Gough Family Holdings Pty Ltd v Khan & Anor

RELEVANT PROVISIONS OF THE CONTRACT

1. To understand the parties' arguments, some reference needs to be made to the provisions of the contract for sale. The contract for sale was in the prescribed form reflecting the 2017 edition.
2. Clause 9 is titled 'Purchasers' Default', i.e. where the purchaser has not complied with the contract in an essential respect, the vendor can terminate the contract by serving a notice. After termination, it can sue the purchaser either: "9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination, to recover - the deficiency on resale (with credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this clause); and the reasonable costs and expenses arising out of the purchaser's non-compliance with this contract or the notice and of resale and any attempted resale; or 9.3.2 to recover damages for breach of contract."
3. Clause 20 contains 'Miscellaneous Provisions'. Clause 20.6 relevantly provides that a document under or relating to this contract is: "20.6.2 served if it is served by the party or party's solicitor; 20.6.3 served if it is served on the party's solicitor, even if the party has died or any of them has died; 20.6.4 served if it is served in any matter provided in section 170 of the Conveyancing Act 1919; 20.6.5 served if it is sent by fax to the party's solicitor unless it is not received; 20.6.6 served on a person if it (or a copy of it) comes into the possession of the person; …"
4. I note that under the heading 'Tax Information' alongside the reference to GST, the indication is provided that the sale of the land is not a taxable supply because the sale is input taxed because the sale is of an eligible residential premises.

ENTITLEMENT TO RENEW APPLICATION TO SET ASIDE JUDGMENT

1. The solicitor advocate for the applicants submitted that his clients had been ill-advised in connection with their earlier application. The proposed defence that had been drafted, at that point, was inadequate; the former solicitor had not obtained relevant documentation. He submits that by the current application, new material is sought to be put, in the sense of a revamped proposed defence, which has much more intrinsic merit than that which was put forward earlier in the year. For interlocutory applications of the present kind, this is not a case where the principle that parties are bound by their advocate's conduct should be applied with full rigour. If, as there appears, there has been prejudice to the respondent by incurring money to enforce a judgment which it reasonably believed is owed, based upon the applicants' inactivity to have it set aside, then that can be cured by an order setting aside the judgment on terms that the applicants pay the respondent's costs which have been thrown away, including the costs of enforcement.
2. Counsel for the respondent submits that the factors raised in the decision of the Victorian Court of Appeal (which decision, it is suggested, this Court should follow) point against the Court exercising a discretion to entertain this application. She referred to the circumstance that the respondent only received notice of this application on 8 October 2020, and that the respondent had spent the sum of about $13,000 in trying to enforce a judgment. It was not adequate explanation for the renewed application to be made on the basis simply that the applicants were previously ill-advised. She accepted that she is not in a position to say that a fair trial could not go ahead because of any circumstance occurring between the time when the first application was determined and the timing when the second (current) application has been brought.
3. In my opinion, whilst recognising the force of the point about the desirability of finality as a principle, save as to the expenditure in the attempted enforcement of the judgment, this is not a case where there is material prejudice to the respondent's position. Further, the period of delay between the bringing of the two applications is not especially long. The Court is satisfied, on the evidence before it, that the application (which has been fully heard) appears to be much more substantial than the one which was brought earlier in the year. In particular, new defences are proposed, which were not advanced earlier in the year. I accept Counsel for the respondent's submission that there is an inconsistency as between the applicants' stated position in an unsealed defence earlier in the year that the contract had been validly terminated and their position now. This is an admission and there may be some point whether, if this application succeeds and the dispute runs to trial, the applicants might require the Court's leave to withdraw an admission. I do not need to consider that issue now. But it does not appear to me that there is a risk of any actual or perceived inconsistency between any decision to set aside the judgment and the refusal earlier in the year, on the basis of the same material, which could certainly affect perceptions about the efficacious administration of justice. Finally, if there is apparent merit to the proposed defence recently identified, in contrast to the absence of merit in the earlier application, then this is another matter favouring the grant of the indulgence to the applicant.
4. On balance, I am persuaded that there is no abuse of process and the applicants are entitled to be heard again. In saying that, I should not be taken to be generally licensing or condoning applicants, in the position of these applicants, who lose an application to set aside a default judgment being readily able to have a second bite of the cherry. As the Victorian Court of Appeal observed in Chris Racovalis v Rescom Mortgages, close attention will always need to be paid to the particular facts.

