Appeal Outcome: Special leave application granted by the High Court 1 May 2009 New South Wales Court of Appeal CITATION: INTERSTAR WHOLESALE FINANCE PTY LIMITED v INTEGRAL HOME LOANS PTY LIMITED [2008] NSWCA 310 HEARING DATE(S): 24 June 2008 JUDGMENT DATE: 24 November 2008 JUDGMENT OF: Allsop P at 1; Giles JA at 163; Ipp JA at 164 1. Appeal allowed. 2. The declarations and orders made by the Court in paragraphs 3, 4, 5, 6 and 7 of the orders made on 3 July 2007 and entered on 4 July 2007 be set aside. DECISION: 3. The answers to the questions reserved for separate determination be recorded as: (1) No (2) No. 4. The respondents pay the appellants' costs. 5. Remit the proceedings to Brereton J for hearing of issues not determined by the appeal, including the costs of the separate hearing at first instance. CATCHWORDS: PENALTY – whether contractual provision a penalty – whether forfeiture of accrued property - FORFEITURE – relation of forfeiture to imposition of penalty - CONSTRUCTION OF CONTRACTS – penalties LEGISLATION CITED: Conveyancing Act 1919 (NSW) Law of Property Act 1925 (UK) Alder v Moore [1961] 2 QB 57 AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Limited (1989) 15 NSWLR 564 AMEV-UDC Finance Limited v Austin [1986] HCA 63; 162 CLR 170 Associated Distributors Ltd v Hall [1938] 2 KB 83 Bartercard Limited v Myallhurst Pty Limited [2000] QCA 445 Brickles v Snell [1916] 2 AC 599 Bridge v Campbell Discount Co Limited [1962] AC 600 Bysouth v Shire of Blackburn and Mitcham (No 2) [1928] VLR 562 Cadogan Estates Ltd v McMahon [2001] 1 AC 378 Chester & Cole v Wright (unreported, Court of Appeal of England and Wales, 1929) Clydebank Engineering and Shipbuilding Co Limited v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 Cooden Engineering Co Ltd v Stanford [1952] 2 All ER 915 Cunning v Riddell 1990 CanLII 854 Della Imports Pty Limited v Birkenhead Investments Pty Limited (1987) NSW ConvR 55-358 Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Limited [2003] VSC 487 Doman Forest Products Ltd v GMAC Commercial Credit Corp 2007 BCCA 88; (2007) 29 BLR (4th) 1 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 Elsey & Co Ltd v Hyde (unreported, King's Bench Division, 1926) Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 Export Credits Guarantee Department v Universal Oil Products Co [1983] 2 All ER 205 CASES CITED: Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; 230 CLR 89 Financings Ltd v Baldock [1963] 2 QB 104 Forestry Commission of New South Wales v Stefanetto [1976] HCA 3; 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 Hardy v Martin (1783) 1 Cox 26; 29 ER 1046 IAC (Leasing) Ltd v Humphrey [1972] HCA 1; 126 CLR 131 Jobson v Johnson [1989] 1 All ER 621 Legione v Hateley [1983] HCA 11; 152 CLR 406 McDonald v Dennys Lascelles Ltd [1933] HCA 25; 48 CLR 457 Miliangos v George Frank (Textiles) Ltd [1976] AC 443 O'Dea v Allstates Leasing System (WA) Pty Limited [1983] HCA 3; 152 CLR 359 Philip Bernstein (Successors) Ltd v Lydiate Textiles (unreported, Court of Appeal of England and Wales, 1962) Proctor v Jetway Aviation Pty Limited [1984] 1 NSWLR 166 Ringrow Pty Limited v BP Australia Pty Ltd [2003] FCA 1297; 203 ALR 281 Ringrow Pty Limited v BP Australia Ltd [2004] FCAFC 206; 209 ALR 32 Ringrow Pty Limited v BP Australia Pty Limited [2005] HCA 71; 224 CLR 656 Robophone Facilities Ltd v Blank [1996] 1 WLR 1428 Steedman v Drinkle [1916] 1 AC 275 United Dominions Trust (Commercial) Limited v Ennis [1968] 1 QB 54 Wollondilly Shire Council v Picton Power Lines Pty Limited (1994) 33 NSWLR 551 WT Malouf Pty Limited v Brinds Ltd (1980) 52 FLR 442 PARTIES: INTERSTAR WHOLESALE FINANCE PTY LIMITED INTEGRAL HOME LOANS PTY LIMITED FILE NUMBER(S): CA 40500/2007 COUNSEL: B Coles QC, K M Richardson N Cotman SC SOLICITORS: Deacons VA Lawyers, Kogarah LOWER COURT JURISDICTION: Supreme Court LOWER COURT FILE NUMBER(S): SC 4009/2006 LOWER COURT JUDICIAL OFFICER: Brereton J LOWER COURT DATE OF DECISION: 3 July 2007 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40500/2007 ALLSOP P GILES JA IPP JA 24 November 2008 INTERSTAR WHOLESALE FINANCE PTY LIMITED v INTEGRAL HOME LOANS PTY LIMITED Headnote Interstar Wholesale Finance Pty Limited and Interstar Non-Conforming Finance Pty Limited (the appellants) engaged in the business of lending and procuring of moneys on the security of mortgages. Integral Home Loans Pty Limited and Integral Financial Pty Limited (the respondents) were mortgage originators who found and brought forward to the appellants applications by third parties for loans, and managed the ongoing servicing of such loans. The legal relationship between the appellants and the respondents were governed by two written agreements styled Loan Origination and Management Agreements in substantially the same form. On 17 March 2006, the appellants terminated both agreements with the consequence that the respondents ceased to be entitled to certain income under the agreements. The respondents asserted that cl 20.3(c) in the agreements, which provided for the cessation of the payments, were penalties. The primary judge held that the provisions in both agreements were void as a penalty and that the respondents continued to be entitled to the commissions in question. Held, allowing the appeal: Allsop P; Giles JA and Ipp JA agreeing 1. Clause cl 20.3(c) was not a penalty. It was part of the circumscription or definition of the entitlement; not a forfeiture of accrued property for the collateral purpose of encouraging compliance with the contract. The relevant fees were not fully earned. Integral's right to receive the fees were dependent upon fulfilling its responsibilities under the contract because they only accrued when earned. The right to receive them was conditioned, in part, on the management obligations under the contract. The determination of the contract put and end to the entitlement in the way provided for in cl 20.3(b) and (c). There was no relevant forfeiture of fully earned property to engage the law of penalties, assuming that forfeiture of rights (as opposed to payment of money) could so engage that law. Nor was there any relevant breach of contract which was necessary for the engagement of the law of penalties: [74], [92], [93]. 2. Discussion of the law of penalties. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40500/2007 ALLSOP P GILES JA IPP JA 24 November 2008 INTERSTAR WHOLESALE FINANCE PTY LIMITED v INTEGRAL HOME LOANS PTY LIMITED Judgment 1 ALLSOP P: The appellants are finance companies which are engaged in the lending and procuring of lending of moneys on the security of mortgages. In the arrangements in question, the company to which the borrowers were introduced for lending was Permanent Trustees Victoria Limited. The respondents are so-called mortgage originators. In the arrangements in question, they found and brought forward to the appellants applications by third parties for loans (to be secured by mortgage) and, if a loan were made to an applicant, the respondents managed the ongoing servicing of it. 2 The legal relationships between the appellants and the respondents were governed by two written agreements styled Loan Origination and Management Agreements. The first such written agreement ("LOMA 1") was between Interstar Securities (Australia) Pty Limited (the first appellant under a former name) and the first respondent and was dated 18 March 2003. The second such written agreement ("LOMA 2") was between the appellants and the second respondent. 3 It is generally unnecessary to differentiate between the respective appellants and respondents. I will therefore refer to the appellants as Interstar and the respondents as Integral. 4 Both these agreements were on foot on 17 March 2006 when Interstar terminated both agreements. As a consequence of termination (should the relevant terms of the agreements be valid) Integral ceased to be entitled to certain income under the agreements, referred to in argument as "trailer commissions". Integral asserted that the provisions (cl 20.3(c) in each agreement) that provided for the cessation of the payments in question were penalties. The primary judge (Brereton J) having reserved two questions for separate determination, answered them by finding that cl 20.3(c) in each agreement was void as a penalty and that Integral continued to be entitled to the commissions in question. For the reasons that follow, I am of the view that the clauses were not penalties and the declarations and orders made by the judge on that basis should be set aside. The agreements 5 The two agreements were substantially similar. Unless otherwise stated, the terms were common to both agreements. 6 The relationship between, and the roles of, Interstar and Integral was made clear in the short recitals: A Perpetual Trustees Victoria Limited … ( Trustee ) and Interstar establish mortgage backed securities programs for the purpose of, amongst other things, investing in mortgage loans and other assets. B Interstar assists the Trustee in the management of such mortgage backed securities programs. C The Originator conducts the business of arranging finance and the ongoing servicing of loans and wishes to submit Applications to Interstar and manage Settled Loans. 7 Interstar appointed Integral as "an originator and servicer" in accordance with the terms of the agreement: cl 3.1. Neither the word "originator" (in lower case as a common noun) or "servicer" was defined. The word "Services" was, however, defined in cl 1.1 as follows: Services means all electronic or on-line mortgage origination, management, servicing and processing services and solutions provided by Interstar from time to time including: (a) submitting Applications on-line; (b) conducting credit checks on-line; (c) obtaining "in principle" or other approvals on-line in relation to Applications; (d) obtaining approvals from mortgage insurers on-line; (e) obtaining valuations on-line; (f) loan repayment and savings calculators and simulators; (g) on-line training; and (h) on-line management reports. 8 Clause 4 provided for applications. Integral could submit them together with such information as may be requested: cl 4.1; Interstar could accept or reject any application in its absolute discretion. 9 Clauses 5 and 6 set out obligations of Integral. Clause 5 set out the framework of obligations of Integral in relation to origination (cl 5.1) and in relation to a "Settled Loan" (cl 5.2). A "Settled Loan" was defined in cl 1.1 as: Settled Loan means a Loan where a drawdown has been made by the Borrower in relation to that Loan and Settled means the date when first drawing is made under a Loan. 10 Clause 5.2 can be seen to describe Integral's duties as "servicer" under cl 3.1 Clause 5 was in the following terms: 5. Origination and servicing loans 5.1 The Originator agrees that, in the process of originating proposed Loans, the Originator will: (a) submit Applications to Interstar; (b) carry out credit checks of Applicants through an approved credit bureau; (c) provide Applicants with written correspondence setting out the proposed terms of a loan; (d) arrange for the valuation of any Property which has been offered as security for a Loan; (e) do such other things as agreed from time to time between Interstar and the Originator; and (f) generally market and promote the loan products provided by Interstar. 5.2 In relation to a Settled Loan, the Originator shall, unless otherwise directed by Interstar: (a) continue to liaise with Borrowers in relation to Settled Loans; (b) where appropriate, answer any queries raised by Borrowers in relation to Settled Loans or refer those queries to Interstar; (c) in accordance with the directions of Interstar, contact Obligors in relation to arrears owing under a Loan (or any other default) and liaise with Interstar in relation to those arrears or defaults; and (d) generally manage and service Settled Loans in accordance with the Manual or as otherwise reasonably directed by Interstar. 11 Clause 6, entitled "Obligations of Originator", contained a general provision for the conduct of business by Integral (cl 6.1) in the following terms: 6.1 The Originator will (and will ensure that all of the Originator's Representatives will) at all times and in all things fulfil its obligations under this Agreement with a high degree of professional skill, care and diligence and in accordance with good mortgage origination and management practice and so as to protect the interests of Interstar and the Trustee. 12 Clause 6.2 contained specific obligations in explication of the general obligations set out in cl 6.1. The nature of these obligations can be understood from the following selection from cl 6.2: 6.2 Without limiting the general obligations under clause 6.1, the Originator will (and will ensure that the Originator's Representatives will): (a) not make any verbal or written representation or statement to any party in relation to the likelihood of success or acceptance of an Application; (b) inform the Applicant in writing (before the Applicant signs the Application) that the Originator will be entitled to receive a commission or fee if the Application is successful and the amount of that commission (if that amount is capable of being calculated); (c) provide to Interstar all information that comes to the Originator's attention which may be relevant to Interstar's decision whether or not to approve an Application; (d) comply with all applicable laws and regulations in the conduct of its business including Privacy Laws and the UCCC; (e) protect the privacy of personal information about any party received or created and ensure that such information is kept securely and destroyed securely; (f) ensure that all relevant licences, registrations, permits and authorities for the conduct of the business are held to perform its obligations under this Agreement; (g) ensure that all requirements contained in the Manual are complied with by the Originator during the term of this Agreement as if the contents of the Manual were set out in full in this Agreement as terms binding on the Originator; (h) act honestly in its dealings with all parties and not engage in misleading, deceptive or unethical conduct; (i) not change any marketing or promotional material provided by Interstar without Interstar's prior written consent; (j) arrange for the Originator's Representatives to attend any training programs arranged or conducted by Interstar; … (l) if at any time the Originator or Originator's Representative receives from an Obligor or from any other person any sum of money on account of principal, interest or other moneys which are otherwise due and payable to the Trustee as soon as practicable pay such money to the Trustee; … (n) assist in the resolution of any complaint made by any person or any dispute resolution process undertaken by Interstar or any enquiry or investigation required by any authorised body; … (t) use its best endeavours to ensure that the obligations of the Obligors are at all times undertaken and performed and in particular, but without limiting the generality of the foregoing, use its best endeavours to ensure that Property Insurance Policies are maintained; (u) if requested, ensure that the Trustee's interest is duly noted or endorsed upon all Property Insurance Policies; (v) ensure that its conduct does not cause Insurance Contracts to become invalid, unenforceable or lapse and not to commit any act whereby any Insurance Contract may be rendered void or voidable at the option of the insurer; … 13 For present purposes, two aspects of the above clauses should be noted. First, the obligations of Integral, and the relationship between Interstar and Integral, were ongoing in important respects after the origination and settlement of the loan. Secondly, and related to the first point, Interstar relied not only on the professional skill of Integral, but also on its honesty and integrity. 