Forestry Commission of NSW v Stefanetto [1976] HCA 3; (1976) 133 CLR 507 (19 February 1976)

HIGH COURT OF AUSTRALIA

FORESTRY COMMISSION OF N.S.W. v. STEFANETTO [1976] HCA 3; (1976) 133 CLR 507

Contract

High Court of Australia
Barwick C.J.(1), Mason(2) and Jacobs(3) JJ.

CATCHWORDS

Contract - Penalty - Forfeiture - Construction contract - Default by contractor - Works proprietor entitled to take possession of plant owned by contractor and use to complete works - Plant held under hire-purchase and leasing agreements - Contractor not entitled to compensation for use of plant - Whether penalty.

HEARING

Sydney, 1975, November 17; 1976, February 19. 19:2:1976
APPEAL from the Supreme Court of New South Wales.

DECISION

1976, February 19.
The following written judgments were delivered:-
BARWICK C.J. The general conditions of contract incorporated into a road the following clauses relevant to the resolution of this appeal:

"35.5. LIQUIDATED DAMAGES FOR DELAY IN COMPLETION.
If the Contractor fails to complete the Works or a separable
part of the Works, as the case may be, within the relevant
time referred to in sub-cl. 35.2, or within any extended
time granted or allowed pursuant to sub-cl. 35.4, the Contractor
shall pay to the Principal by way of pre-estimated
and liquidated damages and not as a penalty the amount or
amounts stated or referred to in the Annexure hereto for
every week and part of a week that shall lapse after that time
or the extended time until the whole of the Works or the
separable part of the Works, as the case may be, has been
completed and that amount or those amounts may be
deducted from any moneys which may then be or thereafter
become payable to the Contractor by the Principal,
including any retention moneys then held by the Principal,
and, if such moneys are insufficient for this purpose, then
from the Contractor's security under the Contract, and any
deficiency then remaining may be recovered by the Principal
as a debt due to the Principal by the Contractor.
Where the Principal has used or occupied any part of the
Works pursuant to sub-cl. 35.3, the amount of pre-estimated
and liquidated damages payable by the Contractor to the
Principal by virtue of this subclause may be reduced to an
amount determined by the Superintendent and notified by
him to the Contractor.

43.1. PROCEDURE ON DEFAULT OF CONTRACTOR.
If the Contractor defaults in the performance or observance
of any covenant, condition or stipulation in the Contract
or refuses or neglects to comply with any direction as
defined in cl. 23 but being one which either the Principal or
the Superintendent is empowered to give, make, issue or
serve under the Contract and which is issued or given to or
served or made upon the Contractor by the Principal in writing
or by the Superintendent in accordance with cl. 23, the
Principal may suspend payment under the Contract and may
call upon the Contractor, by notice in writing, to show cause
why the powers hereinafter contained in this clause should
not be exercised.
The notice in writing shall state that it is a notice under
the provisions of this clause and shall specify the default,
refusal or neglect on the part of the Contractor upon which
it is based.
If the Contractor fails, within the period to be specified in
the notice in writing, to show cause which in the opinion of the
Principal offers reasonable assurance that the default will be
remedied or such direction of the Principal or the Superintendent,
as the case may be, will be complied with and the
Contract satisfactorily completed, the Principal, without
prejudice to any other rights that he may have under the
Contract against the Contractor, may -
(a) take over the whole or any part of the work remaining
to be completed and for that purpose and insofar
as it may be necessary exclude from the site the
Contractor and any other person concerned in the
performance of the Works; or
(b) cancel the Contract, and in that case exercise any of
the powers of exclusion conferred by sub-par. (a) of
this paragraph.
If the Contractor notifies the Superintendent in writing
that he is unable or unwilling to complete the Works, or to
remedy the default, refusal or neglect stated in the notice in
writing referred to in the first paragraph of this subclause,
the Principal may act in accordance with the provisions of
sub-par. (a) or sub-par. (b) of the last preceding paragraph,
as he thinks fit.
43.3 ENGAGEMENT OF OTHERS.
If the Principal elects to exercise the power conferred on
him by sub-par. (a) of the third paragraph of sub-cl. 43.1
he may complete the whole or any part of the work remaining
to be completed and for that purpose may let a contract
or contracts for the work remaining to be completed or, as
the case may be, for any part of that work or may employ
any person or persons other than the Contractor to carry
out that work or, as the case may be, the part of that work.
The Principal may take possession of and permit other
persons to use any materials, Constructional Plant and other
things on or about the site which are owned by the Contractor
and as are requisite and necessary for the purposes
of any such contract or any such employment.
The Contractor shall have no right to any compensation
or allowance for any action taken by the Principal pursuant
to this subclause, other than a right to require the Principal
to maintain in good working order the Constructional Plant
referred to in the preceding paragraph.
On completion of the work all Constructional Plant and
the surplus of the materials and other things so taken possession
of will be handed over to the Contractor, but without
payment or allowances for the fair wear and tear they may
have sustained in the meantime PROVIDED HOWEVER, that if
there is a deficiency as referred to in sub-cl. 43.4 and if the
Contractor fails to make good that deficiency, the Principal
may retain in his possession the said Constructional Plant,
materials and other things until the deficiency is made good
pursuant to the provisions of sub-cl. 43.4.

