Pigram v Attorney-General (NSW)

[1975] HCA 13

HIGH COURT OF AUSTRALIA

Barwick C.J., McTiernan, Gibbs, Mason and Jacobs JJ.

PIGRAM v. ATTORNEY-GENERAL (N.S.W.)

(1975) 132 CLR 216

19 May 1975

Contract

Contract—Penalty—Teacher granted leave on half pay—Agreement to resume duty on fixed date and faithfully to serve as a teacher for stipulated period—Covenant in default of resumption of duty and faithfully serving to pay cost incurred in respect of period of leave—Whether penalty or pre-estimate of loss.

Decisions

May 19.
The following written judgments were delivered:-
BARWICK C.J. The appellant seeks the reversal of a decision of the Supreme Court of New South Wales (Nagle J.) which followed a decision of the Court of Appeal Division of the Supreme Court of New South Wales in a case of Mitchell v. McCaw upon the construction of the terms of a deed in identical terms so far as presently relevant with the deed on which the respondent sued in this case. The deed recites that the appellant, then employed as a teacher of the Department of Education of the State of New South Wales, had applied for leave of absence from his employment to enable him to accept a scholarship tenable at the University of New England and that the Department had agreed that the appellant should have such leave without pay but with financial assistance equivalent to half the salary to which he would be entitled as a teacher in the service of the Department, such leave to be treated as service with the Department for incremental and extended leave purposes. (at p217)

2. The deed in its first clause bound the appellant to resume duty as a teacher on a stated day and for a period of three years (subsequently extended by deed to five years) "to be calculated from the date of his resuming duty as aforesaid faithfully diligently and thoroughly and in whatever locality or localities in the said State as may be directed by the Minister or the Director General or other proper authority of the said State and in all respects in accordance with and subject to the provisions of the Public Service Act, 1902, as amended, and the Public Instruction Act of 1880, as amended, and the Regulations from time to time in force under those Acts serve Her Majesty Her Heirs and Successors as a Teacher in the said Department and perform the duties required of or allotted to the Officer by the Minister or the Director General or other proper authority of the said State . . . " (at p218)

3. The appellant took his leave during which he studied pursuant to the scholarship to the University of New England: but upon the successful conclusion of his course he decided to resign from the service of the Department of Education. Consequently, he did not resume his duties as promised on the stated day or at all. Thereafter, the Attorney-General of the State in this action successfully sued the appellant on cl. 2 (b) of the deed. It is appropriate to set out in full the terms of cl. 2 of the deed as amended and operative at the relevant time:

"2. The Officer DOTH HEREBY further covenant and agree with Her Majesty Her Heirs and Successors that if either of the following events shall happen namely - (a) if the Officer shall at any time before the expiration of the period of service required of the Officer under paragraph (a) of cl. 1 of this Deed by reason of the acceptance of a resignation tendered by the Officer or for any other cause whatsoever and of whatever kind (except his death or his dismissal from the Public Service of New South Wales otherwise than - (i) for misconduct, or (ii) under any of the provisions contained in ss. 44, 51, 56, 58, 61 and 65 of the Public Service Act, 1902, as amended)

cease to be employed in the service of the said Department, or if the Officer shall cease to carry out duties pursuant to the tender of a resignation; or

(b) if the Officer shall by reason of the acceptance of a resignation tendered by the Officer or for any other cause whatsoever and of whatever kind (other than his death or his dismissal from the Public Service of the State of New South Wales otherwise than - (i) for misconduct, or (ii) under any of the provisions contained in ss. 44, 51, 56, 58, 61 or 65 of the Public Service Act, 1902, as amended)

fail to resume as provided by par. (a) of cl. 1 of this Deed the actual and full discharge of his duties in the said Department as aforesaid and faithfully diligently and thoroughly to serve Her Majesty Her Heirs and Successors as a Teacher in the said Department for the period of service required of the Officer under the said par. (a) of cl. 1 of this Deed then the Officer will on demand made by the Secretary to the Board or the Director General forthwith pay to Her Majesty Her Heirs or Successors as and for liquidated damages and not by way of penalty a sum being the cost incurred by the State for or in respect of the period commencing on the date of commencement of the said leave of absence and ending on whichever of the following dates shall first occur namely the date on which the Officer is required by par. (a) of cl. 1 hereof to resume the actual and full discharge of his duties in the Department as aforesaid or the date on which the Officer shall for any reason whatsoever cease to be employed in the service of the said Department PROVIDED ALWAYS that if after the commencement and before the expiration of the period of service required of the Officer under par. (a) of cl. 1 of this Deed the following event shall happen namely the Officer shall by reason of the acceptance of a resignation tendered by the Officer or for any other cause whatsoever and of whatever kind (except his death or his dismissal from the Public Service of the said State of New South Wales otherwise than -

