THE COURT OF APPEAL Neutral Citation Number:  IECA 286
Finlay Geoghegan J.
[Record No: 2016/197]
Breccia and Irish Agricultural Development Company
First and Second named Defendants/Appellants
Blackrock Hospital Limited, George Duffy, Rosaleen Duffy and Tullycorbett Limited
Third, Fourth, Fifth and Sixth named Defendants
Judgment of Ms. Justice Finlay Geoghegan delivered on the 30th day of July, 2018.
1. This appeal brought by Breccia and Irish Agricultural Development Company as appellants (to whom I will simply refer as “Breccia”) is against the order of the High Court (Haughton J.) of the 12th April, 2016, made for the reasons set out in the written judgment of the 5th February, 2016.
2. The background facts to these proceedings are fully set out in the High Court judgment. Suffice it to say for the purposes of the appeal that the plaintiff, Mr. Sheehan entered into two facilities with Anglo Irish Bank (“Anglo”), the first on the 29th March, 2006, (the “2006 facility”) and the second on the 12th November, 2008, (the “2008 facility”). I shall describe them simply in this judgment as the “facilities”. Mr. Sheehan, Breccia, Benray and others were shareholders at the time in Blackrock Hospital Limited (“BHL”). They with other shareholders entered into a shareholders agreement on the 28th March, 2006. Each of the shareholders obtained facilities from Anglo at that time. The purpose of the facilities was to finance the purchase of shares in BHL from BUPA. The borrowings from Anglo were secured by mortgages over the shareholdings in BHL and there were cross guarantees and indemnities between the shareholders and Anglo. For the purposes of the appeal it is no longer in dispute that the contractual terms of the 2006 and 2008 facilities included Anglo’s then general conditions for personal loans. The same general conditions applied in 2006 and 2008.
3. The facilities fell due for repayment on the 30th December, 2010. Anglo re-registered and its name was changed to Irish Bank Resolution Corporation Limited (“IBRC”). On the 7th February, 2013, the special liquidators were appointed for the purpose of winding up IBRC. Prior to that date no demand had been made on Mr. Sheehan by Anglo or IBRC notwithstanding the due date for repayment, 31st December, 2010, had long since passed.
4. In November, 2013 Mr. Sheehan wrote to the special liquidators stating that he wished to redeem his loans and they responded indicating that he could redeem “at par at any time in the sale process”. In March, 2014 he made a bid to IBRC to buy his loans which was unsuccessful. The special liquidators initiated a further sales process, in which Mr Sheehan made a bid which was not accepted and ultimately Mr. Sheehan’s loans were purchased by and transferred to Breccia in December, 2014.
5. Thereafter, in December 2014 Breccia issued a demand to Mr. Sheehan for immediate payment and discharge of a sum of €16,144,572 under the 2006 and 2008 facilities together with further sums under a guarantee. In response, these proceedings were commenced on the 22nd December, 2014.
6. In May, 2015 Mr. Sheehan’s solicitors wrote to Matheson, solicitor for Breccia requesting a redemption figure in respect of the 2006 and 2008 facilities. In response they were given a figure of €19,663,673.88 with continuing interest accruing at a daily rate of €3,059.29. In response to a request for a breakdown Matheson informed them, inter alia, that surcharge interest at 4% from 31st December, 2010, amounting to €2,822,957.05 was due under clause 5 of the general conditions up to the date of acquisition. That was the principal explanation for the difference between the figure then given and the earlier demand which had been made in December, 2014. There was also a reference to the obligation under clause 6.2 of the general conditions to pay all costs, charges and expense incurred in connection with the enforcement of the facilities and a figure identified from the date of acquisition of the loans up to the 8th June, 2015, under this heading of €93,362.56.
7. Mr. Sheehan disputed the claims to surcharge and costs of enforcement and it was agreed that that dispute would be determined in these proceedings and an amended statement of claim delivered and a modular trial agreed.
8. This modular trial was heard by the High Court immediately after the modular trial of similar issue arising in the proceedings between John Flynn and Benray Limited and Breccia (2015/5122P) (“Flynn No. 2”).
Modular Hearing and Judgment
9. At the modular hearing evidence was given by the plaintiff and a banking expert, Mr. Vincent Fennelly, on his behalf. Evidence was given on behalf of Breccia by Mr. Declan Sheeran, the company secretary and a banking expert, Mr. Conor O’Malley.
10. Notwithstanding that the modular hearing in Flynn No. 2 was first heard the trial judge delivered judgment in the modular hearing in these proceedings prior to the Flynn proceedings. Two factors appear to have contributed to that. First, on the 4th November, 2015, one day before closing submissions in this modular hearing, the UK Supreme Court delivered judgment in two cases: Cavendish Square Holding BV v. Talal El Makdessi; ParkingEye Limited v. Beavis  UKSC 67,  A.C. 1172, in which it revisited and restated the law as to when a contractual provision may be struck down as a penalty. Second, the evidence adduced relevant to the penalty issue was more extensive than in the Flynn No. 2 modular hearing.
11. The trial judge delivered a lengthy and detailed judgment on the 5th February, 2016. He conveniently summarises at its end what he terms “the redemption issues” it was agreed should be determined at the modular hearing and his findings on each as follows:
12. Following the delivery of this judgment and the judgment in the Flynn No. 2 modular hearing on the 5th February there were further hearings in relation to costs and stays and the trial judge delivered a further written combined judgment in both proceedings on the 4th March, 2016. By this time Breccia had indicated an intention to appeal.
“Summary of answers to the redemption issues
A. Can Breccia contractually claim the redemption figures sought?
Yes, in so far as default surcharge interest may be contractually claimed under clause 5.1 of the applicable General Conditions, and further, in respect of the 2008 Facility Letter, under clause 9 of that Facility.
B. Is all or part of the redemption figure an “unlawful penalty”?
Yes – that part of it that purports to include default surcharge interest under General Condition 5.1.
C. Has Breccia waived its right to claim all or part of the redemption figure?; and
D. Is Breccia estopped from claiming all or part of the redemption figure?
These questions only arise if the default surcharge interest of 4% is lawful. In such circumstance the answer is that Breccia is estopped from claiming any surcharge interest arising up to 19th June, 2015, but is thereafter entitled to claim it on account balances.
E. Can Breccia charge “enforcement” costs, charges and expenses, and if so, how much?
Yes, but not the sums notified in correspondence. Only such costs of the modular hearing as may be awarded to Breccia, the same to be taxed in default of agreement, may be charged and added to the redemption figure. Reserved costs, and other possible future or “contingent” costs, may not be charged or factored into the redemption figure.
F. What is the correct redemption figure on 9th June, 2015 and as of today’s date?
As of today’s date - €16,985,929.21 being rolled up ordinary interest and principal on 29th October, 2015, together with daily interest from 30th October, 2015 to 31st December, 2015 at the rate of €770.64 per day, plus daily interest thereafter to be agreed/determined to reflect any change in the EURIBOR rate. In addition, in so far as any costs of the modular trial may be awarded to Breccia, such costs, to be taxed in default of agreement.
