Aretzis Properties Pty Ltd v Creative Cooks Pty Ltd
[2020] SADC 119
•28 August 2020
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Appeal Against a Master's Decision)
ARETZIS PROPERTIES PTY LTD v CREATIVE COOKS PTY LTD & ORS
[2020] SADC 119
Judgment of Her Honour Judge Bochner
28 August 2020
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - ENDING PROCEEDINGS EARLY - DEFAULT JUDGMENT - SETTING ASIDE
Appeal from Master - whether default judgment was entered irregularly - whether appropriate warning was given prior to entry of judgment - whether the Master was required to consider whether the respondents had an arguable case when determining whether the default judgment should be set aside.
Held: appeal allowed.
Graziano v Graziano [2010] SASC 320; Gemini Property Investments Pty Ltd v Woodards Investments Pty Ltd & Ors [2000] SASC 210; Yang v Finder Earth Pty Ltd [2019] VSCA 22; Lauro v Minter Ellison [2020] SASC 137; Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344; Nalbandian v Commonwealth of Australia [2017] FCA 45; Thorne v Kennedy [2017] HCA 49, considered.
ARETZIS PROPERTIES PTY LTD v CREATIVE COOKS PTY LTD & ORS
[2020] SADC 119
On 15 May 2019, a default judgment was entered in this matter following the failure of the respondents to file a defence. The respondents applied to have that judgment set aside and on 25 March 2020, orders were made by a District Court Master setting aside the judgment ex debito justitiae. The applicant now appeals the Master’s decision to set aside the judgment.
Background
On 26 March 2019, the applicant issued proceedings against the respondents for breach of a lease. The parties originally entered into a lease in October 2009, for a period of seven years, with options for renewal. In October 2016, a Deed of Extension and Variation of Lease (“the lease extension”) was executed by them with the effect that the lease was extended by an additional period of six years. By early 2017, however, the respondents were suffering from financial difficulties and ceased paying their rent. In December 2017 a notice to remedy breach was served on them, and in January 2018 the applicant terminated the lease. The applicant says that up to the date of termination, the amount owed by the respondents was $94,564.85, made up of rent, outgoings and interest.
In addition to the sum of $94,564.85, the applicant seeks from the respondents further damages for loss of rental income up until the end date of the lease, in October 2022. The applicant also alleges that there were further breaches of the lease by the respondents including a failure to clean the premises and remove rubbish, and to make good. The amounts claimed in the statement of claim comprise a number of separate components. The first component is the sum of $94,564.85 as set out above, the second component is for loss and damage between the termination date and 22 March 2019, in the sum of $282,984.68, the third component is for loss of rental income to 11 October 2022 in the sum of $789,461.31, and the final component is for failure to clean, remove rubbish and make good. It is clear that part of this claim is liquidated and part is unliquidated.
Notices of acting and address for service were filed by lawyers on behalf of the second and third respondents on 4 April 2019. A notice of acting was not filed on behalf of the first respondent until September 2019. Because the second and third respondents were served on different dates, their defences were due on different dates, the later of those dates being 1 May 2019.
On 2 May 2019, the applicant’s solicitor contacted the respondents’ solicitor by email, noted that his clients were in default of filing defences, and reserved all of the applicant’s rights in respect of that default. The applicant did not elucidate what was meant by reserving “all of the applicant’s rights”. The applicant did not receive a response to this email. No defence was filed on behalf of the respondents.
The applicant sought and obtained default judgment against the respondents on 15 May 2019. The judgment text reads:
By reason of the default of the 1st, 2nd and 3rd Defendants’ (sic) in failing to file a defence to the statement of claim THE COURT ORDERS that the plaintiff recover fully from the 1st, 2nd and 3rd Defendants the sum of $94,564.85 being the liquidated amount of the action as pleaded in paragraph 9 of the statement of claim and the balance of the plaintiff’s claim is referred to the directions hearing on 5 June 2019 at 12 pm.
The judgment was served on the respondents’ solicitor on 23 May 2019. On 26 July 2019, the respondents applied to have the judgment set aside.
The Master’s decision
The application to set aside the default judgment was heard on 11 September 2019, and the Master’s decision was delivered on 25 March 2020.
After describing the background to the claim, the Master set out in full the relief sought by the applicant in Part 3 of the statement of claim. She noted that both parties accepted that there was a typographical error in paragraph 19.1; this was not an issue in contention. In addition to the background that I have already outlined, she noted a number of additional factors. The first of these is that the respondents’ solicitor was away from the office because of illness from 8 April 2019 until 29 April 2019. The second is that when the default judgment was served on the respondents’ solicitor, an out of office response was received which advised that he was on leave from 17 May to 3 June 2019.
