Ringrow Pty Ltd & Ors v BP Australia Pty Ltd

[2005] HCATrans 374

[2005] HCATrans 374

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S339 of 2004

B e t w e e n -

RINGROW PTY LTD

Applicant

and

BP AUSTRALIA PTY LTD

Respondent

Office of the Registry
  Sydney  No S340 of 2004

B e t w e e n -

ULTIMATE FUEL PTY LIMITED

Applicant

and

BP AUSTRALIA PTY LTD

Respondent

Office of the Registry
  Sydney  No S341 of 2004

B e t w e e n -

NADER-ONE PTY LIMITED

Applicant

and

BP AUSTRALIA PTY LTD

Respondent

Applications for special leave to appeal

McHUGH J
HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 27 MAY 2005, AT 9.32 AM

Copyright in the High Court of Australia

MR T.E.F. HUGHES, QC:   May it please the Court, in each of these cases I appear with my learned friend, MR T.D.F. HUGHES, for the applicant.  (instructed by Stojanovic Solicitors)

MR M. WALTON, SC:   May it please the Court, I appear with MR D.R. SIBTAIN for the respondent in each of the applications.  (instructed by Corrs Chambers Westgarth)

McHUGH J:   Yes, Mr Hughes.

MR HUGHES:   Your Honours, we rely on the arguments in the outline and I am not going to reiterate them.  I want to engage in a boiling down process.  The Full Court decided the penalty issue in favour of BP very largely on the basis that BP had an enforceable commercial interest in the preservation of the service station sites as exclusive outlets for BP fuel.  Perhaps the best indication of that approach is to be found at page 101 of the application book, line 20, paragraph (b).  This is Justice Beaumont:

The function of the option is to protect the respondent’s commercial interests in the site.

There was a misconception in treating the commercial interests as being, as it were, at large and unlimited in point of time.  If one goes to page 119 of the application book ‑ ‑ ‑

HAYNE J:   Well, before you do that, if you stay at 101, if paragraph (b) is accurate, protecting commercial interest in the site “restitutionary in nature”, how does that fit with paragraph (c) “may produce an apparent windfall”?

MR HUGHES:   It was erroneous to treat the option as restitutionary and the pathway to that conclusion is to look, your Honour, at the limited interest that BP was entitled to protect by means of an option.  The only appropriate option would have been an option to confer in case of termination for breach of the trading agreement an interest, that is to say a leasehold interest, commensurate with the unexpired term of the trading agreement.  Now, if one goes to pages 120 and 121 of the application book, their Honours refer to the graduated liquidated damages levels, the subject of 1.3 of each trading agreement.  There is an important provision, clause 40.4 on page 121, your Honours:

The vendor and purchaser acknowledge and agree that:

(a)      the vendor is prepared to sell the property on the basis of continued operation of the business of a retail fuel outlet operating as a going concern at the property under the POSA for a period of 5 years and the Liquidated Damages reflects (sic) the expected returns to the vendor under the POSA over that 5 year period -

That was the only legal interest that BP was entitled to protect by means of an option enabling it to obtain a retransfer of the property for termination following breach.

McHUGH J:   But, Mr Hughes, it was its site and it was selling it, and you had the POSA, the Privately Owned Site Agreement, to operate for five years under which they were to sell BP fuel and products.  But at the end of five years BP wanted to protect its interests.  They wanted the site back.  Now, why is that not a sufficient ‑ ‑ ‑

MR HUGHES:   Your Honour, it was not entitled to get the site back because ‑ ‑ ‑

McHUGH J:   Well, if it enters into an agreement, why can it not?

MR HUGHES:   Because viewing the option as a purported remedy for a breach of the trading agreement, the remedy is entirely disproportionate, or manifestly disproportionate, to the interest entitled to protection.

McHUGH J:   Well, that depends on your argument that there is no money for goodwill.

MR HUGHES:   No, it does not, your Honour.  This is a freestanding point.  Your Honour will have noticed that we have placed the emphasis of this application on the issue of proportionality.

McHUGH J:   Well, I thought that at the forefront of your argument was the contention that the option was penal in character because it enabled acquisition of the service station site at a price that may not reflect the highest and best use of the land on which the service station business was conducted and because it excluded any allowance for the value of any goodwill attaching to the business conducted on the property.

