Pacific Wireless Pty Ltd v Breeze Logistics Australia Pty Ltd
[2019] VSC 64
•18 February 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
JUDICIAL REVIEW AND APPEALS LIST
S CI 2018 00758
| PACIFIC WIRELESS PTY LTD (ACN 087 960 950) | Plaintiff |
| v | |
| BREEZE LOGISTICS AUSTRALIA PTY LTD (ACN 603 369 044) | Defendant |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 2 November 2018 |
DATE OF RULING: | 18 February 2019 |
CASE MAY BE CITED AS: | Pacific Wireless Pty Ltd v Breeze Logistics Australia Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 64 |
JUDGMENT APPEALED FROM: | [2018] VCAT 173 (Member R Daly) |
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ADMINISTRATIVE LAW – Appeal from decision of Victorian Civil and Administrative Tribunal – Whether tribunal erred – s 148 of the Victorian Civil and Administrative Tribunal Act 1998 - Leave to appeal and appeal allowed
CONTRACT - Termination by plaintiff for breach by defendant - Where contract provided for Termination Payment – Whether Termination Payment a genuine pre-estimate of damage – Expectation damages - Whether overhead expenses should be included in the assessment of damages – No absolute principle that account must be taken of overhead expenses – Plaintiff entitled to such damages as to place it in the same position it would have been in had the contract been performed
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Hoyne | Best Hooper |
| For the Defendant | Mr S Rowland | Aughtersons Solicitors |
HIS HONOUR:
INTRODUCTION AND SUMMARY
The plaintiff (‘Pacific’) entered into an agreement dated 15 September 2016 to provide the defendant (‘Breeze’) with internet and associated services for an initial period of three years (the ‘Service Agreement’). Soon after the Service Agreement was entered into, it was terminated by Pacific following a fundamental breach of its terms by Breeze.
Pacific issued proceedings in the Victorian Civil and Administrative Tribunal (the ‘VCAT proceeding’). Pacific claimed a Termination Payment of $41,382 pursuant to clause 10.3 of the Service Agreement. The Termination Payment was calculated upon:
(1) a minimum monthly service charge, called a ‘Minimum Monthly Payment’, of $990 per month (plus GST), to be paid for the balance of the period of the Service Agreement of 36 months, totalling $38,115.00 (plus GST of $3,762); and
(2) a one-off setup fee of $1,980 (the ‘setup fee’).[1]
[1]The points of claim in the VCAT Proceeding calculated Pacific’s claim for the Termination Payment on a slightly difference basis. I will explain this further below.
In the alternative, Pacific claimed damages in the sum of $40,818.45 representing lost profit, being the Minimum Monthly Payment for 36 months and the setup fee less saved setup costs of $563.55 (the ‘saved costs’) (the ‘lost profit claim’).[2]
[2]Ibid.
Breeze defended the VCAT proceeding relevantly on the basis that:
(1) Pacific had failed to prove its lost profit claim because it did not include all saved expenses by reason of the termination of the Service Agreement; and
(2) in the circumstances, the Termination Payment was an unenforceable penalty.
On 8 February 2018, the Tribunal delivered reasons for judgment,[3] accepting that Pacific had failed to prove its lost profit claim and that the Termination Payment was a penalty. However, the Tribunal concluded that Pacific should be awarded ‘fair and reasonable’ damages, assessed at $15,276.45, based upon the Minimum Monthly Payment of $1,980 per month[4] for 8 months plus the setup fee less the saved costs.
[3]Pacific Wireless Pty Ltd v Breeze Logistics Australia Pty Ltd (Civil Claims) [2018] VCAT 173 (the ‘Reasons’).
[4]This appears to be an error in the Reasons. As noted above, the Minimum Monthly Payment was $990 per month and the one off setup fee was $1,980.
Pacific now seeks leave to appeal and to appeal against that decision for four principal reasons which are interrelated. They may be summarised as follows:
(1) The Tribunal erred in finding that the Termination Payment was a penalty clause because it compared that sum to the wasted expenses that Pacific might have incurred by reason of the termination of the Service Agreement (i.e. reliance damages) rather than the profit that it might have lost from the non-performance of the contract (i.e. expectation damages).
(2) The Tribunal erred in assessing Pacific’s damages at a ’fair and reasonable sum‘ without any proper legal basis for doing so rather than putting Pacific in the position it would have been in if the contract had been performed: in this case, its lost profit claim based on expectation damages.
(3) Having accepted the evidence of Pacific that there were no saved expenses by reason of the termination of the Service Agreement other than the saved costs, the Tribunal erred in deciding that the absence of evidence of fixed and variable overheads adduced by Pacific meant that Pacific had not proved its lost profit claim.
(4) As Pacific was not put on notice that the Tribunal would determine damages on the ‘fair and reasonable’ basis, it was denied procedural fairness.[5]
[5]In these reasons, I will refer to the issue in [6(1)] as the ‘penalty question’ and the issues in [6(2)] and [6(3)] as the ‘damages question’.
For the reasons that follow, leave to appeal will be granted and the appeal allowed. In summary, I have concluded that the Tribunal erred in finding that the Termination Payment is a penalty. This is because it is not out of all proportion with a genuine pre-estimate of Pacific’s damage suffered by reason of Breeze’s breach on an expectation damages basis, which is the appropriate measure of damages in this case. I have also concluded that the Tribunal erred in finding that Pacific failed to prove its lost profits claim on an expectation damages basis, instead assessing Pacific’s loss on a ’fair and reasonable‘ basis.
THE SERVICE AGREEMENT AND ITS TERMINATION
The facts in this proceeding, save for those relating to the damages issues, were not in dispute. They are accurately set out in the Reasons.
Pacific carries on the business of providing fixed wireless internet services to businesses. It has approximately 200 customers, each of whom have agreements on the same terms as the Service Agreement. Pacific purchases internet capacity from its holding company which in turn purchases its capacity from Vocus and AAPT. At all times, Pacific has had more than enough capacity to meet its current requirements and new customers. It did not have to purchase additional capacity for the purposes of providing internet services to Breeze under the Service Agreement.[6]
[6]Reasons (n 3) [108], [112].
The Service Agreement was entered into with Breeze for the provision of internet and associated services (the ‘services’) set out in the Site and Pricing Schedule to the Service Agreement (the ‘schedule’) for an agreed initial term of 36 months.[7] The schedule provided that the services were to be provided at Breeze’s two business sites, located at B1, 54-56 Boundary Road, Braeside, and 560 Clayton Road, Clayton (‘the business sites’).
