Salloway Pty Ltd v Barlow

[2019] NSWSC 1234

Supreme Court

New South Wales

Medium Neutral Citation:

Salloway Pty Ltd v Barlow [2019] NSWSC 1234

Hearing dates:

9 September 2019

Date of orders:

19 September 2019

Decision date:

19 September 2019

Jurisdiction:

Equity

Before:

Darke J

Decision:

Declaration made that mortgage loan from the defendant to the first plaintiff has been forgiven. Orders made for specific performance of defendant’s obligation to provide a discharge of mortgage.

Catchwords:

LAND LAW – mortgages – construction – time stipulations – where first plaintiff granted to the defendant a registered mortgage in respect of a property in North Avoca – mortgage granted pursuant to special condition under a contract for sale of property in Central Mangrove entered into between the second plaintiff as purchaser and defendant as vendor – where Central Mangrove property the subject of a Clean-Up Notice issued by the Environmental Protection Agency – where mortgage secures obligation to repay $250,000 loan made by the defendant in the nature of vendor finance – where clause in mortgage requires the defendant to forgive the loan if notice stating that the Clean-Up Notice has been complied with is not received by mortgagor within 12 months of the date of the mortgage – where notice not received by mortgagor within 12 months – whether the 12 month time period is essential – time period held to be essential – the $250,000 loan held to be forgiven

 

EQUITY – equitable remedies – relief against penalties – mortgage given in connection with a contract for the sale of land – whether clause in mortgage requiring the defendant to forgive a $250,000 loan in the event that a notice is not received within 12 months of the date of the mortgage attracts the penalty doctrine – whether clause requiring the forgiveness of the loan out of all proportion to the legitimate commercial interests of the parties to the transaction – clause part of arrangements made for the setting of the consideration to be paid for the transfer of the land – clause not characterised as penal

  EQUITY – equitable remedies – relief against forfeiture – whether clause in mortgage requiring the defendant to forgive a $250,000 loan in the event that a notice is not received within 12 months of the date of the mortgage is intended to secure the defendant’s obligations to procure the notice – clause operates in its terms without any exercise by mortgagor of a contractual right – relief against forfeiture refused in circumstances where the clause was part of a freely made agreement the terms of which were negotiated with the assistance of solicitors

Legislation Cited:

Environmental Planning and Assessment Act 1979 (NSW), s 149
Protection of the Environment Operations Act 1997 (NSW), s 91
Real Property Act 1900 (NSW), s 52

Cases Cited:

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30
Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99
Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12
Elderslie Property Investments No 2 Pty Ltd v Dunn [2007] QSC 372
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
GR Mailman & Associates v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80
Hampton v BHP Billiton Minerals Pty Ltd [No 2] [2012] WASC 285
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50
Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71
Shiloh Spinners Ltd v Harding [1973] AC 691
United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904

Texts Cited:

J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

Salloway Pty Ltd (First Plaintiff)
CMQ Nominees Pty Ltd (Second Plaintiff)
Heather June Barlow (Defendant)

Representation:

Counsel:
Mr J C Kelly SC with Mr J Anderson (Plaintiffs)
Ms S K Hill (Defendant)

  Solicitors:
Hannams Solicitors (Plaintiffs)
CBD Law (Defendant)

File Number(s):

2018/255526

Publication restriction:

None

Judgment

Introduction

1. These proceedings arise out of a contract for the sale of land entered into between the second plaintiff (CMQ Nominees Pty Ltd) and the defendant (Heather Barlow) in respect of a property in Central Mangrove, and an associated mortgage granted by the first plaintiff (Salloway Pty Ltd) in favour of the defendant in respect of a property in North Avoca.

2. The central question is whether the first plaintiff is entitled to receive a discharge of the mortgage or whether the defendant is entitled to enforce the mortgage to require the first plaintiff to repay the principal sum of $250,000, together with interest.

3. Under the contract for sale, which was entered into on 5 November 2013, the second plaintiff agreed to purchase the Central Mangrove property from the defendant for a price of $1,550,000. By Special Condition 53 of the contract, the defendant agreed that on completion she would provide an interest free loan of $250,000 to the second plaintiff, such loan to be secured by a mortgage over the property that would include certain terms.

4. The contract was completed on 15 November 2013. It appears from the Settlement Sheet that the $250,000 loan the subject of Special Condition 53 was applied as an allowance by the vendor against the purchase price. However, instead of the contemplated mortgage over the property, the loan was secured by the mortgage, dated 15 November 2013, given by the first plaintiff to the defendant over the North Avoca property. Also on 15 November 2013, the second plaintiff and the defendant entered into a Deed which, inter alia, provided that it was agreed that the North Avoca mortgage was accepted as satisfying the requirements of Special Condition 53, and was to be construed and read in conjunction with the contract for sale as representing the agreement between the parties to that contract. It should be noted that the plaintiffs are related companies.

Background

5. Before turning to the detail of the terms of the various agreements, it is relevant to note that the Central Mangrove property (which is more than 19 hectares in area and contains a quarry) was at the time of the sale contaminated with approximately 40,000 tonnes of various waste materials. This fact was noted in the Planning Certificate (issued pursuant to s 149 of the Environmental Planning and Assessment Act 1979 (NSW)) attached to the contract for sale, as was the fact that the property was subject to a Clean-Up Notice which had been issued by the Environment Protection Agency (“EPA”) pursuant to s 91 of the Protection of the Environment Operations Act 1997 (NSW).

