Steinhoff Australia Pacific Limited v Lifestyle Retailing Pty Limited and 1 Or; Lifestyle Retailing Pty Limited and 1 Or v Steinhoff Asia Pacific Limited

Judgment 1Steinhoff Asia Pacific Limited, referred to by the parties as "Steinhoff," trades as the well known business, Freedom Furniture. Lifestyle Retailing Pty Ltd operated a Freedom Furniture store under a franchise agreement with Steinhoff. The sole director of Lifestyle Retailing is Mr Roger Cooper, and that company and Mr Cooper have been referred to as "the Cooper parties." The franchise agreement, relating to a store at Turramurra, was entered into between Steinhoff and Lifestyle Retailing on 16 August 2001. Mr Cooper was a guarantor of his company's debts under that agreement. 2On 24 October 2008, Steinhoff commenced proceedings in this court by statement of claim against the Cooper parties for the recovery of a substantial amount said to be owing under the franchise agreement. On 23 December 2008, the solicitor then acting for the Cooper parties filed a submitting appearance for them, that is, an appearance submitting "to the making of all orders sought, and the giving or entry of judgment in respect of all claims made, save as to costs." For reasons which will become apparent, that solicitor no longer acts for them. 3On 11 January 2010, the Registrar entered judgment for Steinhoff for $907,802.82 and $2968 for costs. The Cooper parties contend that the submitting appearance was entered without instructions, that the judgment was entered irregularly, that is should be set aside and that they should be let in to defend the matter. By an amended notice of motion filed on 1 December 2010, they seek to withdraw the notice of submitting appearance and to be granted leave to file a fresh notice of appearance, and an order that the judgment be set aside. In fresh proceedings, by an amended summons also filed on 1 December 2010, they again seek an order that the judgment be set aside. As I understand it, that course was taken because of a rule to which I shall refer later. 4Affidavits of Mr Cooper and the former solicitor were read, and both of them gave oral evidence. Mr Cooper said that the notice of submitting appearance was filed without instructions and the former solicitor acknowledged as much. This evidence was not challenged. The effect of the former solicitor's evidence is that the appearance in that form was prepared and filed in error, although exactly how that came about is not clear. The proceedings had been the subject of negotiation between the parties, a matter to which I shall return. However, the former solicitor confirmed that, unless the matter could be settled, he had instructions to file a defence and cross-claim on behalf of the Cooper parties. 5I have been supplied with a draft defence and cross-claim. However, before I turn to them it is necessary to determine the status of the judgment entered by the Registrar. 6The judgment was the end of a somewhat tortuous process which I need not recite. Put shortly, early in 2009 the solicitors for Steinhoff filed a motion seeking default judgment for a liquidated claim. As a result of requisitions from the registry, the detail of which need not concern us, further motions to the same effect were filed. The last of them was in response to a requisition of 23 October 2009, which noted that a submitting appearance had been filed and instructed that the judgment be redrawn, leaving the amount blank. The requisition also noted that "costs would not be awarded re terms of the Statement of Submission." It seems that a form of judgment showing no amount was lodged with that last motion, and it was upon that document that the figures for judgment and costs to which I have referred were inserted by hand, presumably by the registrar. The document was sealed and dated, as I have said, 11 January 2010. 7For the Cooper parties, Mr Newlinds SC, who appeared with Mr Sulan, submitted that the registrar did not have power to enter the judgment. By s 13(1) of the Civil Procedure Act 2005, the "senior judicial officer of any court" may direct that specified functions of the court may be exercised by registrars. The current directions in this court are to be found in a document entitled "Delegation to Registrars under section 13 of the Civil Procedure Act 2005", dated 9 April 2009 and under the hand of Spigelman CJ. As far as the entry of judgment is concerned, the delegation is limited to default judgments under Pt 16 of the Rules and judgments by consent under r 36.1A. Clearly, the judgment in question is not a consent judgment. Mr Newlinds submitted that it is also not a default judgment, even though that was the expression used in the motion seeking it. This, he argued, flows from the fact that a submitting appearance had been entered. 8Provision for submitting appearances is to be found in UCPR r 6.11, which provides: " 6.11 Defendant may submit to judgment by notice of appearance (1) A defendant who intends to take no active part in proceedings may include in the defendant's notice of appearance a statement to the effect that the defendant submits to the making of all orders sought and the giving or entry of judgment in respect of all claims made, to which may be added the words ", save as to costs". (2) Except by leave of the court, a defendant who has filed a notice of appearance containing a statement referred to in subrule (1) may not file a defence or affidavit or take any other step in the proceedings." 