At [37], the Master noted that her concern was whether the judgment was irregular. She then went on to state:
The position is quite clear if the judgment is irregularly obtained:
Where a judgment in default has been obtained irregularly, the defendant will normally be able to set it aside ex debito justitiae.[1]
(citations omitted)
[1] Decision 9 of 2020 at [43].
The Master then referred to The Laws of Australia, and quoted from the paragraph dealing with the setting aside of irregularly obtained default judgments, highlighting the words:
… and the judgment entered must follow the relief claimed.[2]
[2] Decision 9 of 2020 at [44].
At [48], the Master noted that the amount of the judgment, while correlating with the amount sought in paragraph 9 of the statement of claim, was not the same as the amount sought in the prayer for relief, at paragraph 19.1. She then set out the terms of rule 99 of the District Court Civil Rules 2006 and of rule 67 of the Supplementary Rules. She noted that Supplementary rule 67 requires a statement of claim to be split into four parts, the fourth part setting out the remedies sought. She referred to Australian Civil Procedure[3] and said:
Dr Cairns in his seminal textbook “Australian Civil Procedure” states that
The relief claimed in a proceeding is stated in the statement of claim in a prayer that covers all the relief the plaintiff seeks.[4]
…
Dr Cairns notes that in the other Australian States and Territories the statement of claim need not follow a particular form. Provided the pleading rules are followed, he notes that commonly the document consists of:
… the introductory allegations, or matters of inducement followed by the substantive allegations, and finally, the claim of the remedy sought or the prayer for relief.[5]
[3] B C Cairns, Australian Civil Procedure (Law Book Co, 12th ed, 2020) [7.90] (The Master does not state which edition she refers to; I have assumed that she is referring to the 12th edition, as the most recent.)
[4] Decision 9 of 2020 at [56].
[5] Decision 9 of 2020 at [60].
She then concluded:
Having regard to these rules and the comments of Dr Cairns I am driven to the conclusion that if a default judgment is to be entered, it must be entered based on contents of Part 3 - the remedies sought, or the prayer for relief, rather than for an amount set out in the particulars of claim.
In arriving at this conclusion, I am reminded of the nature of the default judgment which I have stated earlier, namely, that it is administrative in nature, entered by a member of the registry staff, with no exercise of judicial function. As such, administrative staff cannot be expected to make to assessments as to which part of the statement of claim they should enter judgment on.
If judgment was to be entered for a fixed sum it should have been for the amount in paragraph 19.1 (although I suspect that the reason that it was not, was because that figure is comprised of both liquidated and unliquidated damages), or simply for damages to be assessed.
I have considered the correspondence from the court and the reference to a Master interpreting the judgment to be for the said sum and damages to be assessed. In considering the request, the Master was not considering whether the judgment had been regularly entered but rather the extent of the judgment. Further, he was acting administratively, rather than making a judicial determination. As such, his views and the letter are irrelevant to determining whether the judgment is irregular.
Mr Belperio raised the issue of the arithmetical errors in the statement of claim as being a ground for there being an irregular judgment. If the judgment had been entered based on the amount in paragraph 19.1, or for damages to be assessed, his argument would have some force. I have regard however to the case of Armitage v Parsons to the effect that if the irregularity arose from an accidental slip or admission that could be corrected the judgment need not be set aside.
In all the circumstances, I therefore find that the default judgment was irregular and should be set aside ex debito justitiae without further consideration of the merits of any defence.[6]
(footnotes and citations omitted)
[6] Decision 9 of 2020 at [62]-[67].
The Master also considered that the warning given by the applicant that it may seek to enter default judgment in its favour was inadequate. She said:
Ms Walker argues that the rather ambiguous statement in an email the day after the expiry of the time in which to file a defence is sufficient to constitute a warning and that entering judgment 13 days after the email gave the defendants sufficient time to file a defence.
Whilst she accepts that Mr Coluccio was on sick leave for most of that time, Ms Walker further argues that Mr Coluccio had 2 full business days to respond to the email or file a defence after his return.
With respect, I once again disagree. The email simply says that the plaintiff reserves its rights. That could mean many things, including seeking an order for costs. There were many options available to the plaintiff other than a default judgment. Given the severity of the penalty, if the plaintiff wished to rely on the email as warning to sign judgment, then it should have been more explicit.
