Penalties and damages

Under two short-term loan agreements entered on 5 October 2021, Jasper Nominees Limited, as trustee for certain financiers, advanced Global Meat Exports Pty Ltd substantial sums to finance its purchase of Cedar Meats. Before the loan of the funds:

• On 20 August 2021, Pierre Kairouz, who partly operated Cedar Meats, and Antonio Murdaca, who was a significant shareholder in Global Meat Exports, signed a term sheet for the first loan agreement that included guarantees from the individuals (the Guarantors). A version of the first loan agreement was circulated on 17 September 2021.
• On 1 October 2021, the solicitor for Jasper Nominees and the financiers requested amendments to the first loan agreement via page swap. Mr Kairouz's solicitor advised that his client consented to the amendments, Mr Kairouz having already executed a version of the agreement. Mr Murdaca executed the execution page of the agreement, along with a waiver of independent legal advice.
• On 5 October 2021, the solicitor for Jasper Nominees contacted the solicitors for Mr Kairouz and Mr Murdaca, requesting that they authorise the establishment fee being increased from $402,500 to $412,500 on behalf of their clients, which they both did, despite Mr Murdaca's consent not being sought. This increase reflected the increase in the total value to be repaid, with the establishment fee fixed at 1% of this amount. Jasper Nominees and the financiers executed a version of the first agreement with this amendment made by hand.

The first loan provided for an advance of $36.5 million, with $41.25 million to be repaid nine weeks after the agreement date. The second loan provided for an advance of $2 million, with $2.4 million to be repaid within one month of the agreement date. The loan agreements provided for interest to be charged and capitalised monthly after the repayment due date at annual rates of 60% and 120% per annum respectively.

Upon default by Global Meat Exports, Jasper Nominees sought to enforce the guarantees provided by Mr Kairouz and Mr Murdaca. At trial, the Guarantors advanced the following arguments:

•  The default interest rates constituted unenforceable penalties.
• They were not bound by their signing of the execution pages of the guarantee, as the increase in the establishment fee amounted to a change to the terms of the agreement.
• They had entered into the agreement in reliance on misrepresentations made to them.

The trial judge found that:

• The overdue interest rate provisions were not unenforceable penalties.
• Both Mr Kairouz and Mr Murdaca were bound by the agreement, as the increase in the establishment fee had no effect on the scope of their liability.
• Jasper Nominees had not engaged in misleading or deceptive conduct.

Both Guarantors sought leave to appeal against the judgment.

In a joint judgment, Chief Justice Niall and Justices McLeish and Lyons granted leave to appeal on limited grounds relating to the alleged penalty provisions, but unanimously dismissed these appeals.

The court had to consider the following questions:

• Did the default interest rates have a predominant purpose of punishing Global Meat Exports for failing to repay the loan, such that they amounted to unenforceable penalties?
• Did the handwritten amendment by Jasper Nominees before executing the agreement amount to acceptance of the final agreement, or was it a counteroffer, thereby releasing Mr Kairouz and Mr Murdaca from the guarantor obligations?
• Did Mr Kairouz rely on misrepresentations in entering into the agreement? (Mr Murdaca did not raise the issue on appeal.)

On the first issue, the court held that the default interest rate provisions were not unenforceable penalties. It provided a useful summary of the applicable law relating to penalties, noting that the current test was whether a provision had a predominant purpose of seeking to punish a party for a breach in order to compel performance.

The court relied primarily on the trial judge's reasoning that, in the absence of other provisions under the agreement for Global Meat Exports to pay for the use of the money beyond the repayment date, the default interest rate provisions should be interpreted as imposing such a cost. It would be extraordinary if the parties intended not to impose any such cost, given the significant amount paid for the loan itself. Additionally:

• Despite the high interest rates, the court refused to look beyond the construction of the loan agreements, noting that neither party had provided any evidence of a market range or any financial impact of default that suggested the rates were inequitable or unconscionable.
• The presumption that where compensation is payable on the occurrence of a range of events, 'some of which may occasion serious and others but trifling damage', the parties intended the compensation to be penal, was inapplicable or displaced due to the contractual terms. Under the agreement, the default interest rate applied in two circumstances: upon the failure to repay the loan on the agreed date, or upon the occurrence of an 'event of default' (which failure to repay also constituted). The court held that the two circumstances were two distinct stipulations that operated independently of each other. Even if that second application was found to constitute a penalty (noting it could be triggered by more trivial breaches), the first application would be capable of distinct operation.

