Cauchi v Huongold Pty Ltd [1995] QCA 417

IN THE COURT OF APPEAL [1995] QCA 417 SUPREME COURT OF QUEENSLAND Appeal No. 48 of 1995 Brisbane Before McPherson J.A. Thomas J. Williams J. [Huongold v. Cauchi] BETWEEN FREDDIE CAUCHI (Defendant) Appellant AND HUONGOLD PTY. LTD. (Plaintiff) Respondent REASONS FOR JUDGMENT - McPHERSON J.A. Judgment delivered the 15th day of September 1995 The only point of general interest in this appeal is whether the provisions of cl.33(g)(i) and (iii) of the contract between the parties constitute a penalty against which equity would be prepared to relieve. The provisions in question are set out in the reasons for judgment of Thomas J., which I have had the advantage of reading. Broadly stated, they provide that, in the event that the purchaser terminates the contract pursuant to cl.30, the purchaser is entitled to a refund of money paid to or on account of the vendor, and may retain or may recover form the vendor: (i) the proceeds of all crops sold by the purchaser while in possession; and (ii) money reasonably expended by the purchaser in the maintenance of the business during possession. An initial question arises whether a provision for payment in the event of termination, as distinct from breach, is capable of being considered a penalty. The -- 1 of 16 -- 2 question has not yet been authoritatively settled in England : see Campbell Discount Co. Ltd. v. Bridge [1962] A.C. 600; nor in Australia: O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. (1983) 152 C.L.R. 359. Assuming, however, that the rules governing penalties apply in such a case, the first step is to make a comparison with the position as it would be apart from the contactual provisions giving rise to the dispute. The right of parties to recover payments made or benefits transferred or conferred under a contract for the sale of land which is later terminated for breach was discussed in Lexane Pty. Ltd. v. Highfern Pty. Ltd. [1985] 1 Qd.R. 446, 454-459. Speaking generally, the party not in breach is entitled to recover sums paid on account of the purchase price as moneys had and received. This is no more than is provided in the first paragraph of cl.33(g) of the contract. The purchaser is also entitled to restitution in respect of permanent improvements made to the land while in his possession, which on one view is, however, to be measured by the extent of the enhancement in value rather than cost: cf. Lexane, at 445. The result envisaged by cl.33(g)(iii) is nevertheless not so different as to attract the power of a court of equity to strike it down. -- 2 of 16 -- 1 Clause 33(g)(i) stands in a somewhat different position. Ordinarily a purchaser under a defunct contract for the sale of land is charged an occupation rent for the period of possession less the amount of outgoings paid or incurred during that period: Lexane at 456. The underlying reason is the reciprocal entitlement of the purchaser to retain the rents and profits for that period. The matter does, however, depend, at least to some extent, on the character of the land and of the occupation involved or the activities conducted on it. In the present case cl.30(g)(i) provides for a refund to the purchase of what may be broadly described as outgoings; but it also enables the purchaser to retain the proceeds of crops. In a sense, those provisions afford him something in the nature of a double indemnity. But the subject matter of the contact in this case was more than the mere title to or possession of land. It comprehended the banana farming business conducted on the land of which the purchaser was to have a lease. Unlike some other emblements, bananas are a crop which need constant attention but which in return bear fruit continually throughout the year. To even up the adjustments in a completely equitable manner, it would thus have been necessary to allow the purchaser some recompense for his work and labour. The parties chose not to include such a provision in their contract. That being so, it does not seem inequitable that the purchaser should have been allowed to retain the proceeds of crops marketed during the time he was in possession. At the very least, it seems difficult to maintain a claim that the contractual solution adopted by the parties for adjusting their rights in the event of termination was penal in its operation or effect. They chose a rough and ready but not inequitable method of catering for the exigency which came to pass. I agree with the reasons of Thomas J. on the other matters considered and with the orders he proposes for disposing of the appeal and cross-appeal. -- 3 of 16 -- 2 IN THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 48 of 1995 Brisbane [Huongold v. Cauchi] BETWEEN: FREDDIE CAUCHI (Defendant) Appellant AND: HUONGOLD PTY LTD (Plaintiff) Respondent McPherson JA Thomas J Williams J Judgment delivered 15 September 1995 Separate concurring reasons for judgment by each member of the Court APPEAL DISMISSED WITH COSTS. CROSS-APPEAL ALLOWED WITH NO ORDER FOR COSTS. ORDER BELOW SET ASIDE AND REPLACED WITH THE FOLLOWING: 1. Declaration that the contract of 27 March 1992 between the plaintiff and the defendant was lawfully rescinded by the plaintiff. 2. Declaration that the plaintiff is entitled to return of the $8000 deposit plus interest of $2080. 3. Declaration that the plaintiff is entitled to the return of the $152,000 balance of purchase price with any accretions. 