FEDERAL COURT OF AUSTRALIA

Issa v Dairy Farmers Pty Ltd [2018] FCA 542

ORDERS

THE COURT ORDERS THAT:

1.    The appellants’ interlocutory application seeking leave to adduce additional evidence be dismissed with costs.

2.    The appeal be dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BROMWICH J:

Introduction

1    This is an appeal from orders made by a judge of the Federal Circuit Court of Australia, which included a sequestration order being made against the estates of the appellants under the Bankruptcy Act 1966 (Cth). The respondent to this appeal and petitioning creditor before his Honour, Dairy Farmers Pty Ltd, had been a franchisor in a dairy products franchise to which the appellants/debtors, Mr Gihad Issa and Mrs Maha Issa, were franchisees.

2    The appeal turns on an unhappy outcome of an agreement constituted by written terms of settlement signed by the parties. Dairy Farmers agreed to accept, and the appellants agreed to pay, $40,000 by five equal instalments over five months in full and final satisfaction of a prior acknowledged debt of $100,000. The $100,000 had remained owing after the franchise agreement between the parties was terminated by Dairy Farmers for breach and a payment of $200,000 had been made by the appellants consequent upon that termination. A sum of just over $109,000 remained outstanding. Dairy Farmers only pursued payment of $100,000 so as to remain within the jurisdictional limit of the Local Court of New South Wales, and then agreed to accept $40,000 by instalments in full satisfaction of that amount.

3    When the final instalment of $8,000 was not paid by the appellants as agreed, Dairy Farmers relied upon the terms of settlement to enter judgment for its claim of $100,000, less instalment payments made of $32,000, to issue a bankruptcy notice for the judgment sum of $83,416.97, which included professional costs, service and filing fees and interest, and to petition successfully for sequestration when that bankruptcy notice was not complied with.

4    The key issue raised at the hearing of Dairy Farmers’ creditor’s petition before the primary judge was whether the court in bankruptcy should go behind the judgment debt relied upon by Dairy Farmers to find that the judgment was not in fact based on a true debt. To this end, the appellants argued unsuccessfully that enforcement of the original debt by reliance on the terms of settlement was precluded. That argument was based on a characterisation of the terms of settlement as having involved the immediate end of the existing debt and it being replaced with a new debt for $40,000, to be paid by five instalments of $8,000.

5    On the appellants’ argument, their liability to pay $100,000 to Dairy Farmers therefore only arose from the terms of settlement when the last payment of $8,000 was not made, and not from any antecedent obligation. Viewed in that way, the appellants’ default on the last $8,000 instalment made them liable to instead pay $68,000, which, they asserted, amounted to a penalty on the application of well-established principles.

6    The argument made by Dairy Farmers, both at first instance and on appeal, was that the terms of settlement did not entail any end to the existing $100,000 debt, but, rather, an agreement that, if the $40,000 was paid in full and on time, that would result in the balance of $60,000 not being payable. If any or all of the instalments were not made, and on time, the full amount would remain payable. On that approach, Dairy Farmers had done no more than to enforce the terms of settlement as agreed with the appellants.

7    One point of common ground was that the terms of settlement were not clear enough to favour either argument without engaging in a process of construction of those terms against the backdrop of well-established authority in this area.

8    The appellants’ alternative argument, which was also unsuccessful before the primary judge, was that even if Dairy Farmers had been entitled to recover the balance of the $100,000 debt, the way in which that had been pursued was unconscionable. This argument was run on inadequate evidence before the primary judge, and was sought to be supplemented by fresh evidence on appeal. Dairy Farmers resisted the additional evidence being permitted to be relied upon. Dairy Farmers also argued that, with or without that additional evidence, it could not be shown that there was any unconscionability on its part, or any error on the part of the primary judge.

Chronology of key events

9    The following chronology of key events is drawn from the chronology furnished by the appellants, cross-referenced to documentary evidence before the primary judge that was mostly reproduced in the appeal book. Dairy Farmers mostly agreed with that chronology, save as to events drawn from the appellants’ additional evidence. The summary below is also supplemented with extracts from key documents.

10    On 30 April 2007, the parties entered into a franchise agreement. On 22 August 2013, Dairy Farmers issued a notice to remedy default to the appellants. On 3 January 2014, Dairy Farmers terminated the franchise agreement. On 15 January 2014, the appellants paid $200,000 to Dairy Farmers.

11    The appellants’ chronology additionally refers to Dairy Farmers having advised the appellants that, if they sold their franchise to a purchaser nominated or approved by Dairy Farmers, they could offset the sale proceeds against the balance of moneys owed and pay the residue to the appellants. Dairy Farmers did not agree to the inclusion of this evidence, or possibly to aspects of its contents. Nothing seems to turn on any issue that there might be as to the accuracy of the contents of that evidence.

12    On 23 January 2014, the parties signed a settlement deed (2014 settlement). Dairy Farmers relied upon the terms of cl 3 of the 2014 settlement dealing with payment to establish a pre-existing debt. This was part of the evidence received by the primary judge over objection, with that objection not being pursued on appeal. The payments clauses of the 2014 settlement were as follows (omitting extraneous detail):

3    Payment

3.1    Payment by the Franchise Owner

(a)    The Franchise Owner agrees to pay Dairy Farmers the Specified Amount.

(b)    The Specified Amount will be constituted by:

(i)    an initial amount of $200,000.00 (“Initial Amount”); and

(ii)    a subsequent amount of $109,160.09 (“Subsequent Amount”).

