Perpetual Trustee Co Ltd v Mitchell - [2010] NSWSC 825

No judgment structure available for this case.

CITATION: Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825

HEARING DATE(S): 28 July 2010

JUDGMENT DATE :
30 July 2010

JURISDICTION: POSSESSION LIST

JUDGMENT OF: Davies J

DECISION: (1) The Defendant’s Notice of Motion dated 23 July 2010 is dismissed. (2) The Defendant is to pay the Plaintiff’s costs of the Motion.

CATCHWORDS: CONTRACT - penalty - proceedings pursuant to a loan agreement and mortgage - proceedings compromised with acknowledgment of amount owing - Plaintiff agrees to accept a lesser sum if certain conditions met - if conditions not met acknowledged debt becomes payable - indulgence by creditor - default provision not a penalty.

LEGISLATION CITED: Civil Procedure Act 2005
Mental Health Act 2007

CATEGORY: Procedural and other rulings

CASES CITED: AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170
Cameron v UBS AG [2000] VSCA 222; [2000] 2 VR 108
O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359
Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656
Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd & Anor [2000] QCA 221

PARTIES: Perpetual Trustee Company Ltd (Plaintiff)
Jennifer Victoria Mitchell (Defendant)

FILE NUMBER(S): SC 2008/287575

COUNSEL: J Simpkins SC (Plaintiff)
E Cohen (Defendant)

SOLICITORS: Gadens Lawyers (Plaintiff)
Matthews Follbigg (Defendant)

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
POSSESSION LIST

DAVIES J

30 JULY 2010

2008/287575 PERPETUAL TRUSTEE COMPANY LTD V MITCHELL

JUDGMENT

1 These proceedings commenced by Statement of Claim seeking possession of land the subject of a mortgage and judgment for a sum of money said to be outstanding to the Plaintiff as a result of a loan agreement where default had been made. The monies advanced by the Bank were secured by a mortgage over the land at 59 Fox Valley Road, Wahroonga.

2 Default occurred under the loan agreement and the mortgage on 14 January 2008 and continued thereafter.

The Consent Orders

3 The proceedings eventually settled in terms of Consent Orders made on 3 February 2010. The Consent Orders provided:

1. Judgment that the plaintiff be given possession of the Land described in Item 1 of the Schedule.

being the amount owing under the Loan Agreement as at 22 January 2010

3. Leave to file a cross-claim in the form exhibited behind Tab 11 of exhibit ‘JVM1' to the affidavit of Jennifer Victoria Mitchell dated 9 July 2007 (Cross-claim).

4. The Cross-claim be filed forthwith.

5. Judgment in favour of the cross-defendant on the Cross-claim.

SCHEDULE

1. The whole of the land comprised in folio identifier 102/251923 being the land situated at and known as 59 Fox Valley Road (also known as Fox Valley Way), Wahroonga in the State of New South Wales.

AND THE COURT NOTES THE FOLLOWING

(a) By Friday, 12 February 2010 the plaintiff must by (sic) provided with copies of the following documents for approval by the plaintiff.

(i) Agency agreement entered into by the defendant for the sale of the Property.

(ii) Front page and special conditions of the draft contract of sale of the Property.

(iii) Marketing campaign.

(b) By Friday, 28 May 2010 the defendant must provide the plaintiff with an exchanged contract of sale for the Property, on terms and for a price satisfactory to the plaintiff.

(c) The sale of the Property by the defendant may be by way of sale by private treaty or by auction. The reserve price set for any auction must not be less than $850,000.

(d) The plaintiff must be copied into any correspondence from or to the real estate agent in relation to the sale process.

(e) By 2 July 2010, settlement of the sale of the Property must take place. Conditional upon settlement of the sale of the Property by the defendant taking place by 2 July 2010, the plaintiff will accept the following amount on settlement in full and final satisfaction of its mortgage debt including legal costs and disbursements:

(i) $800,000; plus

(ii) interest on the sum of $800,000 from 2 February 2010 until settlement at the current variable interest rate under the loan agreement.

2. If any of the above conditions are not complied with:

(a) the defendant must hand vacant possession of the Property to the plaintiff within 7 days of any non-compliance;

(b) the plaintiff will be entitled to proceed to enforce the consent judgment for its full amount, including obtaining possession of the Property and selling the Property by way of a mortgagee sale without further notice; and

(c) the defendant agrees not to seek any stay of execution or enforcement of the plaintiffs judgment

3. Time is of the essence in respect of the above dates.

4 In the meantime the Defendant had been admitted to Hospital on 14 September 2009 due to a serious illness. On 29 January 2010 she was transferred to the Royal North Shore Hospital Emergency Department as an involuntary patient under the NSW Mental Health Act 2007 where she remained until 22 February 2010.

