HONEY BEES PRESCHOOL LTD v 127 HOBSON STREET LTD [2018] NZHC 32

HONEY BEES PRESCHOOL LTD v 127 HOBSON STREET LTD [2018] NZHC 32 [31 January 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2016-404-2940[2018] NZHC 32BETWEEN HONEY BEES PRESCHOOL LIMITEDFirst PlaintiffJASON JAMESSecond PlaintiffAND 127 HOBSON STREET LIMITEDFirst DefendantSUNIL GOVIND PARBHU ALSOKNOWN AS DENNIS PARBHUSecond DefendantHearing: 18 September 2017Appearances: S Khan, M Orange and C M Fisher for PlaintiffsR M Dillon for DefendantsJudgment: 31 January 2018[REDACTED] JUDGMENT OF WHATA JThis judgment was delivered by Justice Whata on 31 January 2018 at 4 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate: ...................................Solicitors: Fortune Manning, AucklandQueen City Law, AucklandIntroduction[1] Honey Bees Preschool Limited (Honey Bees) runs a childcare facility. It leasespremises from 127 Hobson Street Limited (127 Hobson). A Collateral Deed to theDeed of Lease required:(a) 127 Hobson to install a second lift in the leased premises; and(b) if the second lift was not fully operational on or before 31 July 2016,127 Hobson and its director, Dennis Parbhu, to indemnify Honey Beesand its director, Mr James, for all obligations they may incur to 127Hobson to the expiry of the lease.[2] The lift was not installed by the due date. Honey Bees and Mr James now seekto enforce the indemnity. Two defences are raised to the plaintiffs' claim, namely:(a) the obligation to indemnify is an unenforceable penalty; and(b) the Collateral Deed was obtained in circumstances such that it amountsto an unconscionable bargain.1The issues[3] The apparent simplicity of the foregoing narrative belies a claim of somecomplexity. Contractual penalties are unenforceable. A routine example of acontractual penalty is a remedial clause stipulating the payment of an extravagant orexorbitant sum of money for a relatively trivial breach of contract.2 But the ruleagainst penalties was recently recast in the United Kingdom3 and Australia.4 Theassessment in those jurisdictions has shifted focus from whether the remedial clausestipulates a genuine pre-estimate of damages to whether the clause protects a1 This ground was not clearly pleaded, but I nevertheless address it below at [100].2 See for example Commissioner of Public Works v Hills [1906] AC 368 (PC); O'Dea v AllstatesLeasing System (WA) Pty Ltd (1983) 152 CLR 359 (HCA); and General Finance Acceptance Ltdv Melrose [1988] 1 NZLR 465 (HC).3 Cavendish Square Holding BC v Makdessi [2015] UKSC 67, [2016] AC 1172 [Cavendish].4 Andrews v Australia New Zealand Banking Group Ltd [2012] HCA 30, (2012) 247 CLR 205[Andrews]; Paciocco v Australia New Zealand Banking Group Ltd [2016] HCA 28, (2016) 258CLR 525 [Paciocco].legitimate performance interest. If so, in either case, the clause will not be a penalty.This recasting (or redirection5) has been described as a "significant shift in perspectivefor the review of alleged penalties."6 A central issue in this case is whether the law ofpenalties should be recast in similar fashion in this jurisdiction.[4] A second issue, raised with some venom by the defendants, concerns the scopeof the penalty rule in New Zealand, and whether breach of a contractual obligation isrequired to engage the penalty rule. In the present case, the defendants claim, adoptingrecent high authority in Australia, there is no requirement for breach.7 The plaintiffsrespond, relying on more recent high authority from the United Kingdom, there mustbe an antecedent breach of a contractual obligation to attract the penalty rule.8[5] As the present proceedings involve two defendants, the claims therefore giverise to the following questions:(a) What is the threshold test for a penalty?(b) What is the scope of the penalty rule in New Zealand?(c) Does 127 Hobson's obligation to indemnify engage the penalty rule?(d) Does Mr Parbhu's obligation to indemnify engage the penalty rule?(e) If the answer to (c) and/or (d) is yes, is the obligation to indemnify apenalty?(f) If the obligation to indemnify is a penalty, what is the appropriateremedy, if any?5 As it was recently put in Wilaci Pty Ltd v Torchlight Fund No 1 LP (in rec) [2017] NZCA 152,[2017] 3 NZLR 293 [Torchlight].6 J W Carter, Wayne Courtney and G J Tolhurst "Assessment of Contractual Penalties: DunlopDeflated" (2017) 34(1) JCL 4 at 4.7 Andrews, above n 4.8 Cavendish, above n 3.[6] A separate inquiry into whether the Collateral Deed is an unconscionablebargain is also then required.Background[7] Mr James owns and operates Honey Bees. In 2011 and 2012 he and his wifestarted looking into investing in or establishing a pre-school facility. They found outabout premises owned by 127 Hobson from an advertisement placed by AnthonyGilbert, a business broker acting for Mr Parbhu. The advertisement stated the landlord"has been through all of the challenges of getting approval from the Fire Department,MOE and Council etc". It also stated the premises "have been constructed with anallowance for 40 plus children, maybe as many as 50." It continued "[t]he landlord islooking for an experienced operator to take on a long term commercial lease at a rentof $56 per child based on whatever MOE dictate the space may be licenced for."Finally, it refers to the possibility of "an opportunity for some discounted rent whilethe centre is building occupancy".[8] Mr James registered his interest in the property. He was selected by Mr Parbhuas the preferred lessee. Mr Parbhu is a director of 127 Hobson and owns and/ormanages a commercial property portfolio worth an estimated [redacted]. He vetted allprospective lessees of the premises and chose Mr James because he considered he"would be a good operator" and "would make a success of the business". Anagreement to lease the premises at 127 Hobson Street was executed by Mr James and127 Hobson on 28 August 2012. Key terms included a six-year lease period with threerights of renewal, a rental based on a rate of $56 per child per week, a minimum rentalbased on 48 children and a lease premium of $90,000. The commencement date was60 days after due diligence. A plan of the leased premises sent to Mr James during thedue diligence period shows two lifts.[9] Due diligence was not smooth sailing. Mr James discovered fire approval wasgiven for over three year olds only, which impacted Honey Bees' prospective market.Due diligence was extended to 10 September 2012 and a variation to the agreement tolease was executed the following day. Among other things, adjustments were made tothe commencement date, the rent holiday was extended to 31 December 2012 and theinitial base rent was fixed for the first three years. There was no mention of arequirement for a second lift in the agreement, the variation to the agreement orassociated correspondence.[10] During the months that followed Honey Bees was permitted access to thepremises. Mr James identified several problems with the property. Threat andcounterthreat were made to cancel the agreement. They came to nothing. Rather,steps were taken, at some considerable cost, by both Honey Bees and 127 Hobson tomake the premises suitable for a pre-school facility. Initially Ministry of Educationapproval proved elusive, but on 16 December 2013 it approved a licence for 24children on a probationary basis.[11] Negotiations then ensued to finalise the terms of lease, particularly betweenMr James and Mr Gilbert. The following key negotiated points were recorded by MrGilbert in an email to Mr James dated 18 December 2013:(a) The Lease was to commence in January 2014 "at $145,600 plus GSTand all outgoings".(b) There would be a rent discount of 50 per cent for 14 months.(c) The lease premium, of $90,000 plus GST, was payable oncommencement.(d) Rent was to be fixed for the first three years.(e) The second lift would be addressed as follows:[Mr Parbhu] to commit to put in second lift before 2017, or earlier ifneeded, this is not to be part of lease. [Mr Parbhu] to provide apersonal guarantee or something else to make you happy.(f) Mr James would have the right to terminate or renegotiate the lease ifregulations changed and his licence "cannot go to 50 for any reason".[12] The previous day Mr Gilbert emailed Mr Parbhu discussing these points, towhich Mr Parbhu responded. Among other things, the second lift was discussed (withMr Parbhu's comment italicised):The necessity of a second lift is almost certainly going to become an issue asthe license increases from 24 to 50. There will need to be some commitmentby the landlord in the lease that a second lift is commissioned at some time inthe future. This is not in my control financially the fact that I have not receivedfull rent to date and for the next months ahead make this very difficult so Icannot commit to this; I can say that it is on my wish list given that I live here.[13] Mr Parbhu added that:Jason needs to quickly send an email accepting the terms and conditions ofour lease agreement that you have provided, otherwise we will have noagreement and I will have no space to move but to take it that no lease exists.[14] This correspondence was followed by a detailed letter from Mr James to MrGilbert on 19 December 2013 confirming his position on, among other things, an "exitclause", car parking and the second lift. Relevantly, he noted:7. Second Lift – To be installed and operating by 6th January 2016 andthe trust who owns the building will need to enter into a separate deedagreeing to put the lift in and will need to be signed at the same timeas the lease deed.[15] Mr Parbhu responded to Mr James' comments the same day in an email to MrGilbert, rejecting many of the proposed requirements as of nuisance value only. Hestated the second lift was: "[n]ot agreed, we have always maintained that whenpossible a lift will be put in; [o]ne clearly cannot commit to something if confidenceis not there that this can be financially accommodated."[16] It is not clear Mr James was given a copy of Mr Parbhu's response. In anyevent, a draft variation agreement prepared by Mr Gilbert was sent to both Mr Jamesand Mr Parbhu on the morning of 20 December 2013. In the same correspondence,Mr Gilbert records:The lift issue will be as a side agreement [to be done today] where Dennispersonally, and as a director of 127 Hobson Street Ltd, agrees to install asecond lift before August 2016. Such agreement shall be drafted by solicitors.This document will not go to Dennis's bank, where this one page confirmationwill.[17] In his email response, Mr Parbhu indicated he agreed with the proposed draft,but noted the rent holiday and backdating of outgoings remained an issue. Mr Gilbertthen circulated a "Final proposed" agreement the same day. Mr James respondedseeking an amendment in relation to the right to terminate.[18] A further draft of a proposed variation agreement was then sent by Mr Gilbertto Mr Parbhu and Mr James at 2.01 pm. His email recorded Mr James' lawyer wantedto convert the agreement to a formal lease, and that they could add that $10,000 willbe payable for backdated outgoings. It also recorded Mr James' lawyer mentioned "theguarantee document to be signed by [Mr Parbhu], also needs to be signed at the sametime as the deed of lease".