Facts

Mr Kay and Playup entered into a contract for the sale and purchase of Mr Kay's 100% shareholding in a company for $1.6 million. Of that sum, $1 million was payable on exchange, with the remaining $600,000 to be paid in 24 monthly instalments following the 22 May 2018 'completion date' stipulated in the contract.

The seller gave a number of warranties regarding the state of the company and agreed to restraints on operating a competing business for three years. Clause 4.3(b) of the contract stipulated that if the buyer was more than seven days late making any of the monthly instalment payments, the warranties and restraints were immediately 'void ab initio' and the total amount of the remaining monthly instalments became payable immediately.

Neither the buyer nor the seller performed any of their completion obligations on the 22 May 2018 'completion date'. The following events then occurred:

• 7 June 2018: the seller performed all but two of his completion obligations. From this date onwards, the parties acted as if completion had occurred.
• 22 June 2018: the first monthly instalment fell due, being one month after the 22 May 2018 'completion date' stipulated in the contract.
• 16 July 2018: the seller performed one of his remaining completion obligations, which was to calculate an adjustment amount that was due to be paid upon completion of the transaction. (The seller's other remaining obligation was to provide the buyer with updated lists of liabilities and debtors, which he did not ultimately comply with.)
• 8 August 2018: as the buyer had not made any monthly instalment payments, the seller served a creditor's statutory demand for the $600,000 total of the monthly instalments minus the adjustment amount.
• 13 August 2018: the buyer began making instalment payments to the seller, but did not pay the full amount of the statutory demand.
• 10 September 2018: the seller commenced winding up proceedings against the buyer.

In order to procure dismissal of the winding up proceedings, the buyer paid the outstanding balance of the monthly instalments. The buyer then commenced proceedings for declaratory relief that the restraints and warranties were not void, contending that:

• Its obligation to pay the monthly instalments was suspended until the seller had agreed to the adjustment amount. As that did not occur until 16 July 2018, its obligation to pay the monthly instalments commenced on 16 August 2018. Given that this was three days after it made its first instalment payment, clause 4.3(b) was not engaged.
• Clause 4.3(b) was void as a penalty.
• Alternatively, if clause 4.3(b) was not a penalty, it should be granted relief against forfeiture.

The buyer succeeded at first instance, with the primary judge agreeing (albeit via different reasoning) that clause 4.3(b) had not been engaged. Had it been necessary, the primary judge would have rejected alternative arguments that clause 4.3(b) was an unenforceable penalty or that relief against forfeiture should be granted. The seller appealed the primary judge's principal finding, with the buyer cross-appealing the judge's findings on the alternative arguments.

Judgment

In deciding the appeal on the primary judge's principal finding, the court had to determine whether the buyer's obligation to pay the monthly instalments was independent of the seller's obligations to calculate the adjustment amount and provide the updated lists of liabilities and debtors. In doing so, the court held that, on its proper construction, the contract dealt with two distinct concepts that were not to be conflated:

• the 22 May 2018 'completion date' – the date on which the parties were obliged to complete the transaction; and
• 'completion' – the word used by the contract to describe the actual event of completion.

The fact that the parties failed to complete on 22 May 2018 meant that they were in default of their contractual obligations – this did not alter the meaning of the term 'completion date'.

The buyer's obligation to pay the monthly instalments was linked to the 'completion date', whereas the relevant obligations of the seller were linked to the concept of 'completion'. As such, there was no relation of interdependency between the two sets of obligations, and the buyer's obligation to make the monthly instalments had not been suspended by the seller's failure to discharge some of his completion obligations.

Although clause 4.3(b) would have been engaged by the buyer's failure to make the instalment payments on time, the court unanimously held that the clause was an unenforceable penalty as to the warranties and restraints.

Justice Brereton further observed that if clause 4.3(b) was not a penalty, relief against forfeiture would not be available, given that no proprietary or possessory rights had been forfeited. Justices Macfarlan and Simpson declined to express a view on relief against forfeiture, as it was not necessary to resolve the appeal.

Independency

The court held that, on proper construction of the contract, the buyer's obligation to pay the monthly instalments was not dependent upon the seller's obligation to calculate an adjustment amount, nor the seller's obligation to deliver updated lists of liabilities and debtors.

