Is there a defence on the merits?
41The Second Defendant has annexed to her affidavit an Amended Defence and an Amended Cross-Claim which she seeks to file if the judgment is set aside. The Defence contains what might be regarded as two substantive defences. The first is a defence of non est factum on the basis, she says, that she had no intention to enter into any contract of guarantee or indemnity with the bank.
42The second defence is a pleading based on the unjustness of the contract by virtue of the Contracts Review Act 1980. The particulars include that she did not obtain either legal or financial advice before executing the document, that she was incapable of understanding the document which was not explained to her and that she was the subject of unfair tactics and unfair pressure by members of her family to execute the document in circumstances where the bank took no steps to ensure that she was executing the document freely and with understanding.
43In her affidavit of 28 November 2012 she sets out the background to the execution of the guarantee including the circumstances of its execution. In that regard she said that she had no dealings whatsoever with the bank in relation to the loan. The First Defendant handled everything and from time to time he would present documents for her to sign without any explanation other than that the bank required the documents to be signed.
44In addition, an affidavit was read by the First Defendant who sets out in greater detail evidence concerning the background and about the execution of the various documents including the guarantee. The First Defendant's evidence also detailed what happened after the Statement of Claim was served and the fact that he principally dealt with the proceedings and the solicitors retained by the Defendants.
45The First Defendant was not required for cross-examination and no criticism can be directed to the bank in that regard. An application to set aside a judgment is not to be regarded as the first bite at any cherry concerning the credit of witnesses. Although there was material suggesting a credit problem with the First Defendant (he was found to have forged documents which ultimately led to the Second Defendant's real estate license being suspended) for the purposes of the present application I should only consider whether his evidence tends to support the submission that the Second Defendant has an arguable defence to the bank's claim.
46In addition, although I have identified credit problems with the Second Defendant's account of her knowledge of the proceedings, I do not consider that it is appropriate to disregard her evidence going to the substance of the transaction particularly where it was not seriously challenged in cross-examination on this application.
47In Vacuum Oil Pty Co Ltd v Stockdale (1942) 42 SR (NSW) 239 at 243 Jordan CJ said:
The present is not a case in which judgment was signed by default through some procedural omission on the part of the defendant or his legal advisers. The action followed the ordinary course, except that its coming on for trial was delayed through dilatoriness on the part of the defendant. It is one in which, the action coming on for trial in its ordinary place in the list, no one was present in Court to conduct it for the defendant, and it therefore proceeded in his absence. In such a case, when the plaintiff is in no respect in default, a new trial will not be granted save in very special circumstances: Chitty's Archbold, 10th ed., 1457; 12th ed., 1526. In every such case the Court has an inherent and unfettered, though judicial, discretion, in the exercise of which it will, however, necessarily consider (a) whether any useful purpose would be served by setting aside the judgment, and (b) how it came about that the applicant found himself bound by a judgment regularly obtained: Evans v. Bartlam [1937] AC 473 at 482. As a general rule (although not necessarily in every case, if some reason exists for departing from it: Collins' Book Depot Pty Ltd. V. Bretherton [1938] VLR 49; Austn. Digest (1934-1939) 1859, the Court requires an affidavit showing prima facie that the defendant has a good defence on the merits: Evans v. Bartlam [1937] AC 473 at 480, 488-9, and also an explanation of his absence which shows that justice requires that in the circumstances it should be excused. And if there has been gross negligence on the defendant's part, the Court will be the more disposed to require at least a reasonably clear case of merits to be shown, to incline it to interfere: Nash v. Swinburne 3 M&G 630 at 632; Weitzel v. Friedenreich 14 WN 7; Austn. Digest 376.
48This passage was said by Hodgson JA (with whom Campbell JA agreed) in Magnate Projects Pty Ltd v Youma Constructions (No 2) Pty Ltd [2005] NSWCA 331 to contain the applicable principles where judgment was entered after a hearing in the absence of a defendant. He went on to say:
In my opinion, an applicant seeking to set aside a judgment obtained after an undefended hearing does not have to show that a different result is likely should the judgment be set aside and a new trial ordered. However, the circumstances may be such, as Jordan CJ says, as to require "a reasonably clear case of merits to be shown"; that is, that it appear reasonably clearly that there is a defence capable of producing a different result. If that defence depends on facts, then there should be some evidence of those facts; and the circumstances may be relevant to the quality of the evidence that is required to show a defence on the merits in particular cases. Among such circumstances could be the degree of the applicant's default, and hardship to the respondent.
49The hearing at which the Second Defendant was absent was not a final hearing. In my opinion the principles set out in Vacuum Oil are nevertheless applicable to the present case although I do not consider that "very special circumstances" need to be shown before the Second Defendant is let in to defend. Given my finding that the Second Defendant was aware of the hearing more emphasis is to be placed on the Second Defendant demonstrating that there is a reasonably clear case on the merits of her Defence and/or Cross-Claim.
50The Bank accepted that there was an arguable Contracts Review Act defence but submitted that it was barely arguable. It pointed to her shareholding in, and directorship of, the company and to her involvement in the business as the licensee.
51In assessing the merits of the Second Defendant's defence it must first be borne in mind that, although the loan was obtained by the company for business purposes, a person giving a guarantee of the business debts of a company of which that person is a shareholder does not enter into a contract "in the course of or in the purposes of a business carried on" by the person and is not prevented from obtaining relief under the Contracts Review Act: Australian Bank Ltd v Stokes (1985) 3 NSWLR 174.