[7]I note in passing that the Service Agreement is dated 15 September 2016 but was not in fact signed by both parties until late October 2016. Nothing turns on this.
Clauses 9.1 and 9.5 of the Service Agreement set out the charges for the services as per the schedule. The schedule provided that there were to be:
(1) setup costs of $990 per business site with the ‘Total Setup’ being $1,980; and
(2) a monthly charge of $495 per site with the ‘Total Minimum Monthly’ payment of $990 (plus GST) for both sites.
Clause 10 of the Service Agreement provided for the termination by either Pacific or by Breeze. Clause 10.2 provided for termination by Breeze. Clause 10.2(a) provided that Breeze may terminate the Service Agreement if Pacific committed a material breach of the agreement (i.e. for cause). Clause 10.2(b) provided that Breeze may terminate without cause. It relevantly provided:
[Breeze] may terminate Agreement by giving 30 calendar days prior written notice and at the same time paying [Pacific] an amount calculated by multiplying the Minimum Monthly Payment specified in the Site and Pricing Schedule by the number of months remaining in the Term or Further Period (Termination Payment).
Clause 10.3 provided for termination or suspension of services by Pacific. Relevantly:
(1) clause 10.3(a)(i) provided that if Breeze committed an Event of Default, then Pacific may in its absolute discretion, without further notice to Breeze, and without prejudice to its other rights and remedies, cease supplying any Service temporarily or permanently by giving Breeze seven calendar days’ prior written notice;
(2)clause 10.3(c)(i) provided that if Breeze breached payment terms in clause 9 or as agreed to in writing from time to time, Pacific will issue a customer Suspension Notice giving Breeze seven calendar days to remedy; and
(3)clause 10.3(e) provided that in the event any of the circumstances in either clause 10.3(a)(i) or 10.3(c)(i) occurred and Pacific elected to terminate the Services, the Termination Payment immediately became due and payable.
An Event of Default was defined under the Service Agreement as occurring, relevantly, where Breeze:
(1) refused or neglected to pay any sum payable under the Service Agreement by the due date for payment;
(2) breached any provision of the Service Agreement, or any undertaking given to Pacific, and the breach was not capable of remedy or Breeze breached any provision of the Service Agreement, or any undertaking given to Pacific, which was capable of remedy and failed to remedy the breach within seven calendar days of the date of a notice from Pacific demanding that the breach be remedied.
Clause 11.2 provided that on termination of the Service Agreement, all unpaid sums owing by each party will immediately become due and payable to the other party, and the party owing any money not paid immediately will be liable to reimburse the other party for all reasonable legal costs and disbursements incurred by the other party in the recovery of such sums.
On 2 November 2016, Pacific sent a Notice of Acceptance to Breeze, as required under clauses 3(a) and 9.2(a) of the terms of the Service Agreement. On that date, Pacific also sent an initial invoice to Breeze pursuant to clause 9.2(a) of the Service Agreement for the setup costs and the first month services totalling $3,267. That has not been paid.
On 8 and 9 November 2016, Pacific completed site inspections of the business sites in order to assess what consumables, such as cables and antennas, were required before installation was completed. After that time, Pacific tried to arrange a date to commence the installation process at the business sites in accordance with clause 4.2 of the Service Agreement. However, at about that time, Mr De Angelis, the Managing Director of Breeze, advised Pacific that Breeze did not wish to proceed with the Service Agreement and refused to permit Pacific to access the business sites.
There followed a series of letters between the lawyers for Pacific and Breeze from mid-November 2016 until March 2017. The details of those communications are not currently relevant. This is because the following findings of the Tribunal were not challenged in this proceeding:
(1) Breeze breached clause 4.2 of the Service Agreement when it failed to provide the written consent required to enable Pacific to access the business sites to install the necessary equipment, despite being asked to do so by Pacific’s lawyers in November and December 2016 and early March 2017;[8]
(2) this breach of the Service Agreement constituted an Event of Default by Breeze which triggered Pacific’s right to terminate the Service Agreement under clause 10.3;[9] and
(3) by letter dated 22 March 2017, Pacific terminated the Service Agreement by reason of the Event of Default by Breeze.[10]
[8]Reasons (n 3) [78].
[9]Ibid [80].
[10]Ibid [81].
The letter of 22 March 2017 was not in evidence before me. However, the Reasons disclose that in that letter Pacific then claimed a different Termination Payment of $38,115 calculated as the Minimum Monthly Payment of $990 plus GST (totalling $1,089 per month) for the remaining 35 months of the term of the Service Agreement. It also claimed damages of $3,267 being the amount of the initial invoice issued on 2 November 2016 (comprising the setup fee of $1,980 and the first Minimum Monthly Payment plus GST of $1,089). The total claimed was therefore $41,382. Breeze failed to pay any of these sums.
THE VCAT PROCEEDING
As a result, on about 10 April 2017, Pacific issued the VCAT proceeding in the Civil Claims List against Breeze. The points of claim were consistent with the 22 March 2017 letter. As noted above, at the trial of the VCAT proceeding Pacific claimed the Termination Payment or alternatively its lost profits claim.
Breeze defended the VCAT proceeding on many bases including that there was no breach of the Service Agreement by Breeze and that the Service Agreement had not been validly terminated. As noted in 18 above, these defences were unsuccessful and there is no challenge to those findings. Breeze also defended the VCAT proceeding on the basis that Pacific had not proved its lost profits claim because it had not included all costs saved following the termination of the Service Agreement and that any entitlement based upon the Termination Payment was unenforceable as a penalty.
On 27 October 2017, the hearing of the VCAT proceeding took place. Pacific led evidence from its Managing Director, Mr Jonathan Shutt. Breeze led evidence from Mr Peter De Angelis.
Much of the evidence of Mr Shutt related to Pacific’s common law damages. Mr Shutt gave evidence about Pacific’s business as set out in [9] above. In cross-examination, it was put to him that Pacific was claiming 100% of the revenue it would have received under the Service Agreement rather than net loss of profits. Mr Shutt disputed this, giving evidence that Pacific only incurred a few additional costs in the delivery of its services because it had incurred significant capital costs upfront when the business of Pacific started. He maintained that that the only costs saved in relation to the Service Agreement arose by reason of the consumables, which were not used at each site because Breeze prevented installation i.e. the saved costs of $563.55 (including GST). This was accepted by the Tribunal.[11]
[11]Reasons (n 3) [40].
