Breach of contract – agreed damages for breach – whether the agreed damages clause was unenforceable as a penalty
Agreed damages were found not to be extravagant or unconscionable, therefore not a penalty.
On 3 October 2007, under a contract in the form of a deed (Deed of Sale), IPN Medical Centres Pty Ltd (plaintiff) agreed to buy a medical centre business that was carried on by Shartres Pty Ltd as trustee for the M & G Trust (second defendant). Ronald Van Houten (first defendant) was a medical practitioner who worked at the medical centre prior to its purchase.
Under the Deed of Sale, both defendants agreed:
- and acknowledged that the first defendant’s entry into a 'Doctors Services Agreement' (agreement) with the plaintiff and his commitment to comply with the terms of that agreement, were fundamental to the plaintiff’s purchase of the medical centre; and
- to pay the plaintiff for breach of contract, the sums 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 (agreed damages provision) if the plaintiff terminated the agreement as a result of the first defendant's breach of the agreement.
The total sum payable under the agreed damages provision 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. The defendants contended that the agreed damages provision was unenforceable as a penalty.
Jackson J held that:
- the first defendant repudiated the agreement; and
- with reference to the well-established categories of case dealing with the doctrine of penalties, the agreed damages provision was not a penalty. They 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 defendants' liability to pay damages. His Honour therefore dismissed the plaintiff's alternative (and larger) claim for damages.