Further, whilst I accept that the plaintiff was unaware that Mr Coluccio was on sick leave, it is quite conceivable that a practitioner who has been absent for three weeks on sick leave might require more than 2 days to apprise himself of what has happened on his files in his absence.
If I were not already convinced that the judgment should be set aside for irregularity, the lack of appropriate warning would have confirmed the decision.[7]
[7] Decision 9 of 2020 at [72]-[76].
Finally, the Master considered the fact that an appearance was not entered for the first respondent until 2 September 2019. She accepted the submission made on its behalf, that the second and third respondents believed that it had been deregistered, and that their solicitor had not checked this instruction (despite the applicant exhibiting a current ASIC search to FDN 11, which was filed on 22 May 2019). She granted leave to the respondents to amend their application to seek the setting aside of the default judgment against the first respondent as well as the second and third, and indicated that she would set aside the judgment against all of the respondents. She also considered that any delay by respondents in seeking to set aside the judgment was not significant, and was not sufficient to warrant the dismissal of the respondents’ application.
The grounds of appeal
There are three grounds of appeal. The first is that the Master erred in law by finding that the default judgment was entered irregularly. The second is that she erred in law, or erred in law and fact, in finding that the applicant failed to give appropriate warning to the respondents prior to the entry of the default judgment. The final ground is that the Master erred in finding that she was not required to consider whether the respondents had an arguable case, when determining whether the default judgment should be set aside.
The arguments of the applicant
The applicant says that the Master was in error in finding that the default judgment was entered irregularly because it was not in the precise form of the relief sought in the statement of claim’s prayer for relief. It argues that the judgment was for the liquidated amount of the claim, which formed part of the total amount sought in Part 3 of the statement of claim. The amount of the judgment was for the loss pleaded and particularised in paragraph 9 of the statement of claim. The balance of the claim, which requires consideration of mitigation of loss, amongst other things, was referred to a directions hearing for assessment. The prayer for relief identified the two separate types of relief sought: the liquidated sum sought at paragraph 9, and a specific sum, which is the applicant’s claim for the unliquidated portion of the claim, as pleaded at paragraphs 10–12.
The applicant submits that the two sources relied on by the Master, The Laws of Australia and Australian Civil Procedure, do not require the form of a default judgment to match precisely the relief sought in the statement of claim. Nor, it submits, did the Master rely on any other authority in reaching this conclusion.
The applicant argues that the Rules and the Supplementary Rules do not require the prayer for relief to set out the separate components of the relief sought; these have already been pleaded and particularised in the body of the statement of claim. It submits that to do so would, arguably, be in breach of the pleadings rules, which require the pleading to be as brief as the nature of the case allows.
Finally, the applicant submits that, if the Master were correct in her approach, that the judgment must mirror exactly the wording of the prayer for relief, there would be authorities to support this. There are none; it can be concluded from this that the Master erred in finding that the judgment was irregular.
As to the second ground of appeal, the applicant contends that, while it may be prudent to warn of an intention to seek a default judgment, this is not a requirement imposed by the Rules, or by the authorities. The most that can be said of a failure to warn is that it may be a significant factor to take into account.
The Master made an error of law, in finding that failure to warn rendered a default judgment irregular.
In any event, the applicant says that the warning that it gave to the respondents was sufficient. The applicant advised the respondents’ solicitor that his clients were in default of their obligation to file their defence, and that it reserved its rights. The applicant then waited a further 13 days before taking any steps.
The applicant says that the right that arises when a respondent fails to file a defence, is the right to obtain default judgment. This is unarguable, and it is not suggested by the respondents’ solicitor that he did not understand what was meant by the applicant, when it made this statement. There was no other correspondence or interaction between the parties which would lead to a conclusion that this step would not be taken.
The applicant also argues that the Master erred in determining how much notice was given to the respondents’ solicitor. The Master concluded that two days’ notice was given when in fact 13 days’ notice was given. This amounts to an error in fact.
The third ground of appeal is dependent on the applicant’s success on the first ground appeal. The applicant says that, if the judgment was entered regularly, then the Master erred in law in not considering the merits of the respondents’ defence.
The applicant asserts that the respondents have not demonstrated an arguable defence. They admitted liability to the applicant’s letting agent by way of an email dated 16 December 2017,[8] and again admitted liability in paragraphs 16 and 17 of the proposed defence, although they plead that the applicant has not taken sufficient steps in mitigation. The respondents allege, however, that they were coerced into signing the lease extension.