3.2    Payment method

…

3.3    Time payment received

…

3.4    Payment default

If any part of the Specified Amount owing is not paid in accordance with this clause 3 (“Default Amount”), the parties agree that:

(a)    Dairy Farmers is immediately entitled to seek recovery of the Default Amount from the Franchise Owner as a debt, including by commencing legal proceedings; and

(b)    if Dairy Farmers commences legal proceedings to recover the Default Amount, this Deed stands as proof that the Franchise Owner is liable to Dairy Farmers for the Default Amount.

13    Between late January 2014 and mid-2015, various attempts were made to sell the franchise. It suffices for present purposes to note that this did not result in the appellants successfully discharging their outstanding debt to Dairy Farmers.

14    On 3 June 2015, Dairy Farmers filed a statement of claim in the Local Court seeking enforcement of the $109,160.09 debt acknowledged in cl 3.1(b)(ii) of the 2014 settlement, albeit limiting its claim to $99,999.99. This was evidently done so as to remain within the jurisdictional limit of the Local Court. Default judgment was obtained by Dairy Farmers and on 12 August 2015, Dairy Farmers issued the appellants with an examination notice.

15    On 13 August 2015, Dairy Farmers procured the issue of a bankruptcy notice addressed to the appellants. The appellants disputed service of the statement of claim and successfully applied to have the default judgment set aside in November 2015. On 1 December 2015, Dairy Farmers filed an amended statement of claim in the Local Court.

16    On 23 February 2016, the Local Court made consent orders in accordance with terms of settlement signed by the parties and dated the same day (2016 terms of settlement). The complete text of the operative components of the 2016 terms of settlement was as follows:

TERMS OF ORDER MADE BY THE COURT BY CONSENT:

1.    The Defendants are to pay the Plaintiff the amount of $40,000.00.

2.    The amount of $40,000.00 is to be paid as follows:

i.    Equal monthly instalments of $8,000.00;

ii.    First instalment of $8,000.00 to be paid in cleared funds on or before 4pm on 26 March 2016;

iii.    Payment of $8,000.00 to be paid in cleared funds on or before 4pm on the 26th day of every month thereafter until $40,000.00 is repaid.

3.    If any of the payments referred to at 2 above are not received in cleared funds by any due date, then the Plaintiff is entitled to enter Judgment against the first and second defendants for the sum of $100,000.00 plus interest and costs as outlined on the statement of claim filed 20 January 2016 and interest at the scale rate since 20 January 2016 on the amount of $100,000.00 (less any amounts received by or for the benefit of the Plaintiff since the filing of these terms).

4.    Judgment as per 3 above shall be entered upon the filing of an affidavit by the Plaintiff, deposing to the default in payment in accordance with these terms and the first and second defendants will consent to judgment being given against them for the sum outlined at 3 above.

5.    Production of these terms of settlement shall be conclusive evidence of the consent of the first and second defendants to the re-instatement of the proceeding and the giving of judgment as aforesaid.

6.    The parties otherwise hereby and forever release and discharge one another from all actions, claims, suits, demands, damages and costs in any way based on or arising out of or in connection with the matters alleged in the pleadings served in these proceedings or in connection with the franchise agreement between the parties and if called upon to do so shall execute a formal release to be prepared by and at the expense of the party requiring the same.

17    The above text of the 2016 terms of settlement and consent orders made by the Local Court required payments to be made by the appellants as follows:

(1)    $8,000 by 4.00 pm on 26 March 2016;

(2)    $8,000 by 4.00 pm on 26 April 2016;

(3)    $8,000 by 4.00 pm on 26 May 2016;

(4)    $8,000 by 4.00 pm on 26 June 2016;

(5)    $8,000 by 4.00 pm on 26 July 2016.

18    In an affidavit sworn on 29 July 2016 by a solicitor employed by the firm representing Dairy Farmers, and read in the proceedings before the primary judge, it was stated (and not disputed on appeal) that in the aftermath of the signing of the 2016 terms of settlement, payments were made totalling $32,000, albeit that each payment was later than the agreed (and court-ordered) payment date.

19    Some of the details reproduced below comprise facts, circumstances or events deposed to for the first time in an affidavit of Mr Issa affirmed on 2 March 2018, being fresh evidence sought to be relied upon that was not before the primary judge and not shown to be known to Dairy Farmers at the time that legal action was taken in reliance upon the 2016 terms of settlement. Evidence of this kind will be marked as “Fresh evidence:”. Dairy Farmers objects to all of this evidence being relied upon in this appeal.

20    Fresh evidence: In early July 2016, the appellants vacated rental accommodation at short notice from their landlord and moved into their own house, which was still subject to some construction works. Mr Issa said that he and his family were forced to live in “terrible circumstances”. He described problems with tradesmen demanding payment for work done, with some of those tradesmen making verbal threats of physical harm. This placed the appellants under considerable stress.

21    Fresh evidence: On 15 July 2016, the appellants’ son was involved in a serious motor vehicle accident.

22    On 19 July 2016, Dairy Farmers notified the appellants that if the fifth instalment of $8,000 that was due on 26 July 2016 was late, it would enforce the 2016 terms of settlement. On 25 and 26 July, the appellants sought from Dairy Farmers a short extension of time to pay the fifth instalment of $8,000. The following emails were in evidence before the primary judge (omitting email addresses, email signatures and other extraneous details):

From: Jehad Issa

Sent: Tuesday, 26 July 2016 9:04 PM

To: Blake Palmer [The appellants’ legal representative at the time]

CC: Zac W Gazzard [Dairy Farmers’ legal representative]

Dear Blake,

I appreciate your attempt to persuade them but unfortunately I do not have any money at the moment to be able to pay the required sum. If I was able to do so I would have did it. Please take into consideration that I am not working and don’t have a source of income. The best I can do is to pay the amount in full by the end of the following month. I am struggling at the moment to pay my bills so some leniency is all I am asking for, I haven’t requested an extension of time to pay before. I’m sure everyone goes through tough time and would expect other to have the decency to help one another.

