Pre-Fixed Damages
Cases
Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co.
[1914] UKHL 861
Lord Dunedin
The respondents appealed to the Court of Appeal, when the majority of that Court—Vaughan Williams and Swinfen Eady, L.JJ.—held (Kennedy, L.J., dissenting) that the said sum of £5 was a penalty, and entered judgment for the plaintiffs for the sum of £2 as nominal damages. Appeal from that decision is now before your Lordships’ House.
We had the benefit of a full and satisfactory argument, and a citation -of the very numerous cases which have been decided on this branch of the law. The matter has been handled, and at a recent date, in the courts of highest resort. I particularly refer to Clydebank Engineering Company v. Castaneda, [1905] AC 6, 7 F. (H.L.) 77, 42 SLR 74, in your Lordships’ House, and the cases of Public Works Commissioners v. Hills, [1906] AC 368, 43 S.L.R. 894, and Webster v. Bosanquet, [1912] AC 394, 49 S.L.R. 1023, in the Privy Council. In all of these cases many of the previous cases were considered. In view of that fact and of the number of the authorities available, I do not think it advisable to attempt any detailed review of the various cases, but I shall content myself with stating succinctly the various propositions which I think are deducible from the decisions which rank as authoritative:—1. Though the parties to a contract who use the words penalty or liquidated damages may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case. 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— Clydebank Engineering Company v. Castaneda.
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— Public Works Commissioners v. Hills and Webster v. Bosanquet.
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 which could conceivably be proved to have followed from the breach—illustration given by Lord Halsbury in the Clydebank case. ( b) It will be held to be 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— Kemble v. Farren, 6 Bing. 141. This, though one of the most ancient instances, is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A promised to pay B a sum of money on a certain day and did not do so, B could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable—a subject which much exercised Jessel, M.R., in Wallis v. Smith, 21 Ch. D. 243—is probably more interesting than material. ( 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 trifling damage”—Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Company, 11 A.C. 332, 13 R. (H.L.) 98, 24 S.L.R. 323. On the other hand—(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary that is just the situation when it is probable that preestimated damage was the true bargain between the parties— Clydebank case, Lord Halsbury; Webster v. Bosanquet, Lord Mersey.
Turning now to the facts of the case, it is evident that the damage apprehended by the appellants owing to the breaking of the agreement was an indirect and not a direct damage. So long as they got their price from the respondents for each article sold it could not matter to them directly what the respondents did with it. Indirectly it did. Accordingly the agreement is headed “Price Maintanance Agreement,” and the way in which the appellants would be damaged if prices were cut was clearly explained in evidence, and no successful attempt was made to controvert that evidence. But though damages as a whole from such a practice would be certain, yet damages from any one sale would be impossible to forecast. It is just, therefore, one of those cases where it seems quite reasonable for parties to contract that they should estimate that damage at a certain figure, and provided that the figure is not extravagant
……
The argument of the respondents was really based on two heads. They overpressed, in my judgment, the dictum of Lord Watson in Lord Elphinstone’s case, reading it as if he said that the matter was conclusive, instead of saying, as he did, that it raised a presumption, and they relied strongly on the case of Willson v. Love, [1896] 1 Q.B. 626.
Now, in the first place, I have considerable doubt whether the stipulated payment here can fairly be said to deal with the breaches, “some of which”—I am quoting Lord Watson’s words—“may occasion serious and others but trifling damage.” As a mere matter of construction I doubt whether clause 5 applies to anything but sales below price. But I will assume that it does. None the less the mischief, as I have already pointed out, is an indirect mischief, and I see no data on which, as a matter of construction, I could settle in my own mind that the indirect damage from selling a cover would differ in magnitude from the indirect damage from selling a tube, or that the indirect damage from a cutting-price sale would differ from the indirect damage from supply at full price to a hostile because prohibited agent. You cannot weigh such things in a chemical balance. The character of the agricultural land which was ruined by slag heaps in Elphinstone’s case was not all the same, but no objection was raised by Lord Watson to applying an overhead rate per acre, the sum not being in itself unconscionable.
I think that 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 claim must be taken at its weakest link. If you can see clearly 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 a penalty, but further than this it does not go. So, for the reasons already stated, I do not think that the present case forms an instance of what I have just expressed.
As regards Willson’s case, I do not think it material to consider whether it was well decided on the facts, for it was decided on the viewof the facts that the manurial value of straw and of hay were known ascertainable quantities as at the time of the bargain, and radically different, so that the damage resulting from the want of one could never be the same as the damage resulting from the want of the other.
Added to that the parties there had said penalty, and the effort was to make out that they really meant liquidated damages; and lastly, if my view of the facts in the present case is correct, then Rigby, L.J., would have agreed with me, for the last words of his judgment are as follows—“On the other hand it is stated that when the damages caused by a breach of contract are incapable of being ascertained, the sum made by the contract payable on such a breach is to be regarded as liquidated damages. The question arises, what is meant in this statement by the expression ‘incapable of being ascertained.’ In their proper sense the words appear to refer to a case where no rule or measure of damages is available for the guidance of a jury as to the amount of damages, and the judge would have to tell them they must fix the amount as best they can.” To arrive at the indirect damage in this case, supposing no sum had been stipulated, that is just what a judge would in my opinion have had to do.
On the whole matter, therefore, I go with the opinion of Kennedy, L.J., and I move your Lordships that the appeal be allowed and judgment given for the sum as brought out by the master, the appellants to have their costs in this House and in the courts below.
Lord Atkinson
The action out of which this appeal arises was brought upon a contract entered into between the appellants, through the agency of Messrs Pellant Limited, and the respondents, claiming amongst other things to recover a sum of £5 in respect of each of the breaches of this contract complained of. The sole question for decision on this appeal is whether the sum of £5 is a penalty or liquidated damages.
The appellants are extensive and well-known manufacturers of motor tyres, covers, and tubes—a trade in which there is keen competition. They have no patents protecting their manufacture. Success over their competitors depends on the reputation acquired for their products, and largely upon the efficiency of the organisation of their business. Ninety-nine per cent. of their output in this class of goods is sold through what one of their managers, who was examined as a witness, described as their distributing organisation. It consists in this, that they sell to motor-car manufacturers, persons called factors who re-sell to retail agents, and retail agents themselves, and that all these latter sell to the public, the users of the goods.
The appellants produce price lists of these goods of theirs varying from time to time. They invariably sell at these prices to the members of their distributing organisation under agreements similar to that sued upon, giving, however, discount and rebates at varying rates. These agreements are styled price—maintenance agreements, and their main purpose obviously is to prevent the sale to the public, the users either directly or indirectly of the goods which the appellants manufacture at prices less than those named in their price lists. The result of this is that competition having reduced these prices to the lowest remunerative scale, the agent secures his remuneration by selling at the prices at which he buys. If he sells at lower prices than these the loss comes out of his discount and rebates, his own profits. The manager in his evidence explains elaborately the dislocation of the distributing organisation of the appellants, and the injury to their trade which would ensue, from the sale by one or more of their agentsor factors of their goods at prices less than those named in these lists. He pointed out that if the business of one of their agents in any particular place was undercut by such sales the agent would, owing to the diminution of his remuneration, most probably throw up his agency and become the agent of a competitor, thus leaving the field open to the rivals of the appellants; that it was essential for their trade that their wares should be obtainable all over the country at as many places as possible; that though the consequential injury to their trade by this undercutting, would, or might, be very serious, it would be very difficult to prove in evidence the precise amount of their loss in money; that considering all these things, the appellant company fixed £5, the sum mentioned in the agreement, as a fair and reasonable sum for liquidated damage in respect of the breaches specified. This evidence was uncontradicted.
In a good deal of the argument which has been addressed to your Lordships on behalf of the respondents, the true object of this price-maintenance agreement and the nature of the consequential injury to the plaintiffs’ trade flowing from the breaches of it have been somewhat lost sight of. It has been urged that as the sum of £5 becomes payable on the sale of even one tube at a shilling less than the listed price, and as it was impossible that the appellant company should lose that sum on such a transaction, the sum fixed must be a penalty. In the sense of direct and immediate loss the appellants lose nothing by such a sale. It is the agent or dealer who loses by selling at a price less than that at which he buys, but the appellants have to look at their trade in globo, and to prevent the setting up, in reference to all their goods anywhere and every where, a system of injurious undercutting.
The object of the appellants in making this agreement, if the substance and reality of the thing and the real nature of the transaction be looked at, would appear to be a single one, namely, to prevent the disorganisation of their trading system and the consequent injury to their trade in many directions. The means of effecting this is by keeping up their price to the public to the level of their price-list, this last being secured by contracting that a sum of £5 shall be paid for every one of the three classes of articles named sold or offered for sale at prices below those named on the list. The very fact that this sum is to be paid if a tyre cover or tube be merely offered for sale, though not sold, shows that it was the consequential injury to their trade due to undercutting which they had in view. They had an obvious interest in preventing this undercutting, and on the evidence it would appear to me impossible to say that their interest was incommensurate with the sum which it was agreed to pay.
Their object is akin in some respects to that which a trader has in binding a former employee not to set up or carry on a rival business within a certain area. The trader’s object is to prevent competition, and especially to prevent his old customers whom the employee knows from being enticed away from him. If one takes, for example, the case of a plumber, the carrying on of the trade of a plumber may mean anything from mending gas-pipes for a few pence apiece up to doing all the plumbing work of a big hotel. If the employee should mend a hundred of such pipes for twenty old customers at 6d. apiece, for which the employer would charge 1s. apiece, could it possibly be contended that the trader’s loss was only a hundred sixpences—£2, 10s.? It is, I think, quite misleading to concentrate one’s attention upon the particular act or acts by which in such cases as this the rivalry in trade is set up and the repute acquired by the former employee that he works cheaper and charges less than his old master, and to lose sight of the risk to the latter that old customers once tempted to leave him may never return to deal with him, or that business which might otherwise have come to him may be captured by his rival. The consequential injuries to the trader’s business arising from each breach by the employee of his covenant cannot be measured by the direct loss in a monetary point of view on the particular transaction involved in the breach. An old customer may be as effectively enticed away from him through the medium of a 10s. job done at a cheap rate as by a £50 job done at a cheap rate, or a reputation for cheap workmanship may be acquired possibly as effectively in one case as in the other.
In many cases a person may contract to do or abstain from doing an act which is a composite act, the product or result of almost numberless other acts. For instance, if one should contract with a builder to build a house of the best materials and with the most skilled workmanship, and to hand over possession of the same completed on a certain day for £1000, £500 to be paid if the agreement was not performed, every firegrate set which on completion would be found to be of bad material, every door which would be then found to have been defectively hung, every cubic foot of masonry which would be found to have been badly and improperly built, would in volve a breach of the agreement, but it would be quite illegitimate to thus disintegrate the obligation to do what the parties regarded as a single whole into a number of obligations to do a number of things of varying importance, and treat the £500 as prima facie a penalty because these individual breaches of the agreement did not cause in many instances any injury commensurate with that sum. This is the very ground, or one of the rounds, upon which Lord Herschell rests his judgment in Lord Elphinstone v. Monkland Iron and Coal Company, 24 S.L.R. 323. He said—“The agreement does not provide for the payment of a sum upon the non-performance of any one of many obligations differing in importance. It has reference to a single obligation, and the sum to be paid bears a strict proportion to the extent to which that obligation is left unfulfilled.”
In the present case the agreement of the parties, in effect though possibly not in form, did little if anything more than impose a single obligation, namely, to sell or endeavour to sell the goods of the appellants at the prices named in their lists, though of course as they sold different kinds of goods this single obligation might be violated in many ways. Much reliance was placed by the respondents on the well-known passage in the judgment of Lord Watson in the last-mentioned case, to the effect that where a single lump sum is made payable by way of compensation, on the occurrence of one or more of several events, some of which may occasion serious and others but trifling damage, the presumption is that the partner intended the sum to be penal and subject to modification. It is quite true that, as mentioned by Swinfen Eady, L.J., Lord Esher in Willson v. Love, [1896] 1 Q.B. 626, said that he thought that this passage meant the same thing as if it ran “some of which occasion serious and others less serious damage.” With all respect, this alteration would mean that the damage resulting from each event should be uniform in amount—a construction which would mean that the stipulated compensation must presumably be a penalty in almost every conceivable case. Moreover, Lord Watson’s statement of the law as it stands was approved by Lord Davey in Clydebank Engineering Company v. Castaneda, 42 SLR 74, and in Webster v. Bosanquet, 43 S.L.R. 894, without any qualification of that kind.
In this last-mentioned case, as in the present, the contract provided that the amount specified should be paid as “liquidated damages and not as a penalty.” The covenant upon which the matter in controversy turned was contained in a deed made on the dissolution of a partnership between two partners, the plaintiff and defendant, and it provided that the defendant should not during a certain period be at liberty to sell the whole or part of the tea crops of two estates named to any person other than the plaintiff without first offering to him the option of buying the same, and further provided that on breach of this covenant by the defendant he should pay to the petitioner the sum of £500 as “liquidated damages and not as a penalty.”
Now it will be observed that this covenant would be violated by the sale of any appreciable part, in a business point of view, of the crops of either of these estates, no matter how relatively small that part might be compared with the entire crop of either. It is also clear that the object of the parties when they executed the deed was to secure to the plaintiff the option of buying the entire crops of both estates, and that when they fixed this sum of £500 they were thinking of the loss which the plaintiff might sustain by the loss of that option. The amount of tea sold by the defendant in breach of the covenant was considerable—nearly 54,000 Ib. It was laid down that in determining whether a sum contracted to be paid is liquidated damages or a penalty one is to consider whether the contract, whatever its language, would at the time it was entered into have been unconscionable and extravagant, and one which no court ought to allow to be enforced if this sum were to be treated as liquidated damages, having regard to any possible amount of damages conceived to have been in the contemplation of the parties when they made the contract. Lord Mersey, in delivering the judgment of the Board, said—“When making the contract it was impossible to foresee the extent of the injury which might be sustained by the plaintiff if sales of tea were made without his consent. That such sales might seriously affect his business was obvious, and the very uncertainty of the loss to arise made it all the more reasonable for the parties to agree beforehand as to what the damages should be. And furthermore, it is well known that damages of this kind, though very real, may be difficult of proof, and that the proof may entail considerable expense.” Those remarks are, having regard to the evidence in the present case, particularly applicable to it.
In Kemble v. Farren, 6 Bing. 141, Tindal, C.J., said—“We see nothing illegal or unreasonable in the parties in their mutual agreement settling the amount of damages, uncertain in their nature, at any sum upon which they may agree. In many cases an agreement fixes that which is almost impossible to be accurately ascertained, and in all cases it saves the expense and difficulty of bringing witnesses to that point.”
Therefore although it may be true, as laid down by Lord Watson, that a presumption is raised in favour of a penalty where a single lump sum is to be paid by way of compensation in respect of many different events, some occasioning serious and some trifling damage, it seems to me that this presumption is rebutted by the very fact that the damage caused by each and every one of those events, however varying in importance, may be of such an uncertain nature that it cannot be accurately ascertained. The damages have been proved to be of that nature in the present case, and the very fact that they are so renders it all the more probable that the sum of £5 was not stipulated for merely in terrorem, but was really and genuinely “a pre-estimate of the appellants’ probable or possible interest in the due performance of this contract.”
Swinfen Eady, L.J., holds that clause No. 5 of the agreement applies to the first part of clause 3, the supplying of these goods to persons on the appellants’ black list, as it was styled. I confess that this seems to me a very very doubtful construction. What is prohibited by the second clause is “the sale or offering for sale of motor tyres, cases, or tubes, at prices less than those in the price list.” What is dealt with in clause 5 is a sale or offering for sale of these particular kinds of goods in breach of the agreement. What is dealt with in the first part of clause 3 is the supplying without consent of any such goods to these black-listed agents at any price whatever; but even if Swinfen Eady, L.J., should be right in this it would not lead me to a conclusion different from that to which I have come.
