KARRY TRADING COMPANY PTY LTD [2025] SADC 63

Applicant: KARRY TRADING COMPANY PTY LTD Counsel: MR L ROWLEY - Solicitor: CHARLTON ROWLEY Respondent: ASOKE COLLOBORATION LIMITED No Attendance Hearing Date/s: 18/11/2024 File No/s: CIV-23-010937 B DISTRICT COURT OF SOUTH AUSTRALIA (Civil) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. KARRY TRADING CO PTY LTD v ASOKE COLLOBORATION LTD [2025] SADC 63 Judgment of his Honour Judge Burnett 11 June 2025 CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - PENALTIES AND LIQUIDATED DAMAGES CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS The applicant has brought a claim against the respondent in which it seeks judgment pursuant to a Deed of Settlement in the sum of $2,575,000 plus interest at the rate of 15% per annum, calculated daily, and compounding. The respondent did not appear at the commencement of the trial. Rather than seek a default judgment, the applicant sought, pursuant to Uniform Civil Rules 2020 145.1(2), that the Court proceed to hear the trial and determine the claim, notwithstanding the absence of the respondent. The Court agreed to that application. The Court determined the issues that were raised by the pleadings, but in the context that the evidence of the applicant was unchallenged and that the respondent had not adduced any evidence in support of its defence. The primary issue that is raised in these proceedings is whether the Deed of Settlement is wholly or partly void, as a penalty. The particular issue raised is that the Deed of Settlement specifies a sum that is said to be owing and payable which, when evidence extrinsic to the Deed of Settlement is considered, patently incorporates a penalty. The applicant contends that the existence of a penalty should be determined solely by reference to the terms of the Deed and that in circumstances where the respondent has agreed to pay the sum specified in the Deed, there was no penalty and no further enquiry should be undertaken as to how that sum was calculated. Other defences that were raised were duress and lack of consideration. The underlying debt due by the respondent to the applicant was in the sum of $644,065 pursuant to a contract in which the applicant paid that sum to the respondent in respect of the delivery of wine, which the respondent failed to deliver. The applicant and the respondent subsequently agreed to impose, what were described as “interest and penalties”, to that sum which included an additional amount of 20% of the invoiced total plus an amount of $5,000 per day until payment was received in full. -- 1 of 20 -- Held: 1. The defences of lack of consideration and duress had no merit. A deed is binding even in the absence of consideration: Prime Sight Ltd v Lavarello [2014] AC 436 applied. The onus of proof rests on the party alleging duress: Barton v Armstrong [1973] 2 NSWLR 598 applied. The respondent has not discharged that onus. 2. The term in the Deed of Settlement that the respondent pay the applicant the sum of $2,575.000 is void as a penalty. 3. In penalty cases, the Court is not constrained by the rules of contractual construction in determining the evidence as to the surrounding circumstances that might be relevant in determining whether the clause is a penalty: Morgan Stanley Wealth Management Australia Pty Ltd v Detata (No 3) [2018] WASC 32, Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2)(2012) 287 ALR 360 applied. The Court can refer to all circumstances which bear upon the objective resolution of the characterisation of the payment: Paciocco v Australian and New Zealand Banking Group Ltd (2016) 258 CLR 525 applied. 4. The disproportion between the Settlement Sum of $2,575,000 in the Deed of Settlement and the underlying contractual liability of the respondent to the applicant is strongly indicative of a penalty. The constitution of the sum of $2,575,000 in the Deed of Settlement includes a very large amount of interest at any exorbitant and disproportionate rate. The interest that the applicant legitimately seeks to protect under the Deed of Settlement is the payment of the $644,065. The far greater balance is imposed in terrorem of that amount not being repaid. 5. The default rate under the Deed of Settlement of 15% per annum, calculated daily and compounding was also void as a penalty because (a) it applied to the Settlement of Sum of $2,575,000 and (b) the 15% rate itself was excessive and out of proportion to the interest that the applicant might legitimately protect. 6. The applicant is entitled to judgment on its alternative claim in relation to the breach of the underlying contract by the respondent to supply wine to the applicant. Uniform Civil Rules 2020 (UCR) 145.1(2), 185.1; Reserve Bank Act 1959 (Cth) ss 85A; District Court Act 1991 s 39, referred to. Prime Sight Ltd v Lavarello 2014] AC 436; Barton v Armstrong [1973] 2 NSWLR 598 ; Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 ; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; AMEV-UDC Finance Ltd Austin (1986) 162 CLR 170 ; Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 ; Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79; Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 ; Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; Morgan Stanley Wealth Management Australia Pty Ltd v Detata (No 3) ; Rinehart v Hancock Prospecting Pty Ltd ; Rinehart v Rinehart (2019) 267 CLR 514; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Cherry v Steele Park (2017) 96 NSWLR 54 ; Commissioner of Taxation v The Trustee for the Michel Hayes Family Trust (2019) 273 FCR 567; Victoria v Tatts Group Ltd (2016) 90 ALJR 392; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 ; Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) ; Cameron v UBS AG (2000) 2 VR 108; Yarra Capital Group Pty Ltd v Goldberg [2006] VSCA 109; Lachlan v HP Investments Pty Ltd (2015) 89 NSWLR 198; Robophone Facilities Ltd v Blank [1966] 1 WLR 1428; Jams 2 Pty Ltd v Stubbings (No 4) [2019] VSC 482, applied. -- 2 of 20 -- KARRY TRADING CO PTY LTD v ASOKE COLLOBORATION LTD [2025] SADC 63 Civil Introduction 1 The applicant seeks judgment against the respondent in the sum of $2,575,000 plus interest at the rate of 15% per annum, calculated daily, and compounding. The applicant claims these monies as a debt owing by the respondent pursuant to a Deed of Settlement. 