South Australian Farmers Fuels Pty Ltd v Whittingham

[2008] SASC 211

SUPREME COURT OF SOUTH AUSTRALIA

(Magistrates Appeals: Civil)

SOUTH AUSTRALIAN FARMERS FUELS PTY LTD & ANOR v WHITTINGHAM & ANOR

[2008] SASC 211

Judgment of The Honourable Justice David

4 August 2008

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - DISCHARGE BY AGREEMENT - NOVATION

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - OTHER MATTERS

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - PENALTIES AND LIQUIDATED DAMAGES - GENERAL PRINCIPLES

PROCEDURE - COSTS - APPEALS AS TO COSTS - MISTAKE OF LAW OR FACT

Appeal against a decision of magistrate dismissing a claim for debt and breach of contract and dismissing a counterclaim refusing to award costs in the appellants' favour - respondents conceded the error on the part of the magistrate in dismissing the claim on the basis of unconscionability - respondents raised alternative arguments on appeal in answer to the claim - whether there was novation of the contract - held, neither findings of fact by magistrate nor evidence supports a finding of novation - whether the appellants waived their right to recovery of the debt - held, neither findings of fact by magistrate nor evidence supports a finding of waiver - whether clause pursuant to which debt is claimed by appellants is unenforceable as a penalty - held, law as to penalties is not invoked as the respondents repudiated the contract, thereby giving rise to their liability to pay the sum stipulated - whether magistrate erred in fact in refusing to award costs on the basis that it would be too difficult to differentiate between the costs the appellants incurred in prosecuting their claim and the costs the appellants incurred in defending the counterclaim - whether magistrate erred in not awarding costs on the basis of the contract - held, magistrate did not err in the exercise of this discretion.

Held: Appeal as to claim allowed, appeal as to costs of counterclaim dismissed.

AMEV-UDC Finance Ltd v Austin and Another (1986) 162 CLR 170; Associated Distributors v Hall [1938] 2 KB 83; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79; O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, applied.
Fightvision Pty Ltd v Onisforou & Ors; Tszyu v Fightvision Pty Ltd & Anor (1999) 47 NSWLR 473, discussed.
Commonwealth v Verwayen (1990) 170 CLR 394; Medway Oil and Storage Co Ltd v Continental Contractors Ltd [1929] AC 88; Smith v Madden (1946) 73 CLR 129, considered.

SOUTH AUSTRALIAN FARMERS FUELS PTY LTD & ANOR v WHITTINGHAM & ANOR
[2008] SASC 211

Magistrates Appeal

DAVID J.

Introduction

1. This is an appeal against the decision of a magistrate dismissing a claim in contract against the respondents. At first instance, the appellants in this matter, South Australian Farmers Fuel Pty Ltd (“SAFF”) and A F Fuels Pty Ltd (“AFF”), were the plaintiffs, and the respondents in this matter, Mr and Mrs Whittingham, were the defendants. At trial, the defendants had no legal representation.

2. The appellants claimed the sum of $13,000, partly as a debt and partly as damages arising from an alleged breach of contract in writing by the respondents. The appellants also claimed a further amount, pursuant to a guarantee. This claim was dismissed by the magistrate and there is no appeal in relation to its dismissal. A counterclaim the respondents brought against the appellants was also dismissed. As there is also no appeal in relation to its dismissal (other than as to the question of costs), there is no need to discuss it in any further detail.

3. Both at the trial and on appeal, it has not been disputed that if the appellants were successful in their claim, they would be entitled to the amount of $13,000.

   Background Facts

4. The parties entered into a written contract on 11 October 2004 (“the contract”). Pursuant to the contract, the respondents operated a service station near Loxton as commissioned agents for the appellants. The contract provided that the appellants would supply fuel and oil products to the respondents. The respondents would sell these products and would earn a commission, the percentages of which were stipulated in the contract.

5. The plaintiff called one witness at trial, namely the general manager of the appellant companies, Mr Fischer. The defendants, Mr and Mrs Whittingham, gave evidence at trial and called no other persons to give evidence.

6. There was a dispute at trial as to the length of the contract. Mr Whittingham gave evidence of discussions between himself and Mr Smith, as representative for the appellants, as to whether the contract was to last for three years or five years. According to Mr Whittingham, Mr Smith had said that although the appellants usually required the contract run for a term of five years, he thought the appellants would agree to the lesser term. When Mr and Mrs Whittingham signed the contract, the end date written into the contract was 11 October 2007. As to other references throughout the contract suggesting it was for a term of five years, Mr Whittingham said that Mr Smith had told him to ignore those references. The contract was subsequently counter‑executed and returned to the respondents and Mr Whittingham said there was no further discussion as to its term. He said the end date, 11 October 2007, which appeared at the time he and Mrs Whittingham executed the contract, was subsequently amended without their knowledge or consent. The magistrate accepted the evidence of Mr Whittingham regarding this alteration.

