Lynn, O. v Dronspace Pty Ltd

Re: OWEN LYNN; MARGARET LYNN; STEPHEN LYNN; GRAHAM LYNN and MALCOLM JAMES
LYNN
And: DRONSPACE PTY LTD; BRUCE GARD; FAY GARD and AGC (INDUSTRIAL) LTD
No. G249 of 1990
FED No. 442
Motion - Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Motion - motion to set aside judgment obtained in action for breach of contract - judgment obtained ex parte and without notice in absence of defence or any other demonstration of intention to defend - whether respondents' inaction constituted deliberate deception or whether genuine intention to defend proceedings

Procedure - whether judgment obtained irregularly - whether Court may and should dispense with requirement of notice of intention to move for default judgment

Federal Court Rules Order 1 rule 8, Order 10 rule 7(1)(b), Order 11 rule 23(1)(b), Order 19 rule 2(1),(2)(d), Order 19 rule 3, Order 35 rule 7(1),(2)(a)

Commonwealth v Verwayen (1990) 170 CLR 394

North v Shierlaw (1897) 13 WN (NSW) 163

Morres v Papuan and Trading Co Ltd (1914) 14 SR (NSW) 141

Term Sales Pty Ltd v Joseph (1949) 67 WN (NSW) 44

Johnsen v Duks (1963) NSWR 730

Rosing v Ben Shemesh (1960) VR 173

Sevil v Heath (1877) Knox 359

Anlaby v Praetorius (1888) 20 QBD 764

Hamp-Adams v Hall (1911) 2 KB 942

Craig v Kanssen (1943) 1 KB 256

White v Weston (1968) 2 QB 647

Singh (Santosh Kumari) v Atombrook Ltd (Trading as Sterling Travel) (1989) 1 WLR 810

HEARING

SYDNEY

#DATE 25:6:1992

Counsel and solicitors for
the applicants: Mr T.J. Clarke instructed by

Stone and Partners

Counsel and solicitors for
the first to third respondents: Mr J.T. Gleeson instructed by

by Dunhill Madden Butler

Counsel and solicitors for
the fourth respondent: Mr M.I. Bozic instructed by

Clayton Utz

ORDER

1. Order pursuant to Order 1 rule 8 that notice of the applicants'

intention to seek judgment against the first, second and third respondents in the absence of a defence be dispensed with.

2. The motion of 10 May 1991 of the first second and third

respondents seeking an order that the judgment in favour of the applicants made on 2 October 1990 be set aside is dismissed.

3. The first, second and third respondents to pay the applicants'

costs.

Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules.

JUDGE1

INTRODUCTION

By their amended notice of motion of 10 May 1991 the first respondent (Dronspace) and the second and third respondents (the Gards) seek an order that the judgment in favour of the applicants (the Lynns) made in the absence of a defence on 2 October 1990 for $120,341.67 plus interest be set aside. The Gards also seek leave now to file a defence and cross-claim against the Lynns and a cross-claim against the fourth respondent (AGC) for an order that AGC pay to the Gards $37,580.87 plus interest.