2 The primary issue for determination is whether the Deed of Settlement is wholly or partly void, as a penalty. The particular issue raised is that the Deed of Settlement specifies a sum that is said to be owing and payable which, when evidence extrinsic to the Deed of Settlement is considered, patently incorporates a penalty. The applicant contends that the existence of a penalty should be determined solely by reference to the terms of the Deed and that in circumstances where the respondent has agreed to pay the sum specified in the Deed, there was no penalty, and no further enquiry should be undertaken as to how that sum was calculated. Procedural background 3 On 30 July 2024, the Court listed this matter for trial to commence on 18 November 2024, with two days set aside. On 13 August 2024, the respondent’s former solicitors filed an interlocutory application to cease to act and the respondent became self-represented. At the commencement of trial, the respondent failed to appear. Mr John Collins, the director of the respondent, sent an email to the Court seeking to vacate the trial date. The Court advised the respondent by email that it, or someone on its behalf, including Mr Collins, should appear to make submissions as to why an adjournment should be granted. The Court granted leave for Mr Collins to appear by telephone. No response was received to these emails and there was no attendance by anyone on behalf of the respondent. The application of the respondent for an adjournment of the trial was refused. 4 Under Uniform Civil Rules 2020 (UCR) 145.1(2), the Court, may, where a respondent has failed to appear at the commencement of the trial, enter default judgment against the respondent or proceed to hear the trial and determine the claim, notwithstanding the absence of the respondent. The applicant sought an order that the Court proceed to hear the trial and determine the claim. The Court made such an order at the commencement of the trial. 5 Therefore, the Court must determine the issues that are raised by the pleadings, but in the context that the evidence of the applicant is unchallenged, and the respondent has not adduced any evidence in support of its revised defence. In its revised defence, the respondent raised three issues: -- 3 of 20 -- [2025] SADC 63 2 (1) The respondent entered into the Deed of Settlement (and an earlier Deed of Settlement) under duress and the Deed was unenforceable (paragraph 23 of the defence); (2) There was no consideration passing from the respondent in relation to the Deed of Settlement or the earlier Deed (paragraph 24(b) of the defence); (3) The Deed of Settlement and the earlier Deed contained unlawful penalties which were void as a matter of law (paragraph 24(c) of the defence). The underlying transaction 6 At trial, the applicant tendered a number of documents. Mr Sing Teck Ong, the director of the applicant, gave evidence. As the respondent was not represented at trial, the evidence of the applicant was unchallenged. I therefore making findings in accordance with the evidence set out below. 7 One of the businesses carried on by the applicant was as a trader and broker of wines, both nationally and internationally. As a trader and broker of wines, the applicant developed a business relationship with the respondent and supplied wine to the respondent for importation into China. The applicant had also developed a business relationship with another company, Aus Craft Wine Pty Ltd (Aus Craft), which also carried on business as a wine trader and broker. 8 In early 2021, the applicant and Aus Craft on the one hand, and the applicant and the respondent on the other hand, entered into back to back contracts relating to the purchase of a significant amount of Penfolds wine for supply to customers of Aus Craft in China and Hong Kong. In January 2021, the applicant and Aus Craft entered into an agreement where the applicant agreed to supply wine to Aus Craft for a total consideration of $1,494,770.10. Pursuant to that agreement, Aus Craft paid the sums of $145,580 and $1,245,431.20 (totalling $1,391,011) to the applicant for the wine, although the applicant later returned the sum of $796,585. For the reasons that appear in the following paragraph, the applicant failed to supply any wine to Aus Craft and was therefore in breach of the terms of its agreement with Aus Craft. 9 So that it could fulfil its obligations under that agreement, the applicant, in about April 2021, entered into an agreement with the respondent whereby the respondent agreed to supply, and the applicant agreed to purchase wine for the sum of $1,440,650 (the wine supply agreement). This wine would then be sold by the applicant to Aus Craft. In May 2021 and August 2021, the applicant paid to the respondent the purchase price in 4 instalments of $130,000, $14,065, $500,000 and $796,585. The respondent did not ever supply the wine. The sum of $796,585 was frozen by the Commonwealth Bank and ultimately returned to the applicant. That money was subsequently returned by the applicant to Aus Craft. -- 4 of 20 -- [2025] SADC 63 3 10 In relation to the wine supply agreement, the applicant has therefore lost the sum of $644,065, being the balance of the money that it paid to the respondent for the supply of wine (which consideration totally failed because the respondent did not supply any wine to the applicant). The applicant, in an alternative claim in these proceedings, seeks payment of the sum of $644,065. In respect of part of that sum, the respondent consented to summary judgment in the sum of $500,000 on 15 January 2024. 11 In relation to its contract with Aus Craft, the applicant failed to supply the wine to the Aus Craft (because it did not receive the wine from the respondent). Aus Craft lost the sum of $698,770.10, being the money that it paid to the applicant for the wine and not returned . Aus Craft now claims that sum from the applicant together with interest and costs. The applicant has not paid that money and accepts that if it receives any money from the respondent, it is liable to pay the $698,770.10, plus interest, to Aus Craft. 12 An alternative way of calculating the loss suffered by the applicant is that as result of the failure of the respondent to deliver the wine to the applicant, the applicant has incurred a liability to Aus Craft to repay the amount paid by Aus Craft plus interest. The amount to be repaid is $698,770.10 plus interest. Entering into the Deed of Settlement 13 Following the failure of the respondent to deliver the wine under the wine supply agreement or to return the sum of $644,065 that had been paid by the applicant, the applicant and the respondent commenced negotiations in relation to the return of the monies to the applicant and later the claim of the applicant for the loss that it had suffered. Mr Ong gave evidence that Mr Collins repeatedly made promises that the respondent would refund the money to the applicant but that did not happen. 