4. Declaration that the plaintiff is entitled to retain proceeds of crops sold while in possession, namely $79,665.85. 5. Declaration that the plaintiff is entitled to sums reasonably expended in the maintenance of the business and in the acquisition of necessities for the business in the sum of $58,409.50. -- 4 of 16 -- 3 6. Judgment for the plaintiff for the said $58,409.50. 7. Judgment for the defendant on the counterclaim. 8. Order defendant to pay the plaintiff's costs of the action and counterclaim to be taxed. CATCHWORDS: Vendor and Purchaser - sale of banana farming business with lease - purchaser given possession - vendor unable to register lease - contract rescinded by purchaser - purchaser in possession for two months while negotiations ensued - whether rescission was under cl.30 of at common law - clause providing for purchaser to retain proceeds of crop sales and also to recover all money "reasonably expended . . in the maintenance of the business" while in possession - whether a penalty - whether costs of eliminating pests, keeping farm reasonably productive, and marketing costs included Counsel: M.E. Pope for the Appellant J.R. Webb for the Respondent Solicitors: Bruce K. Gillan for the Appellant Pescott Reaston for the Respondent Hearing Date: 1 September 1995 -- 5 of 16 -- IN THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 48 of 1995 Brisbane Before McPherson JA Thomas J Williams J [Huongold v. Cauchi] BETWEEN: FREDDIE CAUCHI (Defendant) Appellant AND: HUONGOLD PTY LTD (Plaintiff) Respondent REASONS FOR JUDGMENT - THOMAS J Judgment delivered 15 September 1995 The appellant (who will be referred to as "the vendor") was in 1992 the owner of a banana farming business in the Innisfail district. He conducted it upon land which was subject to a sub-lease in his favour. The sub-lease had about three years to run with an option for a further three years. He sold this business to the respondent by contract dated 27 March 1992. The assets the subject of the sale included the sub-lease and specified equipment. Possession commenced on the date of the contract. It was expressly provided that the agreement was conditional upon the registration by the vendor in the Department of Lands of the lease. Clause 30 of the contract expressly provided: ". . . In the event that the said Lease is not registered in the relevant office within twenty-eight (28) days of todays date then the Purchaser may at its discretion terminate this Contract in which case all deposit monies paid on account of the purchase price shall be refunded to the Purchaser without any deduction whatsoever -- 6 of 16 -- 2 and this Contract shall be at an end." Special provision was made for the circumstance that possession was given before completion. Clause 33 provided that pending completion various terms and conditions should apply, including - "(b) The Purchaser shall keep and maintain the property at all times in good and substantial repair having regard to its condition at the date of possession and shall not alter or add to the property or remove any part of the property without the prior consent in writing of the Vendor save that the Purchaser shall be entitled to purchase such items as are reasonably necessary to conduct the business. . . . (e) Entry into possession under this Clause shall not amount to an acceptance of title or to a waiver of any of the Purchaser's rights pursuant to this Agreement. . . . (g) In the event that the Purchaser terminates the Contract pursuant to the provisions of Clause 30 hereof in addition to a refund of sums paid by the Purchaser to the Vendor or the Vendor's agent or Solicitor as the case may be the Purchaser shall be entitled to retain for its own benefit or to recover from the Vendor as a debt as the case may be the following: (i) The proceeds of all crops sold by the Purchaser during the period of possession. (ii) A refund of all wages paid by the Purchaser to any employees reasonably employed in the business during the period of possession. (iii) A refund of all money reasonably expended by the Purchaser in the maintenance of the business or the acquisition of necessities for the conduct of the business during the period of possession. (iv) A management fee in respect of the Purchaser company's officeholders, Ettor Canzian and Michael Maurice Canzian of SEVEN HUNDRED DOLLARS ($700.00) per week each for the period of possession." The parties agreed that sub-paras. (ii) and (iv) were not to apply, and a line was drawn through them. After taking possession the purchaser commenced working the farm which was in a -- 7 of 16 -- 3 condition described as "mediocre". The banana trees were infested with borer and nematode. Extensive work was undertaken to remove these pests and to restore healthy trees. The vendor was unable to obtain registration of the lease by the due date. The parties then entered into a series of negotiations aimed at achieving an alternative arrangement acceptable to both parties. As from 24 April 1992 the right arose in favour of the purchaser to rescind under cl.30. It is common ground that the contract was not affirmed by the purchaser while negotiations continued. Negotiations broke down towards the end of June 1992 and on 29 June 1992 the purchaser elected to rescind the contract. The purchase moneys had been paid into a trust