Crouch v Graham (No 2)

Case •

[2008] WADC 17

•

8 FEBRUARY 2008

JURISDICTION     :   DISTRICT COURT OF WESTERN AUSTRALIA

IN CIVIL

LOCATION:   PERTH

CITATION:   CROUCH & ORS -v- GRAHAM & ANOR (No 2) [2008] WADC 17

CORAM:   GROVES DCJ

HEARD:   30 JULY 2007

DELIVERED          :   8 FEBRUARY 2008

FILE NO/S:   CIV 361 of 2006

BETWEEN:   DARRELL JOHN CROUCH

First Plaintiff

SPECTO PTY LTD (ACN 104 522 036)
Second Plaintiff

LYDIA HELENE MITTON
Third Plaintiff

SHAUN SAYERS
Fourth Plaintiff

AND

KELLY GRAHAM
First Defendant

WILLIAM MASON
Second Defendant

Catchwords:

Practice and Procedure - Default judgment - Application to set aside - Credible defence - Need for a real prospect of success

Legislation:

Nil

Result:

Appeal allowed

Representation:

Counsel:

First Plaintiff                  :     Mr I F Tait

Second Plaintiff             :     Mr I F Tait

Third Plaintiff                :     Mr I F Tait

Fourth Plaintiff              :     Mr I F Tait

First Defendant              :     Mr R W Douglas

Second Defendant         :     No appearance

Solicitors:

First Plaintiff                  :     Tait & Co

Second Plaintiff             :     Tait & Co

Third Plaintiff                :     Tait & Co

Fourth Plaintiff              :     Tait & Co

First Defendant              :     Salter Power

Second Defendant         :     GG Legal

Case(s) referred to in judgment(s):

Ausintel Investments Australia Pty Ltd v Lam (1990) 19 NSWLR 637

Crouch & Ors v Graham & Anor [2007] WADC 40

Palmer v Prince [1980] WAR 61

Parker v Transfield Ltd [2000] WASCA 382

Skahill & Anor v Kestral Holding Pty Ltd (in liq) & Ors [2000] WASCA 185

  1. GROVES DCJ:  By this appeal the first defendant seeks to set aside a default judgment against her.  That judgment arose by reason of the failure of the first defendant to comply with a springing order for discovery of documents.

  2. The first defendant made application to have the judgment against her set aside.  That application was heard before Deputy Registrar Hewitt and dismissed by written decision delivered on 5 April 2007: Crouch & Ors v Graham & Anor [2007] WADC 40.

  3. By notice of appeal dated 30 April 2007 the first defendant appeals against that decision.

Basis of appeal and legal principles

  1. Pursuant to r 15(6) of the District Court Rules 2005 the appeal is to be by of way of a new hearing of the matter that was before the Registrar.

  2. It is common cause that a judgment in default that has been regularly entered is not to be set aside unless:

    (a)     The failure to comply with the rules is explained; and

    (b)The Court is satisfied that there is a credible defence on the merits which has a real prospect of success (see Palmer v Prince [1980] WAR 61 at 62; Parker v TransfieldLtd [2000] WASCA 382.

Procedural history

  1. The proceedings were commenced by writ bearing an indorsement of claim filed 22 February 2006.  An appearance was entered by solicitors on behalf of the first defendant on 2 March 2006. The statement of claim was filed on 10 May 2006 and the first defendant's defence filed 26 May 2006.  It is a bare defence in that the first defendant "… does not admit …" any of the allegations in the statement of claim.

  2. On 30 May 2006 the first defendant's then solicitors were granted leave to be removed from the record as her solicitors.  The retainer was apparently terminated by reason that the first defendant failed to provide instructions and to pay outstanding fees in accordance with the terms of the solicitor's retainer. Clearly the defence filed was a holding defence as the solicitors had not received instructions from the first defendant since 17 March 2006.  The first defendant was thereafter unrepresented until she retained her current solicitors who filed a notice of appointment on 7 December 2006.

