DISTRICT COURT OF QUEENSLAND

1. [1]
   This is an application for judgment on a compromise. It raises an interesting question as to the law of compromise, and more general principles of contract law, including the doctrine of unenforceability of a penalty. Briefly, the plaintiff commenced an action against the defendant in June 2003. That action was listed for trial in December 2008, but on 19 December 2008 the parties executed a deed of settlement.  On 22 December 2008 it was adjourned to the registry to allow settlement documents to be implemented.  The plaintiff now seeks a judgment in accordance with the terms of that deed.

Background

2. [2]
   The claim filed 17 June 2003 was for $176,000 together with interest at an agreed rate of 4.75% per annum and costs.  The statement of claim alleged that this was an amount the defendant had agreed to pay by an agreement in writing dated 28 April 2003, so that the interest would be payable from that date.  The matter seems to have proceeded at a fairly leisurely pace, and another judge on 13 July 2007 gave the plaintiff leave to proceed under r 389(2).  An amended statement of claim was filed on 10 August 2007, and a further amended statement of claim on 2 November 2007; in that document what was claimed became $220,209.87 as damages for breach of contract, or negligence, or under a statute for misleading and deceptive conduct, together with interest, or in the alternative $176,000 plus interest at 4.75% from 28 April 2003.  An amended defence was filed on 12 March 2008.  The signature of the defendant to the request for trial date was dispensed with on 17 October 2008.  I cannot find a request for trial date on the court file, but nevertheless the matter was listed for trial in December 2008.

Deed of settlement

3. [3]
   The deed of settlement contained a recital referring to the proceeding and that the parties had agreed to settle it and all disputes between them on the terms set out in the deed “without any admission, and for commercial reasons only”. Clause 1 of the deed contained defined terms.  The operative part of the deed is then contained in Clauses 2 and 3, which are in the following terms:

4. [4]
   The term “Total Claim” was defined in Clause 1.1 as “the amount claimed by (the plaintiff) of $176,000 plus interest at the rate of 4.75% from 28 April 2003 together with costs of the proceeding to be assessed if not agreed.”  The term “Indulgence Amount” was defined as the amount of $100,000.  The “payment dates” referred to in Clause 3.1(a) were the date of execution of the deed for the sum of $10,000, which was then paid, 31 January 2009 for the sum of $40,000, and 31 March 2009 for the sum of $50,000.  Clause 5 contained a “no representations” warranty and a statement that the deed contained the entire agreement between the parties and everything connected with it and superseded any prior agreements or anything connected with it.  By Clause 7, time was made of the essence.

Effect of the deed

5. [5]
   The plaintiff alleged, and the defendant did not dispute, that neither of the sums of $40,000 and $50,000 had been paid. The plaintiff’s solicitor deposed to the fact that notice as required by Clause 3.1(b) was given to a defendant on 3 February 2009.

6. [6]
   In circumstances where there is an agreement between parties to a dispute that the dispute will be settled on the basis of the promise by one of them to do something at some time in the future, a question can arise as to whether the effect of entering into the agreement produces an immediate discharge of any existing cause of action. Ordinarily, if a party with an existing cause of action agrees to accept the promises made under a settlement agreement in substitution for rights in respect of the existing cause of action, the effect of entry into the settlement agreement will be that the existing cause of action is discharged: McDermott v Black (1940) 63 CLR 161 at 183-185 per Dixon J, who said that the outcome depends on the correct interpretation of the agreement the parties had entered into:

“If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.”

