Melbourne Linh Son Buddhist Society Inc v Gippsreal Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2016 0132

MELBOURNE LINH SON BUDDHIST SOCIETY INC	Applicant
v
GIPPSREAL LTD	Respondent

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JUDGES:	MAXWELL P, KYROU JA and CAMERON AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	13 February 2017
DATE OF JUDGMENT:	23 June 2017
MEDIUM NEUTRAL CITATION:	[2017] VSCA 161
JUDGMENT APPEALED FROM:	Gippsreal Ltd v Melbourne Linh Son Buddhist Society Inc [2016] VSC 324 (Daly AsJ)

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CONTRACT — Loan agreement — Whether applicant as borrower breached agreement by failing to settle within period nominated by respondent as lender — Whether period nominated was reasonable — Whether applicant’s failure to settle was for reasons beyond control of lender — Applicant not in breach and lender not entitled to terminate agreement — Appeal allowed.

CONTRACT — Construction of commercial contract — Whether amount specified for establishment fee ambiguous — Whether evidence of surrounding circumstances admissible — Amount not ambiguous.

CONTRACT — Penalties — Relevant principles — Amount claimed for establishment fee had no connection with alleged breach of contract and remained the same notwithstanding significant decrease in quantum of loan — Establishment fee constituted a penalty.

CONTRACT — Set off — Whether commitment fees paid by applicant for aborted loans must be set off against amounts claimed by respondent under a subsequent loan agreement — Set off not available.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr P T Kelly	Starnet Legal
For the Respondent	Mr S K Morris	Oakleys Legal

MAXWELL P:

I have had the considerable advantage of reading in draft the joint reasons for judgment of Kyrou JA and Cameron AJA. For the reasons which their Honours give, I too would grant leave to appeal and allow the appeal. As appears from their Honours’ comprehensive analysis, the point of decision in the appeal is that, contrary to the finding of the primary judge, the respondent was not entitled to withdraw the offer of finance which it had made to the applicant and had no entitlement to claim liquidated damages.[1]
[1]See [114], [126], [217] below.

As their Honours point out, the applicant’s success on the principal grounds of appeal makes it unnecessary to decide the other grounds advanced.[2] Nevertheless, for completeness, their Honours have addressed each of the alternative grounds.[3] With one exception, I respectfully agree with the conclusions which their Honours have reached on those other grounds.
[2]See [136] below.
[3]See [137]–[215] below.

The exception concerns the question raised by grounds 5 and 6, namely, whether the establishment fee of $26,625 specified in the loan documentation was a penalty. Their Honours have concluded that it was. For reasons which follow, I consider that there is insufficient evidence before the Court to enable that question to be answered.

I gratefully adopt their Honours’ description of the sequence of events leading up to the respondent’s final offer of a loan of $500,000. The establishment fee of $26,625 had not changed from that fixed previously, when the respondent had offered a loan of $1,775,000.

The 2016 decision of the High Court in Paciocco v Australia and New Zealand Banking Group Ltd[4] contains — in the respective judgments of Kiefel J, Gageler J and Keane J — illuminating discussions of how courts should approach the question of whether a fixed sum is to be characterised as a penalty. The essential inquiry is whether the party asserting the penalty characterisation has established that the amount stipulated is

out of all proportion to the interests of the party which it is the purpose of the provision to protect.[5]

[4]Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569 (‘Paciocco’).

[5]Ibid 580 [29]. See also ibid 602 [154], quoting AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 190.

What Paciocco highlights is that:

[I]nterests of the innocent party beyond the protection of an award of unliquidated damages in the event of a breach of contract can justify a different conclusion. The protection afforded by the stipulation of an obligation to pay a specified sum of money in the event of a breach of contract might be to interests that the innocent party has in contractual performance which are intangible and unquantifiable.[6]

[6]Ibid 604 [161].

In the view of Gageler J, the question is whether

the conclusion objectively to be drawn from the totality of the circumstances is that the only purpose of the stipulation was to punish: to impose a detriment on a contracting party in the event that a principal contractual stipulation is not observed, in order to deter non-observance of that principal stipulation.[7]

[7]Ibid 603 [158].

Three points of importance emerge from Paciocco about the nature of the inquiry. First, it requires an objective assessment of the legal character of the provision, from the effect of its terms in the commercial context in which it is to operate. This is ‘a legal question which does not depend upon an evidentiary inquiry into the parties’ motivation or subjective intention, purpose or calculations.’[8] It follows, with respect to Kyrou JA and Cameron AJA, that evidence given by Mr Rickard, about what he had in mind when he fixed the fee at $26,625, cannot assist the inquiry.
[8]Ibid 621 [243].

Secondly, the inquiry must examine ‘the totality of the circumstances’. Where, as here, the charging of an establishment fee is a standard feature of the party’s lending business, the inquiry must extend to the wider commercial interests of that party. Thus, in Paciocco itself, the Court examined the late payment fee provided for in the particular credit card contract by considering whether

within the totality of the circumstances within which ANZ contracted with its consumer credit card account holders, the stipulation for the payment of the late payment fee was properly characterised as: having no purpose other than to punish an account holder in the event of late payment; or conversely serving the purpose of protecting ANZ’s interests in ensuring that consumer credit card account holders made the minimum monthly payment by the due date.[9]

[9]Ibid 605 [167].

Thirdly, a conclusion that this particular establishment fee was a penalty would have very significant implications for the respondent’s business as a ‘non-confirming second tier lender’.[10] Although the interests on which the respondent would rely for this purpose are not the same as those relied on by ANZ Bank in Paciocco, the enquiry there undertaken suggests that the court would require the assistance of expert evidence in order to understand, and evaluate, those interests.
[10]Gippsreal Ltd v Melbourne Linh Son Buddhist Society Inc [2016] VSC 324 [14(a)] (‘Reasons’).

In the present case, the penalty issue was subsidiary to the main dispute between the parties. It was not raised on the pleadings and was only crystallised, it seems, in the applicant’s final address. Unsurprisingly in the circumstances, there was no opportunity for the judge, or the respondent, to consider the types of evidence which would be necessary to enable the Court to identify the respondent’s relevant interests and then decide whether or not the establishment fee was ‘wholly disproportionate’ to the protection of those interests.[11]
[11]Paciocco 643 [331].

As a result, in my view, the primary judge was in no position to decide the penalty question and, for the same reason, it cannot be determined on this appeal.

It should be noted that, in the offer document itself, the respondent identified at least some of the interests to which the establishment fee was said to be referable. The relevant clause is in these terms:

32 Liquidated Damages
(a)The Borrower acknowledges that after they have accepted the Offer should:-
(i)they not proceed the Proposed Mortgage to completion by the drawdown date; and/or
…
(iii)the Mortgagee exercise its rights pursuant to clause … 36(c)(vii).

they will have breached their agreement and the Mortgagee will suffer loss and/or damages in that inter alia the Mortgagee:
(1)will have incurred legal costs, administrative costs, disbursements, expenses and professional costs in investigating and documenting the Proposed Mortgage, and
(2)would have made arrangements to source investment funds;
(3)would have to place the investment funds that the Mortgagee procured and/or set aside to fund the Proposed Mortgage in alternative investments and that there would be delays in the sourcing, investigating, documenting and settling of an alternative investment, during which time the Mortgagee will suffer the loss of economic opportunity in the form of, amongst other things, loss of interest that it would otherwise have received on the Proposed Mortgage; and
(4)may have refused other loan applications on the basis that the Proposed Mortgage was to proceed.

(b) Such loss and damage will be difficult to calculate. So as to:
(i)provide certainty as to a fair and easily ascertainable sum to become payable by the Borrower as a result of the loss to be suffered by the Mortgagee as a consequence of the Borrower’s breach; and/or
(ii)avoid the expense of litigation to prove the actual losses sustained;

the Liquidated Damages are agreed to be a fair and reasonable pre-estimate of those losses and/or damages, and it is agreed to that they are not disproportionate to the greatest loss that is likely to be suffered by the Mortgagee in the event of default by the Borrower and are accordingly not a penalty.
(c)Interest at the Higher Rate shall be payable on the Liquidated Damages, default costs, legal costs and all other monies becoming due pursuant to this Deed and/or on any subsequent judgement debt and will be capitalised and added to the Liquidated Damages and bear interest at the Higher Rate.

As can be seen, this clause expresses the borrower’s acknowledgment that the putative breach will have caused the lender a range of losses. The nature of those losses was, to some extent, developed in Mr Rickard’s affidavit. But, as the High Court made clear in Paciocco, the identification of legitimate interests for the purposes of the penalty inquiry is not confined to loss and damage causally connected with the breach.[12] Instead, a lender in the position of the respondent would be entitled to lead evidence, for example, of the fixed costs involved in conducting its lending business and of its interest generally in borrowers who have accepted loan offers proceeding to completion.
[12]Ibid 576 [26], 604 [161].

As the joint reasons of Kyrou JA and Cameron AJA record, the respondent’s standard establishment fee was 1.5 per cent of the loan amount. In this case, the proposed establishment fee represented more than five per cent of the loan amount. Plainly enough, the respondent has legitimate interests against which the proportionality of the establishment fee could be judged. Whether a fee of 1.5 per cent, or five per cent, could be shown to be ‘wholly disproportionate’ to those interests could only be determined on proper evidence.

KYROU JA
CAMERON AJA:

Introduction and summary

The applicant seeks leave to appeal against an order made by an associate judge of the Trial Division on 24 August 2016 which required the applicant to pay to Gippsreal Ltd (‘respondent’ or ‘Gippsreal’) the amount of $49,436.77 pursuant to an agreement between the parties.[13]
[13]The application for leave to appeal was made to this Court under r 77.07(1) of the Supreme Court (General Civil Procedure) Rules 2015 because the proceeding was heard and determined by an associate judge upon referral by a judge of the Trial Division under r 77.05(1).

The agreement provided that the respondent would advance to the applicant the sum of $1,775,000 or 50 per cent of the value of the property to be mortgaged to secure the loan, namely, the applicant’s property at 216–240 Tarletons Road, Plumpton (‘Plumpton Property’). The applicant failed to settle the loan transaction within the time specified by the respondent, resulting in the respondent terminating the agreement and claiming liquidated damages and other amounts associated with the proposed transaction.

The applicant seeks leave to appeal against the judge’s decision on seven proposed grounds. The main grounds are: that the judge erred in finding that the respondent was entitled to terminate the agreement, as the time specified for settlement was unreasonable; that the judge erred in finding that the establishment fee for the loan was agreed in the amount of $26,625; and that the judge erred in not finding that the establishment fee was a penalty.

The respondent filed a notice of contention in respect of a ruling by the judge that a letter headed ‘without prejudice’ was inadmissible.

For the reasons that follow, we would grant leave to appeal and allow the appeal.