14 On 30 September 2021, Mr Collins on behalf of the respondent, and Mr Ong on behalf of the applicant, entered into an agreement whereby it was agreed that: (1) the payments made by the applicant to the respondent in the sum of $644,065 which had not been returned by the respondent, would be paid by 8 October 2021; (2) an additional amount of 20% of the invoiced total, that is $288,130, would be paid by the respondent to the applicant by 8 October 2021; (3) if the above amounts were not paid by 8 October 2021, a further additional amount of $5,000 per day would be paid by the respondent to the applicant until payment was received in full. 15 The applicant, through its solicitors, sent a letter of demand to the respondent dated 1 December 2021 (exhibit A3) in which it sought the sum of $1,356,795 calculated in accordance with the agreement that had been reached on -- 5 of 20 -- [2025] SADC 63 4 30 September 2021. In that letter, the applicant referred to the $288,130 and the $5,000 per day charge as “interest and penalties”. The respondent had legal representation throughout this period. The respondent, through their lawyers, made a counteroffer of $1,192,000. 16 The applicant, by its solicitors, sent a further letter of demand to the respondent, by its solicitors, dated 21 January 2022 (exhibit A5). In that letter, the applicant demanded payment of the sum of $1,656,975 which it said was calculated in accordance with the 30 September 2021 agreement and therefore included interest at the rate of $5,000 per day. Again, it referred to $848,130 of the total sum demanded of $1,656,975 as “interest and penalties”. The applicant, through Mr Ong, and the respondent, through Mr Collins, continued to negotiate the terms of the Proposed Deed of Settlement. A draft deed of settlement was provided by the respondent by email dated 4 June 2022 (exhibit A7). Mr Ong responded to that draft by email dated 5 June 2022 (exhibit A8) in which he sets out what he says was the correct amount owing. There were then further communications regarding the deed and the amount to be specified in that deed. 17 On 23 June 2022, the applicant and the respondent entered into a Deed of Settlement (exhibit A14) (the First Deed of Settlement). That deed was drafted by the lawyers for the respondent. Mr Ong gave evidence that the considerations that were taken into account were the loss of profits, damages from the transaction, the high likelihood of losing the client and the adverse effect on the business of the applicant. The First Deed of Settlement records: (1) the applicant claims a debt from the respondent in the sum of $1,980,000 (the debt); (2) the Debt relates to an agreement whereby the respondent agreed to supply wine to the applicant in exchange for the sum of $644,065; (3) the Debt was defined as meaning the sum of $1,980,000; (4) Settlement Sum was defined as meaning the sum of $1,980,000; (5) In full and final settlement of the debt, the respondent agreed to pay the sum of $1,980,000 to the applicant (the payments were to in 5 instalments with the last payment to be made by 23 September 2022); (6) The applicant agreed to accept the Settlement Sum in lieu of proceeding with further legal proceedings; (7) In the event that an instalment is not paid by the date specified, the balance of the Settlement Sum unpaid at the time of default will become due and payable. In the event of a breach, the respondent is liable for the Debt with interest at 5% per annum. -- 6 of 20 -- [2025] SADC 63 5 (8) Upon payment in full of the Settlement Sum, the parties mutually release each other from all action, suits, proceedings, claims and demands and costs arising out of the subject matter of the debt. (9) The parties acknowledge that they enter into this Deed fully and voluntarily on their own information and investigation; (10) The parties acknowledge that they have obtained independent legal advice in relation to this Deed before each of them executed a copy of this Deed; (11) That this deed supersedes any prior agreements between the parties. 18 The respondent did not make any of the payments that were due under the First Deed of Settlement. From about October 2022 to January 2023, the applicant and the respondent, through Mr Ong and Mr Collins respectively, and through their lawyers, negotiated the terms of a revised deed of settlement. Drafts of the deed were sent to and from the applicant and respondent and their lawyers. Ultimately, the applicant and respondent entered into a Deed of Settlement dated 12 January 2023 (exhibit A28)(the Second Deed of Settlement). This is the deed pleaded and relied upon by the applicant in its statement of claim. The Second Deed of Settlement is in similar terms to the First Deed of Settlement, save that the amount of the debt in the second deed has increased to $2,575,000, the default interest clause differs and there is a clause preventing reliance on the deed by a third party. 19 The Second Deed of Settlement records: (1) the applicant claims a debt from the respondent in the sum of $2,575,000 (the debt); (2) the Debt relates to an agreement whereby the respondent agreed to supply wine to the applicant in exchange for the sum of $644,065; (3) Debt was defined as meaning the sum of $2,575,000; (4) Settlement Sum was defined as meaning the sum of $2,575,000; (5) In full and final settlement, the respondent agreed to pay the sum of $2,575,000 to the applicant (the payments were to be made in a number of instalments); (6) The applicant agreed to accept the Settlement Sum in lieu of proceeding with further legal proceedings; (7) In the event that an instalment is not paid by the dates specified, the balance of the Settlement Sum unpaid at the time of default will become due and payable; -- 7 of 20 -- [2025] SADC 63 6 (8) In the event of a breach, the respondent is liable to pay interest on the amount of the Debt outstanding at the rate of 15% per annum, calculated daily and compounding; (9) Upon payment in full of the Settlement Sum, the parties mutually release each other from all action, suits, proceedings, claims and demands and costs arising out of the subject matter of the debt; (10) The parties acknowledge that they enter into this Deed fully and voluntarily on their own information and investigation; (11) The parties acknowledge that they have obtained independent legal advice in relation to this Deed before each of them executed a copy of this Deed; (12) That this deed supersedes any prior agreements between the parties including the deed between the parties dated 23 June 2022; (13) The facts of matters [sic] set out in the Recitals are acknowledged as between the parties only and cannot be relied upon by third parties. 