Prater & Prater Kitchens Pty Ltd (ACN 165 514 929) v Grope Hamilton Lawyers - [2017] SASC 55

SUPREME COURT OF SOUTH AUSTRALIA
(Magistrates Appeals: Civil)
PRATER & PRATER KITCHENS PTY LTD (ACN 165 514 929) v GROPE HAMILTON LAWYERS
[2017] SASC 55
Judgment of The Honourable Justice Parker
11 April 2017
MAGISTRATES - APPEAL AND REVIEW - SOUTH AUSTRALIA - APPEAL TO SUPREME COURT
PROCEDURE - INFERIOR COURTS - SOUTH AUSTRALIA - MAGISTRATES COURT
The respondent commenced proceedings in the Magistrate’s Court to recover legal fees for work done on behalf of the appellants. Appellants did not file a defence to the claim. Magistrate entered default judgment in favour of respondent on 9 November 2015. On 1 July 2016 appellants applied to have default judgment set aside and be granted leave to file defence. Magistrate refused application. Appellants appealed decision to the Supreme Court. Respondent submitted there was no obvious error of law or fact in the reasons of the magistrate.
Held (per Parker J), dismissing the appeal:
1. The magistrate did not err in finding no reasonable excuse had been advanced by the appellants for failing to file a defence and not taking earlier action to set aside default judgment.
2. The magistrate did not err in finding that any proposed counterclaim based on negligence had no possibility of success.
Legal Practitioners Act 1981 Schedule 3, cl 37; Magistrates Court (Civil) Rules 2013 r 87; Supreme Court Civil Rules Schedule 2, referred to.

PRATER & PRATER KITCHENS PTY LTD (ACN 165 514 929) v GROPE HAMILTON LAWYERS
[2017] SASC 55
Magistrates Appeal: Civil