6. The Clean-Up Notice, which had been issued to the defendant on 21 May 2012, required the undertaking of groundwater sampling and analysis and the provision of various reports over a period extending up to 30 April 2014.

7. The Planning Certificate included (amongst the information issued under s 149(5) of the Environmental Planning and Assessment Act) the following:

The property is contaminated with approximately 40,000 tonnes of solid putrescible and non putrescible waste including glass fines, plastic cups, building and demolition waste. The EPA (formerly the Department of Environment, Climate Change and Water) is currently investigating the most environmentally prudent method of dealing with the waste on the site. At the present time the property is the subject of a Clean-up notice which requires sampling, monitoring and reporting on groundwater surrounding the site. All works are to be completed and reports required by the Clean-up notice are to be served on the EPA by 30 April 2014. Following that time EPA will review the results of the sampling and expert assessment of results, along with any recommended actions in the report, before making a final decision on the most appropriate action with regard to the waste emplaced on-site.

8. In August 2013, the defendant engaged an agent to seek expressions of interest from potential purchasers of the Central Mangrove property. The evidence given by the agent, Mr Robert Willcox, indicates that the presence of the contaminating materials was a matter of significance to at least some potential purchasers. On 24 September 2013, Mr Willcox sent a letter to the defendant which included the following:

Please find attached a summary of contacts from our recent marketing programme.

From that list, we have 5 parties that have expressed interest (shown in yellow) and are keen to further explore the purchase.

The biggest obstacle to the parties committing to a purchase is getting a clearance from the EPA of the illegally dumped fill. This is unlikely until early 2014.

…

It seems to me that any sale of the property will be put on hold until early next year when the EPA give a clearance certificate.

9. Mr Willcox gave evidence that one potential purchaser (Mr Clark) told him that he would be prepared to either pay $1.1 million and take the property “as is” with settlement in 6 – 8 weeks, or else pay $1.5 million “subject to an EPA clearance by 30 September 2014”. Mr Willcox also gave evidence of discussions in October 2013 with Mr Angus Reid (who is a director of the plaintiff companies) in which Mr Reid said that he would be prepared to pay $1.3 million “and an extra $250,000 once the EPA notice is cleared”. Mr Willcox gave evidence that he told Mr Reid that he would have to get the solicitors to discuss how the additional $250,000 “will work out”.

Salient facts and circumstances

10. The “additional $250,000” became the subject of Special Condition 53 of the contract for sale. Special Condition 53 provides:

On completion the Vendor will provide to the Purchaser an interest free loan in the amount of $250,000.00. The loan shall be secured by way of a Mortgage over the property. The terms of the Mortgage shall include the following:

Attached to this Mortgage/Agreement is Gosford Planning Certificate is Gosford City Council Planning Certificate [sic] dated 6 August 2013.

Included in the Planning Certificate at Page 11 of 12 is a notation that “the property is contaminated with approximately 40,000 of solid putrescibles and non prutrescible [sic] waste including glass fines, plastic cups, building and demolition waste.” The notation advised that “Following that time EPA will review the results of the sampling and expert assessment of results, along with any recommended actions in the report, before making a final decision on the most appropriate action with regard to the waste emplaced on-site”.

The Mortgagee has to date carried out sampling monitoring and reporting on ground water surrounding the alleged contaminated site.

The Mortgagee agrees to continue to carry out such sampling, monitoring and reporting on the site following completion. To enable that to occur the Mortgagor agrees to allow the Mortgagee, her Consultants or Contractors access to the property at reasonable times and on reasonable notice and to allow those persons to carry out tests or undertake such works as are reasonably necessary.

The Mortgagee has been advised that of the options available to the EPA in making its final decision on the most appropriate action with regard to the waste emplaced on site is to require the waste to be capped and left in situ.

In the event that the final decision of the EPA (or its successors or assigns) is to the effect that the waste on site may be capped and left in situ and that the EPA has concluded its investigation and advised in writing that the requirements on the Clean up Notice have been satisfied (the Notice) then, upon receiving or being provided with notice to that effect, the Purchaser shall pay to the Vendor the sum of $250,000.00 within twenty one days.

In the event that payment of the sum of $250,000.00 is not made within twenty one days from the Mortgagor receiving or being provided with the Notice referred to in subclause vi) above, the Mortgagor shall pay to the Mortgagee interest on the sum of $250,000.00 or so much of that sum as remains outstanding at the post judgment interest rate on Supreme Court Judgments presently provided for under Section 101 of the Civil Procedure Act.

viii)   In the event that the Notice referred to in sub paragraph vi) hereof is not received within twelve months of the date of this Mortgage then the Mortgagee forgives the loan to the Mortgagor and shall provide a Discharge of Mortgage to the Mortgagor upon the anniversary date of this Mortgage.

11. As noted earlier, the parties departed from the terms of Special Condition 53 and agreed instead to a mortgage over the first plaintiff’s property in North Avoca. The mortgage between the first plaintiff as Mortgagor and the defendant as Mortgagee was entered into on 15 November 2013. It relevantly provides:

For the consideration aforesaid the Mortgagor hereby:

(a)   acknowledges receipt of the initial principal sum of two hundred and fifty thousand dollars ($250,000.00);

…

(c)   covenants with the Mortgagee as follows:

Firstly – the Mortgagor will pay to the Mortgagee the principal sum or so much thereof as shall remain unpaid on that date (“the date”) being twenty-one (21) days after the date of receipt by the Mortgagor of written notification (“the EPA satisfaction notice”) from EPA that the requirements of the Clean Up Notice (“the Notice”) referred to in Gosford City Council Planning Certificate No. 124505 dated 6th August 2013 (“the certificate”) (a copy of which is annexed marked “B”) which affects the [Central Mangrove property] have been satisfied.

