1 Personal Property Securities Act 1999.

2 The Australian Law Reform Commission published in 1993 a Report (no. 64) on Personal Property Securities, following a discussion paper produced jointly with several of the State law reform commissions (New South Wales, Queensland and Victoria). The report recommended a national security interest for Australia, along Article 9 lines, and this continues to be the subject of vigorous academic discussion. Note also the Model Law on Secured Transactions, promulgated by the European Bank for Reconstruction and Development, discussed in G. McCormack and F. Dahan, “Comparisons and Oonvergence,” (1999) 3 Company Financial and Insolvency Law Review 65.

3 The introduction of an Article 9 system was recommended by the Crowther Committee ﹛Report of the Committee on Consumer Credit (Cmnd. 4596, 1971), Part V), a recommendation endorsed by the Cork Committee (Insolvency Law and Practice (Cmnd. 8558, 1982), paras. 1620-23); the same recommendation was made in the Diamond Report ﹛A Review of Security Interests in Property (1989)). Recently the Law Commission completed a feasibility study on the introduction of a Commercial Code, which would probably include an Article 9 system. Of course the maintenance of sea walls is a good charitable purpose in England: Charitable Uses Act 1601, preamble.

4 In the rest of the paper, to avoid repeating the formula “including interest and costs”, it will be taken to be implicit in every reference to the creditor's recovery of what he is owed.

5 Inevitably parties have tried to obtain these advantages even in the case where the debtor owns the asset from the outset, through a sale to the creditor coupled with one of the transactions discussed in the next paragraph. Another effect of such a structure, not addressed in this paper, is that if successful, it eliminates the need for the registration which is almost always required for charges and mortgages. The structure of the transaction may be ignored by the court, particularly for this reason: Re Watson (1890) 25 Q.B.D. 27 (C.A.); Polsky v. S. & A. Services [1951] 1 All E.R. 185, affd [1951] 1 All E.R. 1062 (C.A.); Re Curtain Dream pic [1990] B.C.L.C. 925.

6 The term “finance lease” contrasts with “operating lease”; the latter identifies a transaction in which the term of the lease is substantially less than the useful life of the goods, and therefore it is expected that multiple lessees will lease the goods. See generally Goode, R.M., Commercial Law (2nd ed.), (Harmondsworth 1995)Google Scholar, chapters 26-28.

7 Even if ownership is initially transferred to the debtor and thence to the creditor, nonetheless, if the credit being advanced was required to acquire the goods, then it is less likely that the court will ignore the structure of the transaction and treat it as a disguised charge: Staffs Motor Guarantee Ltd v. British Wagon Ltd. [1934] 2 K.B. 305; Pacific Motor Auctions Pty Ltd. v. Motor Credits (Hire Finance) Ltd. [1965] A.C. 867 (P.C., N.S.W.). See generally C.G. van der Merwe and L.D. Smith, “Financing the Purchase of Stock by the Transfer of Ownership as Security” [1999] Stellenbosch Law Review 303.

8 There are also legal considerations. For example, a commercial buyer in possession under a conditional sale will usually be able to give a good title to a third party purchaser: Sale of Goods Act 1979, s. 25(1).

9 [2000] 4 All E.R. 734 (C.A.), affirming [1999] 2 All E.R. 811 (Ch.D.), hereafter “On Demand Information”.

10 There were four leases. As is usual, each lease had a “primary period”, in this case three years. The lessee could terminate the lease after the primary period and sell the goods as agent of the lessor, with the lessee keeping 95 per cent, of the proceeds. Otherwise the lease would be renewed for one year at a time, with the annual rental being only 1 per cent, of the value of the goods. The rental in the primary period is calculated to repay the lessor, with profit, the cost of acquisition of the goods. In this case two of the four leases were in secondary periods; the other two were one and three months away from the end of the primary period. The cost of the goods was £650,205; the rentals already paid amounted to £794,182.08.

11 For the purposes of the litigation, the plaintiffs conceded that the equipment could have been sold for £251,617, so that the 5 per cent, would be calculated on that. They also conceded that they had deprived the defendant of a tax advantage of £15,897 through the sale of the goods at a value below their depreciated value.

12 Robert Walker and Pill L.JJ. composed the majority; Sir Murray Stuart-Smith dissented. The case is discussed further below.

