Ringrow Pty Ltd v BP Australia Pty Ltd [2004] FCAFC 206 (13 August 2004)

Last Updated: 13 August 2004

FEDERAL COURT OF AUSTRALIA

Ringrow Pty Ltd v BP Australia Pty Ltd [2004] FCAFC 206

CONTRACT – penalty – distributor of motor fuels also freehold owner of service stations operated by its franchisees or commissions agents – sale of freehold service stations by distributor to existing franchisees or commission agents conditional upon right of re-purchase by distributor in event of default under collateral site agreement operating for 5 year period following purchase – contractual prohibition upon purchases of fuel other than oil company’s fuel during 5 year period following sale of freehold – breach occurring of contractual prohibition against sale of other than oil company’s fuel – consequential exercise of right of re-purchase by oil company – whether terms of re-purchase constituted penalties and therefore re-purchases void – scope of freehold purchaser’s goodwill of service station business

Petroleum Retail Marketing Franchise Act 1980 (Cth)

BICC Plc v Burndy Corporation [1985] 1 Ch 232 referred to
Ferne v Wilson (1900) 26 VLR 422 distinguished
PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615 referred to
Re Moore and Texaco Canada Ltd (1965) 50 DLR (2d) 300 referred to
Wollondilly Shire Council v Picton Power Lines Pty Ltd (1994) 33 NSWLR 551 referred to and applied
The Minister for Home and Territories v Lazarus [1919] HCA 12; [1919] 26 CLR 159 referred to
Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 referred to and applied
Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 referred to and applied
O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 referred to
Forestry Commission of NSW v Stefanetto [1976] HCA 3; (1976) 133 CLR 507 referred to and applied
CRA Ltd v NZ Goldfields Investments [1989] VR 873 referred to
Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Ltd [1914] UKHL 1; [1915] AC 79 referred to and applied
Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7; (1989) 166 CLR 131 referred to
Whiteman Smith Motor Co v Chaplin [1934] 2 KB 35 referred to

R Meagher, D Heydon, M Leeming, Meagher, Gummow & Lehane’s Equity: Doctrine & Remedies, 4^th ed, Butterworths LexisNexis, 2002

RINGROW PTY LTD V BP AUSTRALIA PTY LTD
N 2519 OF 2003

ULTIMATE FUEL PTY LTD V BP AUSTRALIA PTY LTD
N 2520 OF 2003

NADER-ONE PTY LTD V BP AUSTRALIA PTY LTD
N 2521 OF 2003

BEAUMONT, CONTI AND CRENNAN JJ
12 AUGUST 2004
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 2519 OF 2003

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	RINGROW PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT
		N 2520 OF 2003
BETWEEN:	ULTIMATE FUEL PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT
		N 2521 OF 2003
BETWEEN:	NADER-ONE PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT

JUDGES:	BEAUMONT, CONTI AND CRENNAN JJ
DATE OF ORDER:	12 AUGUST 2004
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeals be dismissed, with costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 2519 OF 2003

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	RINGROW PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT
		N 2520 OF 2003
BETWEEN:	ULTIMATE FUEL PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT

		N 2521 OF 2003
BETWEEN:	NADER-ONE PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT

JUDGES:	BEAUMONT, CONTI AND CRENNAN JJ
DATE:	12 AUGUST 2004
PLACE:	SYDNEY

REASONS FOR JUDGMENT

BEAUMONT J:

INTRODUCTION

1 These are appeals from part of a judgment by a single Judge of this Court given in these proceedings which were heard together.

2 The respondent, BP Australia Pty Ltd, is a manufacturer and supplier of petroleum products. Retail service stations are conducted throughout Australia under the BP brand. the respondent owns (or is the head lessee of) various service station sites. Some of those sites are operated directly by the respondent or one of its subsidiaries. Others of those sites are operated by franchisees or commission agents.

3 The respondent also has an operator owned network of service station sites. These sites are owned by the operator, but are BP branded and supplied with BP fuel. Some of the sites in this network are ex-BP franchise sites that the respondent has sold to the operator who had previously conducted business on the site as a franchisee or commission agent of BP, the owner of the freehold interest in the site. As a condition of sale of the service station, the operator must enter into a package of agreements including an exclusive supply agreement with the respondent pursuant to which the operator agrees to purchase all of its petroleum product requirements from the respondent. These exclusive supply agreements are known as Privately Owned Site Agreements (‘POSA’s’). The term of a POSA is five years. During that time, the operator is permitted to conduct a service station under the BP brand and is required to purchase fuel only from the respondent. At the end of the term, the operator may elect to enter into a new supply agreement with the respondent or may elect to obtain its supply of fuel from third parties.

4 The three proceedings related to the agreements governing the ownership and operation of several service stations including the following:-

• ‘BP Lansvale’, purchased from the respondent in 1999 for $1.2M by Ringrow Pty Ltd (‘Ringrow’), a company controlled by Richard Nader and his wife.

• ‘BP Auburn’, purchased from the respondent in 2000 for $1.4M by Ultimate Fuel Pty Ltd (‘Ultimate Fuel’), a company controlled by Richard Nader and Joseph Ayoub.

• ‘BP Silverwater’, purchased from the respondent in 2000 for $780,000 by Nader-One Pty Ltd (‘Nader-One’), a company controlled by Richard Nader and his brothers.

5 The principal question in these appeals is whether the obligation purportedly imposed on each appellant to sell the three service stations in consequence of the exercise by the respondent of an option to re-acquire each of them is invalid as a penalty.

6 The form of option deed provides that in consideration of the sum of $10 paid by the respondent to Ringrow, the receipt of which is acknowledged, Ringrow grants to the respondent an irrevocable option to purchase the property on specified terms and conditions. The option lapses on the date being five years and three months after the date of the option deed. Clause 1.2 provides that the option may only be exercised by the respondent if one of the events specified in cl (a) – (g) occurs. The event specified in cl 1.2(a) is if:

‘(a) the agreement titled BP Branded Privately Owned Sites Agreement (‘POSA’) entered into between the grantor and the grantee is terminated, and is not replaced by a further POSA which may or may not be called POSA, or becomes unenforceable or of no force or effect from whatever cause.’

7 Clause 2 of the option deed headed ‘Determination of Price’ provides that the purchase price payable for the property will be calculated in accordance with the following formula:

P = V
where
‘P’ means the purchase price payable for the property.
‘V’ means the market valuation of the property as an operational service station as determined by an independent valuer in accordance with Clause 2.

(emphasis added)

8 Clause 2.2 in each option deed is as follows:

‘Within 14 days following delivery of the Notice of Intention, the grantor and the grantee must jointly appoint an independent valuer to determine the market valuation of the property in accordance with this Clause 2. If the grantor and the grantee fail to agree on an independent valuer within 14 day period the grantee may request the president (or if there is no president the senior office bearer) of the Australian Institute of Valuers and Land Economists to appoint an independent valuer in accordance with this Clause 2.’

9 The ‘Notice of Intention’ is a document required to be delivered by the grantee to the grantor pursuant to Clause 1.1 of the option deed confirming the grantee’s intention to exercise the option to purchase.

10 Clause 2.5 of each option deed provides as follows:

‘The valuer shall be instructed to determine the market valuation of the property as at the date of the Notice of Intention and in making the determination shall have regard to all factors the valuer considers relevant but shall not include in the determination of the market valuation of the property any allowance for any goodwill attaching to any business conducted at the property.’

11 Special Condition 39 of each contract provided that concurrently with the completion of the contract the respondent and Ringrow shall enter into a POSA in the form annexed to the contract. Special Condition 41 of each contract provides that in consideration of Ringrow entering into a POSA with the respondent in accordance with Special Condition 39, the respondent agrees to sell to Ringrow the property on the terms and conditions specified in this contract.

12 Under the POSA, the operator is required, inter alia, to:

(a) manage the site in a manner and to a standard which reflects favourably on the respondent (cl A3.7);
(b) refrain from making any misrepresentations about the products offered for sale (cl A3.9(a));
(c) avoid conduct that might be detrimental to the respondent or its public image (cl A3.13);

(d) purchase all motor fuel for retail sale from the respondent (cl A4.2);
(e) refrain from selling any motor fuel other than BP motor fuel (cl A4.2); and

(f) refrain from selling any BP petroleum products which have been mixed or adulterated with non-BP petroleum products or pass off or represent non-BP petroleum products as BP petroleum products (cl A4.16.1).

13 In 2002, the respondent served notices of termination of contract upon each of the appellants, alleging the purchase of ‘foreign fuel’. The appellants’ solicitors disputed the respondent’s entitlement to terminate the POSA’s. The respondent then informed each of the appellants that it not only proposed to terminate the POSA’s but also intended to exercise its contractual rights under the option deeds to buy back those sites.

14 The primary Judge noted that the process prescribed by cl 2 of the option deed was in hand; and that it was common ground that the detail of what was involved was outside the scope of these proceedings; but that it was also common ground that no determination by an independent valuer in terms of cl 2 had yet been made.

15 A number of agreements were executed in relation to each site, including a contract for sale by the respondent as vendor, a POSA, and an option agreement. The option to purchase did not form part of the POSA, although item 20 of the Schedule SC1.2(e) referred to the option agreement. However, the individual agreements recorded different facets of an overall arrangement in relation to each service station site.

16 The option granted to the respondent to purchase each service station site was granted pursuant to special condition 38 of the contract under which the relevant site was originally sold by the respondent to the relevant appellant. That special condition described the consideration for the grant of the option as being the agreement on the part of the respondent to sell the service station site to the purchaser, although the option deed itself described the consideration for it as being the sum of $10.00 paid by the respondent to the appellant in question.

17 By their statements of claim, the appellants claimed relief (relevantly) in the form of a declaration that the contractual obligation on Ringrow in Cll 1.2 and 2.1 – 2.5 of the Option Deed to transfer the Lansvale site and the Meadows site, the subject of Notice of Intention dated 17 December 2002, or in the alternative in the case of BP Lansvale, 19 June 2003, was a penalty and was void and unenforceable.

18 On behalf of the appellants, it was contended before the primary Judge that the contractual obligation to transfer a service station site to the respondent, if the respondent elects to terminate the POSA in relation to that site for breach, and to exercise its rights pursuant to the option deed, was a penalty which was void and unenforceable. In their contention, the provision was in the nature of a punishment for non-observance of a contractual stipulation. It was ‘the imposition of an additional or different liability upon a breach of the contractual stipulation’, (citing Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 445). In their submission, the provision was penal in character because it enabled acquisition of a service station site at a price which may not reflect the highest and best use of the property on which the service station business was conducted, and because it excluded any allowance being made for the value of any goodwill attaching to the business conducted at the property. Even if the acquisition were at a fair value, it was submitted that the provision would still be a penalty because the appellants incurred obligations in the expectation that they would be conducting a service station business on each site in the long term, which expectation would be disappointed as a result of the exercise of the option.

THE DECISION OF THE PRIMARY JUDGE

19 His Honour rejected the appellants’ argument, essentially for the following reasons:

• A penalty is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation. Whether a provision is a penalty is to be judged at the time of the making of the contract, and not as at the time of breach. The issue was a matter of substance rather than of mere form, and depended upon all the surrounding circumstances existing at the time of the making of the contract, as well as on the terms of the contract itself. A stipulation may be penal in character even where the penalty is not expressed in terms of money. The penalty doctrine is not confined to clauses providing for the payment of money, but extends to clauses providing for the transfer of monies’ worth.
• A consideration of the totality of these transactions indicated that the option to repurchase the service station site was restitutionary in nature, given as part of the vendor and purchaser arrangement, rather than as a price to be paid in terrorem in the event of a breach of the POSA. The termination of the POSA provides an occasion for the exercise by the respondent of the options, but the options are not themselves the result of the default or the price to be paid for it.
• The grant of the option was part of the consideration given by each appellant for the original sale of the service station site by the respondent. The evident purpose of the option was to protect the respondent’s commercial interests in the site being maintained as a BP service station. If the option were void as a penalty because one of the events on which it is exercisable is termination of the POSA following breach, then the result will be to deny to the respondent part of the consideration for which it bargained for the sale of the service station site to the applicant. That bargain was reached as a result of an arms’ length transaction entered into between commercial organisations, in circumstances where the appellants had time for reflection, as well as the benefit of legal and accounting advice. There was no good reason why the law should treat the option deed as being void at its inception as a penalty, particularly as it was not then known whether any valuable goodwill will exist in relation to any of the service station businesses when the options come to be exercised, nor was it then known whether the highest and best use of any of the properties at the point of exercise will be other than for use as a service station.
• If the option were not penal in character because it was part of the vendor and purchaser arrangement, then the option deed was not a penalty irrespective of the operation of cl 2.1 and cl 2.5, as the price payable on exercise of the option was not determinative of whether or not the option was a penalty. The option deed was not a means of providing the respondent with any form of compensation in respect of a breach of the POSA. The fact that the option deed might nonetheless act as an incentive to performance of the POSA does not make it a penalty.
• If some valuable goodwill exists in relation to the appellants’ business at the time of exercise of the option which is not reflected in the valuation of the property as an operational service station, then the appellant will not be compensated for that goodwill, but the respondent will not acquire it. The sale of an asset or assets of a business does not involve any sale of the goodwill attaching to the business unless the sale of the asset is accompanied by or carries with it the right to conduct the business.