14 Clause 10 of each agreement provided for Integral's fees. In LOMA 1, cl 10 was in the following terms: 10. Originator's Fee 10.1 In consideration of the origination and management of Mortgages by the Originator, Interstar will, subject as herein provided, pay to the Originator a percentage (as agreed upon between the Originator and Interstar) of the Outstanding Loan Balance on the last Business Day of each month. In the event that: (a) a Loan is Settled during a month then the Originator's Fee in relation to that Loan for that month shall be calculated on a daily basis for the period from the date upon which the Loan is Settled until the last Business Day of that month; and (b) a Settled Loan is repaid in full during a month then the Originator's Fee in relation to that Settled Loan for that month shall be calculated on a daily basis for the period from the first day of that month to the calendar day immediately prior to the date of repayment of the Settled Loan in full. 10.2 Interstar will use its best endeavours to ensure that the Originator's Fee is paid by Interstar to the Originator on a date no later than the 15th calendar day of the succeeding month. 10.3 The Originator acknowledges that: (a) it shall not be entitled to receive an Originator's Fee in relation to any Settled Loan where, as at the date of calculation of the Originator's Fee, Legal Proceedings have Commenced in relation to that Settled Loan; and (b) in the event that the Obligor remedies any breach and legal proceedings are discontinued then the Originator shall not be entitled to a write back or payment of the Originator's Fee relating to that Settled Loan which was not paid in accordance with paragraph (a). 10.4 The Originator acknowledges that it will not be entitled to receive any Originator's Fee in relation to a Loan which: (a) is refinanced; or (b) otherwise repaid in full, within a period of six months of the date upon which the Loan is Settled. In the event that a Loan is refinanced or repaid in full within six months of the date upon which that Loan was Settled, then the Originator shall repay to Interstar upon demand all Originator's Fees previously paid by Interstar to the Originator in relation to that Settled Loan. 10.5 The Originator shall not engage in the practice of churning or procuring (either directly or indirectly) Obligors to refinance Settled Loans. In the event that the Originator breaches this clause in relation to a Settled Loan then the Originator shall repay to Interstar upon demand all Originator's Fees previously paid by Interstar to the Originator in relation to that Settled Loan. 10.6 Interstar may, in its absolute discretion, deduct or set-off any amounts required to be paid by the Originator to Interstar or the Trustee under any provision in this agreement or any other account whatsoever from any amounts (including the Originator's Fee) payable at any time by Interstar or the Trustee to the Originator. 10.7 If GST is or becomes payable in respect of the Originator's Fee then the amount paid to the Originator shall be increased by the amount necessary so that the Originator actually receives what it would have been entitled to receive if there had not been GST in respect of the supply made by the Originator subject always to the Originator providing a tax invoice to Interstar and/or the Trustee. 15 The phrase "Originator's Fee" (being the heading to cl 10 and a phrase used later in the agreement) was defined in cl 1.1 as follows: Originator's Fee means the fee payable by Interstar to the Originator pursuant to clause 10.1 hereof. 16 A number of aspects should be noted about cl 10 in LOMA 1. First, the fee was, in terms, undivided between origination and management. The fee was a percentage of an outstanding balance from time to time. Thus, no separate part of the fee can be seen as allocated to origination alone or to management alone. Secondly, the obligation of Interstar to pay the fee was expressed to be "subject as herein provided". Thus, for instance, no fee was payable (and if paid, was to be refunded) if a Settled Loan was refinanced or repaid in full within six months of settlement (cl 10.4). In particular, churning of loans was prohibited (cl 10.5). This second aspect was central to the arguments of the appellants. 17 In LOMA 2, the fee structure was differently expressed. Clause 10 dealt with fees payable by the first and second appellants separately. (They were referred to as "IWC" and "INC", respectively, in LOMA 2.) The fees payable were an "Upfront Fee" and an "Originator's Fee". These phrases were defined in cl 1.1 of LOMA 2 as follows: Upfront Fee means the initial lump sum amount as agreed upon between a Manager and the Originator and payable by that Manager to the Originator in respect of a Settled Loan. Originator's Fee means the fee payable by IWF or INC to the Originator pursuant to clause 10.1(a)(ii) hereof. 18 Clause 10 in LOMA 2 was in the following terms: 10. Upfront fee and Originator's Fee 10.1 In consideration of the origination and management of Mortgages by the Originator: (a) IWF will, subject as herein provided and in relation to IWF Loans only, pay to the Originator: (i) an Upfront Fee; and/or (ii) a percentage (as agreed upon between the Originator and IWF) of the Outstanding Loan Balance of IWF Loans on the last Business Day of each month ( Originator's Fee ); (b) INC will, subject as herein provided and in relation to INC Loans only, pay to the Originator: (i) an Upfront Fee; and/or (ii) a percentage (as agreed upon between the Originator and INC) of the Outstanding Loan Balance of INC Loans on the last Business Day of each month ( Originator's Fee ). 10.2 In the event that: (a) a Loan is Settled during a month then the Originator's Fee in relation to that Loan for that month shall be calculated on a daily basis for the period from the date upon which the Loan is Settled until the last Business Day of that month; and (b) a Settled Loan is repaid in full during a month then the Originator's Fee in relation to that Settled Loan for that month shall be calculated on a daily basis for the period from the first Business Day of that month to the calendar day immediately prior to the date of repayment of the Settled Loan in full. 10.3 A Manager will use its best endeavours to ensure that the relevant Originator's Fee is paid by or on behalf of a Manager to the Originator on a date no later than the 15th calendar day of the succeeding month. 10.4 A Manager will pay the relevant Upfront Fee to the Originator on such date or dates as agreed upon from time to time between that Manager and the Originator. 10.5 The Originator acknowledges that: (a) it shall not be entitled to receive an Upfront Fee or an Originator's Fee in relation to any Settled Loan where, as at the date of payment of the Upfront Fee or calculation of the Originator's Fee (as the case may be): (i) Legal Proceedings have Commenced in relation to that Settled Loan; or (ii) in the case of a INC Loan, an Obligor has been in breach or default under the INC Loan (or any Security Documents in relation to that INC loan) for a period of not less than thirty days; whichever is the earlier; (b) in the event that the Obligor remedies any breach and legal proceedings are discontinued then the Originator shall not be entitled to a write back or payment of the Upfront Fee or the Originator's Fee relating to that Settled Loan which was not paid in accordance with paragraph (a). 10.6 The Originator acknowledges that it will not be entitled to receive any Upfront Fee or Originator's Fee in relation to a Loan which: (a) is refinanced; or (b) otherwise repaid in full, within a period of six months of the date upon which the Loan is Settled. In the event that a Loan is refinanced or repaid in full within six months of the date upon which that Loan was Settled, then the Originator shall repay to the Relevant Manager upon demand all Upfront Fees and Originator's Fees previously paid by the Relevant Manager to the Originator in relation to that Settled Loan. It is acknowledged that the provisions of this clause will not apply in the event that an IWF Loan is refinanced with INC or vice versa. 10.7 The Originator shall not engage in the practice of churning or procuring (either directly or indirectly) Obligors to refinance Settled Loans. In the event that the Originator breaches this clause in relation to a Settled Loan then the Originator shall repay to the Relevant Manager upon demand any Upfront Fees and all Originator's Fees previously paid by the Relevant Manager to the Originator in relation to that Settled Loan. 10.8 A Manager may, in its absolute discretion, deduct or set-off any amounts required to be paid by the Originator to that Manager, the other Manager or the Trustee under any provision in this agreement or any other account whatsoever from any amounts (including the Upfront Fee and the Originator's Fee) payable at any time by that Manager or the Trustee to the Originator. 10.9 If GST is or becomes payable in respect of an Upfront Fee or the Originator's Fee then the amount paid to the Originator shall be increased by the amount necessary so that the Originator actually receives what it would have been entitled to receive if there had not been GST in respect of the supply made by the Originator subject always to the Originator providing a tax invoice to the Relevant Manager and/or the Trustee. 10.10 Nothing in this Agreement obliges: (a) IWF to pay an Originator any fee or other amount due and payable by INC in relation to a INC Loan; or (b) INC to pay an Originator any fee or other amount due and payable by IWF in relation to an IWF Loan. 19 Clause 18 dealt with the indemnification by Integral of Interstar and the Trustee, and was in the following terms: 18. Indemnity 18.1 The Originator agrees to indemnify and keep indemnified Interstar and the Trustee from and against any damages, losses, outgoings, costs, charges or expenses suffered or incurred by Interstar or the Trustee directly or indirectly in respect of: (a) any breach of the Originator's obligations, warranties, representations and covenants under this Agreement or the Manual or any error, omission or misrepresentation whether innocent or fraudulent by the Originator or the Originator's Representatives; (b) any action, claim or demand made or brought in respect of or otherwise arising form or in connection with any breach of any of the warranties contained in this Agreement or the fact that any of those warranties is untrue at any time; (c) any Settled Loan where an insurer fails to indemnify (or gives notice to any person of its intention to deny liability, either wholly or in part, to indemnify) any Obligor and/or the Trustee under an Insurance Contract where a claim is or may be made under an Insurance Contract and such failure to indemnify results either in whole or in part from any fraud, negligence, misrepresentation, act, omission, or default of the Originator or the Originator's Representatives; (d) the access of the Originator or the Originator's Representatives to or use of the System or Services; (e) the provision of any incomplete or inaccurate Applicant Data; (f) any act or omission of an Originator's Representative; (g) any claim brought by an Originator's Representative against Interstar in relation to the System or Services or otherwise in relation to the subject matter of this Agreement; and (h) any claim by any third party or indirectly arising out of or in connection with the access of the Originator or Originator's Representatives to or use of a System or Services. 18.2 Without limiting the provision of clause 18.1, in the event of any breach of or default under this Agreement by the Originator or the Originators Representatives, the Originator agrees to indemnify Interstar and/or the Trustee against: (a) all fees (including legal fees and disbursements on a solicitor and own client basis) actions, claims, demands, losses, damages, proceedings, compensation, costs, charges and expenses whether during or after the term hereof incurred by Interstar and/or the Trustee in connection with or resulting from this Agreement consequent upon any breach of or default under this Agreement by the Originator or in rectifying such breach or default or procuring the rectification of such breach or default; (b) any loss or damage suffered or incurred by Interstar and/or the Trustee as a result either directly or indirectly of any breach of or default by the Originator under this Agreement including, without limitation, any consequential loss or damage including any financial loss or damage suffered by Interstar under any agreement between the Trustee and Interstar; and (c) any liability either direct or indirect, tortious, contractual or statutory which may be incurred or suffered by Interstar and/or the Trustee or any third person or persons where such loss or damage arises directly or indirectly from any breach of or default under this Agreement by the Originator or the Originator's Representatives including, without limitation, liability for consequential loss or damage including without limitation any financial loss or damage. Such indemnity is in addition to any rights implied by law in favour of Interstar or the Trustee. 18.3 The Originator further agrees to indemnify Interstar, the Trustee, and the Nominated Credit Provider if any of those parties are obliged to pay a Civil Penalty Payment in relation to any Settled Loans provided that such indemnity shall apply only where the Civil Penalty Payment is caused or contributed to by: (a) fraud, negligence, misrepresentation, act, omission or default of the Originator or the Originator's Representatives; and/or (b) the Originator or the Originator's Representatives failing to adopt or adhere to any directions, requests, or requirements of Interstar, the Trustee, and/or the Nominated Credit Provider. 20 Clause 20 of LOMA 1 dealt with termination and was in the following terms: 20. Termination 20.1 Interstar 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 the Manual and the breach not being rectified to the absolute satisfaction of Interstar within fourteen days after the date upon which written notice of such breach is given by Interstar to the Originator; (c) where the Originator or Originator's Representative has engaged in any proven deceptive or fraudulent activity in relation to an Application or a Settled Loan or Interstar 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 Interstar, there is a change in the management or effective control of the Originator which change is not acceptable to Interstar. 20.2 Despite the termination of this Agreement whether pursuant to clause 20.1 hereof or otherwise: (a) the obligations of the Originator to Interstar and the Trustee under this Agreement shall be without prejudice to any other action or remedy which Interstar and/or the Trustee has or might or otherwise could have for moneys payable hereunder or breach of the provisions of this Agreement or for damages as a result of any event occurring or arising prior to the termination of this Agreement; (b) the obligations of the Originator and the rights of the Trustee and Interstar shall continue in respect of the following obligations and provisions hereunder: (i) the obligation of the Originator to pay to Interstar or the Trustee any amounts under clause 10 and (ii) the indemnity by the Originator contained in clause 18. 20.3 In the event that this Agreement is terminated by Interstar: (a) the Originator acknowledges that Interstar will be entitled (but without being under an obligation 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 Interstar reasonably determines to be the remuneration or compensation which Interstar (or a third party appointed by Interstar) 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. 21 The phrase "Originator's Representatives" (relevant, in particular, for cl 20.1(c)) was defined in cl 1.1 as meaning: (a) all officers, employees and agents of the Originator; (b) all independent contractors of the Originator; and (c) Suboriginators. 22 The word "Suboriginators" was defined in cl 1.1 as follows: Suboriginators means any sub-introducers, sub-originators or brokers who: (a) introduce Applicants, either directly or indirectly, to the Originator; and (b) have entered a Deed of Undertaking. 