43.4 ADJUSTMENT OF COSTS ON COMPLETION OF THE WORKS.
On completion of the Works in accordance with the Contract
the Superintendent will ascertain the cost of the Works
to the Principal, comprising payments to the Contractor and
all losses, costs, charges and expenses incurred by the Principal
in carrying out the whole or any part of the Works completed
by him pursuant to sub-cl. 43.3 and any sum or sums
payable or due to the Principal as liquidated damages under
the Contract and he will certify such amount to the Principal.
A certificate signed by the Superintendent stating the
cost of the Works to the Principal shall be prima facie evidence
of the matters stated in the certificate.
Should the amount so certified be greater than the amount
which would have been paid to the Contractor if the whole
of the Works had been carried out by him, the difference
between the two amounts may be deducted from any moneys
which may then be or thereafter become payable to the Contractor
by the Principal, including any retention moneys then
held by the Principal, and, if such moneys are insufficient
for this purpose, from the Contractor's security under the
Contract.
If the amount of such moneys together with the amount of
the security be less than the amount to be deducted, the
deficiency may be recovered by the Principal as a debt due
to the Principal by the Contractor.

43.6. CANCELLATION OF CONTRACT.
If the Contract is cancelled under sub-cl. 43.1 or under
any other provision of the Contract it shall be deemed cancelled
as from the date when notice of cancellation in writing
under the hand of the Principal is served upon the Contractor,
or upon any Official Receiver, Trustee in Bankruptcy,
Liquidator, Official or Provisional Liquidator, Official
Manager, or Receiver or Receiver and Manager of the
Contractor or of the business of the Contrator.
On such cancellation of the Contract all or any sums of
money which may be in the hands of the Principal in respect
of the Contract and are not then payable to the Contractor
under or pursuant to any provision of the Contract, and all
or any sums lodged or retained as security for the due and
proper performance of the Contract and all or any sums
named in the Contract as liquidated damages which have
accrued due to the Principal may be declared by the Principal
to be forfeited and all such sums that are so declared
to be forfeited shall be forfeited and shall be retained by or
become payable to or vested in the Principal.
On such cancellation of the Contract all moneys which
have been previously paid to the Contractor shall be deemed
to be in full satisfaction of all claims of the Contractor of
any kind or description whatsoever under or in respect of the
Contractor.
The amount of the security is $30,000 (sub-cl. 5.2)."
(at p513)

2. The respondent made default in his performance of the contracted work. The appellant became entitled to exercise its rights under the third paragraph of cl. 43.1. It elected to take over the part of the work then remaining to be done. It did not cancel the contract. (at p513)

