Litigation and Dispute Resolution

NSW Court of Appeal confirms “undemanding” test for confidential information

28 November, 2016

One issue that often comes up in a dispute concerning a loan agreement is whether certain fees, such as termination fees, or establishment fees, have to be paid at settlement.  Depending on the circumstances, such a fee may be a penalty, and therefore cannot be enforced by the lender against the borrower.

What is a penalty?

There is nothing wrong with a loan agreement, or any contract, specifying a sum that is payable upon a specific event occurring, such as a breach of the contract.  These clauses are commonly described as “liquidated damages” clauses.

The test of when a liquidated damages clause becomes a penalty, and therefore unenforceable, was settled by the High Court of Australia in Paciocco v Australian and New Zealand Banking Group (2016) 258 CLR 525.  In essence, a clause will be a penalty if it requires one party to pay the other an amount that is “extravagant” or “unconscionable” and out of all proportion to the legitimate interests of the party receiving the sum.  That is, the amount specified by the contract must be a “genuine pre-estimate” of the loss that the party will suffer.

When it comes to determining whether a clause is unenforceable as a penalty the usual rules limiting the admissibility of evidence about surrounding circumstances, arising out of Codelfa Construction v State Rail Authority (NSW) (1982) 149 CLR 525, do not apply.  The Court is free to go beyond the actual words of the clause to determine whether, objectively, the clause is a penalty.  It does not matter how the parties describe the clause, what matters is its effect in substance.

The question then arises – can fees in a loan agreement, such as termination or establishment fees, be penalties?

Loan agreements in the spotlight

This issue was recently considered by the Victorian Court of Appeal in Melbourne Linh Son Buddhist Society v Gippsreal Ltd [2017] VSCA 161.  In this case, the Buddhist Society intended to borrow a sum of $1,775,000.  The loan agreement contained a “loan establishment fee” of 1.5%, which amounted to $26,625.

The parties subsequently agreed to reduce the borrowed amount to $500,000, however the loan establishment fee was not reduced to reflect the lower amount, meaning that it amounted to 5.3% of the amended facility.  The lender’s deed of offer did not continue to settlement as the Buddhist Society failed to settle the loan on time.  The lender withdrew its offer of finance, terminated the loan, and claimed liquidated damages, which included the establishment fee.

The Court of Appeal ultimately held that the lender was not entitled to withdraw the offer of finance and claim liquidated damages, but in any event they considered whether the loan establishment fee was a penalty.

It was submitted to the Court of Appeal that the figure of 1.5% of the initial loan facility was:

“in the circumstances, a random, wildly disproportionate and excessive figure.”

The plurality of Kyrou JA and Cameron AJA, forming the majority of the Court of Appeal, found that the clause was, in the circumstances, a penalty as the figure

“bears no relation to any possible damage to or interest of the respondent arising from the putative breach of the Deed of Offer by the applicant and it is not commensurate with any legitimate commercial interest of the respondent which is sought to be protected by that deed in the event of its breach.”

On the issue as to why the establish fee remained constant after the change in the facility amount, the Court found that the amount remained unchanged not because of any calculation of loss, but rather because of the additional administrative work the lender had to perform due to the changes in the proposed loan.

The Court noted that this administrative work was done prior to the breach, and accordingly could not possibly be a pre-estimate of loss as a result of the breach.  The Court also found that there was no way to quantify the costs of the additional administrative work as there was no item by item correlation between the fee and the work performed.  Therefore, it was an “irresistible inference” that the fee was retained in order to punish the borrower for the inconvenience caused by the changes.

The borrower also sought to justify the figure on the basis of the level of risk associated with the loan.  The Court rejected this and stated that while risk might be relevant for setting the lender’s “price” for the transaction, it does not go to quantifying the loss of a breach.

Finally, the Court also found that the fact that the amount was fixed and agreed between the parties had no bearing on the question of whether the amount is a penalty.  It is the Court’s role, not the borrower’s, to determine whether an amount is a penalty.

Take home message

It is clear that various fees included in loan agreements may well be unenforceable as they are, at law, a penalty.  Courts will look at all of the surrounding circumstances to determine what the purpose of the clause is.  If the fee is proportionate and for the purposes of recovering a loss, then it will likely be enforceable.  However, if the purpose of the clause is simply to punish a party for a breach, and there is no way of quantifying the amount calculated, then it is likely the clause is a penalty.

Regardless, if a borrower intends to resist such fees in a loan agreement, it is essential to seek timely legal advice.  Simply refusing to settle the loan in time, including any fees, may result in a breach of the contract which may result in damages to the lender.

McCabes has experience in reviewing loan agreements and other contracts, as well as applying to Court for relief concerning fees in loan agreements.

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Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract.   Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed.   Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)."   Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and   The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and   The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter.   Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." 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In support of this, Justice Keene cited the dictionary.com definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. 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The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. 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