[19] The draft variation of agreement to lease included the following clauses:1. The lease shall commence in the first two weeks of January 2014. Thevendor's solicitor shall prepare the lease with no changes to thestandard lease other than what is included in this document and thelegal agreement to lease dated 28 August 2012. Outgoings & Rentshall commence from 6th January.2. The Ministry of Education Licence of 24 children as of today (20December 2013), as confirmed by the Ministry of Education. TheMinistry of Education have confirmed that the building measures upfor a maximum of 50 children.3. The commencement rental shall be 50% of the contractual rental - $56x 50 children x 52 weeks, thereafter the rent will revert to $145,600plus GST.4. Rent holiday of this 50% rental as per point 3 above will be 14 monthsfrom January 2014, thereafter the rent will revert to $145,600 plusGST.5. The basis of rent review will be annual CPI, but the rent will be fixedfor a period at $145,600 p.a. (excluding the 14 month rent holiday) for6 years.6. Guarantees – if the lease ends for whatever reason all guarantors arereleased from all liability.7. If at any time after the commencement of the lease, there is any changein circumstances beyond the control of the lessee which has the effectof restricting or impeding the ability of the lessee to obtain 50 licencesfrom the Ministry of Education, the lessee shall have the right toimmediately terminate the lease, or re-negotiate the terms of the leasewhile preserving the lessee's right to terminate the lease. For theavoidance of doubt, circumstances beyond the lessee's control willinclude, without limitation, changes relating to Council, Ministry ofEducation and Fire Service requirements.8. Fixtures & Fittings – if the lease ends for whatever reason we havethe right to remove all of the fixtures & fittings we have installed andno reinstatement of the building changes we have made will berequired.9. The lease premium of $90,000.00 plus GST is payable by the lesseeon the execution of the lease.[20] Mr Parbhu expressed concerns about clauses 6 and 7. In any event, a deed oflease and collateral deed were then drafted by Mr James' solicitors, with copies sentto Mr Parbhu at 3.42 and 3.50 pm respectively. A second version of the lease was thensent to Mr Parbhu at 4.08 pm.Deed of Lease and Collateral Deed[21] About this time, Mr James attended Mr Parbhu's offices and they executed theCollateral Deed. It states:BackgroundA. Honey Bees is the lessee and Jason is the guarantor under a Deed oflease dated on or about the date of this deed ("the Lease") entered intowith 127 Hobson in respect of the premises on the fifth floor of 127Hobson Street, Auckland (Premises) in replacement of an agreementto lease between Jason and 127 Hobson.B. 127 Hobson and the Guarantor covenant as set out in this deed for thebenefit of Honey Bees and Jason.1. 127 Hobson agrees to install at its sole cost and expense a second liftin the building in which the Premises are located providing directaccess to the Premises.2. 127 Hobson and the Guarantor agree that in the event that the secondlift was not fully operational on or before 31 July 2016 then 127Hobson and the Guarantor jointly and severally hereby indemnifyHoney Bees and Jason jointly and severally for all obligations theymay incur to 127 Hobson or any other landlord under the Leaseincluding the payment of rent, operating expenses and other paymentsas provided under the Lease to the expiry of the Lease.3. This deed is collateral to the Lease.[22] The Deed of Lease, dated 20 December 2013, was subsequently executed byHoney Bees and 127 Hobson, with Mr James as Guarantor. The first schedule to theLease records the key terms. It is attached as an appendix to this judgment.Post-execution events[23] The relationship between 127 Hobson and Honey Bees remained fraught afterthe Lease formally commenced. A dispute arose as to whether the deposit paid byHoney Bees discharged the initial rental payments due on 20 January, 20 February and20 March 2014. 127 Hobson claimed the deposit had been spent prior to thecommencement of the Lease. Honey Bees disagreed. The matter was resolved byBrown J in Honey Bees' favour.9[24] Litigation issues aside, the pre-school has been successful. It has been fullylicensed since August 2015, and is operating at full capacity. By contrast, theinstallation of the lift has not gone to plan. Obtaining building consent for theinstallation proved difficult. A structural beam had to be removed, causing delayduring both the consenting and construction phases. Installation was alsocumbersome; with complaints from tenants (including Honey Bees) andcorresponding constraints on construction hours, it has taken longer than anticipated.In the result, the installation was almost 14 months overdue at the time of the hearing.The evidence[25] Much energy was expended in the evidence on the issue of whether Mr Jameshad a legitimate interest in securing the second lift and in seeking an indemnity fromthe defendants. The circumstances leading up the execution of the Lease andCollateral Deed, the use of the current lift, the need for a second lift and the reasonsfor the delay in installing the lift were also matters of importance and contention forthe parties. It is not necessary to traverse that evidence in detail. The salientbackground is set out above. I will record my main findings when I come to resolvethe key questions.9 Honey Bees Preschools Ltd v 127 Hobson Street Ltd [2014] NZHC 2942.(a) What is the threshold test for a penalty?United Kingdom and Australia[26] The history and modern application of the penalty rule or doctrine isthoroughly traversed by the United Kingdom Supreme Court in Cavendish and by theHigh Court of Australia in Andrews and Paciocco. The Court of Appeal in Torchlightalso recently reviewed the approach taken by those Courts.10 The Court there wasdealing with a contract subject to New South Wales law so, like Cavendish andPaciocco, it is not binding authority. Nevertheless, I cannot improve on thedescription of the origins of the penalty rule précised by the Court of Appeal:[69] Equity, where the doctrine first emerged, restrained actions to enforcedefeasible bonds where the true intent inferred was that the bond served assecurity only for payment of the primary obligation. Such a bond wouldinvolve the borrower executing an instrument for a sum typically twice thesum lent, binding the borrower to pay the lender the larger sum on a fixed day,with the proviso that if payment of the lesser sum lent was first made, the bondwould become void. By the second half of the 17th century equity wouldinvariably view the greater sum as penal and award relief upon payment of thelesser sum plus costs and interest. The true nature of the obligation to pay thepenalty was securing and secondary. The equitable doctrine was inapplicablewhere damages were not readily assessable, and developed alongsideequitable relief against forfeiture in mortgages and leases. Equitable relief forpenalties logically should be viewed now through the modern lens ofunconscionability.[70] Common law began to offer relief on the same terms, and statutespassed in 1697 and 1705 regularised the position. Common law's initiativedrew on its equitable competitor. But its constraint on penalties was based onpublic policy objections that punitive provisions in contract should not begiven effect at all. The remedial function of the common law of contract wasconfined to the achievement of performance expectations. Enforcingpunishments formed no part of that.(footnotes omitted)[27] By the early twentieth century, the scope and application of the penalty rulewas largely shaped by Lord Dunedin's speech in Dunlop.11 His Lordship identifiedthe following dichotomy:1210 Torchlight, above n 5.11 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL). See alsodiscussion in Cavendish, above n 3, at [22].12 At 86.The essence of a penalty is a payment of money stipulated as in terrorem ofthe offending party; the essence of liquidated damages is a genuinecovenanted pre-estimate of damage [28] Lord Dunedin also explained that whether a sum is a penalty is a question ofconstruction to be decided upon the terms and inherent circumstances of each contract,judged at the time of the making of the contract, not at the time of the breach.13 Toassist the interpretative task, Lord Dunedin identified four "helpful" tests, namely:14(a) It will be a penalty if the sum stipulated for is extravagant andunconscionable in amount in comparison with the greatest loss thatcould conceivably be proved to have followed from breach.(b) It will be a penalty if the breach consists only in not paying a sum ofmoney, and the sum stipulated is a sum greater than the sum whichought to have been paid.(c) There is a presumption that it is penalty when a single lump sum ismade payable by way of compensation, on the occurrence of one ormore or all of several events, some of which may occasion serious andothers but trifling damages.(d) It is no obstacle to the sum stipulated being a genuine pre-estimate ofdamage, that the consequences of the breach are such as to make precisepre-estimation almost an impossibility. In fact, that is the situation whenit is probable that pre-estimated damage was the true bargain betweenthe parties.[29] However, as alluded to, the United Kingdom Supreme Court recast thethreshold test in Cavendish. Lords Neuberger and Sumption, with whom Carnwathconcurred, stated the threshold test for a penalty clause is now:1513 At 86-87.14 At 87-88.15 Cavendish, above n 3, at [32].[W]hether the impugned provision is a secondary obligation which imposes adetriment on the contract-breaker out of all proportion to any legitimateinterest of the innocent party in the enforcement of the primary obligation.[30] Lord Hodge, with whom Lords Clarke and Toulson agreed, put the test slightlydifferently (but to similar effect):16 the correct test for a penalty is whether the sum or remedy stipulated as aconsequence of a breach of contract is exorbitant or unconscionable whenregard is had to the innocent party's interest in the performance of the contract.[31] These tests are "motivated by a concern to promote freedom of contract"17 andpremised on the core idea that the purpose of contract is to satisfy the expectations ofthe party entitled to performance.18[32] The approach taken in the judgments in Paciocco dovetails with those inCavendish. Kiefel J, with whom French CJ agreed, adopted as a threshold test whetherthe substituted obligation is "out of all proportion to any legitimate interest of theinnocent party in the enforcement of the primary obligation".19 Keane J preferred toadopt Lord Hodge's framing of the question.20 Gageler J focused on whether theexclusive purpose of the clause was to punish in order to deter breach, concluding "therelevant indicator of punishment lies in the negative incentive to perform being so farout of proportion with the positive interest in performance that the negative incentiveamounts to deterrence by threat of punishment."21[33] The full implications of this recasting are explained by the Court in Torchlightin the following terms. First, Lord Dunedin's dichotomy between penalty andlegitimate liquidated damages is a false one, or at least not exclusive. The real questionwhen a contractual provision is challenged as a penalty is whether it is penal, notwhether it is a pre-estimate of loss.22 Second, the tests laid down in Cavendishreinstate a pre-Dunlop focus on whether the substituted obligation is unconscionable16 At [255]. To similar effect, see also Lord Mance's judgment at [143] and [152].17 Carter, above n 3, at 5.18 Cavendish, above n 3, at [30], citing Co-operative Insurance Society Ltd v Argyll Stores (Holdings)Ltd [1998] AC 1 at 15 per Lord Hoffmann. See also the judgment of Lord Hodge at [243].19 Paciocco, above n 4, at [54] and [57].20 At [270].21 At [164]-[165].22 Torchlight, above n 5, at [80].or extravagant.23 Third, relevant considerations include whether both parties arecommercially astute, have relatively similar bargaining power, and are advised; and ifso, the strong presumption must be that the parties themselves are the best judges ofwhat is legitimate in a provision dealing with the consequences of breach.24 Fourth,the mere fact a clause substituting one scale of performance is designed to deter breachdoes not mean it is penal (but, as Lords Neuberger and Sumption emphasised, a clausedesigned to punish is penal).25[34] The Court also derived a similar set of principles from the various judgmentsin Paciocco, which it considered consistent with those in Cavendish: (a) thejustification for the rule lies in an amalgam of equity and the common law rule basedon public policy; (b) a provision whose sole or dominant purpose is to punish thecontract-breaker is contrary to public policy; (c) the test is not simply a comparisonbetween contractually stipulated and court-imposed damages; rather (d) thefundamental question is whether the impugned obligation is out of all proportion toany legitimate interest in enforcement of the primary obligation, or exorbitant, orunconscionable, having regard to performance interests.26[35] With these principles in mind, the Court of Appeal identified "four points ofcontext" in resolving whether, in that case, a late payment fee was a penalty:27(a) the commercial context of the transaction;(b) each party stood to make substantial gains;(c) the transaction involved high risk to the innocent party; and(d) the late payment fee was less than the equivalent cost of credit in theprimary transaction.23 At [81].24 At [82].25 At [83].26 At [85]-[88].27 At [90]-[94].