IN THE HIGH COURT
OF AUSTRALIA
BETWEEN:
NEW VISION LTD
Appellant
AND
INTELLECTUALS CO PTY LTD
Respondent
WRITTEN SUBMISSIONS OF THE APPELLANT
SUMMARY OF FACTS
New Vision Ltd (“New Vision”), a video-conferencing company, and Intellectuals Co Pty
Ltd (“Intellectuals”), a software development company, entered into a contract for
Intellectuals to create and install payroll software (the “payroll program”) and software
designed to optimise New Vision’s video-conferencing facilities (the “synchronisation
program”). Clause 6 of the contract set the price of each program as $1,500,000, payable in
five equal instalments due on the first day of each month from March to July (inclusive).
Therefore, the total contract price was $3,000,000. Clause 7 provided that if New Vision
terminated or repudiated the contract, it forfeited any instalments already paid to Intellectuals.
Clause 8 provided that both software programs were to be installed by Intellectuals on 2 July
2008, provided that New Vision had paid all the instalments.
On 2 June, New Vision wrote to Intellectuals terminating the contract for the payroll
program, due to economic pressures which meant that New Vision could no longer afford the
payroll program. By 2 June, New Vision had paid four instalments for the payroll software
totalling $1,200,000. New Vision requested that the instalments paid for the payroll program
be returned, less an amount for the costs of any work already undertaken by Intellectuals.
On 1 July, New Vision paid the last instalment for the synchronisation program. On
the same day New Vision wrote to Intellectuals to emphasise that the software was to be
installed on 2 July, as agreed in the contract, because New Vision had entered into lucrative
contract with other parties (the “third parties”) to whom it had promised that the
synchronisation program would be functional by 2 July.
On 2 July, Intellectuals failed to install the synchronisation program. On the same day
Intellectuals wrote a letter to New Vision stating that the synchronisation program was
delayed and would not be delivered and installed until 20 July. In the same letter,
Intellectuals refused to refund the instalments paid for the payroll program.
Upon learning of the delay in installing the synchronisation program, New Vision
sought an extension on their contract with the third parties. The third parties agreed to grant
the extension on the condition that the contract price was reduced from $3,000,000 to
$2,000,000.
SUBMISSIONS – Senior Counsel: 25 minutes, Junior Counsel: 15 minutes
SUBMISSION ONE: The Respondent, Intellectuals, cannot rely on clause 7 of the contract
in seeking to retain $1,200,000 in instalments already paid by the Appellant, New Vision, as
clause 7 amounts to a penalty provision and therefore is unenforceable.
1.1 The essence of clause 7 is to ensure the Appellant is in terrorem of breaching the contract
because they understand they would be forced to forfeit all of the payments made under
the contract regardless of the nature of the breach or how far through the contract they
are: Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 662; Dunlop
Pneumatic Tyre Company Ltd v New Garage & Motor Company Ltd [1915] AC 79 at 8687; Bridge v Campbell Discount Co Ltd [1962] AC 600 at 622; O’Dea v Allstates Leasing
System (WA) Pty Limited (1983) 152 CLR 359 at 368.
1.2 The clause is penal as any sum forfeited is not a genuine pre-estimate of the damages
likely to be sustained in the event of a breach by the Appellant. The arbitrariness of the
clause is in the circumstances extravagant, exorbitant and out of all proportion to the
damage likely to be suffered. The clause imposes the same penalty regardless of whether
the breach is significant or trifling: Esanda Finance Corporation Ltd v Plessnig (1988)
166 CLR 131 at 139; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at
662, 664; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 201; Lord
Elphinstone v Monkland Iron & Coal Co (1886) 11 App Cas 332 at 342.
1.3 In the instant case, an anticipatory breach led to the termination of the contract. The
anticipated breach was the non-payment of the final instalment of $300,000 for the
payroll software however the sum forfeited is $1,200,000. This suggests the clause is in
fact a penalty: Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 662;
Dunlop Pneumatic Tyre Company Ltd v New Garage & Motor Company Ltd [1915] AC
79 at 86-87.
