Reported Decision : (2007) Aust Contract Reports 90-261 New South Wales Supreme Court CITATION : Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor [2007] NSWSC 406 HEARING DATE(S) : 22-23 February 2007 JUDGMENT DATE : 27 April 2007 JURISDICTION : Equity Division JUDGMENT OF : Brereton J DECISION : The right to trailer commission in respect of settled loans was an "accrued right". The doctrine of penalties extends to forfeiture or retention of property other than money, including an entitlement to remuneration already earnt under the contract. The doctrine extends to payments conditioned upon termination for an "event of default" which is not a breach of contract but is within the domain of the party that commits or suffers the event. The relevant clause is a penalty and the plaintiff is entitled to trailer commission notwithstanding termination of the agreement. CATCHWORDS : EQUITY – Penalties and forfeiture – penalties – where loan origination and management agreement contains promise by originator to act honestly and not engage in deceptive conduct, and provision for termination by manager for various events of default, including failure to rectify a breach of contract or engaging in deceptive or fraudulent activity or an insolvency event or a change of control – where contract provides that upon termination for insolvency or fraud (but not otherwise) originator has no further right to trailer commission – whether right to trailer commission is an accrued right – whether doctrine of penalties limited to obligations to pay agreed sum of money or extends to provisions forfeiting entitlement to receive accrued remuneration – whether doctrine limited to payments conditioned on breach or extends to events of default not being breaches but within payer's domain. (NSW) Conveyancing Act 1919, s 129 LEGISLATION CITED : (NSW) Uniform Civil Procedure Rules 2005, r 28.2 (UK) Law of Property Act 1925, s146 Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 Alder v Moore [1961] 2 QB 57 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 In re Apex Supply Company Ltd [1942] Ch 108; [1941] 3 All ER 473 Associated Distributors Ltd v Hall [1938] 2 KB 83 Astley v Weldon (1801) 2 Bos & Pul 346; 126 ER 1318 Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056 Bartercard Ltd v Myallhurst Pty Ltd [2000] QCA 445 Berger & Co Inc v Gill & Duffus SA [1984] AC 382 Bernstein (Philip) (Successors) Ltd v Lydiate Textiles Ltd (unreported) [1962] CA Transcript 238, sub nom Sterling Industrial Facilities Ltd v Lydiate Textiles Ltd 106 SJ 669 Bridge v Campbell Discount Co Ltd [1962] AC 600 Bysouth v Shire of Blackburn & Mitcham [1928] VLR 562 Cadogan Estates Ltd v McMahon [2000] 4 All ER 897 Chester & Cole Ltd v Avon (1929) (unreported) Jones & Proudfoot's Notes on Hire-Purchase Law (2nd ed) p115 Chester & Cole Ltd v Wright (1930) (unreported) Jones & Proudfoot's Notes on Hire-Purchase Law (2nd ed) p124 Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo Y Castaned [1905] AC 6 Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86, [1952] 2 All ER 915 Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) NSW ConvR 55-358 Deputy Commissioner of Taxation v Advanced Communications Technologies (Australia) Pty Ltd (Rec & Mgrs Apptd) (Subject to Deed of Company Arrangement) [2003] VSC 487 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 Elkhoury v Farrow Mortgage Services Pty Ltd (1993) 114 ALR 541 Elsey & Co Ltd v Hyde (1926) (unreported) Jones & Proudfoot's Notes on Hire-Purchase Law (2nd ed) p107 CASES CITED : Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124 Export Credits Guarantee Department v Universal Oil Products Co [1983] 2 All ER 205 Financings Ltd v Baldock [1963] 2 QB 104; 1 All ER 443 Forestry Commission of New South Wales v Stefanetto (1976) 133 CLR 507 Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 Halliard Property Co Ltd v Jack Segal Ltd [1978] 1 WLR 377 Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 2 All ER 29 Jobson v Johnson [1989] 1 All ER 621 Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2006] NSWSC 1464 Legione v Hateley (1983) 152 CLR 406 Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40 Marks v Marks (1718) Prec Ch 486; 24 ER 218 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 Roadways Transport Development Ltd v Brown & Gray (1927) (unreported) Jones & Proudfoot's Notes on Hire-purchase Law (2nd ed) p118 Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 United Dominions Trust (Commercial) v Ennis [1968] 1 QB 54; [1967] 2 All ER 345 Wollondilly Shire Council v Picton Power Lines Pty Ltd (1994) 33 NSWLR 551 Wynsix Hotels (Oxford St) Pty Ltd v Toomey [2004] NSWSC 236 Jones & Proudfoot on Hire-Purchase Law, 2nd ed Meagher, Gummow & Lehane, Equity: Doctrines and Remedies (4th ed) The Penal Bond with Conditional Defeasance (1966) 82 LQR 392, 418 Integral Home Loans Pty Ltd (first plaintiff) PARTIES : Integral Financial Pty Ltd (second plaintiff) Challenger Mortgage Management Pty Ltd (formerly Interstar Wholesale Finance Pty Ltd (first defendant) Challenger Non-Conforming Finance Pty Ltd (formerly Interstar Non-Conforming Finance Pty Ltd) (second defendant) FILE NUMBER(S) : SC 4009/06 COUNSEL : Mr N Cotman SC w Mr G Thomas (plaintiffs) Mr B Coles QC w Mr M Cohen (defendants) SOLICITORS : Vosnakis & Associates (plaintiffs) Deacons (defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRERETON J Friday, 27 April 2007 4009/2006 Integral Home Loans Pty Limited ACN 103 856 319 v Challenger Mortgage Management Pty Limited (formerly Interstar Wholesale Finance Pty Limited) ACN 087 271 109 JUDGMENT 1 HIS HONOUR: On 18 March 2003, the first plaintiff Integral Home Loans Pty Limited (as Originator) entered into an agreement styled Loan Origination and Management Agreement ("LOMA") with the first defendant Interstar Wholesale Finance Pty Limited – now known as Challenger Mortgage Management Pty Limited – (as Manager). On or about 18 November 2005, the second plaintiff Integral Financial Pty Limited (as Originator) entered into a LOMA with Interstar Wholesale and the second defendant Interstar Non-Conforming Finance Pty Limited – now Challenger Non-Conforming Finance Pty Limited – (as Managers). Each LOMA is in identical terms in all material respects. 2 Under clause 10 of each LOMA, the Manager was obliged to pay the Originator an "Upfront Fee" on settlement of a loan introduced by the Originator, and in addition an "Originators Fee", which was a percentage of the Outstanding Loan Balance (being the principal loan balance outstanding of the portfolio of all of the Settled Loans originated by the Originator which had not ceased to be subject to the LOMA) on the last Business Day of each month. This is conventionally called "trailer commission". Clause 10.6 provided that the Originator was not entitled to receive any Upfront Fee or Originators Fee in relation to a Loan that was refinanced or repaid in full within six months of the date on which it was settled, in which case Integral was obliged to repay all Upfront Fees and Originators Fees previously paid in relation to that loan. Clause 10.7 provided that the Originator would not engage in "churning" or procuring borrowers to refinance Settled Loans, and if it breached that obligation Integral was obliged to repay any Upfront Fee and Originators Fee in relation to any such loan. 3 Clause 20.1 of each LOMA provided for termination by the Manager in various circumstances, as follows: The Managers may terminate this Agreement immediately upon the happening of any of the following events: (a) upon the occurrence of an Insolvency Event in relation to the Originator; (b) upon the Originator breaching any of the terms and conditions of this Agreement and/or a Manual and the breach not being rectified to the absolute satisfaction of each Manager within fourteen days after the date upon which written notice of such breach is given by each Manager to the Originator; (c) where the Originator or the Originator's Representative has engaged in any proven deceptive or fraudulent activity in relation to an Application or a Settled Loan or a Manager considers, in its reasonable opinion, that the Originator or Originator's Representative has engaged in deceptive or fraudulent activity in relation to an Application or a Settled Loan; (d) where, in the sole bona fide opinion of a Manager, there is a change in the management or effective control of the Originator which change is not acceptable to that Manager. 4 Clause 20.3 of each LOMA provided: In the event that this Agreement is terminated by the Managers: (a) the Originator acknowledges that the Relevant Manager will be entitled (but without being under an obligation to the Originator to do so) to assume (or appoint a third party to assume) the servicing and management of the Settled Loans and to otherwise fulfil the servicing and managing obligations of the Originator as set out in this Agreement; (b) pursuant to clause 20.1(b) or (d) the Originator shall, despite the termination of this Agreement, continue to be entitled to receive an amount equal to: the Originator's Fee (in accordance with clause 10) in relation to the Outstanding Loan Balance LESS the amount which the Relevant Manager reasonably determines to be the remuneration or compensation which the Relevant Manager (or a third party appointed by the Relevant Manager) is entitled to receive to continue to service and manage the Settled Loans as contemplated in paragraph (a); and (c) pursuant to clause 20.1(a) or (c), then the Originator shall, with effect from the date of termination, have no further entitlement to receive any Originator's Fee or Upfront Fee. 5 On 17 March 2006, the Manager under each LOMA (Interstar) gave notice to the corresponding Originator (Integral) terminating the LOMA, informing the recipient that it had formed the opinion that the Originator had engaged in deceptive conduct relating to loan application files, and that it was exercising its right to terminate the LOMA. On 31 July 2006, Integral filed the Summons, which was first returnable on 10 August 2006. Integral contends that Interstar was not entitled to terminate, but alternatively that even if it was, cl 20.3(c) is void as a penalty, with the consequence that Integral remains entitled to receive trailer commission in respect of settled loans. 6 On 22 December 2007 [Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2006] NSWSC 1464], on Integral's application, as Vacation Judge I made an order under (NSW) Uniform Civil Procedure Rules 2005, r 28.2, for the determination, as preliminary questions, of two issues, namely: · (1) whether, on the true construction of the LOMA, clause 20.3(c) is void as a penalty; and · (2) if the answer to (1) is in the affirmative, whether Integral is entitled to trailer commission, notwithstanding the termination of the LOMA by the defendants. 7 This is the determination of those separate questions. It is unnecessary for present purposes to embark on resolution of whether or not Interstar was entitled to terminate, as the separate questions assume, adversely to Integral, that Interstar was entitled to terminate for fraud under clause 20.1(c). The parties have contemplated the possibility that clause 20.3(c) might be held void only insofar as it forfeited the difference between the trailer commission to which Integral might otherwise have been entitled and the reasonable cost to Interstar of assuming management of the loans, so that the answer to the second question might be that – if Interstar has exercised its right under clause 20.3(a) to assume management of the settled loans – Integral's entitlement to continuing trailer commission was subject to deduction of the reasonable costs of Interstar assuming their management, by analogy with clause 21.3(b). In anticipation of that possibility, the parties have adduced evidence for the purpose of showing whether Interstar has exercised its entitlement under clause 20.3(a) and, if so, what is the amount which Interstar has reasonably determined to be its remuneration or compensation under clause 20.3(b), but the parties are in agreement that if this issue arises, it can be determined after the questions of principle arising on the separate questions have been resolved. 8 At common law, a contractual provision that is penal in its operation is void and unenforceable ab initio, and no question of discretion arises [Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1, 23 (Kirby P), 39-49 (Priestley JA); AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 191-3 (Mason and Wilson JJ) – although Deane J would have held it void only to the extent that that it would have imposed liability in excess of the true damnification of the other party, a view which is supported by Jobson v Johnson [1989] 1 All ER 621, 627-8, 632-3, 638 (Nicholls and Kerr LJJ), and by Meagher, Gummow & Lehane, Equity: Doctrines and Remedies (4th ed), [18-070]; PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615, 650-1 (Meagher JA)]. Although the doctrine had its origins in equity, there is rarely nowadays any need for reliance on equitable intervention in the case of a penalty properly so-called, although the equitable jurisdiction survives [AMEV-UDC Finance Ltd v Austin, 191, 193-4 (Mason and Wilson JJ); Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd [2003] VSC 487, [120]-[139]]. The related jurisdiction to relieve against the forfeiture of a proprietary interest is purely equitable, and the principles relating to penalties and forfeitures are related and may overlap in a particular case; however, they are conceptually distinct: the first involves whether a particular clause, or its operation, is absolutely void ab initio because what is involved is a penalty; whereas the second involves whether the exercise of a right under a contract (or mortgage, or lease) to forfeit a proprietary interest as a consequence of a default should be set aside as unconscionable (in a broad sense), which is always discretionary [PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615, 625, 627 (Mahoney JA)]. The present case concerns only the question of whether the relevant provision is void as a penalty, and not relief against forfeiture. 9 Mr Coles QC, for Interstar, submitted that the essence of a penalty is a payment of money stipulated in terrorem of the offending party, involving the imposition in advance of an agreed sum to be suffered by the defaulting party on breach and without regard to the actual consequences of the breach, such that it is found without more to be extravagant and unconscionable in amount [for which he cited Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo Y Castaned [1905] AC 6; Wollondilly Shire Council v Picton Power Lines Pty Ltd (1994) 33 NSWLR 551, 556C (Handley JA); and Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131, 153 (Deane J)]. Mr Coles further submitted that in the present case, the relevant contractual provisions neither involved an obligation to pay money, nor stipulated any sum of money, and accordingly that no question of penalty arose. 10 But in my view, in limiting its application to the payment of a specified sum of money – as distinct from the transfer of property, or the retention or withholding of a payment which the party would otherwise be entitled to receive – this states the doctrine too narrowly. A contractual provision may be said to be penal if its function is to operate in terrorem to induce performance [in respect of which phrase I respectfully agree with Staughton J's observation in Export Credits Guarantee Department v Universal Oil Products Co [1983] 2 All ER 205, 213, to the effect that it remains useful in identifying a true penalty, despite the dislike of the phrase expressed by Lord Radcliffe in Bridge v Campbell Discount Co Ltd [1962] AC 600, 622], or as a punishment for default, in the sense that it imposes an additional or different liability upon default; whereas a forfeiture involves loss or determination of an interest in property or a proprietary right in consequence of failure to observe a covenant [Legione v Hateley (1983) 152 CLR 406, 444-5 (Mason and Deane JJ); Meagher Gummow & Lehane, [18-020]. The distinction of a penalty is twofold: first, it is collateral to the main promise and purpose of the contract; and secondly, it is intended to operate as a deterrent to failure to perform that main promise or purpose, by imposing an additional detriment on the obligor and conferring an additional benefit on the obligee in the event of default [cf Meagher Gummow & Lehane, [18-095]]. 11 At first sight, Mr Coles' submission derives support from Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, in which the High Court said (at [10]) that the law of penalties, in its standard application, is attracted where a contract stipulates that on breach the defaulting party 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, and endorsed the principles stated by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, 86-7, as follows: 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]: 2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ... 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ... 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: ( a ) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ... ( b ) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is 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]. Neither side in the appeal contested the foregoing statement by Lord Dunedin of the principles governing the identification, proof and consequences of penalties in contractual stipulations. The formulation has endured for ninety years. It has been applied countless times in this and other courts [eg O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 368, 378, 399, 400; Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 520; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190; Stern v McArthur (1988) 165 CLR 489 at 540 and Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 at 139, 143, 145]. In these circumstances, the present appeal afforded no occasion for a general reconsideration of Lord Dunedin's tests to determine whether any particular feature of Australian conditions, any change in the nature of penalties or any element in the contemporary market-place [See eg AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190] suggest the need for a new formulation. It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where reconsideration or reformulation is in issue [ O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 400; cf at 392; AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564 at 566, 574]. 