[36] In the result, the Court concluded the late payment fee was not a penalty. Indoing so it emphasised the relevant inquiry is not what damages the lender might havereceived or whether it is designed to deter, unless the deterrence is designed topunish.28New Zealand[37] The most authoritative statement on the law of penalties in New Zealand is theCourt of Appeal decision in Amaltal Corporation Ltd.29 That case examined whetherthe penalty rule was a matter of public policy for the purpose of setting aside an arbitralaward under the Arbitration Act 1996. The Court concluded it was not. It added:30 the rule is simply a branch of equity's relief jurisdiction, supplemented bydevelopments in the common law whereby oppression of a party to acontract may be prevented. When Lord Radcliffe said in Campbell Discountv Bridge at p 622 that the refusal to sanction legal proceedings for penalties"is in fact a rule of the court's own, produced and maintained for purposes ofpublic policy", he was saying nothing more than that the rule was developedby the Courts with a view to limiting the use of a certain kind of contractualstipulation which had the potential for oppression.[38] It also cited with approval the joint judgment of Mason and Wilson JJ inAMEV-UDC Finance Ltd, including the following passage:31 equity and the common law have long maintained a supervisoryjurisdiction, not to rewrite contracts imprudently made, but to relieve againstprovisions which are so unconscionable or oppressive that their nature is penalrather than compensatory. The test to be applied in drawing that distinction isone of degree and will depend on a number of circumstances, including (1)the degree of disproportion between the stipulated sum and the loss likely tobe suffered by the plaintiff, a factor relevant to the oppressiveness of the termto the defendant, and (2) the nature of the relationship between the contractingparties, a factor relevant to the unconscionability of the plaintiff's conduct inseeking to enforce the term. The courts should not, however, be too ready tofind the requisite degree of disproportion lest they impinge on the parties'freedom to settle for themselves the rights and liabilities following a breachof contract. The doctrine of penalties answers, in situations of the present kind,an important aspect of the criticism often levelled against unqualified freedomof contract, namely the possible inequality of bargaining power. In this waythe courts strike a balance between the competing interests of freedom ofcontract and protection of weak contracting parties 28 At [95]-[97].29 Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614 (CA). For anapplication of the penalty rule in New Zealand, see General Finance Acceptance Ltd v Melrose,above n 2.30 At [56].31 At [57], citing AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 (HCA) at 193-194.[39] The Court then concluded:[59] So the rule, which certainly is one developed in the public interest, isconcerned with relief against oppression or unconscionable behaviour by acontracting party. Unlike the principles governing the supervening effect ofillegality, it has always been recognised as being subject to fairly narrowconstraints [40] This explanation of the normative basis of the penalty rule broadly aligns withthe explanation provided in Torchlight, namely a concern that remedial clauses not beoppressive or unconscionable. There are however two apparent points of substantivedifference between the statements of law in Amaltal and in Torchlight. First, Amaltaldescribes the penalty rule as a branch of equity supplemented by developments in thecommon law. 32 By contrast, in Cavendish Lords Neuberger and Sumption suggestthere has been no trace of equitable jurisdiction since the fusion of law and equity in1873.33 This largely accords with the view expressed by Mason and Wilson JJ inAMEV-UDC Finance Ltd who observed the equitable jurisdiction to relieve againstpenalties "withered at the vine."34[41] Second, as evident in the passage at [38] above, in Amaltal the differencebetween the stipulated sum and the likely loss to be suffered by the plaintiff wasdeterminative of whether the clause was a penalty. This appears to remain the settledposition in New Zealand,35 but has been substantially qualified in the United Kingdomand Australia. As explained above, the focus in those jurisdictions is now whether theclause protects and is not out of all proportion with a legitimate performance interest.[42] It may be that in New Zealand equity remains the source of the penalty rule.Certainly, the rule employs language more familiar to equity than the common law.And, as Mr Dillon submits, if there is any conflict or variance between the rules ofequity and the rules of the common law in relation to the same matter, the rules of32 Amaltal, above n 29, at [56]33 Cavendish, above n 3, at [42]34 AMEV-UDC Finance Ltd, above n 31, at 191,35 See Andrew Butler Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,2009) at [21.3.1]. See also General Finance Acceptance Ltd v Melrose, above n 2, at 470-471,adopting the approach of the High Court of Australia in O'Dea v Allstates Leasing System (WA)Pty Ltd, above n 2.equity prevail.36 But it appears generally accepted the penalty rule is a rule of thecommon law rather than equity.37[43] As to the second point of difference, I would not jettison altogether the pre-estimate of loss/stipulated sum comparison in appropriate cases, not least because itwas endorsed by the Court of Appeal in Amaltal.38 Compensatory damages for lossremain the primary remedy for breach of contract.39 A stipulated sum that is out of allproportion to likely compensatory damages for breach is prima facie extravagant andexorbitant.40 Furthermore, the pre-estimate of loss/stipulated sum comparison may beusefully applied in a great many cases if a broad conception of likely loss is adopted,including, for example, indirect losses41 or cost of cure,42 or where the performanceinterest is a contract sum (a point made by Lords Neuberger and Sumption inCavendish).43 Finally the fourth Dunlop category – see [28] above – contemplatescircumstances where the comparison is inapposite, namely where likely loss is notquantifiable at the time of execution. It was never therefore a threshold test ofuniversal application. In appropriate cases, it can sit comfortably alongside theredirection taken by the Courts in the United Kingdom and Australia.44[44] However, in a context where the defaulting party is seeking to depart from theclear words of the contract, in agreement with the way the rule was recast in Cavendishand Paciocco, the innocent party's performance interests, having regard to the fullcontext of the transaction, must be relevant when assessing whether a remedial clause36 Senior Courts Act 2016, s 180.37 See Butler, above n 35, at [21.3.1].38 Further, I think there is some merit to academic criticism about the redirection. Carter et al, aboven 6, at 21 criticise the approach taken in Paciocco insofar as it departs from the Dunlop orthodoxyand promotes a "performance interest" based outcome rather than an assessment based on thedamage likely to be caused by the breach. Jessica Palmer "Implications of the New Rule AgainstPenalties" (2016) 47 VUWLR 305 is also cautious about an approach that places emphasis onperformance interests rather than the compensation principle.39 Peter Blanchard Civil Remedies in New Zealand (2nd ed, Thomson Reuters, Wellington, 2011) at[1.1]; Brian Coote Contract as Assumption: Essays on a Theme (Hart Publishing, Oxford, 2010)at 134.40 This was the accepted orthodoxy in cases before Cavendish and Paciocco, such as Commissionerof Public Works v Hills, above n 2, O'Dea v Allstates Leasing System (WA) Pty Ltd, above n 2,and General Finance Acceptance Ltd v Melrose, above n 2.41 See also Carter et al, above n 6, at 20-21.42 Coote, above n 39, at 130.43 Cavendish, above n 3, at [32], and at [255] per Lord Hodge.44 On my reading of Cavendish, that is in fact the point made in the various judgments. A similarobservation is made in Torchlight, above n 5, at [80].is a penalty. Relevantly, not all remedial clauses are compensatory in the true sense;they may respond to the breach by identifying an alternative or substitutedperformance obligation, as explained in Torchlight.[45] Accordingly, I consider the principles set out in Torchlight provide a coherentframe for assessing whether a clause is an unenforceable penalty. The central issue iswhether a stipulated remedy for breach is out of all proportion to the legitimateperformance interests of the innocent party, or otherwise exorbitant or unconscionable,having regard to those interests. The following factors will be relevant to thisassessment:(a) whether the parties were commercially astute, had similar bargainingpower and were independently advised; and(b) whether the predominant purpose of the impugned clause is to punish(as opposed to simply deter) non-performance.[46] In addition, in appropriate cases, a comparison between likely loss and thestipulated sum may be relevant, particularly where the performance interest is acontract sum.(b) Preliminary issue: what is the scope of the penalty rule?[47] Much argument before me concerned the scope of the penalty rule. The penaltyrule in Australia does not require a breach of a contractual obligation. Rather, the HighCourt of Australia stated in Andrews:45In general terms, a stipulation prima facie imposes a penalty on a party (thefirst party) if, as a matter of substance, it is collateral (or accessory) to aprimary stipulation in favour of a second party and this collateral stipulation,upon the failure of the primary stipulation, imposes upon the first party anadditional detriment, the penalty, to the benefit of the second party. In thatsense, the collateral or accessory stipulation is described as being in the natureof a security for and in terrorem of the satisfaction of the primary stipulation.45 At [10] (footnotes omitted).[48] Lords Neuberger and Sumption were not at all comfortable with the notion aconditional primary obligation can amount to a penalty, because it is not premised onbreach of a contractual obligation. They stated in Cavendish:46The equitable jurisdiction to relieve from penalties arose wholly in the contextof bonds defeasible in the event of the performance of a contractual obligation.It necessarily posited a breach of that obligation. Finally, the High Court'sdecision does not address the major legal and commercial implications oftransforming a rule for controlling remedies for breach of contract into ajurisdiction to review the content of the substantive obligations which theparties have agreed. Modern contracts contain a very great variety ofcontingent obligations. Many of them are contingent on the way that theparties choose to perform the contract. There are provisions for termination oninsolvency, contractual payments due on the exercise of an option toterminate, break-fees chargeable on the early repayment of a loan or theclosing out of futures contracts in the financial or commodity markets,provisions for variable payments dependant on the standard or speed ofperformance and "take or pay" provisions in long term oil and gas purchasecontracts, to take only some of the more familiar types of clause. The potentialassimilation of all these to clauses imposing penal remedies for breach ofcontract would represent the expansion of the courts' supervisory jurisdictioninto a new territory of uncertain boundaries, which has hitherto been treatedas wholly governed by mutual agreement.