3. At the time the appellant took over the work, there was on the site road-making machinery and plant brought there by the respondent in order to perform the contract. Part of this machinery and plant was the property of the respondent and part was being acquired by him under hire-purchase arrangements with the proprietor of that machinery and plant. (at p513)

4. The appellant claimed to be entitled, by virtue of the second paragraph of cl. 43.3, to take possession and make use of all the machinery and plant which was on the site. The respondent disputed the appellant's right to take possession of or use any of such plant and machinery. (at p513)

5. The respondent commenced proceedings in the Equity Division of the Supreme Court of New South Wales to recover possession of all the machinery and plant with certain ancillary relief to which I need not refer. (at p513)

6. The Supreme Court (Needham J.) held that, upon the true construction of the second paragraph of cl. 43.3, the appellant was entitled to take possession only of that machinery and plant which was the property of the respondent: in other words, the Supreme Court held that the machinery and plant under hire-purchase to the respondent did not come within the expression in the clause "which are owned by the contractor". It did so, both because of the natural meaning of the word "owner" in relation to chattels, and upon a comparison of the language of this paragraph of cl. 43.3 and the language of other clauses of the contract, such as the definition of constructional plant and the terms of cl. 16.1. I have no need to set out these clauses: they are fully set out in the reasons for judgment of the Supreme Court (1975) 1 NSWLR 332 . (at p513)

7. I am of opinion that the Supreme Court was right in its construction of the expression "which are owned by the contractor". Further, I agree with the reasoning by which his Honour reached his construction of the contract. I would add nothing to his reasons. (at p514)

8. The respondent submitted that the second, third and fourth paragraphs of cl. 43.3, in giving the appellant the right to take possession of and use the machinery and plant owned by the respondent without payment or any responsibility to make allowances for fair wear and tear, and to retain such possession till any moneys ultimately due by the respondent to the appellant had been paid, constitute a penalty against which a court of equity would grant relief. Accordingly, the respondent claimed to recover possession of his own machinery and plant, though the work may not have been completed and final accounts taken between the parties. (at p514)

9. In a carefully expressed judgment, the Supreme Court, after consideration of a number of authorities, accepted this submission, holding that the doctrines of equity extended beyond relief against pecuniary sums, considered to be penalties as distinct from genuine pre-estimates of damage. His Honour then concluded that the contractual right to take and retain possession of and to use the respondent's machinery and plant did constitute relevantly a penalty and made orders conformable to that conclusion. (at p514)

10. His Honour thought that the great value of machinery and plant used currently in constructional work called for a different approach to such a clause as cl. 43.3 to that which might be made if only manual tools and unmechanised machinery were used. His Honour considered that it was material in deciding the relevant nature of cl. 43.3 that the contract provided a sum of $1,000 per week or part thereof as liquidated damages for delay on the part of the respondent in the completion of the work (see cl.35.5) and a substantial sum by way of security for the performance of the contract (see cl. 5.2). His Honour said (1975) 1 NSWLR, at p 344 : "I cannot accept that a contractual right to appropriate highly expensive equipment and materials belonging to another contracting party for an indefinite period, without payment and without liability to compensate, not only for damage but also for fair wear and tear, could be anything but a penal provision aimed at ensuring that the contractor does not breach his contract." (at p514)

11. I am unable to accept this conclusion. Being of a contrary opinion, I find no need to discuss the interesting question as to the reach of the doctrines of equity in relief against forfeitures and penalties. Whether, if cl. 43.3 were properly held to be relevantly penal in its nature, there would be jurisdiction to grant relief against its operation will remain for me an open question. (at p515)

12. I do not think the provisions of the contract as to liquidated damages for delay in completion or as to the provision of security for the performance of the contract are relevant considerations when determining the nature of the grant of the contractual right to take possession and use the respondent contractor's machinery and plant in the completion of the work. It must be observed that the appellant is not primarily interested in obtaining damages for breach of the contract. It is primarily concerned with the completion of the work within a stipulated time. Both the provisions as to liquidated damages and as to the provision of security are means to that end, coupled with an ease of recovery of damages in the event of breach. But the possession and use of the machinery and plant are, to my mind, a direct means of achieving the purpose of the contract, namely, the completion of the work. They are not a means of providing the appellant with any form of compensation in respect of the breach of the agreement. (at p515)

