MR ANGEL: That is the view, I think, Your Honour put in dissent

in AMEV, with respect, but in our submission, that view - - -

DEANE J:

I think it is the view that Mr Justice Dawson put

more clearly than I did.

MR ANGEL:

I think both Your Honours did but, in our submission,

that is, with respect, not consistent with the
more recent case law and a broader view of
penalities. In particular, in our submission,
it is not consistent with FINANCINGS LTD V BALDOCK,
it is not consistent with the wider view expressed
in CAMPBELL DISCOUNT CO V BRIDGE and it - - -

DEANE J:

I was not suggesting that that view was correct.

All I was pointing out to you was that you get
into the area of penalties by, as it were, treating
breach and termination as the one process.

MR ANGEL:	Yes.
DEANE J:	But you are now trying to deny that by saying

termination does not or is not to be put with
breach in terms of working out what is a penal

consequence of it. I am suggesting to you that
there is an element, not an inconsistency but
an element of difficulty in what you are putting.

MR ANGEL:

In our submission there is no difficulty.

We

do not contest the legal right to cancel for
the particular breach, however trivial.

DEANE J:

But if you equate the cancellation with the

breach for the purpose of getting into the rule
against penalities, why should you then say they
are quite independent for the purpose of working
out what is and what is not a penalty.

MR ANGEL:

I would like to consider that over the lunch

break, Your Honour.

DEANE J:

That is probably because I am being obscure,

Mr Angel.

WILSON J: That might be a convenient time, then, Mr Angel.

MR ANGEL:	Thank you, Your Honour.
WILSON J:	The Court will adjourn until 2.15.

AT 12.45 PM LUNCHEON ADJOURNMENT

C2T37/l/SDL	56	9/8/88
Esanda(2)
UPON RESUMING AT 2.16 PM:
WILSON J: Yes, Mr Angel.

:MR ANGEL: May it please the Court, just before lunch break
I was dealing with paragraph 6 of our written sunnnary.

WILSON J: I thought you were dealing with my brother Deane.
:MR ANGEL:

Yes, well, I am happy to deal with that now. I
hope I understand the proposition. Whether one
joins or divides breach and termination has been
said to be a question of construction. If one
divides the two, we end up, in our submission, with
a result that we proffer in paragraph 6. If one
joins the two by making every term essential, that

is, making termination inextricably tied with
breach, we end up with a result that we proffer
in paragraph 7 and we say in either event, in

this case, it is still penal. Now, I am not sure
whether that answers Your Honour's difficulty.

DEANE J: Well, I think it attempts to deal with the difficulty,
yes.

:MR ANGEL: Well, that is our attempt, Your Honour. May i
take the Court, under paragraph 6 of our precis,
to a recent, or comparatively recent treatment of
this area by the Court of Appeal in the case of
LOMBARD NORTH CENTRJLV BUTTERWORTH, (1987) 1 All ER 267.
The Court will recall that this is the decision that
Mr Reynolds says was a bit formalistic but I
particularly take the Court to the judgment of
Lord Justice Nicholls at page 277. This was a
case where time was made of the essence in relation
to payments under clause 2 and there was, what
could be called, a general cancellation provision

of clause 6. (Continued on page 58 )

C2T38/l/SH 9/8/88

Esanda ( 2) 57

MR ANGEL (continuing):

The court held that clause 6 was

penal in its own terms, but that the effect of
clause 2, the time of the essence provision,
made the timely payments conditions and therefore
damages on the basis of loss of bargain were
recoverable, but be it noted not under clause 6,
as payable pursuant in the terms of the contract, but
damages at common law, and that is very

significant. In so far as the decision holds that
clause 6 was penal, in our submission it supports
us and I refer to page 277E:
In my view, applying the principle
enunciated in FINANCING LTD V BALDOCK
to this case leads inescapably to the
conclusion that in the absence of a
repudiatory breach cl6(a) is a penalty
in so far as it purports to oblige the
defendant, regardless of the seriousness
or triviality of the breach which led to
the plaintiffs terminating the agreement
by retaking possession of the computer,
to make a payment, albeit a discounted
payment, in respect of rental instalments
which had not accrued due prior to -

breach. Now, that, in our submission, is a fair
statement of the result of FINANCING V BALDOCK,
of AMEV, SHEVILL, and O'DEA, that it is penal,
and that is the approach of the Court, in our
submission, as a matter of substance, just looking
at the general effect of such a provision. In
support of that, also, we refer and rely on what
Your Honour Justice Deane said in O'DEA, 152 CLR 359.
We particularly rely on what Your Honour said at
page 400, though I will take perhaps initially what
Your Honour said at page 399.