7. [7]
   In the present matter, there is some ambiguity in the terms of the deed. Clause 2.1(a) on its face reads as an immediate discharge of the defendant from all causes of action arising out of the matters the subject of the proceedings, which on its face would include the causes of action being pursued on the pleadings in the existing proceeding.  On the other hand, Clause 3.2 provides for the immediate discontinuance of the existing proceeding only upon the payment of the “indulgence amount” in accordance with Clause 3.1(a), and Clause 3.1(b) contemplates that if payment does not occur as promised then the plaintiff shall be at liberty to enter judgment in the existing proceeding.  The fact that the existing proceeding was to be kept on foot was a strong indication that, notwithstanding the apparently absolute language in which Clause 2.1(a) was drafted, the effect of the agreement was that there was no discharge of the existing cause of action unless and until the defendant performed the terms set out in Clause 3.1(a):  Blue Moon Grill Pty Ltd v Yorkey’s Knob Boating Club Inc [2006] QCA 253.

8. [8]
   It is well established that, except in cases where the settlement agreement amounts to an accord and satisfaction of the former kind, if what is promised to be done under the settlement agreement is not done the other party is entitled to treat the agreement as being at an end, and to enforce the original cause of action unimpaired. Unless this is an example of an accord and satisfaction which produces an immediate discharge of the earlier cause of action, that earlier cause of action will remain, and it is open to the plaintiff to proceed in the existing proceeding to enforce that earlier cause of action. Ordinarily, however, in order to do that, it is necessary for the plaintiff to obtain judgment in the ordinary way, that is to say, by success at a trial or by some summary process authorised by the rules.

9. [9]
   In the present case the plaintiff is seeking judgment pursuant to Clause 3.1(b) of the deed of settlement, on the basis that, in the events that have happened, there is an entitlement under that deed to judgment.  Although at one time the view was held that, in circumstances where an action had been compromised other than by means of a consent judgment, there was limited capacity for the compromise to be enforced by the court in the proceedings which had been so compromised,^[1] it is now accepted that, at least in circumstances such as the present, there are no procedural obstacles to the court enforcing the compromise by a judgment in the existing proceeding, even if the other party to the compromise no longer consents to the judgment.^[2]

10. [10]
    There is authority that in such circumstances a judgment in the existing proceedings could be seen as based on admissions made expressly or impliedly in the compromise agreement: McLaren v Schuit (1984) 34 SASR 139.  In the present case, however, the fact that the deed expressly recites that it was entered into without any admission and for commercial reasons only would preclude this course.  The basis on which the plaintiff claims to be entitled to judgment for what is described in the deed as the “total claim” is that that entitlement has arisen under the deed.

11. [11]
    There is ample authority for the proposition that where the defendant agrees to pay a particular amount payable by instalments under the compromise, judgment can be given for that amount if payments are not made as agreed under the compromise.^[3]  The compromise agreement here, however, was that the defendant would pay a particular sum in a particular way, but if that sum were not paid in that way, the plaintiff would be entitled to judgment for a larger sum.  It occurred to me during the hearing of this matter that that may give rise to some difficulty, because the obligation to pay the larger amount may be unenforceable as a penalty.

Penalties

12. [12]
    At one time it was commonplace for obligations of various kinds to be secured by a bond, that is, a promise under seal to pay a particular sum of money, which was subject to the condition that it would not apply if the obligation that it secured had been performed. This form of security became unpopular in time, largely because of a well developed jurisdiction on the part of the Court of Chancery to restrain enforcement of the bond so long as the party subject to it was prepared to perform the condition, even if late.^[4]

13. [13]
    If the effect of the bond was that it provided for a payment of money stipulated in terrorem of the party in default, rather than as a genuine covenanted pre‑estimate of damage, it was characterised by equity as a penalty and hence equity would restrain the enforcement of the bond provided that the party subject to it was prepared to do equity, by providing appropriate compensation for actual damage:  Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, especially at p 86 per Lord Dunedin.  The continuing applicability of the basic approach in that case was confirmed by the High Court in Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, [2005] HCA 721.  As has been made clear in earlier decisions in the High Court, the principle, although originating in equity, has long been regarded as giving rise to a common law defence.^[5]  The practical effect is that, if an amount payable under a contract (or under a deed), is properly characterised as a penalty, it is just not recoverable.