20 Accordingly, the primary Judge effectively ordered that the appellants’ statements of claim be dismissed.

THE APPELLANTS’ CONTENTIONS ON THE APPEAL

21 In support of their contention that the ‘obligation purportedly imposed on each of [them] by the POSA to sell [the] three service stations in consequence of the exercise by the respondent of an option to re-acquire each of them, is invalid as a penalty ...’, the appellants rely, in essence, upon the following grounds:

 Each option deed was part of a complex contractual arrangement whereby the respondent had sold to each appellant a service station site and, on a ‘going concern’ basis, the business conducted thereon.
 On 27 May 1999, Ringrow exchanged contracts to purchase from the respondent the Lansvale service station for $1.2 million. The site (including the freehold, fixtures and equipment) was sold by the respondent as a service station business operating on a going concern basis.
 On 20 March 2000, Ringrow commenced operating the Silverwater service station as a commission agent of the respondent. On 17 May 2000, Nader-One contracted to buy BP Silverwater on a ‘going concern’ basis for $780,000.
 On 17 May 2000, Ultimate Fuel exchanged contracts to purchase from the respondent the Auburn service station on a ‘going concern’ basis for $1.4 million. Prior to that date, Ringrow operated the Auburn business from 12 April 2000 on a commission agency basis.
 The option is expressed to be exercisable upon the happening of various events set out in cl 1.2. The first-mentioned series of events is:
‘if:

(a) the agreement titled BP Branded Privately Owned Sites Agreement ("POSA") entered into between the Grantor and the Grantee is terminated, and is not replaced by a further POSA which may or may not be called POSA, or becomes unenforceable or of no force or effect from whatever cause.’

 Each POSA has a term of five years from its commencement date; however, the respondent was entitled to terminate it for breach by the Dealer of the contractual obligation not to sell non-BP motor fuel except in limited circumstances which included the consent of the respondent.
 The primary Judge found that the Dealers had, in respect of four service stations (Auburn, Lansvale, Silverwater and Meadows) respectively owned by them, committed breaches of that obligation.
 On 2 December 2002, the respondent served on Ultimate Fuel, the owner of BP Auburn, a notice of termination of contract with effect from 1 January 2003. Although his Honour noted that the only fact relied on to sustain that notice was one purchase of ‘foreign’ fuel on 4 May 2002. However, in the case of all the service stations, the Judge found numerous breaches of the relevant POSA relating to the sale of ‘foreign’ fuel.
 On 2 December 2002, the respondent served on Ringrow, the owner of BP Lansdale, a notice of termination of contract (the POSA) with effect from 1 January 2003. Also on the same date, the respondent served on Nader-One, the owner of BP Silverwater, a similar notice of termination with effect from 1 January 2003.
 Notwithstanding the termination of each of the relevant POSA’s with effect from 1 January 2003, it was not until 19 June 2003 that the respondent gave notice of its exercise of the abovementioned option with respect to only three service stations, namely, Auburn, Lansvale and Silverwater. In the meantime each Dealer had continued to run its respective business under ‘without admissions’ interim arrangements. The exercise (if valid) of the option subjected each Dealer to an obligation to continue running the business pending completion of the contract of re-sale. Each dealer did so continue. The respondent did not seek to exercise the option with respect to BP Meadows.
 Although one effect of Clause 1.2(a) of the Option Deed is to make the respondent’s option to purchase exercisable upon termination of the POSA consequent upon breach by the Dealer, rather than upon breach alone, that feature of the contractual arrangements does not mean that the clause escapes the scrutiny of the law relating to penalties. As a matter of contractual interpretation, however, the relevant trigger for exercise of the option is not breach, but termination.
 Clauses A16.17 and SC1 of each POSA established a regime for the payment of liquidated damages by the Dealer in the event of termination of the POSA prior to the expiry of its five year term. One must read them with special conditions 40.2, 40.3 and 40.4 of each contract of sale. Each package of contractual documents contained its own schedule of ‘liquidated damages’ which varied from site to site.
 His Honour noted the effect of the last sentence of SC1.2(e) of each POSA, which was as follows:

(a) ‘If this Agreement is terminated and [the respondent] has exercised its right to acquire the site under the separate option agreement... , the Liquidated Damages will not be repayable to [the respondent] under SC1.3’.

(SC1.3 provided for a diminishing scale of payment of liquidated damages dependent upon the time during which the contractual arrangements had been in force.) This has the effect of substituting for the respondent’s entitlement on termination of the POSA to monetary liquidated damages, an entitlement, upon giving due notice of exercise of the option, to purchase the service station the subject of the Option Deed. Liquidated damages and the right to purchase pursuant to the exercise of the option are, in substance, the alternative prices the dealer must pay for termination consequent upon breach of the POSA. The respondent must elect between these alternative rights. The contractual assumption underlying the concept of election is that each right is validly granted and therefore available for exercise.
 The conceptual essence of liquidated damages is that there must be a genuine, consensual pre-estimate of the damage likely to be incurred as the result of a breach of contract. If the sums fixed by the parties as liquidated damages fail this test, they are penalties and unenforceable. The injured party is then relegated to the necessity of proving the quantum of actual loss resulting from breach.
 The ‘liquidated damages’ provisions in each POSA fail this essential test because they are not, and do not purport to be, a pre-estimate by the parties of the damage likely to be incurred as the result of any breach by the Dealer of the POSA. On the contrary, the respondent, in what is effectively a contract of adhesion, stipulated for the pre-assessment of the ‘minimum loss’ it would suffer ‘as a result of the termination of this Agreement if this Agreement is terminated prior to the expiry of the term’. That basis of pre-assessment is the criterion upon which the Liquidated Damages provisions in the POSA are expressed to operate. This is not a criterion recognised by the law with respect to liquidated damages.
 If a payment exigible under a contract upon breach by one of the parties will have the effect of giving the injured party a windfall unrelated to any recognised contractual measure of damages and unrelated to any genuine consensual pre-estimate of damages for such breach, it will be struck down as a penalty. The question whether a contract has that effect must be determined as a matter of construction, as at the time when the contract was made in light of the circumstances then existing. Each of these complex contracts, when made, included provisions amounting to an express recognition by the parties that the respondent was selling to the Dealer not only a service station site but also the benefit of an ongoing business conducted at the site. Thus it was within the intendment of the parties to the contracts for sale by the respondent to each dealer that each sale included not only the site and certain fixtures and equipment thereon, but also the ongoing business conducted at the site up to the time of sale. The concept of the sale of land and of a business conducted thereon ‘as a going concern’ necessarily involves a sale of the goodwill of the business because the description ‘as a going concern’ implies that the vendor is operating the business pending completion to enable the purchaser to carry it on after completion, using the benefit of the business connexion with customers that the vendor agreed to maintain for the purchaser’s benefit.
 In that context goodwill, being the power inherent in an ongoing business to attract customers, necessarily has some value. Alternatively, absence of such a value at the relevant time cannot be assumed. Nor was it legitimate to assume (when the contract was made) that an ongoing business would have no value at the time of some future termination of the contract.
 One effect of the POSA and the Option Deed was to subject the Dealer to an obligation, in the event of the respondent relying on its right to exercise the option, to sell the site back to the respondent at a price which specifically excludes any allowance to cover the value of the goodwill for which the Dealer paid on its purchase of the site and ‘on-going business’. The contractual infliction of that disadvantage necessarily involves a ‘windfall’ to the respondent, because the exercise of the option would enable the respondent to acquire the site and business on a ‘going concern’ basis without payment (as the dealer did) for the fact that it is acquiring the service station on that basis. That windfall is a penalty within the mischief of the doctrine as to penalties. The respondent not only reacquires that which it had sold to the Dealer but also a resale under the option would carry with it the right to carry on that which the Dealer had been required to continue pending completion: see cl 31 of the contract of sale attached to the option deed.

22 By their supplementary outline of argument, the appellants contend:

• The intent of the parties, evidenced by the contractual documents, was that the option should serve the purpose (inter alia) of being a security for the performance by the dealer of each of his contractual obligations under the POSA: see cll 38.1 and 41.1 of the contract of sale; cll 1.2 and 5.1 of the option deed; see also cl 4 of the mortgage by Ringrow given to secure compliance with its obligations under the option. See also POSA cl SC1.2(e).
• An evident purpose of the option was to secure the continued availability of the site, during the currency of the trade tie, and beyond, into the far future, as an outlet for BP petroleum products: part of the intended operation of the option was to secure to the respondent such benefits as would accrue to it for so long as the trade tie with the dealer would continue in operation. However, the respondent elected to terminate the POSA with effect from 1 January 2003 without any contemporaneous exercise of the option. Thus, the Dealer was legally free of the tie from 1 January 2003.
• If, as was evident when the parties entered into the POSA and the option deed, it was part of the intended operation of the latter that it should stand as security for the Dealer’s performance of the POSA, and be exercisable on termination for breach by the dealer of the POSA, that particular aspect of the operation of the option would constitute a penalty if the respondent were to exercise the option in circumstances where, by its own act (i.e. termination), it has discharged the Dealer from performance of the POSA. In those circumstances there is nothing to secure: there could be no valid security for a ‘non-obligation’. The equitable doctrine on ‘clogs’ on the equity of redemption may be applied analogically.
• As at the time of the making of the contractual arrangements, any utilisation of the option predictably would operate as a penalty, in the event of its exercise after its purpose as security for the dealer’s compliance with the trade tie had ceased to exist, by reason of the termination of the POSA.

23 In oral argument on behalf of the appellants, Mr Hughes QC submitted:

• The contractual package confers upon the respondent an entitlement to terminate the POSA for breach of a non-essential term in circumstances giving rise to no substantial, and even to trifling, damage; and, for example, to do so in the fourth year and eleventh month of the fifth year of the term of the POSA. On the true construction of the contractual package, termination in those circumstances would give rise to an entitlement for the respondent, as a reaction to the breach, to exercise the option after the POSA has expired by effluxion of time: for instance, the Lansvale POSA would expire on 27 July 2004; the Lansvale option would not expire until 27 October 2004. The exercise of the option in such circumstances is either an alternative remedy to the stipulated ‘liquidated damages’ or a cumulative remedy, if the ‘liquidated damages’ are paid first. Whichever of these alternatives be correct, the right to exercise the option is a different remedy from damages; it is imposed to deter, and punish for, the breach. On the facts mentioned, the exercise of the option would be a remedy altogether disproportionate to the breach.
• In such a case, the grant of the right to exercise the option has no rational relationship to a genuine consensual pre-estimate of damage for the breach. The grant to the respondent of the right to exercise the option has no proportional relationship to the contractual interest that the respondent was entitled to protect. That interest was limited to the preservation of the site as a BP service station for the mutually intended duration of the POSA –five years from 28 July 1999 in the case of Lansvale. A right to re-acquire the freehold of the site, even if one assumes the price formula to be appropriate, is disproportionate to the protection of that interest. The proportionate protection of that interest would have required no more than the grant of an option for the respondent to take a lease of the site and business for the balance of the term of the POSA following termination for breach.
• The contractual imposition upon a contract breaker of any obligation resulting from a breach of contract will be a penalty unless: (a) it is an obligation to pay common law damages; or (b) it is an obligation to pay genuinely pre-estimated liquidated damages; or (c) it is a non-monetary obligation objectively proportionate to the injury suffered by the injured party as a result of the breach.
• The ‘windfall’ potential of the option deed by reference to its provisions should be examined as at the time when the contractual arrangements were made. The situation was then as follows: the Dealer would pay a price for the land and for a fully operating service station business on a ‘going concern’ basis. It was an incident of the contractual arrangements that the Dealer was to have a licence to utilise the BP marks. If, on termination for breach (however slight and non-essential), the respondent were to exercise the option, the Dealer was under an obligation to maintain the business as ‘a going concern’ (i.e. as an operating service station) until completion of the sale constituted by exercise of the option: cl 31 of resale contract. Yet any value of the ‘going concern’ element was excluded from the resale price on exercise of the option. That feature in itself is penal. Moreover, the valuation formula in the Option Deed excludes any potential use of a non-service station kind. Therefore it excludes the concept of ‘highest and best use’. In the case of Silverwater, the respondent valuation initially assessed the value on ‘Going concern’ and ‘Non petroleum use’ as $800,000. This suggests the possibility of a ‘higher and best use’ leading in the future to increased value.
• A principal reason why the purported conferral of a right to exercise the option in order to satisfy a claim based on termination of an agreement cannot be a conferral of a right to liquidated damages is that there are circumstances in which damages for termination will not be commensurate with damages for breach.
• The penalty principle applies to all the conditions expressed in 1, 2 of the option deed.
• ‘Terminate’ is an ambiguous word. Here it is not apt to include the ending of an agreement by effluxion of time. The respondent’s argument leads to a conclusion, if valid, that the appellants may have been induced to enter into the contractual package by a material misrepresentation. The appellants were buying a site plus a ‘going concern’. It is not credible that the parties contemplated a re-sale at the end of five years at a price that on the respondent’s argument would probably be less than the ingoing price.
• The ‘liquidated damages’ clause does not qualify as such, because it does not stipulate for liquidated damages on breach. Damages for termination can be different from damages for breach. In order to make the stipulations as to ‘liquidated damages’ work, one cannot do so by striking out words. Words have to be added.
• The POSA and the Manuals contain stipulations of a negative kind that may give rise to trivial, irremediable breaches.
• The appellants had personal goodwill, the foundation of which was their acquisition of the respondent’s personal goodwill, for which they paid. They continued to utilise that goodwill in the interests of the plaintiff, but under the pricing formula in the option deed will not be paid for it.

24 The appellants thus submit that the appeal be allowed and in lieu of the orders made at first instance there be a declaration that each option, insofar as it purports to be exercisable by the respondent upon termination of the POSA by reason of the breaches thereof found by his Honour is unenforceable as a penalty. The appellants concede that, as a condition of the appellants’ entitlement to this equitable relief, they are bound to pay damages for the several breaches of the POSA’s as found by the Judge and therefore submit to payment of such damages as may be assessed.

CONCLUSIONS ON THE APPEAL

25 In my opinion, no error in the approach taken by the primary Judge has been demonstrated. For our purposes, there was no dispute about the primary facts. Nor, in my view, did his Honour err in his characterisation of the context of the overall arrangement, documented as it was. Moreover, no error of legal principle has emerged in the Judge’s process of reasoning.