23 Clause 20 of LOMA 2 was in substantially the same terms, but accommodated the two different types of fees in cl 10 of LOMA 2 in cl 20.3, which was in the following terms: 20.3 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. The termination of the LOMAs 24 On or about 17 March 2006, Interstar terminated both LOMAs expressly on the basis (provided for by the second branch of cl 20.1(c)) that Interstar considered that Integral or its representative had engaged in deceptive activity in relation to loan application files. The reasons of the primary judge 25 The primary judge delivered two judgments dealing with the issue as to whether or not cl 20.3(c) was a penalty ([2007] NSWSC 406) and with the consequences of his conclusion that it was ([2007] NSWSC 592). The following outline is concerned with the first of the two judgments. The attack on the second judgment was abandoned during the hearing of the appeal. 26 The primary judge set out the procedural history of the matter and how the separate issues for trial came to be ordered. No question of the sufficiency of the grounds for termination was before his Honour – only the two questions that I have identified and, relevantly for this appeal, whether cl 20.3(c) of each agreement was a penalty. 27 The primary judge set out the terms of the agreements by reference to LOMA 2 – the agreement which contained the differentiation of the "Upfront Fee" and the "Originator's Fee". His Honour stated (with respect, incorrectly) that both agreements were in that form. 28 In [8] of his reasons, the primary judge set out the structure of the governing principles, drawing the distinction between the law of penalties (at common law and in equity) and the principles of relief against forfeiture (in equity). His Honour stated, that he was dealing with the former, not the latter: whether the relevant provision was void as a penalty, not whether relief against forfeiture should be ordered. 29 The primary judge dealt, first, with the submission by Interstar that no question of penalty arose because the essential requirements of a penalty were: (1) a payment of money, (2) stipulated in terrorem, (3) involving the imposition in advance of an agreed sum, (4) to be suffered by the defaulting party on breach, (5) without regard to the actual consequences of the breach, such that it was without more extravagant and unconscionable. 30 The primary judge refused to limit the doctrine of penalties to payment; it included, his Honour said, transfer of property or retention or withholding of payment. At [10] of his reasons he said (distinguishing between penalties and forfeiture): A contractual provision may be said to be penal if its function is to operate in terrorem to induce performance … 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]]. 31 The primary judge at [11]-[12] distinguished Ringrow Pty Limited v BP Australia Pty Limited [2005] HCA 71; 224 CLR 656 at 662-663 [10]-[12]. There the Court (Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ) said the following: [10] The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach. [11] The starting point for the appellant was the following passage in Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd : "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'." [12] Neither side in the appeal contested the foregoing statement by Lord Dunedin of the principles governing the identification, proof and consequences of penalties in contractual stipulations. The formulation has endured for ninety years. It has been applied countless times in this and other courts. In these circumstances, the present appeal afforded no occasion for a general reconsideration of Lord Dunedin's tests to determine whether any particular feature of Australian conditions, any change in the nature of penalties or any element in the contemporary market-place suggest the need for a new formulation. It is therefore proper to proceed on the basis that Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd continues to express the law applicable in this country, leaving any more substantial reconsideration than that advanced, to a future case where reconsideration or reformulation is in issue. (Footnotes omitted) 32 The primary judge at [12] of his reasons said that the statement in Ringrow as to the standard application of the law of penalties and the endorsement by the Court of Lord Dunedin's statement of principles, did not confine those principles insofar as they could be found in other authorities: 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 . (Emphasis by the primary judge) 33 The primary judge noted (at [13]) the burden on the party impugning the clause to show that a sum can only be characterised as a penalty if it is out of all proportion to the damage likely to be suffered as a result of breach: Ringrow at [31] and [32]. 34 Importantly, at [14] of his reasons, the primary judge distinguished between the extinguishment of future rights and obligations (as a necessary consequence of any termination) and "deprivation of rights that have already accrued", saying: … [T]he 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. 35 The primary judge then considered the agreements to ascertain whether the so-called "trailer commissions" had been "earned" before termination. At [16] and [17] of his reasons, the primary judge concluded that: [16] … 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 the 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. This 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 Originator's 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 … 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. 36 The appellant attacks this analysis, in particular the notion that the fee was earned or accrued and was divested or forfeited by termination. 37 The primary judge then turned to the question (which his Honour described as the "main issue in the case") whether the law of penalties applied at all, because termination under the clause was not conditioned on any breach, but on the occurrence of an event. 38 The reasons of the primary judge are most easily understood by recognising the three classes of case by reference to which the primary judge analysed the cases. His Honour expressed these in [19] of his reasons as follows: • 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. 39 The first section of his Honour's reasons ([20]-[28]) was directed to an analysis of the underlying reasoning in In re Apex Supply Company Ltd [1942] Ch 108 in which Simonds J held that no question of penalty arose in the second class of case (that is, as here, where the sum was payable on the occurrence of a certain event). The primary judge saw a number of weaknesses in the authority of Apex. 40 The first weakness was said to be that Simonds J based his conclusion upon a statement by Salter J in Elsey & Co Ltd v Hyde (unreported, King's Bench Division, 1926; but set out extensively by Simonds J) which had now been undermined by contradictory conclusions in Cooden Engineering Co Ltd v Stanford [1952] 2 All ER 915; Bridge v Campbell Discount Co Limited [1962] AC 600; O'Dea v Allstates Leasing System (WA) Pty Limited [1983] HCA 3; 152 CLR 359 at 367 and 390; and AMEV-UDC Finance Limited v Austin [1986] HCA 63; 162 CLR 170 at 184-185 and 211. 41 The second weakness was said to be the reliance that Simonds J placed upon something that had been said by Greer LJ in Chester & Cole v Wright (unreported, Court of Appeal of England and Wales, 1929; also cited by Simonds J in Apex). The decision in Chester & Cole was based on the shared view of Lord Hanworth MR and Greer LJ that the clause was a genuine pre-estimate of damages. Greer LJ added comments by way of obiter dicta which could be seen to be undermined in one respect by the High Court in Ringrow and in another by the cases referred to in relation to Elsey. 42 The third weakness of Apex was said to be the support drawn by Simonds J from the lack of dissent in later cases, when in Associated Distributors Ltd v Hall [1938] 2 KB 83, a case concerned with the first class of case, all members of the Court of Appeal expressly reserved their position as to the earlier cases of Elsey and Chester & Cole. 43 The primary judge concluded, at [28] of his reasons, as follows about Apex: 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. 44 The primary judge then considered Cooden Engineering. Importantly, the court in Cooden stated that aspects of Elsey (and so Apex) were wrong, insofar as they concerned the third class of class – the termination of the contract upon breach by the hirer. Somervell LJ left open the second class, on equitable rather than common law principles. Jenkins LJ, in dissent, agreed with the reasoning in Elsey. Hodson LJ, like Somervell LJ, refused to view the provision in question as based on an event (determination) rather than on a breach (non-payment). Hodson LJ (at 932) expressed (if I may say so) the distinction sought to be drawn which he (and Somervell LJ) would not recognise: 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. (Emphasis of primary judge) 45 The importance of Cooden Engineering (and later Bridge v Campbell Discount and O'Dea) should be understood, but not overstated. First, the fact that termination (and the payment provided for) could occur on the happening of a number of events, some only of which were breaches of contract, did not save the provision for payment being a penalty insofar as the termination and payment were conditioned on breach. Secondly, the distinction between payment conditioned on termination (an event) for breach and payment conditioned on breach itself, was seen as without a difference: see Hodson LJ above. These cases did not, however, decide that the need for the involvement of a breach of contract for the operation of the law of penalties no longer existed. It is important to recognise this when assessing the weight of later cases in England and Australia, in particular IAC (Leasing) Ltd v Humphrey [1972] HCA 1; 126 CLR 131 at 143. In Cooden Engineering, only Somervell LJ left this question open. 46 The primary judge then referred to Bridge v Campbell Discount Co Ltd and the House of Lords' unanimous approval of Cooden Engineering insofar as it rejected the proposition that if a payment was not a penalty in some circumstances upon which it rested, it could not be a penalty in other circumstances based on breach. The primary judge then examined the reasoning of their Lordships insofar as the first and second categories of cases were discussed. Viscount Simonds and Lord Morton of Henryton approved Associated Distributors v Hall to the effect that no question of penalty arises in the first category. Lord Denning and Lord Devlin disapproved Associated Distributors v Hall in its application to the first and second categories. Lord Radcliffe left the question of the first and second categories as penalties open. 47 The primary judge then referred to Financings Ltd v Baldock [1963] 2 QB 104 in which the Court of Appeal held (consistently with the majority in AMEV-UDC v Austin) that upon determination for breach not amounting to repudiation, the owner was only entitled to instalments unpaid, and not damages. Diplock LJ, in obiter dicta comments, dealt with payments in the first and second classes and raised the question of the possibility that they could be penalties. 48 The primary judge then referred to further comments, obiter dicta, about the first and second classes, in United Dominions Trust (Commercial) Limited v Ennis [1968] 1 QB 54. Lord Denning MR repeated his view expressed in Bridge v Campbell Discount that Associated Distributors was wrong. Harman LJ disagreed, stating that there can be no penalty without breach. Salmon LJ made comments about the first, but not second classes, to the effect that such may not be a penalty. 49 The primary judge then turned to O'Dea and noted that Gibbs CJ left open the question as to the correctness of Associated Distributors and the first (and thus second) classes of case. The primary judge also noted Brennan J's view that the balance of opinion in the High Court was that penalty is predicated upon breach. 50 The primary judge then discussed Export Credits Guarantee Department v Universal Oil Products Co [1983] 2 All ER 205, noting that the House of Lords held that the law of penalties was concerned with payments founded on breach of contract. The primary judge drew a distinction at this point, as he did with the case of Alder v Moore [1961] 2 QB 57, describing at [50] of his Honour's reasons these cases (Export Credits and Alder v Moore) as "true case[s] of … payment becoming due on an event" as distinct from cases in which (as he found here): … 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 imposing an additional detriment on the other party if an event which may jeopardise performance of the main purpose occurs. 51 The primary judge then turned to AMEV-UDC v Austin and noted that all five justices were of the view that the doctrine of penalties applied when there was a right to terminate and receive a payment on the happening of a breach of contract even if that be only one of a number of events (which were not breaches) giving rise to the rights of termination and payment. As to the first and second classes of case, Gibbs CJ again left the matter, and a consideration of Export Credits, open. The primary judge then discussed the extensive joint reasons of Mason and Wilson JJ and by reference, in particular, to what their Honours said at 190, stated at [57] of his reasons: … 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. 52 The phrase "In that context" in the first line of this passage referred to the summary (at 190) of Mason and Wilson JJ's historical discussion of equity's intervention in relation to penalties, the fifth point of the summary being: … 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. 53 Before turning to Deane J and Dawson J, who were in dissent in AMEV-UDC, the primary judge discussed (at [58]-[61]) four cases dealing with the statutory restrictions on re-entry and relief against forfeiture in the Law of Property Act 1925 (UK), s 146 and the Conveyancing Act 1919 (NSW), s 129: Halliard Property Co Ltd v Jack Segal Ltd [1978] 1 WLR 377 (Goulding J); Cadogan Estates Ltd v McMahon [2001] 1 AC 378 (House of Lords); Della Imports Pty Limited v Birkenhead Investments Pty Limited (1987) NSW ConvR 55-358 (McLelland J as he then was); and Wynsix Hotels (Oxford St) Pty Limited v Toomey [2004] NSWSC 236 (Young CJ in Eq). From these cases, the primary judge perceived a willingness in the courts to imply a contractual provision not to bring about a state of affairs or an event on which the right to re-enter was conditioned. He saw the approach to this statutory provision in the cognate field of relief against forfeiture as supportive of Mason and Wilson JJ's fifth point of ready implication of the promise. He said at [62] of his reasons: 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" where 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. 54 The primary judge then drew further support for this conclusion from the reasons of Deane J (in dissent) in AMEV-UDC, who at 162 CLR 197-199 rejected, as a general proposition, the requirement that there be a breach of contract for the law of penalties to be invoked (though Deane J recognised the recent statements of high authority to the contrary). The primary judge then extracted from the judgment of Deane J at 162 CLR 199-200 a proposition that directly supported the application of the doctrine of penalties to cases in the second class. The relevant passage from the judgment of Deane J at 162 CLR 199-200 was as follows: … [I]t is plain that the equitable and common law rules relating to penalties do not apply to every obligation to make a payment of money on the occurrence, or default of occurrence, of a specified event. … The general area in which they are applicable is where there exists a contractual liability (whether under seal or for consideration) to pay or forfeit an amount or amounts 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. 