Director of Consumer Affairs v Tassoni
[2014] VSC 21
•10 February 2014
| IN THE SUPREME COURT OF VICTORIA |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2012 04473
| DR CLAIRE NOON (DIRECTOR OF CONSUMER AFFAIRS VICTORIA) | Plaintiff | |
| – and – | ||
| UMBERTO TASSONI and another | Defendants | |
JUDGE: | Mukhtar AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 31 January, 7 February 2014 (orders made, for reasons to be given) | |
DATE OF JUDGMENT: | 10 February 2014 | |
CASE MAY BE CITED AS: | Director of Consumer Affairs v Tassoni | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 21 | |
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PRACTICE AND Procedure – Setting aside judgment – Judgment in default of appearance – Requirement of prima facie or arguable defence – Standard or degree required – Applicable principles
CONTRACT – Penalty – Prosecution for civil contravention of consumer legislation – Precise amount of compensation to be ascertained and verified – Terms of Settlement – Primary stipulation to pay provisional sum for compensation − Default clause for breach of primary stipulation for higher provisional amount – Construction − Substance of obligation – No arguable basis to find a penalty
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J P Moore SC | M + K Lawyers |
| For the First Defendant | Ms S Todorov, solicitor | M A Legal |
HIS HONOUR:
On 20 February 2013 the plaintiff (“the Director”) obtained a default judgment in this Court against the first defendant, Tassoni, for $149 516.47 plus interest of $670.60 and costs of $2850. It was a judgment in default of appearance. The foundation of the judgment was a clause in terms of settlement, typical in the compromise of disputes, under which Tassoni agreed with the Director that in default of making certain promised payments, he would consent to judgment for $146 080.[1] There is no question that he has breached the terms.
[1] The difference in the figures is attributable to interest on the prime sum.
Tassoni has applied to set aside the judgment, by a summons filed 10 October 2013. That was quite some time after the judgment was entered. In the meantime a bankruptcy notice was issued on the judgment. I am told that the Federal Circuit Court has refused him an extension of time for compliance with that notice. The date for compliance has passed.
Tassoni says he was not aware that a default judgment had been obtained until he took notice of the bankruptcy proceedings. He says judgment ought be set aside because that the default clause under the terms of settlement on which the judgment was obtained is a penalty and therefore unenforceable.
On 7 February 2014, the Court refused the application, for reasons to be published. As I will expose, the application concerns an uncomplicated exercise in construction of some terms of settlement. The application became prolonged as the Court tried to elicit the precise grounds and the analytical basis of the asserted defence. I concluded the explanation for not filing an appearance lacked conviction; but putting that to one side, in my judgment there was no arguable or prima facie defence, and there was otherwise no injustice in letting the judgment stand. I accept the Director’s submission, measured as it was, that the penalty argument is based on a construction of the agreement that is an absurdity. My reasons follow.
But first, it is convenient if I take leave to refer to the statement of approach to these applications as I stated in JRC Enterprises:[2]
[2] [2013] VSC 646 at [6] to [8].
…Assuming the judgment was regularly entered (as this one was) the appellate authorities have endorsed the principle that if merits are shown it is undesirable to let a judgment pass on which there has been no proper adjudication: see Lubura.[3] The language of the test varies but if a “defence on the merits” or a “prima facie defence” or “some defence” or “adequate defence” is shown, the courts say the strength or weakness of the case does not matter, for it is not the function of the judge on the application to decide whether the defence would succeed. There will usually be matters of facts to be investigated, and it will be a miscarriage of discretion to make decisions about the credibility of factual assertions made by the defendant: see Lou v Citic Australia Commodity Trading Pty Ltd.[4]
[3] [2013] VSCA 215 at [4], quoting Kostakanellis v Allen [1974] VR 596.
[4] [1999] VSCA 34.
A contiguous principle in forming the exercise of the discretionary judgment is whether the defendant has given an adequate explanation for the failure to file an appearance. The cogency of the explanation can reflect on the merits of the defence. A procedural default attributable to a mistake has been accepted as an adequate reason, but it depends on the particular facts, or the true nature of the mistake. …Absent a testing by cross examination, a disbelief of an explanation given from which a conclusion is then reached that a defendant deliberately disregarded a legal obligation under court process, could miscarry unless it could be said that there was no other conclusion open on the evidence.
