Ringrow Pty Ltd & Ors v BP Australia Pty Ltd

[2005] HCATrans 793

[2005] HCATrans 793

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S291 of 2005

B e t w e e n -

RINGROW PTY LTD

Appellant

and

BP AUSTRALIA PTY LTD

Respondent

Office of the Registry
  Sydney  No S292 of 2005

B e t w e e n -

ULTIMATE FUEL PTY LIMITED

Appellant

and

BP AUSTRALIA PTY LTD

Respondent

Office of the Registry
  Sydney  No S293 of 2005

B e t w e e n -

NADER-ONE PTY LIMITED

Appellant

and

BP AUSTRALIA PTY LTD

Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 4 OCTOBER 2005, AT 10.17 AM

Copyright in the High Court of Australia

MR T.E.F. HUGHES, QC:   May it please the Court, I appear with MR T.D.F. HUGHES for the appellants.  (instructed by Stojanovic Solicitors)

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friends, MR M. WALTON, SC and MR D.R. SIBTAIN, for the respondent in each matter.  (instructed by Corrs Chambers Westgarth)

GLEESON CJ:   Yes, Mr Hughes.

KIRBY J:   Mr Hughes, could I just mention at the outset that my father worked for the respondent many years ago and he receives a tiny superannuation payment.  I do not receive any benefits from it, but I thought I should put it on the record.  I do not feel embarrassed.

MR HUGHES:   I am obliged to your Honour, but that does not cause any difficulty whatsoever.

KIRBY J:   Thank you.

MR HUGHES:   Your Honours, the case for the appellants has been distilled as best we can in the 16 pages of written submissions.  I had thought to travel through those submissions in detail, but on reflection that does not seem to be a very efficient use of time.  Had I done that, I would have sought to correct some errata in those written submissions.  We have taken the course, your Honours, of submitting to the Registry a handwritten list of corrigenda.  I hope your Honours will forgive me for the fact that it is handwritten, but that seems to be the most efficient use of time.

GLEESON CJ:   Thank you, Mr Hughes.

MR HUGHES:   What I propose then to do is to summarise the salient issues in this appeal.  Your Honours, to determine whether a contractual stipulation purporting to operate in the event of termination of a contract for breach is penal, one must, in our submission, ask whether it is designed to operate as a deterrent against breach otherwise than by way of imposing a liability for damages including liquidated damages, or otherwise than by imposing a liability precautional to the breach to transfer property to the injured party in satisfaction of the breach.  Those points we seek to make in paragraphs 15 and 24 of our written submissions.

KIRBY J:   I was curious why the word “deterrent” was embraced by you because, in a sense, any economic cost, though not a penalty, is a deterrent to some extent and it is more the notion of a punishment or penalty or extra super burden that ‑ ‑ ‑

MR HUGHES:   It is an extra burden.

KIRBY J:   But it is a deterrent in economic terms that you have to have certain consequences, you have to bear certain burdens.

MR HUGHES:   It is the extra and, as it has sometimes been called, punitive nature of the burden that attracts the operation of the penalty doctrine, your Honour.  If I used the word “deterrent” unwisely, that is upon my shoulder, but it is difficult to find an exact analogue linguistically.  Your Honours will find in the written submissions a reference to Legione v Hateley and that, of course, is authoritative as a result of that case.

GUMMOW J:   Is there any quarrel with the succinct collection statement of principle by the primary judge at paragraphs 97 and following of his judgment which is in the end of volume 2, I think.

MR HUGHES:   No, your Honour, not as I see it at the moment.  One must undertake the task of construction by assessing in the light of all the relevant surrounding circumstances the full potential operation of the particular contractual provision as at the time of its making, as at the time of the making of the contract, not at the time of breach.  Paragraph (17) of our written submissions endeavours to encapsulate that idea.

KIRBY J:   Now, that is settled law, but it is a curious doctrine because the parties may never fall into dispute and yet here is this agreement which is vulnerable because it has to be judged at the time of the contract.

MR HUGHES:   Yes.

KIRBY J:   The parties may never intend to raise or rely on the so‑called penalty provisions for trivial breaches, yet you look at the document as at the time it was made.  It is a curious notion.

MR HUGHES:   Yes.  Well, it is settled doctrine, your Honour.

KIRBY J:   I accept that, and it is not really challenged.

MR HUGHES:   It is not challenged here.

KIRBY J:   I have applied it in the Court of Appeal and everyone applies it, but it strikes me as an odd doctrine that you do not look to what a party is actually relying on, because you concede that yours was a serious breach.

MR HUGHES:   Yes.

KIRBY J:   Therefore, that you judge whether relief should be given by reference to the breach rather than the terms of the contract which may never be invoked, or particular parts of it may never be invoked.

MR HUGHES:   No.  Of course, there are situations in which the carefully drawn severability clause might mitigate the rigour of the doctrine, but that is not this case.

KIRBY J:   You do have to have the invocation of the penalty provision – so-called penalty provision, allegedly penalty provision – in order to activate the question whether at the time of the making of the contract the contract was flawed.

MR HUGHES:   Yes.  It is a comparative situation of looking to the time of the making of the contract, your Honours, applies in relation to contracts in restraint of trade.  An agreed damages clause, your Honours, is within the scope of the penalties doctrine if the clause applies to a unilateral termination effected by the injured party by reason of a breach of contract on the part of the defaulting party.

GLEESON CJ:   The relevant contract was a contract for the sale of land, was it?

MR HUGHES:   The relevant contracts were a group of contracts, including a contract for the sale of land, including as well a very complex trading agreement regulating the conduct of business on the three service station sites.

GLEESON CJ:   But the option was stipulated for in the contract for the sale of land.

MR HUGHES:   Yes, but there was a deed of grant which was an annexed pro forma to the contract for the sale of land and ultimately executed as part of the complex of contractual documents that attended the completion of the contract for the sale of land.

GLEESON CJ:   Where can we most conveniently see the contractual provision referred to on the bottom of page 316, line 40?  Justice Hely’s judgment refers to a contract.  Where do we most conveniently see it?

MR HUGHES:   The contract, your Honour, for the sale of the land starts at volume 1, page 33.  Your Honours can eliminate everything that appears in that contract until you get to page 48, and the particular special conditions start at page 53.

GLEESON CJ:   In 38.1.

MR HUGHES:   Yes.

GLEESON CJ:   That is it, thank you very much.

MR HUGHES:   That pro forma has come to be called a POSA because the long title is very cumbersome.

GLEESON CJ:   But if the doctrine of penalty bites, as it were, that is the provision that it bites on?

MR HUGHES:   No, it bites, your Honour, on the option deed, the executed copy of which starts at volume 1, page 181.

GLEESON CJ:   Do you mean that clause 38.1 and 38.2 are valid and enforceable?

MR HUGHES:   Not if the option deed is defective under the penalty doctrine.  It is the option deed that purports to regulate the entitlement and liability respectively of the parties.

GLEESON CJ:   Yes, but that was just granted pursuant to a contractual obligation.

MR HUGHES:   Yes.

GLEESON CJ:   That is why I asked whether your attack is an attack on clause 38.  If it is not, is clause 38 left standing and unaffected?

MR HUGHES:   No, because it is implicitly an attack on clause 38 but the attack, in terms of argument in both courts below, centred upon the terms of the deed which starts at page 181 read in conjunction with the POSA, privately owned site agreement, which is a very long document, your Honours, which starts at volume 1, page 213.

GUMMOW J:   The ultimate relief that you seek, Mr Hughes, which appears at page 790, is a declaration that the imposition upon your client by the deed of an obligation to transfer is unenforceable.

MR HUGHES:   Yes, your Honour.  That is the key element in our claim to relief.

GLEESON CJ:   What has happened to clause 38?

MR HUGHES:   Clause 38, as it were, passed into the option deed, and the option deed was executed on 28 July concurrently with settlement, and there the situation was.

GLEESON CJ:   You mean the rights of the parties under clause 38 merged in the options?