EXPLANATION FOR DELAY FROM SERVICE OF THE PLEADING TO ENTRY OF THE DEFAULT JUDGMENT

1. Ms Khan acknowledged service of the Statement of Claim on 11 November 2019 and deposed that her husband (the second applicant) was served on 30 November 2019.
2. She referred to the background of the parties' post-contractual dealings, which saw the respondent grant various extensions of the cooling off period. After the contract had been entered into on 15 May 2018, extensions were granted, until the period expired on 25 June 2018. On 28 June 2018, the respondent's solicitor purportedly notified the applicants' solicitor that the respondent had elected to terminate.
3. After the Statement of Claim was served, Ms Khan deposed to attempts being made to obtain legal representation through November 2019. I inferred that she and the other applicant were dissatisfied with the services with the lawyer who assisted them on the contract of sale; so much so that a complaint was made about the lawyer's services to the Legal Services Commissioner (that complaint ended in June 2020).
4. On 3 December 2019, Ms Khan spoke with a Mr Polo and from that point until 9 December 2019, communications with the respondent's solicitor led Ms Khan to the belief, so she said, that default judgment would not be sought until a response had been received.
5. At 10:09am on 9 December 2019, Ms Khan sent an email to Mr Alvaro seeking confirmation of "last day of the claim", having regard to service on herself and her husband. This would reasonably have been understood as amounting to a request for advice about the last day for her and her husband about to file a defence.
6. At 4:37pm on 9 December 2019, Ms Khan emailed to the respondent's solicitors an unsealed defence. However, Mr Alvaro, the respondent's solicitor, deposes that the only email he received from Ms Khan on 9 December 2019 was one that was sent at 10:09am. He denies seeing her email sent at 4:37pm. He says that the inquiries he instituted of his firm's IT assistants confirmed him in the belief that he did not receive any other email from her on that day. Mr Alvaro indicated that his correct email address was fa@aeslegal.com.au - not fas@aeslegal.com.au. He also denied receiving an email sent by Ms Khan - to his correct email address - at 10:40am in which she asked for an extension of time to lodge the defence to let the Legal Services Commissioner complete its investigation of her complaint against her former solicitor.
7. Ms Zhang deposed to informing Ms Khan on 9 December 2019, in response to being informed by Ms Khan she had lodged a complaint against her former solicitor, that she could not provide any legal advice. Ms Khan does not dispute her saying this, but in her second affidavit, she deposed to asking her to ask Mr Alvaro to call her back and says that Mr Alvaro did not do so. She deposed that this strengthened her belief that default judgment would not be entered until replies had been made to her emails.
8. In reply to the evidence of Mr Alvaro and Ms Zhang, Ms Khan deposed to sending two further emails to email addresses she believed linked with the firm, being at 10:40am (to Mr Alvaro) and 2:26pm (to Ms Zhang), which were substantially identical and were to the effect of requesting time to lodge defence. She deposed to not receiving any replies to them. Both emails requested a 'reply as soon as possible.'
9. It was on 22 May 2020, curiously well over a month since default judgment had been entered, that Ms Khan says she was first notified, by the respondent's solicitors, of the default judgment entered against her and the other applicant. The next week, she deposed to her solicitor, Mr Polo advising her of the need for her to apply to set aside the judgment. It appears that Ms Khan did not wish to incur the expense of having a solicitor prepare and file the documents, but sought to do it herself, at least for a time. But she deposes to having apprehended that a default judgment would not be entered until her and her husband's complaint about their solicitor had been dealt with by the Legal Services Commissioner.
10. At any rate, on 1 June 2020, in circumstances not explained, Mr Polo drafted an application to set aside the default judgment with supporting draft affidavits. The motion was eventually filed on 22 June 2020. It was, apparently, listed for hearing on 17 July 2020. It is not clear from what appears from Ms Khan's affidavit what occurred on 17 July 2020, other than that the applicants' case was not adequately prepared. However, in his affidavit, Mr Alvaro deposed that on 17 July 2020, the motion to set aside the default judgment was dismissed. That set off attempts by the applicants to obtain new legal representation, throughout late July and into August 2020.
11. Eventually, on 11 September 2020, the applicants obtained representation from their current solicitor, Mr Stephen Barry, of the firm CKB Associates. Mr Barry represented the applicants at the hearing of the current application. It is he who advised them of their suggested defences and I infer that it was upon his advice that they instructed him to serve a notice accepting the respondent's purported repudiation of the contract for sale on 7 October 2020.

