Lu v Xu
[2023] VCC 1773
•4 October 2023
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-23-02256
| ZHAOBING LU | Plaintiff |
| v | |
| MING YU XU | Defendant |
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JUDGE: | ROZEN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18 September 2023 | |
DATE OF RULING: | 4 October 2023 | |
CASE MAY BE CITED AS: | Lu v Xu | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 1773 | |
RULING
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Subject:PRACTICE AND PROCEDURE – JUDGEMENT IN DEFAULT OF DEFENCE
Catchwords: Default Judgment – Whether to set aside – Leave to defend – Security for costs – Costs of application
Legislation Cited: County Court Civil Procedure Rules 2018; Civil Procedure Act 2010 (Vic)
Cases Cited:Kostokanellis v Allen [1974] VR 596; Westpac Banking Corp v Webb [2019] VSC 121; Coxon v Duggan [2013] VSC 168; Lubura v Nezirecevic (2013) 42 VR 43; French v Triple M Melbourne Pty Ltd [2006] VSC 36; Gold Dealers Exchange Pty Ltd v Williams [2022] VSCA 277
Ruling: Default judgment set aside and defendant given leave to defend – Plaintiff ordered to give security for costs – No order as to costs
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P. H. Caillard | Vstar Lawyers |
| For the Defendant | Mr S. Horgan KC and Mr L. Magowan | Lin Legal & Associates |
HIS HONOUR:
1By summons dated 5 September 2023, the defendant applies to the court for a default judgment entered against him on 7 July 2023 to be set aside. He also seeks an order that the plaintiff provide security for costs and pay the costs of these applications.
2The applications are opposed by the plaintiff who contends that the defendant has no real defence to the plaintiff’s case and the evidence before the court does not explain adequately why the defendant did not file a defence as required by the County Court Civil Procedure Rules 2018 (Rules).
3As is often the case in such proceedings, the chronology of events is important and must therefore be set out in some detail.
4The plaintiff’s Writ and Statement of Claim were filed with the Court on 11 May 2023.
5In broad summary, the plaintiff alleges that he and the defendant entered into a Joint Venture Agreement (JVA) in about March 2018 under which they would jointly purchase a property in Melbourne. The property would be registered in the defendant’s name with the plaintiff having a 50% interest ‘as a tenant in common in equity’.
6Under the JVA, the plaintiff pleads that he would ‘assist or reimburse the defendant for any outgoing or expenses payable for the property’ and if the property was sold, the defendant would pay the plaintiff ‘his contribution towards the purchase price for the property’.
7The plaintiff pleads that, pursuant to the JVA, the parties purchased a property in March 2018 for $1.735 million and in September 2018 the defendant became the registered owner. Further, he pleads that between March and September 2018, the plaintiff contributed about $995,042.62 to the defendant to buy the property.
8The plaintiff also pleads that the property was sold in April 2022 for $1.838m but, in breach of the [JVA], the defendant ‘only repaid $451,809.40 of the $995,045.62 JVA Payments’ to the plaintiff.
9The plaintiff therefore claims the payment of $543,236.22 ‘in damages pursuant to Contract or equity’, interest and costs.
10On 29 May 2023, the defendant’s solicitors filed and served a Notice of Appearance in compliance with the Rules. The Notice was attached to a letter in which they informed the plaintiff’s solicitors that they noted that the plaintiff is a Chinese citizen who does not own any real estate in Victoria and that their client was concerned that he would be unable to meet any adverse costs order made against him by a Victorian court.
11It should have been clear to the plaintiff’s lawyers as at 29 May 2023 that the defendant was intending to defend the plaintiff’s claim.
12The defendant’s defence was required to be filed by 28 June 2023.[1]
[1] County Court Civil Procedure Rules 2018, r 14.04
13On 20 June 2023, the defendant’s solicitors sent a letter by email to the plaintiff’s solicitors. After referring to the Court file number, the letter stated:
We refer to the above matter.
We have some concerns as to the mental capacity of our client, Mr Xu, to give instructions for the above proceedings.
