Kolt Fashions v Prince
[2014] VMC 12
•5 JUNE 2014
| IN THE MAGISTRATES’ COURT OF VICTORIA |
AT MELBOURNE
CIVIL DECISION
Case No. C12434409
| KOLT FASHIONS PTY LTD | Plaintiff |
| v | |
| DAVID PRINCE | Defendant |
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MAGISTRATE: | GINNANE |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 15 NOVEMBER 2013, 7 FEBRUARY 2014 |
| DATE OF CORRESPONDENCE BY PARTIES RECEIVED: | 2 MAY 2014 |
DATE OF DECISION: | 5 JUNE 2014 |
CASE MAY BE CITED AS: | KOLT FASHIONS v PRINCE |
REASONS FOR DECISION
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Catchwords: Credit agreement for provision of trading finance by company - deed of guarantee executed by director - personal liability under guarantee - amended terms and condition of trade - imposition of cancellation fee - claim for debt under director’s guarantee - company placed in liquidation - whether notice of change in terms and conditions of trade given to company- order placed by company cancelled - whether cancellation fee a genuine pre estimate of loss or a penalty - accord and satisfaction - whether plaintiff agreed with liquidator on retention of title to stock of company in liquidation such as to discharge primary debt in full and therefore the defendant’s guarantee - obligation of a co-obligor under guarantee - order made for plaintiff
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr Henwood | Wood Fussell |
| For the Defendant | Mr Turner (15 November 2013); Mr James, Solicitor | Clamens Evans Ellis
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HIS HONOUR:
Introduction
1.The plaintiff supplies all manner of fashion shoes to retailers. It is also a wholesaler operating a business in a competitive market. In addition to supplying retailers with shoes, it manufactures to order. The plaintiff's Chief Executive Officer Dean Kolthek said it operates a manufacturing facility in China. It obtains orders to purchase and to manufacture in any number of conventional ways, such as by phone, online and in person.
2.The plaintiff gave evidence concerning the provision of a credit facility with a company called Shooii Ltd (“the company”). The defendant was a director of the company. The company was an “on-line” retailer of fashion footwear.
3.The company made an application to the plaintiff for the provision of commercial credit dated 4 November 2011. The application was signed for and on behalf the company by the defendant in his capacity as director (Exhibit P1).
4.On 3 November 2011 the company had signed an acknowledgement and acceptance of the plaintiff's credit trading terms (Exhibit P2).
5.The defendant also signed a director’s personal guarantee of the payment of goods purchased by the company pursuant to the plaintiff’s credit and trading terms (Exhibit P3). The guarantee is expressed as follows:
1/we the undersigned understand the trading terms as explained to us by the supplier. I/we guarantee payment of any and all accounts for goods purchased by the above company together with any legal or out of pocket expenses associated with the collection of any outstanding money. I/we understand this guarantee binds me/us personally.
6.The plaintiff sues the defendant for the sum of $36,906.78. Its claim is particularised by way of Amended Statement of Claim dated 22 October 2013. The central allegation underpinning the claim is that between March and June 2012 the plaintiff supplied the company with products ordered by it and invoiced in the amount of $47,851.54 made up of the wholesale cost of shoes in the amount of $33,580.34 plus a cancellation fee of $14,271.20 (see: paragraph 6 of the Amended Statement of Claim). The company was placed in administration and thereafter liquidation. In the course of the liquidation an online auction of certain of the plaintiff’s stock the subject of a retention of title claim occurred and realised the amount of $7,269.13. This reduced the plaintiff’s claim to $36,906.78.
7.By Amended Notice of Defence the defendant pleaded the following in connection with the guarantee:
10. The defendant admits to signing a personal guarantee in the trading terms and conditions but denies a personal guarantee can be executed for the amount of $47,851.54.
8.Self evidently, paragraph 10 of the Amended Defence pleads an ultimate fact. The fact relied upon to reach the conclusion sought by the defendant is that by reason of certain conduct between the plaintiff and the liquidator the defendant’s obligation on the principal debt was discharged and, in any event, the sum identified as a “cancellation fee” is a penalty and void and unenforceable at the suit of the plaintiff.
9.The defendant was represented at stages in the proceeding by different practitioners. The defendant’s Notice of Defence to the Statement of Claim filed in the Court was drawn by the defendant personally. At one point in the litigation the parties entered consent orders granting the defendant leave to file an Amended Defence and leave was also granted for the plaintiff to file and serve an Amended Statement of Claim. As odd as the juxtaposition of these directions would appear, the court record identifies that they were complied with. The defendant’s Amended Defence was also pleaded under the hand of the defendant personally. Thereafter the plaintiff filed an Amended Statement of Claim.