Mr Shutt also gave evidence stating that income from its 200 service agreements was about 95% of Pacific’s income. Mr Shutt was asked if each service agreement is a source of revenue each month and each financial year: he agreed. He was also asked whether Pacific had expenses which it deducts from revenue when it prepared its tax returns each year: he agreed with that too. But he maintained that it was not possible to classify these expenses as ‘saved’ by reason of the termination of the Service Agreement.[12]
[12]Ibid [42].
THE REASONS
On 8 February 2018, the Reasons were delivered. In the Reasons, the Tribunal undertook a detailed analysis of the factual and legal issues. At paragraph 55 of the Reasons, the Tribunal correctly set out the primary questions for determination. I have already referred to some of those questions and the answers to them earlier in these reasons. The questions currently relevant to the determination of this proceeding are:
(1) Question (c) - Whether the Termination Payment clause is a penalty clause (the ‘penalty question’); and
(2) Question (d) - If the Termination Payment clause is a penalty clause what is the loss and damage suffered by Pacific as a consequence of any breach by Breeze? (the ‘damages question’).
The Tribunal first dealt with the penalty question.[13] It then dealt with the damages question.[14] I will deal with each in turn.
[13]Reasons (n 3) [98]–[104].
[14]Ibid [105]–[117].
The Penalty Question
The Tribunal first dealt with the rule against penalties. It noted decisions of the High Court, including Paciocco v Australia and New Zealand Banking Group Limited[15] (‘Paciocco’) and Andrews vAustralia and New Zealand Banking Group Limited[16] (‘Andrews’), to the effect that an agreed damages clause will be enforceable so long as it is a genuine pre-estimate of damage or foreseeable loss and is not ‘unconscionable’, ‘extravagant’ or ‘out of all proportion’ to the interest to be protected.[17] The Tribunal correctly noted that the onus was on Breeze to prove that the Termination Payment clause was a penalty.[18]
[15](2016) 258 CLR 525 (‘Paciocco’).
[16](2012) 247 CLR 205 (‘Andrews’).
[17]Reasons (n 3) [99].
[18]Ibid [100].
The Reasons then refer to the decision in O’Dea v Allstates Leasing Systems (WA) Pty Ltd[19] to the effect that a term in a chattel lease entitling the lessor to recover, on early termination for breach, not only the chattel, the cost of recovering it and arrears of rent, but also the total rent that would have been paid had the lease been fully performed, was a penalty.[20] The Tribunal noted that the Termination Payment entitled Pacific to recover a similar amount.
[19](1983) 152 CLR 359.
[20]Reasons (n 3) [99].
The Tribunal concluded the Termination Payment was a penalty in the following terms:
On balance, I take the view that it is a penalty because the sum sought is an extravagant or exorbitant amount. It is out of all proportion to the interests that it is supposed to protect in comparison with the greatest loss that could conceivably be proved following from the breach. In addition to the balance of any minimum monthly payments due on the remaining term of the service agreement, the maximum or greatest loss that could have been suffered from that breach would only include any set up fees and costs payable under the service agreement and any reasonable costs and disbursements incurred by Pacific in recovery of the termination payment (clause 11.2).
Further, I find that the termination clause is designed to punish customers or lock them into a contract, rather than simply ensuring payment of the amount due to Pacific that would be payable if the installation had been completed. I do not accept Pacific’s submission that to attempt to recover the full thirty-six months of the payments due under the service agreement is not a penalty. This is because there is an enormous disproportion between the sum said to be due and the amount that could properly be said to be due as a genuine pre-estimate of Pacific’s loss. More likely, it could be said that the sum sought was ”extravagant” particularly in view of the fact that no internet services have been actually provided and the only costs that would have been incurred by Pacific are some set up costs for consumables not service costs totalling $563.55. [21]
[21]Ibid [103]-[104].
The Damages Question
The Tribunal dealt with the damages question in two stages. First, it considered whether Pacific had proven its lost profits claim, concluding it had not.[22] Second, in the circumstances, the Tribunal then considered what Pacific’s loss was, concluding Pacific was entitled to a fair sum consequent upon the termination, which the Tribunal assessed at 8 months plus expenses.[23] The Tribunal considered it was obliged to estimate damages on this basis given Pacific had done its best to adduce evidence of loss. The sum assessed as ‘fair and reasonable’ bore no relationship to the lost profits claim.
[22]Ibid [105]-[112]. It appears that this was because the Tribunal found that Pacific could not produce precise evidence of its operating expenses notwithstanding it had done its best: Reasons [109]-[111], [113].
[23]Ibid [113]-[117].
In relation to the first stage, the Tribunal correctly acknowledged that:
(1) damages for breach of contract are to be awarded on the principle that the injured party, so far as money can do it, is to be placed in the same position as if the contract had been performed;
(2) where a breach results in the loss by the other party of payments that would have been received, damages may be claimed for the loss of the amount by which the receipts would have exceeded expenditure (i.e. loss of profit).[24]
[24]Reasons (n 3) [106].
The Tribunal then noted the nature of Pacific’s lost profit claim, being the lost Minimum Monthly Payments for 36 months and one off setup fees less saved setup costs.[25] At [108] of the Reasons, the Tribunal noted that Pacific’s lost profit claim was based on the fact that the cost to Pacific of providing internet services to Breeze was nominal. That paragraph continues:
Mr Shutt gave evidence that Pacific purchases internet capacity from its holding company, which in turn purchases its capacity from Vocus and AAPT. He says that Pacific has more than enough capacity to meet its current requirements and new customers and that it would not have had to purchase any additional capacity for the purpose of this Service Agreement. The only additional cost savings would have been consumables costing $563.55.
[25]Ibid [107].
The Tribunal then set out the arguments put forward by Breeze[26] to the effect that:
(1) the losses claimed by Pacific were not net profit but revenue because Pacific was only deducting some expenses and setup costs: Breeze relied upon the decision of Robson J in NCON Australia Ltd v Spotlight Pty Ltd [No 5][27] (‘NCON’); and
(2) Pacific had not established its loss because it had failed to set out what its operating expenses would be likely to be based on evidence such as previous years fixed and variable costs.
[26]Ibid [109]-[110].
[27][2012] VSC 604 (‘NCON’).
The Tribunal then referred to the statements in NCON to support the principle to the effect that where the plaintiff cannot give precise evidence of the lost profit (as opposed to where the plaintiff is able to but does not adduce such evidence) the Court must estimate the loss as best it can.[28]
[28]Reasons (n 3) [109(c)]–[109(f)].
