Stormer Building Group Pty Ltd v Johnson and Johnson [2014] ACTSC 23

1. The defendants have applied by application, dated 2 December 2013, to set aside a default judgment which was entered against them. They rely upon rule 1128 of the Court Procedures Rules. The defendants have also sought orders in relation to costs. The defendants have relied upon the affidavits of Graham Michael Johnson, affirmed 2 December 2013, and the affidavit of Graham Michael Johnson affirmed 20 January 2014, and the affidavit of Jasminka Johnson, affirmed 20 January 2014.

2. The plaintiffs have relied upon the affidavit of Mr Robens, sworn on 31 January 2014. That affidavit annexes a transcript of proceedings relating to a caveat before the former Chief Justice, the file provided by the defendants' former solicitors, Nelson & Co, and certain correspondence between the parties. The underlying claim brought by the plaintiff arises out of two progress payments claimed pursuant to a building contract between the plaintiff, the builder and the defendants, the prospective owners of the house.

3. The unusual factor is that at the time the work the subject of the progress claims was undertaken, the defendants were not the registered proprietors of the land. Although, they had entered into a contract for the purchase of the land, that contract had not settled. Both the contract to purchase the land and the building contract substantially predated any construction on the land.

4. The critical evidence for the purposes of the claim and the critical events that provide background for the current application are as follows. On 30 May 2011, the building contract was entered into. That was a standard form of building contract. On 31 May 2011, a contract to acquire the land was entered. On 7 June 2012, the plaintiff sent the defendants an email stating, "We are looking forward to commencing construction on your new property once the land becomes available and we achieve building approval." A Crown lease was registered on 12 June 2012.

5. Settlement of the contract to purchase the land was scheduled for July or August 2012. On 20 July 2012, the plaintiff sent the defendants a letter commencing, "We are looking forward to commencing construction of your new property once the land becomes available and we achieve building approval." The letter also requested the defendants to sign certain documents for the purposes of obtaining building approval. Reminder emails were sent on 25 July and 27 July. The forms, in fact, were signed on 30 July. Those forms in their terms stated that the defendants were the owners of the land.

6. A critical issue in the case will be precisely the state of knowledge of the parties at the time these documents were signed and provided to the plaintiff as to the ownership status of the land, and what should be made of the representations in the letters and emails from the plaintiff on the one hand and the documents signed by the defendants on the other. Clearly, building work proceeded very soon after the documents were signed by the defendants, strip footings having been laid by 8 August 2012. Invoices were issued for a total of around $98,000 on 15 August and 3 October 2012. Although, the evidence at this stage is not completely clear, it appears that the defendants became registered proprietors of the land on 25 February 2013.

7. There is evidence put on for the purposes of this application that because a building was already partially constructed on the land, it was more difficult for the defendants to obtain construction finance for the building. For procedural reasons which do not need to be gone into at this stage, an originating application was filed by the plaintiff on 14 June 2013 seeking to maintain a caveat. Orders were made by the former Chief Justice continuing the caveat and directing the matter to proceed by way of pleadings. A statement of claim was served on 29 July 2013. No defence was filed.

8. A default judgment was entered on 28 August 2013 and served by letter received by the defendants' former solicitors on 5 September 2013. The evidence of the defendants was that they only became aware of the default judgment on 22 October 2013. Both defendants have filed and read affidavits to the effect that at no time prior to 22 October 2013 was the defendant told by Nelson & Co or any of its employees, nor were they otherwise aware, that the statement of claim had been served on Nelson & Co on 29 July 2013, that the defendants needed to file a defence by a certain date, what the consequences might be if a defence was not filed by that date, that default judgment had been entered on 28 August 2013, or that no action would be taken or was taken by Nelson & Co to defend the claim because Nelson & Co did not think that there was a defence to the claim. The defendants' current solicitors were instructed on 11 November 2013. The application to set aside the default judgment was filed on 3 December 2013.

(1) The court may, by order, amend or set aside a judgment entered under this division, and any enforcement of it.