10.When the matter was called on for hearing before me the plaintiff was represented by Mr Henwood of counsel and the defendant by Mr Turner. The hearing did not conclude on 15 November 2013 and it was adjourned part heard until 7 February 2014. On the resumed hearing date the plaintiff was represented again by Mr Henwood. The defendant however was represented by Mr James, solicitor. After the reservation of my decision I invited clarification of a matter regarding the precise date the administration of the company concluded and the liquidator was appointed in order to exclude any potential operation of s 440J (1) of the Corporations Act 2001. On 2 May 2014 the parties forwarded a letter jointly signed the result of which is that it unnecessary to consider that section. The company went into voluntary administration. The administration ended on 3 August 2012 when liquidators were appointed. The plaintiff commenced this proceeding on 29 August 2012.
The course of the proceeding on 15 November 2013
11.The parties proceeded by way of an “Agreed Set of Facts”. That document records the following matters:
AGREED SET OF FACTS
1.Between 2 March 2012 and 31 March 2012 orders were received from Shoii Limited and goods were delivered to Shooii Ltd in the amount of $29,904.71
2.On or about 20 April 2012 Shooii Limited placed an order for goods for the amount of $43,245.
3.The plaintiff forwarded order confirmation to Shoo Limited on 24 April 2012 attached to the email were the updated credit and trading terms
4.The plaintiff submitted proof of debt dated 11 July 2012 for the debt in the amount of $44,175.91 and the liquidators admitted the debt in that amount
5.When the company Shooii Limited went into voluntary administration in June 2012 the order of 20 April 2012 was taken to have been cancelled
6.There was an online auction of the stock on hand at the time of the liquidation. The stock allocated to the plaintiff realised $7,269.13
12.The plaintiff adduced oral evidence from two witnesses, Mr Koltek and Ms Ashley McDonald, Chief Financial Officer of the plaintiff. The defendant testified.
Variation to trading terms and conditions
13.The plaintiff says that that in March 2012 it amended its credit trading terms. The amended terms applied to all existing credit customers. The amended terms incorporated an important change by the introduction and imposition of a cancellation fee. The amended terms including the cancellation fee are in the form of Exhibit P4. The relevant change is expressed in clause “h” as follows:
A cancellation fee of 30% of the order value will be charged on all cancelled orders. The definition of cancelled order is orders cancelled by the customer not more than seven days after placing the order or orders cancelled by Kolt Fashion if the customer is on hold in terms of clause g.
14.It was not suggested by the parties that clause “g” (reserving a right in the plaintiff to cancel orders if the customer account is irregular) was applicable in this case. The amended terms are undated and silent as to the date of their commencement.
Issues for determination
15.The determination of this case gives rise to the proper resolution of the following issues:
(a)whether a discharge of the defendant as guarantor of the company’s primary obligations under a duly executed guarantee occurred
(b)whether there has been accord and satisfaction of the debt owed by the company to the plaintiff
(c)whether in any event a cancellation fee imposed by the plaintiff on the company accounts and which the defendant guaranteed was liquidated sum or a penalty
Isolating the alleged indebtedness
16.The plaintiff says that it traded with the company prior to and after the introduction of the amended trading terms. That is not contested by the defendant. As to the goods ordered after the introduction of the amended trading terms, the plaintiff claims the relevant period is from 2 March 2012 to 27 June 2012 (see paragraph 5 of Amended Statement of Claim). In short, the plaintiff says that goods ordered by the company from 2 March 2012 were governed by the amended credit trading terms.
17.The Agreed Set of Facts records that between 2 March 2012 and 31 March 2012 orders were received by the plaintiff from the company and were delivered totalling $29,904.71.
18.A further Agreed Fact is that on or about 20 April 2012 the company placed an order with the plaintiff for goods to the amount of $43,245.The sum total of these amounts is $73,149.71.
19.The 20 April 2012 order was subsequently cancelled by the company. The plaintiff says that order was governed by the amended terms and conditions and as such it was permitted to impose a cancellation fee. This claim is resisted by the defendant in both form and substance.
20.On 24 April 2012 the plaintiff in accordance with its normal practise sent confirmation to the company of its order.
21.The plaintiff’s case includes that its amended credit and trading terms were sent to the company at the commencement of March 2012 with its March 2012 statement and again at the beginning of April 2012 with its April statement and also on 24 April 2012 as an attachment to a confirmation e-mail for the 20 April 2012 order placed by the company. Only the 24 April 2012 email attachment from the plaintiff to the company was produced in evidence.
