New South Wales Court of Appeal CITATION : R J & M Bezzina Pty Ltd & Ors v Saxby Bridge Mortgages Pty Ltd [2004] NSWCA 211 HEARING DATE(S) : 10 June 2004 JUDGMENT DATE : 23 June 2004 JUDGMENT OF : Giles JA at 1; Hodgson JA at 39; Cripps AJA at 40 DECISION : Appeal dismissed. Cross-appeal allowed and respondent's judgment increased to $155,000 plus interest. Order for costs below should stand. Appellants to pay the respondent's costs of the appeal and cross-appeal. Parties directed to bring in within seven days short minutes of order in accordance with these reasons. CATCHWORDS : Agreement for procuring finance - brokerage fee payable if procured - exclusivity - if another party engaged and found finance, brokerage immediately payable - whether on construction of agreement merely accelerated payment - whether unenforceable as a penalty - held no and no. D AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564; CASES CITED : AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd (1915) AC 79; Edwards v Massey (1947) St R Qd 226. R J & M Bezzuba Pty Ltd - First Appellant P & N Butterfield Pty Ltd - Second Appellant JLB Developments Pty Ltd - Third Appellant PARTIES : Ronald Bezzina - Fourth Appellant James Bezzina - Fifth Appellant Peter Butterfield - Sixth Appellant Saxby Bridge Mortgages Pty Ltd - Respondent FILE NUMBER(S) : CA 41095/03 COUNSEL : R J Powell SC & J C Hewitt - Appellants D Pritchard - Respondent SOLICITORS : Turtons - Appellants Moloney Lawyers, Potts Point - Respondent LOWER COURT District Court JURISDICTION : LOWER COURT DC 6964/02 FILE NUMBER(S) : LOWER COURT Sorby DCJ JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41095/03 DC 6964/02 GILES JA HODGSON JA CRIPPS AJA Wednesday 23 June 2004 R J & M BEZZINA PTY LTD & ORS v SAXBY BRIDGE MORTGAGES PTY LTD Judgment 1 GILES JA: The respondent was a finance broker. The appellants were corporate property developers and their principals. By a contract dated 4 January 1999 ("the Agreement") the appellants engaged the respondent to procure finance for the purchase and development of a property at Cronulla ("the project"). 2 Clause 1 of the Agreement, in which the appellants were the applicants or Applicant(s) and the respondent was the Facilitator, relevantly provided - "1(a) The applicants engage the Facilitator and to the exclusion of all others unless otherwise stated in this document, for the purposes of either introducing, organising, arranging and obtaining loan funds in the sum described in Item 2 of the schedule, ('the advance') for the purpose as set forth in Item 3 of the Schedule ('the purpose'). … (c) The applicants hereby warrant that they have not engaged nor will they during the continuance of this agreement engage any other party to source finance for them for the purpose, and are not currently liable to pay any brokerage, commission or other moneys to any third party for the sourcing of finance. (d) In the event that the Applicants breach the provisions of this clause and obtain funding for the purpose at any time until this agreement has been terminated, then all moneys payable hereunder shall become immediately due and payable by the Applicants to the Facilitator." 3 The advance described in Item 2 of the Schedule was $6,900,000 for "the advance land – settlement" and $8,800,000 for "the advance – construction", a total of $15,700.00. The purpose set forth in Item 3 of the Schedule was "land purchase thence construction 35 units". 4 Clause 2 of the Agreement regulated its duration. For present purposes, it remained in force at all material times. 5 Clause 3 of the Agreement relevantly provided - "3.(a) On the signing of this agreement, the Applicants will pay to the Facilitator a non refundable Processing Fee in the sum set forth in Item 5 of the Schedule ('Processing Fee'). In the event of the loan being approved to the Applicant in the terms of any Letter of Offer issued by the Facilitator to the Applicant, then the Brokerage Fee set forth in Item 6 of the Schedule ('Brokerage Fee') shall become due and payable to the Facilitator. … (b) It is agreed that the entire Brokerage Fee shall be paid contemporaneously with (the first draw down) of the loan to the Applicant …". 6 The Processing Fee in Item 5 of the Schedule was $2,000. The Brokerage Fee in Item 6 of the Schedule was $47,000 "on settlement" and $88,000 "1st drawdown on construction", a total of $155,000. Facts 7 In early December 1998 the appellants approached the respondent with a view to it procuring finance for the project. A meeting was held to determine what finance was required, and the respondent gathered information necessary for approaching financiers. On 22 December 1998 the corporate appellants made written mortgage finance applications to the respondent. 