14. [14]
    One of the propositions from Dunlop cited with approval in Ringrow was that “it will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.”  Hence, it has for a long time been generally said that, where there is an agreement such as a mortgage under which interest is payable, to provide for interest to be payable at a higher rate if the payment is not made punctually is a penalty, at least in a case where there is a significant difference between the two rates:  Beil v Pacific View (Qld) Pty Ltd [2006] QSC 199, where the authorities were reviewed by Chesterman J (as his Honour then was).  Although the judgment sought is judgment in the existing proceeding, and therefore arguably a judgment on the original cause of action, the specific basis upon which it is sought in the present application is the entitlement to judgment in that amount in the deed.  In substance therefore, what is sought to be enforced by the current application is not the original cause of action but the entitlement arising under the deed.  The question of whether there is a penalty for the purposes of the prohibition on the enforcement of penalties is to be decided as a matter of substance.^[6]

15. [15]
    In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Mason and Wilson JJ said at p 193-4, in relation to the current position in respect of penalties:

“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 less they impinge upon 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.”

16. [16]
    The comment about parties’ freedom of contract is perhaps particularly apposite in relation to a contract to compromise litigation, and it may well be that greater than usual leeway will be given in relation to such a contract to something which might possibly be able to be characterised as “liquidated damages”. It seems to me, however, that in the present case the extent of the disproportion between the “indulgence amount” and the “total claim” is such that it is incapable of any realistic characterisation other than as a penalty. The “indulgence amount” under the deed was the sum of $100,000, whereas the total claim was $176,000 together with interest at 4.75% for at least five and a half years and costs. The actual amount of interest sought before me was $50,344.27,^[7] so that giving credit for the payment of $10,000 made in December 2008 the total judgment sought was $216,344.27, plus costs to be assessed.  It was therefore more than double the “indulgence amount”.

17. [17]
    It is important to distinguish the cases where, for example, a creditor agrees to accept payment of part of a debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt. In O'Dea (supra) Gibbs CJ at p 367 identified this as an example of a case which was not a penalty, and cited Thompson v Hudson (1869) LR 4 HL 1 and Ex parte Burden, in re Neil (1881) 16 ChD 675.  In the former case there had been litigation between the parties which had resulted, in one case, in a judgment, and in other cases, in the ascertaining of particular amounts owing, although no decrees had been drawn up formalising those findings.  An agreement was entered into by which in substance it was arranged that the party against whom the judgment had been obtained was to admit the sums found to be due and give up any right of appeal, and give a mortgage in security for the judgment, and the plaintiff consented to accept a smaller sum payable over a period of time, with a reservation of its original rights unless the stipulations were performed:  p 3.  The argument advanced in support of the proposition that the agreement did provide for a penalty was based on the proposition that the agreement amounted to an accord and satisfaction so that the original rights of the plaintiff were discharged:  p 7.

18. [18]
    The Lord Chancellor, Lord Hatherley, said at p 15:

“Where there is a debt due, and an agreement is entered into at the time of that debt having become due and not being paid, in regard to further indulgence to be conceded to the debtor, or further time to be accorded to him for the payment of the debt, or in regard to his paying immediately, if that be a portion of the stipulations of the agreement, or at some further time which may be named, and the creditor is willing to allow him certain advantages and deductions from that debt, as well as to extend the time for its payment, if adequate and proper security in the mind of the creditor be afforded him as his part of the bargaining in respect of which he is to make these concessions, then it is perfectly competent to the creditor to say:

‘If the payment be not made modo et forma as I have stipulated, then forthwith the right to the original debt reverts, and it is to be open to me to proceed with reference to the original debt, and to exercise all those powers which I possess for compelling payment of the original debt.’”

19. [19]
    Lord Westbury at p 29 also emphasised the point that:

“The whole debt is by this recital plainly treated as an existing debt due to the appellants.”