22.The defendant gave evidence. He accepted the correctness of Exhibit P1 and P2. He said that the supply of footwear between November 2011 and 2 March 2012 was cash on delivery.
23.The defendant said he did not see the amended terms until 24 April 2012 by which stage he had placed the 20 April 2012 order.
24.The defendant agreed that on 20 April 2012 the company placed an order for goods in the amount of $43,245. He said he believed that the company’s applicable credit terms and conditions were those in place when the company opened its account in November 2011 and therefore no cancellation fee applied. He said he never executed an amended set of credit terms. He accepted that he didn’t cancel the 20 April 2012 order after becoming aware of the amended credit terms on 24 April 2012. He accepted that in accordance with them, he had 7 days from 20 April 2012 in which to do so. He said that he didn’t believe the amended terms applied to that order and believed the charge related to forward orders and not to existing orders.
25.The plaintiff was unable to produce evidence that the defendant received a copy of the amended credit terms prior to 24 April 2012.
26.The plaintiff submitted that if I concluded that the trading terms as amended were sent by it and received by the defendant in March or April 2012 then I should also accept that the company adopted them by its conduct by placing the order on 20 April 2012. The plaintiff further submitted that even if I was not persuaded of the receipt of the terms when the company’s monthly statement was sent by post in early March or early April 2012 then I should at least be satisfied that the company acknowledged their receipt by its failure to take any corrective action to cancel the order following on the confirmation email sent by the plaintiff dated 24 April 2012. Had it done so, it would not have incurred the cancellation fee because the cancellation would have occurred within a period of 7 days as contemplated under the amended terms. I am not satisfied that this is a necessary conclusion because of differing accounts of the cancellation period given in evidence.
Right to vary terms
27.The defendant relied upon the language of Clause a, that reads as follows:
a Terms:
The Applicant agrees that any purchase of Kolt Fashion Products (product) from Kolt Fashion will be governed by Kolt Fashion’s Credit and Trading applicable at the time of order and by these credit terms. The Credit and Trading Terms may be also varied from time to time by Kolt Fashion sending to the Applicant by email, fax or pre-paid post revised Terms and Conditions of Sale which will (subject to any other agreement made with the Applicant) govern all orders and invoices current with the applicant.
28.In my judgement it is proper that the application of the amended credit terms be applied such that their commencement is conditioned by sufficient evidence of the plaintiff having sent to the credit account holder the varied terms by one or other of the defined methods and on satisfaction of that fact then the amended terms will take effect and govern all orders that are current from that time.
29.The plaintiff testified that a copy of the amended terms and conditions was sent out by post to all credit account holders at the commencement of March 2012 together with the March statement. The plaintiff says the statements for each month are posted. The defendant denies that the company received the amended terms in March 2012. The plaintiff carries the onus of proof in establishing on the balance of probabilities the elements necessary to make good its case. Obviously an important aspect of proof is the receipt by the credit account holder of the varied terms in accordance with clause a. I am not satisfied that the plaintiff has established on the balance of probabilities that the amended terms and conditions were posted to the company with the company’s March 2012 statement. Neither am I satisfied as a matter of fact on the balance of probabilities that the amended terms and conditions were sent to the company at the commencement of April 2012 with the company’s April statement. Whilst the plaintiff says this happened it was unable to produce evidence to such effect. There was no evidence of posting and faced with the defendant’s denial I am not prepared to conclude on a matter of such importance that it occurred. The defendant said that had been made aware of the cancellation fee adopted as part of the plaintiff’s amended terms he would not as its director have countenanced the company trading with the plaintiff on such a basis and the 20 April 2012 would not have been placed.
30.I note too from the evidence that when the plaintiff amended its terms and conditions it did not, for example, adopt a process such as requesting from its account holders a signature and return in order to confirm receipt and acceptance. Although this was not necessary to vary the terms and conditions, nonetheless in circumstances such as these where the plaintiff relies on the fact that they were posted and received by the company and this is disputed by the defendant, then had such an exercise been adopted it would have facilitated proof of the matter and put to rest one way or the other the doubt raised by the defendant.
31.Furthermore Ms McDonald’s evidence was that an account holder could avoid the cancellation fee under the varied credit and trading terms if it cancelled an order within “the selling period”, an undefined term, but a period estimated by her that could be in the order of 4 weeks, a time frame notably and significantly at variance from clause ‘h” of the amended credit and trading terms.
32.Therefore for the reasons stated, I am not satisfied that the plaintiff has proved that on the facts of this it was entitled to impose the cancellation fee on the order placed by the company on 20 April 2012.