Secondly – the Mortgagee shall at the cost of the Mortgagee do all acts and things and take all steps required by EPA to ensure that the EPA satisfaction notice is issued by EPA. In the event that it is determined by EPA that the requirements of the notice are satisfied and the EPA satisfaction notice is issued upon the basis that the contamination of the property may be capped and left in situ then the Mortgagor and the Mortgagee shall accept this determination by EPA.

…

Sixthly – in the event that the EPA satisfaction notice set out in the covenant Firstly referred to herein is not received by the Mortgagor within twelve (12) months of the date of this Mortgage then the Mortgagee forgives the loan to the Mortgagor and the Mortgagee shall provide a discharge of this Mortgage to the Mortgagor upon the anniversary date of this Mortgage.

Seventhly – the Mortgagor and the Mortgagee agree that this Mortgagee satisfies the mortgage requirements agreed to by the Mortgagor as Purchaser and the Mortgagee as Vendor as provided by special condition 53 under the Contract for Sale of Land dated 5th November, 2013 of the [Central Mangrove property].

12. The Deed between the second plaintiff as Purchaser and the defendant as Vendor, also entered into on 15 November 2013, relevantly provides:

2.   The Vendor shall at the cost of the Vendor do all acts and things and take all steps required by EPA to ensure that the requirements of the notice are satisfied and a written notice issued by the EPA to that effect by the anniversary date of the mortgage.

3.   For the purposes of clause 2 hereof the Purchaser agrees to provide access to the property by the Vendor, the Vendor’s consultants and contractors at such reasonable times and on reasonable notice to enable those persons to carry out such sampling, monitoring and reporting on ground water surrounding alleged contamination of the property by putrescible and non putrescible waste so that the Vendor may report the results to EPA to enable the requirements of the notice to be satisfied and the EPA to issue a written notice to this effect. In the event that it is determined by EPA that the requirements of the notice are satisfied and a written notice to this effect is issued by EPA upon the basis that the contamination of the property may be capped and left in situ then the Vendor and the Purchaser shall accept this determination by EPA and the terms of the mortgage shall be satisfied.

4.   The Purchaser agrees with the Vendor that the Purchaser will not undertake any activity on that part of the property the subject of the EPA notice which will hinder or delay the Vendor in fulfilling her obligations to satisfy the requirements of EPA to enable the notice affecting the property to be removed.

…

6.   The parties agree that the mortgage annexed marked “B” is accepted by them in satisfaction of the requirements of special condition 53 of the contract and that it is to be construed and read in conjunction with the contract as representing the agreement between the parties to the contract.

13. Following completion of the sale and entry into the associated agreements on 15 November 2013, the defendant and her consultants undertook further steps aimed at satisfying the requirements of the EPA, including those of the Clean-Up Notice. However, by early September 2014 it had become apparent that it was unlikely that the EPA would make a final decision concerning the Clean-Up Notice prior to the end of November 2014. The defendant’s solicitor sent a letter to the plaintiffs’ solicitor on 5 September 2014 in which it was stated that there may be a need to “approach you concerning an extension of the time within which our client has to comply with Special Condition 53”. No such approach was made.

14. It is common ground that no EPA satisfaction notice was received by the first plaintiff within 12 months of the date of the mortgage. On 17 November 2014, the solicitor for the plaintiffs sent a letter to the solicitor for the defendant in the following terms:

We refer to special condition 53 of the contract between the parties dated the 5th November, 2013 and the mortgage between the parties dated the 15th November, 2013. We note that the time period allowed to your client under special condition 53 to comply with the EPA clean up notice has now expired and no satisfaction notice has been received from it. Would you therefore prepare a discharge of mortgage over [the North Avoca property] as soon as possible and advise us when you are in a position to hand over the discharge with the title.

15. A further letter calling for a discharge of the mortgage was sent by the plaintiffs’ solicitor to the defendant’s solicitor on 25 November 2014.

16. On 1 December 2014, the defendant’s solicitor sent a letter to the plaintiffs’ solicitor in the following terms:

We note that we wrote to you on the 5 September 2014 in relation to a likely delay in a final decision being made by the EPA.

We now enclose herewith letter from the EPA dated 28 November 2014 indicating the requirements of the Clean Up Notice have been met.

We will arrange the Discharge of Mortgage in return for the payment of the sum of $250,000.00.

17. The attached letter from the EPA (dated 28 November 2014) included the following:

The Environment Protection Authority (EPA) understands you act for Mrs Heather Barlow and in your email of 23 September 2014 you requested communication to your office in relation to the [Central Mangrove property].

Reference is made to a letter of 29 April 2014 from Conacher Consulting to the EPA on behalf of your client, which attached the final Groundwater Investigation Report (prepared by DLA Environmental) required under the provisions of Clean-up Notice 1501873. Reference is also made to the report titled “Mangrove Mountain Quarry – Additional Comments on Groundwater Quality and Characteristics” dated October 2014.