Facts

The applicant is an incorporated association which brings together members of Melbourne’s Vietnamese community who follow the Buddhist faith. Its president and spiritual leader is known in the community as Master Dao. The applicant is entirely supported by donations from its members and has a substantial property portfolio. In 2013, it found it difficult to arrange long term finance from banks because of its structure and sources of income.

The respondent is the responsible entity of a registered managed investment scheme established under the Corporations Act 2001 (Cth) which offers first mortgage real estate investment loans to borrowers predominantly on behalf of small investors in the South Gippsland region. The respondent lends to persons who might not otherwise qualify for loans from the major banks. Trevor Rickard is the managing director of the respondent. He is also the principal of Oakleys Legal, the firm of solicitors which acts for the respondent.

According to Mr Rickard’s evidence, the respondent is usually approached by a broker who submits information about a proposed borrower, the amount of finance sought, and the proposed security. If the proposed loan meets the respondent’s lending criteria, the respondent issues an expression of interest document, which provides indicative terms as to how the loan might proceed. If the borrower decides to proceed, the respondent issues a formal deed of offer of finance which, if accepted, becomes a binding agreement.

The respondent keeps investor funds in ‘at call’ accounts. Once a deed of offer of finance is signed by a borrower, investor funds are transferred from the ‘at call’ accounts to the respondent’s trust account in preparation for the settlement of the loan. The funds are ‘drawn down’ from the trust account on the settlement day.

In December 2012, the applicant appointed a broker, Stephen Gay, to source a loan in the sum of $2.6 million. On 20 February 2013, the respondent sent to the applicant (through Mr Gay) an expression of interest which stated that the respondent would consider making a loan to the applicant in the amount of $2.6 million, subject to a cap of 65 per cent of the value of properties at Melton and Footscray that were to be mortgaged to secure the loan. The expression of interest set out an establishment fee of 1.5 per cent of the approved loan advance next to the heading ‘Estimated Costs & Deductions’ and specified a term of three years. The applicant executed the expression of interest on 22 February 2013 and paid to the respondent the sum of $7,500, which the expression of interest described as a ‘Commitment Fee’. The Commitment Fee was said to ‘cover valuation fees, rate and planning enquiries and [the respondent’s] initial loan investigation fees’. However, the loan did not proceed at the behest of the applicant and the fee of $7,500 was not refunded.

The applicant appointed another finance broker, Scott Roberts, to raise $2.4 million, to be secured over a property at Rockbank. The respondent sent an expression of interest to Mr Roberts on 22 March 2013, but the respondent subsequently declined this application.

Another broker, John Adicho, also made enquiries with the respondent on behalf of the applicant. From around February 2013, the respondent had dealings with both Mr Adicho and Mr Roberts concerning the applicant’s various applications for finance. The documents that the brokers submitted to the respondent in support of the applications for finance included lists of assets of the applicant. One such list stated that the Plumpton Property had been valued on 30 November 2012 at $3,507,345 and that the applicant’s ‘expected current value’ was $4,000,000.

On 16 May 2013, the respondent sent to Mr Roberts an expression of interest which stated that it was prepared to consider making an offer to provide finance to the applicant in the amount of $2.45 million, subject to a cap of 50 per cent of the value of the property to be mortgaged to secure the loan, namely, the Plumpton Property. The expression of interest set out an establishment fee of 1.5 per cent of the approved loan advance next to the heading ‘Estimated Costs & Deductions’ and specified a loan term of one year. On 23 May 2013, the applicant paid a fee of $10,000 which the expression of interest described as a ‘Non Refundable Commitment Fee’. The proposed loan did not proceed at the behest of the applicant.

In June and July 2013, Mr Adicho attempted to recover the $10,000 fee from the respondent, but the respondent refused to refund it.

On 26 July 2013, the respondent sent to Mr Adicho an expression of interest which stated that it was prepared to consider making an offer to provide finance to the applicant in the amount of $1,775,000, subject to a cap of 50 per cent of the value of the property to be mortgaged to secure the loan, namely, the Plumpton Property. The expression of interest specified a loan term of one year and an establishment fee of 1.5 per cent of the approved loan advance.

The terms of the 26 July 2013 expression of interest included a proposal by the respondent to consider waiving payment of a commitment fee of $10,000 if the applicant acknowledged that it was not entitled to a refund of the commitment fees of $7,500 and $10,000 that it had paid previously. The expression of interest also contained the following statement (which was also included in the two previous expressions of interest):

THIS IS AN EXPRESSION OF INTEREST ONLY. ANY OFFER OF FINANCE WILL BE MADE ON GIPPSREAL’S STANDARD OFFER TERMS. AN OFFER OF FINANCE MAY NOT INCLUDE ALL OF THE ABOVE ITEMS OR MAY INCLUDE ADDITIONAL ITEMS. THERE IS NO CONTRACTUAL RELATIONSHIP BETWEEN THE PARTIES UNTIL SUCH TIME AS GIPPSREAL ISSUES A DEED OF OFFER OF FINANCE AND IT IS ACCEPTED BY THE APPLICANT(S).

On 15 August 2013, the applicant, through Mr Adicho, advised the respondent that the applicant wished to proceed with the proposed loan, with the amount of the loan to be 50 per cent of the valuation of the Plumpton Property.

On 16 August 2013, the respondent sent to the applicant a ‘Deed of Offer of Finance’ dated 16 August 2013 (‘Deed of Offer’). The Deed of Offer comprised five principal clauses and three schedules. Schedule 1 was headed ‘Offer Schedule’, schedule 2 was headed ‘Special Conditions’, and schedule 3 was headed ‘General Conditions’.

The principal clauses of the Deed of Offer relevantly provided as follows:

1 Offer of Loan
The Mortgagee offers to lend to the Borrower the proposed mortgage sum on the terms and conditions set out in this Deed of Offer of Finance …
2Acceptance of Offer
The Borrower hereby accepts the Offer and agrees to be bound by the terms and conditions of the Offer and the proposed mortgage.

3 Borrower’s Requests, Acknowledgements and Covenants
The Borrower hereby requests, authorises, agrees and acknowledges:
…
3.12they request and authorise the Mortgagee to begin assessing the Borrower’s loan application and to undertake all necessary searches and enquiries and to incur all necessary costs in so assessing the Borrowers’ loan application;
3.13that induced by and in reliance upon the Borrower’s finance application and execution of this Offer the Mortgagee will:
(a)instruct its Solicitors to undertake all necessary searches and enquiries to investigate the proposed mortgage and to proceed with the preparation of all security documents and mortgage documents;
(b)arrange for investors to commit funds for the proposed mortgage to the Borrower which will involve the Mortgagee and its investors suffering loss or damage should the loan not proceed to completion;
(‘the Mortgagee’s undertaking’)

and in consideration of the Mortgagee’s undertaking the Borrower agrees to pay all monies due under this Offer (including the liquidated damages), within seven (7) days of demand and irrespective of whether or not the proposed mortgage proceeds to completion;
3.14that the Liquidated Damages (see clause 32 of Schedule 3 – General Conditions) are a fair and reasonable pre-estimate of the damages which would be suffered by the Mortgagee;
…
3.17the terms of the Deed set out the entire agreement between the Borrower and the Mortgagee;
…

4Effect of this Deed
Once accepted this Offer will form a conditional agreement (see clause 36 of Schedule 3 of the Deed of Offer) between the parties …

Schedule 1 to the Deed of Offer included the following terms:

7

Proposed Mortgage Sum

$1,775,000.00 (or a maximum of 50% Loan to Value Ratio, whichever is the lesser)

8

Initial Loan Term

1 year[14] …

9

Interest Rate

Higher rate 19.25%. Lower rate 9.25% …

…

14

Estimate of Costs and Disbursements

Gippsreal Limited – establishment fee

Mortgage preparation fee

$26,625.00

$5,000.00

Titles Office fees as required

Stamp Duty

as required

Rate and Planning Certificates

as required

6 months Interest in Advance

$82,093.75

Valuation fee (As per valuer’s actual account, estimated)

$5,000.00

Inspection fees

$500.00

GST will be added to and payable on above fees (if applicable)

All charges for costs, disbursements and the like are payable by the Borrower by deduction from the principal sum available at settlement.

Should your finance application have been introduced to Gippsreal Ltd by a third party (‘the Broker’) you acknowledge that the Broker was at all times acting as your agent and is in no way associated with, acting for or authorised to act for Gippsreal Ltd. Any fee agreed to between you and the Broker may be included in the above estimates.

…

19

… Commitment Fee

The following items must be returned to enable Gippsreal to complete its loan investigations and for settlement to take place:

a. Non refundable commitment fee of $10,000.00.

This amount will be credited to your account

On a strictly without prejudice basis Gippsreal will give consideration to accepting the non-refundable commitment fee paid upon acceptance of the previous Expression of Interest issued 16^th May 2013 towards this application, although it is not obliged to do so, on the condition that the [applicant] acknowledges Gippsreal’s entitlement to the previous non-refundable commitment fees of $7,500.00 paid 25 February 2013, and $10,000.00 paid 23 May 2013.

Gippsreal otherwise reserves all its rights in respect of the previously paid non-refundable commitment fees.

This fee is non-refundable in the event of the loan not proceeding for whatever reason regardless of whether the loan actually being advanced.

…

20

Liquidated Damages

·     $31,625.00[15] on account of administrative and professional costs incurred by Gippsreal in investigating the loan prior to completion and procuring investors funds;

·     $41,046.88 being (three) month’s interest at the lower rate: and

·     all monies due to Gippsreal pursuant to clause 34 of Schedule 3 – General Conditions;[16] and

·     any other costs and disbursements incurred by the Mortgagee or its agents at the actual costs or if the actual cost cannot be reasonably quantified, then pursuant to any costs agreement entered into between the Mortgagee and its agents;

(the Liquidated Damages – see clause 32 of Schedule 3 – General Conditions)

21

Proposed Drawdown Date

The Borrower must be in a position to effect settlement:

(i)   within 4 weeks of the date of acceptance of the Deed; or

(ii) if the loan is to assist in the purchase of property, on the date as initially advised to Gippsreal as the settlement date for the purchase; or

(iii) on any other date as reasonably advised by Gippsreal

(the drawdown date).

[14]As discussed at [38] below, the applicant subsequently agreed to amend this provision to specify a two year term.
[15]The judge found that the amount of $31,625 comprised the establishment fee of $26,625 and the mortgage preparation fee of $5,000 that are referred to at [35] above. See [80] below.
[16]Clause 34 is the indemnity clause referred to at [36(c)] below.

