Gordon Nominees Pty Ltd v JPA Finance Pty Ltd

[2019] HCATrans 248

[2019] HCATrans 248

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M95 of 2019

B e t w e e n -

GORDON NOMINEES PTY LTD (ACN 004 707 617)

Applicant

and

JPA FINANCE PTY LTD (ACN 616 176 955)

Respondent

Application for special leave to appeal

GAGELER J
GORDON J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO MELBOURNE

ON FRIDAY, 13 DECEMBER 2019, AT 10.51 AM

Copyright in the High Court of Australia

MR J.L. EVANS, QC:   May it please the Court, I appear with MR A.A. SEGAL for the applicant.  (instructed by Hall & Wilcox)

MR P.D. CORBETT, QC:   If the Court pleases, I appear with MR W.H. FORRESTER for the respondent.  (instructed by Collins & Collins)

GAGELER J:   Yes, Mr Evans.

MR EVANS:   Thank you, your Honour.  Your Honour, the position of the applicant is that there are grounds for the grant of special leave with respect to both the penalties issue and the forfeiture issue.  If I could deal with the penalty issue first. 

The primary ground on which it is said the court erred below is that which is set out in paragraph 5 of the written application which appears at page 83 of the application book, namely that the court appears to have adopted, having accepted what was determined by this Court in Andrews, and also what was found by the New South Wales Court of Appeal in the Australia Capital Finance Case, that the doctrine of penalties could apply in circumstance where an insolvency event was triggered under a contractual provision which gave rise to a right of termination on the part of the counterparty, being the one to whom the insolvency then did not occur, that that could potentially operate as a penalty.

That was certainly the conclusion that was reached in Australia Capital Finance by the New South Wales Court of Appeal.  In this case, the Court of Appeal below determined that the doctrine could not be attracted - this is at paragraph 107 of the written reasons, appearing at application book 76, because it was necessary that the conduct which gave rise to the insolvency event would have been required to have been:

envisaged by the parties at the time of the formation of the contract.

We say that that does not form any part of the law of penalties, and particularly the principles where relief against a penalty for a breach of a contractual stipulation arises.

GORDON J:   Is that right?  If you read the sentence before that sentence which you just quoted from application book 77, what it says is that it is not the event of insolvency that gave rise to the - or the clause itself, it was your client’s own conduct which was described as “wilful” in failing to take any step to either set aside the statutory demand or to meet it.

MR EVANS:   Well, your Honour, it cannot be said that we - the court concluded that GNPL, my client, chose not to satisfy its statutory demand.  We say that that was not a conclusion which was open to it to reach.  It could be said that there is an element of choice in the sense that it did not apply to set aside the statutory demand and it was, of course, aware of the existence of the statutory demand. 

GAGELER J:   Well, that perhaps raises a difficulty because you are challenging a finding of fact on the part of the Court of Appeal.

MR EVANS:   No, we are not.  I do not seek to challenge the finding of fact.  It is more in the characterisation of the word “choose” that I am seeking to deal with that.  It is clear - I mean, it is in the evidence.  It is in the Court of Appeal’s reasons.  Mr Gordon, on behalf of the applicant, said that he believed that the statutory demand had been sufficiently complied with in the sense that it had been compounded – mistakenly, I should say, and that by reason of that no steps were taken to set aside the statutory demand.

That, if I may say, is not, with respect to Justice Gordon’s question, in the nature of a wilful default, because it is not per se a wilful default to fail to comply with a statutory demand.  The event which gives rise to the application of the penalty doctrine is the activation of the right to terminate by virtue of the occurrence of an insolvency event.

It was a similar occurrence of an insolvency event in Australia Capital Finance, which was said to amount to a circumstance where the penalty doctrine was attracted.  Then in that case, if your Honours are assisted by a reference there, that is at paragraph 361 in the Australia Capital Finance decision, where it was said that the doctrine was engaged – and then the subsequent questions regarding whether or not, in the circumstances, the termination event was effectively a penalty was then to be considered.

