Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Financial Pty Limited & Anor

[2009] HCATrans 87

[2009] HCATrans 087

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S572 of 2008

B e t w e e n -

INTEGRAL HOME LOANS PTY LIMITED

First Applicant

INTEGRAL FINANCIAL PTY  LIMITED

Second Applicant

and

INTERSTAR WHOLESALE FINANCIAL PTY LIMITED

First Respondent

INTERSTAR NON-CONFORMING FINANCE PTY LIMITED

Second Respondent

Application for special leave to appeal

GUMMOW J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 1 MAY 2009, AT 10.59 AM

Copyright in the High Court of Australia

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR P. KULEVSKI, for the applicants.  (instructed by VA Lawyers Pty Limited)

MR B.A.J. COLES, QC:   If your Honours please, I appear with MS K.M. RICHARDSON for the respondent.  (instructed by Deacons Lawyers)

GUMMOW J:   Yes, Mr Walker.

MR WALKER:   Your Honours, we submit that, both in statements made in this Court previously and statements made in the reasons in the Court of Appeal in this very case, it is to be seen that there is something in the nature of unfinished business that only this Court can attend to in relation to the important principles in hand.

As to a previous statement in this Court - perhaps the best example of it is to be seen in the statement by Chief Justice Gibbs in AMEV‑UDC 162 CLR 170 at page 174, conveniently and significantly quoted by Justice Allsop at page 43 of the application book, paragraph 51, and in particular what the Chief Justice noted was not called for to be decided in that case, and has not been decided ‑ ‑ ‑

GUMMOW J:   This is about point 8 is it, “We are not concerned”?

MR WALKER:   Yes, that is right.  Now, what this raises, of course, is a fundamentally important question of doctrine involving very likely the interplay between common law and equity, that is, penalty and relief against forfeiture, of the kind that was discussed in Legione v Hateley, but which has never been determined so as to decide the proper outcome in cases like the present.

In cases like the present it can be seen that the parties had stipulated for certain events frankly in relation to breach.  One can see the term relevantly at page 2 of the application book.  Clause 20.1 provided for termination upon breach ‑ ‑ ‑

GUMMOW J:   …..now been supplied with the agreements.

MR WALKER:   No, I am sorry about that.

GUMMOW J:   We have, we have them.

BELL J:   Yes, we have them.

MR WALKER:   I am sorry, your Honours do have them.  It is clause 20.1 which – they are in slightly different form but not in any of the material parts.  You will find in number two at page 183 ‑ ‑ ‑

GUMMOW J:   Does not one begin with 10.1?

MR WALKER:   Yes.

GUMMOW J:  

Interstar will, subject as herein provided –

Mr Coles says clause 20 herein provides.

MR WALKER:   Yes, and that is the argument that says here is the definition of the right.

GUMMOW J:   Yes.

MR WALKER:   My point is this, that by drafting an event which is brought about by reason of conduct which is contrary to a promise – which sounds like a breach - or worse, by drafting an event constituted by the opinion of the party to benefit from this event that something has happened contrary to a promise in that regard brings in its train a financial consequence – we characterise it as a penalty – which is avowedly out of all proportion to what would be damages were that event sued on as a breach, and in our submission, to see this as outside the doctrine of penalty is an egregious reward of form over substance, and this case ‑ ‑ ‑

GUMMOW J:   The form, however, is an expression of freedom of contract, is it not?

MR WALKER:   Unquestionably, but the whole point ‑ ‑ ‑

GUMMOW J:   These penalty doctrines to some extent precede 19th century views of freedom of contract and they bump up against one another.

MR WALKER:   It think it is unquestionably the case, as we would put the legal history, your Honours, that the development in fairly close to the modern form of penalty preceded the mercantile 19th century full flourishing of freedom of contract, but that the doctrine of penalty went into no decline, survived, and still thrives, and this Court’s ‑ ‑ ‑

GUMMOW J:   The question is how much does it thrive?

MR WALKER:   Quite so.

GUMMOW J:   And you say there is unfinished business?

MR WALKER:   Yes, this Court described in Ringrow what might be called – and was called – the “standard application” - paragraph 10 in Ringrow - and that, in our submission, is a very important epithet.  It is not the universal understanding.  It is not the exclusive or mandatory requirement that the way in which it is briefly described in paragraph 10 of Ringrow - where it was not really in contest – is the end of the matter.  This Court in Ringrow did not set out to answer the questions that have been left open.  It did not set out to decide issues which have been evenly left in the jurisprudence in the decisions to which we have both referred in our written submissions, and to which the learned President made detailed reference in deciding that it is only in this Court that the matter which was decisive in this case can be determined and what ‑ ‑ ‑

BELL J:   When you say “the matter that was decisive in this case” there is simply no doubt that the President flagged that there was unfinished business, but it did seem to me that there were a number of construction issues that the President decided against you which are in a different category.

