FEDERAL COURT OF AUSTRALIA

EMCL Pty Ltd v ESANDA Finance Corp Ltd [1999] FCA 978

CONTRACT – construction of oral variation – whether on construction of the contract respondent entitled to commission – whether notice a condition precedent to right to sell or entitlement to commission – proper basis for calculation of entitlement

PRACTICE AND PROCEDURE – leave required to appeal from discretionary ruling of trial judge – where court below refused to entertain arguments after judgment

COSTS – apportionment

Federal Court of Australia Act 1976 (Cth) s 51(A)(1)

Income Tax Assessment Act 1997 (Cth)

Corporations Law

Penalty Interest Rates Act 1983 (Vic)

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322, applied

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938)38 SR (NSW) 632, applied

House v The King (1936) 55 CLR 499, applied

Namol Pty Ltd v AW Baulderstone Pty Ltd [No 2] (1993) 47 FCR 388, followed

Kettle Chip Co Pty Ltd v Apand Pty Ltd (1998) 155 ALR 134, followed

Nagy v Masters Dairy Ltd (1996) 150 ALR 273, followed

Australian Coal and Shale Employees’ Federation v The Commonwealth (1953) 94 CLR 621, applied

EMCL PTY LTD AND FINPAC HOLDINGS LIMITED v

ESANDA FINANCE CORPORATION LIMITED

V 18 OF 1999

TAMBERLIN, SUNDBERG & DOWSETT JJ

MELBOURNE

20 JULY 1999

ON APPEAL FROM A SINGLE JUDGE

OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.      The appeal is allowed in part.

2.      The application for leave to appeal from Heerey J’s ruling on 17 November 1999, refusing to hear a new argument on clause 4(b) of the Master Discount Agreement dated 2 January 1999, is refused.

3.      The application for leave to claim damages for breach of clause 4(c) is refused.

4.      The cross-appeal is allowed.

5.      Orders 1, 7 and 9 made at first instance on 18 December 1998 are set aside.

6.      There be judgment for the appellant against the respondent for $27,587.04 together with interest at the rate of 9% for the period 18 December 1998 to the date hereof.

7.      It is declared that the calculation of any amounts due pursuant to clause 4(b) of the Master Discount Agreement dated 2 January 1990, be referred to a single judge to determine whether the appropriate discount rate should be chosen having regard to the interest rates agreed by the experts and used in connection with the calculations that appear in the Appeal Book at pp 1663-4, or whether those calculations ought to have been made using discount rates based upon an interest rate or interests rates to be derived from the Agreement and from the leases entered into pursuant thereto.

8.      The parties provide to members of the Court draft Short Minutes of Orders as to the costs of the trial and the appeal together with submissions thereon within fourteen (14) days having regard to these reasons for decision.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE

OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

1                     Before the Court is an appeal from three judgments of Heerey J given on 17 September, 17 November and 18 December 1998.  There is also a cross-appeal by the respondent, Esanda Finance Corporation Limited (“Esanda”), concerning the appropriate pre-judgment interest rate.

2                     Although eight grounds are raised on the appeal, and one further ground in a proposed amended notice of appeal, in substance the issues on the appeal and the cross-appeal were narrowed down in the course of submissions to the following matters:

1.         The construction of an oral variation to cl 4(c) of a Master Discount Agreement (“the Agreement”) made on 2 January 1990 between EMCL Pty Ltd  (“EMCL”) and Esanda.

2.         Whether, upon the proper construction of clauses 4(b) and 4(c), the respondent was entitled to the commission payable pursuant to clause 4(b) upon the sale of each car.

3.         Whether his Honour ought to have allowed the application to raise an alternative claim available for damages for breach of cl 4(c).

4.         Whether his Honour ought to have allowed, after his judgment on 17 September 1998, an amendment to the applicant’s case to raise for the first time a contention as to the construction of cl 4(b) of the Agreement.

5.         The proper basis of calculation of the “net present value of the outstanding rentals” for the purposes of clause 4(b).

6.         Costs.

7.         On the cross-appeal, the rate of pre-judgment interest.

Background

3                     For the purposes of this appeal the background circumstances can be briefly outlined.  They are more fully set out in the judgment under appeal and they need not be repeated in full.  Essentially, the position is that Esanda is a financier which as part of its business engages in the leasing of motor vehicles.  EMCL is also engaged in the business of leasing motor vehicles.  EMCL entered the Agreement with Esanda, referred to above, pursuant to which EMCL acquired 2,749 cars for a total purchase price of over $254 million.  The form of the arrangement was agreed upon taking into account two considerations.  First, the Agreement provided for the assignment by EMCL to Esanda of amounts receivable by EMCL pursuant to leases entered into between EMCL and its lessees.  Second, the Agreement provided for the appointment by EMCL of Esanda as its agent to dispose of vehicles at the expiration of the leases or upon earlier termination.  The primary issues turn on the meaning of cl 4 of the Agreement and it is convenient to set out that clause which reads as follows:

“4 (a)  Where the Financier [Esanda] has purchased the Receivables the subject of the Lease the Financier may on behalf of the Lessor [EMCL] and as it’s [sic] duly authorised agent receive the relevant Car upon the expiration of the Period of the Lease or any extension thereof or upon the early termination (whether by virtue of default by the Lessee in the performance of it’s [sic] obligations under the Lease or voluntary return of the Car by the Lessee with the consent of the Lessor and the Financier) of the Lessee’s right to possession of the Car under the Lease AND the Financier shall be entitled as the agent of the Lessor to dispose of the Car at public auction or by private treaty, subject to any conditions which in the interests of such disposal the Financier may think fit.

