Kowalski & Killa P/L v Lochlee P/L No. Scciv-02-698

KOWALSKI & KILLA PTY LTD v LOCHLEE PTY LTD
[2002] SASC 252
Magistrates Appeal

DUGGAN J. The appellants (the defendants) have appealed against an order made in the Magistrates Court on the application of the respondent (the plaintiff).
The plaintiff issued proceedings against both defendants on 18 August 2000. The claim was in contract. The defendants filed a defence to the claim and subsequently leave was given to file an amended statement of claim and an amended defence. The claim was for monies alleged to be owing under a profit sharing agreement between the plaintiff and the defendants and a further agreement involving advances on future commission to be earned by the defendants.
Eventually the action was settled and the compromise was recorded in a deed of settlement dated 29 June 2001.
The deed states, in part, that:
“2David McKay, a director of Lochlee, agrees to open trading with Kowalski for the mutual supply and trading in vehicles, on terms to be agreed between the parties from time to time.
3In full and final settlement of the Claim, Kowalski shall pay Lochlee the sum of $25,000 inclusive of costs and interests (the ‘Settlement Sum’), payable in instalments of $500 per week (the ‘Instalment Payments’) until the Settlement Sum is paid in full, irrespective of the level of profit (if any) generated via the trading referred to in Clause 2 above.”
The deed goes on to record the manner in which instalments of payment are to be made. It states that if any instalments are not paid in accordance with the agreement, then the balance of the settlement sum remaining unpaid will become due and payable and that the plaintiff may then take such steps against the defendants as may be necessary to enforce its claim including “relying on this Deed for the purposes of legal enforcement proceedings, and producing this Deed to the Court in connection with those proceedings”.
The deed also provides that the plaintiff will discontinue the claim which is the subject of the action as soon as practicable after the deed has been executed by each of the parties. In due course, the plaintiff filed a notice of discontinuance of the original action against both defendants.
It would appear that the defendants paid instalments amounting to $2,000, but did not make any further payments under the deed. On 2 November 2001 the plaintiffs filed an application with the court seeking an order that “judgment be entered for the plaintiff”. The original action number was placed on the application. The application was accompanied by an affidavit sworn by a solicitor employed in the firm of solicitors acting for the plaintiff. The affidavit refers to the deed of settlement and records that on 2 September 2001 the defendants paid to the plaintiff the sum of $2000. It goes on to allege that no further payments were made. Paragraph 6 of the application states:
“I request that this Honourable Court sign judgment in favour of the plaintiff in the sum of $23,000.00 and seek the costs of this application in addition.”
The application to the court was also accompanied by an affidavit of service sworn by a clerk in the firm of solicitors acting for the plaintiff stating that she served the defendants with a copy of the application together with a copy of the affidavit in support by causing it to be posted to the defendants.
The plaintiff’s application came on before a magistrate on 14 November 2001. There was no appearance by, or on behalf of, the defendants at the hearing of the application. The difficulty which faced the plaintiff was that it had discontinued the original action and there was no other action before the court. The plaintiff was asking the court for judgment on the deed, but there was no cause of action before the court claiming relief pursuant to the terms of the deed. Faced with this situation the magistrate made an order in the following terms:
“This action is reinstated. I amend the plaintiff’s claim to plead the Deed of 29 June 2001. In accordance with the Deed of 29 June 2001 I now enter judgment for the plaintiff in the sum of $23,000 calculated by the agreed sum of $25,000 less $2,000 paid. The action is reinstated against both Mr Kowalski personally and Killa Pty Ltd. Judgment is against both Mr Kowalski and Killa Pty Ltd in accordance with the Deed. Costs to the plaintiff $300.00.”
Subsequently, the defendants applied to set aside this judgment. In an affidavit filed in support of the application the defendant Kowalski stated that, prior to executing the deed, he reached an agreement with the plaintiff that the plaintiff would supply him with cars which he would sell to the wholesale car trade in Adelaide. He said that it was anticipated that the commission which he would receive from the sale of the cars would put him in funds to pay the instalments provided for in the deed. He said the plaintiff sent him only one car. He claimed that this was a breach by the plaintiff of the arrangement orally agreed between them and that it was a breach of the terms of the deed.
Mr Kowalski went on to say in his affidavit that he was not aware that the matter was before the court on 14 November 2001 although he did not provide any further details in relation to this assertion.
The application to set aside the judgment came on before another magistrate on 17 May 2002. The defendants’ application was dismissed, but a further order was made staying the judgment while the defendants paid $500.00 per week to the plaintiff commencing on 24 May 2002.
In their notice of appeal the defendants claim that the second magistrate erred in not setting aside the judgment entered by the first magistrate.