12 However, the "standard application" of the doctrine is not its sole application, and Lord Dunedin's statements of principle are not complete or universal in relation to penalties, as the Court of Appeal has observed in Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40. First, it is not limited to obligations to pay a monetary sum, but extends to obligations to transfer property [Jobson v Johnson, 628 (Dillon LJ): there is no distinction in principle between a provision that in case of default the promisor will pay a penalty of £1,000, and a provision that upon default he shall transfer to the obligee 1,000 shares in a certain company for no consideration], and to provisions that have the effect of authorising retention or withholding payment of, or extinguishing a right to receive, remuneration already earned but unpaid [Bysouth v Shire of Blackburn & Mitcham [1928] VLR 562; Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, 693H, 698C-F (Lord Reid), 703F-G (Lord Morris of Borth-y-Gest), 711D-E (Viscount Dilhorne), 723H (Lord Salmon): a provision that would have enabled contractors to suspend or withhold payment of large sums of money due by them to sub-contractors in the event of the sub-contractors committing a minor breach of contract causing only trifling damage in no way comparable to the amount owed to them was an unenforceable penalty; see also Export Credits Guarantee Department v Universal Oil Products Co [1983] 2 All ER 205 (CA), 219e-220a]. Secondly, it is not limited to cases in which the dichotomy of penalty or genuine pre-estimate of damages arises, as Bryson JA, writing for the Court in Luu v Sovereign Developments, after referring to the above-cited passage from Ringrow v BP Australia, said (emphasis added): 30 In my respectful view this passage is not to be understood as a departure from authorities other than Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co Ltd [1915] AC 79, or as derogating from the authority of and learning in the cases to which their Honours referred, particularly those in the footnotes to their Honours' para [12]. In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Mason and Wilson JJ made an extensive review of the doctrine of penalties, including the history of its development and the interaction of Law and Equity at pp 186-194. Lord Dunedin's observations were spoken of by their Honours as the starting point; they were not treated as exhaustive statements of the law. It is not to be expected that questions will often present a clear dichotomy between one side and the other side of Lord Dunedin's para [2]. It must be a very rare occurrence that a contract stipulates that a payment of money is in terrorem of an offending party, and the essence of a penalty will usually be present when it can be understood that a provision requiring a payment exists to coerce a party into compliance and not to redress a breach; a literal stipulation that the payment is in terrorem is not required. 31 A difficulty of applying Lord Dunedin's para [2] to the present facts is the absence of any relation between what Special Condition 5 requires and damages payable to the vendor. The requirement under Special Condition 5 that on default the amount which the Contract required to be paid on exchange is to be augmented up to 10% has no discernible connection with damages; it brings about an increase in the part of the purchase price which the purchaser is obliged to pay before completion, but this does not recompense the vendor in any way for the default, and when and if the Contract is completed the vendor receives the contract price and nothing in respect of the default. As well as having no connection with damages, the amount has no discernible connection with any pre-estimate of damage flowing from the default; there is nothing more than a proportion of the purchase price, not even a gesture towards estimating the damage which a default would cause . Then too (echoing Lord Dunedin's para [4(c)]) the same sum is payable on the occurrence of defaults which can be of several different kinds, some of which may occasion only trifling damage, while failure to complete may well (but will not necessarily) occasion serious damage. Special Condition 5 operates quite differently to a provision requiring payment of damages or liquidated damages; its operation is to the effect that if there is a default the purchaser has to increase the part of the purchase price which is subject to the risks to which his deposit is subject. This lacks any connection with damages at all, and falls to be tested as a penalty without resort to the dichotomy in Lord Dunedin's para [2]. Penalties are not encountered exclusively in appositions with liquidated damages . 13 The burden of demonstrating that a contractual provision is a penalty rests upon the party who impugns its operation, and the court should be astute to find a "penalty" in every provision that stipulates a sum to be payable by one party to the other in the event of a breach [Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1447E-F (Diplock LJ)]. The High Court has recently emphasised [in Ringrow v BP Australia, [31]-[32]] that an agreed sum should only be characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach: [31] … The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships. As Mason and Wilson JJ observed in AMEV-UDC Finance Ltd v Austin [(1986) 162 CLR 170 at 190]: [T]here is much to be said for the view that the courts should return to … allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach [ Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 at 1447-1448; [1966] 3 All ER 128 at 142-143 and United Kingdom, Law Commission, Penalty Clauses and Forfeiture of Monies Paid , Working Paper No 61, (1975), paras 33, 42-44]. [32] Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged "extravagant and unconscionable in amount". It is not enough that it should be lacking in proportion. It must be "out of all proportion". It would therefore be a reversal of longstanding authority to substitute a test expressed in terms of mere disproportionality. However helpful that concept may be in considering other legal questions [See eg Cunliffe v The Commonwealth (1994) 182 CLR 272 at 300, 324, 339-340, 387-388 and Lange v Australian Broadcasting Corporation (1997) 189 CLR 520 at 567], it sits uncomfortably in the present context. 14 The ordinary consequences of termination of a contract for repudiatory breach include the extinguishment of future obligations, and the loss by the defaulting obligee of the benefit of such obligations is a necessary and inevitable consequence of the exercise of the right of termination, and is not penal. However, the deprivation of rights that have already accrued under the contract may be penal in operation [Bysouth v Shire of Blackburn; Forestry Commission of New South Wales v Stefanetto (1976) 133 CLR 507, 523]. As Mr Cotman SC, who appeared for Integral, submitted, Bysouth [at 573–574] is direct authority for the proposition that a contractual provision that purports to forfeit a right to receive moneys earned by performance of the contract prior to the termination is a penalty, and void. The observations of four Law Lords in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd, referred to above, are to like effect. 15 Accordingly, one fundamental issue is whether, in the present context, the right to trailer commission in respect of settled loans is, for relevant purposes, an "accrued right". Where a contract is discharged by termination, as distinct from rescinded ab initio, the parties are discharged from further performance of the contract, but the contract is determined so far as it is executory only: rights which have already been unconditionally acquired are not divested or discharged, and rights and obligations which arise from the partial execution of the contract, as well as causes of action which have accrued from its breach, continue unaffected following termination [McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 476-7 (Dixon J; Rich and McTiernan JJ agreeing)]. Accrued rights to receive performance of a contractual obligation after termination endure for the benefit of, and may be enforced by, the party whose breach resulted in the termination, as well as the innocent party [Ettridge v Vermin Board of the District of Murat Bay [1928] SASR 124, 128 (SASC, FC); Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 2 All ER 29; 1 WLR 1129, 1136 (Viscount Dilhorne, HL); Berger & Co Inc v Gill & Duffus SA [1984] AC 382, 390; Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056, 1098–9; Elkhoury v Farrow Mortgage Services Pty Ltd (1993) 114 ALR 541]. 16 Had Integral, before the termination of the LOMA, "earned" the trailer commission in respect of the settled loans? The trailer commission in respect of a particular loan was earned upon settlement of the loan, and continued so long as there was an Outstanding Loan Balance in respect of that loan. The Upfront Fee and the Originators Fee were expressed to be in consideration of the origination and management of mortgages by the Originator [cl 10.1], but the Upfront Fee was an initial lump sum amount payable in respect of a settled loan [cl 1.1], and the Originators Fee in relation to a loan was payable from the time of settlement of a loan until it was repaid [cl 10.2]. Although the Originator had ongoing obligations to manage and service settled loans [clause 5.2], breach of those obligations after settlement did not forfeit the right to trailer commission under the LOMA; the Manager's remedy for such a breach was damages, as is reflected in cl 20.3(b), which authorises deduction from the trailer commission of the cost to the Manager of assuming responsibility for loan management after termination. While there was no entitlement to an Upfront Fee or an Originators Fee in respect of a loan where at the date of calculation (the last business day of each month) legal proceedings had been commenced in respect of that loan [cl 10.5], or if the loan was refinanced or repaid in full within six months [cl 10.6], or the subject of "churning" [cl 10.7] – in which event the Originator was obliged to repay any fee previously paid – clause 20.2 provided that despite termination, the Originator's obligation in respect of any action or remedy that a Manager might have for moneys payable under the LOMA accrued prior to termination, or for damages for breach, would continue, as would the Originator's obligations to repay the "Upfront Fee" and the "Originator's Fee" in respect of loans refinanced or repaid within six months of being settled, or in respect of any loan the subject of "churning" or "procuring". 17 The plain effect of Clause 20.3 is that upon termination, except for insolvency or fraud, Integral would continue to receive its Originators Fee in respect of the Outstanding Loan Balance from time to time, albeit subject to deduction of reasonable remuneration for a replacement manager of the loans. Although there were circumstances in which the entitlement to an Originator's Fee was liable to be divested – if the loan was refinanced or repaid in full within six months, or the subject of "churning" – those circumstances did not include mere termination of the LOMA. The right to trailer commission in respect of a settled loan therefore accrued upon settlement of that loan, and continued so long as there was an Outstanding Loan Balance; it was not conditional upon the contract not being terminated. 18 But it does not necessarily follow that clause 20.3(c) is void as a penalty; indeed the main issue in the case is whether, as Mr Coles submits, the law of penalties does not apply to it at all because the clause is not conditioned on any breach, but on an event, and the contract was terminated, not for breach, but pursuant to a right to do so upon occurrence of an event. It was Mr Coles' submission that on its proper construction, clause 20.3(c) of the LOMA was not concerned with termination for breach, but rather that the parties, having negotiated at arm's length and with no suggestion of their consent being vitiated by unconscionability, had stipulated that upon the happening of certain events, a certain consequence should follow regardless of any question of breach of contract, and that in such circumstances, no question of penalty could arise [for which he cited Export Credits v Universal Oil Co; O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 367 (Gibbs CJ); Bartercard Ltd v Myallhurst Pty Ltd [2000] QCA 445, [2] (Davies JA); [28] (Thomas JA); [30] (Ambrose J); PC Developments Pty Ltd v Revell, 625G-626C, 627G-628G (Mahoney JA); and Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Ltd, [113], [140]–[148] (Hansen J)]; and that it necessarily followed that the first question must be answered in the negative, with the result that the second question did not arise. 19 The proposition that the doctrine relating to the unenforceability of penalties is confined to payments (and transfers, forfeitures, retentions or withholdings) agreed in advance to be made in respect of, but which are not a genuine pre-estimate of the damage arising from, a breach of obligation by one party – and thus that a provision in a contract providing for payment of money by one party on the occurrence of a specified event, rather than on breach of a contractual duty, cannot be a penalty – is well-supported by authority, although reservations have not infrequently been expressed. In considering the authorities, almost all of which arise in the context of the relevant event being termination of a hire-purchase agreement or a chattel lease, it is useful to bear in mind three classes of case to which they have referred: · First, those in which a liability to pay a stipulated sum is imposed in the event of the hirer/lessee terminating the contract in accordance with its terms by returning the goods to the owner/lessor; · Secondly, those in which a liability to pay a stipulated sum is imposed in the event of the owner/lessor exercising a right to terminate the contract upon an "event of default" (such as death, insolvency, or issue of execution against the lessee) where there is no contractual promise that such event of default will not occur – which is the present case; and · Thirdly, those in which a liability to pay a stipulated sum is imposed in the event of the owner/lessor exercising a right to terminate the contract for breach by the hirer/lessee. 20 The relevant authorities begin with Elsey & Co Ltd v Hyde (1926), an otherwise unreported decision of a Kings Bench Divisional Court, mentioned in Jones & Proudfoot on Hire-Purchase Law, 2nd ed, which has had extraordinary influence in the evolution of the law in this field. Salter J, with whom Fraser J agreed, said, in the context of a hire-purchase contract which provided for payment of a sum upon termination of the contract within eight months, that the question whether an agreed sum was a penalty or not arose where the contract provided that if one party has done something which it ought not do and which has prejudiced the other, it would give the other a right to damages; that is, in cases where the person who is to pay has broken a contract with the other or done something which entitled the other to damages. The contract could be terminated by the hirer or by the owner. If it was terminated by the owner returning the goods in accordance with the contract, there was no breach and no right to damages; and if it was not a penalty in those circumstances, nor was it if the termination was by the owner retaking the goods, even though in consequence of a breach of contract by the hirer. Nor was it a penalty if the termination by the owner was in consequence of an event which was not a breach of the contract – for example, the issuing of execution against the hirer [the passages are cited by Simonds J in In re Apex Supply Company Ltd [1942] Ch 108, 115-117; [1941] 3 All ER 473, 479; and by Jenkins LJ in Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86; [1952] 2 All ER 915, 923-4] (emphasis added): Supposing the hirer exercises his right to terminate this hiring, how can it be said that this sum of money, which it is agreed shall be paid, is a penalty or that it is a case in which either the agreed sum or liquidated damages must be paid? If the hirer terminates this agreement, what right does that give the owner to recover any damages against him? He has done him no wrong, he has broken no contract, and I am quite unable to see that this sum would or could give a penalty if it were claimable in those circumstances. It appears to me to be a strange conclusion, if this money is to be regarded as a penalty, where it was payable in one event and not regarded as a penalty where it was payable in another event. I think, therefore, as it is to my mind not a penalty where it is payable on the return of the article by the hirer, it ought not to be regarded as penalty where it was payable on the retaking of the article by the owner. Then the next case I take is where the money is paid on the determination of the hiring by the owner, not as in this case in consequence of the conduct of the hirer which is a breach of contract, but in consequence of the happening of an event which is not a breach of the contract. For example, supposing the owner justifies his right to re-take under cl. 8, because execution has been issued against the hirer. There is no wrong done by the hirer to the owner, and it is no breach of any contract which the hirer has made with the owner. How could that event give to the owner of the goods any right to recover damages against the hirer, liquidated or unliquidated? It appears to me that no question of penalty could arise in such a case, and if this sum is not a penalty where it is payable on the determination of the hiring by the owner, by reason of the levy of execution, it seems to me it would be a strange result if it were to be held a penalty where it is payable on the termination of the hiring by the owner on the ground of non-payment of rent by the hirer . That is this case. Then there is a third case I take, and that is this one, where the hire is determined by the owner, because the hirer is in arrear with his payments. It is proved that this is a breach of this contract, and it is proved that that breach, apart from any termination of the hirer, would give the owner a right to damages against the hirer. But what would those damages be? They would be interest on the amount unpaid and nothing more. The fact that the hirer is in arrear with his payments will not entitle the owner to any damages for depreciation of these things. The reason that they have suffered is that they have second-hand goods put on their hands before they have received very much money in respect of them. That is not the result of the hirer's breach of contract, in being late in his payments, it is the result of their own election to determine the hiring, and it appears to me, even in this case, there is no question of penalty at all, and there is no question whether the sum paid shall be regarded as liquidated damages or a penalty. 