7. The discrepancy as to the term of the contract was significant at trial. The magistrate ultimately found that because Mr Smith had secured the respondents’ signatures on the pretence that they were signing up for a period of three years when, in fact, it was for five years, it would be unconscionable to permit the appellants to rely upon the alleged breach of contract by the respondents. On appeal, counsel for the respondents conceded that the magistrate erred in finding the contract unenforceable on the basis of unconscionability.

8. Matters now raised on appeal by the respondents in answer to the claim were not specifically put, nor addressed, at trial. Although the magistrate touched upon them in his reasons, his primary finding was that of unconscionability.

9. The contract provided that in the event of an early termination for whatever reason by the respondents, an amount (defined as “signage” in the contract) would be payable by the respondents to the appellants, to be calculated according to the duration of the contract left at the time of the termination. In short, it laid down that $10,000 would be payable for signage on termination, but that it would be reduced by $2,000 for each year commenced after the first full year, so that if the fifth year were commenced nothing would be payable. As it was, the respondents left after only 20 full months and, pursuant to that part of the contract, the appellants claimed the amount of $8,000. The additional amount of $5,000 claimed is for steps taken to secure that debt. There is no dispute as to quantum.

10. The magistrate found that by 30 June 2006 the respondents had decided to leave the business, “come what may”, mainly due to the health of Mr Whittingham. Two people, named Taylor and Schmidt, had been working in the business for some time and an arrangement was made with the respondents for them to take over the business.

11. The magistrate found that it was unclear as to what notice or advice had been given to the appellants about the proposal. Mr and Mrs Whittingham said that on 30 June 2006, Mr Eaton, the appellants’ auditor called at the business. He regularly called at the business and did so on that day for the purposes of auditing sales and commissions. The magistrate found that Mr Fischer also suspected by 30 June 2006 that the respondents were unhappy and were considering leaving the business. The basis of the claim for the guarantee (pursued at trial but not on appeal), namely a telephone conversation during the course of which the respondents were alleged to have told Mr Fischer that they would “stand” for the new agents, was rejected by the magistrate. The magistrate found as a matter of fact that there was no such conversation between Mr Fischer and the respondents, let alone one that could form the basis of a guarantee for the liabilities of the new agents.

    The Contract

12. The appellants claimed at trial, as they do on appeal, that the respondents exiting the premises on 30 June 2006 lead to the termination of the contract and gave rise to their liability to pay the sum of $8,000. I set out the clauses of the contract which formed the basis of the claim.

    1.        Definitions

    In this Agreement:

    …

    “Signage” means the signs and/or painting described in Item 3 of the Schedule. [Item 3 of the Schedule is entitled “Signage & Equipment” and describes signage, certain equipment “on loan” and painting “as agreed”.]

    …

    7.        Signage

    7.1(Provision of signage) A F Fuels shall paint the Premises in SAFF’S distinctive colour scheme and/or install or erect promotional signs at the Premises and/or supply the equipment as detailed in Item 3 of the Schedule.

    7.2(Payment) The cost to A F Fuels of providing the Signage to the Premises plus any marketing costs particular to the Premises is the amount stated in Item 5 of the Schedule (“Costs of Signage”) and the Commission Agent shall pay to A F Fuels the Cost of Signage less the amount of the reduction in the Cost of Signage credited in accordance with clause 7.3 immediately upon the termination of this Agreement, by the Commission Agent.

    7.3(Credit towards payment) For each completed period as set out in Item 5 of the Schedule, A F Fuels shall credit the Commission Agent as having paid that amount or percentage of the Costs of Signage as stated in Item 5 of the Schedule.

    8.        Termination

    The Commission Agent shall be appointed for the Period referred to in Item 4 of the Schedule subject to the following:

    8.1SAFF and/or A F Fuels (acting jointly) may terminate this Agreement immediately by notice in writing to the Commission Agent without prejudice to the rights and obligations of SAFF and A F Fuels if the Commission Agent commits an act of bankruptcy or enters into a Part X arrangement or fails to make payments as detailed in Item 16 of the Schedule.

    8.2SAFF and/or A F Fuels (acting jointly) may terminate this Agreement by at least 90 days notice in writing to the Commission Agent without prejudice to the rights and obligations of SAFF and/or A F Fuels if in their opinion it becomes uneconomical to continue to deliver to the Commission Agent or the Commission Agent fails to maintain an image acceptable to SAFF as determined in three consecutive site inspection reports.

    8.3The Commission Agent may terminate this Agreement by at least 90 days notice in writing to SAFF and A F Fuels in the following circumstances:

    (a)The Commission Agent has given SAFF 30 days notice in writing of a breach committed by SAFF of any agreement condition or stipulation contained in this Agreement and SAFF has failed to remedy such breach in 30 days.