  3. Meanwhile, on 1 August 2006 in the absence of the first defendant the court ordered that she give discovery of documents within 28 days of the date of the service of the order upon her.  On 29 September 2006 the plaintiffs filed a chamber summons for a springing order for discovery of documents.  The first defendant does not deny that she received a copy of the chamber summons.  On 13 October 2006, there being no appearance by or on behalf of the first defendant, the Court made the following order:

    "Unless within 14 days of the service of this order on the first defendant, the first defendant do comply with par 3 of the order of Deputy Registrar Hewitt made in chambers on 1 August 2006, the first defendant's defence be struck out and judgment be entered against the first defendant with costs of the action to be taxed." 

  4. A copy of that that order was sent by post to the first defendant.  She does not dispute having received a copy of that order.

  5. On or about 28 November 2006 the plaintiffs were granted default judgment on the basis of the first defendant's non compliance with that order.

  6. By application filed 7 December 2007 the first defendant by her newly instructed solicitors applied for orders:

    (a)     Extending time to comply with the October orders, and

    (b)     Setting aside default judgment.

  7. The application was heard before Deputy Registrar Hewitt on 6 and 22 March 2007 and his reasons for refusing the orders sought were delivered on 5 April 2007.  The first defendant timeously filed a notice of appeal from the decision of the Registrar on 13 April 2007.

  8. It is noted that the plaintiffs obtained a judgment in default of defence against the second defendant.  The allegations made against the second defendant comprised the same allegations which are made against the first defendant.  On 20 April 2007 the default judgment against the second defendant was set aside.  Thus as between the plaintiffs and second defendant the action is still "alive".

Affidavit evidence before the court

  1. The first defendant has filed the following affidavits in support of her application and the appeal.

    (i)      Affidavit of Kelly Susan Graham sworn 6 December 2006.

    (ii)     Further affidavit of Kelly Susan Graham sworn 17 January 2007.

    (iii)     Third affidavit of Kelly Susan Graham sworn 18 July 2007.

    Additionally outlines of submissions dated 19 December 2006, 2 March 2007, 9 July 2007 and 30 July 2007 are before the court.

  2. In opposition to the application and the appeal the plaintiffs have filed the following affidavits.

    (i)      Affidavit of Tyson Lewis Cross sworn 20 December 2006.

    (ii)     Affidavit of Darrell John Crouch sworn 5 February 2007.

    (iii)Affidavit of Sharon Coleen Reed sworn on behalf of the second plaintiff 5 February 2007.

    (iv)     Affidavit of Lydia Helene Mitton sworn 5 February 2007.

    (v)     Affidavit of Shaun Sayers sworn 5 February 2007.

    (vi)     Affidavit of Darrell John Crouch sworn 26 July 2007.

  3. Additionally outlines of the plaintiffs' submissions dated 2 March 2007 and 30 July 2007 were before the court.

  4. Furthermore, since I heard oral argument on 30 July 2007 I have had the benefit of reviewing the transcript of that occasion for the purpose of preparing these reasons.

Failure to comply with Rules of Court

  1. The first defendant admits that she received service of the order made by the Deputy Registrar on 13 October 2006.  She explains her failure to comply with the order as being that she "… was preoccupied with business commitments and I failed to appreciate the significance of the orders and the consequences of not complying with them.  I did not seek legal advice as to the consequences of not complying with the October orders". (First defendant's first affidavit par 9)

  2. The first defendant was absent from court and unrepresented at the time when the springing order was made.  She gives no explanation however as to why she failed to attend or be represented at the hearing of the application on 13 October 2006.

  3. The rules of court do not require that in such circumstances such an order must be served personally upon the party against whom the order is made.

  4. The Deputy Registrar in refusing the first defendant's application regarded her explanation as to her failure to comply with the order "… as being fairly thin because the order is clearly expressed and I would have thought a person with no experience of the law would nonetheless comprehend … the words".  I concur fully with that observation.  Given that the application to set aside the judgment was brought soon after it was entered the Deputy Registrar concluded, "… by the narrowest of margins …" that the first defendant had explained her failure to comply with the order sufficiently. 