13 Rowland v. Divall [1923] 2 K.B. 500 (C.A.).

14 As Goff L.J. in Clough Mill Ltd. v. Martin [1985] 1 W.L.R. Ill, 117A-118E. Sir John Donaldson M.R. suggested (125H-126B) that the same result could be reached on the basis of an implied term, but the difficulty with this is that the contract will probably have been discharged. This solution contemplates recovery for failure of consideration by the party whose contractual default occasioned the failure; but this seems acceptable, so long as the non-breaching party is compensated: Dies v. British and International Mining and Finance Corp. Ltd. [1939] 1 K.B. 724; Campbell, Albo Low Ltd v. Black (1995) 26 O.R. (3d) 111 (Gen. Div.).

15 Stockloser v. Johnson [1954] 1 Q.B. 476 (C.A.), per Somervell and Denning L.J.; Workers Trust & Merchant Bank Ltd. v. Dojap Investments Ltd. [1993] A.C. 573 (P.C., Jamaica). In Stockloser Denning L.J. suggested that this was not part of the law of penalties, because it was about the forfeiture of a sum already paid, rather than the invalidation of a promise to pay a fixed sum. Dojap is preferable in suggesting that, either way, it is the law of penalties which governs. See also Stern v. McArthur (1988) 165 C.L.R. 489, 524. The line between penalties and forfeiture can be difficult to draw. In this paper, as in Transag Haulage Ltd. v. Leyland DAF Finance pic [1994] 2 B.C.L.C. 88 (Ch.D.), the law of penalties is understood to regulate the parties’ ability to determine the quantum of secondary obligations. Relief against forfeiture is confined to the sense explained below, which is conceptually distinct: it regulates the parties’ ability to determine the qualitative impact of the breach of a primary obligation. In particular it prohibits an interest taken or retained by way of security from being enjoyed beneficially.

16 Goss v. Chilcott [1996] A.C. 788, 798 (P.C., N.Z.).

17 It is of course arguable that the decision in Rowland v. Divall [1923] 2 K.B. 500 (C.A.) is overly formalistic and that a buyer in such a case has suffered only a partial failure of consideration, since what he wanted was the use and exchange value of the goods, and he wanted ownership only as a way of guaranteeing that he would have those. Then the restitution solution becomes just as feeble in the conditional sale as it is in the finance lease. See Treitel, G., The Law of Contract (10th ed.), (London 1999), at 982–983Google Scholar.

18 This article does not attempt directly to rationalise the rules about penalties. The argument will be that relief against forfeiture can be understood as recognising and preserving an interest in having the transaction proceed to its economic conclusion, even on the part of the debtor in breach, by recharacterising the rights of the creditor as security rights in accordance with the tenor of the transaction. It appears, though, that the rules against penalties can be understood in a similar way, if all secondary contractual obligations are understood as a kind of guarantee for the performance of primary obligations. Both doctrines implement a mandatory policy which denies the parties full autonomy in crafting the consequences of a breach of primary obligations. This is elaborated below.

19 Union Eagle Ltd. v. Golden Achievement Ltd. [1997] A.C. 514, 518-519 (P.C., H.K.): “The notion that the court's jurisdiction to grant relief [against contractual forfeitures and penalties] is ‘unlimited and unfettered’ (per Lord Simon of Glaisdale in Shiloh Spinners Ltd. v. Harding [1973] A.C. 691, 726 (H.L.)) was rejected as a ‘beguiling heresy’ by the House of Lords in Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 A.C. 694, 700.” See also On Demand Information, note 9, 819-820 (Ch.D.); 753fg (C.A.). It is for this reason that the doctrine needs to be given a more precise content than the general proposition that it is based on unconscionability. See the discussions in C. Harpum, “Relief Against Forfeiture and the Purchaser of Land” [1984] C.L.J. 134; N.Y. Chin, “Relieving Against Forfeiture: Windfalls and Conscience” (1995) 25 U.W.A.L.R. 110.

20 In fact the intervention goes beyond the recognition of the equity of redemption, which allowed the mortgagor to recover the interest transferred in the face of the terms of the contract. Even after the mortgagee took proceedings in Chancery to foreclose the equity of redemption, the foreclosure could be reopened in appropriate cases. In the words of J.T. Robertson, “The Folly of Foreclosure Absolute and the Problem of Unjust Enrichment” (1989) 23 U.B.C.L.R. 301, 303, “Equity refused to honour its own device.”