(b)       If the net proceeds of any disposal (after allowing for all costs and expenses relating to the receipt by the Financier of the Car and its disposal, including storage) pursuant to Clause 4(a) exceed the Residual Value of the Car or exceed the net present value of the outstanding rentals if the disposal takes place following early termination of the Lease, then the Financier shall account to the Lessor for one half of the amount of the excess but shall be entitled to retain the balance as a commission on sale of the relevant Car.

(c)        Notwithstanding anything herein contained, the Financier may not dispose of a Car upon the expiration of the Period of the Lease or any extension thereof or following an early termination unless the Financier gives the Lessor not less than three (3) days prior written notice of the proposed disposal.”  (Emphasis added)

4                     Under cl 6 of the Agreement EMCL was required to appoint Esanda as its agent and attorney in a form set out in Schedule 7 to the Agreement.  A deed of appointment as agent was accordingly executed on 2 January 1990 (“the Agency Agreement”).  Under the Agency Agreement, EMCL appointed Esanda to be “sole and exclusive agent and its true and lawful attorney to perform all or any of the acts … required to be done or executed … by the Lessor [EMCL] pursuant to the Master Discount Agreement”.  The powers conferred on Esanda included a power to “sue for and recover all Receivables payable by the Lessee under the Lease Agreement” (cl 2(k) of the Agency Agreement), and to “execute all such other documents and do all such other deeds, acts and things as the Financier [Esanda] may deem expedient for the full or more beneficial exercise of any of the rights powers remedies authorities or discretions of the Financier hereunder or under the Lease Agreement” (cl 2(l)).  Clause 6 of the Agreement provided that the agency was revocable but any revocation would have no effect as regards any acts of Esanda after receipt of notice of revocation in relation to any Lease entered into prior to the date of revocation.

5                     Finpac Holdings Limited (“Finpac”) was joined as an applicant in the proceeding before Heerey J and has been joined as an appellant in this appeal.  Heerey J found that Finpac, and an agreement it had entered into with EMCL, had no bearing on the issues before the Court.  No relevant submissions have been made in this appeal in relation to Finpac or the Agreement, and in these circumstances we do not consider that the Finpac arrangements have any bearing on this appeal.

6                     The dispute before Heerey J turned on the meaning and operation of cl 4(c) and in particular the provision for three days prior written notice of any proposed disposal of a vehicle by Esanda.

7                     In the period from 1991 to August 1996, Esanda disposed of a large number of vehicles without giving the required three days prior written notice to EMCL.  As a consequence of this omission, EMCL claims that Esanda is liable to pay the total amount received on disposal of the vehicles, because Esanda was not entitled to dispose of the vehicles where an essential precondition of disposal, namely the giving of notice, was not satisfied.  This claim amounts to a figure in the order of $64 million.

8                     Esanda admitted the failure to give three days prior written notice but submitted that the notice was not a condition precedent to its entitlement to dispose of the vehicles.  Several alternative submissions were advanced by Esanda to Heerey J.  One of these was that there was an oral variation to cl 4(c) made on 27 February 1990, which dispensed with the need to give prior written notice, and to substitute a requirement that it was only necessary to give notice of disposal, and that although this had to be done on the date of disposal, it could take place after disposal.  Heerey J accepted that there was an oral variation to this effect made on 27 February 1990.  It was further submitted by Esanda before his Honour that the parties, in the period 1990 through 1997, conducted themselves on the basis that prior notice had been dispensed with, and that such course of conduct amounted to a variation of cl 4(c) by conduct or, alternatively, that the conduct gave rise to an estoppel which precluded EMCL from relying on any absence of prior notice.  There was, in addition, an issue as to the quantum of EMCL’s entitlement to the moneys received on disposal of vehicles.

Judgment below 

9                     The parties agreed before his Honour that he should consider six questions.  The questions posed and the answers given by his Honour were as follows:

1.         Is cl 4(c) of the Master Discount Agreement a condition precedent to the entitlement of Esanda to sell the vehicles the subject of the Agreement, or is it a term the breach of which sounds in damages?

In response to this question of construction his Honour’s answer was that it was a condition of the Agreement, the breach of which would sound in damages, but that it was not a condition precedent.  This finding is appealed from before this Court.

2.         Was there an oral variation of cl 4(c) made on 27 February 1990 to provide for notice on the day of a disposal?

His Honour answered this question in the affirmative.  There is no appeal against this answer.  As appears later, however, a question of construction is on appeal as to whether prior written notice on the day of disposal was required as a consequence of the oral variation.

3.         Alternatively, was there a variation to cl 4(c) to be inferred from the conduct of the parties that notice was required no later than one day after the date of disposal?

This question was answered in the affirmative.  There is no appeal against this finding.

4.         If no agreement was made, is EMCL estopped from relying on the terms of cl 4(c) because the conventional basis on which the parties dealt with each other was for notice to be given after disposal?

His Honour held that EMCL was estopped because the parties dealt with each other from 1990 to 1997 on the assumption that Esanda was not required to give three days notice of disposal.  There is no appeal against this finding.

