Goldwheel Investments Pty Limited v HMC Corporation Pty Limited

[2005] NSWSC 1120

CITATION:	Goldwheel Investments Pty Limited v HMC Corporation Pty Limited [2005] NSWSC 1120
HEARING DATE(S):	3 November 2005
JUDGMENT DATE :	10 November 2005
JURISDICTION:	Common Law Division
JUDGMENT OF:	Associate Justice Malpass at 1
DECISION:	The judgment and orders made by Lulham LCM on 11 April 2005 are set aside; the matter is remitted to the Local Court for determination according to law; the defendant is to pay the costs of the summons; if so entitled, the defendant is entitled to have a certificate under the Suitors’ Fund Act 1951.

CATCHWORDS:	Errors of law - construction of deed - termination and refund provisions - penalty - action for common law damages - damages awarded on bases not in issue between the parties.
CASES CITED:	AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170 Citicorp Australia v Hendry (1985) 4 NSWLR 1
PARTIES:	Goldwheel Investments Pty Limited (Plaintiff) HMC Corporation Pty Limited (Defendant)
FILE NUMBER(S):	SC 11550/05
COUNSEL:	Mr M B J Lee (Plaintiff) Mr M Hadley (Defendant)
SOLICITORS:	Marsdens Law Group (Plaintiff) Shaw McDonald (Defendant)

LOWER COURT JURISDICTION:	Local Court
LOWER COURT FILE NUMBER(S):	8804 of 2003
LOWER COURT JUDICIAL OFFICER :	Lulham LCM

- 10 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

Associate Justice Malpass

10 November 2005

11550 of 2005 Goldwheel Investments Pty Limited v HMC Corporation Pty Limited

JUDGMENT

1 His Honour: The plaintiff is the owner of several hotels (including the Maclin Lodge Motel). The defendant provides management and consultancy services to the hotel industry.

2 The parties entered into a written Management Consultancy Deed dated 1 October 2001 (the deed). On 22 June 2002, amendments were made to the deed. The agreed amendments are set forth in a letter of the same date. One of the amendments was to extend the original one year term of the deed for a further year (ending on 30 September 2003). Another of the amendments is recorded in the letter in the following terms:-

4) The agreement that the execution of clause 2.3 will be held over by yourselves to the completion of the next year of contracted terms if the budget as set out in clause 3.2 is not achieved.

3 On 23 July 2003, the plaintiff purported to terminate the deed by the giving of one month’s written notice. The purported termination date was 27 August 2003.

4 On 18 August 2003, the defendant ceased to provide consultancy services (including at the Maclin Lodge Motel).

5 The defendant brought proceedings in the Local Court claiming money said to be owing under the deed. The proceedings were defended. The plaintiff also filed a cross-claim.

6 The proceedings were heard by Mr Lulham LCM. His decision was given on 11 April 2005. The defendant successfully recovered the sum of $12,575 together with interest and costs. The plaintiff was unsuccessful on the cross-claim.

7 The plaintiff has brought proceedings in this court (the summons was filed on 21 April 2005). It purports to bring an appeal from the decision of the Magistrate. It is contended that there has been error in point of law.

8 The plaintiff bears the onus of satisfying the court that there has been error in point of law that justifies the disturbing of the decision of the Magistrate.

9 The statement of grounds of appeal (which formed part of the summons) identifies 11 alleged errors.

10 The appeal was heard on 3 November 2005. At the commencement of the hearing, counsel for the plaintiff identified grounds 8 – 11 as those which were put forward as being determinative of the appeal. Whilst the plaintiff maintained its views as to the other alleged errors, it was accepted that none of them would effect a successful result in the appeal.

11 Counsel have relied on written submissions. These submissions have been supplemented by oral argument.

12 The relevant claim advanced by the defendant in its pleading was an entitlement to moneys said to be due under clause 8.3 of the deed for a three month period. It was in the sum of $30,073.28. There was no alternative claim made for damages in respect of actual loss suffered as a consequence of breach. At the time of the filing of the process, the defendant was not legally represented.