…

On 26 Jul 2016, at 4:25 PM, Blake Palmer wrote:

Dear Jehad

Please see below.

I tried my best to persuade them to give you extra time earlier today, they have not been persuaded. If you default on the payment, the full remainder of the debt will become payable, not just the reduced amount of $8K (if I recall correctly).

Therefore, I suggest you do whatever you can to make the $8K payment on time.

…

-----Original Message-----

From: Zac W Gazzard

Sent: Tuesday, 26 July 2016 4:14 PM

To: Blake Palmer

Dear Mr Palmer,

We refer to your email dated 25 July 2016.

Please note our client will not be providing any further extension of time whatsoever as previously advised. We note your client has defaulted on all previous payments.

As previously advised, if the payment of $8,000.00 is not received in cleared funds by tomorrow, we are instructed to file default judgment in accordance with the agreed terms.

…

___

From: Blake Palmer

Sent: Tuesday, 26 July 2016 12:32 PM

To: Zac W Gazzard

Hi Zac,

I reckon this guy is good for it. I encourage your client to give him the extra time.

…

___

From Jehad Issa

Sent: Monday, 25 July 2016 9:55 PM

To: Blake Palmer; [Zac W Gazzard]

Hi Blake,

I apologise in advance but I am kindly requesting an extension of time for the last instalment of $8000.00. I have just recently moved houses and been busy organising things and paying all the tradies their bills for the work they completed. It would be greatly appreciated if you could provide me with time till the 31st of August 2016 to settle in to my home and organise everything for you in one final payment. I apologise for any inconveniences I may be causing but I have managed to keep up to date with all instalments and if I was able to pay the current instalment without any issues I would have done so. If you have and queries or concerns please do not hesitate to contact me.

…

On 19 Jul 2016, at 3:46 PM, Blake Palmer wrote:

Dear Jehad,

Please see below FYI.

…

-----Original Message-----

From: Zac W Gazzard

Sent: Tuesday, 19 July 2016 2:54 PM

To: Blake Palmer

Dear Sir,

We note your client’s next payment of $8000.00 is due in cleared funds by no later than 5pm, next Tuesday 26 July 2016.

Our client therefore puts your client’s on notice that if the $8000.00 is not received by that time, our client will immediately move to file its judgment against your clients in the full amount of $100,000.00 plus interest and costs (less the amounts already received pursuant to the terms of settlement) and in accordance with its rights under the terms of settlement.

Could you please acknowledge receipt of this email.

…

23    Fresh evidence: In his affidavit, Mr Issa said of the above emails that he was surprised by Dairy Farmers’ attitude because he had met the obligations in relation to the prior four instalments. He said that he tried to assemble the money to pay the fifth instalment of $8,000 but was unable to assemble the full amount. He said that he genuinely believed that Dairy Farmers would be mindful of his personal circumstances and provide a short extension of time. He said that he was able to pull together approximately $7,700 from his extended family, leaving the appellants $300 short.

24    On 1 August 2016, Dairy Farmers obtained default judgment against the appellants in the Local Court for $83,416.97. That amount was made up of $68,000, being the original $100,000 sought to be enforced in the Local Court less the four instalment payments of $32,000, professional costs of $693, service fees of $124, a filing fee of $456 and interest of $14,143.97. Also on 1 August 2016, Dairy Farmers had a bankruptcy notice issue for the judgment debt amount, but did not seek further interest. The bankruptcy notice and sealed copy of the Local Court default judgment was initially sent to Mr Issa by email the same day.

25    On 2 August 2016, Dairy Farmers obtained garnishee orders against the appellants. On 12 August 2016, Dairy Farmers recovered the sum of $7,696.06 from the appellants’ bank account.

26    Fresh evidence: The balance of Mr Issa’s 2 March 2018 affidavit details his shock at enforcement action being taken so quickly and his attempts to negotiate payment of the fifth instalment. He deposed to not being aware of the garnishee orders.

27    On 24 August 2016, Mr Issa was served with the bankruptcy notice. On 3 September 2016, Mrs Issa was served with the bankruptcy notice. On 29 September 2016, the Dairy Farmers filed a creditor’s petition in the Federal Circuit Court of Australia.

28    On 3 November 2016, the appellants filed a notice stating grounds of opposition to the creditor’s petition in the following terms:

Grounds of opposition

Gihad Issa and Maha Issa, the Respondents, intend to oppose the Creditor’s Petition on the following grounds:

1.    for the reasons set out in the succeeding paragraphs of this Notice pursuant to s. 52(2)(b) of the Bankruptcy Act 1966 there is another sufficient cause why a sequestration order ought not be made against either or both Respondents.

2.    The judgement relied upon by the Applicant in Proceeding No: 2015/164770 in the Local Court Sydney was entered in circumstances where it carried into effect an agreement entitled “Terms of Settlement”: a copy of which is attached and marked “A”, entered in those proceedings on 23 February 2016 between the Applicant as plaintiff and each of the Respondents as defendants for the compromise of those proceedings.

3.    The compromise of the proceeding was carried into effect in a way the provisions of paragraph 3 of the “Terms of Settlement” by their terms constituted a penalty which at law would be unenforceable.