[8] FDN 29 at DJH-2.
The applicant says that the allegation of coercion cannot be sustained. It is inconsistent with the admission of liability, and in any event, is incompatible with the facts of this matter. No evidence of unlawful threats or unconscionable conduct has been adduced by the respondents. Further, the applicant says that it is the respondents’ own evidence that at the time that the lease was due to expire, the respondents did not want to close the business. While the applicant may have put some commercial pressure on the respondents to make a decision in respect of the extension, that pressure did not amount to illegitimate conduct.
The respondents’ position
The respondents contend that the Master was correct in finding that the judgment was entered irregularly, on the basis that it related only to part of the liquidated sum pleaded in paragraph 9 of the statement of claim. They argue that because the judgment did not follow the relief claimed in paragraph 19 of the statement of claim (the prayer for relief) it was irregular.
As to the second ground of appeal, relating to notice being given prior to the entry of default judgment, the respondents submit that this is no more than a complaint as to the way in which the Master exercised her discretion. As a result, no error has been identified. The respondents submit that no warning of the prospect of a default judgment was given by the applicant and that the words in the applicant’s email of 15 May 2019, that the applicant reserved all of its rights, did not amount to a warning in this regard.
In addition, the respondents rely on evidence of the second respondent’s ill‑health and distress caused by the litigation as a reason why he was unable to provide instructions to have a defence filed within the time provided by the rules. They also rely on the absence from the office of their solicitor as a result of ill-health from 8 April 2019 until 29 April 2019.
In relation to the applicant’s submission that the Master had made an error of law in stating that the respondents’ solicitor had only two days’ notice, the respondents say that this does not amount to a factual error. The respondents say that the two days referred to by the Master were the two days between his return from sick leave (29 April 2019) and the date on which he received the applicant’s email advising of the failure to file a defence (2 May 2019).
As to the final ground of appeal, the respondents say that this is entirely dependent on the success of the first ground. The respondents accept that if the judgment was entered regularly, then the merits of the defence would need to be considered.
The respondents say that the draft defence discloses an arguable case which would merit a trial. Their allegation of coercion contains substantial particulars. In addition, an affidavit has been provided by the second respondent which sets out their case in this regard. The respondents also maintain that quantum has not been established and that, in particular, the applicant has failed to show that it has mitigated its loss appropriately.
Consideration
The principles to be applied in determining whether a default judgment should be set aside were not in contention between the parties. As a result, I do not intend to set them out in any great detail here.
Master Lunn set out the principles relating to the setting aside of a regularly entered judgment in Graziano v Graziano[9] as follows:
Where a judgment has been regularly obtained, the Court does not usually set it aside unless the defendant has filed an affidavit of merits showing that he has an arguable defence to the claim. The onus is on the defendant to depose a bona fide and plausible defence, and the application will fail if he does not do so. The practice of the Court is that if the defendant only deposes to a good defence to part of the judgment, the Court does not set aside the whole judgment, but at the best for the defendant merely varies it by reducing to the undisputed amount. [10]
(citations omitted)
[9] [2010] SASC 320.
[10] [2010] SASC 320 at [11].
Where a judgment has been entered irregularly, the position is as set out by Debelle J in Gemini Property Investments Pty Ltd v Woodards Investments Pty Ltd & Ors:[11]
[15] There remains the question whether the judgment was irregularly obtained and, therefore, should be set aside ex debito justitiae. Where a judgment in default has been obtained irregularly, the defendant will normally be able to set it aside ex debito justitiae: Watson v Anderson (supra) at 333. A judgment will have been obtained irregularly if it is entered for a sum in excess of the amount actually due, or if judgment has been entered before the date by which a defence had to be filed, or if it has been entered where in truth the statement of claim had not been served.
…
[18] While it is well established that a defendant would normally be able to get a judgment irregularly entered set aside ex debito justitiae, that very proposition includes within it the notion that it is not an invariable rule that it would be set aside. If an application is made to amend the judgment before a defendant applies to set it aside, the court may be prepared to allow the amendment: see Building Guarantee and Discount Co Ltd v Dolejsi [1967] VR 764. However, as that decision shows, there are decisions to the effect that the applications made after the application to set aside judgment, the court will not always allow the amendment but will set aside the judgment.
[11] [2000] SASC 210.
Thus, it is important for the respondents to establish that the judgment was entered irregularly; if so, the burden that they will face in having the judgment set aside is less onerous than if the judgment had been entered regularly.