We have been advised that Mr Xu had a severe traumatic brain injury after tripping over some steps on 6 March 2021. He had bleeding in many parts of his brain (bilateral frontal and temporal subdural and subarachnoid haemorrhage), a right occipital infarct and skull fractures (left undisplaced occipital midline fracture extending anteriorly and also fracture of the posterior wall of the left sphenoid sinus). Mr Xu had undergone the surgery at Monash Hospital and stayed in ICU for ten days. There may be an issue as to our client’s capacity to provide instructions owing to a medical condition that he has sustained. He is currently being assessed by a medical practitioner.
Subject to his capacity, our client intends to make an application for security for costs as we raised in our letter dated 29 May 2023.
As noted above, we request your client not to file a judgement in default while these above issued (sic) are being worked through.[2]
[2] Emphasis added.
14The plaintiff’s lawyer’s response came later that day:
We refer to the above matter and your letter of even date. We are instructed to respond as follows:
1.Our client does not believe your client is as mentally incapacitated as alleged or implied in your letter. Our client instructs that he has evidence your client was capable of undertaking day to day business affairs and even travelling overseas after 6 March 2021.
2.Even if your client is as mentally incapacitated as your letter alleges or implies, we still do not believe your client’s allege [sic] incapacity would prevent him from instructing your firm to file a defence within the prescribed time limits;
3.The fact your letters of 29 May 2023 and today foreshadow an application for security for costs against our client implies that your client is capable of filing a defence within the prescribed time limits.
In the circumstances, our client reserves his rights under the relevant court rules should your client fail to comply with the prescribed time limits.
15On 6 July 2023, without any further warning to the defendant, the plaintiff’s solicitors applied to the Court for default judgment which was duly entered in his favour.
16On 13 July 2023, having examined the court file, and noting that a default judgement had been entered against the defendant, his lawyers wrote to the plaintiff’s lawyers informing them that the defendant would apply to have the judgment set aside and would seek costs.
17On 31 July 2023, the defendant’s solicitors applied to the Court for an Order appointing Mei Guo, the defendant’s wife, as his litigation guardian and for orders setting aside the default judgment entered against him on 6 July 2023.
18On 21 August 2023, Her Honour Judge Burchell, the duty Judge, made a series of Orders in relation to the matter including orders:
(a) Dismissing the application to appoint a Litigation Guardian on the basis of inadequate supporting expert evidence;
(b) Allowing the defendant to file any further supplementary medical report in support of the application to appoint a Litigation Guardian by 4 September 2023; and
(c) Listing the application to set aside the default judgment on 18 September 2023.
19Her Honour reserved costs.
20The defendant did not pursue his application to appoint a Litigation Guardian after obtaining the advice of senior counsel that it was unnecessary. That advice was provided after senior counsel conferred with the defendant.
21On 8 September 2023, after being served with the defendant’s Summons, the plaintiff’s lawyers made an open offer to the defendant to consent to orders that:
(a) the default judgment be set aside;
(b) the plaintiff pay the defendant security of [sic.] costs of $50,000; and
(c) the defendant pay the plaintiff $3,850 in legal costs thrown away.[3]
[3] Affidavit of Michael Xu affirmed on 11 September 2023 at [15].
22The defendant did not reply to the offer.
Evidence Relied Upon
23In support of his application to set aside the default judgment, the defendant relied on an affidavit affirmed on 5 September 2023 by his solicitor, Feng Lin.
24In opposing that application, the plaintiff relied on:
(a) an affidavit affirmed on 11 September 2023 by Michael Xu, his solicitor; and
(b) an outline of submissions dated 18 September 2023.
25At the return of the defendant’s summons on 18 September 2023, the defendant was represented by Mr Horgan KC and Mr McGowan. The plaintiff was represented by Mr Caillard of counsel.
The Default Judgment
26The court’s power to set aside the default judgment is clear. The judgment in this case was entered pursuant to Rule 21.02 of the Rules as in force prior to 1 August 2023.[4] Rule 21.07 provides a broad unfettered discretion to set aside or vary any judgment entered or given in accordance with this Order.
