Commonwealth Bank of Australia v Humphreys

Adams v Kennick Trading (Int) Ltd (1986) 4 NSWLR 503 Akari v Sole [2008] NSWSC 59 Baxter v Harrigan (1962) 80 WN (NSW) 12 Burgoine v Taylor (1878) Ch D 1 Burns v Kondel [1971] 1 Lloyd's Rep 554 Cockle v Joyce (1877) 7 Ch D 56 Commercial Traders Ltd v Furness [1962] NSWR 291; (1962) 79 WN (NSW) 528 Term Sales Pty Ltd v Joseph (1949) 67 WN (NSW) 44 Cuttle v Brandt (1947) 64 WN (NSW) 96 Evans v Bartlam [1937] 2 All ER 646; ([1937] AC 473 Ex parte Vigilant Finance (NSW) Pty Ltd; Re Cameron Smith [1964] NSWR 1282 CASES CITED : Federal Bank v Bate (1889) 5 WN (NSW) 67 Garrard (t/as Arthur Anderson & Co) v Email Furniture Pty Ltd (1993) 32 NSWLR 662 Grimshaw v Dunbar [1953] 1 QB 408 at 415; [1953] 1 All ER 350 Kostokanellis v Allen [1974] VR 596 Magnate Projects Pty Ltd v Youma Constructions (No 2) Pty Ltd [2005] NSWCA 331 Passmore v Minahan (1887) 13 VLR 262 Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550 Reinehr Industrial Lease & Finance Pty Ltd v Jordan (NSWCA, 4 June 1974 unreported) Rooke v Day (1907) 24 WN (NSW) 127 Simpson v Alexander (1926) 26 SR (NSW) 296 Stollznow v Calvert [1980] 2 NSWLR 749 Vacuum Oil Co Pty Ltd v Stockdale (1942) 42 SR (NSW) 239 at 243; (1942) 59 WN (NSW) 188

Commonwealth Bank (Pltf/resp) PARTIES : John Alexander Humphreys (1D/applicant) ACN 117 070 345 Pty Limited (2D)

COUNSEL : D F Villa (Plt/resp) A G Rogers (Defs/applicants)

SOLICITORS : Gadens Lawyers (Pltf) Phair Lawyers (Defs)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

JUDGMENT 1 HIS HONOUR: The plaintiff, the Commonwealth Bank of Australia entered judgment and orders against the defendants on 16 December 2009 in the following terms:

Judgment for the plaintiff for possession of the land comprised in folio identifier 33/SP13284 being the land situated at and known as 33/7 Broughton Road, Artarmon in the State of New South Wales.

Judgment for the plaintiff for possession of the land comprised in folio identifier 12/SP71700 being the land situated at and known as 12/2-4 Abbott Street, Cammeray in the State of New South Wales;

Judgment for the plaintiff against the first defendant for $2, 690,172.27.

Judgment for the plaintiff for possession of the land comprised in folio identifier 81/SP71980 being the land situated and known as 8/588 Pacific Highway, St Leonards in the State of New South Wales.

Judgment for the plaintiff against the second defendant for $1,635,081.53. 2 The defendants did not file a defence and judgment was entered by default. The defendants seek in these proceedings to have that judgment set aside. 3 Rule 36 of the Uniform Civil Procedure Rules (2005) NSW provides for an application to be made for the court to set aside a default judgment. The relevant principles have been summarised in Ritchie's Uniform Civil Procedure NSW. Drawing upon that summary the principles relevant to the present application are:

(1) In the exercise of the discretion conferred by rule 36.16 of the Uniform Civil Procedure Rules , the task of the court is to balance the competing interests of the plaintiff and the defendant and to determine whether or not the interests of justice require that the defendants should be permitted to contest the plaintiff's claim: Reinehr Industrial Lease & Finance Pty Ltd v Jordan (NSWCA, 4 June 1974, Street ACJ, Hardie and Glass JJA, unreported, BC7400068); Stollznow v Calvert [1980] 2 NSWLR 749 at 751; Adams v Kennick Trading (Int) Ltd (1986) 4 NSWLR 503; Garrard (t/as Arthur Anderson & Co) v Email Furniture Pty Ltd (1993) 32 NSWLR 662 at 671,