20 The respondent has not made any payment to the applicant following the execution of the Second Deed of Settlement. In about March 2025, the applicant obtained summary judgment by consent for part of the outstanding sum, namely $500,000. The applicant has not recovered any part of that sum. Aus Craft demand 21 Aus Craft, through its solicitors, sent a claim to the applicant dated 11 August 2022 (exhibit A16). In that pre-action letter, Aus Craft set out its claim in the sum of $698,770.10 together with pre-judgment interest. The applicant, through its solicitors, responded to the pre-action claim, by letter dated 27 October 2022 (exhibit A20) denying liability. Aus Craft has agreed to await the determination of these proceedings before proceeding with its claim. Determination of the claim 22 The applicant relies upon the Second Deed of Settlement to claim the sum of $2,575,000 plus interest at the rate of 15% per annum, compounding daily. The respondent accepts that it is indebted to the applicant in the sum of $644,065 being the monies it received from the applicant pursuant to the wine supply agreement. The respondent pleaded that it had no liability to the applicant under the First Deed of Settlement or the Second Deed of Settlement. As stated earlier in these reasons, the respondent raised three matters in its defence, namely duress, lack of consideration and that the First Deed of Settlement and the Second Deed of Settlement contained unlawful penalties which were void as a matter of law. -- 8 of 20 -- [2025] SADC 63 7 Duress and lack of consideration 23 The first two matters are easily determined. A deed is binding even in the absence of consideration.1 24 Duress is a form of pressure which is regarded by the law as illegitimate and which is usually created by a threat, coupled with a demand and which has the purpose of inducing a party to enter into a contract which leaves that party no reasonable alternative but to enter into the contract and which operates as a cause of that party’s entry into the contract.2 The onus of proof rests on the party alleging duress.3 In the present case, the respondent has not adduced any evidence that either Deed of Settlement was entered into under duress. In fact, the evidence that was adduced by the applicant strongly suggests that there was no duress. That evidence was: (1) The fact that the respondent was represented by lawyers throughout the process of the negotiations of both Deeds of Settlement; (2) The fact that the respondent, through its lawyers, proffered various drafts of the Deeds of Settlement; (3) The fact that in each of the Deeds of Settlement, both the applicant and the respondent acknowledged that they had entered into the respective deeds fully and voluntarily on their own information and investigation and had obtained independent legal advice in relation to the respective deeds prior to its execution. 25 It follows that the defences to the claim based on lack of consideration and duress fail. Penalty 26 The classic explanation of a penalty which has been applied, including in the High Court,4 without exception, for almost a century was made by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd (Dunlop).5 Lord Dunedin said: 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 1 Prime Sight Ltd v Lavarello [2014] AC 436, [30]. 2 JD Heydon “Heydon on Contract”, (LawBook Co), 2019, [16.10]. 3 Barton v Armstrong [1973] 2 NSWLR 598, 617-618; Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565, 589. 4 Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, [12]; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 368, 378, 399-400; AMEV-UDC Finance Ltd Austin (1986) 162 CLR 170,190; Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131, 139, 13, 145. 5 [1915] AC 79, 86-87. -- 9 of 20 -- [2025] SADC 63 8 conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages… 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 a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach … 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are: (a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. … (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. (c ) There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ …. 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 …. 27 The High Court in Andrews v Australia and New Zealand Banking Group Ltd (Andrews),6 and Paciocco v Australia and New Zealand Banking Group Ltd (Paciocco),7 although recognising the continued relevance and application of the principles set out in Dunlop, modified the penalty doctrine, in two respects. First, the decisions in these cases made it clear that the rule as to penalties was not limited to cases arising out of breach of contract.8 Secondly, the rule against penalties is an equitable doctrine and not a rule of law.9 28 Banks-Smith J in Morgan Stanley Wealth Management Australia Pty Ltd v Detata (No 3) (Morgan Stanley)10 summarised the principles relating to a penalty, following Andrews and Paciocco in the following terms: (a) the question whether a sum stipulated is a penalty or liquidated damages (that is, a genuine pre-estimate) is to be judged as at the time of the making of the contract; 6 (2012) 247 CLR 205; [2012] HCA 30. 7 (2016) 258 CLR 525; [2016] HCA 28. 8 Andrews (2012) 247 CLR 205, [31]-[32], [46]-[50], 78]; [2012] HCA 30; Paciocco (2016) 258 CLR 525, [6]-[10]; [2016] HCA 28. 9 Andrews (2012) 247 CLR 205, [11]; [2012] HCA 30. 10 [2018] WASC 32. -- 10 of 20 -- [2025] SADC 63 9 (b) the party seeking to be absolved of the liability imposed by the stipulation bears the onus of proving that the stipulation constitutes an unenforceable penalty; (c) the critical issue is whether the sum agreed was commensurate with the interest protected by the bargain; (d) the nature of the interest sought to be protected is relevant. The sum agreed may be intended to protect an interest that is different from, and greater than, an interest in compensation for loss caused directly by the breach. It may be intangible and unquantifiable. This is consistent with Lord Dunedin's statement in Dunlop that, 'the essence of liquidated damages is a genuine pre-estimate of damage'. The reference to 'damage' as distinct from 'damages' is significant; (e) an interest may be of a business or financial nature; (f) a sum that is merely disproportionate to the loss suffered does not qualify as a penalty. The penalty must be 'extravagant, exorbitant or unconscionable' and 'out of all proportion' to the interest of the party which it is the purpose of the provision to protect; (g) the distinction between liquidated damages and a penalty, whilst useful, is not a limiting rule and does not mean that if no pre-estimate is made at the time the contract was entered into, the sum agreed will be a penalty; (h) nor does it mean that a sum that reflects or attempts to reflect other types of loss or damage beyond those caused directly will be a penalty; (i) it may be that a reliable pre-estimate is not possible or that damage caused by default is of such an uncertain nature that it cannot accurately be estimated or proved. In such a case a stipulated payment agreed by the parties may well be the true