5.         What is the basis of calculation of the “excess” payable under cl 4(b) of the Master Discount Agreement in respect of leases which have been “predetermined”?

His Honour answered this question by saying that the basis of calculation was to be as per cl 4(b) but without any allowance for a “predetermination fee”.  The basis of this calculation is challenged on appeal.

6.         How much is due to Esanda on its cross-claim?

His Honour found that the amount due to Esanda on its cross-claim was $856,819.40.  There is no appeal from this finding.

10                  We now turn to consider each of the matters raised on the appeal.

The construction and effect of the oral variation

11                  EMCL does not now challenge the finding made by His Honour that an oral variation to cl 4(c) was made in the terms of a handwritten note recorded in a memorandum of Esanda which reads:

“EMCL is agreeable to amend clause 4(c) of the Master Agreement to provide notice on the date of disposal.”

12                  This handwritten note, dated 27 February 1990, appears alongside a typewritten note which is one of a series of notes made under the heading:

“EMCL LUXURY LEASING

Items Requiring Investigation/Clarification

…

Why do we need to give EMCL 3 days notice of disposal.  This is a problem if customer wants to payout without warning.”

13                  The argument on appeal turned on the meaning and effect of the oral variation.  EMCL submits that cl 4(c), as so varied, was not a condition as to time but was a term which requires a sequence to be followed, namely that there be prior written notice of any proposed disposal before Esanda has any entitlement to dispose of a vehicle.  Such notice, so it is said, was required to be given, at the latest, on the day of disposal.

14                  Esanda, on the other hand, submits that the meaning and effect of the oral variation as recorded is that no prior notice is necessary to entitle it to dispose of a vehicle.  Notice of disposal under the amended provision must be given on the day of disposal but may be given either before or after such disposal.

15                  EMCL thus contends that the effect of the oral variation was to require prior notice to be given on the day of disposal.  Further, EMCL says that the requirement operated as a condition precedent to the entitlement of Esanda to dispose of a vehicle.  In the event of a sale without prior notice it says there will be a breach of contract.  However, it does not submit that any of the sales made in breach are invalid or that it has any action in conversion against Esanda.  EMCL contends that a “narrow” construction of the variation is appropriate because the purpose of the prior notice as originally framed was to secure a number of commercial benefits for EMCL.  In submissions EMCL lists thirteen perceived benefits.  They include matters such as the provision of an opportunity for EMCL to maintain and enhance its relationship with motor dealers and finance brokers and to create further business opportunities, to allow it to maintain relationships with corporate executives of large corporations, and also to enable it to provide an opportunity for EMCL to purchase the car in question or introduce a buyer.  These cumulative benefits are said to support a conclusion that the intent of the variation was limited and it operated only to reduce the period of priornotice required but not to dispense with the requirement of prior notice.  However, in our view, once it is accepted, as the applicant does, that the oral variation restricts the requirement of notice to the actual date of disposal, many, if not all, of the suggested advantages conferred by prior notification disappear.  Whilst there may have been some reasonably perceived advantages in having three days priorwritten notice before disposal, it is difficult to see what, if any, benefits flow from a few hours or possibly minutes prior notice of intended disposal.  It is also submitted on behalf of EMCL that the variation must be construed having regard to the taxation benefits which the parties must have borne in mind at the time of the oral variation, although there is no direct evidence as to the state of mind of the parties with respect to taxation at the relevant times.

16                  The different results which flow from the submissions as to the effect of the oral variation of cl 4(c) can be illustrated in the following two possible reformulations.  The EMCL submission is that the amended clause is to this effect:

“(c)     Notwithstanding anything herein contained, the Financier [Esanda] may not dispose of a Car upon the expiration of the Period of the Lease or any extension thereof or following an early termination unless the Financier [Esanda] gives prior written notice of the proposed disposal on the date of disposal.” (Emphasis added)

17                  This formulation emphasises the need for prior notice.

18                  The submission of Esanda is to the following effect:

“(c)  Upon the expiration of the Period of the Lease or any extension thereof or following an early termination, the Financier [Esanda] agrees to give to the Lessor [EMCL] notice of disposal not later than the end of the day on which the disposal takes place.”

19                  In this latter formulation, prior notice is not required and there is no prescription of any pre-condition to valid disposal.

20                  In considering the effect of the amendment, the first matter to be noted is that the variation was a solution to a practical problem perceived by Esanda in complying with a requirement to give three days notice of disposal in circumstances where a customer wishes to make an urgent payout without any prior warning.  This could arise, for example, where a lessee negotiates a deal to purchase a replacement vehicle and wishes to finalise arrangements immediately.  The lessee may wish to make an immediate pay-out on the old vehicle.  In such circumstances three days prior written notice or indeed any prior notice may be impracticable and unrealistic.  This problem is resolved if the requirement for prior notice is dispensed with.

21                  A second matter to note is that the language of the variation as recorded by the note is silent as to whether notice is to be given before or after disposal.  Further, the note does not require, on its face, that the notice should be written.  In these respects the note differs significantly from the original cl 4(c).  In addition, the language used is to the effect that the clause should be amended to “provide” notice.  The word “provide” is consistent with the view that the purpose of the clause was to dispense with the requirement of notice “prior” to disposal.  Its effect in terms is to provide for notification of a sale to be given by the close of the day on which disposal takes place, in accordance with the second formulation set out above, as was advanced by Esanda.