(2) Factors that are relevant to the exercise of that discretion include: (i) the regularity of the judgment, (ii) the reasons for the default which occasioned judgment being entered (including whether or not the plaintiff warned its intention to enter judgment: Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550, (iii) any delay in taking steps to have the judgment set aside, (iv) whether that delay has operated to the prejudice of the plaintiff; and (v) the defendant's apparent prospects of success in the proceedings: Grimshaw v Dunbar [1953] 1 QB 408 at 415; [1953] 1 All ER 350; Vacuum Oil Pty Co Ltd v Stockdale (1942) 42 SR (NSW) 239 at 244.

(3) Generally speaking, it may be said that if the judgment has been properly obtained, the court will require the defendant to show, by affidavit or otherwise, that they have a good defence on the merits, and also to explain the default which occasioned the entry of judgment: Vacuum Oil Co Pty Ltd v Stockdale (1942) 42 SR (NSW) 239 at 243; (1942) 59 WN (NSW) 188; Kostokanellis v Allen [1974] VR 596; Evans v Bartlam [1937] 2 All ER 646; ([1937] AC 473 at 480 (affidavit of merits required); Ex parte Vigilant Finance (NSW) Pty Ltd; Re Cameron Smith [1964] NSWR 1282 at 1285 (affidavit of merits required); Magnate Projects Pty Ltd v Youma Constructions (No 2) Pty Ltd [2005] NSWCA 331; BC200507177 at [15] per Hodgson JA; Akari v Sole [2008] NSWSC 59;

(4) In relation to the question of the defendant's prospects of success, it is clear that on the hearing of an application to set aside judgment, the court is not concerned to embark upon the adjudication of the truth or otherwise of the case which the defendant seeks to make: Reinehr Industrial Lease and Finance Pty Ltd v Jordan , above ; Adams v Kennick Trading (International) Ltd (1986) 4 NSWLR 503; 10 ALN N47; Cuttle v Brandt (1947) 64 WN (NSW) 96 at 98; Simpson v Alexander (1926) 26 SR (NSW) 296 at 301;

(5) The court must be satisfied that the defence is asserted bona fide and that there is an arguable or triable issue: Grimshaw v Dunbar [1953] 1 QB 408 at 415; Burns v Kondel [1971] 1 Lloyd's Rep 554; Evans v Bartlam [1937] 2 All ER 646; (1937) 53 TLR 689;

(6) It is usually said that what must be shown is a defence on the merits, but this merely means a good defence and defences such as infancy, the Statute of Limitations or illegality are defences on the merits: Rooke v Day (1907) 24 WN (NSW) 127; Commercial Traders Ltd v Furness [1962] NSWR 291; (1962) 79 WN (NSW) 528; Term Sales Pty Ltd v Joseph (1949) 67 WN (NSW) 44; Baxter v Harrigan (1962) 80 WN (NSW) 12.