G. What relief, if any, is the plaintiff entitled to in respect of the redemption issues?
(1) An order stating the present day redemption figure in respect of the plaintiff’s loans, together with the rate of daily accrual of ordinary interest based on the current EURIBOR rate.
(2) Such addition to the redemption figure in (1) as may arise when the court determines costs.
(3) No other order at present, apart from liberty to apply.”
13. The appeals in these proceedings and the Flynn proceedings were heard together. Whilst separate written submissions were filed by reason of differing factual and evidential issues the core issues to be determined on appeal are similar and counsel for Breccia and counsel of Mr. Sheehan, Benray and Mr. Flynn made combined oral submissions. The issues to be determined on appeal may be broadly identified as follows:
Penalty Clauses and Surcharge Interest
14. As already stated the UK Supreme Court in Cavendish has conducted a comprehensive review of the case law on penalties since the 18th century and has as set out by the trial judge modified the approach from that which had been applied in application (whether correctly or incorrectly) of the principles set out in Dunlop Pneumatic Tyre v. New Garage  AC 79 and in particular the oft cited principles from the opinion of Lord Dunedin.
(i) Is the surcharge interest at a rate of 4% payable under clause 5.1 of the general conditions an unlawful and unenforceable penalty clause?
(ii) If not is Breccia estopped from claiming surcharge interest between the 31st December, 2010, and the 19th June, 2015?
(iii) Issues in relation to what “enforcement costs” may be included in the redemption figures for Mr. Sheehan’s loan and mortgage.
15. As appears from the judgment of the trial judge submissions were made to him in reliance upon Cavendish as to the approach which he should take. He ultimately rejected any change from the long standing approach in this jurisdiction following the adoption by the Supreme Court per Barron J. in Pat O’Donnell & Co. v. Truck and Machinery Sales  4 I.R. 191 of the principles in Dunlop.
16. The trial judge ultimately decided that in accordance with the principles set out by Clarke J. in Re Worldport Ireland Ltd.  IEHC 189 that he should follow the approach which I had taken in a High Court judgment in ACC Bank v. Friends First  IEHC 435 in applying the Dunlop principles to a clause in bank general conditions providing for surcharge interest.
17. On appeal, Breccia in its written submissions sought to rely upon the change of approach in Cavendish. However, in oral submissions counsel on its behalf focused on what he submitted was an incorrect application of the Dunlop principles as adopted in this jurisdiction by the Supreme Court in Pat O’Donnell by the trial judge herein by following an incorrect or incomplete application of same in the judgment in ACC Bank.
18. Subsequent to the High Court judgment herein and prior to the appeal hearing the Supreme Court gave judgment in Launceston Property Finance Limited v. Burke  IESC 62  2 I.R. 798. McKechnie J. (with whom Charleton J. and O’Malley J. concurred) reiterated at para. 34 the position in this jurisdiction:
19. McKechnie J. referred to three High Court judgments, including ACC Bank in which the High Court continued to apply the Dunlop principles in this jurisdiction. He then referred to Cavendish and its consideration by Haughton J. in the judgment under appeal and in Flynn (No. 2) where at para. 48 he stated:
“34. The starting point for an assessment of the law relating to penalty clauses remains the principles set out in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.  A.C. 79 (“Dunlop Pneumatic Tyre Co.”) at pp. 86-88. These principles were endorsed by the Supreme Court in Pat O'Donnell & Co. Ltd v Truck and Machinery Sales Ltd  4 I.R. 191 (“Pat O’Donnell & Co Ltd”) and have been applied by the Irish courts on myriad occasions since then.”
20. McKechnie J. then continued:
“It is my view that since Cavendish it has become apparent that in the UK courts the jurisprudence on penalty clauses involves a different approach and a different emphasis. Whether this should now be applied in this jurisdiction is a matter that may fall to be considered by an appellate court, but I have concluded that I should not depart from the jurisprudence established by judges of equal rank.”
21. Accordingly it appears to me that the approach, on appeal of counsel for Breccia is correct. The High Court and this Court remain bound in accordance with the Supreme Court judgment in Pat O’Donnell to apply the Dunlop principles in determining whether the surcharge interest clause is or is not a penalty. In so stating I do not wish to be taken as indicating that a reconsideration of those principles in the 21st century by the Supreme Court certainly insofar as they relate to additional default or surcharge interest may not be desirable. However, that remains a matter for the Supreme Court in this jurisdiction. As stated by Lord Neuberger and Lord Sumption in their joint judgment (with whom Lord Carnwath agreed) at para. 31:
“42. Thus the traditional perspective continues to be applied in this jurisdiction, and the test under Irish law, as it presently stands, has now diverged from that applicable in England and Wales. A modest caveat to that, however, should be entered: it is that Haughton J. saw some merit in the new UK approach. However, he stopped short of outright endorsing it, much less applying it, preferring instead to leave it to an appellate court to consider whether a recalibration of the Irish test is required.
43. For the reasons which I am about to outline, I am satisfied that this issue does not require to be determined in the instant case; however, I shall take this opportunity and say, though clearly obiter, that I am not immediately convinced that any change to the test is necessary, nor that the route taken by the UK Supreme Court is necessarily a superior one. I stress that the live debate must be left over for a more suitable case, if and when that should arise. My reasons for this conclusion are as follows.”
22. It is therefore necessary to consider the submissions of Breccia that the trial judge erroneously applied the Dunlop principles by following the approach in ACC Bank. Prior to doing so it is relevant to record certain principles which are not in dispute:
“In our opinion, the law relating to penalties has become the prisoner of artificial characterisation, itself the result of unsatisfactory distinctions: between a penalty and a genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over literal reading of Lord Dunedin’s four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field…”
23. The primary contention of Breccia as to the error in the approach of the trial judge in his judgment in this case and in Flynn (No. 2) (and the error made in ACC Bank) is that the Court failed to apply what it contends is the essential test, namely, whether the sum agreed is “extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time the contract was made”. In so submitting they rely upon the judgment of Barron J. in Pat O’Donnell.
1. The onus of establishing that a clause is a penalty rests on the party alleging same, in this instance Mr. Sheehan.
2. The question of whether a clause is penal must be assessed at the time the agreement was entered not at the date of breach.
3. The courts are reluctant to interfere with the terms of a contract agreed between two parties of equal bargaining power. The willingness to do so in relation to a clause which is determined to be a penalty is an exception to the general rule.