4.    Alternatively, in the circumstances in which the judgment was entered and thereafter sought to be forced the conduct of the Applicant was unconscionable in that:

(a)    delay in satisfaction of the final payment provided for in paragraph 2 of the “Terms of Settlement” was occasioned in a manner disclosed by the First Respondent to the Applicant and arrangements put in place to satisfy the final instalment to the knowledge of the Applicant;

(b)    no prior notice was given to the Respondents of the filing of the Notice of Non-Compliance constituted by the affidavit of Zachary Gazzard sworn 29 July 2016 in the Local Court proceedings: a copy of which is attached and marked “B” or of the issue of Garnishee Order is against bank accounts maintained by the Respondents;

(c)    the amount required to satisfy the final instalment was withdrawn pursuant to the Garnishee Order issued following the entry of judgment such that under the Terms of Settlement as originally entered there remains no debt outstanding and due to the Applicant;

(d)    in the circumstances it is appropriate for the Court to go behind the judgement relied upon by the Applicant dated 1 August 2016 in the local Court and determine that in the circumstances the Applicant was not a creditor of the Respondents as at the date of issue of the Bankruptcy Notice relied upon; service of the Bankruptcy Notice relied upon, each of the Respondents, at the date of presentation of the Creditor’s Petition or at the date of the hearing of the Creditor’s Petition.

29    The primary judge heard Dairy Farmers’ creditor’s petition on 15 March 2017. On 13 June 2017, his Honour delivered judgment in favour of Dairy Farmers, making a single order sequestrating both of the appellants’ estates.

30    On 16 June 2017, a stay was ordered on the sequestration order until 20 June 2017, to be extended to 4 July 2017 if an appeal was filed. On 20 June 2017, the appellants filed an initial notice of appeal. On 22 September 2017, the appellants filed an interlocutory application to stay the sequestration order. On 29 September 2017, a stay was made by consent pending the resolution of the appeal. On 16 February 2018, an amended notice of appeal was filed, which was then heard on 29 March 2018.

The result before the primary judge

31    The two conclusions reached by his Honour that are challenged on appeal is that the 2016 terms of settlement, in providing for Dairy Farmers to enforce payment of the balance of $100,000, did not constitute a penalty, and that Dairy Farmers’ conduct in obtaining default judgment did not constitute unconscionable conduct. His Honour’s reasoning on each, and the wider ambit of unconscionability sought to be advanced for the first time on appeal, are addressed below. In reaching the conclusion on the penalty issue, his Honour was satisfied that the question of whether the 2016 terms of settlement contained a penalty clause was sufficiently arguable for the onus to rest on Dairy Farmers to show that it was not of that character, but found that this onus had been discharged. The primary judge’s threshold finding, casting the onus on Dairy Farmers to show that the 2016 terms of settlement did not contain a penalty clause, was not the subject of any notice of contention. The appeal by way of rehearing proceeded upon that basis.

The grounds of appeal that were pressed

32    The substantive issues on appeal remained those that were before the primary judge, albeit that the appellants sought to enlarge the basis for a finding of unconscionability. The appellants pressed grounds 3 and 4 and, in the alternative, ground 9 in their amended notice of appeal (the remaining grounds were abandoned in the course of both written and oral submissions) as follows:

3.    The Learned Trial Judge erred in law in determining as he did that the Default Clause (described in judgment [11] and [12]) contained within the Terms of Settlement was not a penalty according to law.

4.    The Learned Trial Judge having determined that it was appropriate to do so: judgement [28], ought to have determined that in the circumstances the Default Clause contained in the Terms of Settlement was a penalty and therefore unenforceable.

…

9.    The failure to give and/or obtain consent by notice before Judgement entered in the Local Court constitutes a penalty, and the entry of the Local Court Judgment dated 1 August 2016 was unconscionable and oppressive in the circumstances: judgement [33 and 34].

33    It was common ground that if the appellants failed on grounds 3 and 4, but succeeded on ground 9, the matter would need to be remitted to the primary judge to hear and determine the question of unconscionability upon the wider basis now sought to be relied upon. Counsel for the appellants conceded that his clients could not resist an order for costs in that event, because ground 9 would only then have succeeded upon a basis that was not advanced in the Court below.

Principles on penalties

34    The legal issues at play before the primary judge and in this appeal are succinctly summarised in Cheshire and Fifoot’s Law of Contract (11th Australian Edition, LexisNexis Butterworths, 2017) at [4.24] (omitting footnotes):

Promise to settle. A very important rule of consideration in practical terms is the rule that a compromise of a claim, settlement of a dispute or a forbearance to sue will constitute a good consideration. These cases have sometimes been classed into two groups: those where the party threatened admits liability, but offers some promise to postpone litigation; and those where he or she denies liability but prefers to settle rather than to fight. In the first class, it is said, there is a ‘forbearance to sue’, in the second a ‘compromise (or settlement) of the suit’. …

A compromise agreement falls into two, or possible three, classes. The first is termed an ‘accord executory’ which is in the form of a unilateral contract whereby the plaintiff promises to abandon a claim in exchange for the defendant doing something (usually paying money). The second type of compromise agreement is termed ‘accord and satisfaction’ whereby the plaintiff promises to abandon the claim in exchange for the defendant promising to do something. The significance of the distinction arises when the defendant fails to do what is required and the effect this has on the original cause of action or complaint that is being settled. In the case of an accord executory, where the defendant fails to perform the requested act, the plaintiff’s original rights continue on and can be enforced and no settlement agreement has eventuated. In the case of an accord and satisfaction, the plaintiff has forgone his or her original rights and can only enforce the settlement agreement. Thus, in the case of accord and satisfaction, the plaintiff replaces the original claim (which may or may not have succeeded) with an enforceable contract.