(Continued on page 59)

C2T39/l/HS	58	9/8/88
Esanda(2)

MR ANGEL (continuing): Reading from the top of page 399:

Subject to what is said hereunder, the
principles applicable in deciding whether
a sum stipulated to be payable by one
party to a contract to another party upon
breach is recoverable as liquidated
damages or irrecoverable as representing
a penalty are, in my view, set out in
convenient form in the speech of

Lord Dunedin in DUNLOP ..... They need not

be repeated in detail. As Lord Radcliffe
commented in CAMPBELL ..... "the line of
demarcation is drawn in its simplest form ...
if one says that a sum cannot be legally
exacted as liquidated damages unless it is
found to amount to 'a genuine pre-estimate
of loss'" .... "if it does not amount to
such a pre-estimate, then it is to be
regarded as a penalty, and I do not myself
think that it helps to identify a penalty,
to describe it as in the nature of a threat
'to be enforced in terrorem'" ..... The question
is one "not of words or of forms of speech,
but of substance and of things".
And that quotation from Lord Davey in CLYDEBANK has
been repeated with approval over and again. Then,
over on to page 400, Your Honour Justice Deane
compes to grips with the particular case, and I will
read from the top:
In what is written above, I have omitted the statement to be found in many cases, including
Lord Dunedin's judgment in the DUNLOP ..... to
the effect that "the question whether a sum
stipulated is penalty of liquidated damages
is a question of construction". Properly
understood, that statement is unobjectionable:

whether or not a provision of a contract
imposes a penalty must be determined by reference

to the true operation of that provision. That
question must however be determined as a
question of substance which cannot be foreclosed
by statements of the parties in their agreement,
no matter how genuine they may be, as to their
intention in stipulating the sum. The parties
to an agreement may have subjectively intended
to make a pre-estimate of the damages in the
event of breach.

And it is the following sentence that we particularly
stress:
If, however, that pre-estimate is either
extravagant and unconscionable in amount in
comparison with the greatest loss that could
conceivably be proved to have followed from

C2T40/l/VH

59

9/8/88

Esanda(2)

(Continued on page 59A)

the breach or, judged as at the time
of making the contract, is unreasonable in the
burden which it imposes in the circumstances
which have arisen, it is a penalty regardless
of the intention of the parties in making it.

(Continued on page 60)

C2T40/2/VH	59A
Esanda(2)

MR ANGEL (continuing): Now, it is that latter alternative
that we say is consistent with the majority in
O'DEA and we say is applicable here but one looks
at the overall operation of the term, not just
the sum payable under clause 6, but the combination
of the forfeiture of the proprietory right in the
truck, the retention of the payments already made
that are not just hire payments but are tied
inextricably to the option plus the payment that
is exacted by clause 6. It is the operation of
all three in conjunction that we respectfully
submit makes it a penalty.
Then, lower down on page 400 in the second

fresh paragraph, Your Honour says:
The application of the above principles

to the present case leads to the conclusion
that the provisions of cl. 12 impose a
penalty. There is nothing at all in the
contract to suggest that those provisions
represent a genuine or a reasonable
pre-estimate of damages which Allstates
would sustain in the event of breach by
the lessees. They are applicable on the
occurrence of any default in the punctual
payment of an instalment of rent or of an
insurance premium or in the performance of
any one of a large number of terms and
conditions ranging from the trivial to the

serious. They could result in an unreasonable
windfall to Allstates and an unconscionable
burden upon the lessees in the event of breach
of the most trivial condition.

Now, we would submit that reasoning is applicable here.

WILSON J: Is it?

MR ANGEL: In our submission, it is.
WILSON J:	The provision for rebate of future instalments goes a long way to distinguish this case from O'DEA, does
it not?
MR ANGEL:	Your Honour, this case is distinguishable from O'DEA

in a number of features. First, it is a hire purchase
transaction and not a mere hire, to start with, so
there is an element, as the Chief Justice in the
court below said, an element of proprietory interest
in the property that is forfeited but, furthermore,
the rebate provision here only relates to the charges.
It does not relate to the overall hire.

C2T41/l/SH	60	9/8/88
Esanda(2)

WILSON J: But what about the allowance for the present value

of the vehicle?

MR ANGEL:

That gets down to an analysis of our paragraph 8

of our summary and we say -

WILSON J:	And you will come to that?
MR ANGEL:	We will come to that but we say that is inadequate

in any event because it only refers to the wholesale
value and not the best price reasonably obtainable.
So we say the clause fails on that ground also.

WILSON J:

You would not expect a finance company to go

into the retail vehicle market, would you?

MR ANGEL:

The only judge below who dealt with this question

of resale wholesale was Justice Von Doussa.

WILSON J: In any event, you are going to come to that.

I should not anticipate.

MR ANGEL:

We will come to that, yes, Your Honour.

I now pass to paragraph 7. of our summary
which is our mid-way position. This is premised
on the assumption that each term of the contract
is essential and that the loss of bargain damages

would be recoverable on termination. We say
nevertheless, in any event, that the clause is
penal and for two reasons: firstly, we say there
is an unconscionable burden by virtue of the
forfeiture and so on that I have previously referred
to, and we refer and rely to, in particular,
Justice Murphy and Justice Deane in O'DEA plus
the joint judgment of Justice Mason and
Justice Wilson in AMEV. We also rely on the
whole of the circumstances and the operation
of the contract as a matter of substance and
the nature of the relationship between the parties.
The relationship between the parties, of course,
was a matter that was particularly stressed by

referred to it as "a contract of adhesion", the the Chief Justice in the court below, where he
fact that it is is standard form contract, that
is an element, we say, that must be brought into
account.
(Continued on page 62)

C2T42/l/SDL	61	9/8/88
Esanda(2)

MR ANGEL (continuing):