(i) for misconduct, or (ii) under any of the provisions contained in ss. 44, 51, 56, 58, 61 or 65 of the Public Service Act, 1902, as amended)

cease to be employed as a Teacher in the service of the said Department the said sum so payable to Her Majesty Her Heirs or Successors shall be reduced to the sum that bears the same proportion to the cost incurred by the State as the part of the period of service required of the Officer under par. (a) of cl. 1 of this Deed which is unexpired at the date of the happening of such event bears to the whole of such period of service.

PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED that -

(a) without in any way limiting the meaning thereof the expression "the cost incurred by the State" shall include: (i) all amounts paid to the Officer during the period of leave by or on behalf of Her Majesty Her Heirs and Successors or the Government of the State of New South Wales by way of salary financial assistance and allowances;

(ii) all amounts paid by or on behalf of Her Majesty Her Heirs and Successors or the said Government in respect of the Officer as employer contributions to the State Superannuation Fund established under the Superannuation Act, 1912, as amended;

(iii) an amount calculated at the rate of Two hundred dollars ($200) per annum (it being agreed that an amount so calculated represents a fair and genuine pre-estimate of the value of the leave and incremental advantages preserved to the Officer);

AND a certificate or Statement as to the amount of the cost incurred by the State signed by the Secretary to the Board or the Director General shall be conclusive evidence of such cost and absolutely final and binding on the Officer:

(b) A certificate or statement signed by the Secretary to the Board or the Director General as to the date upon which the Officer shall have resumed duty as provided in paragraph (a) of cl. 1 of this Deed and/or as to the date on which the Officer for any reason whatsoever ceased to be employed in the service of the said Department shall be conclusive evidence of all matters therein set out and absolutely final and binding upon the Officer:

(c) The acceptance of any resignation from the Public Service or from office duty or employment as Teacher in the service of the said Department tendered by the Officer at any time before the expiration of the period of service required of the Officer under par. (a) of cl. 1 of this Deed shall not release discharge or in any manner prejudice or affect any claim or demand which Her Majesty Her Heirs or Successors has or shall have against the Officer under the provisions of cl. 2 of this Deed or otherwise release discharge or affect the liabilities of the Officer under this Deed:

(d) Nothing in this Deed contained shall be construed as prejudicing or affecting in any way the power of Her Majesty Her Heirs or Successors or of the Board or of any other proper authority of the State of New South Wales to terminate at any time at pleasure or for any cause whatsoever the Officer's employment in the Public Service of the said State and whether before or after him resuming duty as aforesaid:

(e) Any notice direction demand or communication required to be or that may be given or made to the Officer by or on behalf of Her Majesty Her Heirs or Successors or the Minister or the Board shall be sufficiently

given or made if signed by the Secretary to the Board or by the Director General and either delivered personally to the Officer or sent by post addressed to the Officer at his last-known place of abode or business in or out of New South Wales and in any case where the same is so sent by post it shall be deemed to be given or made to the Officer at the time when it would in the ordinary course of post be delivered:

(f) In this Deed unless the context otherwise requires the expression "the Board" means the Public Service Board constituted by the Public Service Act, 1902, as amended, the expression "the Minister" means the Minister for Education of the said State and includes his successors in office the expression "the Director General" means the Director General of Education of the said State and includes the person for the time being acting as such and all references to the Secretary to the Board include the person for the time being acting as such Secretary and

"year" means calendar year and "month" means calendar month and the singular includes the plural." (at p220)

4. The appellant appeals to this Court and seeks the dismissal of the action on the footing that the covenant to pay the stated "cost", as defined, involved a penalty and was therefore unenforceable. (at p221)