MR HUGHES:   We have maintained that position, but I am putting the emphasis of the argument on proportionality and upon the failure of the Full Court having - once it had, with respect, misdescribed the extent of the interest entitled to protection by the option, failing to address the important question of adapting Lord Dunedin’s propositions - which I think are set out at page 125 of the application book - to a stipulation requiring the transfer of property as a remedy for breach.  It is a question that occurred ‑ ‑ ‑

McHUGH J:   But look what happened in this case.  The evidence disclosed that your clients, notwithstanding its promise to sell BP products, were selling something like about 10 per cent of foreign products.  What is BP to do?  Just let it go on?  Why cannot it insist on taking back the service station, paying you the market value of the assets, apart from goodwill which is yours and which you can use?

MR HUGHES:   Well, that is a proposition that is based on a misconception as to the nature of the interest which BP was entitled to protect in case of breach by resort to the option.

HAYNE J:   That is of relevance if, but only if, what BP pays is less than the value of what it gets, that is, only if there is something other than a transformation of asset from one asset business into a money asset equal value.  Why is the interest to be protected relevant unless there is a disproportion between the two?

MR HUGHES:   We submit that there is and we have dealt with that in our summary of argument.

McHUGH J:   But, Mr Hughes, your argument would seem to be the same even if you were paid for the goodwill.  You seem to be saying that the option itself requiring or allowing repurchase is itself penal in character?

MR HUGHES:   Yes, indeed, for several reasons, one of which is that the terms of this option attract the operation of the presumption set out in the third proposition in Lord Dunedin’s speech in Dunlop.  This option is exercisable and the Full Court recognised the conceptual difficulties that do arise in such a case where this option was exercisable for a multitude of breaches, some serious as ours were, and others totally trivial and non‑essential.

McHUGH J:   When you are talking about the third of Lord Dunedin’s propositions, remind me, you are referring to the one where his Lordship spoke about where there is a presumption where there is a penalty when a single lump sum is payable by way of compensation?

MR HUGHES:   Yes, and our argument below and the argument we wish to put here is that that proposition needs to be adapted to a case where the propounded remedy is not payment of money, but transfer of property.

HAYNE J:   In exchange for money, and there is nothing penal about that if the property that is handed over is handed over in return for full value.

MR HUGHES:   Yes.  Well, we say here that it was not handed over for full value because the formula devised in the option for the ascertainment of a price excluded highest and best use.  It did so by limiting the price to the price referable to an operational service station, no mention of highest and best use.

McHUGH J:   The agreement is the product of some ingenuity on the part of those who do it.  It is a very well‑drawn agreement from the point of view of BP.  But they were not buying back the business.  They were just buying back the assets and you had an obligation to have them operational.

MR HUGHES:   And keep them operational until the contract arising from the option was completed.  The fact that ‑ ‑ ‑

McHUGH J:   Does your argument come to this?  What you say is that an option for repurchase for breach of contract is penal in character if the breach may be trivial and bear no proportion to the requirement of repurchase?

MR HUGHES:   That is part of what we say.  What we do say is that the Full Court, with respect to them, because they misconceived the nature of the interest entitled to protection, namely, interest arising under a five year tie failed, were diverted from considering the adaptation of Lord Dunedin’s principles, namely, the first and the third.

McHUGH J:   Well, let that be accepted, but what is your answer to Justice Hayne’s point that if you get the value of what you transfer back, it cannot be penal?

MR HUGHES:   It can be penal if the value is not full value.  Even if it is full value, there is still a question whether the remedy prescribed by the contract is manifestly disproportionate to the breach or breaches embraced within the ambit of the option clause.

McHUGH J:   But the disproportion can only sound in money terms, can it not and that is the point Justice Hayne put to you.  There is no disproportion if you are getting market value.  You might not like having to transfer it back.

HAYNE J:   But having your assets compulsorily transformed from business into money, if the transformation is at full value, it may be awkward, unpleasant or all sorts of things, where is the penal element?