55 Dawson J, on the other hand (also in dissent) said that it was clear that a provision calling for the payment of money on the occurrence of an event, rather than on breach, could not be a penalty. Dawson J, though, recognised and accepted the line of authority from Cooden Engineering to O'Dea that refused to treat payment on termination (for breach) as a species of payment on an event, rather than as payment on breach. 56 The primary judge then dealt with the decision of the Queensland Court of Appeal in Bartercard Limited v Myallhurst Pty Limited [2000] QCA 445. In that case Thomas JA (with whom Davies JA and Ambrose J agreed) and Davies JA (in some additional comments) expressed the view that a breach of contract was necessary for the invocation of the law of penalties. The primary judge concluded that the reasoning of the Queensland Court of Appeal leading to his conclusion was not legitimately based and in any event was obiter dicta. 57 The primary judge also put to one side the decision of Hansen J in Deputy Commissioner of Taxation of the Commonwealth of Australia v Advanced Communications Technologies (Australia) Pty Limited [2003] VSC 487. Hansen J was of the view that he was bound to accept Dawson J's statement of the law in AMEV-UDC as in accordance with Export Credits and its recognition by Mason and Wilson JJ in AMEV-UDC, though with reservations. The primary judge thought that this reading of AMEV-UDC was incorrect. 58 The primary judge then referred (at [70] of his reasons) to a number of authorities to the effect that in this field the law looks to substance and not form. Thus, his Honour concluded (at [71]) that insofar as the doctrine of penalties is confined to payments conditioned on breach, and does not extend to payments on the occurrence of a specified event, this must be judged according to substance and not form. 59 The primary judge then concluded, on the basis of the analysis that he had undertaken, that no authority constrained him from concluding that a sum agreed to be paid on forfeiture on termination for an event "in the domain of the other" could be a penalty. The primary judge said the following at [74] and [75] of his reasons: [74] … 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. 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 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. [75] 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. 60 The primary judge then concluded (at [76]-[77]) that cl 20.3(c) was a penalty, even if it be viewed as the payment (or forfeiture) on the occurrence of an event: [76] 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 it does not become insolvent. [77] 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 protect 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. 61 Finally, (at [78]-[79]) the primary judge dealt with the consequences of the operation of cl 20.3(c) and decided the case on an even narrower basis – that all of cl 20.1(c) and 20.3(c) should be viewed as referable to a question of substantive breach, the "reasonable opinion" of Interstate being only an evidential proxy for fraud, and the presence of fraud was an actual breach of contract. He said: [78] Indeed, even on a narrower view of the operation of the doctrine of penalties – the view 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. 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. [79] 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. 62 Thus, the primary judge answered question 1 (whether cl 20.3(c) is void as a penalty) in the affirmative. His Honour also answered question 2 (whether Integral continued to be entitled to the commissions in question) in the affirmative, though leaving it open for Interstar to argue that it was entitled to deduct from the commissions amounts that would be deducted in the operation of cl 20.3(b). 63 The entitlement or otherwise of Interstar to make the above deduction was dealt with by the primary judge in his second judgment ([2007] NSWSC 592). On the authority of AMEV-UDC the primary judge concluded that cl 20.3(c) was void absolutely and its severance did not allow termination pursuant to cl 20.1(c) to be treated as pursuant to cl 20.1(b). His Honour dealt with Interstar's attempt to remove itself from the consequences of voidness of the clause as a penalty, by seeking to amend its pleading of termination to add cl 20.1(b) to the previously admitted basis of cl 20.1(c). The primary judge rejected this application. 64 The primary judge then dealt with other bases relied on by Interstar for resisting payment of commissions. On 3 July 2007, the primary judge made various orders, the substantive ones of which were: … 3. Declare that upon the true construction of the Loan Origination and Management Agreement (LOMA) between the defendants and the first plaintiff, dated 18 March 2003, and the LOMA between the defendants and the second plaintiff, dated 18 November 2005, clause 20.3(c) of each LOMA is void. 4. Declare that the first plaintiff and the second plaintiff respectively are entitled to be paid, and the first defendant is liable to pay, the originator's fee referred to in clause 10.1(a)(ii) of each LOMA, notwithstanding that the LOMA may have been terminated under clause 20.1(c). 5. Order that the first defendant pay to the first plaintiff and the second plaintiff respectively the originator's fee referred to in clause 10.1(a)(ii) of each LOMA, as and when it falls due, notwithstanding that the LOMA may have been terminated under clause 20.1(c). 6. Give judgment that the first defendant pay the first plaintiff the sum of $163,053.81. 7. Give judgment that the first defendant pay the second plaintiff the sum of $6,789.27. The notice of appeal and an outline of the appellants' submissions in relation to the first judgment 65 The appellants attacked the reasoning of the primary judge in a number of respects. 66 First, (Notice of Appeal, grounds 4 and 11) it was submitted that the trailer commissions were not earned otherwise than by the operation of the whole agreement, including cll 18 and 20. The "trailer commissions" were said to be conditional in part on the continuation of the agreements and performance under them. Part of the entitlement to the fees was the differential operation of cl 20 to their continued receipt: see the use of the phrase "continue to be entitled to receive" in cl 20.3(b) and "have no further entitlement to receive" in cl 20.3(c). The appellants emphasised the free commercial bargain that had been entered as to the limits of the entitlement of Integral to commissions. There was, therefore, no vested or unconditional right to the fee and it was not, as the primary judge found, accrued. 67 Secondly, (Notice of Appeal, ground 8) it was submitted that the primary judge failed to distinguish between the law of penalties and the law in respect of relief against forfeiture. This involved incorporating the notion of forfeiture of contractual entitlements into the law of penalties. Here relief against forfeiture had been disavowed by Integral and specifically put to one side by the primary judge. 68 Thirdly, (Notice of Appeal, grounds 3, 5 and 6) it was submitted that the primary judge erred in failing to limit the law of penalties to the payment of money or the transfer of property stipulated in terrorem involving the imposition in advance of an agreed sum and in extending it to include forfeiture or retention of money or property. 69 Fourthly, (Notice of Appeal, ground 5) it was submitted that there was absent the second essential element of the law of penalties – breach of contract as the factor conditioning payment. 70 Fifthly, (Notice of Appeal, grounds 7, 9 and 10) it was submitted that the primary judge erred in concluding that the termination was by reason of an actual breach of contract. 71 The above arguments rested on a fundamental contention that the primary judge had extended the law of penalties beyond the boundaries of its legitimate scope. Further, to the extent that the primary judge concluded that the termination was for breach that could only be based on the fact of fraud or deceptive conduct. Those matters were not before the Court. An outline of the respondents' submissions 72 The respondents supported all the reasoning of the primary judge. 73 Importantly, the respondents submitted that any distinction between relief against forfeiture and penalties was without a difference. The respondents denied that they had disavowed relief against forfeiture (even though they had abandoned a claim for such earlier made) and referred to submissions that they had put to the primary judge on the basis that penalty and forfeiture were related concepts. 74 This submission was part of the respondents' rejection of the appellants' proposition that for the law of penalties to apply there must be a payment of an agreed sum and forfeiture of rights will not suffice. The respondents in this respect relied, in particular, on Forestry Commission of New South Wales v Stefanetto [1976] HCA 3; 133 CLR 507 and Bysouth v Shire of Blackburn and Mitcham (No 2) [1928] VLR 562. Decision and reasoning 75 In my view, for a number of reasons, cl 20.3(c) was not a penalty. 76 The analysis of the legal characterisation and effect of the clauses in question must begin with the terms of the contracts. Each was a commercial bargain between parties who, on the face of the contracts, were of a character well able to attend to the protection of their own commercial interests. No suggestion of unconscionable or unconscientious advantage having been taken by one side was asserted. Integral did not seek relief against forfeiture and the primary judge was not dealing with that equitable remedy. The relevant task was the ascertainment as to whether cl 20.3(c) in each agreement was a penalty and therefore void. The proper construction of the agreements 77 In LOMA 1, the Originator's Fee in cl 10.1 was expressed to be in consideration of (both) the origination and management of the relevant mortgages. Thus, as Integral states, one aspect of the consideration for the future income stream was executed. Equally, another aspect was not: management responsibilities were required to be undertaken by Integral during the life of the mortgage. In LOMA 2, there was a distinction between the Upfront Fee and the Originator's Fee. Whilst the Upfront Fee in cl 10.1(a)(i) was expressed to be "in consideration of the origination and management of Mortgages" (see the chapeau in cl 10.1), the nature of the Upfront Fee as an "initial lump sum amount … payable … in respect of a Settled Loan" (see definition in LOMA 2 cl 1.1) suggests that the words "in consideration of the orgination and management of Mortgages …" in the chapeau of cl 10.1 of LOMA 2 should be read distributively. If one does this, it is arguable that the on-going percentage fee in cl 10.1(a)(ii) in LOMA 2 (the Originator's Fee) was referable only to the obligations of management. Another construction is that the Upfront Fee and the Originator's Fee may both have been referable to origination and management. In this regard it is relevant to note that the parties in cl 20.3(b) of LOMA 2 recognised that the cost of providing the management services may be less than the amount of the Originator's Fee. Another construction is that the Upfront Fee was referable to origination and the Originator's Fee was referable to both origination and management. The words of the chapeau are consistent with the reasonable commercial construction that the Upfront Fee was payable for and on settlement after origination (though anticipating management) and a continuing fee was payable in consideration of origination and continuing management responsibilities. 78 The primary judge drew no distinction between the agreements in this regard to cl 10 of the two agreements. Interstar did not specifically fasten upon this as an error. I am not persuaded that there was any error disclosed by the primary judge in so equating the two agreements. I propose to approach the analysis of the problem on the basis that origination is an element of the consideration for the fees under both agreements 79 I do differ from the primary judge, however, in relation to the analysis of the accrued nature of the rights. I have set out the relevant passages from [16] and [17] of his Honour's reasons. The treatment of the Originator's Fee as "earned upon the settlement of the loan" (see [16] of the reasons) goes too far. The fee was not earned until the consideration for it – both origination and management – was undertaken. An element of accrual of one aspect of the entitlement to receive it can be recognised and accepted: the origination. To state, as the primary judge did in [16] of his reasons, that the fate of the Originator's Fee upon the operation of cl 20(3) was loss or forfeiture, treated the sums as fully earned. What was "accrued" before termination was the completion of only one aspect of the consideration (the origination). The Originator's Fee was not earned or fully accrued at the date of termination. 80 In LOMA 2, the Upfront Fee, on the other hand, can be taken to be accrued in that it was "payable" (see definition in cl 1.1) in respect of a Settled Loan. It is payable in accordance with cl 10.4 of LOMA 2, and subject to cll 10.5 and 10.6. The terms of cl 20.3(c) were "have no further entitlement to receive". This clause is directed to "entitlement". Thus, I would not construe cl 20.3(c) as denying to Integral payment of Upfront Fees on settled loans if settlement had occurred before the termination date, but payment had not. I did not understand Interstar to submit to the contrary. If, however, a prospective loan which had been introduced or "originated" by Integral fructified into a settled loan after the termination date cl 20.3(c), it would on its face, deny this entitlement to receive the fee – not by forfeiting it, but by providing for no further entitlement, notwithstanding the steps taken by Integral. 81 The conditionality of the entitlement to the fees can also be seen in cll 10.5 and 10.6 of both agreements. 82 The fees in both agreements should be understood as earned for a combined or bundled consideration (origination and management) and the entitlement (that is fully accrued legal right) to receive them was by reference to all the terms of the agreements, including cl 20.3(b) and (c). 83 That cl 20.3(b) said that Integral "shall … continue to be entitled to receive" an amount equal to the Originator's Fee less the cost of management, did not transform the fees into earned entitlements to payment forfeited by cl 20.3(c). The provisions of cl 20(3) and the place of management responsibilities in the consideration lead to the conclusion that the rights or entitlements to fees were not accrued by origination alone, but only partly explained by it. The right or entitlement to payment required the continuation of the agreement, and ended (cl 20.3(c)) or was qualified (cl 20.3(b)) on termination. 84 Not being earned, the right to receive the fees did not survive unaffected by the termination: cf McDonald v Dennys Lascelles Ltd [1933] HCA 25; 48 CLR 457 at 477. 