MR WALKER:   When your Honour says “construction issues” there was no disagreement that there is a covenant 6.2(h) that we have all noted ‑ ‑ ‑

GUMMOW J:   Just a minute - 6.2(h).  Yes, “act honestly”.

MR WALKER:   Yes, that on any view of it – I mean that cannot be put to one side - that which on the first alternative occurs to bring about the event leading to termination and what we characterise as a penal consequence is in breach of that.  The second alternative is a device.  The second alternative is that the event comes about if in the opinion of the party standing to benefit financially from the event occurring, that breach has occurred.  Although the word “breach” is not used in the critical phrase, in our submission, there is no contrary construction of these transactional documents which can answer the proposition that the event which led to this windfall comes from a matter which either is – or in the opinion of the party benefiting from that opinion being formed – believed to be a breach.

GUMMOW J:   But there are many contractual relationships which consensually are brought to an end upon the occurrence of an event which is, as it were, blame neutral.

MR WALKER:   Yes, and that is one of the reasons why we say this is an appropriate case to decide what it means to say in the standard application penalties are what I will call exorbitant consequences upon a breach and it would be decisive in this case for this reason.  At first instance, in what we submit is a very thorough and balanced assessment both of the jurisprudence and of what the terms of the transactional documents throw up, Justice Brereton pointed out the oddity that we fasten upon, that where there is frank breach referred to as the event of termination, the parties have, no doubt guided by clever lawyering, declined to stipulate as a consequence, this windfall.

One can assume that is not because of altruism on the part of those drafting on the other side.  It has plainly been done because it has been thought that where breach is so frankly stipulated as the event of termination then jurisprudence in this Court – as it assuredly does – makes it clear that that can bring in its consequences the inquiries which in due course can lead to the partial invalidation involved in the application of the doctrine of penalties, but we then move to the term which Justice Brereton correctly interpreted so as to produce his statement of principle which we have adapted but slightly for the special leave question which we offer this Court.

Could I show your Honours page 61 of the application book, paragraph 75?  The essential background to that formulation, which we respectfully submit is one deserving of the attention of this Court, is that the event in question is one which is not morally neutral, it is not legally blame free, but it has been, by clever drafting, referred to without use ‑ ‑ ‑

GUMMOW J:   You use this word “clever” as some term of abuse.

MR WALKER:   Yes, I am sorry, your Honour, I will start again.  It has been used by drafting which ‑ ‑ ‑

GUMMOW J:   ….. be clever; that is why we are here.

MR WALKER:   ‑ ‑ ‑ pays regard more to language than to what the language describes.  It uses language as a label rather than as describing matters of substance because the word “breach” appears in this provision, and we know that what is described in the next provision must be a breach, subject of course to what Justice Brereton called “the proxy provision” whereby the event occurs if somebody thinks a breach has occurred rather than if a breach has occurred.  In paragraph 75, his Honour tried to encapsulate that by the reference just above line 30:

an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the first party -

Now, “lying within the area of obligation”, that is, unless you behave in a certain way, 6.2(h), you will be in breach of that provision, and 20.1(c) plainly contemplates something which – without the need for any factual elaboration – must be in breach of that.

In our submission, it is difficult to see why in substance, that difference – the difference between something falling with 75 and something which is frankly called a breach – ought to have produced the difference of outcome which the Court of Appeal said it was bound by authority to hold.  We have pointed out in our written ‑ ‑ ‑

GUMMOW J:   This phrase “a matter of substance”, which we all use, is a bit tricky, is it not?

MR WALKER:   Yes, it is and that is one of the reasons why this Court should look at this matter, because otherwise it becomes, as it were, a slogan to be thrown around by those wishing perhaps to interpret words differently from their ordinary meaning.  In our submission, the substance in question has been given content by Justice Brereton, and the Court of Appeal has not so much ruled against his reasoning as saying in disagreement with him that case law precludes them going that far - and precluded him.  What he has said is this.  The substance in question is to look at how the event said to give rise to this entitlement to what I am calling a windfall has in the event arisen because of something which, falling within an area of obligation, is indistinguishable in its legal character from something which is called a breach.