21 Elsey v Hyde was a case in the third class – termination for the hirer's default in the obligation to pay instalments. The fundamental proposition advanced by Salter J – particularly in the two passages emphasised above – was that (a) insofar as the contract provided for payment of an agreed sum on termination by the hirer returning the goods (the first class of case), it was not a penalty because it was not conditioned on breach, and it could not therefore be a penalty where it was payable on termination by the owner (the second and third classes); (b) insofar as the contract provided for payment of an agreed sum on termination upon an event which was not a breach of contract (the second class of case), it was not a penalty because it was not conditioned on breach, and so it could not be a penalty in the third class of case, because it was not conditioned on breach but on the owner's election to terminate which could arise in numerous circumstances, many of which did not involve breach. As shall be seen, this fundamental proposition has since been authoritatively rejected, in the Court of Appeal [Cooden Engineering Co Ltd v Stanford], the House of Lords [Bridge v Campbell Discount Co], and the High Court of Australia [O'Dea v Allstates Leasing System (WA) Pty Ltd, 367 (Gibbs CJ), 390 (Brennan J); AMEV-UDC v Austin, 184-5 (Mason and Wilson JJ), 211 (Deane J)], and it is now accepted that the third class of case involves an unenforceable penalty if the agreed payment is not a genuine pre-estimate of the loss. 22 In Chester & Cole Ltd v Avon (1929) [also unreported, mentioned by Simonds J in Apex, 117], Hawke J followed Elsey v Hyde, apparently without elaboration. 23 The next case, Chester & Cole v Wright [also unreported, mentioned by Simonds J in Apex, 118], was a decision of a Divisional Court constituted by Lord Hanworth MR and Greer LJ. There were two issues – whether the question of penalty or liquidated damages arose at all, and if so whether the sum was a genuine pre-estimate. Lord Hanworth did not address the first issue, but found on the second that the sum was a genuine pre-estimate and accordingly enforceable. Greer LJ came to the same conclusion, but added some observations in respect of the first issue, on which he said, somewhat diffidently (emphasis added): The second question to be determined is a little more difficult. It is whether the sum of 95 l , diminished by the amounts already paid, is to be deemed to be a penalty for breach of a contract, and not damages, or, as may well be, that it is neither one nor the other, that it is neither a penalty, nor is it liquidated damages, but it is a sum which, in consideration of getting the use of this car, the hirer promised to pay in a certain event, that event being the determination in one way or another of the hiring agreement. There is no reason in law why, for a sufficient consideration, there should not be on the same document two contracts, one a contract to hire the motor-car on the terms of the agreement, and another, a contract that if that agreement comes to an end, then a certain sum will be payable by the hirer; and it may very well be that the view which is, I think, the view of Salter J, in Elsey & Co Ltd v Hyde , which was cited before us, is the right way to look at this clause, namely, that it is not either liquidated damages or a penalty, but it is a sum payable in respect of one event, namely, the determination and end of the hiring agreement, whether that end of the hiring agreement arises from the hirer delivering the car back again, or whether it arises from the owner taking it out of the possession of the hirer in the events in which he is entitled to take it out . 24 The first emphasised passage shows that the decision is affected by the view, since exposed as erroneous, that it is somehow relevant that the sum in question is part of the consideration for the whole contract, in the absence of which the price might have been higher. The High Court has stated that it is no answer to a contention that a provision is void as a penalty that it forms part of the consideration, in the absence of which the price would have been higher. In Ringrow v BP Australia, the Court said: [37] There is, however, one argument advanced by the respondent which should be rejected. As part of an argument that the penalty doctrine did not apply in this case, the respondent contended: The option was part of the consideration for the original conveyance of [BP Lansvale]: see special condition 38 of the [Contract for Sale of Site] ... The option encumbered the original conveyance. Had the option not been part of the consideration, the purchase price would have been higher. [38] There is an echo of this argument in the reasoning of the courts below [ Ringrow Pty Ltd v BP Australia Ltd (2003) 203 ALR 281 at 303 [103]; Ringrow Pty Ltd v BP Australia Pty Ltd (2004) 209 ALR 32 at 44 [30]]. By itself, that point could not prevent a conclusion that a contractual term was a penalty, for in almost every case the impugned term will be part of the consideration for the innocent party's promises, and it can be said that if it had not been so, the other elements of the consideration required by the innocent party would be more valuable. 25 The second emphasised passage repeats the fundamental proposition in Elsey, which, as I have said, has since been rejected. 26 In Associated Distributors Ltd v Hall [1938] 2 KB 83, a hire-purchase agreement had been terminated by the hirer, who as a result was contractually obliged to pay a sum of money to the owner (the first class of case). The Court of Appeal, having been referred to the above-mentioned cases, concluded that no question of penalty or liquidated damages arose in those circumstances; however, the case was one in the first class, and dealt only with the position where the hirer determined the contract, deciding that in that event the hirer must pay the sum fixed as a minimum payment; it says nothing about the second or third class of case. It is true that no disapproval was expressed of the reasoning in the earlier cases, but Slessor LJ made clear that it was not necessary to express any opinion upon them because they had nothing to do with the instant case; Scott LJ agreed with Slessor LJ, adding that he wished to make clear that the Court was "expressing no opinion at all" on three other cases, in the third class, that the same County Court judge had decided concurrently with the case under appeal (holding that penalties were involved in all four cases); and Clauson LJ also agreed. The distinction of a case in the first class is not an insignificant one: the hirer chooses to be relieved from further obligations by paying the sum specified in accordance with the terms of the contract, whereas in the second or third class of case, the owner elects to terminate for an event upon which termination is authorised, and to gain a benefit wholly disproportionate to any loss occasioned to it by the relevant event. 27 In re Apex Supply Co concerned a hire-purchase agreement under which the hirer agreed that if it went into liquidation and the owner retook possession of the goods within nine months from the date of the agreement, the hirer would pay, in addition to payments already made, a further sum which with previous payments would total £1020, by way of compensation for depreciation of the goods. Those events occurred, and the owner claimed a sum of £676 pursuant to the provision. The case was therefore one in the second class. Simonds J held that the question whether the sum payable was a penalty or liquidated damages did not arise, as the sum became payable on a certain event – namely termination consequent upon liquidation – and not by way of damages for breach of the agreement; and further that even if it were in respect of damages, it was seemingly a genuine pre-estimate. In reaching that conclusion, his Lordship referred to the cases so far mentioned. Citing extensively from Elsey v Hyde, his Lordship interposed, after the first emphasised passage in the quotation above [[1942] Ch 108 (at 116)] (emphasis added): If I may pause there in the reading of the learned judge's judgment, it exactly covers the case I have to consider to-day, and, if that stood alone, I do not think I should be justified in taking a view on this common commercial document different from that which the learned judge took, a view from which, as I shall show, no dissent has been expressed by any court before which the matter has come. 28 Thus, though a case in the second class, Apex is founded on the view expressed in Elsey v Hyde, that as an agreed payment on termination by the hirer returning the goods (the first class) was not a penalty, so a termination by the owner repossessing in accordance with a contractual right (the second and third classes) could not be a penalty. Simonds J also relied heavily on what Greer LJ had said in Chester & Cole v Wright, which he said was "of the greatest importance": however, it too relied on the same subsequently discredited proposition from Elsey v Hyde; moreover it was a diffidently expressed observation, obiter dicta, in a concurring judgment where the leading judgment did not address the issue. Further, Simonds J relied on the absence of any disapproval of the earlier cases in Associated Distributors – but the Court in Associated Distributors simply did not have to consider the correctness of those cases and made clear that it did not. Simonds J's decision therefore rests on Elsey, the reasoning in which is no longer at least fully sustainable and the result in which is now overruled, but which Simonds J essentially adopted for his own reasoning; on the diffident expression of opinion by Greer LJ in obiter dicta in Wright; and on an inferred endorsement of the earlier unreported cases by the Court of Appeal in Associated Distributors, which on examination does not bear that character. Apex is potentially important, because it seems to be the only case in the second class, but its authority is seriously undermined by the subsequent authoritative rejection of its ratio – that if the payment is not a penalty where it is payable on the return of the article by the hirer, it ought not to be regarded as penalty where it was payable on the retaking of the article by the owner. 29 The first case in which that view was rejected was Cooden Engineering Co Ltd v Stanford, in which the Court of Appeal held that where money was expressed as being payable on an event, but the event was also a breach of contract, the sum could not be recovered if it was penal in amount. The agreement provided (1) for termination by the hirer returning the vehicle to the owners whereupon the hirer would be under no further liability except to pay to the owners (a) all instalments of hire which had fallen due prior to the date of return and are unpaid and (b) forty per cent of the total amount of the monthly instalments which have not then fallen due (said to be in lieu of compensation for agreed depreciation in the market value of the vehicle between the date of this agreement and the date of the return of the vehicle) (cl 10); (2) that should the hirer fail to make any payment on the due day, or die, the owners may by twenty-four hours notice in writing determine the hiring, and should the hirer commit any act of bankruptcy or a receiving order be made or make any arrangement or composition with creditors or an execution or distress or legal process be levied or threatened upon the vehicle or fail to observe or perform any agreement or condition contained in the agreement, the hiring shall ipso facto be determined, and on any such determination by notice or otherwise the full balance then remaining unpaid of the total hire, together with all costs charges and expenses which the owners may incur in exercise of their powers shall at once become payable to and be recoverable by them (cl 11); and (3) if the hirer should duly make all payments and strictly observe and perform all the terms and conditions contained in the agreement, he should have the option of purchasing the vehicle for the sum of 10s, but that no such option should arise in case of termination of hiring under cll 10 and 11 (cl 12). The vehicle was delivered to the hirer and remained in his possession for nearly two years during which he paid, in addition to the initial instalment, seven of the monthly instalments. The owners gave notice determining the hire under cl 11, and repossessed the vehicle. They claimed the arrears of instalments and the balance of the total hire, under cl 11. The hirer contended that, as under cl 11 the owners were entitled to receive the full price of the car and the car itself, the sum claimed was excessive and amounted to a penalty. Accordingly, the case was in the third class – termination by the owner for an event which was also a breach of contract, but the contract also provided for payment of an agreed sum in the first and second classes, though in the first class it was discounted to 40% of the outstanding balance and explained as allowance for depreciation. 30 Somervell LJ, after considering Apex Supply and the unreported cases referred to in it, concluded that the proposition which founded Elsey v Hyde and Apex Supply – that a sum exigible for a breach or breaches could not in law be a penalty because it is made payable on the happening of some other event which is not a breach – was wrong, and that if the agreed amount was not a genuine pre-estimate of the damage, the payment in a case in the third class was an unenforceable penalty (at 920): These passages suggest two lines of reasoning. The first is that, if a sum is payable on the happening of one or other of two events, if it is not a penalty in the one case it cannot be in the other. If this is suggested by Salter J I cannot, with respect, accept it. The events may, in fact, be so similar that a conclusion on one decides the other. The sum payable if the buyer desires to return the car may so clearly be a reasonable figure to cover depreciation that it would also be a reasonable pre-estimate if the owner exercises any right he has to terminate the agreement on a breach. But it cannot, I think, follow as a matter of law that a sum exigible for a breach or breaches cannot in law be a penalty because it is made payable on the happening of some other event which is not a breach. The second line of reasoning is put, if I may say so, very clearly in the passage cited from the judgment of Greer LJ. It is that the law as to penalties is inapplicable if the owner under the agreement is entitled to "determine" the agreement as the result of any breach. If in a contract of this kind, without the special provisions of cl 11, the hirer committed a breach going to the root of the contract, the owner would be entitled to treat this as a repudiation, to re-take possession of the car, to be free from all further obligations to let the hirer have possession of the car, and to sue for damages. In other words, to determine the contract and claim damages. The effect of the words we are considering is, I think, to give the same rights in the event of any failure to make punctual payment. The effect of this clause is, first, to make punctual payment a condition of the contract, and then to provide for the financial consequences to the hirer if the owner treats that breach as a repudiation giving him the right to free himself from all further obligations and claim money. No objection can be taken to the former, but, as it seems to me, the law as laid down in Dunlop's case is applicable to the financial consequences which are plainly a sum to be paid in consequence of the breach. 31 Resolution of the position in a case of the second class was unnecessary, and his Lordship left it open, but observed that the conclusion may well be the same (at 921): In conclusion, I would like to emphasise that we are dealing with a case in which the right to determine and claim payment is based on a breach of contract. The part of the clause with which we are concerned also provides that if the hirer died, for example, a few days after he had taken delivery the owners could re-take possession of the car and claim the balance of the £412 7s 6d. This obviously raises a different point from that with which we have to deal where the claim is made as the result of a breach. In the Apex Supply case the claim was based on the hiring company having gone into liquidation. Though it may well be that the conclusion would be the same, it might fall to be considered on equitable rather than on common law principles. If anyone desires to argue that the conclusion should be different in the case of death or an event such as bankruptcy or liquidation, so far as my judgment is concerned I desire to make clear that that point is open. 32 Jenkins LJ dissented, holding that even in the third class of case, the agreed sum became payable not because the hirer had committed a breach of contract (which he need not necessarily have done, as the clause included the second class of case, in which no question of a penalty arose as there was no breach of contract), but because the hiring had been determined (at [1952] 2 All ER 915, 928-9) (emphasis added): It remains to consider the first and more difficult question whether (being, as I have held, penal in point of amount) the sum payable on determination of the hiring under cl 11 is a penalty in the relevant sense at all. In order to be such the sum in question must, as I understand the law, be (as I have already described it) a sum which the hirer undertakes to pay to the owners in the event of, and in respect of, some breach by the hirer of the terms of the hire-purchase agreement. If the agreement contains a provision of that description, and a breach on the part of the hirer ensues and the owners sue for payment of the sum stipulated to be paid in respect of such breach, then, no doubt, arises the question of penalty or no penalty, turning on a comparison between the stipulated sum and the damages capable of flowing from the breach or breaches in respect of which the stipulated sum is, according to the terms of the agreement, expressed to be payable. But the provision here in question does not appear to me to answer that description. Clause 11 provides for the determination of the hire in a number of different events and in some of these events it enables the hiring to be determined by a specified notice from the owners to the hirer, while in others of them it causes the hiring to determine automatically. The events in which the hiring may be determined by notice include failure by the hirer to make any payment under the agreement on the due date (which would, of course, be a breach of contract), but they also include the death of the hirer (which would, of course, not be a breach of contract). The events bringing about automatic determination include failure by the hirer to observe or perform any agreement or condition contained in the agreement, but they also include the hirer's bankruptcy, the making of a receiving order against him, his making a composition with his creditors, the presentation of a winding-up petition against the hirer if a company, none of which is a breach of contract. On the determination of the agreement by notice or otherwise and whether the event on which the notice was founded or which brought about the automatic determination was a breach of contract on the part of the hirer or not, the sum prescribed by cl 11 becomes payable. It is not payable because the hirer has committed a breach of contract (which he need not necessarily have done), but because the hiring has been determined. Supposing the sum prescribed by cl 11 became payable on a determination by notice founded on the death of the hirer or on an automatic determination due to the presentation of a winding-up petition against the hirer (being a company), no question, so far as I can see, of the sum being a penalty in the relevant sense could arise, and, that being so, it seems to me impossible to invest the same sum with the character of a penalty where the determination by reason of which it becomes payable happens to be brought about by notice founded on or automatically by some breach of contract on the part of the hirer . My conclusion on this aspect of the case is supported by the reasoning of Salter J in Elsey & Co Ltd v Hyde , which, although it turned partly on the circumstance, absent from the case now before us, and to my mind of doubtful relevance to the point at issue, that the same sum was there made payable on determination by the hirer, seems to me to be applicable in its essentials to the provisions of the hire-purchase agreement in the present appeal. The reasoning of Salter J in the case just cited appears to have commended itself to Greer LJ in Chester & Cole Ltd v Wright (Jones and Proudfoot, p 130), and for my part I find it convincing. I may add that in Re Apex Supply Co Ltd , Simonds J while finding it his duty as a judge of first instance to follow Salter J whatever his own view might be, said nothing to suggest that his own view would have been different. 