account, and it is common ground that the purchaser was entitled to recovery of the deposit of $8000 and the balance purchase moneys of $152,000. The submission of counsel for the vendor is that the rescission did not have the effect of entitling the purchaser to the benefit of cll.30 and 33. The submission seems to be that the purchaser could rescind generally at common law, but that it was not entitled to rescind under the express right given to do so by cl.30. Counsel for the vendor submits that the contract was terminated because the vendor was unable to deliver the lease contracted "or any other lease acceptable to the respondent," and that this does not satisfy the requirements of cl.30. However in my view the basis of the rescission was the non-registration of the lease, and it could not reasonably be regarded as anything other than a rescission under cl.30. It was further submitted that the existence of cl.33 placed an obligation upon the purchaser to terminate punctually if it was to terminate at all, as the passage of time during which the purchaser was entitled to the benefits of cl.33 placed a corresponding burden upon the vendor. There is some merit in this submission but the purchaser did not delay unduly. The period after the right first arose was little more than two months and it was not unreasonable to delay whilst bona fide negotiations were on foot. The prospect of an acceptable alternative solution was potentially for the benefit of both parties, and there is no suggestion that the vendor complained at the time about any delay in exercising this particular right. There is no basis for concluding that the purchaser lost its right to rescind under cl.30, or -- 8 of 16 -- 4 that the rescission should be regarded as failing to activate the rights given by cll.30 and 33. It was then submitted that cl.33 is void as a penalty. No authority was referred to other than Legione v. Hateley (1982-1983) 152 C.L.R. 406, 445. The main effect of cl.33 (g) (i) and (iii) is that during possession the purchaser may sell crops (in this case bananas), retain "the proceeds" and obtain a refund of reasonable expenditure upon maintenance of the business. The effect of this is hardly added to by the additional provision covering expenditure on "the acquisition of necessities for the conduct of the business". The intention to contain such expenditure to a reasonable level is already referred to in cl.33(b) which deals with the question of maintenance of the property and which recognises that the purchaser is entitled "to purchase such items as are reasonably necessary to conduct the business". It is to be noted that it was originally proposed that the purchaser should also be able to obtain from the vendor a refund of all wages paid during the relevant period, and a further management fee in respect of Mr Ettore Canzian and Michael Canzian of $700 per week each. The cost of labour in the conduct of a banana farm is a significant matter, and its deletion meant that the reimbursement of expenses contemplated by cl.33(g) was substantially less than an indemnity for all relevant outlays during the period of possession. It must also be appreciated that the management of a farm for a limited period will usually mean that the occupant plants crops which will not be harvested during his period of occupation. Accordingly it is not prima facie inappropriate to provide that he may retain the proceeds of such crops as are sold during the period of possession. In the present case the proceeds would seem to be the sale price of such bananas as were sold, less sale expenses such as commission. Furthermore, it would not be inappropriate in a contract such as the present where the parties are contemplating the possibility of a possession that may terminate prematurely because of a failure on the part of the other party, to frame a clause which may directly or indirectly contain some compensation for disruption through entry into an abortive farming exercise. When all these factors are considered, it is inappropriate to regard cl.33(g) as imposing a penalty. The clause represents an agreed solution to a question that was inherently problematical, -- 9 of 16 -- 5 and in such a case the courts look less critically upon such a clause (Lamson Store Service Co Ltd v. Russell Pilkins & Sons Ltd (1906) 4 C.L.R. 672, 682-683). Furthermore the amounts to be paid or retained cannot be said to be clearly in excess of the greatest loss that might be expected to follow from the breach (Lamson above; O'Dea v. All States Leasing System (WA) Pty Ltd (1983) 152 C.L.R. 359). The question then arises as to the amount to which the purchaser is entitled under cl.33(g). His Honour considered that he could not with any accuracy calculate the amount of the proceeds of crops sold while the purchaser was in possession, or the amount of the moneys reasonably expended in the maintenance of the business or the acquisition of necessities for the conduct of the business during that period. His Honour said: ". . on the information supplied, I cannot determine what are costs properly to be deducted from gross sums for sales of bananas and what are costs properly spent in maintenance of the business. I can give examples of this problem, but it would not achieve a great deal. I think the most appropriate order I can make at this stage is to refer those particular matters back