THE FACTS
The facts of this case border on the bizarre. The Lynns sued Dronspace, the Gards and AGC on 15 May 1990 for $103,000. The action against Dronspace and the Gards was for breach of contract and against AGC for misleading or deceptive conduct in contravention of section 52 of the Trade Practices Act 1974. The matter arose out of a contract dated 26 June 1989 to build nine townhouses at Tweed Heads. The Lynns were the builders and Dronspace was the owner of the property and client of the Lynns. The Gards, who were the directors of Dronspace, were the guarantors of Dronspace's obligations under the contract, and AGC was Dronspace's financier.
The statement of claim, filed by Stone and Partners Solicitors of Lismore on behalf of the Lynns, alleged that the Lynns carried out some of the required building work but that when Dronspace and the Gards failed to make a progress payment required by the contract, work was suspended. The Lynns went on to allege that during the suspension, AGC represented to them that if work was resumed, AGC would, subject to valuation, pay the further progress payments as and when due. Work was resumed but $103,000 was never paid by AGC.
Clayton Utz Solicitors filed a notice of appearance on behalf of AGC on 28 May 1990. Peter Quinlan of Hamilton and Quinlan Solicitors of Coolangatta filed a notice of appearance for Dronspace and the Gards on or about 13 June 1990 just prior to the first directions hearing on 14 June 1990. All parties were represented at this hearing. By consent defences were ordered to be filed and served by 19 July 1990, discovery to be given by 2 August 1990, with inspection by 9 August 1990. The next directions date was fixed by consent for 10 August 1990.
AGC filed a defence on 18 July 1990 generally denying the major allegations made against it but there was no defence by Dronspace or the Gards. On 1 August 1990, an unsworn copy of the Lynns' list of discovered documents was served by Stone and Partners on Hamilton and Quinlan. Formal discovery was given by the Lynns on 3 August and by AGC on 9 August but not by Dronspace or the Gards.
At the directions hearing on 10 August 1990, Dronspace and the Gards were absent. Orders were made for the filing of statements of evidence and for a conciliation conference before a Registrar. The hearing was fixed for 1 November 1990 with a directions hearing on 2 October 1990 to check the result of the conciliation conference.
On 22 August 1990, a statement by the first applicant, Owen Lynn, was filed. On 18 September the Registrar wrote to each of the solicitors, including Hamilton and Quinlan, fixing the mediation hearing for 26 September 1990. On 25 September, AGC filed two statements of evidence.
Only lawyers for the Lynns and AGC attended the mediation conference on 26 September. Forty minutes were spent in conference and it was adjourned to the following day when another fifty minutes were given to the same participants. The matter was then adjourned to the proposed directions hearing on 2 October 1990.
On 28 September 1990 Owen Lynn swore an affidavit in support of a judgment against Dronspace and the Gards for $120,341.67, and on 2 October, in the absence of any appearance for Dronspace or the Gards, judgment was pronounced for that sum plus interest. This judgment was entered on 19 June 1991. The Lynns' case against AGC was adjourned to 3 October 1990 when it was dismissed by consent with no order as to costs. Meanwhile, on the same day as the first judgment, but apparently after the hearing, a defence was filed on behalf of Dronspace and the Gards by city agents for Hamilton and Quinlan.
It seems that nothing then occurred until 12 March 1991 when a notice of appearance was filed by Nicholas Nicholls of Dunhill Madden and Butler Solicitors on behalf of Dronspace and the Gards. Precisely what these parties were then appearing to do is not immediately clear but their original notice of motion was filed on 10 May 1991 by this solicitor with the amended notice of motion dated the same day. It was returnable for 30 May.
The amended notice of motion was eventually supported by two affidavits (sworn 13 May and 18 July 1991) by Fay Gard (the third respondent), two (sworn 21 May and 18 July 1991) by Bruce Gard (the second respondent), and one each by their solicitor Mr Nicholls (sworn 15 July 1991) and an assisting solicitor Meredith Jane Rankin (sworn 13 June 1991). No affidavit was filed by Mr Quinlan or Mr Hamilton.
Affidavits in reply for the Lynns were sworn on 17 June 1991 by Owen Lynn and by Gary Owen Davis, their solicitor, of Stone and Partners. On behalf of AGC, there was filed an affidavit sworn on 18 June 1991 by Brigitte Sandra Markovic, Solicitor of Clayton Utz.
3. THE GARDS' EVIDENCE
The evidence of the Gards and Dronspace was as follows:

3.1 When they were served with the statement of claim, they went to Hamilton and Quinlan. They first saw Mr Hamilton and then Mr Quinlan. They had several conferences with Mr Quinlan who almost from the outset advised them not to defend the proceedings and to go bankrupt.

3.2 Although they apparently had several later conferences with Mr Quinlan, in which this advice was repeated, they nevertheless always intended to defend the matter.

3.3 Mr Quinlan:

(a) did not tell them of the date for filing the defence

(b) told them that not filing a defence would "call the builder's bluff"

(c) said that "the builder will not go through with the proceedings"

(d) did not tell them the date of any directions hearing except the first one on 14 June 1990

(e) especially did not mention the directions hearing on 10 August 1990 when the matter was readied for hearing and a hearing date fixed

(f) did not inform them of the date for hearing, although "at some stage after August 1990, (they) became aware of the fact that there would be an opportunity to defend the hearing in November 1990"

(g) did not advise them of the mediation conference on 26 September 1990

(h) did not inform them of the hearing on 2 October 1990

(i) had no instructions to permit judgment to be entered on 2 October or any other date

3.4 On 6 October 1990, Mrs Gard had a conversation with Mr Quinlan in which he told her that judgment had been pronounced on 2 October

1990. He had said:

I prepared a defence and thought it would have been successfully filed on time. I intended to deliver the defence to my Sydney city agents via the Document Exchange. The defence was filed on your behalf and on behalf of Bruce and Dronspace on 2 October but it was not successful.