    (b)SAFF and A F Fuels have failed to maintain the Commission Agent competitively priced in his market area, as reported on the Market Price report.

    9.        Obligations on termination

    On termination of this Agreement for whatever reason all amounts owing by the Commission Agent to A F Fuels, whether under this Agreement or otherwise, shall become immediately due and payable.

    …

    I also set out the relevant parts of the schedule:

    …

    4.        Item 4 – Period

    Subject to early termination on default or by the giving of notice, A F Fuels appoints the Commission Agent to sell Petroleum Products on or from the Premises for 60 months ending on the ELEVENTH day of OCTOBER 2009. [The end date was written into this clause of the contract by hand and, as the magistrate found, subject to alteration from the year 2007 post execution.]

    4. [sic]   Item 5 – Cost of Signage

    5.1The cost of signage (refer clause 7.2 of the Agreement) is $10,000 (GST included). This amount is to be irrevocably agreed, entered above & Initialled by all parties prior to work commencing. [The cost of signage was written into this clause of the contract by hand.]

    5.2The cost of signage to the Commission Agent reduces (or is credited) as follows:

    5.2.110 to 12 months -      Nil%;

    5.2.213 to 24 months -      20%;

    5.2.325 to 36 months        -      40%;

    5.2.437 to 48 months -      60%;

    5.2.549 to 60 months -      100%

    5.3If the Commission Agent assigns the benefits of this Agreement to the incoming occupier of the Premises, A F Fuels will waive its right of reimbursement against the Commission Agent in whole or in part.

13. The appellants argued, both at trial and on appeal, that by repudiating the contract after 20 months the respondents thereby terminated it and, pursuant to clause 7.2 of the contract and item 4 of the schedule, there is an amount of $8,000 owing. It is agreed that if that is so, the sum of $5,000 is also due.

    Matters on Appeal

14. On appeal, the respondents concede that the magistrate erred in rejecting the appellants’ claim on the basis of unconscionability. However, they now argue other grounds in answer to the claim which were not specifically argued at trial, for a finding that the contract (and clause 7.2 in particular) is unenforceable.

15. As the respondents were unrepresented at trial, I did not refuse to hear their answers to the claim on the mere technicality that they did not specifically raise them at trial. Both parties agree that although the matters raised by the respondents were not earlier agitated, I am nevertheless able to make a decision based on the evidence at trial and the findings of fact by the magistrate. The new issues that have been raised can be narrowed down to the following:

    1.That the contract is unenforceable against the respondents because there was novation to Taylor and Schmidt.

    2.That the contract is unenforceable against the respondents because the appellants waived their rights, pursuant to clause 7.2 of the contract, to seek payment from the respondents for signage.

    3.That if there was no such novation, assignment or waiver, the sum sought pursuant to clause 7.2 of the contract was not a genuine pre‑estimate of damage for the respondents’ repudiatory breach, but rather a penalty for it. If that was so, it is argued that I should allow the appeal and remit the matter for damages to be assessed.

16. There is a further unrelated matter on appeal. At trial, the magistrate dismissed both the claim and the counterclaim. He made no order as to costs. The appellants now argue that no order as to costs was appropriate in relation to a dismissal of the claim at trial (because the respondents were unrepresented), but as the appellants were represented at trial they should have been awarded costs for the dismissal of the respondents’ counterclaim. I will return to that later.

17. I turn to the arguments on appeal.

    Novation

18. The respondents now argue that the handing over of the business to Taylor and Schmidt amounted to a novation. Clause 11 of the contract provides:

    11.Assignment

    11.1   The Commission Agent shall not assign this Agreement without the prior written consent of SAFF and A F Fuels (acting jointly). The consent of SAFF or A F fuels may be withheld at their absolute discretion.

    11.2   The rights of A F Fuels under this agreement may be assigned, mortgaged or charged and a reference to A F Fuels includes any assignee, mortgagee, chargee or other person deriving any interest in the benefit of this Agreement directly or indirectly from A F Fuels.

19. They argue that clause 11 of the contract should be interpreted to cover novation as well as an assignment, because, on their argument, both the benefits and the burden of the contract were passed on to Taylor and Schmidt, the purpose of signage being to secure continued performance. That being so, the respondents face difficulty in arguing there was a novation, because there was no written consent given by the appellants, pursuant to clause 11.1 of the contract. The respondents argue that although no written consent was obtained, a novation can be inferred through an objective assessment of the parties’ intention and conduct.

