Amev-Udc Finance Ltd v Austin [1986] HCA 63; (1986) 162 CLR 170 (4 November 1986)

HIGH COURT OF AUSTRALIA

AMEV-UDC FINANCE LTD. v. AUSTIN [1986] HCA 63; (1986) 162 CLR 170

F.C. 86/065

Contract

High Court of Australia

Gibbs C.J.(1), Mason(2), Wilson(2), Deane(3) and Dawson(4) JJ.

CATCHWORDS

Contract - Damages - Penalty - Agreement for hire of chattel - Failure to pay instalments of hire - Termination by owner pursuant to contractual power - Damages - Instalments due but unpaid - Damages for loss of contract.

HEARING

1986, February 19; November 4. 4:11:1986

Appeal from the Supreme Court of New South Wales.

DECISION

GIBBS C.J.: The facts of this case are fully set out in the judgment of Mason and Wilson JJ., which I have had the advantage of reading, as well as in the helpful judgment of Priestley J.A. in the Court of Appeal. The respondents are sued on guarantees, but the extent of their liability is measured by that of the principal debtor, the lessee under two lease agreements made with the appellant as lessor. Each agreement provided (by cl.1) that the full amount of the total rent should become due forthwith upon the execution of the agreement but that, provided that the lessee paid the instalments specified in the schedule on the due dates therein specified or within seven days thereafter, the lessor would accept payment of the total rent by such instalments. Clause 1 further provided that on default in the payment of any instalment on the due date and upon such default continuing for the space of fourteen days and upwards the lessor was entitled by notice in writing to the lessee to declare the whole unpaid balance of the total rent to be payable forthwith and in that event the same was to become payable. The lessee undertook (by cl.6(b)) to pay interest at specified rates on any moneys payable under the lease which might from time to time be overdue. Clause 7 of each agreement provided that if (inter alia) the lessee failed to pay any instalment within seven days of the due date or any other moneys payable thereunder immediately upon the lessor making demand therefor, then (inter alia):



"(ii) the Lessee's right to use and to the

possession of the goods hereunder may be

terminated by the Lessor by notice in

writing to the Lessee whereupon the whole

unpaid balance of the Total Rent shall be

payable forthwith by the Lessee to the

Lessor."

The effect of cll.10 and 11 of the lease was that (inter alia) on the termination of the lease the lessor became entitled to dispose of the goods leased and if the net proceeds of disposal were less than the residual value stated in the schedule the lessee was obliged forthwith after demand to pay the amount of any deficiency to the lessor in addition to the whole unpaid balance of the total rent and any other moneys payable by the lessee under the agreement. The lessee fell into arrears in payment of the instalments of the rent and the appellant gave notice of termination under cl.7(ii). It was held in the Supreme Court, on the authority of O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [1983] HCA 3; (1983) 152 CLR 359, that the provision requiring the lessee to pay the full balance of the unpaid rent to the appellant was in the circumstances a penalty. Before us it was conceded that this conclusion was correct, as it clearly was. Rogers J., at first instance, assessed damages on the basis that the appellant was entitled to receive, in addition to the arrears of rent at the date of the termination of the hiring, and the amount of any deficiency on the disposal of the goods, the present value of future rentals as at the date of the termination of the hiring. He said that even though the provision in the lease was a penalty it was not to be completely disregarded, and that to restrict the appellant's right to damages to rentals which had accrued prior to termination might mean that the equitable power to relieve against penalties would work an injustice to the appellant. The Court of Appeal by a majority (Mahoney and Priestley JJ.A., Hutley J.A. dissenting) held that the appellant was entitled to receive the sum of unpaid instalments of rental at the date of termination or repossession with interest and remitted the proceedings to the commercial list for further hearing.

2. The question for decision in the present case is a narrow one. We are not required to consider the effect of Export Credits Guarantee Department v. Universal Oil Products Co. (1983) 1 WLR 399; (1983) 2 All ER 205, where it was held that a clause which provided for payment of money on the happening of a specified event other than a breach of contractual duty owed by the contemplated payor to the contemplated payee was not a penalty. We are not concerned with the question whether a penalty clause restricts a plaintiff to the amount of the penalty even though the plaintiff disregards the penalty clause and sues for damages and the actual damage exceeds the amount of the penalty. It was accepted before us that the lessee had not repudiated the agreements, and no question arises as to what the position of the appellant would have been if there had been a repudiation by the lessee or if the appellant had availed itself of other remedies possibly open to it. The sole question is what damages is the appellant entitled to recover in the present circumstances where the lessee, in breach of the contract, but without repudiating it, failed to pay the instalments when they became due and the appellant exercised its right to determine the hiring.

3. The answer to that question is that the appellant is in the position of a plaintiff in an ordinary action for damages for breach of contract. Since no question of remoteness arises in the present case the appellant is entitled to recover such damages as it can prove that it has sustained as a result of the breach. It is true to say, as Rogers J. said, that the lessor is entitled to recover its actual damage. However, it is the actual damage which flowed from the breach which alone can be recovered. If authority is required for that elementary proposition, it is sufficient to refer to Campbell Discount Co.Ltd. v. Bridge (1962) AC 600, at pp 614, 617, 625; O'Dea v. Allstates Leasing System (W.A.) Pty.Ltd., at p 374; and Export Credits Guarantee Department v. Universal Oil Products Co., at p 403; p 224 of All ER

4. The application of this principle to an agreement of hire purchase was considered by the English Court of Appeal in Financings Ltd. v. Baldock (1963) 2 QB 104. In that case the hirer of a truck failed to pay instalments that were due and the owner put an end to the hiring and took possession of the truck. It was held that a clause which provided that in such an event the hirer should pay an amount which with the instalments already paid would equal two-thirds of the total hiring cost was a penalty clause and that the owner could recover damages only for any breach up to the date of termination and not thereafter. Accordingly the owners were entitled only to the instalments in arrears with interest up to the date of judgment. The ratio of that part of the decision was that where there has been no repudiation by the hirer, and the owner has exercised his power to determine the hiring because the hirer was in arrears with his payments, any loss occurring after the determination will have resulted, not from the hirer's breach of contract in being late in his payments, but from the owner's election to determine the hiring: see at pp.111-112, 115, 122-123. That case has since been followed by the Court of Appeal in England in a number of cases and by Moffitt J. in Lessors (Aust.) Pty. Ltd. v. Westley (1964-65) NSWR 2091, at p 2098. Very similar reasoning was accepted by this Court in Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, a case in which a lessor exercised a power of re-entry when the lessee fell into arrears in the payment of rent.

5. It was submitted on behalf of the appellant that the result reached by the Court of Appeal in the present case was unjust. It was said that the leasing agreements were in substance financing transactions. It was pointed out that since the property leased was by its nature likely to fall steeply in value once it had been used, the appellant was likely to suffer considerable financial detriment if the hiring came to an end after a comparatively short period since in those circumstances the right to recover any deficiency below the residual value would probably not recompense the appellant. The answer to these submissions is that the appellant chose to enter into an arrangement of that kind, and to determine the hiring, and that its election to do so caused this loss.

6. The appellant cannot successfully seek to rely on general equitable principles which relate to the relief against penalties when those principles have long since hardened into definite rules governing the position of parties to a contract which contains a clause imposing a penalty for breach. It is well established in the modern law that the liability of a party who has broken a contract which contains a penalty clause is to pay the damages that have resulted from the breach. In the present case, the additional damage in respect of which the appellant seeks to recover did not result from the breach; it resulted from the determination of the hiring which the appellant itself chose to bring about.

7. For these reasons in my opinion the Court of Appeal was correct in holding that the appellant was entitled to recover no more than the unpaid instalments of rental together with interest. I would accordingly dismiss the appeal.

MASON and WILSON JJ.: This appeal from the New South Wales Court of Appeal raises an important question concerning the recovery of compensation by a lessor under a hiring contract which contains a provision for the payment by the hirer of a stipulated sum or sums in the event of the owner exercising a contractual power to terminate the contract on the hirer's non-payment of instalments of rent, when that provision is unenforceable because it is a penalty. The precise question may be stated in this way: Is the owner restricted to recovery of the instalments of rent unpaid at termination plus interest or is he entitled to recover his actual loss, that is, the difference between the capital component of the rent payable after termination, plus interest to the date of termination and the market value of the hired goods on or at that date?

2. The appellant, which is a finance company, sued the respondents on two guarantees dated 27 May 1981 and 13 November 1981 whereby the respondents guaranteed the due and punctual payment by Lithotone Printing Pty Limited ("Lithotone") of the rental and of every other sum payable by that company under two hiring agreements (called "Lease Agreements") bearing the same dates respectively as the guarantees. The Lease Agreements were between the appellant as owner and Lithotone as lessee. They related to certain printing equipment. The equipment was leased to Lithotone at a rental of $4,685.75 per month commencing on 27 May 1981 under the first agreement and at a rental of $800.28 per month commencing on 13 November 1981 under the second agreement. The first agreement provided for a lease of 60 months, the second for 48 months. The appellant terminated the agreements, pursuant to an express power which each conferred, after the lessee failed to pay within seven days of the due date an instalment of rent payable under each agreement.

3. The amount sued for by the appellant under the guarantees was $291,857.40. According to par.13 of the statement of claim it consisted of (a) arrears of rental as at the date of repossession of the equipment; (b) the balance of rental due from the date of repossession to the dates when the agreements would have expired if they had not ended prematurely; and (c) the residual values specified under the agreements; less (d) the proceeds of sale of so much of the equipment as had been sold. Interest under the agreements was claimed on the total. The claim, as thus formulated, was based on the provisions of the agreements. Except as otherwise mentioned, and apart from the particulars specified in the schedules, the agreements are in identical terms.

4. The first such provision is cl.1 which provides:

"1.(a) The Lessor hereby leases the goods to the

Lessee and the Lessee hereby takes the goods

on lease from the Lessor for the period

stated in the Schedule (hereinafter called

'the period of the lease') for the Total

Rent stated in the Schedule.

(b) The full amount of the Total Rent shall

become due forthwith upon the execution of

this Agreement but the Lessor agrees with

the Lessee that provided the Lessee shall

pay to the Lessor the instalments specified

in the Schedule upon the due dates therein

specified or within seven days thereafter

the Lessor will accept payment of the Total

Rent by such instalments. On default in the

payment of any instalment on the due date

and upon such default continuing for the

space of fourteen days and upwards the

Lessor may by notice in writing to the

Lessee declare the whole unpaid balance of

the Total Rent to be payable forthwith and

in such event the same shall become payable

by the Lessee to the Lessor accordingly."

5. The second relevant provision is cl.6(b), by which the lessee undertakes:

"to pay interest at the rate of ten per centum per

annum (in the May agreement, twenty per centum in

the November agreement) on any monies payable

hereunder which may from time to time be overdue".

6. Clause 7 confers on the appellant a power to terminate the agreement on the happening of various events which include failure to pay an instalment of rent within seven days of the due date. It provides, so far as it is material:

"7. If:-

...

(c) the Lessee fails to pay any instalment

within seven days of the due date or any

other monies payable hereunder immediately

upon the Lessor making demand therefor;

(d) the Lessee shall commit or permit or suffer

to be committed any breach of the terms

conditions and provisions of this Agreement;

...

then in any such case -

(i) with or without notice the Lessor shall be

entitled to take possession of the goods

(but without prejudice to the Lessor's right

to payment of the whole unpaid balance of

the Total Rent or other monies payable under

this Agreement) and for the purpose of

taking possession of the goods the Lessee

hereby authorises the Lessor and the agents

or servants of the Lessor to enter upon any

premises occupied or controlled by the

Lessee, and

(ii) the Lessee's right to use and to the

possession of the goods hereunder may be

terminated by the Lessor by notice in

writing to the Lessee whereupon the whole

unpaid balance of the Total Rent shall be

payable forthwith by the Lessee to the

Lessor."

7. Clause 10 authorizes a sale by the appellant of the goods upon termination of the agreement. Clause 11 makes provision for a consequential alteration in the lessee's liability. The clause is in these terms:

"11. If the net proceeds of such disposal (after

allowing for all costs and expenses relating

to the receipt by the Lessor of the goods and

their disposal including storage) are less

than the Residual Value stated in the Schedule

hereto then the Lessee will forthwith after

demand made by the Lessor pay to the Lessor by

way of indemnity the amount of any deficiency

(in addition to the whole unpaid balance of

the Total Rent and other monies payable by the

Lessee under this Agreement)."