13. The clause does not give the appellant any rights of property in the machinery and plant of which it authorizes possession and use. I see a critical difference between a clause which gives absolute property rights to the person in the situation of the appellant and cl. 43.3 which limits the appellant's right to possession and use. Consequently, I would not regard Bysouth v. Shire of Blackburn and Mitcham (No. 2) (1928) VLR 562 , if generally acceptable, as an authority for the course taken by the Supreme Court. (at p515)

14. The respondent laid emphasis upon the fact that there is to be no compensation payable to him for the use of his machinery and plant, including its wear and tear: but the appellant by the contract is to maintain the plant in good working order. No doubt the appellant, having taken possession of the respondent's machinery and plant, will be bound by the general law to use it efficiently to complete the work as expeditiously as possible and to maintain it in good working order not doing any harm or damage to the machinery and plant other than that which is entailed in fair wear and tear in its proper use. (at p515)

15. It seems that the provision allowing the appellant to complete the work with the aid of the respondent's plant is both reasonable and in the interest of both the parties, i.e. the interest of both parties to effect early completion. True it is that the respondent is denied the immediate use of the machinery and plant: but he is in default. It is not unreasonable that the appellant should not be confined to rely only on the liquidated damages for delay or the security provided by the respondent. These are not really a substitute for completion. Clause 43.3 is not, in my opinion, in any sense a punitive clause. Therefore, whatever the stretch of the appropriate equitable doctrine, cl. 43.3 would not be within it. (at p516)

16. In my opinion, the appeal in relation to the penalty issue should be allowed, and the Supreme Court's order varied in this respect. I would otherwise dismiss the appeal. (at p516)

MASON J. On 30th June 1974 the appellant Commission and the respondent entered into a written agreement by which the respondent agreed to construct for the appellant a gravel road twenty-three miles in length through the Imlay Forest, near Eden, for $803,459. The respondent made default in performance of his obligations under the agreement thereby bringing into operation the provisions of cl. 43.1 of the general conditions of contract which were specifically incorporated in the agreement. This clause entitled the appellant by notice in writing to call on the respondent to show cause why certain powers conferred by the clause should not be exercised. (at p516)

2. Apparently the appellant served such a notice upon the respondent, for it is now common ground that there occurred the preliminary conditions essential to the exercise by the appellant of its right, conferred by cl. 43.1(a) of the general conditions of contract, to "take over the whole or any part of the work remaining to be completed". The appellant in fact exercised this right on 3rd January 1975. (at p516)

3. The relevant part of cl. 43.1 is in these terms:

"... the Principal, without prejudice to any other rights
that he may have under the Contract against the Contractor,
may -
(a) take over the whole or any part of the work remaining
to be completed and for that purpose and insofar
as it may be necessary exclude from the site the Contractor
and any other person concerned in the performance
of the Works; or
(b) cancel the Contract, and in that case exercise any of
the powers of exclusion conferred by sub-par. (a) of
this paragraph.
If the Contractor notifies the Superintendent in writing that
he is unable or unwilling to complete the Works, or to
remedy the default, refusal or neglect stated in the notice in
writing referred to in the first paragraph of this subclause,
the Principal may act in accordance with the provisions of
sub-par. (a) or sub-par. (b) of the last preceding paragraph,
as he thinks fit." (at p517)

4. The consequences which flow from an exercise of the right given by cl. 43.1 are set out in cl. 43.3 which is in the following terms:

"If the Principal elects to exercise the power conferred on
him by sub-par. (a) of the third paragraph of sub-cl. 43.1
he may complete the whole or any part of the work remaining
to be completed and for that purpose may let a contract
or contracts for the work remaining to be completed or, as
the case may be, for any part of that work or may employ
any person or persons other than the Contractor to carry
out that work or, as the case may be, the part of that work.
The Principal may take possession of and permit other
persons to use any materials, Constructional Plant and other
things on or about the site which are owned by the Contractor
and as are requisite and necessary for the purposes
of any such contract or any such employment.