26 The subject option is not, in my view, a penalty, essentially for the reasons advanced by the respondent on the appeal as follows:

(a) The option is not a punishment for non-observance of a contractual stipulation. Rather, the option is part of the consideration for the respondent’s agreement to sell each of the sites.
(b) The option is not compensatory. The function of the option is to protect the respondent’s commercial interests in the site. It is restitutionary in nature, not a price to be paid, in terrorem, for breach.
(c) The fact that the price payable on exercise of the option may produce an apparent windfall to the respondent is not determinative of the question whether the option constitutes a penalty. (The rule against penalties is one of law. Equitable relief against forfeiture was not pressed before us.)
(d) In any event, there is no prospect of a windfall to the respondent resulting from the exclusion of goodwill from the purchase price, for the following reasons:

(i) The site would be worth no more to the relevant appellant than the resale price provided for in the option deed until such time as the period for exercise of the option had lapsed.
(ii) Whilst the respondent would not pay for any goodwill in the business, it would not acquire that goodwill. The appellants would be free to conduct business from another site and enjoy any personal goodwill acquired by them, without restriction or restraint. The appellants would be compensated for the assets which were to be acquired, together with the use to which those assets could be put.

27 These conclusions flow, I think, from the well established legal doctrines in respect of penalties; that is to say, a penalty is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation; but a contractual provision which provides for rescission of a contract for breach of an essential term and forfeiture of the purchaser’s interest under a contract for sale of land is not a penalty, notwithstanding that the risk of forfeiture may operate as a strong inducement to performance; however, such a clause must be distinguished from a clause designed to ensure performance of a principal obligation. Whether a contractual provision is a penalty is a question of construction, to be decided upon the terms of the contract and the surrounding circumstances as at the time of the making of the contract, not at the time of breach.

28 It is equally well established that a distinction must be drawn between a clause which is designed to ensure performance of the contract and a clause whose existence is underpinned by some legitimate commercial purpose: BICC Plc v Burndy Corporation [1985] 1 Ch 232 at 246-7 per Dillon LJ. Similarly, a distinction must be drawn between a clause which is the price to be paid for a default and a clause which merely governs the parties’ rights following a default, where the default is merely the occasion for the operation of the clause: see PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615 at 628-9 per Mahoney JA. See also Wollondilly Shire Council v Picton Power Lines Pty Ltd (1994) 33 NSWLR 551. In my opinion, these principles govern the present case.

29 The respondent contracted with each of the appellants upon the understanding that, for a period of at least five years, each of the sites would remain a BP service station, selling BP petroleum products under and by reference to the valuable BP brand. His Honour found that the ‘evident purpose of the option was to protect the respondent’s commercial interests in the site being maintained as a BP service station’. There has been no challenge to that finding of fact, inferential as it may be. But it must follow that the option to re-purchase is thus restitutionary in nature in the sense explained in Re Moore and Texaco Canada Ltd (1965) 50 DLR (2d) 300; and see also C.R.A. Ltd v NZ Goldfields Investments (1989) VR 870.

30 The options form part of the consideration for the respondent agreeing to sell the sites to the appellants at the price at which they were sold to them. It may readily be inferred that, had the options not been a part of that consideration, the respondent would have sold to each of the appellants at a different price. They form part of the commercial bargain which was negotiated by commercial organisations at arms’ length. See, to the same effect, Wollondilly, above.

31 There was, in truth, no ‘windfall’ or penalty here given the following specific circumstances:

• The fact that each of the sites was sold as a service station business operating on a going concern basis, but which could be re-acquired as an ‘operational’ (but not ‘operating’) service station, without any account being taken of the goodwill of the business, is immaterial.

• The options provide for the payment to each of the appellants of the full value of each of the sites, in the hands of the respondent. The purchase price is to be determined by independent market valuation of each site as an operational service station: see clauses 2.1 and 2.5 of the option deed. That valuation would include the value of the land and its improvements (including any improvements made by the appellants), and the potential of those improvements to produce income from the operation of a service station on the site. It would exclude the goodwill attaching to the business.

• Whilst the goodwill of the business is to be excluded from the purchase price, the respondent does not acquire the goodwill in the business. Each of the appellants would remain free to take with them the goodwill which enured to them personally and conduct a service station business from another site, immediately and without restraint. As part of the purchase price, the appellants would be compensated for any ‘local goodwill’ attaching to the land and its improvements and would be compensated for the potential of the site to produce profits.

• The appellants would not be compensated for their personal goodwill, which would leave the sites with them upon their departure. Indeed, it would be unreasonable to expect the respondent to pay for the goodwill which found its source in each of the appellants personally, if they were to have no further involvement at the site and could trade in competition next door, if they so desired. To the extent that there is no goodwill in the business, independent from the assets which are acquired and the ability of those assets to produce profit, the appellants would lose nothing. To the extent that a valuable goodwill exists independently of those assets, that is something which the appellants retain. Reliance was placed by the appellants upon the decision of Madden CJ in Ferne v Wilson (1900) 26 VLR 422 at 437, but the case is clearly distinguishable on its facts.

32 As Conti and Crennan JJ has observed, the appellants made a late application before us to contend that the liquidated damages provision is a penalty. I agree with Conti and Crennan JJ that this application should be refused.

33 The appeals should be dismissed, with costs.

I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont.

Associate:

Dated: 12 August 2004

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 2519 OF 2003

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	RINGROW PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT
		N 2520 OF 2003
BETWEEN:	ULTIMATE FUEL PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT
		N 2521 OF 2003
BETWEEN:	NADER-ONE PTY LTD APPELLANT
AND:	BP AUSTRALIA PTY LTD RESPONDENT
JUDGES:	CONTI AND CRENNAN JJ
DATE:	12 AUGUST 2004
PLACE:	SYDNEY

REASONS FOR JUDGMENT

CONTI AND CRENNAN JJ

BACKGROUND TO AND OUTLINE OF THE TRANSACTIONS OF THE PARTIES TO THE PROCEEDINGS

34 These appeals relate to three consolidated causes of action the subject of findings of a judge of this Court, which were brought by the appellant service station operators against the respondent distributor of motor fuels BP Australia Pty Ltd (‘BP’). The sole cause of action the subject of the present appeals was framed to the effect that certain provisions of three identical contractual arrangements implemented by BP in relation to each of three service stations previously acquired by the three appellants respectively, constituted penalties according to law and were thus invalid. Each appeal involved the consideration of identical contractual arrangements which governed the operation of three service station dealerships conducted respectively by each of the appellants individually on and from those three service stations subject to their respective ownerships. Each of those service station operations had been previously conducted by each of the appellants as so-called franchisees or commission agents of BP as freehold owner. The franchise arrangement was analogous to a lease. The freehold title to each service station was subsequently sold by BP to the respective corporate appellants individually at about the same times for ongoing operation individually as so-called dealers, upon the basis of complex documentary arrangements. The litigation arose in the course of the appellants’ individual conduct of their respective dealerships. BP is a distributor of petroleum products in Australia. The reasons for judgment of the primary judge are reported in volume 203 of the Australian Law Reports commencing at 281.

35 The causes of action originally pursued at first instance by each of the appellants individually against BP were for misleading and deceptive conduct concerning wholesale pricing by BP, unlawful contractual penalty, unconscionable forfeiture of property, and unjust and inequitable conduct within s 16(6) of the Petroleum Retail Marketing Franchise Act 1980 (Cth) (‘the Franchise Act’). Cross-claims by BP in each of the proceedings below for liquidated damages were brought against each of the appellants. In the case of the first appellant, a fourth service station was additionally involved in the proceedings at first instance in relation to BP’s liquidated damages claims, though not in relation to the penalty issue.

36 The reasons for judgment of the primary judge contained findings in favour of BP on each of the claims and cross-claims pursued below in respect of all four service stations. As already indicated, the issue arising on the present appeal relates to the findings of the primary judge on the cause of action for penalty in relation to three of the four service stations, each appellant being the registered proprietor of one of those three service stations until the events giving rise to the controversy involving penalties the subject of each appeal, namely BP’s re-acquisition of the freehold title to each of those three service stations. Resolution of the appeals requires the consideration of complex provisions of what appears to have been standard forms of BP dealership documentary arrangements, in the context of which each of the appellants originally purchased from BP individually the freehold title to the three service stations, the subject of the appeals, as well as the fourth service station, additionally owned by the first appellant. That fourth service station only became involved in the appeal on the last day of a three day hearing of the appeal, in the context of a conditional application made by the appellants for leave to challenge the enforceability of the liquidated damages provisions contained in the contractual arrangements relating to each of the four service stations. That application is later addressed in these reasons, and can be put aside until then.

37 At the material times therefore, and in particular during the times when serious breaches of the dealership agreements were found by the primary judge to have occurred, arising out of the sale of so-called foreign fuel on a large scale to customers of the service stations, two of the four service stations the subject of the proceedings below were operated by the appellant Ringrow Pty Limited (‘Ringrow’) (including that not originally involved in the appeal), the third by the appellant Ultimate Fuel Pty Ltd (‘Ultimate Fuel’) and the fourth by the remaining appellant Nader-One Pty Limited (‘Nader-One’), in each case as so-called dealers operating the freehold service station property owned respectively by each of them.

38 It is apparent from the content of the dealerships agreements, later set out at some length, that the commercial objective of BP in converting certain of its single branded freehold service station sites to sites operated pursuant to dealership agreements was to continue and maintain, at least for the ensuing five years, those sites as BP branded service stations, from which BP products would be exclusively sold by the purchasers of the freehold title to those sites in their altered function as dealers. Until then, those sites had been operated, as already explained, under BP’s ownership as so-called franchised or commission agency sites, from which BP products had been exclusively sold. In short, BP’s objective was to maintain the status quo, albeit in the context of change of freehold ownership, for at least 5 years. The following contextual or threshold findings were made by the primary judge in relation to BP’s motor fuel merchandising practices in operation at the times material to the present proceedings.

39 Franchisees and commission agents generally of BP service stations have been supplied by BP with petroleum products at prices set by BP, which vary from time to time, sometimes on a daily basis, and fall within the description ‘rack price’. As we have already recorded, the appellants were originally franchisees and/or commission agents of BP in relation to the subject service stations. From time to time franchisees were given financial assistance by BP for their retail sale of motor fuel in order to assist their capacity to compete with other service stations. That assistance took the form of rebates on the ‘rack price’ of motor fuel purchased by franchisees from BP, being a practice described as ‘price support’. To obtain price support, a franchisee would be required to survey the prices being charged for the time being by its retail competitors, and to relay that information to BP, often on a daily basis. A rebate might then be calculated and provided by BP in its discretion to an individual franchisee, by reference inter alia to daily information furnished by the franchisee, in order to assist that franchisee in setting a retail price for the time being which would enable the franchisee to profitably compete with its retail competitors. The rebate was said to be assessed by BP as site specific, and thus determined by the competitive conditions for the time being governing individual service station sites the subject of its franchise agreement. Commission agents were not at least directly involved in any such retailing arrangements, since BP would have been the owner of the fuel at all material times as principal.

40 As a condition of the sale by BP of its service stations to dealers such as the appellants, the prospective dealer was required by BP to enter into a package of agreements, including an exclusive fuel supply agreement with BP, pursuant to which the dealer agreed to purchase all of its requirements of motor fuel from BP for resale through the dealer’s service station the subject of its ownership. This exclusive supply agreement is termed ‘BP Branded Privately Owned Site Agreement’, commonly abbreviated and hereafter referred to as the ‘POSA’. The term of the POSA was five years, and during that term, the operator-owner was required by the POSA to continue to conduct the service station under the BP brand and colours, and was obliged by Clause A4.2 thereof to purchase from BP its requirements of motor fuels for retail sale at the service station, and not to sell any motor fuels therefrom other than BP motor fuels. At the end of the five year term of the POSA, the operator-owner or dealer might elect to enter into a new supply agreement with BP, or else to obtain its supply of motor fuel from third party suppliers for resale through the service station the subject of its continuing freehold ownership, subject to BP not choosing to re-acquire the service station.

41 BP established in mid 1998 a wholesale price for its petroleum products called the terminal gate price, commonly abbreviated as ‘TGP’. The price for the time being in operation is uniform throughout for instance metropolitan Sydney. BP supplied fuel to service stations operated under and pursuant to its POSAs at the TGP, plus a fee for delivery. The TGP was originally adjusted by BP every day or so, but since July 2001, it has been adjusted on a bi-weekly basis. BP did not provide any form of price support to the freehold owning operators of sites, that is, to dealers such as the appellants, in the Sydney metropolitan area the subject of its POSAs.

42 The four service stations the subject of the present proceedings are named BP Lansvale, BP Meadows, BP Silverwater and BP Auburn. A brief summary of their operation by the appellants, prior to BP’s disposition of the respective freehold titles thereto in favour of the respective appellants, is set out below. As we have already foreshadowed, the fourth service station (ie the second service station acquired by Ringrow) called BP Meadows, was not directly involved in the appeal, until Ringrow sought to bring that service station within the scope of the appeal in circumstances which will later be explained.

THE TRANSACTIONAL INSTRUMENTS IN MORE DETAIL RELEVANT TO THE ISSUE AS TO PENALTY ARISING IN THE PROCEEDINGS

43 Following upon negotiations with BP, the appellants purchased the freehold of the four subject service station sites, in the following sequence:

(i) on 27 May 1999, Ringrow exchanged contracts for the purchase of BP Meadows for $900,000;

(ii) on the same day, Ringrow exchanged contracts for the purchase of BP Lansvale for $1,200,000;

(iii) on 17 May 2000, Nader-One exchanged contracts for the purchase of BP Silverwater for $780,000; and

(iv) also on 17 May 2000, Ultimate Fuel exchanged contracts for the purchase of BP Auburn for $1,400,000.

Each of those contracts for sale was duly completed, with the consequence that the appellants thereby acquired the respective freehold titles to those four service stations.