In this case the court said that we did not get to the point of whether or not the penalty doctrine was even engaged.  We say that is, as it were, introducing an additional criterion of effectively foreseeability on the part of the parties to a contract so that the Court of Appeal appears to have concluded that it is necessary for the parties to be able to foresee and in fact potentially to have actually foreseen the particular circumstances which might have given rise to an insolvency event and led to the potential application of the penalties doctrine.

GORDON J:   The other way is to see the clause as being an ability for the parties to protect against the need to deal with a party which either inadvertently or unwillingly has an inability to meet its own financial obligations.

MR EVANS:   That is certainly the way in which the Court of Appeal sought to deal with it at paragraph 104 of the reasons.  But we say that there are two answers to that.  The first is that it is necessary to take into account the particular costs stipulation, or particular primary stipulation which was being dealt with here and also what it is ‑ ‑ ‑

GORDON J:   But that is independent – that is my point.  That is independent of clause 9, is it not?

MR EVANS:   Well, your Honour, the only obligations of JPA under this contract were effectively to accept payment of the money in terms of payment of the costs under clause 9(a) and also to accept, if the full option was exercised, payment of the money.  It had no interest in this contract other than receiving money.

GORDON J:   Pretty good interest.

MR EVANS:   Yes, but it is one that does not necessarily involve it having to deal with a counterparty, whether or not that counterparty is insolvent or not.  The issue is not – if one exercises the option, the immediate obligation is to make payment of the amount which is the purchase price under the option.  That can be done by an insolvent company as much as it can be done by a solvent company.  It is a question of assets rather than solvency.

The real question, perhaps that your Honour is addressing to me, is the question of the benefit of the insolvency event clause in any case to JPA.  That was not argued before the court below, where we would say that that clause in fact secured – or effectively would always operate as a penalty because there would never be any need for JPA to have any right to terminate simply because a party was insolvent.

It is a very different situation, if I may say, from the one that was present in Australia Capital Finance where you had a party defaulting on an obligation to make a payment and thereby being compelled on an insolvency event to compel the grant of a call option to the financier so the financier could take over the primary contract.  This is an entirely different set of circumstances.

GAGELER J:   You have another ground, the unconscientious ground.

MR EVANS:   We do.  The unconscientious conduct ground, your Honours, operates essentially as follows.  This Court in Tanwar set out the principles in respect of which the relief against forfeiture might be available.  That was cited by the Court of Appeal.  It is the passage in Tanwar at paragraphs 58 and 59 of the joint reasons.

GAGELER J:   You said it is in the Court of Appeal judgment?

MR EVANS:   It is, your Honours.  I apologise, I am incorrect in that.  I apologise.  It is at paragraphs 58 to 59 of Tanwar.

GAGELER J:   We have them.

MR EVANS:   Thank you.  The essential point to be made out of that is the jurisdiction for relief against forfeiture is not closed in the sense that one or more of “fraud, accident, mistake or surprise” is required in order for the jurisdiction to be enlivened.

GORDON J:   But they are just ideas that give rise to the fundamental thing which underpins it and that is unconscionable conduct and it must be exceptional.

MR EVANS:   Yes, although it is said that, at paragraph 59 in Tanwar:

It should be made clear that what is said above does not support any proposition that the circumstances must be “exceptional” before equity intervenes.

GORDON J:   Correct.

MR EVANS:   What is then said is by citing the joint judgment of Justices Deane and Dawson in Stern, referring back to Justices Mason and Deane in Legione v Hateley where it is said it is not required:

that there must be unconscionable conduct of an exceptional kind before a case for relief can be made out . . . The circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable ‑ or, more accurately, unconscientious ‑ conduct.”