8. Clause 12 provides:

"12. If upon the expiration of the period of the

lease or any extension thereof or upon the

prior termination for any reason whatsoever of

the Lessee's right to use and to the

possession of the goods hereunder the goods

shall not be received by the Lessor within

seven days of the giving of notice by the

Lessor requiring the return of the goods to

the Lessor's place of business or to such

other place as may be agreed upon then the

Lessee will forthwith pay to the Lessor on

demand as and by way of ascertained and

liquidated damages the Residual Value stated

in the Schedule hereto together with the whole

unpaid balance of the Total Rent and any other

monies payable under this Agreement and

interest thereon at the rate of ten per centum

per annum (in the May agreement, twenty per

centum in the November agreement) from the

date of demand until payment."

The residual value specified in the schedules to the two agreements were $64,350 and $9,150 respectively.

9. The appellant determined the hiring under cl.7(ii) of each agreement on the ground mentioned in par.(c) of that clause, namely that in each case the hirer had failed to pay one instalment of rent within seven days of the due date. The two notices under cl.7(ii) were dated 28 April 1982. The relevant part of the first notice was in these terms:

"... NOW the Company in pursuance of the rights

and powers conferred upon it by the said Lease

Agreement exercises its option in accordance with

Section 7(ii) of the said Lease Agreement and

terminates the Lessee's right to use and to

possession of the goods and accordingly the whole

of the unpaid balance of the total rent is payable

forthwith by the Lessee to the Lessor. Further

pursuant to Section 6(b) of the said agreement the

Lessor claims interest from the Lessee at the rate

of 10 per centum per annum upon the moneys payable

which are at the date hereof overdue. The total

rent due with interest at the date hereof is

$230,825.00 and the Company demands payment thereof

forthwith. The Lessor also gives notice that it

intends to claim on you for any deficiency in

relation to the residual value as stated above ..."

It seems that the second notice was in identical terms, save for the specific amount claimed and the rate of interest which was applicable.

10. Lithotone did not comply with the notice of demand. A winding-up order was made against it on 30 April 1982. The appellant repossessed the equipment under the first agreement on 2 August 1982 and under the second agreement on or about 6 May 1982. The appellant sold the equipment which was the subject of the second agreement for $22,500, an amount higher than the residual value of $9,150. The appellant was unable to sell the equipment which was the subject of the first agreement, but it was not claimed that the value of the equipment was less than the residual value of $64,350.

11. The appellant's statement of claim does not precisely state the nature of its claim. In par.10 it is alleged that upon the giving of the notice of termination the whole of the unpaid balance of the total rent became payable. This is a reference to cl.7(ii). However, in par.15, where the appellant formulated its claim against the respondents, the claim made is for "payment of the damages sustained by (the appellant) as a result of (Lithotone's) breaches of the Lease Agreements, together with interest thereon and costs". Despite the way in which par.15 is expressed, the primary judge stated that the appellant sued for moneys payable under the agreements and, alternatively, for damages. In saying this, his Honour no doubt had it in mind that as part of their defence to the action the respondents pleaded that cll.6(b) and 7 of the agreements, which obliged Lithotone to pay the whole of the balance of the total rent due under the agreements upon their early termination, with interest thereon, created liabilities which amounted to penalties and were therefore unenforceable. Moreover, in its reply the appellant pleaded that if equitable relief was granted to the respondents on the basis that their liabilities are penalties then, as a condition of such relief, the respondents should be required to do equity by:

(a) accepting liability to compensate the appellant for

the actual loss which it suffered arising from the

termination of the agreements; or

(b) accepting liability to pay to the appellant an

amount equal to the rental under the agreements for

the period after termination when the goods

remained on Lithotone's premises.

12. Whether the appellant's primary claim for moneys payable under the agreements was based on cll.11 or 12, in addition to cl.7(ii), was not made clear. It seems to have been assumed, both at first instance and in the Court of Appeal, that this branch of the appellant's case was based on cl.7(ii) alone. The confusion may be ascribed to the deficiencies in the statement of claim, which led, in the ultimate analysis, to the absence of any issue in relation to the penal character of cll.11 and 12.

13. At first instance the defence that cl.7(ii) gave rise to a penalty, in so far as it imposed a liability on Lithotone to pay the whole of the balance of the total rent, was upheld. Rogers J. correctly regarded the recent decision of this Court in O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [1983] HCA 3; (1983) 152 CLR 359 as authority for the proposition that, where a lessee is under no present obligation to pay the entire rent, a provision requiring him to pay the whole of the balance of the rent for the unexpired term, without rebate for accelerated payment of future instalments, on his breach of the agreement in failing to make prompt payment of an instalment of rent, is a penalty if in the circumstances the lessor is entitled to repossess and resell the goods leased and is not bound to account to the lessee for the proceeds of sale, even if they exceed the appraisal or residual value. The point is that such a provision cannot amount to a genuine pre-estimate of damage because it must necessarily exceed by a wide margin the greatest loss which the lessor can suffer as a result of default in payment of instalments. The lessor would receive both the entire rental and possession of the vehicle, which would greatly exceed his damage (O'Dea, at p.379).

14. The provisions of the lease agreements in the present case are indistinguishable in material respects from those which were considered in O'Dea. As in O'Dea, the clauses governing payment, when read together, created a liability to pay by instalments, with an obligation to pay the whole in the event of default in payment of an instalment. And the effect of the agreements was that, on termination for breach, the appellant was entitled (a) to the whole of the balance of the rent, without rebate; (b) to repossess and sell the goods; and (c) to recover the difference, if any, between the residual value and the proceeds of sale. The draftsman of the agreements did not attempt to take advantage of the decision of this Court in I.A.C. (Leasing) Ltd v. Humphrey [1972] HCA 1; [1972] HCA 1; (1972) 126 CLR 131. The comments of Walsh J. in that case, at pp 141-145, indicate that if provision is made for an appropriate rebate of future instalments of rent and for the lessee to have the benefit of any excess of the net sale price over the residual value, so long as it is the subject of a bona fide estimate, the problems encountered in the present case may be avoided.

15. Rogers J. held that the consequence of a finding that the amount prescribed to be paid by the provisions of an agreement is a penalty is that "the Court will grant relief against it and refuse to allow the promisee to recover more than the actual damage which he has sustained" (Philip Bernstein (Successors) Ltd v. Lydiate Textiles Ltd, noted only in (1962) 106 Solicitors' J. 669 as Sterling Industrial Facilities, Ltd v. Lydiate Textiles, Ltd, per Diplock L.J.; a statement approved by Staughton J. in Export Credits Guarantee Department v. Universal Oil Products Co. (1983) 2 All ER 205, at p 212; (1983) 1 Lloyd's Rep 448, at p 453). It was therefore necessary to assess the damage actually suffered by the appellant in accordance with the principles of the general law. The issue was whether the appellant was entitled to the arrears of rental to the date of termination only, as the respondents conceded, or to its actual damage, as the appellant claimed.

16. Rogers J. took as a starting point the principle established by the authorities that when a hiring agreement is terminated by the exercise of a power of termination conferred by the agreement and the owner retakes possession of the goods hired, he can recover damages for any breach up to the date of termination, but not for any breach thereafter, because there are no breaches thereafter. The damage which he suffers over and above the instalments up to the date of termination is due, not to any breach of the agreement by the hirer, but to the owner's exercise of his contractual power of termination at a time when the value of the goods has decreased by an amount which exceeds the instalments which the owner has received and is entitled to receive up to that date.

17. However, his Honour considered that the principles on which the Court acts when, having pronounced a contractual stipulation to be a penalty, it awards to the plaintiff compensation for the loss which he has suffered, are derived from the exercise by equity of its jurisdiction to relieve against penalties. In his view it would be inconsistent with those principles "to disregard completely the fact that the parties had agreed that a payment on account of the balance remaining unpaid of the total rent should be paid notwithstanding termination" and he pointed to the indication in cl.11 of the parties' intention that after termination there be, if necessary, an adjustment of rights by payment of moneys by the former lessee on account of the depreciation of the goods. Accordingly, the appellant was entitled to recover the actual damage which it suffered and was not confined to the rental which accrued up to termination. The amount awarded, $206,000, was agreed between the parties and evidently reflected both the unpaid rent to the date of termination and a component for the appellant's capital loss arising by virtue of depreciation of the equipment.

18. The Court of Appeal (Mahoney and Priestley JJ.A., with Hutley J.A. dissenting) allowed the respondents' appeal, set aside the judgment for $206,000 in favour of the appellant and remitted the matter to the Supreme Court for further hearing on the footing that the amount to be awarded to the appellant be limited to the sum of the instalments of rent unpaid at the date of either termination or repossession, and interest. In the Court of Appeal the appellant did not contest the correctness of the finding that cl.7(ii) amounted to a penalty. The issue there was whether the amount for which judgment was given could be supported on the ground advanced by Rogers J. or on the ground that the respondents had repudiated the agreements, the parties having agreed that, if either ground were made out, the amount awarded accurately reflected the amount of the appellant's loss. Mahoney and Priestley JJ.A. found against the appellant on the question of repudiation. Hutley J.A. did not deal with that question, having no need to do so because he found for the appellant on the ground advanced by Rogers J. Repudiation is no longer in contention as the appellant does not challenge the correctness of the Court of Appeal's finding on that matter.

19. Priestley J.A. considered, and Mahoney J.A. was prepared to assume, that Rogers J. was correct in having regard to the principles of equity in determining the compensation which the appellant was entitled to recover in lieu of the stipulated penalty. However, they held that the limitation of the appellant's damages to the amount of instalments which had fallen due, but were unpaid, plus interest, accorded with those principles. The correctness of this conclusion is the critical issue in the appeal.

20. Any attempt to exhume a discretionary jurisdiction to grant relief, which has not been exercised for more than a century, is bound to bring complications in its train. There is the initial problem of ascertaining the scope and mode of exercise of a dynamic jurisdiction which seems to have applied constantly changing criteria in the course of its development over more than two centuries before the introduction of the Judicature system. And there is the secondary problem of determining whether there is any place for the exercise of the equitable jurisdiction in the framework of the law as it has developed in recent times. In the case of the doctrine of penalties these complications are accentuated by doubts which have been expressed with respect to the utility of the doctrine (see Muir, "Stipulations for the Payment of Agreed Sums" (1985) 10 Syd. L. Rev. 503, esp. at pp.526-527; U.K. Law Commission, Penalty Clauses and Forfeiture of Monies Paid (1975) Working Paper No. 61; Meagher, Gummow & Lehane, Equity: Doctrines and Remedies (1984) 2nd ed., at pp.428-429; Meagher, "Penalties in Chattel Leases", in Finn (ed.) Essays in Equity (1985), at pp.57-58). And these doubts are compounded by unresolved difficulties which continue to arise in the course of its application.

21. The mainspring of the appellant's argument is to be found in the comments of Lord Denning in Campbell Discount Co. Ltd v. Bridge (1962) AC 600. In that case Viscount Simonds (at pp 613-614) and Lord Morton of Henryton (at pp 614-615) considered that a minimum payment clause was valid in its application to a termination by the hirer, being the price payable for the exercise of that right, even though it amounted to a penalty when it applied to a breach of contract on the part of the hirer. On the other hand, Lord Denning (at pp.629-631), though agreeing with this conclusion, rejected the notion that the doctrine of penalties was confined to sums stipulated to be paid for breach of contract. He pointed out that the jurisdiction of equity to relieve against penalties was not so confined, calling attention to equity's practice in earlier times of granting relief against penalties for non-performance of a condition in circumstances where, he suggested, the obligor gave no covenant to perform the condition. Lord Devlin (at pp.634-635) reserved his opinion on the wider ground taken by Lord Denning. He based his decision on the conclusion that the minimum payment clause was a penalty in its application to the hirer's breach of contract. He concluded that the minimum payment clause was invalid in its application to termination by the hirer, because, being a sham for one purpose, it must be a sham for all purposes. Lord Radcliffe also found that the clause was a penalty in its application to the hirer's breach of contract. Although he did not commit himself on the wider ground taken by Lord Denning, Lord Radcliffe thought that it would be necessary to construct almost a new set of arguments to render the provision unenforceable in its application to events which were not breaches of contract (at pp.625-626).

22. Common to a number of the speeches in Campbell Discount was the view that the doctrine of penalties has no application to a stipulation which provides for the payment of an agreed sum on the happening of a specified event other than a breach of contract. The correctness of this view has since been affirmed by the House of Lords in Export Credits, at pp.402-403; pp.223-224 of All ER (see also I.A.C. (Leasing), at p.143). The reason given for this limitation on the scope of the doctrine is that it has never been the function of the courts to relieve a party from a contract on the mere ground that it proves to be onerous or imprudent (Export Credits, at p.403; p.224 of All ER). Unfortunately the proposition that the doctrine of penalties has no operation in relation to a sum agreed to be paid on the happening of an event which is not a breach of contract generates difficulties when an attempt is made to apply the proposition to the exercise of an option to terminate a contract which is conditional upon, or associated with, a breach of contract.