44 Each contract of sale provided by special condition 38.1 thereof for the grant by a subsequently executed deed (called an ‘Option Deed’) from the relevant purchaser (ie Ringrow, Nader-One or Ultimate Fuel, as the case may be) as optionor in favour of BP as optionee of a so-called ‘irrevocable option to purchase’ the freehold of the relevant service station property, the condition of exercise being termination or unenforceability of the POSA. The period of time stipulated for exercise of that option by BP was five years and three months commencing from the date of the Option Deed. That period of time for exercise by BP of the option to purchase (or more precisely re-purchase) extended thus for a period of three months beyond the preceding period of the five year term or duration of the optionor’s (ie dealer’s) POSA relating to the service station site. BP was thus granted an additional period of three months after the expiration of the term of the POSA within which to decide whether it would re-purchase the site by exercise of that option to re-purchase. After the expiration of that period of five years and three months, the option of re-purchase in favour of BP would lapse. Clause 1.2 of the Option Deed provided that the option to re-purchase would only be exercisable by BP if any one of the events specified in subclause (a) thereof first occurred. That event presently material was prescribed by subclause (a) as follows:

‘(a) the agreement titled BP Branded Privately Owned Sites Agreement ("POSA") entered into between the Grantor and the Grantee is terminated, and is not replaced by a further POSA which may or may not be called POSA, or becomes unenforceable or of no force or effect from whatever cause’.

The reference to the Grantor is of course to the relevant purchaser while the reference to the Grantee is to BP.

45 Whilst the event described immediately above is that which is directly material to the events which happened, we would also reproduce below for completeness the other six contingencies of Clause 1.2 of the Option Deed which would trigger BP’s entitlement to exercise the option of re-purchase appearing in subclauses (b) to (g):

‘(b) any BP automotive fuels sold from the Property as at the date of this Deed cease to be sold from the Property;

(c) the Grantor leases the Property to a third party without the Grantee’s prior written consent;

(d) at any time an application is made by the Grantor or any other party (other than the Grantee) for the removal or discharge of the mortgage referred to in clause 5, by the Registrar of Titles;

(e) in the period 5 years and 3 months following the completion date an application is made by the Grantor or any other party (other than the Grantee) for the removal or withdrawal of the caveat referred to in clause 6, by the Registrar of Titles;

(f) the Grantor during the currency of this Option serves the Grantee with a Notice of Sale pursuant to clause 7.1, provided that the Grantee exercises the Option within the period of 14 days following the service of the Notice of Sale on the Grantee by the Grantor; or

(g) any financier of the Grantor purports to exercise a power of sale in respect of the property.’

46 Clause 2.1 of the Option Deed, headed ‘Determination of Price’, provided that the purchase price payable for the property, should the option to re-purchase be exercised by BP, would be calculated in accordance with the following formula:

‘P = V

where

‘P’ means the purchase price payable for the property.

‘V’ means the market valuation of the property as an operational service station as determined by an independent valuer in accordance with this clause 2.’

47 Clause 2.2 of the Option Deed further provided as follows:

‘Within 14 days following delivery of the Notice of Intention, the Grantor and the Grantee must jointly appoint an independent valuer to determine the market valuation of the Property in accordance with this clause 2. If the Grantor and the Grantee fail to agree on an independent valuer within [the] 14 day period the Grantee may request the president (or if there is no president the senior office bearer) of the Australian Institute of Valuers and Land Economists to appoint an independent valuer in accordance with this clause 2.’

That ‘Notice of Intention’ was a document required to be delivered by the option grantee (ie BP) to the option grantor (ie a dealer and thus any one of the appellants), pursuant to clause 1.1 of the Option Deed, confirmatory of BP’s decision to exercise the option to purchase the applicable service station property.

48 Clause 2.5 of the Option Deed also provided as follows:

‘The valuer shall be instructed to determine the market valuation of the Property as at the date of the Notice of Intention and in making the determination shall have regard to all factors the valuer considers relevant but shall not include in the determination of the market valuation of the Property any allowance for any goodwill attaching to any business conducted at the Property.’

That latter subclause of the option, excluding as it does any price allowance for goodwill, is integral to the issue arising as to penalty the subject of the present appeal. We should add for completeness that the Option Deed required that any purchaser or other disponee of the service station property from the optionor (ie the dealer) should enter into an identical option in favour of BP at no expense to BP at the time of any such sale by the dealer of the service station.

49 As we have foreshadowed, and as had been BP’s practice, implemented in the context of the disposition by freehold sale of its until then franchised (or commission agency) service station sites under BP’s ownership, special condition 39 of the contract of purchase by Ringrow as purchaser from BP as vendor of both the BP Lansvale and BP Meadows properties provided that concurrently with completion of each of those contracts, BP and Ringrow would enter into a POSA in the standard pro forma annexed to that contract. Special condition 40.1 of each contract of purchase further provided that it was in consideration of Ringrow entering into the standard form of POSA as a so-called dealer, that BP thereby agreed to sell to Ringrow the freehold title to the service station property on the terms and conditions of the contract of purchase. It is appropriate that we reproduce those terms of BP’s standard form of POSA to which the parties specifically alluded in the course of their respective submissions to the Court.

50 Virtually identical contractual structures were created in the context of the subsequent purchases from BP of BP Silverwater by Nader-One, and of BP Auburn by Ultimate Fuel. It will have become apparent that the POSA and the Option Deed, along with the contract of sale, as applicable to each service station site, recorded different aspects of what may be described as contemporaneous overall arrangements governing BP’s exodus from freehold ownership of each of those service station sites. As will shortly appear, BP nevertheless sought to maintain those sites as virtually exclusive BP motor fuel outlets for a period of five years after its freehold disposition of those sites. So much is apparent from the opening preamble of the POSA contained in Clause A1.1, namely ‘While this Agreement is in force, BP agrees to allow the Dealer to sell BP Petroleum Products at the Site using the BP Marks in accordance with the Manuals and this Agreement’.

51 Under the heading ‘Operation Of Retail Business’, the following obligations (inter alia) were imposed in favour of BP upon each so-called ‘Dealer’ (here of course Ringrow, Nader-One or Ultimate Fuel), pursuant to BP’s standard form of POSA, at the time of the dealer’s entering upon the operation of what thus became a previously BP owned service station; these have been extracted below in order to provide some picture of the detail of the arrangements the subject of each POSA, quite apart from the complexity of the conditions bearing upon the supply of motor fuel for retail sale by dealers:

‘A3.2 Manuals

The Dealer must operate the Retail Business in accordance with the Manuals.

A3.3 Comply with Directions

The Dealer must comply with all reasonable orders, directions, notices or other requirements given to the Dealer by BP in relation to issues concerning health, safety, security and the environment, the BP Marks, the image of BP and the control of products and services sold under or by reference to the BP Marks.

A3.4 Marketing Initiatives

The Dealer must actively and diligently participate in those promotions, campaigns, advertisements, marketing programmes, merchandising standards and displays which BP reasonably nominates as being applicable to the Retail Business. These promotions could include, for example:

(a) promoting those services and/or service providers nominated by BP;

(b) competitions to win prizes;

(c) promotional giveaways;

(d) sponsorships; and

(e) co-operative advertising.

A3.5 Uniforms

The Dealer must use reasonable endeavours to ensure that the dealer and all staff serving or in view of customers at all times wear complete, clean uniforms approved by BP and described in the Manuals and comply with normally acceptable standards for personal grooming and hygiene.

A3.6 Credit and Debit Cards

The Dealer must accept from any customer of the Retail Business such valid credit cards or debit cards or other means of payment as BP reasonably nominates from time to time provided that the Dealer is not significantly disadvantaged by BP’s nomination.

A3.7 Service

The Dealer must manage the Retail Business and the Site in a manner and to a standard which provides a service to the public which:

(a) reflects favourably at all times on BP and BP Retail Fuel Outlets;

(b) is consistent with BP’s reputation and goodwill;

(c) ensures the highest standards of service, health, safety, security and the environment at the Site at all times; and

(d) meets the minimum standards of any customer service programme implemented by BP.’

The range and detail of those contractual obligations, particularly the requirement of A3.2 above for dealers to operate the retail business of the BP service stations in accordance with BP’s manuals, were the subject of emphasis on behalf of the appellants in the course of their submissions. That emphasis occurred in the context of the appellants’ illustration, in the course of address on the appeal, concerning the comprehensive range of obligations, said to have been in many instances relatively insignificant, if not trivial, in scope, undertaken by dealers to BP by reference to the content of those manuals, which could conceivably or potentially attract BP’s contractual remedies for breach of the POSA.

52 Moving then to the commercially critical provisions of the POSA concerning the retail sale of motor fuel from service stations, under the heading ‘Petroleum And Other Products’, the following trading obligations (inter alia) were required by the POSA to be performed by each dealer:

‘A4.1 Agreement for Sale of Petroleum Products

BP must supply to the Dealer all the Dealer’s requirements for retail sale at the Site of the kinds of Petroleum Products set out in Item 8 of the Schedule which BP is able to supply from time to time on the terms and conditions set out in this Agreement.

A4.2 BP Motor Fuels

The Dealer must purchase from BP all of the Dealer’s requirements for retail sale at the Site of Motor Fuels and must not sell in the Retail Business any Motor Fuels other than BP Motor Fuels.

A4.3 Promote BP Petroleum Products

The Dealer must promote the sale of BP Petroleum Products and prominently display BP branded Lubricating Oils and other BP branded products at the Site.

A4.4 BP Branded Products and Promotional Products

The Dealer must make available for sale in the retail Business those BP branded products (not being Petroleum Products) and those promotional products nominated by BP.’

53 Clause A4 further stipulated by further subclauses that the prices payable by dealers for products and services purchased from BP, pursuant to the requirements of the POSA, were those to be specified by BP as applicable to each dealer at that dealer’s service station the subject of delivery, as at the time and date of delivery. Those prices sometimes fluctuated daily. Each dealer was contractually prohibited by the POSA from purchasing fuel from any source otherwise than BP (referred to in the POSA as ‘foreign fuel’), except in the limited circumstances of clause A4.15 reproduced below:

‘A4.15 Foreign Fuel

A4.15.1 To the extent that BP Petroleum Products are, for any reason outside the Dealer’s control, not able to be supplied to the Dealer, the Dealer may sell non-BP Petroleum Products from the Site, if the Dealer:

(a) purchases only Petroleum Products which meet the specifications and standards of quality nominated by BP;

(b) before doing so obtains BP’s written consent to purchase those products, such consent to be granted or withheld without unreasonable delay and not to be unreasonably withheld where the Dealer has provided BP with details of the reasons for the unavailability of BP Petroleum Products;

(c) complies with all reasonable directions issued by BP (both before and after the Dealer is permitted to purchase non-BP Petroleum Products) to minimise any adverse effect on the goodwill and reputation of BP, the BP Marks or BP Retail Fuel Outlets during any such time. The directions may include, for example, the covering of the BP Marks on pumps, the covering of the pole sign at the Site and the erection of signs and notices to the Dealer’s customers;

(d) establishes, maintains and keeps current at the Site a register of all those purchases containing details of purchase, the quantity and type of product purchased, the suppliers of the product and into which bulk storage tanks such products were delivered and which pumps are connected to those tanks; and

(e) permits BP to inspect the register of Motor Fuels purchases and take copies of or extracts from it at any time during the normal business hours of the Retail Business.’

It was breaches of those foreign fuel stipulations of the POSA on the part of the appellants which crystallised the issues between the parties the subject of the proceedings below.

54 Under the heading ‘Integrity of BP Petroleum Products’, the following obligations were imposed by clause A4.16 of the POSA upon the dealer, complimentary to the foreign fuel stipulations of the preceding clause A4.15:

‘The Dealer must:

A4.16.1 Non-BP Petroleum Products not to be Dispensed under BP Marks or Mixed with BP Petroleum Products

Not dispense under or in association with the BP Marks, any non-BP Petroleum Products, nor any BP Petroleum Products which have been mixed or adulterated with non-BP Petroleum Products or pass off or represent non-BP Petroleum Products as being BP Petroleum Products.

A4.16.2 Representations as to Supplier

Not represent or suggest that Petroleum Products dispensed out of storage tanks and pumps on the Site are not BP Petroleum Products except to the extent this is permitted by BP where the Dealer is permitted to buy non-BP Petroleum Products.

A4.16.3 Representations as to Quality

Not misrepresent the grade, octane rating or other attributes or qualities of BP Petroleum Products.

A4.16.4 Equipment

Not display, offer for sale, store or dispense other than BP Petroleum Products in the Loaned Equipment or any equipment painted in BP’s colours or displaying any other of the BP Marks, provided that, this clause A4.16.4 does not limit the Dealer’s and BP’s rights under clause A4.15.’

55 Under the heading ‘Disposal of the Site’, the dealer undertook, by clause A5.10 of the POSA, not to dispose of the freehold of the subject service station or effective control thereof (in the case of a corporate dealer), unless the dealer arranged to continue in possession of the site for the purpose of maintaining the operation of the service station retail business in accordance with the POSA, or BP exercised its right of first refusal to re-acquire the site. Under clause A9 of the POSA, the dealer was obliged to use the ‘BP Marks’ (a defined term referrable at least to BP’s green and gold coloured trade otherwise directed by BP).

56 Clause A13.2 of the POSA was headed ‘Termination for Default – 30 days Notice’. Subclause A13.2.1 stipulated as follows:

‘If:

(a) the Dealer breaches this Agreement, including without limitation:

(i) any failure by the Dealer to perform any obligation imposed on the Dealer by this Agreement...

...

(iii) the Dealer breaches clauses A4.15, A4.16 or A5.10;

...

(b) if that default is capable of rectification, it is not totally rectified within 30 days after written notice of such default (and notice of what is required to remedy the default) is given to the Dealer;

BP may terminate this Agreement at any time after then by giving written notice of termination to the Dealer.’

The abovementioned clauses A4.15 (as to part) and A4.16 have already been extracted in these reasons.

57 Subclause A13.2.2 of the POSA further provided as follows:

‘If BP reasonably believes, for any reason (and whether or not the Dealer has breached a provision of this Agreement), that:

(a) the Dealer is no longer suitable to carry on the Retail Business;

(b) the Site is no longer suitable as a retail outlet operated under the BP Marks (whether by virtue of a change in the nature of the Site of BP’s attitude in relation to the BP Marks); or

(c) the Retail Business is no longer being operated in a manner compatible with the reputation or goodwill attaching to the BP Marks;

BP may terminate this Agreement by giving not less than 30 days written notice of termination to the Dealer.’

