Morrison v Smalley

[2022] NSWDC 76

District Court

New South Wales

Medium Neutral Citation:

Morrison v Smalley [2022] NSWDC 76

Hearing dates:

18 March 2022

Date of orders:

24 March 2022

Decision date:

24 March 2022

Jurisdiction:

Civil

Before:

Russell SC DCJ

Decision:

(1)   Set aside the default judgment entered against the defendant on 5 November 2021.

(2)   Grant leave to the defendant to file a Defence to the Statement of Claim by 31 March 2022.

(3)   Order the plaintiff to pay the defendant’s costs of the Notice of Motion filed on 18 November 2021.

Catchwords:

PROCEDURE – application to set aside default judgment – whether judgment entered irregularly – whether there is an explanation why a Defence was not filed – whether there is evidence of a defence on the merits

Legislation Cited:

Uniform Civil Procedure Rules 2005, rr 36.15, 36.16

Cases Cited:

Cohen v McWilliam (1995) 38 NSWLR 476

Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621

Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550

Category:

Procedural rulings

Parties:

Angela Joy Morrison (Plaintiff)
Andrew Smalley (Defendant)

Representation:

Counsel:
A Oakes (Plaintiff)
D Cook SC and J P Nathan (Defendant)

Solicitors:
Coetsee Legal (Plaintiff)
Simpson Freed (Defendant)

File Number(s):

2021/00223171

Judgment

Introduction

1. The plaintiff obtained a default judgment against the defendant on 5 November 2021 for $449,684.96.

2. The defendant filed a Notice of Motion on 18 November 2021 seeking to set aside the default judgment. The defendant relied upon r 36.15 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) and r 36.16 of the UCPR. The defendant sought leave to file a Defence within seven days, if the judgment is set aside. Paragraph 3 of the Notice of Motion, which sought the provision of particulars, was abandoned.

The Statement of Claim

3. In the Statement of Claim filed on 5 August 2021 the plaintiff pleaded as follows:

1. The defendant was the legal owner of 100% of the issued share capital in Bellona Property Group Pty Ltd (“Bellona”) and was the sole director of that company.

2. By a deed dated 21 March 2016 the defendant acknowledged that he held one half of the shares in Bellona on trust for the plaintiff.

3. The defendant and Bellona carried out residential property development projects at Caringbah South and Gymea Bay.

4. The plaintiff carried out project management work on those projects.

5. On 10 April 2019 the plaintiff and the defendant entered into a written agreement by which they agreed that the plaintiff would continue to work on the project at Gymea Bay, would give up her beneficial interest in the shares in Bellona to the defendant and would receive the sum of $300,000 “net” upon completion of the Gymea Bay project.

6. The Gymea Bay project was completed in December 2020.

7. The defendant was liable to pay the plaintiff “the sum of $300,000 net, being $492,121.81”.

8. The defendant had paid $29,000 and the balance owing was $436,121.81.

4. The defendant did not file a Defence to the Statement of Claim in the time prescribed by the UCPR.

Entry of the Default Judgment

5. The defendant relied upon an affidavit by his solicitor Ms E de Mestre affirmed on 18 November 2021 (DX 1). Ms de Mestre annexed copies of the correspondence which pre-dated and post-dated the default judgment. The sequence of events was as follows:

1. The Statement of Claim was filed on 5 August 2021.

2. The Statement of Claim was served on the defendant on 28 September 2021.

3. On 5 October 2021 the solicitor for the defendant sent a letter requesting further and better particulars of the Statement of Claim. That letter concluded as follows:

“We reserve our clients [sic] right to seek further particulars upon receipt of answers to the above. We trust that until we have received all particulars in respect of this matter you will not apply for default judgment. If we are wrong in this assumption and you obtain default judgment, notwithstanding this letter, we will rely on this letter in setting aside default judgment and seeking costs on an indemnity basis. We trust this will not be necessary and look forward to your early reply.

In the event that the particulars provided are sufficient, we ask that you allow our client fourteen (14) days from provision of same to file and serve his Defence.”