to the solicitors to see whether these sums can be agreed. If not, I shall have to hear further evidence upon this matter before I can finally decide that issue." His Honour then made declarations: "(a) that the plaintiff (purchaser) is entitled to retain proceeds of crops sold while in possession; (b) that the plaintiff is entitled to sums reasonably expended in the maintenance of the business and in the acquisition of necessities for the business." The action was for return of the deposit and purchase moneys and for the following declarations: "(cc) Declarations that the Plaintiff is entitled to retain the proceeds of the crops sold by the plaintiff during the period of possession in the sum of $81,632.00 and that the plaintiff was entitled to refund the sum of $121,285.00 being money reasonably expended by it in the maintenance of the business or in the acquisition of the necessities for the conduct of the business during the period of possession; This is a curious framing of relief. It is difficult to know why the amounts were not sued for as moneys owing under the contract. The matter was dealt with upon appeal as if such a claim had been made and counsel for the respondent purchaser was granted leave to file a notice of cross- -- 10 of 16 -- 6 appeal seeking the substitution of judgment for a sum of money. The parties had a full opportunity to present their case below, and if there is a deficiency in the evidence that should reflect adversely upon the party carrying the onus. Argument upon the appeal was directed to the amount that had been proved. For the appellant vendor it was submitted that the only items of expenditure sufficiently proved under cl.33(g)(iii) were purchases of chemicals ($2248.53) and of fertiliser ($2657.00). I understand both counsel to have expressed a preference, in the event that this Court was prepared to do so, that this Court should determine the question of the amount owing under cl.33(g)(iii) on the basis of the available evidence, and order that such sum be included in the judgment. There can be little doubt that the proceeds of the crops sold by the purchaser during the relevant period came to $79,665.85. That is the amount shown in ex.2 which is a summary prepared by Mr Canzian of the amounts that he "received back" from the sales of bananas. The summary (ex.2) was a schedule of such receipts containing references to deposit slips and sources. Clause 33(g)(i) entitles the purchaser to retain "the proceeds" of crops sold, and the evidence shows that sum to have been $79,665.85. There was no relevant cross-examination. Strictly speaking it is unnecessary to quantify that amount, as the purchaser already has those moneys, and quantification would only be necessary if the purchaser had to refund them to the vendor. In view of the finding of the learned trial judge that cll.30 and 33 applied, confirmed by this Court, no such refund is required. I turn to the amount to which the purchaser is entitled under cl.33(g)(iii). This is confined to money reasonably expended in the maintenance of the business, or the acquisition of necessities for the conduct of the business during the relevant period. Mr Canzian in conjunction with his accountants prepared a list of expenditures relating to the operation of the business whilst his company was in possession. This was in the form of a schedule representing relevant invoices, entries from his cash-book and bank records. Initially the invoices were attached to it. The relevant documents were made available to the vendor's legal representatives. In the event only the schedule -- 11 of 16 -- 7 (ex.3) was tendered. It is a fairly detailed document containing with respect to each item of claim the date, details, amount, cheque reference and invoice, receipt or docket reference. Mr Canzian and his accounts adverted to the question whether any items in his original list were of a private or partially private nature, and such items were removed. He swore that what was left was his best attempt at setting out "maintaining the business of the farm or purchasing things . . like fertiliser that (he) necessarily had to have for the business". The schedule was then tendered without objection. Counsel for the vendor in due course cross-examined on a number of items contained in the schedule, and in six instances was able to show a basis justifying a reduction in particular items. The maintenance of the business includes maintaining the farm in a husbandlike manner, which includes the reasonable elimination of pests. In my view it also includes the taking of steps to keep the farm reasonably productive, and the maintaining of reasonable selling outlets. To do this it seems obvious that it would be necessary to obtain cartons or some type of packaging for the purposes of delivering the bananas to the selling agents. The first item in the schedule is stationery and postage, particularised by reference to five invoices totalling $256.05. It is reasonable to infer that some expenditure would be incurred on matters such as labels for boxes or invoices. In the absence of challenge, this item is sufficiently established. The next item, "purchases", contains seven items totalling $966.17. Two of the items (a ladder and air-compressor) were the subject of cross-examination. It can be inferred that these items were purchased for use in the business, and used. However