20. [20]
    The latter case concerned an arrangement under which a creditor who had obtained a judgment entered into an agreement with the debtor for payment of a lesser sum which was not paid. It was held that an entitlement to enforce the judgment did not amount to a penalty. Cotton LJ said at p 679:

“I think the sole question is, whether, under the agreement, the creditor has now a right to enforce his original debt.  In my opinion he has, and if the debtor does not pay it the ordinary consequences must follow.  It is said that the provision for the reviver of the original debt is in the nature of a penalty.  I know of no case in which the equitable doctrine about penalties has been applied to a case in which a creditor agrees to reduce the amount of his claim on certain conditions, but that on the failure of the debtor to fulfil any one of those conditions the original rights of the creditor shall revive, and in my opinion the doctrine ought not to be applied to such a case.”

21. [21]
    In that matter, of course, the original rights of the creditor were the rights under a judgment; the distinguishing feature here is that the original rights of the creditor, the plaintiff, are the right to pursue his claims by the existing proceeding.

22. [22]
    Those decisions were followed and applied by the Court of Appeal of Victoria in Cameron v UBS AG [2000] 2 VR 108.  In that matter, the plaintiff, a Swiss bank, had obtained a judgment against the defendant in Switzerland, and had brought proceedings in Victoria to enforce that judgment, which proceedings were defended.  The parties then entered into a deed which provided for payment of a lesser sum by instalments and, in default, for judgment by consent for the whole sum.  There was a failure to pay one of the instalments on time, and the plaintiff made application for judgment pursuant to the deed.  Judgment was refused by a master but given on appeal by a single judge, whose decision was upheld by the Court of Appeal.  The only point argued on the appeal was in relation to penalty.

23. [23]
    Phillips JA at [17] cited the passage from the judgment of Gibbs CJ referred to earlier, his Honour noted that payment of the full amount of the judgment could not be characterised as a genuine pre‑estimate of damage, and after some comment about the law of penalty said at [20]:

“That is the key to this appeal.  Although the defendant was wont in argument to approach this case as if the deed was simply an agreement for the payment by the defendant to the plaintiff of $1 million, that is not what it was; it was a bargain about the enforcement of the Swiss judgment.  The sum of $8.4 million for which judgment in Victoria was to be obtained by consent under Clause 3 was the sum for which judgment had already been recovered in Switzerland, the judgment which the plaintiff was seeking to enforce in this proceeding. … By the terms of settlement the defendant secured to himself one last opportunity to pay a much lesser sum in full and final satisfaction of what the plaintiff was claiming in Victoria in reliance upon the Swiss judgment.  For the opportunity to pay that lesser sum the defendant bargained away any defence he had to enforcement of the judgment in Victoria, consenting to judgment here if he made default in payment of the lesser sum modo et forma.  That makes this case quite different from those in which the courts have refused to lend assistance to the enforcement of a penalty.  It is more akin to those cases described by Gibbs CJ in O'Dea where the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence.”

24. [24]
    His Honour rejected the submission that the absence of an express acknowledgment of liability for the amount payable under the Swiss judgment prevented this characterisation of the deed.  At [23] his Honour treated the facts of that case as very like those in Thompson v Hudson (supra).  Buchanan JA, who agreed, added at [27]:

“It was conceded by the appellant that if the deed had taken the form of an acknowledgement of the obligation to pay the amount of the Swiss judgment followed by a promise to pay a less sum and thereby satisfy the first obligation, no question of penalty would have arisen.  In my view that was the effect of the deed when looked at as a whole.  The substance of the matter was not affected by the manner of its drafting.”

25. [25]
    At [28] he added that the case was to be equated with those where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt. The third member of the court, Winneke P, also agreed with Phillips JA and added the comment at [3]:

“At the time when the deed was executed, the respondent had a right to enforce an existing debt constituted by the judgment of the Swiss court.  By the deed of settlement it forebore to exercise that right on condition that the indulgence which it afforded to the appellant, namely to pay a lesser sum over a period of time, was fulfilled.  By entering into the deed the appellant implicitly acknowledged that the judgment debt was due and payable by his agreement that, if he did not meet the conditions upon which the indulgence was granted to him, he would submit to judgment in the amount of such judgment debt; thereby giving up any defences which he claimed to have.  In my opinion, there is nothing inequitable or penal about such a compromise.  In substance it amounts to a concession by the appellant that the debt is owed and will be paid if he fails to meet the terms of the indulgence granted by the respondent.”