24. Breccia submits, as it did to the High Court judge, that the judgment in ACC Bank fell into error in the question identified in para. 84:
25. The trial judge at paras. 97 and 98 of his judgment rejects the submission made that the judgment in ACC Bank at para. 84 fell into error by failing to advert to the “latitude” that Barron J. in Pat O’Donnell indicated should be applied in determining whether a clause is a penalty where it is genuinely difficult to pre-estimate the damage that could arise on breach. It is therefore necessary to reconsider the question as to what are the principles set out in Dunlop which have been adopted by the Supreme Court in Pat O’Donnell and are binding on this Court. In Pat O’Donnell the plaintiff’s claim was for recovery of the purchase price of two shovels supplied to the defendant together with accrued interest in accordance with a clause in the conditions of sale which provided:
“84. The onus of establishing that the imposition of a surcharge interest at 6% pursuant to clause 2.7.1 of the General Conditions is a penalty rests on Friends First. The parties to this agreement are both financial institutions capable of protecting their own commercial interests. The question to be determined, in accordance with the applicable principles in this jurisdiction, i.e., Dunlop Pneumatic Tyre Company, is whether it represents a genuine pre-estimate of the bank’s likely loss upon default at the time the Facility Letter was agreed i.e. November, 2007. Friends First contends that it cannot be so considered on the evidence adduced and that the only reasonable construction is that it was intended as a deterrent against default in the payment of interest or principal. The onus is on Friends First to so establish if it is to be considered a penalty.”[emphasis added]
26. The judgment of Barron J. is the only one to consider the penalty issue and O’Flaherty J. and Lynch J. expressly agreed with same. At p. 213 Barron J. commenced his consideration of that issue as follows:
"Accounts are payable in full on the due date which shall not be later than twenty days from date of invoice. Payment in full for all machines and attachments shall become due not later than five days from the date of invoice or on delivery of a notification that goods are ready for dispatch whichever is the earliest. Interest at the rate of 2 per cent per month shall be chargeable and payable immediately on overdue accounts."
Dealing with the circumstances in which an agreed sum might be held to be a penalty, he said at p. 87:-
“The sum of money to be paid upon breach of a term of a contract may be either a penalty or agreed liquidated damages in the event of breach occurring. The principles to be applied are set out in Dunlop Pneumatic Tyre Company Limited v. New Garage and Motor Company Limited  A.C. 79. In the course of his opinion, Dunedin L.J. accepted the following propositions as authoritative. He said at p. 86:-
"1. Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach . . ."
27. Barron J. then stated:
"(a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank case)
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.
In the same case Parker L.J. indicated the difference between these latter two paragraphs. He said at p. 97:-
‘. . . where the damages which may arise out of a breach of contract are in their nature uncertain, the law permits the parties to agree beforehand the amount to be paid on such breach. Whether the parties have so agreed or whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case. There are, however, certain general considerations which have to be borne in mind in determining the question. If, for example, the sum agreed to be paid is in excess of any actual damage which can possibly, or even probably, arise from the breach, the possibility of the parties having made a bona fide pre-estimate of damage has always been held to be excluded, and it is the same if they have stipulated for the payment of a larger sum in the event of breach of an agreement for the payment of a smaller sum.’
In the course of his judgment Parmoor L.J. also indicates the difference between the two situations. He said at p. 101:-
‘There are two instances in which the Court has interfered when the agreed sum is referable to the breach of a single stipulation. It is important that the principle of interference should not be extended. The agreed sum, though described in the contract as liquidated damages, is held to be a penalty if it is extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made . . .
The second instance in which the Courts have sanctioned interference is in the case of a covenant for a fixed sum, or for a sum definitely ascertainable, and where a larger sum is inserted by arrangement between the parties, payable as liquidated damages in default of payment. Since the damage for the breach of covenant is in such cases by English law capable of exact definition, the substitution of a larger sum as liquidated damages is regarded, not as a pre-estimate of damage, but as a penalty in the nature of a penal payment.’”
28. Barron J. then considered the earlier cases from which he derived the principle that in the case of a covenant for a fixed sum or a sum definitely ascertainable the damages are regarded as certain because the only sum allowed over an above the actual fixed sum is interest. He then continued in the middle of p. 217:
“These two instances are quite different. In the first case, the damages would be uncertain and there may genuinely be a difficulty in a pre-estimate of the damage which would occur in the event of breach. A latitude is allowed, but even then the sum agreed must not be extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made. If it is, it is regarded as a penalty, and the plaintiff is left to prove the actual damage.
In the second case, no question of a pre-estimate of loss arises because the amount of the damages is treated as being certain. As will be seen from the cases to which I shall refer the damages are regarded as certain because the only sum allowed over and above the actual fixed sum is interest. This is allowed at the then subsisting commercial rate. Accordingly if the agreed rate is in excess of that it will be treated as a penalty because any interest over the commercial rate will in effect provide for the payment of larger sum in place of a smaller one.”
29. The principles in Dunlop adopted and followed by the Supreme Court in Pat O’Donnell clearly indicate a binary approach; such a clause is either agreed liquidated damages payable in the event of the relevant breach occurring or if it is not it is a penalty. The principles do not appear to envisage a clause which provides for a payment on a specified breach of contract being other than liquidated damages or if not so construed then a penalty.
“None of these cases rule the present one. The guiding principle is that for failure to pay a fixed sum the contract may not provide for the payment of a larger sum. And payment of a rate of interest in excess of the commercial rate includes in it a requirement that the payee should in effect pay a larger sum in respect of liability of a smaller sum.
This doctrine of penalties applies only where there has been a breach of contract…
Returning to the facts of the instant case, no question of a genuine pre-estimate of loss arises because the nature of the loss was always to be certain. The only question to be determined therefore is the relevant commercial rate. Where, as here, no formula is provided for the manner in which it is to be determined, it will be dependent upon evidence, since it is reasonable to hold that thirty % is not a commercial annual rate.
I would accordingly allow the appeal and remit the matter to the High Court to have the appropriate rate of interest assessed at the commercial rate applicable at the time of breach.
There may be cases where in addition to a claim for interest for late payment there is also a claim for special damage. An example is Intermediate Limited v. Smith (Unreported, English Court of Appeal, 22nd March, 1991) which was cited to us in argument. Since that question does not fall for decision in the present case, I express no opinion as to the approach to be adopted.”
30. Neither party pursued a submission that the principles as stated by Barron J. for the Supreme Court in Pat O’Donnell by reference to the Dunlop principles do not apply to the 2006 and 2008 facility agreements which incorporate clause 5 of Anglo’s general terms and conditions.
31. There was however, a new submission made in oral submissions to this Court as to how the principles should be applied to clause 5 of Anglo’s general terms and conditions. Mr. John O’Donnell S.C. on behalf of Mr. Sheehan submitted that the relevant term of the contract of which it is alleged Mr. Sheehan was in breach was a covenant to pay a fixed or ascertainable sum of money on the 31st December, 2010. He submitted that in accordance with the judgment of Barron J. in Pat O’Donnell and, in particular, what appears to be the ratio of that case having regard to the dispute and contractual clause at issue that it falls into what Barron J. referred to as “the second case” following Lord Parmoor’s distinction and that the only sum allowed over and above the actual fixed sum is interest at the then subsisting commercial rate.