4. On 18 October 2021 the solicitor for the plaintiff sent a letter supplying particulars. This letter concluded as follows:

“We note that proceedings were served on your client on 28 September 2021. If your client does not now file and serve a Defence in time, we put you on notice that the Plaintiff will file for judgment in default.”

5. On 18 October 2021 the solicitor for the defendant wrote to the solicitor for the plaintiff. That letter concluded as follows:

“We note that our letter to you dated 5 October 2021 requested 14 days from the provision of the particulars for our client to file his Defence. We require your office to confirm that your client will not file for default judgment until 14 days from today’s date.”

6. By a letter dated 19 October 2021 the solicitor for the plaintiff wrote to the solicitor for the defendant. He characterised the letter dated 18 October 2021, referred to immediately above, as “unnecessarily aggressive”. The letter concluded by stating that in the absence of a Defence, the plaintiff would not seek to enter default judgment until 1 November 2021.

7. By a letter dated 21 October 2021 the solicitor for the defendant wrote to the solicitor for the plaintiff and requested particulars, including two of the particulars which had been already requested in the letter dated 5 October 2021.

8. By a letter dated 26 October 2021 the solicitor for the plaintiff replied and disputed the validity of the request for particulars. That letter concluded:

“The Defendant can be in no doubt as to the case that the Plaintiff propounds by the Statement of Claim.”

9. At 1.04pm on 1 November 2021, without further notice to the defendant, the solicitor for the plaintiff filed a Notice of Motion seeking “Default Judgment for Liquidated Claim”. The Motion was supported by an affidavit by the plaintiff who swore that she was still owed $436,121.81 plus interest and fees.

10. At 7.11pm on 1 November 2021 the solicitor for the defendant emailed the solicitor for the plaintiff requesting further particulars of the Statement of Claim, by pressing what were described as “outstanding responses to our requests for particulars”. That letter said:

“We request that you allow us a further 7 days from the receipt of these particulars to file our Defence to the Statement of Claim. We trust that you will not take further steps in these proceedings until this request for further and better particulars is answered.”

11. The Principal Registrar of the District Court sent a letter dated 2 November 2021 to the solicitor for the plaintiff. That letter indicated that the plaintiff’s Notice of Motion for default judgment had been refused. It said:

“1. An Affidavit of Service must accompany a Notice of Motion for Default Judgment – UCPR 16.3(2).

2.   The Statement of Claim claims for damages and as such a Notice of Motion for Unliquidated Damages must be filed.”

12. At 3.14pm on 2 November 2021 the solicitor for the plaintiff filed another Notice of Motion seeking “Default Judgment for Liquidated Claim”, in precisely the same terms as the refused Notice of Motion filed on 1 November 2021. That Motion was accompanied by an Affidavit of Service. It was not a Motion seeking judgment on an unliquidated claim, as the Principal Registrar had required in the letter from the court dated 2 November 2021.

13. While it was not annexed to the affidavit of Ms de Mestre, the court file contains a record that default judgment for the plaintiff was entered on 5 November 2021 for the sum of $449,484.96 inclusive of costs.

14. On 8 November 2021 the solicitor for the defendant sent an email to the solicitor for the plaintiff noting that no response had been received to the letter dated 1 November 2021.

15. On 10 November 2021 the solicitor for the defendant filed an Appearance in the District Court.

16. The solicitor for the defendant then reviewed the records of the Online Registry and found out for the first time that default judgment had been entered against the defendant on 5 November 2021. Prior to this the solicitor for the defendant had no knowledge of the plaintiff’s two applications for default judgment.