3.5 After a further conversation on the same day in which Mr Quinlan informed Mrs Gard that AGC had bought the debt for $1 and used the money obtained from the sale of a property of the Gards at Dundas (the Dundas property)

to pay part of the judgment debt, she

lost faith in Mr Quinlan altogether.

3.6 The 7 months delay in moving to set aside the judgment was caused by depression and confusion, marital difficulties which finished in separation, financial problems, full time work, caring for two young children and the unemployment of her husband. 3.7 The Gards have always had a good defence to the Lynns' claim and a good cross-claim against them on the basis of bad workmanship, delays beyond contract date, unauthorised variations to the approved plans and specifications, and overcharges and calculation discrepancies. In addition, Owen Lynn successfully bid for one of the townhouses at an auction but subsequently refused to pay the deposit or proceed with the purchase. The particular townhouse was later sold for $13,000 less. 3.8 Against AGC, an $80,000 default by the Gards in interest payments on a $940,000 loan from AGC of 9 March 1991 resulted in $80,000 being deducted from the funds borrowed to pay the Lynns, despite an agreement that a further $80,000, to replace the interest shortfall, would be advanced for this purpose. Moreover, a surplus of $40,000 following the sale of the Dundas property was paid to AGC, when it should have gone to them direct, and was later applied to reduce the debt recovered by the Lynns on 2 October 1990 which they assigned to AGC for $1. 3.9 So far as concerns their defence and cross-claim to the Lynns' claim, the Gards say that they first raised the defective workmanship, contractual breaches and other deficiencies of the Lynns with Mr Hamilton in about January and February 1990. This is partly supported by letters written by them to the Lynns and the Area Inspector of the Building Services Corporation on 8 and 10 January 1990 respectively and a letter written on their behalf by Mr Hamilton to the Lynns on 14 February 1990. There was apparently no reply to this letter but Stone and Partners did write to the Gards on behalf of the Lynns on 2 April 1990 that Dronspace was in default under the contract in the sum of $103,000. The Gards as guarantors were called upon to pay that sum in default of which proceedings were to be brought. 3.10 Their intention to defend the Lynns' claim was always made clear both to their own and to the Lynns' solicitors. By letter of 12 April, Mr Hamilton replied to Stone and Partners' letter of 2 April that liability was denied and that any proceedings would be defended. This was repeated and expanded in a letter from Mr Quinlan to Stone and Partners of 13 June 1990. Their proposed defence and cross-claims were evidenced on the motion. 3.11 As indicated by a letter of 25 July 1990 from Clayton Utz for AGC to Mr Quinlan, the Gards had personally informed AGC that they wanted to settle with the Lynns on the basis that the Gards' moneys held by AGC be paid to the Lynns less some deductions for legal and other fees. Five days later Mr Quinlan followed up instructions to this effect with Ms Markovic and the Lynns, and 10 days later a conference between Owen Lynn and a representative of the Gards' tried to take the matter even further. 3.12 Moreover in their statements of affairs of 27 August 1990 for a proposed Part X arrangement, the Gards indicated an intention to contest all or most of the Lynns' claimed debt. Their decision to go into the Part X arrangement was intended to avoid bankruptcy, at least partly so as to permit continuation of the proceedings against the Lynns.

3.13 A little later, in mid September 1990, Mrs Gard had a conversation with Owen Lynn in which she put to him that this was his last chance to accept the moneys held by AGC. Mr Lynn is said to have replied that he was not interested in taking the Gards' money and that he wanted to pursue AGC. 3.14 At the meeting of creditors on 24 September 1990, their intention to defend the proceedings was made clear even though the Part X arrangement was not accepted.

3.15 The Gards also had conversations with Ms Markovic on 26-27 September 1990 concerning the fate of the moneys held by AGC in any settlement to the Lynns. The evidence also reveals as a possibility, that if AGC would not agree but the Lynns did, the money might have been available from Mrs Gard's sister and brother-in-law.