Schedule 3 to the Deed of Offer set out the respondent’s General Conditions, which included, relevantly, the following terms:

(a) clause 11, which provided that the respondent will make loan funds available to the applicant on the drawdown date and interest will become payable from that date regardless of whether the loan funds are advanced on that date, on a later date, or at all;

(b) clause 21, which relevantly provided that the applicant must be in a position to effect settlement on any ‘reasonable date as advised in writing’ by the respondent, and that interest will accrue on funds set aside on the drawdown date;

(c) clause 34, which contained a broad-ranging indemnity in favour of the respondent;

(d) clause 35, which granted a charge over the Plumpton Property to the respondent (‘Charge’);

(e) clause 52, which was an entire agreement clause;

(f) clause 75, which defined ‘Liquidated Damages’ as all monies defined in the Deed of Offer as Liquidated Damages and, in addition, any other monies payable to the respondent pursuant to the Deed of Offer or the proposed mortgage as a result of the applicant’s breach of the Deed of Offer or the proposed mortgage.

Clauses 32 and 36 of the General Conditions relevantly provided as follows:

32 Liquidated Damages
(a)The Borrower acknowledges that after they have accepted the Offer should:-
(i)they not proceed the Proposed Mortgage to completion by the drawdown date; and/or
…
(iii)the Mortgagee exercise its rights pursuant to clause … 36(c)(vii);

they will have breached their agreement and the Mortgagee will suffer loss and/or damages in that inter alia the Mortgagee:
(1)will have incurred legal costs, administrative costs, disbursements, expenses and professional costs in investigating and documenting the Proposed Mortgage, and
(2)would have made arrangements to source investment funds;
(3)would have to place the investment funds that the Mortgagee procured and/or set aside to fund the Proposed Mortgage in alternative investments and that there would be delays in the sourcing, investigating, documenting and settling of an alternative investment, during which time the Mortgagee will suffer the loss of economic opportunity in the form of, amongst other things, loss of interest that it would otherwise have received on the Proposed Mortgage; and
(4)may have refused other loan applications on the basis that the Proposed Mortgage was to proceed.

(b) Such loss and damage will be difficult to calculate. So as to:
(i)provide certainty as to a fair and easily ascertainable sum to become payable by the Borrower as a result of the loss to be suffered by the Mortgagee as a consequence of the Borrower’s breach; and/or
(ii)avoid the expense of litigation to prove the actual losses sustained;

the Liquidated Damages are agreed to be a fair and reasonable pre-estimate of those losses and/or damages, and it is agreed to that they are not disproportionate to the greatest loss that is likely to be suffered by the Mortgagee in the event of default by the Borrower and are accordingly not a penalty.
(c)Interest at the Higher Rate shall be payable on the Liquidated Damages, default costs, legal costs and all other monies becoming due pursuant to this Deed and/or on any subsequent judgement debt and will be capitalised and added to the Liquidated Damages and bear interest at the Higher Rate.

…
36 Reservation
…
(c)The Mortgagee reserves the right to withdraw the Offer of Finance at any time up to and including the date of settlement should:-
…
(vii)the Borrower [fail] to settle the Proposed Mortgage by the drawdown date for reasons outside of the control of the Mortgagee, and the Mortgagee has given the Borrower notice of [its] intention to withdraw the Offer of Finance if the Proposed Mortgage is not completed within any reasonable nominated time period; …

Master Dao executed the Deed of Offer on 23 August 2013. Schedule 1 contained two amendments made in Mr Adicho’s handwriting. The first amendment was the crossing out of ‘1 year’ next to ‘Initial Loan Term’ and the substitution of ‘2 years’. The second amendment was the insertion of ‘Consultancy Fee 1.80% $31,950.00’ next to the heading ‘Estimate of Costs and Disbursements’. Master Dao’s evidence was that the first amendment was made at his request, but that he was not aware of the second amendment. The respondent informed Mr Adicho that it accepted the two amendments to the Deed of Offer.[17]
[17]Reasons [89].

On 29 August 2013, the respondent appointed a valuer to conduct a valuation of the Plumpton Property. A planned inspection of the Plumpton Property by the valuer on 9 September 2013 was cancelled. The respondent asserted that the reason for the cancellation was that the applicant did not wish to proceed with the proposed loan whereas the applicant asserted that the reason was that Master Dao had to conduct a funeral.

On 9 September 2013, Mr Adicho sent an email to the respondent, explaining that on 4 September 2013, Master Dao gave him further information to provide to the valuer regarding the Plumpton Property, but that the following day Master Dao had told him that the loan would not proceed owing to other committee members of the applicant opposing the loan. He said that he was informed by a committee member on the evening of 8 September 2013 that the inspection by the valuer scheduled for 9 September 2013 had been cancelled.

On 10 September 2013, the respondent lodged a caveat over the Plumpton Property pursuant to the Charge.

On 12 September 2013, the respondent sent an email to Mr Roberts stating that the proposed loan would not be proceeding and attaching an invoice for amounts said to be due to the respondent under the Deed of Offer. Notwithstanding this email, on 17 September 2013, Master Dao telephoned Mr Rickard and, according to a file note prepared by Mr Rickard, the following was discussed:

[Master Dao] said he will be instructing the solicitors to write to us saying they want to proceed with the loan. [He] wants me to write to confirm that we will be in a position to settle within 48 hours of receiving the report from the valuer. Apparently he has spoken to the valuer and the valuer might be able to be there as early as tomorrow and we would expect to have the report sometime next week so that we might be able to settle as late as next week. I said I would be happy to give them that letter but it would be subject to obviously all the documents being signed and executed and any other outstanding issues [being] satisfied and the valuation being satisfactory of course.

The valuer inspected the Plumpton Property on 20 September 2013. On 25 September 2013, the valuer spoke to Mr Rickard and told him that she expected that the valuation of the Plumpton Property was likely to be in the range of $900,000 to $1,200,000, far less than the amounts set out in the applicant’s list of assets to which we referred at [27] above. The difference in the valuation was explained on the basis that the applicant’s valuation was based upon an expectation that the Plumpton Property would be rezoned from commercial/industrial uses to residential use within the near future, and the valuer was not prepared to value the Plumpton Property based upon that assumption.

On the same day, Master Dao telephoned Mr Rickard. After Mr Rickard informed Master Dao about the lower valuation, he told Mr Rickard that the applicant wished to proceed with a loan at 50 per cent of the respondent’s valuation. Master Dao said that the applicant wanted to settle as soon as possible, and Mr Rickard replied that he would prepare the documents and send them to the applicant as quickly as possible. The respondent then sent a letter via fax to the applicant’s solicitors, Wantrup & Associates, advising them that the applicant wanted to proceed with the loan and for settlement to take place on 30 September 2013.

On the following day, 26 September 2013, Mr Ven Dao of the applicant sent an email from Master Dao’s email address providing contact details for the applicant’s new solicitors, Western Lawyers. Later that day, the respondent sent a letter to Western Lawyers via email which relevantly stated:

We advise that we are currently waiting on the valuer’s final valuation figure which they have indicated will be provided this afternoon.
Accordingly, once the valuation figure is received mortgage documentation will be emailed to your office for acceptance and execution by your client.
We understand Master Dao is anxious for settlement to occur on Monday, 30^th September 2013 and subject to receipt of the final valuation report, executed documents, your client satisfying any outstanding requirements, as previously notified, and notification of settlement arrangements, Gippsreal advise it will be in a position to settle.

At 12.09pm on Friday 27 September 2013, the respondent emailed a letter to Western Lawyers which stated that the respondent had entered into an agreement with the applicant and enclosed the mortgage documents for the loan amount of $500,000 for execution by the applicant. The letter stated that, as settlement was scheduled for Monday 30 September 2013, the respondent would ‘draw down the advance on … 30 September 2013 and interest will accrue from this date’.

One of the enclosed mortgage documents was described as ‘Amended Deed of Offer dated 27^th September 2013’ (‘Amended Deed of Offer’). The letter said the following about the Amended Deed of Offer:

Enclosure 1.1b is the Amended Deed of Offer of Finance dated 27^th September 2013. We note that the Deed of Offer as enclosed has been amended to reflect the amended loan amount. Accordingly we require the amended Deed of Offer of Finance to be executed however Gippsreal reserves all its rights pursuant to the executed Deed of Offer of Finance dated 16^th August 2013.

The only presently relevant changes that were made to schedule 1 of the original, unannotated Deed of Offer were in respect of the ‘Proposed Mortgage Sum’ (now described as ‘$500,000.00 (or a maximum 50% Loan to Value Ratio, whichever is the lesser)’) and the item ‘6 months Interest in Advance’ next to the heading ‘Estimate of Costs and Disbursements’ (now specified as $23,125.00). All other amounts next to that heading were the same as in the Deed of Offer, as were the amounts next to the heading ‘Liquidated Damages’, notwithstanding that the sum specified as being three months’ interest was calculated on the basis of the original loan advance of $1,775,000, rather than the revised loan amount of $500,000, and the establishment fee was well in excess of 1.5 per cent of the revised loan amount. Further, the Amended Deed of Offer did not incorporate either of the handwritten amendments to the Deed of Offer made by Mr Adicho,[18] such that the ‘Initial Loan Term’ was specified as ‘1 year’.
[18]See [38] above.

As was the case with the Deed of Offer, the Amended Deed of Offer provided that:

(a)the offer was open for acceptance within seven days (cls 16 and 17 of schedule 1); and
(b)the deed could only be varied in writing signed by all parties (cl 68 of schedule 3).

The mortgage that was enclosed with the letter dated 27 September 2013 included special condition 1, which provided as follows:

It is agreed by the parties that the terms, conditions and covenants in this Mortgage include those set out in the Deed of Offer dated 16 August 2013 as amended by Deed of Offer dated [27] September 2013 from the Mortgagee agreed to and accepted by the Mortgagor … and to the extent of any inconsistency then as interpreted by the Mortgagee …

The letter dated 27 September 2013 also enclosed a tax invoice dated 27 September 2013. The tax invoice gave a ‘credit’ to the applicant for the $10,000 non-refundable commitment fee paid on 23 May 2013. The loan costs to be paid to the respondent upon settlement included the following:

·Establishment fee:  $26,625.00
·Mortgage preparation and documentation fee:  $ 5,000.00
·Titles Office fees:  $     400.20
·Stamping and Lodging:  $     200.00
·Rate and Planning Certificate searches:  $     244.70
·6 months interest in advance:  $23,125.00
·Valuation fee:  $ 5,000.00
·Inspection fee:  $     500.00
·Brokerage fee (1.8 per cent of $500,000):   $ 9,900.00[19]

[19]Some of the amounts are inclusive of GST while others are exclusive of GST.

In a report dated 20 September 2013 which was prepared for the respondent, the valuer valued the Plumpton Property at $1 million.