MR HUGHES:   Yes, your Honour.  Now, a key feature of this appeal, your Honours, is that it presents a need to adapt to a stipulation requiring the transfer of property as a purported remedy for breach, to adapt to such a case principles that have been worked out on a very high authoritative level in relation to stipulations for the payment of money sums under the description of liquidated damages for breach.  The task, in our respectful submission, is to adapt to a stipulation requiring the transfer by the contract breaker to the innocent party upon termination of the contract for breach - the classic exposition of principle enunciated 90 years ago by Lord Dunedin in the Dunlop Case.

We say that embedded in that principle is a requirement that to avoid the stigma of penalty there must be proportionality between the legal interest of the injured party requiring vindication and the means adopted to that end.  Paragraph (28) of our written submissions endeavours to encapsulate that idea.

In the case of Ringrow, which is typical of the other appeals, Ringrow, your Honours, became the owner of the Lansvale Service Station pursuant to a contract of sale dated 27 May 1999 and completed on 28 July 1999.  On the site was a subsisting operating business which had been conducted by Ringrow as commission agent of BP, and the same applied to the other three sites.

Now, that fact is adverted to in paragraph 11(a) of our written submissions.  Clause 40.4, which is found, your Honours, at AB volume 1, page 55 - it has to be read with the whole of clause 40.  Clause 40 is headed “SALE OF ONGOING BUSINESS”.  That is at volume 1, page 54, your Honours.  Clause 40.4 made it clear that the sale was of the land on which a subsisting business was being conducted, operating as a going concern.  Your Honours will have noticed special condition 40.4(a) in that connection.  If one turns, your Honours, to special condition 1 of the option deed, the executed copy of which starts at page 181 of volume 1 ‑ ‑ ‑

GLEESON CJ:   The form of the option deed is annexed to the contract, is it not, at appeal book 61?

MR HUGHES:   Yes, your Honour.I made a mistake.  It is special condition 1 of the POSA, the trading agreement, which is at volume 1 of the appeal book pages 273 and 274.  One finds subclause special condition 1.1, an acknowledgement by the dealer that it - I will leave out irrelevant words:

has acquired from BP pursuant to a separate contract of sale with BP the freehold of the Site, equipment and other assets (excluding the Loaned Equipment) used in the conduct, as a going concern, of the retail fuel outlet at the Site -

and that is described as ongoing business.  The conclusion, we say, to be drawn from the features to which I have just alluded in the trading agreement special condition 1 and the contract of sale is that the legal interest of BP requiring vindication, should it terminate the trading agreement for breach by Ringrow prior to the stipulated five‑year term of the trading agreement, was an entitlement to the continuation of the site as an outlet for BP petroleum products for the balance of the term of the POSA outstanding at the date of termination.

That conclusion, in our submission, gains strength from some uncontested evidence given by a Mr Vasiliou at the trial before the primary judge, which appears at volume 1 of the appeal book at pages 23, 29 and 32.  One of the principal issues below concerned what was BP’s legitimate commercial interest in the preservation of the site as an outlet for BP products.  The tendency below, with respect, was to confuse what may have been their commercial interest with the legal interest entitled to protection under the contractual documents.  In considering the question of penalty, as our written submissions seek to make out, one is entitled to look at all the surrounding circumstances.

GUMMOW J:   The primary judge did this at paragraph 108 in respect of Mr Vasiliou’s evidence.  Do you challenge what he said?

MR HUGHES:   He accepted Mr Vasiliou’s evidence.

GUMMOW J:   He said it was “brief and slightly inaccurate” and had shed “no light upon” the relevant issue.

MR HUGHES:   In my respectful submission, it does shed light on the relevant issues.  What Mr Vasiliou said was, with great respect, congruent with the correct interpretation of the contractual documents.  The contract, clause 40, emphasised that what was being sold was an ongoing business conducted as a going concern under the POSA for a term of five years.  Special condition 1 of the trading agreement was to the like effect.  At page 23 of volume 1 Mr Vasiliou deposed to saying:

“We’ll sell you the sites on the condition that they remain BP Branded for 5 years.  You must stay loyal to BP for those 5 years.  After that you can do what you like.  There are Mortgages, Options and other mechanisms within the Sale agreement that protects BP’s interests should you break the POSA.  You will also have to pay a BP Brand service fee.  If you break the Agreement, BP has a right under the Option Deed to buy the sites back from you.”

At page 29 in the same volume, your Honours, at paragraph 54 Mr Vasiliou deposed to having said at a meeting with Mr Nader, one of the controlling people in the Ultimate Fuel company, which was buying the Auburn service station:

“Get your contracts and your documents checked out by your guys (meaning Tom Williams his Solicitor and Tony Hallasso his Accountant).  Remember you’re here for 5 years – make sure you do the right thing.”

You’ve been running BP Lansvale and BP Meadows under TGP –

terminal gate price –

for a while now.  You know how it operates.”

He said:       “Is it going to be the same for BP Auburn and BP Silverwater?”

I said:           “Yes, exactly the same.”

Going forward to I think the concluding paragraph of this affidavit, I should refer your Honours to what Mr Vasiliou said in paragraphs 63 and 64.  I have not yet taken your Honours to the liquidated damages clauses; I will in a moment.  As we have said in our written submission, the liquidated damages clauses which are contained in special condition 1, to part of which I referred, prescribed a diminishing scale of liquidated damages dependent upon the time during which the relevant trading agreement had been in operation at the time when it was terminated for breach.  Mr Vasiliou said at page 32:

63       I calculated liquidated damages for each POSA by determining the Net Present Value (“NPV”) for the site (which is essentially the profit that BP expects to make over the 5 year term of a POSA) and dividing the NPV by 5. 

64       This provided the profit that BP expected to make for each year, or the liquidated damages figure per annum.  The liquidated damages depend on when the POSA is terminated.  Liquidated damages for a termination within the first year will be the per annum liquidated damages figure times 5.  Liquidated damages for a termination within the second year of the POSA term, will be the per annum liquidated damages figure times 4, and so on, so that the liquidated damages for a termination within the final year of the POSA term is the per annum liquidated damages figure.

That brings me back ‑ ‑ ‑

GLEESON CJ:   I am sorry to keep harping on this point, but clause 38 on page 53 is a present grant of an option, not an agreement to grant an option. 

MR HUGHES:   If it is, it was never looked at in that way below, your Honour.  It is subject to the same frailty, if any, as that to which the actual grant is subject.  May I now refer your Honours to the liquidated damages provision in the trading agreement, the POSA.  That will be found commencing at page 215 and one has to go over to page 273, as I think I may have mentioned before, and special condition 1 is of such importance that I should deal with it in some detail.  I have read the first subclause and I will not read it again.  Clause 1.2:

(a)      BP agreed to sell the Site and the Ongoing Business to the Dealer . . . on the basis of continued operation –

So there is a recognition by the parties that what was being sold was not only the site but the ongoing business inseparably connected with the site.  They said they had done so:

on the basis of continued operation of the business of a retail fuel outlet operating as a going concern at the Site under this Agreement for the Term (being a period of 5 years) and on the basis of the expected returns to BP under this Agreement over the Term.  The expected returns to BP under this Agreement over the Term is $289,531 (“Liquidated Damages”).

(b)      if this Agreement is terminated prior to the expiry of the Term, BP will suffer losses as a result including the specific loss of the Liquidated Damages;

(c)      the reducing rate at which the Liquidated Damages may be payable over the Term as set out in clause SC1.3 represents a fair and proper basis for payment in the circumstances set out in this clause SC1;

(d)      the amount payable on termination of this Agreement as specified in clause SC1.3 represents a genuine pre-estimate of the minimum loss BP will suffer as a result of the termination of this Agreement if this Agreement is terminated prior to the expiry of the Term; and

(e)      BP has the right to acquire the Site under a separate option agreement between BP and the Dealer (or between BP and a Related Company –

I should not have read that because it is not applicable.

BP also has a first right of refusal to acquire the Site under clause A5.11.  If this Agreement is terminated and BP has exercised its right to acquire the Site under the separate option agreement or under clause A5.11, the Liquidated Damages will not be repayable to BP under clause SC1.3.

Your Honours will notice that – and this point is sought to be made in our written submissions – the liquidated damages provision is expressed to be inoperative should BP first exercise the option, but in this agreement or this web of contractual documents drawn, as noticed in the Full Federal Court, with great care there is no provision which prevents the respondent from first claiming and taking the liquidated damages and then invoking its purported rights under the option to repurchase.