The Contractor shall have no right to any compensation
or allowance for any action taken by the Principal pursuant
to this subclause, other than a right to require the Principal
to maintain in good working order the Constructional Plant
referred to in the preceding paragraph.
On completion of the work all Constructional Plant and
the surplus of the materials and other things so taken possession
of will be handed over to the Contractor, but without
payment or allowances for the fair wear and tear they may
have sustained in the meantime PROVIDED HOWEVER, that
if there is a deficiency as referred to in sub-cl. 43.4 and if
the Contractor fails to make good that deficiency, the Principal
may retain in his possession the said Constructional
Plant, materials and other things until the deficiency is made
good pursuant to the provisions of sub-cl. 43.4." (at p517)

5. At the time of the taking over of the work by the appellant the respondent had on the site plant and machinery belonging to him and also plant and machinery which was the subject of hire-purchase or leasing agreements in his favour. The plant and equipment was extensive and was of considerable value. (at p517)

6. The appellant having claimed to be entitled to possession of the whole of this plant and equipment, the respondent commenced an action in the Supreme Court of New South Wales. In this action Needham J. made a declaration that the provisions of cl. 43.3 are in the nature of a penalty and that the respondent was entitled to relief therefrom. His Honour also declared that the appellant was not entitled to retain plant and equipment not owned by the respondent (1975) 1 NSWLR 332 . The arguments advanced by Mr. Handley for the appellant have not persuaded me that his Honour was incorrect in reaching this result. (at p518)

7. It would, I think, be a bold step to construe cl. 43.3 as conferring upon the appellant the right to take and keep possession of plant and equipment not owned by the respondent in the legal sense of that word, being plant and equipment owned by third parties which was on lease or on hire-purchase to the respondent. Under a hire-purchase agreement it is the vendor, not the hirer, who is the owner of the goods and who is correctly so described as a matter of legal terminology, notwithstanding that the hirer has an "equity" in the goods which by statute may amount to a proprietary interest for certain purposes. Likewise, under a bailment or lease agreement, it is the bailor or lessor, not the bailee or lessee, who is the owner of the goods and who is properly so described. (at p518)

8. It may be that on some occasions a person who has a limited or possessory interest in chattels is popularly referred to as the "owner" of them or is said to "own" them, but I can see no justification in the present context for attributing to cl. 43.1 such a meaning. Indeed, the context tells strongly against such a usage. As Needham J. observed (1975) 1 NSWLR, at p 337 , there is a contra-distinction between cl. 43.3 when it refers to "constructional plant" which is "owned by the contractor" and other provisions such as cl. 16.1 which deal with constructional plant brought on to the site without limiting that plant to plant which is owned by the contractor. (at p518)

9. Quite apart from indications of this kind to be gathered from the provisions of the general conditions of contract, there are considerations arising from the very subject matter of the agreement which suggest strongly that the respondent's construction of the clause is incorrect. If it were correct it would bring about the result that the taking by the appellant of possession of the respondent's plant and equipment would result in a termination of his limited or possessory interest in the goods by reason of the presence in hire-purchase and lease agreements of conditions which entitle the vendor or lessor to terminate the agreement in the event that there is a parting with possession of the goods. (at p518)

10. Accordingly, I am of the opinion that his Honour was correct in thinking that cl. 43.1 did not entitle the appellant to take and retain possession of plant and equipment in which the respondent had a limited or possessory interest only under hire-purchase agreements and lease agreements. (at p519)

11. Although the appellant argued at first instance that the jurisdiction to relieve against penalties did not extend to provisions relating to property, as distinct from provisions which sounded in the payment of money, this argument was not pressed before us. Here the appellant conceded that the courts have jurisdiction to relieve against contractual provisions resulting in the forfeiture of property on the footing that they constitute a penalty, but went on to submit that the clause in question was not such a provision. (at p519)