At 2.45pm on Monday 30 September 2013, the respondent sent a letter by email to Western Lawyers, stating as follows:

We note this matter was to settle at the request of Master Dao today Monday, 30^th September 2013 and accordingly we have drawn down the settlement funds and interest will accumulate on those funds from today.
We advise that pursuant to clause 36(c)(vii) of Schedule 3 of the Deed of Offer of Finance if the proposed mortgage does not settle before 4.00pm, Thursday, 3^rd October 2013 Gippsreal will withdraw its offer of finance.
In that event all monies due under the Deed of Offer of Finance including the liquidated damages become due and payable within seven days of demand.
Take notice that pursuant to clause 3.13 of the Deed of Offer (as amplified by clause 32 of schedule 3 of the Deed of Offer of Finance) Gippsreal demands payment of all monies due under the Deed of Offer of Finance the full details of which will be provided to you on Friday 4^th October 2013 if the matter does not settle.
Gippsreal otherwise reserves all its rights under the Deed of Offer of Finance dated 16^th August 2013.

At 5.32pm on Tuesday 1 October 2013, Western Lawyers sent a letter by email to the respondent stating as follows:

We refer to your letter dated 30 September 2013 and advise that we [are] now acting for the [applicant]. We refer to your Mortgage document on the 27 September 2013 and advise that the [applicant] disagree[s] with the terms and conditions of the document as follow:
1)We refer to your offer on 26 July 2013, in Estimated Costs and Deductions a 1.5% [fee] will be charge[d] on the total loan advance which is payable to Gippsreal Limited. On the Mortgage Document the loan advance is only for $500,000 based [on] your offer the establishment [fee] should only be $7,500 and not $26,625.00 as on the mortgage document on 27 September 2013. Please find attached your offer on 26 July 2013.

2)Item 8, the initial loan terms on the letter of offer from Gippsreal on 16 August 2013 was re-offer from our client for 2 years instead of one year. Your mortgage document on 27 September 2013 stated the initial loan term is 1 year, not 2 years. When our client signed [the] proposal mortgage and wish the term of 2 years now [the] mortgage [is] only [for] one year.
3)Our client has not accepted your Mortgage Document as it does not [correspond] with your previous offer.

We are instructed by our client to request you to amend the Mortgage Documents as follow:
(1)The establishment [fee] for the advancement loan of $500,000 is $7,500.00.

(2) The term of the loan is for a period of two years.
Our client requests that you amend the Mortgage Document and forward to our office within the next 3 days from the date of this letter.

The respondent replied to the 1 October 2013 letter by a letter dated 3 October 2013 to Western Lawyers which was headed ‘without prejudice’ and sent by email at 1.51pm (‘without prejudice letter’). In relation to the request for amendment of the loan term, the without prejudice letter stated: ‘We will consent to amendment of the mortgage to reflect a two year loan term subject to the annual review.’ In relation to the request for amendment of the establishment fee, the without prejudice letter explained the basis upon which the respondent fixed the fee at $26,625 and continued as follows:

Notwithstanding and reserving all its rights Gippsreal offers to accept an establishment fee of $20,000.00.
This is a once only final offer which remains open for acceptance until 11.00am, Friday, 4^th October 2013, conditional on the loan settling before 4.00pm Friday, 4^th October 2013.

At 4.20pm on Friday 4 October 2013, the respondent sent a letter by email to Western lawyers stating as follows:

We refer to our email of the 3^rd October 2013[20] and we note we have heard no further from you and your client and in the circumstances Gippsreal formally withdraws its subsequent offer of loan.
We enclose our account for the liquidated damages and note that interest at the higher rate is accruing on that account from 9^th September 2013 when Gippsreal first made demand for the liquidated damages after your client indicated they would be withdrawing from the loan offer.[21]
We note that your client will be additionally liable for any further costs incurred by Gippsreal in enforcing its rights pursuant to the executed Deed of Offer of Finance dated 16^th August 2013.
Please have your client provide us with a cheque for the amount outstanding within 7 days.
Gippsreal otherwise reserves all its rights under the executed Deed of Offer of Finance.

[20]This is a reference to the without prejudice letter.

[21]See [40] and [42] above.

The respondent’s letter dated 4 October 2013 was accompanied by a tax invoice for the sum of $101,238.34, which included the sum of $72,671.88 by way of liquidated damages. The tax invoice made no allowance for the commitment fees of $7,500 and $10,000 which the applicant had previously paid to the respondent.[22]
[22]See [25] and [28] above.

The applicant did not reply to the respondent’s letter dated 4 October 2013. It negotiated a loan from the ANZ Bank secured by a mortgage over the Plumpton Property. The ANZ Bank’s attempt to lodge its mortgage for registration at the Land Titles Office resulted in a dispute regarding the respondent’s caveat which ultimately led to the current proceeding.

The proceeding

The respondent filed an originating motion on 10 January 2014, naming the applicant, the ANZ Bank, and the Registrar of Titles as defendants. The respondent sought orders restraining the Registrar of Titles from registering the mortgage lodged by the ANZ Bank. The respondent and the ANZ Bank reached an agreement whereby the Charge would rank ahead of the ANZ Bank’s mortgage. On 12 March 2014, consent orders were made pursuant to which the ANZ Bank and the Registrar of Titles ceased to be defendants and the proceeding continued against the applicant as if it had been commenced by writ.

On 21 March 2014, the respondent filed a statement of claim seeking payment of various amounts under the Deed of Offer on the basis that the applicant had breached or repudiated the Deed of Offer by failing to effect settlement of the loan by 4.00pm on 3 October 2013 in accordance with the notice to do so in the respondent’s letter dated 30 September 2013. The amounts claimed by the respondent included, as part of its claim for liquidated damages, the amount of $26,625 for the establishment fee.

In para 16 of its defence, the applicant denied that it breached or repudiated the Deed of Offer by failing to settle the proposed mortgage within the time stipulated by the respondent. In para 18, the applicant admitted receiving the ‘alleged notice’ to settle by 4.00pm on 3 October 2013 but denied that the ‘alleged notice was legitimately sent by the [respondent]’. In para 19A, the applicant alleged that the liquidated damages claimed by the respondent were ‘excessive’, ‘unreasonable’ and ‘not enforceable under law’. In paras 21, 22 and 23, the applicant denied that it was liable to the respondent for the amounts claimed by it. In further particulars, the applicant stated that the damages claimed by the respondent were ‘excessive in the sense that they are such that grossly exceed all applicable codes, legislation and industry practice and are ones that would be unenforceable’.

The respondent relied on four affidavits sworn by Mr Rickard on 10 January 2014, 9 July 2015, 5 August 2015 and 16 October 2015, respectively.

In his affidavit of 5 August 2015, relevantly, Mr Rickard deposed as to why, in his opinion, the amount claimed in the tax invoice dated 4 October 2013 in respect of the $26,625 establishment fee was justifiable, along with the other items claimed in that tax invoice. At paragraph 10(d) of that affidavit, Mr Rickard deposed as follows:

The $31,625 administrative and professional costs component of the liquidated damages is made up of two components being the [respondent’s] establishment fee of $26,625 and the mortgage preparation fee of $5,000 set out in Item 14 of Schedule 1 of the Deed of Offer agreed to and executed by the [applicant] as a pre‑condition of the loan.
The $26,625 establishment fee is an agreed fixed fee regardless of the loan advance and was specifically inserted in this instance because of the long history of loan applications … and the significant administrative time involved in receiving the various applications, reviewing and undertaking preliminary due diligence in respect of the various loans. It was a pre‑determined fee which was agreed to by the [applicant] in the Deed of Offer which was not in any way variable on the basis of the actual loan advance. Notably, the proposed loan was to an unincorporated religious Association which had no obvious source of income (in circumstances where the [applicant] had represented to the [respondent] that the loan would be serviced by way of donations from members of the [applicant]). There were to be no guarantees provided and there had been a seven month history of three aborted loan applications and investigations.
The establishment fee is not a fee for service type fee. There are various components of that fee involving elements of establishment, application, procurement, management, regulatory compliance and reporting. To conduct its business the [respondent] must hold an Australian Financial Services Licence which involves significant regulatory obligations from both an investor and borrower management point of view. The establishment fee reflects not only the individual costs of investigating the particular loan and carrying out due diligence but it also reflects the various fixed costs of the [respondent] in being able to conduct business as an Australian Financial Services Licence Holder acting as trustee on behalf of retail investors and all the regulatory compliance obligations consequent upon that including among other things the obligation to hold professional indemnity insurance, be a member of an external dispute resolution service, hold a minimum net tangible asset cash requirement.
An integral component of [the respondent’s] business model involves being able to access investor funds as and when required. This necessarily involves having investor funds ‘on hand’ to place into approved loans which might be advanced on short notice as was to be the case in the subject loan rather than source them individually for each loan.
[The respondent] is obliged to document the management of those investor funds in accordance with the regulatory requirements of the Corporations Act.
Among other things this includes advising investors of the details of the loan advance as evidenced by the Certificate of Investment … and again meeting all the regulatory requirements for managing the investor funds, reporting to investors and satisfying all compliance obligations of managing the Australian Financial Services Licence all of which involves significant record keeping, internal and external audit and compliance and reporting to ASIC.
A part of the [respondent’s] business is to develop its goodwill so that investors entrust the [respondent] to hold their investment funds in readiness for placement in loans as they are approved, offer prudent loans and diligently manage them throughout the course of the loan term. This goodwill has been established over a period of 35 years. The establishment fee reflects in part this goodwill aspect. It does not reflect the actual costs of gathering any individual funds for particular loans.
With the introduction of the Australian Financial Services Licence regulatory regime under the Corporations Act those compliance obligations have been significantly increased and as a result of the Global Financial Crisis the reporting obligations to investors and corporate governance have been made much more stringent and all of which has increased the cost of doing business.

In para 198 of his affidavit of 16 October 2015, Mr Rickard gave the following explanation as to why he retained the original amount of $26,625 as a ‘fixed figure’ that had no relationship to the approved loan amount of $500,000:
In view of:
1the long history of the loan applications and the significant administrative time that [the respondent] had been engaged in in receiving the various applications and undertaking the due diligence in respect of all the various loans;
2the history of the [applicant] changing its mind and then seeking urgent settlements as occurred in this instance;
3the indicated necessity for [the respondent] to arrange investor funds to settle at an early time;
4 the particular risks inherent in this loan;
I determined that regardless of the ultimate loan advance it was appropriate to charge a fixed fee no matter what the loan advance was and the fixed fee was included as a specific item in the [Deed of Offer].
In his affidavit of 16 October 2015, Mr Rickard deposed that the reference to a loan term of one year in the Amended Deed of Offer was a typographical error.

Mr Rickard also gave oral evidence at trial in relation to how the respondent usually conducts its business. In relation to the establishment fee, Mr Rickard gave the following evidence:

And as I have gone to some length in explaining … it covers a multitude of matters. It is not a fee for service type thing. It is not on an item by item basis. It is not necessarily related to a percentage of the loan advance. It is a fee that is determined and it varies from loan to loan depending on the loan to value ratio, the quality of the loan, the quality of the borrowers, the issues, the risks involved. But it covers – indeed it covers, as I say, administration. It covers the costs of doing business, I suppose, in that we have, as I say, for sale licence holders we have strict obligations and all our audit requirements and it addresses all those and I have gone in some detail in explaining that in my affidavit … [I]t amounts to $26,625. And that was specifically considered by me at the time that this deed of offer issued.[23]

[23]Transcript of Proceedings, Gippsreal Ltd v Melbourne Linh Son Buddhist Society Inc (Supreme Court of Victoria, S CI 2014 00069, Daly AsJ, 15 February 2016) 32 (‘Transcript’).