33 Hodson LJ observed (at [1952] 2 All ER 915, 930-1) that in Roadways Transport Development Ltd v Brown & Gray (1927) (unreported): No member of the court expressed the opinion that the contract was outside the penalty area on the simple ground that the agreement provided for a sum of money in a certain event, namely, the determination of the hiring in accordance with the terms of the agreement. I cannot but think that if this had been a complete answer to the appellant's argument the court would have so declared. 34 His Lordship also observed that Associated Distributors did not conclude the argument on the second and third classes of case: The other decision of the Court of Appeal to which we have been referred, namely, Associated Distributors Ltd v Hall , was a case in which under an agreement of the same class the hirer elected to determine the agreement, and in those circumstances the court came to the conclusion that no question of penalty or liquidated damages arose. Scott LJ expressly left open the question, as Simonds J pointed out ([1941] 3 All ER 481) in the Apex case, of what might be the view of the court if the agreement had been terminated, not by the hirer, but by the owner. Slesser LJ also left the question open. The Court of Appeal certainly did not give any decision discouraging to the present defendant although it is true, as Simonds J also pointed out, that the judgment of Salter J sitting as a member of a Divisional Court of the King's Bench Division in Elsey & Co Ltd v Hyde , was not adversely criticised. This last is the authority from which flows the line of argument which was accepted in the court below and is contained in the passage from the judgment of Salter J where he discusses, inter alia, the case of a hire being determined by the owner because the hirer is in arrears with his payments. 35 After setting out the relevant passage from the judgment of Greer LJ in Chester & Cole v Wright, his Lordship observed that it was "not particularly strong support" for the opposing view, and that giving effect to it would enable form to prevail over substance (emphasis added): But, even if it is a penalty, it will be observed that the whole of this passage is introduced by the phrase, "it may very well be", and is, therefore, not particularly strong support for the opinion of Salter J. My difficulty is to see the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract, and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine. The latter situation arises in cases of breach of condition amounting to a repudiation of the contract giving the opposite party the right to accept the repudiation and sue for damages. In so acting he determines the contract. Clause 11 purports to produce exactly this situation in respect of any breach referred to therein, and it seems to me unreal to speak of a remedy arising from the right to determine as opposed to a remedy arising from the breach. It is said that the right to determine arises in cl 11 not only in cases of breaches great or small, but also in a number of other events which have nothing to do with breach of contract, and, accordingly, since the law as to penalties for breach is inapplicable as such in these numerous instances, so it cannot be applied to that part of the clause to which it might otherwise be appropriate. I am unable to accept this contention which seems to involve that a draftsman of a written contract can always draw his document in such a way as to defeat the common law by incorporating in the same clause provisions dealing with the right to determine the contract on the occurrence of an infinite number of events only one of which is a breach of contract . 36 Although often referred to in this context, Alder v Moore [1961] 2 QB 57 is a rather different type of case, which did not involve a hire-purchase agreement or chattel lease, nor did it involve an agreed payment becoming due upon termination for an event. A professional football player agreed, in consideration of settlement of a total permanent disablement claim under an insurance policy, that he would not play in professional football in the future, and that in the event of infringement of that condition he would be subject to a "penalty" of the amount of the payment. By majority, the Court of Appeal held that, despite the use of the word "penalty", the obligation was one to reimburse a payment made on a basis which events proved to be false, and was not in substance penal. Sellers LJ, with whom Slade J agreed, referred with approval to Apex Supply and the proposition that no question of penalty versus liquidated damages arises where there is a contract for the payment of a certain sum in a certain event. Devlin LJ dissented; the dissent emphasises (at 69) the significance of the distinction between a promise that if an event occurs a payment will be made (not penal), and dual promises that an event will not occur but if it does a payment will be made (in which case the second – collateral – promise is penal). In my view, Alder is a true case of payment on an event; it was not a case in which a disproportionate detriment was incurred by one party to the benefit of the other upon the other electing to terminate for some event, but provided for payment of a sum which was entirely defensible upon the happening of the event, the non-occurrence of which was the main purpose of the contract. In substance, the payment was not collateral to the main purpose of the contract. 37 In Bridge v Campbell Discount Co Ltd [1962] AC 600 – a case which the House of Lords ultimately held to be in the third class (termination by the owner for breach by the hirer), whereas in the Court of Appeal it had been treated as in the first class (termination by the hirer in accordance with the contract) – the House of Lord unanimously approved Cooden v Stanford insofar as it rejected the proposition that if an agreed payment was not a penalty in some circumstances upon which it was triggered, it could not be a penalty in other circumstances, in particular where the termination was for breach of contract. As Lord Radcliffe observed (at 624-625): The purpose of an owner entering into a hire-purchase transaction is to turn goods into cash; as a moneylender, which is what he is in all but form, his purpose is to recover with interest the amount of his advance. This clause is designed to provide him with a guarantee at the expense of the hirer that, come what may, he will get out of the deal in money at any rate two-thirds of the total hire-purchase price, which is defined as being cash price plus hiring charges and option fee. The guarantee thus becomes operative whenever the hiring determines before the purchase option is exercised, provided that something less than two-thirds of the whole sum has then been paid over, and it makes no difference to the terms of the obligation whether the hiring is put an end to by the hirer under his option, or by the owner under his, or by the automatic operation of any one of the events specified in cl 8. That is why cl 9 (b) is not attached separately to the various preceding clauses but applies indifferently to them all. It is this aspect which has troubled several judges in the past, and has led more than one to say that such a provision is not a penalty at all or, to put the same idea in another way, to express the view that, if it is not a penalty for all purposes and in all relations, as, for instance, when the hirer brings it on himself by exercising his option to terminate, it cannot be a penalty in any one situation, as, for instance, when the owner is suing for damages for breach of the hiring obligations. I do not think that the difficulty has ever been better put than it is in the judgment delivered by Greer LJ, in Chester & Cole, Ltd v Wright quoted from Jones And Proudfoot's Notes On Hire-Purchase Law (2nd Edn), p 124, in Cooden Engineering Co, Ltd v Stanford ([1952] 2 All ER at p 925; [1953] 1 QB at p 105). I do not myself feel that this is a difficulty which should determine the matter. The court's jurisdiction to relieve against penalties depends on "a question, not of words or of forms of speech, but of substance and of things" (see per Lord Davey in the Clydebank Engineering case ([1905] AC at p 15)). It cannot really depend on a point of construction, though it is often spoken of as so depending. A sum of money sued for in one set of circumstances, as on a hirer's breach, when alone the "in terrorem" idea can have any application, may be a penalty in the eyes of the law, without it being necessarily anything but the price of an option in another set of circumstances or a mere guarantee in yet a third. On this point, therefore, I agree with the views of the majority of the Court of Appeal in Cooden's case. I know, of course, that, to travel to another branch of equity's relief jurisdiction, the precise reason why a deposit made on a sale of land is not recoverable if the bargain goes off by the purchaser's default is that it is treated as a guarantee (see Howe v Smith) ; but, nevertheless, every penalty, even a penal bond, is in some sense a guarantee for the due performance of the contract, and I do not see any sufficient reason why, in the right setting, a sum of money may not be treated as a penalty, even though it arises from an obligation that is essentially a guarantee. When such a sum is claimed, as it is here, as compensation for the hirer's breach of the hiring contract, I think that it bears every mark of being a penalty. The total hire-purchase price is called up to the extent of two-thirds, regardless of two considerations essential to any measurement of the owner's loss; the price includes a considerable interest element which the owner does not in the result forgo so far as the compensation is paid immediately, and the vehicle comes back into the owner's possession with a realisable value that, in many circumstances, may exceed the one-third balance of the price which the owner has not got in. In my opinion, a clause of this kind, when founded on in consequence of a contractual breach, comes within the range of the court's jurisdiction to relieve against penalties, and the respondents should be confined to the right of claiming from the appellant any damage that they can show themselves to have actually suffered from his falling down on the contract. I think, therefore, that Cooden v Stanford was rightly decided, though I do not necessarily agree with everything that was said by the majority of the members of the court in coming to their decision. 38 As to the first class of case, Viscount Simonds and Lord Morton of Henryton approved Associated Distributors Ltd v Hall, to the effect that had the position been (as the Court of Appeal had accepted) that the hirer had exercised his option to terminate the contract by returning the goods, no question of penalty would have arisen. Lord Denning however disapproved Associated Distributors, in its application to the second as well as the first class of case (at 629): The Court of Appeal acknowledge that, in some cases, there is room for the intervention of equity. They accept that, where the hiring is terminated because the hirer is in breach, equity will relieve him from payment of the penalty: see Cooden Engineering Co. Ltd v Stanford . But they say that when it is terminated for any other reason, as, for instance, if the hirer gives notice of termination himself, or if he dies, there is no equity to relieve him or his executors from the rigours of the law: see Associated Distributors, Ltd v Hall . The jurisdiction of equity is confined, they say, to relief against penalties for breach of contract and does not extend further. Applied to this case it means this: If the appellant, after a few weeks, finds himself unable to keep up the instalments and, being a conscientious man, gives notice of termination and returns the car, without falling into arrear, he is liable to pay the penal sum of £206 3s 4d without relief of any kind; but if he is an unconscientious man who falls into arrear without saying a word, so that the respondents re-take the car for his default, he will be relieved from payment of the penalty. Let no one mistake the injustice of this. It means that equity commits itself to this absurd paradox: It will grant relief to a man who breaks his contract but will penalise the man who keeps it. If this be the state of equity today, then it is in sore need of an overhaul so as to restore its first principles. But I am quite satisfied that such is not the state of equity today. 39 His Lordship explained this with reference to cases in which equity relieved against penalties imposed for non-performance of a condition, as distinct from breach of contract (at 629-631) (emphasis added): This case can be brought within long-established principles without recourse to any new equity. From the very earliest times, equity has relieved not only against penalties for breach of contract, but also against penalties for non-performance of a condition. And the stipulation for a "minimum-payment" was, it seems to me, a penalty which was payable on non-performance of a condition. The respondents said to the appellant: "If the hiring is terminated for any reason before you have paid £321 13s 4d, then you must make up the payments to that sum". The condition was designed to ensure that he should pay a minimum sum of £321 13s 4d. If he fulfilled that condition, he was not liable to pay any penalty; but, if he did not perform it, he had to pay the difference. The principal object was to secure a minimum payment of £321 13s 4d. The condition was the means of achieving it. To prove this point, I need not dwell on the cases of penalties for breach of contract. Their name is legion, and no one disputed them before your Lordships. A good instance is Sloman v Walter , to which your Lordships were referred. But I must draw attention to the cases of penalties for non-performance of a condition . They, too, are legion. Take mortgages for instance. At law, the mortgagor was subject to a penalty for non-performance of this condition: "If you repay the money on this day six months, you shall have the land back: but if you do not repay it by that date, you shall lose it for ever", see Coke On Littleton, s 332. The court of equity always relieved the mortgagor in case of non-performance of this condition, and it did so, not by reason of any specialty about mortgages, but in pursuance of its general power to relieve against penalties: see Kreglinger v New Patagonia Meat & Cold Storage Co, Ltd ([1914] AC at p 35) by Viscount Haldane LC. Take next the common penalty bond. It was taken in order to secure that something should be done by the obligor, such as to be of good behaviour (or to pay an annuity, or anything else). The obligor bound himself by his bond to pay a specified sum, say £20, on some such condition as this: "If you are of good behaviour (or pay the annuity, or whatever else it might be), this obligation shall be void: but if you do not do so, then this obligation shall be of full force and effect." In many of those cases, there was no covenant by the obligor to perform the condition; no covenant by him to be of good behaviour (or to pay the annuity or to do anything else); no covenant on which he could be sued at law; but simply a bond that, if he did not perform the condition, he would pay the specified sum. There was thus no breach of contract for which he could be sued at law for damages, but only non-performance of a condition which exposed him to payment of the sum specified in the bond. Yet equity always granted relief in such cases if the sum was a penalty : see, for instance, Tall v Ryland ((1670), 1 Cas in Ch at p 184), Collins v Collins ((1759), 2 Burr at p 826) and the very learned note by Mr Evans in his appendix to Pothier On The Law Of Obligations (1806), p 92; and it did so not by reason of any specialty about penalty bonds, but in pursuance of its general power to relieve against penalties. It would restrain the obligee from suing at law on the bond so long as the obligor was ready to pay him the damage he had really sustained. Likewise, even when the sum had already been paid over in the shape of a deposit to secure performance, equity would be prepared to grant restitution if it was a penal sum: see Benson v Gibson by Lord Hardwicke LC, Steedman v Drinkle by Viscount Haldane. In my judgment, therefore, the courts have power to grant relief against the penal sum contained in this "minimum-payment" clause, no matter for what reason the hiring is terminated. The "minimum-payment" clause is single and indivisible, and no just distinction can be drawn between the cases where the hirer is in breach and where he is not. I find myself in entire agreement with the judgment of Lord MacDermott CJ in Lombank Ltd v Kennedy, Lombank, Ltd v Crossan from which I have profited much. I do not think that Associated Distributors, Ltd v Hall was rightly decided. 