Submissions

1. The solicitor for the applicants submitted that the circumstances were not such that from the time that they were served until the time when default judgment was entered - a period of 4 months (admittedly embracing the summer vacation) - the applicants had ignored the suit. Ms Khan's evidence, which should be accepted, indicated activity. This included her attempts to reach Mr Alvaro on 9 December 2019 and to wish to engage with him an attempt to forestall application being made for the default judgment. That these attempts were ineffective did not mean that she was not genuine and nor did it gainsay her genuine, if misguided belief, that application for default judgment would be held off. She honestly, but mistakenly, believed that her defence of the claim was connected with her own grievance against her former solicitor.
2. The applicants' solicitor was not critical of Mr Alvaro, though he did rely upon the circumstance that he acknowledged receiving at least one email on 9 December 2019 pointing to some uncertainty on Ms Khan's part as to how much time she and her husband had to file a defence. He also relied upon Ms Khan's evidence of asking Ms Zhang to ask Mr Alvaro call her back on that day, which did not occur.
3. Counsel for the respondent submitted that there was nothing that Mr Alvaro did which reasonably induced Ms Khan to think that the respondent intended to hold off on applying for default judgment. Further, Mr Alvaro's evidence, overall, indicated that the presumption in s 161 of the Evidence Act 1995 (NSW) that he had received an email on 9 December 2019 at 10:40am, in which Ms Khan requested an extension of time to lodge her defence to accommodate a period where the Legal Services Commissioner could address her complaint against her previous solicitor, was rebutted. Ms Khan did not follow up at any stage between December 2019 and April 2020 when default judgment was recovered and therefore she could not be said to have conducted herself reasonably.

Consideration

1. The parties' focus was, correctly, on the period from the time when the Statement of Claim was served through to the time when default judgment was entered. I have dealt previously with the explanation for the period from April 2020 to October 2020 (when the present application was filed), indirectly at least, in addressing the respondent's point about the applicants' entitlement to bring a second application to set aside the judgment.
2. Courts are not in the business of mindlessly punishing litigants for delay, or holding them accountable for deficiencies in the level of service they might previously have received from their lawyers. Courts are enjoined to consider case management objectives, including but not limited to the interests of justice. That concept, amongst other things, balances the interests of the parties at both procedural and substantive levels. In this case, I accept that Ms Khan did make an honest attempt to try to have the case put on hold pending determination of her complaint against her former solicitor. Specifically, she did try to persuade Mr Alvaro not to proceed with a default judgment application until that complaint had been determined. This of course, was centred entirely upon her own interest, and that of her husband, and paid no regard to the respondent's legitimate interests in the timely adjudication and disposition of its claim and, objectively, it was an heroic assumption or expectation that the respondent might agree to defer prosecution of its claim until the applicants had prosecuted their own complaint against their former solicitor. It is not necessary to make any criticism of Mr Alvaro since, I accept, he did not receive her email. Had she acted entirely reasonably, I think it may be said that, with hindsight, Ms Khan should have pursued the respondent's solicitors further; even though Ms Khan did have a legitimate expectation that Ms Zhang might pass on to Mr Alvaro her request that he call her. But the circumstance remains that, in effect, the situation was communications between a solicitor and a lay litigant who was misinformed; and in those situations, it is not uncommon for procedural delays in claims to occur. In those circumstances, the explanation for why Ms Khan acted in the way that she did prior to the default judgment being entered in April 2020 should be accepted such that, in my view, she (and her husband) should not be shut out on this discretionary basis from now advancing any defence that may be arguable.

PROPOSED DEFENCE

1. In its proposed draft defence, the applicants wish to contend that the judgment creditor, the respondent to the motion, did not validly terminate the contract for sale. This is because it did not issue a notice of termination in the terms prescribed by that contract. Further, the applicants wish to contend that since the vendor sold the property in November 2018, it put it beyond the applicants' ability to complete and thereby itself repudiated the contract for sale. The proposed defence continues that on 8 October 2020 (after default judgment had been entered and shortly before the present motion was filed) the applicants notified the respondent of their acceptance of that repudiation and termination of the contract on that basis.
2. Further, in the alternative, the applicants wish to put in issue the quantum recoverable by the respondent in any event, raising questions about the respondent not accounting for Capital Gains Tax ('CGT'), contrary to a provision (cl 9.3.1) in the contract for sale; and they do not admit the quantum of an allowance made for agent's commission.
3. The solicitor for the applicants expanded upon these points in his oral submissions at the application, but he also indicated that the quantum of the judgment being impugned was affected by irregularity. It is appropriate to deal with the argument of irregularity first.