On the second issue, the court held that Jasper Nominees' execution of the final agreement with the amended establishment fee amounted to acceptance of the offer, rather than a counteroffer. It noted that, under normal contractual principles, acceptance required assent to terms matching the offer. However, an immaterial amendment to a written offer will not prevent a finding that the offer has been accepted, nor will an amendment that codifies something that was previously implied.

On materiality, the court considered that a reasonable person in the position of Mr Murdaca would have regarded the increase in the establishment fee as immaterial. As this additional fee had already been paid (by virtue of it being withheld from the loan amount), it effectively reduced his potential liability in respect of the guarantee by $10,000. On the clarification of implied terms, the court held that Mr Murdaca was already on notice that the fee would increase, as he had signed a term sheet that fixed the fee at 1% of the total amount to be repaid, and he had already agreed that this amount would increase. The court also clarified that, while the law is traditionally more protective of guarantors, the rules governing offer and acceptance are not required to be interpreted in a way more favourable to them.

The court gave only sparce consideration to the third issue, rejecting Mr Kairouz's counterclaim that he had relied on misleading claims in entering into the agreement. The trial judge found that neither of the parties alleged to have made the misrepresentations worked for Jasper Nominees; that none of the alleged misleading statements were actually made; and that, in any event, Mr Kairouz could not demonstrate that he had relied on them in entering the agreement. The court declined to overturn these findings.

In September 2021, the appellant, 85 Princess Pty Ltd (85 Princess), acquired the Crown lease over an industrial property from a company controlled by the respondent, Mr Fleming. Subsequently, a sublessee constructed two large warehouses on a concrete slab.

Cracks began to appear in the concrete slab, which were initially repaired using an epoxy filler. However, further cracks developed following completion of the sale contract.

The appellant commenced proceedings, claiming $5.3 million to replace the slab. The primary judge rejected that claim. While Justice Brereton accepted that Fleming had breached several warranties under the sale contract, his Honour held that:

• replacing the concrete slab was not a 'rational or reasonable commercial response' to the cracking;
• the appropriate response was to fix the existing cracks, and to implement a program to monitor and repair new cracks, using epoxy or polymer resin; and
• absent evidence of the costs of dealing with the cracks in that way, 85 Princess was only entitled to nominal damages in the amount of $100.

85 Princess appealed the decision.

The Court of Appeal (Justice Bell, with whom Justices Payne and Stern agreed) dismissed the appeal.

The key issues as to the assessment of damages included whether:

• it was unreasonable for 85 Princess to seek damages equal to replacing the slab; and
• a reasonable alternative was to repair the existing cracks, and to implement a monitoring and repair program for future cracks.

Reasonableness of replacing the concrete slab

The principles for assessing damages for rectification of building works are set out in Bellgrove v Eldridge (1954) 90 CLR 613, in which the High Court held that the appropriate measure of damages in a building defects case was the amount required to rectify the defects. That was subject to the qualification 'not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.'

What is necessary and reasonable is a question of fact. The burden of proving that replacement is unreasonable or unnecessary lies with the party in breach.

Fleming (who had breached contractual warranties) did not adduce evidence of the likely costs of fixing the concrete compared with replacing the slab. The court observed that evidence was essential to determining whether the costs of replacing the slab were wholly disproportionate to the benefit obtained by its replacement as opposed to the costs of repair.

However, the court did accept Fleming's submission that it was unreasonable for 85 Princess to seek replacement of the slab, considering that:

• under the sale contract, the parties contemplated that cracks in the slab would be repaired, rather than the slab be replaced; and
• as landlord, 85 Princess only had an obligation to repair structural defects, which the cracks were not. Further, it was unclear whether 85 Princess had a right under the sublease to demolish and replace the concrete slab that was not structurally defective.

Consequently, the court accepted the primary judge's findings that replacing the slab would be unreasonable.

The court also observed that 85 Princess could have proved its loss by adducing evidence of the costs of repairing the cracks for the expected life of the concrete. However, 85 Princess abandoned that claim in favour of replacing the slab, which in and of itself may have provided an additional reason for thinking that replacing the slab was unreasonable.