There is no action for breach of contract, but there is the established device used of a termination upon an event.  In this Court it has already been held that if one or more of several events which can lead to termination and financial consequences is in fact a breach, then the doctrine of penalties applies.  That has already been held; that is established.  All we wish to go is the next step to say “And breach should be understood to have as its substance the notion of an action outside the area”, that is outside where you are permitted to act – an action in this case, to put it concretely, which is dishonest, where you have promised to be honest.

If that is so, then the importance of the relationship between penalty and relief against forfeiture is highlighted, because it need hardly be said that the common law approach in penalty for someone in my client’s position seeking relief may be quite different from the approach of equity in the jurisdiction to relieve against forfeiture.  There is an obvious relationship between the two including the combined equitable and common law antecedence of the doctrine of penalty, but in our submission, this case provides an ideal vehicle because it involves a plaintiff who, on the hypothesis, either has been or is believed to have been, dishonest.

GUMMOW J:   That may not be all that clear.  If one looks at 20.1(c) it talks about:

or Interstar considers, in its reasonable opinion -

Mr Coles says there is an unresolved factual debate about whether a reasonable opinion was formed.

MR WALKER:   But that is not the basis upon which the case has been determined.  The case has been determined, and against us, and we say simply as a ‑ ‑ ‑

GUMMOW J:   Are there not further issues?

MR WALKER:   There will not be any further factual issue there because if we are right, that is, to use Justice Brereton’s language, simply a proxy for what is, in substance, the triggering of a financial entitlement to something that is way above compensatory damages in an event that is a breach.  That does starkly raise the question as to whether the use of labels, or the use of language, or the interposition of something before you come to a judicial determination of breach – in this case the opinion of a party – is enough to deflect what is obviously the judicial supervision of freedom of contract, which is involved in the doctrine of penalties.

It is true that penalties predates the flourishing of 19th century freedom of contract ideology but, with respect, the latter never drove the former from the field.  There may well have been adaptation, but it has not been adapted in any of its basic lineaments at all.  It is still an inquiry as to whether there is what might be called an overreaching by stipulation which can been seen to be in terrorem in relation to something in the nature of an obligation, and in substance, this case ideally raises it because the difference between frank breach and being, in substance, a matter of “are supposed to have acted contrary to our obligation” is the difference between first instance success for us and Court of Appeal failure for us, all the more importantly when at page 162 of the application book, paragraph 106, Justice Allsop identified the formulation in Justice Brereton’s paragraph 75, to which I have taken you, as being, in Justice Allsop’s paragraph 106, explicitly a matter for this Court to look at.

In our submission, coupled with Justice Allsop’s reference at page 161, paragraph 104, to what might well be intellectually the critical matter of the relationship between penalties and relief against forfeiture being “less than pellucid”, in our submission it means that without a grant of special leave there is left in this area as the most recent word - obviously not the most binding authority, but the most recent word on this matter – a

consideration of authorities in this Court which avowedly does not seek to resolve them and says that must be a matter for this Court.

In our submission, that is a paradigm case for a grant of special leave.  Justice Gummow has raised an important matter the other side has raised, but it is not important in terms of defeating this case as an appropriate vehicle for the simple reason that if we are right there is no call for, no relevance in, any factual exploration as to the genuineness of anyone’s opinion as to whether we were in breach of 6.2(h).

GUMMOW J:   Can we just look at your draft notice of appeal at page 191.  Why is 5 alternative to 4?  I do not quite understand that.

MR WALKER:   That is the difference to be gathered from Justice Brereton’s paragraph 75.  The alternative seeks to recognise that the four judges below can be read as understanding there to be a difference between a case of breach – I suppose that means a cause of action for breach – and a case where an event is described, including by this proxy alternative, by reference to a state of affairs that is brought about by reason of a breach.  We submit that properly understood, to use the phrase “as a matter of substance”, there is no distinction for the doctrine of penalties, but that is the point of doctrine that we say is transcendent and important that needs to be argued.

GUMMOW J:   So you are focusing on that some are a subspecies of the class of termination upon a stipulated event, but not termination for breach?

MR WALKER:   Where it is not referred to as breach, the ideal ‑ ‑ ‑

GUMMOW J:   But in substance is breach?  That is what it comes to.