The appellants, like the respondents, are most probably good business men. Neither of them contemplated, presumably, the black-listing of these agents without adequate trade reasons. Nothing was more natural than that the appellants should seek to prevent the supply of their goods indirectly to persons to whom they would not supply them directly. Considerable injury to the appellants’ trade interests might obviously be done by putting such persons in a position to undercut their prices, and derange their supply organisation, and nothing conceivable could be more difficult than to prove by evidence, or to estimate precisely in money, the exact amount of damages which might be caused by such an injury. The passage in the judgment of Tindal, C.J., above quoted, applies directly to such state of things.
I entirely concur with Kennedy, L. J., in his criticism of the agreement. I agree with him that on the face of it, on this point of liquidated damages, it contains nothing unreasonable, unconscionable, or extravagant; and I further think that the same may be said of the real transaction between the parties if its substance be regarded, reasonably.
For these reasons, I think that the judgment of Kennedy, L.J., was right, that the judgment appealed from was wrong and should be reversed, and the judgment of Phillimore, J., be restored, and the appeal allowed with costs.
Lord Parker—Where the damages which may arise out of a breach of contract are in their nature uncertain, the law permits the parties to agree beforehand the amount to be paid on such breach. Whether the parties have so agreed or whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case. There are, however, certain general considerations which have to be borne in mind in determining the question. If, for example, the sum agreed to be paid is in excess of any actual damage which can possibly, or even probably, arise from the breach, the possibility of the parties having made a bona fide pre-estimate of damage has always been held to be excluded, and it is the same if they have stipulated for the payment of a larger sum in the event of breach of an agreement for the payment of a smaller sum.
The really difficult cases are those in which the Court has to consider what presumptions or inferences arise from the number or nature of the stipulations on breach of which it is agreed that the sum in question should be paid. In the case of a single stipulation, which if broken at all can be broken once only, and in one way only, such as a covenant not to reveal a trade secret to a rival trader, there can be no inference or presumption that the sum payable on breach is not in the nature of agreed damages, and if the parties have referred to it as agreed or liquidated damages, no reason why the Court should not treat it as such. The question is more complicated when the stipulation, though still a single stipulation, is capable of being broken more than once, and more ways than one, such as a stipulation not to solicit the customers of a firm. A solicitation which is unsuccessful can give rise to only nominal damages, and even if it be successful the actual damage may vary greatly according to the value of the custom which is there by directly or indirectly lost to the firm. Still, whatever damage there is must be the same in kind for every possible breach, and the fact that it may vary in amount for each particular breach has never been held to raise any presumption or inference that the sum agreed to be paid is a penalty, at any rate in cases where the parties have referred to it as agreed or liquidated damages.
The question becomes still more complicated where it is agreed to pay a single sum on the breach of a number of stipulations of varying importance. It is said that in such a case an inference or presumption is raised against the sum in question being in the nature of agreed damages, even though the parties have referred to it as such. In this respect I think that a distinction should be drawn between cases in which the damage likely to accrue from each stipulation is the same in kind, and cases in which the damage likely to accrue varies in kind with each stipulation. Cases of the former class seem to me to be completely analogous to those of a single stipulation, which can be broken in various ways and with varying damages; but probably it would be difficult for the Court to hold that the parties had pre-estimated the damage if they have referred to the sum payable as a penalty.
In cases, however, of the latter class I am inclined to think that the prima facie presumption or inference is against the parties having pre-estimated the damage, even though the sum payable is referred to as agreed or liquidated damages. The damage likely to accrue from breaches of the various stipulations being in kind different, a separate pre-estimate in the case of each stipulation would be necessary, and it would not be very likely that the same result would be arrived at in respect of each kind of damage. In my opinion, however, any such presumption or inference would be prima facie only and capable of being displaced by other considerations. Supposing it were recited in the agreement that the parties had estimated the probable damage from a breach of one stipulation at from £5 to £15, and the probable damage from a breach of another stipulation at from £2 to £12, and had agreed on a sum of £8 as a reasonable sum to be paid on the breach of either stipulation, I cannot think that the Court would refuse to give effect to the bargain between the parties.
In the present case, even accepting the construction of the contract which makes clause 5 apply not only to a sale or offer contrary to the provisions of clause 2 but also to one contrary to the provisions of clause 3, I think it reasonably clear that the damage likely to accrue from the breach of every stipulation to which clause 5 applies is the same in kind. Such damage will in every case consist in the disturbance or derangement of the system of distribution by means of which the appellants’ goods reach the ultimate consumer. The parties by their contract agree that the sum payable on breach of any such stipulation is to be paid by way of damages and not by way of penalty, and I can see nothing to justify the Court in refusing to give effect to this bargain.
Union Eagle Ltd v Golden Achievement Ltd
[1997] UKPC
Lord Hoffmann
“The boundaries of the equitable jurisdiction to relieve against contractual penalties and forfeitures are in some places imprecise. But their Lordships do not think that it is necessary in this case to draw them more exactly because they agree with Litton V.-P. that the facts lie well beyond the reach of the doctrine. The notion that the court’s jurisdiction to grant relief is “unlimited and unfettered” (per Lord Simon of Glaisdale in Shiloh Spinners Ltd v. Harding [1973] A.C. 691, 726) was rejected as a “beguiling heresy” by the House of Lords in The Scaptrade (Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana [1983] 2 A.C. 694, 700). It is worth pausing to notice why it continues to beguile and why it is a heresy. It has the obvious merit of allowing the court to impose what it considers to be a fair solution in the individual case. The principle that equity will restrain the enforcement of legal rights when it would be unconscionable to insist upon them has an attractive breadth. But the reasons why the courts have rejected such generalisations are founded not merely upon authority (see Lord Radcliffe in Campbell Discount Co. Ltd v. Bridge [1962] A.C. 600, 626) but also upon practical considerations of business. These are, in summary, that in many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be “unconscionable” is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause injustice which cannot be fully compensated by the ultimate decision in the case.
The considerations of this nature, which led the House of Lords in The Scaptrade to reject the existence of an equitable jurisdiction to relieve against the withdrawal of a ship for late payment of hire under a charterparty, are described in a passage from the judgment of Robert Goff L.J. in the Court of Appeal [1983] Q.B. 529, 540-541 which was cited with approval by the House: see [1983] 2 A.C. 694, 703-4. Of course the same need for certainty is not present in all transactions and the difficult cases have involved attempts to define the jurisdiction in a way which will enable justice to be done in appropriate cases without destabilising normal commercial relationships…
…It remains for consideration on some future occasion as to whether the way to deal with the problems which have arisen in such cases is by relaxing the principle in Steedman v Drinkle supra, as the Australian courts have done, or by development of the law of restitution and estoppel. The present case seems to their Lordships to be one to which the full force of the general rule applies. The fact is that the purchaser was late. Any suggestion that relief can be obtained on the ground that he was only slightly late is bound to lead to arguments over how late is too late, which can be resolved only
by litigation. For five years the vendor has not known whether he is entitled to resell the flat or not. It has been sterilised by a caution pending a final decision in this case. In his dissenting judgment, Godfrey J.A. said that the case “cries out for the intervention of equity”. Their Lordships think that, on the contrary, it shows the need for a firm restatement of the principle that in cases of rescission of an ordinary contract of sale of land for failure to comply with an essential condition as to time, equity will not intervene.”
Murray v Leisureplay Plc
[2005] EWCA Civ 963
Conclusions on the Penalty Issue
The penalty issue is one of considerable jurisprudential interest. English law is well-known for the respect which it gives to the sanctity of contact. The question which the law of penalties poses is this: to what extent does English contract law allow parties to a contract to specify for their own remedies in damages in the event of breach? The answer is that English law does not in this particular field take the same laissez-faire approach that it takes to (for example) the question whether parties can agree to time limits for the performance of obligations which they subsequently find difficulty in meeting. So far as that is concerned, pacta sunt servanda. So far as pre-determined damages clauses are concerned, English contract law recognises that, if the parties agree that a party in breach of contract shall pay an unjustifiable amount in the event of a breach of contract, their agreement is to that extent unenforceable . The reasons for this exception may be pragmatic rather principled. Diplock LJ made the following observations on this point in the Robophone case:
“I make no attempt, where so many others have failed, to rationalise this common law rule. It seems to be sui generis. The court has no general jurisdiction to re-form terms of a contract because it thinks them unduly onerous on one of the parties—otherwise we should not be so hard put to find tortuous constructions for exemption clauses, which are penalty clauses in reverse; we could simply refuse to enforce them. … But however anomalous it may be, the rule of public policy that the court will not enforce a “penalty clause” so as to permit a party to a contract to recover in an action a sum greater than the measure of damages to which he would be entitled at common law is well established, and in these days when so often one party cannot satisfy his contractual hunger a la carte but only at the table d’hote of a standard printed contract, it has certainly not outlived its usefulness.” (at pages1446 to 1447)
Interestingly, despite the influence of equity, English law has not always taken a consistent approach. As cases cited by the parties show, that the present position was only reached through the influence of Scots law and Commonwealth jurisprudence. Dunlop Pneumatic Tyre v New Garage and Motor Company, Ltd is thus a remarkable example of the ability of English common law to absorb rules from other legal systems, and in addition of the influence of the Privy Council. The latter point is relevant to the question which Baroness Hale recently raised for consideration, namely the question whether this court is bound by previous decisions which have been disapproved as part of the ratio decidendi in a Privy Council case (see her speech in National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL 41,[163]).
The Clydebank case, cited by counsel, was a Scottish appeal. It concerned a contract for the construction by a Scottish shipbuilder of four torpedo boats for the Spanish government. The contract provided that: “The penalty for late delivery shall be at the rate of £500 per week for each vessel”. The House of Lords held that this sum was not a penalty. In the words of Lord Halsbury LC, it was “obvious on the face of the contract that the very thing intended to be provided against by this pactional amount of damages is to avoid [the] kind of minute and somewhat difficult and complex system of examination that would be necessary if you were to attempt to prove the damage.” (page 11). Lord Davey applied a principle of interpretation of contracts in Scots law:
“My Lords, I therefore conceive that it may be taken as an established principle in the law of Scotland that, if you find a sum of money made payable for the breach, not of an agreement generally which might result in either a trifling or a serious breach, but a breach of one particular stipulation in an agreement, and when you find that the sum payable is proportioned to the amount if I may so call it, or the rate of the non-performance of the agreement – for instance, if you find that it is so much per acre for ground which has been spoilt by mining operations, or if you find, as in the present case, that it is so much per week during the whole time for which the non-delivery of vessels beyond the contract time is delayed – then you infer that prim? facie the parties intended the amount to be liquidate damages and not penalty. I say “prim? facie” because it is always open to the parties to shew that the amount named in the clause is so exorbitant and extravagant that it could not possibly have been regarded as damages for any possible breach which was in the contemplation of the parties, and that is a reason for holding it to be a penalty and not liquidated damages notwithstanding the considerations to which I have alluded.”
Lord Davey held that evidence as to the loss which the Spanish government had actually suffered was inadmissible, and that it would be contrary to the purpose of the clause to admit such evidence. For different view on this point, see per Lord Woolf in the Philips case at pages 59-60.
The Clydebank case was decided in 1904, and it was followed by two decisions of the Privy Council, namely Public Works Commissioner v Hills [1906] AC 368 and Webster v Bosanquet [1912] AC 394. The former case was an appeal from the Cape of Good Hope. The advice of the Privy Council was given by Lord Dunedin, who later gave the leading judgment in the Dunlop case. He noted that the Clydebank case was decided according to “the rules of a system of law where contract law was based directly on the civil law and no complications in the matter of pleading had ever been introduced by the separation of common law and equity.” (page 375). The Privy Council held that the clause in that case was a penalty. It held that the principle to be deduced from the Clydebank case was that the criterion of whether a sum was a penalty or damages was to be found in whether the sum in question “can or cannot be regarded as a “genuine pre-estimate of the creditor’s probable or possible interest in the due performance of the principal obligation.” (page 376). In Webster v Bosanquet the appeal to the Privy Council came from Ceylon. The Privy Council again applied the Clydebank case.
The three cases just cited play an important role in the speech of Lord Dunedin in the Dunlop case. In that case, a contractual provision in an agreement between a manufacturer and dealer in tyres for the payment of 5s per tyre sold below list price in breach of contract was held on the facts not to be a penalty. The House reversed the (unreported) decision of this court (Vaughan Williams and Swinfen Eady LJJ, Kennedy LJ dissenting). The Court of Appeal held that, since the contract in question provided for damages to be paid on breaches of varying degrees of importance, the relevant provision had to be treated as a penalty. The House took the view that such a clause did not inevitably have to be treated as penalty. The leading speech was that of Lord Dunedin and he, drawing on the three cases mentioned above, enunciated the law on penalties which is now embedded in our common law. The classic statement of the law on penalties by Lord Dunedin in the Dunlop case is set out below.
The judge took the analysis of the case law on penalties in the recent Cine case as a complete statement of the law for his purposes. I will take it as my starting point. The facts of that case are complex and issues arose which are not relevant for the consideration of penalties, and accordingly I will restrict my examination of the case to a statement of the facts and principles set out therein relevant to the question of penalties. The first judgment was that of Mance LJ. The other members of the court, Peter Gibson and Thomas LJJ, agreed with him, but gave concurring judgments.
The Cine case concerned the appeal of a Turkish cable television company and its guarantor from the order of Mr Julian Flaux QC giving summary judgment for damages to be assessed for breach of an agreement dated as of 1 May 2000 in favour of the claimant, a joint venture company (“UIP”). Under this agreement Cine was given a licence to exhibit films of the members of the joint venture. Two critical provisions of the agreement were clauses 16 and 17. Clause 16 required Cine to hold an amount of $4,836,155 (“the AB amount”) in a special account for use by UIP and the members of the joint venture in advertising the films licensed. On termination of the agreement the full AB amount had to be paid to UIP. Clause 17 dealt with termination. If Cine failed to maintain a letter of credit in favour of UIP, for payment of the licence fees, UIP could terminate the agreement and thereupon the whole of the licence fees payable over the balance of the term of the licence became due and payable, together with all damages resulting from such breach the AB amount and the outstanding costs of certain prior proceedings between the parties which had been compromised.
The relevant issue on the Cine appeal was whether the argument that clauses 16 and 17 were unenforceable as penalties had a real prospect of success. If so, the claimant was not entitled to summary judgment and the matter would have to go to trial. Because this was an appeal from the grant of summary judgment, this court did not have to reach a final view on these matters.
There is a useful and succinct statement of the law in the judgment of Mance LJ:
“11. The general scope of the law relating to penalties was identified by Lord Browne-Wilkinson giving the advice of the Privy Council in Workers Trust Bank Ltd. v. Dojap Ltd. [1993] AC 573:
“In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit (customarily 10% of the contract price) on the sale of land. …..”
12. The classic distinction drawn by Lord Dunedin in Dunlop Pneumatic Tyre Company v. New Garage and Motor Company Ltd. [1915] AC 79, 86f was between a payment on breach stipulated as in terrorem of the offending party and a genuine covenanted pre-estimate of damage. Lord Dunedin added that the question was one of construction of each contract, to be decided as at the time of its making, not the time of breach. He offered as tests which might prove “helpful, or even conclusive”, these:
“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 ….. This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable ….. is probably more interesting than material.
(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”.
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties…..”
13. Although the phrase in terrorem has appeared in many cases since Dunlop, there is force in Lord Radcliffe’s comment in Campbell Discount Co. Ltd. v. Bridge [1962] AC 600, 622, that
“I do not find that that description adds anything to the idea conveyed by the word “penalty” itself, and it obscures the fact that penalties may quite easily be undertaken by parties who are not in the least terrorised by the prospect of having to pay them ….”
A more accessible paraphrase of the concept of penalty is that adopted by Colman J in Lordsvale Finance Plc v. Bank of Zambia [1996] QB 752, 762G, when he said that Dunlop Pneumatic Tyre showed that:
“whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred.”