6. The plaintiff relied upon an affidavit of her solicitor Mr P Coetsee affirmed on 24 November 2021. In par 8 of that affidavit Mr Coetsee said:

“The position then was that the plaintiff’s case was very simple and supported by a written document, the plaintiff had responded to two requests for particulars, those requests dealt with matters that were largely irrelevant and not necessary for the defendant to be able to understand the plaintiff’s case, the plaintiff had heard nothing after providing its response of 26 October, the plaintiff had agreed to a request for an extension of time for filing any Defence and in granting that request, the plaintiff had expressly given notice that the extension was up to (and not including) 1 November 2021. In those circumstances, I took the view that the defendant did not have a valid Defence and thus did not intend to file any Defence; and indeed that the serving of the previous requests had been merely a delaying tactic. I therefore filed an application for default judgment on 1 November 2021.”

7. There was no explanation provided as to why, after the letter from the defendant’s solicitor dated 1 November 2021 was received, the plaintiff applied without further notice for default judgment on 2 November 2021. There was no explanation provided as to why the direction of the Principal Registrar was not complied with.

Affidavit of the Defendant

8. The defendant swore an affidavit on 9 February 2022 (PX 2). That affidavit is 18 pages long and referred to a bundle of exhibited documents which ran to 363 pages.

9. In view of the two defences put forward in submissions made by Senior Counsel for the defendant, it is not necessary to refer to all of that material in detail.

10. Senior Counsel for the defendant submitted that there were two arguable defences on the merits:

1. Unconscionability – the agreement should be set aside as an improvident transaction on the basis that it was procured by the plaintiff’s exploitation of the special disadvantage that the defendant suffered by reason of his infatuation with the plaintiff.

2. The construction of the agreement under which the defendant was to pay money to the plaintiff is uncertain. The agreement speaks of $300,000 “net”. The plaintiff’s solicitors have indicated that this means “net of income tax”. The defendant would argue that even if this be so, the agreement would be void for uncertainty because it would be impossible to work out what the sum owed was, because any tax payable by the plaintiff upon receipt of that sum of money would depend on a large number of factors.

11. Against the background of those submissions, I will summarise the evidence in the defendant’s affidavit.

12. The defendant says that he met the plaintiff in September 2015 and developed a romantic relationship with her. They moved in together in January 2016. The defendant wanted to marry the plaintiff and have a long-term relationship with her.

13. Besides living together, the plaintiff and the defendant from March 2016 carried out a property development at Gymea Bay. The company Bellona was incorporated and all of the shares were allocated to the defendant. The defendant executed a Declaration of Trust dated 21 March 2016, acknowledging that the plaintiff was the beneficial owner of 50% of the shares. The defendant said that he signed this document without completely understanding it as he loved and trusted the plaintiff and believed that they were building a future together.

14. From April 2016 onwards the plaintiff and the defendant carried out another property development at Caringbah South. The defendant used personal funds and borrowed money from family members to pay for the cost of renovation works at this property.

15. Bellona entered into a contract for purchase of the Gymea Bay property in July 2016. The defendant borrowed money from his sisters to assist in the purchase.

16. The plaintiff and the defendant separated in December 2016.

17. The Caringbah South property was sold in March 2017.

18. The defendant says that he continued with the development of the Gymea Bay property and made many of the payments associated with the cost of development. In August 2018 construction of four townhouses on the Gymea Bay site commenced. There was difficulty in obtaining finance for the construction and the defendant suggested selling the property. The plaintiff opposed this.

19. On 11 October 2018 the defendant sent a lengthy email to the plaintiff which is reproduced as pp 154-155 of the Exhibit to his affidavit. In par 44 of his affidavit the defendant summarised his intent behind that email as follows:

1. The defendant still cared for the plaintiff despite the fact that they had separated.

2. The defendant still wanted to marry the plaintiff.

3. The parties had undertaken two development projects because the defendant believed that they were building a future together.

4. The defendant was hopeful that he would get back together with the plaintiff even though they had separated.

20. I have carefully read the email dated 11 October 2018 but I will not reproduce it in this judgment. It is certainly capable of conveying the state of mind of the defendant set out in par 44 of his affidavit.

21. The defendant continued with the Gymea Bay development and borrowed further funds from relatives.

22. In par 52 of his affidavit the defendant said:

“On 10 April 2019, Angela presented me with an agreement that she had drafted. Angela handed me the document and we had a conversation using words to the effect of:

Angela:   ‘I want you to sign this now’.

