Plaintiff/Defendant by counterclaim v First defendant/Plaintiff by counterclaim

1 In this proceeding, the plaintiff, Stergios Xanthoulas, claims damages and other relief against Lifestyle Residences Hobson's Bay Pty Ltd (Receivers and Managers appointed) (ACN 615 058 305) ('Lifestyle') and Dale John Harrison for:

(a) breach of a consultancy contract;

(b) breach of a constructive trust;

(c) misleading and deceptive conduct said to be contrary to the Australian Consumer Law; and

(d) unconscionable conduct.

2 In their amended defence and counterclaim filed 14 October 2023, the defendants deny the plaintiff's allegations and allege that the consultancy agreement was repudiated by the plaintiff and rescinded by Lifestyle. Lifestyle seeks the removal of a caveat lodged over a property at 274B Millers Road, Altona North.

3 By a summons filed 26 September 2024 ('summons'), the plaintiff seeks judgment and orders against the defendants under s 56(2)(j) of the Civil Procedure Act 2010 (Vic) ('CP Act') and under r 24.02(1)(a) and (b) and r 29.12.1(3)(a) and (b) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) ('Rules').

4 The summons was issued by the plaintiff in accordance with paragraphs [3] and [4] of my order made following a hearing on 20 September 2024. As a result, the defendants have been on notice for over two months that a summons seeking judgment and other final orders against them would be, or had been, issued by the plaintiff because of their default in discovery.

5 I will now set out the applicable statutory law and refer to relevant cases.

6 Section 56(1) of the CP Act provides that a Court may make any order or give any direction it considers appropriate if the Court finds that there has been:

(a) a failure to comply with discovery obligations; or

(b) a failure to comply with any order or direction of the Court in relation to discovery.

7 Section 56(2) of the CP Act provides that a court may make an order or give directions:

(j) dismissing any part of the claim or defence of a party who is responsible for any conduct referred to in subsection (1).

Where a party fails to comply ... with an order for the discovery ... of documents ... the Court may order -

(a) ...

(b) if the party is a defendant, that the defendant's defence ... be struck out.

9 Additionally, where a party required to make discovery of documents fails to make discovery within the time fixed by an order of the Court, the party entitled to discovery may serve on that party a notice in Form 29D. If the party on whom the notice is served does not make discovery within 7 days of the service of the notice, the Court may order under r 29.12.1(3)(b) that the defendant's defence be struck out.

10 In Ting Ting Jia v Lee, Derham AsJ summarised the law in applications of this character as follows:

Rule 24.02 of the Rules provides for the striking out of a defence where there has been a failure to comply with an order for the discovery or inspection of documents. A defendant whose defence is struck under the rule is taken to be a defendant who, being required to serve a defence, does not do so within the time limited for that purpose. This enables default judgment to be entered under r 21.02(1) of the Rules.

There is also an inherent power which the plaintiff seeks to rely upon. The inherent power of a court to control and supervise proceedings includes the power to take appropriate action to prevent injustice, and is not restricted to defined and closed categories. That power is referred to in, and perhaps preserved by, r 24.05 of the Rules. By that rule it is provided that nothing in Order 24 affects the inherent power of the Court -

(a) to dismiss any proceeding for want of prosecution; or

(b) to order that upon the failure of a party to do any act or take any step which under the Rules the party is required to do or take or to comply with an order that the party do any such act or take any such step, the proceeding shall be dismissed or the defence struck out and that judgment may be entered or that there be judgment accordingly.