4. THE LYNNS' EVIDENCE

4.1 The Lynns' solicitor Mr Davis said that on 19 and 24 July 1990 he spoke with Mr Quinlan, on 8 August 1990 he met with a Mr Phil Cameron, the Gards' Insolvency Adviser, on 14 August 1990 he spoke by telephone with Mr Ron Dunlop, Mr Cameron's employer, and on 28 September 1990 he spoke by telephone with Mr Hamilton. The effect of all these conversations was that the Gards were either going into bankruptcy or a Part X arrangement, Dronspace was going into liquidation and they were not intending to defend the Lynns' claim. This account was not seriously challenged. 4.2 Mr Davis advised Mr Hamilton on 28 September that the Lynns were "close to settling (the) matter with AGC" and would be seeking a judgment when the matter was before the Court on 2 October. 4.3 Hamilton and Quinlan's file shows that the Gards discussed setting aside the judgment with their solicitor on 3 October 1990.

4.4 The evidence also establishes that by 6 December 1990, the Gards had the money to pay for an application to set the judgment aside and had instructed their lawyers to do so.

5. AGC'S EVIDENCE

5.1 Ms Markovic's affidavit presents these and other basic facts of the matter. She annexed a letter (annexure C) showing that the Gards and AGC were discussing settlement as early as 25 July 1990.

5.2 Mr Quinlan told her expressly on 30 July that the Gards "will not be filing a defence". This account was not challenged. 5.3 Mr Quinlan also said that the Gards had gone to see an insolvency accountant and that if the Lynns did not accept the settlement offer, the Gards "would file for voluntary bankruptcy".

6. THE GARDS' SUBMISSIONS

6.1 The Gards say firstly that the judgment of 2 October 1990 was given irregularly. Order 10 rule 7(1)(b) and Order 11 rule 23(1)(b) require notice of any motion for judgment. Order 19 rules 2(1) and 3 require three days notice in writing. No written notice at all was given that judgment would be sought on 2 October 1990 and there was no application under Order 19 rule 2(2)(d) to dispense with the requirements of rule 2(1). The Gards say that a power to set aside the judgment may be found in Order 35 rule 7(1) or (2)(a) and that the power under Order 1 rule 8 to dispense with compliance with Orders 10, 11 and 19 cannot be used in this case. In Hamp-Adams v Hall (1911) 2 KB 942 Buckley L.J. said on this subject at 945: Where a plaintiff proceeds by default every step in the proceedings must strictly comply with the rules.

See also Johnsen v Duks (1963) NSWR 730 at 731-2, Craig v Kanssen

(1943) 1 KB 256 at 259 et seq; Anlaby v Praetorius (1888) 20 QBD 764 at 768-9, 770-1.

6.2 Alternatively, if the Court can dispense with the rules as to notice, the Gards argue that:

6.2.1 the onus is on the Lynns and AGC to establish that justice requires waiver and that there is a reasonable explanation or excuse for the neglect of the rules: Morres v Papuan and Trading Co Ltd (1914) 14 SR (NSW) 141 at 144;

6.2.2 the Court would not do so where failure to comply with the rules caused grave prejudice to the other party. 6.3 The Gards say that far from overlooking the filing of a defence or deliberately deciding not to defend, the evidence is to the contrary. They admit that their former solicitor gave some indication, as a matter of unexplained strategy, that no defence would be filed, and that they reluctantly agreed to this "tactic". They say, however, that their subsequent conduct indicated a determination not to allow judgment to be signed. 6.4 The Gards submit that this conduct entitled them to assume that if the settlement being discussed ultimately fell through and the Lynns proceeded with their claim against the Gards, a reasonable amount of notice would be given.

6.5 The Gards rely upon something akin to estoppel in this regard. The argument is that a type of estoppel will arise "where one party knew that the other party laboured under (an) assumption (as to a state of affairs) and refrained from correcting him when it was his duty in conscience to do so". Although remarks of members of the High Court in Commonwealth v Verwayen (1990) 170 CLR 394 at 413 and 444 are quoted, I doubt if that decision extends quite so far.

6.6 However, the same argument may be addressed on the issue of any discretion now falling to be exercised. The argument is that at the very time that AGC and the Lynns knew that the Gards were attempting to settle the matter with them, and were supposedly considering the offer, AGC and the Lynns were, unbeknown to the Gards, putting together a plan to have judgment peremptorily signed against them. The submission is that this intention should first have been conveyed to the Gards before judgment was, as they allege, "snapped".