MR HUGHES:   It is penal for several reasons.  One, the remedy is out of proportion to the interest requiring protection, manifestly out of proportion.  There could have been a lease.  The ingenuity of the draftsmen of these interlocking contracts could well have been employed in providing for a lease back.

McHUGH J:   Well, the ingenuity of the draftsmen seems to pale into insignificance compared to the ingenuity of your argument, Mr Hughes.  You are taking us into new areas altogether.  Perhaps that is the attraction of this case.

MR HUGHES:   Well, it may be.  Your Honour was in a case 30 years ago which is cited in our ‑ ‑ ‑

McHUGH J:   Stefanetto?

MR HUGHES:   Stefanetto, yes.

McHUGH J:   I must admit that was new ground.

MR HUGHES:   And this is new ground because not even in Stefanetto did the three Justices who decided that case deal with the adaptation of Lord Dunedin’s principles to this kind of stipulation.  That is the new point.

HAYNE J:   Well, where do we find in the grounds propounded at 178 of the draft notes of appeal, where do we find the other point that I have been pressing you about, about lack of value?

MR HUGHES:   The other point is wrapped up in the grounds that assert that the Full Court was wrong in not finding that this was a penalty.  That is my answer.  Now, there is one other matter.  I notice time is running on.  We would ask your Honours to look at O’Dea v Allstates per Sir William Deane.  It is in our book of authorities.  There Sir William Deane in his reasons emphasised that where you are dealing with a money sum described as damages - this is the bottom of page 399 - the fact that the sum is unreasonable militates against the proposition that it is a genuine “pre‑estimate”.  Now, one ought to apply that idea, in our respectful submission, analogically to the option provision here.

Now, your Honours, there is one other point that I should mention.  Perhaps I should mention it very briefly.  The liquidated damages are not payable if the option is first exercised, but there is nothing in this contract to deny BP entitlement to get the liquidated damages first and then exercise the option, and that surely is a penal characteristic with a specific provision which says if you exercise the option, you cannot get liquidated damages, but the reverse is not provided for.

Now, very quickly in the time available, I would simply like to say that the application is opposed on the basis of four propositions:  first, because the option is restitutionary in nature, the question of proportionality does not arise and we say simply, the multiplicity of trivial breaches that

will trigger the exercise of the option negates any analysis that the remedy is restitutionary.  The second proposition, the respondent was entitled to and did terminate the POSA for breach by the applicant.  The option is non‑punitive because it may be exercised for reasons unrelated to breach.  We say the respondent was entitled to and did terminate the POSA for breach.  This means that the option does not escape the scrutiny of the law relating to penalties.  The third proposition they rely on is that the function of the option is to affect the respondent’s commercial objective in maintaining the sites as BP sites.  I have dealt with that.  That may have been a unilateral commercial objective.  It was not the mutual contractual intent as appears from the clause to which I referred your Honours earlier on.

McHUGH J:   Well, Mr Hughes, the major problem I have is that you really seem to be taking this case into new territory and you seem to be saying that Esanda v Plessnig is not an exhaustive statement.  I mean, this Court explained what Lord Dunedin’s third proposition in Dunlop was in Plessnig and said that you have to compare the measure of the loss with the breach.  But if you get value, how can it be a penalty?

MR HUGHES:   Because it is not the value we want, that we are entitled - we are entitled to - I see my time is up.

McHUGH J:   Well, that is all right. 

MR HUGHES:   It is questionable whether we do get value, but even if we do, we should not be subjected to a requirement to transfer the property in a situation where that requirement covers a multitude of breaches, some entirely trivial.  This was a problem that the Full Court flagged but never dealt with.  I see my time is up.

McHUGH J:   Thank you, Mr Hughes.  Yes, Mr Walton.

MR WALTON:   May it please the Court, the principles which the applicants espouse in this application are neither new nor controversial.  The decisions below ‑ ‑ ‑

McHUGH J:   Well, the extension of them seems to be.

MR WALTON:   Well, we say that the issue of proportionality simply never arises.  We do not disagree that proportionality is a relevant concept in this field of law, but that is not the purpose of the option.

HAYNE J:   You say proportionality never arises?

MR WALTON:   Yes.

HAYNE J:   Does that not assume that the option is exercisable at full value?