We rely on the passages, and I will

not take the Court's time reading them, but we
particularly rely on the passages that we have
referred to in our summary. Before turning to my
friend's submissions I will complete our submission
by referring to paragraph 8 of the summary. If
my friend is correct and it just gets down to the
narrow question of whether the recoverable sum
in clause 5 is reasonably proportional to the
appellant's loss of bargain, in our submission,
the clause still fails to achieve that object.
First of all we point to the provision relating to
rebate, the fact that it only refers to the
value of the vehicle is allowed rather than the
charges and not to the overall hire payment.
best price reasonably attainable. In the latter
regard, to be compared with the remarks of
Justice Von Doussa in the court below, there is
the decision in UNIVERSAL GUARANTEE PTY LTD V
CARLILE of Mr Justice Sholl and I refer to that.
That is reported in (1957) VR 68. There are two passages in His Honour's judgment that are

relevant to this particular issue. The first is
at page 72 of his judgment and taking up at
the first fresh paragraph on page 72:
(Continued on page 63)

C2T43/l/SR	62	9/8/88
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MR ANGEL (continuing):

I was told by counsel that this was
the usual method by which finance
companies calculated in such cases the
value to be credited to the hirer.
For the purpose of calculating value, however, one must assume that the owner,
if he resells, will sell by the best
means and at the best price reasonably
available, and in this case no evidence
appears to have been given to explain why
the company could not itself resell by
retail, or by auction, or by other form
of private sale by advertisement or
otherwise; or whether, if it could not
resell except to a retailer, it could
not get better than the wholesale price.
Similarly, in the case at bar, there was simply no
evidence led by the appellant as to why it could not
get better than the wholesale price. I note in that
particular passage that His Honour seems to be
assuming an onus of proof on the finance company,
and we naturally accept that the general onus of
striking down a provision as a penalty is on the
person attacking the provision, but the onus, in
our submission, adverted to by implication in that
passage is really an evidentiary onus, that prima
facie, we say, there is no justification for only
crediting the wholesale, that it ought to be
justified somehow but simply here, in the case
at bar, as in UNIVERSAL GUARANTEE, there was no
evidence led on that.
The other passage in Justice Sholl's judgment

that we refer to is at page 82, right at the end

of the judgment, and the last concluding
paragraph of the judgment:

At the further hearing below, unless
the company is allowed to reopen its
case on the point, the value of the
refrigerator ought, I think, to be taken
to be the retail value, less the cost of

repairs and repossession charges. It may
be that the company could have shown that
the value to it was only the wholesale

value, but it did not do so. It may
be that from the retail value, if that
be adopted, further deductions ought to
be made.
But His Honour clearly proceeds on the basis - and
we respectfully submit the correct basis - that
wholesale is not good enough and in the absence

C2T44/l/HS	63	9/8/88
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of any evidence as to why it should be retail,
in our submission, it fails on that score.
In that regard, apropos the remarks of
Justice Von Doussa in the court below, we submit
there was simply no evidence to base what he said,
and we say, in the absence of evidence, the
appellants fail on that narrow ground alone.

(Continued on page 65)

C2T44/2/HS 64 9/8/88
Esanda(2)

MR ANGEL (continuing): Another reason, we submit, is that

referred to in paragraph 8(b) of our submission,

and that is the matter adverted to by
Your Honour Justice Gaudron earlier, that the
formula takes no account of the appellant's

duty to mitigate its loss. As I submitted earlier
this morning, the actual loss is the matter that
has to be considered, and the actual loss is

not performance. The actual loss, in damages terms,
is the loss of profit from the transaction as a whole.
We simply do not know from the evidence as to what money the finance company got out of this particular
transaction as a matter of profit and that is the
measure of their actual loss, whereas clause 6 is
premised on the basis that they are entitled to
performance, even though the transaction has ended because they terminated. It is that juxtaposition
of termination and enforced performance that renders
the general effect of the interplay between clauses 5
and 6 a penalty as a matter of substance.

BRENNAN J:

What is the difference between the two measures,

do you say: performance as against loss?

MR ANGEL:

Yes, performance against loss.

Our submission

is that damages for breach of contract in the
present case are the finance company's loss of
profits from the transaction.

BRENNAN J: Yes.

MR ANGEL:

Their administrative costs and all these sort of

matters have to come in for each payment right
through the term of the contract. But here, if
you apply clause 6, in effect they are getting
full performance, assuming the rebate goes
to the ·hirepayments, they get full performance
in advance but they do not sustain any of the
costs of maintaining the contract. Their actual
loss, in our submission, is their loss of profit

from the transaction. It is not the loss of
the actual - - -

BRENNAN J:

Does that not assume that the discounting of the

charges is not a fair reflection of the saved costs
of administration of the contract?

MR ANGEL:

Well, in this case, in our submission, no. We

say that is really tied in with the failure of
the rebate clause to apply to the hire charges as

such. The effect of the application of the clause
is to give them an advance payment of the full
performance by the hirer and yet they have taken
away the very subject-matter of the contract.
This really touches on something that I was coming to a little later, but I will mention it

now to put it in context. It touches on my

C2T45/l/JM	65	9/8/88
Esanda(2)

friend's submission that the seller of goods or
land in a terminated contract is entitled to
retain the proceeds of sale. In our submission,
those cases have nothing to do with this case
because those cases are where the contract is off,
no performance is demanded and the vendor is simply
selling their own property. But, that is not
this case because they are combining the sale of
their property, together with performance of
the contract by the hir~r and that is why it
is objectionable. So that whole line of authority,
in our submission, the sale of goods and the sale
of land cases, are, with respect, nothing to the
point.
We would equally join issue with my friend's

submission on section 47 of the SALE OF GOODS ACT too.
Section 47 of the SALE OF GOODS ACT is the unpaid
vendor's right of lien. Now, if a lienee sells
other people's property, he must account for the

profit. He must account in equity for any excess.
If he is selling as owner, he may retain the
proceeds. But, again, that is not to the point for
this case.
So, in our submission, those particular aspects

really have to be put on one side. They still do not
meet this basic point that we make in clause 8(c)
about the retention of surplus.