During cross-examination, Mr Rickard gave evidence that the establishment fee was not the sum of a series of individual items, but rather ‘a fee that’s arrived at depending on the circumstances’.[24] He agreed that the establishment fee was 1.5 per cent of $1,775,000, and that it had been expressed as a percentage in the 26 July 2013 expression of interest, and gave evidence that the establishment fee might vary between 1 per cent and 2.5 per cent of the loan amount. He gave the following evidence:

… Specifically, the deed of offer, when we come to address that point of the establishment fee, rather than put the 1.5 per cent, which we would normally do, because of the long history and because they had pulled out yet again and because of the problems they had caused us, all the enquiries they had made of us, I specifically determined that we were going to have a fixed fee regardless of what the mortgage advance was, keeping in mind that even at that stage we still didn’t have the valuation. We hadn’t even sought the valuation, so we were agreeing – I had specifically determined that the fee, regardless of the mortgage advance, was going to be $26,000 …
That was, you suggested to her Honour earlier today, based on your 30 years’ experience as a mortgage solicitor?---Based on my 30 years’ experience of what the issues were in this particular loan, the risks that were involved and the history of these loan applications.
You say that was a genuine predetermination of the loss and damage?---No, that’s not the loss and damage. That is our fee for providing the service.[25]

[24]Transcript 49.

[25]Transcript 50–51.

Mr Rickard acknowledged there was no express reference in the Deed of Offer to the establishment fee being based upon the additional work required for this loan rather than as a percentage of the loan amount. He accepted that all of the previous loan offers made by the respondent to the applicant referred to an establishment fee of 1.5 per cent, and that loan documents discovered by the respondent relating to other borrowers referred to an establishment fee of 1.5 per cent of the loan amount, except for one instance where the rate was 1 per cent. He agreed that the sum of $26,625 was 5.3 per cent of the amount of $500,000.

Mr Rickard disagreed with the suggestion that the reference to an establishment fee of $26,625 in the Amended Deed of Offer was a typographical error, as was the case with the loan term of one year.

The applicant relied upon two affidavits sworn by Master Dao on 10 February 2014 and 18 December 2015, respectively. In para 35 of the first affidavit, Master Dao said the following about Western Lawyers’ letter dated 1 October 2013 to the respondent:

[The respondent] did not agree to amend the mortgage documents according to the [request from Western Lawyers] and on the 4^thOctober 2013 [the respondent] advised [Western Lawyers] that it was to withdraw the offer of loan.

In para 53 of Master Dao’s affidavit of 18 December 2015, he stated:

On 3 October 2013 Gippsreal responded with a proposal for settlement of the dispute in a ‘without prejudice’ letter … I object to this letter being produced or relied on, on the basis that it was a ‘without prejudice’ offer …

Mr Adicho gave evidence that, in his experience as a broker, an establishment fee of up to 2.5 per cent of the loan amount could be charged depending on the complexity of the transaction. He said that a fee of 1.5 per cent is ‘[a]bout average’ and agreed that 2.5 per cent is ‘the upper end’.[26]
[26]Transcript 103.

Decision, rulings and orders made by the judge

The judge identified five key issues which required determination. The issues that are presently relevant were described as follows:

...
(c)whether [the respondent] was entitled to withdraw its offer of finance to the [applicant] pursuant to clause 36(c)(vii) of the General Conditions of the Deed of Offer: in particular, whether [the respondent’s] demand in its letter of 30 September 2013 that the [applicant] settle the loan by 4.00pm on 3 October 2013 was reasonable (‘breach issue’);
(d)whether the reference to the $26,625 establishment fee in the Deed of Offer was merely an estimate applicable only if the full amount of the proposed loan was advanced, and as such that particular term of the Deed of Offer should be construed in a manner to include words to the effect that ‘or, if a lesser amount is advanced, a sum equivalent to 1.5 per cent of the funds approved to be advanced’ (‘establishment fee issue’); …[27]

[27]Reasons [72].

The judge summarised her findings on the above key issues as follows:

…
(c)in all of the circumstances, [the respondent’s] demand in its letter of 30 September 2013 that the [applicant] settle the loan by 4.00pm on 3 October 2013 was not unreasonable, and as such, it was entitled to withdraw its offer of finance pursuant to clause 36(c)(vii) of the General Conditions of the Deed of Offer, thus triggering its entitlement to claim damages from the [applicant];
(d)no ambiguity arises with respect to the reference to the sum of $26,625 as an establishment fee, either by reason of its inclusion under the heading ‘Estimate of Costs and Disbursements’, or the reference to an establishment fee of 1.5% of the loan amount in the [26 July expression of interest], such as to warrant construing that term of the Deed of Offer in the manner contended for by the [applicant]; …[28]

[28]Reasons [88].

As discussed more fully below, the applicant’s proposed grounds of appeal seek to impugn findings (c) and (d). The judge’s reasons in relation to those findings will be discussed below under Grounds 1, 2 and 3 to which they relate. Ground 5 relates to a statement by the judge that ‘[i]t did not seem to be submitted on behalf of the [applicant] that the establishment fee was a penalty’[29] and Ground 6 concerns whether the establishment fee was a penalty and therefore not recoverable by the respondent. Ground 7 relates to the judge’s failure to set off against the damages awarded to the respondent the commitment fees of $7,500 and $10,000 that the applicant had previously paid to the respondent.[30]
[29]See Reasons [100].
[30]See [25] and [28] above.

The judge found that, although Mr Rickard and Master Dao were honest witnesses, some aspects of their evidence were unreliable.[31]
[31]Reasons [84].

During the course of the hearing, the respondent sought to rely on the without prejudice letter dated 3 October 2013.[32] The applicant submitted that the without prejudice letter was inadmissible under s 131(1)(a) of the Evidence Act 2008 (‘EA’), whereas the respondent submitted that s 131(1)(a) was inapplicable due to s 131(2)(g).[33] Section 131 relevantly provides as follows:
[32]See [55] above.
[33]At trial, the respondent also submitted that the without prejudice letter did not fall within s 131(1)(a) but that is not an issue in the application for leave to appeal.

131 Exclusion of evidence of settlement negotiations
(1) Evidence is not to be adduced of—
(a)a communication that is made between persons in dispute, … in connection with an attempt to negotiate a settlement of the dispute …

(2) Subsection (1) does not apply if—
…
(g)evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence;

…

On 15 February 2016, the judge ruled that the without prejudice letter was inadmissible (‘Without Prejudice Ruling’) for the following reasons:

I accept that simply heading a letter ‘without prejudice’ does not of itself confer upon the document without prejudice privilege. However, given the fact that the parties were clearly in dispute at that time … I do consider that it was part of a series of negotiations to resolve an extant dispute and that there is no need for the dispute to be limited in such a way as to merely involve the dispute that is the subject of this proceeding.
I am not satisfied at this stage, given the contents of the relevant sections of Mr Dao’s affidavit, that the absence of the letter of 3 October from evidence will cause the court to be misled. I can do that certainly at this stage on the basis of not viewing the contents of the letter. I can infer that the fact that the offer was not received suggests that it was different in content from the proposal put by Western Lawyers. And the qualification in Master Dao's affidavit of there being no formal response from Gippsreal, I think is sufficient to overcome any[thing that] might be misleading if you said that there would be no response.
I do adopt the suggestion of [counsel for the applicant] that if, as events unfold during [the] course of the cross-examination of Mr Dao or the examination or the cross-examination of Mr Dao, that the situation changes, I will certainly give the [respondent] liberty to apply to seek to have the letter brought back into evidence.[34]

[34]Transcript 47.

The Without Prejudice Ruling is the subject of the respondent’s notice of contention and will be discussed in the context of Grounds 2 and 3 to which the notice of contention relates.

After the delivery of judgment on 20 July 2016, the judge heard submissions with respect to the final orders to be made and on the question of costs. On 24 August 2016, the judge made a ruling on the quantum of liquidated damages to which the respondent was entitled (‘Liquidated Damages Ruling’). In the Liquidated Damages Ruling, the judge relevantly stated:

[Clause 20 of Schedule 1 of the Deed of Offer], headed ‘Liquidated Damages’, includes $31,625 on account of administrative and professional costs incurred by [the respondent] in investigating the loan prior to completion and procuring investor funds, and incorporates the establishment fee and the mortgage preparation fee. This is simply an amount that was agreed to be paid under the terms of the Deed of Offer …[35]

[35]Liquidated Damages Ruling [5].

The Liquidated Damages Ruling is the subject of Ground 4 and is discussed below under that ground.

On 24 August 2016, the judge made the following declaration and orders:

THE COURT DECLARES THAT:
1The Deed of Offer between the [respondent] and the [applicant] dated 23 August 2013 is binding on the [respondent] and the [applicant].

THE COURT ORDERS THAT:
1There be judgment for the [respondent] in the sum of $49,436.77, comprising:
(a)       Liquidated damages:
Establishment fee (including   $31,625
mortgage preparation fee)
Three months interest on $500,000   $11,562.50

(b)       Valuation fee (incl GST)                 $5,500
(c)       Disbursements (incl GST)                $649.67
(d)      Disbursements not subject to GST    $99.60.
2The question of the [respondent’s] entitlement to interest on the judgment sum, the quantum of any interest payable upon the judgment sum, and the parties’ costs of the proceeding, be reserved for hearing and determination on a date to be fixed in the week commencing 5 September 2016.
…

4 Paragraph 1 of these orders be stayed pending further order. …

Grounds 2 and 3 and notice of contention: Clause 36(c)(vii)

As Grounds 2 and 3 are central to the outcome of the application for leave to appeal, we will discuss them first in conjunction with the notice of contention.

Grounds 2 and 3 are as follows:

2Her Honour erred in finding at [99] of the Judgment that the Respondent’s requirement that the Applicant settle the loan within 3 days was reasonable.