[49] This question is relevant for present purposes because the plaintiffs contendthe defendants' obligation to indemnify is a primary obligation, and therefore notsubject to the penalty rule. The defendants submit Andrews is good law insofar as itidentifies that in equity, a breach of a primary obligation is not a prerequisite to theapplication of the penalty rule. This issue was not directly addressed by the Court ofAppeal in Torchlight. Given my interpretation of cl 2 below, it is unnecessary for meto rule on this question with finality. I nevertheless turn to briefly address it given thetime spent on it in argument.[50] The concept of primary and secondary obligations is a cornerstone of contractlaw. As stated by Professor Coote:47A party to a contract is subject to primary obligations to perform hisundertakings and to corresponding sanctioning or secondary obligations topay compensation if he commits a breach. At common law the two areinseparable, in the sense that no primary obligation arises unless the partyconcerned has also accepted the sanctioning obligations that go with it.46 Cavendish, above n 3, at [42].47 Coote, above n 39, at 106.[51] Lords Neuberger and Sumption also explained the rationale for this taxonomyand its operation in penalty cases in Cavendish:[13] This principle is worth restating at the outset of any analysis of thepenalty rule, because it explains much about the way in which it hasdeveloped. There is a fundamental difference between a jurisdiction to reviewthe fairness of a contractual obligation and a jurisdiction to regulate theremedy for its breach. Leaving aside challenges going to the reality of consent,such as those based on fraud, duress or undue influence, the courts do notreview the fairness of men's bargains either at law or in equity. The penaltyrule regulates only the remedies available for breach of a party's primaryobligations, not the primary obligations themselves. This was not a newconcept in 1983, when ECGD was decided. It had been the foundation of theequitable jurisdiction, which depended on the treatment of penal defeasiblebonds as secondary obligations or, as Lord Thurlow LC put it in 1783 inSloman v Walter 1 Bro CC 418, 419, as "collateral" or "accessional" to theprimary obligation. And it provided the whole basis of the classic distinctionmade at law between a penalty and a genuine pre-estimate of loss, the formerbeing essentially a way of punishing the contract-breaker rather thancompensating the innocent party for his breach. We shall return to thatdistinction below.[14] This means that in some cases the application of the penalty rule maydepend on how the relevant obligation is framed in the instrument, ie whetheras a conditional primary obligation or a secondary obligation providing acontractual alternative to damages at law. Thus, where a contract contains anobligation on one party to perform an act, and also provides that, if he doesnot perform it, he will pay the other party a specified sum of money, theobligation to pay the specified sum is a secondary obligation which is capableof being a penalty; but if the contract does not impose (expressly or impliedly)an obligation to perform the act, but simply provides that, if one party doesnot perform, he will pay the other party a specified sum, the obligation to paythe specified sum is a conditional primary obligation and cannot be a penalty.[15] However, the capricious consequences of this state of affairs aremitigated by the fact that, as the equitable jurisdiction shows, the classificationof terms for the purpose of the penalty rule depends on the substance of theterm and not on its form or on the label which the parties have chosen to attachto it. As Lord Radcliffe said in Campbell Discount Co Ltd v Bridge [1962] AC600, 622, "the intention of the parties themselves", by which he clearly meantthe intention as expressed in the agreement, "is never inclusive and may beoverruled or ignored if the court considers that even its clear expression doesnot represent 'the real nature of the transaction' or what 'in truth' it is taken tobe" This aspect of the equitable jurisdiction was inherited by the courts ofcommon law, and has been firmly established since the earliest common lawcases.[52] The last sentence at [14] of Cavendish read in isolation may confuse. As Iunderstand it, their Lordships identify an important difference between a "conditionalprimary obligation" and an obligation that is "collateral or accessional" to a primaryobligation. In the former, performance of the primary obligation is simply triggeredby the occurrence of a specified event or condition. It is not, per Cavendish, subjectto the penalty rule. In the latter, the obligation is responsive to and arises out of thenon-performance or breach of a contractual obligation. It is therefore a secondaryobligation and, per Cavendish, amenable to the penalty rule.[53] The United Kingdom Supreme Court in Cavendish was in fact addressing twoappeals; Cavendish Square Holdings BV v Makdessi and ParkingEye Ltd v Beavis.The facts in ParkingEye are illustrative of a secondary obligation. In that case LordsNeuberger and Sumption found penalty rule was plainly engaged.48 The facts aremercifully simple. ParkingEye displayed signs recording that: By parking within the car park, motorists agree to comply with the car parkregulations. Should a motorist fail to comply with the car park regulations themotorist accepts that they are liable to pay a parking charge [54] The regulations allowed a maximum parking period of two hours; failure tocomply would result in a parking charge of £85. The appellant, Mr Beavis, overstayedand was duly charged a fine of £85. Superficially, the obligation to pay the chargemight be construed as a conditional primary obligation (that is an obligation arisingon the occurrence of a specified event). But the clear objective of the impugnedprovision, in context, was not to agree terms for overstaying. Rather, its object was toprotect against and sanction breach of a parking condition.49[55] By contrast, the facts in the Cavendish appeal are illustrative of what amountsto a conditional primary obligation. Cavendish concerned an agreement for the saleand purchase of shares. Clause 5.1 of the agreement disentitled the sellers, if theydefaulted on a restrictive covenant, from receiving payment which would otherwisehave been due to them as their proportion of the price of transferred shares.50 LordsNeuberger and Sumption were satisfied, having regard to the immediate commercialcontext, that the obligation to pay the full share price was a conditional primaryobligation, and that the reduction in price was not a sanction for breach, but an48 Cavendish, above n 3, at [99].49 At [94], [284], [298].50 Clause 5.6 was also at issue. Under it each seller granted the purchaser the ability to requiredefaulting sellers to sell their shares to it within 30 days of receipt of a notice by the purchaserexercising its option in consideration for payment of a defined defaulting shareholder option price.adjustment to the price to reflect the agreed value of the shares in the event the sellersfailed to observe the restrictive covenant.51[56] Gageler J's account in Paciocco of the significance of Andrews then helpfullybridges (somewhat) the apparent conceptual divide:52[125] The statement in Andrews that "[i]t is the availability of compensationwhich generates the 'equity' upon which the court intervenes" without which"the parties are left to their legal rights and obligations" is, in context, areference to the historically important, although now comparatively rare,exercise of equitable jurisdiction to grant relief against penalties. Thestatements that, "[i]n general terms", a penalty is enforced "only to the extent"that compensation can be made for prejudice suffered by failure of the primarystipulation and that a party who can provide compensation "is relieved to thatdegree from liability to satisfy the collateral stipulation" are similarly directedto, and broadly descriptive of, the grant of equitable relief.[127] For present purposes, the significance of Andrews lies in itsexplanation of the conception of a penalty as a punishment for non-observanceof a contractual stipulation, in its explanation of that conception of a penaltyas a continuation of the conception which originated in equity, and in itsendorsement of the description of the speech of Lord Dunedin in Dunlop asthe "product of centuries of equity jurisprudence".(footnotes omitted)[57] With this clarification in mind, I tend to prefer the view that the penalty rule ordoctrine affixes only to secondary obligations (including collateral or accessoryobligations) to compensate or make good on the breach of or failure to dischargeprimary obligations, for the reasons succinctly expressed by Lords Neuberger andSumption.53 I also gratefully adopt Professor Jessica Palmer's coherent explanationfor the rule:54Contract law maintains a healthy respect for the parties' autonomy to makebargains, both good and bad. For this reason, the power afforded to the courtby the penalty doctrine to ignore particular terms of the contract should notextend to rewriting parties' primary obligations. However, a viable contractlaw requires that courts must be able to enforce contracts. Enforcement isachieved indirectly by the recognition of a secondary obligation to require a51 At [74].52 See also Kiefel J's comments at [18]-[23].53 Cavendish, above n 3, at [4]-[18]; See also Paciocco, above n 4, at [18]-[23] per Kiefel J and[125]-[127] per Gageler J, and Torchlight, above n 5, at [68]-[89]. .54 Palmer, above n 38, at 317. See also the reasoning in Cavendish, above n 3, at [12], Paciocco,above n 4, at [21].remedy (compensation) in the event of breach. Parties can attempt toincorporate a secondary obligation into the contract at the time of enteringtheir primary obligations for the sake of efficiency and certainty, but courtsmust retain the ability to review and set aside secondary obligations thatoverreach the compensation principle and thus usurp the courts' authority.Approach to interpretation[58] Whether a clause is penal is essentially a question of construction. In thisregard, I approach the interpretation of the Collateral Deed applying the usual rules,55overlaid by the guidance set out in Cavendish and Paciocco: it is necessary to look tothe substance not form to assess whether cl 2 (a) engages the penalty rule and, if so,(b) is a penalty.[59] It is necessary to preface the following discussion with a point of clarification.On my review of the authorities, I have found the interpretative exercise is usually aseamless examination of the meaning and effect, in context, of the impugned clause.Bright-line dichotomies between types of obligations have not driven the analysis inmost cases. It is also evident in complex cases the true object of the clause does notnecessarily become clear until the second step in the interpretative exercise iscomplete, namely the assessment of whether the clause is in fact a penalty.56 This isimportant because a clause that appears amenable to the application of the penalty rule(applying orthodox rules of interpretation) may take on a different character with thebenefit of the full proportionality assessment. The converse is equally true. In myview, therefore, the question of whether the penalty rule is engaged should be viewedsimply as a gateway test, used to exclude obligations that are clearly primary ratherthan secondary obligations.55 Air New Zealand Ltd v New Zealand Air Line Pilots' Association Inc [2016] NZCA 131, [2016] 2NZLR 829 at [35]: "When interpreting a written contract, the court is concerned to identify theintention of the parties by reference to 'what a reasonable person having all the backgroundknowledge which would have been available to the parties would have understood them to beusing the language in the contract to mean' And it does so by focussing on the meaning of therelevant words in their documentary, factual and commercial context. That meaning has to beassessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevantprovisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts andcircumstances known or assumed by the parties at the time that the document was executed, and(v) commercial common sense, but (vi) disregarding subjective evidence of any party'sintentions."56 My comment here echoes that of Palmer, above n 38, at 319.