DEANE J:	But if you go to page one of the hire purchase agreement,
would it not be true to say that if the contract
went to completion as the parties expected, the finance company's profit. lies completely in terms
charges, the $44,000 is the money it has paid out to buy the machine which it is not going to own at the end of the contemplated transaction?
MR ANGEL:	Your Honour is correct, if by "profit" Your Honour

means gross profit.

DEANE J: Yes.
MR ANGEL:	But not the net profit, net, that is, of

administrative charges and so on.
(Continued on page 67)

C2T45/2/JM	66	9/8/88
Esanda(2)

DEANE J: Yes, I follow that but if that is the profit - if that anount -

if there is a premature determination one needs two

obvious adjustments: one is one needs to rebate
the term charges by some time formula because,
in effect, they are interest, if you look at
the substance of this transaction. But whatever
way you look at it, you need to rebate them.

The formula does that. The next thing one needs
to do is to take account of the fact that instead
of what was planned, the company is going to
own the equipment. Now, the formula does that

by giving you a credit of the value. I understand
your attack on the value not being the appropriate
value but, putting that to one side, I have difficulty
in seeing why this is not the obvious way that
one would attempt to make an adjustment in a
case where you have not moved into the territory;
that the Chief Justice's judgment turns on?

MR ANGEL:

Your Honour, it is very difficult to answer

what Your Honour says in light of what the
Chief Justice said. The Chief Justice, in effect,
has applied the formula and tested to see whether
there are any circumstances in which it is,
in effect, unfair.

DEANE J:	What I meant to say to you was, put to one side
the point made in the judgment of the Chief Justice,
and that is that this formula is unfair, in the
sense he is speaking, if one uses it when the
stage has been reached where the value of the equipment exceeds outstanding payments. If you
put that to one side and put to one side the
valuation problem that you advert to, what better
formula could there be than this for adjusting
things for a premature termination?
MR ANGEL:	Your Honour is asking me to draft something

on my feet with, no doubt, many -

DEANE J: No, I was just suggesting to you that this 1s

the obvious way of doing it?

MR ANGEL: It is one way, Your Honour. It is one way but,

in our submission, it does not truly reflect the actual loss in the sense that we are not speaking, even putting aside these other matters.
The actual loss is their net profit from the
transaction, whatever that is.

WILSON J:

But are you not looking-striving to extract

too great a degree of precision from a clause
such as this? As long as it is a genuine attempt to accommodate the loss that has not yet occurred but which may occur in the future, it does not
become a penalty unless it is extravagant and
unconscionable and you seem to be just pointing to some comparatively minor departure from what
might be an accurate assessment of loss?

C2T46/l/SDL	67	9/8/88
Esanda(2)

MR ANGEL:

Your Honour, I would answer what Your Honour has

said in two respects: first of all, in our
submission, the law has passed beyond the stage
where it only strikes down extravagant differences.
Although DUNLOP and the earlier cases do use
such adjectives, those adjectives no longer apply
and the law after BRIDGE V CAMPBELL, at least,
and Lord Radcliffe has been accepted in O'DEA
and AMEV on this, as long as it is a genuine

pre-estimate - that is the test. So we immediately
set aside this question of extravagance.

WILSON J: It does not have to be accurate.

MR ANGEL:

We accept that, absolutely, and Your Honour's

remarks are ones with which we would agree apropos
this difference between net loss, the actual
net loss, and the formula. But, certainly, we
say that the other differences that, for the
purposes of my discussion with Justice Deane,
we set on one side; certainly, when you bring
those into the scale, that is the rebate matter,
the duty to mitigate, the wholesale value of
the vehicle and those other matters that I have
referred to, we say that clearly puts it on the
other side of the line.

WILSON J:

Yes.

(Continued on page 69)

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MR ANGEL:

So far as paragraph 8(c) is concerned, that deals

again with this question of the retention of

surplus. Now my friend put a submission based on
section 47 of the SALE OF GOODS ACT, based on some
of the real property cases and so on to say that
the law of penalties generally did not apply to
the retention of surplus. In that regard we would
submit this, that that submission of my friend
is inconsistent with the passages we have referred
to there in O'DEA and it is also inconsistent
with IAC - the earlier High Court decision, because
the very reason in that case that the provision
was upheld was that it did make provision for a
proper credit in the event of an excess and that
was the very reason that the clause in question
there was not struck down - it was central to the

reasoning of the court. So in our submission
my friend's argument on that cannot prevail.

WILSON J:

What do you say about Mr Justice Von Doussa's

discussion of that, t~e fact that you could
hardly call a clause a penalty if the only
criticism of it is that it does not make provision
for - there being no obligation on the hirer to
pay anything,it does not ensure that the owner
will refund any excess?