14. In Philips Hong Kong Ltd. v. The AG of Hong Kong (1993) 61 BLR 49, the Privy Council in advice delivered by Lord Woolf underlined test (a) suggested by Lord Dunedin, endorsed the view that the “court should not be astute to descry a ‘penalty clause'” and emphasised that it would “normally be insufficient …. to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss” (pp.58-59). However, Lord Woolf went on:
“A difficulty can arise where the range of possible loss is broad. Where it should be obvious that, in relation to part of the range, the liquidated damages are totally out of proportion to certain of the losses which may be incurred, the failure to make special provision for those losses may result in the “liquidated damages” not being recoverable. (See the decision of the Court of Appeal on very special facts in Ariston SRL v Charly Records Ltd (1990) The Independent 13 April 1990.) However, the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts “
15. I have also have found valuable Colman J’s further observation in Lordsvale at pp.763g-764a, which indicate that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all the possibilities. There are clauses which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable. In the case before him, Colman J was concerned with a provision for prospective increase in the interest rate payable by a borrower, following the borrower’s default. He said that, although the payment of liquidated damages is “the most prevalent purpose” for which an additional payment on breach might be required under a contract
“…. the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.” “
In essence, this court held in the Cine case, that in determining whether provisions were a penalty the court had at the outset of its enquiry to look at the aggregate amount that would be payable on breach under the terms of the agreement, and compare that with what would have been payable if UIP had had to bring its claim under the common law. In other words the alleged genuine pre-estimate of loss in clause 17 had to relate to the overall net balance of losses payable on termination less the credits to which Cine would have been entitled at common law. The court declined to treat the AB amount as separate from the other items payable on breach under clause 17. It noted that under the agreement UIP did not have to give credit for the right to use the films licensed to Cine, which came to an end on the termination of its licence.
In the circumstances, this court concluded that a triable issue was shown with respect to the question whether the provisions of the agreement for the acceleration of licence fees and the payment of the AB amount to UIP in the event of breach were unenforceable as penalties. At [50], Thomas LJ held that it would have to be investigated at trial why what appeared to be benefits to UIP on termination were not brought into account when the agreement was drawn up. He added: “A genuine pre-estimate would ordinarily imply consideration being given to bringing into account the material and significant matters that went into the ascertainment of the actual loss suffered by the innocent party.” As Peter Gibson LJ observed, the question, whether the failure to bring the benefit of the termination of the film rights into account in determining the amount payable on breach rendered clause 17 a penalty, had to be assessed on the basis of the position at the date of the agreement.
It was also argued in the Cine case that there was a triable issue as to whether the other amounts payable on breach were also penalties but for reasons which were specific to the facts of that case and which I need not explore the court held that the only triable issues were as I have set out above.
What, to my judgment, is striking about the statement of the law in the Cine case and its application is the way in which the court sought objectively to rationalise its conclusions as to whether the provisions of the agreement constituted a penalty. The court’s reasoning turns on a comparison between the overall amount payable under the agreement in the event of a breach with the overall amount that would have been payable if a claim for damages for breach of contract had been brought at common law. The court proceeded on the basis that, if such a comparison discloses a discrepancy, which can be shown not to be a genuine pre-estimate of damage or to be unjustified, the agreement provides for a penalty.
The usual way of expressing the conclusion that a contractual provision does not impose a penalty is by stating that the provision for the payment of money in the event of breach was a genuine pre-estimate by the parties to the agreement of the damage the innocent party would suffer in the event of breach. As Lord Dunedin said in the Dunlop case, the “essence” of a liquidated damages clause is “a genuine covenanted pre-estimate of damage” (at page 86). As the Dunlop case and the citation from the Philips case (in the Cine case) show, a contractual provision does not become a penalty simply because the clause in question results in overpayment in particular circumstances. The parties are allowed a generous margin.
The judgments in the Cine case show the continued usefulness of the authoritative guidance given by Lord Dunedin in the Dunlop. There are two particular points I would make about that guidance for the purposes of this appeal. First, paragraph (a) envisages an exceptional payment, though paragraph (a) does not state that this is the only circumstance in which a payment will be held to be a penalty. Second, paragraph (c) of Lord Dunedin’s guidance shows that there are several types of clause which may amount to penalties. Some may provide for the same sum to be paid on different breaches of contract. That is the sort of penalty clause which Lord Dunedin had in mind in (c). There are other kinds of clauses which may constitute penalties, such as those which provide for a single sum or aggregate sum to be paid on a single breach. This was the situation in the Cine case. It is also the case in this case where there is a single event giving rise to the payment of money under clause 17, namely the termination of the agreement without giving one year’s notice.
Third, paragraph (d) of Lord Dunedin’s guidance is also relevant in this case. When a person is dismissed without notice, it is difficult to forecast in advance what the damages payable will be. It may depend for instance on whether he is able to obtain comparable employment. Paragraph (d) makes it clear that, even in the situation when the parties cannot at the time of contracting, predict the loss likely to result from a breach of contract, a sum can be a genuine pre-estimate of damage.
In paragraph (a) Lord Dunedin refers to the sum stipulated in the parties’ contract being “extravagant and unconscionable”. The decision of this court in the Cine case shows that those words have to be given a contemporary meaning. The real question is whether the sums for which the parties have provided the paid on breach differ substantially from the sums that would be recoverable at common law and whether there is shown to be no justification for that.
In paragraph 13 of his judgment, quoted above, Mance LJ refers to the observation of Lord Radcliffe in Campbell Discount Co Ltd v Bridge [1962] AC 600, 622 that the description of sums being stipulated as in terrorem adds little to the concept of penalty. That point has particular resonance in this case. The evidence of Mr Murray at trial was not that he wanted to terrorise MFC or that he wanted to deter MFC from dismissing him without one year’s notice. His evidence was that he wanted a remuneration package which, seen overall, was generous because of the loss that his working for MFC would cause to his other business interests. In other words Mr Murray was motivated by his own desire to protect his own interests not a desire to terrorise MFC. Since he had other business interests, he would not necessarily want to deter MFC from terminating his agreement. For the reasons given below, I do not consider that the absence of evidence that Mr. Murray intended to deter MFC from breaching the agreement means that clause 17.1 cannot be a penalty.
I have already referred to the Philips case, which is referred to by Mance LJ in paragraph 14 of his judgment. The words of Lord Woolf which he quotes are a timely reminder of the importance of legal certainty. The court should give weight to the fact that the parties have agreed the particular clause. In the same case Lord Woolf said:
“Except possibly in the case of situations where one of the parties to the contract is able to dominate the other as to the choice of the terms of a contract, it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss. ” (at pages 58 to 59)
The appellant has relied on the opening phrase in this passage. He contends that this is not a case where domination can be shown and that accordingly the respondent cannot, simply by pointing to the absence of any deduction for mitigation from the payment provided for by clause 17 in this case, contend that clause 17 must be a penalty because in some situations a greater loss could be recovered under clause 17 than at common law. In my judgment there are two answers to this point. The first is that Lord Woolf was not laying down any principle that a different rule would apply in the case of domination; he simply recognised that there might be a different rule in that case. Indeed this court in the Jeancharm case held that the Philips case did not represent a departure from the law as laid down by Lord Dunedin in the Dunlop case. Accordingly I do not consider that oppression on a party to make a contract is of itself a criterion in determining whether a contractual sum is a penalty. Second the fact that a greater loss can be recovered under a contractual provision than at common law may lead to the conclusion that the clause in question is a penalty, although that result is not inevitable. It all depends on the circumstances.
In paragraph 15 of his judgment, Mance LJ makes the point that it need not simply be shown that the clause was a genuine pre-estimate of the damage that would occur on breach. There is scope for other justification for the amount payable on breach. The Cine case illustrates this point. Clause 17 of the agreement in that case provided for the payment of costs of prior proceedings. Those proceedings had been compromised on terms which did not require Cine to pay UIP’s costs. However, Mance LJ was not prepared to hold that the clause was necessarily a penalty. It was open to the parties to agree to forego the costs in the prior litigation on terms that the new agreement was entered into and duly performed.
However in the normal situation, the test will be whether or not the parties genuinely pre-estimated the loss that would occur on breach. This is a relatively low level of review: see paragraphs 44 and 45 above. I agree with Mr Bannister that the parties do not have to make an accurate assessment of the damages that would have been awarded at common law. Indeed it may be very difficult for them to do so. That will frequently be the case in an employment contract. In ascertaining whether the parties have made a genuine pre-estimate of the damage, the court will consider the reasons which the parties had for agreeing to the clause in question at the time when the agreement was made.
Lord Dunedin in the Dunlop case makes the point that, although the issue is one of construction, the court is not confined to the terms of the agreement and may look at the “inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach…” (at page 87). In my judgment, the inherent circumstances to which the court may have regard extend beyond those which may be adduced in evidence for the purposes of determining the true interpretation of the agreement under the well known test in the Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. But the purpose of adducing that evidence is not so that the parties can demonstrate that they agreed to opt out of the remedies regime provided by the common law but rather that the reasons that they had for doing so constitute adequate justification for the discrepancy between the contractual measure of damages and that provided by the common law.
The parties in this case cited a number of further authorities not cited by Mance LJ in the Cine case. I need only deal with Abrahams v Performing Right Society. In this case, the plaintiff was employed for an indefinite period under a contract by which his employer had agreed to give him two years’ notice of termination of his employment or pay him a lump sum of two years’ salary in lieu. The employer failed to give notice and so the plaintiff sued him for the lump sum. The employer argued that the plaintiff had a duty to mitigate his loss but this argument was rejected because the payment of two years salary was a contractual payment, viz one which the employer was bound to make. Termination of the plaintiff’s employment was not a breach of the contract but if the employer elected to terminate the contract, it had either to give notice or to pay a sum equivalent to two years’ gross salary. Hutchinson LJ, with whom Aldous LJ agreed, observed that the contractual sum could not be impugned as a penalty. He did not give any reasons for this conclusion. Accordingly it is not clear whether Hutchinson LJ meant that the clause was a genuine pre-estimate of the employee’s loss or whether he meant that since the sum was not payable on breach but on the exercise of an option to terminate the employment of the plaintiff with a lump sum payment. In my judgment, he meant the latter. In that case it is distinguishable from the present case where the sum payable under clause 17 is payable on breach. There does not appear to have been argument directed to the penalty question in any event.
With the benefit of the citation of authority given above, in my judgment, the following (with the explanation given below) constitutes a practical step by step guide as to the questions which the court should ask in a case like this:-
i) To what breaches of contract does the contractual damages provision apply?
ii) What amount is payable on breach under that clause in the parties’ agreement?
iii) What amount would be payable if a claim for damages for breach of contract was brought under common law?
iv) What were the parties’ reasons for agreeing for the relevant clause?
v) Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss for the purposes of the Dunlop case, and, if he has shown the latter, is there some other reason which justifies the discrepancy between i) and ii) above?
A point that neither the Dunlop case nor the Cine case considers is the position if either there is no evidence at trial as to why the parties agreed a particular clause, or if the evidence is that they did consider it but took a wholly wrong view about what damages would be payable under the general law in the event of breach. In the Dunlop case, trial had taken place and there had been evidence as to why Dunlop needed the clause. In the Cine case, trial had not take place but the court proceeded on the basis that there would or could be evidence about the reasons for the clause in question at the trial to which the case was remitted. What happens if there is no evidence about the reasons for the clause? There would in my judgment be no reason why the court could not draw inferences of fact as to the reasons and as to the genuineness of those reasons. What if it appears from the evidence that is given (or from the inferences that the court makes from the facts) that the decision to include the damages clause was included on the basis of a mistaken belief that the damages at common law would be assessed on a materially more generous basis than in fact would occur? This would be the case if for example the parties failed to have regard to the fact that a party would have to give credit for a benefit that he obtained on breach, such as a tax saving as a result of the receipt of damages for lost income in the form of a lump sum payment of damages. In my judgment, the good faith belief of the parties is not the deciding factor here. The court would look at the result and (bearing in mind that the onus is on the party challenging the clause to establish that it is a penalty) ask whether it is satisfied that the parties could not, if they had had the proper information or considerations in front of them, genuinely have considered that the damages payable under the contractual provision were a realistic pre-estimate of the damages payable on breach at common law. In other words, in the context of Lord Dunedin’s speech, the test of genuineness is objective. A pre-estimate is genuine if it is not unreasonable in all the circumstances of the case.
I now turn to the facts of this case
Joseph Sheehan v Breccia,
Irish Agricultural Development Company, Blackrock Hospital Limited, George Duffy, Rosaleen Duffy and Tullycorbett Limited.
2016 197 (WLIE 1)
Court of Appeal
30 July 2018
unreported
[2018] IECA 286/1
Mr. Justice Gerard Hogan
July 30, 2018
JUDGMENT
1. The basic facts of this dispute have already been set out by Finlay Geoghegan J. in the judgment which she has just delivered dealing with the question of surcharge interest. I gratefully adopt those statements of facts, supplementing them where necessary with specific details particular to the discrete issue of estoppel by conduct with which this judgment is solely concerned.
2. I should add that I have had the opportunity of reading in advance the judgment which Finlay Geoghegan J. has just delivered dealing with the question of surcharge interest and I agree with it. This judgment deals solely with the separate question of whether even if Breccia was entitled in principle to charge surcharge interest, it is, in any event, estopped from doing so.
3. In the two judgments which he delivered in this matter, Flynn v. Breccia[2016] IEHC 68 and Sheehan v. Breccia[2016] IEHC 129Haughton J. found in both instances that Breccia was estopped from endeavouring to charge surcharge interest prior to the 19th June 2015. This finding was made independently of his conclusions that the surcharge interest was unenforceable as a penalty clause. Breccia have now appealed to this Court against these findings.
4. This particular judgment deals only with the Sheehan appeal and it is supplementary to the judgment which I have just delivered in the Flynn appeal. The two judgments should really be read together, but in this judgment it is perforce necessary to repeat some of the detailed facts already set out in the accompanying Flynn judgment.
The Sheehan appeal: background facts to the estoppel claim
5. The plaintiff in this appeal, Mr. Joseph Sheehan, is a well known consultant surgeon who resides in the United States of America. He is one of the founding shareholders of Blackrock Hospital Ltd. (“BHL”). Breccia is a private unlimited company controlled by the well-known businessman, Mr. Lawrence Goodman, and its directors are Mr. Goodman and Ms. Catherine Goodman. In 1983 the British health insurer, BUPA, in conjunction with four doctors, namely, brothers Joseph Sheehan (the plaintiff in this appeal) and James Sheehan, George Duffy and the late Maurice Neligan, put together an investment package to build and develop the Blackrock Clinic, which in due course became vested in BHL.
6. In 2006 BUPA agreed to sell its shareholding of approximately 56% of BHL to, inter alia, the plaintiffs and Breccia. Financing for the purchase of the shares was obtained from Anglo Irish Bank (“Anglo”). As an integral part of the purchase of the BUPA shareholding the parties, including all existing shareholders and two guarantors, entered into a shareholders’ agreement dated the 28th March 2006. As part of the shareholders’ agreement it was agreed that an annual dividend would be declared which would be used to pay the interest on the Anglo loans until they matured, whereupon the entire facility would become immediately due and payable.
7. On the 28th March 2006 Mr. Joseph Sheehan, Mr. John Flynn and Dr. George Duffy also borrowed money from Anglo, on similar terms, to purchase shares in BHL. A company controlled by Mr. Flynn, Benray Ltd., furnished a further guarantee dated the 28th March 2006 in respect of the borrowers’ liabilities under those further loans (“the “cross guarantee”). Similar cross guarantees were entered into by the other shareholders concerned, save that Breccia did not enter into a cross guarantee, but instead executed a deed of covenant dated the 28th March 2006. The relationship between the shareholders and BHL and the shareholders inter se was governed by a shareholders’ agreement also dated the 28th March 2006 (“the shareholders’ agreement”).