There is a third category whereby the parties make an accord and satisfaction that is conditional, that is, the plaintiff only abandons his or her original rights so long as the defendant carries out her or his promise but, failing that, the plaintiff’s original rights can still be enforced.

The question whether there has been an accord and satisfaction (or another category of settlement) is one of fact. The difference between these three possibilities depends on the drafting of the agreement and, ideally, as Phillips JA pointed out in Osborn v McDermott, the agreement should specify what is the consequence of the defendant failing to perform. The interpretation of a settlement agreement can be difficult if it has not been drafted well. …

35    The above summary provides a concise framework for the arguments on appeal.

Before the primary judge

36    The appellants contended before the primary judge and on appeal that, upon its proper construction and when read as a whole, the agreement constituted by the 2016 terms of settlement was an “accord and satisfaction”, whereby Dairy Farmers had promised to abandon its original claim in return for the appellants merely promising to pay $40,000 by five instalments. On the appellants’ argument, addressed in further detail below, Dairy Farmers:

(1)    had forgone its original rights (as reflected in those parts of the 2014 settlement reproduced at [12] above);

(2)    could only enforce the agreement manifested in the 2016 terms of settlement; and

(3)    could not enforce that agreement by reliance upon cll 3, 4 and 5, because, in the context of the rest of the 2016 terms of settlement, that would amount to a penalty and therefore did not represent any proper measure of Dairy Farmers’ damages for breach of contract.

37    Dairy Farmers contended before the primary judge and on appeal that the 2016 terms of settlement, viewed in the context in which the settlement was made, entailed the appellants:

(1)    agreeing to bargain away their right to resist Dairy Farmers’ claim for $100,000 in return for acknowledging a debt in that amount;

(2)    agreeing to discharge that $100,000 debt by the payment of $40,000 in five equal instalments of $8,000; and

(3)    agreeing that in default of timely payment of any or all of the five instalments of $8,000, Dairy Farmers could enforce payment of whatever balance remained owing of the $100,000.

38    In reaching a conclusion in favour of Dairy Farmers, the primary judge referred generally to the law of penalties, as considered by the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; 224 CLR 656, Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; 247 CLR 205, and Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; 258 CLR 525, and noted that the dispute between the parties was not as to the state of the authorities, but, rather, as to how they should be applied to the present case. The principles are sufficiently set out in Ringrow:

10    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.

11    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 [[1915] AC 79 at 86-87]:

(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 a 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’ [Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 342 per Lord Watson].”

39    The primary judge also cited, and in places quoted, the following authority, which his Honour applied in the process of characterising the 2016 terms of settlement (the passages reproduced below do not exactly replicate those reproduced by his Honour):

(1)    In McDermott v Black [1940] HCA 4; 63 CLR 161, it was said at 183-185:

The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The dis­tinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. … An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doi.ng an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.

(2)    In Morris v Baron & Co [1918] AC 1, it was said at 35:

There is no doubt that the general principle is that an accord without satisfaction has no legal effect, and that the original cause of action is not discharged as long as the satisfaction agreed upon remains executory. … If, however, it can be shown that what a creditor accepts in satisfaction is merely his debtor’s promise and not the performance of that promise, the original cause of action is discharged from the date when the promise is made. …

(3)    In O’Dea v Allstates Leasing Systems (WA) Pty Ltd (1983) 152 CLR 359, it was said at 366-7 (omitting citations):

The cases to which counsel for the first respondent referred in support of his argument that there can be no question of penalty in the present case seem to me to fall into two classes. In the first class of case, if a sum of money is payable by instalments, and it is provided that in the event of one instalment not being punctually paid the whole sum shall immediately become payable, the acceleration of payment is not a penalty. Similarly there is no penalty where it is agreed to charge a certain rate of interest on condition that if payment is made punctually the rate will be reduced or where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt. In all the cases of this kind 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.

(4)    In Cameron v UBS AG [2000] VSCA 222; 2 VR 108, in finding that enforcing payment of a larger debt in default of performing an agreement to satisfy that debt by payment of a lesser sum was not a penalty, it was said:

20    By the terms of settlement the defendant secured to himself one last opportunity to pay a much lesser sum in full and final satisfaction of what the plaintiff was claiming in Victoria in reliance upon the Swiss judgment. For the opportunity to pay that lesser sum the defendant bargained away any defence he had to enforcement of the judgment in Victoria, consenting to judgment here if he made default in payment of the lesser sum modo et forma. That makes this case quite different from those in which the courts have refused to lend assistance to the enforcement of a penalty. It is more akin to those cases described by Gibbs CJ in O’Dea where the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence: as to which see also Acron Pacific [Ltd v Offshore Oil NL (1985) 157 CLR 514].

…

22    In my opinion, when read fairly these terms of settlement did contain, by implication, an acknowledgment by the defendant of his liability for the $8.4m should there be default, and thus an acknowledgment of liability which, though conditional, was effective when the terms of settlement were agreed. Immediately before the terms of settlement there was a dispute about the enforceability of the Swiss judgment and so about the amount owing by the defendant under it; but, as I see it that dispute was finally resolved by the terms themselves and the deed. From that point onwards, the defendant was acknowledging his liability in respect of the Swiss judgment subject only to this: that if he paid a lesser sum according to cl 2 he could have a release from the larger sum. In those circumstances, according to the cases to which I have referred, the provision in cl 3 for consent to judgment is not a penalty.