33.In light of my finding that a factual basis did not exist as to permit the imposition of a cancellation fee, it is unnecessary for me to determine if the amount calculated as a cancellation fee is a genuine pre-estimate or a penalty and therefore unenforceable. However, as considerable argument was put before me by the parties and in deference to them, I think I should by way of obiter express the view I would have adopted had it proved necessary for me to decide the point.
34.As the High Court of Australia pointed out in Ringrow Pty Ltd v BP Australia Pty Ltd & Ors (2005) 224 CLR 655 at [11] the starting point for the determination of a matter such as this is Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87:
2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage…
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach…
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach…
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid…
(c) There is a presumption (but no more) that it is a penalty when a ‘single lump sum is payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage: Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas at 342 per Lord Watson
35.The defendant in written submissions did not identify how it contended that the plaintiff’s account of how it arrived at the amount of 30% of the order value placed by a credit account holder but subsequently cancelled offended the principles enunciated by Lord Dunedin.
36.The plaintiff led considerable evidence of the mechanism used to arrive at the figure of 30%. Both Mr Kolthek and Ms McDonald spoke of the formula utilised in arriving at the figure of 30%. This evidence was given in furtherance of the matters pleaded in paragraph 5B of the Amended Statement of Claim that the true costs incurred to the plaintiff as a result of a cancelled order is approximately 55% of the wholesale value of the order after taking into account administration, storage, receiving, re-ticketing, re-packaging, incoming and outgoing delivery fees and a write- down of selling price.
37.Accordingly, had I been required to determine the question, I would have been satisfied that the cancellation fee incorporated into the trading terms and conditions for current orders does not offend as a penalty.
Accord and Satisfaction
38.It is fair to say that the overarching argument raised by the defendant to avoid the enforceability of the debt pursuant to the guarantee is that an accord and satisfaction occurred as between the plaintiff and the principal debtor company. If the defendant’s submission is the correct, then the primary debt will have been discharged and in consequence so too will be the defendant’s personal obligation under the guarantee.
39.I agree with the general principle that in construing a guarantee a court should bear in mind that the prima facie intention is that the liability on the guarantee shall continue as long as the principal debt is owing: CBA Ltd v Colonial Finance, Mortgage, Investment and Guarantee Corporation Ltd (1906) 4 CLR 57 at 65. If a plaintiff having not recovered full payment or performance from the debtor agrees to discharge the debtor from any further liability, then the defendant as guarantor will be absolutely discharged. This is both the legal and commercial consequence and quite properly so. This position is of course capable of being avoided, For example, guarantees will on occasion expressly preserve the liability of the guarantor notwithstanding the release of the principal debt. The guarantee in this case appended to the plaintiff’s terms and conditions was not of such a type. However, for the reasons that follow it had no need to be.
40.In assessing whether accord and satisfaction existed, I have had regard to the classical statement of Dixon J (as he then was) in McDermott v Black 91940) 63 CLR 161 at 183-185 in which he said:
The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim.
41.As mentioned earlier the plaintiff went into administration and was subsequently wound up in liquidation. A creditor, as was the plaintiff’s status in the company’s liquidation, is entitled to prove for the amount of a principal debt, s 553E of the Corporations Act 2001 making so much at least plain. It has been said by the learned authors of the “Modern Contract of Guarantee” O’Donovan & Phillips, that:
A central issue regarding the creditor’s right of proof in the principal’s bankruptcy or liquidation is the difficulty in reconciling what has been described as “two potentially conflicting principles: that on the one hand a creditor should be entitled to obtain the full benefit of his guarantee; and that on the other a surety should be entitled to receive the full benefit of a right of indemnity from his liability upon the guarantee"
If the guarantor pays the whole of the principal debt, the guarantor will be subrogated to the creditors proof.
In the absence of the payment of the whole of the principal debt, the amount for which the creditor can prove in the bankruptcy liquidation of the principal debtor depends on whether the surety has guaranteed the whole or merely part of the principal debt.
42.The plaintiff submitted a Proof of Debt dated 11 July 2012. The defendant submits that the plaintiff’s actions that realised the sale proceeds of stock extinguished the debt between it and the company and in consequence the defendant’s obligations under his guarantee of the company’s obligations pursuant to the provision of credit with the plaintiff.
43.The plaintiff disputed the defendant’s analysis of the matter and submitted that looked at as a whole its conduct in realising the stock was a straight forward act of mitigation and not conduct evincing an intention to release the primary debt of the company. I agree for the reasons that follow.