GLEESON CJ:   What, however, if it gets into dispute and there is litigation between the parties?  That expression “BP has exercised its right” qualifies the expression “Liquidated Damages will not be repayable” which I think means payable.  How would you apply that if there were termination, a claim for liquidated damages not paid, litigation, then exercise of the option, then a court comes to gives judgement?

MR HUGHES:   In such a case the option may be exercised, perhaps notwithstanding the claim made for liquidated damages, but one is looking at the potential operation of this agreement, the full potential operation of the agreement, at the time when it is made.  There is nothing to stop BP first claiming and receiving the liquidated damages and then turning around and exercising the option.  The construction that we have sought to put upon the contractual relationship between the liquidated damages provision and the option provision is treated rather dismissively by my learned friends as a strained construction.  It is a plain construction, in a document to which praise was given in the Full Federal Court for the care in its drawing.

GUMMOW J:   Now, there was no contention, was there, that the liquidated damages provision itself was bad?

MR HUGHES:   There was an attempt in the Full Federal Court to raise that issue in relation to the service station in respect of which out of the four service stations the option was not exercised, and I was not given leave to raise it.

GUMMOW J:   So it is not an issue here?

MR HUGHES:   No.  Your Honours, I have to say this because it is part of giving the setting in which the proceedings were run at first instance compared with the way they were run in the Full Court.  It has to be said that the learned primary judge did not have the benefit of any submission put to him on the possible effect on the outcome of this case of the principles propounded by Lord Dunedin and accepted as good principles even up to the present time.  I think in the concluding paragraph or paragraph 37 of our written submissions, we refer to a decision of the Court of Appeal.  It is Artes Studios Thoroughbreds 15 NSWLR 564, a decision in which I think your Honour Justice Kirby participated.

KIRBY J:   Your citation in your submissions is incorrect.  It is 15, not 18.

MR HUGHES:   I am so sorry, I have corrected it belatedly in the corrigenda.  Your Honour sat on that case and we have cited the page in the judgment where that statement of ‑ ‑ ‑

KIRBY J:   Justice McHugh also sat.  We both agreed with Justice Clarke.

MR HUGHES:   Yes, your Honour.  Lord Dunedin’s principles are, after 90 years, alive and well.

KIRBY J:   They are and they are regularly applied but I must say, reading them through again, the so‑called principle No 2 seems to be nothing more than an illustration of principle No 1.

MR HUGHES:   It is a corollary of No 1.  As we have endeavoured to say in our written submissions, principle (c) as it is set out is separate from 1 and 2.  I should go on to ‑ ‑ ‑

KIRBY J:   You are really asking us to do a bit of surgery on the principles and instead of “sum” put “sum or obligation”, and instead of “amount” put “amount or value”.

MR HUGHES:   Yes.  That is not a revolutionary proposition because, as we have pointed out in our written submissions, it has been held implicitly on the authority of this Court in Stefanetto, in the Court of Appeal in England and in the Court of Appeal of New South Wales that the penalty doctrine is sufficiently alive as to be applicable to stipulations requiring a contract‑breaker to transfer property on breach.  As we have pointed out, your Honours, the dispute that persisted for some time as to whether a stipulation which required payment of money on a variety of events, some of which were breaches and some of which were not, is affected by the penalties doctrine to the extent that the stipulation in question purports to apply to termination which occurs by reason of breach.

GLEESON CJ:   It does, however, raise this interesting question.  In an ordinary case where a provision for liquidated damages is held invalid because it is a penalty, that does not mean you do not get damages.

MR HUGHES:   No, you get common law damages.

GLEESON CJ:   It just means you assess damages according to common law.

MR HUGHES:   Yes.

GLEESON CJ:   Here, the contractual stipulation that you say is a penalty is not the liquidated damages provision; it is the option to repurchase which was taken as part of the original sale.

MR HUGHES:   Yes.

GLEESON CJ:   In this event, on your case, as I understand it, all the other aspects of the contractual provisions between the parties remain on foot and in force.  There simply disappears the option to repurchase.

MR HUGHES:   May I add to the mix this idea, if the option fails as a penalty in its application to termination of the POSA for breach, the respondent’s right to common law damages is unaffected.  It still has a right to recover common law damages.

GLEESON CJ:   Its right to liquidated damages is unaffected, is it not?

MR HUGHES:   Yes.

GUMMOW J:   Is there any application for specific performance of the option agreement in this case?

MR HUGHES:   No, your Honour.  That is a matter still down the track.

GUMMOW J:   It is still down the track, is it?

MR HUGHES:   It is expressly reserved as such by the learned primary judge and that was accepted to be the situation in the Full Court.

GLEESON CJ:   And there has never been any valuation?

MR HUGHES:   No.  There may have been but they have not surfaced.

GLEESON CJ:   Because, whether it is right or wrong, part of the argument against you, as I understand it, is that this is an option to repurchase at fair market value?

MR HUGHES:   Yes, and the argument against, as we have sought to put in our written submissions, is that it is not at fair market value.  It is part of the potential operation of the option deed that the exercise of the option could well be at less than fair market value for the reasons that we have endeavoured to set out in our written submissions.  We gave two illustrations, your Honours.  One, supposing a termination by BP of the POSA for a trivial non‑remedial breach committed by one of the appellants in the first month or two of the coming into operation of the POSA – I do not wish to ‑ ‑ ‑

GLEESON CJ:   Would your argument be different if it were common ground – and I realise it is not – that the option was to repurchase at fair market value?

MR HUGHES:   One leg of our argument, in that eventuality, would be weakened, not totally amputated, because looking, your Honours, at the potential scope, the potential reach of this option agreement, one can envisage the sort of breach I have just mentioned - trivial, certainly non‑essential, non‑remediable – breached in the first few months of the five‑year term, BP would be entitled to terminate leaving an appellant, as it were, to hang out to dry for five years without fuel but under an obligation, a potential obligation or an actual obligation, to keep the service station in its state of an operational service station; one that can be used and is set up to be used as a service station even though not operating, against the possibility that five years down the track BP would seek to exercise the option.  Now, that is a legitimate illustration, in our respectful submission, of the harshness of the reach in terms of the penalty doctrine in this option. 

Looking at the other end of the scale, and we have said this in our written submissions, consider if one will, a trivial breach committed in the dying stages of the five‑year term or even during a holding‑over period - there is a holding‑over provision in the POSA to which we have alluded in our written submissions.

GUMMOW J:   Mr Hughes, at some stage either or both sides should provide us really with a full set of the pleadings in the Federal Court.  At the moment we only have scraps and I am finding it very hard to understand what the parameters were of what was going on.

MR HUGHES:   What was going on in the Federal Court before the learned primary judge was litigation over a multiplicity of issues of which only one was penalty.

GUMMOW J:   Yes, I understand that, but I still want to see the full picture.

MR HUGHES:   Well, that can be done by – we have brought the ‑ ‑ ‑

GUMMOW J:   There is no particular hurry for it but one or other of you should give it to us, I think.

MR HUGHES:   Yes, your Honour.

GUMMOW J:   At one stage there was a section 47 under the Trade Practices Act exclusive dealing which disappeared, was there not?  It started off in the Supreme Court, got transferred to the Federal Court because it was a special federal matter then section 47 dropped out, but there were a number of other issues as well.

KIRBY J:   You are not pursuing any of those in this Court.

MR HUGHES:   None of it.  I eschew it.

KIRBY J:   You have confined, you have boiled it down, as you have said in the special leave hearing.  This is a boiling down works.

MR HUGHES:   Yes, and it was boiled down to penalty.

GUMMOW J:   I want to see the body before ‑ ‑ ‑

MR HUGHES:   If I had been there earlier it would have been boiled down long before.

GUMMOW J:   I want to see the body before it was boiled.

MR HUGHES:   Well, your Honour, that can be done because the ‑ ‑ ‑

GUMMOW J:   Yes, thank you.

MR HUGHES:   I think I am right in saying the pleadings in the Full Federal Court – we have brought the Full Federal Court appeal book and your Honour’s request can be easily satisfied.

GUMMOW J:   Thank you.  Now, what the trial judge did was make a number of declarations it seems.