The Tribunal then set out the counter-argument of Pacific that it was neither normal nor surprising that Pacific incurred few additional costs in the delivery of internet services to Breeze: this was typical of businesses which provided services or where there were significant capital costs incurred upfront.[29]
[29]Ibid [111].
The Tribunal then concluded the first stage of the damages question as follows:
I find that Pacific has not proven on the balance of probabilities that its claim for damages constitutes lost profit, because while I accept Mr Shutt’s evidence regarding the cost of providing the services, I do not accept that the remaining claim represents a fair and reasonable claim for loss of profit. [30]
[30]Ibid [112].
The Reasons then address the second stage of the damages question. Based on the decision in NCON, the Tribunal considered that it had to determine ‘whether it can estimate what is a fair estimate of the damages’.[31] As noted above, this is because the Tribunal found it was ‘a case where it would be difficult to estimate the damages for loss of profit because Pacific cannot adduce precise evidence of what has been lost’.[32] Indeed, the Tribunal concluded that:
Pacific was required to do the best it could to set out what its operating expenses would be likely to be on evidence such as previous years fixed and variable costs, and has failed to do so at the hearing.[33]
[31]Ibid [113], [115].
[32]Ibid [113].
[33]Ibid.
The Reasons continue:
(1) Breeze had requested details of loss of profit including financial records and tax returns of Pacific for previous years; and
(2) while these documents were produced at the hearing, Mr Shutt maintained that the only expenses or savings Pacific would have incurred would be marginal and amounted only to the saved costs of $563.55 for the purchase of the relevant consumables and the remaining claim represented loss of profit not revenue.[34]
[34]Reasons (n 3) [113].
The Tribunal also referred to Mr Shutt’s evidence that the financial records of Pacific would not provide any relevant evidence in relation to the profits lost with respect to this Service Agreement because the records only relate to the profit and loss of all of Pacific’s business and would not demonstrate a marginal cost. The Tribunal accepted that Pacific had done the best it could to estimate its loss based on Mr Shutt’s evidence.[35]
[35]Ibid [113], [115].
The Tribunal concluded that, in these circumstances, Pacific was entitled to a ‘fair sum’ consequent upon the termination.[36] It then undertook an assessment of that sum. Relying on Paciocco, the Tribunal stated that the amount must be:
‘fair, in other words it has to be a genuine pre-estimate of the loss which will be incurred by Pacific as a result of the termination of the contract’.[37]
[36]Ibid [116]-[117].
[37]Ibid [116].
The Tribunal considered several alternatives as to what that fair sum might be, rejecting the awarding of nominal damages and Breeze’s contention that it would have incurred a 15% profit based upon an industry report. Rather, the Tribunal concluded as follows:
I have selected eight months, which allows approximately six months from the date of commencement of the service agreement on 15 September 2016 until the date of termination on 22 March 2017 and two months after the date of termination. I have allowed the first six months of the service agreement because I find that Pacific acted reasonably throughout this period in trying to comply with its obligations under the service agreement. Whereas I find that Breeze has not acted reasonably because they repeatedly failed to provide the necessary consent to the installation phase without giving any satisfactory reason for doing so. In fact virtually all of the reasons given by Breeze for not giving consent, were either withdrawn before the hearing or not raised at the hearing. I have allowed an additional two months of the service agreement because Pacific had to apply to the tribunal on 10 April 2017 to enforce its rights under the service agreement which has caused delays before it has been able to receive any compensation as a result of the breach. Breeze did not offer any resolution until arranging their lawyer’s letter dated 21 September 2017 (the offer) only one month before the scheduled hearing date of 27 October 2017 after notice of the hearing date was sent on 7 August 2017. Based on the monthly fee of $1,980.00 for both business sites, this equals a total amount of $15,840.00. After deducting the setup cost of $563.55, this gives a total amount of $15,276.45.[38]
[38]Reasons (n 3) [117].
As noted above, the Minimum Monthly Payment was $990 plus GST for both business sites, not $1,980 which was the one-off setup fee.
LEAVE TO APPEAL
Pacific seeks leave to appeal the Tribunal’s decision to this Court pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (the ’Act’). Section 148(1) restricts appeals to ’questions of law‘ and requires leave to appeal.
Pacific’s application for leave was made on 1 March 2018 by way of Originating Motion. Accordingly, s 148(2A) of the Act does not apply to the determination of leave in this proceeding. This is because that section does not apply to applications made before 1 May 2018, the date on which it commenced. As a result, this application for leave to appeal will be determined according to the principles in Secretary to the Department of Premier and Cabinet vHulls[39], which have since been developed by this Court.[40]
[39][1999] 3 VR 331.
[40]See, eg, Metricon Homes Pty Ltd v Softley (2016) 49 VR 746 (‘Metricon’).
In summary, those authorities make plain that the applicant must:
(1) identify a question of law relevant to the granting of relief below;
(2) show that there is a real or significant argument to be put on that question so as to show sufficient doubt to justify the grant of leave; and
(3) generally demonstrate that to allow the error to go uncorrected would impose substantial injustice.
Having regard to these principles, I have concluded that Pacific has shown that there is a real and significant argument to be considered that the Tribunal made errors of law in assessing the loss and damage suffered by Pacific as set out in [6] above, in particular [6(1), (2) and (3)]. In addition, there is the apparent error in applying the wrong figure for the Minimum Monthly Payments as the basis for the damages in fact awarded. In all these circumstances, I am satisfied that there is sufficient doubt about the reasoning of the Tribunal on these issues to justify the granting of leave. Should leave be refused, it is likely to cause substantial injustice to Pacific.
GROUNDS OF APPEAL
I will now turn to the four questions of law raised by Pacific. As noted in [6] above, they are interrelated. They turn on the correct approach to assessing common law damages and a ‘genuine pre-estimate of the damage’ likely to be suffered in the event of breach of the Service Agreement. The interrelation between these four questions is confirmed by the reasoning of the Tribunal set out above. It is also confirmed by the arguments of the parties in this proceeding.
Before doing so, as noted above, the argument before me proceeded on the basis that Pacific was entitled to a Termination Payment based upon 36 Minimum Monthly Payments. However, on my reading of clause 10.3(e) read with clause 10.2(b) of the Service Agreement, the Termination Payment only became payable on termination and was to be calculated by reference to the number of months then remaining in the term. As noted above, the unchallenged finding of the Tribunal was that the Service Agreement was in fact terminated on 22 March 2017.[41] Thus, in my preliminary view, Pacific would only be entitled to a Termination Payment calculated from that time for the balance of the term of the Service Agreement. However, in my view, the legal issues which arise on this appeal do not turn on the time from which the Termination Payment became payable. As a result, I will proceed on the basis of the parties’ submission in the determination of this appeal.
