District Court New South Wales Medium Neutral Citation: Circuit Finance Australia Limited (Managers & Receivers Appointed) (In Liquidation) v Sobbi & Anor [2011] NSWDC 157 Hearing dates: 15-16/06/11, 13-15/09/11 Decision date: 22 September 2011 Jurisdiction: Civil Before: Elkaim SC DCJ Decision: See paragraph 41 Catchwords: Interpretation of motor vehicle lease. Legislation Cited: Civil Procedure Act 2005 Contracts Review Act 1980 Cases Cited: AMEV-UDC Finance v Austin (1986) 162 CLR 170 Esanda Finance v Plessnig (1989) 166 CLR 131 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656. Category: Principal judgment Parties: Circuit Finance Australia Limited (Managers & Receivers Appointed) (In Liquidation) (Plaintiff) David Sobbi (First Defendant) Arezoo Chahili (Second Defendant) Representation: B Nolan (Plaintiff) M K Rollinson (First and Second Defendants) Jade Lawyers (Plaintiff) Avondale Lawyers (First and Second Defendants) File Number(s): 2010/00233989 Judgment 1This matter commenced before me on 15 June 2011. The defendants' case was in disarray. The defendants' counsel, who was very recently briefed, struggled to pinpoint his client's case. Ultimately the matter was adjourned to allow the plaintiff to respond to a Further Amended Defence. 2Part of the plaintiff's response was to file a Further Amended Statement of Claim on 27 June 2011. The new pleadings went beyond the Further Amended Defence but no document in response to the plaintiff's new pleading was filed. 3When the matter returned for hearing before me on 13 September 2011 there was a new counsel for the defendants. Mr Rollinson, who had obviously conducted a thorough review of the matter, was able to reduce the issues significantly. 4I was informed by counsel for the defendants that liability was admitted and it was only the measure of quantum that remained in dispute. He further narrowed the dispute on quantum to the following three matters: (a)The construction of a clause in the lease that was the subject of the dispute. (b)Proof of the various amounts asserted by the plaintiff and contained in paragraph 26 of the Further Amended Statement of Claim ("the Statement of Claim"). (c)The applicability of the interest rate dictated by the lease. In particular it was said that the interest rate of 40% should be reduced to 20% and that this variation should be granted pursuant to Section 7(1)(c) of the Contracts Review Act 1980 ("the CRA"). 5The above issues were later further narrowed when the defendants conceded the amounts listed as Particulars in paragraph 26 of the Statement of Claim, other than the $54,627.06 interest component, and also abandoned the attack on the 40% interest rate under the CRA. 6The origin of the dispute is a Lease Agreement ("Lease") executed on 10 March 2008. (The Lease can be found in Exhibit A at page 65.) The plaintiff was the lessor. The defendants are the lessees. The subject of the Lease was a Chrysler limousine. 7The Lease provided for the payment of 48 monthly instalments of $7,566.36 by the defendants to the plaintiff. At the end of the period the vehicle would have an agreed residual value of $22,500.50. 8Clause 4.3 of the Lease prescribed an interest rate of 40% per annum on all moneys in which there had been default in payment. 9Clause 8 allowed the plaintiff to terminate the Lease in the event of a default. The defendants conceded that the plaintiff validly terminated the Lease on 18 January 2010. 10Prior to termination the defendants had been in default of their payment obligations from time to time. The parties agreed that interest had accrued as a consequence of these defaults in the sum of $1,259.14. The plaintiff alleged that as at the date of termination the defendants were in arrears of their rental payments to a total of $7,997.93. The defendants did not agree. It was agreed however that the interest that accrued on the final arrears to the date of termination was $61.35. The total interest to this date was therefore agreed at $1,320.49. 11Following the termination of the Lease, and with the assistance of orders in the Supreme Court, the plaintiff repossessed the vehicle and sold it for $121,316.50. During the currency of the Lease the defendants had made payments of $171,968.61. The total of these two figures ($293,285.11) was accepted by the parties to represent a credit to be applied in the calculation of the plaintiff's damages. 12The plaintiff's claim was for the whole of the rental ($363,185.28) plus the various amounts particularised in paragraph 26 of the Statement of Claim, but reduced by the amounts paid by the defendants together with the proceeds of the sale of the vehicle. The figures in paragraph 26 were amended during the hearing and were ultimately as follows: Residual payment $22,500.50 GST paid by plaintiff $4,356.93 Direct debit fees $104.00 Dishonour payment fees $310.00 Acceptance fee $136.36 Legal fees $40,449.48 Collection costs $4,510.00 Extension fees $100.00 Property search fees $210.95 Bank deposit fees $280.00 Vehicle registration fees $40.00 Valuation fees $765.00 Agreed interest on arrears up to 18/1/10 $1,320.49 Total $75,083.71 13The defendants conceded the plaintiff's entitlement to all of the amounts listed in paragraph 12, above. 