Particulars
The Respondent was entitled to withdraw the offer of funding under clause 36(c)(vii) of schedule 3 of the Deed of Offer if the Applicant had failed to settle the mortgage by the proposed date for reasons outside of the control of the Respondent and the Respondent had given the Applicant notice of intention to withdraw the offer if the mortgage was not completed within any reasonable nominated time period. The time period nominated by the Respondent was unreasonable, because:
(a)The mortgage document which was prepared by the Respondent and provided to the Applicant for execution was limited for a term of 1 year and not 2 years as agreed by the parties;
(b)The Respondent required the Applicant to settle the loan with payment of an establishment fee of $26,625, when, upon a proper construction, the Applicant was not obliged to pay an establishment fee of $26,625 or any sum near that amount;
(c)The Applicant’s solicitors had requested that the Respondent’s solicitors make necessary amendments to the loan document, which the Respondent’s solicitors failed to do;

(d) The period of 3 days was in these circumstances unreasonable.
3Her Honour erred in failing to find that the Respondent was in breach of the terms of the Deed of Offer when the necessary pre-condition of the clause on which the Respondent relied to withdraw the offer of funding had not been met.
Particulars
In withdrawing its offer of finance the Respondent relied on clause 36(c)(vii) of the Deed of Offer. That clause required that the Applicant have failed to settle the Proposed Mortgage by the date nominated by the Respondent for reasons beyond the control of the Respondent. However, the Applicant failed to settle by 30 September 2013 because of defects in the mortgage documentation which were within the ability of the Respondent to amend. As a consequence the Respondent’s subsequent withdrawal of the offer of funding on 4 October 2013 was a breach of the Deed of Offer.

The respondent’s notice of contention contains the following grounds:

1Her Honour erred in deciding not to permit (or alternatively, after the applicant had given its evidence, the issue was not raised for further decision that) the respondent’s ‘without prejudice’ communication to the applicant’s solicitors dated 3 October 2013 be allowed into evidence, the contents of which would have further supported the respondent’s claim (and rebutted Ground 3 of the applicant’s application for [leave to] appeal).
Particulars
Her Honour did not permit the content of the without prejudice communication to be allowed into evidence on the basis of the [respondent’s] contention that it ought to be allowed pursuant to section 131(2)(g) [of the EA] …
2Her Honour’s judgment can be affirmed in respect of the applicant’s breach of the Deed [99] and the reasonableness of the tight timeframe for settlement [99] on the basis of the applicant’s unresolved dispute with the respondent in respect of the respondent’s entitlement to the fixed establishment fee of $26,625 (which Her Honour found the respondent to be entitled to).
Particulars
In the days between 27 September 2013 and 3 October 2013 the unresolved dispute as to the amount of the establishment fee to be charged by the respondent was a matter outside of the control of the respondent for the purposes of cl 36(c)(vii) of Schedule 3 of the Deed [of Offer]. It remained a sticking point [68]. This is a matter that appears to form part of Her Honour’s reasoning at [99] but for the purpose of certainty, is a matter included in the respondent’s Notice of Contention.

Judge’s decision relating to Grounds 2 and 3

Grounds 2 and 3 relate to the judge’s decision on what she described as the ‘breach issue’.[36]
[36]See [73] and [74] above.

The judge noted that the breach issue only clearly emerged during the course of the trial, when counsel for the applicant submitted that the demand made by the respondent in its letter dated 30 September 2013 did not fall within the terms of cl 36(c)(vii) of schedule 3 to the Deed of Offer. The judge was content to deal with the issue despite it not having been expressly pleaded by the applicant, because she said that it was arguably covered by the allegation in the defence that the demand was not legitimately sent.[37]
[37]Reasons [73]. See [61] above.

The judge held that while the timeframe stipulated by the respondent was short, in all of the circumstances, it was not unreasonable for the respondent to nominate a tight timeframe for the settlement of the loan.[38] The judge gave the following reasons for this conclusion:

[The applicant] had communicated to [the respondent], directly and indirectly, that it wanted to proceed quickly. [The respondent] had gathered the funds to settle the loan. The [applicant’s] conduct in its dealings with [the respondent] over the course of 2013 was, to say the least, erratic … While no particular blame can be attributed to the [applicant] for this, the disparity between the value of the security property as represented to [the respondent] and the actual valuation must have caused [the respondent] concern. I have found that [the respondent] was entitled, by reason of the terms of the Deed of Offer, to charge an establishment fee by way of a fixed sum rather than a percentage of the actual loan amount. There is no reason not to accept Mr Rickard’s evidence that the reference in the loan documentation to a term of one year was a typographical error, and that [the respondent] was always prepared to agree to a two year loan period. Accordingly, I reject the contention that it was [the respondent], not the [applicant], that breached the terms of the Deed of Offer.[39]
[38]Reasons [99].
[39]Reasons [99].

Parties’ submissions on Grounds 2 and 3 and notice of contention

The applicant submitted that there are two conditions that must be fulfilled in order for the respondent to be able to withdraw the offer of funding under cl 36(c)(vii) of schedule 3 to the Deed of Offer. They are that:

(a) the applicant has failed to settle the mortgage on the proposed date for reasons outside the control of the respondent; and

(b) the time period nominated by the respondent is reasonable.

According to the applicant, neither of these conditions was fulfilled and the respondent’s purported withdrawal on 4 October 2013 was a breach of the Deed of Offer.

In relation to the nominated time period, the applicant submitted that it was unreasonable because the Amended Deed of Offer which the respondent drafted and sent to the applicant for execution on 27 September 2013 contained significant errors and did not reflect the terms of the loan previously agreed by the parties. Those errors were said to be the term of the loan (expressed to be for one year rather than two years as agreed) and the establishment fee (expressed to be $26,625 rather than 1.5 per cent of the loan amount).

The applicant submitted that in circumstances where the applicant’s solicitors requested the necessary amendments to the Amended Deed of Offer and the respondent failed to make those amendments, the three day period cannot be a reasonable nominated time period. Further, according to the applicant, on the evidence before the Court, the respondent never responded to the applicant’s request in open correspondence before withdrawing the offer of finance on 4 October 2013.

The applicant submitted that the reasons it failed to settle within the nominated time period were within the control of the respondent, namely, the errors in the Amended Deed of Offer.

In relation to the notice of contention, the applicant submitted that the statement in para 35 of Master Dao’s affidavit of 10 February 2014[40] was true and the admission of the without prejudice letter would not disprove it. According to the applicant, the without prejudice letter reveals that the respondent was prepared to consent to amendment of the Amended Deed of Offer to reflect a loan term of two years, although it did not actually do so, but was not prepared to amend the establishment fee and instead put a counter-proposal. The applicant submitted that a partial agreement does not constitute an agreement and therefore para 35 is literally correct. The applicant also submitted that the judge did not base her decision on the ‘breach issue’ on the written negotiations between the parties and took into account Mr Rickard’s evidence that the respondent had been prepared to amend the loan period in the mortgage documents, notwithstanding that it did not do so and did not offer to do so in open correspondence. In these circumstances, according to the applicant, the judge cannot be said to have been misled. The applicant also noted that the respondent did not seek to re-argue the issue of the admissibility of the without prejudice letter pursuant to the liberty to apply reserved by the judge.[41]
[40]See [70] above.
[41]See [78] above.

The applicant submitted that the parties had agreed to an establishment fee of 1.5 per cent of the amount advanced and it was within the control of the respondent to amend the Amended Deed of Offer to reflect this. In any event, so it was said, regardless of whether the respondent was entitled to the establishment fee it claimed, in circumstances where the Amended Deed of Offer contained an inaccurate loan term, it was unreasonable for the respondent to compel the applicant to settle the loan without providing amended loan documentation. The applicant submitted that any period of time would be unreasonable in circumstances where a lender is asking a borrower to sign mortgage documents containing a material error. This was said to be the case regardless of whether the respondent subjectively intended to amend the loan term specified in the documents. In relation to whether the applicant could have affected the amendment whether by handwriting or otherwise, the applicant submitted that no prudent solicitor would have their client execute a document in circumstances where there was uncertainty as to such a fundamental term.

In oral submissions, the applicant submitted that the fact that there had been a change of solicitor on around 26 September 2013 was also relevant because the period specified was not enough time for the solicitors to investigate the matters that arose from the two errors in the Amended Deed of Offer and obtain instructions in relation to those matters.

The respondent primarily submitted that, as the applicant had not pleaded that the respondent’s demand made on 30 September 2013 did not satisfy the requirements of cl 36(c)(vii) of schedule 3 to the Deed of Offer, and the respondent prepared its evidence on the basis of the pleadings, it was unfair for the respondent to be required to address that allegation on appeal. Specifically, the respondent submitted that it did not put forward all the evidence available to it in relation to whether the applicant’s failure to settle the proposed mortgage on 30 September 2013 was beyond the control of the respondent because it did not believe that this was in issue at trial.

In oral submissions, the respondent identified a file note of a conversation between Mr Rickard and a solicitor employed at Western Lawyers on 27 September 2013 as the additional evidence that would have been adduced at trial on the issue of whether the applicant had failed to settle the proposed mortgage for reasons that were outside the control of the respondent. That conversation took place after Western Lawyers had received the mortgage documents. The applicant did not object to the file note being tendered. The file note relevantly stated as follows:

[The solicitor] asked about the establishment fee and the fact that it seems to be based on the original loan application for [$1,775,000] and [Gippsreal has not] altered [the amount] to reflect the lower value. I said that [this] is because that was the deed of offer that [the applicant] signed originally and [Gippsreal] actually sought and obtained funding for that and it was only after the valuation came in that [Gippsreal] had to reduce the figure to meet the [loan to value ratio] but that didn’t alter the establishment fee particularly in the circumstances where [the applicant] attempted to withdraw from the loan and [Gippsreal has] reserved all [its] rights under the [Deed of Offer].
The [Deed of Offer] had that figure in it and the [Amended Deed of Offer] which [Gippsreal has] provided reserving all [its] rights in respect of the [Deed of Offer] also included that same establishment fee.
[The solicitor] carried on that it was unfair and unjust and [the applicant] may have to go to court and [the solicitor] wouldn’t be recommending to her clients that they sign it.
I suggested that she ought to read the [Deed of Offer] and the [Amended Deed of Offer] and [Gippsreal’s] rights are quite clearly set out …
The fact that the valuation came in [substantially less than anticipated] was not of [Gippsreal’s] doing, the fact that [the applicant] may have paid substantially more than that was not of [Gippsreal’s] doing.

Notwithstanding the respondent’s submission that this Court should not entertain the issues raised by Ground 3, it addressed the issues raised by both Grounds 2 and 3.

In relation to whether the time period specified by the respondent in its letter dated 30 September 2013 was reasonable, the respondent described the applicant’s conduct as ‘erratic’ in the weeks leading up to 3 October 2013. According to the respondent, the applicant wished to settle the loan quickly and it was for that reason that the respondent had drawn down the necessary funds by 30 September 2013. The respondent referred to the file note dated 27 September 2013 as evidence that the respondent had explained to the applicant’s solicitors that the applicant was bound by the strict terms of the Deed of Offer in relation to the quantum of the establishment fee. According to the respondent, that conduct rendered the time period reasonable, because it put the applicant in a position to confirm that it understood that it was bound by the Deed of Offer and wanted to proceed with the loan.