MR ANGEL:

Yes, our answer to that is this: that HELBY V

MATTHEWS, with respect, does not really add much

to the question. The question in HELBY V MATTHEWS
was the right of the owner against a third party.
and proprietary rights. It did not discuss the
question of proprietary interests as between the
owner and hirer. Justice Von Doussa, central to
his reasoning was the fact that, as he said, in the
ordinary operation of a hire purchase agreement
that the owner retained the property in the goods
after termination and in effect they were his to
rehire, to sell, to burn if he wished, it did not
matter. In our submission, that cannot apply in the

case at bar and the reason it cannot apply is

because of the very terms of the agreement. As I
said earlier, the "hire" payments are inextricably
bound to the option to purchase. And that being so,
the consideration for the option is the payments
which means that as soon as the agreement is
terminated one of the facets of the penalty that
we have previously submitted is the forfeiture

of the right in the option. And one simply cannot
get away from that and it is that aspect that, in
our submission, Justice Von Doussa has ignored and

accepted. it is that aspect the Chief Justice and the majority
On that question of options, of course, we rely

on the prima facie rule that an option is a
conditional purchase and that is LAYBUTT V AMOCO

and the other cases on options. And we say,

C2T47/l/SR	69	9/8/88
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that really there is no distinction between this
case and an instalment purchase at least whilst it
is on foot. Another submission made by my friend
was the fact that the doctr:ine of penalties only

applies to payments. We reject that argument. We
note that in the Oxford English Dictionary
defintion put before the Court, the defintion 2
includes disadvantage of some kind. And we also
note that that submission of my friend is
inconsistent with all the cases which say, for
example, that an excessive deposit cannot be
retained, that is a penal provision.and similarly
the instalments paid on a cancelled contract of
sale cannot be retained because such a provision is

also penal. I appreciate that those two lines of
cases that I have just referred to do somewhat
blur the distinction between penalties and forfeiture
but,in our submission, the principle is really the
same.
On that score also, in the nature of the

proprietary interest, the respective propreitary
interests as between the finance company and the hirer, we also refer to the line of authority of
which WICKHAM HOLDINGS LTD V BROOKE HOUSE MOTORS LTD,
(1967) 1 WLR 295, is an example. That is a case
involving the measure of damages and conversion
where the owner under a hire purchase agreement
sued for conversion and his damages was held to be
the residual interest in the agreement, not the
full value of the subject-matter of the hire purchase
agreement. That line of authority, and there are
other cases on our list of authorities that reflect
the same principle, in our submission accord with
principle and are not inconsistent with HELBY V

MATTHEWS. We stress that.
(Continued on page 71)

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DEANE J:	Mr Angel, how on your approach would it affect the argument if the correct view were that if one entered
the territory where the value of the machine exceeded
the rebated outstanding instalments, equity would relieve against forfeiture of the interest under the option upon tender of payment of the outstanding rebated instalments?
MR ANGEL:	Yes.

DEANE J: It would, to some extent, remove the whole basis of

the Chief Justice's judgment, would it not?

MR ANGEL:

Yes, it would.

I accept that.

I

must accept that. I mean, in our submission, it is
very difficult to draw a clear distinction between
many of the penalty cases and many of the forfeiture
cases. In fact, Your Honour Justice Brennan took
that point in, I think it was AMEV, that really
it was not a penalty but, rather, it was a question
of relief against forfeiture but, in our submission
with respect, Your Honour is in the minority there
and that the majority of these more recent cases
really stetmning from FINANCINGS V BALDOCK in 1963,
the majority of the cases, Their Honours do hold
that, overall, one takes a broad view, a substance
view if you like and holds that it is a penalty
but, perhaps, the answer lies in whereabouts is one
at in the litigation. Here, of course, we have a
case where the finance company are suing on the
contract of hire and, for present purposes, it is
sufficient, in our submission, to brand the clause
penalty. You cannot do it. Go away and recover
your cotmnon law damages.

On the other hand, had the finance company

repossessed, let us say, before the last instalment,
it may well be that the hirer would go into court
and say, "I want to be relieved against forfeiture

of all my payments. I have paid all but the last

instalment and here I am without a truck and I have
almost fully performed". It, really, in a sense,
depends on where one is in in the litigation but,
for present purposes, we say the Court can, and is
entitled to, brand it a penalty.

My learned friend, in the course of his

argument, when he was putting an argument about
section 47 of the SALE OF GOODS ACT, referred to the case of WARD V BIGNALL and said it stood for
the authority that the selling vendor could retain
any surplus. In our submission, that case is not
authority for any such proposition.

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MR ANGEL (continuing): It was a case involving damages for
non-acceptance, and the assessed damages for
non-acceptance exceeded the value of the truck

sold. So the question did not even arise.
So, in our submission, that case does not support
what my friend has said. My friend put a submission
that the relative comparison between pre-estimate
of damage and the recoverable sum had to be

manifestly disproportionate. I noted that he used
the word "manifestly" in his submission, whereas the relevant ground of appeal in the appeal book speaks of "grossly" disproportionate.
In our submission, that is not the law any

more, for the reasons that I previously referred
Your Honour Justice Wilson to, and I just, in passing,
refer the Court to the case of MALOUF V BRINDS,
which we have listed under paragraph 2 of our

summary. In that case the principles, or the
cases, are usefully collected showing a general

watering down of the test. I will not read from

the case. I just merely draw the Court's attention
to it that many of the authorities on this particular
point are collected there, and it really gets down
to genuine pre-estimate, rather than grossly
disproportionate.
I am reminded by my learned junior, apropos

that all the cases speak with one voice here.

paragraph 8(a) of our summary, the wholesale point, proper credit they are speaking of the actual
value, so the general authorities, in our submission,
are inconsistent with what Justice Von Doussa said,
as well as the particular remarks of Justice Sholl

in CARLILE's case. In our submission, the former
section 15(2)(b) of the 1960 South Australian
HIRE PURCHASE ACT, which refers to the credit
of the best price which could be reasonably
obtained by the owner is reflective of the true

common law position. (Continued on page 73)

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BRENNAN J: Mr Angel, if one is in the area of penalty

one starts, as I think Mr Justice Deane put to
you earlier, with some breach of contract.