  5. It does not appear that the practice relating to springing orders was drawn to the Deputy Registrar's notice.  The Full Court (WA) in Skahill & Anor v Kestral Holding Pty Ltd (in liq) & Ors [2000] WASCA 185 at [18]-[19] set out the principles. Paraphrasing, so far as is relevant here, the relevant principle is:

    "If the party against whom the order is made is not present in court, personally or by solicitor or counsel … the onus is on party seeking to rely on the order to serve the order on the party against whom it is made … .  Where the litigant is unrepresented, actual personal service normally would be required."

  6. It is not apparent from that decision why that should be so.  In explanation counsel for the first defendant suggested that the "… practice exists for a good reason and that is that an ordinary person is more likely to take notice of a document served upon them personally than they are to take notice of something that is received in the mail, along with a great deal of other correspondence".  Again, I would regard that as being a "pretty thin" explanation particularly where the words of the order are clear and unambiguous and yet the first defendant did nothing in response.  Save where the interests of the administration of justice demand otherwise the rules of court and orders of court must be honoured by compliance rather than breach.  It is a flimsy excuse which is advanced.

  7. The plaintiffs have not cross-appealed against the finding by the Deputy Registrar on this threshold issue.  Given that the practice as enunciated in Skahill was not followed I am prepared to accept that the failure to comply with the Rules is explained.

Basis of the plaintiffs' claim

  1. Each plaintiff alleges that they (separately) entered into agreements and made payments totalling $231,000 in or about August 2004 to purchase a total of 437,500 shares in Rosemount Holdings Pty Ltd ("Rosemount") the owner of a restaurant business trading as Vulcanoes Restaurant located at Hillary's Boat Harbour at Sorrento Quay.

  2. The plaintiffs allege that they did not receive the shares for which they paid, and that the payments were induced by four representations made orally and in writing by the first defendant on her own behalf or on behalf of the second defendant, or them both.

  3. The alleged representations, said to be made orally and in writing in or about August 2004 were that:

    (a)the first defendant was a director of Rosemount (par 3(a)) of the         statement of claim);

    (b)if the plaintiffs paid the first defendant the purchase price for the         shares in Rosemount they would receive shares in Rosemount          (par 3(b) of the statement of claim)

    (c)the purchase price would be held in trust pending the issue of     shares in Rosemount to the plaintiffs (par 3(c) of the statement of     claim); and

    (d)that Rosemount was solvent and would continue to remain        solvent for the foreseeable future (par 3(d) of the statement of         claim).

  4. The first defendant denies that the alleged representations, either oral or in writing were made by her.

An overview

  1. It is apparent from the numerous affidavits filed and the lengthy submissions that issue is joined on the plaintiffs' allegations.  They are issues of fact and go to the very core of the dispute namely whether or not in fact the alleged representations were made and if so whether or not any of the plaintiffs relied upon those representations in agreeing to purchase shares in Rosemount as alleged.  These are not issues which can simply be determined on the affidavits before the court.  The conflict on these issues can only be resolved by the evidence being adduced and subjected to close scrutiny at trial in the usual way. 

  2. Issues of fact will necessarily have to be determined on the basis of findings made as to the credibility of the witnesses.  Given the factual disputation apparent on the affidavits it will only be then, in my view, that the first defendant's claimed defence, ie her denial that the representations were made or that there was reliance on those representations, can be determined.

  3. Insofar as the representations are said to have been in writing, the statement of claim at par 4(b) and (c) lists the various documents wherein it is alleged that the representations are contained.  It is not apparent on the face of those documents either read alone or when read together that the alleged representations are apparent.  It may well be that those documents in conjunction with the oral evidence will identify the representations or that the representations might be inferred from the documents.  Again this is simply not a matter which can be determined on the papers.

  4. Insofar as the documentation is concerned there is a threshold issue.  The first defendant asserts that the first plaintiff "… worked closely with me or directed me, to prepare information, forms and agreements that were, in his view, necessary for the potential investors he had in mind".  The first defendant asserts inter alia that she specifically recalls that the first plaintiff prepared the document referred to at par 4(b)(ii) of the statement of claim.  On the other hand the first plaintiff in response asserts that the first defendant provided to him the documents referred to in par 4(b) of the statement of claim.  He states "I had no input in and had no role whatsoever in the preparations of those documents".  Clearly that issue can only be determined by the evidence being tested through the trial process.