But the absence of a sufficient reason for the procedural default does not necessarily mean that the application to set aside the judgment must fail.[5] What dominates, in the end, is whether the defendant is able to show a prima facie defence on the merits. If so, the law’s attitude is not to inflict the serious prejudice of preventing a defendant from defending the claim especially if there is no actual prejudice to the plaintiff. The only compensatory measure available to the courts is an order for costs in the plaintiff’s favour. In more recent times, that not only includes the awarding of costs on an indemnity basis for costs thrown away but also a requirement that the defendant provide security for the costs payable, and a stay on the order to set aside judgment until the security for costs is lodged: see Lubura.[6]
[5] Kostokanellis v Allen [1974] VR 596 at 605.
[6] At [118]-[122].
I am very conscious of the restriction that it is not the function of the Court on such an application to decide whether the defence would succeed. If there is a defence on the merits shown, then the strength or weakness of that defence does not matter. That is particularly so where there are questions of fact to be investigated under the ordinary processes of trial. But, in the confines of this case (a construction exercise) there are no controversies in the admissible objective facts and the question is a narrow legal one concerning the law of penalties in contract.
I would add this. I do not think it is enough to say that a defence is arguable. Anything is arguable as a perfunctory exercise. The primary consideration is whether there is a defence on the merits to which the Court should pay heed, or put another way, whether a defence has been raised which carries some degree of conviction.[7] That gives meaning to the test of a prima facie defence. In Lubura[8] the Chief Justice regarded the test as not all that different from the test in summary judgment applications.That brings into consciousness the conventional test for such applications under the Rules of Court of no real question to be tried, or, the statutory test of no reasonable prospect of success.[9]Where facts are not in dispute or to be investigated, it sometimes requires extensive legal arguments and reasons to show the asserted defence is bound to fail whether it is an application to set aside default judgment or an application for summary judgment.
[7] See Civil Procedure Victoria, Vol 1 at [21.07.20].
[8] [2013] VSCA 215 at [3].
[9] That is, under s 63 of the Civil Procedure Act. See Lysaght [2013] VSCA 158.
The reasons for default
In my assessment, the explanation given by Tassoni for being unaware of the default judgment, even untested, lacks apparent conviction. The history of the proceeding shows the Director experienced difficulty in serving Tassoni personally and had to obtain an order for substituted service. His affidavits for this application give his address as 12/32 Outer Crescent in Brighton. In December 2012, an order for substituted service by post stipulated that address. So there is no doubt legal process was sent to his correct address. Under the terms of the order for substituted service, service was effected on 17 September 2012. I should add, that when a bankruptcy notice was issued on 20 May 2013, the Registrar of the Federal Circuit Court also made an order for substituted service at the same address in Brighton, because the difficulties the Director was encountering in effecting personal service.
Tassoni swears in his supporting affidavit that “I am not often in attendance at the [Brighton] address… as I am often travelling.” He adds that “When I am in Melbourne, I usually stay at my partner’s residence as opposed to my own.” I think it cryptic to use language such as “not often” or “usually”. He does not deny the Brighton address as being his usual place of residence. He says nothing about arrangements in dealing with mail delivered to his home. He says that in about September 2013 he “found” correspondence from the Director’s lawyers enclosing a bankruptcy notice which also attached the default judgment. To say “found” without saying more only adds to the equivocal quality of his evidence. I think given the passage of time since the default judgment was obtained and served, it really did call for a much more precise and convincing explanation from Tassoni.
But, faithful to the discretionary principles I have already identified, I cannot seize on the questionable explanation alone to refuse the application. The absence of a cogent explanation intensifies the Court’s scrutiny whether there truly is a prima facie defence here. The starting point is an understanding of the origins of the Terms of Settlement
The claim underlying the judgment
This is not an ordinary case of the settlement of a money claim as between contracting parties or of parties liable to one another under some other private legal relationship. It was an action brought by the Director as the head of Victoria’s general consumer protection agency, responsible for receiving and investigating complaints and bringing proceedings for contraventions under the enforcement and remedy provisions of the Fair Trading Act. The action was against Tassoni, a fellow company officer and some other companies for civil contraventions of the Fair Trading Act in the supply of consumer goods. The corporate defendants were either wound up or deregistered.