85 The importance of this conclusion can be seen by reference to the case that was central to the primary judge's reasons and to Integral's argument on appeal, Bysouth v Shire of Blackburn and Mitcham (No 2). There, the contractor and the Shire entered into a contract for road-making. The contractor alleged a repudiation of the contract by the Shire in removing him from the site and the works. He claimed to be entitled to payment of retention moneys (for work certified) and money for work done (but not certified). The Shire relied on cl 11 of the contract which was, relevantly, in the following terms: If the contractor shall, in the opinion of the engineer, fail to make such progress with the works as the engineer shall deem sufficient to ensure their completion within the specified time, or if the contractor shall use or employ bad or insufficient materials or execute any work in an imperfect manner, and shall fail or neglect to rectify any such cause of complaint for seven days after being thereunto required in writing by the engineer, or if the contractor shall in the judgment of the engineer commit a wilful breach of his contract, or if any of the works in the specification or in any of the drawings or any extras, additions, enlargements, deviations or alterations thereto or thereon shall be carried on or done on any Sunday without the written permission of the engineer previously obtained, then and in any of such cases it shall be lawful for the council by an instrument under its common seal … absolutely to determine this contract. And from and after the delivery of the said instrument … the contract shall be absolutely determined, and in the event of such determination happening the moneys which shall have been previously paid to the contractor under this contract shall be deemed to be the full value of the work executed, and shall be taken and accepted by the contractor in full payment and satisfaction of all claims and demands under this contract, and the deposit and percentages or retention money, and also all materials, implements, and plant then being in or upon the works or near thereto for the purpose of being used or employed in or about the same, shall remain the absolute property of the council, and may be disposed of as the council shall think fit. 86 The Shire relied on the whole of cl 11. It stated that it had validly determined the contract, that there had been no certification of the further work, and that the contractor had breached his contract. Damages were claimed in a counter-claim. In his reply (in paragraph 2) the contractor contended (see [1928] VLR at 564): … that the conditions of the contract under which the defendant purported to act in determining the contract and retaining moneys payable to the plaintiff and the plaintiff's materials, implements and plant, and also the conditions relating to damages for delay and the power to order the removal of inferior materials were conditions in the nature of a penalty, and as such unenforceable. 87 It is to be noted that one aspect of cl 11 was the determination of the contract on the opinion of the Superintendent. Clause 11 also concerned breach by the contractor. The clause as a whole was relied on. No point was taken in argument (and the judges did not discuss) any differential approach to be taken to the operation of cl 11 as a clause setting out the consequences of termination for breach and termination because of a state of affairs (the Superintendent's opinion). 88 Irvine CJ concluded that the clause involved "a forfeiture of existing rights" ([1928] VLR at 573); but this conclusion related only to moneys due for work that had been certified or in respect of which the contractor was entitled to a certificate. The deposit and the retention moneys, which by cl 24 were not the property of the contractor, were not forfeited by the exercise of the termination power. This was so because they did not become the property of the contractor until the engineer had certified that the work had been finally and satisfactorily completed. Irvine CJ continued at [1928] VLR at 574 and said: The forfeiture of the moneys already earned, as to which the engineer's certificate has been given or as to which the contractor is entitled to a certificate, and of the contractor's property "in or upon the works or near thereto" comes, I think, within the principle which subjects stipulations in contracts for penalties to equitable modification or adjustment. 89 Irvine CJ referred (at 575) to the judgment of the Privy Council in Steedman v Drinkle [1916] 1 AC 275. In that case, dealing with payments under an instalment contract for the sale of land, the Privy Council dealt with the matter as one of relief from forfeiture, stating at 279: As to the relief from forfeiture, their Lordships think that the Supreme Court was right in holding, for the reasons assigned in the former decision of this Board, that the stipulation in question was one for a penalty, against which relief should be given on proper terms. The same approach was taken in Brickles v Snell [1916] 2 AC 599 at 604-605. Dixon J explained these cases in McDonald v Dennys Lascelles as a form of relief against forfeiture, whether of the instalments or the estate under the contract to which they related. At law the payments are impliedly conditioned upon conveyance; and, if such implication is negated by an express term, equity would view the forfeitures of the instalment as penal. Dixon J said at 48 CLR 478: It is now beyond question that instalments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract ( Mayson v Clouet …). Although the parties might by express agreement give the vendor an absolute right at law to retain the instalments in the event of the contract going off, yet in equity such a contract is considered to involve a forfeiture from which the purchaser is entitled to be relieved (see the judgment of Long Innes J in Pitt v Curotta…) . The view adopted in In re Dagenham (Thames) Dock Co; Ex parte Hulse … seems to have been that relief should be granted, not against the forfeiture of the instalments, but against the forfeiture of the estate under a contract which involved the retention of the purchase money: and this may have been the ground upon which Lord Moulton proceeded in Kilmer v British Columbia Orchard Lands Ltd … notwithstanding the explanation of that case given in Steedman v Drinkle … and Brickles v Snell… . However, these cases establish the purchaser's right to recover the instalments, other than the deposit, although the contract is not carried into execution. If a vendor under a contract containing an express power to forfeit instalments at first determined the contract and retained the instalments but afterwards resiled from his former election to treat the contract as discharged and insisted that, if the purchaser was unwilling to forfeit his instalments according to the tenor of the agreement, he should at least carry out the sale, perhaps the purchaser as a term of equitable relief against forfeiture would be required to carry out his contract. But, where there is no express agreement excluding the implication made at law, by which the instalments become repayable upon the discharge of the obligation to convey and the purchaser has a legal right to the return of the purchase money already paid which makes it needless to resort to equity and submit to equity as a condition of obtaining relief, the vendor appears to be unable to deduct from the amount of the instalments the amount of his loss occasioned by the purchaser's abandonment of the contract. A vendor may, of course, counterclaim for damages in the action in which the purchaser seeks to recover the instalments. See also Legione v Hateley [1983] HCA 11; 152 CLR 406 at 455 (per Mason and Deane JJ in a passage to which I will come). 90 The answers given by Irvine CJ at [1928] VLR 575 to the relevant paragraph of the reply (set out at [85] above) were: The answer to the question so far as it relates to clause 11 should be, in my opinion, Yes, as to moneys already payable under the contract at the time of determination of the contract and to the property of the contractor at that time; otherwise, No. 91 Irvine CJ saw as important to any conclusion of penal forfeiture the fact that what was to be forfeited was the right to receive payment that had been fully earned. Relevant for present purposes, and leaving to one side the jurisprudential analysis of the penal character of the forfeiture of payments by instalments, is the clear basis for Irvine CJ's refusal to view the deposit and retention moneys as penally forfeited - that they had not been fully earned under the contract. 92 Mann J relevantly agreed with the Chief Justice. Lowe J (at 584) agreed with the Chief Justice that cl 11 was not a "penalty" in relation to the deposit and retention moneys. Lowe J also considered that cl 11 was not a penalty insofar as it prevented the re-vesting of equipment in the contractor. (Clause 7 of the contract had vested title in materials brought on-site in the Shire). He also concluded that the clause did not apply to any property not otherwise covered by cl 7. 93 Here the relevant fees were not fully earned. Integral's right to receive them was dependent upon fulfilling its responsibilities under the contract because it only accrued when it was earned. The right to receive them was conditioned, in part, on the management obligations under the contract. The determination of the contract put an end to that entitlement in the way provided for in cl 20.3(b) and (c). There was no relevant forfeiture of fully earned property to engage the law of penalties, assuming that forfeiture of rights (as opposed to payment of money) could so engage that law. 94 Thus, I agree with Interstar's first submission that cl 20.3(c) is not a penalty because it is part of the circumscription or the definition of the entitlement; it is not the forfeiture of accrued property for the collateral purpose of encouraging compliance with the contract. 95 If I be wrong in the above conclusion, it is necessary to assess whether cl 20.3(c), or more particularly how it operates in the context of the second branch of cl 20.1(c), is a penalty. Was cl 20.1(c) a surrogate or proxy for actual breach? 96 The primary judge concluded at [78] and [79] of his reasons (set out above) that the second branch of cl 20.1(c) ("Interstar considers … a Settled Loan") was a matter of "mere form" and was an evidentiary provision and a proxy for proof of the fact of fraud. In my respectful view, it is no such thing. The subject is not one of mathematical measurement by an expert, such as may be the case in the context of an architect or surveyor in a building contract. In such a case, the opinion of such a person may be (and may in some cases be provided for as such) a proxy for proof of the fact. Here, the second branch of cl 20.1(c) is a state of affairs or circumstance dependent upon the state of mind of Interstar and there being sufficient grounds to make it a reasonable opinion. It does not depend upon there being a breach of contract, or upon Interstar or its Originator's Representative having in fact engaged in deceptive or fraudulent activity. Evidence for fraud and evidence for an opinion that fraud has occurred may be quite different. What might well reasonably support an opinion may well be entirely inadequate to conclude that fraud occurred. 97 In my respectful view, the primary judge was wrong to conclude that the position of the parties should be assessed on the basis that Interstar had terminated for the proven fraud of Integral. Interstar had not purported to do so; the clause relied on did not say so; and the issue before his Honour did not raise that. The elements of the law of penalties 98 It is then necessary to assess the legitimacy of expression of the primary judge's views in [75] of his reasons as to the extent of the law of penalties. In my respectful view, his Honour expressed the matter too widely in that paragraph. 99 Although the origins of the principles both as to relief against forfeiture and penalties are rooted in equitable sources, there is a clear doctrinal distinction between the two. The modern rule against penalties is a rule of law, not equity: AMEV-UDC at 191. 100 The contractual provision must be assessed at the time of making the contract, and not at the time of breach. The question depends upon the interpretation of the contract understood in the surrounding circumstances: O'Dea at 368 and 373. It can be accepted that the issue is one of substance and not mere form – "not of words or of forms of speech, but of substance and of things": O'Dea at 368 where Gibbs CJ quoted Lord Radcliffe in Bridge v Campbell Discount at 624. That said, the substance of the contract must be ascertained by a process of construction. The notion put by Integral and present in the primary judge's reasoning, to a degree, that the substance of the operation of the contractual provision can be viewed other than by reference to the words used by the parties, is difficult to sustain. Limited to payment of money? 101 A stipulation may be penal in character even though the penalty is not expressed in terms of the payment of money but in terms of transfer of property: Jobson v Johnson [1989] 1 All ER 621; and Wollondilly Shire Council v Picton Power Lines Pty Limited (1994) 33 NSWLR 551 at 555 where Handley JA (with whom Clarke and Meagher JJA agreed) stated (concisely identifying the elements of the doctrine and the continuing living influence of equity on the common law principles): The classical test to determine whether a contractual stipulation is a penalty requires the court to determine whether the sum expressed to be payable in the event of a breach is a genuine pre- estimate of the damage likely to be suffered by the innocent party. If it is, then the clause will be upheld but if not, it will be struck down as penal: see Dunlop Pneumatic Tyre Co, Ltd v New Garage and Motor Co, Ltd [1915] AC 79. But this subclause does not stipulate for any sum of money to be payable to the Council on breach. Equity always looked to substance rather than form and the penalty doctrine developed from Equity. In principle therefore the doctrine should apply not only to clauses which provide for the payment of money on breach but also to those which provide for the transfer of money's worth. 102 See also Ringrow Pty Limited v BP Australia Ltd [2003] FCA 1297; 203 ALR 281 at 302-303 [100] (Hely J), adopted on appeal by Conti and Crennan JJ [2004] FCAFC 206; 209 ALR 32 at 73 [109]. In Ringrow in the High Court, it was not submitted (see 224 CLR at 659-660) that the provision was not a penalty because it did not provide for a payment of money. Reference can also be made in this respect to Stefanetto v Forestry Commission of New South Wales and the discussion of that case in Rossiter Penalties and Forfeiture (Law Book Co) at 80-82. 103 In assessing what dealing with money or property may amount to a penalty, it is important not to blur the distinctions between penalties and forfeiture, in their respective natures and fields of operation. In Legione v Hateley at 445, Mason and Deane JJ said the following: A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation (see, generally, O'Dea v. Allstates Leasing System (WA) Pty Ltd ). On the other hand, forfeiture involves the loss or determination of an estate or interest in property or a proprietary right, e.g., a lease, in consequence of a failure to perform a covenant. When non-payment of rent or a fine is made the occasion for forfeiture of an estate or interest in property it may be proper to treat the forfeiture as being similar in character to a penalty because it is designed to ensure payment of the rent or fine. There is, however, a real distinction between "penalty" and "forfeiture" and it is unfortunate that the terms have been frequently used in a way which blurs it. The claims made by the purchasers in Steedman v Drinkle and Brickles v Snell were for relief against the "forfeiture" of instalments of purchase money. The relevant contracts, like the modern contract of sale, permitted the vendor to "forfeit" instalments of purchase money. In this situation, despite the use of the word "forfeit", relief is granted on the footing that the contractual provision entitling the vendor to retain the instalments is in substance a penalty, or in the nature of a penalty, because it is designed to ensure payment of the entire purchase price and it exceeds the damage which he suffers by reason of the purchaser's default. See also the discussion in Rossiter op cit at 82-84. 