Me:      ‘Well, the worst case is that Bellona doesn’t make a profit and neither of us will get paid, so ok’.”

23. In par 53 of his affidavit the defendant said that he signed the agreement without reading it carefully or understanding it because he trusted the plaintiff even though they had broken up.

24. The agreement is set out at p 279 of the Court Book. It records an obligation of the defendant to the plaintiff for “payment of $200,000 net for work to date” and “a further $100,000 net and $4,000 per month for living expenses until the completion of the project”.

25. On 12 January 2021 the plaintiff sent an “invoice” to the defendant. The invoice claimed the following:

“Payment as per signed agreement dated 10 April 2019 - $300,000.”

26. After credit for certain payments already made, the balance outstanding on the invoice was $247,299.40. The invoice requested that payment be made to a third party and gave bank details for that third party.

27. The fact that the plaintiff’s demand was for $300,000, but said nothing about that figure being net of income tax, affords some support for the defendant’s dispute concerning construction of the agreement.

28. The balance of the defendant’s affidavit concerns further financial dealings between the parties, including a large number of regular payments made by the defendant to the plaintiff, and to the plaintiff’s parents.

29. The defendant did annexe a draft Defence to his affidavit. It was different to a draft Defence previously annexed to the affidavit of Ms de Mestre. Neither draft Defence was relied upon by Senior Counsel for the defendant, who put forward submissions as to the two defences outlined above. The unconscionability defence had been pleaded, after a fashion, in the draft Defence attached to the defendant’s affidavit. Unconscionability was not raised in the first version of the draft Defence. Neither draft Defence raised a defence that the agreement was void for uncertainty.

Consideration of Rule 36.15 UCPR

30. Rule 36.15 is as follows:

“(1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith.

(2) A judgment or order of the court in any proceedings may be set aside by order of the court if the parties to the proceedings consent.”

31. Senior Counsel for the defendant submitted that the default judgment was obtained irregularly. There was no submission that it was obtained illegally or against good faith.

32. A judgment will have been obtained irregularly if there has been a failure to comply with proper procedure or the rules. Examples are where a party has not been given notice of a hearing and yet judgment is entered against them, where judgment is entered prematurely or before actual default is made by the defendant, or where judgment is entered for too much (which is arguably one submission available to the defendant in this case).

33. Default judgments are obtained under Pt 16 of the UCPR. A defendant is in default for the purposes of Pt 16 if he fails to file a Defence within the prescribed time of 28 days after service of the originating process. Rule 16.3 sets out the procedure and the affidavits required to obtain a default judgment. Such applications are made ex parte.

34. Although there is no requirement to notify a defendant of an intention to apply for default judgment to be entered, it may be appropriate in certain circumstances to give such notice – Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550.

35. In Pope Justice Wallace said:

“I think that where the parties signing judgment does so without giving warning of its intention to do so, such party will generally, though perhaps not invariably, be in difficulties on a summons to set aside the judgment where a defence on the merits is disclosed.”

36. His Honour said that two questions arise in such an application:

1. Has the defendant disclosed a defence on the merits?

2. If so, should its conduct debar it from success on the summons?

37. Of course, Pope was not dealing with the modern day r 36.15. Nevertheless, that authority has been cited time after time in applications of the present kind, made under earlier provisions.

38. In the present case the solicitor for the plaintiff did give one warning that he would forebear from signing default judgment before 1 November 2021. However, the correspondence from the solicitors for the defendant seeking particulars contained requests that no step be taken to sign default judgment until particulars had been received and the defendant had been afforded sufficient time to file a Defence.

39. No response was made to those requests. I regard it as unfortunate that the solicitor for the plaintiff proceeded to sign default judgment, when:

1. He knew that there were solicitors acting for the defendant.

2. Those solicitors had requested particulars which they said they needed in order to prepare a Defence.

3. Those solicitors constantly asked for the plaintiff to confirm that default judgment would not be sought without notice.