23. What is the position if the option is exercisable by the owner in a hire purchase agreement or the lessor in a chattel lease on the happening of any one of a series of events, some of which are breaches of contract on the part of the hirer and some of which are not? If the option is exercised on the occasion of the hirer's breach of contract, it accords with principle and authority to say that the sum is payable in respect of the breach of contract and is a penalty, unless it is a genuine pre-estimate of the damage (O'Dea, at p 368; Cooden Engineering Co. Ltd v. Stanford (1953) 1 QB 86, at pp 96, 116; Campbell Discount; United Dominions Trust (Commercial) Ltd. v. Ennis (1968) 1 QB 54, at pp 65, 68, 69; cf. I.AC (Leasing), at pp 142-143). The point is that the doctrine is concerned with matters of substance, not of form (Campbell Discount, at p.624; O'Dea, at pp.368, 403).

24. A related problem arises when an agreement contains a minimum payment clause which requires the hirer to pay a stipulated sum on his exercise of an option to terminate the agreement or on the happening of other events which include his breach of contract. Such a provision has been held to be valid in its application to termination by the hirer (Associated Distributors, Ltd v. Hall (1938) 2 KB 83), notwithstanding that the provision constitutes a penalty in its application to a breach of contract. However, the status of Associated Distributors has been weakened by the comments made in Campbell Discount (see also O'Dea, at p.368).

25. The restricted view of the doctrine of penalties, vindicated in Export Credits, was criticized by Lord Denning in Campbell Discount (at p.629) on the ground that equity would thereby commit itself to an "absurd paradox: it will grant relief to a man who breaks his contract but will penalise the man who keeps it". With reference to the terms on which equitable relief would be granted against a penalty his Lordship said (at p.632):

"When equity granted relief against a penalty, it

always required the recipient of its favours, as a

condition of relief, to pay the damage which the

other party had really sustained. A Quantum

Damnificatus was issued to determine it. On

payment of the damage, equity granted an injunction

to restrain the other party from proceeding to

enforce the penalty at law. Now that equity and

law are one, the hire-purchase company should

recover its actual damage, and such damage should

be assessed according to the realities and not

according to any fiction. The hire-purchase

company should recover the money it has advanced

with interest at a reasonable rate up to the time

when the hiring was terminated, less the

instalments already received and the sum which the

car might reasonably be expected to realise when it

was delivered up to them."

26. Immediately before this passage, Lord Denning had stated that he was prepared, if necessary, to hold that the hiring was terminated by a repudiation which was accepted. Subsequently in Financings Ltd v. Baldock (1963) 2 QB 104, at pp 112-113, his Lordship made it clear that the last sentence in the passage in Campbell Discount which we have quoted was relevant only to a case in which there was before termination a repudiation by the hirer of his obligation to pay future rentals and that where there was only a failure to pay instalments which did not go to the root of the contract, giving rise only to a right to terminate pursuant to an express stipulation in the contract, the owner can recover only instalments in arrear, with interest, and nothing else. The point is that when the lessor terminates pursuant to the contractual right given to him for breach by the lessee, the loss which he can recover for non-fundamental breach is limited to the loss which flows from the lessee's breach. The lessor cannot recover the loss which he sustains as a result of his termination because that loss is attributable to his act, not to the conduct of the lessee. It is otherwise in the case of fundamental breach, breach of an essential term or repudiation (see Progressive Mailing House Pty Ltd v. Tabali Pty Ltd [1985] HCA 14; (1985) 59 ALJR 373, at p 379; [1985] HCA 14; 57 ALR 609, at p 619). In the present case, perhaps in deference to the views expressed in Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, it was not argued that the existence of a contractual right on the part of the lessor or owner to terminate for a breach of what is otherwise a non-essential term endowed that term with the character of a condition, though the judgment of Jordan C.J. in Larratt v. Bankers & Traders Insurance Co. (1941) 41 SR(NSW) 215, at pp 225-226 seems to support the proposition. Such an argument was advanced in Financings Ltd v. Baldock, but was not discussed by the English Court of Appeal. However, the point was discussed by Mahoney J.A. in Citicorp Australia Ltd v. Hendry (1985) 4 NSWLR 1, at pp 25-26.

27. The doctrine of penalties has pursued such a tortuous path in the course of its long development that it is a risky enterprise to construct an argument on the basis of the old decisions. However, we can be reasonably sure that by the beginning of the seventeenth century it was established that equity would relieve against a penal bond where it was possible to compensate the obligee for the loss suffered as a result of the default (Simpson, "The Penal Bond with Conditional Defeasance" (1966) 82 LQR 392, at p.418). According to the opinion of Lord Somers, cited by counsel in argument in Marks v. Marks (1718) Prec. Ch 486, at p 488; 24 ER 218, at p 219, and in Astley v. Weldon (1801) 2 Bos & Pul 346, at p 349; [1801] EngR 108; 126 ER 1318, at pp 1320-1321:

"... where the party might be put in as good a

plight as where the condition itself was literally

performed, there the Court of Chancery would

relieve though the letter of it were not strictly

performed, as payment of money &c. but where the

condition was collateral and no recompense or value

could be put on the breach of it, there no relief

could be had for the breach of it".

So, where compensation was not possible, or damages could not be assessed, it seems that relief would not be granted (Tall v. Ryland [1670] EngR 49; (1670) 1 Chan. Cas. 183; 22 ER 753). It was recognized during Lord Nottingham's chancellorship that in the eye of equity a penalty was regarded as an obligation by way of security or, to use the language of the later cases, a guarantee of performance (Selden Society, Lord Nottingham's Chancery Cases (Vol. II) (1961) vol. 79, at pp.7-30, esp. at p.19). By the last quarter of the eighteenth century equity was relieving against penal bonds which were collateral to performance contracts, as well as against stipulations for the payment of agreed sums on default of the payment of money (Hardy v. Martin (1783) 1 Cox 26; 29 ER 1046; Sloman v. Walter [1783] EngR 158; (1783) 1 Bro CC 418; 28 ER 1213; Muir, at pp 507-508).

28. Hardy v. Martin is an interesting illustration. There the plaintiff and the defendant had been partners as brandy merchants. The plaintiff, on quitting the business and selling the lease and goodwill of the shop to the defendant for 300, entered into a penal bond for 600 not to sell, for nineteen years, any quantity of brandy less than six gallons within five miles of the cities of London and Westminster or to permit any person to do so in his name. When, upon a breach, an action was brought and a verdict given for payment of the penalty, the plaintiff filed a bill praying that an account might be taken of the actual damage sustained by the defendant and an issue directed (quantum damnificatus) for that purpose. An injunction was granted to restrain the defendant from taking out execution for the penalty under the bond, an issue was directed on damages and the jury subsequently gave a verdict for the plaintiff at law (the defendant in equity) with damages of 1s.

29. The basis of the decision in Hardy v. Martin is to be found in Sloman v. Walter where Thurlow L.C. said, at p 419; p 1214 of ER:

"The rule, that where a penalty is inserted merely

to secure the enjoyment of a collateral object, the

enjoyment of the object is considered as the

principal intent of the deed, and the penalty only

as accessional, and, therefore, only to secure the

damage really incurred, is too strongly established

in equity to be shaken."

Lord Thurlow invoked this general principle in order to displace the rule of interpretation, applied before the enactment of the Statute 8 & 9 Wm. III c.11 s.8 (1696), that stipulations for the payment of an agreed sum otherwise than on default of the payment of money were to be considered as liquidated damages (see Muir, at pp.506-507). In both Hardy v. Martin and Sloman v. Walter the parties had imprudently described the amount agreed to be paid as a penalty. At that time much depended on the terms which the parties used, for the distinction between a penalty and liquidated damages was thought to be in a substantial degree a matter of intention. This was emphasized eighteen years later by Lord Eldon ChJ. in Astley v. Weldon. He pointed out (at pp 350-351; p 1321 of ER) that the decision in Sloman v. Walter was justified on the footing that the parties described the sum as a penalty. He stated that there was little to commend the view that, if the sum be "enormous and excessive considered as liquidated damages, it shall be taken to be a penalty though agreed to be paid in the form of contract". He thought that there was no reason why an agreement such as that made in Hardy v. Martin should not be enforced, except perhaps if the agreement be entered into "in the form of a bond with a penalty" (at p 352; p 1322 of E.R.). And he regretted that the principle stated by Lord Somers, quoted above, had not been adhered to.

30. Astley v. Weldon and Kemble v. Farren [1829] EngR 590; (1829) 6 Bing 141; 130 ER 1234, were both cases concerning contracts for theatrical performances by which the performer was required to comply with many covenants and a large sum was fixed by the contract as being payable on any breach. In Kemble v. Farren the sum was described as liquidated damages; in Astley v. Weldon it was not given a description. In granting relief in each case the court applied the presumption that where a sum was payable on a number of contingencies, one of which was the non-payment of a smaller sum, a penalty was intended, even though the breach relied on was failure to perform, rather than non-payment of money. Kemble v. Farren marked a turning point because Tindal C.J. refused to give effect to the declaration by the parties that the stipulated sum was liquidated damages and determined its true character as a penalty. In the result the verdict awarded by the jury in favour of the plaintiff for an amount less than the stipulated sum was allowed to stand. The plaintiff had sued at common law for the stipulated sum and, pursuant to the Statute 8 & 9 Wm. III c.11 s.8 (1696), had recovered a verdict for his actual damage, subject to a motion for increasing the damages to the stipulated sum if the Court thought he was entitled to recover the whole of that sum as liquidated damages.

31. As early as the seventeenth century the common law courts had themselves begun to relieve against penalties, thereby avoiding the need for proceedings in equity. The practice of the common law courts in this respect was regulated by the Statute 8 & 9 Wm. III c.11 s.8 (1696) (actions for penalties for non-performance of covenants or agreements) and Statute 4 & 5 Anne c.3 ss.12, 13 (1705) (actions on money bonds). The refusal of the common law courts to enforce penalties was to lead to the emergence of the principle that a penalty provision is unenforceable, a matter to be discussed later because it is fundamental to the disposition of this appeal. The English statutory provisions have been replaced in New South Wales by ss.33 and 34 of the Imperial Acts Application Act 1969 (N.S.W.) which fulfil a similar function. Astley v. Weldon and Kemble v. Farren are instances of the exercise of jurisdiction by the common law courts in accordance with the 1696 statute.

32. Although the subsequent history of the doctrine of penalties in the nineteenth century throws little light on the way in which the jurisdiction to relieve was exercised, the judgment of Sir George Jessel M.R. in Wallis v. Smith (1882) 21 ChD 243, at p 256 et seq., is illuminating. His Lordship, who was given to expounding the virtues of freedom of contract (see p 266), like Lord Eldon Ch.J. in Astley v. Weldon, rejected the idea that the mere magnitude or extravagance of the sum agreed upon was indicative of its character as a penalty. For him the concept of a penalty was a sum of money agreed to be paid for breach of a covenant or promise in respect of which the damage was ascertainable and was "much less than the sum named as payable upon the breach", to use the words of Coleridge J. in Reynolds v. Bridge (1856) 6 El & Bl 528, at p 541; [1856] EngR 555; 119 ER 961, at p 966.

33. Wallis v. Smith was a staging post on the way as the doctrine became more closely identified with sums agreed to be paid on breaches of contract, a development which was fully reflected later in the landmark decisions of the House of Lords in Clydebank Engineering and Shipbuilding Company v. Don Jose Ramos Yzquierdo y Castaneda [1904] UKHL 3; (1905) AC 6 and Dunlop Pneumatic Tyre Company, Limited v. New Garage and Motor Company, Limited [1914] UKHL 1; (1915) AC 79. In both these decisions, in conformity with the doctrine's historic antecedents, the concept is that an agreed sum is a penalty if it is "extravagant, exorbitant or unconscionable" (Clydebank, at pp.10-11, 17; Dunlop, at p.87). This concept has been eroded by more recent decisions which, in the interests of greater certainty, have struck down provisions for the payment of an agreed sum merely because it may be greater than the amount of damages which could possibly be awarded for the breach of contract in respect of which the agreed sum is to be paid (see Cooden Engineering Co. Ltd v. Stanford, at p 98). These decisions are more consistent with an underlying policy of restricting the parties, in case of breach of contract, to the recovery of an amount of damages no greater than that for which the law provides. However, there is much to be said for the view that the courts should return to the Clydebank and Dunlop concept, thereby allowing parties to a contract greater latitude in determining what their rights and liabilities will be, so that an agreed sum is only characterized as a penalty if it is out of all proportion to damage likely to be suffered as a result of breach (see Robophone Facilities Ltd v. Blank (1966) 1 WLR 1428, at pp 1447-1448; (1966) 3 All ER 128, at pp 142-143; U.K. Law Commission, at pars.33, 42-44).