MR ANGEL:	Yes.
BRENNAN J:	Why does not one start with a breach of contract

and then look not only to the formula of money
but to the power of termination in clause 6?

MR ANGEL:

In our submission you do. We say the termination,

for example, for a trivial breach, is one of
the matters that the courts do take into account,
and I refer to what Justice Deane said in O'DEA's

case at page 400; One looks at it globally,

in substance; one does not just pick out particular
aspects, in our submission.

BRENNAN J: Is it right then to say that your argument

is that, for a variety of breaches, the single
formula of forfeiture of possession plus the
payment of the recoverable amount, is specified
in the contract and that those two together constitute
a penalty?

MR ANGEL:

Your Honour, we do say that and we say that

is quite consistent with what Lord Dunedin said
in DUNLOP's case but the only problem we have
in putting that submission is if the parties,
by agreement, elevate every term to a fundamental
term - we -have come full circle - which ,gets
back to, firstly, whether the parties or the
drawer of the document has accomplished that,
that is the first question and that must be clearly
spelled out - - -

BRENNAN J:	I am sorry to be so slow in catching on.
MR ANGEL:	I am sorry, Your Honour, it is just that that

is what we are putting.

BRENNAN J:

Yes.

(Continued on page 74)

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MR ANGEL:

But we say that the draftsman, in making every

term fundamental - even if he does accomplish that,
we say the courts nevertheless as a matter of
substance can see through it, and that is when we
get back to what is proposed by Dr Reynolds in his
paper. It should not come down to mere drafting
techniques, particularly when we are dealing in
an area that has commonly been called an area of
public policy.
Subject to anything the Court particularly

wishes to hear from us, in our submission, for
those reasons, this appeal should be dismissed.

WILSON J: Just picking up that last point, is it said

that thi~ contract elevates every breach to one

of fundamental or essential premise? I am sorry,
it may have been my attention may have been drawn to it.

MR ANGEL: Well, my friend has not put a specific submission

on this. Unquestionably clause 6 enables cancellation
for any breach, but our submission is that that, of
itself - and this is paragraph 6 of our written
submission - does not make every term fundamental,
sufficient to attract a loss of bargain set of
damages as opposed to damages just for the individual
breach.

WILSON J: Yes.

MR ANGEL:

May it please the Court.

WILSON J: Yes, Mr Shaw?

(Continued on page 75)

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MR SHAW:	If the Court pleases, in our submission what my learned friend has put to the Court conflates
penalties which might be relieved against in
equity or the area where equity relieves against
forfeitures where there is that blurring that
was referred to by Your Honour the presiding Judge and Mr Justice Mason in, I think - - -
WILSON:	AMEV.
MR SHAW:	AMEV. I think that is right.

WILSON J: Would you mind saying that statement again without

using the word "conflates", so that I can understand
it?

MR SHAW:

I thought that was a popular word here, Your Honour.

What I meant to say was, and I use it for purposes

of euphemism, politeness to my learned friend, he

had muddled up, is what I meant to convey, but

politely, and he will understand that I am only

being blunt because Your Honour has told me I must.

The doctrine of relief against forfeiture where the

provision is valid and equity says, albeit, it is

valid, we will not let you enforce it and there

are certain consequences which follow.

Something

which falls within that area does not help him

here.

He has to say, because of the facts, this

is such a penalty provision as, despite the fact

it does not produce an unjust result here, it is

void or unenforceable, whatever the right word is,

at law.

Now, for him to say that, it is not enough for

him to say things like~ it is - like he says in
paragraph 7 of his summary - things about unconscionable
burdens and, taking everything together, operations

and so on. He has to show that the rule which makes
a penalty clause wholly unenforceable, however

satisfactorily it may operate in the particular (Continued on page 76)
circumstances, is the one which applies.

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MR SHAW (continuing): In our submission, that area is
as was said by Lord Justice Diplock and has been
affirmed by the House of Lords, a narrow field.

In our submission, the modern approach of the
courts is not to widen that field but rather
to give the parties a wider ambit than some cases
might suggest, to agree between themselves about
how much should be paid under a contract in
certain events. In AMEV, Your Honour the presiding
judge referred to that and, in our submission,
it is particularly true in this case because
what has happened here was something which had
not happened in AMEV and was particularly referred
to by Your Honour and Mr Justice Mason at page 181

in 162 CLR. Your Honours said:
The draftsman of the agreements did not
attempt to take advantage of the decision
of this Court in IAC (LEASING) LTD V HUMPHREY.