[41]Reasons (n 3) [81].
Arguments on the First Ground – the Penalty Question
Pacific submitted that the Tribunal erred in finding that the Termination Payment was a penalty clause because it compared that sum to the wasted expenses that Pacific might have incurred by reason of the termination of the Service Agreement (i.e. reliance damages) rather than the damage Pacific was likely to suffer, namely lost profit (i.e. expectation damages).
In doing so, Pacific submitted that the Tribunal erred at [102] of the Reasons when it took into account that no internet services were provided to Breeze. Pacific argued that the applicable test in determining whether a payment is a penalty does not involve consideration of whether the internet services were provided or not.
Breeze submitted that that there was no error because:
(1) the penalty finding needed to be considered in the context of the Reasons as a whole, particularly the finding that Pacific had failed to prove its loss or any adequate estimate of it;
(2) there are always difficulties in attempting to determine a genuine pre-estimate of damage and there will be differences of approach in the methodology to be adopted, relying upon Kiefel J in Paciocco at [555]; and
(3) the Tribunal did not err in failing to consider whether the loss was expectation damages or reliance damages: these expressions are simply manifestations of the central principle that that the injured party, so far as money can do it, is to be placed in the same position as if the contract had been performed.
Arguments on the Second and Third Grounds – the Damages Question
On the second ground, Pacific submitted that the Tribunal erred in rejecting Pacific’s lost profit claim for expectation damages on the basis that it was not ‘fair and reasonable’.[42] This was notwithstanding that the Tribunal generally accepted the evidence of Mr Shutt on Pacific’s loss.
[42]Reasons (n 3) [112].
Pacific submitted that:
(1) the Tribunal should have assessed what was necessary to put Pacific in the position it would have been in had the Service Agreement been performed, in accordance with established principles (in this case, expectation damages); and
(2) idiosyncratic notions of fairness or reasonableness were not relevant in that assessment, relying on Campbell’s Cash and Carry Pty Ltd v Fostif.[43]
[43](2006) 229 CLR 386, 434-5 [92].
On the third ground, Pacific submitted that, having accepted the evidence of Pacific that the only saved expenses by reason of the termination of the Service Agreement were the saved costs of $563.55, the Tribunal erred in deciding that the absence of evidence of fixed and variable overheads meant that Pacific could not adduce precise evidence of its loss.[44] This ground is closely related to the previous ground: but for the finding that Pacific had not proved its loss, the Tribunal would not have sought to assess that loss on a fair and reasonable basis.
[44]Reasons (n 3) [113].
Pacific submitted that:
(1) it is not appropriate for overheads to be deducted from the damages owing in this case: there was no evidence that those costs would have been saved by Pacific in the event that the Service Agreement was not performed;
(2) if the Service Agreement was performed, it would have only incurred costs of about $563, being the installation costs of the two business sites and, as such, these were the only costs that were required to be deduced from the sum of damages owing; and
(3) the Tribunal had misapplied NCON.
In response to these grounds, Breeze submitted that the Tribunal did not err in rejecting Pacific’s lost profit claim. It submitted that the fact that an award of damages must be fair and reasonable is so basal in awarding damages for breach of contract that it is not often stated, relying upon the judgment of Toohey J in The Commonwealth of Australia v Amann Aviation Pty Limited (‘Amann’).[45]
[45](1991) 174 CLR 64, 134 (‘Amann’).
Breeze further submitted that the Tribunal’s conclusion must be viewed in the context of the Reasons as a whole, in particular the finding that Pacific did not prove its loss and that the Tribunal was obliged to estimate damages as best it could. Breeze contended that, in the circumstances of this case, Pacific was required to set out its operating expenses by producing evidence such as the previous years’ fixed and variable costs and that it failed to do so. As a result, the Tribunal was entitled to assess damages as it did.
Finally, Breeze submitted that courts are reluctant to review findings of fact relating to damages, relying upon the judgment of Robson AJA in Metricon.[46] It is convenient that I deal with this point now. In Metricon, the Court was not asked to review findings of fact but to consider whether the Tribunal provided adequate reasons for the conclusions it had reached: it considered it appropriate to do so.[47] So too, in this case, I am not asked simply to review findings of fact in respect of the damages assessed but to consider whether there was any error of law in determining those damages. It is appropriate that I do so.
[46]Metricon (n 40) 789-90 [174]-[177].
[47]Ibid 790 [176].
Arguments on the Fourth Ground - Procedural Fairness
Pacific submitted it had been denied procedural fairness because, had it been aware that the Tribunal would reduce damages on account of notions of ’fairness‘, it would have sought to adduce evidence or make further submissions.
Breeze argued that neither party was denied an opportunity to make submissions on the assessment of damages and both parties were aware that the Tribunal might have to make an estimate in assessing damages. In reply, Pacific asserted that while damages were a live issue during the VCAT proceeding, the way in which the issue was ultimately decided had not been raised.
THE LEGAL PRINCIPLES
Before considering the parties’ arguments on each ground of appeal, it is appropriate to set out legal principles relevant to both the issue of assessing damages for breach of contract and determining whether a contractually agreed sum of damages constitutes an unenforceable penalty. I will first deal with the principles of assessing damages in contract. These principles inform the consideration of what is a genuine pre-estimate of damage for the purposes of determining whether a liquidated damages clause constitutes a penalty. This was also the course adopted by counsel for Pacific in oral argument.
Legal principles relevant to the Damages Question
In Amann, the High Court held that the well-established principle for assessing damages for breach of contract is as stated by Parke B. in Robinson v Harman[48]:
… that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.[49]
[48](1848) 1 Ex 850 (‘Robinson’).
[49] Ibid 855, approved in Amann (n 45) 80, 98, 117, 134, 148, 161.
In Amann, Mason CJ and Dawson J found that an award of expectation damages includes the party’s expected profit arising out of a contract as well as any expenses reasonably incurred in carrying out its contractual obligations. Their Honours held:
The award of damages for breach of contract protects a plaintiff’s expectation of receiving the defendant’s performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as “expectation damages”. The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff’s expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.
In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing profit, that is to say, that a party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profit. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which the gross receipts would have exceeded those expenses.[50]
[50]Amann (n 45) 80-1.