Clean-up Notice 1501873 required groundwater sampling at selected bores upgradient and downgradient of Central Mangrove Quarry in June 2012, January 2013, June 2013 and January 2014. The Notice was issued as certain wastes had been emplaced at the Quarry without authority and investigations were necessary to determine what, if any, action should be taken in relation to that waste. The Clean-up Notice required a final report on all monitoring carried out, which needed to include investigations and recommended actions to address any groundwater contamination identified by the monitoring.

The EPA has reviewed all relevant reports relating to this matter and is satisfied the requirements of the clean-up notice have now been met.

…

The EPA has assessed this matter and based on the information reviewed to date considers no further action is necessary at this stage with regard to the waste with the exception that the local council will be requested to place a notation of factual information in relation to the waste on planning certificates pertaining to this site, issued under section 149(5) of the Environmental Planning and Assessment Act 1979. The EPA will request Gosford City Council list this letter and all reports that are available for the site, so that persons reviewing the s149(5) certificate can be aware of the scope of work and limitations of investigations and so that they can undertake their own due diligence investigations as they consider appropriate.

18. Later on 1 December 2014, the plaintiffs’ solicitor sent a letter in response to the defendant’s solicitor in the following terms:

We refer to your letter dated the 1st December, 2014. In reply thereto:

No extension of time was sought by your client to obtain clearance from the EPA nor did our client consent to any extension of time.

Your client has not complied with the terms of the mortgage in that it has not provided a final notice from the EPA prior to the 16th November, 2014.

The letter from the EPA dated 28th November, 2014 which you enclose in your letter is not a final notice and indeed contemplates placing a notation on zoning certificates pertaining to this site together with the letter and reports relating to the site and states further that no further action is warranted at this stage but investigations were limited so that persons may undertake their own due diligence investigations as they consider appropriate.

In our opinion, the enclosed letter from the EPA falls way short of satisfying the terms of the contract between the parties and the mortgage between the parties.

Kindly provide a discharge of mortgage without further notice.

19. No discharge of mortgage has since been provided by the defendant. Neither has any payment been made to the defendant. The plaintiffs commenced these proceedings by Summons filed on 20 August 2018 following the service by the defendant of a notice under s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of the mortgage. The defendant filed a Cross-Summons on 30 October 2018.

Submissions

20. The plaintiffs submitted that upon the true construction of Special Condition 53, and clauses Firstly and Sixthly of the mortgage, the failure of the defendant to provide the requisite notice in respect of the EPA within 12 months of the date of the mortgage meant that the loan to the first plaintiff was thereupon forgiven and the defendant was bound to provide a discharge of the mortgage.

21. It was submitted that the forgiveness of the loan takes effect immediately once the time stipulated for the receipt of the requisite notice expires. It was put that in this regard time was essential. The anniversary of the date of the mortgage was said to be a critical date, and there was no room for a construction that would allow the defendant to provide the requisite notice on a later date and seek repayment of the loan. The plaintiffs submitted that in any event the notice provided on 1 December 2014 did not satisfy Special Condition 53 or clauses Firstly and Sixthly due to qualifications found within its terms.

22. The defendant submitted that the time for the provision of the requisite notice was not essential. It was pointed out that the time period was not expressed to be essential and it was put that neither the subject matter nor surrounding circumstances of the contract suggested a contrary conclusion. The defendant submitted that the terms of the transaction that called for co-operation between the parties, in particular clauses 3 and 4 of the Deed, pointed to time not being of the essence. It was further submitted that the provisions of the mortgage as to time in relation to the EPA satisfaction notice are similar to the rent review clauses the subject of United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 which were construed as not containing essential stipulations as to time.

23. The defendant then submitted that the EPA letter dated 28 November 2014, which was provided to the first plaintiff on 1 December 2014, met the requirements for the EPA satisfaction notice set out in clause Firstly in the mortgage because it stated that the requirements of the Clean-Up Notice had been satisfied. Accordingly, it was submitted, the defendant became entitled to repayment of the principal sum of $250,000.

24. The defendant further submitted that insofar as clause Sixthly would have the effect that the loan was forgiven:

1. it was a provision that was unenforceable because it was in the nature of a penalty; or

2. relief should be given against the forfeiture of the defendant’s interests under the mortgage, which forfeiture would arise if clause Sixthly operated as contended by the plaintiffs.

25. In relation to the penalty argument, the defendant invoked the general statement of principle in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 at [10], and submitted that clause Sixthly was a collateral stipulation in the nature of a security for and in terrorem of the satisfaction of the primary stipulation contained in clause Secondly. The defendant did not suggest that her failure to provide the EPA satisfaction notice by 15 November 2014, or any other conduct on her part in relation to the EPA, amounted to a breach of contract. Indeed, the defendant referred to Andrews v Australia and New Zealand Banking Group Ltd (supra) and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 in support of the proposition that the penalty doctrine can operate where no breach of contract is involved. Reference was also made to Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 in support of the proposition that the penalty doctrine can apply in respect of stipulations that provide for other than monetary payments. The defendant submitted that in circumstances where the EPA satisfaction notice was given a mere 16 days after the anniversary of the mortgage “no loss or damage was incurred by the mortgagor and the $250,000 is both extravagant and unconscionable”.

26. In relation to relief against forfeiture, the defendant referred to Shiloh Spinners Ltd v Harding [1973] AC 691 at 723 where Lord Wilberforce reaffirmed the right of courts of equity:

…in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result.