MR WALTON:   Well, we say the option is exercisable at full value.

HAYNE J:   What is the point of excluding goodwill save to encourage performance of the contract according to its terms?

MR WALTON:   Your Honour, goodwill was excluded from the sale because it was not part of the sale.  The personal goodwill attaching to the applicants would travel with the applicants.  They could set up business across the road ‑ ‑ ‑

HAYNE J:   That is so, but this is not limited to personal goodwill that is excluded, is it?  Goodwill generally is excluded.

MR WALTON:   Well, the finding of the trial judge was, with respect, that there was no goodwill and that there could never be an expectation that there would be goodwill at the time of making the contract.  But our point is not essentially that the option was for full value, but that the option had a totally different commercial legitimate purpose other than as punishment for a breach.  The commercial purpose, as the trial judge found, of the burdened - the original conveyance to the applicants was burdened by two things, by the POSA and by the option.  The commercial purpose of that burden conveyance was to protect the interest of the respondent in:

maintaining a source of supply of its petroleum products for at least five years.

That was a finding of the trial judge on page 33 of the application book, line 39.

That interest was protected in a way so as to ensure that if the respondent elected at any time during the currency of the option to retain the relevant sites as BP sites it could do so.  For example, if the respondent chose to retain the site as a BP site after the expiry of the five year term of the POSA it could, provided it did so within the next three months.

If I could take your Honours just briefly to the option agreement, which is in the applicants’ bundle at tab 4, in clause 1.2 the option provides:

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 . . . or becomes unenforceable or of no force or effect from whatever cause -

That provision, although it may conceivably operate in circumstances where there has been a breach of the POSA, is not preconditioned on a breach occurring.  As such it cannot be a punishment for breach.  The other provisions of clause 1.2 also address not questions of breach ‑ ‑ ‑

HEYDON J:   It includes terminated for breach though?

MR WALTON:   It could be terminated for breach, yes, but that is not the - a termination is the occasion for the exercise of the option.  The exercise of the option is not consequent upon a breach, and that is made clear by the remaining provisions of clause 1.2, all of which address the issue of protection of BP’s interest in the sites.  They do not address questions of breach.

HAYNE J:   Yes, I understand there is a separate agreement and I understand the option is exercisable only on termination.  Can we focus on termination on account of breach?

MR WALTON:   Well, we submit that is the wrong categorisation of the option, your Honour.  The fact is that this agreement may be exercised after the POSA has run its course.  No question of breach.  Or it may be exercised for a number of reasons unrelated to breach.  If, for example, BP chose to renew the POSA, the option to reacquire the site would be surrendered.  If it did not, it could protect its interest in ensuring the site as a source of supply provided it exercised the option within three months of the lapse of the POSA or it may decide, for whatever reason, that it does not want the site and it could simply choose not to exercise the option.  The importance is that it is not an option exercisable for breach.  It is an option exercisable on termination of the POSA for a variety of reasons set out in clause 1.2.

HEYDON J:   Is that a point that any of the courts below note?

MR WALTON:   This point was not raised in front of the primary judge, so he did not address it. 

HAYNE J:   In the events that have happened, the termination with which we are concerned is termination for breach, correct?

MR WALTON:   Yes. 

HAYNE J:   In the events that have happened, the option that is exercised is for the value determined in accordance with 2.5?

MR WALTON:   That is right.

HAYNE J:   What is the point of excluding from that valuation any allowance for any goodwill attaching to any business conducted at the property?  That is what the agreement provides.  What is the justification for its application in the events that have happened?

MR WALTON:   The sale to the respondent reserves to the applicants any personal goodwill and BP does not therefore pay for goodwill.  What is sometimes called locational goodwill ‑ ‑ ‑

McHUGH J:   Site goodwill.

MR WALTON:   Site goodwill - attaches to the property and is included in the valuation.

HAYNE J:   Where?  Why is not excluded by the first three lines at page 1576?

MR WALTON:   Because this Court in Murry’s Case, your Honour, which is referred to in the courts below, decided that any goodwill attaching to the site - and this was accepted by the applicants’ experts at the trial - would be covered by this formula.  The only thing that is excluded ‑ ‑ ‑

McHUGH J:   That is because in Lazarus’ Case Justice Isaacs and Justice Rich said that if goodwill is wholly or partly attributable to the land it pro tanto enhances the value of land.