[4] Rule 21.02 was repealed and replaced with effect on 1 August 2023 by S.R 73/2023, r 6(1). The Rule now requires a plaintiff to serve a notice in Form 21A informing the defendant that the plaintiff intends to enter or apply for judgment against the defendant. The plaintiff is then required to wait a further 7 days before applying to the court – see r 21.02(2). It is conceivable that this new procedure, had it been in force, would have prevented the current matter coming before the court.
27A court faced with such an application will consider:
(a) whether there is a defence on the merits;
(b) the reasons for the default;
(c) if the application has been made promptly; and
(d) whether the plaintiff would be prejudiced by the setting aside of the judgment in any respect which could not be adequately compensated by an award of costs.[5]
[5] See Kostokanellis v Allen [1974] VR 596 at 605 (‘Kostokanellis’); Westpac Banking Corp v Webb [2019] VSC 121 at [9].
A Defence on the Merits
28The defendant’s solicitor’s affidavit exhibited his proposed defence to the claims of the plaintiff.
29In summary, if granted leave, the defendant proposes to plead that he and the plaintiff entered into a different agreement to the JVA (which is referred to as the ‘Purchase Agreement’). The defendant will say that, under the Purchase Agreement, he and the plaintiff agreed to purchase a property (‘the Doncaster Property’) in circumstances where the defendant (being an Australian citizen) would be the registered owner in consideration for:
(a) the defendant being paid a fee of $165,000 ‘representing the approximate fees and costs that [the plaintiff] would incur if he was entitled to be a foreign purchaser of the Doncaster Property’; and
(b) ‘[the defendant] being entitled to recover, by way of indemnity, his costs and expenses of holding the Doncaster Property on trust for [the plaintiff] as against the Doncaster Property’.
30While the defendant agrees that the property was purchased for $1.735 million and sold for $1.838 million, he denies owning the plaintiff any money under the Agreement or on any other basis.
31Counsel for the plaintiff submitted that the defence is spurious and internally contradictory.
32However, the court is not required, on an application such as this, to make an assessment of the merits of a proposed defence or assess the likelihood of it succeeding. As the Full Court of the Supreme Court explained in Kostokanellis, a defendant merely needs to show a ‘prima facie case on the merits’.[6]
[6] [1974] VR 596 at 605.
33The JVA is pleaded to be partly oral and partly in writing; so too is the Purchase Agreement. Any assessment of the competing claims will turn, in large part on the evidence of the plaintiff and the defendant including under cross-examination. Little more can be said about that at this juncture.
34I am satisfied that the defendant has a prima facie defence on the merits. I have made this assessment without considering any other defences such as illegality that may be available to the defendant.[7]
[7] Mr Horgan KC orally submitted that it may be open to the defendant to defend the claim on the basis that the JVA would be unenforceable because it was designed to defraud the revenue by avoiding Foreign Investment rules.
Reasons for the Default
35In his affidavit, Mr Lin deposes to making inquiries about the defendant’s fitness to provide instructions in the period shortly after the correspondence on 20 June 2023 referred to earlier in this ruling. He wrote to the plaintiff’s lawyers about this on 13 July 2023 (apparently before he was aware that default judgment had been entered) and requested their agreement to an adjournment of the directions hearing on 17 July 2023 to obtain further medical evidence.[8]
[8] The relevant correspondence is reproduced at pp 7-9 of exhibit ‘FL-1’ to Mr Lin’s affidavit.
36The plaintiff maintains that these reasons are inadequate because no satisfactory medical evidence has been produced to support the suggestion of incapacity.
37In my view, that is not to the point. I am satisfied that the defendant’s solicitor had a genuine concern about his client’s capacity to provide instructions and was making appropriate enquiries to ascertain the true position. This was a delicate matter and I accept that there were good reasons for the default. It was not a case of a defendant paying no attention to the requirements of the Rules.