MR WALKER:   Yes, and with the extra point – an important point because it again raises the question of the capacity for draftsmen to step around the doctrine, but the second point of this proxy alternative of the opinion of the person who stands to benefit from what would otherwise be a penalty.  Those, in our submissions, are points ideal for a grant of special leave.

GUMMOW J:   Yes, Mr Coles.

MR COLES:   If your Honours please.  In the respondent’s submission - although the applicant raises certain matters of undoubted interest - any invitation to extend the law of penalty necessarily as a matter of policy collides with consistent course of authority in this Court favouring freedom of contract, and recognising that where that freedom of contract is to be further infringed upon in areas where the market is unregulated, then that may well be a matter for the legislature.  But, in our respectful submission, however interesting may be the question which our learned friends identify, and however theoretically possible it may be that one day there may be a need to agitate the concerns which it raises, in our respectful submission, your Honours would take into account in these proceedings at least the following matters.

Firstly, these proceedings, of course, come to this Court via the Court of Appeal from the identification by his Honour – opposed by the present respondent – of a separate question which called attention to no more than essentially the issue of construction as to whether there was a penalty or not.  In our respectful submission, your Honours said in Ringrow - if I can give your Honours the reference ‑ ‑ ‑

GUMMOW J:   I do not think Ringrow can be given the beat‑up that you try and give it, Mr Coles.

MR COLES:   The respectful attention to its text perhaps, your Honours, but your Honours did there observe – if we may just adopt the observation ‑ ‑ ‑

GUMMOW J:   None of these ideas were in play in the dispute in Ringrow, I do not think.

MR COLES:   No, quite, that is plainly so, but your Honours there observed that, in effect, there would need to be some identification of particular features of Australian conditions, some change in the nature of penalties, or some element in the contemporary marketplace which might excite, enliven or inform the context of the dispute so that the point, whatever it may be, could emerge in that context.

The present case, of course, coming as it does by way of the determination of a separate question, is stripped of any of that context and any exploration of surrounding circumstances which might have enlivened one or more of those considerations.  But more fundamentally may we say then, your Honours, that the utility of the point raised depends of course, very much on the applicants being able to surmount issues of construction that must be overcome before the point is of any use to the applicant, because if the points upon which the Court of Appeal differed with Justice Brereton are correct, that is to say that there was relevantly - on the proper construction of the agreement – no accrued right to the applicant, there was simply a mechanism for its remuneration, which terminated in the events that happened along with the contract, then of course you do not get to this question.

Can I say, your Honours, obviously as the proceedings in the courts below indicate, there is room for discussion about that, but the unanimous conclusion on that issue of the Court of Appeal is not so plainly wrong that even if superficially minds might differ on its reconsideration it is not of sufficient importance in itself to agitate the concern of this Court on what is really a one‑off question of construction, so that is a matter the applicant would, in our respectful submission, need to overcome.

The third, I suppose, general point we would make is that the special leave question which the applicants formulate - which really has its origin via Justice Brereton’s judgment in the observations of Sir William Deane in AMEV‑UDC v Austin in the passage that is set out in the judgments below – is itself a formulation which is at least capable on its face of demonstrating a degree of inexactitude or imprecision in its application, and whilst we do not criticise our learned friends for that formulation, indeed it is as correct a formulation of what Sir William Deane said as any paraphrase could allow, it does not suggest, in our respectful submission, that were the Court to entertain a development in the law encouraged by that dissenting observation, or that observation more accurately in a dissenting judgment, there would be necessary or apparent advantage to the law by the substitution despite longstanding authority to the contrary of a new formulation which begged many questions and posed many issues as to what indeed was the sort of conduct that a person might have had, inferentially or implicitly, an obligation to avoid.

It would not, in our respectful submission, therefore, your Honour, apparently necessarily contribute to certainty in the law while at the same time colliding with policy that favours contractual freedom.  We would put therefore, your Honours, that there be little reason to suppose that the Court of Appeal erred in the conclusions it reached essential for the disposition of the appeal and the present application would not lead, necessarily, to generating the point, however interesting and otherwise important, which the applicant seeks to ventilate.

GUMMOW J:   There will be a grant of special leave in this case.  I suspect it is not within the limits of a one‑day matter, is it?

MR WALKER:   That would be our assessment, your Honour.

GUMMOW J:   A day and a half, at least, to two days, I would say.

MR WALKER:   A day and a half to two, I would think.

GUMMOW J:   I would think so.  All right, so there will be a grant of special leave in this case.  We will adjourn shortly to reconstitute.

AT 11.28 AM THE MATTER WAS CONCLUDED