6.7 The conversation between Mr Davis and Mr Hamilton on 28 September demonstrates a knowledge of the duty to give notice. If so, the almost immediate filing of a defence is an endorsement and re-inforcement of the Gards' intention and desire to defend the matter.

6.8 The Gards also submit that their poor financial position ought also be taken into account in explaining why they ought not be held to account for the non-filing of a defence while another less expensive way of dealing satisfactorily with the matter was available.

6.9 The Gards should also be granted their motion because they have established an entitlement to set aside the judgment even if it had been regularly obtained.

6.10 The Gards also raise another more complex argument. It is that AGC had no right under the terms of the mortgage on the Gards' Dundas property to hold any surplus funds achieved on its sale, and was obliged to refund this money to the Gards. This is because the claimed basis for retaining these funds was a charge which they held over a deposit by Dronspace with VACC Finance Limited. This charge did not represent a charge over the Gards' equity in the Dundas property. The retention of this amount by the assignment by the Lynns of their 2 October 1990 judgment to AGC ought not to be permitted because it only becomes possible as the result of the wrongful holding of the money in the first instance. If it had been paid to the Gards as it should, AGC could never have entered into the assignment agreement with the Lynns.

6.11 In the light of the conclusions I have reached, it is not necessary for me to deal with this very interesting argument. It is in any event strongly disputed by AGC on the facts and I have not heard or been supplied with all the facts. Moreover, the present motion does not seek to set aside the assignment or the judgment entered on 3 October 1990 between the Lynns and AGC.

7. THE LYNNS' SUBMISSIONS

7.1 The Lynns argue that the Gards through their solicitor deliberately sought to deceive the Court and the applicants as to their intentions concerning the defence of the proceedings. 7.2 In this regard they point to the Gards' failure to appear or take any other step at any stage of the proceedings after the first directions hearing, despite having a solicitor who was well aware of the proceedings. This withdrawal from any participation in the proceedings, including the failure to appear at the mediation conference before the Registrar, was contumelious, and any culpable default bringing about the present situation lies in the deliberate strategy instituted and continued by the Gards and their solicitors.

7.3 The Lynns say that abandonment of litigation carries an implicit concurrence in judgment being obtained. The Gards are bound by the response of their solicitor that they would take no further part in the proceedings even though he and they were aware of the consequences. The overriding principle is to see that the interests of justice are served. The Gards' behaviour in the matter shuts them out of any possibility of a successful claim that justice has not been done to them thus far and would not be done to them if they are not now permitted to defend the proceedings.

7.4 In support of their argument that the Gards intentionally deceived the Lynns and the Court, the Lynns say that: 7.4.1 The early advice of Mr Quinlan to the Gards that they "call the builder's bluff" and go bankrupt, and that "the builder will not go through with the proceedings", was demonstrably accepted by the Gards, so far as the Lynns are concerned, by their non-participation in the proceedings. The expression given by Mrs Gard in cross examination that they should "pretend" and "give the impression" not to defend the proceedings while in fact always having the intention of defending them, was the clearest possible indication of misleading conduct. 7.4.2 The conversations held by Mr Davis (for the Lynns) with Mr Quinlan and Mr Hamilton (for the Gards), and with Mr Dunlop, the Gards' insolvency adviser, to the effect that the Gards could and would not defend the matter because they had no money and that they were planning bankruptcy or a Part X arrangement, were entitled to be taken at face value. Mr Davis could not have been expected to know or guess during or after his conversation with Mr Hamilton on 28 September that a defence would be filed.

7.4.3 The fact that Ms Markovic did not get back to the Gards with AGC's response to their proposed settlement is not to the point because this was the Lynns', not the Gards' or AGC's action. Further, there never was a concluded agreement, and pending an agreement, the proceedings were not stayed and no right or intention to file a defence was reserved.

7.4.4 The negotiations between the Lynns and AGC which resulted in the judgment against the Gards and the assignment of the debt to AGC were predicated on the conviction, based on the Gards' deliberate non-involvement in the litigation and Mr Davis' conversation with their advisers, that they had no real interest in the case.