In Hodgson v Amcor, Vickery J noted that authority supported the proposition that:

It is conceivable that in some cases the inherent power of the Court to take appropriate action to prevent injustice in the management of a proceeding before it, may call for the staying of the proceeding or part of a the proceeding, or even the striking out of a pleading or part of a pleading. However, sanctions involving the striking out of a party's case are generally reserved for only the most serious cases, where no alternative and less severe remedy is available.[1]

In Hodgson v Amcor,[2] Vickery J refers to many judicial cautions that support this general statement, as well as decisions in the Federal Court of Australia on the application of the equivalent, but differently worded rule in the Federal Court Rules 2011, and predecessor Rules. Statements in one of those cases, Lenijamar,[3] are apt to the present application. In that case Wilcox and Gummow JJ noted the power given by the rule is conditioned on one circumstance only, the failure of a party to comply with a particular kind of order of the Court, and there was:

no requirement of intentional default or contumelious conduct, although the attitude of the applicant to the default and the Court's judgment as to whether or not the applicant genuinely wishes the matter to go to trial within a reasonable period will usually be important factors in weighing the proper exercise of the discretion conferred by the rule. There is no requirement of 'inordinate and inexcusable delay' on the part of the applicant or the applicant's lawyers, although any such delay is likely to be a significant matter. There is no requirement of prejudice to the respondent, although the existence of prejudice is also likely to be significant. And it must be remembered that, in almost every case, delay adversely affects the quality of the trial and is an additional burden on the parties.

The observations which we have just made ... are not intended to convey the impression that any failure to comply with a procedural direction will appropriately result in the dismissal of the proceeding. On the contrary, the rules must be administered sensibly and with an appreciation both of the fact that some delays are unavoidable, and unpredictable, by even the most conscientious parties and their lawyers, and of the likely serious consequences to an applicant of staying or dismissing a claim ... We would not wish our observations to cause respondents to apply for dismissal of proceedings simply because there has been a non-compliance with a direction by the applicant, even though it does not cause or indicate a continuing problem in preparing the matter for an early trial.

In Lenijamar, Wilcox and Gummow JJ went on to say that it was undesirable to attempt any exhaustive statement of the circumstances under which the power will appropriately be exercised. But their Honours identified two situations where the use of the power will generally be warranted:

a) where a history of non-compliance indicates an inability or unwillingness to co-operate with the Court and the other party in having the matter ready for trial within an acceptable period; and

(b) where there is significant continuing default giving rise to undue prejudice and expense to the other party.[4]

In Hodgson v Amcor, Vickery J noted that all matters relevant to the exercise of the power should be weighed, and that in different cases, the factors may assume greater or lesser significance. He identified a list of factors to be taken into account derived from the case law examined:

(a) the effect of the contravening conduct on the just resolution of the real issues in the proceeding in an efficient, timely and cost-effective manner;

(b) the extent of any delay caused by the contravening conduct and the prejudice associated with it, and whether the delay was inordinate and inexcusable;

(c) whether the history of non-compliance by a party is such as to indicate an unwillingness or inability to co-operate with the Court and the other party or parties in having the matter ready for trial within an acceptable period. In determining whether the defaulting party is either subjectively unwilling to cooperate or, for some reason, is unable to do so, the cumulative effect of the party's defaults may be taken into account;

(d) whether the non-compliance is continuing and is continuing to occasion unnecessary delay, expense or other prejudice to the other party (ie. a significant continuing default which continues to impose an unacceptable burden on another party);

(e) the prejudice which might reasonably be assumed to follow for the other party arising from the contravening conduct, and that which is shown to have arisen;

(f) the extent to which the achievement of efficiency in the conduct of proceedings by other parties in other cases before the Court have been compromised;

(g) the veracity and reasonableness of any explanation given for the contravening conduct;

(h) whether the default was intentional or the product of contumelious conduct;

(i) whether any alternative remedy by way of a lesser, but equally efficient, sanction is available;

(j) whether the contravening conduct has rendered it impossible to conduct a fair trial, or would make any judgment in favour of the offending party unsafe, or which would render any further proceedings unsatisfactory and prevent the Court from doing justice, or there is a real risk of any of these things happening; and

(k) whether the object of the order which has been contravened is ultimately secured (e.g. the late production of a document which has been withheld on discovery).