34. From this review of the doctrine of penalties, brief though it is, the following points emerge:



(1) equity would only relieve where compensation could be

made for the actual damage suffered by the party seeking

to recover the penalty;

(2) the actual damage suffered by the party was assessed in

an action at common law, such as an action of covenant,

or upon a special issue quantum damnificatus which could

be joined in an action on the case (Simpson, fn. 11, at

p.418);

(3) the expression "actual damage" seems to have been used

in contradistinction to "agreed sum" or "liquidated" or

"stipulated" damages, not by way of opposition to damage

which was recoverable at law;

(4) there seems to have been no instance of equity awarding

compensation over and above the amount awarded as common

law damages, other than cases in which equity would not

relieve against the penalty; and

(5) relief was granted, in the case of penal bonds, where

there was no express contractual promise to perform the

condition (see Hardy v. Martin), though it seems such a

promise could in many cases readily be implied.

35. The advent of the Judicature system, with its emphasis on the disposition of all issues in one proceeding, hastened the demise of equity's separate jurisdiction to relieve against penalties. Although it is not possible to identify when the principle that a penalty is unenforceable became an established rule of law, the Judicature system reinforced the principle. That system strengthened the development which had been taking place in the common law courts since the seventeenth century, whereby all relevant relief could be obtained in the one action in which the plaintiff sued to recover a penalty. It meant that there was no need to invoke the equitable jurisdiction. It is significant that counsel have not drawn to our attention any instance of the equitable jurisdiction to relieve against penalties having been invoked in England since the Judicature Act 1873 (U.K.), let alone any instance of the exercise of the jurisdiction in which compensation awarded has exceeded the amount of damages which would have been awarded at common law in lieu of the penalty. Without exception the cases show that once the agreed sum is held to be a penalty the plaintiff recovers damages for breach of contract in lieu of the penalty. All this leads to the conclusion that the equitable jurisdiction to relieve against penalties withered on the vine for the simple reason that, except perhaps in very unusual circumstances, it offered no prospect of relief which was not ordinarily available in proceedings to recover a stipulated sum or, alternatively, damages.

36. Moreover, the old cases do not deal with the question whether the jurisdiction to relieve against penalties would have been exercised so as to recompense a party for the capital loss which he sustained as a result of his termination, pursuant to a contractual right, of a contract on account of the other party's non-fundamental breach in circumstances where there was no repudiation. The law of contract was in its infancy and the distinctions between essential and non-essential terms and between fundamental and non-fundamental breach had not at that time been fully developed. However this may be, it would now be inconsistent with modern authority for equity to condition its relief by imposing on the obligor a liability to pay damage which flows, not from the obligor's breach of contract, but from the obligee's act in exercising his contractual right to terminate for non-fundamental breach.

37. This conclusion does not provide a comprehensive answer to the appellant's alternative submission that the penalty clause should be enforced to the extent to which it is not a penalty. It is one thing to deny to a plaintiff a right to recover damages for a loss which is of his own making and cannot be sheeted home to conduct of the defendant. It is another thing to deny to a plaintiff the right to recover pro tanto on an indemnity for capital loss arising from depreciation and deterioration of the goods leased to the defendant when the amount of the indemnity exceeds the amount which the law is prepared to allow. So, according to the argument, although the relevant provisions, cll.7(ii) and 12, were penal in character, they should be treated as valid and operative to the extent to which they provide an indemnity for the actual loss which the appellant has sustained.

38. The question whether a penal provision is void or unenforceable has been the subject of continuing debate. There has also been a conflict of authority on the related question whether a penalty operates to impose a limit on the common law damages which a plaintiff may recover. The charterparty cases say that the plaintiff may ignore the penalty and sue for greater damages (Wall v. Rederiaktiebolaget Luggude (1915) 3 KB 66; Watts, Watts and Company, Limited v. Mitsui and Company, Limited (1917) AC 227), but there is also authority the other way (Wilbeam v. Ashton [1807] EngR 20; (1807) 1 Camp 78; 170 ER 883; Lord Elphinstone v. Monkland Iron and Coal Co. (1886) 11 App. Cas. 332, at p 346; Public Works Commissioner v. Hills (1906) AC 368, at p 376). The point was left open by Lord Atkin in Cellulose Acetate Silk Co. v. Widnes Foundry (1925) Ltd (1933) AC 20, at p 26, and by Diplock L.J. in Robophone Facilities Ltd v. Blank, at p 1446; p 142 of All ER; but cf. Financings Ltd v. Baldock, at p 121. Since then the question has attracted different answers from the Supreme Court of Canada in Elsley v. J.G. Collins Insurance Agencies Ltd (1978) 83 DLR(3d) 1 and from Lee J. in W & J Investments Ltd v. Bunting (1984) 1 NSWLR 331. It is unnecessary for the purposes of determining the present case to resolve the larger aspects of this controversy.

39. At least since the advent of the Judicature system a penalty provision has been regarded as unenforceable or, perhaps void, ab initio (Citicorp Australia Ltd v. Hendry). In all that time it has been thought that no action could be brought on such a clause, no doubt because the courts should not lend their aid to the enforcement in any way of a provision which is oppressive. However, this is not the only reason why the courts would refuse to lend their aid. In the majority of cases involving penalties, the courts, if called upon to assist in partial enforcement of the kind suggested by the appellant, would be required to undertake an unfamiliar role. They would need to rewrite the clause so as to permit the plaintiff to recover the loss he has actually sustained. Penalty clauses are not, generally speaking, so expressed as to entitle the plaintiff to recover his actual loss. Instead they prescribe the payment of a sum which is exorbitant or a sum to be ascertained by reference to a formula which is not an acceptable pre-estimate of damage. In either case the court, if it were to enforce the clause, would be performing a function very different from that which it undertakes when it severs or reads down an unenforceable covenant, such as a covenant in restraint of trade.

40. In the ultimate analysis, in whatever form it be expressed, the appellant's argument amounts to an invitation to the Court to develop a new law of compensation, distinct from common law damages, which would govern the entitlement of plaintiffs who insist on the inclusion of penalty clauses in their contracts. In this respect it is perhaps worthwhile recalling that the amount of compensation which equity regarded as a just and equitable recompense for loss suffered, usually happened to be equivalent to the amount of damages recoverable at common law (Elsley, at p.13).

41. Instead of pursuing a policy of restricting parties to the amount of damages which would be awarded under the general law or developing a new law of compensation for plaintiffs who seek to enforce a penalty clause, the courts should give the parties greater latitude to determine the terms of their contract. In the case of provisions for agreed compensation and, perhaps, provisions limiting liability, that latitude is mutually beneficial to the parties. It makes for greater certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach or termination, and thus enables them to provide for compensation in situations where loss may be difficult or impossible to quantify or, if quantifiable, may not be recoverable at common law. And they may do so in a way that avoids costly and time-consuming litigation. But equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff's conduct in seeking to enforce the term. The courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract. The doctrine of penalties answers, in situations of the present kind, an important aspect of the criticism often levelled against unqualified freedom of contract, namely the possible inequality of bargaining power. In this way the courts strike a balance between the competing interests of freedom of contract and protection of weak contracting parties (see generally Atiyah, The Rise and Fall of Freedom of Contract (1979), esp. Ch.22).

42. Our rejection of the appellant's arguments should not be taken as throwing any doubt on the right of the owner or the lessor to recover his actual loss on his early termination of a hire-purchase agreement or chattel lease, pursuant to a contractual right, for the hirer's non-fundamental breach, under a correctly drawn indemnity provision. The validity of such a provision was upheld in I.A.C. (Leasing) and is supported by the comment of Gibbs C.J. in O'Dea (at p.369) that "a lessor is entitled to be compensated for the loss which he is likely to suffer on the premature termination of a hiring." A similar suggestion was made by Willmer L.J. in Anglo Auto Finance Co. Ltd v. James (1963) 1 WLR 1042, at p 1047; (1963) 3 All ER 566, at p 569. And in Shevill v. Builders Licensing Board (1982) 149 CLR 620 there were indications that, if the lease clearly provided that whenever a lessor exercised the right of re-entry conferred by the lease he was able to recover such loss as he may have suffered by reason of the premature termination of the lease, such a provision might be effective (at pp.629, 637). The assumption on which these comments are based is that the suggested provisions, unlike cl.7(ii) of the agreements in the present case, do not amount to a penalty.

43. It may no longer be possible to sustain all the steps in the reasoning which led to this Court's conclusion in I.A.C. (Leasing). However, there is no reason to suppose that a provision which gives the lessor an indemnity, on his early termination for the lessee's breach, in the form of all unpaid instalments of rent, suitably discounted for early receipt, plus the residual value of the goods adjusted so as to reflect their actual value at the relevant time, would constitute a penalty. The topic is dealt with in recent decisions which are discussed in Barnes, "Agreed Damages Clauses in Financing Contracts in the Light of Citicorp Australia Limited v. Hendry" (1986) 14 ABLR 63.

44. We would dismiss the appeal.

DEANE J.: It was said by Lord Selborne L.C. in Jervis v. Berridge (1873) 8 ChApp 351, at p 358 that there "are ... certain cases where a Defendant has incurred ... penalties ... in which the whole locus standi in curia of the Plaintiff (to equitable relief) is dependent on an election, which must be declared by the bill, to forgo legal rights for the sake of equitable remedies" (see, also, Langman v. Handover [1929] HCA 42; (1929) 43 CLR 334, at pp 349 and 356). Regardless of whether one agrees with that precise formulation, it was a fundamental doctrine of equity that relief in Chancery against enforcement of a penalty was only available where the quantum of the damage for which the impugned payment would be compensatory could be ascertained and upon the terms that the claimant did equity by paying the amount of the true damnification. That equitable jurisdiction was to relieve against direct or indirect enforcement. Thus, after penalties became unenforceable at common law, equity did not intervene in the opposite direction to declare that the party asserting unenforceability at common law should be compelled in Chancery to make good the loss actually sustained in any case where common law remedies were inadequate to achieve that result. That being so, the acceptance by the common law of the unenforceability of penalties largely removed the occasion for the exercise of the equitable jurisdiction to relieve against enforcement with the result that the terms upon which equity would grant such relief became ordinarily of but academic or historical interest. The equitable jurisdiction did not, however, cease to exist and the terms upon which equitable relief against penalties would be granted remain directly applicable in those comparatively rare cases in which the party asserting unenforceability is constrained to seek positive relief (whether primary or ancillary) which is purely equitable in character, such as an order for reconveyance. In such cases, it would seem that, in the absence of any statutory injunction against indirect enforcement such as commonly exists in money-lending legislation, such relief should be refused unless the plaintiff, in Lord Selborne's words, elects "to forgo legal rights for the sake of equitable remedies" or, as I would prefer to put it, submits to the terms on which equitable relief is available and does, or undertakes to do, equity by paying the amount of the actual loss sustained (cf. Mayfair Trading Co. Pty. Ltd. v. Dreyer [1958] HCA 55; (1958) 101 CLR 428, at pp 451ff.).

2. It was suggested in argument that, at first instance in the present case, Rogers J. acted on the basis that the traditional terms upon which equity would have granted relief against enforcement at common law were directly applicable to require that Lithotone Printing Pty. Ltd. ("the lessee"), whose liability was guaranteed by the respondent guarantors, make good the loss sustained by the appellant finance company ("the lessor"), including loss of the bargain, upon termination of the "lease" of the relevant equipment. I do not read his Honour's judgment in that way. In my view, his Honour's reference to the terms upon which equity would grant relief against penalties should properly be understood, in the context of the adoption by the common law of equitable principles relating to unenforceability of penalties and of the subsequent fusion of law and equity, as directed towards the ascertainment of the content of the relevant contemporary rules governing recoverability. Be that as it may, it suffices for present purposes to say that the traditional terms of equitable relief would only have been directly in point if the present case had been one in which the lessor (or the respondent guarantors) was constrained to rely on such relief and that it appears to me to be plain that the lessee and the guarantors did not seek the aid of equity but simply relied upon the unenforceability of the alleged penalties at common law. That being so, I am of the view that there is no basis in the present case upon which the lessor could invoke the assistance of equity to recover more than the amount which it was entitled to recover at common law upon its election to exercise its right to terminate each lease agreement upon the ground of the lessee's failure duly to pay an instalment of rent. Accordingly, the lessor's entitlement falls to be determined by reference to its ordinary common law rights of recovery.