(c) Does 127 Hobson's obligation to indemnify engage the penalty rule?[60] The terms of the Collateral Deed are stated at [21]. Clause 2 imposes anobligation on 127 Hobson to indemnify the plaintiffs for all their lease obligations if asecond lift is not fully operational by 31 July 2016. Literally construed, this clauseimposes a conditional primary obligation on 127 Hobson, as the plaintiffs contend.But, in context, as Mr Dillon submits for the defendants, 127 Hobson's obligation toindemnify at cl 2 seeks to secure the performance of 127 Hobson's primary obligationto install a second lift; while the obligation to indemnify is the sanction (as well as asubstitute) for non-performance.[61] My reasons for this conclusion are as follows. First, the evident object of theCollateral Deed is to secure the installation of a second lift in the leased premises bya specific date, rather than an indemnity per se. That construction is consistent withthe negotiations leading up to the execution of the Collateral Deed, which make nomention of an obligation to "indemnify" at all.57 The focal point of negotiations wasalways about securing the installation of the second lift within a specified timeframe.Second, the Collateral Deed is, explicitly, collateral to the Lease, the purpose of whichis to secure a long-term leasehold that is fit for purpose, namely a fully licencedchildcare facility. A primary obligation to install the second lift conforms to thispurpose, as does a secondary obligation deterring non-performance. Third, thebroader factual matrix, known to both parties, reveals (a) they committed significantresources to improvements of the premises to enable a fully licenced pre-schoolfacility, and (b) Honey Bees and Mr James considered the second lift was importantin achieving that enablement. In this context, a primary obligation to indemnifysimpliciter would not secure the primary objective of the parties, namely premises thatare fit for purpose. Rather, cl 2 is, to use the language employed by the Court ofAppeal in Torchlight, a clause substituting one scale of performance for anotherdesigned to deter breach of the former.58[62] The plaintiffs also submit the indemnity is a "conditional primary obligation"because cl 1:57 By email dated 18 December 2013 to Mr James, Mr Gilbert did however record "Denis to providepersonal guarantee or something to make you happy".58 Torchlight, above n 5, at [83].(a) requires 127 Hobson to install a lift while cl 2 requires that the lift befully operational;(b) is not limited by time whereas cl 2 is; and(c) is an agreement with 127 Hobson alone, whereas cl 2 is an agreementwith both 127 Hobson and Mr Parbhu arising in the event the lift is notoperational by 31 July 2016.[63] There is force to this submission. But, to assess whether the penalty rule isengaged, substance comes before form. The listed factors do not change the essentialcharacter of cl 2 as a deterrent sanction for failure to install the lift on time. In short,the requirement at cl 2 for the lift to be operational by a specified time simply definesthe point for breach, and, as expanded upon below, Mr Parbhu's liability is additionalsurety of performance and sanction in the event of default.[64] The plaintiffs further contend the requirement to indemnify can never be apenalty because:(a) An indemnity is a duty to make good any loss, damage or liabilityincurred by another.(b) This duty presupposes that a loss has been, or will be, incurred by theparty being indemnified.(c) The fact the parties agreed to an indemnity shows it is a genuine pre-estimate of loss, and Honey Bees had a legitimate interest.[65] Argument on this issue was relatively sparse. In any event, there are severalproblems with the plaintiffs' analysis. First, the plaintiffs' tautology misses the objectof the penalty rule; it is engaged if the sanction, in this case the obligation to indemnify,is out of all proportion to the legitimate performance interests of the innocent party, orotherwise exorbitant or unconscionable, having regard to those interests. Anyapparent consensus between the parties reflected in the terms of the agreement aboutthe likely loss caused by breach is not determinative of this issue. Second, labels usedby the parties have never been a basis for avoiding characterisation as a penalty.59Finally, whether a party-party indemnity is the source of a secondary obligation to paycompensation for loss is a matter of construction.60 As Carter and Courtney note,"[t]he adoption of an "indemnity" may indicate, in the sense the term was used byAsquith LJ in Victoria Laundry,61 that the promise is to be protected against all lossflowing from breach, including loss that is unpredictable and improbable".62 In thisregard, for the reasons already expressed at above, I am satisfied the obligation toindemnify in the present case falls into this category.[66] Accordingly, the penalty rule is engaged insofar as it concerns 127 Hobson.(d) Does Mr Parbhu's indemnity clause engage the penalty rule?[67] Clause 2 also literally imposes a conditional primary obligation on Mr Parbhuto indemnify Honey Bees and Mr James if the second lift is not installed by 31 July2016. Furthermore, unlike 127 Hobson, there is no express obligation imposed on himto install the lift. At first blush therefore, Mr Parbhu's obligation to indemnify doesnot appear to correspond to a breach by him of any primary obligation and is notsubject to the penalty rule. As noted by the House of Lords in Export Credit GuaranteeDepartment v Universal Oil Products Co, a clause that provides for payment of moneyon the happening of a specified event other than a breach of a contractual duty "owedby the contemplated payor to the contemplated payee" is not a penalty clause.63[68] However, read in context, I am satisfied for this part of the assessment MrParbhu's obligation to indemnify corresponds to the breach of an obligation owed byhim. Mr Parbhu is the sole director of 127 Hobson and is identified by the CollateralDeed as the "guarantor" of 127 Hobson's obligations. The plaintiffs seek to attach Mr59 See Cavendish, above n 3, at [15], and Dunlop, above n 11, at 86.60 J W Carter and Wayne Courtney "Indemnities against Breach of Contract as Agreed DamagesClauses" (2012) JBL 555 at 563 and 575-576. At 564, these authors note the difference betweenparty-party indemnities and third party indemnities, where the latter is not usually concerned aboutan act of breach of contract, except perhaps as a stipulation.61 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 CA .62 At 539. In Burkard & Co Ltd v Wahlen (1928) 41 CLR 508 (HCA), a majority found on the trueconstruction of a contract for sale of tin clippings, a provision for indemnity in the event of defaultin delivery "shuts out" a claim in damages.63 Export Credit Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399 (HL) at402. This decision was endorsed in New Zealand in Marac Financial Services Ltd v Stewart[1993] 1 NZLR 86 at 94.Parbhu's guarantee to the indemnity, but in pre-contractual correspondence known toboth parties, Mr James sought and Mr Parbhu accepted personal responsibility forinstalling the lift, not for indemnifying loss for non-performance.64 As a result, MrParbhu is the "guarantor" insofar as he has provided a guarantee to secure installationof the second lift. In this sense, his obligation to indemnify is similar in concept to theobligation to pay in the defeasible bond cases.65 As Lord Radcliffe noted in Bridge vCampbell Discount Co Ltd:66I do not see any sufficient reason why in the right setting a sum of money maynot be treated as a penalty, even though it arises from an obligation that isessentially a guarantee.[69] I am prepared therefore to approach the substantive assessment on the basisthat Mr Parbhu's obligation to indemnify is secondary and engages the penalty rule.(e) If the answer to (c) and or (d) is yes, is the obligation to indemnify apenalty?[70] It is necessary to first define the extent of the obligation to indemnify. Clause2 imposes an obligation on 127 Hobson and the Guarantor (Mr Parbhu) to "indemnify"for "all obligations" Honey Bees and Mr James may incur "under the Lease",including the payment of rent, without any apparent limit. While the plaintiffspresently seek only to enforce the obligation to indemnify rent and outgoings, theindemnity is not literally limited to these payments. As Mr Dillon submits, literallyexpressed, the obligation to indemnify includes rent payments, maintenance,breakages, painting, care of grounds, maintenance of waste and storm water, rubbishremoval, notification of defects, use of premises, and compliance with statutes. Onlycursory attention was given to this aspect of the case, but it defies common sense tosuggest a landlord would, in indemnifying a lessees' obligations under the lease forlate installation of a lift, include breaches of covenants relating to the use, maintenance64 This is not to suggest the corporate veil should be pierced. Rather the context shows that MrParbhu was inextricably part of the contractual matrix, including for the purpose of securing thesecond lift.65 See Sloman v Walter (1783) 1 Bro CC 418 at 419. See also the discussion in Andrews, above n 4,at [11]; Cavendish, above n 3, at [4]-[5]. See also AMEV-UDC Finance Ltd v Austin, above n 31,at 190 per Mason and Wilson JJ.66 Bridge v Campbell Discount Co Ltd [1962] AC 600 (HL) at 624, citing Clydebank Engineering &Shipbuilding Co Ltd v Yzquierdo y Castaneda [1905] AC 6 (HL) at 15.and repair of damage. I therefore confine the scope of the indemnity to the Honey Beesto performance obligations to pay rent and outgoings.[71] Second, the defendants claim the obligation to indemnify extends to the entireterm of the lease including rights of renewal, that is 24 years. Whether renewalamounts to the grant of a fresh lease is a matter of construction in each case.67 MrDillon submits on a proper construction of the Lease, each additional term is avariation not a renewal, and the distinction between the initial lease term and renewalterms is confined to cl 32.1, which need not be read into the Collateral Deed. Idisagree. Clause 32.1 states:If the tenant has given to the Landlord written notice to renew the lease then the landlord will grant a new lease for a further term from the renewaldate as follows: [72] It resembles the clause discussed in Sina Holdings, in which the Court ofAppeal found renewal constituted the grant of a new lease.68 I see no reason to holddifferently in relation to the present lease. That cl 32.1(c) provides the provisions ofthe Lease continue unchanged, a point made by Mr Dillon, does not displace the factthat on renewal, the Lease is a "new" lease. There is also nothing in the broadercontext to suggest Honey Bees, 127 Hobson, Mr James or Mr Parbhu agreed or had inmind an indemnity running for 22 years. Indeed, as with the suggestion that theindemnity extends to damage caused by the lessee to the premises, it is commerciallyabsurd to suggest any of the contracting parties had this period in mind when theyexecuted the Collateral Deed.69[73] I also reject Mr Dillon's pleadings point. He contends the plaintiffs have notresponded to the affirmative defence raised in the statement of defence, namely thatthe penalty ran for about 22 years. But, the plaintiffs' statement in reply denied(among other things) that the Collateral Deed contains a provision amounting to apenalty and that the terms of the penalty were unconscionable. This was sufficient to67 Otehei Bay Holdings Ltd v Fullers Bay of Islands Ltd [2011] NZCA 300, [2011] 3 NZLR 449 at[61].68 Sina Holdings Ltd v Westpac Banking Corporation [1996] 1 NZLR 1 (CA).69 Mr Parbhu first refers to the prospect of abatement in payments for 22 years in an email to MrJames on 25 October 2016. While Mr James does not disabuse Mr Parbhu of this prospect, nordoes he purport to confirm it. It provides very weak evidence only that the parties contemplatedan indemnity for this period.put the defendants on notice that the penalty claim was challenged, particularly giventhe length of the indemnity is a question of mixed law and fact. In any event, had Ithought it necessary to do so, I would have granted leave to the plaintiffs to amendtheir pleadings to make the necessary denial.