5 On 2 February 2010 Latham J appointed the Defendant’s husband James Royce Scott Mitchell to be tutor in the proceedings on her behalf. It seems that Mr and Mrs Mitchell had a solicitor, Mr D’Emilio from Matthews Folbigg, assisting them in the matter but he did not file a Notice of Appearance until 2 February 2010.

6 The matter was stood over to 3 February 2010 before Latham J. On that day her Honour approved the Terms of Settlement pursuant to s 76 Civil Procedure Act 2005 and made the orders in the Consent Order.

The contracts for sale

7 Thereafter, the property was immediately listed for sale after minor repairs had been completed. A contract was exchanged for the sale of the property on 28 May 2010 for a sale price of $940,000. Settlement was due to take place on 30 June 2010, but on 24 June 2010 Mr D’Emilio was informed by the purchaser’s solicitor that the purchaser was unable to proceed as he could not obtain finance.

8 The property was immediately put back on the market and a further contract exchanged on 26 June 2010 also for a price of $940,000. Mr D’Emilio said in his affidavit that this contract was due to complete on 26 July 2010 but I note the completion date on the contract itself specifies 28 July 2010. The solicitors for the Plaintiff were kept informed about the rescission of the first contract and the new contract by emails of 30 June and 1 July 2010. This resulted in some correspondence from the solicitors for the Plaintiff, the details of which have not been provided to the Court.

9 In reply, a letter from Matthews Folbigg of 20 July 2010 said this:

With reference to your letters dated 5,12 and 15 July 2010, we note the terms of the contract between your client and our client annexed to the Consent Orders dated 2 February 2010.

The agreement was made In consideration of settlement of substantial proceedings between your client and our client. As previously mentioned to you, our client's failure to settle on 2 July 2010 will cause no damage to your client other than an interest loss. The amount which you are requiring our client to pay on settlement is a penalty and is unenforceable.

Our client is prepared to settle in accordance with the terms of Clause 1(e) other than as to time on a date which our client believes will be 26 July 2010. The amount that will be tendered to your client on that day will be calculated as per Clause 1(e) of the agreement annexed to the Consent Orders.

If your client is suffering any further damage other than as suggested above by the failure to pay by 2 July 2010, would you please advise within 24 hours. If your client advises that it is not prepared to accept the above amount within 24 hours, our client will have no alternative than to refer the matter to a duty judge for urgent decision and will tender this letter in connection with costs.

10 The solicitors for the Plaintiff wrote on 21 July 2010 in these terms:

We refer to your letter of 20 July 2010.

Our client rejects any suggestion that the requirement that the net proceeds of sale up to the amount of the full consent judgment be paid to our client on settlement constitutes any penalty and is unenforceable, in circumstances that include the following.

2. The terms of settlement between our respective clients were approved by Justice Latham under section 76 of the Civil Procedure Act 2005 on 3 February 2010.

3. Your client consented to judgment being entered in favour of our client for its full mortgage debt. Any requirement that our client's entitlement under the judgment be met cannot be in the nature of a penalty.

You have foreshadowed that your client may refer the matter to the Duty Judge for urgent decision. It is unclear what application your client would propose to make to the Court.

We anticipate receiving instructions to vigorously oppose any application that seeks orders with respect to any aspect of the consent judgment or terms of settlement being a penalty.
…

11 There is another letter of the same date from the solicitors for the Plaintiff dealing with deductions and amounts which might be receivable on settlement. That letter concluded by saying:

Meanwhile, our client continues to reserve its rights generally, including under the loan agreement, mortgage and judgment.

The Defendant’s application

12 The Defendant applied by Notice of Motion to Schmidt J on 23 July 2010 seeking these orders:

^nd

a. Certificate of Title Folio identifier 102/251923; and

b. Duly executed discharge of Mortgage registered number AD425411.

^nd

4. That the Plaintiff pay the Defendant's costs of this Notice of Motion on an indemnity basis.

5. Such further or other order as this Honourable Court sees fit.

13 As it transpired, the Defendant was not seeking that the Notice of Motion be heard before Schmidt J on that date but said that it needed to be heard within the following 14 days because of a fear that a Notice to Complete would be issued. It is in those circumstances that the matter came before me on 28 July 2010.