8 The respondent approached St George Bank Ltd ("St George"). On 24 December 1998 St George told the respondent what information it wanted to consider development funding. In late December 1998 the Agreement was prepared and sent to the appellants. It was executed and returned, with the Processing Fee (in fact, with $5,000). 9 In the first half of January 1999 representatives of the respondent, the appellants and St George met, and on 22 January 1999 the respondent submitted to St George an application for finance for the appellants. On 25 January 1999 St George issued an indicative letter of offer for finance of $14,000,000 in two tranches of $7,000,000. The respondent forwarded the letter to the appellants on the same day. 10 Contrary to the warranty in cl 1(c) of the Agreement, the appellants had engaged another party to procure finance for the project. In late 1998 the appellants had engaged Premier Finance Australia Ltd ("Premier") to that end. Premier had obtained from Cassa Commerciale Australia ("Cassa"), a division of Bendigo Bank, an indicative letter of offer dated 29 December 1998 for construction finance facilities of $6,911,000 and $7,089,000, a total of $14,000,000. At some time in January 1999 the corporate appellants formally applied to Cassa for the finance, which was approved. 11 The appellants thereupon told the respondent that they did not want to take up the St George finance, but would proceed with the finance from Cassa. So far as the evidence went, the respondent took no further steps to procure finance for the project. 12 On 19 March 1999 the corporate appellants completed the purchase of the property using $8,626,000 lent by Cassa. It is not clear whether the balance of the Cassa facilities was thereafter drawn down, although later reference to refinancing suggests that it was. 13 Contrary to the promise in cl 1(c) of the Agreement, the appellants then engaged another party to procure finance for the project. Apparently following earlier letters of 31 May 1999 and 3 June 1999 which were not in evidence, by a letter dated 19 August 1999 they engaged Ashe Morgan Winthrop ("Ashe") to procure finance of $12,400,000. The letter was replaced by a letter dated 29 November 1999, by which Ashe was engaged to obtain finance of $16,460,000. The stated purpose was to refinance the Cassa finance and provide funds for construction. 14 Ashe obtained an offer of finance of $16,319,900 from NMFM Lending Pty Ltd. It was not taken up: instead, the corporate appellants returned to St George, directly rather than through the respondent, and arranged finance of $16,500,000 for refinancing and construction. The St George finance was the subject of a letter of offer dated 28 July 2000. The proceedings 15 The appellants were in breach of the warranty and the promise in cl 1(c) of the Agreement. They had obtained funding for the purpose, within cl 1(d), through Premier. Perhaps they had not obtained funding for the purpose through Ashe - it is not necessary to decide whether "obtain funding" included an offer of finance which was not taken up. Obtaining the Cassa finance was sufficient. The Cassa finance was not precisely of $6,900,000 and $8,800,000, but it was accepted that precise correspondence was not required and that the Cassa finance was finance or funding for the purpose within cll 1(c) and 1(d). 16 In proceedings in the District Court the respondent claimed the amount of the Brokerage Fee from the appellants pursuant to cl 1(d). It also claimed the Brokerage Fee pursuant to cl 3(a) of the Agreement, on the basis that there was approval of the loan as described in cl 3(a) on 28 July 2000 when St George "made a formal offer of loan funds to the defendants for the project" (amended statement of liquidated claim, para 13). 17 Sorby DCJ held that cl 1(d) was unenforceable as a penalty, but that the respondent was entitled to damages for breach of cl 1(c) being the value of the lost chance of obtaining the Brokerage Fee. His Honour assessed the chance at 80 per cent and awarded damages of 80 per cent of $155,000, $124,000, plus interest. Perhaps in error, his Honour said that it was therefore unnecessary to decide the claim pursuant to cl 3(a). Judgment was entered for $177,568 and the appellants were ordered to pay the respondent's costs. 