8. The plaintiff entered into two facilities with Anglo, the first on the 28th March 2006 (“the 2006 facility letter”) and the second on the 12th November 2008 (“the 2008 facility letter”). I propose to term them collectively as the facility letters. The plaintiff’s borrowing was secured by a mortgage of his shareholding in BHL (“the mortgage”); a deed of covenant entered into between Breccia and Anglo, deeds of ‘cross guarantee’ and indemnity entered into by the other shareholders (Benray Ltd., James Sheehan, Rosemary Sheehan and George Duffy), all dated the 28th March, 2006; and a mortgage dated the 24th August 2006 of a house in Ballyheigue, Co. Kerry. The plaintiff also entered into a guarantee on the 28th March 2006, cross guaranteeing the financial obligations of the other shareholders who took out Anglo loans.
9. The plaintiff was advanced the principal amount of €11,188,256 pursuant to the terms and conditions of the 2006 facility letter, and a further €6,342,000 pursuant to the terms and conditions of the 2008 facility letter. The facility letters provided for an annual interest rate varying between 1.75% and 2.75% above the three month EURIBOR. Clause 5.1 of the facility letters provided for the payment of surcharge interest in the case of default.
10. It is agreed that the loans under the facility letters all fell due for repayment on the 31st December 2010. On the 21st January 2009 following the enactment of the Anglo Irish Bank Corporation Act 2009 Anglo re-registered as a private limited company. Although the facility letters had fallen due on the 30th December 2010, Anglo did not in fact demand repayment or initiate any proceedings against the plaintiff.
11. By special resolution dated the 3rd October 2011 the name of Anglo was changed to that of the Irish Bank Resolution Corporation Ltd. (“IBRC”). The Irish Bank Resolution Corporation Act 2013 (“the 2013 Act”) provided for a mechanism whereby IBRC itself could be liquidated. On the 7th February 2013 the Minister for Finance made the Irish Bank Resolution Corporation Act (In Special Liquidation) Order 2013, providing for the appointment of Mr. Kieran Wallace and Mr. Eamonn Richardson of KPMG as joint Special Liquidators of IBRC (“the Special Liquidators”) for the purpose of winding up IBRC.
12. On the 29th May 2013 IBRC wrote to Mr. Sheehan notifying him that the loan facilities under the 2006 facility letter were in default and that IBRC were reserving their rights. They wrote again on the 31st October 2013 notifying him of the Special Liquidators’ decision to sell his loans, and those of the fourth named defendant, Dr. George Duffy. On the 8th November 2013 the plaintiff wrote to the Special Liquidators advising them that he wished to redeem his loans. The Special Liquidators responded on the 12th November 2013 indicating that he could redeem “at par at any time in the sale process”.
13. In March 2014 the plaintiff made a bid to IBRC to buy his loans, and the loan of Dr. Duffy. This attempt to purchase these loans was unsuccessful, and, it is understood, is the subject matter of other pleas in these proceedings. These issues are, however, not before this Court.
14. As it happens, the plaintiff’s loans did not sell in March 2014, so later that year the Special Liquidators initiated a further sales process in respect of the plaintiff’s loans (but not those of Dr. Duffy, as these loans had been redeemed in the meantime). The plaintiff bid to purchase his own loans, but he was outbid by Breccia. The validity of the purported purchase by Breccia of the plaintiff’s loans is also apparently challenged in these proceedings, but this issue is again not before this Court. In the High Court Haughton J. assumed for the purposes of the surcharge interest and estoppel issues that the purchase of the plaintiff’s loans by Breccia was valid. I propose to make a similar assumption for the purposes of this judgment.
15. Breccia acquired the loans by assignment from IBRC on the 10th December 2014. By letter dated the 18th December 2014 Breccia wrote to the plaintiff notifying him of the acquisition, inter alia, of the plaintiff’s loans under the facility letters. In that letter Breccia demanded the “immediate payment and discharge of the sum of €16,144,572 under the BHL Loan Agreement and the 2008 Loan Agreement and the sum of €6,734,852 under the Guarantee, being in total the sum of €22,879,424.” The letter indicated that Breccia reserved the right, inter alia, to appoint a receiver in the event of non-payment and this was stated to be without prejudice to “any other rights or remedies we may have including….the right to make further demands in respect of sums owing to us”.
16. Following receipt of this letter these proceedings were initiated by Mr. Sheehan by way of plenary summons issued on the 22nd December 2014. On that date the plaintiff applied for and obtained an interim injunction from the High Court (Noonan J.) restraining Breccia from acting on foot of the letter of demand of the 18th December 2014, or from seeking to enforce any of the security held, or appointing a receiver.
17. A statement of claim was delivered by the plaintiff on the 9th February 2015. The first and second named defendants’ defence and counterclaim were delivered on the 26th February, 2015. The counterclaim contains a claim for the two sums demanded in the letter of the 18th December 2014.
18. By letter dated the 25th May 2015 Arthur McLean, the plaintiff’s solicitors, wrote to Matheson, solicitors for Breccia, requesting a redemption figure in respect of the facility letters as “our client is in the process of refinancing his loans”. The reply dated the 9th June 2015 indicated that the figure of €19,663,673.88. It further stated that interest was continuing to accrue at a daily rate of €3,059.29. As this figure greatly exceeded the amount in the demand letter in respect of the plaintiff’s loans, Arthur McLean sought a breakdown. In response by a letter of the 19th June 2015 Matheson explained that the sum of €16,198,273.71, excluding surcharge interest, was due under the facility letters at the date of acquisition of the loans by the defendant. The letter further stated that surcharge interest at a rate of 4% was due from the 31st December 2010. This sum for surcharge interest amounted to €2,822,957.05 and it was was due under clause 5 of the General Conditions up to the date of acquisition. The letter also stated that further accrued interest gave a subtotal of €19,359,220 as of the 31st March 2015; and that further interest in the sum of €211,090 between the 31st March to the 8th June 2015 was also due. Matheson stated that the interest was currently accruing on the total amount due at a daily rate of €3,059.29. In addition they indicated that the plaintiff would also have to pay all costs, charges and expenses incurred in connection with the enforcement of the facility letters pursuant to clause 6.2 of the General Terms and Conditions.
19. The plaintiff continues to wish to redeem his loans under the facility letters. In the High Court he asserted that he has secured and continues to have in place refinancing to enable him to achieve this, but on the basis that the redemption figure does not include the 4% surcharge interest charged up to the date of the Matheson letter of the 19th June 2015.
The estoppel issue: relevant legal principles
20. Before considering the evidence on this point, it is necessary briefly to rehearse again the relevant legal principles governing the estoppel issue which are, in any event, set out in my judgment in Flynn. For an estoppel to arise there must first be an express or implied representation amounting to a “clear and unambiguous promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly”: see Doran v. Thompson Ltd.[1978] I.R. 223, 230, per Griffin J. In that judgment Griffin J. proceeded to articulate what was required in respect of the second limb of the test ([1978] I.R. 223, 230):
“….and the other party has acted on [the promise or assurance] to his detriment, it is well settled that the one who gave the promise or assurance cannot afterwards be revert to their previous legal relation as if no such assurance or promise had been made by him, and that he may be restrained in equity from acting inconsistently with such promise or assurance.”
21. It is these principles which I now propose to apply.
Was there a representation?
22. The claim for surcharge interest is based on clause 5.1 of Anglo’s general terms and conditions. This clause provides:
“5.1. Any monies due by the borrower to the Bank and for the time being unpaid will bear a surcharge interest at the rate of 4% over the facility interest rate or at the Bank’s discretion at a rate equivalent to the aggregate of 4% over the facility interest rate on the due date calculated on a daily basis from the due date to the date of actual payment after as well as before any demand is made, any judgment obtained hereunder or the bankruptcy or insolvency of the borrower….”
23. The first question is whether there was a representation. In the High Court Haughton J. found that there was no evidence that any express representation was ever made by Anglo/IBRC or by the Special Liquidators or, indeed, by Breccia, that surcharge interest would not be applied to the loans. One can only agree with this conclusion, so that the next question is whether the existence of such an implied representation may be inferred from the general course of dealing between the parties.
24. The first thing to note in that context is that, if one assumes for this purpose that the application of surcharge interest was indeed lawful, one would have expected to see a reference to it in the various loan account balances at any time after the 31st December 2010 when the default was triggered. As Haughton J. noted, it is apparent from the bank statements supplied by Anglo/IBRC, that no question of the application of any surcharge was ever mentioned in these statements and nor was such a figure for such interest ever added to the amounts stated to be due. The bank statements instead simply showed that ordinary interest was debited and applied to all outstanding balances, i.e., the EURIBOR rate, plus the relevant marginal rate. These bank statements further record any change in this normal interest rate.
25. Haughton J. also accepted the plaintiff’s evidence that there had been no verbal demand for surcharge interest or any inclination that it might be charged. It was not until the letter of the 29th May 2013 that IBRC wrote formally notifying the plaintiff of the default and reserving IBRC’s rights in that regard. That letter related only to the 2006 facility letter and it made no reference to any surcharge interest. The loan accounts and the bank statements nonetheless continued to operate as previously.
26. As I have already mentioned, the Special Liquidators then informed the plaintiff by letter dated 31st October 2013 of a decision that they had taken to sell his loans, together with the loan of Dr. George Duffy. The plaintiff then wrote to the Special Liquidators on the 8th November 2013 indicating that he wished to redeem his loan. The Special Liquidators replied by letter dated the 12th November 2013 in which they stated:
“We note that you say you wish to redeem your loan in full. That is always available to you and you can redeem this at par at any time in the sales process . If you wish to pay off your loan in full please contact [X]…who will provide the amount outstanding by you.” [Emphasis added]
27. Having quoted this letter, Haughton J. then stated (at para. 146 of his judgment):
“Although the plaintiff did not seek to redeem his own loan at that time, this letter is none the less significant. The reference to “par” was a reference to the amount due on foot of the loan accounts without reference to any surcharge interest. This I did not take to be disputed, and is how it would be understood by a reasonable person reading that letter. The Special Liquidators’ letter of 12th November 2013 was therefore a clear and unambiguous representation that the plaintiff could redeem his loan at par, i.e., at the level of the balances set out in the bank statements that he received from IBRC from time to time, without reference to any surcharge interest. Can it be inferred from this that IBRC/the Special Liquidators would not be charging any surcharge interest? In my view it can, given the history of the accounts since 31st December, 2010 and the absence of any indication of surcharge in the intervening period. The plain meaning of this representation was obvious – it was saying to the plaintiff that you only have to pay par in order to redeem your loans, and nothing further is required. Moreover, following on from this in the mounting of an offer of €24 million in March/April, 2014 through a special purpose vehicle company to purchase his loan and that of Mr. Duffy from IBRC, I am satisfied from the evidence that the plaintiff actually based the amount of his bid on combined loan balances without including any surcharge interest.”
28. For my part, I entirely agree with this reasoning. As Haughton J. noted, this letter amounted to a representation that the loans could be redeemed at par. If IBRC had ever intended that surcharge interest should be charged, this was certainly the time to say it. Judged, therefore, by the terms of this letter and the entire course of dealing between the parties, the silence of Anglo/IBRC amounted to an implied representation that no surcharge interest would be charged. One could equally describe this as estoppel by silence or as a form of acquiescence.
Was it intended that the plaintiff could rely on this implied representation?
29. In the High Court Haughton J. held (at para. 148) that it was intended that the plaintiff could rely on the implied representation:
“Was this representation intended to be relied upon by the plaintiff? Undoubtedly it was, as the representation that the plaintiff could redeem at par was immediately followed by the sentence “if you wish to pay off your loan in full please contact [X]…who will provide the amount outstanding by you.” It should also be noted that this letter was in response to the plaintiff’s letter of 8th November 2013 indicating his wish to redeem his loans.”
30. Again, I can but agree with this analysis. The letter amounted in substance to a formal statement of the sums that were due under the facility letter and a statement as to the mechanism whereby these loans could be redeemed. It follows, therefore, that the two elements of the first limb of the Doran test have been satisfied. There was a representation (albeit an implied representation) which was intended to affect the legal relations between the parties to the effect that no surcharge interest would be charged. Of course, the defendants as purchasers of the loans from IBRC stand in the shoes of the previous owners so far as these representations are concerned and they are, in principle, at any rate, equally bound by them.
Whether the plaintiff acted to his detriment in reliance on the loans
31. This brings us to the further question of whether the plaintiff acted to his detriment such that it would now be inequitable for the defendants to resile from these representations. In the High Court, Haughton J. held with the plaintiff on this point:
“While it is true that the plaintiff did not proceed to redeem his loans in the manner contemplated by this correspondence [with IBRC], I am satisfied that he did place reliance on it in assembling and mounting the bid of €24m. for the combined loans and security, and the work and expense involved in raising alternative finance to support his bid.”
32. In my view, this conclusion is amply supported by the evidence. The sales process organised by the special liquidators involved an initial screening process. Serious bidders were then admitted to the second phase of the process where they had access to what was termed a data room which contained further information regarding the loans. Bidders with access to the data room were invited to make what was termed as “Phase II offers” based on the “gross loan balance” as of 31st July 2014. This figure was stated to be €16,144,572.
33. As Haughton J. observed:
“…this figure tallied with the plaintiff’s understanding at the time of what he owed on foot of the facility letters, and was reflected in the bank statements which he received at different times quarterly or two monthly. There was nothing in the sales documentation in the data room suggesting that any surcharge interest was included or applied to the loans, or that any offer should take into account a surcharge interest.”
34. The term “gross loan balance” was defined in the documentation provided by the Special Liquidators as representing “all outstand[ing] principal, interest and all other amounts due under a specific amount in local currency.”
35. On any view, this is yet a further representation as the total sum due and that this sum did not include surcharge interest. It was clearly a representation which was intended to be relied on by the plaintiff and, as it happens, the other bidder, namely, Breccia.
36. The plaintiff bid the figure of €16,850,000 for his loans. Haughton J. accepted Mr. Sheehan’s evidence that the bid offer was slightly greater than the par value because of the fact that the special liquidators’ costs had to be discharged and that they had put in an additional figure just “for safety” because it “was very important to us to buy our loan [and] not [just] redeem it”. The trial judge further accepted the plaintiff’s evidence that he had:
“….relied centrally on the representation by the Special Liquidators of a gross loan balance of €16,144,572 as of 31st July 2014, and that his bid was calculated on that basis and that he did not at that time entertain any notion that the loan might attract surcharge interest.”
37. Haughton J. also noted Breccia had equally relied on the data room statements:
“I also note that Breccia in bidding €17 million for the loan (in addition to which they paid the administrative costs of the Special Liquidators of €299,000 odd) paid a sum which, while it exceeded the gross loan value, was substantially less than the gross loan value plus surcharge interest from 31st December 2010. Thus Breccia also placed reliance on the representations of the Special Liquidators as to gross loan value in the data room, and also did not factor in any surcharge interest. Mr. Sheeran [a witness for Breccia] in his evidence accepted that at the time of the sale he was aware that the plaintiff was another bidder, and he agreed that because of this Breccia made an offer of €17 million that was somewhat over the Gross Loan Balance on 31st July 2014. He agreed that “we wanted to ensure that we acquired the loan” (Day 3 p. 51). I am satisfied that the only reason Breccia was prepared to pay approximately €850,000 over the par value was a strong desire to acquire the loan and more particularly the security for the loan.”
38. There was an abundance of evidence before the trial judge to support those findings. It is perfectly clear that Mr. Sheehan acted on these representations to his detriment and that he altered his position accordingly, thus satisfying the second limb of the Doran test. He put together financing for his bid and bid accordingly for these loans based on these representations. As Haughton J. observed in his judgment, had the gross loan balance in fact included a claim for surcharge interest “it is reasonable to presume that the plaintiff would have pitched his bid very differently, or not made a bid at all.” Moreover, as the trial judge found, Mr. Sheehan went to some considerable expense in arranging a team of financial and other advisers in the course of the preparation of the bid.
39. A centre feature of the Breccia defence to the estoppel claim is the contention that there was no evidence that Mr. Sheehan would have acted differently but for the representation. This, perhaps, is but another way of saying that, in the words of Fennelly J. in Daly v. Minister for Agriculture[2001] 3 IR 513, 530, a plaintiff “must show that he changed his position in a material way.” As Wilken and Ghaley explained in The Law of Waiver, Variation and Estoppel (3rd ed., 2006)(at 9-82): “what is essential is that the representee has been led to act differently from the way in which it would have done had the representation had not been made.”