Their Honours went on to note that the expression ‘damages for loss of profit’ should not be understood as carrying with it an implication that no damages are recoverable in the case of contract where no net profit would be generated or in the case of a contract where the amount of profit cannot be demonstrated. In such circumstances, the plaintiff is entitled to recover the costs incurred of performing contractual obligations in accordance with the rule in Robinson.[51]
[51]Ibid 81.
Issues arise in some instances in determining whether overhead expenses should be taken into account when claiming expectation damages. In summary, the relevant principle is that such costs are only to be deducted to the extent they were saved by the breach and are not deducted if they are not saved: that determination depends on the facts of each case.
For example, in Bartonvale Management Services Pty Ltd v International Legal Services Pty Ltd[52] (‘Bartonvale’), the Full Court of the South Australian Supreme Court considered the damages payable on the wrongful termination of a laundry services contract. The Court had to determine whether it was appropriate to deduct from expectation damages an appropriate proportion of the general overheads of the business. Chief Justice Doyle, with whom Williams and Gray JJ agreed, concluded as follows:
A proper assessment of the plaintiff’s loss required an allowance to be made for the real possibility of reduced income as well as for the consequential reduction in expenditure.
The evidence did not allow precise calculation be made of either matter.
…
Mr Hall [the plaintiff expert] deducted from the estimated earnings the expenses that he identified as attributable to the provision of the contract services. That is, he deducted expenses that in his opinion would have increased when the contract was being in performed, and would have diminished when it ended. Mr Hall correctly observed that other outgoings, such as accounting fees, rents, rates and taxes would not reduce as a result of the termination of the contract. Mr Hall acknowledged that there were other expenses, for example telephone and postage, which would reduce slightly upon termination of the contract. But as Mr Hall said, as the earnings from the contract were only 1 per cent of the plaintiff’s total revenue, looking at things broadly, these other items of expense were insignificant and could be disregarded. In my opinion that is an appropriate way of approaching the matter.[53]
[52](2002) 220 LSJS 428 (‘Bartonvale’).
[53]Bartonvale (n 52) 432 [18]-[19], [23].
In North Sydney Leagues Club Ltd v Synergy Protection Agency Pty Ltd[54] (‘North Sydney’), the New South Wales Court of Appeal also considered the nature of expectation damages on wrongful termination of a contract. The appellant club appealed on the ground that the trial judge had erred in disregarding all overhead costs, both fixed and variable, on a pro rata basis when determining the respondent contractor’s loss of profit. The appeal was dismissed.
[54] (2012) 83 NSWLR 710 (‘North Sydney’).
Beazley JA (with whom Macfarlan and Whealy JJA agreed) undertook an exhaustive examination of the relevant authorities, including Bartonvale.[55]Her Honour concluded that in determining expectation damages:
(1) there is no absolute principle that account must be taken of overhead expenses or that such expenses must be taken into account proportionately, that is, proportionate to the value of the contract to the overall business; and
(2) the true principle is that such costs are only to be deducted to the extent they were saved by the breach, and are not to be deducted if they were not saved by the breach: the aim is always to place the plaintiff in the same position as it would have been had the contract been performed.[56]
[55]Ibid 715-19 [28]-[47].
[56]North Sydney (n 54) 718-19 [46].
Her Honour noted that the respondent contractor was required to do ‘no more and no less than adduce evidence of its loss to be assessed in accordance with the applicable legal principles’.[57] She noted that the trial judge was satisfied that the respondent’s managing director had a detailed understanding of its finances and the data he had prepared. There was no requirement that the financial data be collated or analysed by an expert accountant.[58]
[57]North Sydney (n 56) 725 [78].
[58]Ibid.
Further issues arise when a plaintiff is not able to precisely calculate its loss. However, it is a well-established principle that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can, which may involve some estimation and degree of speculation or guesswork.[59] These authorities were considered by Robson J in NCON.[60] Consistent with authority, His Honour formed the view that where a party is unable to lead evidence to prove precisely the quantity of its loss, that party will not be deprived of an award of damages as the court must do its best to fairly estimate the loss and damage.[61] But these authorities do not entitle the decision-maker to simply award damages simply on the basis of what is fair or reasonable.
[59]See, eg, Amann (n 45) 83 (Mason CJ and Dawson J).
[60]NCON (n 27) 72-7 [283]-[296].
[61]Ibid 74-7 [289]-[296].
Legal principles relevant to the Penalty Question
I now turn to the law of penalties. First, as correctly noted by the Tribunal, the onus of proving that a contractual clause is a penalty rests on the party asserting it is a penalty.
Second, a contractually agreed sum is a penalty where it is out of all proportion to the damage likely to be suffered as a result of the breach or non-observance of the contractual obligation.[62] However, that damage may extend beyond damages which may be awarded in compensation for the non-observance or breach of the contractual obligation. The interest of the party which it is the purpose of the clause to protect is relevant.[63]
[62] See, eg, Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 (‘Ringrow’) 667, 669 [27], [32].
[63] Paciocco (n 15) 546-7 [26]-[29] (Kiefel J with whom French J agreed), 574 [145] (Gageler J), 616 [283]
(Keane J).
Third, in determining whether an agreed sum is ‘out of all proportion’ to the damage likely to be suffered, it is necessary to recall that the essence of a penalty is a payment ‘in terrorem’ of the offending party. The courts have held that an agreed sum will be a penalty if it is ‘extravagant and unconscionable’ in comparison to a genuine pre-estimate of the greatest loss that could conceivably be suffered. In Ringrow Pty Ltd v BP Australia Pty Ltd (‘Ringrow’), the High Court adopted the following comments of Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin[64] (‘AMEV’) in relation to proportionality:
[E]quity and common law have long maintained supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is a penalty rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend upon a number of circumstances including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they infringe upon the parties’ freedom to settle for themselves the rights and liabilities following a breach of contract. [Emphasis added][65]
[64](1986) 162 CLR 170 (‘AMEV’).
[65]Ringrow (n 62) 667-8 [27] quoting AMEV (n 64) 193-4 (emphasis in original) (citations omitted).
These principles were endorsed by the High Court in Paciocco.[66] For example, Keane J stated:
Only in cases where gross disproportion is such as to point to a predominant punitive purpose have agreed payments payable on breach of contract been struck down as penalties … if the provision is not distinctly punitive in its character, the penalty rule does not operate to displace the parties’ freedom to settle for themselves the contractual allocation of benefits and burdens and the rights and liabilities following a breach of contract.[67]
[66]Paciocco (n 15) 553-4 [54] (Kiefel J with whom French J agreed), 577 [154] (Gageler J), 594-5 [220]-[221] (Keane J).
[67] Ibid 595 [221].