3. By reason of the conditions upon which special leave to appeal was granted, it is not now in dispute that, conformably with the decision of the Court in O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [1983] HCA 3; (1983) 152 CLR 359, the contractual obligation to make each of the impugned payments upon termination for breach pursuant to cl.7 constituted a penalty and was unenforceable at common law. As Mr. Bainton Q.C. (who appeared for the lessor) forcefully pointed out, however, that does not avoid the need to pay some attention, as a step along the path of determining the consequences of unenforceability in the circumstances of the present case, to the proper basis upon which the relevant payments were unenforceable as penalties. In that regard, two points need to be made at once. The first is that in the present case, as in O'Dea, the contractual liability to pay the penalties did not arise merely upon breach of a provision of the contract. It arose upon the election by the lessor to exercise its contractual right to terminate (under cl.7 of each lease agreement) upon the ground of that breach. The second point is that, in determining whether the amounts payable by the lessee upon such termination are properly to be seen as a genuine pre-estimate of loss or as a penalty, relevant loss is not restricted to the loss flowing immediately and merely from the actual breach of contract; it includes the loss of the benefit of the contract resulting from the election to terminate for breach (see I.AC (Leasing) Ltd. v. Humphrey [1972] HCA 1; (1972) 126 CLR 131, at pp 141-142; O'Dea, at pp 373, 379, 387; Campbell Discount Co. Ltd. v. Bridge (1962) AC 600, at pp 632-633; Cooden Engineering Co. Ltd. v. Stanford (1953) 1 QB 86, at pp 103-104; but cf. Mahoney J.A. in Citicorp Australia Ltd. v. Hendry (1985) 4 NSWLR 1, at pp 24-25, 29-30). Whatever their precise rationale might be, those two points indicate that the rules relating to the unenforceability of a contractual penalty extend to at least some cases where the actual liability to pay arises directly and immediately upon some event other than breach of contract and where the relevant measurable loss sustained by the party to whom the impugned payment is to be made flows from that other event and not merely from breach of contract. And that is as one would expect it to be.

4. The common law rules relating to the unenforceability of penalties were derived from equitable principles determining the availability of relief in Chancery. Like all rules with true equitable foundations, they are concerned with substance rather than form. It would, for example, have been out of accord with equity's concern with substance for the availability of equitable relief against the enforcement of a performance bond (i.e. a money bond subject to conditional defeasance) to have depended upon whether it was possible to identify some implied contractual warranty of which the failure to perform or pay constituted a technical breach of contract on the part of the plaintiff. In fact, of course, equity observed no such limitation upon its jurisdiction to grant relief. It granted relief against the enforcement of such a bond by a common law action in debt regardless of whether the failure to bring about or prevent the event which precluded fulfilment of the condition of defeasance constituted a breach of contract at common law. Indeed, the equitable jurisdiction to grant such relief preceded the evolution of general common law notions of liability for breach of contract which occurred with the development of the action in assumpsit. Nor, in my view, did equity ever commit itself to what would, as Lord Denning pointed out in Bridge (at p.629), have been the "absurd paradox" that "it (would) grant relief to a man who breaks his contract but (would) penalise the man who keeps it". The reasons why such a paradox would be unacceptable to equity transcend the fundamental notions of justice to which Lord Denning referred (ibid.). They go to the very basis of equitable jurisdiction. Equity followed and built upon the common law, adding its remedies by way of enforcement of the common law in some cases and granting its relief against the harshness of the operation of the common law in others. It was not, however, subversive of the common law. It would have been contrary to the underlying thesis of the equitable jurisdiction to prevent unconscionable advantage being taken of the harshness of the common law to have made the existence of legal fault in the plaintiff, as distinct from legal liability, a prerequisite of entitlement to relief or to have made the contumacy of the plaintiff's conduct giving rise to legal liability a ground for equitable relief against the liability. A fortiori, it would have been unreasonable for the common law itself, in withdrawing its remedies to enforce what equity regarded as a penalty, to have added a limitation that common law unenforceability did not extend to any case where the person burdened by the penalty was innocent of common law fault in the form of breach of contract. It is true that one can point to judicial statements, including some recent statements of high authority, which support the contrary view that a contractual clause will not be unenforceable as a penalty unless it provides for payment upon breach of contractual duty (see, in particular, Tool Metal Manufacturing Co., Ltd. v. Tungsten Electric Co., Ltd. [1955] UKHL 5; (1955) 1 WLR 761, at p 767; [1955] UKHL 5; (1955) 2 All ER 657, at p 662; Export Credits Guarantee Department v. Universal Oil Products Co. (1983) 1 WLR 399, at pp 402-404; (1983) 2 All ER 205, at pp 223-224). Such broad statements appear to me, however, to have generally been made in a context where the grounds for declining to hold that a penalty was involved are properly to be seen as more narrowly confined: e.g., that the alleged penalty represented part of the agreed royalty payments for a non-exclusive licence under letters patent (Tool Metal Manufacturing); that the relevant contractual liability was pursuant to an indemnity agreement and corresponded with the loss incurred (Export Credits Guarantee Department); or, in a highly debatable area, that the alleged penalty was the price of a right or option to terminate exercisable by the party liable to make the payment (see, e.g., Associated Distributors, Ltd. v. Hall (1938) 2 KB 83; Lombank, Ltd. v. Kennedy and Whitelaw (1961) N.ILR 192, at pp 214-215; Bridge, at pp 613-614; but cf. Bridge, at pp 631 and 633; the dissenting judgment of Lord MacDermott L.C.J. in Lombank, at pp.206-209 and the comments of G.H.L. Fridman in (1963) 26 MLR, 198). I do not see any of those general statements as binding this Court. For my part, for the reasons given above, I am not prepared to accept them as correctly stating the position either in equity or at common law. As I have indicated, the restriction of equitable relief or common law unenforceability to the case where it is possible to identify a technical breach of contract on the part of the party claiming relief or unenforceability would, in my view, be contrary to historical fact, general principle and basic common sense.

5. On the other hand, it is plain that the equitable and common law rules relating to penalties do not apply to every obligation to make a payment of money on the occurrence, or default of occurrence, of a specified event. They do not, for example, apply to policies of insurance where other rules inspired by comparable considerations of public policy operate to restrict the maximum amount payable in some circumstances. Nor do they apply to an obligation to pay money under a wagering or gaming contract where enforceability falls to be determined by reference to the special mix of legislative and common law rules applicable to such arrangements. While the rules relating to penalties developed as part of the broad equitable jurisdiction to relieve against forfeiture (see Lord Wilberforce in Shiloh Spinners Ltd. v. Harding (1973) AC 691, at pp 722ff.), they are properly to be seen, under a Judicature Acts system, as distinct rules dealing with a particular category of case. The general area in which they are applicable is where there exists a contractual liability (whether under seal or for consideration) to pay or forfeit an amount or amounts either on or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the party liable to make the payment in the sense that it is his or her responsibility to ensure that the specified event does or does not occur and where the stipulated payment contains an element of compensation for the economic loss or damage which might be sustained by the other party by reason of the particular occurrence or default. It is within that general area that a liability to pay or forfeit money may be discerned, as a matter of substance, as going beyond any genuine pre-estimate of damage and as representing a penal sanction or security against the occurrence or non-occurrence of an event which the obligor and obligee have seen as falling within the responsibility of the obligor. There, the particular rules relating to penalties are applicable to determine the enforceability of the liability to pay or forfeit the designated amount regardless of whether there was any distinct contractual condition or warranty that the event would or would not occur. There, if the liability is unenforceable as a penalty and the quantum of damage sustained is ascertainable, a court can give a monetary recompense or compensation for what the obligee primarily expected or desired, namely, the occurrence or non-occurrence of the particular event (cf. Pomeroy's Equity Jurisprudence, 5th ed. (1941), vol. 2, 432ff; Peachy v. Duke of Somerset (1721) 1 Str 447, at p 453 (93 ER 626, at p 630); Davis v. Thomas (1831) 1 Russ & M 506, at p 507 (39 ER 195, at p 195)).

6. In the present case, it is apparent that, under the contractual arrangements between the parties, termination by the lessor pursuant to cl.7 of each lease agreement was treated as being within the area of obligation of the lessee in the sense that, regardless of whether the event giving rise to the lessor's contractual right to terminate itself constituted a technical breach of an express or implied contractual warranty or condition, that event and the consequential termination were accepted by the parties as being the responsibility of the lessee to avoid and as being at the risk of the lessee if they occurred. That being so, the rules relating to penalties would have been applicable to determine the enforceability of the lessee's contractual liability to make the relevant payments even if that liability had arisen by reason of termination under cl.7 on a ground, such as the lessee becoming a convicted person (cl.7(b)) or doing or causing or permitting or suffering "any act or thing likely to endanger the safety or condition of the goods" (cl.7(f)), which did not involve a breach of contract. In fact, of course, the ground giving rise to the lessor's right to terminate was, in the case of each lease agreement, a breach of the contractual obligation to pay an instalment of rent on or before a specified date. As has been mentioned, it is not now in dispute that the contractual obligation to make the impugned payments on termination for such breach was, in the case of each lease agreement, unenforceable as a penalty. What is in dispute is the effect and extent of that unenforceability in the circumstances of the present case.

7. The assertion by equity of jurisdiction to relieve against penalties did not involve any general objection to an agreement by one party to a contractual relationship to compensate the other for loss sustained by the other on the occurrence of an event seen by the parties as falling within the area of responsibility of the party liable to pay compensation. What equity objected to was the unconscionable inflation of the amount to be paid in circumstances where the quantum of damages was ascertainable. Indeed, by denying relief except on terms that compensation be paid for the loss actually sustained, equity had from the first recognized that it would be at least as unjust or unconscionable to deprive one party of compensation for the true loss caused by the event for which the parties had agreed that compensation was to be paid (e.g. non-performance of an act upon the performance of which the defeasance of a money bond was conditioned) as it would be to force the other party to pay an amount which was demonstrably and unconscionably excessive. Procedural questions aside - and those were substantially resolved by statute - there was no reason in principle or justice why the common law should render completely unenforceable an obligation which the rules of equity, which it was following, effectively enforced sub modo up to the amount of the true damnification. It is unnecessary here to essay a detailed examination of the process, beginning in the seventeenth century, by which the common law, in part supplemented and in part instigated by statute, accepted equitable principles in relation to the enforcement of penalties. It suffices that I indicate in essentially summary fashion some conclusions which a consideration of the cases and of the helpful academic writings on the point has led me to reach in relation to that process. The fusion of law and equity would, no doubt, have effectively resolved any real tension between the equitable and common law rules relating to penalties. In fact, as will be seen, any such tension had largely been resolved by the time of the enactment of the Judicature Acts by the Parliament of the United Kingdom.