26. [26]
    In my opinion there is an important distinction between the facts of that case and the facts of the present; the distinction lies in the recital that the parties had agreed to settle the existing proceedings and the disputes between them “without any admission and for commercial reasons only”. It is one thing to characterise a deed of settlement as the admission of the existence of the claimed debt in circumstances where the debt is reflected in an existing judgment of a court, notwithstanding the absence of an express admission of liability for that debt, and another to characterise the deed as an acknowledgment of liability in respect of the plaintiff’s claim in circumstances where it expressly states that it is nothing of the sort. In my opinion, that serves to distinguish the present case from the decision of the Court of Appeal in Cameron, a case which belongs in the Thompson v Hudson line of authority.^[8]

27. [27]
    Cameron was applied to justify judgment for the amount claimed (rather than a lower amount agreed to be paid under a settlement) in Commonwealth Bank v Mileoak Pty Ltd [2001] VSC 12, on the basis again that the settlement agreement was characterised as an irrevocable consent to judgment for the amount claimed and an indulgence if a lesser sum was paid by the stipulated date, applying the reasoning in Cameron, although with respect the reasons do not address the issue of whether the settlement agreement in that matter amounted to an admission of the plaintiff’s claim, which was not otherwise established by a judgment.  This is the closest that I have found to a case which supports the plaintiff’s application, but I consider that his Honour’s response to the argument that the clause in that matter provided for a penalty was, with respect, superficial and unpersuasive.  I might mention that that decision was referred to by Jones J in Blue Moon Grill Pty Ltd v Yorkey’s Knob Boating Club Inc. [2005] QSC 251 but only as an example of an accord executory:  [19].^[9]

28. [28]
    A differently formulated settlement was held not to create a penalty in Australian Management Consultants Pty Ltd v Director Mortgage Funding Pty Ltd [2003] VSC 202, another decision which applied the decision in Cameron.  In essence, that settlement agreement provided for the settlement of the plaintiff’s claim and all matters in dispute for a lump sum payment of $700,000, the amount of the claim but without allowance for interest and costs which would have been substantial if the plaintiff had been successful in the action.  It then contained a further provision that if a lesser sum were paid in accordance with a timetable for instalments, the plaintiff would accept that lesser sum in discharge of the obligation to pay the $700,000 under the settlement agreement.  It was held that this was in substance not a penalty, because the settlement agreement created the obligation to pay $700,000, and it was simply a matter of enforcing that obligation (not the full amount claimed in the action) if the further concession provided for by the settlement agreement was not available.  This was analogous to the well‑recognised mechanism where, for example, interest is payable on money lent at a particular rate, but if a lower rate is paid in a timely way it will be accepted in satisfaction of the obligation to pay interest, which (despite its air of artificiality) has been long accepted as not giving rise to a penalty.^[10]

29. [29]
    The crucial distinction between a debt which is admitted or already established by judgment or in some other way and a debt which is merely claimed was also emphasised by the Queensland Court of Appeal in Zenith Engineering Pty Ltd v Queensland Crane and Machinery Pty Ltd [2001] 2 Qd R 114.  In that case, an action in this court for an amount of about $72,000 was settled by a deed of settlement which provided that the defendants would pay the sum of $55,000 by instalments which would be accepted in full settlement of the plaintiff’s claim and the defendant’s counterclaim, and went on to provide in Clause 4 that:

“If any payment is not made on the due date, in respect of which time is agreed to be of the essence, the plaintiff will be entitled to enter judgment against the defendant for the full amount claimed in the amended claim plus interest and costs.”