Avoiding details, the Director sued Tassoni in a prior proceeding[10] as principal or as accessory for misleading and deceptive conduct in not fulfilling consumer orders, taking orders in the knowledge that they would not be fulfilled, misleading consumers about delivery times, making unauthorised product switches and, most pertinently for present purposes, not refunding consumers for payments for undelivered goods. Paragraph C of the statement claim sought –
An order pursuant to section 149A of the Act requiring the Fourth and Fifth Defendants [Tassoni is the Fifth] to refund all moneys received by the First, Second or Third Defendants [the corporate defendants who were the sellers] from consumers for the supply of goods where those goods have not been supplied by the Defendants to the consumers, in such manner and using such procedures as the Court prescribes.
[10]Originating Motion no S CI 2010 04977.
I will not refer copiously to the statement of claim filed by the Director. I will confine myself to referring to the allegation that of the 405 orders taken, only 112 (or 28%) of the orders were fulfilled, and of the 293 unfilled orders, refunds were not made to at least 106 consumers. Paragraph 4 of the statement of claim gives some idea of the amounts paid for the goods which were mattresses, bedding material, cookware and some cleaning machines. The amount paid ranges from $3565 to $4100. It is plain that the Director could not identify all purchase transactions, and the proceeding was of a nature where a question of identifying precisely the consumers who were out of pocket and for how much would have to be pursued as part of the remedial orders.
The obvious point is this: this was not money payable to the Director under a private obligation; this was a money claim being pursued, which would have to be calculated by some means, to enable the Director to effect repayment to deceived consumers to compensate them for contraventions of the Fair Trading Act. That is the statutory function of the Director. Payment of any moneys is not for the Director’s or the State’s benefit and, for the purposes of applying the doctrine of penalties, it is not apposite to speak in terms of “genuine pre-estimate of damages”. Nor is it possible, in this case, to speak about losses that might be proved to follow on from a breach. What was sought to be enforced under the legal proceedings, by means of mandatory injunctions as a remedy, was to make Tassoni and others repay moneys to deceived consumers. The Director does not stand to gain financially in any way. Thus, the very nature of the case readily leads to an immediate resistance to the applicability of the doctrine of penalties and forfeiture.
Be that as it may, the point having been taken, the doctrine of penalties requires a construction of the relevant agreement and an examination whether, as a matter of substance rather than form, it requires Tassoni on breach to pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach: see generally Ringrow[11] and Andrews.[12]
[11] Ringrow Pty Ltd v BP Australia (2005) 224 CLR 656 at 662-3.
[12] Andrews v ANZ Banking Group Limited (2012) 86 ALJR 1002 at [9]-[15].
Rather than reproduce the terms of settlement, which have to be considered as a whole, I have for convenience attached them to these reasons. It is worth noting that apart from the financial obligations on Tassoni, he and the fourth defendant, Andrew Hall, also signed a proposed consent order agreeing to restrain themselves for five years from accepting payment for the supply of goods in Australia to the public before actual delivery.
The relevant clauses start with clause 2.1 and 2.2. Tassoni agreed to pay $20 000 to the Director by 20 April 2012 and then pay another $20 000 by 30 June 2012. He did not make the first payment. He has not made any payment at all.
Had he made the payment as promised, then clause 3.1 set up a means by which the Director could undertake the task of “facilitating refunds to affected customers”. The Terms are clear and self-explanatory. The Director was to take the responsibility to find out who was owed a refund. The practical method under the Terms was for the Director to invite the affected consumers to make a statutory declaration if they had not received refunds. Assuming Tassoni made the two payments of $20 000 the next step under clause 3.3 was for the Director to then tell Tassoni’s solicitors the “Amount Outstanding” to the consumers based on those statutory declarations. Clause 3.4 says if the Amount Outstanding was less than $40 000 then the Director pays Tassoni the difference. That is, Tassoni gets the “change”.
But, what if the Amount Outstanding amount was found to be more than $40 000? That was in obvious contemplation under clause 4. In that event, Tassoni was bound to pay more to the Director, and could pay in two instalments. Clause 4.1 says in effect that Tassoni agreed to pay 50% of the Amount Outstanding less the $40 000 and do so by 30 September 2012. Then under clause 4.2 he agreed to make payment of the other 50% by 31 March 2013.