8. In its development of rules relating to penalties, the common law truly proceeded analogously with equity. Its concern was with the extent to which penal clauses might be enforced by common law action rather than with their intrinsic validity. Thus, for example, in the case of money bonds, the device originally employed by the common law courts was to grant the defendant in the common law action an indefinite stay of proceedings (an "imparlance") but only on tender of principal, interest and costs. The adoption by the common law of substantive rules of relief corresponding with those of the Courts of Chancery was impeded by the limitations of common law remedies and procedures. For example, a common law judgment in debt (on the penal covenant) limited to the amount of damage actually sustained was likely to be inadequate in a case where the penalty was intended to be compensatory for what might be a series of distinct breaches of contract or performance: if judgment could only be obtained in an action on the penal clause for the amount of loss sustained by a breach which had already occurred, the right of action to enforce the penalty under the clause would at least arguably have passed into rem judicatam precluding further enforcement of the penalty to compensate for subsequent breach. Indeed, there is some disagreement among scholars (see, e.g., A.W.B. Simpson, "The Penal Bond with Conditional Defeasance", Law Quarterly Review, vol. 82 (1966), 392, at p.419; R.W. Turner, The Equity of Redemption, (1931), p.33) about whether there was common law acceptance of the unenforceability of penal clauses, as distinct from a procedural refusal to enforce them, before the time when the position was, to some extent, regulated by the Administration of Justice Acts of 1696 (8 and 9 William III c.11 s.8) and 1705 (4 and 5 Anne c.3 ss.12 and 13) (see now, as regards New South Wales, the Imperial Acts Application Act 1969 (N.S.W.), ss.33 and 34). The effect of the statute of 1696, as subsequently applied and developed by common law courts, was summarized by Bailhache J. in Wall v. Rederiaktiebolaget Luggude (1915) 3 KB 66, at p 72: "in an action upon a bond (and this includes a penalty clause in a contract) conditioned for the performance of a contract the plaintiff must assign a breach, or as many breaches as he thinks fit, of the condition, and though he is entitled on proving a breach to judgment for the full amount of the penalty he can only recover by execution the amount of the damages proved to have been sustained by the breach or breaches (i.e. of the condition) assigned. The result of suing for the penalty (i.e. "in archaic phraseology to sue in debt" (Wall's Case, at p.73)) is therefore that the plaintiff recovers proved damages, but never more than the penal sum fixed" (emphasis added). Regardless of whether the statutory provisions are seen as essentially substantive or as essentially procedural, it would seem plain enough that, under that effect and instigation, the general position was established by the mid-eighteenth century that a contractual obligation to make payment of a penalty was unenforceable at common law but only to the extent that the amount payable exceeded the quantum of relevant loss or damage which could be proved to have been actually sustained. That being so and notwithstanding some judicial statements to the contrary (see Diplock L.J. in Financings Ltd. v. Baldock (1963) 2 QB 104, at p 120; but cf. Diplock L.J. in Financings, at p 121), a penal clause is not void at common law. Nor is it even completely unenforceable. Common law unenforceability, while ab initio (see Kirby P. and Priestley J.A. in Citicorp Australia Ltd., at pp.23, 24, 39), is limited to the extent to which liability under the clause exceeds the true damnification (see Astley v. Weldon (1801) 2 Bos. & Pul. 346, at p 353 [1801] EngR 108; (126 ER 1318, at p 1322); Wilbeam v. Ashton [1807] EngR 20; (1807) 1 Camp 78 (170 ER 883); Lord Elphinstone v. Monkland Iron and Coal Co. (1886) 11 App.Cas. 332, at p 346; Elsley v. J.G. Collins Ins. Agencies Ltd. (1978) 83 DLR (3d) 1, at p 15).

9. In these circumstances, the essential issue in the present case resolves itself into the identification of the relevant damage sustained by the lessor for the purpose of ascertaining the extent to which the penal clauses in each lease agreement were enforceable at the suit of the lessor upon breach and consequent termination. It has been seen that, in a case such as the present, the event giving rise to the liability to make the penal payment is the exercise by the lessor of the right to terminate upon breach and not the mere breach itself. It has also been seen that, in such a case, the relevant loss, for the purpose of determining whether the amount of the payment is properly to be seen as a genuine pre-estimate of loss or as a penalty, includes the loss of the benefit of the contract upon such termination. In that context, it appears to me to be difficult to avoid the conclusion that unenforceability as a penalty in the circumstances of the present case was limited to the amount by which the contracted amounts exceeded the damage sustained by the lessor by reason of the termination upon breach, including the loss of the bargain. That conclusion would appear to be inevitable on what I have suggested to be the correct approach, namely, that the rules relating to penalties are not technically confined to the strict area of payments arising upon breach of contract and that, in a case such as the present, the event giving rise to the penalty (and in respect of which the penalty should be seen as compensatory) is properly to be seen as the act or event upon which liability was conditioned, namely, the termination of the contract. Even if one rejects that approach and treats the penalty area as confined to contractual liability consequent upon breach of contract, that conclusion still seems to me to be the preferable one. I turn to explain why that is so.

10. On the approach that a payment cannot be a penalty unless it arises on breach of contract, one conceivable view in the present case is that, for the purposes of the common law rules relating to penalties, the true damnification is restricted to the loss arising directly and immediately from the actual breach of contract and does not extend to the loss arising upon termination consequent upon the breach. A more qualified and possibly more rational, though anachronistic, view would be that the amount recoverable in the action on the penalty (i.e. the old action in debt) was controlled by the amount which could have been recovered in an action for damages for the breach (i.e. the old action in assumpsit). Either view lies ill indeed, however, both with the fact that the event upon which the penal obligation was conditioned in the present case was termination upon breach and not the mere breach and with the position that the loss against which the impugned payments were compensatory, in that it is the loss against which they were to be measured for the purpose of determining whether they constituted a penalty, included the loss sustained upon termination. On that approach, the explanation for such a payment being a penalty only if it exceeds the loss sustained upon termination upon breach and notwithstanding that the contractual obligation to make it arises only on termination would seem to be that advanced by the majority of the English Court of Appeal in Cooden Engineering. In essence, that explanation is that, at least for the purposes of the rules relating to penalties, the loss sustained by reason of the exercise of a contractual right to terminate upon breach in a case such as the present is to be seen as flowing from the breach. The point was clearly made by Hodson L.J. in Cooden (at p.116) when he expressed his difficulty in seeing "the validity of the distinction between a claim to receive payment of a sum of money because of a right to determine arising from breach of contract and a claim to receive payment of the same sum by reason of breach of contract giving a right to determine" (see also Somervell L.J. at pp.96-97). In that context and notwithstanding the support for the contrary view which can be found in some cases, I am unable to accept that the common law would found upon that very distinction between breach and termination to reduce the extent to which a penalty clause can be enforced below the actual amount of the loss sustained upon termination for breach. Were it otherwise, the common law would be guilty of propounding a paradox as illogical as that which Lord Denning rightly denounced in Bridge (see above) as too "absurd" to be countenanced by equity. That paradox, which has been adverted to in the foregoing, would be: although no distinction is drawn between a payment contingent upon breach and a payment contingent on termination in determining whether the relevant payment is within the penalty area (i.e. a clause may be penal regardless of whether the sum in question is payable on breach or on termination); and although no distinction is drawn between loss flowing from breach and loss consequential upon termination in determining whether the relevant payment is penal or a genuine pre-estimate; and although a liability to pay an amount by way of compensation for the loss upon termination for breach (including loss of bargain) will not be unenforceable at all if the amount represents a genuine pre-estimate of that loss; yet in determining the pro tanto enforceability of a penalty clause the loss recoverable is limited to that resulting from breach and excludes the loss flowing from termination (that loss being the very loss for which the parties intended to provide compensation).

11. It follows that, in the circumstances of the present case, I am of the view that the lessor was entitled to enforce the penal clauses up to the amount of the loss proved to have been actually sustained by it on termination of each lease agreement consequent upon the breach by the lessee of its contractual obligation to pay the relevant instalment of "rent" on or before the designated date. It is common ground between the parties that the orders made by the learned trial judge were the appropriate ones to achieve that result.

12. There is one further matter which should be mentioned. That is that, even if the lessor was not entitled to enforce the actual penalty clauses of the lease agreements to the extent of the loss actually sustained on termination for breach of contract, there would be strong grounds for arguing that it was nonetheless entitled to recover the amount of that loss. The reason for that is that the unenforceability of a penal clause does not preclude the party who would otherwise be entitled to the benefit of the clause from recovering the amount which he or she would otherwise be entitled to recover under ordinary principles of contract law at least up to the amount which would have been recoverable under the clause if it had been fully enforceable. While the matter was not explored in argument, I am disposed to think that the appropriate prima facie assumption as to the consequences which flow from the exercise of a contractual right to terminate a contract upon breach by the other party is that identified by Jordan C.J. in Larratt v. Bankers & Traders' Insurance Co. (1941) 41 SR (NSW) 215, at pp 225-226:

"... a right to avoid a contract may arise in

various ways.... it may arise by reason of a

breach by one of the contracting parties of an

express or implied promise of the contract which,

irrespectively of any express stipulation in that

behalf, would be an essential promise ... or it may

arise because the parties have expressly agreed

that particular specified breaches of the contract

shall give a right of avoidance....

... Where it is avoided by one party, not by

virtue of any express or implied provision for

avoidance, but because of the common law right to

avoid arising upon the breach by the other of an

essential promise ... the contract is determined

so far as it is executory only - as a source of

future obligations - but rights and obligations

which have already arisen from the partial

execution of the contract remain unaffected, and

the party in default is also liable for damages for

the breach.... Where it is avoided by virtue of an

express right of avoidance, the consequences which

flow from an avoidance depend on the intention of

the parties, actual or imputed, and, in the absence

of some express or implied indication of intention

to the contrary, are governed by the ordinary law

applicable to the avoidance of contracts for

breaches of essential promises..."

The effect of that passage is that there is a prima facie assumption that the consequences which flow from the exercise of an express contractual right to terminate on breach are governed by "the ordinary law applicable to the avoidance of contracts for breaches of essential promises". It appears to me that that assumption was not negatived in the present case. The application of that assumption leads to the conclusion that the lessor was entitled to recover the loss it sustained upon termination of the contract on the same basis as if breach by the lessee giving rise to the lessor's right to terminate was a breach of an essential promise. It is true that there is a degree of tension between that conclusion and the reasoning accepted by the majority of the Court in Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 (cf. the judgment of Mahoney J.A. in the New South Wales Court of Appeal in Shevill, unreported, 19 December 1980). In Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. [1985] HCA 14; (1985) 59 ALJR 373, at pp 389-390; [1985] HCA 14; 57 ALR 609, at pp 637-638, I alluded, in passing, to the difficulty I have with the decision in Shevill. The approach adopted in the judgments in that case seems to me, with all respect, to lie ill with modern notions of causation and remoteness in the law of contract (cf., for example, Koufos v. C. Czarnikow Ltd. [1967] UKHL 4; (1969) 1 AC 350, at p 385; Wenham v. Ella [1972] HCA 43; (1972) 127 CLR 454, at pp 466, 471-472) while the actual decision confounds long established practice and understanding of real property lawyers in New South Wales in relation to the consequences of termination of a real property lease upon the exercise by the lessor of a contractual right of re-entry upon breach (cf. Mahoney J.A. in Citicorp Aust Ltd. v. Hendry). It suffices, for present purposes, to say that, at least to the extent that Shevill might be seen as being in conflict with the prima facie assumption enunciated by Jordan C.J. in Larratt, I would not at present be prepared to extend its authority outside the area of such termination of a real property lease. I would, however, stress the tentative character of my views in that regard. Indeed, if the outcome of the present appeal had turned upon this aspect of the matter, it may have been thought desirable that the respondents should be given a further opportunity to make submissions in relation to it.

13. I would allow the appeal and restore the judgment of the learned trial judge.

DAWSON J.: The appellant is a finance company which hired two sets of printing equipment to Lithotone Printing Pty. Ltd. under two separate agreements called leasing agreements. So far as is material, the agreements were in the same terms. Performance of the obligations of the hirer Lithotone (called the lessee) under each agreement was guaranteed by the respondents.

2. The lessee defaulted in the periodic payment of rent under each agreement and the appellant owner (called the lessor) terminated the lessee's right to possession of the equipment and subsequently retook possession of it, as it was entitled to do under the agreements. The lessor sued, pursuant to the terms of the agreements, for arrears of rent to the date of repossession, the unpaid balance of the total rental for the term of each lease and the specified residual value of the equipment. As the equipment under one of the agreements had been sold, credit was given for the proceeds. Interest was claimed upon the total amount in each instance. In the alternative, the lessor claimed (or was treated by the trial judge as having claimed) damages for the breach of each of the agreements should the amounts claimed pursuant to the terms of the agreements be held to be penalties and for that reason unenforceable.

3. The amount claimed pursuant to the terms of each agreement was found by the trial judge to be a penalty. This finding was not challenged in the New South Wales Court of Appeal or before us. It is, therefore, the measure of the loss which the lessor is entitled to recover by way of damages which is the question in this appeal.

4. The loss suffered by the lessor upon termination of the agreements has been agreed, in round figures, to be $206,000. Disregarding the termination of the agreements, the lessor's loss was much less being in each case only the one instalment of rent which was in arrears at the date of termination. The agreed sum of $206,000 includes arrears of rent, future rental payments discounted to arrive at their value at the date of termination, interest and, in the one case, allowance for the amount by which the proceeds of sale exceeded the residual value. It appears that in the other case the lessor was unable to sell the equipment. Allowance was thus made for the capital component in the rental payments, reflecting the fact that each agreement was in reality a financing arrangement whereby the lessor advanced money for the provision of equipment to the lessee, rather than a simple hiring.

5. The trial judge took the view that the lessor ought to recover its actual damage upon the termination of each agreement (the loss of the bargain) and ought not to be restricted to loss upon breach disregarding termination (the arrears of rental). He held that this might be done, in reliance upon equitable principles, by granting relief against the penalty provisions upon terms that the lessee compensate the lessor for the loss of his bargain.