38The defendant’s lawyers put the plaintiff’s lawyers on notice and provided some medical explanation in their letter of 20 June 2023. While it is correct to say that they were on notice from the response they received that there was a risk that the plaintiff would enter judgment despite being asked not to, the reasonable thing for the plaintiff’s lawyers to have done in the circumstances was to have given a precise warning (such as that which is now required under the Rules). I will return to the significance of this below when I consider what costs orders should be made.
Was the Application made Promptly?
39On 13 July 2023, the defendant’s solicitors informed the plaintiff’s lawyers immediately on finding out about the default judgment that they would apply to overturn it.[9] While the court was not notified of the application until 31 July 2023, I do not consider this delay to disentitle the defendant from the relief he seeks.
[9] Affidavit of Feng Lin dated 5 September 2023 at 10 of exhibit ‘FL-1’.
Security for Costs
40The defendant seeks an order that the plaintiff provide security in the amount of $199,808.15 or such amount as the Court otherwise orders. The basis of the application is that the plaintiff is a Chinese national who does not live in Victoria and has no assets in Australia which could satisfy an adverse costs order.
41The sum claimed is justified on the basis of the estimate made by Mr Lin, a solicitor who has practised in this State for 14 years and is familiar with the scale of costs applicable in the County Court.[10] Mr Lin deposes as to his reasons for retaining senior counsel in what he accepts is a case in which he would normally brief only a senior junior. He explains that he has done that because of the brain injuries suffered by the defendant and his belief that senior counsel ‘is better equipped to navigate these challenges…’.[11]
[10] Affidavit of Feng Lin affirmed 5 September 2023 at [8]-[15].
[11] Affidavit of Feng Lin affirmed 5 September 2023 at [52].
42The court’s power to make the order, as conferred by r 62.02(1)(a), is enlivened on the evidence before me. There is no dispute that the plaintiff is ordinarily resident outside of Victoria and that he has no assets in the jurisdiction.
43In such circumstances, orders for security for costs are regularly made to protect a defendant. It is unfair to expect a defendant to have to bear the risk of enforcement in a foreign jurisdiction.
44I accept that it is appropriate to make an order in the circumstances of this case. However, I will not make the order in the sum sought by the defendant for two reasons.
45First, it is very early in the life of the litigation and there is some chance that the proceedings may be able to be resolved at a mediation. I consider that the defendant should have security up to and including the mediation.
46Secondly, I do not accept that this is a case in which it is reasonable for the plaintiff to brief senior counsel (at $12,000 per day) and senior junior counsel (at $5,800 per day). It is a relatively straightforward commercial case.
47I will order that the plaintiff provide security for costs in the sum of $50,000 up to and including the mediation. I base this amount on the estimate of Mr Lin noting that he does not intend to brief senior counsel at a mediation.[12]
[12] Affidavit of Feng Lin affirmed 5 September 2023 at 8.
48If the case does not resolve, a further application can be made.
Costs of this Application
49The issue of who should pay the costs of this application was hotly contested. The defendant has succeeded in having the default judgment aside and has had partial success in relation to security for costs.
Plaintiff’s Submissions
50In arguing that the defendant should pay the plaintiff’s costs, Mr Caillard relied on the principle that the plaintiff had done no more than enforce the Court’s own Rules and the defendant had been given an indulgence by the Court in having the default judgment set aside. The ‘usual rule’ should apply and the plaintiff should have his costs.[13]
[13] See Coxon v Duggan [2013] VSC 168 at [16]; Lubura v Nezirecevic (2013) 42 VR 43 at [120].
51Mr Caillard also submitted that it is relevant that there were options available to the defendant once his lawyers had been put on notice on 20 June 2023 that the plaintiff ‘reserved his rights under the Rules’. One option was to seek from the plaintiff an agreement to extend time for filing his defence under Rule 3.02(3). If that consent was not forthcoming, the defendant could have applied to the Court for an extension of time under Rule 3.02(2). At the very least, the lawyers could have responded to the plaintiff’s lawyer’s correspondence explaining the inquiries that they were making and seeking an undertaking that judgment would not be entered before a particular date. Rather than doing that, it did not communicate at all until 13 July 2023 (more than three weeks later). Old fashioned as it may be in this day and age, they could have picked up the telephone and discussed the case in accordance with both sound legal practice and the duty of co-operation now imposed on lawyers by statute.[14]
[14] Civil Procedure Act 2010 (Vic), s 20.