Was the judgment entered irregularly?
The Master found that the judgment had been entered irregularly, because the judgment was not in the same terms as the prayer for relief set out at paragraph 19 of the statement of claim. In making this finding, she did not rely on any authority. She did, however, rely on a number of passages from The Laws of Australia and Australian Civil Procedure. In his argument before me, Mr Belperio for the respondents was also unable to point to any authorities which supported this position. The only case referred to by Mr Belperio in this regard was the case of Yang v Finder Earth Pty Ltd.[12] In my view, this case is not analogous, because it dealt with a situation where the judgment entered was for a liquidated sum when in fact it should have been for damages to be assessed.
[12] [2019] VSCA 22.
In my view, the Master erred in finding that the judgment was irregular because the relief granted was not in the same terms as that sought in the prayer for relief. While The Laws of Australia make it clear that “the judgment entered must follow the relief claimed”, this is not the same as requiring that the judgment be in identical terms to the relief sought. Nor do the passages relied on from Australian Civil Procedure assist. They only provide a broad description of how relief should be claimed in a statement of claim.
Nor do the Rules of Court which were in operation at the time provide any assistance to the respondents. Rule 229 simply provided:
(1)In the following cases, a plaintiff may enter judgment in default without first obtaining the Court's permission to do so—
(a) if a defendant does not file a defence to a liquidated claim within 28 calendar days after service of the plaintiff's statement of claim—the plaintiff may enter judgment in default of a defence against the defendant for an amount not exceeding the amount of the liquidated sum plus interest;
(b) if a defendant does not file a defence to an unliquidated claim within 28 calendar days after service of the plaintiff's statement of claim—the plaintiff may enter judgment in default of a defence against the defendant for an amount to be assessed;
(c) if a defendant does not file a defence to a claim for the detention of goods within 28 calendar days after service of the plaintiff's statement of claim—the plaintiff may enter judgment in default of a defence against the defendant—
(i) for delivery of the goods; or
(ii) for the value of the goods to be assessed.
In effect, the rule allows a plaintiff (to use the terminology of the old Rule) to enter a default judgment for a liquidated claim up to the amount of the claim as pleaded. It does not require the plaintiff to enter a default judgment in identical terms to the relief sought in the prayer for relief.
Paragraph 19.1 of the prayer for relief seeks:
An order that the Defendants and each of them pay to the Plaintiff the sum of $377,549.53, being for the loss and damage pleaded at paragraphs 10 and 13 of this pleading;
It is clear that the sum of $377,549.53 is made up of the amounts sought at paragraphs 10 and 13. Once the typographical error has been taken into account, so that the paragraphs referred to are 9 and 12, it is clear that the applicant is seeking judgment in the sum of $94,564.85 as a liquidated amount (as sought in paragraph 9) and the sum of $282,984.68 (as sought in paragraph 12) as an unliquidated amount. The only confusion that might arise in the mind of the respondents is in relation to the typographical error referring to the paragraph numbers. The respondents have conceded that this is not a fatal error, and have not suggested that it caused any confusion for them. It is clear from the terms of the judgment itself that judgment has only been entered for the liquidated amount as pleaded.
There is no reason why this should be regarded as an irregularity. While the drafting of paragraph 19 of the statement of claim may be somewhat infelicitous, and while a “rolled up” claim such as that appearing here may generally be undesirable, it cannot be said that the judgment does not follow the relief claimed. Paragraph 19.1 of the statement of claim refers specifically to paragraph 10 (although it should have referred to paragraph 9) as being a component of the dollar sum sought. The judgment refers specifically to paragraph 9 as the basis for the amount of the judgment entered. The balance of the applicant’s claim is referred to a directions hearing for an assessment of damages. It is clear that the judgment is for the amount sought in paragraph 9 of the statement of claim, being a liquidated sum, and specifically forming a component of the total sum sought in paragraph 19.1.
The judgment is not irregular on this basis.
Was insufficient warning given to the respondents?
Firstly, it is important to note that, while it is good practice to warn of an intention to seek a default judgment, it is by no means mandatory. This was affirmed as recently as 30 July 2020, by Bleby J, in Lauro v Minter Ellison,[13] where he said:
The essence of the appellant’s submission is that there is an established practice to warn before default judgment is entered, and that a failure to do so renders the judgment irregular. I do not accept this. Such a broad proposition would be contrary to the terms of rule 234(2) of the District Court Civil Rules 2006 (SA).[14]
[13] [2020] SASC 137.