…

28    The obligation to pay $8.4m was not one which sprang from the deed unheralded. Its genesis lay in the past dealings between the appellant and the respondent’s predecessor. In my opinion the case is to be equated with those in which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt. At one end of the spectrum covered by those cases is an undisputed judgment debt.15 Further towards the middle of the range is a sum ascertained in a suit in Chancery before a final decree has been made.16 At the other end of the spectrum, but still within it in my view, is the present case where the debt is the subject matter of a claim which is disputed but is not suggested to be a colourable device.

40    The primary judge observed that the New South Wales Court of Appeal in Lachlan v HP Mercantile Pty Ltd [2015] NSWCA 130; 89 NSWLR 198 at [37]-[51] had applied, inter alia, O’Dea and considered, inter alia, Cameron. His Honour characterised the principle arising from these cases, as applied in Lachlan, as being that whether or not the default term is a penalty “depends on whether, on the proper construction of the relevant agreement, the party bound by the default clause expressly or impliedly acknowledged that the larger amount that is payable on the default of payment of the smaller amount is a presently owing debt, subject to the debt being discharged by the payment of the smaller amount in accordance with the terms of the agreement”.

41    The primary judge concluded that the facts in this case were materially indistinguishable from those in Cameron, such that the 2016 terms of settlement were to be equated with the settlement agreements in those cases, quoting from [28], in “which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt”. That view of the 2016 terms of settlement was reinforced by reference to the terms of the 2014 settlement, in which the appellants had separately acknowledged the $100,000 debt already owed by them to Dairy Farmers.

42    The primary judge supported the conclusion that the 2016 terms of settlement did not contain a penalty clause by reference to the principles in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35], to the effect that, in the absence of a contrary intention being indicated, a court is entitled to approach the task of contractual interpretation in a commercial setting upon the assumption that the parties intended to achieve a commercial result. His Honour was reasoning, in effect, that the appellants’ construction made no commercial sense. That is, it made no sense for Dairy Farmers to forego its original rights that had already been acknowledged by the appellants in the 2014 settlement, rather than agree to accept less than the full amount of $100,000 that the appellants acknowledged that they owed, in return for performance of the promise to pay all of the lesser sum of $40,000 by five instalments, each of which was to be made by a precise date and time.

43    As to the appellants’ claim of unconscionability, the primary judge summarised, at [33], the grounds of opposition relied upon as follows, but found that none of them raised any arguable case of unconscionable conduct:

a)    The respondents had given the applicant an explanation for the delay in making the final payment, and arrangements had been put in place for the payment of that amount.

b)    The applicant gave the respondents no prior notice of its intention to obtain the Judgment because of the respondents’ non-compliance, or of its intention to apply for the issue of a garnishee order.

c)    The applicant recovered an amount equal to the last instalment by garnishee order.

44    In reaching the conclusion that the claim of unconscionable conduct had not been made out, the primary judge said at [34] (omitting footnotes):

a)    There is evidence the respondents informed the applicant they would be unable to make the last payment on time because they did not have the money. The applicant, however, was not required to accept what the respondents said as a reason for not exercising its rights under the Terms of Settlement. And there is no evidence the applicant agreed to provide the respondents further time to pay the final instalment.

b)    The evidence indicates the applicant gave the respondents notice of its intention to apply for judgment if the last instalment was not received by the following day. Even if the applicant had given no such notice, however, it would not have been unconscionable for it to apply for Judgment under the Terms of Settlement, because the Terms of Settlement did not oblige the applicant to give notice.

c)    Assuming, as appears to be the case, the applicant applied for the issue of a garnishee order, and it did not give notice of its intention to do so, there is nothing to suggest the applicant had no right to do so.

45    The primary judge also rejected reliance by the appellants, for the purposes of their unconscionability claim, on them being unrepresented at the time of entering into the 2016 terms of settlement. His Honour characterised those terms as being favourable to the appellants, given that there was no evidence that they had any grounds for resisting Dairy Farmers’ claim for $100,000. The evidence indicated that the appellants had no defence and that Dairy Farmers had agreed to reduce their liability by over 50% and give them five months in which to pay that substantially reduced amount. In those circumstances, a threshold issue on appeal, in the event that grounds 3 and 4 do not succeed, is whether the additional evidence sought to be relied upon by the appellants could have made any material difference to the conclusions reached by the primary judge.

The penalty issue on appeal

46    If the appellants’ characterisation of the 2016 terms of settlement was correct, default in making the final $8,000 instalment payment gave rise to a contingent liability of $68,000, as well as costs and interest (totalling over $83,000). If accepted as a new liability, and not a pre-existing debt, that amount would comfortably exceed any genuine pre-estimate of the loss suffered by Dairy Farmers by reason of breach of the 2016 terms of settlement. Dairy Farmers did not seek to contend otherwise. It follows that this issue does not need to be considered further. The live question is one of construction of the 2016 terms of settlement, which, in turn, is a question of characterisation.

47    The appellants’ case on appeal on the issue of construction of the 2016 terms of settlement may be shortly stated as follows:

(1)    The primary judge failed to construe the terms of the 2016 terms of settlement as a whole.

(2)    In particular, the effect of cl 6, described as the “release clause”, is that Dairy Farmers’ claim for $100,000 was released with immediate effect, and was replaced by claims arising from the terms of settlement.

(3)    While release clauses usually only operate in favour of a debtor once the obligation to pay has been met, as was the case with the clause reproduced in Cameron at [8], cl 6 operated immediately and was not subject to any of in the instalment payments being made.