14The plaintiff abandoned its claim for interest continuing after 18 January 2010 at 40% per annum. Rather the claim for interest after the date of termination was made pursuant Section 100 of the Civil Procedure Act 2005. The parties agreed that interest should be calculated after I had given my reasons. They also agreed that 10% was an appropriate rate. 15The defendants' concessions left one matter in issue. This was whether the plaintiff's claim could include the whole of the instalments due under the Lease or whether this figure needed to be discounted. This figure, $363,185.28, is produced by the simple calculation of 48 monthly instalments of $7,566.36. The plaintiff says that it is entitled to this figure (less amounts paid or recovered) because it is a "recoverable amount" as defined in clause 1.1(f) of the Lease. 16The defendants submitted that the proper construction of this clause does not entitle the whole of the 48 payments to be brought into account without substantial reduction. 17In reality the dispute was about the payments due after 18 January 2010 to the end of the Lease. This was agreed to be 25 months. The figure is 25 x $7,566.36 = $189,159.00. The plaintiff said the full amount should go into the final calculation of loss. The defendant said the figure should first be discounted. 18Clause 1.1(f) defines recoverable amount as follows: "f. "recoverable amount" means: i. The amount of any rental, stamp duty and other money (including any costs for repossession, storage, maintenance and sale of the goods and any legal costs) then payable under this lease; and ii. The present value at the date of termination of the residual value of the goods and of all rental that would have been payable during the period of this lease but for the termination; iii. In calculating the recoverable amount the Lessor must take account of the proceeds received by it following and sale of the goods. In this case of a termination following a breach of this Lease that amount will be liquidated damages." 19The plaintiff said that a straightforward reading of the above definition includes in the recoverable amount "all rental that would have been payable during the period of this lease but for the termination" (clause 1.1(f)(ii)). This figure, under subclause (iii) is then reduced by the amounts received including the proceeds of sale of the vehicle. 20The defendants submitted that to give the definition the meaning advanced by the plaintiff would be to render the clause an unenforceable penalty. The defendants did not however advance such a finding. Rather the defendants contended that the recoverable amount was not a penalty because the words " the present value at the date of termination ... of all rental ..." meant the value of future rental payments, taken from 18 January 2010 to the end of the term, had to be reduced by an amount representing the " term charges " for the balance of the Lease. These charges were the interest and administrative levies that would have been included in the future payments. 21The defendants dissected the monthly payments to separate principal from interest and other charges. Applying a proportionate calculation it was submitted that the future payments claimed should be reduced by 38.05%. The plaintiff did not contest this assessment of the term charges but rather said there was no basis for any reduction. 22The defendants' submissions relied principally on the following two High Court authorities: AMEV-UDC Finance v Austin (1986) 162 CLR 170 and Esanda Finance v Plessnig (1989) 166 CLR 131. 23The starting point for the defendants' submissions was that the Lease did not, in any term, make the whole of the amount that would ultimately be paid through the four year duration of the Lease, payable on demand. Rather the mechanics of the Lease, submitted the defendants, was that there was an ongoing obligation to make monthly payments as dictated by clause 4 and that, should there be a failure to pay, then clause 8 would apply (in particular clause 8.2) and in turn provide the lessor with a right to terminate under clause 9. Once exercised the lessor could "recover forthwith from the Lessee the recoverable amount as defined in clause 1.1." (clause 9). 24The defendants submitted that the terms of the hire purchase agreement in Esanda Finance were analogous to those in the present case with one significant distinction. This distinction was that the deductions to be made in favour of the lessee in the final accounting of the amount owing to the lessor, following termination because of default by the lessees, included a rebate of term charges calculated in accordance with a particular formula. The High Court found that the amount to be paid under the agreement in question was not a penalty. 