  5. Further the first defendant asserts that the first plaintiff "… made many of the representations rather than received them, both to me and to the other investors".  The first plaintiff does not specifically respond to that assertion but I might reasonably assume that he denies making any such representations.  Nevertheless, that is another issue of fact which can only be determined after trial.

  6. Furthermore it is noted that the Shareholders Agreement (Annexure DJC 12 to the first plaintiff's affidavit of 5 February 2007) contains an "Entire Agreement" clause.  So far as is relevant cl 12.6 provides:

    "This agreement embodies the whole agreement between the parties relating to the subject matter of this agreement and supersedes any and all oral and written negotiations and communications by or on behalf of any of them.  The parties have not, in entering into this agreement, relied upon any warranty representation or statement, whether oral or written, made or published by any other party or any person on behalf of any other party or otherwise in connection with the subject matter of this agreement, except such as are expressly provided herein … ."

  7. What effect, if any, does that clause have in the context of the alleged representations and the plaintiffs' reliance on those representations?  That is a question of both law and fact and without making findings as to the facts the law cannot be applied to determine that question.  Again that question can only be determined after trial.  A finding favourable to the first defendant may provide a good defence.

  8. The foregoing overview really highlights the fact that unless the issues are agitated by the trial process it cannot be concluded on the affidavits alone that the first defendant does not have a credible defence on the merits which has a real prospect of success.  For completeness I will go on to make some observations in respect to each of the alleged representations insofar as there are issues to be addressed.

First representation – the first defendant was a director of Rosemount

  1. The first defendant asserts that in or about August 2004 at a meeting with the first plaintiff the latter produced a company search for Rosemount and said words to the effect "I have a company search of Rosemount and you are not a director".  The first plaintiff in response categorically denies that conversation and states that at no time prior to signing the agreement or handing over his cheque was he aware that the first defendant was not a director of Rosemount.  Where the truth lies cannot simply be determined by a reading of the affidavits and annexures.

  2. Each plaintiff makes the assertion that "At no time was I aware that the first defendant was not a director of Rosemount".  The statement of claim positively asserts that it was represented by the first defendant that she was a director of Rosemount.  If that is so why would not each plaintiff have stated as a positive fact that the representation was made?  Put in the negative as that statement is in their affidavits it is open to an interpretation that a representation to the contrary was not made either orally or in writing but rather that each plaintiff simply assumed that the first defendant was a director or Rosemount.

  3. There is also an issue raised as to whether or not one of the investors in fact relied upon the first defendant's status as a director of Rosemount at the time when payment was made.  The first defendant contends that a cheque for $66,000 from at least one of the investors (not the fourth plaintiff) was banked before she signed the Sale Agreement on behalf of "Bluejacs Hillarys".  If that were the case then it calls into question whether or not that investor made the payment in reliance on a written statement (if any) that was made after that investor had made the payment.

Second representation – the plaintiffs would receive shares in Rosemount

  1. This allegation is nowhere to be found in the documents upon which the plaintiffs rely.  The "Expressions of Interest to Purchase Shares" (Annexure KSG 6 to the first defendant's affidavit 17 January 2007) refers to cheques being made payable to "Bluejacs Pty Ltd Share Application Account".  The payments were made by the plaintiffs to Bluejacs Pty Ltd and were banked into Bluejacs Pty Ltd account.  Those circumstances are not confirmatory and in fact are contrary to the allegation that if the plaintiffs paid the first defendant the purchase price that they would receive shares in Rosemount. 

  2. A review of the documents executed by the various parties may give rise to an inference being drawn that it was represented to the plaintiffs that Bluejacs Hillarys Pty Ltd was or was to be the new name for Rosemount Holdings Pty Ltd and that the first defendant was a director of that company, authorised to enter agreements on its behalf.  The Registrar in his reasons so concluded at pars 10 – 12.  However, the company Bluejacs Hillarys Pty Ltd did not exist until May 2005 well after the time when the alleged representations were made.  Even so whether or not any inference supportive of the plaintiffs' allegation will again have to be determined in light of such findings as may be made on the whole of the evidence.