14 The Defendant submits that the Agreement entered into on 3 February 2010 contained a provision that was a penalty. That provision is found in paragraph 2 of the Agreement which is said to be the default clause. The Defendant submits that it is a penalty because, if it is enforced, the Plaintiff will obtain a wrongful advantage. In the circumstances of its enforcement, it is said, the Plaintiff will obtain an amount that is out of all proportion to the damage likely to be suffered as a result of the breach (a reference to a statement by Mason and Wilson JJ in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190).

15 It is submitted that the higher amount, the consent judgment for $1,047,837.83, is an assessment of liquidated damages payable on breach. It is submitted that one looks to the substance and not the form of the Agreement and the alleged penalty provision to see if it is a penalty. The Defendant submits that, despite the way the Agreement is framed (judgment for the higher sum but if the conditions are met then the lower sum accepted in full satisfaction), in substance the Agreement requires payment of the higher sum on breach and that sum cannot represent a true measure of the damages that the Plaintiff suffers because of non-compliance with the conditions. This is because the Agreement envisaged a settlement by 2 July 2010, and a settlement on 26 July (as the contract now envisages) or even 14 days after that time could not result in the Plaintiff suffering damages to the extent of the difference between $800,000 and interest on the one hand and the judgment of $1,047,837.83 on the other.

Does the arrangement amount to a penalty?

16 In my opinion, these submissions are misconceived.

17 In Ringrow Pty Ltd v BP Australia Pty Ltd [2005] 224 CLR 656 the High Court rejected the notion that a doctrine of proportionality existed in the context of the law of penalties (see at [27]-[30]). They went on to say:

AMEV-UDC Finance Ltd v Austin

[T]here is much to be said for the view that the courts should return to ... allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach.

[32] Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged "extravagant and unconscionable in amount". It is not enough that it should be lacking in proportion. It must be "out of all proportion". It would therefore be a reversal of longstanding authority to substitute a test expressed in terms of mere disproportionality. However helpful that concept may be in considering other legal questions, it sits uncomfortably in the present context.

18 I do not consider that the present Agreement is analogous to the situations that existed in O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, in AMEV-UDC, or in Ringrow. In the present case there was a pre-existing debt owed to the Plaintiff. The precise amount of that debt was in dispute between the parties but that, no doubt, was the reason for the compromise entered into in relation to the proceedings that produced the agreement in the Consent Orders. In that regard, paragraph 2 in the Agreement does not represent a liquidated damages clause nor a clause that has anything to do with a pre-estimate of damages that the Plaintiff might suffer if the conditions of the Agreement were not met.

19 In O’Dea Gibbs CJ said (at 366-367):

The Protector Loan Co. v. Grice

Wallingford v. Mutual Society

Astley v. Weldon

Thompson v. Hudson

Ex parte Burden

re Neil

20 An analogous arrangement to the present was made in Cameron v UBS AG [2000] VSCA 222; [2000] 2 VR 108. The Plaintiff there had obtained a judgment in Switzerland for $8.4m. The Plaintiff sought to register the judgment in Victoria and there was a dispute over the Plaintiff’s right to enforce that judgment in Victoria. The parties reached an agreement whereby the Plaintiff would accept $1m in 5 instalments in full satisfaction of the judgment. It was provided that in the event of default of payment of any one of the instalments the Plaintiff would be entitled to a judgment in Victoria. The Defendant defaulted in the payment of one instalment and the Bank sought to enter judgment for the amount of $8.4m. In those circumstances the Defendant contended that the default provision in the Agreement was a penalty.

21 Both the Trial Judge and the Court of Appeal determined that the provision in the Agreement was not a penalty. Winneke P said:

[ 3 ] In my opinion, this was not the substance of what the parties had, by their deed, agreed upon. At the time when the deed was executed, the respondent had a right to enforce an existing debt constituted by the judgment of the Swiss court. By the Deed of Settlement it forebore to exercise that right on condition that the indulgence which it afforded to the appellant, namely to pay a lesser sum over a period of time, was fulfilled. By entering into the deed the appellant implicitly acknowledged that the judgment debt was due and payable by his agreement that, if he did not meet the conditions upon which the indulgence was granted to him, he would submit to judgment in the amount of such judgment debt; thereby giving up any defences which he claimed to have. In my opinion, there is nothing inequitable or penal about such a compromise. In substance it amounts to a concession by the appellant that the debt is owed and will be paid if he fails to meet the terms of the indulgence granted by the respondent. All the advantages of amount and time were with the appellant provided that he complied with those terms. In these circumstances it seems to me to be of little moment that the appellant, prior to the execution of the compromise, was disputing the respondent's claim to enforce the foreign court's judgment, which was the background against which the compromise was made. If the appellant's submission is right, no judgment creditor whose judgment is appealed by the judgment debtor could safely compromise the appeal on terms which reserved to the former the full amount of the judgment debt in the event that the latter failed to meet the terms of indulgences as to amounts and times of payment afforded to him by the creditor.