5. The submission of the appellant, a submission which was rejected in the case of Mitchell v. McCaw, is that upon its true construction cl. 2 (b) of the deed means that the sum covenanted to be paid is payable if the officer fails to resume duty as promised, or if he at any time during the period of his service fails "faithfully diligently and thoroughly to serve" in the agreed capacity although the officer's service is not terminated: that is to say, that cl. 2 (b) provides for two distinct events in which the covenant to repay will operate. Thus, it is said that the whole sum representing the defined cost is payable on any breach of the terms of the employment at any time, the service continuing notwithstanding the breach. Therefore, it is said that the agreement to repay to the State that cost in such an event is on its face not capable of being regarded as a pre-estimate of the damages suffered by the State by reason of the appellant's particular breach of duty and consequently it provides a penalty. This construction is founded on the presence in cl. 2 (b) of the words "and faithfully diligently and thoroughly to serve . . . for the period of service required of the officer under the said par. (a) of cl. 1 of the deed". (at p221)

6. It may at once be said that if the deed on its true construction so provides, the covenant to pay the "cost" as defined does involve a penalty and the covenant would be unenforceable even in respect of an event, e.g. failure to resume duty, with respect to which the cost could be regarded as a genuine pre-estimate of resulting damage. There would be, in my opinion, no basis on which the operation of the covenant could be severed so as to be a penalty only as to a particular application of it. (at p221)

7. But, in my opinion, the submission wholly misconceives the terms of the deed. The words of the deed which state the event on which the "cost" is agreed to be repaid are that "by reason of the acceptance of a resignation tendered or for any other cause whatsoever and of whatever kind" (other than death or dismissal otherwise than by misconduct) the officer "fails to resume" his duties as provided by cl. 1 (a). The amount of that cost is calculated to the date set for resumption of duty or the date of prior resignation. There is, in my opinion, quite clearly no promise to be derived through cl. 2 (b) to repay the cost in any other event than the failure to resume duty as the result of some cause, including an accepted resignation but not including death or dismissal otherwise than for misconduct or under specified provisions of the Public Service Act, 1902, as amended. There is no separate event specified in cl. 2 (b) attracting the performance of the covenant to repay the cost which could be described as a failure during the officer's continuing service duly to perform the duties of the service. The presence of the words "faithfully diligently and thoroughly to serve" in the clause, though as I think unnecessary for the achievement of the evident purpose of the clause, is explained by the reference in cl. 2 (b) to the "actual and full discharge" of the duties which are to be resumed: duties which, by reason of resignation in this case, the officer has failed to resume. The words were, in my opinion, unnecessary in the description of the duties which had not been resumed, but they have no function beyond being part of that description. They are conjoined to and not disjoined from the words "fail to resume". (at p222)

8. Further, cl. 2 as a whole is quite evidently dealing with two distinct situations, namely, (1) a failure to resume duty and (2) a failure to serve the full term of the agreed service, though expressed in the reverse order. In referring to the events covered by the covenanting words in the opening portion of the clause, the words of the clause are "if either of the following events shall happen, namely", and then follow two paragraphs (a) and (b): (a) dealing with failure to serve the full term, and (b) dealing with failure to resume duty. The failure to resume is to result from a resignation or for some cause; an unlikely condition of a failure to perform agreed duties. Paragraph (a), which deals with the period of the service, requires a termination of the service before any liability under the covenant to repay could arise: again, a pointer against the suggested construction of cl. 2 (b). Further, the proviso to the clause makes it quite clear that in the event of termination of the officer's service, including a termination for misconduct, only a ratable portion of the "cost" will be payable. (at p222)

9. Not only does the language of the deed lend no support to its suggested construction but it evidences a clear intention to provide a mere pre-estimate of the damage likely to flow from the breaches of the deed for which it provides. The cost as defined, including item (iii) of the definition, covers only elements which would be reasonable as damages in the event that the officer did not resume duty or, having resumed, did not serve the agreed period. The proviso clearly indicates an intention to relate the amount payable to the recoverable damage in the case of termination during the agreed period of service. Thus, if there were any ambiguity in the language of the deed, which in my opinion there is not, the disclosed intention of the parties would require acceptance of a construction which did not involve any penalty. (at p222)