32. I do not consider that the Court can entertain such a submission as part of this appeal. It was not contended in the High Court that the only damages recoverable by Anglo in the event of a failure to pay any of the monies due under the lending agreement on the due date was interest on the amount due at the then subsisting commercial rate. That would have been a different contention and one to which different evidence may have been potentially relevant. The expert evidence led on behalf of Mr. Sheehan from Mr. Fennelly did not approach potential losses of Anglo by reason of a default in payment on the due date on this basis.
33. The remainder of this part of the judgment is therefore on an assumption (but without any decision to that effect) that Anglo in 2006 (or 2008) would have had a claim recognisable in law for damages for loss and damage which it might suffer by reason of the failure of Mr. Sheehan to make a payment due under the agreements on a due date which went beyond the sum in question and interest thereon at a commercial rate.
34. To return to the question as to the proper approach of a court in accordance with the Pat O’Donnell and Dunlop principles where it is contended that a contractual provision which provides for the payment of a sum of money upon breach of contract is a penalty. As already stated the principles indicate a binary approach. The clause is either agreed liquidated damages or, if it is not, then it is construed as being a penalty because its functional effect is not to compensate by payment of agreed liquidated damages, rather it is a clause whose functional effect is to deter the party from committing a breach of the agreement.
35. Whilst I accept that it is probably more accurate to state that the question the Court must determine is whether the contractual provision is properly an agreement for the payment of liquidated damages, that question in turn normally falls to be decided by determining whether the clause is to be construed as a genuine pre-estimate of loss to be suffered by the innocent party by reason of the relevant breach of contract. Those questions must be determined by construction of the relevant clause of the contract. As was stated by Lord Dunedin in 1915, this question is to be decided upon the “terms and inherent circumstances of each particular contract judged of as of the time of the making of the contract…” The principles according to which the courts will now construe a commercial contract such as that at issue are those set out by the Supreme Court in Analog Devices BV v. Zurich Insurance Company  IESC 12,  1 I.R. 274.
36. Pat O’Donnell and Dunlop do indicate that there are certain tests which may be applicable to assisting the Court in deciding whether the clause in question is an agreement for the payment of liquidated damages or if it cannot be so construed that it is consequently a penalty. One such test, is as indicated by Lord Parmoor “where the agreed sum, though described in the contract as liquidated damages” is extravagant or unconscionable in relation to any possible amount of damages that could have been within the contemplation of the parties at the time when the contract was made . . .”. This is cited as one of two instances in which “the Court has interfered when the agreed sum is referable to the breach of a single stipulation”. Further he is speaking of a situation where the agreed sum is “described in the contract as liquidated damages”.
37. As appears from the opinions of Lord Dunedin, Lord Parker and Lord Parmoor quoted by Barron J. the essential question of construction which must be determined by the Court is whether the clause is to be construed as an agreement for the payment of liquidated damages. In construing such a clause one of the factors a court may look at is the potential loss and damage which the innocent party may suffer by reason of the breach to which the payment relates. Where a court is considering that question then if there is a probable variation in the loss and damage to be suffered by the innocent party and the Court considers that there may genuinely be a difficulty in a pre-estimate of the damage suffered in the event of breach then, as indicated by Barron J., a latitude should be allowed in determining the question as to whether the clause is an agreement for the payment of liquidated damages. The relationship between the sum agreed to be paid and the probable or possible loss of the innocent party, envisageable by the parties at the time the contract was made is amongst the matters relevant to the construction issue.
38. The authorities further indicate that if the sum agreed to be paid is - as was stated by Lord Parker - “in excess of any actual damage which can possible, or even probably arise from the breach the possibility of the parties having made a bona fide pre-estimate of damages has always been held to be excluded…”. It is correct to say that in such circumstances or, where as put by Lord Parmoor, if the amount “described in the contract as liquidated damages … is extravagant or unconscionable in relation to any possible amount of damages that could have been with the contemplation of the parties when the contract was made” then it will be considered to be a penalty.
39. However, it does not follow in my view that a party contending that the clause is a penalty must establish that either of the above thresholds is met. The relationship between probable damages and the sum agreed to be paid is a relevant factor and part of the circumstances which the Court must take in to account when construing the contract. It is, however, not a rigid threshold which must be met nor is it the only matter to be taken into account when construing the probable functional effect of the clause from the terms of the contract in its relevant factual matrix.
40. Accordingly, it appears to me that insofar as I stated at para. 79 of the judgment in ACC Bank that the principles in Pat O’Donnell adopting those in Dunlop “require the Court to determine whether or not the additional sum is payable is a genuine pre-estimate of the probable loss by reason of the breach” that it may be more accurate to have stated that they “require the Court to determine whether or not the additional sum payable is a genuine agreement for the payment of liquidated damages”. That question in turn, however, at least in part, may depends upon whether or not the additional sum payable represents in this instance, a genuine pre-estimate of the probable loss of Anglo by reason of the potential breaches of contract to which clause 5 of the general conditions refer. It is not, however, the only factor and it also appears that where the evidence establishes that such loss is uncertain, then a latitude is allowed to the parties in considering the question as to whether the clause is a genuine pre-estimate of a sum to be paid by way of liquidated damages the purpose of which is to compensate the innocent party for loss and damage.
41. Whilst I accept that there may have been some shorthand used by me at paras. 79 and 84 of the judgment in ACC Bank, it is also a shorthand that has been used elsewhere. In ACC Bank much reliance was placed on the judgment of Colman J. in the High Court in England in Lordsvale Finance plc v. Bank of Zambia  QB 752. At p.763 he stated:
42. In a context where this Court continues to apply the traditional binary approach which follows from Pat O’Donnell and Dunlop for the reasons already explained then the question has, as is stated by Colman J., always been considered to be whether the alleged penalty clause “can pass muster as a genuine pre-estimate of loss”. I would also like to draw attention to what was termed “unsatisfactory distinctions between a penalty and pre-estimate of loss” by Lord Neuberger and Lord Sumption at para. 31 of their joint judgment quoted above.
“It is perfectly true that for upwards of a century the courts have been at pains to define penalties by means of distinguishing them from liquidated damages clauses. The question that has always had to be addressed is therefore whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss. That is because the payment of liquidated damages is the most prevalent purpose for which an additional payment on breach might be required under a contract. However, the jurisdiction in relation to penalty clauses is concerned not primarily with the enforcement of inoffensive liquidated damages clauses but rather with protection against the effect of penalty clauses. There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.” [emphasis added]
43. In Durkan New Homes v. Minister for the Environment, Heritage and Local Government  IEHC 265,  2 I.R. 440, Charleton J. in the High Court referred to an extract from Treitel – The Law of Contract (13th ed., 2011) at para. 20.131 in the context of the principles set out by Lord Dunedin in Dunlop. The passage from Treitel cited with apparent approval by Charleton J. and again set out with apparent approval by the Supreme Court per McKechnie J. in Launceston states:-
44. I would respectfully agree that expressing the question to be determined as to whether “the clause is a genuine attempt by the parties to estimate in advance the loss which will result from the breach” may be a better way of putting the question. This approach permits the courts to uphold a clause which is a genuine attempt by the parties to estimate in advance the loss which will result from the breach but where by reason of the uncertainty of the loss it may be a sum which differs from the actual loss anticipated.