40 Lord Devlin also disapproved Associated Distributors in its application to the first (and thus necessarily the second, which is a fortiori) class of case (at 633-635): In the course of the hearing in your Lordships' House, there was considerable discussion about the true effect of cl 9, on the footing that the letter of 3 September did amount to the exercise of an option. The noble and learned Viscount on the Woolsack considers that it did, and has expressed his opinion accordingly; and others of your Lordships, having regard to the importance of the point and to the full argument which took place on it, have expressed their opinion on the same footing. For my part, on this point I agree with the conclusion reached by my noble and learned friend, Lord Denning, and I think that Associated Distributors Ltd v Hall was wrongly decided; and I shall express shortly my reasons for so thinking. If a hire-purchase agreement is terminated before its natural end and the car is returned to or retaken by the owner, it will usually have depreciated in value and be worth less than the cash price paid for it. This will cause loss to the owner if the depreciation exceeds in value that part of any instalments paid as is to be counted as return of capital. The possibility of such an excess is a contingency against which the owner is entitled to protect himself. If the sum payable on termination under cl 9 (b) "by way of agreed compensation for depreciation of the vehicle" could be justified as a genuine pre-estimate of that excess, it would, I think, be recoverable under the agreement, whether the termination was the result of a breach, or of the exercise of the option, or of some other event. Viewed in relation to a breach, it would represent a pre-estimate of one head of the damage flowing from the breach; and an agreement genuinely liquidating one head of damage is, I think, just as good as one which liquidates the whole. When your Lordships have determined that cl 9 (b), when it comes into operation as the result of a breach, is a penalty clause, your Lordships must also have determined that the clause contained no genuine estimate of the loss caused to the owners by depreciation, and no genuine agreement that a sum should be paid in respect of it. There is no half-way house between a penalty and liquidated damages. However large the sum stipulated may be, if it is a genuine covenanted pre-estimate of damage, it is not stipulated as in terrorem, and so cannot be a penalty. If, therefore, your Lordships had taken cl 9 (b) at its face value, and had supposed that, as it states, there was really an agreement about the sum to be paid as compensation for depreciation (I do not mean necessarily a separate collateral agreement; an estimate in which the appellant acquiesced would serve the purpose) the respondents would inevitably have succeeded in their claim. The claim fails because your Lordships decline to take the words of cl 9 (b) at their face value. It is well settled that, when a court of law finds that the words which the parties have used in a written agreement are not genuine and are not designed to express the real nature of the transaction but for some ulterior purpose to disguise it, the court will go behind the sham front and get at the reality. That, indeed, is what the court is doing when it declares that what is expressed as an agreement about liquidated damages is not a genuine agreement, but cloaks the imposition of a penalty. The respondents have failed in this case because, wishing to make the appellant pay an extravagant sum if the contract was terminated under cl 6, cl 7 or cl 8, and aware that, if it was terminated under cl 7, the sum would or might be treated as a penalty, they chose to record a fictitious agreement to treat the sum as compensation for depreciation. As I understand it, none of your Lordships believes that the sum was arrived at in that way. There never was any agreement, genuine or purported, to pay compensation generally or except in relation to a specific sum; and so, if the sum was not genuine, there can be no genuine agreement at all. My Lords, I do not see how an agreement can be genuine for one purpose and a sham for another. If it is a sham, it means that it was never made and does not exist; if it does not exist, it must be ignored altogether. It cannot be a part of cl 9 when that clause is applied by virtue of cl 6 or cl 8, and not a part of it when it is applied by virtue of cl 7. There is no agreement to pay a sum irrespective of depreciations, as the price of exercising the options, and I am not prepared to construct one. On this comparatively narrow ground, I should (if I had construed the letter of 3 September as the exercise of an option) have held that the appellant was, nevertheless, entitled to succeed. I have not fully considered the wider grounds on which my learned and noble friend, Lord Denning, reaches the same conclusion nor those on which Lord MacDermott CJ reached a similar conclusion in his dissenting judgment in Lombank, Ltd v Kennedy, Lombank, Ltd v Crossan . 41 In respect of the first and second classes of case, the remaining member of the House, Lord Radcliffe, left the matter open, though suggesting that there were difficulties in the way of the position advanced by Lord Denning (at 625-6): Having regard to the view that your Lordships have taken as to the true facts of the case, our decision does not, I take it, conclude the question of an owner's rights under such agreements, when the hiring is determined under a hirer's option or by an event specified in the contract but not involving a breach. Such questions are closely related to what we have to consider here, but it does not follow that the legal arguments that sustain the hirer, when he is sued on breach, would be capable of sustaining him in these other situations. Indeed, although I wish to decide nothing, I appreciate that the doctrine of penalties can only be applied to those situations by the construction of almost a new set of arguments that would not arise naturally out of the arguments and considerations that have prevailed with courts, either of equity or of common law, when relieving against penalties in the past. "Unconscionable" must not be taken to be a panacea for adjusting any contract between competent persons when it shows a rough edge to one side or the other, and equity lawyers are, I notice, sometimes both surprised and discomfited by the plenitude of jurisdiction and the imprecision of rules that are attributed to "equity" by their more enthusiastic colleagues. Since the courts of equity never undertook to serve as a general adjuster of men's bargains, it was inevitable that they should, in course of time, evolve definite rules as to the circumstances in which, and the conditions under which, relief would be given, and I do not think that it would be at all an easy task, and I am not certain that it would be a desirable achievement, to try to reconcile all the rules under some simple general formula. Even such masters of equity as Lord Eldon and Sir George Jessel MR it must be remembered, were highly sceptical of the court's duty to apply the epithet "unconscionable" or its consequences to contracts made between persons of full age in circumstances that did not fall within the familiar categories of fraud, surprise, accident, etc, even though such contracts involved the payment of a larger sum of money on breach of an obligation to pay a smaller (see the latter's judgment in Wallis v Smith) . But I do not speculate what principles they would have thought applicable to a hire-purchase contract, in which the hirer, I dare say willingly enough, transacts only with a dealer who is not the agent of the owner and, if he signs up at all, signs up to an elaborate fixed menu of stipulations and conditions, which he probably does not bother himself to read and very likely does not or cannot understand. 42 In Financings Ltd v Baldock [1963] 2 QB 104; 1 All ER 443, the agreement contained (1) a provision for termination by the owner should the hirer fail to pay the initial instalment of rent in full when the agreement was made, or to pay any subsequent instalment or other sum payable in full within ten days after the same shall have become due, or die or have a receiving order made against him or be made bankrupt or call any meeting of or make any arrangement or composition with his creditors or if the goods or any part thereof be seized under any execution or legal process issued against the hirer or under any distress for rent or fail to observe or fulfill any term of the agreement or do or suffer anything whatsoever which in the owner's opinion bona fide formed upon reasonable grounds would or may have the effect of jeopardising the owner's right of property in the goods (cl 8); (2) a provision for termination by the hirer returning the goods to the owner (cl 10); and (3) a provision that should the hiring be terminated by the hirer under cl 10 or by the owner under cl 8 the hirer shall forthwith pay to the owner the greater of (a) such further sum as with the total amount of any instalments previously paid hereunder will equal two-thirds of the total hiring cost or (b) the amount of all instalments and other moneys then already due hereunder. The hirer defaulted in the payment of several instalments of hire, but not so as to amount to a repudiation, and the owner terminated for breach, so the case was one in the third class. The main issue was whether in those circumstances (it being accepted that the minimum payment clause was a penalty) the owner was entitled to damages occasioned by their termination as opposed to the unpaid instalments as at the date of repossession. Lord Denning MR, Upjohn and Diplock LJJ held that the owner was limited to recovery of the instalments unpaid as at termination (a view which was approved by the majority of the High Court in AMEV-UDC v Austin. Whether cl 11, in its application to events which were not breaches of contract, was an unenforceable penalty did not have to be decided, but Diplock LJ – a judge who was not otherwise given to expanding the field of operation of the law of penalties [see Robophone, and see also Bernstein (Philip) (Successors) Ltd v Lydiate Textiles Ltd [1962] CA Transcript 238, sub nom Sterling Industrial Facilities Ltd v Lydiate Textiles Ltd 106 SJ 669, cited extensively in Export Credits Guarantee Department v Universal Oil Products Co] – appears to have left open the possibility that payments in the first and second class of case might be unenforceable penalties ([1963] 1 All ER 443, 450-2) (emphasis added): It is to be observed that some of these events, such as the death of the hirer, would not constitute breaches of contract on his part at all; others do constitute breaches of contract by the hirer, but these are not limited to breaches going to the root of the contract which, if committed, would, apart from any express provision of the contract, have entitled the plaintiffs to treat it as wrongfully repudiated by the hirer. They included such breaches as delay in payment of a single instalment for more than ten days, even if the instalment is tendered on the eleventh day after it fell due. That time of payment is not of the essence of the contract is apparent from the provision in cl (1) that interest at ten per cent per annum shall be paid on all overdue instalments, thus providing an express remedy in damages, of which the measure is agreed, for breach of the hirer's obligation to pay an instalment on the due date. All that cl (8) does is to entitle the plaintiffs to terminate the hiring on the occurrence of any of the events therein defined whether amounting to breaches of contract or not, and to put an end to the hirer's right to possession of the chattel. This clause does not deal expressly with any other rights, apart form the right to retake possession, which accrue to the plaintiffs on the exercise of the option to terminate the hiring so granted to them. Those are left to be dealt with by other express provisions in the contract or, in so far as the contract is silent or its relevant provisions unenforceable, by the general principles of the common law of contract. Clause (11) of the contract does contain express provisions as to the rights of the plaintiffs as owners in the event of their exercising their option to terminate the contract under cl (8). They are the same, although I do not think that this is relevant for the purpose of deciding the present appeal, as in the case where the hirer exercises his contractual option under cl (10) of the contract to determine the hiring without any breach of contract by either party thereto. So far as is relevant, cl (11) reads as follows: Should the hiring be terminated by … the owner under cl (8) hereof the hirer shall … forthwith pay to the owner either (a) such further sum as with the total amount of any instalments previously paid hereunder will equal two-thirds of the total hiring cost shown in the schedule as agreed compensation for the depreciation of the goods or (b) the amount of all instalments and other moneys then already due hereunder, whichever is the greater … This purports to give the plaintiffs the right to recover a sum of money representing whichever is the higher result of two alternative calculations. This sum is not expressed to be payable as damages for breach of contract. It is payable irrespective of whether the event giving rise to the plaintiffs' right to determine the contract is a breach of contract by the hirer or not. It is an arbitrary sum which, where the event giving rise to the plaintiffs' right to determine the contract is a breach of contract by the hirer, is not a genuine pre-estimate of the loss suffered by the plaintiffs as a result of such breach. In Bridge v Campbell Discount Co Ltd , it was held that a similar provision, when sought to be enforced on the termination of the contract of hiring on breach of his contract by the hirer, was a penalty from which the court would grant relief. Whatever may have been the position before the fusion of law and equity, the effect today of the court's granting relief against a penalty agreed to be paid pursuant to a penalty clause in a contract is that the penalty clause is treated as void and the plaintiff is forced to rely on his right to such measure of damages as he would be entitled to at common law for the breach of contract which the defendant has committed . … As I ventured to point out in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd , parties to a contract may incorporate in it provisions which expressly define the events, whether or not they amount to breaches of contract, which are to have this result. But such a provision of itself may do no more than define an event which of itself, or at the option of one or other of the parties, brings the contract to an end and thus relieves both parties from their undertakings further to perform their obligations thereunder. Whether it does more than this and confers any other rights or remedies on either party on the termination of the contract, depends on the true construction of the relevant provision. If it does not, then each party is left with such causes of action, if any, as had already accrued to him at the date that the contract came to an end, but acquires no fresh cause of action as a result of the termination. If it does purport to confer on one of the parties a right to recover a sum of money from the other, a question may arise whether this right is unenforceable as constituting a penalty . In the present contract, cl (8) itself merely defines a number of events, the occurrence of any one of which gives the plaintiffs an option to bring the contract to an end. Clause (11) purports to confer on the plaintiffs other rights on exercising their option to bring the contract to an end, but this clause is void as a penalty clause, at any rate in so far as it purports to confer rights on the plaintiffs in the events which in fact gave rise to their right to bring the contract to an end, namely, the defendant's breach of contract in failing to pay two instalments of hire . 43 In United Dominions Trust (Commercial) v Ennis [1968] 1 QB 54; [1967] 2 All ER 345, the hire-purchase agreement gave the finance company an option to terminate the agreement for the hirer's breach (cl 8), and also provided that the hirer may terminate the hiring by returning the goods to the finance company (cl 10). There was a minimum payment clause (cl 11) whereby, should the hiring be terminated by the hirer under cl 10 or by the finance company under cl 8, the hirer was obliged to pay to the finance company "such further sum as with the total amount of any instalments previously paid hereunder will equal two-thirds of the total hiring cost". The vehicle was returned to the finance company in circumstances that were ultimately held not to constitute an exercise by the hirer of his option under cl 10, but an exercise by the finance company of its option under cl 8 to terminate the agreement for the hirer's breach; accordingly this was also a case in the third class. But as to the first class, Lord Denning MR said: In Bridge v Campbell Discount Co Ltd ([1962] 1 All ER at p 400, letter i , [1962] AC at p 631), sitting in the House of Lords, I expressed the view that Associated Distributors v Hall was wrongly decided. So did Lord Devlin ([1962] 1 All ER at pp 401, 402, [1962] AC at p 633). I retain that view and I think that it is open to this court to reconsider this decision; but it is unnecessary to do so today. 44 Harman LJ did not share that view ([1967] 2 All ER 345, 349-50): That claim the county court judge thought was a good claim. He did not decide it on that ground: he decided it on the ground that he was bound to hold, though he did not like it, that there being no penalty because there was no breach of the agreement, the finance company were entitled to enforce the option clause, if I may so call it, by which the hirer, it was said, had terminated the agreement. For myself I must say that if I had agreed with that view, I should have felt bound to come to the same conclusion, because I do not think that there can be a penalty without a breach of contract, for which the penalty may be the result. 45 But Salmon LJ, while observing that there was much to be said for the view that the court may be bound to hold that in a case in the first class the agreed payment would not be a penalty and would be recoverable, recognised that that could give rise to anomalies, and said nothing about a case in the second class: Clause 10 of the hire-purchase agreement gives the hirer an option of terminating the agreement in a particular way, "by returning the goods at his own expense and risk to the [finance company] at such place as shall be appointed by the [finance company] in a good state of repair … " That purports to confer a benefit on the hirer. It is, of course, a snare and delusion, because if the hirer elects to exercise the option to terminate the agreement under that clause, he finds himself liable under the following clause to pay the finance company a sum equal to two-thirds of the total hiring costs outstanding at the date of the termination—in this case, some £709. One had this rather anomalous position. Suppose a hirer is one instalment in arrear and does nothing at all except perhaps intimate that he is in financial difficulty. The finance company then has power to retake the car under cl 8 and claim two-thirds of the hiring costs under cl 11; but in circumstances such as those, Bridge v Campbell Discount Co Ltd shows quite plainly that the finance company could not recover any part of the outstanding instalments under cl 11 because the sum stipulated in the clause would constitute a penalty and would accordingly be irrecoverable. If, on the other hand, the hirer terminates under cl 10, it is, at any rate, doubtful whether the obligation specified in cl 11 to pay two-thirds of the outstanding hiring charges is a penalty. There is, I think, much to be said for the view that this court may be bound to hold that in these circumstances it would not be a penalty and would be recoverable. 