[14] Ibid at [77].
In any event, I am of the view that sufficient warning was given by the applicant. The applicant advised the respondents that they were in default of filing the defence. It advised that it “reserved all of its rights”. Where respondents have failed to file a defence in accordance with the rules of court, it is difficult to understand what other rights would be reserved, save for the right to enter a default judgment. While this argument may have some merit if the parties were unrepresented, where the respondents are represented by lawyers, there should be no doubt in their minds as to what is meant here. The statement that the applicant “reserved all of its rights” can have no other meaning in these circumstances.
I also have formed the view that the respondents’ submissions in relation to the timing of the warning are misconceived. The applicant did not apply to have judgment entered until 14 days after the defences should have been filed, and 13 days after it gave notice to the respondents of its intention. The absence of the respondents’ solicitor from the office, whether as a result of ill-health or otherwise, is in my view completely irrelevant. The Rules do not require a party to file a defence within a certain amount of time unless their solicitor is unwell in which case further time is allowed. It is not for the applicant to speculate as to why there is a delay in filing a defence, nor should leeway be given, either automatically or retrospectively, to a party because of the ill-health of their lawyer particularly where that indulgence has not been sought. An applicant is entitled to expect a defence to be filed when it is required by the Rules unless an indulgence is sought by the respondent prior to the expiry of that time limit.
Where a party instructs a lawyer, the party should be able to rely on that lawyer to file a defence within the time required, regardless of their personal circumstances. Where a lawyer is a member of a law firm there should be sufficient safeguards in place to ensure that all crucial deadlines are met, even in situations where the lawyer with the conduct of the file is away by reason of sickness, holiday or other circumstances.
It is important to note that, in fact, the default judgment was not sought during the period that the respondents’ solicitor was on leave. The advice from the applicant that it was intending to seek a default judgment was given after the respondents’ lawyer returned from leave and was not acted upon until nearly two weeks later. In these circumstances, there is no excuse for the failure to communicate with the applicant, either by serving a defence, seeking an extension of time by way of letter, or filing an application for an extension of time to file the defence.
I conclude that the notice given by the applicant that it intended to seek a default judgment was appropriate, both in its terms, and in the length of time that it allowed to remedy the default. I am of the view that the Master erred, both in fact and in law, in finding otherwise.
Given my finding that the judgment was entered regularly, it follows that I must conclude that the Master erred in failing to consider whether the respondents have an arguable defence. For completeness, I will consider whether such a defence has been demonstrated.
Do the respondents have an arguable defence?
The respondents’ proposed defence is found at exhibit DJH–11 to FDN 29. I note the respondents admit that the first respondent entered into a lease with the applicant on 12 October 2009 for a period of seven years. They also admit that the second and third respondents jointly and severally guaranteed the obligations of the first respondent. They further admit that they signed the lease extension. They admit that the first respondent breached the lease by failing to make the payments required under the lease. They admit that a notice to remedy breach was issued to the first respondent on 22 December 2017, and that the applicant terminated the lease on 12 January 2018. Further, the respondents admit that the applicant has suffered loss.
The crux of the respondents’ defence is set out in paragraph 7 of the proposed defence. The second and third respondents say that they were coerced into signing the lease extension. Paragraph 7 reads:
7. In response to the allegations in paragraph 4 of the Statement of Claim the Second and Third Defendant’s (sic) state as follows:
7.1Creative Cooks Pty Ltd was set up at the behest of the Plaintiff in order to sign a Lease with the said Plaintiff.
7.2Paragraph 4.1 is admitted;
7.3As to paragraph 4.2 it is admitted that there was a Deed of Extension and Variation (“Extended Lease”) dated 10 October 2016, between the First Defendant and the Plaintiff, however the Second and Third Defendant’s (sic) state that they were coerced into signing the Deed.
7.3.1The Plaintiff’s director Dimitri Aretzis (“Dimitri”) had various discussions with the Second Defendant, prior to the preparation of the Extended Lease, outlining that in the event the First Defendant did not sign an extension of Lease, then the Plaintiff would terminate the lease altogether.
7.3.2The Plaintiff made it clear that the Plaintiff had significant other interest in the Premises, and that another retailer was willing to sign a Lease for the Premises.
7.3.2.1The Plaintiff presented at the very least that the adjoining business, being Super Cheap Auto, were prepared to Lease the Premises in the event the First Defendant did not sign a Lease extension immediately.
7.3.3The Plaintiff was aware that the Creative Cooks Business was in financial difficulty.