[74] I turn now to address the threshold issue, applying the principles summarisedin Torchlight.Is obligation to indemnify out of all proportion to the legitimate performance interestsof the innocent party, or otherwise exorbitant or unconscionable, having regard tothose interests?[75] I have had the benefit of comprehensive submissions on this issue. They maybe reduced to some core propositions. The plaintiffs contend at the time of executioninstallation of a second lift was important to the operation of a fully licenced childcarefacility, and the constraints of having only one lift could have threatened their business'viability. It was therefore necessary to secure the installation of the second lift andmitigate the commercial risk arising from not having premises that were fully fit forpurpose. Given the plaintiffs were liable for the full rental and outgoings, an indemnitycorresponding to this liability was a reasonable deterrent against non-performance,particularly as the indemnity only equates to a reduction in rental and outgoings ofless than 13 per cent over a potential 24-year arrangement.[76] Mr Dillon colourfully responds that the indemnity is the "death" of thedefendants' benefits under the Lease, and extravagant relative to any loss the plaintiffscould conceivably have incurred in the event of non-performance. He submits theclaimed "existential" threat presented by non-performance is, in short, fanciful,because (a) the requirement for a second lift did not feature in the agreement to leaseand (b) the facility has been fully licenced and operational since August 2015. He alsosays the indemnity does not incentivise performance at all, was never a proper basisfor sanction, and is plainly punitive. To illustrate, he observes, had the lift beenoperational on 1 August 2016, the full force of the indemnity would apply – namelyall obligations would be indemnified.Assessment[77] While the position is not clear cut, I am not satisfied the indemnity is out of allproportion to the plaintiffs' legitimate performance interests, or otherwise exorbitantor unconscionable, having regard to those interests. Clause 2 seeks to secure theinstallation of the second lift by 31 July 2016 and provides a legitimate substitute fornon-performance. As submitted by the plaintiffs, multiple factors support thisconclusion.[78] Before I set these out, it is helpful to note that some of the Dunlop rules forassessing whether a clause was a penalty were not affected by the recasting inCavendish and Paciocco. Key among these is the rule that whether a sum is a penaltyis a question of construction to be decided upon the terms and inherent circumstancesof each contract, judged at the time of the making of the contract, not at the time ofthe breach.70 This is important because the present exercise is still concerned withwhat the parties intended, not what in fact transpired.[79] Turning then to the proportionality factors; first, it is readily inferable from thewords used in the Collateral Deed, and the broader context, the plaintiffs sought tosecure and protect two related legitimate performance interests: (a) the installation ofa second lift by a specified time and (b) leasehold premises that were fit for a fullylicenced pre-school facility for the full leasehold period (including renewals). Theplaintiffs also legitimately sought to insulate themselves from the commercial riskassociated with premises which were not fully fit for purpose, in the event a secondlift was not installed. In combination, these interests provided a proper basis for asecondary obligation to indemnify the plaintiffs' obligations under the Lease in theevent of non-performance of the primary obligation to install.[80] Second, the obligation to indemnify was only triggered if the lift was notinstalled by 31 July 2016, more than 31 months after the lease was executed. Thisafforded 127 Hobson ample opportunity to install the lift. This factor mitigates the70 Dunlop, above n 11, at 86-87 and Cavendish, above n 3, at [87].apparent harshness of the scenario raised by Mr Dillion, namely an indemnity runningto the expiry of the lease where the lift is installed on 1 August 2016.71[81] Third, at the time of execution I find Mr Parbhu knew or should have knownthat:(a) The second lift was important to the plaintiffs.(b) The lift was (and is) important to the effective operation of a fullylicenced facility because of the timing of drop off and pick up ofchildren, the limited parking space available, and the location of thefacility on the fifth floor of the building.(c) Mr James and Honey Bees had expended significant resources on thefit out of the premises.72(d) Honey Bees had a probationary licence for 24 children only.(e) After 14 months, rental liability was to be fixed by reference to a fullylicenced facility of 50 children and Honey Bees was liable to pay thefull rent and outgoings, irrespective of the actual level of occupancy.[82] These matters justified a strong deterrent against non-performance.[83] Fourth, the likely losses arising from non-performance were not quantifiableat the time of execution, because the effect of non-performance was systemic; that is,it affects the fitness for purpose and attractiveness overall of the premises for a fullylicenced childcare facility. Thus, any linkage between the absence of the second liftand financial losses is indirect only. This places the indemnity obligation into thefourth class of obligation identified in Dunlop, for which a comparison between thestipulated sum and likely loss is inapposite. This is also a factor favouring theconclusion that the indemnity was a genuine attempt at securing performance and a71 I return to this issue below at [94].72 Accounts provided by Honey Bees and provided to the Ministry of Education, adduced in evidenceas Exhibit 1, put this figure at $600,000.remedial solution to non-performance commensurate, in the view of the contractingparties, to plaintiffs' interests in performance. The impact of non-performance is alsoloosely akin to the type of systemic impact cl 5.1 of the agreement in Cavendish soughtto protect against.73[84] Additionally, I find both parties would have reasonably contemplated at thetime of execution that by 31 July 2016:74(a) The plaintiffs would have committed significant resources to theestablishment of a viable and fully licenced facility, a client base andgoodwill.(b) The absence of a second lift could affect the plaintiffs' ongoing abilityto efficiently and competitively operate a childcare facility at fullcapacity, and attract and keep clients – a point alluded to in pre-execution correspondence.75(c) Any termination of the lease for non-performance (assuming HoneyBees could do so without incurring additional liability)76 would havemajor consequences for the plaintiffs' business, including a potentiallysignificant impact on goodwill.(d) The plaintiffs had no viable way of securing a second lift without thedefendants' cooperation, so alternative performance by the plaintiffscould be difficult, if not impossible.73 See [55] above. And in particular, see Cavendish, above n 3, at [143] per Lord Mance.74 I have employed the remoteness tests adopted in McElroy Milne v Commercial Electronics Ltd[1993] 1 NZLR 39 (CA) at 43 per Cooke P and at 45 per Hardie Boys J for the assessment ofpotential impact.75 The evidence on the effect of having only one lift, which I accept, included wait times of up to 20minutes for a lift to arrive. The broader context to this is the other major tenant in the building isa hotel which places frequent demands on the use of the single lift, including at peak times for thechildcare facility.76 The lease expressly permits Honey Bees to cancel if regulatory conditions preclude a fullylicenced operation at the premises. It does not expressly permit early termination for breach of cl1 and or 2 of Collateral Deed.[85] I disagree with Mr Dillon's submission that any "existential threat" to theplaintiffs' business arising from non-performance is not reflected in the pre-executionbehaviour of the plaintiffs, or events after execution. I am satisfied Mr James soughtconfirmation a second lift would be installed at the time of the initial negotiations andthen insisted on it immediately prior to execution, reflecting its importance to him.The subsequent success of the facility does not detract from the objectivereasonableness of the plaintiffs' concerns about potential impact at the time ofexecution.77 Conversely, the fact the lift was still not installed 14 months after the duedate vindicates (in part)78 the legitimacy of Mr James' concern.[86] Fifth, both parties were commercially astute, Mr Parbhu particularly so. He isa very experienced property developer, managing some twelve commercial propertieswith a portfolio worth some [redacted]. He cannot be described as a person undulyvulnerable to commercial pressure. While there is evidence he was juggling hisfinances at the time of execution, this was not clearly made known to Mr James to anextent it could be deemed a disadvantage upon which he acted. I accept Mr Parbhudid not turn his mind to the precise terms of the indemnity at the time of execution,that it was not raised in pre-contract negotiations and that he did not receiveindependent legal advice about the effect of the Collateral Deed. This suggests apower imbalance and is a cause for concern. But these were self-imposedcircumstances. Mr Parbhu could have sought his solicitor's advice, but he chose notto. He was content to rely on his own expertise in such matters, and he had goodreason to do so given his extensive commercial property experience. In this context,there is no reason to depart from the axiom the parties can be presumed to be the bestjudges of their interests.[87] Sixth, I am satisfied the predominant purpose of the indemnity was not topunish non-performance. In addition to the purposes already mentioned, the plaintiffshad good reason to doubt the reliability of the defendants' ability to install the secondlift on time and therefore equally good reason to seek to deter non-performance instrong terms. Mr James' experience with Mr Parbhu was marred by the misleading77 Cf Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 61 BLR 41 (PC) at 59 for thereverse proposition that what transpired indicated the clause was not in fact punitive.78 See my discussion below regarding relief against forfeiture.nature of the advertisement for the 127 Hobson Street premises and ongoing problemswith securing premises that were fit for purpose throughout the pre-lease set up period.A salient example is the handling of car parking issues. Mr Parbhu assured Mr Jamesthe facility would have access to a specified number of carparks. He forwarded anemail to Mr James sent by Auckland City Council. Mr James later discovered MrParbhu had edited the email to exclude comments by the Council which appeared toplace the availability of the parks in doubt. This exacerbated Mr James' existingconcerns about Mr Parbhu's trustworthiness and reliability.79[88] Finally, I have considered the potential consequences of non-performanceagainst the estimated cost of the indemnity to Mr Parbhu and/or 127 Hobson. The costto the defendants is substantial: $556,578.83 or about 60 per cent of the lease paymentsto expiry. In addition, there is the estimated cost of the installation of $222,940.80 Arelatively trifling breach of cl 2 therefore exposed 127 Hobson and Mr Parbhu to,effectively, forfeiture of all their performance consideration from the date of breach tothe expiry of the first lease.81[89] This is the defendants' strongest point. It was a decisive factor in twocomparable cases: Hills and Gilbert Ash.82 In those cases remedial clauses enabledthe non-breaching party to withhold payments for works either not completed on timeor not compliant with contract standards. The complete lack of any correspondencebetween the losses arising on trivial breaches and the stipulated amounts rendered therelevant provisions unenforceable.79 Despite the validity of Mr James' concerns, I accept Mr Parbhu did not intend to mislead, eitherin respect of the advertisement, or on the parking issues. He had independent expert advice as tothe suitability of the premises for the purpose of the advertisement. Furthermore, I accept MrParbhu's explanation that he edited the email to avoid causing undue concern rather than tomislead. He had a very clear appreciation of the rights to carparking which ultimately have beenproven to be correct.80 This sum was not produced in evidence. Rather, it was provided by counsel for the defendants inresponse to a specific question I asked to be addressed in closing submissions. It was not contestedby counsel for the plaintiffs in their reply submissions.81 In this regard, I reject the plaintiffs' quantification of the relative impact by reference to the 24-year rental and outgoings sum. I am not prepared to infer the parties had this sum in mind at thetime of execution.82 See Commissioner of Public Works v Hills, above n 2, at 375-376 and Modern Engineering(Bristol) Ltd v Gilbert Ash (Northern) Ltd [1974] AC 689 (HL) at 698. See also Cavendish, aboven 3, at [253]-[254] per Lord Hodge.