21 At common law, moreover, he was still able to sue for the debt owing, even after having taken that asset. Robertson, ibid., 303n4, identifies other factors: “(1) borrowers were men of necessity and were likely to agree to harsh conditions, (2) an animosity existed towards money lenders, (3) the mortgage was often penal in form, (4) the Church's opposition to usury and (5) interest was adequate compensation for the failure to pay on the appointed ‘law day’.” We may assume that (2) and (4) are no longer relevant. (3) highlights the potential overlap between the law on penalties and that on forfeiture: see note 18. (1) and (5) will be taken up in the discussion below. (1) is ultimately rejected as inconsistent with a law which evaluates the transaction rather than the mind of the debtor. (5) is crucial, but presupposes an ability to override the parties’ bargain as to the consequences of the breach, which itself must be justified.

22 Cf. Birks, P.B.H., An Introduction to the Law of Restitution (rev. ed.), (Oxford 1989)Google Scholar, at 208-216; Eisenberg, M.A., “The Limits of Cognition and the Limits of Contract” (1995) 47 Stanford L.R. 211, 225-236Google Scholar.

23 Simpson, A.W.B., A History of the Land Law (2nd ed.), (Oxford 1986), at 245Google Scholar.

24 Eisenberg, note 22, 234-235 argues for this sort of rule in relation to penalties.

25 Ibid.

26 This is arguably exactly what happened in On Demand Information, note 9 above.

27 See Jackson, T.H., The Logic and Limits of Bankruptcy Law (Cambridge 1986), at 36-44Google Scholar; F. Oditah, “Assets and the Treatment of Claims in Insolvency” (1992) 108 L.Q.R. 459, 482-490.

28 Cf. Atiyah, P.S., An Introduction to the Law of Contract, (5th ed.), (Oxford 1995)Google Scholar, at 299-300. See however Chen-Wishart, M., “Controlling the Power to Agree Damages” in Birks, P. (ed.), Wrongs and Remedies in the Twenty-First Century (Oxford 1996)Google Scholar 271, who argues that the distinction between primary and secondary obligations is unworkable and lacks substance (although she would preserve a jurisdiction over penalties and forfeitures under the rubric of unconscionability). I would argue that even if the line between primary and secondary obligations may be difficult to draw in some cases, it does have normative substance, as dividing lawful from unlawful conduct.

29 Weinrib, E.J., The Idea of Private Law (Cambridge, Mass. 1995)Google Scholar, especially at 136-140.

30 See Jaffey, P., The Nature and Scope of Restitution (Oxford, 2000), at 374–383Google Scholar.

31 Benson, P., “The Idea of a Public Basis of Justification for Contract” (1995) 33 Osgoode Hall L.J. 273, 319Google Scholar; see now Benson, , “The Unity of Contract Law”, in Benson, P. (ed.), The Theory of Contract Law: New Essays (Cambridge 2001) 118Google Scholar.

32 Corrective justice can, however, support disgorgement of gains made by the defendant through breach of contract, if the right to performance is viewed as a patrimonial entitlement of the promisee, just as it can support such awards in cases of profitable infringements of property rights. See Attorney-General v. Blake [2000] 3 W.L.R. 625, 637B; [2000] 4 All E.R. 385, 395j; E.J. Weinrib, “Restitutionary Damages as Corrective Justice” (2000) 1 Theoretical Inquiries in Law 1.

33 The same reasoning can be used to understand the law of penalties, since a penalty is an excessive secondary obligation triggered by the breach of a primary obligation: Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827, 850 (H.L.), per Lord Diplock: a contractual term “must not offend against the equitable rule against penalties, that is to say, it must not impose on the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation”. See also Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 2 A.C. 694, 702 (H.L.); and Export Credits Guarantee Department v. Universal Oil Products Co. [1983] 1 W.L.R. 399 (H.L.), holding that a term can only be a penalty if it is a secondary obligation. See Burrows, A., Remedies for Torts and Breach of Contract (2nd ed.), (London 1994)Google Scholar, at 331; Getzler, J., “Unconscionable Conduct and Unjust Enrichment as Grounds for Judicial Intervention” (1990) 16 Monash L.R. 283, 300-305Google Scholar.

34 [1973] A.C. 691, 723-724 (H.L.).

35 Note 9 above, relying on Transag Haulage Ltd. v. Leyland DAF Finance plc [1994] 2 B.C.L.C. 88 (Ch.D.), which in turn relied on a number of authorities. The Court of Appeal declined an invitation to overrule Transag Haulage and explicitly approved it. See also M. Pawlowski, “The Scope of Equity's Jurisdiction to Relieve against Forfeiture of Interests in Property other than Land” [1994] J.B.L. 372.

36 Ibid., 822.

37 Sir Murray Stuart-Smith, dissenting, took the view that the point of the consent order of Harman J. was to transfer the parties’ rights in the equipment to the proceeds of sale, and it would therefore be “a bizarre result” (755fg) if the sale instead extinguished the rights of one of the parties.