104 It is but a small step from accepting that the doctrine applies to a transfer of property, to applying it to forfeiture of property in a clause designed to encourage performance. The relationship between penalties and relief against forfeiture at this point becomes less than pellucid. It is unnecessary to examine it any further here. I am prepared to assume that the doctrine can apply to forfeiture of rights or property. Must the payment be conditional on breach of contract? 105 Central to the primary judge's expression of the principle at [75] of his reasons was a rejection of the proposition that the balance of authority that should guide him (in particular as a judge at first instance) was to the effect that the doctrine of penalties was one concerned with a provision "in the nature of punishment for non-observance of a contractual stipulations [consisting] of the imposition of an additional or different liability upon breach of the contractual stipulation": Legione v Hateley at 445 per Mason and Deane JJ, citing generally O'Dea. This was not (if I may respectfully put it this way) a casual or loose expression of the matter by their Honours. It was in a part of the joint judgment in which the distinction between penalties and forfeiture was being drawn. Of course, it predated the views expressed by Deane J in AMEV-UDC at 197-199 to which the primary judge referred and to which I will return. 106 In my view, the expression of view by the primary judge that the doctrine of penalties (distinguished from relief against forfeiture) in the common law of Australia (using that expression to mean, relevantly here, the general law encompassing common law and equity) was not limited to circumstances of breach of contract was not open to his Honour. The intermediate appellate authorities in Australia, the persuasive view of a unanimous House of Lords, existing High Court authority and other views expressed in the High Court constrained the primary judge (and constrain this Court) to limiting the application of the doctrine of penalties to circumstances of breach of contract. If a wider doctrine is to be enunciated in the form of that appearing in [75] of his Honour's reasons, it is for the High Court of Australia to enunciate it. This is so not least because of the need to resolve the views of a number of justices of the High Court, including but not limited to a majority of the Court in IAC (Leasing).. 107 It is convenient, however, to begin with the House of Lords decision in Export Credits. The case, which had a degree of commercial complexity, concerned the building and financing of an oil refinery in Newfoundland. A Newfoundland company entered a construction contract with the third defendant, which was a subsidiary of the second defendant, which was in turn a subsidiary of the first defendant. The first defendant gave a number of guarantees of performance of the refinery when constructed. The Newfoundland company issued promissory notes with different maturity dates to a banking consortium which provided funds to it to pay the third defendant for the progressive construction of the refinery. Payment of the promissory notes was guaranteed by the plaintiffs who were paid a premium of £1 million by the defendants under a premium agreement. In the premium agreement, the defendants promised (by cl 7(1)) that they would reimburse the guarantor plaintiffs in respect of sums paid under the guarantee in the event of dishonour of the notes by the Newfoundland company if the defendants were in breach of any of their contractual obligations, including the construction contract. The notes were dishonoured; the plaintiffs paid under the guarantee; the plaintiffs alleged that the third defendant was in default under the construction contract and sought reimbursement. Clause 7(1) was alleged, by the defendants, to be a penalty and unenforceable. 108 At first instance, Staughton J recognised the improvidence of the bargain undertaken by the defendants, in particular because of the need only for a trivial breach of the building contract to exist for the plaintiffs to be able to recover their guarantee payments from the defendants (for the risk of which they had been paid a significant premium). Staughton J analysed the circumstances of payment as other than one for breach of the premium agreement. After referring to Alder v Moore and Re Apex, Staughton J quoted extensively from the unreported decision of the Court of Appeal in 1962 in Philip Bernstein (Successors) Ltd v Lydiate Textiles Ltd. There, Diplock LJ, well alive to the debate concerning Re Apex and the question of payment conditioned on the occurence of an event rather than on breach and writing after Bridge v Campbell Discount had approved Cooden Engineering, said the following (cited by Staughton J at [1983] 2 All ER 212-213): In the ordinary way a penalty is a sum which, by the terms of a contract, a promisor agrees to pay to the promisee in the event of non-performance by the promisor of one or more of the obligations and which is in excess of the damage caused by such non-performance. When there is such a stipulation in a contract, then the question arises whether that provision is a genuine pre-estimate of the damages which will be sustained on a breach, in which case it is enforceable, or whether it is a penalty, in which the court will grant relief against it and refuse to allow the promisee to recover more than the actual damage which he has sustained. … Gorman J in a careful and considered judgment referred to the cases, starting with Re Apex Supply Co Ltd … in which a distinction has been drawn by the courts between payment which by the terms of the contract a party undertakes to make in a specified event and payments which he undertakes to make on breach of a contract. Those cases, which I need not repeat, for they are set out in the judgment, in the view of Gorman J, and in my view rightly, draw a distinction between those two types of payment, and, to use the words I think [counsel for the second defendant] adopted from Hodson LJ in an earlier case, hold that the former type of payment does not fall within the penalty area. [Counsel for the second defendant] concedes that there is no case in which it has been held that a payment to be made on a specified event not being a breach by the promisor of his own contract is a penalty or can be treated by the courts in the same was as a penalty. The ordinary rule which the courts apply is that contracts should be enforced, pacta sunt servanda , unless they can be brought within the limited category of cases in which, for reasons of public policy, the court refused to give effect to the agreement of the parties. One limited class and well-known class is the class of penalty, but up till now it has been restricted to cases where there is a prior agreement by the parties to the contract as to an amount to be paid by a party in breach to the other party in respect of that breach. Since the judgment of Gorman J there has been some discussion of the nature of penalties in the recent case in the House of Lords of Bridge v Campbell Discount Co Ltd … but speaking for myself I can find nothing in the decision in that case and nothing in the speeches of any of their Lordships, with the possible exception of Lord Denning, which throws any doubt on the rule accepted by Gorman J that the penalty area is limited to the narrow field which I have described. There are, it is true, in the speech of Lord Denning certain observations which suggest that that field should be extended … But those observations find, so far as I can see, no support in any other of the speeches of their Lordships, and, for my part, I think the law is well settled as to what the penalty area is. What, in effect, the parties agreed here, and this was a dealer bargaining with a hire-purchase company, was that in certain events, namely a failure by a hirer to pay an instalment, the dealer should pay a sum specified in the contract and the finance company should assign its rights to the dealer. It may be that that was an improvident bargain. Whether it was depends on all the terms and not on an isolated clause. But one does not relieve against bargains merely because they are improvident when they are entered into between parties at arm's length, as these two were. In my view, the judgment of Gorman J was right. This was not a penalty and clearly, I think, did not fall within the penalty area. I, for my part, am not prepared to extend the law by relieving against an obligation in a contract entered into between two parties which does not fall within the well-defined limits in which the court has in the past shown itself willing to interfere. (Emphasis added) 109 In the Court of Appeal, Waller LJ cited the emphasised part of the above passage from the judgment of Diplock LJ in Philip Bernstein, and then continued at 215: No case has been cited to us in which these principles have been departed from. A distinction is drawn in the cases, however, where the sum of money is payable on the happening of an event: see for example Re Apex Supply Co Ltd … Alder v Moore … and the Philip Bernstein case. Where the contract provides for a sum of money payable on the happening of an event no question of a penalty arises and the court will not grant any relief. See also Bridge v Campbell Discount Co Ltd … where the distinction was drawn between the exercise of an option and a genuine pre-estimate of damage for breach of contract. If the sums payable are by reason of the exercise of an option the penalty clause provisions would not apply. 110 Likewise, Slade LJ applied Diplock LJ in Philip Bernstein at 217 and 218-219, stating for himself at 217: Nevertheless, the mere fact that a person contracts to pay another person, on a specified contingency, a sum of money which far exceeds the damage likely to be suffered by the recipient as a result of that contingency does not by itself render the provision void as a penalty. This is shown quite clearly for example by the decisions of Simonds J in Re Apex Supply Co Ltd … and of this court in Adler v Moore … The type of provision for payment in a contingency which the court will or may regard as a penalty is to be found conveniently summarised in the passage from the judgment of Diplock LJ in Philip Bernstein (Successors) Ltd v Lydiate Textiles Ltd … in the Court of Appeal, which Waller LJ has already quoted. It is implicit in this statement of principle that, in the ordinary way, a penalty is a sum which, by the terms of a contract made between A and B, A agrees to pay to B in the event of non-performance by A of one or more of A's obligations under that contract with B, and which is not a genuine pre-estimate of the damage which is likely to be suffered by B in the event of such breach. Sir Sebag Shaw agreed. 111 In the House of Lords, the only opinion delivered was that of Lord Roskill (with whom Lord Diplock, Lord Elwyn-Jones, Lord Keith of Kinkel and Lord Brightman agreed). Lord Roskill's examination of the clause led him to conclude that it could not be a penalty, given that all that the clause was intended to do was to see the plaintiffs recompensed for their loss. The clause was not intended as an enforcement of the building contract, but rather as the basis for recovery of their outgoing. The primary judge made this point about the case, and legitimately so. However, the approach of Staughton J and the Court of Appeal and their clearly expressed views as to the limits of the law of penalties were expressly and clearly approved by Lord Roskill at 224, in the following terms: My Lords, I have arrived at this conclusion in complete agreement with the courts below and for the same reasons, simply as a matter of the construction of the premium agreement, and that is sufficient to dispose of this appeal. But both courts below relied on a virtually unreported decision of the Court of Appeal in Philip Bernstein (Successors) Ltd v Lydiate Textiles Ltd ... The court consisted of Ormerod, Danckwerts and Diplock LJJ. Your Lordships' House has recently, and since the judgments given in the courts below, strongly deprecated the citation of unreported decisions of the Court of Appeal, and Berstein's case is such a decision. I therefore only refer to it because the judgments below contain substantial extracts from the judgment of Diplock LJ, who spoke for all the members of the court. Those extracts show that the view then taken by the Court of Appeal is in entire conformity with the view of the law which I understand all your Lordships to take and which I have endeavoured to express without reference to that unreported decision. I would only add that I entirely agree with the concluding observation of Diplock LJ in that case. "I, for my part, am not prepared to extend the law by relieving against an obligation in a contract entered into between two parties which does not fall within the well-defined limits in which the court has in the past shown itself willing to interfere." I would respectfully and gratefully adopt that statement as my own. 112 When one appreciates the approach of the lower courts in Export Credits, the expression of view of the House of Lords is a powerful statement as to the limits of the doctrine of penalties as arising from the consequences of breach of contract, as to the public policy of keeping commercial parties to their bargains and consequently in keeping a doctrine having the consequences of voidness or unenforceability of terms bargained for within strict and clearly identifiable limits. 113 This last-mentioned policy was also been clearly stated recently by the High Court in Ringrow at 224 CLR 669 [31] and [32] where Gleeson CJ and Gummow, Kirby, Hayne, Callinan and Heydon JJ in a joint judgment said: [31] Thirdly, consideration of the purpose of the law of penalties shows why this must be so. The law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships. As Mason and Wilson JJ observed in AMEV-UDC Finance Ltd v Austin : "[T]here is much to be said for the view that the courts should return to ... allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterised as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach." [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, it sits uncomfortably in the present context. (Footnotes omitted) 114 In Ringrow, their Honours had earlier said at [10]: [10] The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach. It can be accepted that this was stated as the "standard application". A qualification to this expression has already been seen in relation to the transfer of property. 115 In Ringrow, their Honours at 662 [11] set out the well-known passage from Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87, which I have set out above. It is sufficient to say that the formulated expression was in terms of the consequence of breach of contract. In Ringrow, their Honours expressed the view at 663 [12] that the appeal before them was not the occasion for any reassessment of the Australian law of penalties by reference to the contemporaneous marketplace (citing the reference to the page of AMEV-UDC v Austin containing the passage their Honours later set out at 669 [31], see above). In this context, their Honours also referred to pages in O'Dea at 400 (per Deane J) and AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Limited (1989) 15 NSWLR 564 at 566 and 574 dealing with the correct test for assessing the extravagance of the penalty, a subject to which it will be necessary to return. 