Fuji Xerox Australia Pty Ltd v Harris - [2014] SADC 59

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
FUJI XEROX AUSTRALIA PTY LTD v HARRIS
[2014] SADC 59
Judgment of His Honour Judge Tilmouth
16 April 2014
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES
Action for the enforcement of a deed of guarantee and indemnity upheld on the merits.
Capital Finance Australia Ltd v Airstar Aviation Pty Ltd [2004] 1 Qd R 122; Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570; Blatch v Archer (1774) 1 Cowp 63; TC Industrial Plant Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130; Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235, referred to.
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; Abrahams v Performing Rights Society Ltd [1995] ICR 1028; Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, applied.

FUJI XEROX AUSTRALIA PTY LTD v HARRIS
[2014] SADC 59
The issues

This is an action for the enforcement of a guarantee and indemnity executed by the defendant. It was given in support of a line of credit afforded by the plaintiff to a company of which the defendant was director, Motown Image Limited (Motown). There is no dispute that the defendant executed the guarantee. In his defence he raises issues of mitigation and questions whether the equipment leased by the plaintiff to Motown was fit and proper for its purpose. In the result, the defendant not presenting a substantial case in his own defence, the plaintiff must succeed in the action.
Uncontested facts
The plaintiff Fuji Xerox Australia Pty Ltd (Fuji Xerox) is the supplier of photocopying equipment and supportive services. Motown ran a printing business from Sir Donald Bradman Drive Cowandilla in the western suburbs of Adelaide. It had commenced trading in April 2004. On 15 August 2011 Motown was placed in liquidation by creditors in the course of a voluntary winding up. It was ultimately deregistered by ASIC on 28 October 2012.
By an agreement of 23 June 2010 entitled ‘Preferred Customer Rental and Support Services Agreement’, Fuji Xerox agreed to lease to Motown a PC 700 Digital Press and other equipment for a period of five years, for a monthly rent of $4,129. By clause 3(f) therein, Fuji Xerox was entitled to terminate the agreement for breach of any term or condition thereof. Thereupon Motown became obliged by sub-clause 3(f)(i)(a) thereof, to pay an amount equivalent to the then unpaid balance amounts discounted to their net present value at the rate of 5 per cent per annum, plus an administration fee of $250.00.
The payment of invoices rendered by Fuji Xerox was designated a ‘fundamental term’ by clause 4(g) of this agreement. Clause 4(i) thereof later provided that interest at the rate of 15 per cent per annum was due and payable on ‘the daily balance of all overdue monies’.
By way of security for this preferred customer facility, Mr Harris executed, also on 23 June 2010, a separate Guarantee and Indemnity Deed ‘for all future liabilities of Motown’. For purposes relevant to these proceedings this provided:
2.You guarantee Customer’s payment to us of all monies, when due, payable under all agreements we have with Customer, past present and future. If we ask, you must pay amounts not paid by Customer.
…
4.You must pay us all legal and other costs to us of enforcing this document and any agreement with Customer on a full indemnity basis.
It might be noted in passing, that there could have been reason to suggest clause 8 of the Guarantee and Indemnity might have been inoperative or invalid, to the extent that it purports to exclude any rights of set-off, but in the result it is unnecessary to consider that question: see for example Capital Finance Australia Ltd v Airstar Aviation Pty Ltd,[1] Jovanovic v Commonwealth Bank of Australia.[2]
[1] [2004] 1 Qd R 122, [17].
[2] (2004) 87 SASR 570, [114], [118], CF [67].
A second ‘Preferred Customer Rental and Support Services Agreement’ was entered into between Fuji Xerox and Motown on 3 November 2010 in identical terms to the first. This was with respect to the renewal of a previous lease of another photocopier, a PC5000 for $500 per month over 12 months. This machine was originally leased in 2006.
Between 3 March and 30 June 2011, invoices totalling $20,120.67 were rendered for consumables (such as paper and toner), support services and monthly rental costs under both agreements. Between 8 July and 8 August 2011 invoices totalling a further $5,642.01 were so rendered. On 9 September 2011 a further invoice for $2,108.37 was rendered for support services. On 25 September 2011 a further invoice was rendered for $157,416.70, in effect for paying out the balance then due under the first agreement. Invoices in lesser amounts were also issued, three on 30 September 2011.
Both photocopiers PC5000 and PC700 were repossessed by Fuji Xerox on 1 September 2011. In December 2011, Fuji Xerox leased PC700 to an unrelated party for a three year term, effectively commencing on 29 February 2013, for a monthly fee of just $1,100.
For the purposes of enforcement of the outstanding debts, Fuji Xerox engaged a debt recovery agent AMPAC, which charged a commission. AMPAC issued a letter of demand to Mr Harris on 4 December 2012. Since none of the invoices were paid by Motown, proceedings were issued against Mr Harris personally for the enforcement of the guarantee and indemnity on 13 May 2013.
Trial hearing
At the trial, proceedings took place based entirely on documents tendered by the plaintiff, proof of which were accepted by Mr Harris. Those documents support the findings made earlier and those which follow. At the hearing, Mr Harris elected not to give evidence and despite being offered several times the opportunity of an adjournment to consider his position, those invitations were declined.
Based on the documents tendered by the plaintiff, contractual amounts claimed by Fuji Xerox totalled $143,106.18 in respect of the agreement over PC700. Those with respect to PC5000 amounted to $454.55, the total being $143,560.73. All were exclusive of GST, because GST was not recoverable on an award of damages, as such an award does not constitute a taxation supply. On top of this, a further claim was made for outstanding unpaid invoices of $29,263.87. When AMPAC’s commissions and dispersements were added, the total claimed came to $186,429.94.
Resolution of claims
Mr Harris in his defence pleaded that upon signing both the first and second agreements and presumably the guarantee that supported them, he was approached on 23 June ‘needing a quick signature’. However he accepted at the trial that he was bound by his signature. That acknowledgement was undoubtedly correct given the High Court’s decision in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd.[3]