The implications of those wide ranging conditions were thus unusual in scope, since the same were not specifically geared to any contractual default, yet the liquidated damages provisions next set out below would nevertheless apply, unless BP exercised its right of re-purchase of the site pursuant to what appears in the next paragraph as SC1.2(e) of the POSA.

58 I would add for completeness that subclause A13.2.3 of the POSA conferred upon BP a further right of termination for default upon giving 30 days notice, and clause A13.3 conferred a right of immediate termination on the occurrence of a number of circumstances such as falsification of records, reports etc., fraudulent operation of the retail business conducted on the site, vacating the site, bankruptcy and the like, and endangering public health.

59 Clause A16.17 of the POSA stipulated that ‘[t]he special conditions... set out in Item 20 of the Schedule will apply to this Agreement and form part of this Agreement’. Item 20 of that Schedule provided for the following special conditions (tabulated SC), the monetary sums for liquidated damages being specifically referable to the POSA in respect of BP Lansvale alone:

‘SC1 Liquidated Damages

SC1.1 The Dealer acknowledges that it (or a Related Company of the Dealer or any other person related to the Dealer) has acquired from BP pursuant to a separate contract of sale with BP the freehold of the Site, equipment and other assets (excluding the Loaned Equipment) used in the conduct, as a going concern, of the retail fuel outlet at the Site ("Ongoing Business").

SC1.2 The Dealer and BP acknowledge and agree that:

(a) BP agreed to sell the Site and the Ongoing Business to the Dealer (or a Related Company of the Dealer or any other person related to the Dealer) on the basis of continued operation of the business of a retail fuel outlet operating as a going concern at the Site under this Agreement for the Term (being a period of 5 years) and on the basis of the expected returns to BP under this Agreement over the Term. The expected returns to BP under this Agreement over the Term is $289,531 ("Liquidated Damages);

(b) if this Agreement is terminated prior to the expiry of the Term, BP will suffer losses as a result including the specific loss of the Liquidated damages;

(c) the reducing rate at which the Liquidated Damages may be payable over the Term as set out in clause SC1.3 represents a fair and proper basis for payment in the circumstances set out in this clause SC1;

(d) the amount payable on termination of this Agreement as specified in clause SC1.3 represents a genuine pre-estimate of the minimum loss BP will suffer as a result of the termination of this Agreement if this Agreement is terminated prior to the expiry of the Term; and

(e) BP has the right to acquire the Site under a separate option agreement between BP and the Dealer (or between BP and a Related Company of the Dealer or any other person related to the Dealer). BP also has a first right of refusal to acquire the Site under clause A5.11. If this Agreement is terminated and BP has exercised its right to acquire the Site under the separate option agreement or under clause A5.11, the Liquidated Damages will not be repayable to BP under clause SC1.3.

SC1.3 The Dealer agrees that if this Agreement is terminated prior to the expiry of the Term the Liquidated Damages will be payable by the Dealer to BP as follows:

If termination or acceptance occurs between the Commencement Date and the expiration of year 1 of the Term:...............$289,531

If termination or acceptance occurs between the expiration of year 1 and the expiration of year 2 of the Term:....................$231,625

If termination or acceptance occurs between the expiration of year 2 and the expiration of year 3 of the Term.....................$173,719

If termination or acceptance occurs between the expiration of year 3 and the expiration of year 4 of the Term.....................$115,812

If termination or acceptance occurs between the expiration of year 4 and the expiration of year 5 of the Term.....................$57,906

If termination or acceptance occurs after the expiration of year 5 of the Term:...............................................................$Nil

SC1.4 The Liquidated Damages are payable by the Dealer to BP within 7 days of the date of the termination of this Agreement. Any monies received by BP pursuant to the separate contract of sale referred to in clause SC1.1, by way of payment of the Liquidated Damages, will be credited against the amount owing by the Dealer under this clause SC1.

SC1.5 The Dealer (or a Related Company of the Dealer or any other person related to the Dealer) has agreed under and on the terms and conditions set out in the separate contract of sale referred to in clause SC1.1, to grant a mortgage in favour of BP over the Site to secure payment of the Liquidated Damages in the event of a termination of this Agreement prior to the expiry of the Term.’

Similar graduated monetary levels of liquidated damages in the otherwise standard form of SC1.3, though of differing amounts, appeared in the POSAs for BP Meadows, BP Silverwater and BP Auburn.

60 The graduated liquidated damages levels the subject of SC1.3 of each POSA mirrored in structure, though not in precise amounts, what appeared in each of the four contracts of sale entered into between BP and each of the appellants contemporaneously with the POSAs, by virtue of the following special conditions (those appearing below for instance appearing in the BP Lansvale contract for sale in favour of Ringrow as purchaser, the amounts in SC1.3 varying in the otherwise identical form of contracts for sale for the other three service station sites):

‘40.2 The purchaser acknowledges that the vendor will obtain financial benefit during the term of the POSA from the sale of petroleum products to the purchaser under the terms of the POSA. If the POSA is terminated prior to the expiry of the 5 year term the vendor will suffer loss which loss the vendor has estimated to be $289,531 ("Liquidated Damages"). The purchaser agrees that if the POSA is terminated prior to the expiry of the 5 year term the purchaser will pay the vendor the Liquidated Damages as follows:

If the POSA is terminated:

• from the date of commencement to the expiration of year 1 $289,531

• from the expiration of year 1 to the expiration of year 2 $231,625

• from the expiration of year 2 to the expiration of year 3 $173,719

• from the expiration of year 3 to the expiration of year 4 $115,812

• from the expiration of year 4 to the expiration of year 5 $57,906

• following the expiration of year 5 Nil

40.3 The Liquidated Damages are payable by the purchaser to the vendor within 7 days of the date of the termination of the POSA.

40.4 The vendor and purchaser acknowledge and agree that:

(a) the vendor is prepared to sell the property on the basis of continued operation of the business of a retail fuel outlet operating as a going concern at the property under the POSA for a period of 5 years and the Liquidated Damages reflects (sic) the expected returns to the vendor under the POSA over that 5 year period;

(b) if the POSA is terminated prior to the expiry of the 5 year term, the vendor will suffer losses as a result;

(c) that the amortisation of the Liquidated Damages over the 5 year term of the POSA as set out in special condition 40.2 represents a fair and proper basis for amortising the Liquidated Damages over the term of the POSA; and

(d) the amount payable on termination of the POSA as specified in special condition 40.2 represents a genuine pre-estimate of the minimum loss the vendor will suffer if the POSA is terminated prior to the expiry of the agreed 5 year term of the POSA.’

Consistently with the earlier extracted SC1.2(e) of the POSA, liquidated damages were stipulated not to become payable, should BP subsequently exercise its right to acquire (or perhaps more accurately re-acquire) the freehold title to a relevant service station site, pursuant to the Option Deed.

THE CONTEXT OF THE DISPUTES AT FIRST INSTANCE

61 On 2 December 2002, BP served notice of termination of the POSA relating to BP Auburn to take effect as from 1 January 2003, on the ground of a purchase of foreign fuel said to have been made by Ultimate Fuel on 4 May 2002 in breach of clause A4.15 of the POSA (extracted in [53] above). The primary judge observed that the particular purchase was not an isolated incident of these Nader controlled companies which had been making purchases of foreign fuel at least by about that time. Evidence subsequently tendered at the hearing below demonstrated that the total sales at BP Auburn of super motor spirit, unleaded petrol, diesel and pulp, in the period from July 2000 to June 2003, comprised 25,950,495 litres, whereof 2,695,305 litres were non-BP product (ie foreign fuel). Documents produced on subpoena at that hearing included 77 invoices from a third party fuel supplier for the sale and delivery of foreign fuel to BP Auburn, implicitly for resale.

62 Also on 2 December 2002, notice of termination of the POSA in relation to BP Lansvale was served by BP on Ringrow, with effect from 1 January 2003, relating also to the purchase of foreign fuel, based on eight breaches of the POSA at different times concerning that service station, being breaches already the subject of notices of breach relating to the period from 1 August 2002 to 18 November 2002. Evidence was tendered by BP at the hearing below that the volume of motor spirit sold through BP Lansvale in the period July 1999 to July 2003 was 27,964,130 litres, whereof 3,460,410 litres comprised non-BP product. Documents produced on subpoena included 95 invoices from third party suppliers for the sale and delivery of foreign fuel to BP Lansvale, again implicitly for resale.

63 Additionally again on 2 December 2002, notice of termination of contract was given by BP to Nader-One in relation to BP Silverwater, and similarly to Ringrow in relation to BP Meadows. In the case of BP Silverwater, a total volume of 21,429,362 litres of motor fuel was asserted by BP to have been sold in the period April 2000 to July 2003, whereof 808,108 litres were non-BP product. Moreover in the case of BP Meadows, a total volume of 16,753,868 litres of foreign fuel was asserted by BP to have been sold in the period June 1999 to July 2003, whereof 162,950 litres were non-BP product (as earlier mentioned, the proceedings on appeal do not relate to BP Meadows).

64 Ultimately as the primary judge recorded in his reasons for judgment, it was conceded on behalf of the appellants that each of them was in breach of the POSA, and the POSAs were terminated by notices respectively given by BP to each appellant on 2 December 2002, being termination subject only to the operation of s 16 of the Franchise Act.

65 On 17 December 2002, BP’s solicitors informed the solicitor for the appellants that apart from bringing each of the POSAs to an end for breach of the foreign fuel stipulations thereof, BP also proposed to exercise its buy-back rights conferred by the Option Deeds in relation to each one of the four subject service station sites. However, formal notices of intention to exercise those buy-back options were not subsequently given by BP to the respective appellants until about six months later on 19 June 2003, and in any event did not extend to BP Meadows, which was of course one of the two service stations which had been originally purchased from BP by Ringrow. The BP buy-back price determination process provided for by clause 2.2 of the Option Deed (earlier extracted in [47] of these reasons) was by 19 June 2003 apparently in train, though no determination by valuers had yet been made. In the meantime, the appellant companies continued for the time being to operate their respective service station businesses under ‘without admissions’ arrangements made with BP, pending the outcome apparently of the proceedings in this Court at least at first instance.

66 The primary judge concluded that the breaches on the part of each of the appellants of the POSA as to dealing in foreign fuel, had been deliberate, calculated, constant and secretive, and further that BP had not, in any meaningful sense, contributed to any of those breaches, having neither authorised them, nor having been guilty of any wrongful conduct inducing the same. Though his Honour appeared to implicitly accept that the appellants’ service stations had been subjected to severe price competition from other service stations, his Honour emphasised that BP had made it ‘clear at the outset’ to the appellants that price support would not be given by BP to counter any effects of localised competition. Moreover his Honour found that the breaches of the POSA on the part of the appellants in relation to the acquisition of foreign fuel had been neither trivial nor slight, and that BP was entitled to view those breaches in that light, the nature and extent thereof in his Honour’s view striking at the heart of the appellants’ commercial arrangements with BP, involving, as those arrangements required, the sale of BP product alone through the BP branded service stations under the appellants’ control for the five year term of each POSA, subject only to limited circumstances which did not in any event occur. His Honour recorded that the POSA allowed for the sale of foreign fuel in exceptional circumstances, but that no attempt had been made by the appellants to invoke any of those circumstances, nor were any steps designed and implemented by the appellants to protect the public from being misled by the sale of foreign fuel at what were exclusive BP outlets, presented as such by BP colours and signage.

67 Those findings of the primary judge reflected the essence of his Honour’s adverse view of the conduct of the appellants in contravention of the foreign fuel stipulations of the POSA relating to each service station. No submission was made on behalf of the appellants to the effect that those findings were not open to be made on the evidence placed before his Honour. The grounds of appeal pursued by the appellants in the present Full Court were essentially confined to the subject of penalty. Before outlining the submissions advanced by the parties in that regard, and in particular those of the appellants, since BP’s submissions essentially were confirmatory of the reasons for decision of the primary judge, it is appropriate to summarise his Honour’s findings and conclusions below upon the issue of penalty.

THE REASONS FOR DECISION OF THE PRIMARY JUDGE ON THE ISSUE OF PENALTY

68 The primary judge acknowledged that if goodwill existed in relation to any one or more of the appellants’ respective service station operations, at the time of BP’s exercise of the options for re-transfer of three of the four service station properties from the appellants to BP, being goodwill not reflected in the formulation of the valuations commissioned by BP in respect of those three properties as operational service stations, the appellants would not be compensated for that loss of goodwill. Nor however in his Honour’s view did BP acquire any goodwill upon its exercise of such options, assuming any such goodwill existed. His Honour observed that the sale of assets of a business does not in principle include the sale of the goodwill attaching to that business, unless the sale of those assets is accompanied by, or carries with it, the right to conduct the business said to give rise to or reflect that goodwill.

69 In support of that observation, the primary judge cited the following dicta of The Minister for Home and Territories v Lazarus [1919] HCA 12; [1919] 26 CLR 159 at 166 (Isaacs and Rich JJ):

‘If the goodwill of a business is personal only, it adds nothing to the value of the land. If it is attributable wholly or partly to the land, it pro tanto enhances its value, and that value is recoverable not as goodwill eo nomine but as part of the value of the land.’

The distinction subsequently identified in Lazarus at 167 between so-called ‘local’ and ‘personal’ goodwill, the former enhancing the value of the land in contrast to the latter, has been the subject of consideration by the High Court more recently in Federal Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 at 618-619, to which the primary judge drew attention. It is appropriate to cite the analysis of the joint judgment appearing in Murry at 618 (Gaudron, McHugh, Gummow and Hayne JJ) for assistance in relation to the controversial implications of clause 2.5 of each Option Deed (earlier extracted in [48] of these reasons):

‘Goodwill, as property, is "inherently inseverable from the business to which it relates". That which can be assigned and transferred from the business may, while it is connected to the business, be a source of the goodwill of the business but cannot logically constitute any part of the goodwill of the business. To the extent that the law provides remedies for the protection of a severable asset of a business which is also a source of its goodwill, the right to the remedies arises from the legal properties of the asset and not from the existence of goodwill in the business...