10. In my opinion, the covenant to repay the defined cost does not include a promise to repay it upon any failure to perform the agreed duties which does not result in a termination of employment. If there is such a termination, including a dismissal for misconduct, cl. 2 (a) and not cl. 2 (b) will govern the situation; and the proviso will operate. (at p222)

11. No other reason was advanced in argument for holding the covenant to involve a penalty beyond the tortuous construction of cl. 2 (b) with which I have dealt. In my opinion, the conclusion of the Supreme Court in Mitchell v. McCaw was right. The appellant's construction of the deed is, in my opinion for the reasons I have given, insupportable. The appeal should be dismissed. (at p223)

McTIERNAN J. The appellant entered into a deed of agreement with the Crown dated 21st September 1967 in which it is recited that he was granted leave of absence from his employment as a teacher in the Department of Education for a period of one year (increased later to three years) to enable him to accept a scholarship tenable at the University of New England. By that deed the appellant covenanted that after the period of leave of absence he would "resume the actual and full discharge of his duties as a Teacher in the said Department" and would "at all times during the period of three (3) years (by a later deed increased to five (5) years) to be calculated from the date of his resuming duty as aforesaid faithfully diligently and thoroughly and in whatever locality or localities in the said State as may be directed by the Minister or the Director-General or other proper authority of the said State and in all respects in accordance with and subject to the provisions of the Public Service Act, 1902, as amended, and the Public Instruction Act of 1880, as amended, and the Regulations from time to time in force under those Acts serve Her Majesty Her Heirs and Successors as a Teacher in the said Department and perform the duties required of or allotted to the Officer by the Minister or the Director-General or other proper authority of the said State". The appellant covenanted further that "if either of the following events shall happen namely - (a) if the Officer shall at any time before the expiration of the period of service (mentioned above) . . . cease to be employed in the service of the said Department, or (b) if the Officer shall . . . fail to resume . . . the actual and full discharge of his duties in the said Department as aforesaid and faithfully diligently and thoroughly to serve Her Majesty Her Heirs and Successors as a Teacher in the said Department for the period of service (mentioned above) . . . then the Officer will on demand made by the Secretary to the Board or the Director General forthwith pay to Her Majesty Her Heirs or Successors as and for liquidated damages and not by way of penalty a sum being the cost incurred by the State for or in respect of the period commencing on the date of commencement of the said leave of absence and ending on whichever of the following dates shall first occur namely the date on which the Officer is required . . . to resume the actual and full discharge of his duties in the Department as aforesaid or the date on which the Officer shall for any reason whatsoever cease to be employed in the service of the said Department . . . " There follows a proviso which provides for a proportion of the "cost incurred by the State" to become payable in respect of the unexpired part of the period of service required of the appellant should he cease to be employed as a teacher in the Department during the currency of that period, and a proviso setting out the method of calculation of the "cost incurred by the State". (at p224)

2. In the statement of claim the respondent claims that:

"The defendant failed to resume the actual and full discharge of his duties as a Teacher in the said Department on 30th January 1970 and to serve as a Teacher in the said Department for a period of five years. The defendant failed to pay on demand the sum of $10,019.25 being the cost incurred by the State." (at p224)

3. The ground of the defence upon which the appellant relied before this Court was that "the sum claimed by the plaintiff as the cost incurred by the State is a penalty and is not recoverable by the plaintiff". In support of this argument the appellant submitted that on the proper construction of the deed, the sum claimed as liquidated damages could be claimed not only for breaches of the covenants to "resume the actual and full discharge of his duties" and to continue in the service for five years but also for any breach, however trivial, of the covenant "faithfully diligently and thoroughly and in whatever locality or localities in the said State as may be directed by the Minister or the Director General or other proper authority of the said State and in all respects in accordance with the subject to the provisions of the Public Service Act, 1902, as amended and the Public Instruction Act of 1880, as amended, and the Regulations from time to time in force under those Acts serve Her Majesty Her Heirs and Successors as a Teacher in the said Department and perform the duties required of or allotted to the Officer by the Minister or the Director General or other proper authority of the said State". For this reason, it was contended, the sum provided as the "cost incurred by the State" could not be considered to be a genuine pre-estimate of damage, and was a penalty. (at p224)