40. For my part, however, I consider that Mr. Sheehan can readily satisfy that test. At all material times he acted on the basis that he needed to raise a figure somewhat in excess of €16m. and not the figure of some €19m. later demanded of him by Breccia. His various dealings with IBRC and various finance houses were all conducted on the basis that this was the figure he needed to raise. That was the basis on which he engaged with IBRC and, indeed, the finance house. If, as Breccia now assert, the true position was that he at all times needed to raise over €19m. to redeem the loans, the fact that he acted – perhaps not always successfully – on foot of an earlier representation that he only needed to raise some €16m. is sufficient to show a material change of position.
41. It follows that as of the date of the assignment of these loans to Breccia on the 10th December 2014, IBRC was estopped from recovering or seeking to recover default surcharge interest up to that point. It follows in turn that Breccia – who acquired the loans and security ‘subject to the equities’ – is equally estopped from seeking to recover (or add to the redemption figure) any default surcharge interest that might otherwise be contractually claimed for any period up to the 10th December 2014.
Whether the estoppel also extends up to the date of the Matheson letter of the 19th June 2015
42. It is next necessary to consider whether Breccia are also estopped from charging surcharge interest for the period from the 10th December 2014 up to the date of the Matheson letter of the 19th December 2015. Mr. Sheehan relies for this period on the stated amount of the demand in Breccia’s letter of the 18th December 2014 as establishing an estoppel. Breccia responded by saying that it cannot amount to an estoppel as the letter ended with the following saver of rights:
“This demand is without prejudice to and shall not be construed as a waiver of any other rights or remedies which we may have including, without limitation, the right to make further demands in respect of sums owing to us.”
43. After considered the evidence on this point Haughton J. found that:
“The letter was prepared and sent after advice had been obtained from Breccia’s solicitors. Mr. Sheeran personally signed the letter on Breccia’s behalf. It demanded immediate payment from the plaintiff of the sum of €16,144,572 under the facility letters (and a further sum on foot of the plaintiff’s guarantee). I have some difficulty with Mr. Sheeran’s evidence that the reference in the final paragraph to “the right to make further demands in respect of sums owing to us” was intended to be a reference to a right to charge surcharge interest, a subject to which I return below. I do accept his evidence that the quantum of the demand was “pitched marginally below the par value of the loan” in order to ensure what he described as “the integrity of the enforcement process”, and so that it couldn’t be “derailed” (Day 3 p. 74). The clear and admitted intention of Breccia at that time was to appoint a receiver to the secured assets the principal of which was the plaintiff’s shareholding in BHL. I am of the view that this was their primary objective in the issuance of the letter of demand. The timing supports this – it was very soon after completion of the acquisition of the loans, and very close to Christmas when it might be anticipated that it would be difficult for the plaintiff to organise payment or mount effective opposition to the appointment of a receiver.
I am satisfied that the real reason for demanding €16,144,572, as opposed to any greater figure, was concern over the calculation of normal interest by reason of the decision in IBRC v. Morrissey[2014] IEHC 460 which raised issues on the historic calculation of normal interest which applied to these loan accounts. I am satisfied that if the plaintiff had promptly discharged the sum of €16,144,572 on receipt of the letter dated 18th December, 2014 the loans under the facility letters would have been redeemed (albeit that the security might not have been discharged as it still supported the cross guarantees that the plaintiff had given in respect of the other Anglo loans), and indeed Mr. Sheeran accepted as much in his evidence when stating that he didn’t believe that Breccia would have had any scope to rework the redemption figure if the plaintiff had paid up on foot of the figures in the letter.”
44. Haughton J. went on to say:
“I am satisfied that any reasonable person standing in the shoes of the plaintiff as borrower and having knowledge of the history of the account as related above with Anglo/IBRC and the Special Liquidators would, with one proviso, have treated this letter as clearly representing the redemption figure. Knowing €16,144,572 to be the gross loan balance as of 31st July 2014 they would have wondered why additional ordinary interest since that date had not been added to the figure. Equally they would probably and reasonably have treated the interest since 31st July 2014 as the possible subject of further demand under the reservation of rights paragraph if the principal demand was not met. Mr. Sheeran in evidence mentioned that the normal interest in the region of €113,000 accrued from 31st July, 2014 to the date of completion of the purchase of the loan (10th December, 2014). This minor ambiguity does not however materially affect the clarity of the representation in the letter.”
45. Haughton J. also found that Breccia were fully aware that no surcharge interest had been charged by either Anglo or IBRC prior to the 31st July 2014. Again, these were all findings which the trial judge was fully entitled to make on the evidence.
46. What, then, is the consequence of this? If Breccia believed – at it apparently did – that it was entitled to surcharge interest, then it was obliged to inform Mr. Sheehan of this fact in unambiguous terms. Its failure to do so amounted, in substance, to a representation that it did not intend to charge surcharge interest. Like Haughton J. I find myself entirely unpersuaded by the suggestion of Breccia that it was not under an obligation to notify the plaintiff at this juncture of the intention to charge surcharge interest. It is true that as a matter of ordinary contract law there is a not a general duty of disclosure by the contractual parties. But the situation is different where, as here, Breccia made a formal statement containing an implied representation that no surcharge interest would be charged.
47. Still less am I impressed with Breccia’s entirely fanciful contention that the formal saver of rights contained in the letter ought to have conveyed such to Mr. Sheehan. If Breccia really intended to charge surcharge interest and thereby to change the course of dealing which had obtained for four years between Mr. Sheehan on the one hand and Anglo/IBRC, one must then ask why the letter did not expressly say as much.
48. The long and short of it was that a formal demand was made by Breccia of Mr. Sheehan of the sums which are now said to be now due. As Haughton J. found, this demand was a prelude to the subsequent appointment of a receiver over the pledged assets of Mr. Sheehan. Having asserted what was then due Breccia cannot in conscience be allowed unilaterally to resile from that figure. To put matters another way, Breccia cannot be permitted to advance one figure in a formal letter to Mr. Sheehan for the ostensible purpose of securing a redemption of the loan figure, while reserving on to itself the right later to claim a higher figure without having first disclosed the basis of that higher claim.
49. It is clear that Mr. Sheehan changed his position on foot of these implied representations by again making arrangements to redeem the loan balance as stated in the letter of the 18th December 2014. As I have already noted, his solicitors, Arthur McLean, wrote on the 18th May 2015 to Matheson solicitors indicating that he intended to redeem the loans and inquired as to the redemption figure. It was only then that Matheson reverted on 9th June 2015 on behalf of Breccia with a figure that included surcharge interest. Even at that stage Breccia did not explain the higher figure now suggested as the redemption figure, or set out any calculations of a surcharge interest. This figure was only provided on the 19th June 2015.
50. So far as detrimental reliance is concerned, Haughton J. accepted Mr. Sheehan’s evidence that after losing out on the sale he set about trying to raise funds with a view to redeeming his loan and that “this work was in progress (he had hoped to have funds in place to redeem on or about 5th December 2014) but was incomplete or had been unsuccessful by the time he received Breccia’s letter of the 18th December 2014.”
51. The trial judge further found that after Mr. Sheehan received the Breccia letter of the 18th December 2014 that letter was shown to potential funders in the course of continuing efforts to raise funds. The letter also featured in discussions up to the 25th May 2015 when his solicitors sought a redemption figure as “our client is in the process of refinancing his loans.” Haughton J. also found that Mr. Sheehan continued to rely on the terms of the Breccia letter of the 18th December 2014 so far as the final redemption figure was concerned. It is not been suggested that this was a finding which the trial judge was not entitled to make on the evidence.
52. It follows, therefore, that, in my view, the trial judge was entirely correct to hold that the formal letter from Breccia dated the 18th December 2014 demanding payment in the sum of €16,144,572 amounted to an implied representation that no surcharge interest was payable. Haughton J. was also entitled to hold on the evidence that the plaintiff had acted to its detriment on foot of that representation, so that the two limbs of the Doran test are accordingly satisfied. It follows that Breccia are also estopped by their conduct in claiming surcharge interest for the period between the 10th December 2014 (the date of the acquisition of the loans from IBRC) and the 19th June 2015 (the date of the Matheson letter setting out the basis on which surcharge interest was claimed).
Conclusions
53. Summing up, therefore, I am of the view that Breccia as assignee is bound by the representations as to the redemption figure given by its assignor, IBRC, to the plaintiff in the course of the bidding process for the loans in July 2014. The plaintiff acted to his detriment in seeking to arrange finance on the basis that this was the true redemption figure. It follows in turn that Breccia is estopped by reason of the conduct of its assignor from asserting that surcharge interest is now due on these loans up to and including the date of the assignment on the 10th December 2014.
54. The letter from Breccia dated the 18h December 2014 setting out a formal demand for €16,144,572 also amounted to an implied representation that no surcharge interest was payable, the formal reservation of rights contained in that letter notwithstanding. The plaintiff also acted to his detriment in reliance on that letter by seeking to arrange funding. Breccia is accordingly estopped from claiming surcharge interest for the period from the 18th December 2014 until the subsequent letter of Matheson dated 19th June 2015.
55. I would accordingly affirm the decision of the High Court on the estoppel issue.
Ms. Justice Finlay Geoghegan
July 30, 2018
JUDGMENT
1. This appeal brought by Breccia and Irish Agricultural Development Company as appellants (to whom I will simply refer as “Breccia”) is against the order of the High Court (Haughton J.) of the 12th April, 2016, made for the reasons set out in the written judgment of the 5th February, 2016.
2. The background facts to these proceedings are fully set out in the High Court judgment. Suffice it to say for the purposes of the appeal that the plaintiff, Mr. Sheehan entered into two facilities with Anglo Irish Bank (“Anglo”), the first on the 29th March, 2006, (the “2006 facility”) and the second on the 12th November, 2008, (the “2008 facility”). I shall describe them simply in this judgment as the “facilities”. Mr. Sheehan, Breccia, Benray and others were shareholders at the time in Blackrock Hospital Limited (“BHL”). They with other shareholders entered into a shareholders agreement on the 28th March, 2006. Each of the shareholders obtained facilities from Anglo at that time. The purpose of the facilities was to finance the purchase of shares in BHL from BUPA. The borrowings from Anglo were secured by mortgages over the shareholdings in BHL and there were cross guarantees and indemnities between the shareholders and Anglo. For the purposes of the appeal it is no longer in dispute that the contractual terms of the 2006 and 2008 facilities included Anglo’s then general conditions for personal loans. The same general conditions applied in 2006 and 2008.
3. The facilities fell due for repayment on the 30th December, 2010. Anglo re-registered and its name was changed to Irish Bank Resolution Corporation Limited (“IBRC”). On the 7th February, 2013, the special liquidators were appointed for the purpose of winding up IBRC. Prior to that date no demand had been made on Mr. Sheehan by Anglo or IBRC notwithstanding the due date for repayment, 31st December, 2010, had long since passed.
4. In November, 2013 Mr. Sheehan wrote to the special liquidators stating that he wished to redeem his loans and they responded indicating that he could redeem “at par at any time in the sale process”. In March, 2014 he made a bid to IBRC to buy his loans which was unsuccessful. The special liquidators initiated a further sales process, in which Mr Sheehan made a bid which was not accepted and ultimately Mr. Sheehan’s loans were purchased by and transferred to Breccia in December, 2014.
5. Thereafter, in December 2014 Breccia issued a demand to Mr. Sheehan for immediate payment and discharge of a sum of €16,144,572 under the 2006 and 2008 facilities together with further sums under a guarantee. In response, these proceedings were commenced on the 22nd December, 2014.
6. In May, 2015 Mr. Sheehan’s solicitors wrote to Matheson, solicitor for Breccia requesting a redemption figure in respect of the 2006 and 2008 facilities. In response they were given a figure of €19,663,673.88 with continuing interest accruing at a daily rate of €3,059.29. In response to a request for a breakdown Matheson informed them, inter alia, that surcharge interest at 4% from 31st December, 2010, amounting to €2,822,957.05 was due under clause 5 of the general conditions up to the date of acquisition. That was the principal explanation for the difference between the figure then given and the earlier demand which had been made in December, 2014. There was also a reference to the obligation under clause 6.2 of the general conditions to pay all costs, charges and expense incurred in connection with the enforcement of the facilities and a figure identified from the date of acquisition of the loans up to the 8th June, 2015, under this heading of €93,362.56.
7. Mr. Sheehan disputed the claims to surcharge and costs of enforcement and it was agreed that that dispute would be determined in these proceedings and an amended statement of claim delivered and a modular trial agreed.
8. This modular trial was heard by the High Court immediately after the modular trial of similar issue arising in the proceedings between John Flynn and Benray Limited and Breccia (2015/5122P) (“Flynn No. 2”).
Modular Hearing and Judgment
9. At the modular hearing evidence was given by the plaintiff and a banking expert, Mr. Vincent Fennelly, on his behalf. Evidence was given on behalf of Breccia by Mr. Declan Sheeran, the company secretary and a banking expert, Mr. Conor O’Malley.
10. Notwithstanding that the modular hearing in Flynn No. 2 was first heard the trial judge delivered judgment in the modular hearing in these proceedings prior to the Flynn proceedings. Two factors appear to have contributed to that. First, on the 4th November, 2015, one day before closing submissions in this modular hearing, the UK Supreme Court delivered judgment in two cases: Cavendish Square Holding BV v. Talal El Makdessi; ParkingEye Limited v. Beavis[2015] UKSC 67, [2016] A.C. 1172, in which it revisited and restated the law as to when a contractual provision may be struck down as a penalty. Second, the evidence adduced relevant to the penalty issue was more extensive than in the Flynn No. 2 modular hearing.
11. The trial judge delivered a lengthy and detailed judgment on the 5th February, 2016. He conveniently summarises at its end what he terms “the redemption issues” it was agreed should be determined at the modular hearing and his findings on each as follows:
“Summary of answers to the redemption issues
A. Can Breccia contractually claim the redemption figures sought? Yes, in so far as default surcharge interest may be contractually claimed under clause 5.1 of the applicable General Conditions, and further, in respect of the 2008 Facility Letter, under clause 9 of that Facility.
B. Is all or part of the redemption figure an “unlawful penalty”? Yes – that part of it that purports to include default surcharge interest under General Condition 5.1.
C. Has Breccia waived its right to claim all or part of the redemption figure?; and
D. Is Breccia estopped from claiming all or part of the redemption figure? These questions only arise if the default surcharge interest of 4% is lawful. In such circumstance the answer is that Breccia is estopped from claiming any surcharge interest arising up to 19th June, 2015, but is thereafter entitled to claim it on account balances.
E. Can Breccia charge “enforcement” costs, charges and expenses, and if so, how much? Yes, but not the sums notified in correspondence. Only such costs of the modular hearing as may be awarded to Breccia, the same to be taxed in default of agreement, may be charged and added to the redemption figure. Reserved costs, and other possible future or “contingent” costs, may not be charged or factored into the redemption figure.
F. What is the correct redemption figure on 9th June, 2015 and as of today’s date? As of today’s date – €16,985,929.21 being rolled up ordinary interest and principal on 29th October, 2015, together with daily interest from 30th October, 2015 to 31st December, 2015 at the rate of €770.64 per day, plus daily interest thereafter to be agreed/determined to reflect any change in the EURIBOR rate. In addition, in so far as any costs of the modular trial may be awarded to Breccia, such costs, to be taxed in default of agreement.
G. What relief, if any, is the plaintiff entitled to in respect of the redemption issues?
(1) An order stating the present day redemption figure in respect of the plaintiff’s loans, together with the rate of daily accrual of ordinary interest based on the current EURIBOR rate.
(2) Such addition to the redemption figure in (1) as may arise when the court determines costs.
(3) No other order at present, apart from liberty to apply.”