116 Whilst dealing with this aspect of Ringrow, it is convenient to say something of the judgment in the Federal Court. Ringrow was an appeal from the Full Court of the Federal Court ([2004] FCAFC 206; 209 ALR 32). In the Full Court, Conti and Crennan JJ at 73 [109] adopted the reasons for judgment of the primary judge (Hely J), which, relevantly, they had set out at 60 [72]. With respect to their Honours, it is convenient to express the reasons of Hely J in his Honour's own words to appreciate the clarity of what Conti and Crennan JJ relevantly took the law to be (and upon which no doubt was cast by the High Court). In [2003] FCA 1297; 203 ALR 281 at 301-302, Hely J said at [97]-[100]: [97] The modern rule against penalties is a rule of law: AMEV-UDC Finance Ltd v Austin … . The sphere of operation of the penalties doctrine is limited to payment of agreed sums or transfer of property upon a breach of contract: Rossiter, Penalties & Forfeiture , 1992, p 66. A clause providing for a payment of an agreed sum on termination of a contract (in itself not an event of breach) is still within the reach of the penalties doctrine if one of the grounds on which the agreement may be terminated is breach: O'Dea v Allstates Leasing System (WA) Pty Ltd … ; Lanyon, "Equity and the Doctrine of Penalties" (1996) 9 JCL 234 at 235. [98] Although the principles as to relief against forfeiture and penalty clauses stem from a common origin, there is a distinction between a "penalty" and a "forfeiture". A penalty is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation. Forfeiture, on the other hand, involves the loss or determination of an estate or interest in property or of a proprietary right in consequence of a failure to perform a covenant: Legione v Hateley … . Relief may be granted against forfeiture whether or not the condition producing the forfeiture is penal in character: Legione v Hateley … . Risk of forfeiture may be a strong inducement to completion of a contract, but a clause which provides for recision [sic] of a contract for fundamental breach and the forfeiture of the purchaser's interest which it entails is not a penalty or in the nature of a penalty: Legione v Hateley , above, at 445–6. [99] Whether a provision is a penalty is to be judged at the time of the making of the contract, and not as at the time of breach. The issue is a matter of substance rather than of mere form, and depends upon all the surrounding circumstances existing at the time of the making of the contract, as well as on the terms of the contract itself: O'Dea … If a provision is a penalty it is unenforceable, or enforceable only to the extent of the loss which the innocent party can prove to have been caused by the breach in question. That result is not dependent upon the exercise of a judicial discretion. It flows automatically from the decision that the clause is penal. The circumstances of the default are irrelevant to the operation of the penalties doctrine. However, the grant of relief against forfeiture does involve the exercise of a judicial discretion, and the circumstances in which the forfeiture occurred are highly relevant to the exercise of that discretion. [100] A stipulation may be penal in character even where the penalty is not expressed in terms of money. So much was conceded in Forestry Commission (NSW) v Stefanetto … . Jobson v Johnson … and Wollondilly Shire Council v Picton Power Lines Pty Ltd … are each authority for the proposition that the penalty doctrine is not confined to clauses providing for the payment of money, but extends to clauses providing for the transfer of moneys worth. See, generally, Rossiter, above, p 78 and the following paragraphs. 117 It is convenient at this point to say something of the proper approach to be adopted in the analysis and deployment of the legal authorities. The existence of an accepted body of authority, concerning the Australian common law (using that term in the wide sense of general law, including equitable principle), including one or more intermediate appellate courts of different precedential hierarchies in Australia should, generally, be followed by a judge sitting at first instance unless High Court authority clearly directs to the contrary: Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; 230 CLR 89 at 151-152 [135]. Also relevant in this context is what was said by Lord Simon of Glaisdale in Miliangos v George Frank (Textiles) Ltd [1976] AC 443 at 478 and Proctor v Jetway Aviation Pty Limited [1984] 1 NSWLR 166 at 177-180. These latter two cases are not directly relevant, because they were dealing with directly binding authority in the relevant hierarchy. Taken together with what was said in Farah Constructions, they reveal, however, the caution with which a judge at first instance should approach the task of setting to one side persuasive authorities in other relevant hierarchies on the basis that they are said not to have correctly distinguished or interpreted earlier authority. This is even more so if there exists a unanimous and powerfully expressed opinion of the House of Lords to the same effect as the Australian appellate authorities. 118 Here, the House of Lords (including Lord Diplock) clearly adopted the reasoning of the Court of Appeal which in turn had clearly adopted the reasoning and approach of Lord Diplock when on the Court of Appeal in 1962 in Philip Bernstein, which in turn had taken into account the English jurisprudence up to and including the House of Lord's decision in Bridge v Campbell Discount. 119 The primary judge's discussion of the English authorities at [20]-[43] of his reasons does not, in my view, give sufficient weight to the clarity of expression of principle by the House of Lords in Export Credits. Whatever might be taken from the judgment of Diplock LJ in Financings Ltd v Baldock (after Philip Bernstein), the clarity of the statement of principle in Export Credits (and the concurrence of Lord Diplock) tells powerfully against the use of these earlier English authorities to support the development (by expansion) of the law of penalties. 120 In Australia, at the intermediate appellate court level, I have already referred to the reasons of Conti and Crennan JJ in Ringrow. The reservation that can be seen in the High Court's reasons in Ringrow at 670-671 [37]-[38] about one aspect of the judgments of Hely J and Beaumont J, does not detract from the statement of principle by Hely J (adopted by Conti and Crennan JJ) to which I have earlier referred. 121 In Bartercard v Myallhurst, Thomas JA (with whom Davies JA and Ambrose J agreed) said the following at [27]-[28]: [27] In the AMEV-UDC Finance case Mason and Wilson JJ recognised the desirability of courts allowing parties greater latitude in determining the terms of their contract than had been permitted at various times during the evolution of this part of the law. Their Honours observed: "Equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term." Their Honours continued: "The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract. The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties." The present case reveals no aspect of unconscionability, oppression or undue advantage. The learned judge at first instance correctly declined to identify the relevant contractual term as a penalty. [28] It is unnecessary to discuss the matter at greater length. The above considerations are in my view the essential ones that lead to the conclusion that cl 34(a) is not void as a penalty. It is also unnecessary to deal with an alternative point raised below and only faintly argued here on behalf of Bartercard to the effect that the right to the payment arose not by reason of Myallhurst's breach, but by reason of termination of the contract, which, it submitted was a provision for payment of money on the occurrence of a specified event rather than upon breach. There is authority that such provisions are not penalties because they do not provide for an agreed payment in advance in respect of a breach. (Footnotes omitted; save that Export Credits was cited as authority for the last sentence.) 122 Davies JA added the following comments of his own: [2] … It now appears to be accepted that where a right to terminate a contract and to receive a payment arises on the happening of any of a number of events some only of which are breaches of contract it is only where the termination is in consequence of breach that the question of penalty can arise. ( Export Credits was amongst the citations for this comment.) 123 The primary judge disagreed with these statements partly because of his view as to the true import of what was said by Gibbs CJ in O'Dea and Mason and Wilson JJ in AMEV-UDC; partly because of his Honour's analysis of Bridge v Campbell Discount; and partly because of his distinguishing of Export Credits and the lack of authoritative adoption of it by the High Court. 124 I will come to the High Court authorities in a moment, but the Queensland Court of Appeal's reliance on Export Credits was, for the reasons that I have given, legitimate. 125 The expression of the principle by Handley JA (with whom Meagher and Clarke JJA agreed) in Wollondilly at 555 was also in terms of payment or transfer on breach. I have already referred to the Full Court in Ringrow. 126 Intermediate appellate courts in Australia have dealt with the governing principles of the law of penalties on the basis that payment being conditioned on a breach of contract is an essential element. 127 It is also to be noted that Export Credits has been applied, without qualification, by the British Columbia Court of Appeal: Cunning v Riddell 1990 CanLII 854; and Doman Forest Products Ltd v GMAC Commercial Credit Corp 2007 BCCA 88; (2007) 29 BLR (4th) 1, in support of the proposition that payment conditioned on a breach of contract is an essential element of a penalty. 128 It is now necessary to say something about the High Court authorities. In IAC (Leasing) at 142-143 Walsh J (with whose reasons McTiernan J agreed, Barwick CJ giving his own separate reasons on the penalty question) in discussing a clause in a leasing agreement that provided for the financial consequences of return of the goods by the hirer, noted the conclusion of the House of Lords and Court of Appeal in Bridge v Campbell Discount and Cooden Engineering, respectively. Walsh J then continued at 143: But 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. 129 In O'Dea, at 367-368, Gibbs CJ, as the primary judge said, left open the question whether Associated Distributors v Hall was correctly decided and did not express any opinion on In re Apex and Alder v Moore beyond agreeing with Bridge v Campbell Discount and Cooden that these authorities did not prevent a payment on termination for breach being a penalty, even if the right to terminate could arise from circumstances not amounting to a breach. At 390, however, Brennan J said by reference to what Walsh J had said in IAC (Leasing): 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. 130 In AMEV-UDC at 184, Mason and Wilson JJ said the following: 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 … : see also IAC (Leasing) … . 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 … . Unfortunately the proposition that the doctrine of penalties has no operation in relation to a sum agreed to be paid on the happening of an event which is not a breach of contract generates difficulties when an attempt is made to apply the proposition to the exercise of an option to terminate a contract which is conditional upon, or associated with, a breach of contract. (Footnotes omitted) Their Honours then (at 184-185) discussed the "difficulties" as resolved by Bridge v Campbell Discount , Cooden and O'Dea. Their Honours then (at 185-186) discussed the criticism by Lord Denning of the restricted view of the doctrine of penalties, later vindicated in Export Credits ; and (at 186-190) discussed the historical devleopment of the doctrine of penalties (calling it "a tortuous path in the course of its long development"). At the conclusion of this survey their Honours stated that five points emerged from their historical review, the fifth of which I have set out at [52] above. 131 The primary judge placed significant emphasis on this last-mentioned paragraph in Mason and Wilson JJ's historical summary for his conclusion that the doctrine of penalties was available in the absence of breach. In my respectful view, this historical review by Mason and Wilson JJ and this last paragraph by way of summary do not support this conclusion. Six pages before, their Honours had referred with apparent approval to Export Credits and Walsh J's comments in IAC (Leasing) at 143. Their Honours began their historical reviews by stating at 186: "…it is a risky enterprise to construct an argument on the basis of the old decisions." The 18th century case of Hardy v Martin (1783) 1 Cox 26; 29 ER 1046 to which reference was made in the last paragraph of the summary at 190, was a case in which a covenant in restraint of trade upon sale of the business was the substance of the penal bond, though no express covenant was in the sale. (It is not clear from the report whether the sale was documented.) In these circumstances, plainly, the payment under the bond was conditioned on a breach of a covenant and was treated by Lord Loughborough as such: 1 Cox at 27; 29 ER at 1047. I do not see what appears after 162 CLR 184 as lessening the effect of what their Honours said at 184 in accepting the correctness of the requirement of breach by Export Credits and by Walsh J's views in IAC (Leasing). I certainly do not see these reasons of Mason and Wilson JJ as supporting the views of Lord Denning in Bridge v Campbell Discount as the primary judge said at [69] of his reasons. 132 I have already set out the passages in the reasons of Deane J (in dissent) which the primary judge (correctly) took as support for his formulation of principle. 133 Dawson J (also in dissent) at 210-211 referred to Cooden Engineering, Bridge v Campbell Discount and O'Dea and their rejection of the proposition that payment upon exercise of a right to terminate for breach should be distinguished from payment upon breach. He then said at 211: 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… He cited Bridge v Campbell Discount and Export Credits . 134 Three justices in AMEV-UDC (one of whom was, however, in dissent) can be seen to adhere to the correctness of Export Credits; and two to the correctness of the comments of Walsh J in IAC (Leasing). Taken together with IAC (Leasing) itself, this does not, in my respectful view, permit the fashioning of a principle squarely based on the dissenting views of Deane J, which went beyond the boundaries of the doctrine expressed in modern times by the High Court (in IAC (Leasing) and three justices in AMEV-UDC), by the House of Lords in Export Credits and by intermediate appellate courts in Australia and Canada. Some other cases 135 It is necessary to deal with some other cases referred to by the primary judge and by the parties in argument. 136 The primary judge referred to four decisions concerned with the meaning of "breach of … condition" in the Law of Property Act 1925 (UK), s 146 and the Conveyancing Act 1919 (NSW), s 129: Halliard Property Co Ltd v Jack Segal Ltd, Cadogan Estates Ltd v McMahon, Della Imports Pty Limited v Birkenhead Investments Pty Limited and Wynsix Hotels (Oxford St) Pty Limited v Toomey. The purpose of the reference to these was to draw analogical support for the viewing of an "event of default" (without any express promise that it would not occur) as the basis for the operation of the doctrine of penalties. With respect, little can be taken from these cases. They all involve a purposive and beneficial construction of the relevant statutory provision. That is especially so in the case of Della Imports, which, if I may respectfully say (without being taken to have finally decided the question), appears to be the preferable construction of s 129. McLelland J's approach obviates the need for the strained contractual analysis evident in, at least, Cadogan Estates. 137 Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 was relied on by Integral. This involved a building contract and a sub-contract. A provision of the sub-contract entitled the contractor upon any default by the sub-contractor to withhold or suspend payment of moneys in the contractor's hands paid by the employer to the contractor as due to the sub-contractor. The provision was said to be unenforceable as penal: Lord Reid at 698, Lord Morris of Borth-y-Gest at 703, Viscount Dilhorne at 711. The clause was predicated on breach. It takes this part of the discourse no further. It does support, however, the proposition that forfeiture of property can fail within the doctrine of penalties. 