9I take it that the Cooper parties initiated the fresh proceedings seeking that the judgment be set aside because of the terms of sub rule (2), which would prevent them from taking any further step in the 2008 proceedings. No doubt, that course was taken for more abundant caution. However, argument at the hearing centred on the merits of the case and that procedural issue need not concern us. 10Mr Newlinds fastened upon the provision in sub rule (2) that a party who has filed a submitting appearance may not file a defence. Part 16 of the Rules, dealing with default judgment, sets out the circumstances in which a defendant might be "in default" in r 16.2. Relevantly for present purposes, a defendant who fails to file a defence within the prescribed time or such further time as the court may allow is in default: sub rule (1)(a). Mr Newlinds argued that that provision could not apply to the Cooper parties because, a submitting appearance having been entered, they were prevented from filing a defence at all by r 6.11(2). 11Mr Newlinds relied upon the decision of Young J (as he then was) in Trust Co Aust v Perpetual Trustees (1995) 36 NSWLR 654. In that case his Honour had occasion to consider the predecessor of r 6.11, Pt 11, r 4 of the Supreme Court Rules . Sub rules (3) and (4) of that rule were in virtually identical terms to the present rule. In particular, sub rule (4) provided that a defendant who had filed a submitting appearance "shall not, except with the leave of the Court, file a defence ...". Part 17 of the Supreme Court Rules dealt with default judgment, and by r 2(c) a defendant was in default if he was required to file a defence and the time to do so had expired. The case was concerned with a claim for unliquidated damages, and Pt 17, r 5 provided for the recovery of default judgment in such a claim. 12Considering the interaction between Pt 11, r 4 and Pt 17, Young J said (at 658 - 9): "... by forbidding a person to file a defence it completely nullifies the provision of Pt 17, r 5 which provides that if a defendant is in default, a plaintiff may enter judgment for damages to be assessed and for costs. A defendant is only in default if under Pt 17, r 2, the defendant is required to file a defence and the time has expired without him doing so. By removing the obligation to file a defence, the rule no longer allows default judgment to be signed." 13Thus, said Mr Newlinds, the judgment in the present case is not a default judgment and the registrar has no power to grant it. Pursuant to UCPR r 36.15(1), he seeks an order that it be set aside on the basis that it was given irregularly. 14Counsel for Steinhoff, Mr Loughnan, argued that the judgment entered by the registrar is a default judgment. He submitted that the decision of Young J in Trust Co Aust v Perpetual Trustees does not assist the Cooper parties, describing the judgment as "of historical significance only." His researches revealed that it had not been applied in any subsequent case and had no appellate support. He also argued that there was a relevant difference in part of the default judgment provisions under the Supreme Court Rules and the present Rules. As noted above, under Pt 17, r 2(c) of the Supreme Court Rules , a defendant was in default if he was " required " to file a defence and had not done so within time. By the current provision, r 16.2(1)(a), a defendant who "fails" to file a defence within the necessary time is in default. There is no need, said Mr Loughnan, to establish a requirement to file a defence. 15I am unpersuaded by that latter argument, because I do not see the wording of the two provisions as relevantly different. In ordinary parlance, one would not say that a party has "failed" to file a defence when that party is prevented by another provision in the Rules from doing so. To speak of a defendant as being "required" to file a defence merely recognises that, in the ordinary course of litigation, a defendant who wishes to contest a plaintiff's claim must do so. 16As to Trust Co Aust v Perpetual Trustees , it may be that Young J's judgment has remained in isolation since it was delivered but, presumably, that is because the occasion to re-examine it has not arisen. Young J himself described the effect of the interaction of the two provisions as "rather weird" (at 658), but added that his reasoning about the matter appeared to be "unassailable" (at 659). I respectfully agree. It is apparent that his Honour arrived at his conclusion after full argument on the matter, and after consideration of the history and rationale of a submitting appearance. In any event, the views of Young J in such a matter command respect. I certainly do not consider that his Honour's position was plainly wrong and, as a matter of comity, I would follow his decision. 17For that reason alone, then, the judgment entered by the registrar should be set aside. However, Mr Newlinds submitted that, even if the judgment were a default judgment, the proper exercise of discretion would be to set it aside and, further, to grant the Cooper parties leave to withdraw the submitting appearance. It is necessary to examine the issues raised by the proposed defence and cross-claim and the course of the proceedings prior to the filing of the motions before me. 18The Turramurra store the subject of the 2001 franchise agreement was relatively small. Nevertheless, according to Mr Cooper, between 2001 and 2007 it operated profitably. In October 2006, Steinhoff opened a much larger store at Belrose, roughly 10 kilometres from the Turramurra store. Mr Cooper's evidence was that in September 2006 a director of Steinhoff told him informally about the opening of the Belrose store, but he was never provided with any written notice of it. 19It is the Cooper parties' case that the opening of the Belrose store led to a