46 In O'Dea v Allstates Leasing System (WA) Pty Ltd, a lease of machinery for 3 years at an "entire rental" of $39,550 payable on execution, contained a concession that if monthly instalments were paid promptly the lessor would not seek to recover the outstanding balance. A further provision that the outstanding balance of the "entire rental" became due on termination was held to be a penalty as a matter of substance, there being a covenant to pay the monthly instalments, so that on failure to make such a payment there was not only a withdrawal of the concession, but a breach of covenant. Brennan J said (at 390): The balance of opinion in this Court has favoured the view that no question of penalty arises unless the obligation to pay arises upon breach of contract. In IAC (Leasing ) , Walsh J said (126 CLR at 143): " ... there has been a preponderance of opinion in favour of the view that it is only when a provision operates so that the event upon which an obligation is placed upon a party to pay a sum of money to another party to a contract is the breach by the former party of a term of the contract, that the question arises whether an obligation arising upon that event is a penal provision." 47 However, Gibbs CJ said (at 367-8): The second class of case arises where the parties have stipulated that a sum shall become payable on a certain event which, although brought about by the party required to make the payment, does not involve a breach of contract. It has been held that where there is a contract for the payment of a certain sum in a certain event, and that event has happened, the sum is payable and no question of penalty versus liquidated damages arises: Re Apex Supply Co [1942] Ch 108 at 119; Alder v Moore [1961] 2 QB 57 at 65. Difficulties have arisen in the application of this principle to contracts of hire purchase which provide that, in the event of termination, a sum representing all or part of unpaid instalments will be paid by the hirer to the owner. There was some controversy as to the position when the owner's right to terminate the contract and receive payment arose on the happening of any of a number of events, some of which were breaches and some of which were not, but it has now been settled in England that in such a case where the agreement is terminated by reason of a breach committed by the hirer, the sum payable will be a penalty unless it is a genuine pre-estimate of the loss suffered by the owner by reason of the breach: Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86 ; [1952] 2 All ER 915; Campbell Discount Co Ltd v Bridge [1962] AC 600 ; [1962] 1 All ER 385; Financings Ltd v Baldock [1963] 2 QB 104 ; [1963] 1 All ER 443. I respectfully agree with that conclusion. If however the agreement is terminated by the hirer himself, eg because he is unable to keep up his payments, it has been held that the question whether the sum payable is liquidated damages or a penalty does not arise, since what has occurred is that the hirer has exercised his option to put an end to the contract on paying a certain sum, and the sum for which he has made himself liable must be paid: Associated Distributors Ltd v Hall [1938] 2 KB 83 Conflicting opinions have been expressed as to the correctness of that decision (see Campbell Discount Co Ltd v Bridge [1962] AC at 614, 631 and 633; and United Dominions Trust (Commercial) Ltd v Ennis [1968] 1 QB 54 at 64, 67) but the question whether it was correct does not fall for consideration in the present case. 48 Thus his Honour, while (1) acknowledging that it had been held that where there was a contract for a payment of a certain sum in a certain event and that event had happened, the sum was payable and no question of penalty versus liquidated damages arose, and (2) agreeing (with Cooden and Bridge) that in a case where the owner's right to terminate and receive a payment arose on the happening of any of a number of events, some of which were breaches and some of which were not, if the agreement was terminated by reason of a breach committed by the hirer (my third class), then the sum payable will be void as a penalty unless it is a genuine pre-estimate of the loss suffered by the owner by reason of the breach, (3) left open whether, where the agreement was terminated by the hirer (my first class), any question of whether the sum payable was liquidated damages or a penalty could arise – as the question of its correctness did not arise in that case. 49 In Export Credits Guarantee Department v Universal Oil Products Co, the plaintiffs had guaranteed payment of promissory notes issued by third parties to a banking consortium in return for provision of funds to the defendants for construction work undertaken for the third parties. The consideration for the plaintiffs' guarantee was a premium of £1 million paid by the defendants, who also agreed to reimburse any sums paid by the plaintiffs to the banking consortium in the event of the third parties dishonouring the promissory notes at a time when the defendants were in breach of the construction contract. When the plaintiffs sought to recover £39 million on that basis, the defendants contended that the provision was a penalty. The House of Lords, upholding Staughton J and the Court of Appeal, held that a provision in a contract providing for payment of money by one party on the occurrence of a specified event, rather than on breach of a contractual duty, could not be a penalty because the doctrine relating to the unenforceability of penalties was confined to payments which were agreed in advance to be made in respect of, but which were not a genuine pre-estimate of, the damage arising from a breach of obligation by one party. 50 Export Credits did not involve a case of termination by one party for an event in the domain of the other. It was, like Alder v Moore, a true case of a payment becoming due on an event, and in any event, the plaintiffs were only seeking to recover their actual loss by way of indemnity. I have used the terminology "a true case of a payment becoming due on an event" to distinguish these cases from those in which the payment is exigible upon termination at the option of one party for an event committed or suffered by the other, as a collateral obligation intended in substance better to secure the performance of the main purpose of the contract, by allowing the first party to terminate and impose an additional detriment on the other party if an event which may jeopardise performance of the main purpose occurs. 51 In AMEV-UDC Finance Ltd v Austin, all five Justices accepted that where the right to terminate and receive a payment arises on the happening of any number of events, only some of which are breaches of contract, the doctrine of penalty applies where in fact the termination is by reason of a breach. As to the first and second classes of case, Gibbs CJ (who was in the majority) again left the question open, observing (at 174) that the High Court was not required to consider the effect of Export Credits in that respect: The question for decision in the present case is a narrow one. We are not required to consider the effect of Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399; [1983] 2 All ER 205, where it was held that a clause which provided for payment of money on the happening of a specified event other than a breach of contractual duty owed by the contemplated payor to the contemplated payee was not a penalty. We are not concerned with the question whether a penalty clause restricts a plaintiff to the amount of the penalty even though the plaintiff disregards the penalty clause and sues for damages and the actual damage exceeds the amount of the penalty. 52 Mason and Wilson JJ, who were the other majority judges, in a joint judgment observed (at 184) that Export Credits had affirmed the view, which had been common to a number of the speeches in Campbell Discount Co Ltd v Bridge, that a clause which provided for payment of money on the happening of a specified event other than a breach of contractual duty owed by the contemplated payer to the contemplated payee was not a penalty, for the reason that it was not the function of the courts to relieve a party from a contract on the mere ground that it proves to be onerous or imprudent: The mainspring of the appellant's argument is to be found in the comments of Lord Denning in Campbell Discount Co Ltd v Bridge [1962] AC 600. In that case Viscount Simonds (at 613–4) and Lord Morton of Henryton (at 614–5) considered that a minimum payment clause was valid in its application to a termination by the hirer, being the price payable for the exercise of that right, even though it amounted to a penalty when it applied to a breach of contract on the part of the hirer. On the other hand, Lord Denning (at 629-31), though agreeing with this conclusion, rejected the notion that the doctrine of penalties was confined to sums stipulated to be paid for breach of contract. He pointed out that the jurisdiction of equity to relieve against penalties was not so confined, calling attention to equity's practice in earlier times of granting relief against penalties for non-performance of a condition in circumstances where, he suggested, the obligor gave no covenant to perform the condition. Lord Devlin (at 634–5) reserved his opinion on the wider ground taken by Lord Denning. He based his decision on the conclusion that the minimum payment clause was a penalty in its application to the hirer's breach of contract. He concluded that the minimum payment clause was invalid in its application to termination by the hirer, because, being a sham for one purpose, it must be a sham for all purposes. Lord Radcliffe also found that the clause was a penalty in its application to the hirer's breach of contract. Although he did not commit himself on the wider ground taken by Lord Denning, Lord Radcliffe thought that it would be necessary to construct almost a new set of arguments to render the provision unenforceable in its application to events which were not breaches of contract (at 625–6). Common to a number of the speeches in Campbell Discount was the view that the doctrine of penalties has no application to a stipulation which provides for the payment of an agreed sum on the happening of a specified event other than a breach of contract. The correctness of this view has since been affirmed by the House of Lords in Export Credits (WLR) at 402–3; (All ER) at 223–4 (see also IAC (Leasing) at 143). The reason given for this limitation on the scope of the doctrine is that it has never been the function of the courts to relieve a party from a contract on the mere ground that it proves to be onerous or imprudent ( Export Credits (WLR) at 403; (All ER) at 224. 53 Their Honours then discussed the difficulties that arise when an attempt is made to apply the proposition in the context of the exercise of an option to terminate a contract which is conditional upon, or associated with, a breach of contract: What is the position if the option is exercisable by the owner in a hire purchase agreement or the lessor in a chattel lease on the happening of any one of a series of events, some of which are breaches of contract on the part of the hirer and some of which are not? If the option is exercised on the occasion of the hirer's breach of contract, it accords with principle and authority to say that the sum is payable in respect of the breach of contract and is a penalty, unless it is a genuine pre-estimate of the damage ( O'Dea (CLR) at 368; Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86 at 96, 116; Campbell Discount; United Dominions Trust (Commercial) Ltd v Ennis [1968] 1 QB 54 at 65, 68, 69; cf IAC (Leasing) at 142–3). The point is that the doctrine is concerned with matters of substance, not of form ( Campbell Discount at 624; O'Dea (CLR) at 368, 403). 54 Turning to what I have called the first class of case, their Honours observed that the status of Associated Distributors had been diminished: A related problem arises when an agreement contains a minimum payment clause which requires the hirer to pay a stipulated sum on his exercise of an option to terminate the agreement or on the happening of other events which include his breach of contract. Such a provision has been held to be valid in its application to termination by the hirer ( Associated Distributors, Ltd v Hall [1938] 2 KB 83), notwithstanding that the provision constitutes a penalty in its application to a breach of contract. However, the status of Associated Distributors has been weakened by the comments made in Campbell Discount (see also O'Dea (CLR) at 368). 55 Their Honours then cited Lord Denning's criticism in Campbell Discount (at 629) of the result of Associated Distributors as an "absurd paradox". Reviewing the evolution of the doctrine of penalties, their Honours referred to equity's jurisdiction to relieve against a penal bond where it was possible to compensate the obligee for the loss suffered as a result of the default [citing Simpson, "The Penal Bond with Conditional Defeasance" (1966) 82 LQR 392, 418; and an opinion of Lord Somers, cited in argument in Marks v Marks (1718) Prec Ch 486, 488; 24 ER 218 at 219, and in Astley v Weldon (1801) 2 Bos & Pul 346 at 349; 126 ER 1318 at 1320–1], explaining (at 187-8) that (emphasis added): … It was recognised during Lord Nottingham's chancellorship that in the eye of equity a penalty was regarded as an obligation by way of security or, to use the language of the later cases, a guarantee of performance (Selden Society, Lord Nottingham's Chancery Cases (Vol II) (1961) vol 79, at 7–30, esp at 19). By the last quarter of the eighteenth century equity was relieving against penal bonds which were collateral to performance contracts, as well as against stipulations for the payment of agreed sums on default of the payment of money ( Hardy v Martin (1783) 1 Cox 26; 29 ER 1046; Sloman v Walter (1783) 1 Bro CC 418; 28 ER 1213; Muir, at 507–8). Hardy v Martin is an interesting illustration. There the plaintiff and the defendant had been partners as brandy merchants. The plaintiff, on quitting the business and selling the lease and goodwill of the shop to the defendant for £300, entered into a penal bond for £600 not to sell, for 19 years, any quantity of brandy less than six gallons within five miles of the cities of London and Westminster or to permit any person to do so in his name. When, upon a breach, an action was brought and a verdict given for payment of the penalty, the plaintiff filed a bill praying that an account might be taken of the actual damage sustained by the defendant and an issue directed ( quantum damnificatus ) for that purpose. An injunction was granted to restrain the defendant from taking out execution for the penalty under the bond, an issue was directed on damages and the jury subsequently gave a verdict for the plaintiff at law (the defendant in equity) with damages of 1s. The basis of the decision in Hardy v Martin is to be found in Sloman v Walter where Thurlow LC said, (Cox) at 419; (ER) at: "The rule, that where a penalty is inserted merely to secure the enjoyment of a collateral object, the enjoyment of the object is considered as the principal intent of the deed, and the penalty only as accessional, and, therefore, only to secure the damage really incurred, is too strongly established in equity to be shaken." Lord Thurlow invoked this general principle in order to displace the rule of interpretation, applied before the enactment of the Statute 8 & 9 Wm III c 11 s 8 (1696), that stipulations for the payment of an agreed sum otherwise than on default of the payment of money were to be considered as liquidated damages (see Muir, at 506–7). … 56 Their Honours concluded (at 190) (emphasis added): From this review of the doctrine of penalties, brief though it is, the following points emerge: (1) equity would only relieve where compensation could be made for the actual damage suffered by the party seeking to recover the penalty; (2) the actual damage suffered by the party was assessed in an action at common law, such as an action of covenant, or upon a special issue quantum damnificatus which could be joined in an action on the case (Simpson, fn. 11, at 418); (3) the expression "actual damage" seems to have been used in contradistinction to "agreed sum" or "liquidated" or "stipulated" damages, not by way of opposition to damage which was recoverable at law; (4) there seems to have been no instance of equity awarding compensation over and above the amount awarded as common law damages, other than cases in which equity would not relieve against the penalty; and (5) relief was granted, in the case of penal bonds, where there was no express contractual promise to perform the condition (see Hardy v Martin ), though it seems such a promise could in many cases readily be implied . 