(2) Without limiting rule 6901 (Orders may be made on conditions), an order may be made on any of the following conditions:

10. The authority most commonly referred to in this context is Evans v Bartlam [1937] AC 473 at 480, where Lord Atkin made it clear that a discretion under a rule, such as r 1128, is unconditional, there is a general requirement that there be an affidavit disclosing the merits of the defence, but there are no rigid requirements for such an application and the matter is one of discretion. In Ryan v Adams (1993) 112 FLR 474 at 476, Miles CJ said of the relevant principles that, "As far as this Court is concerned, the most authoritative pronouncements are those in the Federal Court in Davies v Pagett [1986] FCA 106; (1986) 10 FCR 226."

11. In that case, the Court noted that the trial judge had set out a summary of the principles from Lord Wright's speech in Evans v Bartlam, and then adopted the trial judge's summary of the relevant considerations as follows:

1. The length of the delay between the time for delivery of defence and the date of interlocutory judgment. On this aspect, the giving of notice of intention to apply for judgment may be a relevant factor.

2. The length of delay between the entering of such judgment and the application to set it aside.

3. The reasons for such delay. The defendant's own contribution to the delay, as contrasted with the delay caused by his legal advisers, may fall for consideration.

4. The evidence as to whether or not the defendant may have a defence? The probability of a successful defence need not be demonstrated, and the fact that a defendant's case may appear weak, will seldom be a bar.

5. Whether the plaintiff will be prejudiced by setting the aside the judgment, the nature of the prejudice being such that it cannot adequately be compensated by an order for costs.

12. In EzekielHart v Law Society [2012] ACTSC 103, Refshauge J added that separate consideration will in some cases be given to the notice of an intention to apply for judgment. He referred in that case to the judgment of Wallace J in Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550 at 1551 where his Honour said:

I think that where the party signing judgment does so without giving warning of its intention to do so, such party will generally, though perhaps not invariably, be in difficulties on a summons to set aside the judgment where a defence on the merits is disclosed.

Refshauge J continued and referred to other cases where that had been a significant factor.

13. In Davies v Pagett, a further factor was referred to by the trial judge and accepted by the Full Court as being of significance. That is the fact that prejudice is not limited to financial prejudice. The trial judge in that case had said:

But there is in my view another type of prejudice which falls for consideration and it is a prejudice which cannot really be ameliorated by way of costs. I refer to the anxieties which accompany litigation in which ordinary people become involved. The delays experienced in our civil courts are a threat to the administration of civil justice, they tend to bring the law into disrepute. Such delays promote confusion and frequently impede the ultimate fact finding processes, as time dulls memory. The Rules of Court were designed to promote the orderly procedures of litigation and the time limits imposed are intended as an aid to reasonably prompt disposal. Simple procedures are available to gain extensions of time and the courts, as the authorities illustrate, are very ready to set aside orders based on minor infringements of the rules or misunderstandings. But the courts, in my view, will not serve the community if they do not allow litigants to utilise (within reason) the procedures available, by the Rules, albeit such procedures may lead to interlocutory judgment. Frequently in these matters the courts will be reluctant to bind persons who suffer by their solicitors' omissions, but in the long run it must be a matter of degree and where solicitors are negligent clients may have their remedies.

14. That approach by the trial judge was commented on favourably by the members of the Full Court. I would particularly associate myself with the comments about the delays in civil courts being a threat to the administration of justice, and also to the care that must be taken in cases such as this where a party may have been affected by the conduct of their solicitors and the need for balancing where that is apparent.

15. In the light of the authorities to which I have referred, in my opinion, it is appropriate to separately consider in the context of this case:

(a) whether or not an arguable defence on the merits is disclosed;

(b) the reasons for the failure by the defendants to file a defence, including considering whether any notice of intention to file a default judgment was provided;

(c) the extent of delay in the application to set aside the judgment; and

(d) whether there is prejudice to the defendants that cannot be compensated by an order for costs.

16. In relation to the merits of the defence, the defendants have set out effectively in the affidavit of Mr Graham Michael Johnson, affirmed 2 December, the basis on which the defence will be made. In outline, the defendants say that the plaintiff was not entitled to claim for the two progress payments which form the basis of the judgment, and they raise an allegation of misleading or deceptive conduct as either a defence to or counterclaim in relation to the payments. In substance, the defendants say that the plaintiff commenced work before settlement of the purchase of the land without authority from the defendants and that caused considerable trouble for the defendants when their financier or finance broker found out.