12. The appellant's concession was well founded because the equitable doctrine of relief against forfeiture is consistently applied so as to protect property and proprietary interests, the granting of relief against penalties being no more than a special application of the general doctrine (Kreglinger v. New Patagonia Meat and Cold Storage Co. Ltd. [1913] UKHL 1; (1914) AC 25, at p 35 ). The distinction between a penalty (when it takes the form of an obligation to pay a sum of money in the event of a breach of contract) and liquidated damages is that the latter is a genuine pre-estimate of loss or damage (Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1914] UKHL 1; (1915) AC 79, at p 86 ), whereas the former is not. Except in so far as it throws some light on the character of the penalty this distinction has little relevance to the provision now in question. The purpose of the provision is not so much to provide compensation for loss which the principal may sustain as a result of the contractor's breach of contract, but to enable the principal to complete the contract works which the contractor has engaged to execute. If the provision were limited in its operation to the attainment of this objective, it might be impossible to characterize it as a penalty, so long at any rate as the advantage which the principal might derive from the use of the contractor's materials, plant and equipment was to be taken into account in arriving at the contractor's entitlement or liability under, or by virtue of, the contract. (at p519)

13. However, there are two reasons why this character cannot be assigned to the power conferred upon the appellant by cl. 43.3. First, the power to take possession is not confined to possession for the purpose of executing the contract works. As I read the clause, the appellant could take and retain possession of the materials, plant and equipment until completion of the contract works without using them at all. Secondly, the clause specifically denies to the respondent any compensation or allowance for the use or deprivation of the materials, plant and equipment. It may be that there are additional reasons for arriving at a similar conclusion but it is unnecessary to explore them for enough has already been said to demonstrate that the power may be exercised arbitrarily and capriciously so as to prejudice and penalize the respondent and that the power is not one which is so confined as to enable the appellant to complete the contract works on a footing whereby the respondent receives some credit or allowance for the use or deprivation of his property. (at p520)

14. I have not discovered in the authorities referred to in argument any support for a contrary view. True it is that in Emden and Gill's Building Contracts and Practice, 7th ed. (1969), p. 302, the distinction is drawn between clauses which forfeit the builder's property absolutely and clauses which allow the employer to use the builder's property for the purpose of completing the contract. This passage should be understood as differentiating between the forfeiture of the builder's property which, although expressed to be by way of liquidated damages, in truth constitutes a penalty, and a provision which does no more than entitle the employer to use the builder's property for the exclusive purpose of completing the contract of work on the footing that the builder receives some credit or allowance, when no question of penalty arises. (at p520)

15. The observations of Lord Cranworth L.C. in Ranger v. Great Western Railway Co. [1854] EngR 73; (1854) 5 HLC 72, at pp 108-110 [1854] EngR 73; (10 ER 824, at pp 839-840) were directed to a different situation. There the contract conferred upon the railway company a power to seize and appropriate plant belonging to the contractor. Lord Cranworth said (1854) 5 HLC, at p 108 (10 ER, at p 839) :

"The question is, whether, having taken possession, they
became absolutely entitled to all which they seized, or
whether the whole provision is not to be regarded as mere
machinery for enabling them to complete the works, at the
risk and cost of the appellant. I think the latter is the true
construction of the clauses."

His Lordship went on to say (1854) 5 HLC, at p 110 (10 ER, at p 840) :

"I have come to the conclusion that the true meaning of
this part of the contract is, that the Respondents, though at
liberty to seize and appropriate the plant belonging to the
appellant, were yet bound to account for its value in settling
their accounts with him."