Pausing there it is plain that the scheme was for Tassoni to fund the Director to make the refunds. The payment of the $40 000 was a provisional amount which may or may not turn out to be enough to compensate consumers who had not received a refund. Depending on proof of refunds due, Tassoni agreed he may have to pay more. As I would describe it, this is a “rise and fall” mechanism by the regulator.
Tassoni did not pay the first $20 000. He has not paid anything. He says nothing about his breach. Clause 5.1.1 was then engaged under which he agreed that $146 080 would then become immediately due and payable to the Director. He also agreed under clause 5.1.4 that he would consent to judgment for $146 080 less any amount paid by him, plus interest and costs. And that is what has happened. Rather than moving on the existing proceeding, the Director chose to bring this separate proceeding to obtain the default judgment.
The terms on their face do not reveal the basis upon which the amount of $146 080 was fixed. Neither does the statement of claim, although it does identify 12 consumers in paragraph 4. But, it is plain under that statement of claim that the remedial orders would have to include “in such manner in using such procedures as the Court prescribes” a means by which the exact amount to be refunded could be in turn ascertained. The Director was proceeding on allegations of contravention concerning some consumers. Assuming proof of contravention, it would remain to ascertain precise amounts of compensation to affected consumers.
Tassoni now says judgment ought be set aside because the default clause is a penalty. That of course is a legal point but according to the draft defence the penalties argument is put by his lawyers in the following way. First, the Terms imply that the $40 000 “is the genuine covenanted pre-estimate of damages”. The second step is to say that the default sum of $146 080 is extravagant and unconscionable in amount “in comparison with the greatest loss that could conceivably been proved to have followed from Tassoni’s breach of clauses 2.1 and 2.2.”
This is no occasion for an exegis of the law of penalties, and the elementary features of this case do not call for it. It is sufficient to refer to Andrews[13] where the High Court said of the doctrine:
… A penalty is in the nature of a punishment for non-observance of a contractual stipulation and consists, upon breach, of the imposition of an additional or different liability.
In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.
[13] Andrews v ANZ Banking Group (2012) 86 ALJR 1002 at [19].
To that statement of principle, one can add the well-known approach in Dunlop Pneumatic Tyre[14] as affirmed in Ringrow.[15] That is, the question whether a sum stipulated is a penalty is a question of construction to be decided upon the terms and inherent circumstances of each particular contract judged at the time of the making of the contract. In aid of that task, it may be helpful or conclusive to see if the sum stipulated is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
[14] [1915] AC 79 at 86-7.
[15] (2005) 224 CLR 656 at 662 [11].
I think it is a misconception to say that the Terms imply that the $40 000 represents a genuine pre-estimate of damages. The $40 000 was a provisional amount. The “damages” or more truly, the compensation payable to consumers was something to be determined under the verification procedures in the Terms. It might be more; it might be less. Therefore the second step cannot be argued sensibly; that is it cannot be argued sensibly that the default sum of $146 080 is therefore extravagant and unconscionable in amount in comparison with the greatest compensation that could conceivably be shown to be payable. It misunderstands the law of penalties to arithmetically compare the two figures that way and spontaneously assert the clause was penal. The point is hopeless.
The point is hopeless because first it overlooks the obligation of Tassoni under clause 4 to pay more if the Amount Outstanding was more than the $40 000 that was to be paid by him as a first step. Secondly, although clause 5.1 does not say it expressly, on its proper construction I think it plain that the Director would be bound under the verification process that underlies this whole agreement to still find out how much was owing to the deceived consumers and apply the greater sum (be it money paid faithfully under clause 5.1.1 of coercively by a judgment under clause 5.1.4) to make compensation.
As Tassoni would have it, clause 5.1 is penal because the Director can keep the $146 080 and is not bound to undertake the verification exercise, and that shows it to be an unconscionable and in terrorem payment going beyond compensation for the breach. Of course it would be unconscionable.But that is why the clause cannot sensibly be construed to mean that. The question is this: is it arguable that on a proper construction of the Terms the Director is not obliged to carry out the verification exercise and can simply “pocket” the money? The answer is a resounding no. That would be an absurd outcome. It would be repugnant to the intention of the parties to compel Tassoni to put the Director in funds with which to make refunds after a verification process.