MR WALTON:   Yes, and that case was referred to in Murry’s Case with apparent approval.  So the only thing that was excluded by this formula is the personal goodwill attaching to the applicants and that personal goodwill was not paid for because it went with the applicants.

HEYDON J:   But where?  In well-established suburbs of Sydney you cannot operate a service station over the road and if you move a few miles you do not have any personal goodwill.  Customers do not follow the person or runners of petrol stations around.  They go for their petrol on the routes that they travel.

MR WALTON:   I do not understand what your Honour means by not being able to operate across the road.  They could have acquired a site ‑ ‑ ‑

HEYDON J:   Well, because councils and planning authorities will not freely grant permission for new petrol stations to be set up.

MR WALTON:   No.  But they could have acquired a site that was already designed as a service station, in which case their personal goodwill would have been worth something.

HEYDON J:   Is there a petrol station opposite each of these three petrol stations?

MR WALTON:   I do not know that, your Honour.

HEYDON J:   In that case they could not.

MR WALTON:   But in any event, BP did not, when it acquired these sites, pay for any personal goodwill and it was not selling any personal goodwill or is not acquiring any personal goodwill.

HEYDON J:   But there is a difference between the money that these three people had under these contracts and the money they could get if they sold on the open market.  That difference is personal goodwill which would be protected by covenants no doubt preventing them doing what you say they might be able to do.  Is not that disproportion in value, or that difference in value, disproportionate to the amount of damages payable for a trivial breach?

MR WALTON:   Well, we cavil with the last part of your Honour’s description because we say that this is not an option exercisable for trivial breach.  It is an option exercisable for termination of the POSA for legitimate commercial reasons.  BP, when it sold these sites, sold them encumbered by this option and by the POSA with the full intent that they would have the option to retain the sites as BP service stations beyond the five year term of the POSA.  That is why the option was exercisable after five years and three months so that when the POSA ran its course, BP would have the option to consider its position, whether it would want to renew the POSA or not and, if it did not renew the POSA, then it could reacquire the sites.  It was nothing to do with breach. 

It could conceivably have occurred that there would not be a single breach of the agreement for its entire term and yet the options would still be exercisable.  The options are not penal in that sense.  They are not punishment for breach, consistently with what this Court said in Legione v Hateley.  The courts below relied on two decisions of the New South Wales Court of Appeal in PC Developments Pty Ltd v Revell and Wollondilly Shire Council v Picton Power Lines Pty Ltd.

McHUGH J:   In the Federal Court your opponent said they wrongly decided and they now seem to say that they are distinguishable?

MR WALTON:   Yes.  They do not challenge the principles enunciated in those cases.  We rely on those cases but we also submit that conventional applications of the principles in Legione v Hateley would deliver the same results.  Justice Beaumont pointed out in his judgment, at page 102 - it was found that the POSA and the option were at the heart of the bargain that was struck by the parties as the price of the sale and, as Justice Beaumont pointed out:

It may readily be inferred that, had the options not been a part of that consideration –

for the sale, BP –

would have sold to each of the appellants at a different [and presumably] higher price. 

That is at line 43, page 102. 

HAYNE J:   While in the judgment of Justice Beaumont, is there a tension between points (b) and (c) on page 101?

MR WALTON:   We submit not.

HAYNE J:   How can there be windfall when it is restitutionary?

MR WALTON:   We submit there was in fact no windfall.  A question of windfall arises at the time of exercise of the option.  A question of penalty arises at the time of entering into the contract and the question of windfall is dealt with by equity in considering - in the discretionary relief that equity grants against forfeiture.  That relief was claimed before Justice Hely and it was refused on a number of grounds, firstly, on the ground that there was no windfall; and, secondly, on discretionary grounds.  But it is a timing situation, your Honour.  A windfall can only arise at the time of exercise of the option and the question of penalty arises, as I said, at the time of entering into the contract.  So we would submit there is no tension between paragraphs (b) and (c) on page 101.