O'Dea v Allstates Leasing System (WA) Pty Ltd;

22 Phillips JA said:

[20] … Although the defendant was wont in argument to approach this case as if the deed was simply an agreement for the payment by the defendant to the plaintiff of $1 million, that is not what it was; it was a bargain about the enforcement of the Swiss judgment. The sum of $8.4 million for which judgment in Victoria was to be obtained by consent under cl3 was the sum for which judgment had already been recovered in Switzerland, the judgment which the plaintiff was seeking to enforce in this proceeding as successor to the Swiss Bank in the Swiss proceeding. That sum was quantified before the terms of settlement were entered into; the dispute was only over the plaintiff's right to enforce the Swiss judgment in Victoria, a right asserted in the statement of claim in this proceeding and denied by the defendant in his defence. By the terms of settlement the defendant secured to himself one last opportunity to pay a much lesser sum in full and final satisfaction of what the plaintiff was claiming in Victoria in reliance upon the Swiss judgment. For the opportunity to pay that lesser sum the defendant bargained away any defence he had to enforcement of the judgment in Victoria, consenting to judgment here if he made default in payment of the lesser sum modo et forma. That makes this case quite different from those in which the Courts have refused to lend assistance to the enforcement of a penalty. It is more akin to those cases described by Gibbs CJ in O'Dea where the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence: as to which see also Acron Pacific .

[21] Yet, according to the defendant, that was not this case in that, consistently with the pleadings in which the defendant was denying all liability, the deed embodying the terms of settlement contained no acknowledgment of his liability for the sum of $8.4 million for which judgment could be entered by consent under cl3, with the result that it could not be said before default occurred under cl2 that any sum was owing by the defendant subject only to the opportunity being extended to pay a lesser sum, and on terms. But I reject that submission. In O'Dea , there was nothing between the parties prior to their entry into the lease between them, which accordingly was the sole source of any obligation of either; and so it was in most of the other cases cited to us. Here, there was a considerable history which led directly to the terms of settlement and the deed. The Swiss Bank had recovered judgment for $8.4 million in a Swiss court and the plaintiff, as its successor, was seeking to enforce it here, while the defendant was seeking to resist enforcement in Victoria. It was in that context that the terms of settlement came into being, the defendant obtaining thereby the opportunity to secure a release from what was claimed under the foreign judgment by paying the settlement sum by instalments, and the bank securing in return the withdrawal of all defences, should there be default. In those circumstances, the consent to judgment can be seen as doing no more than formalising a liability acknowledged, by implication, when the terms of settlement were agreed and the deed was entered into.

23 Buchanan JA said:

[28] The obligation to pay $8,400,000 was not one which sprang from the deed unheralded. Its genesis lay in the past dealings between the appellant and the respondent's predecessor. In my opinion the case is to be equated with those in which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt. At one end of the spectrum covered by those cases is an undisputed judgment debt. Further towards the middle of the range is a sum ascertained in a suit in Chancery before a final decree has been made. At the other end of the spectrum, but still within it in my view, is the present case where the debt is the subject matter of a claim which is disputed but is not suggested to be a colourable device.

24 Similarly, in Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232 the parties to a lease, who were in dispute about the lessee’s liability for rent, reached agreement at a mediation. The written agreement contained an acknowledgment by the Defendants of a present indebtedness to the Plaintiff in a particular amount. The Agreement provided that that amount could be satisfied by paying a lower sum over a period of time and the performance of certain other matters. It provided that if there was a failure to meet the obligations by the Defendants, and there was a failure to remedy after service of a notice, the full amount of the indebtedness would become payable immediately. The Defendants contended that that was a penalty.

25 McMurdo J said of this argument:

O’Dea v Allstates Leasing System (WA) Pty Ltd

… there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in smaller amount, becomes recoverable at once or in full.

[28] But in any case, the defendants’ argument ignores the substance of the transaction, which was that the creditor agreed to accept a lesser sum than the amount acknowledged to be owing if the debtors complied with the conditions of settlement. Accordingly, the provision whereby the acknowledged debt would be paid in full if those conditions were not met, was not penal.