And it makes no difference to have a default judgment clause. Having agreed to pay $146 080 does not make the default judgment per se a penalty. If the payment is not a penalty, then an agreement to consent to judgment for the same amount is not penal either. A failure by Tassoni to pay voluntarily under clause 5.1.1 could lead to a judgment being obtained anyway.
So understood, in my view the law of penalties is not even engaged. Not even arguably. Payment of the $146 080 cannot possibly result in the Director receiving “compensation” of an excessive amount in comparison with the greatest loss that could conceivably be proved to have been suffered by the Director, or even by the deceived consumers. The payment is a step in the agreed process to establish the true amount owing to consumers.
Despite that, at Ms Todorov’s request, I gave a short adjournment to give Tassoni an opportunity to file any further evidence that might be said to be admissible on the construction of the Terms; that is facts and surrounding circumstances known to both parties to show the purpose and object of the contract: see Codelfa[16] and Alphapharm.[17]
[16] Codelfa Construction v State Rail Authority (1982) 149 CLR 337 at 352.
[17] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [41].
Tassoni has now sworn another affidavit. It impermissibly reveals matters (that are irrelevant anyway) about the mediation at which the Terms were struck. If anything the evidence about the provenance of the default figure supports the Director’s submission on the proper construction. Ignoring all inadmissible statements, it comes down to saying –
(a)before the mediation, he gave the Director records which showed that about $160 000 was owing to affected consumers;
(b)at mediation, his position was that the previous records were out-dated and that the amount outstanding was $15 800;
(c)despite that, the Director who had different information wanted to do a verification exercise and have a default clause stating an amount closer to the $160 000 as originally calculated.
His affidavit has as its design to show that the amount in the default clause exceeds what he, Tassoni, asserts is the amount owing to consumers which he says was $15 800. The submission is: that goes to show that anything more than $40 000 is a penalty.
I need say no more about that submission than it is misconceived. The legal exercise here is to construe the agreement to see if the default clause is penal according to the principles as I have stated them. The Director would not accept Tassoni’s assertions about refunds. The Terms were struck on the agreed basis that the amount payable to consumers was something to be ascertained by a verification process to which Tassoni agreed.
For completenss I should refer a responding affidavit that was filed by Lisa Anne Tickell on behalf of the Director. This affidavit reveals in an objective way the provenance of the figure of $146 080 as stated in the default clause in the terms of settlement. I shall not refer to the affidavit in detail. It is sufficient to say that as a result of what the deponent said was Tassoni’s “manifestly deficient” discovery of documents, Consumer Affairs Victoria had to gauge the extent of the loss or damage suffered by consumers at the hands of the defendants according to the complaints made by consumers.
Accordingly, the affidavit says, prior to the mediation on 6 March 2012, Consumer Affairs prepared a list of consumers who had made complaints and who were seeking a refund. At that stage, the total refund sought was $198 150. The list which certainly appears business-like identifies the consumers, the purchaser price and whether or not a refund had been received according to the consumers.
Closer to the mediation, the affidavit says that another search was conducted of Consumer Affairs’ records for all complaints made about the defendant’s products. The deponent swears that she analysed each of the 130 complaints and excised those complaints where the complaining consumer had since received a charge-back of the purchase price from a bank or financial institution; that is, a refund from a credit as distinct from the defendants. In addition, she swears that she made telephone contact with all but four complainants to confirm if they were still out of pocket. After that exercise, there were 54 consumers who still claimed to be out of pocket. The total refund amount for those consumers was $146 080. She says conclusions could be reached that eight of the complainants had meritorious claims for loss and damage. As for the rest, the merits of their complaints were yet to be verified.
This application can be decided on the basis that as a matter of construction the law of penalties has no application. It fortifies that view to see that verification procedure was the very thing that the Director sought to undertake and to which Tassoni agreed. It is fanciful for it now to be contended, as it was in submissions, that the Director knew that something far less than $40 000 was payable and the default clause was therefore penal.
For those reasons, the Court refused the application to set aside the judgment.
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