(7) The court's discretion extends to terms on which it will set aside or vary a judgment. Again, the matter is discretionary, but it is not unusual for terms to include an order that the defendant pay the costs of the application and the costs of steps rendered useless by the judgment being set aside: Federal Bank v Bate (1889) 5 WN (NSW) 67; Burgoine v Taylor (1878) Ch D 1; Cockle v Joyce (1877) 7 Ch D 56; Passmore v Minahan (1887) 13 VLR 262. 4 Although a number of matters were argued during the proceedings the defendants ultimately advanced only two submissions in support of the application. They have otherwise indicated an intention to bring a cross-claim in the proceedings or if their present application fails commence separate proceedings seeking damages against the Bank. In the event that the defendants commence those proceedings the Bank has given an undertaking in the following terms: "Provided that the First Defendant commences any proceedings for breach of the Mortgage Innovation Agreement dated 15 October 2004 within 28 days of today's date, the Plaintiff will not argue that the entry of the default judgments against the First Defendant and against the Second Defendant prevents the First Defendant from arguing in those proceedings that his damages (if any) may include: 1. interest charged on the Veridian Line of Credit at the difference between the Excess Drawing Rate and the Debit Rate applicable from time to time to that facility; 2. interest charged on the Fixed Rate Bill Facility at the difference between the Fixed Bill Rate and the interest rate provided for by clause 10.7 of the terms and conditions governing the Fixed Rate Bill Facility (which as at today's date is 4.50% above the Plaintiff's monthly index rate for overdraft accounts); 3. the "early repayment adjustment" of $76,604 (plus any interest charged on that amount)." 5 The defendants did not provide any explanation for their failure to file a defence in the matter. 6 The first defendant was engaged by the Bank to assist prospective customers in arranging finance from the Bank. He provided his services through a company with the name Humphreys Financial Services Pty Limited. The Bank entered into an agreement with that company described as a Mortgage Innovation Service agreement pursuant to which he was engaged to sell financial products and perform associated services for the Bank. 7 The original agreement was entered into in 2004 but by early 2008 the relationship between the Bank and Mr Humphreys had deteriorated. In February 2008 the Bank terminated Mr Humphreys services. Mr Humphreys said that as a consequence his personal finances were severely affected which had the result that he was unable to meet loan commitments which either he or another of his companies had entered into with the Bank. He indicated that he was considering bringing proceedings claiming damages against the Bank for the wrongful termination of the Mortgage Innovation Service agreement being the subject of his foreshadowed cross-claim. 8 Mr Humphreys borrowed money from the Bank pursuant to an agreement which was titled a Veridian Line of Credit. Under the terms of that agreement the "credit limit" was defined as $947,250. When the agreement was executed the interest rate was stated to be 6.47% per annum. However, as a separate matter an excess drawing interest rate of 13.95% per annum was provided. These matters were referred to in part of the agreement described as "Financial Table" which included the following terms: "Under the contract we (the bank) can, without your consent, change the information in this table relating to the following: the credit limit; … the excess drawing interest rate …" 9 Clause 013, found in part D of the agreement, provided that the Bank may "provide any credit in excess of credit limit stated at item B (being the point at which the credit limit was originally stated) and if it did so then (a) that credit and any interest on that credit is debited to the loan account; (b) despite clauses 6 and 02.1, we (the Bank) charge interest on that credit at the rate stated at item 4(4) (being the excess drawing interest rate); (c) you (Mr Humphreys) must repay that credit and any interest charged on it within 30 days of the credit being provided." 10 Clause 03 of the agreement provided for repayments. Clause 03.2 provides that Mr Humphreys must repay the debit balance on the Loan Account when the Bank demands it. Clause 04.1 provides: "We (the Bank) may reduce or cancel the credit limit on the Loan Account at any time." 11 Clause 04.3 provides: "Any reduction or cancellation of the credit limit on the Loan Account under this clause does not affect your obligations under the Contract for credit made available on the Loan Account before the date on which the credit limit is reduced or cancelled." 12 Mr Humphreys' indebtedness under the agreement by July 2009 had, according to the Bank, risen to $978,381.63. By letter of that date the Bank advised Mr Humphreys that it had cancelled the credit limit on his account with the consequence that the interest applying to the entire account was then 15.99%. The Bank continued to charge interest at this rate and ultimately brought proceedings claiming moneys under the Veridian Agreement. 13 The Bank also sued for moneys which it alleged were owing pursuant to a bill facility. Although issues were originally raised by the defendants in relation to the Bank's allegations with respect to those facilities they were not pursued. The argument before me was confined to a challenge to the Bank's entitlement to charge interest on the whole amount of the Veridian Loan at the excess drawing rate. 14 The defendants' submission was that the credit limit having been defined as $947,250 the Bank was always confined to charging interest on that amount at the annual percentage rate. It was submitted that although the Bank was entitled to unilaterally reduce the credit limit it could not reduce it to nil. It was submitted that this would have the consequence that there was no credit available in circumstances where the agreement always contemplated that at least some credit defined as credit limit would be available. 