138 In Bysouth, one element of cl 11 was the opinion of the Superintendent as to breach. Other aspects of cl 11 were founded on breach. No point was taken in argument that the clause was conditioned on an event rather than breach. The case cannot be taken as a foundation for a legal proposition as to the availability of the doctrine of penalties wider than that which I have expressed – as founded on breach of contract. Was there a breach of contract here? 139 Can it be concluded here (in the present state of the litigation) that there has been a breach of contract by Integral? In my view, no. The express obligations of Integral were set out in cl 6. They included an obligation in cl 6.2(b) "to act honestly in its dealings with all parties and not engage in misleading, deceptive or unethical conduct." The consequences of breach of this clause will often be found in the first branch of cl 20.1(c), though this need not be so. One can be misleading, without being dishonest or deliberately deceptive. 140 The second branch of cl 20.1(c) rests upon the existence of an opinion which must be reasonable, and so must have a reasonable foundation. That Interstar has formed this opinion reasonably does not mean, however, that Integral has been deceptive or fraudulent. There may have been a misunderstanding, matters may not be as they reasonably seem. As I earlier said, the kind of evidence to found fraud, and the kind of evidence to found an opinion that fraud has occurred may well be of a quite different character. To a significant degree, however, Integral has power or capacity to ensure that its conduct (in the extended sense including "Originator's Representative") is honest and not deceptive. It can put in place business and organisation systems and take care in those whom it engages. In that broad sense, it can be said that the subject matter lay within the "area of obligation" or "responsibility" of Integral. But there is no term, and in my view none would be implied, that it undertook a contractual obligation (sounding in damages) that there would be no circumstance during the life of the agreement that would give a reasonable basis for an opinion that it or any "Originator's Representative" had "engaged in deceptive or fraudulent activity in relation to an Application for a Settled Loan". 141 Thus, in my view, the law of penalties did not make unenforceable the second branch of cl 20.3(c), based on the event or circumstance in the second branch of cl 20.1(c). Were the consequences extravagant? 142 If I be wrong, either in my conclusion that there was no breach of contract, or in my view that the primary judge expressed the principle too broadly in [75] of his reasons, it is necessary to say something of the consequences of breach or the failure to fulfil the obligation or responsibility to which the primary judge referred. 143 The consequences in cl 20.3(c) were not expressed in terms of satisfaction of damage, whether as a liquidated damages clause or otherwise. The contractual expression of the parties is in terms of entitlement to the relevant fees. Nevertheless, if there is to be implied into the agreement a contractual term of the nature referred to above, or if one is to focus on an occurrence within the field of responsibility of a party, one needs to assess what might be the consequences of such a breach or occurrence and the value or worth of the stipulated payment, transfer or forfeiture. 144 In Ringrow, the High Court stated (at 224 CLR 662) as the law applicable in this country passages from Dunlop Pneumatic Tyre which included paragraph 4 of Lord Dunedin's speech, concerning the relationship between the payment and the consequence of breach. I have earlier (see [31]) set out the extensive citation of Lord Dunedin's speech cited by the High Court, which contained paragraph 4. 145 These passages, especially 4(a), taken from Lord Dunedin's speech, should be understood in the light of the balance of the judgment in Ringrow. The Court rejected the proposition that a notion of "proportionality" of consequences with legitimate commercial interests of the parties governed the assessment of the consequences of the breach and the payment: see 224 CLR 667-669 [26]-[32]. 146 In addition to the passage from Lord Dunedin's speech in Dunlop Pneumatic Tyre, the Court in Ringrow referred (at 667-668 [27] and 669 [31]) to passages in the joint reasons of Mason and Wilson JJ in AMEV-UDC at 190 and 193. The Court said at 669 [32] that the "propounded penalty must be judged 'extravagant and unconscionable in amount' "; it not being sufficient "that it should be lacking in proportion". Rather it must be "out of all proportion". It is this disproportion expressed in terms of "exceptional language" that must be shown. A question arises, however, from Ringrow as to what is the comparator to assess the relevant degree of disproportion (that is "extravagant and unconscionable"). The comparison posited by Lord Dunedin was between the stipulated sum and "the greatest loss that could conceivably be proved to have followed from the breach". The comparison posited by Mason and Wilson JJ in AMEV-UDC was between the stipulated sum and the "damage likely to be suffered as a result of the breach." 147 It should first be recognised, in this regard, that at 663 [12] the Court in Ringrow expressly adopted the passage from Lord Dunedin's speech as continuing "to express the law in this country" until any reconsideration by the High Court. 148 Also, the context of the reference to the views of Mason and Wilson JJ in AMEV-UDC was in rejecting the proportionality argument. It is not clear that any derogation from Lord Dunedin's formulation was intended: and, given the express adoption in [12], any derogation from Lord Dunedin's formulation is unlikely to have been intended. 149 In this context, paragraph 4(a) of the extract from Lord Dunedin's speech cited should also be read with what his Lordship said in the same case two pages later at 89, as follows: I think Elphinstone's Case … or rather the dicta in it, do go this length, that if there are various breaches to which one indiscriminate sum to be paid in breach is applied, then the strength of the chain must be taken at its weakest link. If you can clearly see that the loss on one particular breach could never amount to the stipulated sum, then you may come to the conclusion that the sum is penalty. But further than this it does not go; so, for the reasons already stated, I do not think the present case forms an instance of what I have just expressed. 150 The expression of view by Mason and Wilson JJ in AMEV-UDC at 189-190 was in the context of preferring the approach in Clydebank Engineering and Shipbuilding Co Limited v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 and Dunlop Pneumatic to that in more recent decisions such as Cooden Engineering, which struck down provisions for payment "merely because it may be greater than the amount of damages which could possibly be awarded for breach of contract": see AMEV-UDC at 190. Mason and Wilson JJ then said at 190, referring first to Cooden and the more recent decisions: These decisions are more consistent with an underlying policy of restricting the parties, in case of breach of contract, to the recovery of an amount of damages no greater than that for which the law provides. However, there is much to be said for the view that the courts should return to the Clydebank and Dunlop concept, thereby 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: see Robophone Facilities Ltd v Blank; UK Law Commission , pars 33, 42-44. (Footnote omitted) 151 It can be taken as clear from Ringrow, Dunlop Pneumatic and Mason and Wilson JJ in AMEV-UDC that what might be called the "weaker test" in Cooden Engineering and in WT Malouf Pty Limited v Brinds Ltd (1980) 52 FLR 442 at 462 (per Samuels JA with whom Hope JA agreed) is not the law. This was a view reached unanimously by this Court in AMEV Finance v Artes Studios (Kirby P, McHugh JA and Clarke JA). 152 The relationship between the passages in paragraphs 4(a) and 4(c) in Lord Dunedin's speech and the further comments of Lord Dunedin at [1915] AC 89 were (if I may respectfully say so) helpfully discussed by Clarke JA in AMEV Finance v Artes Studios at 573-574. Where the sum is payable for more than one breach (some of which breaches are trivial and some of which are not), it may be that, looked at objectively, the provision for the stipulated sum will be penal. (The position of the finance lease and the prescription of a sum on termination for the loss flowing from termination may be judged not by reference to the triviality or not of default, but by reference to the consequences of early termination: Clarke JA in AMEV Finance v Artes Studio at 74F-75B). However, where the sum payable is for a breach, the approach is as described by Lord Dunedin in paragraph 4(a). As Brennan J said in Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 at 143: To apply this test, it is necessary to identify the breach prescribed by the clause which imposes the supposed penalty and to ascertain the measure of loss which might follow from that breach. 153 I do not see this as, in substance, different from the expression of the test by Mason and Wilson JJ in AMEV-UDC or Clarke JA in AMEV Finance v Artes Studios at 578 each of whom used the concept of the damage "likely" to follow from the breach. "Likely" can be seen in terms of foreseeable or contemplated damages: cf Lord Parmoor in Dunlop Pneumatic at 100-101; Clydebank at 10-11 (Earl of Halsbury LC) and 17 (Lord Davey); and Robophone Facilities Ltd v Blank [1996] 1 WLR 1428 at 1447-1448 (Diplock LJ). Given that it is necessary to assess the penal character of the clause at the time of contract formation, these differences in expression are unlikely to be significant. In any event, the Court in Ringrow has clearly adopted paragraph 4(a) in Lord Dunedin's speech, which, in my respectful view, was accurately paraphrased by Brennan J in Esanda Finance v Plessnig. 154 The primary judge dealt with the question of the consequences of the operation of cl 20.3(c) and damages at [77]-[78] which I have earlier set out. There are a number of difficulties with these paragraphs. First, they combine breach for fraud, the event of insolvency and the event of the opinion of Interstar. Secondly (and somewhat inconsistently), cl 20.3 (c) is treated not as a breach, but as an event unrelated to possible damages. Thirdly, insofar as damages from insolvency or fraud are contemplated, they are restricted to the kinds of costs of substituted management set out in cl 20.3(b). 155 Taking the first branch of cl 20.1(c) and the operation of cl 20.3(c), it cannot be said, at least at the time of contract formation, that the loss of the fees contemplated by cl 20.3(c) would be extravagantly and unconscionably disproportionate to the damage that could be caused to Interstar from the perpetration of deceptive or fraudulent activity. The very nature of the business anticipated by the agreements is of a co-operative kind in which significant reliance can be seen to be placed on Integral, its competence and integrity in seeking out and gaining borrowers for a financing and mortgage business. The damage that could be caused to Interstar (in particular to its business reputation) from deceptive or fraudulent conduct of Integral or its representatives could be enormous. 156 It is true that the financial consequences of the operation of cl 20.3(c) are not expressed as liquidated damages. If, however, contrary to the words of "entitlement" as employed by the parties, cl 20.3(c) is to be viewed as the forfeiture of accrued rights upon breach or an event of default, the assessment of the clause's validity by reference to the law of penalties should be made by reference to paragraph 4(a) in Lord Dunedin's speech. Doing so, cl 20.3(c) has not been shown to have penal consequences insofar as it operates by reference to the first branch of cl 20.1(c). 157 As to the operation of cl 20.3(c), insofar as it operates by reference to the second branch of cl 20.1(c), the same conclusions follow. If one views that part of cl 20.1(c) not as an event, but as a provision within the responsibility or obligation of Integral, one must (as the primary judge did at [75] of his reasons) examine the damage which might be suffered by Interstar by reason of the "occurrence or default". If there are circumstances apparent to Interstar which are a reasonable foundation for an opinion that Integral or its representatives has or have engaged in deceptive or fraudulent activity, that may well be productive of significant damage to Interstar (including Interstar's business reputation). It has not been shown that (judged at the time of contract formation) the forfeiture of commissions, at any time in the future, would be extravagant and unconscionable. 158 The same conclusion applies to cl 20.3(b) operating by reference to cl 20.1(a). An "Insolvency Event" occurring to a company (Integral) acting as one of its originators could, likewise, cause significant damage to Interstar's business. General 159 The issues in this appeal raise or may raise important questions for commercial law, the common law and equity, and the relationship of all three to each other. If I may respectfully say (though I have the misfortune to disagree with him) the primary judge's thoughtful reasons highlight the potential tension between different approaches in this field. In my view, as I have attempted to explain, the weight of existing authority (underpinned by a recognition of the need for clarity and certainty and by a respect for the bargains of parties) is to limit the doctrine of penalties within narrow and clear boundaries. This is especially important given its roots in public policy that there is something inherently wrong in such an aspect of the bargain and given the consequences of its engagement: voidness and unenforceability of a bargained for term. The role or place of equity and relieving parties from injustice or unconscionable bargains or from unfair forfeitures is most effectively brought about by judging the operation of the clause or provision in the light of principles of relief against forfeiture, unconscionable bargains, any found obligation of good faith or such other consideration. This approach would enable an approach to be taken to the justice of the case by reference to an analysis of the behaviour of the parties and the circumstances at the point of asserted breach or forfeiture. 160 The consideration of the above matters, of the relationship of penalties to relief against forfeiture and of the existence (or, perhaps, renewed recognition) of equity's role in the doctrine of penalties are matters for doctrinal consideration which will inevitably involve reconsideration of High Court authority, including IAC (Leasing) and AMEV-UDC. Therefore, it is a task for the High Court, not this Court, and not a judge at first instance. 161 It is to be recalled that in this case, the primary judge expressly did not consider, and the pleader did not invoke, relief against forfeiture. Conclusions 162 For the above reasons I conclude that cl 20.3(c) is not a penalty. Accordingly, the orders that I would make are: (a) The appeal be allowed. (b) The declarations and orders made by the Court in paragraphs 3, 4, 5, 6 and 7 of the orders made on 3 July 2007 and entered on 4 July 2007 be set aside. (c) The answers to the questions reserved for separate determination before trial of any other question be recorded as: (1) No and (2) No. (d) The respondents pay the appellants' costs of the appeal. (e) Otherwise remit the proceedings to Brereton J for hearing of the issues not determined by the appeal, including the costs of the separate hearing at first instance. 163 GILES JA: I agree with Allsop P. 164 IPP JA: I agree with Allsop P. ********** 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.