27. The defendant submitted that unlike the doctrine of penalties, where attention is focused on the time the contract is made, the principles of relief against forfeiture direct attention to how the forfeiture occurred, the effects of the forfeiture and the propriety of allowing it to stand (see J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths) at [18–220]). The defendant submitted that she complied with her obligations in relation to seeking the EPA satisfaction notice and provided the notice only 16 days late (the delay not being due to her own fault) such that the first plaintiff ought not be permitted to rely on its strict legal rights under clause Sixthly to call for a discharge of the mortgage.

28. In response to the defendant’s arguments based on the doctrine of penalties and the principles of relief against forfeiture, the plaintiffs submitted that clause Sixthly of the mortgage was a freely negotiated provision that reflected the legitimate commercial purposes of the respective parties in relation to the price to be paid for the contaminated land. It was submitted that clause Sixthly should not be regarded as a collateral stipulation intended to operate in terrorem of satisfaction of the primary stipulation for the provision of the EPA satisfaction notice. The plaintiffs submitted that it was no purpose of clause Sixthly to punish the defendant, let alone that punishment was the sole or even predominant purpose of the provision. Rather, the evident intention was to reward the defendant with an additional payment of $250,000 upon the happening of the defined event (namely, the provision of the EPA satisfaction notice within 12 months of the date of the mortgage). It was further submitted that the amount of $250,000 was a reasonable reflection of the commercial risks involved in the transaction.

29. The plaintiffs submitted that there were no grounds for relief against forfeiture in circumstances where the transaction was an arm’s length transaction in which the parties, who were represented by solicitors, negotiated the terms on which a known risk would be allocated in terms of both time and money.

Determination

30. It should be stated at the outset that in circumstances where, as described above, the parties to the contract for sale departed from Special Condition 53 and agreed instead to a mortgage over the first plaintiff’s North Avoca property, it is necessary to focus upon the terms of the mortgage rather than those of Special Condition 53. I accept the submission made by the defendant to this effect.

31. The first issue to consider is whether, upon the true construction of the mortgage, in particular clauses Firstly and Sixthly, the fact that the first plaintiff did not receive an EPA satisfaction notice within 12 months of the date of the mortgage had the consequence that the loan to the first plaintiff was forgiven by the defendant. This question of construction is to be answered by the application of the well-established principles that apply to the construction of written commercial agreements (see Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]). In accordance with those principles, the meaning of the terms of the agreement is to be determined by what reasonable business persons would have understood the terms of the contract to mean. In making that determination it is necessary to consider the language employed by the parties as well as the surrounding circumstances known to them, and the commercial purposes or objects to be secured by the contract. Here, the relevant surrounding circumstances include the contract for sale that was entered into 10 days prior to the mortgage, and the Deed entered into on the same day as the mortgage.

32. Clause Sixthly must of course be read as part of the mortgage as a whole, including clause Firstly which contains the first plaintiff’s obligation to repay the principal sum. That obligation is expressed to arise 21 days after the date the first plaintiff receives the EPA satisfaction notice. Clause Firstly is silent as to any time within which that receipt is to occur. However, clause Sixthly (the opening words of which expressly refer to clause Firstly) does make provision in respect of the time within which the EPA satisfaction notice is to be received by the first plaintiff. Clause Sixthly goes on to specify that if the notice is not received within the stipulated time certain consequences follow. One such consequence is the forgiveness of the loan. It can thus be seen that clause Firstly operates subject to clause Sixthly where, as here, the EPA satisfaction notice is not received by the first plaintiff within the stipulated time.

33. In my opinion, the language of clause Sixthly, read in its context (including clause Firstly which defines the concept of the EPA satisfaction notice), plainly provides that if the EPA satisfaction notice is not received by the first plaintiff within 12 months of the date of the mortgage the loan to the first plaintiff is immediately forgiven. This meaning is supported by the use of the word “then”, and is reinforced by the concluding words of the clause which state that the defendant shall provide a discharge of mortgage “upon the anniversary date of this Mortgage”. The language unmistakably indicates that if the requisite notice is not received within the 12 month period the loan will be forgiven and the defendant becomes obliged to promptly provide a discharge of the mortgage. I do not think that anything in the surrounding circumstances (including the Deed, which calls for co-operation in respect of the taking of steps to satisfy the EPA), or the commercial purposes or objects of the transaction, indicates that a different meaning was intended.

34. In my view, reasonable business persons in the positions of the parties to the mortgage would have understood clause Sixthly to operate as described above. For what it is worth, I note that the defendant’s solicitor seemed to have that understanding when he wrote the letter sent on 5 September 2014. I do not accept that clause Sixthly ought be regarded as similar in nature to the rent review clauses the subject of United Scientific Holdings Ltd v Burnley Borough Council (supra). Quite apart from the different language employed, the time provision in clause Sixthly serves a different purpose and arises in a context that is markedly different from that present in United Scientific Holdings Ltd v Burnley Borough Council (supra).

35. It follows from the above that the provision to the first plaintiff of an EPA satisfaction notice after the expiry of the 12 month period is too late to prevent the forgiveness of the loan. The forgiveness occurs as soon as the 12 month period expires without the first plaintiff receiving an EPA satisfaction notice.