22                  In the present circumstances, where both the natural and ordinary meaning of the language and the evident purpose of the oral variation was to resolve a specific problem arising from unanticipated requests for immediate disposal, we consider that the construction advanced for Esanda is to be preferred.

23                  Accordingly, we do not accept the submission by EMCL that the variation preserved a requirement for any prior notice of disposal.  On its proper construction the variation requires notification of disposal, either oral or written, to be given either before or after disposal but prior to the end of the day on which disposal takes place. Prior notice is not therefore a condition precedent to the entitlement to sell.

24                  Having reached this conclusion as to the effect of the amendment it is not necessary for us to deal with the submissions made as to construction of cl 4(c) in its original form; nor the questions going to variation of the Agreement by conduct or estoppel.

Entitlement to commission

25                  EMCL also argued (at least implicitly) that even if notice were not a condition precedent to the right to sell pursuant to cl 4, nonetheless it was a condition precedent to Esanda’s entitlement to commission pursuant to that clause.  It seems that in some instances, no notice was given, before or after sale.  The Agreement conferred numerous rights and obligations upon Esanda, including the right to sell, an entitlement to commission when it did so and an obligation to give notice of sale.  Nothing in the language used in the Agreement suggests a common intention that any breach of the obligation as to notice should have consequences other than those normally flowing from a breach of contract.

26                  For Australia, the classic statement of those consequences is found in the decision of the High Court in Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 336, where the Court (Dixon, Williams, Webb, Fullagar and Kitto JJ) said:-

“The first question is whether the company’s undertaking to present the defendant’s drawings on the front page of the comic is a condition or essential term of the contract going to its very root, the breach of which would immediately entitle the defendant at his option to rescind the contract and sue for damages for the loss of the contract, or a mere warranty or non-essential and subsidiary term the breach of which would entitle the defendant to damages.  Various tests have been advanced by the courts from time to time to determine what is a condition as opposed to a warranty.”

27                  At 337, their Honours endorsed the following statement by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938)38 SR (NSW) 632 at 641 and 642:-

“The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor … .  If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.”

28                  Clearly, the obligation imposed by cl 4(c) in its amended form lacked the element of essentiality and therefore was “a mere warranty or non-essential and subsidiary term the breach of which would entitle [EMCL] to damages”.  In light of this, it was not open to EMCL to terminate the Agreement for such breach.  It follows that Esanda became entitled to commission upon effecting each sale, although EMCL was entitled to recover damages for any loss flowing from the failure to give notice, no claim for which was pleaded.  Counsel for EMCL submitted that Heerey J ought to have permitted such a claim once his Honour had rejected the appellant’s principal arguments.  In support of this assertion, counsel attempted to demonstrate that the question of damages for breach of cl 4(c) had always been a live issue and that EMCL had been incorrectly excluded from ventilating it.  However, in the course of argument before us, EMCL conceded that if the Court considered that the amendment to cl 4(c) relieved Esanda from any obligation to give notice prior to sale, no claim for damages could be made out: see Appeal Book (“AB”) at 459-460.  As we have formed that view, it is unnecessary for us to consider par 4 of the notice of appeal which asserts that his Honour ought to have awarded damages for breach of cl 4(c).

Amendment – cl 4(b) argument

29                  After Heerey J delivered judgment on 17 September 1998, EMCL sought to advance an argument based on a new construction of cl 4(b) of the Agreement, which had not previously been foreshadowed.  The contention sought to be raised was that where leases had been terminated early, the calculation of the amount due by Esanda should exclude the net present value of the residual value of the vehicle.  As pointed out on behalf of Esanda, the “new” case was contrary to the way in which such calculations had been carried out during the operation of the Agreement.  In monetary terms this would have increased the amount of the alterative claim of EMCL based on cl 4(b) from a figure of less  than $2 million to a claim in the order of about $16.8 million.

30                  The application to amend was rejected by Heerey J, in his ruling on 17 November 1998, having regard to the way in which the case had been conducted by EMCL up to that point.  The new alternative claim had not been “hinted at” until an affidavit was filed on or about 9 November 1998.  His Honour considered that it would be unfair to allow this belated claim to be opened up.  The application before Heerey J was strenuously opposed by Esanda.  Senior Counsel for Esanda said that the case had been conducted on the basis of detailed particulars furnished by EMCL which did not indicate  that a new case was to be made in relation to cl 4(b).  He said that if the present application had been made at the proper time its case would have been conducted differently in that its pleadings would have been different and there would have been a suit for rectification of the sub-clause.  In either event there would have been the necessity for further evidence and cross-examination at the trial. 

31                  The record demonstrates the point made by Heerey J and by counsel for Esanda.  A letter of 15 December 1997 (AB 994-9), provides particulars of par 14B of the Further Amended Statement of Claim.  It shows that EMCL recognised the entitlement of Esanda to include the residual value in the amounts to be deducted from the net proceeds of sale, for the purposes of cl 4(b), where there had been early termination of the relevant lease.  Further, in opening, counsel for EMCL told his Honour (AB 145):

“There’s some debate – an ancillary debate, a peripheral debate in a way – about the method of calculation of the 50 per cent under that clause.  In the end, its probable that that’s in effect a matter for the determination of quantum, but there is a question of construction which is raised in a way because Esanda initially treated that clause as applying to an amount called the pre-determination fee and split it fifty-fifty, so that one half was an amount called the pre-determination fee.”