20. I was referred to the decision of the New South Wales Court of Appeal in Fightvision Pty Ltd v Onisforou & Ors; Tszyu v Fightvision Pty Ltd & Anor.[1] In that case, a well‑known professional boxer, Kosta Tszyu, entered into a contract with a well‑known fight promoter, Bill Mordey, to promote his fights into the future. The contract was between Mr Tszyu and the corporate vehicle of Mr Mordey, namely Classic Promotions Pty Ltd. Some time into the contract, Mr Mordey decided that Classic Promotions Pty Ltd would cease trading and that a new company, Fightvision Pty Ltd, would carry on his fight promotion business. It was alleged that there was novation of the original contract by a substitution of the parties. On the facts of that case, it was held that there was a novation and the contract was still enforceable, because there was a plethora of evidence that indicated Mr Tszyu had full knowledge that though there was a change of corporate entity, he was still, in effect, dealing with Mr Mordey on the same basis. The Court said:[2]

    Novation is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made: Olsson v Dyson (1969) 120 CLR 365 at 388 per Windeyer J, which Bainton J referred to. Novation involves the extinguishment of one obligation and the creation of a substituted obligation in its place. Intention is crucial to show a novation: see, eg, Vickery v Woods (1952) 85 CLR 336 at 345 per Dixon J as his Honour then was. A novation may be express or implied from the circumstances.

    Although the argument was not put to the magistrate, there are certain findings of fact upon which the respondents now rely to argue that a novation existed. In his judgment the magistrate said:[3]

    Persons by the names of Taylor and Schmidt, or at least one of those persons, had been working in the business for some time and an arrangement was made between the Whittinghams and Taylor and Schmidt for Taylor and Schmidt to take over the business. The evidence is a little unclear as to what advice or notice the Whittinghams had given or gave to the plaintiffs about this proposal. Mr and Mrs Whittingham said that on 30 June 2006 Mr Scott Eaton, who was described as the auditor for the plaintiffs and a person who had regularly called at the business during the time that the Whittinghams ran it, and had done so on behalf of the plaintiffs for the purpose of auditing the sales and commissions, attended at the premises and undertook a stock-take, at least of the oil, that was then on the premises. That highly suggests that some notice at least was given to Mr Eaton of what was about to occur, namely that Taylor and Schmidt were going to take over.

    The magistrate also said:[4]

    In the event Taylor and Schmidt did take over the running of the business and the plaintiffs continued to supply, on credit, fuel and oils to Taylor and Schmidt. On 8 September 2006 Taylor and Schmidt signed a commission agency agreement which is Exhibit P22. The plaintiffs’ case on the guarantee is that Mr Whittingham had during the conversation with Mr Fischer on 30 June 2006, at least guaranteed the liability of Taylor and Schmidt for fuel and oil during the period from 30 June 2006 onwards to the point where Taylor and Schmidt vacated the business.

    In my view, such findings of fact do not necessarily amount to novation. The fact that a new contract was entered into between the appellants and the new commission agents on 8 September 2006 itself indicates there was no novation of the previous contract. In any event, there is no evidence upon which the magistrate could have relied to find that the clear intention of the parties was such that the contract was to be taken over by Taylor and Schmidt pursuant to the original conditions.

    [1]    Fightvision Pty Ltd v Onisforou & Ors; Tszyu v Fightvision Pty Ltd & Anor (1999) 47 NSWLR 473.

    [2]    Fightvision Pty Ltd v Onisforou & Ors; Tszyu v Fightvision Pty Ltd & Anor (1999) 47 NSWLR 473, 491-492.

    [3]    Judgment (ex tempore) SA Farmers Fuel P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008) [20].

    [4] Ibid [26].

1. I find that there was no novation.

   Waiver

2. The respondents now argue that the appellants waived their rights in respect of the reimbursement of signage pursuant to clause 7.2. To support this argument, the respondents point out item 5.3 of the schedule to the contract which states:

   5.3If the Commission Agent assigns the benefits of this Agreement to the incoming occupier of the Premises, A F Fuels will waive its right of reimbursement against the Commission Agent in whole or in part.

   The respondents also point out the following passages from the magistrate’s reasons:[5]

   [5]    Judgment (ex tempore) SA Farmers Fuel P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008) [24], [57].

   in any event whilst it is the plaintiffs’ case that $8,000 was owed, Mr Fischer said that there was no mention to Mr or Mrs Whittingham at the time, that is 30 June 2006, of the fact that any such sum was owed nor was there any endeavour by the plaintiffs at that time to collect that sum. My recollection is, and acknowledging that Mr Teague feels that this was not said - only a reading of the transcript is going to establish which of us is right - but my recollection is that as to that, Mr Fischer’s evidence was that the plaintiffs were not interested or were not of mind, certainly, to collect that money as long as the arrangement with Taylor and Schmidt seemed to be in place and proceeding satisfactorily.