13 The relevant provisions of the deed included the following:-

2.3 Refund if Budget not met
HMC must refund to Gold Wheel the amount of $20,000.00 if the Budget (as defined in clause 3) is not achieved. HMC must make the payment referred to in the preceding sentence within seven (7) days of the end of the Term.
The parties agree that the preceding paragraph does not apply in circumstances where the Budget is not achieved as a result of force majeure events.
… … …
3.2 Preparation of Budget
Prior or shortly after the Commencement Date HMC must prepare a budget for the operation of the Business during the Term (“ Budget ”). The Budget must address the issues agreed upon by both Gold Wheel and HMC. Both Gold Wheel and HMC must agree on the terms of the Budget.
3.3 Following the Budget
Once the Budget has been prepared and agreed upon HMC must operate the Business strictly in accordance with the Budget. If the costs incurred in the operation of the Business exceed the costs set out in the Budget then the provisions of clause 2.3 apply.
Where Gold Wheel fails to heed recommendations of HMC regarding the operation of the Business and such failure leads to the Budget to be exceeded the provisions of clause 2.3 do not apply.
… … …
8.2 Termination upon notice
This Deed may be terminated by notice in the following situations:
(1) Gold Wheel may terminate this Deed after giving one month’s notice in writing to HMC where, at the end of any financial quarter, there has been no increase in the estimate of the net profit of the Business;
(2) Automatically where a party is in breach of its obligations under this Deed and has not remedied the breach within one (1) month of receiving notice to do so from the other party; or
(3) Where a party has reasonable grounds that party may terminate this Deed by giving three (3) month’s notice in writing to the other party.
8.3 Early termination by Gold Wheel
Where Gold Wheel terminates this Deed and it is subsequently determined that there were no reasonable grounds to support such termination then Gold Wheel must pay to HMC an amount equal to three (3) month’s fees plus any outstanding Incentive Bonus.
… … …
8.5 Application of clause 2.3
Clause 2.3 does not operate where this Deed is terminated in accordance with this clause 8.

14 The defence raised a number of grounds. It suffices just to mention certain of them. It was contended that the deed had been validly terminated by reason of exercise of common law rights. It was contended that because the termination was not pursuant to clause 8.2, the defendant could not rely on clause 8.3. It was also contended that the payment provided for in clause 8.3 of the deed constituted a penalty and was therefore unenforceable.

15 The cross-claim relied on clause 2.3. A claim was made in the sum of $40,000 plus interest (comprising $20,000 for each of the financial years ended 30 June 2002 and 30 June 2003).

16 In paragraph 23 of his judgment, the Magistrate identified what he regarded as being the issues. In so doing, he introduced the concept of entitlement to rescind.

17 The Magistrate found that clause 8 provided a code for termination so as to exclude any common law rights. He made this finding despite it being common ground before him that the plaintiff did have such common law rights (inter alia, a repudiation could give rise to a termination).

18 The Magistrate made, inter alia, the following findings:-

43 … … …
(i) That the defendant did not have the right to terminate the agreement at common law, and that being so, the termination had to be pursuant to clause 8.2. The termination clearly did not comply with the provisions of clause 8.2. There were no reasonable grounds to support such termination and clause 8.3 applied.
(ii) Alternatively if the defendant had the right to terminate the MC Deed at common law, being a right in addition to clause 8.2, there did not exist the grounds which would entitle the defendant to give such notice. In such circumstances there were no reasonable grounds to support the purported common law Notice of Termination and in those circumstances clause 8.3 would apply.

19 The plaintiff does not challenge the finding that there were no grounds to support the purported common law termination.

20 There is no dispute that the Magistrate found that clause 8.3 gave rise to a penalty. Whilst the plaintiff contends that this result was reached for the wrong reason (he had regard to matters occurring subsequent to the making of the deed), neither party challenges this finding.

21 After the making of that finding, the Magistrate observed as follows:-

50 Having said that, it appears to me that the basis for calculating the damages for breach in clauses 8.3 and 8.4 was reasonable. In the case of the unreasonable termination by the defendant, the plaintiff would lose the profit which it would otherwise have earned under the Contract, and would also incur additional expense in either having to relocate and find other employment for its employees under the MC Deed. What made the amount unreasonable was the fact that notice was given within 3 months of the normal termination date. I am satisfied that the minimum which the plaintiff would be entitled to recover would be the fees to which it would have been entitled under the Deed from 28 August 2003 to 30 September 2003. That is the same basis which the defendant agreed to pay damages if the notice had been given outside the 3 month period. I calculate the daily fee payable under the MC Deed to be $369.86 and that the amount payable for the above period would be, in round figures, $12,575.00. I propose to award that amount to the plaintiff for damages for the unlawful termination of the Agreement by the defendant.

22 The cross-claim was dealt with in the following two paragraphs:-

52 The defendant brought a Cross Claim seeking to rely on clause 2.3. That clause required the plaintiff to refund to the defendant the amount of $20.000.00 if the budget as defined in clause 3 was not achieved. The evidence indicated that at the time of the holding of the meeting on 22 June 2002, that the execution of clause 2.3 for the first 12 month period was to be held over by the defendant until the completion of the following year’s trading to see if the figures in next year’s budget was achieved. I have found that the defendant unlawfully terminated the MC Deed prior to the completion of the second year. I find that clause 8.5 therefore has application and in the terms of that clause;
‘Clause 2.3 does not operate where the Deed is terminated in accordance with this clause 8.’
53 By unlawfully terminating the Agreement prior to the end of the second year, the defendant denied itself the opportunity of proving that the budget figures for the second twelve months were not achieved, and in those circumstances no amount is payable pursuant to 2.3. The Cross Claim must fail.