32                  At AB 148 counsel said:

“How does this operate in terms of construction of clause 4.  Clause 4(c) is plain enough, that is, that the financier may not dispose of the car upon the expiration of the period or any extension thereof or following early termination.  So it expressly envisages an early termination.  I think your Honour had noted that the earlier notices refer to a predetermination so 4(c) envisages an early termination of the lease but speaks not of a determination of the lease but of a disposal of the vehicle.

It then provides that the financier may not dispose of the car unless the financier gives the lessor not less than three days’ written notice.  Now, in practice and in commercial reality all that’s required for Esanda to make good then its right to dispose of the car under (c) and then in turn the amount of commission on the sale of the car under (b) for acting as agent for the lessor, is for it to give a notice.  So it wouldn’t be very surprising that in commercial terms the value of that right is going to equate very closely to a value of the residual because in effect the amount of the commission on the sale of the car is going to include the residual, and then provides for a profit-sharing as to amounts which exceed the residual or the net present value.”

33                  These passages support the conclusion that the respondent’s treatment of the residual value was not in dispute and that the only construction questions concerning cl 4(b) were as to the pre-determination fee, which point was decided in favour of EMCL, and the discount rate as discussed below.

34                  In substance the EMCL application seeks review by this Court of a discretionary ruling by a trial judge.  The principles which set out the requirements to justify such an interference are well settled and need not be repeated here: see House v The King (1936) 55 CLR 499 at 504-5.  Application of these principles leads to the conclusion that this belated application must be refused.  None of the features there referred to are made out.  During the hearing of the appeal an application for leave was made to allow an appeal from his Honour’s ruling on the new cl 4(b) claim.  We reject that application.  We are not persuaded that we should interfere with the ruling particularly having regard to the procedural history of the matter and the way in which the case has been conducted by EMCL.  Accordingly, the Court is not prepared to grant leave to argue that the ruling of Heerey J on 17 November 1998 should be set aside.  We are of the view that there was ample justification in the circumstances for his Honour’s determination on this question. 

Discount rate in calculation of “net present value of the outstanding rentals”

35                  In order to understand this aspect of the appeal, it is necessary to have a broad understanding of the issue.  It will be recalled that pursuant to cl 4(b), in the event of disposal of a vehicle following early termination, Esanda was entitled to retain one half of the amount by which the net proceeds of disposal exceeded the “net present value of the outstanding rentals”, raising the question of the meaning of the expression “net present value of the outstanding rentals”.  Three definitions appearing in cl 1(b) of the Agreement are relevant.  They are as follows:-

‘Discount Consideration’ [means] in respect of any Receivables, the amount calculated in accordance with cl 3(a).

‘the Receivables’ means all monies which a customer pursuant to a Lease of car from [EMCL], covenants to pay to [EMCL] pursuant to cl 2(a) of the Lease.

‘Discount Rate’ means the rate of interest per annum (expressed as a discount rate) from time to time notified to [EMCL] by [Esanda] in writing as the rate to be used in the calculation of the Discount Consideration on and after the date of the receipt of the notice by [EMCL].

36                  Clause 3(a) provides:-

“The Discount Consideration payable by [Esanda] on assignment of the Receivables, in each case, shall be the net present value of the Receivables to be acquired, calculated on the basis of the discount rate advised to [EMCL] in writing on or before the date of the relevant written notice … .”

37                  The reference to a “Lease” is to the various leases entered into by EMCL with its lessee customers.  A standard form of lease was to be attached to the Agreement, but this was not done.  In practice, an Esanda lease was subsequently adopted, although it was re-written in the name of EMCL.  It appears at AB 886-892.  Clause 6 of the lease relates to default and provides that if the lessor becomes entitled to repossess any goods from the lessee, then an amount (called the “recoverable amount”) is payable by the lessee to the lessor, calculated by reference to a number of factors including “[t]he aggregate of the rent instalments not then accrued due rebated to reflect the present value, such value to be ascertained by applying the discount rate (as defined herein) to each rental instalment …”. 

38                  Subsequently, “Discount Rate” is defined to mean:-

… “the rate which, when applied to a future instalment or payment or the residual value as aforesaid will ensure that the lessor shall receive the same rate of pre-tax return or profit after such discounting as the lessor would have received from the lease if all instalments and payments had been paid on their respective due dates and an amount equal to the Residual Value had been received on the date of expiration of the lease.”

39                  Although this definition relates to circumstances of default, cl 7(b) (which relates to early termination) also provides for the lessee to become liable to the lessor in an amount equal to the “recoverable amount (rebated and discounted as at the date of such return)”.  This is apparently a reference to the “recoverable amount” referred to in cl 6.  Pursuant to cl 1(a) of the Agreement of 2 January 1990, “Expressions defined in the form of lease set out in Schedule 4 have the same meaning as in this Agreement.”  Although it is not entirely clear, it seems that one of EMCL’s arguments is that in calculating the net present value of outstanding rentals for the purposes of cl 4(b), one should adopt the same process as is prescribed in cl 6, and adopted for the purposes of cl 7(b) of the lease.  Inherent in this argument may be the further proposition that the expression “Discount Rate”, where it is used in cl 6(h), is the same rate as that specified in the definition section of the Agreement of 2 January 1990.  Clause 3(a) of that Agreement also prescribes a similar exercise for calculating the Discount Consideration, applying the Discount Rate to Receivables which are, by definition, the amounts due by way of rent.  Of course, the rate might vary from lease to lease.