7.3.4Despite paragraph 7.3.3, the Plaintiff made no efforts to suggest an alternate option to renew the Lease or seek a variation of the Lease, or even to offer a month to month basis, for which the Lease already provided for, at clause 16.
7.3.5Further, despite being aware of the financial distress of the Second and Third Defendants, the Plaintiff ignored the option to renew in the Lease, being a period of 5 years, and requested that a new Lease be entered into for an additional period of 6 years.
7.3.6In the event the right to renewal provided for in the Lease, was taken, the new Lease would have commenced on 12 October 2016 until 11 October 2021.
7.3.7Despite the existence of a renewal period, and despite the Plaintiff’s awareness of the financial circumstances of the Creative Cooks Business, along with the personal financial circumstances of the Second and Third Defendants, the Plaintiff proceeded to request that the First Defendant enter into a new Lease in order to remain at the Premises.
7.3.8The Plaintiff was wilfully indifferent towards undertaking the new Lease, knowing that the Creative Cooks Business, along with the Second and Third Defendants would be unlikely to financially survive a period of 6 years.
7.3.9Rather than merely seeking the right to renewal as already outlined by the original Lease, the Plaintiff coerced the First Defendant to enter into a new Lease by making false claims as to the desire of the Premises.
7.3.10Failure of the Second and Third Defendants to obtain legal advice with respect to both the Lease, and the Extended Lease, which consequently failed to bring to their attention the Holding Over clause under the Lease;
7.3.11If such a clause was brought to the attention of the Defendants, then it may have enabled the First Defendant to enter a month to month Lease, being reflective of the financial position of the Creative Cooks Business.
7.3.12Had a holding over period been offered, or a smaller extension then the Plaintiff would have been able to offer the Premises to the other retailers and the Defendant’s (sic) would not have suffered such losses and incurred this matter.
I note the respondents make no plea of undue influence, unconscionable conduct, misrepresentation, or the like. They do not plead that they had (or have) a special disability or disadvantage vis-à-vis the applicant.
The concept of financial coercion or duress was examined by the New South Wales Court of Appeal in the case of Australia and New Zealand Banking Group Ltd v Karam[15] (“Karam”). The Court said:
The vagueness inherent in the terms “economic duress” and “illegitimate pressure” can be avoided by treating the concept of “duress” as limited to threatened or actual unlawful conduct. The threat or conduct in question need not be directed to the person or property of the victim, narrowly identified, but can be to the legitimate commercial and financial interests of the party. Secondly, if the conduct or threat is not unlawful, the resulting agreement may nevertheless be set aside where the weaker party establishes undue influence (actual or presumptive) or unconscionable conduct based on an unconscientious taking advantage of his or her special disability or special disadvantage, in the sense identified in Amadio. Thirdly, where the power to grant relief is engaged because of a contravention of a statutory provision such as s 51AA, s 51AB or s 51AC of the Trade Practices Act, the Court may be entitled to take into account a broader ranger of circumstances than those considered relevant under the general law. Pursuant to both Trade Practices Act provisions and the Contracts Review Act, the relative strengths of the bargaining positions of the parties, and their ability to negotiate terms, will be relevant. However, it does not follow that because, for the purposes of s 9(2)(a) of the Contracts Review Act, there was a material inequality of bargaining power, a contract between such parties will necessarily be set aside. Most “contracts of adhesion” will fall into that category, but most will be valid.
…
Where the statutory definitions operate, there is no necessary condition prescribed, but merely a range of factors to be taken into account. These factors require the Court to look at the situation of each party, their relationship and the terms of the transaction. The fact that one party is in financial difficulties, of which the other party is aware, as in the present case, will be relevant, but not sufficient to establish unconscionable conduct on the part of the stronger party. Something more is required and may be sought in the terms of the particular transaction. However, even unusual terms will not necessarily demonstrate taking unconscientious advantage of the situation of the weaker party. The greater the financial risk, the greater the justification for increased security. [16]
[15] [2005] NSWCA 344.
[16] Ibid at [66] – [68].
In Nalbandian v Commonwealth of Australia[17] (“Nalbandian”), Burley J examined the concepts of unconscionable conduct and economic duress. He said:
It is to be noted from the foregoing that in the case of unconscionable conduct it is necessary for the applicant to establish first, the existence of a disabling condition that seriously affects the ability of the applicant to make a rational judgment as to his or her own best interests. Secondly, it must be established that the respondent possess the relevant predatory state of mind such that the respondent obtained the benefit of the bargain on the basis of unfair exploitation of the weakness. In the case of economic duress, threatened or actual unlawful conduct on the part of the respondent must be demonstrated.[18]
[17] [2017] FCA 45.