We say that in the correct approach, which is that which was described originally by Justice Robson and is then repeated by the Court of Appeal at paragraph 27 of the Court of Appeal reasons - that is at application book 48 - so, essentially, that in the consideration of an application for relief against forfeiture there is a three‑stage process:  firstly, to identify the right or rights that would be forfeited; second, to identify the legal rights the exercise of which would affect the forfeiture; and, third, the identification of the reasons why the exercise of those legal rights would be unconscientious.

Then we say that further, at paragraphs 76 through to – sorry, at paragraph 80, the Court of Appeal correctly identified the utility in the answering of the third question, namely, whether the conduct is unconscientious in the circumstances of the five subsidiary questions identified by Justices Mason and Deane in Legione v Hateley which have been applied in subsequent cases.

GAGELER J:   You say they lost sight of those subsidiary questions when they came to address the third of the questions?

MR EVANS:   We do indeed.  The way we put that in terms of it being not merely appealable but also an appropriate ground for the grant of special leave is that the Court of Appeal essentially concluded that because there was nothing unconscientious in JPA serving a statutory demand in the circumstances where Gordon Nominees had failed to pay the costs required to be paid under clause 9(a) ‑ ‑ ‑

GORDON J:   Or set aside the statutory demand.

MR EVANS:   ‑ ‑ ‑ and where it did not induce, as the Court of Appeal concluded as a matter of fact, JPA’s failure to set aside the statutory demand, that there was not unconscientious conduct on the part of JPA and that was the end of the inquiry.

GORDON J:   That is what those five questions are directed at, are they not, that is, that is that broader question.

MR EVANS:   In my submission, the Court of Appeal erred effectively in two respects in this way.  The first was to focus the unconscientious conduct, not upon the act of termination – that is to say, the exercise of the right to terminate on the occurrence of an insolvency event – but, rather, on the unconscientious event – on contact that occurred beforehand.  The second is to not approach the five subsidiary questions correctly. 

GORDON J:   They are not required in every case, are they?  There is not some rule that you have to go through all of them?

MR EVANS:   It is not.  But, if I can answer your Honour’s questions – in this case, we identified that the way in which the five questions would be characterised in this case – restating them – so that is reproduced at paragraph 49 of the Court of Appeal’s reasons at application book, 55 ‑ ‑ ‑ 

GAGELER J:   Was there any evidence of the value of the right that was terminated?

MR EVANS:   That is a somewhat difficult question.  There was, before Justice Robson.  We sought before the Court of Appeal at the hearing of the appeal, leave to file a document which was tendered before Justice Robson but was overlooked in the preparation of the application book and that leave

was refused.  We refer to that in our special leave application at footnote 7 to the existence of that document.  We would, if special leave is granted, seek to rely upon that document. 

GORDON J:   Can I ask one other question?  Even if one was to – and I have now reread paragraph 49, application book 55 – if one actually approached those same five subsidiary questions, why is it not open to say it was not inadvertent – it was, as I said, at least arguably wilful.  Your client could have withdrawn the money from the trust account at any time.  There was no application made to set aside the statutory demand or to otherwise meet it.  They did not induce it.  It was your client’s choice not to comply.  In a sense, it was a bad deal.  Why are they not also open answers to those five questions – that even if you actually applied them, you would not get to the answer that you wanted.  

MR EVANS:   Your Honour, because the five questions – only one of them is really directed to the – the first question is, in the original formulation, whether the conduct of the vendor contributed to the purchaser’s breach and it can be seen that the Court of Appeal effectively has answered that question in the negative.  But the other questions – was the purchaser’s breach trivial or slight and inadvertent and not wilful?  In terms of it not being wilful I have already said that there was evidence below which was that a decision was made not to contest the statutory demand.  That, in my submission, does not lead to a conclusion that the occurrence of the insolvency event is something that occurs wilfully and it ignores, if I may say, the final three questions altogether which are of consideration, not the point of the anterior conduct of JPA in this case but the point of what is the consequence of the strict insistence upon the exercise of its legal rights.