[3] (2004) 218 CLR 471, [33].
A second issue calling for consideration in the defence, seemed to have been that the photocopier PC700 was not fit and proper for its intended purpose, or as expressed in the defence ‘did not fulfil my business specifications’ and ‘did not meet my company’s needs’. Without deciding the question whether Mr Harris could ultimately rely on such claims in defence of the proceedings against him personally, the fact of the matter is there is simply no evidence to support those allegations. That being so that part of the defence requires no further consideration.
Mitigation of loss
A third issue raised in the defence is of more substance and it is in effect one of mitigation. It was pleaded in this way:
Fuji Xerox wishes for me to pay for their inaction/incompetence to re-lease the machine and so defray their costs’ [and] ‘… what action did Fuji Xerox undertake to release the machine and so minimise all party’s losses?
At the hearing counsel for Fuji Xerox was taxed on several occasions, as to whether it proposed to call evidence to explain why the photocopier PC700 was leased at approximately ¼ of the monthly rent which it had obtained from Motown. There was a distinct election at least twice not to call any such evidence.
Counsel for the plaintiff contended that clause 3(f) of both preferred customer agreements, amounted to liquidated damages clauses and accordingly the question of mitigation did not arise. These provided:
(3)(f)Xerox may terminate this Agreement if the Customer breaches any of the terms and conditions of this agreement and then;
(i) customer shall be obliged to pay an amount equivalent to the then unpaid balance of Lease/Rentals discounted to their net present value at the rate of 5% per annum, plus an administration fee of $250.000.
It may be accepted that in the case of contractual stipulation consisting of genuine pre-estimates of loss which give rise to claims for liquidated damages, there is no duty to mitigate, as ‘a duty to mitigate is entirely foreign to a claim for liquidated damages’: Abrahams v Performing Rights Society Ltd.[4]Although the penalty rate provided for in the liquidated damages clause no doubt involves the imposition of an additional liability in the sense described by unanimous decision of the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd,[5] it is not in this instance of such an order ‘which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach’: Ringrow Pty Ltd v BP Australia Pty Ltd.[6]
[4] [1995] ICR 1028, and see MacGregor on Damages (Thompson Reuters Ltd), 18th Edition 2009, 494.
[5] (2012) 247 CLR 205, [9]-[10].
[6] (2005) 224 CLR 656, [10]
In other words expressed in a manner described by Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin:[7]
An agreed sum is only characterised as a penalty if it is out of all proportion to damage likely to be suffered as a result of the breach.
Moreover as was observed in Ringrow v BP Australia:[8]
[32] Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged "extravagant and unconscionable in amount". It is not enough that it should be lacking in proportion. It must be "out of all proportion". It would therefore be a reversal of longstanding authority to substitute a test expressed in terms of mere disproportionality. However helpful that concept may be in considering other legal questions, it sits uncomfortably in the present context.
[7] (1986) 162 CLR 170, 190.
[8] Above, [32] footnotes omitted.
For that reason insofar as there was a challenge to the enforcement of the guarantee on the basis that they constitute penalties, which was not evident from the pleadings or anything said by Mr Harris, it would have failed anyway.
Returning to the question of adducing evidence of steps taken in mitigation, Lord Mansfield CJ famously observed in Blatch v Archer:[9]
All evidence is to be weighed according to the proof in the power of one side to have produced, and in the power of the other to have contradicted.
[9] (1774) 1 Cowp 63, 65
The fact remains however that there is simply no evidence before the court as to how or why the re-leasing arrangements occurred, or as to the circumstances which led to the large reduction in rent. Obviously one consideration would be that PC700 was second-hand as of December 2011, even though it was new at the time of lease to Motown. Once again there is no material before the court as to value, or industry standards, values or practices in relation to the resale of photocopiers.
Mr Harris maintained in his oral presentation that PC700 was current technology and fairly new, particularly as it had only been leased for one of the five years of the lease term. He also questioned why it took three and a half months to re-lease. The court is in no position to judge those questions and it would be speculating if it tried to do so. Whilst the disproportion between the monthly lease rates remains questionable, the issue stands only to be resolved on the basis that the onus lies squarely on Mr Harris of establishing the failure of Motown to mitigate its loss: TC Industrial Plant Ltd v Robert’s Queensland Pty Ltd,[10] Karacominakis v Big Country Developments Pty Ltd.[11] As he has adduced no evidence on that subject, Mr Harris must fail on the issue of mitigation. In light of the above authorities, the question of mitigation simply does not arise because Mr Harris has failed to produce evidence to discharge the onus of demonstrating Fuji Xerox has acted unreasonably by failing to minimise its loss.
[10] (1963) 180 CLR 130, 135.
[11] (2000) 10 BPR 18,235, [187].
Assessment of damages
It must follow then by reason of the application of the provisions of the rental agreements that Fuji Xerox is entitled to judgment on the sum of $186,429.94, as toted above. On top of that, pursuant to clause 4(i) the interest rate of 15 per cent is to be applied on overdue amounts. Between 10 May 2013, that is just before the Statement of Claim was issued and the date of trial 11 March 2014, that is 305 days, produces a figure of $23,367.58 on account of contractual interest.
Orders
Accordingly it is proposed to enter judgment in favour of Fuji Xerox for $209,797.52. According to the terms in clause 4 of the deed and indemnity, there will be a declaration that Fuji Xerox is entitled to an order for costs in its favour on an indemnity basis.
However before entering final judgment, the parties are at liberty to apply within 10 clear working days from the date of this judgment to speak to the above calculations, failing which judgment will be entered as proposed.