4. In my opinion this contention must fail. The construction contended by the appellant is not the natural construction of the deed. In my opinion the provision for the repayment of "the cost incurred by the State" refers only to the specific breaches of failing to resume duties at the expiration of the period of leave of absence and of failing to serve the full period of service stipulated in the deed. That these are the events contemplated by the parties at the time of the execution of the deed is supported by the proviso in the deed whereby a proportion of the "cost incurred by the State" is payable should part but not all of the period of service stipulated be completed by the appellant. The provision for repayment is, in truth, as was said by Sellers L.J. in the course of Alder v. Moore (1961) 2 QB 57, at p 59 , " . . . more like a refund in the light of events". I would adopt the words of Sellers L.J. (1961) 2 QB, at p 65 , to describe the sum payable in this case as "a repayment of a sum in circumstances which are entirely equitable. It is in no way an imposition of a fine or penal payment, and if it has to be made to fall under one head or the other, it is to be regarded as a payment by way of damages for breach of an undertaking which is not unfair or unconscionable and therefore not a penalty". (at p225)

5. It is of weight too, that the appellant covenanted in the deed that the sum was to be "as and for liquidated damages and not by way of penalty". But such a covenant to regard the amount payable on the breach of an agreement as liquidated damages is not in all cases conclusive of the question whether it is in truth liquidated damages rather than a penalty. (See Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. (1915) AC 79, at pp 86-88 ; Alder v. Moore (1961) 2 QB, at p 65 .) (at p225)

6. I also think that the method provided in the deed for the calculation of the "cost incurred by the State" supports the view that the sum stipulated is a genuine pre-estimate of damage, and is not in terrorem of the appellant. (at p225)

7. I would for these reasons dismiss the appeal. (at p225)

GIBBS J. The facts of this matter are set out in the judgment of the Chief Justice which I have had the advantage of reading. I agree that the appeal should be dismissed. (at p225)

2. The argument for the appellant is that the sum made payable by the deed on which the respondent sues (the deed of 21st September 1967 as varied by that of 17th April 1968) is a penalty. It is submitted that the failure to which cl. 2 (b) refers, and on which the sum becomes payable, is a failure by the employee to resume his duties with the Department of Education and faithfully, diligently and thoroughly to serve as a teacher in the department for five years. On this construction the sum will be payable not only if the employee fails to resume his duties but also if, having resumed and without ceasing to be employed, he fails to serve faithfully, diligently and thoroughly - a breach of faith or diligence or thoroughness in connexion with his service even on the last day of the five years would make the whole sum payable. The sum would on this construction of the deed be made payable on the occurrence of any of one of a number of possible events some of which might occasion only the most trifling damage to the Department. In these circumstances it was submitted the sum could not be regarded as a genuine pre-estimate of the loss which would flow to the Department from a breach of the obligations cast on the appellant by the deed. (at p226)