15 I am satisfied that this submission is not arguable. The agreement contemplates that credit will be made available to a borrower and provides a lower interest rate for so much of the credit up to the "credit limit" as defined. Where credit is provided above that limit the excess drawing interest rate is payable. The clause to which I have referred in the financial table provides that the Bank may change the "credit limit" identified in that table and clause 04.1 provides that the Bank may reduce or cancel the "credit limit" on the account at any time. If the Bank, as it did in the present case, reduces the "credit limit" under the agreement to nil this does not have the consequence that credit ceases immediately to be available. When the "credit limit" is nil all of the credit provided will be above the limit. Of course, the available credit would be reduced to nil if the Bank demands the repayment of the debit balance. However, until that demand is made, if the credit limit has been reduced to nil, interest will be payable on the whole of the loan at the higher rate. 16 A second argument of the defendants was that the Veridian agreement was unjust within the meaning of the Contracts Review Act. It was submitted that the injustice arose from the fact that the interest rate could be increased by the Bank in the event that it wrongfully terminated Mr Humphreys' arrangements under the Mortgage Innovation Service Agreement causing a disruption to his cash flow and making him unable to meet his obligations under the Veridian agreement. 17 To my mind this proposition is also not arguable. For the purposes of the Contract Review Act the Veridian agreement must be considered at the date upon which it was executed. That agreement had no relationship with Mr Humphreys' arrangements under the Mortgage Innovation Service Agreement. If Mr Humphreys can make good a claim that his services were wrongly terminated which was the cause of his being unable to meet his financial obligations to the Bank he may be able to recover damages which would recompense him for his loss. However, I do not see how the circumstance which was said to have arisen years after the original Veridian agreement entitles the defendants to relief under the Contracts Review Act. 18 Because I am satisfied that the defendants' construction of the Veridian Agreement is not arguable and I am not otherwise persuaded that there is any arguable defence to the plaintiff's claim, the motion must be dismissed. 19 I had previously referred to the undertaking which the plaintiff has given in the event that the defendants seek to sue the Bank for damages for wrongful termination of the Mortgage Innovation Service agreement. If a claim for wrongful termination of that agreement can be sustained Mr Humphreys may be able to recover any damages caused by that termination. As I understand the position he will argue that his damage includes losses which he may have suffered as a result of his default under the Veridian arrangement and the bill facility. With the undertaking which has been given by the plaintiff dismissal of the present motion will not prejudice that claim if Mr Humphreys wishes to pursue it. 20 I provided the foregoing reasons for judgment to the parties in draft. I took this course because of the disjointed manner in which the application was required to proceed, given the other obligations I had in the duty list during the week that it was heard. I was concerned that I may not have captured all of the arguments which the defendants sought to bring forward, their counsel having expressly abandoned some arguments during the last day of the hearing. There are in effect three matters which counsel say I have not dealt with. 21 The first is a matter flowing from an allegation that the Bank failed when requested to provide copies of various documents to the defendants. That request was made at a time when the defendants had notice that default judgment was being sought by the Bank. No attempt was made to delay the entry of that judgment or indeed to seek to defend the matter at that point in time. The failure, if it be the case, and I have no view about it, of the Bank to provide those documents is of no significance to this application. 22 The second matter is really an extension of the substantive argument which I have already dealt with. I have referred to clauses 04.1 and 04.3 of the relevant agreement which related to the Viridian loan. 23 In April 2009 the Bank communicated to the defendants that it had "cancelled" the Viridian facilities. The Bank adverted to clause 04.1 of the agreement as the source of its entitlement to cancel the credit limit, as it purported to do. The consequence was that clause 04.3 became relevant which, as I have previously indicated, provided that even if the credit limit was cancelled the obligations under the contract remain. Those obligations extended in the present case to the payment of interest and fees and also to the obligations arising from the fact that the Viridian account was the nominated account for the purposes of the Better Business facility - the bank bill. The Bank continued to assign obligations under that bill facility to the Viridian account as it was plainly entitled to do. The argument of the defendants has not substance. 24 The only other matter that I need address was the suggestion by the defendants that they should be given an extended time within which to file a cross-claim. Because I am of the view that the defence has no merit this submission is of no consequence but furthermore, as I have already indicated in my reasons for judgment, the defendants, if they wish, may pursue a claim against the Bank for wrongful termination of the agreement with any consequence in relation to the issue of damages. 25 The motion is dismissed with costs. **********

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