12. Following the delivery of this judgment and the judgment in the Flynn No. 2 modular hearing on the 5th February there were further hearings in relation to costs and stays and the trial judge delivered a further written combined judgment in both proceedings on the 4th March, 2016. By this time Breccia had indicated an intention to appeal.
Appeals
13. The appeals in these proceedings and the Flynn proceedings were heard together. Whilst separate written submissions were filed by reason of differing factual and evidential issues the core issues to be determined on appeal are similar and counsel for Breccia and counsel of Mr. Sheehan, Benray and Mr. Flynn made combined oral submissions. The issues to be determined on appeal may be broadly identified as follows:
(i) Is the surcharge interest at a rate of 4% payable under clause 5.1 of the general conditions an unlawful and unenforceable penalty clause?
(ii) If not is Breccia estopped from claiming surcharge interest between the 31st December, 2010, and the 19th June, 2015?
(iii) Issues in relation to what “enforcement costs” may be included in the redemption figures for Mr. Sheehan’s loan and mortgage.
Penalty Clauses and Surcharge Interest
14. As already stated the UK Supreme Court in Cavendish has conducted a comprehensive review of the case law on penalties since the 18th century and has as set out by the trial judge modified the approach from that which had been applied in application (whether correctly or incorrectly) of the principles set out in Dunlop Pneumatic Tyre v. New Garage[1915] AC 79 and in particular the oft cited principles from the opinion of Lord Dunedin.
15. As appears from the judgment of the trial judge submissions were made to him in reliance upon Cavendish as to the approach which he should take. He ultimately rejected any change from the long standing approach in this jurisdiction following the adoption by the Supreme Court per Barron J. in Pat O’Donnell & Co. v. Truck and Machinery Sales[1998] 4 I.R. 191 of the principles in Dunlop.
16. The trial judge ultimately decided that in accordance with the principles set out by Clarke J. in Re Worldport Ireland Ltd.[2005] IEHC 189 that he should follow the approach which I had taken in a High Court judgment in ACC Bank v. Friends First[2012] IEHC 435 in applying the Dunlop principles to a clause in bank general conditions providing for surcharge interest.
17. On appeal, Breccia in its written submissions sought to rely upon the change of approach in Cavendish. However, in oral submissions counsel on its behalf focused on what he submitted was an incorrect application of the Dunlop principles as adopted in this jurisdiction by the Supreme Court in Pat O’Donnell by the trial judge herein by following an incorrect or incomplete application of same in the judgment in ACC Bank.
18. Subsequent to the High Court judgment herein and prior to the appeal hearing the Supreme Court gave judgment in Launceston Property Finance Limited v. Burke[2017] IESC 62[2017] 2 I.R. 798. McKechnie J. (with whom Charleton J. and O’Malley J. concurred) reiterated at para. 34 the position in this jurisdiction:
“34. The starting point for an assessment of the law relating to penalty clauses remains the principles set out in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.[1915] A.C. 79 (“Dunlop Pneumatic Tyre Co.”) at pp. 86-88. These principles were endorsed by the Supreme Court in Pat O’Donnell & Co. Ltd v Truck and Machinery Sales Ltd[1998] 4 I.R. 191 (“Pat O’Donnell & Co Ltd”) and have been applied by the Irish courts on myriad occasions since then.”
19. McKechnie J. referred to three High Court judgments, including ACC Bank in which the High Court continued to apply the Dunlop principles in this jurisdiction. He then referred to Cavendish and its consideration by Haughton J. in the judgment under appeal and in Flynn (No. 2) where at para. 48 he stated:
“It is my view that since Cavendish it has become apparent that in the UK courts the jurisprudence on penalty clauses involves a different approach and a different emphasis. Whether this should now be applied in this jurisdiction is a matter that may fall to be considered by an appellate court, but I have concluded that I should not depart from the jurisprudence established by judges of equal rank.”
20. McKechnie J. then continued:
“42. Thus the traditional perspective continues to be applied in this jurisdiction, and the test under Irish law, as it presently stands, has now diverged from that applicable in England and Wales. A modest caveat to that, however, should be entered: it is that Haughton J. saw some merit in the new UK approach. However, he stopped short of outright endorsing it, much less applying it, preferring instead to leave it to an appellate court to consider whether a recalibration of the Irish test is required.
43. For the reasons which I am about to outline, I am satisfied that this issue does not require to be determined in the instant case; however, I shall take this opportunity and say, though clearly obiter, that I am not immediately convinced that any change to the test is necessary, nor that the route taken by the UK Supreme Court is necessarily a superior one. I stress that the live debate must be left over for a more suitable case, if and when that should arise. My reasons for this conclusion are as follows.”
21. Accordingly it appears to me that the approach, on appeal of counsel for Breccia is correct. The High Court and this Court remain bound in accordance with the Supreme Court judgment in Pat O’Donnell to apply the Dunlop principles in determining whether the surcharge interest clause is or is not a penalty. In so stating I do not wish to be taken as indicating that a reconsideration of those principles in the 21st century by the Supreme Court certainly insofar as they relate to additional default or surcharge interest may not be desirable. However, that remains a matter for the Supreme Court in this jurisdiction. As stated by Lord Neuberger and Lord Sumption in their joint judgment (with whom Lord Carnwath agreed) at para. 31:
“In our opinion, the law relating to penalties has become the prisoner of artificial characterisation, itself the result of unsatisfactory distinctions: between a penalty and a genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over literal reading of Lord Dunedin’s four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field…”
22. It is therefore necessary to consider the submissions of Breccia that the trial judge erroneously applied the Dunlop principles by following the approach in ACC Bank. Prior to doing so it is relevant to record certain principles which are not in dispute:
1. The onus of establishing that a clause is a penalty rests on the party alleging same, in this instance Mr. Sheehan.
2. The question of whether a clause is penal must be assessed at the time the agreement was entered not at the date of breach.
3. The courts are reluctant to interfere with the terms of a contract agreed between two parties of equal bargaining power. The willingness to do so in relation to a clause which is determined to be a penalty is an exception to the general rule.
23. The primary contention of Breccia as to the error in the approach of the trial judge in his judgment in this case and in Flynn (No. 2) (and the error made in ACC Bank) is that the Court failed to apply what it contends is the essential test, namely, whether the sum agreed is “extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time the contract was made”. In so submitting they rely upon the judgment of Barron J. in Pat O’Donnell.
24. Breccia submits, as it did to the High Court judge, that the judgment in ACC Bank fell into error in the question identified in para. 84:
“84. The onus of establishing that the imposition of a surcharge interest at 6% pursuant to clause 2.7.1 of the General Conditions is a penalty rests on Friends First. The parties to this agreement are both financial institutions capable of protecting their own commercial interests. The question to be determined, in accordance with the applicable principles in this jurisdiction, i.e., Dunlop Pneumatic Tyre Company, is whether it represents a genuine pre-estimate of the bank’s likely loss upon default at the time the Facility Letter was agreed i.e. November, 2007. Friends First contends that it cannot be so considered on the evidence adduced and that the only reasonable construction is that it was intended as a deterrent against default in the payment of interest or principal. The onus is on Friends First to so establish if it is to be considered a penalty.”[emphasis added]
25. The trial judge at paras. 97 and 98 of his judgment rejects the submission made that the judgment in ACC Bank at para. 84 fell into error by failing to advert to the “latitude” that Barron J. in Pat O’Donnell indicated should be applied in determining whether a clause is a penalty where it is genuinely difficult to pre-estimate the damage that could arise on breach. It is therefore necessary to reconsider the question as to what are the principles set out in Dunlop which have been adopted by the Supreme Court in Pat O’Donnell and are binding on this Court. In Pat O’Donnell the plaintiff’s claim was for recovery of the purchase price of two shovels supplied to the defendant together with accrued interest in accordance with a clause in the conditions of sale which provided:
“Accounts are payable in full on the due date which shall not be later than twenty days from date of invoice. Payment in full for all machines and attachments shall become due not later than five days from the date of invoice or on delivery of a notification that goods are ready for dispatch whichever is the earliest. Interest at the rate of 2 per cent per month shall be chargeable and payable immediately on overdue accounts.”
26. The judgment of Barron J. is the only one to consider the penalty issue and O’Flaherty J. and Lynch J. expressly agreed with same. At p. 213 Barron J. commenced his consideration of that issue as follows:
“The sum of money to be paid upon breach of a term of a contract may be either a penalty or agreed liquidated damages in the event of breach occurring. The principles to be applied are set out in Dunlop Pneumatic Tyre Company Limited v. New Garage and Motor Company Limited[1915] A.C. 79. In the course of his opinion, Dunedin L.J. accepted the following propositions as authoritative. He said at p. 86:-
“1. Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
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 …”
Dealing with the circumstances in which an agreed sum might be held to be a penalty, he said at p. 87:-
“(a) It will be held to be a 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. (Illustration given by Lord Halsbury in Clydebank case)
(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. In the same case Parker L.J. indicated the difference between these latter two paragraphs. He said at p. 97:-
‘… where the damages which may arise out of a breach of contract are in their nature uncertain, the law permits the parties to agree beforehand the amount to be paid on such breach. Whether the parties have so agreed or whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case. There are, however, certain general considerations which have to be borne in mind in determining the question. If, for example, the sum agreed to be paid is in excess of any actual damage which can possibly, or even probably, arise from the breach, the possibility of the parties having made a bona fide pre-estimate of damage has always been held to be excluded, and it is the same if they have stipulated for the payment of a larger sum in the event of breach of an agreement for the payment of a smaller sum.’
In the course of his judgment Parmoor L.J. also indicates the difference between the two situations. He said at p. 101:-
‘There are two instances in which the Court has interfered when the agreed sum is referable to the breach of a single stipulation. It is important that the principle of interference should not be extended. The agreed sum, though described in the contract as liquidated damages, is held to be a penalty if it is extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made …
The second instance in which the Courts have sanctioned interference is in the case of a covenant for a fixed sum, or for a sum definitely ascertainable, and where a larger sum is inserted by arrangement between the parties, payable as liquidated damages in default of payment. Since the damage for the breach of covenant is in such cases by English law capable of exact definition, the substitution of a larger sum as liquidated damages is regarded, not as a pre-estimate of damage, but as a penalty in the nature of a penal payment.’”
27. Barron J. then stated:
“These two instances are quite different. In the first case, the damages would be uncertain and there may genuinely be a difficulty in a pre-estimate of the damage which would occur in the event of breach. A latitude is allowed, but even then the sum agreed must not be extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made. If it is, it is regarded as a penalty, and the plaintiff is left to prove the actual damage.
In the second case, no question of a pre-estimate of loss arises because the amount of the damages is treated as being certain. As will be seen from the cases to which I shall refer the damages are regarded as certain because the only sum allowed over and above the actual fixed sum is interest. This is allowed at the then subsisting commercial rate. Accordingly if the agreed rate is in excess of that it will be treated as a penalty because any interest over the commercial rate will in effect provide for the payment of larger sum in place of a smaller one.”
28. Barron J. then considered the earlier cases from which he derived the principle that in the case of a covenant for a fixed sum or a sum definitely ascertainable the damages are regarded as certain because the only sum allowed over an above the actual fixed sum is interest. He then continued in the middle of p. 217:
“None of these cases rule the present one. The guiding principle is that for failure to pay a fixed sum the contract may not provide for the payment of a larger sum. And payment of a rate of interest in excess of the commercial rate includes in it a requirement that the payee should in effect pay a larger sum in respect of liability of a smaller sum.
This doctrine of penalties applies only where there has been a breach of contract…
Returning to the facts of the instant case, no question of a genuine pre-estimate of loss arises because the nature of the loss was always to be certain. The only question to be determined therefore is the relevant commercial rate. Where, as here, no formula is provided for the manner in which it is to be determined, it will be dependent upon evidence, since it is reasonable to hold that thirty % is not a commercial annual rate.
I would accordingly allow the appeal and remit the matter to the High Court to have the appropriate rate of interest assessed at the commercial rate applicable at the time of breach.
There may be cases where in addition to a claim for interest for late payment there is also a claim for special damage. An example is Intermediate Limited v. Smith (Unreported, English Court of Appeal, 22nd March, 1991) which was cited to us in argument. Since that question does not fall for decision in the present case, I express no opinion as to the approach to be adopted.”
29. The principles in Dunlop adopted and followed by the Supreme Court in Pat O’Donnell clearly indicate a binary approach; such a clause is either agreed liquidated damages payable in the event of the relevant breach occurring or if it is not it is a penalty. The principles do not appear to envisage a clause which provides for a payment on a specified breach of contract being other than liquidated damages or if not so construed then a penalty.
30. Neither party pursued a submission that the principles as stated by Barron J. for the Supreme Court in Pat O’Donnell by reference to the Dunlop principles do not apply to the 2006 and 2008 facility agreements which incorporate clause 5 of Anglo’s general terms and conditions.
31. There was however, a new submission made in oral submissions to this Court as to how the principles should be applied to clause 5 of Anglo’s general terms and conditions. Mr. John O’Donnell S.C. on behalf of Mr. Sheehan submitted that the relevant term of the contract of which it is alleged Mr. Sheehan was in breach was a covenant to pay a fixed or ascertainable sum of money on the 31st December, 2010. He submitted that in accordance with the judgment of Barron J. in Pat O’Donnell and, in particular, what appears to be the ratio of that case having regard to the dispute and contractual clause at issue that it falls into what Barron J. referred to as “the second case” following Lord Parmoor’s distinction and that the only sum allowed over and above the actual fixed sum is interest at the then subsisting commercial rate.
32. I do not consider that the Court can entertain such a submission as part of this appeal. It was not contended in the High Court that the only damages recoverable by Anglo in the event of a failure to pay any of the monies due under the lending agreement on the due date was interest on the amount due at the then subsisting commercial rate. That would have been a different contention and one to which different evidence may have been potentially relevant. The expert evidence led on behalf of Mr. Sheehan from Mr. Fennelly did not approach potential losses of Anglo by reason of a default in payment on the due date on this basis.
33. The remainder of this part of the judgment is therefore on an assumption (but without any decision to that effect) that Anglo in 2006 (or 2008) would have had a claim recognisable in law for damages for loss and damage which it might suffer by reason of the failure of Mr. Sheehan to make a payment due under the agreements on a due date which went beyond the sum in question and interest thereon at a commercial rate.
34. To return to the question as to the proper approach of a court in accordance with the Pat O’Donnell and Dunlop principles where it is contended that a contractual provision which provides for the payment of a sum of money upon breach of contract is a penalty. As already stated the principles indicate a binary approach. The clause is either agreed liquidated damages or, if it is not, then it is construed as being a penalty because its functional effect is not to compensate by payment of agreed liquidated damages, rather it is a clause whose functional effect is to deter the party from committing a breach of the agreement.
35. Whilst I accept that it is probably more accurate to state that the question the Court must determine is whether the contractual provision is properly an agreement for the payment of liquidated damages, that question in turn normally falls to be decided by determining whether the clause is to be construed as a genuine pre-estimate of loss to be suffered by the innocent party by reason of the relevant breach of contract. Those questions must be determined by construction of the relevant clause of the contract. As was stated by Lord Dunedin in 1915, this question is to be decided upon the “terms and inherent circumstances of each particular contract judged of as of the time of the making of the contract…” The principles according to which the courts will now construe a commercial contract such as that at issue are those set out by the Supreme Court in Analog Devices BV v. Zurich Insurance Company[2005] IESC 12, [2005] 1 I.R. 274.
36. Pat O’Donnell and Dunlop do indicate that there are certain tests which may be applicable to assisting the Court in deciding whether the clause in question is an agreement for the payment of liquidated damages or if it cannot be so construed that it is consequently a penalty. One such test, is as indicated by Lord Parmoor “where the agreed sum, though described in the contract as liquidated damages” is extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made …”. This is cited as one of two instances in which “the Court has interfered when the agreed sum is referable to the breach of a single stipulation”. Further he is speaking of a situation where the agreed sum is “described in the contract as liquidated damages”.