That is the point where we say the Court of Appeal approached the test fundamentally wrongly in that it seems to have said JPA did not participate in unconscientious conduct; that is the end of the matter.  It effectively, if I may say, elevates an answer to the first subsidiary question:  did the conduct of the vendor contribute to the purchaser’s breach to not merely one of five subsidiary considerations for – five questions for consideration but to a conclusive answer against the possibility of forfeiture, the forfeiture doctrine being enlivened.  We say in that regard the Court of Appeal necessarily fell into error.

GAGELER J:   That is really your two points, is it?  Your time is nearly up.  Is there something you wish to add?

MR EVANS:   No, those are the two principal points.

GAGELER J:   Yes.  Mr Corbett.

MR CORBETT:   If the Court pleases.  There is no special feature of this case which warrants the attention of this Court.  This case was based upon the construction of a private agreement between commercial parties that was negotiated at arm’s‑length by two men of business with the assistance of their lawyers.  The clause which falls to be construed is not an unusual one in the sense that it is reserved to either party the right to terminate the agreement upon the happening of an insolvency event.  There is no dispute in this case, no factual dispute, that there was an insolvency event which triggered the right to terminate. 

The proposition which my learned friend wishes to put forward is that a conventional clause of this nature should be construed as a penalty because after the event of the formation of the contract events transpire which they regard as unfair or penal by the exercise of the right created at arm’s‑length. 

That, with respect, is a novel concept and one which this Court ought not to entertain.  It is, in effect, arguing that close contractual conduct should be brought in to assist in the construction of the clause and that is not what the cases about penalties advocate.  That is not what this Court said in Paciocco about the construction of the penalty clause and what constitutes a penalty for the purposes of equitable intervention.

So what my learned friend seeks to contend is a proposition which is, with respect, bad in law but one which is extremely novel at best in terms of a commercial contract of this kind.  One could envisage, if my learned friend is right, that a commercial contract where either party reserves the right to terminate insolvency would have to be reopened if either party contended that it was somehow unfair to terminate or insist upon the strict legal rights created by the contract.

So there is, with respect, no point of principle raised by this case nor is there, with respect, any error in the findings of the Court of Appeal, in particular the judgment of Justice of Appeal McLeish, in the application of principle or the facts in respect of the penalty.  The concept of a penalty was one raised by the trial judge in his reasons, and it was not one which was raised below by my learned friends as being a source of relief.

GAGELER J:   His case was always relief against forfeiture.

MR CORBETT:   There were two points, effectively, taken below, your Honour.  The first is the notice point, which your Honour has probably seen from the Court of Appeal’s decision, which they failed on on appeal – that is, that the notice was not in accordance with the contract.  Then, secondly, if notice was validly given, that relief against forfeiture should be granted because it was somehow unconscientious for us to rely upon our strict legal rights in the circumstances of this case.

Now, turning back to the relief against forfeiture point, what my learned friend seems to be contending is that unconscientious conduct in this particular case should be considered in some form of vacuum, regardless of the conduct on the part of the respondent or the person to whom the applicant seeks equity’s relief to intervene.  So, regardless of their conduct, there seems to be some overarching entitlement to set aside a transaction for unconscionable conduct if the circumstances of the case somehow warrant it.

GORDON J:   They seem to suggest there was no independent requirement on them to establish unconscientious conduct.

MR CORBETT:   That is so.  That is the second point – the way I read the second point in their application and that the only relevant considerations are the five questions identified in Legione v Hateley and that it is not necessary for them to establish some disentitling conduct on the respondent’s part before equity will intervene. 

With respect, that is not what this Court has said on numerous occasions in relation to the concept of unconscionability and there is nothing about this case which, with respect, requires those principles to be revisited.  Nor is it factually the case that there was unconscientious conduct.  Justice of Appeal McLeish was very clear in that, that there was nothing on the part of JPA that warranted a court of equity intervening because of its entitlement to rely upon strict legal rights.  In fact, as he said at paragraphs110 and 111 of the reasons, it was the election of the applicant to take a particular course of action which led to the consequences of termination.