36. Finally, I note that clause Sixthly does not oblige the defendant to provide an EPA satisfaction notice to the first plaintiff within the stipulated time. The time provision in clause Sixthly is concerned not with the time for performance of a contractual obligation, but rather with the time within which a contractually significant event may or may not occur. Nevertheless, the time limit can in a sense be regarded as “of the essence” (see GR Mailman & Associates v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 at 88E-F, and 100D-F). That this is so is certainly implicit in the language of clause Sixthly.

37. In light of my conclusion concerning the construction of clause Sixthly it is not strictly necessary to consider whether the notice provided to the first plaintiff on 1 December 2014 met the requirements for an EPA satisfaction notice, as set out in clause Firstly. Nevertheless, I will briefly explain why I think that the notice provided met those requirements.

38. Clause Firstly called for written notification from the EPA that the requirements of the Clean-Up Notice “have been satisfied”. (Arguably, Special Condition 53(vi) called for notice of a wider ambit, but as I have said, the relevant provisions are those of the mortgage.) The letter from the EPA dated 28 November 2014 states in terms that after having reviewed all relevant reports the EPA was satisfied that the requirements of the Clean-Up Notice “have now been met”.

39. It is true that the EPA letter went on to state that the EPA considered that no further action was necessary “at this stage” in relation to the waste on the land (other than a request that certain information be included in any Planning Certificate in respect of the land). The door was thus left open to the possibility of future regulatory actions in relation to the waste. However, that would be the case regardless of whether the requirements of the Clean-Up Notice had been satisfied. The fact remains that the EPA letter was written notification from the EPA that it was now satisfied that the requirements of the Clean-Up Notice had been met. In my view, that was all that clause Firstly required for an EPA satisfaction notice.

40. The next issue to consider is whether clause Sixthly is unenforceable as being in the nature of a penalty. In Andrews v Australia and New Zealand Banking Group Ltd (supra) the High Court said (at [10]):

In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessary) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessary stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.

41. The High Court further stated in that case (at [12]):

It should be noted that the primary stipulation may be the occurrence or non-occurrence of an event which need not be the payment of money. Further, the penalty imposed upon the first party upon failure of the primary stipulation need not be a requirement to pay to the second party a sum of money.

42. The High Court went on to hold that the scope of the doctrine of penalties was not limited to situations involving breaches of contract (see at [46]-[50]).

43. In the present case, the defendant submitted that clause Sixthly was a collateral stipulation in the nature of a security for and in terrorem of the satisfaction of the primary stipulation contained in clause Secondly. Clause Secondly obliged the defendant, at her own cost, to “do all acts and things and take all steps required by EPA to ensure that the EPA satisfaction notice is issued by EPA.” Given the definition of the EPA satisfaction notice found in clause Firstly, the obligation included doing what is required to satisfy the requirements of the Clean-Up Notice. (The defendant assumed a similar obligation to the second plaintiff under clause 2 of the Deed. In essence, that obligation was to do what was required to ensure that an EPA satisfaction notice was issued by the anniversary date of the mortgage.) The plaintiffs did not suggest that the defendant had failed to discharge her obligations under clause Secondly, and the defendant adduced evidence (which was not challenged) to show what was done to satisfy the requirements of the EPA.

44. Clause Secondly does not in my view oblige the defendant to actually procure the issue of an EPA satisfaction notice. Despite the use of the word “ensure”, I do not think that the defendant bound herself to achieve that result, which is ultimately not something within her power. The clause rather requires the taking of all steps (or at least, by implication, all reasonable steps) required towards the achievement of the result.

45. The essence of the defendant’s argument is that clause Sixthly, which operates to extinguish the defendant’s right to repayment of the loan if the EPA satisfaction notice is not received by the first plaintiff within 12 months, is intended to punish the defendant in the event that she fails to do what is required by clause Secondly. It is put that clause Sixthly hung over the defendant in terrorem as a negative incentive to perform her obligations under clause Secondly.

46. It may be accepted that if the defendant failed to discharge her obligations under clause Secondly, there would be an increased likelihood of clause Sixthly operating so that the loan would be forgiven. It can thus be seen that the presence of clause Sixthly provides an incentive to the defendant to discharge her obligations under clause Secondly. Viewed in this way, clause Sixthly might be regarded as a stipulation collateral to the primary stipulation in clause Secondly, such that the penalties doctrine is engaged (see Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd [2017] NSWCA 99 at [361]).

42. The question remains as to whether the asserted collateral stipulation should be characterised as penal. In Paciocco v Australia and New Zealand Banking Group Ltd (supra) Kiefel J (with whom French CJ agreed) stated at [29], in relation to stipulations that operate to require the payment of a sum of money, that the sum must be “extravagant and unconscionable” or “out of all proportion to the interests of the party which it is the purpose of the provision to protect” before it can be characterised as a penalty. At [34] Kiefel J stated that in this context words such as “extravagant” and “unconscionable” all describe “the plainly excessive nature of the stipulation in comparison with the interest sought to be protected by that stipulation”.

43. In Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [158] Gageler J stated:

To ask whether a stipulation serves merely to secure the enjoyment of a collateral object is to ask whether the conclusion objectively to be drawn from the totality of the circumstances is that the only purpose of the stipulation was to punish: to impose a detriment on a contracting party in the event that a principal contractual stipulation is not observed, in order to deter non-observance of that principal stipulation.