25It was submitted that the inclusion of the rebate in respect of term charges, in Esanda Finance, was the essential provision that made the difference between a finding of a penalty or otherwise. This point is clear, it was submitted, for example, from the following passages in the judgment of Gaudron J: "The instalments payable under the agreement are calculated by reference to the purchase price paid for the goods and the terms charges referable to the agreed period of hire. In order to ascertain the outstanding component of the purchase price as at the date of early termination it is necessary that there be some formula for the apportionment of instalments already paid as between terms charges and purchase price. For the latter purpose it is necessary that there also be a formula for the ascertainment of that proportion of the total terms charges referable to the actual period of hire. So long as the formulae involve no imposition of additional terms charges or terms charges for a period extending beyond the time at which the outstanding component of the purchase price is reasonably to be regarded as available to the finance company there can be no question of their operating in a manner penalising the hirer. The rebate formula in cl 13 of the agreement allows for the ascertainment of the terms charges referable to the period from termination until the hiring would have terminated if the agreement had run its course. When that amount is deducted from the total charges (ie purchase price plus total terms charges) there is ascertained an amount which is the sum of the purchase price and the terms charges referable to the actual period of hire. The amount which is disclosed by the deduction of the instalments paid is the outstanding component of the purchase price." 26The defendants submitted that their position was reinforced by the earlier decision of the High Court in AMEV-UDC. The following passages in the judgment of Mason J and Wilson J I think most completely advance the submission made by the defendants: "At first instance the defence that cl 7(ii) gave rise to a penalty, in so far as it imposed a liability on Lithotone to pay the whole of the balance of the total rent, was upheld. Rogers J correctly regarded the recent decision of this court in O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 ; 45 ALR 632 as authority for the proposition that, where a lessee is under no present obligation to pay the entire rent, a provision requiring him to pay the whole of the balance of the rent for the unexpired term, without rebate for accelerated payment of future instalments, on his breach of the agreement in failing to make prompt payment of an instalment of rent, is a penalty if in the circumstances the lessor is entitled to repossess and resell the goods leased and is not bound to account to the lessee for the proceeds of sale, even if they exceed the appraisal or residual value. The point is that such a provision cannot amount to a genuine pre-estimate of damage because it must necessarily exceed by a wide margin the greatest loss which the lessor can suffer as a result of default in payment of instalments. The lessor would receive both the entire rental and possession of the vehicle, which would greatly exceed his damage ( O'Dea (CLR) at 379). The provisions of the lease agreements in the present case are indistinguishable in material respects from those which were considered in O'Dea . As in O'Dea , the clauses governing payment, when read together, created a liability to pay by instalments, with an obligation to pay the whole in the event of default in payment of an instalment. And the effect of the agreements was that, on termination for breach, the appellant was entitled (a) to the whole of the balance of the rent, without rebate; (b) to repossess and sell the goods; and (c) to recover the difference, if any, between the residual value and the proceeds of sale. The draftsman of the agreements did not attempt to take advantage of the decision of this court in IAC (Leasing) Ltd v Humphrey (1972) 126 CLR 131. The comments of Walsh J in that case, at 141-5, indicate that if provision is made for an appropriate rebate of future instalments of rent and for the lessee to have the benefit of any excess of the net sale price over the residual value, so long as it is the subject of a bona fide estimate, the problems encountered in the present case may be avoided." 27The effect of the decisions in Esanda and AMEV-UDC, submitted the defendants, was that the recoverable amount in clause 1.1 of the subject Lease was a penalty unless effect was given to the words "present value" so as to give rise to a rebate for term charges occurring after the "present" . The "present " was the date of termination, namely 18 January 2010. 28The plaintiff's response to the defendants' reliance on the above two decisions was that I should rather be guided by the more recent decision of the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656. 29The plaintiff submitted that, in relation to the present dispute, the following two principles emerged from Ringrow : (a)A calculation of loss would not be a penalty where it was a genuine pre-estimate of damages. A penalty would only arise where it would be harsh and unconscionable to impose an amount that exceeds the amount which would have been paid. I was referred to paragraphs 10 and 11 of the judgment in Ringrow . (b)The identification of a penalty could only be made against the background of the necessities of freedom of contract. This point is succinctly made at paragraph 32 in the judgment in Ringrow . I will quote it: "[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." 