   …

   In my view [item 5.3 of the schedule to the contract] evidences the fact that the plaintiffs are not particularly fussed about signage as long as they have got someone in occupation from time to time. That is the reason why, I believe, Mr Fischer gave evidence that he was not fussed about any question of signage on 30 June 2006 as long as Taylor and Schmidt were going to be taking over. I think in effect that there was an assignment of the benefits of the contract from the defendants to Taylor and Schmidt and that that was accepted by Mr Fischer and that Mr Fischer then waived any right of reimbursement in respect of signage.

   And the evidence of Mr Fischer, when questioned by the magistrate:[6]

   Q.So you hadn’t tried to recover the 8,000 owing under the signage provision before Taylor and Schmidt went east or west –

   A.West.

   …

   Q.Was there any reason for that?

   A.The comfort of their exit; when they exited. If we had a new agreement and the obligations of the new agreement were passed on to the Schmidts, they would have been forgiven. That’s my whole point.

   [Emphasis added.]

   [6]    Trial transcript, SA Farmers Fuel P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008), A W Fischer XN, pp 49 –50.

3. In Commonwealth v Verwayen, Mason J stated:[7]

   “waiver” is an imprecise term capable of describing different legal concepts, notably election and estoppel.

   It has been doubted that waiver exists as a defence or answer in any case except where it is used as an alternative designation for some other defence or answer, for example, election, estoppel or new agreement: Bysmouth, per Lowe J. Generally speaking, as Jordan CJ pointed out in Larratt, an existing legal right is not destroyed, by mere waiver in the sense of an express or implied intimation that the person in whom the right is vested does not intend to enforce it: see Mulcahy v Hoyne, per Isaacs J; Atlantic Shipping and Trading Co v Louis Dreyfus & Co, per Lord Sumner. In these cases, unless consideration is present, something in the nature of an election or an estoppel is required.

   [Footnotes omitted.]

   [7]    Commonwealth v Verwayen (1990) 170 CLR 394, 406.

4. Neither the magistrate’s findings, nor item 5.3 of the schedule can be the basis of a waiver. I have already found that there was no novation, nor any proper assignment pursuant to the contract; therefore, item 5.3 does not come into play. The magistrate did not, and could not, point to any positive action on the part of the appellants, apart from the alleged assignment, that could constitute waiver in whichever legal form it is advanced – new agreement, election or estoppel. The magistrate only went so far as to describe Mr Fischer’s state of mind at the relevant time. The finding, at most, that the appellants impliedly deferred pursuing immediate payment of the sum, and that they were “not particularly fussed about signage as long as they got someone in occupation from time to time”, in my view, falls far short of that required for waiver.

   Penalty Clause

5. If, as I have found, there was neither novation nor waiver, the respondents alternatively argue that clause 7.2 (corresponding to the item in the schedule), requiring payment for signage in the event that the respondents terminated the contract before it was fully performed, is penal in nature and, therefore, unenforceable. The magistrate made the following findings upon which the respondents now seek to pursue this argument:[8]

   What is intended is that of the $10,000, $2,000 of that will be forgiven for each 12 months that the agent remains in occupation of the premises and selling the plaintiffs’ fuels. So if the defendants remained for a period of five years the amount repayable is nil.

   The evidence is that no painting was undertaken by the plaintiffs when the Whittinghams moved in in October 2004 nor were any signs or equipment that was not already at the premises provided by the plaintiffs. In my view the combination of the definition of the word “signage” and clause 7 that I have mentioned, and the Schedule results in a mishmash of jumbled terms without any consistency flowing through those particular parts of the contract. “Signage”, as I said, is defined to mean “signs and/or painting described in item 3 of the Schedule”. Item 3 describes much more than painting and signage. 7.1 purports to bring into the definition of “signage” equipment, which is described in Schedule 3, but that is not consistent with the definition of the word “signage”. 7.2 then purports to bring into the definition of “signage” marketing costs. In the schedule there is a reference to painting in item 3.3 but no painting was undertaken. There was during the trial a reference to only one sign which the evidence said was there at all times, before the Whittinghams went in and after they left. There is also a reference to some equipment. There was no reference to marketing costs.

   In my view the explanation given in evidence by Mr Fischer as to what was intended by these provisions was entirely different to what the provisions say. In truth, I think the real purpose of this signage issue is, as was suggested by somebody during the course of the case, I can’t remember who now – to maintain some sort of a hold over agents as a means of persuading them to stay rather than go if it should come to that. The evidence was that the previous operators of the premises were not charged any signage when they left.

   The respondents argue that although it was not one of the pleas at trial, the above findings nevertheless support the argument that clause 7.2 of the contract, corresponding to item 5 of the schedule, is unenforceable as a penalty. They argue that the sum stipulated is not a genuine pre-estimate of damage for breach by repudiation, but rather an arbitrary amount set to penalise the respondents.

   [8]    Judgment (ex tempore) SA Farmers Fuel P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008) [53]‑[55].