18 The appellants appealed and the respondent cross-appealed. The appellants appealed on the ground that the judge should not have awarded damage for loss of a chance when the respondent's case as pleaded and conducted was a claim for a liquidated sum pursuant to cl 1(d). The respondent cross-appealed on the grounds that the judge should not have found that cl 1(d) was a penalty when the appellants had not pleaded that it was, and that in any event it was not a penalty. The respondent did not complain of error in failing to determine the claim pursuant to cl 3(a). 19 The pleading complaints arose in submissions before the judge. The appellants there said that cl 1(d) was a penalty. The respondent said that it had not prosecuted a case of damages for loss of a chance because the appellants had not pleaded that cl 1(d) was a penalty, and that if the appellants were to be permitted to argue that cl 1(d) was a penalty it should be permitted to maintain a fall-back damages claim. It was apparent from the transcript and subsequent written submissions that the parties proceeded accordingly, and that the judge was entitled to decide the proceedings in the way he did. 20 This was ultimately recognised at the hearing in this Court The grounds of appeal and cross-appeal were reformulated. The issues for this Court became - (a) whether cl 1(d) on its proper construction provided for payment of the amount of the Brokerage Fee upon breach and finance being obtained through another party, or only for acceleration of actual payment of any Brokerage Fee which had otherwise become payable; (b) if cl 1(d) operated in the former manner, whether it was unenforceable as a penalty; and (c) if cl 1(d) was unenforceable as a penalty, whether the evidence entitled the judge to find the 80 per cent lost chance. Construction of cl 1(d) 21 It is first necessary to explore the meaning of "[i]n the event of the loan being approved to the applicant in the terms of any Letter of Offer issued by the Facilitator to the Applicant" in cl 3(a). The respondent did not claim on the basis that these words were satisfied by the St George indicative letter of offer of 25 January 1999. It therefore accepted that an indicative letter of offer was less than an approval to the appellants within cl 3(a) – otherwise it would have claimed pursuant to cl 3(a) in reliance on St George's indicative letter of offer, rather than in reliance on St George's formal letter of offer of 28 July 2000. There is no occasion to decide whether or not this was correct. In the manner the proceedings were conducted, the Brokerage Fee did not become due and payable by virtue of the St George indicative letter of offer. 22 The appellants submitted that the words "all moneys payable hereunder", in cl 1(d) meant that it had to be found elsewhere that money was payable. They pointed to cl 3(b), by which the Brokerage Fee payable on approval of the loan as described in cl 3(a) was to be paid upon the first draw down of the loan. They said that cl 1(d) operated to make the Brokerage Fee payable on the approval rather than upon the first draw down. According to the submission, it was still necessary that the Brokerage Fee had become payable on approval of the loan as described in cl 3(a), which it submitted had not happened. 23 The respondent did not submit that there had been approval of the loan as described in cl 3(a) upon the St George letter of offer of 25 July 2000. If there had been, even on the appellants' construction of cl 1(d) the Brokerage Fee had become payable on 25 July 2000, and the difference between the parties' constructions of cl 1(d) went only to interest. The respondent did not revive that claim. 24 However, I do not think the appellants' construction of cl 1(d) can be accepted. Clause 3 of the Agreement distinguished between money becoming due and payable (cl 3(a)) and money being paid (cl 3(b)). Clause 1(d) did not deal with money being paid, but with money becoming due and payable. The force of cl 1(d) was that any money which might otherwise have become due and payable as described in cl 3(a) became due and payable upon breach and finance being obtained through another party. It was not necessary that there be approval of the loan as described in cl 3(a), on the meaning of cl 3(a) earlier considered approval effectively being a formal letter of offer procured by the respondent. To the contrary. Clause 1(d)'s operation upon breach and finance being obtained through another party meant that the respondent was deprived of the opportunity to bring about approval of a loan as described in cl 3(a). The point of cl 1(d) was that the money would become due and payable although there had not been approval of the loan as described in cl 3(a). Deferral of actual payment until draw down did not arise, because cl 3(b) only applied to the Brokerage Fee which became due and payable pursuant to cl 3(a). 