40                  There are two other aspects to EMCL’s argument.  The first is that the Corporations Law required that Esanda use the interest rate in such leases in valuing them for internal accounting purposes.  The second is that certain tax rulings and decisions dictated a similar approach for tax purposes.  Although it is again not entirely clear, it seems that EMCL wishes to argue that such obligations also bound Esanda for present purposes.  It is, of course, not possible to evaluate fully any of these arguments as they have not been properly ventilated.

41                  EMCL raised this issue in its particulars at par 14B of the further amended statement of claim, referring to a letter dated 15 December 1997.  A complete copy with annexures appears at AB 994 et seq.  In particular, there is a document headed “Formula for Net Present Value” (AB 998) which refers to the “periodical interest rate to the customer”.  It seems that Esanda was aware of the argument.  For example, in an affidavit by John Patrick Kent filed on its behalf and sworn on 9 November 1998, the deponent asserted that:-

“… Esanda will submit that, in any event, the court ought to reject any argument by EMCL that the net present value of future rentals and the residual value ought be calculated by reference to the interest rate used for calculating payments due under the lease.”

42                  The outline of EMCL’s submissions on the issue of quantum, presumably for use on 17 November, appears at AB 1753.  In par 5 (AB 1755) reference is made to the formula which is at AB 998.  At par 11 (AB 1758), this passage appears:-

“… The applicants contend that the appropriate discount rate to be used for the calculation of net present value is the relevant interest rate used to calculate the amounts payable under the lease in question …”.

43                  Esanda was asserting that the “net present value of the outstanding rentals” for the purposes of cl 4(b) should be determined by expert evidence from actuaries and/or accountants.  Such an argument assumed that the Agreement did not otherwise indicate the appropriate basis for the calculation.  At the hearing on 18 December 1998 counsel for EMCL asserted a desire to advance the points to which we have referred.  His Honour refused to allow him to do so, saying (AB 489):-

“I’ve heard what Mr Searle has to say on this point and I’m satisfied that on 17 November counsel agreed to be bound by such agreement as the experts should reach as to the interest rate to be used for calculation of the net present value and I don’t propose to entertain any other rate.”

44                  The minutes of order made on 17 November appear at AB 1825-7.  Paragraph 1 directs the experts “to meet and endeavour to reach agreement as to the amount due pursuant to cl 4(b) of the Master Discount Agreement referred to in the pleadings in this proceeding in respect of leases which have been pre-determined”.  Sub-paragraph 2(2) provides that they adopt an interest rate agreed by them or failing agreement, one of a number of specified alternatives, including the “internal implicit interest rate in the lease”.  Other parts of the evidence suggest that this is a reference to the Discount Rate mentioned in the Agreement and the leases or perhaps, to an interest rate to be calculated from, or used in calculating such Discount Rate.  The order does not prescribe the effect to be given to any such agreement between the experts.  One might assume that its effect would be to resolve any dispute in the evidence as to the appropriate discounting rate, to the extent that such rate was properly to be established by such evidence.  That would not dispose of any argument, based on the proper construction of the Agreement and the leases, that the rate was prescribed by those documents. 

45                  The experts’ combined report is at AB 1663-4.  Relevantly, they report that they had reached agreement that:-

“The net present value of each pre-determined lease should be calculated by adopting an interest rate equivalent to Esanda’s borrowing rate at the pay-out date for a period equivalent to the remaining term of the lease, plus the interest rate margin used by the respondent for that lease originally … .”

46                  The experts also report that:-

“There may be grounds for the Court to conclude that the contract interest rate is appropriate for cl 4(b)… .”

47                  Esanda asserted that the inclusion of this latter paragraph was as a result of EMCL’s urgings.  This was not disputed and demonstrates that during the period between the hearing on 17 November and that on 18 December, EMCL had continued to assert the appropriateness of an interest rate calculated by reference to the terms of the Agreement and the various leases, rather than one fixed by experts. 

48                  This difference between the parties’ respective approaches is also evident from the transcript of proceedings on 17 November.  At AB 441 counsel for Esanda raised three questions for consideration, the second being the discount rate.  At AB 468 Mr Searle for EMCL clearly asserted that the appropriate interest rate for the purposes of calculating net present value was what he described as “the interest rate implicit in the lease”.  At AB 469 he indicated that he required the experts to do two sets of calculation.  Again, at AB 470, it was made clear that EMCL required the calculations to include figures based upon both the applicant’s and the respondent’s “scenarios”.  At AB 471 counsel for Esanda said:-

“The only alternative I can suggest is that the experts endeavour to agree to matters in dispute and if they can’t, that two sets of calculations are made and that when we come back, at least the calculations will have been made and we just have to determine the issues upon which they can’t agree.  Because it may well be that in two of the three issues in dispute they can agree and the figures can be prepared on two alternative bases, depending upon the answer to the outstanding question, I think.  That’s the only alternative I can suggest to your Honour deciding now these issues.”