7.4.5 The Gards admit that some amount of money is owed to the applicants, yet their defence goes to the whole of the claim.

7.5 On discretionary matters, the Lynns submit: 7.5.1 If the judgment is set aside, they cannot expect a resolution of their claim until perhaps three years after they first took action. The Lynns would then be in the same position as would have occurred if the Gards had filed their defence in accordance with the Court's order in June 1990. Yet they deliberately ignored this order without having the courtesy to tell the Court why, and deliberately misled the Lynns and AGC. 7.5.2 The Gards can still take action against the Lynns for breach of contract. If so, execution on the current judgment could be stayed on appropriate conditions as to costs and security to protect the Lynns who, because of the assignment to AGC, no longer have any interest in this litigation. It is not relevant to the present motion that the Gards may have an action against AGC. 7.6 Alternatively, if the Court has no power to waive compliance with the rules as to notice of an intention to seek a default judgment, the judgment should only be set aside on conditions as to the payment of the Lynns' costs to date, the payment into Court of the amount in dispute or security therefor and an order that the defences and any cross-claims be verified.

8. AGC'S SUBMISSIONS

8.1 AGC also argues for the regularity of the judgment. It says: 8.1.1 Order 10 rule 7(1)(b) and Order 11 rule 23 apply because, and only when, a party has defaulted in complying with a Court order.

8.1.2 Although the Gards were in default of orders made on 14 June 1991 at which they were represented, the judgment was not entered on this account.

8.1.3 This was a judgment entered following a settlement reached at a mediation hearing before a Registrar, of which hearing the Gards' solicitor was aware though he did not attend, following directions of the Court that the results of the mediation be conveyed to the Court. 8.1.4 When this order was complied with, the Court was informed that part of the settlement was the entry of judgment against the Lynns.

8.1.5 The affidavit of Owen Lynn of 28 September 1990 filed in support of the judgment did not rely on the failure of the Gards to comply with Court orders. 8.1.6 Order 35 rule 7(2)(a) contemplates or implies that judgment can be entered in the absence of any unsuccessful party without notice. 8.1.7 It is for the Gards to satisfy the Court that such a judgment should be set aside.

8.2 Alternatively AGC says that any irregularity in the obtaining of the judgment does not per se entitle the Gards to set it aside but only to an exercise of the Court's discretion. 8.3 For entitlement, the defect must be fundamental, e.g. White v Weston (1968) 2 QB 647 where there was no service of the originating process; Hamp - Adams where there was a failure to comply with an order for substituted service; cf Singh (Santosh Kumari) v Atombrook Ltd (Trading as Sterling Travel) (1989) 1 WLR 810 where there was a failure to serve a writ at the defendant's registered office.

8.4 The complaint in this case is far from a fundamental defect caused by the suing party. Any irregularity here was brought about by the degree of success achieved by the unsuccessful parties in the impression of not defending the action they deliberately set out to create.

8.5 On discretionary matters in relation to dispensing with the rules, AGC says:

8.5.1 The question is one of justice.

8.5.2 The decision not to defend was deliberate, taken not out of deference to their solicitor or any inadequacies as to their power of argument or available funds, but because it suited them.

8.5.3 It was acquiesced in by the Gards from beginning to end. 8.5.4 At best the Gards presumed but did not insist, and were never given by Mr Quinlan to believe, that a defence was to be filed.

8.5.5 Not only did the Gards not convey to the Lynns or AGC an intention to defend the action, the opposite was conveyed or allowed to be believed. In this regard, the uncontested evidence of Ms Markovic as to a conversation with Mr Quinlan on 30 July 1990 and of Mr Davis as to a conversation with Mr Hamilton on 28 September 1990 is particularly powerful testimony.

8.5.6 The deliberation of the Gards in this regard was due to their assessment of their financial situation and interests. In early 1990 they were on the verge of bankruptcy due to inability to pay their debts. After the Lynns' action commenced, they did not have the $15,000-$20,000 they were told it could cost to defend the case. By taking no part in the proceedings they avoided incurring further legal costs. 8.5.7 AGC will suffer prejudice if the judgment is set aside because it has since paid $53,000 to the Lynns against whom it would have to commence recovery proceedings. Whatever the result of such an action, further costs will be incurred. This result would directly flow from the Gards' failure to participate in the proceedings. 8.5.8 There was an inordinate delay in making application to set aside the judgment. There is an obligation to move in this regard as soon as possible after the fact of the judgment first becomes known: Sevil v Heath (1877) Knox 359; North v Shierlaw (1897) 13 WN (NSW) 163; Term Sales Pty Ltd v Joseph (1949) 67 WN (NSW) 44; Rosing v Ben Shemesh (1960) VR 173. Nevertheless no application was made for seven months after the judgment and for five months after the necessary information was supplied to the Gards' solicitor. This delay is completely unexplained.