MR HUGHES:   Yes.

GUMMOW J:   Looking, for example, at page 370.  But no dispositive relief was granted.  That was all stood over in some way, was it?

KIRBY J:   Actually, he asked the parties to bring in orders ‑ ‑ ‑

MR HUGHES:   Short minutes, yes.

KIRBY J:   And they brought in these declarations, and there were only declarations.

GUMMOW J:   What was to happen next?

MR HUGHES:   The learned trial judge upheld the validity of the option deed.

GUMMOW J:   Yes.

MR HUGHES:   And that was regarded as the crucial deciding point, after all the excrescences constituted by the other issues had been litigated, unfortunately at great length, by other counsel.

KIRBY J:   He had not read Justice Gummow’s scriptures about not making declaratory orders alone.

GUMMOW J:   They are not just mine,…..the whole court.

MR HUGHES:   As your Honour ‑ ‑ ‑

GUMMOW J:   Anyhow, I am not complaining about it again, but I just need to know how we have got in the middle of Gaza, as it were, eyeless or otherwise.

MR HUGHES:   If your Honour wishes to be taken, at least at pleading level, into the Sargasso Sea of issues that occupied the time of the trial judge.

KIRBY J:   Even the cost order, No 7, is a declaration.  It declares that the appellant is liable to pay the respondent.

MR HUGHES:   Yes.

KIRBY J:   Even I, who have the most ample view of declaratory relief, find that a little odd.

MR HUGHES:   Yes.

KIRBY J:   However, perhaps he expected that as gentlepersons, the parties would then go away and resolve the matter between themselves, helped by his declarations.

GUMMOW J:   Service station litigation does not suggest that sort of outcome.

MR HUGHES:   No.  Well, it is perhaps a little closer than it was.  Now, I was inviting your Honours’ attention to special condition 1, starting on page 273.  I had read what appears at page 274, paragraph (e).  I should invite your Honours’ attention to subclause 1.3:

The dealer agrees that if this Agreement is terminated prior to the expiry of the Term the Liquidated Damages will be payable by the Dealer to BP as follows:

If termination or acceptance occurs between the Commencement Date and the expiration of year 1 of the Term:………$289,531 ‑

and then the diminishing scale.  It is very difficult to attach any significance to the words “or acceptance”.  They seem to be an excrescence but nothing, we suggest, turns on that. 

SC1.4  The Liquidated Damages are payable by the Dealer to BP within 7 days of the date of the termination of this Agreement.  Any monies received by BP pursuant to the separate contract of sale referred to in clause SC1.1, by way of payment of the Liquidated Damages, will be credited against the amount owing by the Dealer under this clause SC1.

SC1.5  The Dealer . . . has agreed under and on the terms and conditions set out in the separate contract of sale referred to in clause SC1.1, to grant a mortgage in favour of BP over the Site to secure payment of the Liquidated Damages in the event of a termination of this Agreement prior to the expiry of the term.

The mortgage, your Honours, on the Lansvale site, which is typical, is to be found commencing at volume 1, page 206 of the appeal book and is shortly described as a mortgage to secure any indebtedness by the dealer to BP and also as a mortgage to secure the rights of BP pursuant to the option and the contract, including any damages payable to the mortgagee for any:

breach or failure to comply by the Mortgagor with its restrictions or obligations on the Mortgagor pursuant to the Option and the Contract –

In that aspect of its operation it is really an incumbrance rather than a mortgage security given to cover an obligation other than an obligation for the payment of money.  Nothing turns on that.  There is as well, as part of the contractual picture, a caveat to preserve the equitable interest said to be created by the option.  I have just lost where it is in the ‑ ‑ ‑

GUMMOW J:   At 211.

MR HUGHES:   Thank you, your Honour.  Then – I need not trouble your Honours with this – there was, as part of the contractual picture, a deed of priority, but nothing turns on that. 

GLEESON CJ:   Do we need to be interested in this clause A5.11?

MR HUGHES:   No, your Honour, because that is the clause that conferred the right of first refusal that was never exercised.

GLEESON CJ:   I wonder whether it throws any light on the construction, if there is a disputed question of construction, of the options agreement.

MR HUGHES:   Not as it has occurred to us.  A large issue between the parties in this appeal concerns the respondent’s assertion in its written submissions that this option was exercisable not just on termination but after the expiry by effluxion of time of the POSA.  We have dealt with that in our written submissions.

Clearly, looking at the POSA, the reference to termination in the liquidated damages clause can refer only to termination of the contract by an act of termination upon breach.  It is quite inappropriate to suppose that a liquidated damages clause can be activated by anything but a breach.

GLEESON CJ:   But we are concerned, are we not, with clause 1.2 on pages 64 and 65?

MR HUGHES:   Yes.

GLEESON CJ:   That sets out the circumstances in which the option may be exercised.

MR HUGHES:   Yes, indeed, and I come to that.  That refers to termination in its first part.  Clause 1.2(a) says:

The Option may only be exercised by the Grantee if:

(a)      the agreement titled BP Branded Privately Owned Sites Agreement (“POSA”) entered into between the Grantor and the Grantee is terminated, and is not replaced by a further POSA which may or may not be called POSA, or becomes unenforceable or of no force or effect from whatever cause –

Now, “terminated” there, in our respectful submission, can only refer to termination for breach of the POSA.  There ought to be congruency of interpretation of the word “terminated” in the option and the same word as used in the POSA.  That is a key proposition.  It is quite incompatible with the concept of liquidated damages that they can be exacted or awarded for anything other than a breach of contract. 

I should mention that looking further down clause 1.2 of the option deed, the second branch of clause 1.2(a) is the agreement becoming “unenforceable or of no force or effect from whatever cause”.  That does not apply because, if a contractual stipulation is invalid as a penalty, the whole agreement is not brought down.

GLEESON CJ:   I suppose that was put in with an eye to the Trade Practices Act.

MR HUGHES:   Probably, yes, your Honour.  So if the penalty point is correct, clause 1.2(a) does not avail the respondent.

HAYNE J:   How does that understanding of the word “terminated” fit with 1.3?

MR HUGHES:   Clause 1.3 of the ‑ ‑ ‑

HAYNE J:   Of the option.

MR HUGHES:   That, if I may say so, with respect, is a significant observation, because the option deed draws a distinction between termination and lapse, and that is a significant distinction.  Turning back to 1.2(b):

any BP automotive fuels sold from the Property as at the date of this Deed cease to be sold from the Property –

If one looks at appeal book volume 1, page 100, a cessation of sales of automotive fuels by the dealer – an appellant from the property would collide with clause 4.3 on that page 100 of volume 1.  It would be a breach.  Turning to clause 1.2(c) the condition:

the Grantor leases the Property to a third party without the Grantee’s prior written consent ‑ ‑ ‑

KIRBY J:   Could I just ask, presumably your client in taking the foreign petroleum products did so because they were cheap or they could get them cheaper than from BP.

MR HUGHES:   Yes.

KIRBY J:   But presumably they were sold from bowsers at your client’s petrol stations with the livery of BP, the customers thinking they were buying BP petroleum products.

MR HUGHES:   That has to be said.

KIRBY J:   And presumably this arrangement was designed to stop you doing that.  I am thinking of proportionality here, because that really is deception to the customers.  There has to be some sanction and the sanction is this arrangement.

MR HUGHES:   Well, liquidated damages or termination, but that still leaves the option under the microscope.

KIRBY J:   I just have my eyes fixed very clearly on proportionality.  The House of Lords did not use that expression.  It is one that has spread in the law since then and I am favourable to it.

MR HUGHES:   It is embedded in what Lord Dunedin said in the Dunlop Case.

KIRBY J:   Yes.  He would have regarded it as a vulgar word and he did not use it.  It actually came into English law from German law.

GUMMOW J:   He used much stronger language really.  He referred to Clydebank I think.

MR HUGHES:   Yes.

KIRBY J:   But if we keep our eye on that notion, that is really what you were up to, was it not?

MR HUGHES:   I cannot stand here and condone what happened.  These were serious breaches but part of the problem is that the option was expressed to be exercisable for any one of a multiplicity of breaches, some serious but others trivial and ‑ ‑ ‑

HAYNE J:   Now, if that is accepted for the purpose of debate the consequence is that one asset, namely land, is transformed into another asset, money.  I think I asked of you at the leave hearing ‑ ‑ ‑

MR HUGHES:   Your Honour did.