40. I find that in those circumstances the default judgment obtained by the solicitor for the plaintiff was obtained irregularly within the meaning of r 36.15.

41. I also come to that conclusion for a second reason. The application for a default judgment for a liquidated amount, made on 1 November 2021, resulted in the Principal Registrar of the District Court refusing the application and requiring the solicitor for the plaintiff to file a different application, being a Notice of Motion for a judgment for unliquidated damages.

42. In spite of that, the solicitor for the plaintiff made precisely the same application – for default judgment for a liquidated sum. When the Principal Registrar of the District Court requires a solicitor to take a certain step, there are two options open to that solicitor. The first is to comply with the direction of the Principal Registrar, and the second is to at least take up and discuss with the Principal Registrar why the solicitor asserts that a different direction should have been made. Neither course was taken. Somehow, the application for default judgment for a liquidated sum, made after the direction of the Principal Registrar was conveyed to the solicitor for the plaintiff, was granted by the court. That should not have happened. However, in my view the solicitor for the plaintiff should never have simply made a second application in precisely the same terms and ignored the direction made by the Principal Registrar.

40. There is a third reason why I regard the judgment as obtained irregularly. The Statement of Claim pleaded an agreement for the defendant to pay the plaintiff $300,000 “net”. The solicitor for the plaintiff has interpreted this as “net of income tax”. That is not what the agreement says. While there may well have been a breach of an obligation under that agreement, the precise calculation of the amount due would have to be the subject of evidence. In my view the Principal Registrar was perfectly correct in saying that the claim was not for a liquidated sum (even though it was structured as such in the Statement of Claim) but was properly to be understood as a claim for unliquidated damages for breach of contract.

41. I have already remarked upon the fact that when the plaintiff sent an invoice to the defendant, she asked for $300,000, and not $300,000 net of income tax.

42. Even if that construction of the agreement be correct, there would have to be evidence produced to establish the damages for breach of contract. Such evidence would include how much the plaintiff earned for the tax year, what deductions were available to the plaintiff, and whether there were tax losses from previous years. There would also have to be some exploration of whether or not $300,000 received in part as payment for the plaintiff’s interest in the Bellona shares was truly income, or was a capital payment and was thus subject to capital gains tax and not income tax.

43. Even if the Principal Registrar had not given the direction to bring a different motion, my view is that any default judgment given for a liquidated sum would have been obtained irregularly, as the plaintiff’s claim was properly to be understood as a claim for damages for breach of contract, with damages to be assessed.

44. I am therefore of the view that the default judgment in this matter was entered irregularly within the meaning of r 36.15 UCPR.

Consideration of Rule 36.16 UCPR

48. The defendant also relies upon r 36.16 which gives the court a general power to set aside a judgment after it has been entered, if it is a default judgment. The defendant must establish a defence on the merits and must explain the delay in filing a defence – Cohen v McWilliam (1995) 38 NSWLR 476.

49. I find that the defendant has explained the delay in filing a Defence. His solicitors were seeking particulars and continued to request the plaintiff not to apply for default judgment until the defendant had a chance to consider those particulars and have a Defence drafted. While I accept that the solicitor for the plaintiff took the view that this was all a delaying tactic and that the defendant had no defence, his lack of warning to the solicitors for the defendant that he would seek a default judgment on 1 November 2021 and then 2 November 2021 meant that those solicitors were under the misapprehension that nothing of that nature would be done. In my view the continued requests for confirmation that the plaintiff would allow a reasonable time for the filing of a Defence meant that it was precipitate of the solicitor for the plaintiff to go ahead with seeking a default judgment, without further warning or notice.

50. Subject to the defendant establishing an arguable defence on the merits, I find that there is an adequate explanation for the delay in filing the Defence.

Consideration of the Defence on the Merits

51. This is an element which the defendant must satisfy under r 36.15 and r 36.16.

52. For the defence of unconscionability, Senior Counsel relied upon the decision of the High Court in Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621. That case concerned a man who was infatuated with a woman, for whom he purchased a house. The parties fell out and the man sought to recover that property. The trial judge found that the man was emotionally dependent on the woman, who had greatly influenced his actions. The trial judge found that the woman tolerated the man’s attentions because of the material advantages which resulted. Further, she had created an atmosphere of crisis by making suicide threats in relation to the house.