significant decline in the sales of the Turramurra store between October 2006 and June 2007, such that the business lost its commercial viability. The franchise agreement was terminated in August 2007, and Steinhoff took over the operation of the Turramurra store. As I have said, I have the defence and cross claim in draft form. 20It is in the cross-claim that the issues between the parties are spelled out. It is alleged that Steinhoff was in breach of implied terms of the franchise agreement that it would act honestly, fairly and in good faith in the exercise of its rights under the agreement, that it would not act in a manner which would destroy the business of Lifestyle Retailing, and that it would disclose to Lifestyle Retailing within a reasonable period its intention to open a store which would have a significant adverse affect upon Lifestyle Retailing's commercial interests. This is a broad summary of the terms said to be implied by law set out in par 19 of the draft cross-claim. In par 20, it is claimed that Steinhoff was in breach of those implied terms by opening the Belrose store without warning to Lifestyle Retailing, without consultation with it and without providing financial or management assistance to enable it to adjust its business practices accordingly. 21It is also alleged that Steinhoff engaged in unconscionable conduct, within the meaning of s 51AC of the Trade Practices Act 1974 (Cth): pars 21 -34. There is a claim concerning the disposition of the stock, plant and equipment at the Turramurra store following the termination of the franchise agreement: pars 25 -29. Finally, on the basis of the allegations concerning Steinhoff's dealings with Lifestyle Retailing, Mr Cooper claims to be entitled to be discharged from his obligation as guarantor: pars 31 -32. 22The case sought to be made by the Cooper parties is not consistent with the express terms of the franchise agreement. The agreement provided for a "territory", being the area within a 2 kilometre radius of the Turramurra store. By cl 3.3, if Steinhoff proposed to open another store within that territory it was required to give Lifestyle Retailing the right of first refusal (subject to certain matters set out in the clause.) Otherwise, the clause provided that Steinhoff might "establish and operate itself or franchise other Freedom Furniture Stores in any location at any time." The Belrose store, of course, was well outside the 2 kilometre radius specified in the agreement. There was also an "entire agreement" clause: cl 29.5. 23Mr Newlinds acknowledged that the Cooper parties did not have "the easiest case in the world." Nevertheless, he explained that it was founded upon an implied obligation on the parties to a commercial contract to act in good faith, noting that authority on that question is not settled: United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177, 74 NSWLR 618, particularly per Allsop P at [59] - [61] (634 - 5). He also referred to the judgment of Byrne J in Far Horizons Pty Ltd v McDonald's Australia Limited [2000] VSC 310. That also was a case of a franchisor opening a store in circumstances where it was said to have an adverse impact on the profitability of one of its franchisees. The franchisee in that case failed to establish that the franchisor's conduct was a breach of an implied obligation under the franchise contract but, also, to establish that the opening of the new store destroyed the commercial viability of the franchisee's business. Mr Newlinds relied, in particular, upon an observation of Byrne J at [130]: "Accordingly, the suggested implications have not been made out. I leave for another day the case where the impact caused by the new store is such that it effectively destroys the business which the impacted operator had bargained for or where the degree of impact is such as to give rise to the inference that its opening was for a purpose which might give rise to the operation of the implied obligation of good faith and fair dealing." 24Mr Loughnan noted, correctly, the factual differences between Far Horizons v McDonald's and the present case, observing that that case was squarely founded upon an allegation of bad faith on the part of the franchisor. In the present case, he argued, Steinhoff acted within its contractual rights, and the obligation asserted by the Cooper parties could not be implied because it would be inconsistent with the express terms of the agreement: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, per Mason J (as he then was) at 347. 25I can see the force of those submissions, but I am not persuaded that the Cooper parties' case can be dismissed in that summary way. No doubt, the case faces difficulties but I do not consider it to be unarguable. It raises issues which are fit for trial. 26Let me turn, then, to the evidence of Mr Cooper and his former solicitor about their conduct after Steinhoff instituted the proceedings in 2008. There is some inconsistency between their evidence but, broadly speaking, their accounts are to the same effect and they need not be examined in detail. As I have said, it is not in dispute that the submitting appearance was filed without instructions. The solicitor, who was not experienced in litigation and most of whose practice was in other areas, frankly acknowledged as much. 27Mr Cooper consulted the solicitor in November 2008. He wanted to negotiate an acceptable outcome with Steinhoff, wishing to avoid the time and expense of a contested hearing. The solicitor told him then that, in order to "stall the defence", he would write to Steinhoff's solicitors to say that they did not want to file a defence and cross-claim at that stage because it was understood that the parties were discussing settlement. By then, Mr Cooper had had a meeting with an officer of Steinhoff, Mr Geoffrey McIntosh, with a view to settling the matter and had been asked to provide a statutory declaration setting out his assets and liabilities. 