McHUGH J:   Well, his Honour seems to be making a declaratory statement that the fact that it may produce an apparent windfall is not determined.  Then he goes on in paragraph (d) to say:

In any event, there is no prospect of a windfall ‑ ‑ ‑

MR WALTON:   Yes.  But his Honour goes on to make a point that the rule against penalty is one of law…..relief against forfeiture is not pressed before us.  So his Honour is making the point that I just put.  Our submission, your Honours, is that the termination of the POSA was clearly an occasion for the exercise of the option by BP.  It was one of the events which might warrant its exercise, but the option was not in the nature of a punishment for non-observance of the terms of the POSA.  So the question of trivial breach and non-trivial breach simply does not arise in this case.

The terms of the option did not invite any consideration of whether there was a breach of the POSA.  The question was simply irrelevant.  As the finding of the primary judge made clear, the commercial purpose had nothing to do with penalising the applicants for breach of the POSA, but everything to do with securing the site for the sale of BP’s products beyond the life of the POSA.  We submit the issue of proportionality advanced by the applicants is not in principle controversial, but it is the respondent’s contention that that issue simply does not arise on the facts of this case and that if one is forced to consider the sale price, the applicants get full value for what they are giving up.  They get a full market value excluding personal goodwill which they keep.  Those are our submissions, your Honours.

McHUGH J:   Thank you.  Yes, Mr Hughes.

MR HUGHES:   I can be very brief.

McHUGH J:   You will have to be, Mr Hughes, you do not have long.

MR HUGHES:   I know.  My learned friend said personal goodwill was not included in the sale to the applicants.  That is wrong.  The documents, and this formed a large part of the argument in the court below, in the Full Court, provide that the applicants were buying the site and an ongoing business, and that business was a business that had been conducted by BP at the relevant sites, in one case being conducted by BP through, I think it was Ringrow, one of the applicants. as a commission agent.  So to say that the sale of an ongoing business does not include personal goodwill is, to say the least of it, a controversial statement.

Now, my learned friend has said that one looks at the overall commercial purpose.  This ignores what was said in Plessnig, and I have referred to it.  The fact that the option is exercisable on termination, not specifically by referable to breach, does not mean that the law relating to penalties is not relevant.  The question of trivial breach in this case is relevant and it is a question that the Full Court altogether failed to attend to beyond indicating that there was a difficulty perhaps, but never grappling

with it.  The termination for trivial breach is most relevant, and my learned friend has not grappled with this point. 

The point is that in considering whether a stipulation is penal in nature, it is necessary to look as at the time when the contract is made at the full range of the prospective operation of the provision under attack so that if in its prospective operation you find that the clause attacked as penal is referable, exercisable in the case of a trivial breach, and there is no working severability clause, that brings the clause down.

We put this in the Full Court and it has simply been ignored.  Those are the orange lights.  I think I should stop.

McHUGH J:   Thank you, Mr Hughes.  Yes, there will be a grant of special leave in this case.  Mr Hughes, you might give some attention to the notice of appeal in this case having regard to what we have said.

MR HUGHES:   Yes, I shall.  Maybe the grounds are stated too generally and too shortly.  We will certainly do that, your Honours.

McHUGH J:   Yes.  One day will dispose of this matter?

HAYNE J:   A statement of prediction rather than question, I suspect, Mr Hughes, do you not?

MR HUGHES:   Yes.  Well, if your Honours say Monday, Monday it will be.

McHUGH J:   No, no, one hearing day.

HAYNE J:   One day.

MR HUGHES:   One hearing day.  I am sorry, I thought your Honour wanted the notice of appeal amended by Monday.

McHUGH J:   No, no.  This should not take ‑ ‑ ‑

MR HUGHES:   Yes, one day.  It may drift into a second.

McHUGH J:   Not with Chief Justice Gleeson presiding.  Are you happy with that, Mr Walton?

MR WALTON:   Yes, your Honour. 

MR HUGHES:   We can propound full written arguments?

McHUGH J:   Yes.

MR HUGHES:   Yes.

McHUGH J:   Yes, thank you.  The Court will now adjourn to reconstitute.

AT 10.16 AM THE MATTERS WERE CONCLUDED