25 In my opinion, cl 1(d) provided for payment of the amount of the Brokerage Fee upon breach and finance being obtained through another party. Penalty 26 A contractual obligation to pay a sum of money upon breach of contract is not enforceable unless the sum to be paid is properly to be characterised as liquidated damages, as distinct from a penalty. The sum must be found to amount to a genuine pre-estimate of loss, by reference to the terms and inherent circumstances of the contract judged as at the time of the making of the contract and not as at the time of the breach. 27 Clause 1(d) obliged the appellants to pay the amount of the Brokerage Fee to the respondent in the event of breach of contract. But it was necessary that there be more than breach of contract – the appellants also had to have "obtain[ed] funding for the purpose". In context, the finance had to have been obtained through the other party whose engagement constituted the breach of contract. I do not think that the added requirement took cl 1(d) outside the penalty/liquidated damages dichotomy. The sum of money was still payable upon breach of contract, although the breach had to be supplemented by the further event of obtaining finance otherwise than through the respondent. The added requirement, however, was important to the characterisation of cl 1(d). 28 That the appellants also had to have obtained finance otherwise than through the respondent provided some support for the amount of the Brokerage Fee being a genuine pre-estimate of loss. The money was not payable when the respondent may have lost nothing because it might still earn the Brokerage Fee: upon the appellants obtaining their finance elsewhere, the respondent would be deprived of its opportunity to earn the Brokerage Fee by procuring finance for the appellants. On the other hand, what the respondent would lose was no more than an opportunity to earn the Brokerage Fee. Whether it would have earned the Brokerage Fee depended on whether there would have been approval of the loan as described in cl 3(a). The respondent may not have been able to procure the finance which the other party procured, or similar finance; the appellants may have decided not to proceed with an indicative letter of offer, so that the approval by the financier never came about; or at the last the financier may have declined to approve the finance. The stipulated sum in the Agreement was at the uppermost level of potential loss, and made no allowance for these contingencies. 29 Unenforceability of a penal provision is an exercise of "a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory": AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 193 per Mason and Wilson JJ. Their Honours continued - "The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract. The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties: see, generally, Atiyah, The Rise and Fall of Freedom of Contract (1979), esp. Ch 22." 30 This passage was adopted by Clarke JA, with whom Kirby P agreed "generally" and McHugh JA agreed, in AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564 at 577, as an approach which "draws a fair balance between the freedom of the parties to contract as they might wish and the public interest … in protecting a weaker party from oppressive burden or the unconscientious use of power by a stronger party". His Honour considered that "the courts should afford primacy to the parties' freedom to settle for themselves the rights and liabilities following a breach of contract except to the extent that unconscionable or oppressive obligations are imposed on one party", spoke of "the need for significant disproportion, and the caution to exercise care in finding it", and said that - " … contractual terms providing for the payment of agreed liquidated damages should be struck down as a penalty only if the agreed sum be either extravagant in amount or imposes an unconscionable or unreasonable burden upon a party. This approach would give full meaning to the distinction between a genuine attempt to agree as to the damage likely to flow from the event which triggers the operation of the clause and the imposition of a sanction or penalty against breach." (at 576-7) 31 There was no suggestion that the relationship between the appellants and the respondent was other than that of willing parties to an unexceptional commercial transaction. The appellants gave exclusivity to the respondent, and the respondent was entitled to protect itself against conduct of the appellants depriving it of the opportunity to earn the Brokerage Fee. The parties were free to agree upon this balance of interests - what was extraordinary was the apparently cavalier disregard by the appellants of their obligations under the Agreement. 