IPN Medical Centres Pty Ltd v Van Houten & Anor  QSC 204
Agreed damages were found not to be extravagant or unconscionable, therefore not a penalty.
On 3 October 2007, IPN Medical Centres Pty Ltd (plaintiff) entered into a contract in the form of a deed to purchase a medical centre business that was carried on by Shartres Pty Ltd as trustee for the M & G Trust (seconddefendant). Ronald Van Houten (first defendant) was a medical practitioner who worked at the medical centre prior to its purchase.
By clause 11.1 of the deed, the first and second defendant agreed and acknowledged that the first defendant’s entry into a 'Doctors Services Agreement' (agreement) and his commitment to comply with the terms of that agreement, were fundamental to the plaintiff’s purchase of the medical centre under the deed.
The deed contained a provision for payment of $5,500 per month for the first 36 months of the deed and $3,000 per month for the balance of the fixed term (the agreed damages), for breach of contract by the first defendant which resulted in the plaintiff terminating the agreement. The total sum of agreed damages was slightly less than the purchase price of $290,000 for the intellectual property rights and goodwill.
From 14 November 2007 to 22 May 2008 the first defendant practised at one of the plaintiff's medical centres pursuant to the agreement. On 22 May 2008, without notice, the first defendant ceased practising. On 23 May 2008, the first defendant's solicitors sent a letter to the plaintiff purporting to terminate the agreement, alleging misrepresentations and breaches of collateral contractual warranties. The plaintiff's solicitors responded on 13 June 2008, purporting to terminate the agreement and alleging breaches by the first defendant of essential terms and repudiation of the agreement. The plaintiff also demanded $226,000 and interest pursuant to the agreed damages provision in the deed. The defendants contended that the agreed damages provision was unenforceable as a penalty.
Jackson J held that the first defendant repudiated the agreement.
With reference to the well-established categories of case dealing with the doctrine of penalties, His Honour held that the agreed damages provision was not a penalty. The agreed damages were not 'extravagant' or 'unconscionable' in relation to the greatest loss that could conceivably be proved to have followed from the breach of the agreement entered into interdependently with and consequent upon the payment of the price under the deed.
As the plaintiff was entitled to the agreed damages, this impliedly limited the defendant's liability to pay damages. His Honour therefore dismissed the plaintiff's alternative (and larger) claim for damages.