It follows that the sale of an asset of a business does not involve any sale of goodwill unless the sale of the asset is accompanied by or carries with it the right to conduct the business. The sale of hotel premises, for example, may involve the sale of goodwill although the contract does not refer to goodwill. Similarly, the mortgage of land used as a business may involve the mortgage of the goodwill of the business although the mortgage does not mention goodwill. But the reason that is so is that, by necessary implication, the sale or mortgage of such a site includes the sale or transfer of the business conducted on the site. Unless a business is transferred to the person to whom an asset of the business is transferred, the transfer of the asset does not transfer any part of the goodwill of the business...

When an asset of the business is sold and the business is not, the sale may reduce the value of the goodwill of the business. Nevertheless, the sale does not involve the disposition of the goodwill of the business or any part of it.’

70 In the view of the primary judge, what passed to BP in consequence of the exercise of the option in each instance was the service station site and its improvements, and not the goodwill of the business until then conducted by the relevant appellant at each such location. The fact that BP was entitled, on the exercise of the option, to carry on a service station business at each location, under a business name prefixed by its mark BP, did not in his Honour’s view require any different conclusion. That entitlement in favour of BP crystallised, not because BP thereby acquired the goodwill of the particular appellant’s business previously conducted under a BP designated name (for instance BP Lansvale), but because the mark BP was (and remains) BP’s brand name, and because of the reservation of BP’s proprietary entitlement in that regard contained in the POSA. Thus by way of illustration given by his Honour, BP would not be entitled to restrain any of the appellants from soliciting custom from ‘old’ customers of the respective businesses formerly conducted by the appellants, because what BP acquired pursuant to its exercise of the option crystallising on each appellant’s default were assets transferred out of the business of that appellant until then conducted by it, rather than each such business per se or as a whole. Consistently with that analysis, so his Honour continued, there was no obligation imposed on any of the appellants not to compete within any trading area proximate to their respective former service station freehold sites, subsequent to BP’s exercise of the options the subject of the three relevant Option Deeds (ie those relating to the BP Lansvale, BP Silverwater and BP Auburn sites), albeit of course without using the BP name or marks.

71 The primary judge recorded the essence of BP’s submissions against the imputation of the doctrine of penalty adversely to BP, as follows:

(i) the function of the Option Deed, and clause 2.5 thereof in particular, was not to ensure performance of the terms of the POSA on the dealer’s part, but rather to restore the parties to their pre-contractual position on the occurrence of a number of specified events, including the event of termination of the POSA;

(ii) each service station had been sold and conveyed to one of the appellants upon the condition that the relevant appellant would obtain its fuel supplies from BP for a period of at least five years, that condition being ‘at the heart of the original conveyances’;

(iii) each appellant acquired its service station property ‘encumbered’ by both the POSA and the Option Deed to which it was bound as a party;

(iv) the provisions of the Option Deed assisted to protect the commercial interests of BP in maintaining a source of supply of its petroleum products to the service station the subject of the Option Deed for at least five years; and

(v) if the restoration of the parties to their respective pre-contractual positions resulted in a ‘windfall’ for BP, then equity may assist by providing relief against forfeiture, if any one or more of the appellants otherwise established an entitlement to that relief, but any such ‘windfall’ was not in the nature of a penalty.

72 In reaching his conclusions that the appellants’ case below on the issue of penalty should fail, the primary judge pointed to the distinction between penalty and forfeiture, albeit that both doctrines stemmed from a common origin, penalty being in the nature of a punishment for non-observance of a contractual stipulation consisting of the imposition of an additional or different liability upon breach of the contractual stipulation, and forfeiture on the other hand involving the loss or determination of an estate or interest in property, or of a proprietary right, in consequence of a failure to perform a covenant, his Honour citing in that context Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 445 (Mason and Deane JJ). Moreover although the risk of forfeiture may be a strong inducement to completion of a contract, his Honour emphasised that a provision for rescission of a contract for fundamental breach, and the forfeiture of the purchaser’s interest which rescission may thereby entail, is not a penalty or in the nature of a penalty (Legione further at 445-446). In Legione, the rescission related to a contract of sale of land, and was effected by the vendor, after notice to complete within 14 days given to the purchaser had expired, on the basis of failure to pay the balance of purchase money on the due date stipulated by the contract.

73 The primary judge acknowledged the operation of the further established principle that whether a provision is a penalty is to be judged as at the time of the making of the contract, and not at the time of breach, and that the issue as to the imputation or otherwise of a penalty, is a matter of substance rather than of form, and depended for its resolution upon all the surrounding circumstances existing at the time of the making of the contract, as well as upon the terms of that contract, citing thereby what was observed by Gibbs CJ in O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 at 368. If a contractual provision is a penalty, his Honour recorded, the contract is unenforceable, or enforceable only to the extent of the loss which the innocent party can prove to have been actually caused by the breach of contract in question, that outcome not being dependent upon the exercise of any judicial discretion, but flowing automatically from the conclusion that the clause is penal in nature. Thus the particular circumstances of the default were described by the primary judge as irrelevant to the operation of the doctrine as to penalties. However the grant of relief against forfeiture, by way of contrast exemplified by the primary judge, involves the exercise of a judicial discretion, and the circumstances in which the forfeiture may have occurred, are relevant to the exercise of that discretion. The primary judge further acknowledged that a stipulation may be penal in character, even where the penalty is not expressed in terms of money, but extends to contractual provisions for the transfer of moneys worth, referring thereby to dictum in Forestry Commission of NSW v Stefanetto [1976] HCA 3; (1976) 133 CLR 507 at 519 (per Mason J as he then was), subsequently restated in Wollondilly Shire Council v Picton Power Lines Pty Ltd (1994) 33 NSWLR 551 at 558 (per Handley JA with whom Clarke and Meagher JJA agreed), where his Honour referred to ‘the transfer of moneys worth’. The dissent of Mason J in Stefanetto was unrelated to his Honour’s enunciation of that principle, being an enunciation which was in line with the statements of principle of the majority.

74 In Wollondilly, the circumstances were that the purchaser of land from the local Council was bound by the contract of purchase to resell that land to the Council at the same price for which it had acquired the same, if the purchaser subsequently failed to erect industrial premises upon the land within a specified time. Having defaulted in so doing, the Council moved to exercise its right to re-acquire the land at the original sale price. In rejecting the purchaser’s contention that the relevant contractual provision was penal in character, Handley JA reasoned and concluded at 556 as follows:

‘The courts have had no difficulty striking down liquidated damages clauses where the sum recoverable substantially exceeds the maximum damage the innocent party is likely to suffer on breach. However such a clause will not be characterised as penal merely because the innocent party would have difficulty in proving its damages. Indeed for that very reason, the Court is more likely to find that there has been a genuine pre-estimate...

The submissions... emphasised the so-called "windfall" effect of the clause in returning the land to the Council at the original price when it may have greatly increased in value. The loss by the company of this increase in value was said to be the penal aspect of the clause, especially... where that increase exceeded any damages the Council could hope to prove. In my opinion this argument assumes the invalidity of the subclause that it seeks to establish. The test is whether the sum payable under the clause as it stands is a genuine pre-estimate of the damage likely to be suffered by the innocent party... The test does not begin by assuming that the clause is invalid. If it were nothing would be payable pursuant to its terms.

If this obligation to re-sell is valid the land will never be worth more to the respondent that the re-sale price unless and until it has substantially commenced the necessary building work. Until that stage is reached any unearned increase in value accrues to the Council. It follows that if the clause is valid its specific enforcement does not confer a windfall on the Council nor penalise the respondent by causing it to lose money’s worth to which it has become entitled.

The Council entered into the original sale to encourage industrial development in the shire and took contractual promises from the purchaser to ensure that this purpose was carried out. The failure, in this respect, of the contractual purpose of both parties gave rise, in accordance with the terms of subcl (b), to the obligation to re-sell the land. This obligation was restitutionary rather than penal.’

75 In the view of the primary judge in the present proceedings, at the time when each appellant entered into its contract to purchase each service station property from BP, the same was thereby agreed to be encumbered by both the POSA and the Option Deed to which it related. Consequently in his Honour’s further view, until the term of each POSA had run its course, and the Option Deed relating thereto had ex hyposesi lapsed, the service station site the subject thereof was worth no more to that appellant than the resale price provided for by the Option Deed. Until the stage had been reached of the POSA running its course of operation, there could be no prospect in his Honour’s view of any windfall accruing to BP arising from its exercise of the option, nor did the exercise of the option penalise the appellants, in his Honour’s further view, by causing them to lose moneys to which they had otherwise ex hyposesi become entitled.

76 The primary judge additionally discussed PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615, which involved a contract for the sale of land pursuant to which, prior to completion thereof, the purchaser had been allowed to enter upon, in order to demolish existing structures and to commence building work for his own purposes, though not to remove any such work, nor to be compensated for what work might be undertaken in the meantime. Having exercised that right of entry and partially completed that building work, the purchaser failed to complete the contract of purchase, and thereby suffered the termination of the contract and a purported forfeiture of the deposit to the vendor. The NSW Court of Appeal rejected the contention that the contractual provision there involved, as to disentitlement of the purchaser to remove the building works carried out on the land, and as to further disentitlement to any compensation in respect thereof, constituted a penalty. It held that the purpose of that contractual provision was merely to provide a mechanism for dealing with problems that were apt to arise if there occurred default on the purchaser’s part in completion of the contract of sale, rather than to stipulate a price to be paid by the purchaser in terrorem if the purchaser did not complete the contract. Mahoney JA observed at 628 that ‘[t]he default is, in such a case, the occasion of the provision, but the provision made is not the result of the default or the price to be paid for it’. In the present circumstances, in the view of the primary judge, ‘... a consideration of the totality of the transaction indicates that the option to re-purchase the service station site was restitutionary in nature, given as part of the vendor and purchaser arrangements, rather than as a price to be paid in terrorem in the event of breach of the POSA’, and further that ‘[t]he termination of the POSA provides an occasion for the exercise by BP of the options, but the options are not themselves "the result of the default or the price to be paid for it".’

77 The primary judge found that if the options were not penal because they were part of each vendor and purchaser arrangement, then the Option Deeds did not constitute a penalty, irrespective of the operation of SC2.1 and SC2.5 thereof, ‘as the price payable on exercise of the option is not determinative of whether or not the option is a penalty’. The primary judge referred in that context to BICC Plc v Burndy Corporation [1985] Ch 232 and CRA Ltd v NZ Goldfields Investments [1989] VR 873 as illustrations of cases where the entitlement of an innocent party to acquire the defaulting party’s interest in property for no consideration, or for less than market value, was not struck down as a penalty, because there was a sensible commercial reason why provision to that effect was included, being a reason unrelated to any issue of punishment of the defaulting party. In the view of the primary judge, the Option Deeds did not constitute a means of providing BP with any form of compensation in respect of breach by the appellants of the respective POSAs, perhaps comparably to the circumstances in Stefanetto, where it was the contractual entitlement of the Forestry Commission to take and use a defaulting contractor’s plant on site, other than that the subject of hire purchase and leasing agreements in favour of third parties, in order to complete contract works. Moreover the fact that the Option Deed might nonetheless provide an incentive to performance of the contractually related POSA did not in his Honour’s view render the same to be in the nature of a penalty (referring thereby in that context to Legione at 445-446).

78 The primary judge recorded certain further submissions made by the appellants below, in the following terms, being submissions not dissimilar to those advanced on the appeal:

(i) by reason of clauses 2.1 and 2.5 of the Option Deed, BP stood to obtain some kind of windfall, or conversely the appellants would be exposed to punishment for breach of the POSA, because the service station property the subject thereof in each case was required to be valued as a service station, whatever its highest and best use might be at the exercise of the option, and because of the exclusion from the valuation process, of any goodwill attaching to the service station business being conducted; and

(ii) if the option to purchase each service station at market value was not per se penal in nature, the position was otherwise, once regard was had to the provisions of those clauses of the Option Deed.

79 His Honour’s conclusions upon those last mentioned submissions were in summary as follows:

(i) the first submission failed for the reasons appearing in Wollondilly, since any enhancement in the value of any of the properties, flowing from each service station property’s capacity for use for a purpose other than a service station, would not have accrued to any of the appellants until the lapse of the option exercisable by BP;

(ii) the second submission failed, since clause 2.1 of each of the Option Deeds provided that the price payable upon exercise for each service station was to be the market valuation of the service station as an operational service station (as opposed to an operating service station), excluding any value attributable to goodwill attaching to any business conducted on the site, the expression operational meaning, according to the Macquarie Dictionary (revised 3^rd ed), ‘ready for use; in working order’, but not operating; the latter expression was described as contemplating a site actually operating as a service station; if a business was not operating on the site, then by definition there was no goodwill which was to be valued;

(iii) there was no inconsistency between clauses 2.1 and 2.5 of the Option Deed, clause 2.5 making explicit what was already implicit in clause 2.1, namely that the service station was to be valued upon the assumption that it was ready for use as a service station, but was not yet actually trading as such; and

(iv) each of the appellants’ experts accepted under cross-examination that a valuation of each site as an operational service station would include any value arising by reason of the location of the site, as well as any value arising from improvements made to the site, inclusive of any value arising from the potential of the site to produce profits when used as a service station.

80 Those conclusions of the primary judge made no reference in the above context to goodwill of any value subsisting at the time BP re-possessed the service stations, consistently with his finding as to the competing expert testimonies.