38 See also N.Y. Chin, “Relieving Against Forfeiture: Windfalls and Conscience” (1995) 25 U.W.A.L.R. 110, 122-123.

39 Above, Section II.

40 Re Watson (1890) 25 Q.B.D. 27 (C.A.); Polsky v. S. & A. Services [1951] 1 All E.R. 185, aff’d [1951] 1 All E.R. 1062 (C.A.); Re Curtain Dream pic [1990] B.C.L.C. 925.

41 Compaq Computer Ltd v. Abercorn Group Ltd. [1993] B.C.L.C. 602.

42 Street v. Mountford [1985] A.C. 809 (H.L.).

43 Lancashire Waggon Co. v. Nuttall (1878) 42 L.T. 465 (C.A.).

44 [1997] A.C. 514 (P.C., H.K.).

45 The buyer would still be protected by the law of penalties against an excessive deposit paid, just as he would be protected against an excessive liquidated damages clause: Workers Trust & Merchant Bank Ltd. v. Dojap Investments Ltd. [1993] A.C. 573 (P.C., Jamaica).

46 Waters, D.W.M., The Constructive Trust (London 1964)Google Scholar, ch. II; Gray, K., Elements of Land Law (2nd ed.), (London 1993)Google Scholar, at 265; Oakley, A.J., Parker and Mellows: The Modern Law of Trusts (7th ed.), (London 1998) at 375Google Scholar; Martin, J.E., Hanbury and Martin: Modern Equity (15th ed.), (London 1997), at 315–314Google Scholar. The beneficial ownership genuinely passes, even without conveyance of the estate, when the purchase price has been paid in full.

47 (1988) 165 C.L.R. 489; cf. Legione v. Hateley (1983) 152 C.L.R. 406.

48 This was partly due to improvements made by the purchasers with the consent of the vendors. Such improvements could in any event be the proper subject of an unjust enrichment claim, even if relief against forfeiture were denied.

49 [1983] 2 A.C. 694, 702 (H.L.).

50 Ibid.

51 Sport International Bussum BV v. Inter-Footwear Ltd. [1984] 2 All E.R. 321 (H.L.) (no jurisdiction to relieve against termination of a contractual licence to use trade marks); BICC pic v. Burndy Corp. [1985] 1 Ch. 232 (C.A.) (jurisdiction to relieve against obligation to assign patent rights); Crittall Windows Ltd. v. Stormseal (UPVC) Window Systems Ltd. [1991] R.P.C. 265 (Ch.D.) (no jurisdiction to relieve against termination of a contractual licence to use trade marks).

52 Note 9 above.

53 [1973] A.C. 691 (H.L.).

54 Lord Wilberforce said (725): “When the [plaintiffs] assigned a portion of their leased property, retaining the rest, which adjoined and was supported by the portion assigned, they had an essential interest in securing adequate protection for their buildings, in having the entire site fenced, in preventing unauthorised access through the assigned property. The covenants were drafted accordingly.”

55 Note 9 above, 824e (Ch.D.); 750-751 (C.A.).

56 Note 9 above, 825-826 (Ch.D.).

57 [1994] 2 B.C.L.C. 88 (Ch.D.), expressly approved by the Court of Appeal in On Demand Information, note 9 above.

58 [1973] A.C. 691 (H.L.).

59 (1988) 165 C.L.R. 489. In fad in this case the debtor was able, and was allowed, to discharge the whole debt.

60 Note 9 above.

61 (1878) 42 L.T. 465 (C.A.).

62 Note 9 above, 753hj.

63 [1973] A.C. 691 (H.L.).

64 (1988) 165 C.L.R. 489.

65 Shiloh Spinners Lid. v. Harding [1973] A.C. 691, 727D (per Lord Simon). The same idea clearly underlies the judgment of Lord Wilberforce, since he held that there was jurisdiction to grant relief but that it was not appropriate in that case.

66 [1973] A.C. 691, 723-724 (H.L.).

67 Ibid., 725.

68 (1988) 165 C.L.R. 489.

69 Note 9 above.

70 [1999] 1 All E.R. (Comm.) 856.

71 Ibid., 862-863.

72 (1823) 3 Russ. 1, 38 E.R. 475 (M.R.); aff'd (1828) 3 Russ. 48, 38 E.R. 492 (L.C.). This is largely dispensed with in Article 9 systems by requiring registration for most transfers of receivables, whether outright or by way of security.