The court's ruling is significant in that it rejects the notion that 'clear words' are required in order to make a finding of independency, instead emphasising that the intention of the parties is paramount. The court identified a number of factors that indicated the parties did not intend the two sets of obligations to be dependent upon one another:

• Where interdependency was intended in relation to other obligations in the contract, the contract stipulated this expressly.
• The adjustment amount was to be paid on the actual date of completion, and was not connected to, or paid out of, the monthly instalments (which were triggered by and ran from the 'completion date' stipulated in the contract, not the actual date of completion).
• The doctrine of merger tends against the notion that post-completion obligations would be dependent on obligations to be performed upon completion.
• The seller's obligation to calculate an adjustment amount and ensure that it was paid was not a condition precedent to completion. The seller's failure to tender the adjustment payment might have entitled the buyer to refuse to complete, but the buyer did not do so.

Consequently, the court held that while the buyer was entitled to retain the objectively correct adjustment amount out of the monthly instalments, it was not entitled to treat the obligation to pay the monthly instalments as suspended until the seller had agreed to the adjustment amount.

The court also observed that seller's obligation to provide updated lists of liabilities and debtors was not necessary to give content to any of the seller warranties, as any new liabilities that would have been disclosed in the updated lists were already covered by an indemnity provided by the seller. The court therefore held that there was no relevant connection between the seller's obligation to provide the updated lists and the buyer's obligation to pay the monthly instalments.

Penalty

The court held that clause 4.3(b) was a penalty insofar as it operated to avoid the seller warranties and restraints, and was thus unenforceable. This finding is significant in that it extends the penalty doctrine to accrued contractual rights, despite the doctrine's 'standard application' being to the payment of a stipulated sum of money.

Although the parties did not dispute that the penalty doctrine could apply to accrued contractual rights, the court nevertheless noted that restricting the doctrine to its standard application would 'elevate form over substance'. When determining that clause 4.3(b) , in substance, a penalty, the court identified two key factors:

• Restraints and warranties are a fundamental protection of the goodwill of the subject business, so as to ensure that the buyer actually gains the benefit of the business. Avoidance of the restraints and warranties is a severe consequence that is 'out of all proportion' to the seller's legitimate interest in securing the payment of each monthly instalment.
• The clause operated indiscriminately – it applied not only in the case of a total failure to pay, but also in the event of a delay of one day after the grace period in paying the very last monthly instalment.

The court also noted that while clause 4.3(b) was the product of robust negotiation between two properly advised parties of comparable bargaining power, this did not alter the fact the clause was penal in character.

Relief against forfeiture

Justice Brereton further held that if the court was wrong and clause 4.3(b) was not a penalty, relief against forfeiture would not be available as an alternative. This finding is significant in that it upholds the traditional view of the doctrine, being that it is confined to proprietary or possessory rights and does not extend to mere contractual rights.

Justice Brereton made the following observations in response to Justice Edelman's suggestion in Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6)[1] that the scope of the doctrine could be broadened beyond proprietary rights:

• Although there have been cases that suggested or assumed that relief against forfeiture might be available for a contractual license, these can be distinguished from the facts at hand. The present case deals with a mere contractual or personal right, whereas the licensee in each of the precedent cases held not merely a contractual license but also an equitable interest in land. None of the precedent cases extended the doctrine to a bare licence – relief was only granted where there was some estate or interest in land that equity would protect.
• It is true that a foundational rationale for the doctrine – that it is a constraint on the unconscionable exercise of contractual power – is not tied to the existence of a proprietary right. However, the precedent cases are against the application of the doctrine to merely contractual rights, as distinct from proprietary or possessory rights. Although this may mean that the court's inquiry then becomes what is a 'proprietary' right for the relevant purpose, it is nevertheless an identifiable discriminator of the scope of the doctrine.
• Expanding the scope of the doctrine to all contractual rights and leaving control of its use to judicial discretion would 'offend against the well-recognised need to ensure that equity does not undermine the certainty of the law'.

Although Justice Brereton held that relief against forfeiture was not available for the above reasons, he noted that had the doctrine been applicable, he would have granted relief on discretionary grounds.