“A clause is penal if it provides for ‘a payment of money stipulated as in terrorem of the offending party’, or, as it has been put more recently, if the contractual function of the clause is ‘deterrent rather than compensatory’. If, on the other hand, the clause is a ‘genuine’ attempt by the parties to estimate in advance the loss which will result from the breach, it is a liquidated damages clause. This is so even though the stipulated sum is not precisely equivalent to the injured party's loss…”
Application of principles to Clause 5 of the General Conditions
45. For the reasons set out I do not consider that there was any error on the part of the trial judge in applying the principles set out in Pat O’Donnell by adoption of those in Dunlop in determining the penalty issue by a consideration of the question as to whether the surcharge interest provided for in clause 5 of the general conditions is a genuine pre-estimate of the probable loss to Anglo by reason of the relevant breach of contract. Subject to the reservation of “shorthand” already set out I also do not consider he was in error in following ACC Bank. The essential question to be determined is whether the clause in question properly construed is an agreement for the payment of liquidated damages. The courts have traditionally approached that question by asking the question as to whether the sums stipulated are a genuine pre-estimate of the loss to the innocent party which would result from the relevant breach.
46. The relevant clause must be construed from its terms in the context of the agreement as a whole and taking into account the permissible background or factual matrix at the time the agreement was entered into.
47. The trial judge applying the principles set out in ACC Bank ultimately concluded at para. 127 that he was satisfied that “the surcharge rate of 4% was a generic rate and not a genuine pre-estimate of loss arising from default”. He further held in accordance with the expert evidence that “the pre-estimate of probable loss in the event of default was part of the calculation of the ordinary interest (Euribor plus the margin rate)”. However, he also appears to have relied upon what he understood to be agreed expert evidence that the “surcharge provision was intended to deter borrowers from defaulting on their loans”. Breccia on appeal disputes that that was the evidence given by its expert Mr. O’Malley. Whether or not his overall evidence is to be understood as so agreeing, I accept the broader submission that in construing clause 5 of the general conditions in accordance with the principles in Analog Devices it is not appropriate or permissible to take into account expert evidence or indeed evidence from any other person as to the intention of the relevant clause. The intention of the clause must be deduced from the words used in its contractual context when properly construed in accordance with the Analog Devices principles.
48. On appeal there was greater focus on the relevant contractual provisions than would appear to have been the position in the High Court. The question arose as to whether clause 3 of the general conditions applies to surcharge interest if payable. Counsel for Breccia contended, correctly in my view, that it does not. The consequences of this is considered below.
49. In my view, the trial judge is correct in his conclusion that clause 5 of the general conditions is not, when properly construed and having regard to the admissible expert evidence, an agreement for the payment of liquidated damages. It is not a genuine attempt to agree upon liquidated damages or estimate the loss which Anglo might suffer by reason of a default to which it relates. My principal reasons for so concluding are as follows.
50. Clause 5.1 provides:
51. The first important contractual feature is that it forms part of the general conditions and therefore is not a clause which is specific to the borrowing of Mr. Sheehan. In its terms it provides for “any monies due by the borrower to the bank and for the time being unpaid” to “bear surcharge interest at the rate of 4% over the facility interest rate…”. It does not contain an express obligation on the borrower to pay such interest though that may be implied from the fact that the monies due are to bear the surcharge interest. More importantly it does not specify when such interest becomes payable by the borrower. It does not give to the bank the right to debit the borrower’s account with interest, as is, expressly provided both under the terms of the 2006 and 2008 facility letters and also clause 3.3 of the general conditions in relation to facility interest . The latter provides “the Bank shall debit the Account with the amount of interest when it becomes due under the terms of the Facility Letter”. Counsel for Breccia contended correctly that clause 3 of the general conditions applied only to the Facility Interest Rate and not to surcharge interest. It may be observed that if it did apply to the surcharge interest then Anglo was obliged pursuant to clause 3.3 to debit Mr. Sheehan’s account with the amount of the interest when it became due. The evidence before the Court was that no surcharge interest had been debited to the account prior to the assignment to Breccia. The statements of accounts provided to Mr. Sheehan did not include any surcharge interest.
“5.1 Any monies due by the Borrower to the Bank and for the time being unpaid will bare surcharge interest at the rate of 4% over the Facility Interest Rate or at the Bank’s discretion at a rate equivalent to the aggregate of 4% over the Facility Interest Rate on the due date calculated on a daily basis from the due date to the date of actual payment after as well as before demand is made, any judgment obtained hereunder or the insolvency of the Borrower.”
52. The 2006 and 2008 facility letters provide expressly for the quarterly debiting of interest to Mr. Sheehan’s account. On the foregoing analysis it is probably not correct to consider clause 5 of the general conditions as providing for an uplift or increase in the interest rate payable by Mr. Sheehan under the 2006 and 2008 facilities in the sense that term was used by Colman J. in Lordsvale. On the facts of Lordsvale upon default a different interest clause which formed part of the specific lending agreement came to be applied. It replaced the earlier interest clause. There were three elements to the aggregate provision for interest, two of which changed on default. The one which became the subject of the alleged penalty dispute was an additional 1%. It was described by Colman J. as an “uplift” in the rate of interest. That is not the position here. The facility interest which continued to be applied to the borrowings in accordance with the terms of the facility letters (including the general conditions) provided for a varying interest rate with interest debited to the borrowers account quarterly and payable quarterly. The additional interest potentially payable pursuant to clause 5 of the general conditions (if not a penalty) is a rate of 4% on any amount due and unpaid from the date upon which that amount became due and was unpaid until the date of actual payment of the unpaid amount. There is no provision for payment or debiting in advance of the date upon which the unpaid amount is finally paid. If clause 5 is not a penalty, it appears to follow that the amount due and unpaid as at the 31st December, 2010, would bear surcharge interest at 4% calculated on a daily basis up to the date of actual payment and such interest would only become payable as an additional lump sum on the date of payment of the amount due as at the 31st December, 2010.
53. The trial judge set out in some detail the banking evidence adduced in this case at paras. 100 – 116. Whilst there was some dispute between Mr. Fennelly, who gave evidence on behalf of Mr. Sheehan, and Mr. O’Malley who gave evidence on behalf of Breccia, They were not in dispute on the question upon which the trial judge placed reliance, namely that the pre-estimate of probable loss in the event of default was a factor taken into account in the calculation of ordinary interest (Euribor plus the margin rate). In addition it would appear from the evidence of Mr. Fennelly recorded at para. 102 of the judgment that he also gave evidence that:
54. Even if one were to approach the issue identifying the question to be determined as being whether clause 5.1 is a genuine attempt by the parties to estimate in advance the loss which will result from breach, it appears to me that the answer must also be no. The accepted evidence was that in accordance with Basel II which probably applied at the time of the 2006 loans and certainly applied at the time of the 2008 loans, the pre-estimate of probable loss in the event of default formed part of the analysis which the bank did prior to determining the interest rate to be applied in this instance in 2006 a margin of 1.76% over Euribor. Further there was the evidence from Mr. Fennelly that a probable loss following default depends upon an interplay between the amount outstanding at the time of default, the value of the security ultimately realised and the cost in time or effort in achieving these outcomes.