49. Gageler J continued (at [164]):

And as the facts in Clydebank and Dunlop again both sufficiently illustrate, the fact that the amount of a payment stipulated to be made on breach of contract is set at a level which provides a negative incentive – even a very strong negative incentive – to perform the contract is not enough to justify the conclusion that the stipulation served only to punish. The prospect of paying compensatory damages to be assessed by a court in the event of breach itself provides a negative incentive to perform a contract. The relevant indicator of punishment lies in the negative incentive to perform being so far out of proportion with the positive interest in performance that the negative incentive amounts to deterrence by threat of punishment.

50. In the same case, Keane J stated (at [257]):

Courts of equity regarded a collateral provision designed to provide an incentive to perform a principal obligation as objectionable on the ground that its enforcement was unnecessary to give the promisee the benefit of the substance of the transaction. Such a collateral provision might be described as operating “in terrorem”, because of its evident tendency to deter the promisor from non-performance.

51. It can thus be seen that attention needs to be given to the interest or interests sought to be protected or advanced by the impugned stipulation. This factor was important in the decision in the seminal case of Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79, in particular in the speech of Lord Atkinson at 91-3 (see also Andrews v Australia and New Zealand Banking Group Ltd (supra) at [75] and Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [28] and [270]).

52. It should be added that the question whether a stipulation ought be characterised as penal calls for an analysis focused upon the time when the contract was made (see Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd (supra) at 86-7; Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [62]). Further, it appears that the Court may receive evidence going to the purposes sought to be achieved by the parties to the contract (see Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 at [225]).

53. In the present case, the impugned stipulation appears in a mortgage that was entered into in connection with a contract for the sale of land between the second plaintiff as purchaser and the defendant as vendor. The contract for sale envisaged a mortgage between those parties, on terms including those set forth in Special Condition 53. It appears that the mortgage loan was to be provided by the defendant on completion of the contract for sale, and it can be inferred that it was intended to be a form of vendor finance.

54. The evidence of the defendant’s solicitor shows that the second plaintiff was not able to provide the envisaged mortgage, so a mortgage over the first plaintiff’s North Avoca property was offered instead. That was acceptable to the defendant. As it turned out, the contract for sale and the mortgage loan (together with the Deed) settled contemporaneously on 15 November 2013. The first plaintiff acknowledged receipt of the principal sum of $250,000, and that amount was applied as an allowance by the defendant against the purchase price of the land.

55. It is clear from the terms of Special Condition 53 and later the terms of the mortgage, in particular clause Sixthly, that the requirement to repay the mortgage loan of $250,000 was to depend upon whether a notice in respect of the EPA Clean-Up Notice was received within 12 months of the date of the mortgage.

56. In broad terms, the sum of $250,000 may be viewed as an additional amount that would be paid to the defendant provided an EPA satisfaction notice was received by the first plaintiff within 12 months. Put another way, the total amount (or price) to be received by the defendant would be either $1.3 million or $1.55 million, depending upon whether such a notice was received by the first plaintiff within that time. This way of looking at the transaction is broadly consistent with the position put by Mr Reid to Mr Willcox in negotiations in October 2013 (see [9] above).

57. Clause Sixthly of the mortgage can thus be seen as an integral part of the agreements reached between the defendant and the plaintiffs for the setting of the consideration to be paid in respect of the transfer of the land. The amount of consideration was agreed to vary depending upon whether an EPA satisfaction notice was received by the first plaintiff within 12 months. If that event occurred, the defendant would receive the higher amount of $1.55 million; if the event did not occur, the defendant would receive the lower amount of $1.3 million (about 16% less).

58. The land the subject of the sale was contaminated, and had come under the attention of the EPA. There was uncertainty as to what actions might ultimately be required to be undertaken to address the problem. At the time the agreements were entered into an extant Clean-Up Notice, issued to the current owner, remained unsatisfied. Whilst satisfaction of the requirements of the Clean-Up Notice would not necessarily foreclose future regulatory actions in relation to the waste on the land, it might go at least some way towards providing comfort to, or reducing the uncertainty facing, a purchaser of the land. It seems to me that there existed a rational commercial basis for a prospective purchaser of the land to offer to pay a substantial additional amount if it could be shown that the EPA was satisfied that the requirements of the Clean-Up Notice had been met.

59. The terms of the notice meant that this could not occur for at least some months, and well after the contractual date for completion of the sale. There was of course no certainty that the EPA would be so satisfied, either at all or by any particular time. I note, in this regard, that the solicitors for the respective parties discussed how long it might take for the EPA to make its decision. This discussion seems to have occurred on about 1 November 2013, in the context of settling the terms of the contract for sale. It appears that the defendant’s solicitor suggested that 6 months would be an adequate time, and the plaintiffs’ solicitor suggested 12 months. The plaintiffs’ solicitor thereupon drafted a clause in substantially the same terms as that which became Special Condition 53(viii). Special Condition 53(viii) was later reproduced in almost identical terms in clause Sixthly of the mortgage.

60. Clause Sixthly was the product of negotiations between the parties in relation to the consideration to be paid to the defendant for the transfer of the land. It was an integral element in the structure of the transaction which proceeded on the basis that the amount of consideration may vary depending upon whether an EPA satisfaction notice was received by the first plaintiff within 12 months. In the circumstances that existed in relation to the transaction, there was a rational commercial basis for a provision in terms of clause Sixthly which effectively made payment of an additional amount to the defendant contingent upon a defined event occurring within a certain period of time.