Given the gravity and effect of a striking out order, it should only be made in a clear case where the exercise of the discretion properly calls for this to occur and when the sanction ordered is the least that is necessary to achieve the ends of appropriate case management. Further, as observed in Lenijamar the power conferred on the Court must be 'administered sensibly and with an appreciation both of the fact that some delays are unavoidable, and unpredictable ... and of the likely serious consequences to [the party in default]'.[5]

12 In Ren v S_inicorp Pty Ltd_, Matthews AsJ (as her Honour then was) said:

That a dismissal or striking out of a party's case is a measure of 'last resort' is well established in the context of the Court's inherent power to supervise, and take appropriate action in order to prevent injustice in the management of, a proceeding before it. This applies with equal force to the powers conferred on the Court by the CPA. However, there appear to be elements of the common law test applied in the exercise of the Court's inherent jurisdiction which are attenuated in the context of s 56(2)(j) of the CPA. In particular, to the extent the common law test required an applicant to show a lack of good faith in the party whose pleadings are subject to dismissal or strikeout, or required an applicant to show a 'real risk' that the defaulting conduct amounted to 'an abuse of process which would render any further proceedings unsatisfactory and prevent the Court from doing justice', s 56(2)(j) of the CPA is not so confined. Rather, s 56(2)(j) treats a risk of an abuse of process and a lack of good faith as factors in the exercise of the discretionary power conferred by that section of the Act.

Similarly, the authorities in respect of s 56(2)(j) and cognate rules of court clearly establish that contumelious conduct or intentional default is not required before an order dismissing a proceeding or striking out a defence is made for default of discovery obligations.[6]

13 I will now describe the defendants' recent conduct and past conduct back to 2021. The proceeding was issued in the Commercial Court and has been managed in that Court.

14 On the return of the summons on 18 November 2024, no practitioner appeared for the defendants. Mr Harrison appeared in person despite the presence of solicitors on the record for the defendants. Nevertheless I heard his submissions and adjourned the summons for two weeks as an indulgence to the defendants so that they could get their legal representation and conduct of the proceeding in order. However, on the return date after the adjournment, the proceeding was no more advanced than it was when the adjournment was granted. The defendants did not file any document, depose to any affidavit or take any additional step in the proceeding.

15 On the adjourned hearing of the summons, Mr Harrison again appeared in person. His solicitors remained on the record but did not appear. Mr Harrison produced a letter from Mr Ian Hone, a sole practitioner, written on the previous day, to the effect that he was keenly interested in engaging in the matter subject to three conditions. The conditions are significant.

16 The first condition is that he receive the files in the proceeding from Welner Lawyers, the defendants' solicitors on the record. It is very likely that these files are subject to a solicitors' lien for costs. It is likely that they can only be obtained by payment of outstanding costs. I have no evidence that payment of outstanding costs by the defendants is possible or as to how long it will take.

17 The second condition imposed by Mr Hone was the refund of trust monies by Welner Lawyers. Again I have no evidence or explanation as to what this entails or how much is involved.

18 The third condition is that Mr Hone be put in the necessary funds to conduct the litigation. Again, there is no material as to how much is involved or whether this is possible.

19 Mr Hone's letter does not provide a fair or sound basis on which to grant the defendants yet another adjournment against the opposition of the plaintiff. The further adjournment of the summons would be very unfair to the plaintiff who has incurred very considerable costs which are ongoing. The defendants have caused lengthy delays in the conduct of the proceeding.

20 The summons is supported by the plaintiff's affidavit and exhibits filed 26 September 2024. The facts deposed in the plaintiff's affidavit are uncontested.

21 I will now describe the defendants' breaches and failures in relation to court orders for discovery.

22 In an order made by consent on 30 July 2021, I ordered that the parties exchange critical documents in accordance with s 26 of the CP Act on or before 17 September 2021. The defendants did not do so.

23 By a further order made by me by consent on 20 September 2021, I extended the time for compliance with this order until 1 November 2021. Again the defendants did not comply with this order.

24 On 28 July 2022, I ordered by consent that the parties make discovery of the documents required by r 29.01.1(3) of the Rules by affidavit in accordance with r 29.04 of the Rules by 12 October 2022. The defendants failed to do so.

25 On 4 November 2022, I ordered the parties to make discovery under r 29.01.01(3) by 2 February 2022. While the order says 2 February 2022, it is plain that 2 February 2023 was intended. The defendants again failed to do so.