SUBMISSION TWO: In the alternative, if the Court finds that clause 7 was not a penalty
provision and is enforceable, the Appellant is entitled to recover the $1,200,000 in
instalments already paid because the Court should allow relief against forfeiture for the
following reasons.
2.1 The Respondent is prevented from exercising its legal right to insist on retention of the
instalments as exercise of this right amounts to unconscionable conduct: Legione v
Hateley (1983) 152 CLR 406 at 444.
2.2 An order for relief against forfeiture will not cause an injustice to the Respondent but will
prevent an injustice to the Appellant given that there has been a complete failure of
consideration in the instant case. The Appellant stands to suffer a significant loss and the
Respondents a significant windfall. Therefore the Court should grant relief against
forfeiture: Legione v Hateley (1983) 152 CLR 406 at 429, 449; McDonald v Dennys
Lascelles Ltd (1933) 48 CLR 457 at 470, 478; Tanwar Enterprises Pty Ltd v Cauchi
(2003) 217 CLR 315 at 352.
2.3 The repudiation by the Appellant in the circumstances was relatively trivial and was
brought about by unforeseen economic circumstances. It would be unconscionable for
Intellectuals to insist on forfeiture when due regard is given to the surrounding
circumstances: Legione v Hateley (1983) 152 CLR 406 at 447.
2.4 By insisting on forfeiture the Respondent is not seeking to protect itself from losses
incurred but rather is attempting to take unconscientious advantage of the benefits which
fortuitously accrue to it: Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319 at
325; Legione v Hateley (1983) 152 CLR 406 at 441, 449.
SUBMISSION THREE: The Respondent is liable for the loss of $1,000,000 caused to the
Appellant by the Respondent’s delay in delivery of the synchronisation program. The loss
suffered by the Appellant as a result of the renegotiation of the contract with the international
contracting parties is damage that is sufficiently likely to result from the Respondent’s breach
of contract in the ordinary course of things, and is therefore not too remote.
3.1 Damages for breach of contract are limited by the rule in Hadley v Baxendale. Under
the first limb of the rule, the contract-breaker is liable for damages arising naturally,
that is according to the usual course of things, from such breach of contract: Hadley v
Baxendale (1854) 9 Ex 341 (Alderson B); Wenham v Ella (1954) 127 CLR 454
(Gibbs J); Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528
(Asquith LJ).
3.2 Damages arising ‘in the ordinary course of things’ are those losses that, on the
information available to the parties when the contract was made, the contract-breaker
should, or the reasonable person in the position of the contract-breaker would, have
realised was sufficiently likely to result from the breach of contract to make it proper
to hold that the loss flowed naturally from the breach: Koufos v C Czarnikow Ltd
(‘Herron II’) [1969] 1 AC 350 (Lord Reid); Wenham v Ella (1954) 127 CLR 454
(Gibbs J); Transfield Shipping Inc v Mercator Shipping Inc (‘Achilleas’) [2009] 1 AC
61 (Lord Hoffman).
3.3 Loss of business profits caused by the contract-breaker’s delay in providing
equipment which was intended to be applied profitably by the other party is
recognised as damages liable to result from a breach of contract in the ordinary course
of things: Burns v MAN Austomotive (Australia) Pty Ltd (1986) 161 CLR 653 (Gibbs
CJ, Wilson, Deane and Toohey JJ); Victoria Laundry (Windsor) Ltd v Newman
Industries Ltd [1949] 2 KB 528 (Asquith LJ).
3.4 Once it is decided that the damages are of a kind within one or other of the limbs of
the rule in Hadley v Baxendale, and therefore the damages are not too remote, the fact
that the damages are unforeseeably large does not limit or in any way affect the
contract-breaker’s liability: Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377
(Lord Hope of Craighead); Transfield Shipping Inc v Mercator Shipping Inc
(‘Achilleas’) [2009] 1 AC 61 (Lord Hoffman).