61. The additional amount the subject of clause Sixthly is the $250,000 principal sum under the mortgage. The amount is denied to the defendant if the event does not occur within the specified time. However, I am not prepared to hold that this amount is extravagant and unconscionable, or out of all proportion to the interests of the plaintiffs in the transaction (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [29]). Those interests are not confined to the interest in being compensated for any loss suffered as a result of a breach of clause Secondly (see Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd (supra) at [369]). The additional amount can be seen to be the product of a commercial judgment made by one side of the transaction, and acceptance of that amount by the other side of the transaction, in circumstances where there was uncertainty about what might unfold, after completion of the contract, in relation to the contamination on the land.

62. Neither can clause Sixthly be regarded as plainly excessive in comparison with the interest sought to be protected by it (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [34]). As I have sought to explain, there was an evident commercial justification for such a provision from the point of view of the plaintiffs. Indeed, it can be said that there was a commercial justification for the provision from the point of view of the defendant. Clause Sixthly, read with clause Firstly, clearly defined the circumstances in which the defendant would be entitled to payment of the additional amount following the completion of the sale.

63. It may be accepted that clause Sixthly itself provides an incentive to the defendant to discharge her obligations under clause Secondly (see [46] above). However, in my view it cannot be concluded that the only purpose of clause Sixthly is to punish (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [158] and [164]). In light of the circumstances I have already referred to, I cannot accept that the purpose (or even the predominant purpose) of clause Sixthly was merely to punish the defendant in the event that she failed to discharge her obligations under clause Secondly. Again, clause Sixthly was intended to define the circumstances in which the defendant would be entitled to payment of the additional amount following the completion of the sale. Further, it should not be overlooked that the happening of the event upon which payment of the additional amount depended was itself dependent upon the defendant taking steps to satisfy the Clean-Up Notice. Whilst clause Secondly imposed obligations upon the defendant in that regard, she was in any event obliged by the applicable legislation to take those steps.

64. Neither can it be said that enforcement of clause Sixthly is not necessary in order to give the plaintiffs the benefit of the substance of the transaction (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [257]). Clause Sixthly cannot be divorced from its central role in relation to the working out of the consideration to be paid in respect of the transfer of the land.

65. For these reasons, I do not think that clause Sixthly should be regarded as being in the nature of a security for and in terrorem of satisfaction of clause Secondly.

66. It follows from the above that clause Sixthly should not be characterised as penal. Clause Sixthly remains enforceable in accordance with its terms.

67. The final matter to consider is whether the Court should exercise its equitable jurisdiction to grant relief against forfeiture. In this regard, the defendant contends that the jurisdiction is engaged because the primary object of clause Sixthly of the mortgage is to secure performance of the defendant’s obligations under clause Secondly. Whilst I accept that clause Sixthly operates to provide an incentive to the defendant to perform those obligations (see at [46] above), it should be apparent from what I have already said (at [56]-[64] above) that the primary object of clause Sixthly was not to secure performance of clause Secondly but was rather to operate, in conjunction with clause Firstly, for the purpose of ascertaining whether the defendant would be entitled to be paid the additional $250,000 component of the consideration for the transfer of the land.

68. In any event, even if the jurisdiction was engaged, I would not see this as an appropriate case to grant relief in the nature of relief against forfeiture to relieve the defendant from the consequences of the operation of clause Sixthly.

69. As the defined event did not occur within the stipulated time, clause Sixthly operates in its terms to effect a forgiveness of the mortgage loan and require the defendant to provide a discharge of the mortgage. No exercise by the first plaintiff of a contractual right under the mortgage is involved (see Elderslie Property Investments No 2 Pty Ltd v Dunn [2007] QSC 372 at [66]; Hampton v BHP Billiton Minerals Pty Ltd [No 2] [2012] WASC 285 at [240]). Moreover, the fact that the defined event did not occur within time was in no way the fault of the plaintiffs.

70. The clause operates, in essence, to deny the defendant’s entitlement to payment of the additional $250,000 component of the consideration. It encapsulates the bargain struck by the parties as to the circumstances in which the additional amount would or would not be payable. It is unfortunate from the defendant’s point of view that the EPA satisfaction notice was not able to be given to the first plaintiff until about two weeks after the expiry of the stipulated period. Further, it can be accepted that no loss was suffered by either of the plaintiffs as a result of that delay, which I also accept was not due to default on the part of the defendant. Nevertheless, I do not think that it is unconscientious on the part of the first plaintiff to insist on its strict legal rights under clause Sixthly. By doing so, the first plaintiff is seeking to uphold a freely made commercial agreement, the terms of which (including clause Sixthly itself) were negotiated with the assistance of solicitors. The parties must be taken to have been aware of the provisions of clause Sixthly which clearly state that if the EPA satisfaction notice was not received within 12 months, the loan would be forgiven and the mortgage would be discharged. For these reasons, the defendant’s claim for relief against forfeiture also fails.

Conclusion

71. A declaration should be made to the effect that upon the true construction of the mortgage between the first plaintiff and the defendant, and in the events that have happened, the mortgage loan has been forgiven pursuant to clause Sixthly. Orders should also be made in the nature of specific performance to compel the defendant to perform her obligations under clause Sixthly to provide a discharge of the mortgage.

72. The defendant’s Cross-Claim will be dismissed.

73. The Court will further order that the defendant pay the plaintiffs’ costs of the proceedings.

**********

Decision last updated: 19 September 2019