King of the Pack Pty Ltd v Luong [2011] NSWLC 30

Local Court New South Wales

Medium Neutral Citation: King of the Pack Pty Ltd v Luong [2011] NSWLC 30 Hearing dates: 04/03/2011; 01/04/2011; 26/08/2011 Decision date: 23 September 2011 Jurisdiction: Civil Before: Magistrate Brown Decision: Judgment for the defendant. The plaintiff to pay the defendant's costs as agreed or assessed. Catchwords: CONTRACT LAW - franchise contract - clause providing for 'early termination fee' - whether a penalty at common law or genuine pre-estimate of damage Cases Cited: AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Fermiscan Pty Ltd v James [2009] NSWCA 355 Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd [2008] NSWCA 310 O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 Category: Principal judgment Parties: King of the Pack Pty Ltd (the plaintiff) Van Hoa Luong (the defendant) Representation: Sneddon for the plaintiff Wood for the defendant File Number(s): 2010/181472

JUDGMENT 1The sole point at issue in the present case is whether the contractual payment provided for in cl 19.5 of the contract is a penalty at common law or not. 2Cl 19.5 provides: 19.5 Early termination In the event that this Agreement is terminated by either party, prior to the expiry of the Term, you must, unless otherwise agreed by the parties, pay us: our Monthly Franchise Fee for the balance of the Term that would have been paid to us had this Agreement not been terminated; and our Early Termination Fee for our reasonable costs of Fixtures, Fittings, Plant and Equipment, which you acknowledge is a fair value for such a loss to our Business System." 3The early termination fee referred to is defined in cl 1.1 as: "Early Termination Fee" means an amount up to the fee specified in Item 18 of the Reference Schedule', and the fee specified in Item 18 is $15,000 (plus GST). 4The basic legal framework of penalties is well settled, and was described as follows in 2005 in the joint judgment of Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 at [10]-[11]: 10. The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach. 11. The starting point for the appellant was the following passage in Lord Dunedin's speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd ([1915] AC 79 at 86-87): "2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ... 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ... 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: (a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach ... (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ... (c) There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage' ( Lord Ephinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 342 per Lord Watson)."