THE SUBMISSIONS OF THE PARTIES ON THE APPEAL

81 It is appropriate to first refer to BP’s submissions only briefly, since they were essentially confirmatory of the reasons for judgment of the primary judge on the issue of penalty. BP emphasised from the outset of the appeal that there was no prospect of windfall or advantage accruing to BP, at least of any significance, resulting from the exclusion of ‘goodwill attaching to any business’ (to adopt the expression used in clause 2.5 of the Option Deed), from the valuable consideration to be provided by BP for the re-purchase of each of the three service stations the subject of the appeal (BP Lansvale, BP Silverwater and BP Auburn). That was said to be for the reason, in line with the conclusions of the primary judge and in particular with his Honour’s reliance upon Wollondilly, that those service stations would have been worth no more to the respective appellants than the so-called ‘resale price’, which was determinable pursuant to clause 2.1 of each Option Deed throughout the period of time stipulated for exercise of the option to re-purchase, ‘encumbered’ as they were by the POSAs and Option Deeds.

82 BP emphasised also that although BP was not required to make payment to the appellants for goodwill under clause 2.1 of the Option Deed, BP did not acquire goodwill of the appellants in respect of those three service stations, in line with the primary judge’s conclusions on the expert evidence. That absence of acquisition by BP of goodwill from the appellants was said to be exemplified by the circumstance that following re-purchase by BP on termination of the POSA, each appellant was free to conduct its then existing service station business at and from another site in the neighbourhood, if it so chose, without restriction from BP’s contractual documentation as to location or identity of customer patronage. It was further emphasised that each appellant was not restricted by the POSA from exploiting commercially any personal goodwill acquired in the course of its operation as a dealer of any of its previously owned service stations (which service stations reverted of course to BP upon the exercise by BP of its options to re-purchase). BP submitted that the appellants were compensated in principle, pursuant to the terms of the Option Deed, for the value of the service station assets which each of the appellants had originally acquired from BP, except to the extent of any so-called locational goodwill, the latter belonging inherently to BP because of its re-acquisition of ownership of the location of, and of course the land title to those sites. It appears that no sum was allocated to goodwill, in relation to any of the subject service stations, at the time the appellants purchased the same from BP, in the circumstances outlined in [44] above. In any event of course, as we have already recorded, the unchallenged finding of the primary judge was to the effect that no goodwill of value was attributable to any of the subject three service stations, at the time of reversion of the freehold titles to BP.

83 BP emphasised that the option to re-purchase conferred in its favour by the Option Deed was not designed to secure performance of the POSA, and referred in that regard to subclause A13.2.2 of the POSA (extracted in [57] above). That submission was somewhat of an overstatement, once regard is paid to the entire text of the circumstances which would trigger BP’s entitlement to exercise of the Option Deed. The subject of emphasis, in terms of the appellants’ obligations the subject of the POSA, was of course the prohibition upon the sale of foreign fuel imposed by clause A4.15 of the POSA, breach of which was the raison d’etre for BP’s termination of the POSA. It may thus be inferred from the text of clause A4.15 of the POSA that prominent to BP’s concern for protection was the potential retail market component of foreign fuel, being a potential market contributed partly by the availability of ethanol as a cheaper product.

84 Understandably, the appellants’ submissions on the appeal tended to be more wide-ranging than those advanced by BP, the appellants undertaking the formidable task of negating the comprehensive reasons for judgment below on the penalty issue, upon which reasons, BP wholly relied. The cardinal submission made by the appellants may be summarised to the effect that although BP’s right to exercise the choses the subject of each Option Deed was designed to ensure adherence by the appellants to the stipulations of the POSA, that adherence being conceded by the appellants to be a legitimate condition precedent to the exercise of that right, nevertheless the operation of the Option Deed, in the context of the POSA, was not so limited, and travelled impermissibly beyond the legitimate protection of BP’s commercial interest in maintaining each site as a BP branded service station, by virtue of the consequences of any exercise of that right. Nevertheless the appellants asserted as a starting point that the objective of the Option Deed was reflected in the primary judge’s finding, not eschewed by BP on appeal, that ‘[t]he evident purpose of the option was to protect BP’s commercial interests in the site being maintained as a BP service station’. On that footing, the appellants set about their endeavours to characterise the provisions of each to purchase as a penalty, having the effect of invalidating the purported exercise by BP of the option the subject thereof.

85 The appellants cited at the outset of its submissions the following passage from the leading speech of Lord Dunedin in the House of Lords in Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Ltd [1914] UKHL 1; [1915] AC 79 at 87:

‘(a) [i]t will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach...

(b) [i]t will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid...’ (described by Lord Dunedin as ‘truly a corollary to the last test’).

(iii) [t]here is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage"...’

That dictum has been described as the ‘classic passage’ of exposition of the doctrine of penalties: Meagher, Gummow & Lehane’s Equity: Doctrine & Remedies (4^th ed) (Butterworths LexisNexis 2002). The reference above to ‘greatest loss’ is of significance in the present context, and presents at the outset a formidable hurdle to the appellants’ case.

86 The appellants acknowledged the principle that whether or not a contractual stipulation constitutes a penalty is a question of construction to be determined upon the terms and surrounding circumstances of the particular contract, being terms and surrounding circumstances required to be viewed or assessed at the time when the contract was made, and not at the time of subsequent breach (O’Dea at 368, 378 and 399). One such circumstance identified by the appellants was that the Option Deeds, and the contemporaneous POSAs relating to each service station site, were entered into by the appellants at a time when BP was engaged in the process of exodus from some of the franchised and commission agency service station sites then subject to BP’s freehold ownership, on the basis that the franchisees and commission agents would convert to the status of freehold owners of those sites, and to the operation thereof as so-called dealers, yet would remain effectively tied commercially to BP for the ensuing five years as sellers exclusively of BP motor fuel at what would continue to be BP branded service stations.

87 The appellants made the uncontentious threshold submission on the appeal that although one effect of clause 1.2(a) of each Option Deed was to render the option to purchase exercisable by BP upon termination consequential upon breach, rather than upon breach alone, that feature of the contractual arrangements ‘[did] not mean that the clause escapes the scrutiny of the law relating to penalties’, the appellants citing in that context Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7; (1989) 166 CLR 131 at 140 (Wilson and Toohey JJ). The appellants drew attention to the last sentence of SC1.2(e) of the POSA, stipulating as it does that if upon termination of the POSA, BP exercised its right of re-purchase of the service station site, liquidated damages would not be ‘repayable’ by the dealer to BP under SC1.3 of the POSA. It was pointed out that BP was required to elect between those alternative remedies, pursuant to SC1.2(e). Though not literally framed as an election, it is no doubt true that recourse to termination of the POSA on BP’s part, operated to deny recourse to liquidated damages.

88 The appellants submitted on that footing that since liquidated damages, and the right to purchase pursuant to the exercise of the option, were the alternative prices each appellant was required to pay or sustain for termination consequent upon breach of the POSA, BP was required to elect between those alternative rights or remedies. The appellants reasoned that ‘[t]he contractual assumption underlying the concept of election is that each right is validly granted and therefore available for exercise’, and therefore if one such alternative remedy was not available as a matter of construction, by virtue of the operation of legal principles concerning liquidated damages, the alternative right to exercise the option of re-purchase, conferred as it was by the Option Deed operating collaterally to the POSA, was also unavailable to BP, as a matter of construction of those contemporaneous instruments when read together. In order to make that proposition good, the appellants submitted that the liquidated damages provisions of the POSA were unenforceable in terms, the same not purporting to constitute pre-estimates of the loss or damage likely to be sustained by BP as a result of breach by BP of the foreign fuel prohibitions of the POSA. A corresponding submission was made in relation to the liquidated damages provisions of the contemporaneous contracts of sale in respect of each other site made between BP as vendor and each appellant as purchaser.

89 The foregoing submission of the appellants should not be accepted. The quantification of liquidated damages stipulated by SC1.3 is geared to the point in time during the five year term of the POSA when termination might occur at the instance of BP in consequence of the dealer’s default, and is designed to reflect the loss of the benefit of a bargain of five years duration. Bearing in mind the inherent likelihood of the involvement of cost in connection with the re-starting of a business in the wake of the departure from the business of a defaulting contracting party at arms length, whether that departure be voluntary or otherwise, the estimates of liquidated damages the subject of SC1.3 were not in our opinion vulnerable to characterisation as penal or punitive in contrast to compensatory. Equity looks to the intent of documentation, in circumstances where relief is sought against penalties, and the intent of SC1.3 is we think directed not to breach but rather to loss of the bargain. We do not think that it is open to predication that the ‘sliding scales’ of monetary amounts the subject of SC1.3 reflect any greater loss to BP of its five year bargain with each dealer beyond what might reasonably be adjudged to be the measure of common law damages. In that regard, we refer once again to the expression ‘greatest loss that could conceivably be proved’ in Dunlop (ante).

90 We would not accept the proposition in any event that the invalidity of any one of two contractual remedies has the consequence of invalidating as well an otherwise not invalid alternative remedy. No authority was cited in support of any such principle. Nevertheless it is necessary to record that on the final hearing day of the appeals, the appellants sought to amend their respective grounds of appeal by the addition of contentions to the effect that the liquidated damages provisions of the relevant POSAs, and of the corresponding provisions of the contracts of sale of the relevant service stations, did not provide or purport to provide, a pre-estimate of the damages likely to be incurred by BP as a consequence of breaches of the POSA, or of the contract for sale, relating to each appellant. The appellants undertook not to seek the recovery of the liquidated damages already paid, presumably by way of appropriation by BP out of the proceeds of sale of the relevant service stations, pursuant to SC1.2(e) of the POSA, and the contract of sale entered into between BP as vendor and each appellant as purchaser in conformity therewith, if the amendments were to be allowed. The appellants indicated they would bear their own costs of the appeal, in so far as those costs related to the implementation of the proposed amendments, if the amendments were to be allowed. Having regard to the conclusions reached by the Full Court on the appeals that the same should be dismissed, and the reasons for those conclusions later to follow, it becomes unnecessary to consider those belated amendment applications.

91 Returning then to the appellants’ primary case on appeal on the ground of penalty, unrelated to the liquidated damages provisions of the POSA, the appellants contended that although his Honour’s characterisation of each option to re-purchase as restitutionary might imply that exercise of the option was remedial in character, nevertheless the option was expressed to be exercisable otherwise than solely upon breach of the POSA by the dealer (appellant). The Court was referred to clause A13.2.2 of the POSA, extracted in [57] above, and in particular, to the condition precedent to its operation being, ‘[i]f BP reasonably believes, for any reason (and whether or not the Dealer has breached a provision of this Agreement) that... the Dealer is no longer suitable to carry on the Retail Business...’. That illustration of the submission is not entirely compelling, since the notion of unsuitability would conceivably encompass the circumstance of a dealer not being in default in the observance or performance of specific conditions of the POSA. In any event, there is no reason in principle why a condition of defeasance, exigible by one contracting party alone, cannot be invoked if so authorised contractually, by reference to the crystallisation of an agreed event not involving default by the other.

92 More compelling however was the appellants’ submission that the options of re-purchase were susceptible to exercise by BP upon termination by BP of the POSA upon the basis of solitary breach by an appellant of the POSA, even of a non-essential term. Subparagraph (i) of clause A13.2.1(a) of the POSA refers in that regard to any failure by the dealer to perform any obligation imposed on the Dealer... to abide by any direction...’. That aspect of the contractual arrangements was contended by the appellants to ‘stamp the option with the character of a stipulation "in terrorem" designed to deter breach’, and to involve a penal liability different from, and more drastic than, payment of common law damages or genuinely pre-estimated liquidated damages.

93 The appellants invoked the principle, enunciated in Legione v Hateley at 445 (per Mason and Deane JJ), that ‘[a] penalty... is in the nature of a punishment for non-observance of a contractual stipulation [consisting] of the imposition of an additional or different liability, upon breach of the contractual stipulation, to the liability to pay common law damages’. It was submitted that it was not open to BP to rely on the severance condition of clause A16.5 of the POSA, in order to validate the liquidated damages provisions of SC1.3 to SC1.5 thereof, or alternatively to validate the operation of the Option Deed per se, to enable either of those contractual provisions to apply to the purported termination of the POSA by BP upon the basis of breach thereof by the appellants, since clause A16.5 authorised only excision, and did not permit any re-writing of the POSA in order to avoid an imputation of invalidity, illegality, or enforceability. That severance condition was framed as follows:

‘If any provision of this Agreement is or becomes invalid, illegal or unenforceable the provision is deemed to be severed from this Agreement but as far as possible all the remaining provisions are not to be affected.’

94 The primary judge disposed of the thrust of the submission by what we have earlier summarised in [75] above, and by reference to the ratios of the decisions of the New South Wales Court of Appeal in Wollondilly and Revell. The appellants submitted that Wollondilly was wrongly decided ‘because the decision negativing penalty was based on the question begging assumption that the clause under attack was valid’, and that Revell was in any event distinguishable and moreover contained nothing incompatible with the appellants’ case. Both of those authorities serve to exemplify the conceptual difficulties which may arise in the resolution of an issue as to forfeiture of property in specie, in contrast to forfeiture of a monetary fund. We are unable with respect to distil error in principle in the approach of the New South Wales Court of Appeal in either case, and we observe incidentally that the reference by Handley JA to ‘maximum damage’ in Wollondilly at 556 is consonant with Lord Dunedin’s description of ‘greatest loss’ in Dunlop. We have earlier set out at some length the circumstances and reasoning appearing in both of those authorities as recorded by the primary judge.

95 The primary basis for characterisation of the option exercisable by virtue of the Option Deed as a penalty, as submitted by the appellants on the present appeal, was the stipulation for the transfer of property comprising the subject service stations, following upon breach of the POSAs by the appellant owners, without payment by BP for the appellants’ goodwill appertaining to the service stations, implementation of that stipulation being contended to have the effect of affording BP a windfall unrelated to any recognised measure of damages. We were more extensively referred to the reasons for judgment of Handley JA in Wollondilly at 555-557, in the course of which his Honour observed that in principle, ‘the doctrine as to penalty should apply not only to contractual provisions which provide for the payment of money on breach but also to those which provide for the transfer of money’s worth’. That observation reflected what had been earlier confirmed by the members of the High Court in Stefanetto (Barwick CJ, Mason and Jacobs JJ) to the effect that a contractual stipulation for the transfer of property, by the party in breach to the innocent party, may be struck down as a penalty (Mason J dissented in the outcome of the appeal).