26 Ms Cohen, who appeared for the Defendant, submitted that the present arrangement in the Consent Orders did not mean there was a pre-existing debt to bring into play what Gibbs CJ had said in O’Dea and what had been applied in both Perpetual Trustee v Aspley Specialist and in Cameron v UBS AG. She drew my attention to the decision of the Court of Appeal in Queensland in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd & Anor [2000] QCA 221. In that case the Applicant sued the Respondent for money claimed under a contract to carry out engineering work. A defence was filed disputing liability for certain of the sums making up the Applicant’s claim and counterclaiming for alleged bad work. The case was settled with the Deed providing that the First Respondent could pay to the Applicant a smaller sum than had been claimed in the proceedings. Clause 4 of the Deed provided:

If any payment is not made on the due date, in respect of which time is agreed to be of the essence, the Plaintiff will be entitled to enter judgment against the Defendant for the full amount claimed in the Amended Claim plus interest and costs.

27 Pincus JA, with whom White and Chesterman JJ agreed, found that this was a penalty provision. Pincus JA said:

Where a stipulated sum is presently due and owing as a debt and the creditor grants the debtor an indulgence to pay the debt by instalments, it is not a penalty for the creditor to provide, as a condition of granting the indulgence, that the indulgence will be withdrawn if the debtor defaults in the payment of an instalment. However this principle ... has no application where, having regard to the substance and notwithstanding the form of the transaction, the stipulated sum is not owing as a present debt.

28 In my opinion there was a pre-existing debt in the present case. Ms Cohen conceded as much but said that the issue was what the extent of that debt was. She said that her client would have been contending that it was $800,000. That immediately raised the spectre, she submitted, that the default provision that resulted in a judgment for over $1m was a penalty provision for the reasons I have outlined earlier when noting her submissions.

29 It seems to me that that submission overlooks 2 matters. First, there was a pre-existing debt which was compromised in the proceedings. Secondly, and more significantly, the form of the Agreement was a judgment for $1,047,837.83 “being the amount owing under the loan agreement as of 22 January 2010”. That was an acknowledgment by the Defendant that that was the debt owing before the arrangement was made in the Agreement for the payment of a lower sum on conditions being met. In my opinion, the case falls entirely within the principle set out in the judgment of Gibbs CJ in O’Dea and is entirely analogous with the position in both Perpetual Trustee v Aspley Specialist and Cameron v UBS AG.

30 The Agreement in substance was that the Plaintiff agreed to accept a lesser sum than the amount acknowledged to be owing if the Defendant complied with the conditions of the settlement. In those circumstances cl 2, providing for full payment if those conditions were not met, is not a penalty.

Conclusion

31 I make the following orders:

(1) The Defendant’s Notice of Motion dated 23 July 2010 is dismissed.

(2) The Defendant is to pay the Plaintiff’s costs of the Motion.

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Citations

Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825

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Cases Cited

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Statutory Material Cited

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AMEV-UDC Finance Ltd v Austin [1986] HCA 63

O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3

CITATION:	Perpetual Trustee Company Ltd v Mitchell [2010] NSWSC 825
HEARING DATE(S):	28 July 2010
JUDGMENT DATE :	30 July 2010
JURISDICTION:	POSSESSION LIST
JUDGMENT OF:	Davies J
DECISION:	(1) The Defendant’s Notice of Motion dated 23 July 2010 is dismissed. (2) The Defendant is to pay the Plaintiff’s costs of the Motion.
CATCHWORDS:	CONTRACT - penalty - proceedings pursuant to a loan agreement and mortgage - proceedings compromised with acknowledgment of amount owing - Plaintiff agrees to accept a lesser sum if certain conditions met - if conditions not met acknowledged debt becomes payable - indulgence by creditor - default provision not a penalty.
LEGISLATION CITED:	Civil Procedure Act 2005 Mental Health Act 2007
CATEGORY:	Procedural and other rulings
CASES CITED:	AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Cameron v UBS AG [2000] VSCA 222; [2000] 2 VR 108 O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 Perpetual Trustee Co Ltd v Aspley Specialist Centre Pty Ltd [2010] QSC 232 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd & Anor [2000] QCA 221
PARTIES:	Perpetual Trustee Company Ltd (Plaintiff) Jennifer Victoria Mitchell (Defendant)
FILE NUMBER(S):	SC 2008/287575
COUNSEL:	J Simpkins SC (Plaintiff) E Cohen (Defendant)
SOLICITORS:	Gadens Lawyers (Plaintiff) Matthews Follbigg (Defendant)