bargain and not a penalty; (j) where pre-estimation of loss is difficult, precision may not be called for, bearing in mind the question is whether the stipulation is 'out of all proportion' to the interest said to be damaged by default; (k) the court will not lightly interfere with the bargain struck between the parties. The court requires good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is expressed as an exceptional rule and descriptors such as 'extravagant' and 'out of all proportion' are used in its application; (l) the ultimate question in determining whether a stipulation is a penalty, is whether it is intended only to punish the defaulting party. Framed another way - does the innocent party's interest in the observance of the principal contractual obligation explain the agreed stipulation as having a purpose other than punishment; (m) the conventional application of the doctrine of penalties arises when a stipulated sum is made payable upon breach. However, the rule as to penalties is not limited to cases arising out of breach of contract; and (n) whether a clause is a penalty invites attention to the proper construction of that clause, and the contract as a whole, but it is not solely a matter of contractual construction. The court is not limited to considering the terms of the contract and any background factual matrix evidence that would be admissible for the purposes of contractual construction. (citations omitted). -- 11 of 20 -- [2025] SADC 63 10 29 The applicant contends that the respondent has not discharged its onus of proving that the provision in the Second Deed of Settlement requiring the payment of the sum of $2,575,000 by the respondent to the applicant was a penalty. Even though the respondent has not attended at trial and has not given evidence, leaving the evidence of the applicant unchallenged, it is still open to the Court to find that on the whole of the evidence before it, there was a penalty. 30 The applicant’s contention that there is no penalty because the Deed simply imposes an obligation on the respondent to pay the sum of $2,575,000 that is unrelated to any breach raises two issues: (1) Can the Court use extrinsic evidence to characterise the nature of the payment of the sum of $2,575,000 and how it was calculated? (2) What is the correct characterisation of the payment of the settlement sum of $2,575,000 in the Second Deed of Settlement? 31 A further issue arises, separate from the above two issues, namely whether the 15% per annum, compounded daily, default rate provided for in the Second Deed of Settlement is a penalty. Use of extrinsic evidence 32 Addressing the first of these issues, both as a matter of principle and also on the application of authority, the Court should admit evidence of the surrounding circumstances in this case to determine the characterisation and composition of the settlement sum of $2,575,000 specified in the Second Deed of Settlement. There are three reasons why this evidence is relevant and admissible to the characterisation and composition of the settlement sum. They are: (1) The context, background and purpose is relevant to the construction of the terms of the Deed of Settlement; (2) Where there is a matter of a latent ambiguity, extrinsic evidence can be admitted to resolve that ambiguity; (3) In cases of a penalty, the Court is not limited to considering the terms of the contract and the factual matrix evidence that would be admissible for the purposes of contractual construction. 33 As a matter of general principle, the context, background and purposes of the Second Deed of Settlement will be used in the construction of the terms of that deed. That principle was affirmed by the High Court in Rinehart v Hancock Prospecting Pty Ltd; Rinehart v Rinehart11 where Kiefel CJ, Gageler, Nettle and Gordon JJ held: 11 (2019) 267 CLR 514; [2019] HCA 13. -- 12 of 20 -- [2025] SADC 63 11 As the Full Court concluded: "[c]ontext will almost always tell one more about the objectively intended reach of such phrases than textual comparison of words of a general relational character". There may be cases which have to be resolved largely, if not entirely, by reference to the language of the arbitral clause in question. But this is not such a case. The background to and the purposes of the Deeds, as reflected in their terms, point clearly to arbitral clauses of wide coverage with respect to what was to be the subject of confidential processes of dispute resolution.12 It is well established that a commercial contract should be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract. It could not have been understood by the parties to these Deeds that any challenge to the efficacy of the Deeds was to be determined in the public spotlight. Especially is this so with respect to the Hope Downs Deed.13 (citations omitted) 34 There has been some debate as to whether ambiguity is required before resort can be made to the surrounding circumstances. 14 This debate arose because of the statement in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales15 where Mason J referred to the true rule being that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. As the High Court stated in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,16 what Mason J did not say was how the ambiguity in the construction of a term in a contract might be identified. Leeming JA in Cherry v Steele Park17 (and cited with approval by Steward J in the Commissioner of Taxation v The Trustee for the Michel Hayes Family Trust (Hayes Family Trust)18 held that the statements of Mason J were directed as to how the ambiguity might be resolved, rather than how it was identified. Leeming JA in Cherry v Steele Park19 observed that the approach taken by the High Court in Victoria v Tatts Group Ltd20 and Simic v New South Wales Land and Housing Corporation21 suggested that ambiguity was a conclusion rather than a pre-condition to admissibility. 35 These statements of principle lead to the conclusion that evidence of the surrounding circumstances is admissible and relevant in the present case to the task of construing the nature of the payment of the sum of $2,575,000 and in particular whether that sum is an acknowledgement of an existing debt or whether it is a new obligation. On the above general principles, the surrounding circumstances and purpose of entering into the Deed must be taken into account when construing the 12 Ibid, [26]. 13 Ibid, [44] 14 See on this topic M Hoffmann QC and S Mackenzie “ Contractual interpretation: The true rule and surrounding circumstances” presented at SA Bar Association conference, 22-23 February 2020. 15 (1982) 149 CLR 337, 353. 16 (2015) 256 CLR 104, [110]-[11] 17 (2017) 96 NSWLR 548, [83]; [2017] NSWSC 295. 18 (2019) 273 FCR 567, [30]; [2019] FCACFC 226. 