If an existing debt is expressly acknowledged, then clauses requiring its payment in the future provided certain conditions are not met will not be penal.
In 2012 Idameneo (No 123) Pty Ltd (buyer) commenced proceedings against Auzcare Pty Ltd and Dr Azam (applicants) alleging breach of a Deed of Sale of Practice and a deed entitled 'Provision of Services to Incorporated Medical Practitioner' between the parties, claiming back the full consideration of $800,000 that had been paid by the buyer. The parties agreed to settle before trial and a Deed of Settlement and Release (settlement deed) was entered into in April 2013. The settlement deed provided that:
- the applicants and Mrs Azam (whose account had been used for the transfer of money) acknowledge that they are jointly and severally indebted to the buyer in the amount of $800,000 (Debt); and
- the buyer agrees not to enforce its rights against the applicants and Mrs Azam immediately on the basis that the applicants and Mrs Azam acknowledge and agree to the conditions outlined in the settlement deed. Any breach of the settlement deed by the applicants and Mrs Azam will enliven the right of enforcement.
The applicants breached their obligations under the settlement deed and the buyer was successful in obtaining judgment in the amount of $800,000 plus interest and fees in the first instance. The applicants appealed against that judgment, claiming that the above provisions of the settlement deed were unenforceable as penalties.
In a joint judgment, Ward JA, Leeming JA and Emmett AJA dismissed the applicants' appeal with costs.
The application did not turn upon the broader questions concerning the nature and extent of the doctrine of penalties therefore their Honours did not consider this in their decision.
Their Honours held that there was an express acknowledgment of pre-existing debt in the settlement deed executed by the parties. Therefore the provisions of the settlement deed—which provided that the Debt became immediately payable if the settlement deed was not complied with—were not penal.
Their Honours emphasized the important distinction between a forbearance in relation to an existing debt and promises whose effect is to compel performance. If there is a present debt payable in the future, provided that certain conditions are met, demanding the full amount if those conditions are not met does not render the provision penal.
The key indicator is an explicit or implicit acknowledgment in the agreement of an existing debt.