30. [30]
    The instalments were not paid, but Wylie DCJ refused to enter judgment under Clause 4 on the ground that this provision constituted a penalty, and that decision was upheld by the Court of Appeal.  Pincus JA, with whom the other members of the court agreed, applied O'Dea (supra), referred to the decision in The Protector Endowment Loan and Annuity Company v Grice (1880) 5 QBD 592, and what was said about it in O'Dea by Deane J, and said at [8]:

“It appears to me that this court should, in accordance with the views just set out, be wary of extending the Protector Loan principle beyond the sort of case to which it refers, one in which there was an admitted debt payable by instalments with a provision for acceleration.  It should be added that the character ascribed to such an agreement will not necessarily be that which its terms stipulate; as the O'Dea case illustrates, the question of penalty or no is to be determined in accordance with the substance of the arrangements between the parties, which might not accord with the language chosen by ingenious drafters.”

31. [31]
    His Honour referred at [9] to a textbook statement of the principle in Thompson v Hudson (supra) and continued:

“Here the stipulated sum was neither in form nor in substance a present debt; it was merely an amount claimed.  That is, the case is one in which the obligation sought to be enforced was one to pay a much larger sum than that agreed to be due, upon default in payment of agreed instalments of the latter. … As the learned primary judge pointed out, the additional amount which would, if Clause 4 of the deed is enforceable, become payable bears no rational relationship to the loss the applicant suffered by late payment of an instalment.  I agree with the primary judge’s view that Clause 4 is unenforceable, as a penalty provision.”

32. [32]
    That decision deals with the particular point in issue before me, and concludes it adversely to the plaintiff. The only distinction is that the reasons in Zenith record no recital expressly disavowing any admission of liability, a feature which I regard as supporting the characterisation of the provision here as a penalty.  I am of course bound by that decision, but, for the reasons that I have set out, I would respectfully entirely agree with it, and merely add that there is nothing that I have seen in any later decision which would cast any doubt on the correctness and continuing applicability of what was decided by the Court of Appeal in that matter.

33. [33]
    In the light of the authorities, the position overall appears to be that there can be a settlement agreement under which a party is to pay $X in a particular way, but if it is not paid that party will be liable to pay $Y, only if the liability to pay $Y was already established by a judgment, or was not disputed, or is expressly or impliedly agreed or admitted by the settlement agreement to have been payable, otherwise the provision for the liability to pay $Y will be unenforceable as a penalty, unless the difference between $X and $Y is small enough to be characterised as liquidated damages. It may be as well that a settlement under which one party is to pay $Y, but if $X is paid as specified it will be accepted in satisfaction of the obligation to pay $Y, will also not be a penalty. But that is not the situation here.

Conclusion

34. [34]
    The substance of the settlement deed in the present case was that the defendant would pay and the plaintiff would accept in discharge of his claims against the defendant the sum of $100,000 payable in three instalments, provided that if that sum was not paid as stipulated under the deed payment of an amount of in excess of double that sum would become enforceable by judgment in the proceeding. In my opinion, because of this, the provisions of Clause 3.1(b) of the deed do amount to a penalty, and are therefore unenforceable.  The fact that the parties entered into the agreement and the deed in these terms is not conclusive; that is always the case where a contract or deed is rendered unenforceable on this basis.

35. [35]
    It follows that the options available to the plaintiff in law are limited to enforcing the settlement agreement (so much of it as is not unenforceable as a penalty), or terminating the settlement agreement and proceeding with his original cause of action, assuming that the deed of settlement did not amount to an accord and satisfaction which had the effect of discharging the original cause of action. It is unnecessary for me to decide, for the purposes of this application, whether or not that was the case. All I have to do is to decide whether the plaintiff is entitled to the relief sought in the application, which was judgment for the “total claim” after giving credit for the $10,000 paid. For the reasons set out above, I am not prepared to give that judgment. It is a matter for the plaintiff to decide what he wants to do in the light of this decision, or perhaps for someone else to decide (if some dispute about that matter emerges) what courses of action remain open to the plaintiff. The only order I make is to dismiss the application.