6. An appeal against the decision of the trial judge was upheld by the Court of Appeal (Mahoney and Priestley JJ.A., Hutley J.A. dissenting). The majority denied the availability of discretionary relief and held that the only amount to which the lessor was entitled comprised the unpaid instalments of rent at the date of termination of the agreements together with interest at the rates fixed by the agreements.

7. Notwithstanding that it is no longer contested that the moneys which each agreement purported to make payable by the lessor upon its termination amounted to a penalty, it is instructive to consider briefly why the trial judge made the finding which he did.

8. He reached his conclusion by the application of the decision of this Court in O'Dea v. Allstates Leasing System (W.A.) Pty. Ltd. [1983] HCA 3; (1983) 152 CLR 359. That case concerned the lease of a truck upon terms not dissimilar from those contained in the leasing agreements in the present case. The lease was terminated and the truck was repossessed by the lessor upon default in the payment of rent by the lessee. The action was brought to recover, amongst other amounts, rent for the balance of the entire term of the agreement. In answer to the claim that the liability for the lessee's accelerated rental payments was a penalty, the lessor pointed to a provision in the agreement (and there was an equivalent provision in the agreement in this case) making the entire rental for the whole of the term payable on the signing of the agreement. What was evidently intended by this provision was the creation of a present debt which could be paid, as a matter of indulgence, by instalments. Reliance was placed upon the decisions in The Protector Loan Co. v. Grice (1880) 5 QBD 592; Wallingford v. Mutual Society (1880) 5 App.Cas. 685; Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. [1906] HCA 87; (1906) 4 CLR 672. However these authorities were held to be inapplicable because, upon its true construction, the leasing agreement did not create a debitum in praesenti solvendum in futuro. That clearly was so in O'Dea (and is so in the present case) where the provision relied on by the lessor entitled him to terminate the lease and take possession of the goods upon the failure of the lessee to pay an instalment of rent, with the expressed consequence that a sum equal to the whole of the balance of the rent for the entire term became payable. Because such a term operates upon the premature termination of the lease, it can hardly be construed as the withdrawal of an indulgence to continue paying the rent by instalments. There no longer being any lease, it is, strictly speaking, inaccurate even to refer to the amount payable as rental, even as accelerated rental payments, although it is convenient to continue to do so.

9. This Court in O'Dea (and the trial judge in this case) held that the acceleration of rental payments did in fact and in law amount to a penalty. Indeed, in O'Dea it was not argued to the contrary once the relevant provision was found to be capable of being so construed. The provision was a penalty because no credit was given for the value of the vehicle which was repossessed and because the right to terminate the lease and claim the balance of the entire rent was exercisable in a number of events, some of which would have given rise to trifling damage only, as well as default in the payment of rent. Similar provision was made in the present case. Nevertheless it seems clear that in O'Dea the Court would have regarded the accelerated rental payments as a penalty even if they had been payable only upon default in the payment of instalments of rent. Gibbs C.J. put it this way at p.369:

"The first respondent became entitled under the

contract to receive the accelerated payments of the

rental without any rebate and to receive back the

vehicle sooner than would otherwise have been the

case without giving credit for its value and in

these circumstances the amount receivable by the

first respondent was manifestly excessive in

comparison with the greatest loss that it could

possibly suffer as a result of the default in

payment of the instalments."

10. No great attention was paid in O'Dea to one aspect of the matter to which the argument in the present proceedings does give relevance. Under the agreement, the lessee's liability to pay the balance of the entire rent arose, not upon breach of the agreement, but upon the termination of the lease. That is the position in this case. Disregarding authority, the view is at least tenable that the liability to pay the balance of the entire rental in those circumstances does not arise upon breach, but upon the happening of an event, namely, termination of the lease, albeit an event which the lessor is contractually entitled to bring about upon breach. If that were the correct view, it might be said that no question of penalty could arise because the liability to make the accelerated payments did not arise upon breach. That conclusion has been rejected in the cases to which I shall refer in a moment, but the reasoning upon which the rejection has been based is not without its inconsistencies. For in determining whether the liability amounts to a penalty or not - whether it amounts to a genuine pre-estimate of damage - comparison is made not with the loss which flows to a lessor from a default in the payment of rental instalments, which is confined to arrears of rent, but with the loss which flows to the lessor upon termination, which is the loss of his bargain. This loss may well extend to the loss of the balance of the entire rental, provided there is an appropriate rebate for early recovery and allowance is made for the proceeds of the goods repossessed to the extent that they exceed the residual value specified. Thus termination is treated as the equivalent of breach for one purpose and not another.

11. The view that a sum payable, not upon breach, but upon the exercise of a contractual right, cannot amount to a penalty was put by Jenkins L.J. in a dissenting judgment in Cooden Engineering Co. Ltd. v. Stanford (1953) 1 QB 86 in relation to a hire-purchase agreement which contained a clause providing for payment of the full amount of the instalments of hire upon the termination by the owner of the agreement for default in payment of the instalments. Jenkins L.J., at p.102, relied upon a line of reasoning in the cases which commenced with a judgment of Salter J. in Elsey & Co. Ltd. v. Hyde, only reported, apparently, in Jones and Proudfoot's Notes on Hire Purchase Law, 2nd ed. (1926) at p 107. Salter J. adverted to the question of the damage suffered by reason of a hirer falling into arrears in his payments of hire under a hire-purchase agreement containing a minimum hire clause and said:

"The fact that the hirer is in arrear with his

payments will not entitle the owner to any damages

for depreciation of these things. The reason that

they have suffered is that they have secondhand

goods put on their hands before they have received

very much money in respect of them. That is not

the result of the hirer's breach of contract, in

being late in his payments, it is the result of

their own election to determine the hiring, and it

appears to me, even in this case, there is no

question of penalty at all, and there is no

question whether the sum paid shall be regarded as

liquidated damages or a penalty."

12. This line of reasoning was, however, rejected by the majority, Somervell and Hodson L.JJ., in Cooden Engineering Co. Ltd. v. Stanford, Hodson L.J. remarking at p 116:

"My difficulty is to see the validity of the

distinction between a claim to receive payment of a

sum of money because of a right to determine

arising from breach of contract and a claim to

receive payment of the same sum by reason of breach

of contract giving a right to determine."

The decision in Cooden Engineering Co. Ltd. v. Stanford was approved in Campbell Discount Co. Ltd. v. Bridge (1962) AC 600, and applied in Financings Ltd. v. Baldock (1963) 2 QB 104, and was clearly accepted by the majority in O'Dea. See also Brady v. St. Margaret's Trust Ltd. (1963) 2 QB 494; United Dominions Trust (Commercial) Ltd. v. Ennis (1968) 1 QB 54; Lessors (Aust.) Pty. Ltd. v. Westley (1964-5) NSWR 2091. However, treatment of the termination of an agreement upon breach in the same way as the breach itself for the purpose of determining whether a stipulated payment is capable of amounting to a penalty has no extended application. It would seem clear that a provision calling for the payment of money by one party on the occurrence of a specified event, rather than upon breach by that party, cannot be a penalty: Campbell Discount Co. Ltd. v. Bridge; Export Credits v. Universal Oil Co. (1983) 1 WLR 399; (1983) 2 All ER 205.

13. Thus the trial judge in this case was constrained by authority to find that the amounts claimed by the lessor pursuant to the leasing agreements were to be treated as amounts payable upon breach rather than amounts due upon an event other than breach, namely, the termination of the agreements by the lessor pursuant to its contractual right to do so. And since upon any view the lessor's potential loss - whether flowing from the breach itself or from the subsequent termination of the agreements - was obviously exceeded by the amounts stipulated, the trial judge was also bound to reach the conclusion that the amounts were penal in character. The relevant provisions could not be a genuine pre-estimate of damage giving the lessor, as they did, the entire rent for the whole term of each leasing agreement together with the agreed residual value.

14. It is, of course, clearly established that a penalty clause does not preclude the recovery of actual loss arising from breach of contract and that the quantum of damages is to be assessed upon ordinary principles. Recovery was allowed by the law in either of two ways. There was a right to sue for the penalty (i.e. in debt) or to sue for damages for breach of contract disregarding the penalty (i.e. in assumpsit). In an action for the penalty, the recovery of proved damages was limited to a maximum amount equal to the penal sum fixed, however many breaches might be assigned. See Wall v. Rederiaktiebolaget Luggude (1915) 3 KB 66, at pp 72-73. The limit is now provided in New South Wales by ss.33 and 34 of the Imperial Acts Application Act 1969 (N.S.W.), which replaced the English legislation 8 & 9 Wm.III c.11 s.8 (dealing with penalties for the non-performance of covenants or agreements) and 4 & 5 Anne c.3 ss.12, 13 (dealing with money bonds). The effect of that legislation was to regularize the position which had been reached at common law by the end of the seventeenth century in deference to the relief available in equity, but it seems to have played little direct part in the development of the relief afforded by the courts even if it may be said to be reflected in the decisions. See Betts v. Burch (1859) 4 H & N 506, at p 511; [1859] EngR 585; 157 ER 938, at p 940; Wall v. Rederiaktiebolaget Luggude at pp 72-73. The distinction between the right to sue upon the penalty and recover proved damages and the right to sue for damages disregarding the penalty has ceased to be of any real practical importance save, perhaps, in relation to the debate whether, even in an action for damages in disregard of a penalty clause, the penal sum provides a limit to recovery. See Cellulose Acetate Silk Co. v. Widnes Foundry (1925) Ltd. (1933) AC 20, at p 26; Robophone Facilities Ltd. v. Blank (1966) 1 WLR 1428, at p 1446; (1966) 3 All ER 128, at p 142; Elsley v. J.G. Collins Ins. Agencies Ltd. (1978) 83 DLR (3d) 1, at pp 14-15; W & J Investments Ltd. v. Bunting (1984) 1 NSWLR 331. It is unnecessary to pursue that question here.

15. In assessing damages the approach favoured by the cases is, as I have said, to restrict recovery to the loss actually flowing from the relevant breach, disregarding any loss occasioned by the termination of the agreement, unless, of course, the breach amounts to a repudiation of the agreement (including for this purpose fundamental breach) in which case the injured party is entitled to treat the agreement as at an end and to recover damages for the loss of his bargain. There being no repudiation in this case, the result of that approach is to restrict the lessor to the recovery of the one instalment of rent in arrears in respect of each lease at the time the agreements were terminated, together with any interest payable upon those amounts. However, the actual loss suffered by the lessor was upon termination of the agreements and amounted to the loss of the bargain in each case, including the loss of the capital component in the unpaid instalments of rent.

16. It is to my mind hardly satisfactory to say, as it is said, that that loss flowed, not from the breaches, but from the lessor's action in terminating the agreements, for, whilst that is so, the lessor was doing something which was contemplated by the parties in the agreements which entitled him to take that course. There is no reason in logic or in principle why, if the agreement can provide for the lessor to take that step, it cannot, if the parties so intend, provide for the step to be taken at no loss to the lessor. It is logical enough to say that if the agreement provides for the lessor to recover more than the loss of his bargain, the provision is to be treated as a penalty because, whilst not strictly speaking a provision for stipulated damages upon breach, it is the equivalent and occurs as a consequence of breach. But it does not follow that if the provision is struck down as a penalty, the lessor should be restricted to damages as upon breach disregarding the termination of the agreement, which is not what he was attempting to provide for in the first place. Moreover, if, as is logical but is not done, the provision for loss upon termination of the agreement were to be compared in amount with the loss flowing from a breach not amounting to a repudiation, it would almost certainly be markedly more and for that reason a penalty even though a genuine pre-estimate of the lessor's damage upon the exercise of his contractual right to terminate the agreement. It is not done because the result is obviously unsatisfactory, but I shall return to that point shortly.

17. In Campbell Discount Co. Ltd. v. Bridge, upon the relevant clause providing for minimum hire upon termination of a hire-purchase agreement being held to be a penalty, the case was remitted to the county court to assess the damage which the hire-purchase company had sustained. There was nothing in that case which would indicate that the owner was not entitled to be compensated for the loss of his bargain and that was the basis upon which damages were assessed. Indeed, Lord Devlin expressly rejected any restrictive approach saying, at p.633, that:

"If a hire-purchase agreement is terminated before

its natural end and the car is returned to or

retaken by the owner, it will usually have

depreciated in value and be worth less than the

cash price paid for it. This will cause loss to

the owner if the depreciation exceeds in value that

part of any instalments paid as is to be counted as

return of capital. The possibility of such an

excess is a contingency against which the owner is

entitled to protect himself. If the sum payable on

termination under clause 9(b) 'by way of agreed

compensation for depreciation of the vehicle' could

be justified as a genuine pre-estimate of that

excess, it would, I think, be recoverable under the

agreement, whether the termination was the result

of a breach or of the exercise of the option or of

some other event. Viewed in relation to a breach,

it would represent a pre-estimate of one head of

the damage flowing from the breach; and an

agreement genuinely liquidating one head of damage

is, I think, just as good as one which liquidates

the whole."