HAYNE J:    ‑ ‑ ‑ what is penal about that?

MR HUGHES:   What is penal about that is simply this, that if the money fails the test of proportionality because the valuation stipulation takes out of the repurchased price an element in the value of the land that was part of the ingoing price, there is a manifest lack of proportionality.  Add to that, the non‑rebuttal, as we would submit, of Lord Dunedin’s presumption.  Add to that again the fact that this option on the construction of the option deed is exercisable even though BP has first taken the liquidated damages and you have a trio of penal factors.  I do not wish to expatiate upon that.  We have sought to make that point in one of the concluding paragraphs of our written submissions.

GLEESON CJ:   You have, I think, yet to come to your argument in support of the proposition that the purchase price upon exercise of the option takes out of the value something that was included in it at sale.

MR HUGHES:   Yes.  I have touched on the argument by referring to certain provisions in the POSA, the special conditions, which make it clear that what was sold to each appellant was land with a business inseparably connected therewith, at the time of sale.

GLEESON CJ:   Yes, but at some time convenient to yourself you will let us know what you say about what Justice Beaumont said at page 714, line 30 and following.

MR HUGHES:   Yes.  Indeed, we have dealt with that in our written submission and the proposition is simply this, that it is not appropriate to treat or examine the question of penalty and say it is not a penalty because the option is part of the consideration for the sale of the land.  I think that is the point that your Honour the Chief Justice ‑ ‑ ‑

GLEESON CJ:   No, he also said the price for the repurchase of the land is fair market value, because of what he says about goodwill.

MR HUGHES:   Yes.

GLEESON CJ:   He had a certain approach to that question of construction of the option agreement, which I would understand you contest.

MR HUGHES:   Yes, we do.  The effect of the provision in the option deed that regulates the repurchase price payable by BP is that – I will come to the particular clause in terms.  Clause 2.5 at pages 182 and 183, your Honours, of volume 1 writes out of the repurchase price an element that was necessarily included in the sale price to Ringrow.

GLEESON CJ:   That is a point of departure between the two arguments that we are considering.  Justice Beaumont, rightly or wrongly, says that what he calls locational goodwill would be included in the market value of the property upon repurchase.  For example, if this is an excellent site for a service station because there are no other service stations in the vicinity or it is on a corner of a highway or whatever, he says that is part of the inherent value of the land and he says, rightly or wrongly, that what is being excluded under clause 2.5 is some kind of personal goodwill associated with the fact that the Naders are very good at running service stations.

MR HUGHES:   Your Honour, that approach is, in our respectful submission, inappropriate because clause 2.5 does not refer to personal goodwill; it refers in broad terms to the exclusion of “any allowance for any goodwill attaching to any business conducted at the Property.”  If the intention had been to restrict the operation of the clause to personal goodwill, it would have been very easy to say so, but it did not.  One is confronted with the circumstance that each appellant paid for a property on which there was inseverably connected an ongoing business.  That was part of what the purchasers, the appellants, paid for.  It is not part of what they get because of clause 2.5 as the exit price.

GLEESON CJ:   That is why I asked whether there had ever been a valuation.  We have not had an opportunity to see how this clause actually works in practice in this litigation.

MR HUGHES:   Nor, with very great respect, does one need one because this is a pure question of construction.

GLEESON CJ:   Yes.

MR HUGHES:   There is no scope for the intrusion – I use that expression with respect – the introduction into this case of a valuation issue.

GLEESON CJ:   I suppose the question is whether the expression “any goodwill attaching to any business” means something different from “any goodwill inherent in the location of the site”.

MR HUGHES:   Yes.  But, your Honour, the site and the business were, at the time of the contract, inseparably connected.

HAYNE J:   Now, Justice Hely dealt with these issues in paragraphs 113 and 114 of his Honour’s reasons, and points in paragraph 114 to what he identifies as being:

The fact that BP is entitled on the exercise of the option to carry on business, for example, under the name of BP Lansvale does not indicate or require –

a conclusion different from that which he reached earlier, namely that what passes to BP, in consequence of the exercise of the option, is the site and improvements and not the business that the applicant conducts on the site.  Now, do you take issue with that analysis?

MR HUGHES:   Yes we do, because Murry’s Case demonstrates – and we have endeavoured to encapsulate this idea in one of the paragraphs in our written submissions – the idea that goodwill, in the case of a business conducted on land, part of it is inseparably connected with the land.  This clause, clause 2.5, does not purport to divide up goodwill into purely personal goodwill of the kind that your Honour the Chief Justice mentioned, goodwill resulting from efficiency of operation.

GLEESON CJ:   Or business contacts.

MR HUGHES:   Or business contacts.  It is an exclusion of any goodwill attaching to any business conducted on the land.

GLEESON CJ:   Well, the goodwill of any BP service station is contributed to, amongst other things, by all the advertising that BP undertakes.

MR HUGHES:   Yes.

GLEESON CJ:   Australia-wide or Sydney-wide.

MR HUGHES:   Yes.  So much may be conceded, but it is still part of goodwill attaching to any business conducted on the land.  It matters not who generates it when one comes to consider the operation of clause 2.5.  That is the approach that we would ask this Court to take.

Coming back for a moment to your Honour Justice Kirby’s observation about proportionality, may I say this.  A possible answer to the problem that your Honour mentioned is that the question of penalty or no has to be considered at the time when the contract is made.

KIRBY J:   That is true, but to the extent that you use foreign product in the livery of BP with the advertising and so on that builds up customer loyalty, you are really taking advantage of the investment of BP for your own financial gain and deceiving the customers, or some of them, who have a sense of loyalty or a feeling that BP’s product is better.

MR HUGHES:   I have already indicated to your Honour that I have to face that.

KIRBY J:   I will not mention it again, Mr Hughes.  I do not want to rub it in but it is in my mind insofar as we are talking about proportionality.  If it should not be, take it out.

MR HUGHES:   But, your Honour, proportionality has to be looked at in the light of Lord Dunedin’s third principle and, in our written submission, we have referred to a somewhat strong passage adopted by Lord Dunedin from the case of Lord Elphinstone v Monkland Iron & Coal, the strength of the chain has to be taken at its weakest link.

GUMMOW J:   I am not sure this proportionality means what you have been putting to us, Mr Hughes.  If one looks at Artes Studios Thoroughbreds (1989) 15 NSWLR 564 at 575 starting at E, the argument is that it is not a penalty unless it is extravagant or unconscionable. The other view is it may be but it need not be so something less will do. That seems to be the debate, not that there is some weighing in proportionality.

MR HUGHES:   One approach is to say that Lord Dunedin’s third principle is freestanding.

GUMMOW J:   What is the third principle?

MR HUGHES:   That there is a presumption that it is penalty where a single ‑ ‑ ‑

GUMMOW J:   This is 4(c)?

MR HUGHES:   A single sum is enacted to cover a multiplicity of breaches, some serious and some trivial.

KIRBY J:   I suppose the answer to my question earlier as to why the law attaches these consequences at the time of contract as distinct from the time of breach is a public policy and common law principle that is designed to discourage the insertion of such provisions in contract because whether they will be used or not is not known at the time of the contract and they may operate sub silentio as a kind of burden on the party affected.

MR HUGHES:   An extra burden.

GLEESON CJ:   Well, operating in terrorem.

MR HUGHES:   In terrorem.

KIRBY J:   Yes, exactly.  I was trying to avoid a Latin word, but it is hard sometimes.

MR HUGHES:   It is, yes.  Now, we have said in our written submissions, and I hope orally, why we contend that the exclusion created by clause 2.5 is a penal factor.  We have said in our written submissions that clause 2.5 implicitly recognises that that which is taken out by the clause forms part of the value of the land.

GLEESON CJ:   I still am puzzled by this concept of goodwill and valuation, in relation to a site where a substantial part of the goodwill results from BP’s advertising.  Let us suppose you were setting out to construct a fair option to repurchase.  When the Naders buy BP Lansvale from BP they are buying it in circumstances where a lot of customers who pull up there are pulling up there because of BP’s large and continuing advertising expenditure.  Then when BP comes to buy it back from the Naders, how do you take account of that objective fact, if you are looking for a fair way?  Suppose you are a solicitor and somebody said, “We just want to be fair.  How do we do it?”