28The solicitor had a brief discussion about the matter with Steinhoff's solicitor in mid-December 2008, undertaking to communicate with him about an offer of settlement in the New Year. As I have said, on 23 December 2008 the submitting appearance was filed, and a copy of it was forwarded to Steinhoff's solicitor on 5 January 2009. By letter of 9 January, Mr Cooper's solicitor conveyed an offer of $40,000 in settlement of the claim, expressed to be without admission of liability. On 14 January, Mr McIntosh e-mailed Mr Cooper to note the offer but to inform him that they could not "consider such a settlement" and that their legal team would "have no option but to continue in their course of action against you." Mr Cooper forwarded this e-mail to his solicitor. 29Thereafter, without notice to Mr Cooper or his solicitor, Steinhoff set in train the process for obtaining default judgment which I have described. During that time, it must be said, neither Mr Cooper nor his solicitor took any steps to resolve the matter. According to the solicitor, Mr Cooper phoned him on a number of occasions between January 2009 and October 2010 to enquire what was happening with the case. The solicitor said that he had heard nothing, and expressed the assumption that Steinhoff had decided that it was not worth pursuing him because he had no money. The first that Mr Cooper knew of the registrar's judgment was when he received a bankruptcy notice on 8 October 2010. Shortly thereafter, he retained his present solicitor and the steps which brought the matter before me were taken. 30As to the submitting appearance, Mr Loughnan argued that the Cooper parties should be bound by the action of their solicitor in filing it. He referred to Donellan v Watson (1990) 21 NSWLR 335, in which Handley JA said at 342 C - D: "A solicitor retained to conduct litigation ordinarily has both implied and ostensible authority to bind his client to a compromise of those proceedings ... . Any instruction from the client which restricts the solicitor's authority to compromise the proceedings will only affect the other party who is on notice of that restriction ... . (References to authority omitted.)" Although that case was concerned with the compromise of proceedings, rather than the filing of a submitting appearance, Mr Loughnan argued that those observations are apposite in the present case. 31Generally, he submitted that the Cooper parties had not made out a case for the exercise of my discretion in this regard. Plainly enough, by December 2008 Mr Cooper was aware of the need to file a defence and that that step was being "stalled", at least until early in the New Year, so that negotiations might be pursued. In the event, his offer of $40,000 in settlement was refused, and it should have been clear to him from the terms of Mr MacIntosh's e-mail of 14 January that Steinhoff intended to pursue the matter. Yet still no defence or cross-claim was filed and, as I have said, neither Mr Cooper nor his solicitor took any further steps to protect the Cooper parties' interest in the case. In the light of these matters, Mr Loughnan submitted, I should not exercise my discretion to allow the submitting appearance to be withdrawn. Equally, assuming it to be a default judgment, he argued that the judgment of the registrar should not be set aside. 32A discretionary decision in circumstances such as these is not an easy one. Certainly, the Cooper parties should have filed their defence and cross-claim at an early stage, and sat on their hands after negotiations had come to an end. On the other hand, the submitting appearance was filed in error and at no stage reflected their approach to the case. No doubt, Mr Cooper was prepared to go to considerable lengths to resolve the matter rather than litigate it, but I accept that, if that could not be achieved, he intended to defend it. I also accept that Steinhoff should have been on notice that the submitting appearance was filed in error, given that negotiations continued after it was filed and the offer of settlement conveyed on 9 January was expressed to be without admission of liability. Finally, as I have said, the proposed defence and cross-claim raise issues properly to be determined at a trial. In all the circumstances, I am satisfied that the orders sought by the Cooper parties are in the interests of justice. 33Mr Newlinds propounded an alternative basis to set aside the judgment, submitting that the component in the judgment amount for default interest was incorrect and not consistent with the terms of the franchise agreement. Given the conclusions I have expressed, I find it unnecessary to decide this issue. 34Accordingly, the Cooper parties should have leave to withdraw the submitting appearance and to file an appearance in the ordinary form. If I be wrong in my characterisation of the registrar's judgment earlier in these reasons, and the judgment is in truth a default judgment, it should be set aside pursuant to r 36.16(2). The question remains whether these orders should be made subject to terms, a matter raised by Mr Loughnan in written submissions. The parties should have the opportunity to be heard on that issue, and on any directions which should be given for the further conduct of the proceedings. They should also have the opportunity to be heard on the costs of these motions.