6. Both parties cited a number of cases in relation to penalty clauses. The High Court in Ringrow Pty Ltd v BP Australia Pty Ltd[9] recently affirmed the reception and continued application of the English common law. The Court said:[10]

   [9]    Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656.

   [10] Ibid 662‑663.

   The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract‑breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre‑estimate of the damage likely to be caused by the breach.

   The starting point for the appellant was the following passage in Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd:

   “[1.Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages …]

   2.     The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre‑estimate of damage …

   3.     The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ...

   4.     To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

   (a)It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ...

   (b)It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is the sum greater than the sum which ought to have been paid ...

   (c)There is a presumption (but no more) that it is 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’.”

   Neither side in the appeal contested the foregoing statement by Lord Dunedin of the principles governing the identification, proof and consequences of penalties in contractual stipulations. The formulation has endured for ninety years. It has been applied countless times in this and other courts. In these circumstances, the present appeal afforded no occasion for a general reconsideration of Lord Dunedin’s tests to determine whether any particular feature of Australian conditions, any change in the nature of penalties or any element in the contemporary market-place suggest the need for a new formulation. It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where the reconsideration or reformulation is in issue.

   [Footnotes omitted.]

7. The facts of the present case can only be analysed pursuant to test (a) above, because the relevant breach is the single act of repudiation. Clause 7.2 is penal if, looking at its substance and the circumstances of the contract judged at the time it was entered into between the parties, the sum stipulated is “extravagant or unconscionable in comparison to the greatest loss” conceivable as a result of the breach, namely the act of repudiation.

8. While the language has been held to be presumptive when present, the fact that the clause does not refer explicitly to either a penalty or liquidated damages, is not conclusive. The respondents argue that Mr Fischer gave numerous answers as to the allocation of the figure of $10,000 for signage. At one point in evidence he said that signage “puts value to” the contract and gives the contract “worth”.[11] In this respect, I note that in Ringrow the High Court held that merely because a contractual term is part of the consideration for a contract, in the absence of which other contractual terms would have been more stringent, does not, of itself, prevent the conclusion that the term is penal in nature and effect.[12]

   [11]   Trial transcript, SA Farmers FueL P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008), A W Fischer , XN p 34.

   [12]   Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656.

9. At another point, Mr Fischer said that signage included everything, even beyond that expressly envisioned in the contract, such as travel and maintenance.[13] He said the figure for signage was “a general arbitrary number” set by Mr Smith, as representative for the appellants.[14] However, in his reasons the magistrate commented on the limited use to which Mr Fischer’s evidence could be put:[15]

   [13]   Trial transcript, SA Farmers Fuel  P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008) A W Fischer XN, pp 26_27.

   [14]   Trial transcript, XN Mr Fischer, page 34.

   [15]   Judgment (ex tempore) SA Farmers Fuel P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008) [33], [37].

   In the case of Mr Fischer I was not particularly impressed by his evidence. I think his evidence certainly suffered from the fact that he had very little if any direct hands-on involvement with the defendants at the relevant time. Mr Fischer is not a field operative of the plaintiffs, if I can use that term. He is the general manager I think - this is how he described himself - and obviously he does most of his work I should think in head office. Therefore the fact that he did not have a direct role obviously had an impact upon what he could say and also in my view on what he did say. Certainly in relation to anything to do with the execution of the contract he had no direct knowledge whatsoever…

   …

   Going back to the events of 11 October 2004, the fact is that the person from the plaintiffs that has the knowledge as to what occurred, other than the Whittinghams of course, is Mr Peter Smith. He was not called by the plaintiffs [nor by the defendants].

   More specifically in relation to how test (a), as outlined by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd,[16] is to be applied, the High Court in Ringrow, commented:[17]

   The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships. As Mason and Wilson JJ observed in AMEV‑UDC Finance Ltd v Austin:

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

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

   [Footnotes omitted.]

   [16]   Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.

   [17]   Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, 669.

10. It is clear that test (a), at least, is not therefore an easy one to satisfy. The respondents’ act of repudiation could prevent the appellants from recouping their expenses through the further performance of the contract. Certainly, in the absence of new commission agents, it would put a halt to sales at the premises.

11. The appellants argue that the test need not be applied because the law as to penalties is not, in any event, invoked. The appellants contend that clause 7.2 is to be characterised as falling within one of either two classes of case set out by Gibbs CJ in O’Dea v Allstates Leasing Systems (WA) Pty Ltd in which no question of penalty arises: [18]

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

    The second class of case arises where the parties have stipulated that a sum shall become payable on a certain event which, although brought about by the party required to make the payment, does not involve a breach of contract. It has been held that where there is a contract for the payment of a certain sum in a certain event, and that event has happened, the sum is payable and no question of penalty versus liquidated damages arises … Difficulties have arisen in the application of this principle to contracts of hire purchase which provide that in the event of termination a sum representing all or part of unpaid instalments will be paid by the hirer to the owner. There was some controversy as to the position when the owner's right to terminate the contract and receive payment arose on the happening of any of a number of events, some of which were breaches and some of which were not, but it has now been settled in England that in such a case where the agreement is terminated by reason of a breach committed by the hirer, the sum payable will be a penalty unless it is a genuine pre-estimate of the loss suffered by the owner by reason of the breach … I respectfully agree with that conclusion.