19 (2017) 96 NSWLR 548, [28]; [2017] NSWSC 295. 20 (2016) 90 ALJR 392; [2016] HCA 5. 21 (2016) 260 CLR 85; [2016] HCA 47. -- 13 of 20 -- [2025] SADC 63 12 Deed both as a matter of general principle in construing the Deed and because of the latent ambiguity as to the nature of the payment of the sum of $2,575,000. The decision in Hayes Family Trust supports the view that the surrounding circumstances might show a latent ambiguity even though the terms of the agreement, by themselves, do not show any ambiguity. The cases that deal specifically with penalty clauses suggest the same conclusion is reached. In determining whether a clause in a contract is properly characterised as a penalty, the Court is not constrained by the normal rules of contractual construction in relation to the admission of evidence as to the surrounding circumstances. That was the conclusion reached by Banks-Smith J in Morgan Stanley22 and the Court of Appeal in Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) (Spiers)23 where McLure P held:24 The parties did not conduct the trial on the basis that the question whether a contractual provision is a penalty is solely a matter of contractual construction. That must be correct in principle. It is impossible to identify solely from the text of the first contract (1) the basis for the calculation of the stipulated weekly sum or (2) the relevant factual background required to make an objective and informed assessment of whether the stipulated sum is a genuine pre-estimate of the damage which could potentially flow to the developer from a delay in practical completion. If, as I have concluded, the characterisation of a term as either a genuine pre-estimate of damage or a penalty is not solely a matter of construction, the construction rules relating to the admissibility of extrinsic evidence of surrounding circumstances (those within the actual or constructive knowledge of the parties) do not apply. There is support for that view in Zachariadis v Allforks Australia Pty Ltd [2009] VSCA 258, [146] - [150]. 36 In Morgan Stanley, Banks-Smith J held that the obligations in the settlement dealings “do not spring from the deed unheralded. Their genesis lies in past dealing between the parties”. Therefore, those circumstances may be relevant in construing the Deed.25 Gageler J in Paciocco26 stated that the reasoning in Dunlop showed that the Court could refer to all circumstances which bore on the objective resolution of the ultimate question of the characterisation of the payment. Nettle J reached a similar conclusion, namely that “the question is one of construction (more accurately, of characterisation) of the terms of the contract having regard to the inherent circumstances of the contract at the time that the contract was made”.27 37 In the present case, the external evidence as to the circumstances that are relevant to the characterisation of the the obligation under the Second Deed of Settlement to pay the sum of $2,575,000 includes: (1) The letter from the applicant, by its solicitors, to the respondent dated 1 December 2021 (exhibit A3) which records: 22 [2018] WASC 32, [417]. 23 [2012] WASCA 53. 24 Ibid, [25], [26]. 25 [2018] WASC 32, [426] quoting Cameron v UBS AG (2000) 2 VR 108, [28]; [2000] VSCA 222. 26 (2016) 258 CLR 525, [146]; [2016] HCA 28. 27 Ibid, [317(3)]. -- 14 of 20 -- [2025] SADC 63 13 (a) The agreement between the applicant and the respondent entered into in about April 2021 whereby the applicant agreed to purchase, and the respondent agreed to supply specified wine at the agreed value of $1,440,650; (b) The applicant paid to the respondent sums totalling $1,440,650 of which $796,585 was returned by the receiving financial institution leaving a balance paid of $644,065; (c) The respondent did not supply the wine nor return the sum of $644,065; (d) On 30 September 2021, the applicant and respondent entered into an agreement whereby: (i) The respondent was to pay the sum of $644,065 which constituted the re-payment of the monies paid by the applicant by 8 October 2021; (ii) An additional amount, namely $288,130, which was equal to 20% of the invoiced total [of $1,440,650], was to be paid by the respondent to the applicant by 8 October 2021; (iii) If the above amounts were not paid by 8 October 2021, a further and additional amount of $5,000 per day would be paid by the respondent to the applicant in full; (iv) As at 1 December 2021, a total of $1,356,975 was required to be paid by the respondent to the applicant which comprised the initial debt of $644,065, $548,130 in “interest and penalties” (being the amounts calculated by reference to (ii) and (iii) above and a further amount relating to the return of some other wine in the sum of $154,780 plus legal fees of $10,000. (2) The letter from the applicant solicitors dated 21 January 2022 (exhibit A5) which made a further demand of $1,656,975 which referred to interest and penalties in the sum of $848,130; (3) The entry into the First Deed of Settlement on 23 June 2022 which recorded a debt in the sum of $1,980.000. Characterisation of the payment in the Second Deed of Settlement 38 The second issue that arises is the characterisation of the payment of $2,575,000 under the Second Deed of Settlement. The evidence referred to above establishes that the debt is primarily made up of amounts that the applicant described as “interest and penalties”. The fact that the communications between -- 15 of 20 -- [2025] SADC 63 14 the applicant and the respondent refer to the matter as a penalty is relevant but not determinative.28 39 The evidence establishes that the amount of “interest and penalties” included in the Deed amount to approximately $1.8m. The terms of the Deed itself, although not express, implicitly recognise that the settlement sum of $2,575,000 includes amounts that are penalties. The Second Deed of Settlement refers to the Debt of $2,575,000 as relating to an agreement whereby the respondent was engaged to supply wine to the applicant in exchange for the sum of $644,065. The sum as owing under the Second Deed of Settlement is extravagant, exorbitant or unconscionable and out of all proportion to the original amount owing. The disproportion between the Settlement Sum of $2,575,000 and the outstanding contract price of $644,065 is strongly indicative of a penalty. The amount is so extravagant when compared to the likely loss that a conclusion that the amount is a penalty is readily reached. The fact that the amount included an on-going sum of $5,000 per day until payment in full also suggests a penalty in that it is an extraordinarily large sum in light of the underlying debt and the fact that it continues to be incurred, unabated, until payment in full. 40 The applicant submitted that the amount should not be regarded as a penalty because: (1) The amount specified should not be regarded as be extravagant, exorbitant or unconscionable and out of all proportion to the interests that the applicant seeks to protect because of the risk associated with the transaction and the losses that might be sustained by the applicant as a result of the transaction; (2) The amount specified represented the amount agreed by the applicant and the respondent. Because of that agreement, the Court should not enquire into the adequacy of the consideration for the deed or whether it represented a good bargain. 