The plaintiff’s dealings with the company’s liquidators
44.The correspondence relied on by parties in the hearing reveal the following occurred. On 2 October 2010 the plaintiff’s David Kretzmer sent an email to Cara Barlett of SV Partners (Exhibit P10). It asked as follows:
Hi Cara,
Can you please send me a written confirmation of our situation regarding the value at which the returned stock will be credit to Shooii’s account?
45.On 10 October 2012, Ms Bartlett responded (part Exhibit P10) as follows:
Dear David,
Please refer to the attached letter confirming our acceptance of your valid retention of title claim over your stock.
Upon collection of the stock to the value of your claim, this will effectively satisfy the debt Shooii Limited has with Kolt Fashion.
46.The principle that stemmed from the liquidator’s letter was that the primary debt owed by the company for the stock supplied would stand discharged.
47.On 22 October 2012 the plaintiff wrote a letter sent by email to Ms Meagher and Mr Van Der Helde, the liquidators to the company (Exhibit P12). The letter was expressed as a response to (Exhibit P10) from Ms Bartlett. It was in these terms:
I refer to your letter dated 10 October 2012. I advise that in general terms we accept a return of stock; however our company requires return of stock to the actual realizable (current market) value of $44,175.91, i.e. not limited to the stock that was invoiced to the company for the foregoing amount.
As you would appreciate, the stock concerned comprised of specialty fashion items supplied to order which, once returned to us, will then need to be resold for the best obtainable price.
Matters that will militate against the realisable value of the stock, include that it is now from a past season that the goods will need to be restocked and will be subject to variations as to condition.
We will further incur the handling costs and advertising associated with the disposal of the stock through a discount clearance site.
In the circumstances we propose that the credit that we provide will be determined at the next realised value of the subject stock, which I anticipate would require the return of all products supplied by us, noted in your letter as "stock on hand as at the date of appointment".
Accordingly we require the return of all Kolt Fashion stock on hand, namely $81,351 invoiced value, as we anticipate that the liquidation of the stock will realise the approximate value of the outstanding claim.
We will of course make all records relating to the disposal of stock available for your perusal. The final amount will not be resolved until all stock has been disposed of by us.
48.In a subsequent letter from the liquidators to the plaintiff (Exhibit P11) sent by email and dated 23 October 2012, so far as is relevant, is expressed in these terms:
As previously advised, your valid retention of title (“ROT”) claim by way of an all monies clause is the value of $44,175.91. This enables you to exercise your rights in collecting any stock to this value only. All other stock that has been paid for by Shooii Limited (In liquidation) (“Shooii”) remains the property of Shooii.
We have also previously corresponded with you on numerous occasions, earliest date of 25 July 2012 to arrange collection of your stock for the above valid ROT.
Our auctioneers have also tried to correspond with you to arrange suitable timeframes view to collect the ROT stock.
Accordingly, we reject Kolt’s request for the entire value of stock on hand totalling $81,351 to be returned to Kolt.
49.The plaintiff submitted that its correspondence reveals nothing more than an intention on its part to mitigate its loss by auctioning the stock on hand.
Liability of co-obligors
50.In the course of the hearing I expressed some reservations regarding the prospects of success of the defendant’s claim that the plaintiff’s dealings with the liquidator disclaimed the debt of the company and hence released the co-obligor. I am satisfied that the defendant’s attempts to find succour in the correspondence passing between the plaintiff and the liquidators by elevating it to that of a disclaimer by the plaintiff of the balance of the indebtedness of the company must fail. The plain expression of the plaintiff’s correspondence is to the contrary, and this was maintained by Mr Koltek in his evidence before me.
51.I satisfied that in consequence the liabilities of the insolvent company were not disclaimed such as to in consequence avoid the ongoing liability for the defendant co-obligor see, for example, Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70.
Conclusion
52.For the reasons stated the plaintiff is entitled to succeed against the defendant and I order as follows:
1.There be an order for the plaintiff against the defendant in the sum of $22,635.58 arrived at by virtue of the sum of $47,851.54 (paragraph 6 Amended Statement of Claim) less the cancellation fee imposed of $14,271.20 equalling $33,580.34 less credits of $3,675.63 (paragraph 6 Statement of Claim) equalling $29,904.71 less the proceeds of auction of $7,269.13 (paragraph 7A Statement of Claim) amounting to $22,635.58
2.The defendant to pay the plaintiff’s costs together with interest to be fixed and in default to be taxed by the Costs Court
3.I reserve liberty to the parties to apply on the giving of reasonable prior notice
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