52Secondly, the Second Defendant owns only one of the E-Class shares in the company, in common with three other E-Class shareholders. On the other hand a company called Norah Head Investments Pty Ltd owns 988 ordinary shares in the company. Although the Second Defendant was a former director of Norah Head Investments the only two shareholders were the First Defendant and Jennifer Campbell. Those matters tend to show that the evidence about the Second Defendant's minimal involvement in the business has some corroboration.
53Moreover, the evidence demonstrating that it was the First Defendant who principally dealt with Taylor David after the service of the Statement of Claim also tends to corroborate the evidence that the First Defendant was the moving party in the whole arrangement from the time that the loans were obtained and PMD took over the business.
54At the present time there is unchallenged evidence that the guarantee and other documents were executed by the Second Defendant at the behest of the First Defendant and without any explanations about the liabilities that the Second Defendant was undertaking. Having observed the Second Defendant in the witness box for about 40 minutes I formed the view that the assessment of her by the First Defendant in his affidavit and by her own counsel, that she was not very "savvy" in business matters, was an accurate assessment.
55I do not overlook the fact that the Second Defendant was the licensee of the real estate agency and a director of PMD at the time the loans were taken out, matters going to the extent of her involvement with the company and the business and benefits that she received from the business, but I do not think that that alters the fact that there is a reasonably arguable defence based upon the Contracts Review Act.
56On the other hand I do not think there is any basis shown in the evidence for the non est factum defence. When regard is had to what was said in Petelin v Cullen (1975) 132 CLR 355 at 359-361 and Ford v Perpetual Trustees Victoria Ltd [2009] NSWCA 186; (2009) 75 NSWLR 42 at [77]-[82] (albeit, the remarks in the latter case were made in the context of a person with diminished mental capacity) I do not think that there is any arguable case that the Second Defendant's mind did not go with her pen when she signed the guarantee. Moreover, I do not think she could show that in so signing she did so without carelessness on her part.
57I have given anxious consideration to whether my discretion should be exercised to refuse to set aside the judgment by reason of ss 56 and 58 Civil Procedure Act 2005 and also as a result of the somewhat changed landscape from the High Court's decision in Aon Risk Services Australia Limited v Australian National University [2009] HCA 27; (2009) 239 CLR 175. This is of some moment given my findings that the Second Defendant was aware that the hearing of the summary judgment Motion was to take place on 14 August and also that she was informed shortly thereafter of the judgment but did not take steps to set it aside for a period of some three months. I have concluded, however, that because she has a reasonably arguable defence based on the Contracts Review Act the interests of justice require that she be permitted to have that Defence determined at a trial of the proceedings.
58In reaching this conclusion I have considered what Barrett JA said in Northey v Bega Valley Shire Council [2012] NSWCA 28 at [13] to [17]. I note that he considered that the central question is whether it is unjust to let the judgment stand (see at [16]), and I note he made reference in that regard to part of the passage I have cited from Vacuum Oil.
59Although I have no doubt that the Second Defendant knew of the hearing I accept that she believed that her brother, the First Defendant, was dealing with the matter. This may have been very careless of her, particularly in the light of what she knew both about his dishonesty that led to the suspension of her real estate license and also about his role in bringing about her liability to the bank. It does not, however, demonstrate that she simply ignored the hearing and what might result from it.
60Accordingly, the judgment will be set aside and the Second Defendant will be allowed to defend but only on the basis of the Contracts Review Act.
61I will hear the parties on the appropriate costs order but my preliminary views are these. The judgment was obtained by the Plaintiff after a hearing where the Second Defendant was absent through no fault on the part of the Plaintiff and where she was aware of the hearing. The Defence and Cross-Claim that the Second Defendant now puts forward were not the Defence and Cross-Claim filed at the time Schmidt J heard the summary judgment application.
62In the first place, therefore, my view is that the Second Defendant should pay the costs of the present Motion on an indemnity basis. This Motion was necessitated entirely by the Second Defendant's absence at the hearing before Schmidt J. Further, because the Second Defendant did not have a viable defence to the claim at the time the summary judgment Motion was heard, the strong likelihood is that she would have been unsuccessful in resisting a judgment at that time. Accordingly, there is no reason to alter the costs order made by Schmidt J that the Second Defendant should pay the costs of the application for summary judgment. In my opinion those costs should be paid on the ordinary basis. In addition, the Second Defendant should pay any other costs thrown away by reason of judgment being given which are not included in the earlier orders I propose.
63The bank submitted also that it should be a condition of setting aside the judgment that the Second Defendant submit to an asset preservation regime. In my opinion there is no evidence to justify such an order.
64Accordingly, I make the following orders:
(1) Set aside the judgment given by Schmidt J on 14 August 2012 against the Second Defendant.
(2) Grant leave to the Second Defendant to file the Amended Defence being annexure "A" to her affidavit of 28 November 2012 omitting paragraph 9.
(3) Grant leave to the Second Defendant to file the Amended First Cross-Claim being annexure "B" to her affidavit of 28 November 2012.
(4) The Amended Defence and Amended First Cross-Claim are to be filed within 14 days of this judgment.