26 On 4 August 2023, the court ordered by consent that the time for making discovery be extended to 15 September 2023. Again, the defendants failed to do make discovery.

27 On 9 November 2023, the court ordered that the time for making discovery be extended to 30 November 2023. Again, the defendants did not do so.

28 On 14 December 2023, the court ordered that the time for making discovery be further extended to 31 January 2024. Again, the defendants failed to do so.

29 By an email dated 8 February 2024, the plaintiff's solicitors reminded the defendants' solicitors that the defendants were in default of the Court's orders regarding discovery. The defendant's solicitors did not respond to the email.

30 On 5 April 2024, the plaintiff's solicitors served a default notice in Form 29D of the Rules. The defendants again failed to make discovery. Under the default notice process, the Court may order under r 29.12.03(b), that the defendants' defence be struck out.

Breach of overarching obligations under the CP Act

31 In addition to their repeated breaches of Court orders, the defendants are in serious and continuing breach of their overarching obligations under the CP Act. The defendants have overarching obligations to cooperate in the conduct of the proceeding (s 20); to act promptly and minimise delay (s 25); and to disclose the existence of documents (s 26). They have consistently failed to meet these obligations for a period exceeding three years. They have not filed any affidavit seeking to explain or justify their conduct.

32 Despite being given a further opportunity to rectify their position as an indulgence at the hearing on 18 November 2024, the defendants did not do anything of substance during the two-week adjournment of the summons.

33 In summary, the uncontested evidence shows that:

(a) the defendants have consistently and repeatedly failed to comply with discovery orders without explanation;

(b) the defendants failed to respond to a default notice for discovery;

(c) the defendants are in continuing breach of their overarching obligations under the CP Act;

(d) it is likely that the defendants' documents if discovered will cast light upon on the plaintiff's claims for breach of contract, misleading and deceptive conduct and unconscionable conduct;

(e) the defendants do not claim or assert that the discoverable documents are voluminous or that discovery would be unduly difficult; and

(f) the defendants are and have been legally represented including by counsel at contested interlocutory hearings in the past.

34 The defendants' non-compliance with Court orders and with overarching obligations in the CP Act is long, inordinate and egregious - and all the more so in a Commercial Court proceeding. The defendants have not filed any affidavit that seeks to explain why it is they have failed to do make discovery as they were ordered to do repeatedly over a three year period. It is obvious that their continuing breaches and disregard of Court orders cannot be permitted to go on. Such a course would be highly unfair to the plaintiff, who has incurred, and is continuing to incur substantial costs in the conduct of the proceeding whilst at the same time experiencing repeated and lengthy delays. Whilst the orders sought by the plaintiff are not often made, I am of the opinion that it is fair and just that they should be made given the extreme and ongoing nature of the defendants' defaults and the prejudice suffered by the plaintiff.[7]

35 I am satisfied that the plaintiff has shown that it is entitled to interlocutory judgment and to have the Court assess damages and make other orders as appropriate.

LIFESTYLE RESIDENCES HOBSON'S BAY PTY LTD (ACN 615 058 305) (RECIEVERS AND MANAGERS APPOINTED)

[1] [2011] VSC 63; (2011) 32 VR 495 [70].

[2] [2011] VSC 63; (2011) 32 VR 495.

[3] [1990] FCA 520; (1990) 27 FCR 388.

[4] [1990] FCA 520; (1990) 27 FCR 388, 396.

[5] [2018] VSC 164.

[6] [2021]VSC 728, [101]-[102] (Citations omitted).

[7] See also Lenijamar Pty Ltd v AGC (Advances) Ltd [1990] FCA 520; (1990) 27 FCR 388, 396 (Wilcox and Gummow JJ); Professional Administration Service Centres Pty Ltd v Commissioner of Taxation [2012] FCAFC 180; (2012) 295 ALR 52 (Edmonds, McKerracher and Nicholas JJ); David L Bailey(ed) Civil Procedure Victoria, (on line edn) (Lexis Nexis) [24.02.0], [24.02.50].