Difficulties may be encountered in seeking to determine a genuine pre-estimate of the damage likely to be suffered, and differences in approach may be employed.[68] This is particularly so when the damage claimed goes beyond financial loss. As the High Court noted in Ringrow, in typical penalty cases, the Court compares what would be recoverable as unliquidated damages with the sum of money stipulated on breach.[69]
[68]See, eg, Paciocco (n 15) 554-5 [57].
[69]Ringrow (n 62) 665-6 [21].
ANALYSIS OF GROUNDS
In light of these principles, I will turn to the grounds of appeal and my reasons.
Analysis of Second and Third Grounds – the Damages Question
In relation to the damages question, in my opinion, the Tribunal erred in finding at [112] of the Reasons that Pacific had not proven its lost profit claim on the basis that, while the Tribunal accepted Mr Shutt’s evidence regarding the cost of providing services, it did not accept ‘that the remaining claim represents a fair and reasonable claim for loss of profit’. My reasons are as follows.
First, for the reasons set out at [62]-[64] above, the proper test to be applied in assessing contractual damages is to place the innocent party in the same position it would have been in had the contract been performed. It is not part of that test that the damages awarded must, in the subjective opinion of the decision-maker, be fair and reasonable. In my opinion, the test that the Tribunal applied was contrary to principle.
Second, it appears that the Tribunal assumed that Pacific must have saved some overheads or additional costs by reason of the termination of the Service Agreement with the result that Pacific had not proved the loss it claimed. Indeed, the Tribunal concluded that Pacific was ‘required to do the best it could to set out what its operating expenses would be likely to be on evidence such as previous years fixed and variable costs, and has failed to do so at the hearing’.[70]
[70]Reasons (n 3) [113].
In my view, the Tribunal erred in determining Pacific was required to do so in order to prove the lost profits claim. As the authorities set out in [66]-[69] above make plain, there is no general rule that account must be taken of overhead expenses either absolutely or proportionately: each case depends upon its own facts. I will address the facts of this case later in these reasons. I note that it does not seem that all the relevant authorities, including Bartonvale and North Sydney were drawn to the attention of the Tribunal.
Further, as Beazley JA noted in North Sydney, a party seeking contractual damages is required to do ‘no more and no less than adduce evidence of its loss assessed in accordance with applicable legal principles’.[71] The effect of the Tribunal’s conclusion that Pacific was required to set out its operating expenses was to impose an obligation on Pacific otherwise than in accordance with legal principle.
[71]North Sydney (n 54) 725 [78].
It follows from what I have said above that the Tribunal erred in concluding that Pacific was entitled to an award of damages on the basis of eight monthly service payments plus the setup fee less the saved costs (quite apart from adopting the wrong figure for monthly service payment).
In reaching that conclusion, the Tribunal stated that for the damages award to be ‘fair it has to be a genuine pre-estimate of the loss which will be incurred by Pacific as a result of the determination of the contract’, relying upon Paciocco.[72]With respect, this is also in error. This confuses the test in determining whether a contractually agreed sum for damages is a penalty with the task that was then before the Tribunal, namely, to determine the damage that Pacific suffered by reason of the termination of the Service Agreement.
[72]Reasons (n 3) [116].
Contrary to the findings of the Tribunal, I consider that Pacific did produce adequate evidence of its lost profits claim. This is particularly so given the nature of Pacific’s business, set out at [9] above (which was accepted by the Tribunal), namely:
(1) it provides fixed wireless Internet services to approximately 200 customers;
(2) at all times, Pacific had more than enough capacity to meet its current requirements and new customers; and
(3) it did not have to purchase additional capacity for the purpose of providing internet services to Breeze under the Service Agreement.
All of these factors are of significance in assessing Pacific’s loss and the reason why its operating expenses were not deducted from its claim. The amounts it paid via its parent company did not change by virtue of the Service Agreement. This is because it did not have to purchase additional capacity from its parent company to provide services to Breeze. The number of its customers is also of significance. I will address this shortly.
As noted above, Mr Shutt’s evidence was accepted by the Tribunal. Mr Shutt sensibly conceded in cross-examination that there were expenses in the running of Pacific’s business that that were deducted from revenue: but he maintained that those expenses did not relate to the loss of profit from the termination of the Service Agreement.[73]
[73]Transcript of Proceedings, Pacific Wireless Pty Ltd v Breeze Logistics Australia Pty Ltd (Victorian Civil and Administrative Tribunal, C2813/2017, Member R. Daly, 27 October 2017)(‘VCAT proceeding transcript’) 30 (S Rowland), 43 (M Hoyne). For example, Mr Shutt gave evidence that he would not have to employ any extra staff or contractors in order to fulfil the Service Agreement.
I note that Breeze’s lawyers sought the financial statements of Pacific for previous years. They were made available at hearing. But as the Tribunal noted at [113] of the Reasons, Mr Shutt (whose evidence the Tribunal generally accepted) maintained that the financial records of Pacific did not provide any relevant evidence in relation to the probable profits lost as a result of the termination of the Service Agreement. In any event, there was no cross-examination on these financial statements so as to identify any particular overheads or costs which might have be saved.[74]
[74] Ibid 56 (S Rowland).
Further, Mr Shutt maintained on many occasions that the only expenses saved were the consumable items.[75] The Tribunal expressly found that it accepted the evidence of Mr Shutt in relation to the cost of providing services in respect of this termination of the Service Agreement.[76] There was no challenge to the fact that Mr Shutt had a detailed understanding of Pacific’s business, its finances and data.
[75] VCAT proceeding transcript (n 73) 43 (M Hoyne).
[76]Reasons (n 3) [112]-[113], [115].
In these circumstances, I am satisfied on the balance of probabilities that, in light of the nature of Pacific’s business, the evidence of Mr Shutt was sufficient for the plaintiff to establish its lost profit claim in the circumstances of this case. I am not satisfied that any other overheads were attributable to the Service Agreement. To adopt the words of Doyle CJ in Bartonvale, as the earnings from the Service Agreement were less than 1% of Pacific’s total revenue and ‘looking at things broadly, these other items of expense were insignificant’[77] and could properly be disregarded.
[77]Bartonvale (n 52) 432 [23].
For completeness, I wish to address two matters. First, in my view, the judgment of Toohey J in Amann does not support the proposition that, as matter of principle, an award of damages must be fair and reasonable. Rather, in the passage relied upon by Breeze, Toohey J was noting that at the time that Robinson was decided, the award of damages ‘was still very much one for the jury based upon its assessment of what was fair and reasonable in the circumstances’.[78]
[78]Amann (n 45) 134.