GAGELER J:   Not inevitably did it lead to the consequences of termination.

MR CORBETT:   No, it did not, but it created the right to terminate under the agreement, which was reserved to the parties and negotiated at arm’s‑length.

GAGELER J:   Yes.

MR CORBETT:   It was a clear consequence of that election.  With respect to my learned friend’s argument – and this appears in the application submissions – we do not accept and we did not accept at trial or on appeal that Mr Gordon, the principal of the applicant, made any mistake whatsoever. 

The evidence below was that he was shocked and surprised by the fact that we had exercised our right to terminate but there is no evidence, and there was no evidence below, that there was a mistake as to the effect of the election that they made.  We were at pains to put that below both to the Court of Appeal and to Justice Robson and neither court made a finding of any relevant mistake. 

So what my learned friends are now asking this Court to do is to revisit those factual findings and deem there to be some form of mistake which would enliven the jurisdiction in equity to relieve against forfeiture.

GORDON J:   So I put to Mr Evans that is in a sense what is set out in paragraph 113 of the judgment of Justice of Appeal McLeish – that is, it is not mistake; they chose not to comply with or apply, not because of any unconscientious conduct and not induced by the conduct of JPA.

MR CORBETT:   That was so, your Honour, and that is the case which we ran at trial and before the Court of Appeal.  That was clearly open on the evidence, the correspondence passing between the parties, which Justice of Appeal McLeish sets out, that there was this course of conduct between the parties whereby there was a dispute about legal costs.  The applicant reserved its legal rights.  We served the statutory demand.  They did not seek to set it aside.  They elected to roll the dice, as we put it, and they were unsuccessful in doing so and we pursued our strict legal rights.

GAGELER J:   What about this question that I raised about the evidence of the value of those terminated rights?  Where does that stand?

MR CORBETT:   There was no evidence at trial or on appeal as to the value of that right.  There are the contractual provisions which talk about the right to exercise the option in February of this year for $2.1 million plus GST.  That was the option price but there was no evidence about the value to the applicant of that option should it be exercised.

Without that evidence, with respect, if there had been some evidence of that nature, perhaps the loss of the right may be something more persuasive or convincing but there simply was not and that is not the way in which the case was put below or before the Court of Appeal.

So there is no error, with respect, in relation to the Court of Appeal’s finding and nothing which the Court of Appeal - no unconventional application of principle or fact by the Court of Appeal that warrants the intervention of this Court or revisiting by this Court.

What Justice of Appeal McLeish did is apply very well‑recognised principles of law to the facts of this case in a very conventional manner.   He properly, with respect, construed the contract provision of clause 7 in its commercial context at the time of formation of the contract and found it not to be a penalty and there is nothing controversial about that finding or construction; in fact, it is entirely consistent with a clause of this nature.

Having found that this was not a penal clause, he turned to the question of relief against forfeiture.  He stated the principles without departure from what this Court has said about those principles and other courts have said.  He came to the assessment of whether or not it was unconscientious for the respondent to rely upon its strict legal rights and whether equity should intervene in the circumstances of the case and he found that by reason of the conduct of the applicant, equity ought not to intervene in the circumstances of this case.

He applied, with respect, the correct legal test including the correct legal test identified by the Court in Tanwar, which goes beyond the five questions.  I think Justice Gordon raised that issue with my learned friend.  Tanwar at paragraph 44 clearly states that the inquiry is not one limited to the five questions and ought not be limited to those five questions but, even if those five questions were strictly applied, we would say the answer is that there is no unconscientious conduct because there was nothing in what the respondent did which was a departure from its clear legal rights under an express agreement.  If the Court pleases.