3. The argument depends entirely on the suggested construction of cl. 2 (b) of the deed. I find the provisions of the deed tautologous, confused and difficult to construe. If some of the words of cl. 2 (b) - the words "fail to resume as provided by par. (a) of cl. 1 of this Deed the actual and full discharge of his duties in the said Department as aforesaid and faithfully diligently and thoroughly to serve Her Majesty Her Heirs and Successors as a Teacher in the said Department for the period of service required of the Officer under the said par. (a) of cl. 1 of this Deed" - are construed literally, and in isolation, they support the construction for which the appellant contends. They suggest that an employee who has resumed his service as required but who fails to serve faithfully, diligently and thoroughly for the period of five years must pay the specified sum. However, there are other indications in the deed that the words of cl. 2 (b) should not be given this construction. Clause 2 commences by making the sum payable "if either of the following events shall happen". This plainly indicates that the parties contemplated that the sum would become payable either on the happening of the event specified in par. (a) or on the happening of that specified in par. (b); it suggests that par. (b) states one event only and not a number of events. The symmetry of the deed was somewhat impaired by the fact that the supplementary deed made on 17th April 1968, which extended the period of leave granted to the appellant, amended par. (a) by inserting after the words "the said Department" and before the word "or" the words "or if the Officer shall cease to carry out duties pursuant to the tender of a resignation". However, there is nothing in the supplementary deed that reveals the slightest intention to alter the effect of cl. 2 (b) of the original deed; on the contrary, the insertion of the new words in cl. 2 (a) is inconsistent with the view that cl. 2 (b) already provided for payment of the specified sum if an officer who had resumed service failed thereafter to serve faithfully, diligently and thoroughly, for if it had so provided, the words inserted would have been redundant. Further, the introductory words of cl. 2 (b) - "if the Officer shall by reason of the acceptance of a resignation tendered by the Officer or for any other cause whatsoever and of whatever kind . . ." govern the words "fail to resume . . . and faithfully diligently and thoroughly to serve . . .", but would seem inappropriate to apply to "faithfully diligently and thoroughly to serve" if the latter words are disjoined from those that immediately precede them. Moreover, the sum which would become payable under the deed in the events therein mentioned was "the cost incurred by the State" (as defined in the deed) for or in respect of the period commencing on the date of commencement of the leave and ending on the date on which the appellant was bound to resume duty or on the cessation of his employment, whichever was the earlier, but the proviso effected a proportionate reduction of the amount payable if the appellant, having commenced to serve, ceased employment before the expiration of the period of service required of him by the deed. These various provisions indicate that the intention of the parties to the deed was that if the appellant failed to resume his duties on the due date he should repay to the Department a sum representing what it had cost to provide him with financial assistance while he was on leave and that if, having resumed duty, he ceased to serve before the five years expired, he should pay a sum representing only a proportion of that cost. A bargain of that kind is intelligible, whereas a further undertaking to repay the whole of the cost in the event of an unimportant breach near the end of the period of service would, if viewed at the date of the deed, have appeared patently unreasonable and out of accord with the scheme of the deed. For all these reasons, when the deed is regarded as a whole, I find it impossible to construe cl. 2 (b) as rendering the appellant liable if he fails to serve faithfully, diligently and thoroughly, provided that he has resumed service as required, and does not cease to be employed or cease to carry out his duties pursuant to the tender of his resignation. On one view the words of cl. 2 (b) now in question do no more than describe what it is that the appellant fails to resume, but it seems more accurate to say that some of the words of the paragraph are mere surplusage. However, in my opinion it is necessary to treat them in this way, not of course to prevent the deed from imposing a penalty, but to give the words of the paragraph a construction which is consistent with the provisions of the deed as a whole. (at p227)

4. We were referred to the decision of Macrossan A. C. J. in R. v. Stewart (1938) St R Qd 87 . The bond in that case bears a superficial resemblance to the deed in the present case, but the provisions of the two instruments are in truth quite distinguishable. (at p227)

5. Once this question of construction is resolved against the appellant it is clear that the sum provided in the deed is not a penalty. That was the sole point at issue in the appeal, and in my opinion the appellant's submission must fail. (at p227)

MASON J. I agree with the Chief Justice that the appeal should be dismissed and with his reasons for that conclusion. The decision of the Court of Appeal in Mitchell v. McCaw was in my opinion correct and the differences between the deed which was considered in that case and the deed under consideration in this case are immaterial to the issue which has arisen for decision. (at p227)

2. In my opinion, therefore, the appeal should be dismissed. (at p227)

JACOBS J. The appellant was a teacher in the New South Wales Department of Education. In 1967 he applied for and was awarded a Students Representative Scholarship at the University of New England. He was granted leave of absence for three years without pay but with financial assistance equal to half his salary on conditions incorporated in certain deeds between him and the Crown dated 21st September 1967 and 17th April 1968. He covenanted to resume the actual and full discharge of his duties as a teacher on 30th January 1970 and during the ensuing period of five years faithfully diligently and thoroughly to serve as a teacher in the Department and to perform the duties required of or allotted to him. (at p228)

2. Clause 2 of the deed of 21st September 1967 is set out in full in the reasons for judgment of the Chief Justice and I shall not repeat it. (at p228)

3. The appellant did not resume duties as a teacher on 30th January 1970. He was appointed a lecturer and subsequently a senior lecturer in Geography at the University of New England. In December 1972 he was sued by the New South Wales Attorney-General for the sum of $10,019.25, being the "cost incurred by the State" as defined and demanded of him in terms of the said deeds. The Supreme Court adjudged him liable to pay the said sum, applying a decision of the New South Wales Court of Appeal, Mitchell v. McCaw. (at p228)