[18] Ibid at [57].
In the recent decision of the High Court in Thorne v Kennedy,[19] the Court considered the question of undue influence and unconscionable conduct in the context of a challenge to a pre-nuptial agreement. While the question of financial duress was raised, the Court was not required to consider the correctness or otherwise of the decisions in Nalbandian and Karam. The plurality, at [29] said:
… it is not necessary to address the arguments in favour of or against the conclusion of the New South Wales Court of Appeal that duress at common law requires proof of threatened or actual unlawful conduct. Nor is it necessary to consider whether the recognition of lawful act duress adds anything to the doctrine concerned with unconscionable conduct.
(citations omitted)
[19] [2017] HCA 49.
Nettle J, however, made it clear that the decisions in Nalbandian and Karam represent the state of the law as it currently stands, and absent careful consideration by the High Court:
Nevertheless, there would need to be detailed argument and deep consideration of the ramifications of departing from Karam before this Court would contemplate that course, and, although counsel for Ms Thorne essayed something of that task in written submissions, in oral argument it was accepted that what was said about illegitimate pressure by lawful means was subsumed by what was advanced under the rubric of unconscionable conduct.[20]
[20] Ibid at [73].
As a result of these decisions, I am left with the conclusion that to succeed in a claim of economic or financial duress, the respondents must demonstrate that the conduct of the applicant which led to the respondents entering into the lease extension was unlawful. This allegation has not been made by the respondents, nor is it made out in the affidavit material relied on by them.
Indeed it appears that some of the particulars relied on by the respondents in paragraph 7 of the proposed defence amounted to no more than the applicant exercising its rights in accordance with the lease. For example, the respondents plead that the applicant indicated that it would terminate the lease altogether if the first respondent did not sign the lease extension. This is a curious plea given that the first lease was due to expire in any event. Paragraph 7.3.4 of the proposed defence pleads that the applicant made no effort to suggest an alternate (sic) option to renew the lease or seek a variation of the lease or offer a lease on a month to month basis. Given that there is no obligation on the applicant to do any of these things it is difficult to understand how its failure to do them would amount to coercion. Paragraph 7.3.7 is also curious. It pleads that the applicant requested the first respondent enter into a new lease to remain at the premises, despite the applicant’s awareness of the respondents’ financial circumstances. It begs the question, on what other basis would the first respondent be entitled to remain in the premises, without signing a new lease.
FDN 29 also fails to assist the respondents. The second respondent states that neither he nor the third respondent sought legal advice before entering into the lease or the lease extension.[21] He makes it clear that they were unwilling to close the business at that time.[22] I note that the second respondent says in his affidavit that the applicant failed to bring various conditions of the lease to his attention.[23] In the absence of any duty on the part of the applicant to do so, it is unclear to me why this would amount to coercion.
[21] At [8] and [14].
[22] At [12].
[23] At [17].
It appears that many, if not most of the instances, relied on by the respondents in seeking to establish coercion, amount to no more than the applicant advising that it would assert its legal rights if the respondents did not sign the lease extension. Other instances appear to be failures by the respondents to obtain legal advice or to read the lease documents carefully, which they now wish to sheet home to the applicant. In respect of the allegation that the applicant failed to take into account the first respondent’s poor financial position, I note the statement of the New South Wales Court of Appeal in Karam, where it said:
… Once it is accepted, correctly, that the perilous financial circumstances of the Company were “not the Bank’s doing”, there is no basis for saying that the Bank, in a legal sense, subjected the Karams to pressure.[24]
[24] At [95].
In my view, the same approach must be taken here; given that the parlous financial state of the first respondent was not in any way attributable to the conduct of the applicant, this in itself does not amount to the applicant putting undue pressure on the respondents.
Finally, I am unable to find that the ill-health of the second respondent is in any way relevant. Given that there is no pleading that his ill-health resulted in the signing of the lease extension, it is difficult to assign it any relevance.
As a result, I am unable to reach the conclusion that the respondents have an arguable defence. They have not pleaded undue influence, unconscionable conduct or any statutory breach; they have relied solely on “coercion”. It is clear that such a defence cannot be maintained in the circumstances of this case where there is no illegality in the conduct of the applicant.
In all of the circumstances, the appeal must be allowed.
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