37. As appears from the opinions of Lord Dunedin, Lord Parker and Lord Parmoor quoted by Barron J. the essential question of construction which must be determined by the Court is whether the clause is to be construed as an agreement for the payment of liquidated damages. In construing such a clause one of the factors a court may look at is the potential loss and damage which the innocent party may suffer by reason of the breach to which the payment relates. Where a court is considering that question then if there is a probable variation in the loss and damage to be suffered by the innocent party and the Court considers that there may genuinely be a difficulty in a pre-estimate of the damage suffered in the event of breach then, as indicated by Barron J., a latitude should be allowed in determining the question as to whether the clause is an agreement for the payment of liquidated damages. The relationship between the sum agreed to be paid and the probable or possible loss of the innocent party, envisageable by the parties at the time the contract was made is amongst the matters relevant to the construction issue.
38. The authorities further indicate that if the sum agreed to be paid is – as was stated by Lord Parker – “in excess of any actual damage which can possible, or even probably arise from the breach the possibility of the parties having made a bona fide pre-estimate of damages has always been held to be excluded…”. It is correct to say that in such circumstances or, where as put by Lord Parmoor, if the amount “described in the contract as liquidated damages … is extravagant or unconscionable in relation to any possible amount of damages that could have been with the contemplation of the parties when the contract was made” then it will be considered to be a penalty.
39. However, it does not follow in my view that a party contending that the clause is a penalty must establish that either of the above thresholds is met. The relationship between probable damages and the sum agreed to be paid is a relevant factor and part of the circumstances which the Court must take in to account when construing the contract. It is, however, not a rigid threshold which must be met nor is it the only matter to be taken into account when construing the probable functional effect of the clause from the terms of the contract in its relevant factual matrix.
40. Accordingly, it appears to me that insofar as I stated at para. 79 of the judgment in ACC Bank that the principles in Pat O’Donnell adopting those in Dunlop “require the Court to determine whether or not the additional sum is payable is a genuine pre-estimate of the probable loss by reason of the breach” that it may be more accurate to have stated that they “require the Court to determine whether or not the additional sum payable is a genuine agreement for the payment of liquidated damages”. That question in turn, however, at least in part, may depends upon whether or not the additional sum payable represents in this instance, a genuine pre-estimate of the probable loss of Anglo by reason of the potential breaches of contract to which clause 5 of the general conditions refer. It is not, however, the only factor and it also appears that where the evidence establishes that such loss is uncertain, then a latitude is allowed to the parties in considering the question as to whether the clause is a genuine pre-estimate of a sum to be paid by way of liquidated damages the purpose of which is to compensate the innocent party for loss and damage.
41. Whilst I accept that there may have been some shorthand used by me at paras. 79 and 84 of the judgment in ACC Bank, it is also a shorthand that has been used elsewhere. In ACC Bank much reliance was placed on the judgment of Colman J. in the High Court in England in Lordsvale Finance plc v. Bank of Zambia[1996] QB 752. At p.763 he stated:
“It is perfectly true that for upwards of a century the courts have been at pains to define penalties by means of distinguishing them from liquidated damages clauses. The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. That is because the payment of liquidated damages is the most prevalent purpose for which an additional payment on breach might be required under a contract. However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.” [emphasis added]
42. In a context where this Court continues to apply the traditional binary approach which follows from Pat O’Donnell and Dunlop for the reasons already explained then the question has, as is stated by Colman J., always been considered to be whether the alleged penalty clause “can pass muster as a genuine pre-estimate of loss”. I would also like to draw attention to what was termed “unsatisfactory distinctions between a penalty and pre-estimate of loss” by Lord Neuberger and Lord Sumption at para. 31 of their joint judgment quoted above.
43. In Durkan New Homes v. Minister for the Environment, Heritage and Local Government[2012] IEHC 265, [2014] 2 I.R. 440, Charleton J. in the High Court referred to an extract from Treitel – The Law of Contract (13th ed., 2011) at para. 20.131 in the context of the principles set out by Lord Dunedin in Dunlop. The passage from Treitel cited with apparent approval by Charleton J. and again set out with apparent approval by the Supreme Court per McKechnie J. in Launceston states:-
“A clause is penal if it provides for ‘a payment of money stipulated as in terrorem of the offending party’, or, as it has been put more recently, if the contractual function of the clause is ‘deterrent rather than compensatory’. If, on the other hand, the clause is a ‘genuine’ attempt by the parties to estimate in advance the loss which will result from the breach, it is a liquidated damages clause. This is so even though the stipulated sum is not precisely equivalent to the injured party’s loss…”
44. I would respectfully agree that expressing the question to be determined as to whether “the clause is a genuine attempt by the parties to estimate in advance the loss which will result from the breach” may be a better way of putting the question. This approach permits the courts to uphold a clause which is a genuine attempt by the parties to estimate in advance the loss which will result from the breach but where by reason of the uncertainty of the loss it may be a sum which differs from the actual loss anticipated.
Application of principles to Clause 5 of the General Conditions
45. For the reasons set out I do not consider that there was any error on the part of the trial judge in applying the principles set out in Pat O’Donnell by adoption of those in Dunlop in determining the penalty issue by a consideration of the question as to whether the surcharge interest provided for in clause 5 of the general conditions is a genuine pre-estimate of the probable loss to Anglo by reason of the relevant breach of contract. Subject to the reservation of “shorthand” already set out I also do not consider he was in error in following ACC Bank. The essential question to be determined is whether the clause in question properly construed is an agreement for the payment of liquidated damages. The courts have traditionally approached that question by asking the question as to whether the sums stipulated are a genuine pre-estimate of the loss to the innocent party which would result from the relevant breach.
46. The relevant clause must be construed from its terms in the context of the agreement as a whole and taking into account the permissible background or factual matrix at the time the agreement was entered into.
47. The trial judge applying the principles set out in ACC Bank ultimately concluded at para. 127 that he was satisfied that “the surcharge rate of 4% was a generic rate and not a genuine pre-estimate of loss arising from default”. He further held in accordance with the expert evidence that “the pre-estimate of probable loss in the event of default was part of the calculation of the ordinary interest (Euribor plus the margin rate)”. However, he also appears to have relied upon what he understood to be agreed expert evidence that the “surcharge provision was intended to deter borrowers from defaulting on their loans”. Breccia on appeal disputes that that was the evidence given by its expert Mr. O’Malley. Whether or not his overall evidence is to be understood as so agreeing, I accept the broader submission that in construing clause 5 of the general conditions in accordance with the principles in Analog Devices it is not appropriate or permissible to take into account expert evidence or indeed evidence from any other person as to the intention of the relevant clause. The intention of the clause must be deduced from the words used in its contractual context when properly construed in accordance with the Analog Devices principles.
48. On appeal there was greater focus on the relevant contractual provisions than would appear to have been the position in the High Court. The question arose as to whether clause 3 of the general conditions applies to surcharge interest if payable. Counsel for Breccia contended, correctly in my view, that it does not. The consequences of this is considered below.
49. In my view, the trial judge is correct in his conclusion that clause 5 of the general conditions is not, when properly construed and having regard to the admissible expert evidence, an agreement for the payment of liquidated damages. It is not a genuine attempt to agree upon liquidated damages or estimate the loss which Anglo might suffer by reason of a default to which it relates. My principal reasons for so concluding are as follows.
50. Clause 5.1 provides:
“5.1 Any monies due by the Borrower to the Bank and for the time being unpaid will bare surcharge interest at the rate of 4% over the Facility Interest Rate or at the Bank’s discretion at a rate equivalent to the aggregate of 4% over the Facility Interest Rate on the due date calculated on a daily basis from the due date to the date of actual payment after as well as before demand is made, any judgment obtained hereunder or the insolvency of the Borrower.”
51. The first important contractual feature is that it forms part of the general conditions and therefore is not a clause which is specific to the borrowing of Mr. Sheehan. In its terms it provides for “any monies due by the borrower to the bank and for the time being unpaid” to “bear surcharge interest at the rate of 4% over the facility interest rate…”. It does not contain an express obligation on the borrower to pay such interest though that may be implied from the fact that the monies due are to bear the surcharge interest. More importantly it does not specify when such interest becomes payable by the borrower. It does not give to the bank the right to debit the borrower’s account with interest, as is, expressly provided both under the terms of the 2006 and 2008 facility letters and also clause 3.3 of the general conditions in relation to facility interest . The latter provides “the Bank shall debit the Account with the amount of interest when it becomes due under the terms of the Facility Letter”. Counsel for Breccia contended correctly that clause 3 of the general conditions applied only to the Facility Interest Rate and not to surcharge interest. It may be observed that if it did apply to the surcharge interest then Anglo was obliged pursuant to clause 3.3 to debit Mr. Sheehan’s account with the amount of the interest when it became due. The evidence before the Court was that no surcharge interest had been debited to the account prior to the assignment to Breccia. The statements of accounts provided to Mr. Sheehan did not include any surcharge interest.
52. The 2006 and 2008 facility letters provide expressly for the quarterly debiting of interest to Mr. Sheehan’s account. On the foregoing analysis it is probably not correct to consider clause 5 of the general conditions as providing for an uplift or increase in the interest rate payable by Mr. Sheehan under the 2006 and 2008 facilities in the sense that term was used by Colman J. in Lordsvale. On the facts of Lordsvale upon default a different interest clause which formed part of the specific lending agreement came to be applied. It replaced the earlier interest clause. There were three elements to the aggregate provision for interest, two of which changed on default. The one which became the subject of the alleged penalty dispute was an additional 1%. It was described by Colman J. as an “uplift” in the rate of interest. That is not the position here. The facility interest which continued to be applied to the borrowings in accordance with the terms of the facility letters (including the general conditions) provided for a varying interest rate with interest debited to the borrowers account quarterly and payable quarterly. The additional interest potentially payable pursuant to clause 5 of the general conditions (if not a penalty) is a rate of 4% on any amount due and unpaid from the date upon which that amount became due and was unpaid until the date of actual payment of the unpaid amount. There is no provision for payment or debiting in advance of the date upon which the unpaid amount is finally paid. If clause 5 is not a penalty, it appears to follow that the amount due and unpaid as at the 31st December, 2010, would bear surcharge interest at 4% calculated on a daily basis up to the date of actual payment and such interest would only become payable as an additional lump sum on the date of payment of the amount due as at the 31st December, 2010.
53. The trial judge set out in some detail the banking evidence adduced in this case at paras. 100 – 116. Whilst there was some dispute between Mr. Fennelly, who gave evidence on behalf of Mr. Sheehan, and Mr. O’Malley who gave evidence on behalf of Breccia, They were not in dispute on the question upon which the trial judge placed reliance, namely that the pre-estimate of probable loss in the event of default was a factor taken into account in the calculation of ordinary interest (Euribor plus the margin rate). In addition it would appear from the evidence of Mr. Fennelly recorded at para. 102 of the judgment that he also gave evidence that:
“A default in itself will not necessarily cause the bank to incur loss. Ultimately this will depend on the interplay between the amount outstanding at the time of default, the value of the security ultimately realised and the cost in time or effort in achieving these outcomes. Thus the loss possibilities include everything from nil to the entire amount.”
54. Even if one were to approach the issue identifying the question to be determined as being whether clause 5.1 is a genuine attempt by the parties to estimate in advance the loss which will result from breach, it appears to me that the answer must also be no. The accepted evidence was that in accordance with Basel II which probably applied at the time of the 2006 loans and certainly applied at the time of the 2008 loans, the pre-estimate of probable loss in the event of default formed part of the analysis which the bank did prior to determining the interest rate to be applied in this instance in 2006 a margin of 1.76% over Euribor. Further there was the evidence from Mr. Fennelly that a probable loss following default depends upon an interplay between the amount outstanding at the time of default, the value of the security ultimately realised and the cost in time or effort in achieving these outcomes.
55. The fact that clause 5 forms part of the general conditions which is not specific to the facilities agreed between Mr. Sheehan and Anglo and takes no account of either the amount of the loan or the level of security strongly supports the contention that this clause cannot be regarded as a genuine attempt by these parties to pre-estimate loss which would occur in the event of a default by Mr. Sheehan. This position is further strengthened by the fact that under the terms of clause 5 it is to apply on any monies due and unpaid on a due date. This would include a quarterly interest payment due and not fully paid on a due date. It is not confined to default in the repayment of the entire loan on the due date.
56. In summary, a construction of clause 5 from its terms in the context of the entire of the general conditions and 2006 and 2008 facility letters leads to the conclusion that this clause was not a genuine attempt to agree upon liquidated damages payable by the borrower on default and hence should be construed as being a penalty. This is so in particular by reason of (i), the marked difference between the terms of clause 5 and the very specific provisions which apply to the payment of the interest due at the Facility Interest Rate and the entitlement of the bank to debit such interest on a quarterly basis; (ii) the absence of any express provision as to when the surcharge interest becomes payable by the borrower and (iii) the absence of any provision entitling the bank to debit the account of the borrower with surcharge interest.
57. For completeness, I wish to draw attention to one other clause in the general conditions which in my view supports the conclusion which I have reached. It is clause 14. This was relied upon by Breccia in the context of the submissions on the enforcement costs. It does not appear to have been considered by the parties or submissions made in relation thereto to the trial judge or this Court in relation to the penalty clause issue. Clause 14 provides insofar as relevant (and the part relied upon in the submissions on enforcement costs):
“14. Indemnity
The borrower indemnifies and agrees to keep indemnified the Bank against all claims, demands, liabilities, losses, costs (including legal fees on a full indemnity basis), actions, proceedings, charges and expenses whatsoever and howsoever arising which the Bank may incur or suffer by reason of:
(a) …
(b) any default by the Borrower or any guarantor in the performance of any of the obligations expressed to be assumed by it in the Agreement or any of the Security Documents.
(c) …
(d) …”
The “Agreement” is defined in clause 2.2 as meaning the facility letter and the general conditions. Clause 14 makes no reference to default interest payable under clause 5. It is a clause expressly directed to the obligation of Mr. Sheehan to indemnify Anglo against losses which it might suffer by reason of any default. The inclusion of this clause without any attempt to pre-estimate the loss or to set out the manner of its interaction with default interest provided for in clause 5 would also appear to undermine a construction of clause 5 as being a liquidated damages clause.
58. I wish to make clear that in setting out the above observation, it was not a matter which I took into account when reaching agreement on the penalty clause issue but when considering the issues in relation to the enforcement of costs the potential relevance of clause 14 to the penalty clause issue became apparent.
Estoppel
59. In view of the conclusion which I have reached on the penalty clause issue and the fact that my colleagues have indicated agreement with this conclusion it is unnecessary to consider the grounds of appeal against the trial judge’s determination of this issue. Nevertheless, if it were necessary I would dismiss this part of the appeal for the reasons set out by Hogan J. in the judgment about to be delivered.
Enforcement Costs
60. The factual basis for this issue in the modular hearing in the High Court was the inclusion by Matheson in their letter of the 19th June as part of the redemption figure a sum of €93,362.56 as enforcement costs estimated to have been incurred and for which Mr. Sheehan was liable pursuant to clause 6.2 of the general conditions. Mr. Sheehan gave oral evidence of further costs and charges since the 8th June, 2015, of €313,036 as well as VAT and counsel’s fees for the modular hearing that had yet to be billed. In these proceedings – unlike in Flynn (No. 2) – the only costs sought to be included in the redemption figure are the legal costs connected with the defence of these proceedings brought by Mr. Sheehan both in relation to the modular hearing and estimated future costs connected with the substantive proceedings.
64. In the High Court it was sought, inter alia, to argue on behalf of Mr. Sheehan that these proceedings fell outside “enforcement costs” within the meaning of clause 6.2 of the general conditions. The trial judge rejected that submission for the reasons set out at paras. 192 and 193 of his judgment and concluded that the defence of these proceedings both in respect of the modular hearing and substantive proceedings formed part of “enforcement proceedings” as that term is used in clause 6.2. He further decided that the enforcement costs contractually recoverable under clause 6.2 of the general conditions could be enforced against the property the subject of the mortgage by reason of the definition of secured liabilities in the mortgage which in the case of Mr. Sheehan is clause 2.1. Those decisions are not the subject of a cross appeal on behalf of Mr. Sheehan.