4. The question which has been argued on this appeal is whether cl. 2 really provides for a penalty for breach of cl. 1 rather than the liquidated damages for which it purports to provide. Clause 2 sets out two events upon the happening of either of which the sum shall be payable. The first is ceasing to be employed in the service of the Department before the expiration of the service period of five years. (I omit the qualifications on this condition as they are not immediately relevant.) The second is failing to resume the actual and full discharge of duties and faithfully diligently and thoroughly to serve as a teacher. The first condition is subject to the proviso for reduction in the amount payable under the clause by an amount of the total proportionate to that part of the period of five years which is expired at the date of ceasing to be employed as a teacher in the service of the Department. If this condition be severable it is not void as a penalty because it is a genuine pre-estimate of the damage. It relates the loss of the Crown to the period of service actually lost. In respect of this period it may clearly be seen that the Crown's expenditure in allowance to the appellant over portion of the period of his University course is lost to it in that it does not receive in return the subsequent services of the appellant over the five years stipulated. (at p228)

5. It is the second condition in cl. 2 which, it is submitted, shows an intention that the damages should not be a pre-estimate of loss but should be a penalty. The appellant might have resumed the actual and full discharge of his duties and he might have served for the whole period of five years but, it is said, after the expiration of that period and without him ceasing to be employed in the service during that period the whole liquidated sum might have been claimed from him upon the ground that, though he had resumed the actual and full discharge of his duties, he had not during the period faithfully diligently and thoroughly served. The answer which is given to this claim is to say that the second condition does no more than require that the appellant resume the discharge of his duties as provided because all relevant kinds of misconduct including unfaithful lazy or careless service are provided for in the first condition. (at p229)

6. If this contention be correct then there is no penalty because it can well be said that on the appellant not resuming at all a statement of the damages as the whole cost incurred by the State would be a genuine pre-estimate of that damage. But I am unable to see how this contention can be correct. First, the language of the condition follows the language of cl. 1 whereby the appellant not only undertakes to resume but also faithfully diligently and thoroughly to serve. In cl. 1 the words are clearly intended to have contractual force. Clause 2 uses the words in a context where there is a breach of cl. 1 and they cannot be ignored in the manner suggested. That would be to treat them as mere surplusage and cannot be taken to be the likely intention of the parties. (at p229)

7. Then it is said that a breach of that provision in cl. 1 is sufficiently covered by the first condition of cl. 2 - ceasing to serve. But the provisions are not the same. Ceasing to serve is different from failing to serve faithfully diligently and thoroughly, even though in some cases the latter may result in the former, either by resignation or dismissal. But then it is said that there are only two conditions in the clause, that this is shown by the use of the word "either" before the expression of the conditions and that the construction for which the appellant contends would result in three conditions - ceasing to serve, failure to resume, and failure to serve faithfully diligently and thoroughly. Therefore only two conditions were intended and it can be inferred from the presence of the first condition that the second condition was intended to be failure to resume. This also requires the additional words to be treated as surplusage. This was the approach which commended itself to the Court of Appeal in the unreported case to which I have referred. But with all respect to that approach it appears to me that it is based on an incorrect assumption that failing to resume and serving faithfully diligently and thoroughly would need to be regarded as separate conditions. They are not. They are the two integers of one condition. The condition would be broken if the appellant did not resume service and serve faithfully diligently and thoroughly throughout the covenanted period. Such a covenant would be broken even if the appellant resumed unless he served in terms of the covenant for the full period of service. It could be broken in the last months of the covenanted period and the measured damages would be the same as if it were broken by the appellant not resuming at all or by the quality of his service being other than faithful diligent and thorough at all times throughout the period. This is a penalty. It cannot be severed from the first part of the second condition and therefore the whole condition is void. It is this condition upon which the respondent sought to rely in order to obtain the damages which purported to be pre-estimated. Since that is a penalty, the damages should be assessed in the ordinary way, the appeal should be allowed and a new trial ordered. (at p230)

Orders

Appeal dismissed with costs.