32 Clause 1(d) did not make the amount of the Brokerage Fee payable upon minor breach or a range of breaches of the Agreement. The breach, engagement of another party to procure finance, had to have been supplemented by the further event of obtaining finance otherwise than through the respondent. The respondent would then lose entirely its opportunity to earn the Brokerage Fee. There were contingencies, but they were not powerful. If the other party had procured an offer, the appellants had applied for the finance and the financier had approved the finance, it can be said with some force that the respondent could have procured the same or a similar offer which would equally have come to fruition. So far as appeared the respondent was as skilled in its field as Premier or Ashe, with equal access to the full pool of potential financiers, and the corporate appellants' self interest would have dictated proceeding with an acceptable offer as they in fact proceeded with the offer procured by Premier. 33 The Processing Fee of $2,000 plus the Brokerage Fee of $155,000 was one per cent of the total advance of $15,700,000 in Item 2 of the Schedule to the Agreement. It may be the respondent would have been entitled to a total fee correspondingly smaller or larger if the finance it procured was less or greater than the $15,700,000 – for example, a Brokerage Fee of $138,000 if the respondent had procured the finance which Premier procured. By breach and obtaining finance otherwise than through the respondent, the appellants nonetheless deprived the respondent of the opportunity of earning a Brokerage Fee of the order of $155,000. Guided by the approach described above, I do not think that payment of the amount of the Brokerage Fee was "extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach", to use some of the words of Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd (1915) AC 79 at 87, or disproportionate to the loss likely to be suffered by the respondent. In my opinion, cl 1(d) did not impose an extravagant or unconscionable obligation such that it was a penalty. 34 Each case depends on its own facts, but reference may be made to Edwards v Massey (1947) St R Qd 226. The vendor engaged a real estate agent to find a buyer for his farm, on terms of "sole rights" and, as construed by the court, payment of the real estate agent's commission if the vendor "deprives him of the opportunity of earning his commission by the vendor's act in withdrawing the farm from sale, or by selling it privately or through any other agent during the stipulated time of twenty-one days" (at 231). Stanley J, with whom Mansfield SPJ agreed and Sheehy J agreed in the result, regarded the commission as fixed maximum amount, and said (at 232) - "Having regard to the very limited duration of the contract, and the possible limitation of the agent's commission, I cannot say that this sum is so exorbitant that it cannot have any real relation to the loss the plaintiff might possibly sustain by breach, and that it should be relieved against as a penalty and not treated as liquidated damages." The valuation of the lost chance 35 It is not necessary to decide this issue. The result 36 The appellants had an appeal as of right. On the cross-appeal the amount at stake was $31,000 plus interest, and leave to cross-appeal was probably required. When the Court drew attention to this the appellants did not oppose a grant of leave, and the inter-relationship between appeal and cross-appeal was such that any requisite leave should be granted. 37 The appeal should be dismissed. The cross-appeal should be allowed, and the respondent's judgment should be increased to $155,000 plus interest. It seems that no account has been taken of the overpayment of the Processing Fee, and the parties should have the opportunity to consider whether there should be an adjustment accordingly. The order for costs below should stand. The appellants should pay the respondent's costs of the appeal and cross-appeal. 38 I propose that the parties be directed to bring in within seven days short minutes of orders in accordance with these reasons. 39 HODGSON JA: I agree with Giles JA. 40 CRIPPS AJA: I agree with Giles JA ********** Last Modified: 06/28/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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