8.6 If the judgment is set aside, terms should be imposed that the Gards pay AGC's costs to date on an indemnity or solicitor and client basis.

9. THE GARDS' REPLY

9.1 Order 35 rule 7 only applies to the variation of a judgment once given, not with the prerequisites to the pronouncement of judgment.

9.2 It offends natural justice for a party not to have its case heard on the merits before judgment is given against it. 9.3 The 28 September telephone advice from Mr Davis and Mr Hamilton that judgment would be sought must be looked at in the context that the defence was filed immediately thereafter. 9.4 A stay of execution on the judgment is inadequate because it would prevent the Gards from challenging the AGC's holding of the surplus from the sale of the Dundas property. If this is not permitted in this action, it may be extinguished. 9.5 If the judgment is not set aside, AGC would profit from its own wrong in holding the Gards' money from the Dundas sale without legal authority.

9.6 There should be no order as to the costs of the judgment. Either AGC and the Lynns should pay the costs of the motion or there should be no order as to costs.

CONCLUSIONS

In my opinion the judgment was obtained irregularly. I reject AGC's submission that it flowed in some way from the mediation conference. The Court was not asked to enter or approve terms of settlement. It was asked for an ex parte judgment. The rules require that written notice be given of any such application. Oral but not written notice was given, and it was less than three working days.
Order 1 rule 8 is in the broadest terms. Its words and proper construction provide no basis for reading it down so that it cannot apply to the present circumstances if justice so demands. That means that an exercise of discretion is required. It would seem that the Lynns and AGC must establish the grounds for its exercise. Two issues arise. The first is whether the failure to file a defence was deliberate. I have little doubt that it was. In this regard the Gards' evidence was quite unsatisfactory and inconsistent. I believe that it was in important respects prevaricating.
From the outset it was decided, however reluctantly, that no defence would be filed. It was then decided that none of the Court's orders would be complied with. Even if this decision was made by the Gards' solicitors, it is inconceivable that they would have done so if they were not acting under instructions. If that is not the case, the Gards' remedy lies elsewhere than in this action. The failure of the Gards to call either Mr Quinlan or Mr Hamilton, or to give a reason for their absence, must at least lead to the conclusion that their evidence could not have assisted in this regard.
In view of the considerable number of discussions they had with their solicitor, it is also inconceivable that the Gards could have thought that nothing at all needed to be done, so far as the case was concerned, between the first directions hearing in June and the October judgment.
The completion by the Gards on 27 August 1990 of their verified statements of affairs for the meeting of creditors on 24 September must have been a declaration that their dispute with the Lynns would now become a matter for their creditors and controlling trustee. It assisted them to keep their declared debts as low as possible, and raising a doubt about the size of the Lynns' debt served this end.
I do not understand the intent or purpose of the claimed ruse to engender a false belief in the Lynns that the case would not be defended. Nor did the Gards effectively explain even their understanding of its purpose, let alone why they went along with it, even reluctantly. Perhaps it was that if the Lynns could be persuaded to believe that the Gards were going bankrupt, their claim would be dropped. If so, it was at best naive. If this exercise was undertaken to trick the Lynns into withdrawal while intending that if they did not fall for this stratagem, a defence would then be filed, it was at least one of the more hamfisted escapades I have seen. Why a party would be more likely to withdraw proceedings when there was no defence than where there was a defence of substance, I do not know. If the Gards' bankruptcy or a Part X arrangement was a likely occurrence, the Lynns would possibly lose something by withdrawing the case, while gaining nothing, not even an improvement in their changes of recovery from AGC.
However, the seriousness of this suggestion lies elsewhere. If there always was an intention to file a defence at some stage, what occurred here was an act of outrageous brinkmanship in defiance of Court rules and orders. If practised widely, it would completely wreck the capacity of the Court to administer its business. Numbers of litigants being sued would take no part in the interlocutory stages of proceedings. Then, just when the cases were to be heard undefended, they would file, or seek to file, defences they had always intended to file, thus requiring the whole interlocutory process to be begun again. The consequences for other litigants in the particular actions, and for other cases awaiting attention in the Court, would be immense.