17. The defendants point to a credible explanation for the plaintiff acting in that way. The defendants point to the fact that they were unaware that the plaintiff had commenced work until after the work had been undertaken. They rely upon the terms of clause 4 of the contract, which they say was not simply facultative but prevented the builder commencing work until title to the property was obtained. They point to the terms of the correspondence which led to the defendants signing the documents on 30 July as indicating an intention on the plaintiff's part not to rely upon those documents to authorise commencement of construction prior to title being obtained.

18. The issues which arise from the affidavit of Mr Johnson are:

(a) whether or not he and his wife were aware of the plaintiff commencing work on the site;

(b) whether or not he and his wife were aware of the meaning and significance of the documents that they signed for the purposes of the certifier and the obtaining of building approval; and

(c) the relationship between the documents that were signed and the letter of request which expressly contemplated the need to wait until the land became available.

19. Mr Robens, who appeared for the plaintiff, made submissions concerning the proper interpretation of clause 4 and the effect of what was represented in the documents signed on 30 July 2012. He also relied significantly upon the letter from Mr Colquhoun of Nelson & Co which was consistent with the defendants having made a conscious decision not to defend the claim.

20. Notwithstanding the submissions made by Mr Robens, in my view, in light of the evidence of Mr Johnson and the draft defence and counterclaim, which is annexure 33 to the affidavit, I am satisfied that there is a serious question to be tried as to whether or not the plaintiff was entitled under the contract to payment and whether or not the defendants suffered damage by reason of representations made in the documents as to how those documents would be used and hence an offsetting claim under the Competition and Consumer Act 2010 (Cth).

21. In relation to the operation of clause 4, there are clearly arguments both ways as to its operation. It is not appropriate to say more than that, in my view, there is a serious question to be tried. In relation to the claim of misleading and deceptive conduct, there is clearly a contest over precisely what the plaintiff knew as at 20 July 2012. There is also an issue about precisely what was meant by the reference in the letter to "commencing construction on your new property once the land becomes available and we achieve building approval". Whether the commencement of construction following the signing of the documents by the defendants on 30 July 2012 amounted to misleading and deceptive conduct will involve a more detailed examination of the chronology and state of knowledge of the parties than is possible to achieve on the present application.

22. However, I am satisfied that there is a serious question to be tried both as to the knowledge of the plaintiff and whether the plaintiff's reliance upon the documents following the terms of 20 July letter amounted to misleading and deceptive conduct.

23. The material before me discloses that no notice of intention to file for default judgment was given. The evidence before me discloses that there was no notice of intention to file for default judgment following the service of the statement of claim. That is a factor which would tend in favour of setting aside of the default judgment if a defence was disclosed.

24. I accept the defendants' submission that at least on the evidence before me the defendants personally are not at fault for failing to file a defence. Recognising that the evidence is not complete and that this issue may need to be determined either elsewhere or as part of these proceedings on a final and more considered basis, the evidence before me discloses that this is a case where the default appears to lie with the defendants' solicitors rather than the defendants personally. The material from the file from Nelson & Co does not clearly establish that the defendants were on notice of the filing of the statement of claim and does not disclose that they were advised of the necessity to do something in order to avoid default judgment being entered.

25. Remarkably, there does not appear to have been any correspondence with the solicitors for the plaintiff that might have made it more difficult for the plaintiff to seek default judgment. The terms of the file do not clearly disclose advice having been given or instructions having been received in relation to the possibility of not defending the judgment. It appears that the efforts of the solicitor for the defendants were focused on the possibility that the insurer of the defendants' previous solicitors might take over or otherwise be involved in the defence of claim. That continued up until and after the plaintiff had entered default judgment. In the light of the content in the file, I cannot, at this stage, place too much weight on the statement of the defendants' former solicitor in the letter dated 25 November 2013, that advice had been given on some unspecified date that there was no defence to the action by the plaintiff on the contract for the recovery of the amount of the invoices for work completed.