41 Addressing the first of these issues, the applicant submitted that the amount specified in the Deed should not be considered a penalty because it represented the risk associated with the transaction and the unsecured nature of the transaction. Mr Ong’s evidence about the considerations that were taken into account when entering into the First Deed of Settlement (and which therefore flow through to the Second Deed of Settlement) including the loss of profits, damages from the transaction and the loss caused by losing the client (Aus Craft) and the adverse effect on the business of the applicant are relevant matters, but do not affect the conclusion that the amount was extravagant, exorbitant or unconscionable and out of all proportion to the interests of the applicant. The evidence of Mr Ong was at a very general level. There was no evidence about any specific loss or loss of business. The margin on the transaction between the purchase of the wine from the 28 Dunlop [1915] AC 79, 86-87. -- 16 of 20 -- [2025] SADC 63 15 respondent for $1,440,650 and the sale by the applicant to Aus Craft for $1,453,650 was small and did not justify the 20% addition to the invoiced amount or the $5,000 per day interest fee. There was no evidence from Mr Ong about the extent of any loss of business. Any damage suffered by the applicant as a result of the breach of the underlying agreement was the $698,777 claimed by Aus Craft. The approximately $1.8m in interest and penalties that are included in the sum to be paid in the Second Deed of Settlement is out of all proportion to that damage. 42 As to the second argument, the applicant submitted that regardless of the genus of the amount specified in the Second Deed of Settlement (and the First Deed of Settlement), that amount represented the bargain that was struck and an acknowledgement by the respondent that it was indebted to the applicant in that amount. The respondent was actively engaged in the negotiation of the amount. That agreement is a relevant consideration. However, as Chernov JA held in Yarra Capital Group Pty Ltd v Goldberg (Yarra Capital),29 the doctrine of penalties represents a balance that the court strikes between the freedom of the parties to contract as they wish and the public interest that calls of the protection of the weaker party from the oppressive burden or unconscionable use of power by the stronger party. Therefore, in a case such as this, where the amount specified is out of all proportion to the underlying debt, the amount is properly characterised as a penalty. The penalty doctrine is an exception to the rule that the Court will not enquire into the adequacy of a bargain. 43 This is not a case where in the deed of settlement, the respondent has provided an unconditional affirmation of the pre-existing debt obligation where there has been an acknowledgment that of the amount owed under the underlying contract (the wine supply agreement) which corresponds to the amount claimed under the deed of settlement.30 The constitution of the sum of $2,575,000 includes a very large amount of interest, including interest at the rate of $5,000 per day. The substance of the Second Deed of Settlement is: (1) to pay the interest and penalties because of the breach of the underlying wine supply agreement by the respondent (that is the failure to pay the $644,065); (2) to pay an exorbitant sum in exchange for an agreement by the applicant to accept that sum over a period of time (which was in fact very short). The same is true of the First Deed of Settlement. 44 The only difference between this case and the normal case involving a penalty is that in the normal case, the penalty is imposed as a consequence of the breach of agreement. That is, the agreement specifies an amount to be paid (which is a penalty) upon breach. In this case, the penalty has already been imposed as a result of the breach of the wine supply agreement and the subsequent agreement 29 [2006] VSCA 109, [11]. 30 See Lachlan v HP Investments Pty Ltd (2015) 89 NSWLR 198, [41]-[43]; [2015] NSWSC 130. -- 17 of 20 -- [2025] SADC 63 16 reached by the parties on 30 September 2021 to pay the penalties. That agreed penalty was then incorporated into the sum specified in the Second Deed of Settlement. That is not a difference that affects the characterisation of the sum as a penalty. The payment of the sum of $2,575,000 fits within the classic definition of a penalty as set out by the High Court in Andrews:31 it is a punishment imposed for the non-compliance with a term of an agreement (the failure of the respondent under the wine supply contract to deliver wine and return of the $644,065 paid by the applicant for that wine), which demands that the respondent, as the party in breach of that term, pay an additional or different liability from the original term or condition. The interest that the applicant legitimately seeks to protect under the Second Deed of Settlement is the payment of the $644,065. The far greater balance is imposed in terrorem of that amount not being repaid. Term requiring payment of interest rate of 15% per annum, compounding daily 45 The Second Deed of Settlement also contains a provision that the respondent will be liable to pay interest on the amount of the Debt (which is defined as $2,575,000) at the rate of 15% per annum, calculated daily and compounding. The applicant seeks to rely upon this provision to claim interest at this rate following the default of the respondent to make any payment due under the Deed. The first payment was due to be made on 31 January 2023 and therefore under clause 30 of the Deed, the whole amount of the Debt fell due 30 days later. 46 I consider that this clause also imposes a penalty. I have come to this conclusion for two reasons. First, the interest rate of 15% is applied on the amount of the Debt ($2,575,000) outstanding. There has been no payment of the Debt. Therefore, the annual interest payment under this clause is approximately $375,000. However, I have found that the Debt of $2,575,000 incorporates a penalty and is therefore not owing by the respondent. The interest rate is therefore applied on an excessive sum. It should only be applied on the $644,065 which is the sum paid by the applicant to the respondent which has not been repaid. Even if it was accepted that a 15% interest rate was valid and not a penalty, the imposition of this rate on the sum of $644,065 would result in an interest charge of about $100,000 per annum or about a quarter of the interest rate calculated pursuant to the Second Deed of Settlement. In these circumstances, the amount claimed as a result of the breach of the Second Deed of Settlement is excessive and out of all proportion to the interest of the applicant that is sought to be protected. 