Second, the facts and issues raised in NCON were very different from the present case. The plaintiff in NCON sought damages for breach of a rental agreement for electrical equipment called ‘Yes boxes’ which reduced power usage for fluorescent lighting. The defendant Spotlight repudiated the agreement and NCON accepted that repudiation claiming damages.
The nature of that damage changed over time. It was initially a claim for loss of profits: particulars filed at trial were for loss of revenue.[79] No allowances were made for costs and expenses that may have been incurred to earn the rental, as NCON claimed the loss of revenue was a lesser sum than damages based on lost profit.[80] When Robson J raised issues about the damages claim during final submissions, NCON produced a calculation based on loss of profit which took into account some expenses of which there was little or no evidence.[81]
[79]NCON (n 27) 58-64 [233]-[254], [257].
[80]Ibid 65-6 [257], [263].
[81]Ibid 68-71 [277]-[280].
Robson J concluded that, assuming NCON was entitled to damages calculated on a loss of profits basis, the evidence established that several categories of expenses would have been incurred, but (1) no direct evidence was given that these were in fact all the categories of expenses that would have been incurred and (2) insufficient evidence was led to prove that the expenses would have been incurred in each category that was identified.[82] For example, no evidence was given of the costs of installing the ‘Yes boxes’ in the stores[83] or the cost of their manufacture.[84] Robson J also concluded that there was insufficient evidence to prove the loss of revenue claim as particularised.[85]
[82]NCON (n 27) 78-82 [303]-[318].
[83]Ibid 79 [307].
[84]Ibid 80 [309]-[310].
[85]Ibid 82-8 [319]-[350].
In these circumstances, Robson J ‘reached the unfortunate conclusion that NCON has not properly proved its loss and damages’ when it had the ability to do so.[86] As a consequence, Robson J ordered nominal damages.
[86]Ibid 88 [351].
By contrast, this is not a case where Pacific relied upon items in establishing its lost profits claim which it could not prove. This is a case where the managing director, whose evidence was accepted, maintained that there were no other relevant items to be taken into account other than saved expenditure. For the reasons set out above, I am satisfied that the evidence of Mr Shutt was sufficient for the plaintiff to establish its lost profits claim in the circumstances of this case.
Analysis of First Ground – the Penalty Question
In relation to the penalty question, in my view, the Tribunal also erred in finding at [104] of the Reasons that the Termination Payment was a penalty. This is because the Tribunal did not compare the payment with a genuine pre-estimate of damage suffered by reason of the termination in accordance with legal principle.
The only kind of damage which Pacific contended it suffered was its unliquidated damages by reason of the breach and termination of the Service Agreement. As set out above, in such circumstances, the Court is to compare with what would be recoverable as unliquidated damages with the agreed contractual sum.[87]
[87]See [75] above.
The Tribunal looked only at the reliance damages suffered by Pacific i.e. the setup fees and costs payable under the Service Agreement and recovery costs[88]. It did not consider the true nature of the genuine pre-estimate of the damage which Pacific suffered by reason of the termination of the Service Agreement, in this case, its loss profit claim based on expectation damages set out in the previous section.
[88]Reasons (n 3) [104].
If that comparison had been undertaken, it would have revealed that there is no substantial disproportion between the genuine pre-estimate of Pacific’s damage on an expectation damages basis (i.e. the lost profit claim of $40,818.45) and the Termination Payment (i.e. $41,382). The Termination Payment is clearly not ‘extravagant’ or ‘out of all proportion’ to the damage likely to be suffered by Pacific for the purpose of calling in aid the law of penalties.
I have also considered other factors which may be relevant to determining whether the Termination Payment is a penalty. Relevantly, I have considered the relationship between Pacific and Breeze. As noted in Ringrow, this is a factor relevant to the unconscionability of a party’s conduct in seeking to enforce an agreed contractual sum.[89] However, there was no evidence before me of any inequality of bargaining power as between Pacific and Breeze which would suggest any relevant unconscionability on Pacific’s part in seeking to include or enforce the Termination Payment.
[89]See [73] above.
Further, I have considered the nature of the Termination Payment in this case. First, it is not payable for any breach or non-observance of the Service Agreement by Breeze. Rather, it is payable, relevantly, on the decision by Pacific to terminate the agreement following an Event of Default, which the parties have agreed are sufficiently serious to entitle Pacific to terminate the Service Agreement. Second, the Termination Payment is not a single fixed or invariable sum. It is calculated by reference to the balance of the contractual term at the time of termination. As a result, in my view, it could not be said to be inordinate or extravagant.[90]
[90]Paciocco (n 15) [37].
As a result, I have concluded that the Termination Payment is not a penalty.
I am conscious, as was the Tribunal, of the fact that the effect of this outcome is that Breeze may be required to pay all the Minimum Monthly Payments remaining under the Service Agreement notwithstanding that no services were provided. At first blush, that result may seem odd and might be seen to punish customers like Breeze or act to lock them into such agreements.
However, it is necessary to apply the relevant legal principles in determining the outcome of proceedings. In this case, the relevant legal principle required a comparison between the Termination Payment and a genuine pre-estimate of the damage which might be suffered by Pacific if the contract were terminated for breach. For the reasons set out above, in the circumstances of this case, the Termination Payment is not out of all proportion to the genuine pre-estimate of damage likely to be suffered by Pacific following termination of the Service Agreement as a result of the breach by Breeze.
Analysis of Fourth Ground – Procedural Fairness
In light of the conclusions I have reached above, it is unnecessary to form a view on whether Pacific was denied procedural fairness in the VCAT proceeding.
CONCLUSION
In light of the conclusions I have reached in relation to the merits of Pacific’s claim, I consider that it is appropriate that I make orders dealing with the substance of the issues giving rise to this proceeding rather than remitting the matter. It would add considerable expense to the parties for the matter to be remitted for the purposes of entering judgment in accordance with these reasons.
However, it is appropriate that I hear from the parties on the form of orders to be made, particular in the light of the view I have expressed in [48] above.
As result, I will order that:
(1) by 4:00pm on 22 February 2019, the parties confer with a view to reaching agreement on any proposed final orders, including on the issues of interest and costs; and
(2) in the event that proposed orders cannot be agreed between the parties:
(a)by 4:00pm on 27 February 2019, each party file and serve a respective minute of proposed final orders together with short written submissions (limited to three A4 pages) in support thereof; and
(b)the matter be listed for hearing for the making of final orders on 1 March 2019.
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