as they have been retained by the purchaser, the only amount that can be justified against the vendor with respect to such items is some depreciation. This will be taken account of in due course. No other item was challenged under the heading. The item "fuel and oil" comprises five invoices totalling $1329.69. It is a reasonable inference that farm equipment including a tractor was used, and there is express evidence that a utility was purchased for use in the business. In the absence of any challenge to the quantum, this part of the claim is sufficiently established. -- 12 of 16 -- 8 Counsel for the vendor conceded liability for the amounts claimed for chemicals ($2248.53) and fertiliser ($2657.00). The next item, "repairs and maintenance", comprises fourteen items totalling $1155.95. Counsel for the vendor submitted that these expenses should be regarded as expenses incurred in building up the purchaser's business as distinct from the vendor's business. I do not think that such a distinction can be maintained having regard to cl.33 which contemplates a continuity of "the business". Even if, as the Court was told, each party ran the business under his or its own name, the business in question was that which was being run on the farm at the time. Of course if the purchaser expended money in changing the nature of the business or in extending it beyond the character it bore when the purchaser took possession, such expenditure would lie outside cl.33(g)(iii). That is not shown to be the case with respect to the present item which is within a list of items sworn to by Mr Canzian as maintaining the business or purchasing things that he necessarily had to have for the business. In the context of such a business, expenditure of this order is not such as to raise suspicion, particularly in the absence of any cross-examination. The item "household expenses" consists of four items totalling $322.62. Three of them obviously relate to telephone and electricity. The fourth is "RACQ - $34". The utility was purchased solely for the farm, but the period for which the vendor is responsible is limited to three months. There must therefore be a deduction of $26 from this item. The item "cartons, liners packing etc." (seven items totalling $19,962.54) with references to multiple delivery dockets would seem to have been a necessary expenditure in maintaining market outlets. Further freight charges totalling $24,571.12 would also seem to fall within the same principle of maintaining continuity of market. Shed and mobile phone expenses ($1060.88) are expenses at a credible level, and in the absence of challenge are sufficiently proved. The item, "insurance, $1692.66" is now conceded by counsel on behalf of the purchaser to -- 13 of 16 -- 9 be inappropriate, and it will be deducted from the total. Vehicle registration ($403.50) requires a deduction to give effect to the three month period. The purchaser borrowed money in order to run the business, and loan fees were paid totalling $5048.56. However cross-examination with respect to loan fees justifies a reduction of $1165 from the amount claimed. Similarly bank charges ($216.80) and Workers Compensation ($451.68) fall within the description of expenses in maintaining the business. In the result, from the total of ex.3 ($62,043.78) there should be deducted the following items: Excess claims revealed by cross-examination $1,612.6 2 Insurance 1,692.66 Vehicle registration 303.00 RACQ 26.00 Total $3,634.2 8 The amount to which the purchaser is entitled under cl.33(g)(iii) is $58,409.50. Interest will not be allowed because the pleadings did not seek judgment for a money sum, and in the event no claim for interest was made in the application to make a late cross-appeal and seek a money judgment in lieu of the declaration. The appeal should be dismissed with costs, and the cross-appeal allowed. In consequence the order below should be set aside and replaced with the following: 1. Declaration that the contract of 27 March 1992 between the plaintiff and the defendant was lawfully rescinded by the plaintiff. 2. Declaration that the plaintiff is entitled to return of the $8000 deposit plus interest of $2080. 3. Declaration that the plaintiff is entitled to the return of the $152,000 balance of purchase price with any accretions. -- 14 of 16 -- 10 4. Declaration that the plaintiff is entitled to retain proceeds of crops sold while in possession, namely $79,665.85. 5. Declaration that the plaintiff is entitled to sums reasonably expended in the maintenance of the business and in the acquisition of necessities for the business in the sum of $58,409.50. 6. Judgment for the plaintiff for the said $58,409.50. 7. Judgment for the defendant on the counterclaim. 8. Order defendant to pay the plaintiff's costs of the action and counterclaim to be taxed. It is directed that no costs be allowed with respect to the cross-appeal. -- 15 of 16 -- 11 IN THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 48 of 1995 Brisbane Before McPherson JA Thomas J Williams J [Couchi v. Huongold Pty Ltd] BETWEEN: FREDDIE COUCHI (Defendant) Appellant AND: HUONGOLD PTY LTD (Plaintiff) Respondent REASONS FOR JUDGMENT - G N WILLIAMS J Judgment delivered 15/09/1995 I have had the advantage of reading the reasons for judgment prepared by McPherson JA and Thomas J; I agree with them and with the orders proposed. -- 16 of 16 --