26. Although I should note specifically that the evidence before me is limited and there should be no suggestion in my comments of any final determination of the issue at this interlocutory stage, on the material presently before me, it is a matter to which the remarks in Collins Book Depot Pty Ltd v Bretherton [1938] VicLawRp 11; [1938] VLR 40 at 44 are applicable where Martin J said "where default is due to the carelessness of a party's solicitor, the party is not penalised to the extent of being shut out from litigating his claim or defence".

Delay in the application to set aside the default judgment

27. The defendants submit that they acted promptly once they became aware of the default judgment. They became aware of the default judgment on 22 October 2013. Understandably, they consulted the solicitors which they retained at that time as to what to do and then sought independent legal advice no later than 11 November 2013.

28. There was then a period of correspondence between the defendants' current solicitors and the plaintiff's solicitors. The application before the Court is dated 2 December 2013, slightly less than six weeks after the defendants first became aware of the default judgment. I am satisfied that the delay between becoming aware of the problem and the filing of the application was a reasonable one. While a delay between the entry of default judgment and the application being made is longer, that does not appear to me, to be the defendant's fault personally but appears to arise out of the manner in which the matter was handled by the defendants' former solicitors.

Prejudice to the defendant which cannot be compensated by a cost order

29. True enough, if the judgment is set aside, the plaintiff will lose the forensic benefit of having an enforceable judgment of the Court. That is not relevant prejudice for the purposes of this kind of application. The plaintiff has taken other steps to enforce the judgment as a consequence of the entry of the default judgment. However, it has been on notice since 23 October 2013 of the issues in relation to the default judgment and the likelihood that an application will be made to set it aside.

30. While I recognise the full force of the comments made by the trial judge in Davies v Pagett, which I have set out and referred to at [11] and [13] above, which were endorsed by the Full Court in that case, this is not a case where those considerations indicate that judgment should not be set aside. Although the genesis of the litigation in this Court appears to have been the requirement that the defendants provide security to their former solicitors by way of a mortgage, which, in turn, triggered the lapsing of a caveat, I note that alternative means of dispute resolution were available to the plaintiff and it has chosen not to pursue them. Therefore, I am not satisfied, in the absence of specific evidence, that this is a case where the prejudice to the plaintiff as a consequence of the setting aside of the default judgment is a prejudice, which cannot be met by an order for costs.

31. Taking all of those factors into account, I am satisfied that this is a case where the default judgment should be set aside. In particular, the existence of an arguable defence on the merits, the apparent inadequacy of the approach taken by the defendants' former solicitors, the absence of any notice being given to the defendants of an intention to apply for a default judgment, the absence of any significant delay in seeking to have the judgment set aside after the defendants became aware of it and the absence of any particular prejudice that cannot be accommodated by an order for costs make it an appropriate case to set aside the default judgment.

32. In relation to costs, the defendants submit that the appropriate order is the defendants pay the plaintiff's costs thrown away in the sum of $5,250 but that the plaintiff pay the defendants' costs of and incidental to the application dated 2 December 2013 on and from 27 November 2013. The plaintiff, on the other hand, submits the defendant should pay the costs of the application as well as costs thrown away by reason of the setting aside of the default judgment.

33. Generally speaking, in an application such as this, the party seeking to set aside the default judgment is seeking an indulgence and the usual order would be that the moving party pays the cost of the application and the cost thrown away by reason of the setting aside of the default judgment. That position might not be adopted if the resistance or continuing resistance to the application was unreasonable.

34. In the present case, the defendants made an offer prior to the making of the application to pay the plaintiff's costs thrown away by having the default judgment set aside. That would have avoided the necessity for the application and given the plaintiff a fixed sum costs order in its favour. That offer was not accepted. A slight increase in the offer was made on 8 January 2014, although that was clearly after the plaintiff would have incurred substantial additional costs in relation to the application. While parties to litigation are not obliged to give away a forensic advantage that they have, they are also obliged to conduct themselves reasonably and reasonably assess the prospects of being successful on an interlocutory application such as this. It was quite appropriate for the defendants to make an offer to pay the plaintiff's costs thrown away as a means of avoiding the necessity for a contested application. That would often be a significant factor in favour of not awarding costs to a respondent to an application which unsuccessfully opposed it. However, in the present case, I am not satisfied that it is appropriate to deny the plaintiff its party and party costs of opposition to the application.