53. Justice Deane said that the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which:

1. One party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them; and

2. That special disability was sufficiently evident to the other party to make it prima facie unfair or unconscionable that the other party procure, accept or retain the benefit of the disadvantaged party’s assent to the impugned transaction in the circumstances in which it was procured or accepted.

54. Justices Dawson, Gaudron and McHugh agreed with Justice Deane.

55. Senior Counsel for the defendant pointed not only to the two-page email to which reference has been made above, but to the continuing involvement of the defendant in the Gymea Bay property development, spending his own money and borrowing substantial amounts from relatives along the way, largely in the hope that he and the plaintiff could reconcile and re-establish their relationship.

56. Proceedings of this nature at trial involve assessments of credit, consideration of documents and challenges in cross-examination. At this level it is only necessary for the plaintiff to demonstrate an arguable case on the merits.

57. I find that on the evidence presented, the defendant has an arguable defence on the merits, based on the doctrine of unconscionability.

58. I also find that there is an arguable defence that the contract is void for uncertainty. There is nothing in the words of the agreement itself which indicates that the word “net” should be interpreted as nett of income tax. As pointed out above, it is not even certain that income tax would be levied on this particular payment, if made. Instructively, the plaintiff herself did not ask for a figure higher than $300,000.

59. In summary, I find that the defendant has also established an arguable defence on the merits that the contract is void for uncertainty.

Prejudice

60. Counsel for the plaintiff submitted that any prejudice which would be suffered by the plaintiff, if the default judgment was set aside, was a discretionary reason for refusing the relief sought. How such prejudice might arise was not made clear. It is hard to see how there could be prejudice, as there was no delay by the defendant. The plaintiff waited for seven months after sending her invoice for $300,000 before filing the Statement of Claim, and a further seven weeks before serving it. By contrast, the defendant filed his Motion seeking to set aside the default judgment eight days after his solicitor became aware that there was a default judgment. The plaintiff and the defendant are the primary witnesses. All of the documents and financial records seem to be available.

Costs of the Motion

61. If the failure to file a Defence was the fault of the defendant or of his solicitors, the defendant would be seeking an indulgence from the court and would normally be ordered to pay the costs of the plaintiff.

62. However, I have found above that this default judgment was entered irregularly. The solicitor for the plaintiff ignored a direction made by the Principal Registrar of the District Court to file a different Motion. In my view the default judgment for a liquidated sum should never have been entered. There is no explanation as to how it slipped through the court system.

63. The defendant has found himself in the position of having a default judgment entered against him, which in my view should never have been sought, let alone entered. The application dated 2 November 2021 by the plaintiff’s solicitor should never have been made.

64. Further, given the correspondence between the solicitors for the parties, I have found that the solicitor for the plaintiff should have given fair warning of his intention to make an application for default judgment. He was clearly on notice that there were solicitors acting for the defendant, who were seeking particulars and who intended to file a Defence once the particulars were supplied.

65. The necessity for this application has come about through the solicitor for the plaintiff deliberately ignoring a direction from the Principal Registrar of the District Court. In his affidavit the solicitor made no attempt to explain why he did not comply with the direction made by the Principal Registrar.

66. I am therefore of the view that the appropriate order for costs is that the plaintiff should pay the defendant’s costs of the Notice of Motion.

Conclusion and Orders

67. I find that the default judgment entered on 5 November 2021 should be set aside and the defendant should be let in to defend.

68. My orders are:

1. Set aside the default judgment entered against the defendant on 5 November 2021.

2. Grant leave to the defendant to file a Defence to the Statement of Claim by 31 March 2022.

3. Order the plaintiff to pay the defendant’s costs of the Notice of Motion filed on 18 November 2021.

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Decision last updated: 25 March 2022