GAGELER J:   Thank you, Mr Corbett.  Mr Evans.

MR EVANS:   Thank you, your Honour.  I will be as brief as I can.  Mr Corbett suggested that an approach of construction of a penal clause which required consideration of subsequent matters found no support in the authorities.  In my submission, it does find support.  It certainly finds support in the decision of the New South Wales Court of Appeal in Australia Capital Financial.  It also, if I may say, finds support – sorry, that is the case that we refer to and rely upon.  That is at paragraph 319.  That is at paragraph 9 of our application, and we do not say that that is contrary to any decisions of this Court.

Mr Corbett suggested that we were suggesting that the Court could find relief against forfeiture where it found no unconscientious conduct on the part of JPA.  That is certainly not our case.  As we have sought to make clear in special leave question 2 and also at paragraph 26 of the application document, the question is not whether or not there is no unconscientious conduct.  The question which the Court of Appeal failed to address was whether it was unconscientious to insist upon the strict exercise of its legal right, and that is the point where one assesses unconscientiousness, not as to were you unconscientious in sending the statutory demand?  The question is, is it unconscientious of you to exercise your right of termination in these circumstances?  That is the relevant text.

With respect to the reflections about the findings of fact, you have the benefit of Justice Robson’s reasons for decision.  I think I do no criticism to his Honour where I say he did not explicitly make a single finding of fact in that judgment.  So the factual basis for his reasoning was not made entirely clear. 

The Court of Appeal did make a series of factual findings, but one factual finding that they did not make was whether or not Mr Gordon’s – whether or not they accepted Mr Gordon’s evidence that – and we have reproduced it at paragraph 36 of our application document - that Gordon Nominees, the applicant:

formed the view that the statutory demand was complied with and so there was no “Insolvency Event” as defined in clause 1.1 of the Call Option Deed”. 

All the Court of Appeal did was, say, reach the conclusion stated at paragraph 111 of the reasons of Justice McLeish, where Justice said:

it is hard to credit the proposition that a party could think that unilaterally depositing money in their own trust account, on terms proposed to be agreed, could amount to securing that money if terms were not in fact agreed. 

In my submission that is a particularly harsh finding.  It relates to the application of the terms of a statutory demand.  The statutory demand provides that a party may secure or compound for a debt to the reasonable satisfaction of the creditor.  We initially were going to run that argument before Justice Robson that that had in fact been done, but it was determined not to do so.  But, in my submission, it has never been determined by either the original court or the Court of Appeal as to whether or not Mr Gordon was actuated properly by a mistake within the meaning of that term in the four special heads in Shiloh and subsequent cases.

Finally, I really must disagree with what my learned friend said regarding there being no evidence of value for the purpose of the application of the penalty doctrine.  We have referred to the document that we relied upon originally.  We say it does set out valuations of the right of the 20 units, with or without to JPA the benefit of the call option. 

GAGELER J:   You tried to rely on that in the Court of Appeal? 

MR EVANS:   We did. 

GAGELER J:   What happened to it?

MR EVANS:   We sought leave - if I may say, with respect, we did not think we needed leave because it was a document that was before the court below.  The Court of Appeal approached it on the basis that the question required leave and then refused us leave.  But we would, if necessary, seek to rely upon that document here.  It was part of the documents originally before the judge at first instance. 

GAGELER J:   Very well, thank you.

On the question of penalty the decision of the Court of Appeal, in our view, was plainly correct.  On the question of relief against forfeiture, we are not persuaded that an appeal would have sufficient prospects of success to warrant the grant of special leave to appeal.  Special leave is refused with costs.

MR CORBETT:   If the Court pleases, I perhaps did not hear your Honour Justice Gageler, but we would seek costs.

GAGELER J:   Yes, we have dismissed the appeal with costs.  Thank you.

MR CORBETT:   If the Court pleases.

11.26AM THE MATTER WAS CONCLUDED