Third representation – the purchase price would be held in trust pending the issue of shares in the company to the plaintiffs

  1. The monies invested by the plaintiffs were paid into the account of Bluejacs Pty Ltd.  The account was called a Share Application Account.  Interestingly the Deputy Registrar at par 20 said: "… it seems to me axiomatic that the monies so deposited would be held until the application to which the payment referred had been approved and the shares issued".  At first blush that conclusion might seem logical.  However, it might not be the law.  In Ausintel Investments Australia Pty Ltd v Lam (1990) 19 NSWLR 637 Meagher JA (with whom Gleeson CJ agreed) said at 647 – 648:

    "… so the argument ran, having notionally received Mrs Lam's money, the appellant held it as trustee for the sole purpose for which it was advanced, viz the allotment of shares; and that any dealings with it other than applying it towards the issue of shares were in breach of trust.  […] Here there was no agreement, express or implied, as to how the money should be treated if no allotment of shares took place; nor, more importantly, was there any evidence of a mutual intention that the monys should not become part of the appellant's general funds.  […] Moreover as Barclays Bank Ltd v Quistclose Investments Ltd itself recognises (at 581), in the absence of some special arrangement, where money has been paid to a company for the purpose of obtaining an allotment of shares the payment is made on the basis that the money becomes part of the company's general assets.  In the present case there are no special circumstances which would require displacement of that general rule."

  1. What that authority indicates is that there may be an issue of law to be determined so far as this allegation is concerned.  Again, the determination of that question of law will turn upon the evidence which might be given at trial. 

Fourth representation – Rosemount was solvent and would continue to remain solvent for the foreseeable future

  1. As to this allegation the Deputy Registrar found at par 21 "… some level of controversy …" such that "in my view there is sufficient doubt as to that aspect of the matter to resolve it in favour of the first defendant".  I concur with that conclusion.

  2. Whether or not any of the plaintiffs relied on the Financial Forecasts (Annexure DJC 8 to the first plaintiff's affidavit 5 February 2007) is clearly open to question.  The Financial Forecasts do not show a cash starting position, or any underlying assets or liabilities of any entity and consequently do not address the "balance sheet" solvency of Rosemount as at the date of preparation of those forecasts in or about May/June 2004. 

  3. In denying that she represented that Rosemount would continue to remain solvent for the foreseeable future the first defendant asserts that the Financial Forecasts were prepared as projections for the proposed microbrewery operations of Bluejacs Hillarys not the existing operations of Vulcanoes Restaurant.  She goes on to state "on numerous occasions in July and August 2004 I told the investors words to the effect: "the operation of Vulcanoes Restaurant is tired and that its reputation has been damaged by its previous owners.  The turnover will not increase until we complete the refit".  None of the plaintiffs responded to that assertion in their affidavits.  It will be a matter of evidence as to whether or not the fourth alleged representation is made out. 

First defendant's claim for contribution against the first plaintiff

  1. The first defendant submits that she has a claim for contribution against the first plaintiff outlined at pars 52 – 59 of her submissions dated 9 July 2007 which is responded to in the plaintiffs' submissions dated 26 July 2007 at par 9.  I need say no more than that the issue there joined is one that can only be determined upon a full airing of the evidence at trial.  I am not able to say that the first defendant's claim for contribution is without merit.

Conclusions

  1. As will be apparent from the foregoing the issues raised on the affidavits are only capable of determination by findings of fact to be made after trial.  The issues which the first defendant raises by her application, if successful, do suggest at face value that she has a credible defence on the merits which may have a real prospect of success.  I have identified sufficient areas where there is conflict (which should not be taken as being completely comprehensive) to highlight the necessity of these matters being agitated and determined after trial.

  2. In light of my findings I conclude that the appeal should be allowed and that the default judgment entered against the first defendant on 28 November 2006 be set aside.

  3. I will hear counsel as to any consequential orders.

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Cases Citing This Decision

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Cases Cited

4

Statutory Material Cited

1

Crouch v Graham [2007] WADC 40
Parker v Transfield Pty Ltd [2000] WASCA 382
Skahill v Kestral Holdings Pty Ltd (in liq) [2000] WASCA 185