It is necessary to say something further concerning the circumstances in which the judgment was obtained. I have said that a notice of discontinuance was filed in relation to the original action. Rule 88(3) of the Magistrates Court (Civil) Rules 1992 (MCR) provides that a discontinuance of an action has effect as a judgment. According to the learned author of Lunn, Civil Procedure South Australia, it is unclear whether a judgment given in these circumstances is a final judgment.
If it is not a final judgment the question arises as to whether the judgment in this case was properly set aside. MCR r 104 empowers the court to set aside a judgment, but none of the circumstances in which this can be done under that rule exist in the present case.
MCR r 87 also empowers the court to set aside or vary a judgment which is not a final judgment. Sub-rule (2) states:
“The Court must not set aside such a judgment unless the party seeking to set it aside establishes that he or she –
(a) has an arguable case on the merits; and
(b)has a reasonable excuse for not having complied with these rules, or an order of the Court, or any time limit fixed by these rules or order of the Court, in respect of the action or proceeding.”
In my view, this rule is not applicable to the present case. The notice of discontinuance was filed by the plaintiff. It was not open to the plaintiff to subsequently apply to set aside the judgment which resulted from their own notice of discontinuance. This would give rise to a meaningless enquiry as to whether there was an arguable case on the merits of the plaintiff’s original cause of action when it had discontinued that action and was seeking relief on a quite different basis under the deed. The magistrate purported to reinstate the original cause of action not because of the merits of that cause of action, but in order to allow it to be used as a vehicle to add a fresh cause of action arising from the deed.
After purporting to reinstate the original action, the learned magistrate then ordered that it be amended so as to plead the deed. He then entered judgment in accordance with the terms of the deed. The effect of this was to enter summary judgment on a cause of action of which the defendants had no knowledge. The defendants were, of course, aware of the deed. If effective service of the plaintiff’s application had been made then the defendants would also have been aware that the plaintiff was claiming that there had been default under the deed and that the plaintiff was attempting in some way to obtain a judgment from the court. However, it is clear that the shortcut taken by the magistrate was not authorised by any of the rules or procedures of the court. Even if it had been possible to reinstate the original cause of action, the magistrate had no power to enter judgment in respect of a cause of action which was not in existence at the time the application to sign judgment was served and which was added without notice to the defendants and without any pleaded particulars to support it.
When the matter came before the second magistrate on the defendants’ application to set aside the judgment, he was empowered to make that order if he considered that the judgment was obtained consequent upon an irregularity (MCR r 104(1)(b)(iv)). I think this judgment could also have been set aside in the inherent jurisdiction of the court to set aside judgments in circumstances where there has been a fundamental defect of the process whereby the judgment was obtained.
In White v Weston [1968] 2 QB 647 at 658 Lord Justice Russell stated:
“There has in the past been much discussion whether a judgment is a nullity or a mere irregularity, and for the cases on the subject I may perhaps refer to In re Pritchard, decd. [1963] Ch. 502; 2 WLR 685; [1963] 1 All ER 873, CA where they were discussed. Upjohn LJ [1963] Ch. 502, 523-524 in that case expressly stated to be a nullity, proceedings which ought to have been served but have never come to the notice of the defendant at all, excluding, of course, cases of substituted service, service by filing in default, or cases where service has properly been dispensed with. Danckwerts LJ ibid. 526 adopted that judgment. I do not myself attach importance to the question whether it is proper to label a judgment obtained in circumstances such as this as ‘irregular’ or ‘a nullity’. The defect is in my judgment so fundamental as to entitle the defendant as of right ex debito justitiae to have the judgment avoided and set aside. If as a technical matter it is a matter of discretion to set aside the judgment, ‘in accordance with settled practice, the court can only exercise its discretion in one way, namely, by granting the order sought,’ to quote Upjohn LJ in In re Pritchard, decd. [1963] Ch. 502, 521.”
(See also Ford v Gray (1989) 50 SASR 425.)
Given the circumstances in which judgment for the plaintiff was obtained, it is my view that the second magistrate erred in not setting it aside. There was a fundamental defect in the proceedings which took place before the first magistrate and, in the light of the nature of that defect, it is unnecessary for me to embark upon a consideration of the respective merits of the parties’ cases arising from the deed of settlement. Furthermore, whereas there is some ambiguity in the defendants’ response to the plaintiff’s claim that the notice of application before the first magistrate was served on the defendants, the defect is of such a nature that the judgment should be set aside irrespective of whether the defendants had a reasonable explanation for not attending the hearing of the application.
I grant leave to appeal pursuant to SCR r 96B. For the reasons which I have given, the appeal will be allowed and the orders of the magistrate appealed from (the second magistrate) will be set aside.
In lieu thereof, there will be an order that the appeal to the second magistrate be allowed and that the judgment obtained by the plaintiff on 14 November 2001 and the consequential order as to costs will be set aside.

[2002] SASC 252

6 August 2002