49                  At AB 472 his Honour said:-

“In other words, one witness would say, ‘Well, I think the implicit interest rate is appropriate because’ – such and such a reason – and the report would include the actual figures based on that assumption and there would also be figures based on …”

50                  At AB 473 his Honour said:-

“But as I understand the stage we have reached now, the actuaries will meet, they will prepare figures and agreeing, if possible.  Where they disagree on matters and notably 2(2), the appropriate interest rate, they will endeavour to agree on what the figures are, given each of those two competing assumptions, and they will present a joint report and – well, the report will include each gentleman’s contention as to the reasons that he thinks the given – whichever interest rate is appropriate.  This will all be in by the 10th.”

51                  Although EMCL agreed to consultation between the experts, it is clear that it continued to urge that the appropriate interest rate was not to be determined by reference to expert evidence, but by reference to a rate discernible from the Agreement itself, although some formal extrinsic evidence may have been necessary to support some of its arguments.

52                  The present question is whether Heerey J was correct in ruling that EMCL had agreed to be bound by any agreement reached between the expert witnesses, and the effect of any such agreement.  We have read and re-read the transcript of proceedings on 17 November and are unable to conclude that counsel for EMCL agreed that the question of the appropriate discount interest rate should be so determined.  At all times, counsel maintained his submission that the interest rate implicit in the lease should be used.  We feel that misunderstanding has arisen because counsel for Esanda assumed that the argument being advanced by EMCL was based upon the same assumption as was his own argument, namely that the matter was to be determined by expert evidence rather than by construction or legal necessity.  It is likely that he thought that EMCL was merely asserting factors which the experts should consider, including rates in the leases and accounting practices for other purposes.  Although those matters may have been appropriately considered by the experts in their deliberations, that was not EMCL’s primary point in raising them.  Its argument was that as a matter of law and/or construction, the interest rate in each lease was to be adopted.  This submission could not have been disposed of by agreement between the expert witnesses.  Counsel for EMCL understood the argument advanced against him.  If that argument were successful, the expert evidence would be relevant, and so agreement between the experts would be of value.  Thus he agreed that they attempt to resolve their differences.  That did not compromise EMCL’s entitlement to advance its own point concerning the appropriate rate, which did not rely upon or involve such expert evidence.

53                  We do not suggest that EMCL’s arguments were necessarily strong, but they were worthy of consideration.  In the circumstances, we consider that the question of the discount rate must be reconsidered.  Given the history of this matter, we would very much like to dispose of it ourselves rather than refer it back for reconsideration by a Judge at first instance.  However there appear to be limited factual matters which EMCL wishes to address with respect to its arguments arising out of the Corporations Law, the Income Tax Assessment Act 1997 (Cth) and associated rulings and decisions.  Such evidentiary matters were not addressed previously because of the splitting of the trial on the issues of liability and quantum.  It would be inconvenient to reconvene this Court to determine such factual matters as it is comprised of Judges from three different centres.

54                  The appeal should be allowed to the extent necessary to permit the parties to ventilate the issue of whether the appropriate discount rate should be chosen having regard to the interest rates agreed by the experts and used in connection with the calculations which appear at AB 1663-4 or whether those calculations ought to have been done using discounting rates based upon an interest rate or interest rates to be derived from the Agreement and from the relevant leases entered into pursuant thereto.  This question should be referred back for determination by a single Judge in the Melbourne registry.  This is a discrete matter, separate from the balance of the case, and it is not particularly difficult.  We see no reason why Heerey J should necessarily resolve this aspect.  Any other Judge could just as conveniently do so.  However it will probably be necessary that the Judge to whom the matter is assigned give directions with a view to crystallizing the issues prior to hearing. 

Costs

55                  The primary judge awarded Esanda two thirds of its costs, including reserved costs, up to and including the judgment on 17 September 1998.  His reasons for this award were expressed as follows:

“This litigation was to some extent provoked by Esanda.  It should have been able to provide timely information to EMCL.  It not only did not do that, but wrongly asserted waiver and alleged agreements which denied the contractual right of EMCL to the 50 per cent under cl 4(b).

However, the litigation was commenced by EMCL and dominated by EMCL’s construction claim which it asserted would result in $64 million being due to it.  That claim, which failed, occupied most of the hearing.”

56                  His Honour said he would make some reduction for the factors he had mentioned.  By this we understand him to have meant that but for Esanda’s unsatisfactory conduct he would have awarded it more than two thirds of its costs.  His Honour left the parties to bear their own costs from 17 September 1998 onwards.  He did this because during that period they had been working out, with the aid of experts, what should be due.

57                  EMCL claimed that it should have had its costs in accordance with the ordinary rule that costs follow the event.  It was said that there were no exceptional circumstances sufficient to displace the ordinary rule.  Costs are always in the discretion of the judge.  EMCL had sued for a very large sum ($64 million), but recovered a comparatively small amount ($90,529.83) after deduction of the amount owing on the cross-claim.  The court declared that Esanda was entitled to receive the residual value in respect of the lease of 2749 vehicles, and granted permanent injunctions enjoining EMCL from engaging in certain conduct in relation to those vehicles.  In those circumstances it was in our view open to his Honour to have awarded Esanda most of its costs, because most of the hearing time was occupied with issues upon which EMCL failed.  It was also open to his Honour to have adjusted the costs somewhat in EMCL’s favour because of Esanda’s conduct.  The award of two-thirds of Esanda’s costs was within the scope of his Honour’s discretion, and we would not interfere with it.