MR HUGHES:   Well, one way to do it would be to keep goodwill attaching to the business conducted on the land as a factor in valuation with a provision for diminution in a case where the service station owner, Ringrow, has damaged the goodwill by using foreign fuel.  It is not beyond the wit of a draftsman, just as it is not beyond the wit of a draftsman to draft a provision which would have a very strong element of proportionality in terms of protecting the legal interest that was entitled to protection, namely the five-year use of the site for the sale of BP products.

GLEESON CJ:   It is an interesting question because some businesses and authorities, including one not very far removed from where we are now, enter into contracts with oil companies and provide people with credit cards which they can use at any service station with that oil company’s livery, as it were.

MR HUGHES:   Yes.

GLEESON CJ:   And the possibility that people will go to a particular site to buy oil, which is part of what goodwill involves, results from the contracts that are made between the oil company and the authority.

MR HUGHES:   Yes.  In this particular trading agreement – I have not taken your Honours to it – there is a provision that requires the dealer to honour recognised credit cards.

GLEESON CJ:   But the existence of those arrangements, coupled with advertising, contributes to the goodwill.  Who should pay for that, in fairness, at what stage of the transaction?

MR HUGHES:   I have postulated, albeit in broad terms, the practicability of adjusting that collision, or potential collision of interests, by a clause which diminishes the goodwill factor in the repurchase price by reference to the sort of conduct that occurred in this case, just as it was not beyond the wit of a draftsman, your Honours, to make a provision which granted an option to BP to acquire a lease of the service station for the balance of the term rather than reacquire the freehold.  That point is flagged in our written submissions.

The main areas of contention between the parties in this appeal are, first, the submission that the penalty doctrine has no possible application to this contractual arrangement.  We have flagged in our submissions in reply the various references in judgments of this Court where Lord Dunedin’s indiscriminate factor, as we have called it, is recognised and applied by this Court.

KIRBY J:   In terms of legal concept it would not be a very viable proposition that you have to confine it to a money sum because that would be an easy way to slip out of the penalty provision.  It is a question of whether there is an economic burden which is disproportionate.

MR HUGHES:   Yes, we have accepted that.

KIRBY J:   I think that that water has flown under the bridge myself.

MR HUGHES:   Yes.

CALLINAN J:   Mr Hughes, I was thinking about the Chief Justice’s question about valuing goodwill and at the moment I just do not see how you could ever put a value on what was goodwill personal to the operator, for example, and separate that out from goodwill attaching to the use of the BP advertising and the signs and the like.  I just do not see how you could do it.

MR HUGHES:   Your Honour, it may be difficult, but one comes back to the price formula in clause 2.5.  That it is a difficult valuation exercise is not to the point in determining whether, at the time when this contract was made, it ran foul of the doctrine of penalties.  Second, the formula that BP chose in clause 2.5 of the option was a broad‑based formula covering any goodwill attaching to any business conducted at the site and ‑ ‑ ‑

CALLINAN J:   You would have to be able to say, would you not, that the goodwill personal to the operator was at least substantial before you would have an argument really?

MR HUGHES:   Yes.

CALLINAN J:   I do not know how you could say that.  I am not saying it is impossible; I am just at the moment uncertain how you could ever make any respectable assessment of that.

MR HUGHES:   Clause 2.5 is a broad-brush clause which covers any goodwill attaching to the business conducted on the land.

CALLINAN J:   And you say that is sufficient for your argument because that exceeds what would be a reasonable ‑ ‑ ‑

MR HUGHES:   A legitimate formula.  What we submit cannot be overlooked in this case is the penal potency of the three factors which we have referred to in our written submissions:  the indiscriminate factor, the valuation factor - clause 2.5 - and the fact that in one aspect of its operation this option constitutes a double infliction.  An award first of liquidated damages does not preclude the oil company from then resorting to the option if it is valid.  That surely is penal.

GLEESON CJ:   The acid test of whether there was any personal goodwill attaching to your clients’ conduct of the business would be if they started to compete with BP after they left the service station, would it not?

MR HUGHES:   They are still there, your Honour.

GLEESON CJ:   No, the acid test of the existence of any goodwill would be if they decided to compete, to go round the corner.

MR HUGHES:   What has happened in the real world is that these appellants are still operating the sites as BP sites.

GLEESON CJ:   The in terrorem provisions did not frighten them very much.

MR HUGHES:   Not quite that, your Honour.  The agreement was terminated and there was a mutual arrangement to carry on.

GUMMOW J:   There is a covenant and restraint of trade in the right of first refusal, is there not, but not in this instrument?  I am looking at the primary judge at paragraph 114 in the last sentence, the last couple of sentences.

MR HUGHES:   Yes:

There is no obligation on an application (as there is under cl 5.11 of the POSA in the case of a right of first refusal) to enter into a covenant not to compete in the trading area –

This was a subject that was discussed during the special leave application.  It was suggested that these appellants could somehow or other start up a business over the road or in the near vicinity.

CALLINAN J:   It is all fairly unrealistic.

MR HUGHES:   Very unrealistic ‑ ‑ ‑

CALLINAN J:   First of all, these sites are all very tightly held, and there are obviously ‑ ‑ ‑

MR HUGHES:   There are planning restrictions and so on.

CALLINAN J:   And conventions about how proximate you have to be or should not be.  But the tightness with which sites would be held, I would have thought, would make it very difficult to compete.

KIRBY J:   I think Justice Heydon made many of these points on the special leave hearing.

MR HUGHES:   His Honour did.

HAYNE J:   Now, the right of first refusal and the restraint of trade is found at page 232.

MR HUGHES:   Yes.

HAYNE J:   We need not go to it now, but that is where it is.

MR HUGHES:   Yes, well one has to query whether the right of first refusal, if in restraint of trade, is part and parcel of a penalty argument.

HAYNE J:   Clause A5.11.2 in its last sentence provides for the dealer to offer to refrain – it says “restrain” – to offer refrain from competing.

MR HUGHES:   Yes.  It is perhaps doubtful whether the infection of restraint of trade in relation to a separate aspect of the operation of the agreement would bear on the question of penalty.  I should mention that in Justice Beaumont’s judgment at page 709 of volume 3 of the appeal books, paragraph 23, his Honour noticed an oral argument that I put in the Full Court.  I said:

On the true construction of the contractual package, termination in those circumstances would give rise to an entitlement for the respondent –

that is termination for breach of a non-essential term –

as a reaction to the breach, to exercise the option after the POSA has expired by effluxion of time:  for instance, the Lansvale POSA would expire on 27 July 2004; the Lansvale option would not expire until 27 October 2004.  The exercise of the option in such circumstances is either an alternative remedy . . . or a cumulative remedy, if the ‘liquidated damages’ are paid first.  Whichever of these alternatives be correct, the right to exercise the option is a different remedy from damages; it is imposed to deter, and punish for, the breach.  On the facts mentioned, the exercise of the option would be a remedy altogether disproportionate to the breach.

I mention that because in one part of their argument my learned friends have said that raising this argument that the option remains exercisable if valid, even though liquidated damages have first been exacted, was an argument that I did not put or an argument to the contrary of which I put something in the Full Court.  His Honour Justice Beaumont recognised the argument and did not deal with it.  For the reasons we have endeavoured to express in our written submissions and that I have endeavoured to put this morning, it is our submission that this option is invalid as a penalty and that the appeal ought be allowed.  We have in our written submissions articulated the orders that we would seek, but unless your Honours wish me to I will not go into that at this stage.

GLEESON CJ:   Thank you, Mr Hughes.

KIRBY J:   Just a small question on the orders.  I noticed that the Full Court in both the joint reasons and Justice Beaumont’s reasons proposed that the appeal be dismissed with costs and then in the actual orders entered the provision in relation to costs is crossed through in each of the orders.  Was that because of some agreement between the parties that I should know of?