65. However, the trial judge made two further decisions in relation to the costs which Breccia had sought to include in the redemption figure which are the subject of an appeal by Breccia.
66. First the trial judge excluded the recovery of costs which might have been incurred by Breccia in defending or pursuing enforcement proceedings but where a court in those proceedings had made an order directing Breccia to pay the costs to Mr. Sheehan or had made no order. At para. 195 he stated:
“195. Where a court has made an order directing that costs be paid by a bank, or has specified that there should be no order in relation to such costs, as a matter of public policy a contractual provision entitling a bank to add “enforcement costs” cannot in my view be construed as entitling the bank to recover those costs, or enforce against security, in defiance as it were of the court order. Were the position otherwise the administration of justice by the courts and the enforcement of its judgments would be seriously undermined, and it would open the door to a multiplicity of different contractual provisions effectively ousting the jurisdiction of the courts or fatally undermining the effectiveness of court orders.”
67. The reasons for which he reached that conclusion are set out at paras. 196 – 200 of his judgment and will be considered in the context of the submissions made on appeal below.
68. He also rejected Breccia’s claim to be entitled to future costs which might be incurred in defending this appeal or the substantive proceedings in the future as a contingent liability. He did so by reason of his construction of clause 6.2 of the general conditions and clauses 2.1 and 7.1(b) of the mortgage; a consideration of the Australian decision in Australian and New Zealand Banking Group Limited v. Mishra[2012] NSWSC 13333 and the equitable right of a mortgagor to redeem which he considered to be inextricable from Mr. Sheehan’s right to redeem the amount of the loans under the Facility Letters. He ultimately concluded that if Breccia had the right to include possible future enforcement costs as “contingent liabilities” that it would in real terms be a “clog” or “fetter” on redemption. At para. 209 he set out his conclusion on the enforcement costs issues before the High Court by stating:
“209. Accordingly, I conclude that Breccia is not entitled to factor in or include in the redemption figure the costs and expenses notified in correspondence since June, 2015. Following this judgment and any submissions that the parties may make I will deal with the costs of the modular issue. If, but only if, any such costs are awarded to Breccia, then such costs (to be agreed or in default taxed) will fall to be added to the redemption figure. Other than this, reserved costs or possible future or “contingent costs” of these proceedings or any appeal do not fall to be included in the redemption figure that must be provided at this point in time.”
69. On appeal Breccia identifies the issues in relation to enforcement costs which remain in dispute as being:
(i) Can “enforcement costs” already incurred, and not yet subject of any award of costs or order for taxation, because the issue of costs has not been considered by the Court, be added to the redemption figure for the mortgage?
(ii) Can “enforcement costs” already incurred, but in respect of which a court has made either an order for costs against Breccia or decided that no order as to costs should be made be added to the redemption figure for the mortgage?
(iii) Can “enforcement costs” expected to be incurred in extant proceedings and not yet subject of any award of costs or order for taxation, be added to the redemption figure for the mortgage as a contingent liability of the mortgagor?
70. Whilst Breccia has identified the issues in an abstract manner it is not proposed in this judgment to seek to express a view on the issues in such an abstract manner. The issue in the modular hearing in the High Court was the inclusion by Breccia of the costs already incurred or to be incurred in the defence of these proceedings. It is clear from the judgment that the trial judge was considering costs incurred or to be incurred by a mortgagee in defending the validity or quantum of its core claim. At para. 191 at the outset of his consideration of these issues he stated:
“191. I accept as correct the principles cited with approval by Laffoy J. in Red Sail, and in particular I agree with the observation of Nourse L.J. in Parker-Tweedale that “[o]ften the process of enforcement or preservation makes it necessary for [a mortgagee] to take or defend proceedings.” From this it follows that in general the costs incurred by a mortgagee in defending before a court the validity or quantum of its core claim, are costs that it is entitled to add to the debt or redemption figure. It does not logically make any difference that this ‘defending’ arises in a claim, defence or counterclaim.”
71. Accordingly, I do not understand the High Court judgment at para. 209 to be determining that non-litigation enforcement costs can only be added to a redemption figure if the mortgagee has obtained a costs order in its favour and those costs have been agreed or taxed. It must be considered in the context of the dispute before him what the enforcement costs being sought related to pending litigation.
72. The trial judge principally relies upon the relevant statements of the law by Laffoy J. in Red Sail Frozen Foods Limited (in receivership)[2006] IEHC 328, [2007] 2 I.R. 361. That judgment was given in an application brought by a receiver pursuant to s. 316 of the Companies Act 1963 seeking directions from the Court on a number of issues which included the entitlement of the bank in question to be paid out of the assets of the company legal costs and other expenses incurred by the bank in connection with inter alia the appointment of the receiver. On that issue, Laffoy J., having set out the general principles in the context of the direction in relation to costs of the proceedings, turned at para. 61 to consider the bank’s claim to be paid the legal costs and expenses incurred in connection with the appointment of the receiver out of the assets of the company. Having referred to the bills in question she then stated:
“Having regard to the information given in the bills, I am satisfied that those costs and expenses were reasonable and properly incurred by the bank in relation to the enforcement and preservation of its security and subject to being reasonable in amount, the bank is entitled to reimbursement out of the secured assets”.
73. She then referred to a submission that where a mortgagee is claiming entitlement to recoupment of legal costs out of secured assets that the proper measure of the costs is that which would tax on a party and party basis in reliance upon the decision of the English Court of Appeal in Gomba Holdings UK Limited v. Minories Finance Limited (No.2)[1993] Ch. 171, [1992] 3 W.L.R. 723 She rejected that proposition where the relevant contractual documents provide for costs on “a full indemnity basis” as was the position in her view on the debentures in issue. She then continued at para. 62 and stated:
“As regards the quantum of this aspect of the claim by the Bank, adopting an approach consistent with the approach I have adopted in relation to the Receiver’s legal costs, I do not propose to approve of the amount claimed. If the Companies dispute the amount, they can request the taxation of the costs.”
74. I respectfully agree with the above which makes clear that where a mortgagee is entitled to recover enforcement costs which are not litigation costs there is no requirement for an order for costs by a court. However, as with most persons obliged to pay legal costs, whether to their own solicitor or another, if the amount of the costs is disputed then the person may seek taxation of the amount of the costs. As stated by Laffoy J., the basis for the taxation may depend, in the case of a mortgagee, upon the terms of the security documents. I do not understand the trial judge to have intended to make any determination which runs contrary to the decision of Laffoy J. in Red Sail Frozen Foods Limited in relation to non-litigation costs, nor am I clear that it arises in relation to Mr. Sheehan on the facts of these proceedings.
75. Turning to the question of litigation costs which are also enforcement costs within the meaning of clause 6.2, the trial judge determined that Breccia could only include such costs where an order for costs was made in its favour and expressly decided that it could not include any costs where the Court had made an order in favour of the plaintiff against Breccia or had made no order as to costs as between the parties. This latter was decided by reason of the fact that it would be contrary to public policy.
76. Counsel for Mr. Sheehan made forcible submissions in respect of the potential injustice if the Court were to construe the contractual documents as giving Breccia a right to recover as a matter of contract costs of litigation where the Court exercising its discretion under O.99 had had refused to make an order in its favour or made an order against it in respect of the same costs. He also referred us to the judgment of the English Court of Appeal in Gomba Holdings (UK) Limited and ors v. Minories Finance Limited and ors (No. 2)[1993] Ch. 171, [1992] 3 W.L.R. 723 and to the judgment of Laffoy J. in Red Sail Frozen Foods Limited (in receivership).
77. This issue raises a difficult question as to the interaction between the jurisdiction of the courts under O.99 in relation to costs of proceedings and a prior contractual clause which governs the payment of the costs of the same proceedings. As put by Scott L.J. in Gomba the question is “as to how, if at all, the powers of the Court in respect of litigation costs can curtail a contractual right of recovery”. Whilst that judgment in part relates to the English statute and rules of court and the particular procedure at issue in those proceedings it is of assistance in identifying the principles which apply in this jurisdiction.
78. In relation to litigation costs (in a Superior Court) it appears to me the starting point must be O.99 and in particular rr. 1(1) and (2), as these provide:
Subject to the provisions of the Acts and any other statutes relating to costs and except as otherwise provided by these Rules:
(1) The costs of and incidental to every proceeding in the Superior Courts shall be in the discretion of those courts respectively.
(2) No party shall be entitled to recover any costs of or incidental to any proceeding from any other party to such proceeding except under an order or as provided by these rules.
79. Hence under O.99, r.1 litigation costs are in the discretion of the Court and further it would appear from O.99, r.1(2) that costs of proceedings may not be recovered except under an order (unless otherwise provided in the rules and no such submission was made by any party). Whilst the starting point under O.99, r.1(4) is that costs follow the event there is the well established and known jurisprudence as to the jurisdiction of the Court to depart from this.
80. The resolution of a potential conflict between the jurisdiction of the Court to award costs, the exclusion of recovery except pursuant to a court order and an agreement between the parties which relates to such costs, such as clause 6.2 appears to be that the Court should, if asked, take into account the contractual provision when making the order for costs in the litigation.
81. There is nothing in O.99 which precludes a mortgagee which has a contractual right to litigation costs irrespective of the outcome of the proceedings from both bringing that to the attention of the Court and making a submission that by reason of the contractual entitlement that it should obtain an order for costs or an order on a particular basis. This would appear to be the point in time where the Court should be asked to determine whether effect should be given to the asserted contractual right to costs or whether the nature and outcome of the litigation was such that the Court in the exercise of its discretion should make an order for costs which has the effect of depriving the mortgagee of its contractual entitlement to costs.
82. Accordingly, I would uphold the decision of the trial judge that Breccia is not entitled to include in the redemption figure litigation costs which come within clause 6.2 of the general conditions where the relevant costs have been the subject of an order of the Court and have not been awarded to Breccia.
83. I do not think it appropriate in this appeal to express a definitive view as to how the Court should exercise its discretion under O.99 in litigation between a mortgagor and mortgagee where reliance is placed upon a contractual right to costs. I have noted the acceptance by Laffoy J. in Red Sail Frozen Foods Limited at para. 59 the analysis of the settlement by counsel for the companies which she considered to be “underpinned by irrefutable logic”. That analysis included looking at the possible outcomes of the litigation if it had continued and a statement to the effect that “an entitlement by the bank to add its costs to the debt would only have arisen if the latter outcome, that the companies lost had come to pass”. This statement may be considered to support a proposition that a mortgagee who brings or defends proceedings which are enforcement proceedings in respect of which it has a contractual entitlement to be indemnified in respect of its costs may only recover those costs if successful in the litigation. However, I do not want in this appeal to be taken as having accepted that proposition. For the reasons set out above it seems to me that the costs of the proceedings remain in the discretion of the court under O.99. However, in addition to the normal matters which are taken into account at the end of proceedings, where a contractual right to costs is relied upon, the court should also take such right into account when determining how its discretion should be exercised,. The question as to how that discretion should be exercised will depend in any given case on the terms of the contract and the facts of the case.
84. I would agree with the trial judge that insofar as any particular contractual clause is properly construed as being an ouster of the jurisdiction of the courts then it may be contrary to public policy. There is nothing in clause 6.2 which in its express terms precludes a court from exercising its jurisdiction in respect of costs of proceedings which are also enforcement costs. Clause 6.2 does not expressly address enforcement costs which arise by reason of litigation either pursued or defended unsuccessfully by the mortgagee.
85. Reliance was also placed by Breccia on clause 14 of the general conditions. This provides:
“The Borrower indemnifies and agrees to keep indemnified the Bank against all claims, demands, liabilities, losses, costs (including legal feels on a full indemnity basis), actions, proceedings, charges and expenses whatsoever and howsoever arising which the Bank may incur or suffer by reason of:-
(a) …
(b) any default by the Borrower or any guarantor in the performance of any of the obligations express to be assumed by it in the Agreement or any of the security documents;”
Whilst this clause expressly refers to costs where they comprise legal fees on a full indemnity basis it only arises where such costs are incurred by reason of a default by the borrower in the performance of the identified obligations. It does not in its express terms apply to all enforcement costs but only those which are incurred by reason of a default by the borrower in the performance of his obligations. It may be a matter for consideration by a trial judge when considering the question of costs in litigation but may depend upon a finding of default by a borrower.
86. The final issue is whether the trial judge was correct in deciding that the costs which may be included in the redemption figure to redeem the mortgage (insofar as it relates to Mr. Sheehan’s loan) do not include what have been described as “contingent costs”. I am in agreement with the trial judge that upon an overall construction of clause 6.2 of the general conditions, the definition of secured liabilities in clause 1 of the mortgage, the covenant to pay in clause 2.1 and the charging clause in clause 3.1 of the mortgage that the costs which must be discharged at any given time as part of the redemption sum are the costs then incurred by Breccia which are payable by Mr. Sheehan. Whilst clause 4.3 of the mortgage provides that the bank will execute such documents as may be necessary to release the security “if all monies and liabilities hereinbefore covenanted to be paid and discharged have been paid and discharged and the mortgagor is under no future liability to the bank present or future actual contingent or prospective”, I do not consider that such clause can extend the payments which Mr. Sheehan as mortgagee is obliged to make in order to exercise his right of redemption. He has a right to redeem at any time after the legal right to redeem arises provided he pays the capital, interest and costs which he is liable to pay and which have been charged on the property in question.
87. I am in further agreement with the trial judge that the Australian authorities do not alter the principles applicable in this jurisdiction which permit a person to exercise a right of redemption upon payment of all sums then due which are secured on the property in question.
88. However, it appears to me that there may be some part of costs already incurred at the date of redemption which may still have an element of contingency or where the amount is not determined. In particular I am referring to legal costs already incurred in connection with these proceedings, as they have been determined to be within the definition of enforcement costs but where final orders have not been made in the proceedings. It follows from the earlier analysis that Breccia has a contractual right to the payment of such costs but that such contractual right must be considered to be contingent upon the final orders for costs made in the proceedings. This is because in the earlier analysis I have determined that the costs of the proceedings are a matter of discretion for the judge but that the judge when exercising his discretion should take into account the contractual right. The order made by the court may not however give effect to the contractual right. That may depend inter alia on the nature of the contractual right and the issues in and outcome of the proceedings.
89. Where there is a contractual right to costs already incurred but no relevant court order has yet been made then there may be an element of contingency in relation to either the liability for the costs or as to the amount of the costs. It appears to me that Breccia, nevertheless is entitled to provide as part of the redemption figure an estimate of the costs incurred to which it asserts a contractual entitlement to recover out of the mortgaged property. Mr. Sheehan has the option either of redeeming by making payment of the estimated amount or by seeking to reach agreement that the amount estimated to be costs incurred but which appear contingent as to liability or amount be otherwise secured by an appropriate mechanism. A mortgagee cannot be required to release security for costs already incurred to which it has a contractual secured right but which are contingent either as to amount or because they are litigation costs and ultimately a judge in exercise of his O.99 discretion might deprive the mortgagee of the costs unless there is alternative agreed security in place.
90. Accordingly, it follows that my determination on the enforcement costs issues only differs from that of the trial judge insofar as it appears to me that Breccia is entitled to include in the redemption figure an estimate of litigation costs already incurred to which there is a contractual right but which have not yet been the subject of a court order notwithstanding that the ultimate recovery may be contingent on an order in Breccia’s favour pursuant to O.99 or contingent as to amount if the costs have already been awarded but the amount of same is disputed and taxation has not yet taken place.
Conclusion
91. I would accordingly dismiss the appeal of Breccia against the determination of the High Court that clause 5 of the general conditions is a penalty clause and hence unenforceable. If it were necessary I would dismiss the appeal against the estoppel decision. I would vary the High Court order to permit the inclusion of an estimated figure for any enforcement costs incurred prior to the date of proposed redemption in accordance with this judgment. The Court will hear the parties in relation to the precise variations required in the High Court order by reason of the judgments being delivered today.