35. Following the application, there was some correspondence between the solicitors for the plaintiff and the solicitors for the defendant. That was principally generated by the poor drafting of Mr Johnson's affidavit of 2 December 2013, which involved much inadmissible material and was clearly not drafted with sufficient attention to the applicable rules of evidence. In my view, particularly in the light of the poor drafting of the affidavit, the material put forward by the defendants was not so clear and compelling as to mean that the application should not reasonably have been opposed. Therefore, in my view, the appropriate order is that the defendants pay the costs of the application as well the costs thrown away by reason of the setting aside of the default judgment.

36. In my view, the case is one which needs to be prepared for hearing promptly. It is notorious that building disputes over relatively modest sums of money have the capacity to very quickly expand to court proceedings which are unsettleable because of the amount of costs payable to lawyers on both sides. Unfortunately, the dispute resolution provisions in the contract, which have, at all times, been available to the parties, do not appear to have been invoked in the present case. The clause in the contract is unsatisfactory, in my view, from a practical perspective in that it is discretionary rather than mandatory: see clause 28, paragraph (a).

37. It is obvious that significant amounts of costs have already been incurred in the two substantial interlocutory skirmishes between the parties. The defendants have indicated that they may wish to join third parties to the proceedings. Whether or not they do so, in my view, it is imperative that the parties properly consider resolving the matter without the need for substantial additional court processes at an early stage.

38. Therefore, the directions that I intend to make in addition to the orders on the application will both accommodate the rapid preparation of the proceedings for a hearing as well as a mediation at the earliest possible opportunity. If the matter does not resolve at that mediation, I would contemplate that there would be further alternative dispute resolution measures undertaken when the matter has been fully prepared for hearing.

1. The default judgment entered against the first and second defendants on 28 August 2013 is set aside.
2. The first and second defendants are to file a defence and any counterclaim against the plaintiff within 14 days of today.
3. The first and second defendants are to file and serve any third-party notices within 14 days of today and must, at the time of serving any such notice, also serve a document setting out the terms of these directions and a copy of each affidavit filed in the proceedings.
4. The defendants are to pay the plaintiff's costs of the application and costs thrown away by reason of the setting aside of the default judgment.
5. The proceedings are listed for further directions before me on 7 March 2014 at 10 am.
6. The plaintiff is to provide, no later than 28 February 2014, to each other party a proposed comprehensive set of directions to prepare the matter for hearing consistent with the following principles:
   • (a) any pleading shall be filed in a period no longer than the period specified in the rules;
   • (b) any order for discovery shall be limited to that which is necessary to do justice between the parties in the circumstances of the case;
   • (c) evidence at the hearing is to be given orally;
   • (d) the timetable shall have the matter prepared for hearing in no longer than six months from today;
   • (e) the timetable shall incorporate a mediation within three weeks of the date set for the filing of defences by any third party, either on terms as agreed between the parties or as directed by the Court;
   • (f) the timetable shall include a direction that:
     • (i) where any party is in default or likely to fall into default of any direction, it must apply by application under part 6.2 to have the matter relisted and will file and serve an affidavit fully disclosing the circumstances which give rise to the need to have the matter relisted and setting out the directions which it proposes to have made; and
   • (ii) if a party is in default of any direction for a period of more than seven days, each other party is under an obligation to have the matter relisted before the docket judge and shall do so by requesting the matter be relisted by emailing the docket judge's associate and each other party. Where that is done, the party in default must file an affidavit fully disclosing the circumstances of its noncompliance with the Court's orders no later than the day prior to the day on which the proceedings are listed.
7. Any party that does not agree with the timetable proposed by the plaintiff must propose a variation to the timetable consistent with the above principles. The parties are to consult with each other and attempt to agree on a proposed timetable. In the event that the parties agree, then the plaintiff is to provide by email to the Master's associate no later than 4 pm on Wednesday, 5 March, a copy of the directions which the parties propose be made. In the event that the parties are unable to agree, the plaintiff and each other party that does not agree with the timetable proposed by the plaintiff are to send by email to the docket judge's associate no later than 4 pm on 5 March 2014 a copy of the directions which the party says should be made.

I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of Master Mossop.