And then Your Honours go on to refer to what
is said there. It is plain enough that that is what has, in fact, occurred here. So one
has an attempt being made, it may be fumbling
but at any rate an attempt, to satisfy the kind
of test which was accepted by this Court in that
case and, in our submission, the Court thought,
rather than take the view which my learned friend
seemed to be urging on the Court, that one should
try the best one could to get out of such a provision
as this, rather one should say, "This is an area
of commerce in which certainty is desirable and
attempts to satisfy what
the indications which have been given by the regarded as genuine
ought to be satisfied and one should not seek
to dilute the effect of the indications which
the Court has given to men of commerce about
how they might properly arrange their affairs.

(Continued on page 77)

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MR SHAW (continuing): So that we would meet head on
what my learned friend urges on the Court, and
we would say too that if occasions arise where
in the future remedies are needed, they can no
doubt satisfactorily be found in the equitable
doctrine of relief against forfeiture, and there
is no need in order to protect the weak to expand
a doctrine which is so indiscriminate in its
effect, because it simply says, "This provision,
however it operates in the particular circumstances
which arise, is invalid, and that's that."
Now, if I might go to what my learned friend

says in paragraph 6 of his summary -

WILSON J: Just dwelling on that last corrrnent, the submissions
of Mr Angel emphasizing that the modern test
is a genuine pre-estimate of damage, that could
hardly be applied as a test if one required a
ffieticulous compliance in every case, in all the
diversity of cases, with what would be a genuine
pre-estimate of damage.

MR SHAW: Indeed, it could not, Your Honour, and in any case
the test, if stated in that way, misstates the
test because what one ought to be looking at is in
its longer statement it will be held to be a penalty
if the sum stipulated is "extravagant or
unconscionable in amount in comparison with the
greatest loss that could conceivably be proved to
have followed from the breach", and those words
I think were in what Your Honour Justice Deane
said in O'DEA's case in the passage at page 400
that my learned friend read out.

WILSON J: But it is the old law, according to Mr Angel,

from 1915. I mean, those are the words of
Lord Dunedin, in substance.

MR SHAW: Those are the words of Your Honour's brother

Justice Deane.

WILSON J: Yes. There was some pedigree.

(Continued on page 78)

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MR SHAW:	In so far as my learned friend indicated that
he needed new law, he does indeed,we would
submit, need new law.

WILSON J: Yes.

MR SHAW:

In paragraph 6 we would submit that it is

unnecessary for us to say that the effect of
condition 6 of the contract is to make all the

terms essential or fundamental.

We would say

that if it were necessary, but, in our submission,

it is quite unnecessary for us to say that.

What we say is simply this: that the clause makes the amount in question payable on an event ard,

in our submission, it is wholly logical in those
circumstances to say, when asking oneself what

test should one use in relation to the rule against

penalties, to look at the loss which flows from that

event. And, in our submission, the penalty area is
not entered at all until one reaches an area in

which - I know that this is old law and on this occasion
:In fact-, -:a&:has been disapproved by Your Honour Justice Deane,

but it has been said it is not much help saying it
is in terrorem or by way of a punishment, but
although those terms might in fact help one to get

an answer in a particular case, they do indicate
that what is seeking to be imposed in the

circumstances is an additional burden, additional

to sorre actual loss. It is because it is additional,

and accordingly in terrorem, that it becomes a

penalty. In our submission all one has here is

an agreement between the parties that the

consequences of something actually happening in

the course of the contract are to be distributed

between them in this particular way.

(Continued on page 79)

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78

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MR SHAW (continuing): In our submission, in those

circumstances, whether or not the terms of
the contract make every clause fundamental, it
is both sensible and in accordance with authority to say that that is open to the parties to do and
my learned friend said that AMEV indicated the
contrary but, in our submission, when one looks
at AMEV and, in particular, at page 194,
Your Honours Justice Wilson and Mr Justice Mason
expressly refer to recovery under a correctly
drawn indenmity provision of actual loss on
early termination for non-fundamental breach and
say that the parties may agree
it is the same idea which is picked up by when Your Honours
as to the consequences of certain events and, for
example, at pages216 to 217, His Honour Justice Dawson
refers to a passage in WESTRALIAN FARMERS where
Justices Dixon and Evatt said that the consequences
of:
Determination of the contract on a given contingency -

depend on the intentions of the parties and he
goes on to refer to LARRATT's case and what was
said by Chief Justice Jordan there in a passage
which finds - I was going to say an echo but I
should have said a parallel - at pages205 to 206

in the judgment of Your Honour Justice Deane. So
that, in our submission, what has been put in
clause 6 of my learned friend's sunnnary is
fundamentally out of accord both with principle
and with authority.
(Continued on page 80)

C2T56/l/SH	79	9/8/88
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MR SHAW (continuing):

Clause 7 confuses, as we submit,

the two doctrines in relation to penalty. As to
paragraph 8 of my learned friend's summar~ we would
adopt what has been said by Mr Justice Von Doussa on that
question and add a reference to INTERNATIONAL LEASING
CORP V AIKEN, (1966) 85 WN (Pt 1) (NSW) 766. That
was a case before the Court of Appeal presided over

by Mr Justice Jacobs. The clause in question
provided that if, in taking into account the value

of - it was there a motor vehicle - if a sale
of the motor vehicle had not taken place within two
weeks without default on the part of the lessor, then
for the purpose of the calculation of damages the
value of the motor car should be taken as nothing.
The court held that that did not render the provision
a penalty and at page 778 and the following pages
Justice Jacobs examines the question of penalty and
says that in that particular case it was not right
to have regard - this is the last complete paragraph -
primarily to operations of a clause which were
unfavourable to the lessee.
In our submission, what His Honour says in that

judgment is helpful on this question of penalty.
We need not, I think, say anything separately about
what my learned friend says in paragraph 8(b) of
his summary and as to paragraph 8(c) that was, indeed,
the basis of the decision below. Although it has
taken my learned friend until the very last
subparagraph of his summary to reach that point, we
did, we hope, deal with that sufficiently in our
address and there is nothing new we would wish to
say about that except to say that it merits as

little defence as it there receives. If the Court
pleases.