(4)    The entitlement to enter judgment for $100,000 upon default of the instalment terms, while described by reference to the statement of claim, was not a continuation of that pre-existing claim. This was on the basis that cl 5 makes reference to the proceedings having to be “reinstated”. It was submitted that the claim could not be described as being reinstated unless it had already been given up and ceased to exist upon the 2016 terms of settlement being executed.

(5)    Having released the appellants from the prior damages claim for $100,000, the 2016 terms of settlement stipulated a new contingent right to be paid the balance of $100,000, but only if there was a breach of the contractual obligation to pay any of the instalments. Authority dealing with release clauses that operated only once payment obligations had been complied with was therefore inapplicable.

(6)    Alternatively, the primary judge erred in applying McDermott v Black at 183-4, because, in holding that the 2016 terms of settlement were of the kind that it is only the payment of the lesser sum that gives rise to the creditor giving up the claim for the larger sum, his Honour failed to have regard to the effect of cl 6 in the release having immediate effect in giving up prior rights.

48    Dairy Farmers’ case on appeal on the issue of construction of the 2016 terms of settlement was that the primary judge:

(1)    referred to all of the clauses of the 2016 terms of settlement, so could not be said to have failed to have regard to any of them, especially cl 6;

(2)    understood the appellants’ submissions by reason of summarising them at [18]-[20] and appreciated the appellants’ reliance on the proposition that the 2016 terms of settlement constituted an accord and satisfaction by which Dairy Farmers relinquished their prior cause of action, requiring the effect of cl 6 to be determined;

(3)    understood Dairy Farmers’ contrary submissions by reason of summarising them at [21] and [22], by which it was contended that the 2016 terms of settlement as a whole, including cl 6, had a contrary meaning;

(4)    expressly or, alternatively, by inference, construed the whole of the 2016 terms of settlement, referring both to [29] and to parts of the transcript of the hearing before his Honour;

(5)    by citing and quoting from Electricity Generation Corporation in relation to the interpretation of commercial contracts, must be taken to have considered the 2016 terms of settlement as a whole; and

(6)    was taken repeatedly to cl 6 during the course of the hearing before his Honour, again referring to parts of the transcript.

49    The extensive authority surveyed by the primary judge leads to the conclusion that this Court should be very slow to infer erroneous reasoning or material oversight, especially as to any of the paragraphs of the relative short 2016 terms of settlement. The real question is not whether his Honour considered all of the paragraphs of that document, but rather whether the conclusion his Honour reached as to its legal meaning and effect has been shown to be wrong, either by overt mischaracterisation or by omission.

50    The question of a penalty clause in this appeal is best framed by several observations about the 2016 terms of settlement. The terms of cl 3, read in isolation, would operate to preserve the appellants’ pre-existing liability to pay to Dairy Farmers $100,000, less any payments already made, but adding costs and interest. Clause 4 is of less significance to the question of construction, being only a mechanical provision to enable judgment to be entered in accordance with cl 3 in the event of default. As such, the live question raised by the appellants’ case is whether the meaning to be given to cl 3 is affected by the terms of cl 5 and/or cl 6.

51    In the case of cl 5, the appellants placed considerable reliance on the use of the word “re-instatement”. As noted above, the appellants contended that there can only be a need to re-instate a proceeding if it is not a presently existing right prior to the reinstatement. Dairy Farmers submitted that the use of that word constituted only a procedural requirement. The argument advanced by Dairy Farmers should be accepted. Significantly, the 2016 terms of settlement did not constitute a stand-alone document. They were, on their face, and having particular regard to the Local Court “NOTICE OF ORDERS MADE” to which they were attached, a record of orders to be made by that court by the consent of the parties. They reflected a settlement of the proceedings, albeit clearly expressed in contingent terms. Once those orders were made, as the heading immediately prior to the clauses of the 2016 terms of settlement makes clear, the Local Court proceedings were to become dormant.

52    Upon execution of the 2016 terms of settlement, and certainly upon the Local Court making orders by consent in those terms, the parties would have known that there were to be no more court dates, appearances or other steps to be taken in court, provided the instalment payments took place. From the moment of the orders being made by the Local Court, and, practically speaking, from the moment of the execution of the 2016 terms of settlement, the Local Court proceedings were, procedurally, at an end – but only procedurally, and only on a contingent basis. If the contingency of payment of the instalments did not take place, then the proceedings would need to be brought back before the Local Court. It was only in that limited procedural sense that the terms of settlement provide for the proceedings to be “re-instated”. In this way, cl 5 can and should be read in a way that is harmonious with the terms of cll 1, 2, 3 and 4, rather than in a way that changes their meaning (and the meaning of cl 3 in particular).

53    In the case of cl 6, it is capable of being read in two entirely different ways, depending on whether the appellants’ “re-instatement” argument, contrary to the above, is accepted. The key issue is the meaning to be given to the word “otherwise”, insofar as it is stated that the “parties otherwise hereby and forever release and discharge one another from all actions, claims, suits, demands, damages and costs” arising from the dispute in question. On the appellants’ interpretation, the use of that word should be taken to have precluded the continuation of any rights not set out in the 2016 terms of settlement. On the basis of the appellants’ “re-instatement” argument, cl 6 is therefore said to reinforce the cessation of Dairy Farmers’ pre-existing claim for $100,000. In support of this interpretation, it was submitted that this clause would not be necessary if cl 5 is interpreted in the manner contended for by Dairy Farmers. With respect to counsel for the appellants, the problem with this submission is that the favourable meaning to be given to the word “otherwise” depends first on the “re-instatement” argument he advanced being accepted. This plank of the appellants’ argument therefore cannot be accepted.