30The defendants submitted that if their interpretation of a " recoverable amount " was correct their liability to the plaintiff would be arrived at by the following path: (a)Total these components: The full rent for the 23 weeks before termination (23 x $7,566.36 = $174,026.28) plus the conceded amounts listed in paragraph 12, above ($75,083.71). The sum is $249,109.99. (b)Calculate the balance of the full rental from the date of termination to the end of the Lease (25 weeks x $7,566.36 = $189,159.00). (c)Reduce the figure produced in (b) above by 38.05% to remove the term charges ($189,159 x 61.95% = $117,184.00). (d)Add the total from (a) above to the figure produced in (c) above ($249,109.99 + $117,184.00 = $366,293.99) (e)Reduce the new total of $366,293.99 by the agreed sum of rentals paid by the defendants and the proceeds of sale of the vehicle ($366,293.99 - $293,285.11 = $73,008.88) (f)Add interest pursuant to Section 100 of the Civil Procedure Act 2005 from the date of termination to the date of judgment (87 weeks) at 10% per annum. 31The plaintiff's calculation is essentially the same except the future rental payments would not be reduced to remove the term charges. Thus the path is: (a)These amounts are added $174,026.28 + $75,083.71 + $189,159.00 = $438,268.99. (b)The above total is reduced by the agreed paid rentals and proceeds of sale ($438,268.99 - $293,285.11 = $144,983.88) (c)Add interest pursuant to Section 100 of the Civil Procedure Act 2005 from the date of termination to the date of judgment (87 weeks) at 10% per annum. 32The competing assessments of quantum are therefore: (a)Plaintiff - $144,983.88 plus interest. (b)Defendants - $73,008.88 plus interest. 33The question for me is ultimately a decision on the construction of clause 1.1. I think the only way I can approach this question, in order to accommodate the positions of both parties, is to determine the following: (a)Should clause 1.1(f) be interpreted to require a rebate from future payments? This rebate would be achieved by deducting interest and administrative charges from the unpaid instalments from 18 January 2010 to the end of the Lease (25 months). If 'yes' the defendants' submission on quantum would be adopted. If 'no':- (b)Does clause 1.1(f) give rise to an unenforceable penalty? If 'no' the plaintiff's submission on quantum would follow. 34These points favour the defendants: (a)The receipt of a lump sum payment before the end of the 48 month term would be an accelerated payment giving the plaintiff, with the opportunity to re-invest, a potentially larger sum than would ultimately have been received. (b)The claim for past interest on the judgment amount necessarily involves double interest because the instalment amounts already have an interest component. 35There is a fundamental difficulty with the defendants' interpretation. It is an interpretation that is said to reflect the intention of the parties. If the clause was intended to encompass a rebate then, as in Esanda Finance , a formula would have been stipulated to calculate the rebate. The proportionate method suggested by the defendants is a speculative, even if logical, attempt to 'guess' the rebate. It could not be an extension of the defendants' construction of the clause that, if necessary, a speculative method be found to give effect to the parties' intentions. I therefore find against the defendants' interpretation of the " recoverable amount ". 36Turning now to the plaintiff's submission: The receipt of the full amount is a reflection of the plaintiff's entitlement under the Lease and no regard should be had to accelerated payment or the opportunity to re-invest. In addition: (a)The lump sum has not yet been received because of the defendants' intransigence (let alone the long-time denial of liability) and the plaintiff is now in liquidation and cannot mitigate or re-invest in any event. (b)Even if re-investment had been an option there is no guarantee it would have successfully created surplus funds. 37In my view the amount claimed by the plaintiff is the amount that would have been paid under the Lease. Applying Ringrow, the definition of " recoverable amount " provides a genuine pre-estimate of damage. It is easy to calculate (to pre-estimate) and because it is simply a reflection of what would have been paid, it has no element of harshness or unconscionability. 38There is however one consequence of my finding that is not favourable to the plaintiff. The claim for interest under Section 100 necessarily includes a claim for interest to be levied upon the interest component of the unpaid instalments. 39I accept that the verdict sum includes amounts unrelated to unpaid instalments. However the entitlement to interest under Section 100 is discretionary. I think that the safest way to avoid any suggestion of my conclusion producing a harsh or unconscionable result is to not allow any interest at all. It is to be recalled that the future instalment is the largest sum in the calculation producing the plaintiff's loss (paragraph 32(a), above). 40The result is that there will be a verdict for the plaintiff for the sum of $144,983.88. 41The formal orders are: (a)Verdict and judgment for the plaintiff for $144,983.88. (b)The defendants are to pay the plaintiff's costs of the proceedings (subject to any special costs applications made by the parties). ********** 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. Decision last updated: 14 October 2011