23 Before proceeding further, I should make some brief observations concerning certain of the provisions of the deed and how they were dealt with in the judgment. Hopefully, they may be of future assistance.

24 The view seems to have been adopted that the notice effectively terminated the relationship created by the deed. Save in the case of a notice given pursuant to clause 8.2(3), this could only be the position if the notice complied with the termination provisions of the deed. Where the notice was given pursuant to clause 8.2(3), it appears to have been intended that it effected a termination even thought there was a lack of reasonable grounds. It would not be the case where the notice was not given pursuant to the provisions and was not lawful. In those circumstances, an acceptance of such repudiation may be required.

25 The Magistrate found that clause 8.3 had application in circumstances where the plaintiff purported to terminate the deed at common law. In my view, that finding was erroneous.

26 It seems to me that there was intended to be a relationship between clauses 8.2 and 8.3. The language used in clause 8.3 conveys the impression that it was intended to provide a remedy where there was a purported termination pursuant to clause 8.2(3) and it was subsequently found that there were no reasonable grounds to support such termination. It reads as purporting to impose an obligation to pay a prescribed sum as the price for purporting to utilise clause 8.2(3) when there were no reasonable grounds to do so.

27 In this case, the purported termination could not be regarded as being given pursuant to clause 8.2(3). Such a termination contemplates the giving of three (3) months’ notice in writing. In the present case, only one month’s notice was given. In my view, clause 8.3 did not confer a cause of action in the circumstances of this case.

28 The court was told that the defendant deliberately did not give notice pursuant to clause 8.2 because it did not want to lose its entitlements pursuant to clause 2.3.

29 The remedy upon which the Magistrate came to award the defendant the sum of $12,575 may be thought to be somewhat unclear. After finding that clause 8.2(3) was a penalty provision, he proceeded to express himself as awarding damages for unlawful termination.

30 What that basis may have been does not need to be pursued. On any view, what was done was contrary to longstanding authority (see, inter alia, AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170; Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1; E V Lanyon, “Equity and the Doctrine of Penalties”, (1996) 9 JCL 234). Both this court and the Local Court are bound by the law as it presently stands. It was not open to the Magistrate to fashion a remedy so as to allow damages (whether he was purporting to rely on either clause 8.3 or some other putative remedy).

31 Further, it was not open to him to allow damages on the issues pleaded and litigated during the hearing. What was done by the Magistrate saw the plaintiff being denied procedural fairness. The issues did not call upon the plaintiff to defend a common law claim for damages and it did not do so. As a consequence, it was not given the opportunity to either lead evidence or make submissions in respect of any such claim.

32 I should add that there is no dispute that the defendant had such a claim. The question may be whether or not such a claim can be fully litigated in the future.

33 The decision reached in relation to the cross-claim is also infected with error. There are a number of matters that require mention.

34 The Magistrate erroneously relied on the provisions of clause 8.5. The deed was not terminated pursuant to clause 8 and as a consequence clause 8.5 had no application. Indeed, this finding was inconsistent with earlier findings made by the Magistrate (see paragraph 24 of the judgment – “The notice was not served pursuant to Clause 8.2”.)

35 I have difficulty with what is said in paragraph 53 of the judgment. If it was intended as providing an additional reason for refusal of relief it does not appear to be either persuasive or address the real issues.

36 The cross-claim was dealt with very briefly in a shorthand manner. It may be that it does have its problems (either in whole or in part). However, it seems to me that the cross-claim cannot be properly disposed of until it has been the subject of closer scrutiny and further findings are made.

37 The defendant contends that there was a misdirection in the construction of clause 2.3. The cross-claim was propounded in respect of financial years. The defendant points to evidence which confirms that the budgets that were prepared were approached on this basis.

38 It is unclear whether the Magistrate really addressed that matter. The impression could be gained that he assumed that it had application to a contractual year. This approach may be correct. Clause 3.2 requires the preparation of a budget for the operation of the business “during the Term” (“Term” is identified in clause 1.2).

39 The entitlement to a refund under clause 2.3 is dependent upon the budgets meeting the definition provided by clause 3. According to that clause, the defendant must prepare the budgets for the operation of the business during the Term and the budgets must address the issues agreed upon by the parties.

40 The question of whether or not there had been agreement in the relevant sense was put in issue by the pleadings. The question was not addressed by the Magistrate.

41 The entitlement to a refund may also be dependent upon the proper construction of the fourth of the five amendments made to the deed. I do not consider that this task has been undertaken.

42 I am satisfied that the plaintiff has demonstrated that there has been error of law which justifies the disturbing of the decisions made by the Magistrate in respect of both the original action and the cross-claim. Unfortunately for the parties, there is no alternative to the matter being remitted back to the Local Court.

43 The judgment and orders made by Lulham LCM on 11 April 2005 are set aside. The matter is remitted to the Local Court for determination according to law. The defendant is to pay the costs of the summons. If so entitled, it is to have a certificate under the Suitors’ Fund Act 1951.

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