WILSON J:

Thank you, Mr Shaw.

The Court will consider its

decision in the matter.

AT 3.17 PM THE MATTER WAS ADJOURNED SINE DIE

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Key Legal Topics

Areas of Law

Commercial Law
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Legal Concepts

Contract Formation
Breach
Damages
Remedies
Offer and Acceptance

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Citations

Esanda Finance Corporation Limited v Plessnig [1988] HCATrans 156

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amount of money involved.	May I simply take the
Court for the moment - - -

amended grounds_ of appeal appear at pages 211 to 217;
the relevant new grounds at page 216.	The Full Court,

would be recoverable for loss of bargain upon repudiation.	In this
respect there is no difference between what His Honour says
and what Mr Justice Von Doussa says.	Each of them,

the same passages in the same case.	Then His Honour
goes on at line 13 of page 224 to say:

that did not constitute the formula	a penal one,
as had been recognized by the majority at page 226,
lines 5 to 16.	So the sole ground of difference

would require him to say that was a penalty.	He
obviously could not.

parallels in other States.	So that the consequence
which the majority in the Full Court saw as a	consequence am::)Unting to a penalty is in fact a
consequence well recognized by commentators and by the legislatures as one which was to find
a remedy, if at all, only in legislation and, of
course, there is no relevant legislation here.

the	judgment of His Honour Mr Justice Dawson in
AMEV-UDC V AUSTIN.	Although different conclusions

stating the law.	They are all either, or derived
from, statements by Lord Diplock.	The first

(1966) 1 WLR 1428 or (1966) 3 All ER 128.	At
page 141, about four lines from the bottom, of Appeal, said:

unreported case.	EXPORT CREDIT GUARANTEE is
in (1983) 2 All ER 205.	At page 212,

Lord Justice Waller,in the Court of Appeal, cites the beginning of the passage which was cited by	Mr Justice Staughton below and accepts it and, at	page 217, Lord Justice Slade, between the letters
Hand I, refers with approval to what is said by
Lord Justice DipLock in the PHILIP BERNSTEIN case and which was cited by Lord Justice Waller and goes on to say, beside the letter J:

the approval of this Court in AMEV V AUSTIN.	And
then in the last proposition we refer to the
fact that, as is clearly established by
HELBY V MATTHEWS, the contract here remained a

that this provision did not constitute a penalty.	taken to arisen for decision, my opinion is
That conclusion would be required if the agreement ought to be construed in the way in which the majority of this Court construed the
agreement under consideration in LAMSON .....
that is, as an agreement to pay a total rent,
being the sum of the monthly instalments, subject only to such adjustments as were
specified in the agreement.

reason of that very fact in the circumstances.	I
put that submission based on the discussion of
these matters in a paper delivered by Dr Francis
Reynolds in the text of Finn,'Essays on Contract':

Lord Diplock in the course of his submissions.	We
say Lord Diplock is, with respect, a little out on

years, he comes to the direct control method.	He
asksthe question whether:

altogether, even in England;	even
less so in Australia.	I will not enter

in one sense, in the application of the rule.	But
so far as whether, at the end of the day, it is a
penalty, we clearly come home, because one is

unconscionable or oppressive that	their nature is penal rather than
compensatory.

[1988] HCATrans 156

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Contract Law

Legal Concepts

Contract Formation

Breach

Damages

Remedies

Offer and Acceptance

very clearly spell that out.	In the clause here,
it does not say in express terms,	"Every single

Lord Dunedin in DUNLOP .....	They need not
be repeated in detail.	As Lord Radcliffe

referred to it as "a contract of adhesion", the	the Chief Justice in the court below, where he
fact that it is is standard form contract, that
is an element, we say, that must be brought into account.

case at bar and the reason it cannot apply is
because of the very terms of the agreement.	As I

of all my payments.	I have paid all but the last
instalment and here I am without a truck and I have

watering down of the test.	I will not read from
the case.	I just merely draw the Court's attention

case at page 400;	One looks at it globally,
in substance;	one does not just pick out particular

MR SHAW:	Indeed, it could not, Your Honour, and in any case the test, if stated in that way, misstates the test because what one ought to be looking at is in
its longer statement it will be held to be a penalty
if the sum stipulated is "extravagant or unconscionable in amount in comparison with the
greatest loss that could conceivably be proved to
have followed from the breach", and those words
I think were in what Your Honour Justice Deane
said in O'DEA's case in the passage at page 400 that my learned friend read out.
WILSON J:	But it is the old law, according to Mr Angel,

in the judgment of Your Honour Justice Deane.	So
that, in our submission, what has been put in
clause 6 of my learned friend's sunnnary is
fundamentally out of accord both with principle
and with authority.