52Finally, it was submitted that, until the hearing on 18 September 2023, it was the defendant’s contention that the default judgment entered on 6 July 2023 was irregular because the claim was for ‘damages’ but the judgment had been given in a fixed amount on the basis that the claim was for a debt.[15] A considerable part of the submissions dated 18 September 2023 filed by the plaintiff in respect of this hearing was devoted to refuting this argument only for the Court to be informed by Mr Horgan for the defendant that the regularity issue was conceded.[16]
[15] See Orders of Her Honour Judge Burchell dated 21 August 2023, ‘Other Matters’: Paragraph I.
[16] Outline of Submissions by the Plaintiff dated 18 September 2023 at [14]-[24].
Defendant’s Submissions
53In support of his application for costs, the defendant referred the court to a series of cases in which courts have set aside default judgments in circumstances where lawyers were criticised for entering default judgment at the earliest opportunity without warning against parties known to be legally represented. In these so called ‘snapping on’ cases, the courts have accepted that while such conduct is legal, it will not be countenanced. As Bongiorno J explained in French v Triple M Melbourne Pty Ltd,[17] ‘…it would be contrary to justice for this Court to allow this tactic to be successful by refusing to set aside the judgment entered by default. Litigation is not a steeple chase nor even a bike race where a fall can determine the outcome’.[18]
[17] [2006] VSC 36; see also Gold Dealers Exchange Pty Ltd v Williams [2022] VSCA 277 (‘Gold Dealers’).
[18] [2006] VSC 36 at [23].
54In Gold Dealers, the Court of Appeal referred to the overarching purpose in s 7(1) of the Civil Procedure Act 2010 (Vic) being ‘to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute’. As the Court there observed, rather than achieving that purpose (which here means determining if the defendant is indebted to the plaintiff as the plaintiff claims), the plaintiff’s conduct has ‘had the foreseeable consequence of an application being made by the [plaintiff] to set aside the default judgment, with the result that the dispute [is] prolonged and the parties’ costs increased’.[19]
[19] [2022] VSCA 277 at [117].
55In such circumstances, as the Court of Appeal recognised in that case, it is open to a judge ‘to find that the [plaintiff] was responsible for all of the costs that were incurred from the time that it entered default judgment’.[20]
[20] [2022] VSCA 277 at [118].
Conclusion
56The question is finely balanced and there are sound arguments each way. I have taken them into account as well as the open offer made by the plaintiff on 8 September 2023 discussed above. The offer was made at a time when the defendant was maintaining that the default judgment was irregularly entered.
57Ultimately the court must make an order that reflects what it considers to be the just outcome. I consider that will be achieved by making no order as to costs.
Orders
58I will make the following orders:
1. The default judgment dated 7 July 2023 is set aside and the defendant is given leave to defend.
2. The defendant has leave to file and serve a defence by 18 October 2023. The defence should be in accordance with the proposed defence annexed to the affidavit of Feng Lin but may include other defences as foreshadowed by counsel at the hearing on 18 September 2023.
3. The plaintiff is to file and serve any reply 30 days after the defence is served.
4. Pursuant to Order 62.02(1)(a) of the County Court Civil Procedure Rules, the Plaintiff give security for the costs of the Defendant in the proceeding up to and including mediation in the sum of $50,000 such security to be provided by 24 November 2023 by way of payment into Court or a bank guarantee.
5. If the plaintiff fails to give security as required by Order 4, the plaintiff’s claim is dismissed.
6. The Defendant has liberty to apply for further security for costs subsequent to the mediation in the proceeding.
7. There be no order as to costs.
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