MR HUGHES:   No, your Honour.  Your Honour’s eagle eye, if I may say so, has lit upon something that I had not noticed, but as I understood it the inevitable consequence of failure on the appeal to the Full Court would be that we would have to wear the costs.

HAYNE J:   I think they are indistinct.  The order as reproduced at 760 has struck out paragraph 2 and substituted beneath the seal of the court the words “with costs” in paragraph 1.  I think it was simply a drafting alteration which has been reproduced indistinctly.

MR HUGHES:   I am obliged to your Honour.  It was something I had not noticed, but I had assumed that obviously we have to wear the costs of the appeal to the Full Court if the ultimate result is that the Full Court was right.

GLEESON CJ:   Thank you, Mr Hughes.  Yes, Mr Walker.

MR WALKER:    If it please the Court.  If there is no difference to be seen either on the face of the terms in question or by reason of the facts which give content in the particular case to the operation of those terms between the market value stipulated by clause 2.5 of the option and whatever greater price it is for which the appellants contend as that which would prevent such a stipulation being a penalty, then there is no need for this Court to concern itself with other arguments or issues concerning the application of the doctrine of penalty. 

Now, my learned friend has very plainly restricted their case to one which says that it is on the face of the terms that one can perceive that there is a deficiency, deficit, short coming – our words, not his – in what will be produced by that formula, more or less come what may in the market or on the particular facts of the particular trader.  In our submission, that is an incorrect approach.  However, we will deal with that separately.

If one actually looks to the facts as argued and determined in the case, it would appear that there does lack any data by which in this Court there can be a comparison sounding to the detriment of the vendor under the option between the price to be paid to the purchaser under the option and the value at that date or, if it be relevant, the price paid by that later vendor as the original purchaser.

One can pick that up, starting backwards, in volume 3 of the appeal book, page 744, paragraph 82 at about line 20.  That is the beginning of it.  There is a finding.  It does not seem to be challenged.  Certainly, it is not challenged with ‑ ‑ ‑

HEYDON J:   This is part of an argument.

MR WALKER:   It is, your Honour.

HEYDON J:   I am sorry for interrupting.  I just wanted to point that out.

MR WALKER:   Your Honour is talking about the beginning of paragraph 82.  It records a submission for my client.

HEYDON J:   Yes, and it seems to go on, line 15, “BP submitted” and so on.

MR WALKER:   Exactly, your Honour, and paragraph 83 follows in exactly the same position.  One sees at line 23 on page 744 a reference by their Honours in the course of, no doubt, and very clearly recording a submission, there appears also to be something in the nature of a finding or a reference to a finding.  I am grateful to your Honour.  The material needs to be looked at. 

MR HUGHES:   Off the top of my head, I cannot ‑ ‑ ‑

GLEESON CJ:   I am just wondering what prompted that observation on his part.

MR HUGHES:   It is not only Lord Dunedin but successive judgments of this Court.

GLEESON CJ:   Yes.

MR HUGHES:   As I understand it, my learned friend’s argument has not in this Court, in this case, gone to the length of submitting that that principle ‑ ‑ ‑

KIRBY J:   He says he does not have to and he can just succeed by the application of this principle, and he has been upheld below.  But here you come to this Court and it just seems to me that every now and again when we have a case we should have a look at the principle, because if the law goes on just accepting everything sometimes it leads to injustices or a lack of thinking through and it is difficult to reconcile the principle with that word unconscionable because it is not unconscionable to give effect to a provision in the circumstances of a serious breach, which you concede was a serious breach, by reference to a provision in the contract that has never been relied on, is not relied on and is not really relevant to the business affairs between these parties.

MR HUGHES:   We take our stand on the proposition that the option is exercisable on the true construction of the contract for any one of a number of breaches of a trivial nature.  I rely on the authority of this Court as expressed in judgments which are referred to and, indeed, to some extent relied upon in the argument presented by my learned friends in paragraphs 19 to 26 of their written submissions.

CALLINAN J:   Mr Hughes, in a case in this Court, Peters (WA) Limited v Petersville Limited 205 CLR 126, this Court enforced or gave effect to the restraint of trade doctrine with respect to two major corporations who had been carrying on business for 14 years. So the application of some of these doctrines does not depend upon whether the corporations are substantial or the parties are at arms length.

MR HUGHES:   No.

KIRBY J:   But insofar as the doctrine of the House of Lords talks of unconscionable, then it sets the mind searching for what is unconscionable in this case.

MR HUGHES:   What is unconscionable in this case or extravagant as a purported remedy is the totally wide sweep of the option in terms of its exercisability, totally wide in the sense that the merest trivial breach can trigger it, and this, let it be said – and I do say – in what was essentially a contract of adhesion.  That is not said in any pejorative sense but it is perfectly apparent that these were standard terms and conditions in a series of contracts which were put up, proffered to my clients on a “take it or leave it” basis.

Now, there was some reference this morning to clause 5.11, appeal book volume 1, page 107, line 15:

Whenever any disposition or assignment is proposed under clause A5.10 –

going back to 5.10, that prohibits the dealer disposing or allowing any disposal of the freehold site without consent, and 5.11.1 goes on to stipulate for a right of first refusal:

Whenever any disposition or assignment is proposed under clause A5.10, the interest must first be offered to BP or its nominee on no less favourable terms or if it is proposed that the interest be given away, for market value. 

Then there is a provision for resolving dispute as to market value. 

GLEESON CJ:   Does market value in that clause mean anything different from market value in ‑ ‑ ‑

MR HUGHES:   Yes, your Honour, it does.  Indeed, we respectfully say, it must because the formula in clause 2.5 extracts from the ordinary concept of market value any allowance for the goodwill attached to any business conducted on the site, and I do not want to reiterate tediously what I put this morning. 

Clause 2.5 is a very clear pointer to what, but for the exclusion of the goodwill factor, the parties regarded market value as meaning.  Market value in 5.11.1 is what I might describe as full market value without deduction of any allowance for the element of goodwill.  Market value in clause 2.5 is market value less something which would otherwise be included within that concept.

In paragraph (3) of our submissions in reply we have referred to judgments of this Court that we venture to say, with respect, entrench the concept of proportionality as a test of penal validity in relation to money sums stipulated as liquidated damages.  We would add to those references a passage in the judgment of Sir Harry Gibbs in Pigram v Attorney‑General for the State of New South Wales 132 CLR 216 at 225, your Honours.

KIRBY J:   Mr Hughes, has anybody used this notion of proportionality?  Have any of the commentators used this notion, or is this a metaphor that you have introduced into the dialogue?  Have any judges used proportionality to, as it were, wrap up the notions expressed in Dunlop?

MR HUGHES:   Yes, your Honour.  Your Honour will find references to proportionality in the judgments to which we have referred on page 2 of our reply submission.

GLEESON CJ:   Is that proportionality or proportionate?

MR HUGHES:   Proportionate and proportionality in this area of discourse, I venture to suggest, your Honour, are the same.

GLEESON CJ:   Proportionality in a slightly different context involves asking whether a law is necessary to achieve a certain object, and whether in achieving that object it goes further than is necessary.

MR HUGHES:   Your Honour has in mind cases like Nationwide News v Wills.

KIRBY J:   It was in Lange, that ghastly phrase “appropriate and adapted”.  Some commentators, I included, prefer “proportion”.  That is a very different frame of reference to Dunlop which is talking of unconscionable seriously offensive and ‑ ‑ ‑

MR HUGHES:   But, proposition three in Dunlop, if it is freestanding, is separate from unconscionable.  The better view may be that it is but an exemplification of what is extravagant.  I have said that before and I do not wish to weary your Honours with repetition, but I feel bound to mention that in response to your Honour Justice Kirby just then.

The idea that BP could, in this case, for a trivial breach, non‑essential breach - in the second month of the operation of the contractual relationship under the POSA - terminate and hang an appellant out to dry for the next five years, I venture to suggest, amounts to extravagance, unconscionability and lack of any proportional relationship between such a breach, and the vindication of the only interest that under this contractual relationship the oil company was legally entitled to vindicate.

GLEESON CJ:   I think the problem with “proportionality” is that it is a word that now comes, and comes with quite a deal of baggage, in the context of judicial review of legislative action and the proper bounds of judicial review of legislative action are not necessarily co‑extensive with the proper bounds of judicial refusal to enforce contracts.