“A default in itself will not necessarily cause the bank to incur loss. Ultimately this will depend on the interplay between the amount outstanding at the time of default, the value of the security ultimately realised and the cost in time or effort in achieving these outcomes. Thus the loss possibilities include everything from nil to the entire amount.”
55. The fact that clause 5 forms part of the general conditions which is not specific to the facilities agreed between Mr. Sheehan and Anglo and takes no account of either the amount of the loan or the level of security strongly supports the contention that this clause cannot be regarded as a genuine attempt by these parties to pre-estimate loss which would occur in the event of a default by Mr. Sheehan. This position is further strengthened by the fact that under the terms of clause 5 it is to apply on any monies due and unpaid on a due date. This would include a quarterly interest payment due and not fully paid on a due date. It is not confined to default in the repayment of the entire loan on the due date.
56. In summary, a construction of clause 5 from its terms in the context of the entire of the general conditions and 2006 and 2008 facility letters leads to the conclusion that this clause was not a genuine attempt to agree upon liquidated damages payable by the borrower on default and hence should be construed as being a penalty. This is so in particular by reason of (i), the marked difference between the terms of clause 5 and the very specific provisions which apply to the payment of the interest due at the Facility Interest Rate and the entitlement of the bank to debit such interest on a quarterly basis; (ii) the absence of any express provision as to when the surcharge interest becomes payable by the borrower and (iii) the absence of any provision entitling the bank to debit the account of the borrower with surcharge interest.
57. For completeness, I wish to draw attention to one other clause in the general conditions which in my view supports the conclusion which I have reached. It is clause 14. This was relied upon by Breccia in the context of the submissions on the enforcement costs. It does not appear to have been considered by the parties or submissions made in relation thereto to the trial judge or this Court in relation to the penalty clause issue. Clause 14 provides insofar as relevant (and the part relied upon in the submissions on enforcement costs):
The “Agreement” is defined in clause 2.2 as meaning the facility letter and the general conditions. Clause 14 makes no reference to default interest payable under clause 5. It is a clause expressly directed to the obligation of Mr. Sheehan to indemnify Anglo against losses which it might suffer by reason of any default. The inclusion of this clause without any attempt to pre-estimate the loss or to set out the manner of its interaction with default interest provided for in clause 5 would also appear to undermine a construction of clause 5 as being a liquidated damages clause.
The borrower indemnifies and agrees to keep indemnified the Bank against all claims, demands, liabilities, losses, costs (including legal fees on a full indemnity basis), actions, proceedings, charges and expenses whatsoever and howsoever arising which the Bank may incur or suffer by reason of:
(b) any default by the Borrower or any guarantor in the performance of any of the obligations expressed to be assumed by it in the Agreement or any of the Security Documents.
58. I wish to make clear that in setting out the above observation, it was not a matter which I took into account when reaching agreement on the penalty clause issue but when considering the issues in relation to the enforcement of costs the potential relevance of clause 14 to the penalty clause issue became apparent.
59. In view of the conclusion which I have reached on the penalty clause issue and the fact that my colleagues have indicated agreement with this conclusion it is unnecessary to consider the grounds of appeal against the trial judge’s determination of this issue. Nevertheless, if it were necessary I would dismiss this part of the appeal for the reasons set out by Hogan J. in the judgment about to be delivered.
60. The factual basis for this issue in the modular hearing in the High Court was the inclusion by Matheson in their letter of the 19th June as part of the redemption figure a sum of €93,362.56 as enforcement costs estimated to have been incurred and for which Mr. Sheehan was liable pursuant to clause 6.2 of the general conditions. Mr. Sheehan gave oral evidence of further costs and charges since the 8th June, 2015, of €313,036 as well as VAT and counsel’s fees for the modular hearing that had yet to be billed. In these proceedings – unlike in Flynn (No. 2) - the only costs sought to be included in the redemption figure are the legal costs connected with the defence of these proceedings brought by Mr. Sheehan both in relation to the modular hearing and estimated future costs connected with the substantive proceedings.
64. In the High Court it was sought, inter alia, to argue on behalf of Mr. Sheehan that these proceedings fell outside “enforcement costs” within the meaning of clause 6.2 of the general conditions. The trial judge rejected that submission for the reasons set out at paras. 192 and 193 of his judgment and concluded that the defence of these proceedings both in respect of the modular hearing and substantive proceedings formed part of “enforcement proceedings” as that term is used in clause 6.2. He further decided that the enforcement costs contractually recoverable under clause 6.2 of the general conditions could be enforced against the property the subject of the mortgage by reason of the definition of secured liabilities in the mortgage which in the case of Mr. Sheehan is clause 2.1. Those decisions are not the subject of a cross appeal on behalf of Mr. Sheehan.
65. However, the trial judge made two further decisions in relation to the costs which Breccia had sought to include in the redemption figure which are the subject of an appeal by Breccia.
66. First the trial judge excluded the recovery of costs which might have been incurred by Breccia in defending or pursuing enforcement proceedings but where a court in those proceedings had made an order directing Breccia to pay the costs to Mr. Sheehan or had made no order. At para. 195 he stated:
67. The reasons for which he reached that conclusion are set out at paras. 196 - 200 of his judgment and will be considered in the context of the submissions made on appeal below.
“195. Where a court has made an order directing that costs be paid by a bank, or has specified that there should be no order in relation to such costs, as a matter of public policy a contractual provision entitling a bank to add “enforcement costs” cannot in my view be construed as entitling the bank to recover those costs, or enforce against security, in defiance as it were of the court order. Were the position otherwise the administration of justice by the courts and the enforcement of its judgments would be seriously undermined, and it would open the door to a multiplicity of different contractual provisions effectively ousting the jurisdiction of the courts or fatally undermining the effectiveness of court orders.”