57 It is the fifth point which is of present importance, and is the culmination of an analysis which is redolent of Lord Denning's description in Bridge v Campbell Discount of equity's jurisdiction to relieve in cases of penalties for non-performance of a condition (as distinct from penalties for breaches of contract). In that context, and read as a whole, their Honours' judgment does not decide that relief against a penalty is available only when it is conditioned upon a breach of contract; to the contrary, it suggests that relief may be granted in cases of penalties for non-performance of a condition, although there is no express contractual promise to perform the condition – apparently on the basis that despite the absence of such an express promise, a penalty conditioned on failure of a condition is for these purposes in substance equivalent to a promise that the condition will be satisfied. Such a view supports the applicability of the doctrine of penalties to the second class of case. 58 There are other situations in which the commission of an "event of default", upon which termination is authorised, is regarded as a breach of a condition of an agreement, even though there is no contractual promise that the event will not occur. In Halliard Property Co Ltd v Jack Segal Ltd [1978] 1 WLR 377, Goulding J held that where a lease provided that the lessor was entitled to re-enter on the bankruptcy of the tenant's surety, the surety's bankruptcy was a "breach of … condition" within (UK) Law of Property Act 1925, s146 (the equivalent of (NSW) Conveyancing Act 1919, s 129) so that the lessor was required to serve notice of the breach before exercising the right of re-entry, even though the event was one which the tenant had no power to control, and there was no explicit promise that the surety would not become bankrupt (and no right to damages for breach of covenant if the surety did become bankrupt). In Cadogan Estates Ltd v McMahon [2000] 4 All ER 897, the lease contained a proviso for re-entry on the tenant's bankruptcy, but the covenants in the lease made no reference to bankruptcy. The term of the lease expired and the tenant became a statutory tenant; he became bankrupt and the landlord sought possession on the ground that there had been a breach or non-performance of an "obligation" of the previous protected tenancy which was applicable to the statutory tenancy, contending that it was a condition of the lease that the tenant not become bankrupt. On appeal to the House of Lords, the tenant contended that the lease had created no obligation not to become bankrupt. Despite a powerful dissent of Lord Millett, the logical force of which was conceded by the other Law Lords, the House held that the bankruptcy constituted the breach or non-performance of an obligation of the previous protected tenancy which was applicable to the statutory tenancy. While both those cases depended at least in part on a purposive construction of the relevant legislation, they reveal that there are circumstances in which commission of an event of default will be regarded as a breach of a condition of an agreement, notwithstanding that there is no covenant that the event will not occur. 59 In this state, McLelland J came to a similar conclusion in Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) NSW ConvR 55-358, holding that a right of re-entry conferred in case the lessee go into liquidation or a receiver be appointed was "a right of re-entry or forfeiture under any proviso or stipulation in the lease, for a breach of any … condition … in the lease", within Conveyancing Act, s 129(1). His Honour explained: However this may be, I am of the opinion that the right of re-entry conferred by CL13(a)(vii) is a "right of re-entry or forfeiture under any proviso or stipulation in a lease, for a breach of any ... condition ... in the lease", within the meaning of s129(1) of the Conveyancing Act 1919, which would not be enforceable by Birkenhead unless and until notice were given under that sub-section, and in respect of which Della might apply for relief against forfeiture under s129(2). At this stage it cannot be said that relief against forfeiture would necessarily be refused. I think that a provision in a lease which provides for re-entry or forfeiture on the happening of any particular stipulated event, regardless of whether or not there is any obligation on the lessee to prevent that event occurring, is a "condition" within subs(1) of s129. I think that the word "breach" in that sub-section is equivalent to "non-fulfilment". I think that this interpretation of s129 is supported first, by the evident policy of the provision which would otherwise be manifestly inadequate for the protection of lessees which it obviously is intended to confer and, secondly, by the reference in paras (c) and (e) of subs(6) of s129 to "a condition for forfeiture on the taking in execution of the lessee's interest" in certain types of lease, non-fulfilment of which would not normally amount to a breach of any contractual provision in the lease but simply be an event which might occur. 60 In Wynsix Hotels (Oxford St) Pty Ltd v Toomey [2004] NSWSC 236, Young CJ in Eq approved Della Imports and Halliard: [43] Broadly speaking, breaches of covenant in a lease must be put into two classes: (a) positive covenants; and (b) negative covenants. A positive covenant such as "The tenant shall ensure" is usually (but not always) capable of remedy by actually doing the thing covenanted to be done albeit late. However, a negative covenant, a covenant not to do something, is usually not capable of remedy; see Expert Clothing Service & Sales Ltd v Hillgate House Ltd [1986] Ch 340. [44] In the instant lease, cl 12.1 is headed "Events of Default". The clause continues: If at any time: … (f) the lessee … (v) has a receiver or manager of any of its assets appointed … THEN … the lessee will be deemed to have defaulted under this lease and … the lessor has the following rights … B. To re-enter the land and the building, expelling the lessee and the persons under its control. [45] In a technical sense, cl 12 does not involve covenants at all, rather it merely lists events which, if occur, can break the lease. The lease accordingly comes to an end not because of breach but because of agreement; see eg Shevill v The Builders Licensing Board (1982) 149 CLR 620. [46] The cases, or at least the English cases, show that there may well be a vital difference between a provision in the lease being an option to terminate, conditional upon the happening of an event or whether it is truly a re-entry under a forfeiture, Cadogan Estates Ltd v McMahon [2001] 1 AC 378, per Lord Hoffmann at p 385. [47] Lord Millett at 390 made it clear that a proviso for re-entry normally does not impose any obligation express or implied on the part of the tenant not to cause or suffer anything which would entitle a landlord to exercise his right of re-entry. [48] Viewed in this way, there can be no breach of cl 12.1 and accordingly there is nothing on which s 129 can operate. [49] I was referred to the decision of Ashworth J in Warner v Sampson (No 2) [1958] 1 All ER 314; [1958] 1 QB 404 , 424, which held that the English equivalent of s 129 does not apply where the forfeiture operates by operation of law such as where the tenant denies the landlord's title. However, this decision was reversed by the Court of Appeal in Warner v Sampson [1959] 1 QB 297, but as the Court of Appeal held there was no forfeiture it did not have to consider the relief point. The case was referred to because, like cl 12.1 in the instant case, if I can quote the words of Lord Hoffmann in Cadogan Estates Ltd v McMahon at 383, "The re-entry clause is expressed as a series of conditions, rather than obligations. Furthermore, the sole purpose of the conditions is to specify the events in which the landlords will be entitled to re-enter and resume possession." [50] However, in Halliard Property Co Ltd v Jack Segal Ltd [1978] 1 WLR 377, Goulding J held that the words "breach of condition" in the English equivalent of s 129(1) must be read widely and apply to a condition that the landlord could re-enter if there was bankruptcy of a surety. [51] In Cadogan at 385, Lord Hoffmann said that this was a question of construction as to which side of the line something fell; was it a condition within 129 or was it merely another expression of the tenant's obligation to yield up possession if certain things happened. [52] In Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) NSW Conv R 55-358, M McLelland J considered the matter and considered that s 129 applied to cases where the termination was to take place on the happening of an event as well as where it was to take place on a breach. [53] The matter does not need to be decided in this case. However, with respect, I would follow the approach of McLelland J. If that were wrong, I would concur with Goulding J and give s 129 a wide operation. I think this view is reinforced by s 129(10). [54] The right to terminate on the happening of an event that the lessee has a receiver appointed comes very close to a negative covenant promising not to have a receiver appointed . … 61 The observation in [54] is redolent of the reference by Mason and Wilson JJ in AMEV-UDC v Austin, in the fifth point of their Honour's summary previously quoted, to the circumstance that, in the case of penal bonds, where there was no express contractual promise to perform the condition, such a promise could in many cases readily be implied. 62 This line of cases reinforce the view that in a case in the second class – where termination, accompanied by a liability to pay an agreed sum, is authorised for an "event of default" but there is no express promise that the event will not occur – nonetheless the position may be seen as, in substance, akin to termination for breach. So does the judgment of Deane J in AMEV-UDC v Austin. While his Honour dissented in the result in part, holding that a penalty clause should not be unenforceable absolutely but only insofar as it imposed liability which exceeded the actual loss, his Honour also emphasised that the law in this field was concerned with substance and not form, and that the result should not and did not depend upon whether it was possible to identify some express or implied contractual obligation, failure to perform which constituted a technical breach of contract on the part of the plaintiff (at 197-199)(emphasis added): The common law rules relating to the unenforceability of penalties were derived from equitable principles determining the availability of relief in Chancery. Like all rules with true equitable foundations, they are concerned with substance rather than form . It would, for example, have been out of accord with equity's concern with substance for the availability of equitable relief against the enforcement of a performance bond (ie a money bond subject to conditional defeasance) to have depended upon whether it was possible to identify some implied contractual warranty of which the failure to perform or pay constituted a technical breach of contract on the part of the plaintiff. In fact, of course, equity observed no such limitation upon its jurisdiction to grant relief. It granted relief against the enforcement of such a bond by a common law action in debt regardless of whether the failure to bring about or prevent the event which precluded fulfilment of the condition of defeasance constituted a breach of contract at common law. Indeed, the equitable jurisdiction to grant such relief preceded the evolution of general common law notions of liability for breach of contract which occurred with the development of the action in assumpsit. Nor, in my view, did equity ever commit itself to what would, as Lord Denning pointed out in Bridge (at 629), have been the "absurd paradox" that "it [would] grant relief to a man who breaks his contract but [would] penalise the man who keeps it". The reasons why such a paradox would be unacceptable to equity transcend the fundamental notions of justice to which Lord Denning referred (ibid). They go to the very basis of equitable jurisdiction. Equity followed and built upon the common law, adding its remedies by way of enforcement of the common law in some cases and granting its relief against the harshness of the operation of the common law in others. It was not, however, subversive of the common law. It would have been contrary to the underlying thesis of the equitable jurisdiction to prevent unconscionable advantage being taken of the harshness of the common law to have made the existence of legal fault in the plaintiff, as distinct from legal liability, a prerequisite of entitlement to relief or to have made the contumacy of the plaintiff's conduct giving rise to legal liability a ground for equitable relief against the liability. A fortiori it would have been unreasonable for the common law itself, in withdrawing its remedies to enforce what equity regarded as a penalty, to have added a limitation that common law unenforceability did not extend to any case where the person burdened by the penalty was innocent of common law fault in the form of breach of contract. It is true that one can point to judicial statements, including some recent statements of high authority, which support the contrary view that a contractual clause will not be unenforceable as a penalty unless it provides for payment upon breach of contractual duty (see, in particular, Tool Metal Manufacturing Co, Ltd v Tungsten Electric Co, Ltd [1955] 1 WLR 761 at 767 ; [1955] 2 All ER 657 at 662; Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 at 402–4 ; [1983] 2 All ER 205 at 223–4). Such broad statements appear to me, however, to have generally been made in a context where the grounds for declining to hold that a penalty was involved are properly to be seen as more narrowly confined: eg, that the alleged penalty represented part of the agreed royalty payments for a non-exclusive licence under letters patent ( Tool Metal Manufacturing ); that the relevant contractual liability was pursuant to an indemnity agreement and corresponded with the loss incurred ( Export Credits Guarantee Department ); or, in a highly debatable area, that the alleged penalty was the price of a right or option to terminate exercisable by the party liable to make the payment (see, eg, Associated Distributors, Ltd v Hall [1938] 2 KB 83; Lombank, Ltd v Kennedy and Whitelaw [1961] NILR 192 at 214–5; Bridge at 613–4; but cf Bridge at 631 and 633; the dissenting judgment of Lord MacDermott LCJ in Lombank, at 206–9 and the comments of G H L Fridman in (1963) 26 MLR 198). I do not see any of those general statements as binding this court. For my part, for the reasons given above, I am not prepared to accept them as correctly stating the position either in equity or at common law. As I have indicated, the restriction of equitable relief or common law unenforceability to the case where it is possible to identify a technical breach of contract on the part of the party claiming relief or unenforceability would, in my view, be contrary to historical fact, general principle and basic common sense. 63 His Honour, accepting that the equitable and common law rules relating to penalties plainly did not apply to every obligation to make a payment of money on the occurrence, or default of occurrence, of a specified event, identified as their general area of applicability circumstances where there is a contractual liability to pay or forfeit an amount "either on or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the party liable to make the payment, in the sense that it is his or her responsibility to ensure that the specified event does or does not occur and where the stipulated payment contains an element of compensation for the economic loss or damage which might be sustained by the other party by reason of the particular occurrence or default": It is within that general area that a liability to pay or forfeit money may be discerned, as a matter of substance, as going beyond any genuine pre-estimate of damage and as representing a penal sanction or security against the occurrence or non-occurrence of an event which the obligor and obligee have seen as falling within the responsibility of the obligor. There, the particular rules relating to penalties are applicable to determine the enforceability of the liability to pay or forfeit the designated amount regardless of whether there was any distinct contractual condition or warranty that the event would or would not occur. There, if the liability is unenforceable as a penalty and the quantum of damage sustained is ascertainable, a court can give a monetary recompense or compensation for what the obligee primarily expected or desired, namely, the occurrence or non-occurrence of the particular event (cf Pomeroy's Equity Jurisprudence 5th ed (1941), vol 2, 432ff; Peach v Duke of Somerset (1721) 1 Str 447 at 453 ; 93 ER 626 at 630; Davis v Thomas (1831) 1 Russ & M 506 at 507 ; 39 ER 195 at 195). 64 That view would plainly support the application of the doctrine of penalties to cases in what I have called the second class. 65 Dawson J, who was in dissent, said (at 211) that it would seem clear that a provision calling for the payment of money by one party on the occurrence of a specified event, rather than upon breach by that party, could not be a penalty (at 210): No great attention was paid in O'Dea to one aspect of the matter to which the argument in the present proceedings does give relevance. Under the agreement, the lessee's liability to pay the balance of the entire rent arose, not upon breach of the agreement, but upon the termination of the lease. That is the position in this case. Disregarding authority, the view is at least tenable that the liability to pay the balance of the entire rental in those circumstances does not arise upon breach, but upon the happening of an event, namely, termination of the lease, albeit an event which the lessor is contractually entitled to bring about upon breach. If that were the correct view, it might be said that no question of penalty could arise because the liability to make the accelerated payments did not arise upon breach. That conclusion has been rejected in the cases to which I shall refer in a moment, but the reasoning upon which the rejection has been based is not without its inconsistencies. 66 His Honour then referred to the dissenting judgment of Jenkins LJ in Cooden Engineering Co Ltd v Stanford, and the line of reasoning in the cases commencing with Elsey & Co Ltd v Hyde, and continued (at 211): This line of reasoning was, however, rejected by the majority, Somervell and Hodson LJJ, in Cooden Engineering Co Ltd v Stanford , Hodson LJ remarking at 116: "My difficulty is to see the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine." The decision in Cooden Engineering Co Ltd v Stanford was approved in Campbell Discount Co Ltd v Bridge [1962] AC 600, and applied in Financings Ltd v Baldock [1963] 2 QB 104, and was clearly accepted by the majority in O'Dea . See also Brady v St Margaret's Trust Ltd [1963] 2 QB 494; United Dominions Trust (Commercial) Ltd v Ennis [1968] 1 QB 54 Lessors (Aust) Pty Ltd v Westley [1964–65] NSWR 2091. However, treatment of the termination of an agreement upon breach in the same way as the breach itself for the purpose of determining whether a stipulated payment is capable of amounting to a penalty has no extended application. It would seem clear that a provision calling for the payment of money by one party on the occurrence of a specified event, rather than upon breach by that party, cannot be a penalty: Campbell Discount Co Ltd v Bridge Export Credits v Universal Oil Co [1983] 1 WLR 399 ; [1983] 2 All ER 205. 67 In Bartercard Ltd v Myallhurst Pty Ltd, the respondent was entitled to terminate the agreement relevantly (1) for default in payment of transaction fees (which was a breach of contract), and (2) if the appellant's negative trade balance exceeded $130,000 (which was not a breach of contract). Upon termination for either cause, all outstanding amounts became immediately due. The respondent expressly terminated on the first of those grounds; accordingly it was a case in the third class. Thomas JA (at [25]-[27]) held that the sum involved was not shown to be other than a genuine pre-estimate of loss. His Honour, observing that it had been only faintly argued that the right to terminate had not arisen by reason of a breach of contract, added (at [28]) that there was authority that provisions for the payment of money on the occurrence of a specific event were not penalties, because they did not provide for an agreed payment in advance in respect of a breach [citing O'Dea, 367; Export Credits; and Meagher Gummow and Lehane, Equity Doctrines and Remedies, 3rd ed [1817]]. Ambrose J at [30] agreed with Thomas JA. Davies JA observed (at [2]) that it appeared now to be accepted that where the right to terminate and receive a payment arose on the happening of any number of events some only of which are breaches of contract, it was only where the termination was in consequence of breach that the question of penalty could arise, which his Honour said illustrated the arbitrary nature of the doctrine, [for which view his Honour cited Bridge v Campbell Discount Co; Export Credits; O'Dea v Allstates, 367, 390; and AMEV-UDC Finance Ltd v Austin, 184-185, 211]. 