18. Nevertheless, in Financings Ltd. v. Baldock the case of Campbell Discount Co. Ltd. v. Bridge was treated, as were the previous cases of Yeoman Credit Ltd. v. Waragowski (1961) 1 WLR 1124; (1961) 3 All ER 145 and Overstone Ltd. v. Shipway (1962) 1 WLR 117; (1962) 1 All ER 52, as a case in which the breach amounted to a repudiation giving a right at common law to treat the contract as rescinded and to sue for the loss arising upon rescission.

19. Where an agreement of the kind in the present case contains a provision, as it usually does, enabling the lessee to terminate the lease himself by returning the goods with a consequent liability to compensate the lessor, often in the form of accelerated payments of rent, no question of penalty arises because the termination does not arise upon breach but upon the act of the lessee. In that circumstance (notwithstanding the forceful dissenting views of Lord Denning in Campbell Discount Co. Ltd. v. Bridge), the lessor may require full compensation as provided even if, were it payable upon breach, it would constitute a penalty: see Associated Distributors, Ltd. v. Hall (1938) 2 KB 83. It is, to say the least, anomalous that a lessee should be encouraged to fall into arrears and provoke repossession by the lessor, rather than to act within the terms of the agreement by bringing it to an end himself. As Lord Denning observed in Campbell Discount Co. Ltd. v. Bridge at p 629, it is absurdly paradoxical to grant relief to a man who breaks his contract and to penalise another who keeps his. And from the lessor's point of view, he may be constrained to encourage circumstances amounting to a repudiation rather than to bring an unsatisfactory situation to an end in accordance with his contractual right to do so.

20. But the more fundamental reason why the decided cases are unsatisfactory is that to which I have already adverted. It lies in the inconsistency in the reasoning which supports them. That inconsistency is demonstrated in the acceptance by the cases that it is permissible for a lessor to provide for genuine compensation for the loss of his bargain upon repossession, notwithstanding that if he fails in his attempt and the provision is held to be a penalty his recovery of his actual loss will be restricted to the loss flowing from the breach disregarding the valid termination of the agreement by the repossession. Thus it was held in I.AC (Leasing) Ltd. v. Humphrey [1972] HCA 1; (1972) 126 CLR 131, that there was no penalty where there was provision for the payment, upon repossession, of the rental instalments not then accrued due, rebated to reflect their then value, ascertained by applying an interest rate of ten per cent per annum to each such instalment over the period by which the date for payment thereof is by virtue of this clause brought forward together with provision for the set-off against the amount due by way of rent of any excess of the proceeds of the leased equipment over the "appraisal value" specified in the agreement.

21. Yet if a provision stipulating a payment by way of accelerated rent or the like upon repossession is to be regarded as payable upon breach rather than upon termination of the agreement for the purpose of characterizing it as a penalty and if upon the provision being characterized as a penalty the only recovery permitted is for the breach and not for the loss of the bargain (assuming no repudiation), there can be no justification for having regard to the loss arising from termination in determining whether the provision is a genuine pre-estimate of damage or a penalty. Yet that is what is done. And it is done because otherwise the lessor would effectively be prevented from providing for the recovery of his loss upon repossession even in accordance with a provision which constituted a genuine attempt to calculate that loss. That would be an unwarrantable interference with the freedom of the parties to a contract to determine for themselves the course which their agreement should take upon the failure of one party to perform his obligations under it. Cf. Robophone Facilities Ltd. v. Blank at p 1446; p 142 of All ER, per Diplock L.J. The point is given emphasis when it is recognized that agreements of this kind take the form of a "lease" because, for reasons arising from the law relating to money-lending, hire-purchase and taxation, it is mutually advantageous to the parties to adopt that form. In reality the lessor lends money which is expended upon the capital cost of the goods and it is contemplated that the lessor will recover that capital cost in the rental payments, subject to any residual value (often minimal) which the goods may subsequently have.

22. The incongruity of restricting a lessor, relegated to pursuing his right to damages, to his loss upon breach in disregard of any loss flowing from the termination of the agreement is something which I am unable to accept unless I am compelled to do so.

23. I do not think I am compelled to do so. Even upon the basis that the relevant provisions in this case are penalties and that damages must be assessed as upon breach, it does not appear to me that damages must be assessed without regard to the fact of the lessor's exercise of his right to terminate the agreements and that they must be confined to the amount by which the payment of rent was in arrears at the date of termination. The lessor would, of course, have been able to recover damages for the loss of his bargain if there had been a repudiation of the agreements by the lessee but the Court of Appeal rejected a submission that repudiation had occurred and there was no challenge to that finding before us. However, that does not, to my mind, mean that the termination of the agreements by the lessor upon the breaches which occurred has no further relevance in the assessment of damages.

24. In Westralian Farmers Ltd. v. Commonwealth Agricultural Service Engineers Ltd. [1936] HCA 6; (1936) 54 CLR 361, Dixon and Evatt JJ. said at p 379:

"When the parties themselves have provided for the

determination of the contract on a given

contingency, the consequences flow altogether from

their contractual stipulation and are governed by

their intention, either actual or imputed."

I can see no reason why, if, as in the present agreements, it was evidently intended by the parties to provide for compensation to the lessor for damage flowing to him as a result of termination consequent upon breach, the law should not give effect to that intention. If it cannot do so by reference to the stipulated amounts because they are penalties, there is no reason why it should not do so by way of unliquidated damages. The result is similar to that which ensues upon the acceptance of the repudiation of a contract but it occurs because of the agreement between the parties rather than the application of general principles. And just as the parties to a contract may agree that an otherwise non-essential term is to be treated as essential, thus giving an extended application to the doctrine of repudiation, there does not appear to me to be any reason why they should not be able to prescribe, subject to the law relating to penalties, the measure of compensation payable upon termination for breach of an inessential term.

25. In Larratt v. Bankers & Traders' Insurance Co. (1941) 41 SR(NSW) 215, Jordan C.J. adopted this approach when he said at pp 225-226:

"Where it (i.e. the contract) is avoided by virtue

of an express right of avoidance, the consequences

which flow from an avoidance depend on the

intention of the parties, actual or imputed, and,

in the absence of some express or implied

indication of intention to the contrary, are

governed by the ordinary law applicable to the

avoidance of contracts for breaches of essential

promises: Westralian Farmers Case."

That statement may go too far in the light of Shevill v. Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 where it was affirmed that termination of a lease under a provision for re-entry upon breach, not amounting to a repudiation, does not entitle the lessor to sue for the loss of rental for the remainder of the term. It was said that the damage, if any, flowed from the action of the lessor in terminating the lease and not from the breach on the part of the lessee. But in Shevill there was no provision in the lease for the recovery of any loss flowing to the lessor upon re-entry; and the case does not deal with the situation where such a provision is made and the recovery of loss upon termination is within the contemplation of the parties. If a lease may provide for termination upon a breach amounting to something less than repudiation, there is no reason in principle why it should not also provide that it be at no loss to the lessor. This, I think, was recognized by Gibbs C.J. in Shevill when he said at p.629:

"It would have been easy, although inequitable, to

provide that in any of the circumstances mentioned

in cl.9(a) the lessor would be entitled to damages

for loss of the benefits which performance of the

covenants of the lease would have conferred on him

in the future."

Of course, what may have been inequitable in the circumstances of that case would not necessarily be inequitable in other circumstances and it should be borne in mind that the law relating to penalties would relieve in a situation where a sum was stipulated by way of sanction rather than compensation. Also, equity is able to intervene where an unfair advantage is taken by one party of another so that the bargain is unconscionable. Wilson J. also referred to the same point made by Gibbs C.J. in Shevill when he said at p.637:

"It is one thing to be able to rid oneself of an

unsatisfactory tenant; but it is quite another,

requiring a clear expression of intention, to be

able to hold the evicted tenant liable for whatever

damages might be suffered as a result of the

premature termination of the tenancy."

26. In The Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. [1985] HCA 14; (1985) 59 ALJR 373; 57 ALR 609, it was held that the termination of a contract in the exercise of a contractual power to do so for breach may render the party in default liable in damages for loss of the bargain in the same way as rescission upon repudiation or fundamental breach. Of course, in that case it was recognized, upon the authority of Shevill, that it is necessary "... that the exercise of the power is consequent upon a breach or default by the defendant which would attract an award for such damages": see Mason J. at p.379; p.619 of ALR. That qualification, however, in no way precludes and rather suggests that damages for loss of the bargain upon termination for something less than repudiation or fundamental breach should be recoverable if such was the intention of the parties.

27. To the same effect and open to the same comment was the observation of Deane J. in Tabali that "... where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach exist concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate will not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract expressly or impliedly so provides ...": see p.390; p.637 of ALR. It is consistent with that observation to say that where a contractual power to terminate an agreement is exercised upon breach, damages for loss of the bargain should be recoverable, not only where the breach amounts to repudiation or is fundamental, but also where it is intended by the parties that such loss should be recoverable. And if it is the intention of the parties, it will not be correct to say that the loss was due solely to the act of the party terminating the agreement. It will be attributable also to the breach because it was contemplated by the parties as something for which damages should be recoverable: see Sotiros Shipping Inc. and Aeco Maritime S.A. v. Sameiet Solholt (1983) 1 Lloyd's Rep 605, at p 607.

28. In this case there was a clear expression of intention that the lessee should bear the damage suffered by the lessor as a result of the premature termination of the lease upon breach. It was an intention primarily expressed by way of a provision for stipulated damages which proved to be unenforceable because it was a penalty. But there is, to my mind, no reason why the intention should not be given effect in accordance with ordinary principles and by reference to the same events, namely, breach and termination, by way of proved damages. To do so is to engage in a reasoning process which is entirely consistent with the method employed to determine that the offending provision was a penalty, which was to compare it with a genuine pre-estimate of damage flowing, not from breach, but from termination upon breach. And it is to recognize the right of the lessor to provide contractually for the recovery of his loss upon termination so long as he does not do so by way of penalty.

29. In Anglo Auto Finance Co. Ltd. v. James (1963) 1 WLR 1042; (1963) 3 All ER 566, a minimum hire clause was held to be a penalty and Willmer L.J. remarked at p 1047; p 569 of All E.R.:

"I would only add this. Clause 5(b) is the only

clause which deals with the question of

compensation in the event of the termination of the

hiring. No clause is contained in the contract

purporting to deal with depreciation or

deterioration of the vehicle. Had such a clause

been inserted (and assuming, of course, that it did

not amount to a penalty clause), it may be that the

plaintiff company would have been entitled to

recover something considerably more. But here the

company has sought to protect its rights only by

the insertion of this clause, which I hold to be a

penalty clause."

For my part I am unable to see why the intention of the parties concerning payment of compensation upon termination should be disregarded merely because the provision which they make fails as a penalty. Just as actual loss is recoverable upon breach, even where there is a stipulation which is unenforceable as a penalty, there is no reason to my mind why actual loss should not be recoverable upon termination in the same circumstances. As Willmer L.J. recognized, the parties to an agreement may provide additionally for such matters as depreciation or determination of the goods. It is, therefore, a matter of the intention of the parties, and it can hardly be said that the failure to make a genuine pre-estimate of the loss accruing upon termination is inconsistent with an intention to recover actual loss upon termination any more than the failure to make a genuine pre-estimate of damages upon breach is inconsistent with an intention to recover actual damage upon breach. Whilst these matters were not, perhaps, specifically adverted to during argument, the issue was the measure of damages which, in my view, sufficiently raised them.

30. It is unnecessary to examine whether, in reliance upon equitable doctrines, relief against a penalty may be granted upon terms. That appears to have been, as I have said, the view of the learned trial judge in holding that the lessor was entitled to damages for the loss of his bargain in each case. It is a view which was rejected by the Court of Appeal in this case and in the later case of Citicorp Australia Ltd. v. Hendry (1985) 4 NSWLR 1. Having regard to the conclusion which I have reached, I have no need to examine that view and to consider whether, because of the development of the common law and following the fusion of law and equity, relief against penalties is any longer discretionary.

31. I would allow the appellant its appeal and damages in the sum of $206,000.

ORDER

Appeal dismissed with costs.