    [Footnotes omitted.]

    [18]   O’Dea v Allstates Leasing Systems (WA) Pty Ltd (1983) 152 CLR 359, 366‑367.

12. The cases decided by the High Court in the 1980s were analysed pursuant to test (b) as set out by Lord Dunedin in Dunlop, that is, the breach consisted of non-payment, and the clause stipulated a greater payment than that which was due. Though the election to terminate the contract by the owner activated the clause, rather than the breach of the hirer, they were distinguished from the second class of case by the fact that the breach nevertheless precipitated the termination. In relation to the second class of case, Gibbs CJ went on to say:[19]

    If, however, the agreement is terminated by the hirer himself, e.g. because he is unable to keep up his payments, it has been held that the question whether the sum payable is liquidated damages or a penalty does not arise, since what has occurred is that the hirer has exercised his option to put an end to the contract on paying a certain sum, and the sum for which he has made himself liable must be paid: Associated Distributors Ltd. v. Hall. Conflicting opinions have been expressed as to the correctness of that decision (see Campbell Discount Co. Ltd. v. Bridge …) but the question whether it was correct does not fall for consideration in the present case.

    … in my opinion, the question whether the rules which relate to the distinction between penalties and liquidated damages are applicable must be judged as at the time of the making of the contract in question. The question is “not of words or of forms of speech, but of substance and of things”, to use the words cited by Lord Radcliffe in Campbell Discount Co. Ltd. v. Bridge.

    [Footnotes omitted.]

    Similarly in AMEV‑UDC Finance Ltd v Austin, Gibbs CJ, in his short judgment concurring with Mason and Wilson JJ, again set such a situation apart:[20]

    It was accepted before us that the lessee had not repudiated the agreements, and no question arises as to what the position of the appellant would have been if there had been a repudiation by the lessee ... The sole question is what damages is the appellant entitled to recover in the present circumstances where the lessee, in breach of the contract, but without repudiating it, failed to pay the instalments when they became due and the appellant exercised its right to determine the hiring.

    [19] Ibid 367‑368.

    [20]   AMEV‑UDC Finance Limited v Austin and Another (1986) 162 CLR 170, 174‑175.

1. The conflicting opinions on this point which Gibbs CJ had earlier referred to in O’Dea were further explored by Mason and Wilson JJ in Austin:[21]

   In Campbell Discount Co. Ltd v. Bridge … Viscount Simonds and Lord Morton of Henryton considered that a minimum payment clause was valid in its application to a termination by the hirer, being the price payable for the exercise of that right, even though it amounted to a penalty when it applied to a breach of contract on the part of the hirer. On the other hand, Lord Denning, though agreeing with this conclusion, rejected the notion that the doctrine of penalties was confined to sums stipulated to be paid for breach of contract. He pointed out that the jurisdiction of equity to relieve against penalties was not so confined … Lord Devlin reserved his opinion on the wider ground taken by Lord Denning. He based his decision on the conclusion that the minimum payment clause was a penalty in its application to the hirer’s breach of contract … Lord Radcliffe also found that the clause was a penalty in its application to the hirer’s breach of contract. Although he did not commit himself on the wider ground taken by Lord Denning, [he] thought that it would be necessary to construct almost a new set of arguments to render the provision unenforceable in its application to events which were not breaches of contract.

   Common to a number of the speeches in Campbell Discount was the view that the doctrine of penalties has no application to a stipulation which provides for the payment of an agreed sum on the happening of a specified event other than a breach of contract … The reason given for this limitation … is that it has never been the function of the courts to relieve a party from a contract on the mere ground that it proves to be onerous or imprudent … Unfortunately the proposition that the doctrine of penalties has no operation in relation to a sum agreed to be paid on the happening of an event which is not a breach of contract generates difficulties when an attempt is made to apply the proposition to the exercise of an option to terminate a contract … associated with, a breach of contract.

   …

   A related problem arises when an agreement contains a minimum payment clause which requires the hirer to pay a stipulated sum on his exercise of an option to terminate the agreement or on the happening of other events which include his breach of contract. Such a provision has been held to be valid in its application to termination by the hirer (Associated Distributors, Ltd v. Hall), notwithstanding that the provision constitutes a penalty in its application to a breach of contract. However, the status of Associated Distributors has been weakened by the comments made in Campbell Discount: see also [the comments of Gibbs CJ in] O'Dea.

   [Footnotes omitted.]