Quantum

1. The points of suggested irregularity all concern the quantum of the judgment debt.
2. First, the interest claimed in the affidavit in support of the application for the default judgment. In that affidavit, the interest claimed was $5,337.36. This, it was said, was an overstatement of pre-judgment interest. The applicants contend that, properly calculated, the amount should be $3,060.09, a not immaterial difference of $2,277.27.
3. Secondly, as a matter of both form and substance, judgment should not have been entered to the extent that it incorporated allowance for 'lost rent', as claimed in sub-paragraph 28(c) of the Statement of Claim. The applicants argued that this particular claim was in the nature of a claim for unliquidated damages; and not a liquidated claim. That being so, it was argued, by reason of r 16.8 of the Uniform Civil Procedure Rules 2005 (NSW) ('UCPR'), it was necessary for the Court to give separate judgments for heads of loss representing a liquidated debt and loss representing unliquidated damages: Arnold v Forsythe [2012] NSWCA 18 at [59]. This had not occurred, which did not comply with the Court rule.
4. As a matter of substance, the applicants argued that properly construed, cll 9.3.1 and 9.3.2 of the contract required the respondent to make an election between the express right for damages for a liquidated claim and a common law claim for unliquidated damages: Zografakis v McCarthy (2007) NSW Conv R 56-176. That is, the rights conferred by cll 9.3.1 and 9.3.2 were truly alternative. The claim for loss of rent, it was submitted, fell into the latter category. But the respondent did not sue for recovery of common law damages and could not recover for loss of rent under cl 9.3.1.
5. Thirdly, in relation to the claim under cl 9.3.1, the respondent had not credited to the applicants the CGT on anything recovered from the deficiency between the unpaid purchase price and the resale price after the property had been subsequently sold to other purchasers (as calculated in the loss referred to in sub-paragraph 28(a) of the Statement of Claim). By its proposed Defence, the applicants wish to contend that its current estimate of the amount of that credit would be approximately $30,000.
6. Fourthly, though this point was not vigorously pressed, there was no indication whether GST had been taken into account, and credited to the applicants, in relation to some of the items in paragraph 28 of the statement of claim.
7. In response to these points, the respondent's position was as follows.
8. As to the point of overstatement of interest, the respondent had no response (either in writing or verbally).
9. In relation to the point of lost rent, Counsel for the respondent pointed to the second bullet point in cl 9.3.1 and argued that the lost rent, in holding the property vacant, fell within the expression 'reasonable costs and expenses arising out of the purchaser's non-compliance'. Counsel argued that where, as here, the lost rent was quantifiable, in the sense that it was ascertainable in a fixed sum, this was sufficient.
10. In relation to the CGT issue, Counsel for the respondent argued that, properly construed, cl 9.3 did not mean that the applicants were entitled to any credit in reduction of the amount it could claim against the defaulting purchaser. The reality of the situation, known to the parties, was that the vendor's liability for CGT could not be ascertained until a number of events, including the lodgement of the company's tax return. Clause 9.3 produced a set-off so that the vendor could sue the purchaser to recover for the full amount and, once the CGT liability was known, the purchaser could, if necessary, sue the vendor. Counsel argued that cl 9.3 was to be construed in a way that meant that its operation could survive termination of the contract. Particular reference was made to the CGT "on anything recovered".
11. In his submissions in reply, the applicant's solicitor argued that the respondent's construction of cl 9.3 was unworkable and, therefore, the construction could not be accepted. It could not be conceived that a defaulting purchaser would have its rights to recover a credit held hostage to the uncertainty produced by having to await upon the vendor learning what its CGT liability was and voluntarily providing that information, or at least providing the credit. The result might be that if the vendor was recalcitrant, the purchaser would have to institute an application for preliminary discovery and thereafter sue for the amount. The solicitor argued that the CGT liability in cl 9.3.1 crystallized on the date that the vendor entered the contract on the resale.
12. As to the GST point, as indicated earlier in my reference to the contractual provisions, the contract plainly indicated that no GST was chargeable on any amount of loss.