68 As will by now be apparent, I do not accept that the passage in O'Dea at 367 (Gibbs CJ) supports that view; Campbell Discount is equivocal with two speeches in either direction and one undecided; nor do I accept that the passage in AMEV-UDC v Austin at 184-5 supports it when read in the context of their Honours' judgment as a whole; and while the passage at 211 (Dawson J) does, his Honour was in dissent, and Deane J's judgment, which is no less authoritative, was plainly to the contrary; finally I do not accept that Export Credits has been authoritatively accepted by the High Court, nor that it is applicable to this situation as distinct from what I have called "a true case of a payment becoming due on an event". In any event, the primary basis of the decision in Bartercard was that the sum was a genuine pre-estimate, and the termination was for breach, so these observations were doubly obiter. 69 In Deputy Commissioner of Taxation (Cth) v Advanced Communications Technologies (Australia) Pty Ltd, Hansen J (at [111]) felt bound to accept Dawson J's statement of the law in AMEV-UDC v Austin, believing it to accord with the recognition of Export Credits in the judgments of Mason and Wilson JJ, and its acknowledgment, although with reserve, by Gibbs CJ. However, in my respectful view, Gibbs CJ lends no support to Dawson J's statement of the law, and read in context Mason and Wilson JJ do not reject, but tend to support, the views of Lord Denning in Campbell Discount Co. 70 As will already be apparent, the cases in this field of discourse are replete with references to equity's preference for substance over form. Thus in Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo Y Castaned, Lord Davey observed (at 15) that in this area the question is one "not of words or forms of speech but of substance and things"; see also Bridge v Campbell Discount, 624 (Lord Radcliffe); O'Dea v Allstates, 368 (Gibbs CJ); Deputy Commissioner of Taxation v Advanced Communication Technologies (Australia ) [113]; Meagher Gummow & Lehane, [18-085]. In Bysouth, both Irvine CJ and Lowe J rejected attempts to disguise a penalty in some other form so as to avoid the application of the doctrine; and in Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514, Deane J (at 520) said that the question whether the provisions of an agreement impose a penalty is determined as a matter of substance rather than of mere form [see also Luu v Sovereign Developments, [32]]. In Export Credits Guarantee Department v Universal Oil Products Co, in the Court of Appeal, Slade LJ observed that for many years the courts, in considering whether contractual provisions fell within the rule against penalties, have had regard to substance rather than to form [at 219j]. Thus equity relieves against what it considers penalties, even though they are described as liquidated damages, looking to the "real nature of the transaction" [Bridge v Campbell Discount Co, 602 (Viscount Radcliffe)]. 71 Insofar as it has been suggested that the doctrine relating to the unenforceability of penalties is confined to payments (and transfers, retentions or withholdings) conditioned on a breach of obligation by one party – and thus that a provision in a contract providing for payment of money by one party on the occurrence of a specified event, rather than on breach of a contractual duty, cannot be a penalty – this must be judged according to substance and not form. It is clear that where the right to terminate and receive a payment arises on the happening of any number of events, only some of which are breaches of contract, the doctrine of penalty applies where in fact the termination is by reason of a breach. In this context, it would be extraordinary (as Deane J observed in the passage cited from his Honour's judgment in AMEV-UDC v Austin) if whether a provision was void as a penalty depended upon whether it was conditioned on a breach of contract as distinct from being a consequence of an election to terminate pursuant to an event entitling a party to terminate – often called an "event of default" – that did not involve a breach of contract. It would be wholly inconsistent with the maxim that equity looks to the intent, rather than to the form. The inclusion in an agreement of a list of "events of default", commission of which by one party will authorise termination by the other, which events invariably include breaches of covenants on the part of the first party, but usually also include events which are not the subject of express covenants – such as death, or committing an event of insolvency, or suffering execution to be issued – is intended to confer on the other party an option to terminate where performance of the main purpose of the contract might be jeopardised. Such provisions serve to secure the interests of the second party in receiving performance of the main promise of the contract, to which they are collateral. In substance, they are collateral provisions which operate to secure performance of the main purpose of the contract by the first party. Their effect is that the first party's entitlement to continue to enjoy the benefit of the contract is conditional upon its not committing any event of default, and if an agreed payment disproportionate to the consequences is attached to termination for an event of default, it is an obligation collateral to the main purpose of the contract that operates in terrorem to deter the first party from commission of an event of default, and to punish it (and reward the second party) if it suffers such an event to occur. That is the classic territory of the doctrine of penalties, and although it might not be conditioned on a breach of contract in the strict sense that there is no promise that the event will not occur and no right to damages if it does, it is conditioned on the commission of an event which is seen as being within the field of responsibility of the first party. 72 The only case which has been decided on the basis that it was within the second class is Apex Supply, which can no longer be regarded as authoritative in the light of Cooden, Campbell Discount Co, O'Dea v Allstates and AMEV-UDC v Austin. Save for Apex, the cases which hold that the question of penalty does not arise in the case of a payment agreed to be made upon a certain event do not go so far as holding that the doctrine does not apply to a payment in the event of termination by one party for a contractual "event of default" by the other, although there be no promise, breach of which would sound in damages, that the event will not occur. Luu v Sovereign Developments demonstrates that the doctrine of penalties is not limited to circumstances in which the penalty/liquidated damages dichotomy arises. No case since Apex Supply, so far as I have been able to ascertain, has decided whether an agreed payment upon termination by the owner for a contractual "event of default" by the hirer under the agreement, where there is no contractual promise not to commit that event of default, can be a penalty. Accordingly, despite the judgments of Jenkins LJ (in dissent) in Cooden, Viscount Simonds and Lord Morton in Campbell Discount Co, Harman LJ in United Dominions Trust (Commercial) v Ennis and Dawson J in AMEV-UDC v Austin, no authority constrains me to hold that a sum agreed to be paid in the event of termination by one party for an "event of default" committed by the other cannot be within the doctrine of penalties. Export Credits did not involve a case of termination by one party for an event in the domain of the other, but like Alder v Moore, was a true case of a payment becoming due on an event, and in any event, the plaintiffs were only seeking to recover their actual loss by way of indemnity. On the other hand, the judgments of the Court of Appeal in Associated Distributors Ltd v Hall, Somervell and Hodson LJJ in Cooden, Lords Radcliffe, Denning and Devlin in Campbell Discount Co, Diplock LJ in Financings Ltd v Baldock, Gibbs CJ in O'Dea, Lord Denning MR and Salmon LJ in United Dominions Trust (Commercial) v Ennis, and Gibbs CJ, Mason and Wilson JJ and Deane J in AMEV-UDC, either leave open or positively support the view that the doctrine of penalties applies to a case in the second class, if not the first class. 73 To my mind, the reasoning of Deane J in the passage cited above from his Honour's judgment in AMEV-UDC v Austin is compelling; so too is Lord Denning's "absurd paradox". The chief flaws in the various dicta to the contrary are, first, that, they disregard equity's clearly established jurisdiction to grant relief in the case of penal bonds, for non-performance of conditions notwithstanding the absence of any express contractual promise to perform the condition – as Lord Denning in Campbell Discount Co, and Mason, Wilson and Deane JJ in AMEV-UDC v Austin, have shown; and, secondly, that in a field in which it has so frequently been said that it is substance and not form that counts, they represent a triumph for form over substance, so that if they were correct, the doctrine of penalties could always be evaded by the drafting of lists of event of default upon which termination was authorised and payment of a wholly disproportionate sum was exigible, without including a contractual promise that those events would not occur. 74 Accordingly, I would hold that a penalty is a contractual liability to pay or forfeit or suffer the retention of a sum of money or property which is agreed in advance to be payable (or forfeited or retainable), by one party to the other, upon or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the first party, in the sense that it is his or her responsibility to see that the specified event does or does not occur, and where the stipulated payment is out of all proportion or unrelated to the damage which might be sustained by the other party by reason of the particular occurrence or default. 75 The forfeiture of Integral's entitlement to trailer commission under cl 20.3(c) satisfies that description. Clause 20.3(c) imposes a contractual liability to forfeit an entitlement to remuneration already earned, upon termination for fraud or insolvency, the implied obligation to avoid which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the Originator, in the sense that it is its responsibility to see that there is no fraudulent conduct and that it does not become insolvent. 76 The stipulated forfeiture is entirely unrelated to the damage which might be sustained by Interstar by reason of fraud or insolvency. As Mr Cotman submitted, the particular vice of cl 20.3(c) is that it does no work at all in relation to damages, but operates in a way that simply inflicts a loss on the Originator for the benefit of the Manager, for no reason other than termination of the LOMA under cl 20.1(a) or (c). The juxtaposition of cl 20.3(b) and (c) is instructive: whereas (b) assumes that the trailer commission will exceed the reasonable cost of remunerating a replacement manager, so that there will be some remaining return to Integral, (c) provides a different outcome in the case of insolvency or fraud, although there is no reason to think that the cost to Interstar would be materially different. The amount forfeited is entirely unrelated to any damage which Interstar might suffer as a result of the relevant fraud. In other words, Integral incurs a more severe detriment, and Interstar receives a more generous benefit, in the event of termination for fraud or insolvency, for reasons quite unconnected with the consequences for Interstar of any such fraud, insolvency or termination. Like the obligation that was held to be a penalty in Luu v Sovereign Developments, clause 20.3(c) does not sit in apposition to, but does no work in relation to, damages in respect of the defaults it contemplates. It simply imposes an additional detriment on the Originator, and extracts a corresponding additional benefit for the Manager, in those events, which are not the main promise or purpose of the contract, in order better to secure the position of the Manager in respect of the main promise and purpose. Clause 20.3(c) therefore operates in terrorem against insolvency and fraud, and is an unenforceable penalty. 77 Indeed, even on the narrower view of the operation of the doctrine of penalties which has been plainly and authoritatively endorsed in Cooden, Campbell Discount Co, O'Dea v Allstates and AMEV-UDC v Austin – that where the right to terminate and receive a payment arises on the happening of any number of events, only some of which are breaches of contract, the doctrine of penalty applies where in fact the termination is by reason of a breach – cl 20.3(c) would be an unenforceable penalty in this case. Just as in O'Dea there was a covenant to pay the instalments, which had the consequence that failure to pay an instalment was a breach attracting the penalty doctrine, even though it was also an "event" authorising termination, so in this case each LOMA contains a covenant on the part of the Originator that it will "act honestly in its dealings with all parties and not engage in misleading, deceptive or unethical conduct" [cl 6.2(h)]. Engaging in fraud is the antithesis of the obligation imposed by that provision, and therefore a breach of contract, although it is also an event of default. The circumstance that the ground of termination is expressed in terms of the Manager considering, in its reasonable opinion, that the Originator has engaged in deceptive or fraudulent activity in relation to an Application or a Settled Loan, rather than in terms of the Originator having done so as a matter of fact, is a matter of mere form for present purposes; the "reasonable opinion" of the Manager is an evidentiary provision which is a proxy for proof of the fact of fraud. Thus this is a case where in fact the termination was by reason of a breach of contract, so as to fall within the third class, and the operation of the doctrine of penalties is attracted. Conclusion 78 A penalty is a contractual liability to pay or forfeit or suffer the retention of a sum of money or property (including remuneartion already earnt under the contract) which is agreed in advance to be payable (or forfeited or retainable), by one party to the other, upon or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the first party, in the sense that it is his or her responsibility to see that the specified event does or does not occur, and where the stipulated payment is out of all proportion or unrelated to the damage which might be sustained by the other party by reason of the particular occurrence or default. The jurisdiction to relieve against penalties is not limited to contractual provisions for the payment of monetary sums; it extends to provisions which effect a forfeiture or retention of property, including of rights that have accrued under the contract. While it does not extend to relief against the consequences of termination of a contract so far as the termination affects future rights and obligations, since loss of the benefit of those rights is an inevitable consequence of termination of the contract, it does extend to the deprivation of rights that have already accrued under the contract. 79 The forfeiture of Integral's entitlement to trailer commission under cl 20.3(c) satisfies that description. The right to trailer commission in respect of a settled loan accrued upon settlement of the loan, and although it was liable to be divested if the loan was refinanced or repaid in full within six months, or the subject of "churning", it was not conditional on the contract remaining on foot. Clause 20.3(c) imposes a contractual liability to forfeit an entitlement to remuneration already earned, upon termination for fraud or insolvency, the implied obligation to avoid which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the Originator, in the sense that it is its responsibility to see that there is no fraudulent conduct and it does not become insolvent. The stipulated forfeiture is entirely unrelated to the damage which might be sustained by Interstar by reason of fraud or insolvency. Clause 20.3(c) does no work in relation to damages, but operates in a way that simply inflicts a loss on the Originator for the benefit of the Manager, for no reason other than that it has terminated the agreements. Clause 20.3(c) therefore operates in terrorem to deter and punish insolvency and fraud, and is penal in its operation. 80 Even on the narrower view of the operation of the doctrine of penalties – that where the right to terminate and receive a payment arises on the happening of any number of events, only some of which are breaches of contract, the doctrine of penalty applies where in fact the termination is by reason of a breach – cl 20.3(c) would be an unenforceable penalty, because each LOMA contains a covenant on the part of the Originator that it will "act honestly in its dealings with all parties and not engage in misleading, deceptive or unethical conduct", and engaging in fraud is a breach of that contractual obligation, as well as being an "event" authorising termination. 81 It follows that in my judgment cl 20.3(c) is void, as a penalty. Question 1 should be answered in the affirmative. 82 Consistent with the holding of the majority in AMEV-UDC v Austin, the consequence of holding that cl 20.3(c) is a penalty is that it is absolutely void, and there would apparently be no room for its enforcement to the limited extent that recovery under it would not be disproportionate to the loss. However, the parties have not been heard on this issue, and I will answer Question 2 in the affirmative, but without concluding any argument that Interstar is entitled to deduct the reasonable costs of a replacement manager. 83 I order that the Questions be answered as follows: (1) Whether, on the true construction of the LOMA, clause 20.3(c) is void as a penalty: Yes . (2) If the answer to (1) is in the affirmative, whether Integral is entitled to trailer commission, notwithstanding the termination of the LOMA by the defendants: Yes, without prejudice to any argument that Interstar is entitled to deduct the reasonable costs of a replacement manager: 84 I order that the defendants in each matter pay the plaintiff's costs of the separate questions. ******* 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.