The absence here of any obligation on the part of the appellant to account for the value of plant and equipment seized distinguishes this case from Ranger's Case. (at p521)

16. The other authority to which I should refer is Bysouth v. Shire of Blackburn and Mitcham (No. 2) (1928) VLR 562 . The contract there provided that upon determination by the council the materials and plant in or upon the works should become the property of the council. By a majority, the Full Court of the Supreme Court held that the forfeiture of the contractor's property was a penalty, there being no provision that the value of the materials and plant should be taken into account in determining the financial position of the parties. (at p521)

17. That situation differed from the present circumstances, so it was argued, in that here there is no provision for the forfeiture of property - no more is involved than the possession and, perhaps, the use of materials, plant and equipment by the principal. However, as Needham J. pointed out, if the principle on which Bysouth's Case was decided be correct, as in my opinion it is, it can make no difference that the contractor is deprived not of property but of possession. The deprivation is none the less a penalty, though not as severe. There is in my view no convincing basis for distinguishing the present case. (at p521)

18. For these reasons I would dismiss the appeal. (at p521)

JACOBS J. I agree with the conclusion of Needham J. that the reference in cl. 43.3 to "any materials, constructional plant and other things on or about the site which are owned by the contractor" is a reference to such things when owned by the contractor "in a legal sense", by which I understand him to mean owned at law. Chattels held under lease or hire, including hire purchase, are not so owned. (at p521)

2. The second question, as Needham J. observed, is of greater difficulty. Clause 43.3 provides:

"43.3. ENGAGEMENT OF OTHERS.
If the Principal elects to exercise the power conferred on
him by sub-paragraph (a) of the third paragraph of sub-cl.
43.1 he may complete the whole or any part of the work
remaining to be completed and for that purpose may let a
contract or contracts for the work remaining to be completed
or, as the case may be, for any part of that work or
may employ any person or persons other than the Contractor
to carry out that work or, as the case may be, the part of
that work.
The Principal may take possession of and permit other
persons to use any materials, Constructional Plant and other
things on or about the site which are owned by the Contractor
and as are requisite and necessary for the purposes
of any such contract or any such employment.
The Contractor shall have no right to any compensation
or allowance for any action taken by the Principal pursuant
to this subclause, other than a right to require the Principal
to maintain in good working order the Constructional Plant
referred to in the preceding paragraph.
On completion of the work all Constructional Plant and
the surplus of the materials and other things so taken possession
of will be handed over to the Contractor, but without
payment or allowances for the fair wear and tear they
may have sustained in the meantime PROVIDED HOWEVER,
that if there is a deficiency as referred to in sub-cl. 43.4
and if the Contractor fails to make good that deficiency, the
Principal may retain in his possession the said Constructional
Plant, materials and other things until the deficiency
is made good pursuant to the provisions of sub-cl. 43.4."

What is claimed is that the provision that the appellant "may take possession of and permit other persons to use any materials, constructional plant and other things on or about the site which are owned by the contractor and as are requisite and necessary..." constitutes a penalty and as such is void. It appears to me that this provision is not in itself a provision for any penalty. There could be no objection to such a contractual provision for use of the plant and materials provided compensation or allowance were made: cf. Ranger v. Great Western Railway Co. [1854] EngR 73; (1854) 5 HLC 72 (10 ER 824) . It is the immediately following provision that the respondent should have no right to any compensation or allowance for any action taken by the appellant pursuant to the earlier provision which may create a situation where equity would relieve against such a forfeiture of the right to ownership of materials and to possession of the plant without compensation or allowance. (at p522)

3. The primary argument on behalf of the appellant is that no question either of penalty or relief against forfeiture arises because on the true construction of the contract the respondent is entitled, as the appellant has exercised the power to take over the work pursuant to cl. 43.1(a) rather than to cancel pursuant to cl. 43.1(b), to receive the whole of the contract price when the works have been completed by or on behalf of the appellant. Included in that contract price, it is claimed, will be compensation for the use of the respondent's plant because if he had completed the work he would have used the plant and his compensation for that use would have been part of the contract price. I cannot accept this argument. The contract no doubt remains on foot so far as rights are thereby conferred upon the appellant, but it does not follow that the respondent, who is admittedly in breach of contract, is entitled to payment or credit thereunder for work not executed by him. The completion of the works by the appellant was not a contractual substitution of a different mode of performance thereof by the respondent. The argument is not consistent with cl. 41 whereby payment to the respondent was to be made against certificates and the latter were to be certificates of work "carried out in performance of the contract" (cl. 41.1) and "executed by the contractor" (cl. 41.6). The final certificate under cl. 41.8 is only to be issued "when all work under the contract has been finally and satisfactorily executed and the contractor has fulfilled all his other obligations under the contract". (at p523)