96 The appellants’ principal submission was that the critical effect of the Option Deed and the POSA, in combination, was to subject each of the appellants, in the event of BP seeking to rely on its right to exercise the option of re-purchase, to acceptance of a sale price for its service station property which would exclude any allowance for the goodwill. In that context, the submission continued, it would be correct to conclude that the provisions of clause 2.1 of the Option Deed were required to be read consistently with clause 2.5 thereof, the latter excluding significantly any allowance for goodwill. Yet each appellant had furnished valuable consideration to BP in the context of its earlier purchase of each service station business in combination with the service station land and buildings relating thereto. The appellants contended in that setting that the ‘contractual infliction of that disadvantage necessarily produced a windfall in favour of BP, because BP’s exercise of the option of re-purchase conferred by the Option Deed enabled BP to acquire each service station site and the business conducted thereon on a "going concern" basis without payment by BP for that latter asset’, and further that the windfall thereby gained by BP on re-acquisition was to be characterised as falling ‘within the mischief of the doctrine as to penalties’. In short, the contention amounted to the complaint that BP acquired the goodwill of each service station without providing valuable consideration for any such intangible property of value. We observe incidentally that if the appellants’ proposition be correct, any such ‘going concern’ value for goodwill would presumably include as a component in its calculation or assessment the extent of foreign fuel purchases previously made by the appellants, albeit in deceptive breach of contract, and in the present context, on a significant scale (see again [61]-[63] above). That consequence would flow because turnover or gross sales would necessarily be a factor of relevance to the assessment of goodwill, unless of course the quantity of foreign fuel was to be specifically excluded. Thus BP would conceivably reward the appellants, in the calculation of any repurchase price for goodwill postulated by the appellants, for their radical breaches of contract. Since however that subject was not raised in argument, it is unnecessary to incorporate our observation in that regard into any aspect of our reasoning upon the issues arising for determination.

97 In our opinion the submission provides no sufficient answer to the approach adopted by the primary judge, involving as it did his Honour’s application of the principles enunciated by the High Court in Murry, and further involving the implications flowing from BP’s ownership and usage of its marks and signage. We have earlier summarised his Honour’s application to the present circumstances of dicta in Murry of present application. There is no good reason to infer, much less to conclude, that whatever goodwill of the service station businesses could be attributed to the respective appellants personally, whether directly or indirectly, would not have been retained by the respective appellants for any ongoing exploitation by the appellants if they should so choose.

98 Moreover in conformity with the approach adopted unanimously by the Court of Appeal in Wollondilly, the appellants’ ownership of each of the subject service stations, and of the choses thereby entailed, was by operation of law rendered subject to, or ‘encumbered by’, the provisions of the POSA and of the contemporaneous Option Deeds. This occurred to the extent and for the purposes predicated by the primary judge as we have earlier summarised, so that the subsequent reversion of the freehold titles to the subject service stations in favour of BP, in consequence of its exercise by BP of the options conferred by those Option Deeds, did not operate in law to confer upon BP any proprietary rights, and in particular rights in relation to goodwill, additional to what BP may have already possessed prior to its re-acquisition of the freehold titles to the service station.

99 The appellants submitted further that it was unrealistic to suggest otherwise than that BP, by virtue of its exercise of each of the three options of re-purchase, and of completion of each such re-purchasing transaction, would not reacquire what it had previously sold to each appellant, that is, a service station property together with the service station business until then conducted thereon by each appellant on a going concern basis. Yet under the valuation formula stipulated by the Option Deed for application in relation to each re-purchase the contention of the appellants continued, BP would not provide valuable and adequate consideration to the appellants for its acquisition of those ‘going concern’ businesses. Contrary to what the primary judge found, in the context of his Honour’s examination of the implications flowing from the High Court’s reasons for decision in Murry, the appellants contended that not only would BP re-acquire that which it had previously sold to each appellant, but that each re-purchase by BP, pursuant to its exercise of the option the subject of each Option Deed, would create the inherent entitlement on its part to carry on that very business which each appellant had been contractually required to continue to conduct until completion of each re-purchase by BP, upon the terms and conditions of the pro forma contract of sale attached to each Option Deed. A conceptual difficulty attends however the appellants’ submissions, by reason of the implications of the appellants’ ambiguous reference to their former "business" in that global way, rather specifically to the asset in the nature of the goodwill of that "business". The incidents of a service station customer base more than possibly containing each of the three differing zoological illustrations of the nature and incidents of goodwill, made by Scrutton LJ in Whiteman Smith Motor Co v Chaplin [1934] 2 KB 35 at 42, would tend to manifest in varying degrees to a city or suburban service station operation, such as those here involved, particularly where each of the operators engaged in foreign fuel trading to a significant extent during the time when the nature and value of goodwill fell for appraisal.

100 It was submitted by the appellants that the grant to BP of the right to exercise the option on termination of each POSA carried no rational, or at least no proportionate, relationship to any genuine or consensual pre-estimate of damages for breach, or to any contractual right or interest that BP was legitimately entitled to protect in the context of its relationship with each appellant. That contractual right or interest, so the appellants contended, was confined to the preservation of the site as a BP service station for the mutually intended duration of the POSA of five years. The right to re-acquire title to the freehold (including of course the buildings) of each service station site, even if the price formula for so doing was appropriate, was described by the appellants as disproportionate to the protection of that interest of BP, given that a service station business would be conducted at each site up to the time of reversion thereof to BP pursuant to exercise of the option. The appellants’ submission went further than to address the implications of goodwill accruing to BP, and extended to the freehold property which had purportedly reverted to BP as well. Any appropriate protection of BP would have required, in the appellants’ submission, no more than the grant of an option for BP to take a lease of the service station site, albeit also of the business conducted thereon up until then by the appellants, for the balance remaining unexpired of the term of the POSA computed from the time of early termination by BP for breach by each appellant, irrespective of the length of the preceding times during which the purchase of foreign fuel had been taking place, albeit to an extent radically in contravention of each POSA.

101 The appellants further submitted that each Option Deed was mutually intended to serve the inherent purpose of constituting only a form of security for the performance of the appellants’ contractual obligations in favour of BP by subject of the corresponding POSA. The appellants referred in that context first to special condition 38.1 of each contract of sale (earlier identified at the commencement of [45] above), and additionally to special condition 41.1 of each such contract of sale reading as follows:

‘41.1 The purchaser agrees to grant a mortgage in favour of the vendor on the terms and conditions set out in (the annexed mortgage) to secure:

(a) payment of the Liquidated Damages in the event of a termination of the POSA prior to the expiry of the 5 year term of the POSA; and

(b) any moneys payable by the purchaser to the vendor pursuant to the Option Deed.’

102 The appellants next referred to clause 1.2 of the Option Deed (extracted in [44]-[45] above), and additionally to clause 5.1 thereof not previously cited, which contained the mutual acknowledgement of BP and each appellant ‘... that the Grantee [ie BP] has been granted a mortgage by [the dealer] contemporaneously upon entering into this Option’, and to clause 4 of each mortgage entered into by each of the appellants in favour of BP, contemporaneously with its acquisition of each service station in the first place, whereby each appellant as mortgagor covenanted in favour of BP as mortgagee as follows:

‘4. This mortgage is given by the Mortgagor to secure the rights of the Mortgagee pursuant to the Option and the Contract including any damages payable to the Mortgagee for any breach or failure to comply by the Mortgagor with its obligations under the Option or the Contract and as a separate and independent covenant to secure repayment to the Mortgagee of any credit which the Mortgagee may agree to extend to the Mortgagor or any related company of the Mortgagor at a future date.’

103 In the light of the inter-related transactions, the subject of the documentation which we have summarised in the preceding paragraphs, the appellants submitted that the mortgages granted by the appellants over their respective service station properties in favour of BP, at the time of completion of their respective purchases of the subject service station properties, must be discharged, if a conclusion in the appellants’ favour on penalty was to be reached by the Full Court, for the following reasons in summary:

(i) an evident purpose of each Option Deed was to secure the continued availability of the site, during the currency of the trade tie of five years stipulated by each POSA as an outlet for BP petroleum products; in other words, part of the intended operation of the Option Deed was to secure to BP such benefits as would accrue to BP, for so long as the trade tie with each appellant would continue in operation;

(ii) BP elected however, by notices given on 2 December 2002 to terminate each of the POSAs with effect from 1 January 2003, without any contemporaneous exercise of the corresponding options; ‘[t]hus, on any view of the facts, the Dealer was legally free of the tie from 1 January 2003’; as we have earlier recorded, notice of intention to exercise the buy-back options the subject of each Option Deed was not subsequently given by BP until 19 June 2003, in relation of course to each of the BP Lansvale, BP Silverwater and BP Auburn sites; we interpolate to record that the original five year term of each POSA would nevertheless have been unexpired as at that latter date, and would not have expired until the following year, were it not for BP’s termination of the POSAs with effect from 1 January 2003;

(iii) if it were the case, as was said to be evident when the parties entered into each POSA and Option Deed, that it was part of the intended operation of each Option Deed that it should stand as security for the dealer’s performance of the POSA, and be exercisable on termination for breach of the POSA by the dealer, ‘that particular aspect of the operation of the option would constitute a penalty if BP were to exercise the option in circumstances where by its own act (termination) it [had] discharged the dealer from performance of the POSA’; in those circumstances, so the appellants’ submissions continued, there was nothing to secure in favour of BP, since there could be no valid security for what the appellants described as a ‘non-obligation’; and

(iv) as at the time of the making of the contractual arrangements, so the appellants’ submissions further emphasised, ‘any utilisation of the option predictably would operate as a penalty in the event of its exercise after its purpose as security for the dealer’s compliance with the trade tie had ceased to exist by reason of the termination of the POSA’.

104 The submission the subject of the previous paragraph does not appear to have been raised in the proceedings below. There is no provision of the POSA that explicitly throws light on the issue (see again [44]-[48] above). No express reservation of any continuing right to exercise any of the options to purchase conferred by the Option Deeds was made at the time of BP’s termination of the POSAs. It will be recalled that the period of time for exercise of the option the subject of each Option Deed was five years and three months, the commencement of that latter component of three months being geared to coincide with the expiration of the POSA for the property to which the Option Deed was to relate (see again clause 1.2(a) of each Option Deed).

105 In our opinion, the appellant’s submission should not be sustained. The only stipulation of the Option Deed as to the lapsing thereof was in the following terms:

‘1.3 The option will lapse on the date being 5 years and 3 months after the date of this Deed.’

It is readily apparent that the contents of the Option Deed had been settled with consideration care and legal expertise, extending as the Option Deed does over seven pages, and geared as it is to provisions of the POSA.

106 Other provisions of the Option Deed conceivably bearing upon the operation of the Option Deed are as follows:

‘1.2 The Option may only be exercised by the Grantee if:

(a) the agreement titled BP Branded Privately Owned Sites Agreement ("POSA") entered into between the Grantor and the Grantee is terminated, and is not replaced by a further POSA which may or may not be called POSA, or becomes unenforceable or of no force or effect from whatever cause;

(b) any BP automotive fuels sold from the Property as at the date of this Deed cease to be sold from the Property;

(c) the Grantor leases the Property to a third party without the Grantee’s prior written consent;

(d) at any time an application is made by the Grantor or any other party (other than the Grantee) for the removal or discharge of the mortgage referred to in clause 5, by the Registrar of Titles;

(e) in the period 5 years and 3 months following the completion date an application is made by the Grantor or any other party (other than the Grantee) for the removal or withdrawal of the caveat referred to in clause 6, by the Registrar of Titles;

(f) the Grantor during the currency of this Option serves the Grantee with a Notice of Sale pursuant to clause 7.1 , provided that the Grantee exercises the Option within the period of 14 days following the service of the Notice of Sale on the Grantee by the Grantor; or

(g) any financier of the Grantor purports to exercise a power of sale in respect of the property.

In this case "automotive fuels" mean motor spirits of any kind and grade including but not limited to leaded, premium and unleaded motor spirits, automotive diesel fuel, liquefied petroleum gas for automotive use and two stroke fuel.

1.3 The Option will lapse on the date being 5 years and 3 months after the date of this Deed.’

107 The care and detail apparent from the above extracted provisions, and indeed the various other terms and conditions of the Option Deed, evince the input of considerable thought by the draftsman, and purport implicitly in our view to set out the whole of the intended terms and conditions. In particular, clause 1.2 did not set any limit upon the time for exercise, whether by reference to termination of the collateral POSA, or otherwise. Given the nature and extent of the terms and conditions of the Option Deed, we do not think that there is room for an implication to the effect that the option to purchase in favour of BP the subject of any of the subject Option Deeds lapsed upon BP’s termination of each of POSAs. Particularly should that conclusion follow, in circumstances where a POSA would have been terminated by BP on the basis of default by the dealer thereunder, bearing in mind that exercise of the option the subject of each Option Deed was an important aspect of BP’s rights and remedies arising in the situations set out in clause 1.2 thereof.

108 We would therefore reject the submission that the availability or operation of the Option Deed came to an end on BP’s terminations of the POSAs, and that therefore BP’s exercise of the options the subject of each Option Deed was of no force or effect.

CONCLUSION

109 For the reasons appearing above, which essentially adopt the reasons for judgment for the primary judge below, except to the extent that fresh submissions were raised in the context of the present appellate proceedings, the appeals should be dismissed with costs.

I certify that the preceding seventy-six (76) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Conti and Crennan.

Associate:

Dated: 12 August 2004

Counsel for the Appellant:	TEF Hughes QC MF Holmes QC GF Grinter
Solicitor for the Appellant:	Stojanovic Solicitors
Counsel for the Respondent:	M Walton SC DR Sibtain MG Small
Solicitor for the Respondent:	Corrs Chambers Westgarth
Date of Hearing:	10, 11 and 12 May 2004
Date of Judgment:	12 August 2004