47 The second reason why the interest rate of 15% per annum, compounded daily, to be paid on a breach of the Second Deed of Settlement is a penalty is that this rate of interest, is, in itself, a penalty. An interest rate of 15% per annum, compounded daily, equates to an annual interest rate of about 16.22%. There was no evidence about the rates of interest that are charged by commercial lenders. The respondent bears the onus of proof in establishing a penalty, although as stated by Diplock LJ in Robophone Facilities Ltd v Blank,32 the terms of the clause may be 31 Andrews (above), [9]. 32 [1966] 1 WLR 1428 and accepted in Yarra Capital Group Pty Ltd v Goldberg [2006] VSCA 109, [11]. -- 18 of 20 -- [2025] SADC 63 17 sufficient to give rise to the inference that it is a penalty. The evidence available to the Court about an interest rate that might be charged is contained in: (1) The RBA cash rate. Section 85A of the Reserve Bank Act 1959 (Cth) provides for judicial notice to be taken of information published by the Reserve Bank.33 That rate as at the time of entering into the Second Deed of Settlement on 12 January 2023 was 4.85% per annum. (2) the Uniform Civil Rules 2020 (UCR) 185.1 which applies a post judgment interest rate of 6% per annum and has done so since 2020 and at the time of the entry into of the Second Deed of Settlement. 48 In my view, although the evidence is limited, the interest rate of 15% per annum, compounded daily, is excessive and out of all proportion to the interest that the applicant seeks to protect. It is more than 3 times the RBA cash rate and over 2 ½ times the rate prescribed in the UCR. These facts gives rise to an inference that the rate prescribed in the Second Deed of Settlement is excessive. The applicant did not adduce any evidence that might refute that inference. The Court is therefore left with that evidence which is sufficient to conclude that the amount charged on breach is excessive and out of all proportion and therefore is a penalty and unenforceable. 49 The applicant did not make a claim in its statement of claim pursuant to the First Deed of Settlement although it did deny in its reply that the First Deed was unenforceable. For the same reasons that the Court has found the amount claimed in the Second Deed, namely $2,575,0000 to be unenforceable as a penalty, the amount claimed in the First Deed, namely $1,980,000 is also a penalty and therefore unenforceable. Alternate claim by the applicant 50 The applicant has made an alternate claim in the event that the Court finds that the amount claimed in the Second Deed of Settlement was a penalty and therefore unenforceable. In that case, the applicant claims: (1) the sum of $644,065 being the amount paid to the respondent. In its defence, the respondent admitted that it remained indebted to the applicant in that sum. The evidence of Mr Ong confirmed that this sum was paid by the applicant and has never been repaid by the respondent; (2) Interest in the amount of $104,606.03. It is not clear how that amount has been calculated and there was no evidence or submission as to the interest rate to be applied. Under s 39 of the District Court Act 1991, the Court may include pre-judgment interest in its judgment. UCR 182.3 gives the Court a discretion as to the rate at which pre-judgment interest is calculated but as guide, it refers to a rate of 5% per annum. I 33 See Jams 2 Pty Ltd v Stubbings (No 4) [2019] VSC 482, [32]. -- 19 of 20 -- [2025] SADC 63 18 therefore award pre-judgment interest at the rate of 5% per annum from the date that the applicant paid the sum of $644,065 to the respondent; (3) Legal fees. There is no evidence of any contractual entitlement to the payment of legal fees. Although the Second Deed of Settlement contains a provision for the payment of costs on an indemnity basis in the event of a breach, because of my finding that the amount specified in that deed, was a penalty, there was not a breach of the Deed in failing to pay that sum; (4) The difference between the amount of $644,065 and interest on that amount and the liability of the applicant to Aus Craft. That liability is in the sum of $698,770.10 plus interest. The evidence of Mr Ong which was confirmed in the demand by Aus Craft was that the applicant received $698,770.10 from Aus Craft which it has not paid. I am satisfied that the applicant has incurred a liability in that sum to Aus Craft. The evidence from Mr Ong was that the contract between the applicant and the respondent on the one hand and the contract between the applicant and Aus Craft were separate contracts, although related to each other. The applicant is also liable for interest on that sum. Therefore, in addition to its loss in the sum of $644,065 the applicant has incurred the further loss of $54,705.10 representing this difference together with interest on that sum. 51 From the amount that is calculated in accordance with matters set out above, the sum of $500,000 should be deducted as the applicant has already obtained summary judgment in that sum. Conclusion 52 The Court rejects the claim of the applicant for judgment in the sum of $2,575,000 pursuant to the Second Deed of Settlement on the ground that this amount is a penalty and is unenforceable. The claim of the applicant that it is entitled to interest at the rate of 15% per cent per annum, compounding daily, as a result of the breach of the Second Deed of Settlement is also rejected as that interest rate is a penalty and unenforceable. 53 The applicant is entitled to judgment on its claim in relation to the payment of the sum of $644,065 for the delivery of wine by the respondent which delivery was not made, interest on that sum at the rate of 6% per annum from the date that sum was paid by the applicant and a further amount representing the applicant’s liability to Aus Craft (including any liability for interest) after adjusting for the $644,065. The amount determined in accordance with these matters should be adjusted to take into account the judgment that has already been entered in favour of the applicant, against the respondent, in the sum of $500,000. The applicant is to provide the Court with the amount, calculated in accordance with these reasons, that it says that it is entitled to judgment. -- 20 of 20 --