[90] Similarly, their Lordships in Bridge unanimously concluded a stipulated sumpayable upon early cancellation, purportedly as agreed compensation for depreciationand amounting to two thirds of the full hire cost, was a penalty.83 Lord Radcliffeacknowledged an owner may legitimately seek to protect himself against having"goods, part-worn and of uncertain realisable value, thrown back on his hands, withthe attendant difficulty of putting any satisfactory second-hand value on them for thepurposes of proving his damage".84 But he doubted whether the owner could "protecthimself on the scale of up to two-thirds that is envisaged here, without much moreelaborate provisions for adjustment according to the circumstances in which the claimfalls due."85[91] This reasoning was echoed by the High Court of Australia in O'Dea. It setaside a clause purporting to require the hire-purchaser of a truck to pay all instalmentsto the end of the hire period even though the truck had been repossessed early. DeaneJ commented, in concluding the stipulated sum was a penalty, that the clause removedall the hire-purchaser's consideration for trivial breach, while at the same timeconferring all the benefits of the agreement to the hirer.86 Smellie J reached the sameconclusion in similar circumstances in Melrose. He stated that the remedial clausewas a penalty because: 87In the circumstances of this case the facts show clearly that if the provisionsof cl 15 are applied the plaintiff will recover significantly more as a result ofthe defendant's default than it would have recovered had the agreement run itscourse.[92] Nevertheless, the plaintiffs in the present case executed the Lease on theassumption that by 31 July 2016 the premises would have two lifts, not one. It was amajor prerequisite to the plaintiffs entering and committing to a long-term leasehold.The date for implementation was not a target to be hit, but a compromise beyond whicha remedy would be demanded. As noted, at the time of execution, the parties shouldreasonably have contemplated that non-performance could have a significant,83 Viscount Simonds dissented on the result because of a pleading point, but otherwise agreed thatthe stipulated sum in cl 9(b), the focus of the other judgments, was a penalty.84 At 625.85 At 625.86 At 400-401. See also the judgments of Gibbs CJ at 369, Murphy J at 375, and Wilson J at 383.87 General Finance Acceptance Ltd v Melrose, above n 2, at 470.ongoing, systemic impact on the overall functioning and viability of the childcarefacility. Furthermore, it is relevant that but for the indemnity the plaintiffs wereexposed to full rental and outgoings liability even if they were not operating at fullcapacity, and with or without the installation of the second lift. In this context, unlikethe facts in Hills, Gilbert Ash, Bridge or O'Dea, the plaintiffs continued to assume theongoing commercial risk of occupying premises that were not, in their minds, fit forpurpose. The effect of the indemnity was to reallocate that risk to the defendants. Thisshould have been obvious to the parties at the time of execution, even though I acceptMr Parbhu did not specifically turn his mind to it. Accordingly, there was, at the timeof execution, a sufficient relationship between the indemnity against lessee liabilityand the legitimate performance and commercial interests of the plaintiffs.[93] These facts also bring this case into closer alignment with the facts inCavendish and ParkingEye. In the former, protection of performance interestsjustified a strong deterrent clause (and significant price adjustment) to account forunquantifiable impacts of a breach of the restraint of trade on goodwill.88 InParkingEye, a substantial sum was payable for overstaying, well in excess of the actualcost of parking, because of the systemic effect on the plaintiff of such overstaying.89Furthermore, the plaintiffs in the present case were not interested in recovering a sumreflecting economic losses. They clearly wanted to establish and maintain a long termviable childcare centre, for which they saw the installation of the lift as a keycomponent.[94] I also draw assistance from Philips, a decision of the Privy Council. That caseconcerned a purported liquidated damages clause, the effect of which meant that asubcontractor might be liable for a sum which could be wholly out of proportion toany loss for a hypothetically minor breach of the contract. In declining to accept thishypothetical scenario, the Privy Council stated, relevantly: 90Whatever the degree of care exercised by the draftsman it will still be almostinevitable that an ingenious argument can be developed for saying that aparticular hypothetical situation a substantially higher sum will be recoveredthan would be recoverable if the plaintiff was required to prove his actual lossin that situation. Such a result would undermine the whole purpose of parties88 Cavendish, above n 3, at [75].89 At [99]. See also Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (CA).90 Philips, above n 77, at 54.to a contract being able to agree beforehand what damages are to berecoverable in the event of breach of contract.[95] Finally, as I will explain below, the response to the type of unconscionabilityidentified in Hills, Gilbert Ash, Bridge and O'Dea may be better framed in terms ofequitable relief against forfeiture.91[96] Stepping back from the detail, it is not the function of the law of penalties toprotect commercially sophisticated property investors from their commercialdecisions. The facts and conclusion in Export Credits Guarantee Departmentexemplifies the point. In that case, several multilateral contracts were concludedbetween three companies. One of the contracts involved a construction project to becompleted by the third defendants. Finance was partially effected by an arrangementwhereby the companies issued promissory notes to mature on specified dates in returnfor bank funds, which were used to pay the third defendant. Payment on thepromissory notes was guaranteed by the plaintiffs subject to a proviso (cl 7(1)) thatthe defendants would reimburse the plaintiffs if the promissory notes weredishonoured at a time the defendants were in breach of the contracts, including theconstruction contract. Some of the promissory notes were dishonoured, and theplaintiffs claimed £39,571,001.54 in payments made under the guarantee, as the thirddefendant was in default under the construction contract at the time. The defendantsclaimed the indemnity clause was a penalty.[97] The House of Lords rejected the penalty claim. Lord Roskill stated:92 the law relating to penalty clauses is to prevent a plaintiff recovering a sumof money in respect of a breach of contract committed by a defendant whichbears little or no relationship to the loss actually suffered by the plaintiff as aresult of the breach by the defendant. But it is not and never has been for thecourts to relieve a party from the consequences of what may in the event proveto be an onerous or possibly even a commercially imprudent bargain.[98] His Lordship emphasised that on the facts the plaintiffs were doing no morethan claiming their actual losses, so the clause could never amount to a penalty. This91 Notably, Brennan J in O'Dea at 391 preferred to frame the central issues in terms of equitablerelief against forfeiture. See also discussion in Cavendish, above n 3, at [17] per Lords Neubergerand Sumption, [160]-[161] per Lord Mance, and [226]-[229] per Lord Hodge.92 Export Credit Guarantee Department v Universal Oil Products Co, above n 63, at 403.is a distinguishing factor. But for the reasons set out above, I remain satisfied thereforethat the penalty rule, while engaged, ought not be applied in this case.[99] Accordingly, overall, I am satisfied the obligation to indemnify is not out of allproportion to the legitimate performance interests of the plaintiffs, or otherwiseexorbitant or unconscionable, having regard to those interests. Given this, I have notfound it necessary to consider what alternate relief is appropriate.Was the Collateral Deed executed in circumstances that were unconscionable?[100] The plaintiffs allege unconscionable bargain has not been pleaded as anaffirmative defence. But all aspects of the unconscionability claim needed to be andwere addressed in any event. Additionally, while far from perfect, I am satisfied thestatement of defence adequately pleaded the necessary elements of unconscionablebargain:93(a) The party seeking relief must have been suffering under a significantdisability or disadvantage at the time they entered into the bargain. Aqualifying disability is a characteristic or condition which significantlydiminishes a party's ability to assess his or her best interests. Stress oranxiety may qualify.(b) If a qualifying disability or disadvantage is proven, the essentialquestion is whether in the particular circumstances it is unconscionableto permit the stronger party to take the benefit of the bargain. Thisrequires:(i) knowledge (including constructive knowledge, which mayamong other things be established from the substance of thetransaction or the way it was concluded) of the weaker party'sdisability or disadvantage; and93 See Gustav & Co Ltd v Macfield Ltd [2007] NZCA 205 at [30] for a full statement of relevantprinciples. These principles were endorsed on appeal in Gustav & Co Ltd v Macfield Ltd [2008]NZSC 47, [2008] 2 NZLR 735 at [6].(ii) that the stronger party took advantage of that disability, eitherby active extraction or passive acceptance of a benefit.[101] I therefore prefer to deal with the merits. Mr Dillon submits that the orthodoxrequirements for unconscionability are met:94(a) Qualifying disability – Mr Parbhu was under significant financialpressure at the time he entered into the Collateral Deed and did notreceive legal advice.(b) Mr James knew about this disability.(c) The knowledge was used to extract an advantage that would beunconscionable to allow to stand, namely the indemnity obligation incl 2.[102] This claim fails at several points. First, I am not satisfied Mr James knew aboutMr Parbhu's financial pressures to the extent it bears on the conscionability of thebargain. He was plainly aware Mr Parbhu wanted to finalise the Lease and that he wasunder financial pressure. The imbalance in consideration in the Collateral Deed andthe haste with which Mr Parbhu entered into it are factors to be considered, but MrJames was not aware of the detail of Mr Parbhu's financial circumstances; in fact fromhis perspective he was entered into a Lease agreement with a highly successfulcommercial property owner/manager. Second, Mr Parbhu insisted on using Mr James'solicitors to draft the agreements, because as an experienced and sophisticatedowner/manager of commercial property, he did not feel the need to retain legal advice.Any vulnerability arising was therefore due to Mr Parbhu's decision making, and hasnothing to do with Mr James. It is also relevant the agreements were sent through MrGilbert, Mr Parbhu's business broker. Mr Parbhu was not without access toindependent advice.9594 See also discussion in Butler, above n 35, at [23.1.2].95 A similar conclusion with similar facts was reached in Walmsley v Christchurch City Council[1990] 1 NZLR 199 at 207.