Consideration of irregularity point

1. I reject the applicant's point regarding GST for the reason submitted by the respondent.
2. Otherwise, I find that there is merit to the applicant's other points.
3. First, there is no challenge that the interest component in the judgment is overstated.
4. Secondly, although no authorities or provisions of tax legislation were drawn to the Court's attention, it seems to me that the applicants' solicitor is correct. It seems to me, prima facie, that the parties commonly intended that the allowance made for CGT is known and quantifiable in advance of the vendor's suit against the defaulting purchaser and, consistently with that, it may be expected that the CGT liability likely would crystallize upon entry into the contract for resale; just as much as the other event - GST liability - would be known if the contract had provided otherwise than what it did in this case. It is not without significance that cl 9.3.1 refers to the CGT (or in other circumstances GST) 'payable' on anything recovered, a word which adds force to the applicants' solicitor's contention that the amount is ascertainable as at the date that the contract for resale is entered into.
5. Thirdly, I prefer the applicants' construction of cl 9.3 in relation to 'lost rent'. I find it a very strained construction that lost rent could fall within the concept 'reasonable costs and expenses'. That expression, it seems to me, relates to actual expenditure by the vendor. This was illustrated in the decision of Zografakis v McCarthy referred to earlier. In that case, Hamilton J treated extra rental payments made by vendors in the period prior to completion as falling within the second bullet point cl 9.3.1. I regard it as much more obvious that a claim for loss of rent amounts to a head of loss recoverable in a common law claim for damages.
6. The respondent did not dispute that cl 9.3 presents an election. Here, as indicated by paragraph 28 of its Statement of Claim, the respondent elected to exercise its right to sue under the express right in the contract; and not at common law. In my view, it makes no difference that the amount of the lost rent just happens to be quantifiable. The judgment impermissibly incorporated as part of the loss an item which could only have been recoverable in a common law claim for damages.

CONSEQUENCES OF FINDINGS ON QUANTUM

1. By r 36.15 of the UCPR, judgments may be set aside "on sufficient cause" on several enumerated grounds including, relevantly, irregularity. The condition of 'sufficient cause' is meant to ensure that the power is not exercised for trifling, inconsequential matters.
2. Amongst other categories of circumstance, a judgment may be regarded as "irregular" where it has been entered for more than is due: Hughes v Justin [1894] 1 QB 667; Ritchie's Uniform Civil Procedure (NSW) [36.15.12].
3. In the three instances on quantum noted, I find that the default judgment has been entered for more than that which is due. I do not regard the three circumstances as being inconsequential or trifling, certainly not when viewed, as they should be, in the aggregate.
4. The applicants should be permitted to contest the quantum of the respondent's claim in the way foreshadowed in its Defence.
5. It follows, therefore, that in my view, the default judgment entered by the Court on 9 April 2020 should be set aside.

OTHER MATTERS

1. The above conclusion relieves me from considering another contested matter raised by the applicant, being whether an email by Mr Alvaro sent to the applicants' then solicitor on 28 June 2018 amounted to a valid notice of termination served on the applicants, having regard to, amongst other things, cl 20.6 of the contract. Given that the judgment should be set aside as an irregularity, it is unnecessary for the Court to weigh the parties' respective contentions in respect to that issue. Once satisfied that it should be set aside on one basis, it is not appropriate for the Court to scour the balance of a proposed defence to determine whether or not it is reasonably maintainable on another, separate basis. Further, it is not the Court's task on an application of this kind to be supplying advisory opinions.
2. As a consequence of the above reasons, that will be an issue that is to be fought, if it is to be fought at all, at the trial.
3. The issue now arises as to what terms upon which the default judgment should be set aside.
4. In my view, to address the prejudice sustained by the applicants' delay, the applicants should pay the costs that the respondent has thrown away from its reliance upon an effective judgment procured on 9 April 2020, including the costs identified in paragraph 11 of Mr Alvaro's affidavit sworn on 14 July 2020.

ORDERS

1. I make the following orders: 1. Pursuant to r 36.15 of the UCPR, the default judgment entered on 9 April 2020 is set aside on terms that the applicants should pay the costs that the respondent has thrown away from its reliance upon an effective judgment procured on 9 April 2020, payable forthwith. 2. The respondent is directed forthwith to notify the sheriff engaged in enforcement of the said judgment of order 1. 3. Having heard from the legal representatives, I order that that costs of the present application are costs in the cause. 4. I also direct the defendants to file and serve a Defence by 11 December 2020. 5. The plaintiff is directed to file and serve any Reply by 25 January 2020. 6. The proceeding is adjourned for case management directions before the Judicial Registrar on 4 February 2020.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 December 2020