The respondent submitted that the applicant’s unwillingness to pay the establishment fee of $26,625, made clear in the letter from Western Lawyers dated 1 October 2013, was a matter that was outside the control of the respondent for the purposes of cl 36(c)(vii) of schedule 3 to the Deed of Offer. The respondent submitted that it was entitled to the fee and had a contractual right to withdraw from the loan pursuant to cl 36(c)(vii) in circumstances where the applicant refused to pay it.

The respondent rejected any contention that it was not willing to offer a two year loan, or that the term of the loan was an issue that was the subject of dispute at the time the respondent withdrew from the loan. The respondent referred to evidence given by Master Dao at trial which was said to be to the effect that he had only three concerns, namely, the quantum of the establishment fee, the low valuation obtained by the respondent and the respondent’s cancellation of the loan. According to the respondent, if it had only proposed to make an advance for one year, it would have referred to such an amendment in its letter dated 27 September 2013, which stated that the Amended Deed of Offer reflected the amended loan amount. The respondent also submitted that if the dispute about the establishment fee had been resolved, amended loan documentation could have been provided promptly to the applicant. The respondent argued that the applicant could have made handwritten amendments to the mortgage documents before executing them.

The respondent submitted that the evidence in para 35 of Master Dao’s affidavit of 10 February 2014 was likely to mislead the Court if not contradicted and that the without prejudice letter should have been adduced in accordance with s 131(2)(g) of the EA because it ‘specifically contradicts’ that evidence. The respondent submitted that the without prejudice letter is required to correct the statement that the respondent did not agree to amend the Amended Deed of Offer when in fact it had agreed to amend it.[42]
[42]At trial, the respondent also contended that paras 28 and 33 of Master Dao’s affidavit of 10 February 2014 were misleading in the light of the contents of the without prejudice letter. This contention is incorrect, as those paragraphs refer to the handwritten alteration to the loan term in the Deed of Offer and have nothing to do with the amendments requested by Western Lawyers in their letter dated 1 October 2013.

According to the applicant, similar submissions were made orally during the hearing which sought to impugn the establishment fee on the basis that it was a penalty. The applicant submitted that in these circumstances, the judge erred in concluding otherwise and thereby failing to consider whether the establishment fee was a penalty.

The applicant contended that the establishment fee component of the liquidated damages sum of $31,625 was not a genuine predetermined estimate of the respondent’s loss, because it was calculated as 1.5 per cent of $1,775,000 which was, in the circumstances a random, wildly disproportionate and excessive figure.

The applicant submitted that the principles regarding penalties are applicable to the establishment fee because it formed part of a demand by the respondent for liquidated damages.

The respondent submitted that the applicant did not plead that the establishment fee was a penalty or that it was punitive or not a genuine predetermined estimate. According to the respondent, the applicant: pleaded only that the sum of $31,625 was ‘excessive, unreasonable and completely disproportionate’; did not open its case on the basis that that sum was a liquidated damages amount rather than a fixed fee or that it was punitive or not a genuine predetermined estimate; and appeared to have conceded that it was a fixed fee.

The respondent further submitted that the applicant did not run its case on the basis that the establishment fee was a penalty and that this is reflected in the fact that the key issues identified by the judge did not include any reference to whether the establishment fee was a penalty. According to the respondent, the trial proceeded on the basis that the establishment fee and the mortgage preparation fee were viewed in a legal sense as fixed fees for service and the judge formed the view that the manner in which the applicant had run the trial did not permit or require the term ‘establishment fee’ to be construed as a form of liquidated damages in any legal sense in relation to which the respondent needed to demonstrate that it had made a genuine predetermined estimate of damage. The respondent submitted that the use of inverted commas around the term ‘Liquidated Damages’ in the Liquidated Damages Ruling[109] recognises the wide definition given to that term at cl 75 of schedule 3 to the Deed of Offer.
[109]See [179] above.

The respondent referred to the judge’s conclusions as to the difference between fixed fees and estimates in cl 14 of schedule 1 to the Deed of Offer[110] and submitted that as the establishment fee was a fixed fee for a service, it cannot be a penalty. The respondent contended that the establishment fee is not calculated by reference to estimated loss, it is a fixed fee for certain work completed by the respondent and regulatory fees and other costs incurred by the respondent in the completion of that work.
[110]See [141] above.

Decision on Grounds 5 and 6

In our opinion Grounds 5 and 6 are made out.

Although the applicant did not expressly plead that the establishment fee was a penalty, its defence asserted that that fee and other components of the respondent’s claim for liquidated damages were ‘excessive’, ‘unreasonable’ and ‘not enforceable’.[111] Even if it is assumed that the pleadings were insufficient to raise the issue whether the amount of $26,625 was a genuine pre-estimate of loss, that issue was clearly raised by the applicant in its submissions. Further, as set out at [63]–[69] above, Mr Rickard gave evidence about the nature of the establishment fee and how he had quantified it, and he was cross-examined on the pre-estimate of loss issue. In his closing address, counsel for the respondent expressly submitted that neither the establishment fee nor the amount claimed for loss of three months’ interest ‘can be said to be a penalty’.[112]
[111]See [61] above.
[112]Transcript of Proceedings, Gippsreal Ltd v Melbourne Linh Son Buddhist Society Inc (Supreme Court of Victoria, S CI 2014 00069, Daly AsJ, 16 February 2016) 195. See also paras 26 and 35 of the respondent’s written submissions at trial.

We note that the judge did not find that the issue of penalty was not before her but rather said that ‘[i]t did not seem to be submitted on behalf of the [applicant] that the establishment fee was a penalty’.[113] We also note that, unlike Ground 3 in respect of which the respondent submitted that it would have adduced additional evidence had the issue of the beyond control requirement been raised at trial, the respondent did not contend that it would have adduced further evidence in relation to the penalty issue had it been expressly pleaded. Further, the respondent did not contend that the evidence on the penalty issue was insufficient to enable this Court to decide it.
[113]Reasons [100].

For the above reasons, the respondent would not suffer any relevant prejudice by this Court entertaining Grounds 5 and 6 and determining whether the establishment fee is a penalty on the basis of the evidence adduced by the parties at trial.

The question whether the establishment fee of $26,625 constitutes a penalty must be considered in the light of the dual purposes served by that fee. The first purpose was to be an amount payable by deduction from the principal sum where the Deed of Offer proceeded to settlement. The second purpose was to be an amount payable by the applicant to the respondent as liquidated damages in circumstances which include the withdrawal of the offer of finance by the respondent due to the applicant’s failure to settle the loan in accordance with the Deed of Offer.

As the loan did not proceed, it is not necessary for us to decide whether the establishment fee was a penalty insofar as it was payable by way of deduction from the principal sum at settlement. We will confine our discussion to the question whether the establishment fee is a penalty when it is claimed as compensation for a breach of the Deed of Offer.

For the purposes of the analysis that follows, we will assume, contrary to our conclusion at [114] above, that the applicant breached the Deed of Offer by not completing the loan transaction within the time specified in the respondent’s letter dated 30 September 2013. We will also assume that the establishment fee became payable as an item of liquidated damages under cl 20 of schedule 1 and cl 32 of schedule 3 to that deed consequent upon the putative breach by the applicant.[114]
[114]As set out at [37] above, cl 32 of schedule 3 to the Deed of Offer provided that, where the respondent exercises its rights pursuant to cl 36(c)(vii) to withdraw the offer of finance, the applicant is deemed to have breached that deed as a result of which the respondent is entitled to be paid the ‘Liquidated Damages’ described in that deed.

The evidence at trial that was relevant to whether the establishment fee was a penalty included the following:

(a)The matters set out at [109] above.
(b)The evidence of Mr Rickard set out at [63]–[69] above.
(c)The evidence of Mr Adicho set out at [72] above.

In our opinion, the establishment fee of $26,625 is a penalty because it bears no relation to any possible damage to or interest of the respondent arising from the putative breach of the Deed of Offer by the applicant and it is not commensurate with any legitimate commercial interest of the respondent which is sought to be protected by that deed in the event of its breach.

As stated in Dunlop, in deciding whether the establishment fee of $26,625 is a penalty, the Court must consider the ‘inherent circumstances’ of the Deed of Offer.[115] At the time the Deed of Offer was signed, the parties expected that the loan amount would be $1,775,000 and agreed, in accordance with the respondent’s usual practice, to an establishment fee which was 1.5 per cent of that amount. However, the Deed of Offer made provision for the loan amount to be reduced to 50 per cent of the value of the Plumpton Property and, based on a valuation of $1 million, the approved loan amount became $500,000. When this occurred, instead of reducing the establishment fee to $7,500 in order to maintain the usual proportion between the fee and the loan amount, the respondent decided to retain the amount of $26,625, thus increasing the fee to 5.32 per cent of the loan amount.
[115]See [166] above.

The evidence discloses that the respondent’s retention of the amount of $26,625 as the establishment fee had nothing to do with the protection of any of its legitimate commercial interests which it was concerned might be damaged by a breach of the Deed of Offer by the applicant. Rather, the evidence of Mr Rickard indicates that he decided to retain the amount of $26,625 predominantly due to the additional administrative work that the respondent had to perform in the lead up to 27 September 2013 arising from the constant changes in the applicant’s position regarding the proposed loan.

There are a number of difficulties with this approach. First, the additional administrative work preceded the putative breach on 3 October 2013 and did not represent loss suffered as a result of that breach. Secondly, there was no evidence that would enable the Court to quantify the additional administrative work. In fact, Mr Rickard acknowledged that there was no item by item correlation between the fee and this work or any ‘service’ provided by the respondent to the applicant. Rather, he simply retained the amount of $26,625 as a figure he subjectively thought was appropriate based on his 30 years’ experience in the finance industry. The irresistible inference that arises from Mr Rickard’s evidence and the inherent circumstances of the proposed loan transaction is that the fee of $26,625 was retained in order to punish the applicant for the inconvenience its conduct caused the respondent in the lead up to 27 September 2013 rather than to protect any legitimate commercial interest of the respondent arising from a breach of the Deed of Offer by the applicant.

We are fortified in this view by the evidence of Mr Rickard and Mr Adicho that establishment fees are usually set at between 1 and 2.5 per cent of the approved loan amount, and are commonly 1.5 per cent. As the amount of $26,625 was 5.32 per cent of the loan amount of $500,000, it was 3.54 times greater than the establishment fee that the applicant usually charged. There was no evidence from which it could be concluded that this vast discrepancy could be attributed to any genuine estimate of the loss that might arise from the applicant’s putative breach of the Deed of Offer. The only conclusions that are open on the evidence are: that the establishment fee is extravagant and unconscionable and out of all proportion to the likely loss that the respondent might suffer as a result of such a breach; and that its purpose is to punish the applicant rather than to protect a legitimate commercial interest of the respondent.

Another reason given by Mr Rickard for retaining the establishment fee at $26,625 was the risk inherent in the loan. While that risk might be relevant to setting the respondent’s ‘price’ for the transaction, it has nothing to do with quantifying a loss that might arise from a breach by the applicant. The risk of a loan defaulting has no relevance when a loan does not proceed.