[103] Third, there is nothing to suggest Mr James intentionally relied on anydisability to extract an advantage. In this regard, Mr Dillon notes there was noobligation under the agreement to lease to include the collateral obligations, and thesomewhat frantic circumstances of leading up to execution. But these factors fall wellshort of demonstrating an intention on Mr James' part to take advantage of MrParbhu's disability, even in the form of passive acceptance of a benefit.[104] This claim therefore fails. I pause however to note that the very late inclusionof an indemnity, without any warning to Mr Parbhu about it, raises distinct fairnessconcerns. Had Mr Parbhu been a less sophisticated party in commercial propertymatters, and the period to install less generous, a case for unconscionable bargain maywell have succeeded.Relief[105] The plaintiffs seek and are entitled to specific performance of the obligation toindemnify to the date of installation of the second lift. That much is clear. I reserve myposition however in relation to specific performance beyond that date. The rule againstpenalties has been the focus of this proceeding. Equitable relief against forfeiture wasnot sought or argued. But with the benefit of close examination of the law in this areaand the facts, it is tolerably clear to me that this is a case where equitable relief againstforfeiture should be considered.[106] Importantly, Lord Mance and separately Lord Hodge, with whom the rest ofthe Court largely agreed,96 emphasised the conceptual difference between the penaltyrule and equitable relief against forfeiture. Lord Mance stated:[160] Jobson v Johnson [1989] 1 WLR 1026 proceeds on the basis that acase may raise for consideration both the penalty doctrine and the power ofthe court to relieve against forfeiture. In my opinion, that is both logical andcorrect in principle under the current law. A penalty clause imposes a sanctionfor breach which is extravagant to the point where the court will in nocircumstances enforce it according to its terms. The power to relieve againstforfeiture relates to clauses which do not have that character, but which nonethe less operate on breach to deprive a party of an interest in a manner whichwould not be penal. That it would not be penal is evident from the fact that thecourt will only grant relief on the basis that the breach is rectified by96 Cavendish, above n 3, at [291] per Lord Clarke, [294] per Lord Toulson and at [10] and [18] perLords Neuberger and Sumption.performance. "In the ordinary course", as the Privy Council said in ÇukurovaFinance International Ltd v Alfa Telecom Turkey Ltd (No 4) [2016] AC 923,979, para 13, "relief in equity will only be granted on the basis of conditionsrequiring performance, albeit late, of the contract in accordance with its termsas to principal, interest and costs: see eg per Lord Parker of Waddington inKreglinger (G & C) v New Patagonia and Cold Storage Co Ltd [1914] AC 25,49–50 and per Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] AC691, 722c, 723h." The two doctrines, both originating in equity, thereforeoperate at different points and with different effects. Consideration whether aclause is penal occurs necessarily as a preliminary to considering whether itshould be enforced, or whether relief should be granted against forfeiture.[107] Similarly, Lord Hodge noted:[227]. Cavendish has argued that such clauses should be seen as forfeitureclauses to which the law of penalties should not apply. Ms Smith urged that itwould be a recipe for confusion if a single clause were to be classified in twodifferent ways. I disagree. There is no reason in principle why a contractualprovision, which involves forfeiture of sums otherwise due, should not besubjected to the rule against penalties, if the forfeiture is whollydisproportionate either to the loss suffered by the innocent party or to anotherjustifiable commercial interest which that party has sought to protect by theclause. If the forfeiture is not so exorbitant and therefore is enforceable underthe rule against penalties, the court can then consider whether under Englishlaw it should grant equitable relief from forfeiture, looking at the position ofthe parties after the breach and the circumstances in which the contract wasbroken. This was the approach which Dillon LJ 1271adopted in BICC plc vBurndy Corpn [1985] Ch 232 and in which Ackner LJ concurred. The courtrisks no confusion if it asks first whether, as a matter of construction, theclause is a penalty and, if it answers that question in the negative, considerswhether relief in equity should be granted having regard to the position of theparties after the breach.[108] Significantly also for present purposes, Lords Neuberger and Sumption notedthat relief from forfeiture was not confined to cases about forfeiture of land. Theystated:97Where a proprietary interest or a "proprietary or possessory right" (such as apatent or a lease) is granted or transferred subject to revocation ordetermination on breach, the clause providing for determination or revocationis a forfeiture and cannot be a penalty, and, while it is enforceable, relief fromforfeiture may be granted: see BICC plc v Burndy Corpn [1985] Ch 232, 246–247, 252 (Dillon LJ) and The Scaptrade [1983] 2 AC 694, 701–703 (LordDiplock). But this does not mean that relief from forfeiture is unavailable incases not involving land: see Çukurova Finance International Ltd v AlfaTelecom Turkey Ltd (No 3) [2016] AC 923, especially at pp 956–957, paras92–97, and the cases cited there.97 At [17].[109] The Court of Appeal in Greenshell recently laid out the applicable criteria forequitable relief from forfeiture. For present purposes, it is only necessary to refer thefollowing passage:98The paradigm case for relief is where the primary object of a bargain is tosecure a stated result which can be effectively attained when the matter comesbefore the court, and where the forfeiture provision is added by way of securityfor the production of the result.[110] In the present case, 127 Hobson must, in effect, forfeit all rental and outgoingpayments and corresponding secondary rights of enforcement for non-payment.While the form of the forfeiture is indirect, in substance that is what cl 2 achieves. Toillustrate, 127 Hobson has effectively lost the landlord's right to re-enter the propertyfor breach of the covenant to pay rent.99 In the result, the indemnity derogates fromrights that are proprietary in nature.100 Crucially, it also carries the most distinctivefeature of clauses the doctrine classically provides relief against: it is designed assecurity of a primary stipulation. For my part, it is therefore arguable that in thecircumstances of this case, equitable relief against forfeiture of the rental andoutgoings following the installation of the second lift would be appropriate. AsBrennan J stated in O'Dea:101Equity may mould a decree relieving against the exaction of a forfeiture undersuch a stipulation according to the exigencies of the case, as Jacobs J said inForestry Commission of NSW v Stefanetto: "A court of equity can mould itsrelief so that the substantial purpose of its doctrine of relief against forfeiture is achieved.[111] This outcome would vindicate and protect the plaintiffs' performance interestsconsidering the circumstances that have in fact unfolded, while preserving 127Hobson's residual performance interests under the Lease. It would address the typeof unconscionability underpinning the outcomes in Hills, Gilbert Ash, Bridge and98 See Greenshell NZ Ltd (in rec) v Kennedy Bay Mussel Co (NZ) Ltd [2015] NZCA 374, [2016] 2NZLR 44 at [44] (footnotes omitted).99 Property Law Act 2007, ss 244-245.100 While equitable relief appears not to be limited to cases involving land, the prevailing orthodoxyis that the relief attaches only to possessory rights. See Scandinavian Trading Tanker Co AB vFlota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 AC 694 (HL) at 702. See also ÇukurovaFinance International Ltd v Alfa Telecom Turkey Ltd (No 3) [2016] AC 923. It will be a matter forfull argument, but my preliminary view is that the obligation to indemnify derogates from thelandlord's various rights of entry and possession for non-payment of rent.101 O'Dea, above n 2, at 392, citing Forestry Commission of NSW v Stefanetto (1976) 133 CLR 507(HCA).O'Dea. It is also the type of relief endorsed in Jobson, though in that case under therubric of the penalty doctrine. My preliminary view therefore is that this is logicalpoint for the intervention of this Court to avoid an apparently unconscionable result.Two additional comments are necessary:102(a) If relief against forfeiture was granted in respect of 127 Hobson, relieffor Mr Parbhu's indemnity would likely follow. As Brennan J stated inO'Dea:The principle stated by Rich J in McDonald v Dennys Lascelles Ltdas to a guarantor's liability for instalments of the purchase price undera contract of sale of land is no less applicable to the guarantor'sliability for that part of the entire rental which is attributable to thehiring period after repossession. Richard J said: "Once it is decided,as upon the authority of Mayson v Clouet, I think it must be decided,that as between purchaser and vendor the vendor cannot retain, letalone recover, an overdue instalment of purchase money after thecontract has come to a premature end even by his own fault, I think itfollows that no guarantee of such an instalment could be enforced bythe vendor.(b) Unlike the penalty rule, the conduct of the party seeking relief isrelevant under the equitable doctrine of relief against forfeiture.Nothing I say here should be seen as a final comment on the grant ofrelief.[112] Given that the availability of equitable relief from forfeiture was not argued, Igrant leave to the parties to be heard on this issue before making orders for specificperformance in relation to the periods following installation of the second lift.Outcome[113] The plaintiffs' claim is successful. 127 Hobson and/or Mr Parbhu mustindemnify the plaintiffs for rental and outgoings to the date of installation of the secondlift.[114] If agreement cannot be reached, I reserve leave to the parties to be heard onrelief for the period following installation. Memoranda in this regard are to be filed,102 O'Dea, above n 2, at 394 (footnotes omitted).within 15 working days, together with submissions on costs. I expect costssubmissions to be succinct, given (a) the presumption that costs follow the event and(b) the cost principles ordinarily applicable to grants of equitable relief fromforfeiture.103103 See Mulholland v Waimarie Industries Ltd (2009) 10 NZCPR 590.1. PREMISE: 127 Hobson Street, Auckland comprising the whole ofLevel 52. CAR PARKS: 5 pickup and drop off car parks in Pacific Parade [nopermanent car parks]3. TERM: Six (6) years4. COMMENCEMENT DATE: the date of this Deed5. RIGHTS OF RENEWAL: Three (3) rights of renewal for six (6) yearseach6. RENEWAL DATES: the 6th, 12th and 18th anniversaries of the dateof this Deed7. FINAL EXPIRY DATE: 24 years less one day from the date of thisDeed8. ANNUAL RENT: Premise $145,600 plus GST(Subject to review if applicable) Car Parks $- plus GSTTOTAL $145,600 plus GST9. MONTHLY RENT: $12,133.33 plus GST10. RENT PAYMENT DATES: One month from the date ofthis Deed and the same dayof each month thereafter11. RENT REVIEW DATES: 1. Market rent review dates: 2. CPI rent review dates:On the sixth anniversary ofthe date of this Deed andannually thereafter16. PROPORTION OF OUTGOINGS pro rata based on floor area% which at commencementdate is estimated to be$19709.27 plus GST perannum