   As already stated, the first difficulty referred to in the above passage was resolved through the fact that a breach activated the option to terminate. The second difficulty referred to in the above passage, namely the validity or invalidity of a clause requiring payment by a party on the party’s repudiation, was not resolved by the High Court in O’Dea, Austin, nor Ringrow. The result must be that the decision in Associated Distributors Ltd v Hall[22] still stands. The election to repudiate carries with it the liability to pay the sum stipulated.

   [21] Ibid 183‑185.

   [22]   Associated Distributors Ltd v Hall [1938] 2KB 83.

2. The appellants argue that clause 7.2 provides for payment on a given event, namely early termination by the respondents for whatever reason, whether it is by notice pursuant to its option on breach by the appellants, or by its repudiation after performance is already due, rather than on the basis of any breach. In this instance, the appellants allege that the contract was terminated because of the repudiatory action of the respondents, namely their unwillingness to further perform the contract, and their exiting of the premises as a fait accompli.

3. Having found that clause 7.2 could not constitute a penalty by virtue of it falling into the second class of case referred to by Gibbs CJ in O’Dea,[23] it is unnecessary to determine whether it would have also fallen into the first class of case. Further, the law of penalties not having been invoked, it is also unnecessary to determine whether the stipulated sum is “out of all proportion” to the damages which might conceivably flow from the respondents’ repudiation of the contract.

   [23]   O’Dea v Allstates Leasing Systems (WA) Pty Ltd (1983) 152 CLR 359.

   Costs of the Counterclaim

4. The appellants argue that the magistrate erred in fact in refusing to award costs on the basis that it would be too difficult to differentiate between the costs incurred by the plaintiffs in prosecuting their claim, and those they incurred in defending the counterclaim. The appellants also argue that the magistrate did not make any finding contrary to the appellants’ entitlement to recover costs according to the terms of the contract. Clause 5 of the contract, relied upon by the appellants, provides:

   5.Indemnity

   The Commission Agent is responsible for and, to the extent permitted by law, will indemnify SAFF and A F Fuels severally against all damages, losses, claims, demands, costs, expenses and liabilities incurred, or suffered by or brought about or made or recovered against SAFF or A F Fuels arising out of or in connection with:

   5.1     any act matter or thing occurring on or after the commencement of this Agreement in respect of the Premises including the condition and safety of the Premises;

   5.2     any breach of this agreement by the Commission Agent;

   5.3     any wilful or negligent act or omission of the Commission Agent;

   5.4     the operation by the Commission Agent or any other person of the Service Station Business;

   5.5     the employment of any persons by the Commission Agent; and/or

   5.6     the non-discharge by the Commission Agent of any obligations or duties assumed by it in respect of the Premises.

5. The appellants argue that the discretion as to costs is not applicable in the same way if the costs liability is contractually agreed in advance. In relation to the appellants’ application for costs at trial the magistrate stated:[24]

   If I were to order costs in favour of the plaintiff on the counterclaim, then obviously the defendants would be entitled to costs in their favour on the claim.

   I think it would be an extraordinarily difficult task for any taxing person to differentiate between the costs on the claim and the counterclaim. As I understand it, the defendants have largely been self-represented … as self-represented litigants, they are not entitled to costs as such. They might be entitled to some attendance fees, but generally self‑represented litigants do not obtain costs.

   The vast majority of the time – it was only a two-day trial, I realise, but most of the time in the trial was spent in relation to the claim, in my view. In my view the fair result so far as costs is concerned is that there should be no order as to costs on the claim and counterclaim. That is my order: there is no order as to costs on the claim or counterclaim.

   [24]   Ruling re costs, trial transcript, SA Farmers Fuel P/L & Anor v Whittingham & Anor [2008] SAMC 30 (Unreported, Magistrate Forrest, 22 February 2008) p 226.

6. In my view, clause 5.2 of the contract is not applicable because the costs sought by the appellants relate to the failure of the respondents’ counterclaim and not to any breach of the contract by the respondents.

7. In Smith v Madden,[25] Dixon J applied the House of Lords decision in Medway Oil and Storage Co Ltd v Continental Contractors Ltd.[26] In that case, the House held that where a claim and counterclaim are both dismissed, or otherwise dealt with in the same manner, there should be no apportionment of costs. Rather, the costs relevant to each are to be assessed and paid accordingly.

   [25]   Smith v Madden (1946) 73 CLR 129.

   [26]   Medway Oil and Storage Co Ltd v Continental Contractors Ltd [1929] AC 88.

8. In my view, the magistrate has not erred in the exercise of his discretion. I would dismiss the appeal against the order as to costs on the counterclaim.

   Conclusion

9. I allow the appeal as to the claim. Judgment is awarded to the appellants in the sum of $13,000. I dismiss the appeal as to the costs of the counterclaim. I will hear the parties as to the costs of the appeal.