68. He also rejected Breccia’s claim to be entitled to future costs which might be incurred in defending this appeal or the substantive proceedings in the future as a contingent liability. He did so by reason of his construction of clause 6.2 of the general conditions and clauses 2.1 and 7.1(b) of the mortgage; a consideration of the Australian decision in Australian and New Zealand Banking Group Limited v. Mishra  NSWSC 13333 and the equitable right of a mortgagor to redeem which he considered to be inextricable from Mr. Sheehan’s right to redeem the amount of the loans under the Facility Letters. He ultimately concluded that if Breccia had the right to include possible future enforcement costs as “contingent liabilities” that it would in real terms be a “clog” or “fetter” on redemption. At para. 209 he set out his conclusion on the enforcement costs issues before the High Court by stating:
69. On appeal Breccia identifies the issues in relation to enforcement costs which remain in dispute as being:
“209. Accordingly, I conclude that Breccia is not entitled to factor in or include in the redemption figure the costs and expenses notified in correspondence since June, 2015. Following this judgment and any submissions that the parties may make I will deal with the costs of the modular issue. If, but only if, any such costs are awarded to Breccia, then such costs (to be agreed or in default taxed) will fall to be added to the redemption figure. Other than this, reserved costs or possible future or “contingent costs” of these proceedings or any appeal do not fall to be included in the redemption figure that must be provided at this point in time.”
70. Whilst Breccia has identified the issues in an abstract manner it is not proposed in this judgment to seek to express a view on the issues in such an abstract manner. The issue in the modular hearing in the High Court was the inclusion by Breccia of the costs already incurred or to be incurred in the defence of these proceedings. It is clear from the judgment that the trial judge was considering costs incurred or to be incurred by a mortgagee in defending the validity or quantum of its core claim. At para. 191 at the outset of his consideration of these issues he stated:
(i) Can “enforcement costs” already incurred, and not yet subject of any award of costs or order for taxation, because the issue of costs has not been considered by the Court, be added to the redemption figure for the mortgage?
(ii) Can “enforcement costs” already incurred, but in respect of which a court has made either an order for costs against Breccia or decided that no order as to costs should be made be added to the redemption figure for the mortgage?
(iii) Can “enforcement costs” expected to be incurred in extant proceedings and not yet subject of any award of costs or order for taxation, be added to the redemption figure for the mortgage as a contingent liability of the mortgagor?
71. Accordingly, I do not understand the High Court judgment at para. 209 to be determining that non-litigation enforcement costs can only be added to a redemption figure if the mortgagee has obtained a costs order in its favour and those costs have been agreed or taxed. It must be considered in the context of the dispute before him what the enforcement costs being sought related to pending litigation.
“191. I accept as correct the principles cited with approval by Laffoy J. in Red Sail, and in particular I agree with the observation of Nourse L.J. in Parker-Tweedale that “[o]ften the process of enforcement or preservation makes it necessary for [a mortgagee] to take or defend proceedings.” From this it follows that in general the costs incurred by a mortgagee in defending before a court the validity or quantum of its core claim, are costs that it is entitled to add to the debt or redemption figure. It does not logically make any difference that this ‘defending’ arises in a claim, defence or counterclaim.”
72. The trial judge principally relies upon the relevant statements of the law by Laffoy J. in Red Sail Frozen Foods Limited (in receivership)  IEHC 328,  2 I.R. 361. That judgment was given in an application brought by a receiver pursuant to s. 316 of the Companies Act 1963 seeking directions from the Court on a number of issues which included the entitlement of the bank in question to be paid out of the assets of the company legal costs and other expenses incurred by the bank in connection with inter alia the appointment of the receiver. On that issue, Laffoy J., having set out the general principles in the context of the direction in relation to costs of the proceedings, turned at para. 61 to consider the bank’s claim to be paid the legal costs and expenses incurred in connection with the appointment of the receiver out of the assets of the company. Having referred to the bills in question she then stated:
73. She then referred to a submission that where a mortgagee is claiming entitlement to recoupment of legal costs out of secured assets that the proper measure of the costs is that which would tax on a party and party basis in reliance upon the decision of the English Court of Appeal in Gomba Holdings UK Limited v. Minories Finance Limited (No.2)  Ch. 171,  3 W.L.R. 723 She rejected that proposition where the relevant contractual documents provide for costs on “a full indemnity basis” as was the position in her view on the debentures in issue. She then continued at para. 62 and stated:
“Having regard to the information given in the bills, I am satisfied that those costs and expenses were reasonable and properly incurred by the bank in relation to the enforcement and preservation of its security and subject to being reasonable in amount, the bank is entitled to reimbursement out of the secured assets”.
74. I respectfully agree with the above which makes clear that where a mortgagee is entitled to recover enforcement costs which are not litigation costs there is no requirement for an order for costs by a court. However, as with most persons obliged to pay legal costs, whether to their own solicitor or another, if the amount of the costs is disputed then the person may seek taxation of the amount of the costs. As stated by Laffoy J., the basis for the taxation may depend, in the case of a mortgagee, upon the terms of the security documents. I do not understand the trial judge to have intended to make any determination which runs contrary to the decision of Laffoy J. in Red Sail Frozen Foods Limited in relation to non-litigation costs, nor am I clear that it arises in relation to Mr. Sheehan on the facts of these proceedings.
“As regards the quantum of this aspect of the claim by the Bank, adopting an approach consistent with the approach I have adopted in relation to the Receiver’s legal costs, I do not propose to approve of the amount claimed. If the Companies dispute the amount, they can request the taxation of the costs.”
75. Turning to the question of litigation costs which are also enforcement costs within the meaning of clause 6.2, the trial judge determined that Breccia could only include such costs where an order for costs was made in its favour and expressly decided that it could not include any costs where the Court had made an order in favour of the plaintiff against Breccia or had made no order as to costs as between the parties. This latter was decided by reason of the fact that it would be contrary to public policy.
76. Counsel for Mr. Sheehan made forcible submissions in respect of the potential injustice if the Court were to construe the contractual documents as giving Breccia a right to recover as a matter of contract costs of litigation where the Court exercising its discretion under O.99 had had refused to make an order in its favour or made an order against it in respect of the same costs. He also referred us to the judgment of the English Court of Appeal in Gomba Holdings (UK) Limited and ors v. Minories Finance Limited and ors (No. 2)  Ch. 171,  3 W.L.R. 723 and to the judgment of Laffoy J. in Red Sail Frozen Foods Limited (in receivership).
77. This issue raises a difficult question as to the interaction between the jurisdiction of the courts under O.99 in relation to costs of proceedings and a prior contractual clause which governs the payment of the costs of the same proceedings. As put by Scott L.J. in Gomba the question is “as to how, if at all, the powers of the Court in respect of litigation costs can curtail a contractual right of recovery”. Whilst that judgment in part relates to the English statute and rules of court and the particular procedure at issue in those proceedings it is of assistance in identifying the principles which apply in this jurisdiction.
78. In relation to litigation costs (in a Superior Court) it appears to me the starting point must be O.99 and in particular rr. 1(1) and (2), as these provide:
79. Hence under O.99, r.1 litigation costs are in the discretion of the Court and further it would appear from O.99, r.1(2) that costs of proceedings may not be recovered except under an order (unless otherwise provided in the rules and no such submission was made by any party). Whilst the starting point under O.99, r.1(4) is that costs follow the event there is the well established and known jurisprudence as to the jurisdiction of the Court to depart from this.