54    On Dairy Farmers’ interpretation, cl 6 did not entail the release of any right to enforce the pre-existing debt if the instalment payments were not made. Rather, its effect was to release any right that would otherwise have existed to obtain the remaining $60,000 if the compromised sum of $40,000 had been paid as agreed, as well as any other rights that might have been left over from the prior contractual relationship between the parties. In other words, cl 6 ensured that, if the $40,000 was paid as agreed, there would be nothing left between the parties.

55    Dairy Farmers went one step further, submitting that the 2016 terms of settlement operated so that either cll 1, 2 and 6 were operative, or cll 3, 4 and 5 were operative. That was to say that the release in cl 6 would only have effect if cl 2 was complied with. The problem with that interpretation is that it does not give effect to the use of the word “hereby” in cl 6. Clause 6 was intended to take effect from the moment of execution, but it did not have the effect on cl 3 contended for by the appellants. That is because cl 6 goes further than only operating in conjunction with cll 1 and 2, but does not go so far as to alter the meaning of cl 3.

56    So far as possible, cl 6 must be interpreted as part of a coherent whole agreement, supporting and being consistent with the other clauses, rather than being in stress with any of them, or changing, by a mere drafting side-wind, the meaning of any of them. That is achieved if cl 6 is interpreted as supporting the bargain between the parties to limit their dispute to the outstanding debt of $100,000, which was acknowledged by the appellants to be owed by them to Dairy Farmers.

57    The existing $100,000 debt was to be satisfied in one of two ways. Either the appellants could pay the five instalments of $8,000 on time, in which case their liability to Dairy Farmers would be discharged once and for all. In the event that the appellants failed to make any of the instalment payments on time, Dairy Farmers could instead elect to enforce its $100,000 debt, less any instalment payments made, together with costs and interest. Clause 6 operates to reinforce that bargain. But it goes further than that, reflecting a wider agreement. In its terms, cl 6 operates to curtail any other rights beyond the $100,000 debt immediately upon execution, both otherwise owed by the appellants or by Dairy Farmers, irrespective of whether the five instalments were paid or not.

58    Put simply, if the appellants paid the five instalments of $8,000 on time, then it was all over between the parties. If the appellants did not pay all of the instalments and on time, then Dairy Farmers would have a right to enforce the $100,000 debt already acknowledged in the 2014 settlement less payments made, plus interest and costs, but nothing more. The parties agreed to confine the ambit of any further actions between them.

59    It was submitted by the appellants that, even if it is accepted that cll 3, 4 and 5 of the 2016 terms of settlement provide for enforcement of the Dairy Farmers’ original claim of $100,000, it remains to be determined whether those clauses imposed a penalty. In particular, it was submitted that the Court would need to determine whether Dairy Farmers’ loss of not receiving the final payment of $8,000 was out of all proportion to insisting on the claim for the full outstanding sum of $68,000, citing Jobson v Johnson [1989] 1 WLR 1026 at 1039. However, I do not accept that this submission demonstrates any error in the primary judge’s application of Cameron and the finding that the present case was one in “which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt”.

60    It follows that the primary judge was correct in concluding that the 2016 terms of settlement did not constitute an accord and satisfaction of Dairy Farmers’ original claim, and, accordingly, did not involve the enforcement of any penalty when cll 3, 4 and 5 were acted upon by Dairy Farmers in response to the appellants’ default. Grounds of appeal 3 and 4 must therefore fail.

The unconscionability issue on appeal

61    The submissions for the appellants acknowledged that the grounds of objection raising unconscionability before the primary judge were not supported by any evidence. On appeal, the appellants sought to remedy that defect by seeking leave to adduce further evidence going to that issue. Dairy Farmers objected to that leave being given, but submitted that even if leave were to be given, it should be confined to the evidence going to the way in which the 2016 terms of settlement were enforced upon the appellants’ default, the issue of any prior transactions having been overtaken by that agreement.

62    The purpose of Dairy Farmers at least seeking to confine the scope of the additional evidence was to exclude evidence of the alleged encouragement by an officer of Dairy Farmers to the appellants to sell the franchise to a particular person, and offset the purchase money against the appellants’ debt. That aspect of Dairy Farmers’ objection must be upheld. The attempt to adduce evidence of events prior to the parties entering into the 2016 terms of settlement does not merely entail additional evidence, but also a material departure from the grounds of objection before the primary judge. No sufficient reason has been given for changing the very nature of this aspect of the appellants’ case, and not just the evidence in support of the case that they chose to run in the Court below.

63    Putting to one side the evidence as to potential sale of the franchise prior to the parties’ settlement agreement in 2016, the additional evidence otherwise sought to be adduced, which is marked in the chronology of key events above as “Fresh evidence”, goes further only in detail, but not in substance, than the evidence that was before the primary judge. It does not afford any basis for concluding that there was any error on the part of the primary judge in finding that there was no unconscionability in the enforcement of the 2016 terms of settlement upon the appellants’ default. As the written submissions for the appellants concede, Dairy Farmers did not know of all of the circumstances placing the appellants at a disadvantage, and so cannot be said to have taken advantage of the appellants’ position in that respect: see Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474-5.

64    As the additional evidence about the enforcement of the 2016 terms of settlement cannot affect the correctness or otherwise of the primary judge’s conclusion as to unconscionability, the interlocutory application to adduce that evidence must be dismissed with costs.

Conclusion

65    The appeal must be dismissed with costs.

Associate:

Dated:    20 April 2018