By 2 October 1991 the Gards were hopelessly out of time with the filing of defences and cross-claims. They needed the leave of the Court to file them. When they were eventually lodged on the day of the hearing, albeit after judgment was pronounced, they were not accompanied by any such application. In the circumstances established here, a grant of leave, if applied for, would have been at best doubtful. This is not because the Gards could demonstrate no defence but because their defence amounts in substance to an admission of the debt and an allegation of a breach of contract by the Lynns, and other generally unrelated matters. The Gards could demonstrate no reason why they should not pursue whatever rights they have by their own legal action(s). A fortiori the same applies to the cross-claims.
However, this story of tactics on the part of Mr Quinlan and Mr Hamilton is too preposterous to accept, and in their absence I simply do not believe the Gards' evidence in this regard. It would be positively Macchiavellian, even Gilbertian, for Messrs Hamilton and Quinlan to be maintaining to Mr Davis and Ms Markovic on so many occasions, even as late as 28 September 1990, that no defence was to be filed, for insolvency advisers to be retained, for statements of affairs to be assembled and a Part X meeting to be called, and for the Court's orders and mediation conferences to be ignored without a word of regret or apology to the Court even now, if the intention and instructions were always to defend the proceedings. I reject that contention absolutely.
In this context, the so-called settlement discussions and proposals between the Gards and AGC are in my view as wholly irrelevant as they were eccentric. Without a defence showing AGC the strength of the Gards' case and their chances of resisting the Lynns' claim, and without a cross-claim against AGC demonstrating the nature and bona fides of the Gards' assertions concerning AGC's supposed defaults, including its allegedly wrongful withholding of the surplus from the sale of the Dundas property, there was absolutely no pressure on AGC to agree to anything proposed by the Gards and no reason for doing so. The Gards' effort to pull off this settlement certainly did not manifest, and was not relevant to, an intention to defend the proceedings. Quite the contrary. As it seems to me, the Gards' proposal in this regard was a speculative, perhaps even desperate, ploy to avoid bankruptcy and the liquidation of Dronspace.
It is ironic that the Gards are now submitting that the actions of the Lynns and AGC in September 1990 misled them into believing that their failure to file a defence would not prevent them from actually defending the claim. This is because if I am to believe that this failure was Mr Quinlan's magical thesis to cajole the Lynns into discontinuing their claim, the Gards and their two solicitors were wilful parties to an elaborate scheme to deceive the solicitors for the Lynns and AGC. The fact that this incredible fairytale occurred in Australia in the last decade of the twentieth century prods me to look for the realities. The Gards were not misled. Their story is a concoction.
The second issue is the delay in filing the motion to set aside. There is simply no serious explanation first of the delay between 3 October and 6 December 1990, and then of the delay between 6 December and 10 May 1991 when notice of the motion was finally given. I can perhaps accept that the first period might be explained on the basis of the need for the Gards to raise the money for the motion, but the second period is completely inexplicable. I simply cannot imagine that depression and the marital problems of his client could have caused a fully or sufficiently briefed solicitor not to file the motion, even if it had to be later amended. It is, however, not necessary to give a final judgment on this question. If it is, I do not accept the explanation given for a delay of seven months in moving to set aside a judgment which it is contended was accidentally allowed to occur against a long-held determined intention to defend it.
The refusal of this motion does not deny the Gards the opportunity of pursuing their rights. Subject to appropriate time limits, they are free to pursue the Lynns in relation to the claims they say they wish to make. They may if they wish pursue AGC for the "Dundas money" as well as for any other moneys they claim to be owed. If successful, interest will compensate them for any delays caused by their failure to be allowed to defend these proceedings. As these delays are entirely of their own making, there is no warrant for involving the Lynns and AGC in the delays by postponing their entitlement to the benefits of what has occurred.
I am indebted to all counsel for their careful and thorough submissions. The Lynns will be granted an order dispensing with their failure to give notice of an intention to seek a default judgment. The Gards' motion is dismissed with costs.

[1992] FCA 442

25 JUNE 1992