4. On a not dissimilar contract the same argument was presented in Simpson v. Trim Town Commissioners (1898) 32 Ir LT 129 . FitzGibbon L.J. in delivering the judgment of the Court of Appeal in Ireland said that the argument had been presented "with such marked ability that we almost regret to be obliged to pronounce it fallacious". With much the same regret I reach the same conclusion on the present contract. The words of FitzGibbon L.J. are applicable to this contract: "The contractor having broken his contract, was out of it altogether, except as regards what was or might be due under interim certificates and his liability for delay, and what might be due if the work was completed" (1898) 32 Ir LT, at p 130 . (at p523)

5. So there is no comfort for the appellant in this, its primary, argument. But a second argument was presented. It is submitted that cl. 43.3 is a clause which confers on the appellant a contractual right in aid of the early completion of the contract whereby delays that would otherwise take place may be reduced, delays which would arise if the appellant or a new contractor could not use the plant and materials already on the site. The existence of the right, it is argued, is something which is likely in the ordinary course to reduce the damages otherwise payable by the respondent. (at p523)

6. In my view these submissions are correct so far as I have stated them. The appellant would go further and submit that therefore no question of relief against forfeiture or penalty can ever arise. I am not satisfied that this is correct. The provision for use of the plant is a contractual provision in aid of the appellant getting the work completed. As such, it cannot be impugned. Equity may relieve against the forfeiture without compensation or allowance of the respondent's right to possession of the plant during the period of completion of the works but it does not follow that the only relief which equity may grant is the avoiding of the appellant's right to the use of the plant during the period of completion of the works. It cannot be determined whether equity will relieve against such a forfeiture until it is known whether the forfeiture in fact results in an impermissible burden or penalty having been imposed on the respondent. There could only be such a burden or penalty if the works are completed for a smaller outlay than would have been payable by the appellant to the respondent if he had completed the work. If they are not, then there could be no occasion for equity to interfere. The additional cost of the works to the appellant payable by the respondent under cl. 43.3 would have been reduced by the fact that the appellant had used the plant and materials instead of incurring the cost of obtaining other plant and materials. In the possible but hardly probable event that the works should be completed for a sum less than the original contract price, the question would arise, and only then would arise, whether equity would treat the provision in cl. 43.3, that no compensation or allowance should be made, as impermissibly penal and would interfere by declaring that provision void and would require upon a final account that compensation or allowance for the use of the plant and materials be made by the appellant to the respondent. It may be that equity would not allow the appellant to make a profit from the respondent's breach of contract. A court of equity can mould its relief so that the substantial purpose of its doctrine of relief against forfeiture and penalties is achieved. It can leave the contractual right to use the plant and materials unaffected and can avoid that part and that part only of the agreement between the parties which is, or may be, open to challenge under the equitable doctrine. Whether or not there is substance in the challenge is at this stage hypothetical. (at p524)

7. I would therefore allow the appeal in respect of this issue. Otherwise I would dismiss the appeal. (at p524)

ORDER

Appeal allowed.

Order of the Supreme Court of New South Wales set aside and in lieu thereof declare that the appellant is not entitled to detain from the respondent and or put to its use constructional plant of which the respondent is not the owner and order that the appellant forthwith take all such steps, or cause to be done all such things, as are necessary to effect delivery to the respondent of all items of constructional plant and equipment, set forth in the schedule to the order of the Supreme Court, of which the respondent is not the owner.

Defendant to pay plaintiff's costs of the suit.