1. Subject to the provisions of the Acts and any other statutes relating to costs and except as otherwise provided by these Rules:
80. The resolution of a potential conflict between the jurisdiction of the Court to award costs, the exclusion of recovery except pursuant to a court order and an agreement between the parties which relates to such costs, such as clause 6.2 appears to be that the Court should, if asked, take into account the contractual provision when making the order for costs in the litigation.
81. There is nothing in O.99 which precludes a mortgagee which has a contractual right to litigation costs irrespective of the outcome of the proceedings from both bringing that to the attention of the Court and making a submission that by reason of the contractual entitlement that it should obtain an order for costs or an order on a particular basis. This would appear to be the point in time where the Court should be asked to determine whether effect should be given to the asserted contractual right to costs or whether the nature and outcome of the litigation was such that the Court in the exercise of its discretion should make an order for costs which has the effect of depriving the mortgagee of its contractual entitlement to costs.
82. Accordingly, I would uphold the decision of the trial judge that Breccia is not entitled to include in the redemption figure litigation costs which come within clause 6.2 of the general conditions where the relevant costs have been the subject of an order of the Court and have not been awarded to Breccia.
83. I do not think it appropriate in this appeal to express a definitive view as to how the Court should exercise its discretion under O.99 in litigation between a mortgagor and mortgagee where reliance is placed upon a contractual right to costs. I have noted the acceptance by Laffoy J. in Red Sail Frozen Foods Limited at para. 59 the analysis of the settlement by counsel for the companies which she considered to be “underpinned by irrefutable logic”. That analysis included looking at the possible outcomes of the litigation if it had continued and a statement to the effect that “an entitlement by the bank to add its costs to the debt would only have arisen if the latter outcome, that the companies lost had come to pass”. This statement may be considered to support a proposition that a mortgagee who brings or defends proceedings which are enforcement proceedings in respect of which it has a contractual entitlement to be indemnified in respect of its costs may only recover those costs if successful in the litigation. However, I do not want in this appeal to be taken as having accepted that proposition. For the reasons set out above it seems to me that the costs of the proceedings remain in the discretion of the court under O.99. However, in addition to the normal matters which are taken into account at the end of proceedings, where a contractual right to costs is relied upon, the court should also take such right into account when determining how its discretion should be exercised,. The question as to how that discretion should be exercised will depend in any given case on the terms of the contract and the facts of the case.
84. I would agree with the trial judge that insofar as any particular contractual clause is properly construed as being an ouster of the jurisdiction of the courts then it may be contrary to public policy. There is nothing in clause 6.2 which in its express terms precludes a court from exercising its jurisdiction in respect of costs of proceedings which are also enforcement costs. Clause 6.2 does not expressly address enforcement costs which arise by reason of litigation either pursued or defended unsuccessfully by the mortgagee.
85. Reliance was also placed by Breccia on clause 14 of the general conditions. This provides:
Whilst this clause expressly refers to costs where they comprise legal fees on a full indemnity basis it only arises where such costs are incurred by reason of a default by the borrower in the performance of the identified obligations. It does not in its express terms apply to all enforcement costs but only those which are incurred by reason of a default by the borrower in the performance of his obligations. It may be a matter for consideration by a trial judge when considering the question of costs in litigation but may depend upon a finding of default by a borrower.
86. The final issue is whether the trial judge was correct in deciding that the costs which may be included in the redemption figure to redeem the mortgage (insofar as it relates to Mr. Sheehan’s loan) do not include what have been described as “contingent costs”. I am in agreement with the trial judge that upon an overall construction of clause 6.2 of the general conditions, the definition of secured liabilities in clause 1 of the mortgage, the covenant to pay in clause 2.1 and the charging clause in clause 3.1 of the mortgage that the costs which must be discharged at any given time as part of the redemption sum are the costs then incurred by Breccia which are payable by Mr. Sheehan. Whilst clause 4.3 of the mortgage provides that the bank will execute such documents as may be necessary to release the security “if all monies and liabilities hereinbefore covenanted to be paid and discharged have been paid and discharged and the mortgagor is under no future liability to the bank present or future actual contingent or prospective”, I do not consider that such clause can extend the payments which Mr. Sheehan as mortgagee is obliged to make in order to exercise his right of redemption. He has a right to redeem at any time after the legal right to redeem arises provided he pays the capital, interest and costs which he is liable to pay and which have been charged on the property in question.
87. I am in further agreement with the trial judge that the Australian authorities do not alter the principles applicable in this jurisdiction which permit a person to exercise a right of redemption upon payment of all sums then due which are secured on the property in question.
88. However, it appears to me that there may be some part of costs already incurred at the date of redemption which may still have an element of contingency or where the amount is not determined. In particular I am referring to legal costs already incurred in connection with these proceedings, as they have been determined to be within the definition of enforcement costs but where final orders have not been made in the proceedings. It follows from the earlier analysis that Breccia has a contractual right to the payment of such costs but that such contractual right must be considered to be contingent upon the final orders for costs made in the proceedings. This is because in the earlier analysis I have determined that the costs of the proceedings are a matter of discretion for the judge but that the judge when exercising his discretion should take into account the contractual right. The order made by the court may not however give effect to the contractual right. That may depend inter alia on the nature of the contractual right and the issues in and outcome of the proceedings.
89. Where there is a contractual right to costs already incurred but no relevant court order has yet been made then there may be an element of contingency in relation to either the liability for the costs or as to the amount of the costs. It appears to me that Breccia, nevertheless is entitled to provide as part of the redemption figure an estimate of the costs incurred to which it asserts a contractual entitlement to recover out of the mortgaged property. Mr. Sheehan has the option either of redeeming by making payment of the estimated amount or by seeking to reach agreement that the amount estimated to be costs incurred but which appear contingent as to liability or amount be otherwise secured by an appropriate mechanism. A mortgagee cannot be required to release security for costs already incurred to which it has a contractual secured right but which are contingent either as to amount or because they are litigation costs and ultimately a judge in exercise of his O.99 discretion might deprive the mortgagee of the costs unless there is alternative agreed security in place.
90. Accordingly, it follows that my determination on the enforcement costs issues only differs from that of the trial judge insofar as it appears to me that Breccia is entitled to include in the redemption figure an estimate of litigation costs already incurred to which there is a contractual right but which have not yet been the subject of a court order notwithstanding that the ultimate recovery may be contingent on an order in Breccia’s favour pursuant to O.99 or contingent as to amount if the costs have already been awarded but the amount of same is disputed and taxation has not yet taken place.
91. I would accordingly dismiss the appeal of Breccia against the determination of the High Court that clause 5 of the general conditions is a penalty clause and hence unenforceable. If it were necessary I would dismiss the appeal against the estoppel decision. I would vary the High Court order to permit the inclusion of an estimated figure for any enforcement costs incurred prior to the date of proposed redemption in accordance with this judgment. The Court will hear the parties in relation to the precise variations required in the High Court order by reason of the judgments being delivered today.