This case considers whether judgments recovered pursuant to adjudication certificates from three adjudication determinations made pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) could be stayed if enforcement would include utilising the mechanisms of the SOP Act to enforce a penalty.

In the NSW Supreme Court, McDougall J held that where the quantum of damages in a contract is found to be penal, equity will intervene to protect against unconscionability. Unconscionable conduct will enliven the Trade Practices Act 1974, preventing the damages from being enforced.

Whether the TPA will be enlivened will be assessed on the facts. The case gives guidance to adjudicators when enforcing a clause for damages:

• If the damages to be awarded for breach are “extravagant and unconscionable” compared to damages suffered, this will amount to a penalty, and so be unenforceable.
• To establish whether a damages clause imposes a penalty, what must be balanced is the reasonably foreseeable maximum damages that would flow from breach of the contract, against the pre-estimate or liquidated sum as contained in the contract.
• This question is to be decided when the contract is made, undertaking an inquiry of the facts.

McDougall also held that the court could stay a judgment founded on a determination under the SOP Act (under section 87 of the TPA), if the determination had been procured by unconscionability in breach of section 51AA or 51AC of the TPA.

Background

The dispute concerned three construction contracts between Katherine Pty Limited (Katherine) and The CCD Group Pty Ltd (CCD), and three determination clauses in those contracts which were enforced against Katherine by an adjudicator (the second defendant). Upon breach of contract, the determinations made Katherine liable to CCD for an amount calculated at 9 percent interest per month compounding. In total, Katherine was found liable by the adjudicator for $340K, of which only $100K was owed for work done and materials supplied and the balance was interest on the debt, payable at a rate of 9% per month. The issue was whether the 9% interest rate was a penalty, and thus unconscionable, enlivening ss51AA or 51AC of the TPA.

McDougall J compared the damages suffered by CCD against the damages imposed on Katherine. Affidavit evidence showed that as a result of Katherine’s breach of contract, CCD had been forced to extend its overdraft. This was held to be a foreseeable consequence of the breach. However, his Honour found that the 9% contractual rate to be paid by Katherine was so disproportionate to the loss suffered by CCD as to be a penalty. McDougall J found that CCD would experience a loss of 16.5% per annum on monthly rests due to unpaid invoice amounts, flowing from the breach of contract by Katherine. This was compared to the contractual rate imposed on Katherine, which amounted to about 180% per annum on monthly rests.

McDougall J rejected CCD’s argument that the interest rate should be enforced because it was inserted as part of a standard form contract provided by ASOFIA (the relevant industry association) to assist its members by acting as a strong disincentive for persons who pay late. There were two reasons that McDougall J rejected this argument. Firstly, because CCD’s officer made assurances to Katherine officer that the contracts only contained “standard conditions”. In fact, McDougall J found that the 9% rate was not a standard figure but a penalty, and so the assertions made by CCD’s officer were incorrect. The second issue was that Katherine signed the contracts without reading all the conditions. McDougall J noted that Katherine did not pay adequate regard to their own interests. Still, his Honour held that because there was unconscionability, Katherine’s conduct did not prevent the granting of relief.

It was the finding of unconscionability under the unwritten law (here, being equity) that enlivened s51AA of the TPA. Because s51AA applied, McDougall J found it unnecessary to consider s51AC.

McDougall J noted that the doctrine of freedom of contract is sacred - this means that a court will not intervene in a contract freely entered into by parties unless there are exceptional circumstances that warrant it. However, one such justification for court intervention is under equity (under Legione v Hately (1983) 152 CLR 406 and Stern v MacArthur (1988) 165 CLR 489) where the nature of the contract, or the matters within it, are unconscionable. Unconscionability has been described as conduct that is “unfair, unjust, unscrupulous, unreasonable, or excessive….Conduct is deemed unconscionable where it [is] so unfair and against conscience” (Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445 ; ATPR ¶41-009 ) or “so unreasonable and oppressive so as to affront minimum standards of fair dealing” (Commonwealth v Verwayen (1990) 170 CLR 394 ; 95 ALR 321). In such circumstances, a court will intervene under equity to prevent the unfair dealings.

The TPA makes this case law doctrine enforceable under statute.

Section 51AA(1) states that, “a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law” (the unwritten law being case law).

This means that where a judge finds that there has been unconscionable conduct by one of the parties - as McDougall J found here - under the TPA, the contract, or the part therein which is unconscionable, will be unenforceable. Any part of a damages clause which is not excessive or unconscionable will still be enforceable.

McDougall J also considered that the principles of Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9 (which enable the court to stay a judgment founded on a determination under a NSW Act if the determination had been procured by misleading or deceptive conduct in breach of section 52 of the TPA) enabled the court to fashion relief under section 87 of the TPA based on section 51AA or 51AC.

Because CCD had imposed an unconscionable rate of damages on Katherine, that clause was unenforceable under s51AA(1) of the TPA to the extent that is was unconscionable and the judgments of the District Court (or any determinations of the adjudicator where there was no judgment) could be enforced only in relation to the amounts found by the adjudicator other than the penalty interest. Katherine was still liable to CCD for the damages that had been caused by its conduct which were recognised as a reasonably foreseeable from breach of the contract. This meant that Katherine was liable for the invoices from their due dates of payment until the date of payment, being the damages suffered by CCD as a result of the breach of contract. Katherine was also liable for interest but at the overdraft rate, rather than the contractual rate of 9% per month.

Conclusion: Ramifications of s51AA of the TPA for adjudicators

The case makes clear that where a penalty exists in a contract between companies, the court will intervene under the TPA to prevent any unconscionability that flows from this. The implication for adjudicators is that they must assess whether a damages clause being enforced under a contract between two parties is so “extravagant and unconscionable” as to amount to a penalty. Any amount of damages flowing from breach of contract awarded in excess of that which is reasonably foreseeable at the time the contract is made will be found to be a penalty and so unenforceable.