A further reason given by Mr Rickard for the retention of the amount of $26,625 was to take into account the respondent’s goodwill. This was put in terms of recouping part of the value of the goodwill in the form of a higher fee rather than as compensation for damage to the goodwill arising from a possible breach of the Deed of Offer by the applicant. As such, the goodwill bears no relation to any possible loss that might arise from a breach of the Deed of Offer.

We reject the respondent’s submission that the establishment fee is incapable of being characterised as a penalty because it was a fixed amount that the applicant agreed to pay to the respondent. Neither the fixed nature of the amount nor the fact that the applicant agreed to pay it has any bearing on whether the establishment fee is a penalty. This is because, where a party seeks to impugn an amount payable under a contract as a penalty, that party does not allege that he or she did not agree to pay that amount, but rather that that amount is unenforceable based on the principles which we have discussed above. Further, amounts sought to be impugned as penalties are usually specified as fixed amounts and one of the indicia that such an amount is a penalty is that it remains the same irrespective of the likely loss that might be suffered from breaches of different types of contractual obligations.

We accept that the definition of ‘Liquidated Damages’ in cl 75 of schedule 3 to the Deed of Offer[116] is very wide and purports to extend to items payable under that deed which would not normally constitute either damages or liquidated damages. However, that definition does not mean that the principles relating to penalties cannot apply to the establishment fee. This is because the fee was claimed by the respondent as an amount payable as a result of the applicant’s putative breach of the Deed of Offer and not otherwise.
[116]See [36] above.

Finally, we note that cl 32(b) of schedule 3 to the Deed of Offer contains an acknowledgement by the applicant that the amounts specified as liquidated damages ‘are agreed to be a fair and reasonable pre-estimate of [the relevant losses]’[117] and ‘are not disproportionate to the greatest loss that is likely to be suffered by the [respondent] in the event of default by the [applicant] and are accordingly not a penalty’. That statement is not determinative;[118] whether an amount is a penalty is a matter for the Court. In any event, in circumstances where the applicant’s acknowledgement that the amount of $26,625 was a genuine pre-estimate of loss was given at a time when the loan amount was expected to be $1,775,000, the acknowledgement cannot be treated as being equally applicable to a loan for the much reduced amount of $500,000.
[117]There is a similar acknowledgement in cl 3.14 of the principal clauses of the Deed of Offer.
[118]See [176] above.

Ground 7: Offset of amount previously paid by the applicant

Ground 7 is as follows:

Her Honour erred in failing to offset $17,500 previously paid by the Applicant to the Respondent against any damages payable to the Respondent.
Particulars

The Applicant had sought credit against damages for previous separate payments of $7,500 and $10,000. The payments were made when the terms of the loan under discussion were different, but were made on account of administrative and professional costs incurred by the Respondent in investigating the loan prior to completion and procuring investor funds. The damages Her Honour awarded on 24 August 2016 address these costs. It is not relevant to note as Her Honour did in paragraph [137] that [those] fees had been paid on the basis they were non-refundable, as the Applicant does not seek a refund of the fee but rather a credit of the $10,000 against any loss for which it is ordered to compensate the Respondent.

The judge rejected the applicant’s contention that there should be an accounting for the commitment fees of $7,500 and $10,000 which the applicant had paid to the respondent on 22 February 2013 and 23 May 2013, respectively.[119] The judge held that this was because the payment of $7,500 related to an entirely different transaction, and in any event, the commitment fees were paid on the basis that the respondent had made it ‘abundantly clear’ that they were non-refundable while maintaining the discretion to credit the fees against any sum ultimately advanced.[120]
[119]See [25] and [28] above. Reasons [137].
[120]Reasons [137].

The applicant submitted that the judge erred in finding that the previous payments of $7,500 and $10,000 were made in respect of an entirely different transaction. While the applicant accepted that the previous payments were in respect of different proposed loan amounts for which security was to be arranged over different properties, those are merely details of the same transaction that changed in the course of negotiation between the parties. The applicant submitted that both payments were made to cover the valuation fees, rate and planning enquiries and the respondent’s initial loan investigation fees and there was no evidence led by the respondent that it had carried out valuations in respect of any other properties.

According to the applicant, as the damages awarded by the judge included $5,500 in valuation fees and $26,625 ‘on account of administrative and professional costs incurred by [the respondent] in investigating the loan prior to completion and procuring investor funds’,[121] the judge should have given credit to the applicant for the previous payments totalling $17,500 as they covered the same subject matter.
[121]See the Liquidated Damages Ruling at [80] above and the judge’s order dated 24 August 2016 at [82] above.

The applicant accepted that the fees were paid on the basis that they were non-refundable, but submitted that that fact was not relevant because the applicant does not seek a refund of the fees, but a credit of $17,500 against any loss for which it is ordered to compensate the respondent.

The respondent submitted that the applicant did not plead a set off or credit against damages, nor did it make a counterclaim for the amount of $17,500. The respondent submitted that although the applicant asserted in its pleadings that the sum of $10,000 had been paid in August 2013, and mentioned the matter briefly in its closing submissions, that allegation was denied by the respondent and there was no evidence that the applicant paid that sum in August 2013 (as distinct from May 2013). According to the respondent, the applicant was not entitled to seek a set off of the amount merely by making reference, in its closing submissions, to the respondent failing to account to the applicant.

The respondent submitted that, in any event, the only commitment fees paid by the applicant to the respondent were paid in response to expressions of interest by the respondent in relation to two prior approaches for a loan, and those fees were non-refundable. The respondent referred to the 16 May 2013 expression of interest which stated that the commitment fee was ‘non-refundable in the event of the loan not proceeding for whatever reason regardless of whether a formal Deed of Offer of Finance is made and accepted and/or the loan actually being advanced’.

In our opinion, Ground 7 is misconceived. The payments of $7,500 and $10,000 on 22 February 2013 and 23 May 2013, respectively[122] were in respect of transactions that were separate from the transaction embodied in the Deed of Offer. The second payment was clearly expressed to be non-refundable. The fact that the payments were described as covering particular expenses does not mean that they must be refunded merely because those expenses were not incurred.
[122]See [25] and [28] above.

Even if it is assumed that the respondent made a windfall gain as a result of the applicant’s decision not to proceed with the earlier loan transactions, that does not mean that the respondent was obliged to account for any such gain as a set off against damages to which it was entitled in respect of a subsequent unrelated transaction.

The matter may be tested by an analogy. If a person pays a deposit pursuant to a contract to buy a car which he or she cancels and, several months later, he or she decides to buy a different vehicle from the same dealer under a new contract, he or she could not compel the dealer to treat the deposit already paid as part or full satisfaction of his or her obligation to pay a deposit for the new car under the new contract. The fact that the person paid the deposit for the original car which he or she never received and that the dealer may have made a windfall gain if the dealer was able to sell that car to someone else, cannot affect the legal position. It may be that the dealer might choose to adopt a generous approach for commercial reasons, but that is different from the dealer being obliged as a matter of law to do so.

In the present case, the respondent stated in the 26 July expression of interest and in the Deed of Offer that, as a matter of discretion, it would consider giving credit to the applicant for the previous commitment fees but it expressly refused to accept a contractual obligation to give such a credit.

Relief to be granted by this Court

The respondent submitted that, notwithstanding the applicant’s success in relation to Grounds 2 and 3, this Court should not set aside the judge’s orders and substitute for them an order that the proceeding be dismissed. This was said to be because cl 34 of schedule 3 to the Deed of Offer contains a wide indemnity in favour of the respondent, including in respect of its costs associated with the enforceability of the deed.

We reject this submission. As the applicant did not breach the Deed of Offer, the respondent had no contractual right to withdraw the offer of finance. By purporting to do so, the respondent repudiated the Deed of Offer and that repudiation was accepted by the applicant.[123] It follows that the respondent had no legal basis to make any claim upon the applicant pursuant to any provision of the Deed of Offer or otherwise.
[123]See [114] and [126] above.

Conclusion

For the above reasons, we would grant leave to appeal and allow the appeal.

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7	Proposed Mortgage Sum		$1,775,000.00 (or a maximum of 50% Loan to Value Ratio, whichever is the lesser)
8	Initial Loan Term		1 year[14] …
9	Interest Rate		Higher rate 19.25%. Lower rate 9.25% …
…
14	Estimate of Costs and Disbursements		Gippsreal Limited – establishment fee Mortgage preparation fee		$26,625.00 $5,000.00
Titles Office fees		as required
Stamp Duty		as required
Rate and Planning Certificates		as required
6 months Interest in Advance		$82,093.75
Valuation fee (As per valuer’s actual account, estimated)		$5,000.00
Inspection fees		$500.00
GST will be added to and payable on above fees (if applicable)
All charges for costs, disbursements and the like are payable by the Borrower by deduction from the principal sum available at settlement.
Should your finance application have been introduced to Gippsreal Ltd by a third party (‘the Broker’) you acknowledge that the Broker was at all times acting as your agent and is in no way associated with, acting for or authorised to act for Gippsreal Ltd. Any fee agreed to between you and the Broker may be included in the above estimates.
…
19		… Commitment Fee		The following items must be returned to enable Gippsreal to complete its loan investigations and for settlement to take place: a. Non refundable commitment fee of $10,000.00. This amount will be credited to your account On a strictly without prejudice basis Gippsreal will give consideration to accepting the non-refundable commitment fee paid upon acceptance of the previous Expression of Interest issued 16^th May 2013 towards this application, although it is not obliged to do so, on the condition that the [applicant] acknowledges Gippsreal’s entitlement to the previous non-refundable commitment fees of $7,500.00 paid 25 February 2013, and $10,000.00 paid 23 May 2013. Gippsreal otherwise reserves all its rights in respect of the previously paid non-refundable commitment fees. This fee is non-refundable in the event of the loan not proceeding for whatever reason regardless of whether the loan actually being advanced. …
20		Liquidated Damages		· $31,625.00[15] on account of administrative and professional costs incurred by Gippsreal in investigating the loan prior to completion and procuring investors funds;
· $41,046.88 being (three) month’s interest at the lower rate: and
· all monies due to Gippsreal pursuant to clause 34 of Schedule 3 – General Conditions;[16] and
· any other costs and disbursements incurred by the Mortgagee or its agents at the actual costs or if the actual cost cannot be reasonably quantified, then pursuant to any costs agreement entered into between the Mortgagee and its agents;
(the Liquidated Damages – see clause 32 of Schedule 3 – General Conditions)
21		Proposed Drawdown Date		The Borrower must be in a position to effect settlement: (i) within 4 weeks of the date of acceptance of the Deed; or (ii) if the loan is to assist in the purchase of property, on the date as initially advised to Gippsreal as the settlement date for the purchase; or (iii) on any other date as reasonably advised by Gippsreal (the drawdown date).

[2017] VSCA 161

23 June 2017