Cross appeal – interest prior to judgment

58                  Section 51(A)(1) of the Federal Court of Australia Act 1976 (Cth) provides in part that:

“In any proceedings, for the recovery of any money (including any debt or damages or the value of any goods) … the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

(a)       order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which the judgment is entered; or

(b)       … order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.”

59                  The primary judge awarded EMCL interest at the rates payable under the Penalty Interest Rates Act 1983 (Vic).  Over the period in question, these rates were 13.2 per cent and 12.3 per cent.  His Honour made the award in reliance on a line of authority in which the Federal Court has adopted the practice of applying the interest rates specified for the Supreme Court of the State in which the case was heard.  In Namol Pty Ltd v AW Baulderstone Pty Ltd [No 2] (1993) 47 FCR 388 at 389 Davies J said this was the usual practice when the Court was sitting in New South Wales.  The reason his Honour gave was that the rates applicable in the Supreme Court “reflect commercial rates of interest, which is not the case for the rates prescribed in O 35 r 8 of the Federal Court Rules”.  He added that the practice had the policy advantage of ensuring that damages are awarded on the same basis, whether a matter be instituted in this Court or in the Supreme Court.  The practice was applied by Burchett J sitting in Sydney in Kettle Chip Co Pty Ltd v Apand Pty Ltd (1998) 155 ALR 134.  In Nagy v Masters Dairy Ltd (1996) 150 ALR 273 at 317 Nicholson J sitting in Perth adopted the same approach “because (the Supreme Court rates) reflect commercial rates.”

60                  For Esanda it was submitted that the primary judge did not give any consideration to whether the rates applicable under the Penalty Interests Rates Act reflected commercial rates.  In fact they were not commercial rates, but were truly penal.  Accordingly, it was said, his Honour should not have applied the earlier cases because they were predicated on the Supreme Court interest rates reflecting commercial rates.

61                  It is not correct to say that his Honour did not consider whether the Victorian rates reflected commercial rates.  He noted that during the relevant period the prescribed rates were 13.2 per cent and 12.3 per cent, and there was the evidence of the experts that a commercial rate was 9 per cent.  Heerey J said it would be undesirable for there to be distinctions drawn from State to State, depending on whether it was thought the regime in any particular State did or did not impose a commercial rate of interest.  Accordingly, his Honour was alert to the fact that the Victorian rates were not commercial, and his exercise of discretion as to the rate to be applied did not miscarry in the manner asserted.

62                  Section 51A(1)(a) confers a discretion to fix the rate.  In order for a discretionary judgment to be interfered with on appeal, it is not enough that the appellate court would not have reached the same conclusion as the primary judge.  It must appear that some error has been made in exercising this discretion – for example that the judge allowed an extraneous or irrelevant matter to guide him, or failed to take into account or accord sufficient weight to a material consideration.  See Australian Coal and Shale Employees’ Federation v The Commonwealth (1953) 94 CLR 621 at 627.  In those circumstances the determination can be reviewed, and the appellate court may exercise its own discretion in substitution for that of the judge, if it has materials for doing so.  In our view the primary judge’s discretion miscarried.  The reason his Honour adopted the Namol practice was not because he thought it appropriate to fix interest at a penal rather than a commercial rate.  It was because of the “obvious practical value in having the Federal Court applying the same interest rate as would be applied in litigation in the same State in which the case is being heard”.  Whatever might be the position where there is no evidence that the rate applied under a State law is penal and not commercial, in a case such as the present where there is, it is wrong in principle to put aside the fact in favour of a policy that produces a uniformity of outcome as between courts.  To do that is to fail to take into account a material consideration, namely that the Namol practice is founded on the State rate reflecting commercial rates.  His Honour’s discretion miscarried.  We would award pre-judgment interest at the commercial rate of 9%.  The cross-appeal should be allowed.

Conclusion

63                  For the reasons given above, our findings on this appeal are as follows.  Esanda is entitled to its commission on the sale of cars, pursuant to cl 4(b) of the Agreement: cl 4(c) does not require notice as a condition precedent to the right to sell or the entitlement to commission.  Clause 4(c) was varied by oral agreement so that notice of disposal was required not later than the end of the day on which the disposal takes place.  Consequently, damages for breach of cl 4(c) cannot be made out.  In these circumstances we refuse leave to EMCL to claim such damages.  Leave is also refused to the application to appeal from Heerey J’s interlocutory ruling in which he refused to hear new argument from EMCL on the “new” construction of cl 4(b) of the Agreement. 

64                  With regard to his Honour’s ruling on the discount rate, to be applied in the calculation of the net present value, we consider that the appeal should be allowed in part.  The matter should be referred back to a single judge in the Melbourne registry, to determine whether the appropriate discount rate should be chosen on the basis of the interest rates agreed by experts and used in connection with the calculations that appear at AB 1663-4, or whether those calculations ought to have been done using discount rates based upon an interest rate or interest rates derived from the Agreement and from the leases entered into pursuant thereto.

65                  EMCL’s appeal against Heerey J’s ruling on costs is dismissed for the reasons given.  However, Esanda’s cross-appeal against his Honour’s decision to apply the interest rates prescribed by the Penalty Interest Rates Act 1983 (Vic) is allowed.  In exercise of our Court’s discretion we award interest at the commercial rate of 9%.

Associate:

Dated:              20 July 1999