MR HUGHES:   But dealing with the question of enforceability of a contract which contains a provision authorising termination for the most minor breach it is not difficult, as a matter of commonsense, to see a striking lack of proportionality in such a situation as the two situations that we exemplified in our main written submissions, a trivial breach early in the operation of POSA leading to termination and the trivial breach in the concluding stages.

Maybe because of the interest, which very understandably, with respect, some of your Honours have expressed in this idea of proportionality, I should really invite your Honours to read the passages to which we have referred in paragraph (3) of our reply submissions in O’Dea.  I have already given your Honour a reference to a passage in Pigram, page 225. In O’Dea 152 CLR 359 at 369 Sir Harry Gibbs said, three‑quarters of the way down the page:

Moreover, the entitlement of the first respondent arose on a number of events, including any default in performance of the terms and conditions of the contract, some of which, by their nature, could lead only to trifling damage.

That is an invocation of a commonsense doctrine of proportionality.  Likewise, Sir Ronald Wilson at page 383, after the reference to Lord Thurlow, his Honour said in the middle of the page:

Bearing in mind that the possible defaults that may activate the powers of the lessor under cl 12 encompass both trivial and serious breaches without distinction in the remedy and that the clause may operate at any time during the currency of the lease with no provision for rebate of future instalments or for crediting the lessee with any capital gain represented by the amount by which the value of the vehicle on repossession exceeds its appraisal value, it is in my opinion quite impossible to conclude that the clause reflects on the part of the parties a genuine pre‑estimate of damage.  It is a penalty against which the lessee is entitled to relief.

That is plainly the invocation of a concept of proportionality, your Honours.  At page 399 ‑ ‑ ‑

GLEESON CJ:   With reference to “extravagant and unconscionable”.

MR HUGHES:   Yes.

KIRBY J:   And to “in terrorem” which the Chief Justice mentioned earlier.

MR HUGHES:   But then his Honour goes on to say:

There is a presumption –

and this is his Honour’s own view; it is not just a quotation from Dunlop –

(but nothing more) that it is a penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage” –

His Honour is adopting that proposition per Lord Dunedin quoting Lord Watson in Elphinstone.  That is expressed by Sir William Deane, your Honours may think, as a separate freestanding criterion.  We submit it is but if we are wrong, it is but an exemplification of a species of extravagance and unconscionability.  We have cited the relevant passage in Elphinstone in our main written submissions.

There is another reference, your Honours, to goodwill in a part of the POSA which so far has not been specifically mentioned.  If your Honours would be good enough to go to volume 1, page 246, there is a clause A13.6 starting in the middle of the page, “Upon cancellation of a Part”, which procedure may be adopted by the oil company in terms of the immediately preceding clause, line 20:

BP may at any time by giving written notice to the Dealer cancel a Part –

and a “Part” is defined in the definition clause at page 253 as meaning “a part of this Agreement”.  Reading line 26 on page 246:

Upon cancellation of a Part:

. . . 

(g)      the Dealer is not entitled to any payment, repayment or compensation for any goodwill attaching to the business carried on under the Part –

and cancellation of a part, as your Honours will see from reading subparagraph (b) at line 24, may occur if:

any of the grounds specified in clause A13.3 as a cause for termination of this Agreement occurs. 

Clause 13.3 is at line 40 on page 25.  So the exclusion of goodwill is not peculiar to the case of termination as provided for in clause 1.2 of the option deed, your Honours. 

Now, my learned friend has spent a little time in the course of his submissions to this Court in referring to evidence given by two witnesses, valuers, as to what to them, in effect, the contractual arrangements meant.  In my submission, it is clear that the views expressed by valuers do not govern or should not influence in any way whatsoever the question of interpretation posed in this case as to the penal nature, or lack of it, of the option deed provisions clause 1.2.

The question is to be determined, as all the authorities indicate, as questions of construction in the light of the surrounding circumstances.  My learned friend placed some reliance on an article by Professor Goode in 104 Law Quarterly Review.  The first question propounded on page 28 of that article – the learned author, one-third of the way down the page, said:

But as this writer ventured to point out some 17 years ago in relation to hire-purchase agreements . . . the first question to be answered by the court in determining whether a clause is penal is:  against what sort of loss is the contract seeking to provide?

Well, applying that question to this case, the answer is any breach of the POSA, however large, however small, that is part of the loss for which the relevant stipulation is intended to provide.

In other words, the learned author would by transposition of his mode of thought pay regard, as I submit regard should be paid, to what we have ventured to describe as the indiscriminate factor in these contractual arrangements.  I will not go back to that again because it is, I hope, clearly defined in our submissions.

My learned friend, as he is fully entitled to, has made much of the fact or factor in this situation that the option was part of the consideration for the conveyance of the property.  He has relied on the conclusion expressed in the Full Federal Court and by the primary judge that the clause attacked as penal encumbered the property conveyed.  With very great respect to the courts below, that question is, on analysis, question begging.

It is question begging because implicit, if not explicit, in the formulation of the proposition is the validity of the contractual stipulation under attack as a penalty.  That has been flagged in our written submissions but I hope it is not inappropriate for a brief mention to be made of it in reply because a great deal of stress was placed upon that approach in the submissions made by my learned friend today.

It is incorrect to say, in our respectful commission, that termination upon the occasion of breach merely accelerated a presently existing obligation and that proposition has been very much in the forefront of my learned friend’s written and oral submission but, your Honours, there can be no acceleration of a conditional obligation that may never arise.  It could not be predicated that the time when these contractual arrangements were made in 1999 and 2000 in relation to the four service stations that the exercise of the option was a certainty.  It was a possible future event which might never arise and to describe such a possibility being accelerated when it might never have happened seems to be, in our respectful submission, based on a fundamental misconception. 

How my learned friend put to your Honours in the form of a rhetorical question this afternoon could the penalty doctrine be attracted by the circumstance that BP’s contractual terms did not provide for a lease for the balance of the term of the POSA outstanding at the time of breach.  The answer, in our respectful submission, to that rhetorical question is quite simple.

If one takes the view, which we seek to press upon this Court, that the only legitimate legal interest entitled to protection or vindication was the preservation of the service station site as an outlet for the sale of BP products during the term of the POSA or any holding over, the provision of a pro forma lease would have been an adequate and totally sufficient mode of protecting BP’s legitimate legal interest entitled to protection.

It is a fallacy to suppose that BP had a protectable legal interest in the permanent preservation of the site as a BP outlet.  Indeed, I think we have already referred – and there has been no criticism explicitly by my learned friend of what Justice Beaumont said at page 698 of his Honour’s reasons in volume 3 at line 24:

The term of a POSA is five years.  During that time, the operator is permitted to conduct a service station under the BP brand and is required to purchase fuel only from the respondent.  At the end of the term, the operator may elect to enter into a new supply agreement with the respondent or may elect to obtain its supply of fuel from third parties.

That is, in our submission, clearly a correct appreciation of the contractual intent in that relevant respect.

At appeal book volume 1, page 204 there is set out clause 31 of the pro forma contract for resale of the service station upon exercise of the option to repurchase.  That clause in the pro forma contract says:

The vendor must not do any act or thing or refrain from doing any act or thing between the day of sale and the completion date under this contract –

that is the contract of repurchase –

which has or may have the effect of adversely impacting on the business conducted by the vendor at the property.

That, in our submission, is a stipulation included for the obvious and only purpose of protecting goodwill attaching to any business conducted at the

site, goodwill, not personal goodwill, but goodwill attaching to the business and separately connected with the land which is excluded under clause 2.5 of the option and therein lies a strange inconsistency.

Goodwill is recognised in the sense that if the option is exercised the vendor, that is the dealer, whose contract is the subject of termination, has to take action to preserve goodwill for which any value is excluded under the price formula in the option.  That is, in our respectful submission, a factor which spells penalty and it is not a feature of our submissions that evoked any response whatsoever from my learned friends.  For those reasons, we submit that this appeal ought to be allowed, your Honours.

GLEESON CJ:   Thank you, Mr Hughes.  We will reserve our decision in this matter and we will adjourn until 10.15 am tomorrow.

AT 4.13 PM THE MATTER WAS ADJOURNED