PARKER J: This is an appeal against the refusal of a magistrate to set aside a summary judgment entered against the first appellant, Rachel Prater, and the second appellant, Prater Kitchens Pty Ltd (“PK”). Ms Prater is and was at all material times a director of PK. She appeared for both appellants. The respondent, Grope Hamilton Lawyers (“GHL”), is a firm of solicitors. The dispute between the parties concerns the recovery of legal fees for work done by the respondent on behalf of the first and the second appellants. The judgment sum was for $47,618.17.
Background
In about December 2014 Ms Prater instructed Grope Hamilton to act on her behalf and on behalf of PK with respect to claims against Maras Construct Pty Ltd (“Maras”) and Tagara Builders Pty Ltd (“Tagara”). In about February 2015 she instructed GHL to act for her and for PK with respect to a dispute with Jamie Nicholas.
On 7 September 2015 the respondent instituted a claim for damages in the Magistrates Court against the appellants in the sum of $46,075.40 (plus interest and costs) in respect of unpaid invoices issued to the appellants with respect to the retainers referred to above covering the period from 31 December 2014 to 28 August 2015.
Neither appellant filed a defence to the claim instituted by the respondent. A default judgment was entered on 9 November 2015 in the Magistrates Court against the appellants and in favour of the respondent in the sum of $47,618.17 (“the judgment sum”). The judgment sum has not been paid.
I pause to note that on 3 June 2016 the respondent filed an application in the Magistrates Court seeking an order authorising it transfer the sum of $30,000 held in the GHL trust account on behalf of PK to its firm account in part payment of the judgment sum. The sum of $30,000 had been paid into the GHL trust account on settlement of the claim by PK against Maras. The magistrate dismissed the application by GHL for want of jurisdiction. The application has been pursued in this Court and is the subject of a separate judgment delivered concurrently.
On 1 July 2016 the appellants filed an application seeking to set aside the default judgment and that leave be granted to file a defence to the claim by the respondent. I infer that the application by the respondent for approval to transfer the $30,000 from its trust account prompted the appellants to take action to set aside the default judgment.
On 19 October 2016 the magistrate dismissed the application by the appellants to set aside the default judgment. The present appeal is against the order made by the magistrate.
The magistrate’s reasons
The magistrate considered the application to set aside the default judgment under r 87 of the Magistrates Court (Civil) Rules 2013. Rule 87 provides as follows:
(1)     The Court may set aside or vary a judgment (not being a final judgment).
(2)The Court must not set aside such a judgment unless the party seeking to set it aside establishes that he or she –
(a)     has an arguable case on the merits; and
(b)     has a reasonable excuse for not having complied with these Rules, or an order of the Court, or any time limit fixed by these Rules or order of the Court, in respect of the action or proceeding.
(3)     When setting aside a judgment the Court may order –
(a)     payment to the other party of costs thrown away;
(b)     payment or security under Rule 81.
The magistrate noted that the power to set aside a default judgment is discretionary. However, the authorities establish that it was necessary for her to be satisfied that the defendant has a bona fide intention of defending the claim and that there is some possibility of them succeeding. Her Honour noted that while it is not appropriate to attempt to evaluate the competing positions based upon affidavit evidence, there must be an affidavit from the defendant which discloses facts upon which they can establish an arguable ground of defence.
Against that background the magistrate first considered whether there was a reasonable excuse for failing to file the defence pursuant to r 87(2)(b). Her Honour found that the respondent had served the claim on both Ms Prater and PK on 9 September 2015. Ms Prater acknowledged that she had lived at the address where service was effected but said that because of mental health issues related to numerous court proceedings and default judgments against PK she had spent most of 2015 avoiding opening any mail. She also said that she had been an inpatient at Glenside Hospital in November 2014 and her condition had not significantly improved until about February 2016. The magistrate noted that there was no medical evidence before the Court to support the assertions made by Ms Prater about her mental health. The magistrate also noted that she had presided in the claim by Ms Prater and PK against Mr Nicholas. Those proceedings had been conducted over several months during mid-2015.
Armed with that knowledge the magistrate accepted that Ms Prater had been through a very stressful time during 2015. Nevertheless, the magistrate noted that Ms Prater had attended court on numerous occasions and appeared to be actively involved in instructing her solicitors. The magistrate accepted that Ms Prater had been suffering significant stress and it is possible that she had ignored and did not open the letter whereby service of the claim was effected.
The magistrate also observed that Ms Prater had acknowledged that she knew about the default judgment as early as December 2015. However, she had not applied to set aside the default judgment until 1 July 2016.
The magistrate held that she was not satisfied that the appellants had demonstrated that they had a reasonable excuse for failing to file a defence or for not taking earlier steps to set aside the default judgment. As it was necessary for them to satisfy both limbs of r 87 their application must necessarily fail. Nevertheless, in case she was wrong about that matter the magistrate went on to consider whether the appellants had an arguable case on the merits.
Arguable defence on the merits
The appellants contended that they had an arguable defence for three different reasons. Those reasons were, first, that the respondent had agreed to act pro bono thus they had no liability to pay any legal costs. Secondly, they asserted that they had suffered considerable loss and damage arising from the negligence of the respondent and sought to set off their entitlement to damages against the liability to pay legal costs. Thirdly, they claimed to have been overcharged by the respondent.
The magistrate noted there was no documentary evidence to support the claim that the respondent had agreed to act pro bono. However, her Honour noted that this issue had been the subject of two affidavits which she had ordered to be struck from the file on 18 August 2016 on the basis that the affidavits contained material which was scandalous and therefore an abuse of process.
The magistrate referred to the fact that Ms Prater had signed three instructions forms relating to each matter. These forms comprised part of the written letters of engagement sent to her by the respondent. Ms Prater acknowledged that she signed these documents but said that she “would have signed anything” at the time and had not read what she was signing.
The magistrate found that each of the instructions forms signed by Ms Prater contained a statement that she was authorised to speak for and on behalf of PK and instructed the respondent to act for and on behalf of the company on the basis that she and the company would be jointly and severally liable for the payment of the respondent’s fees. The retainer letters had stated that the respondent would accept instructions from the appellants jointly and severally.
The retainer letters went on to specify that the respondent would charge fees calculated by way of time costings plus external disbursements and what were described as internal disbursements and administrative services. Each of the three retainer letters contained an estimate of the likely fees and expenses. The schedule to each retainer letter listed the charge out rates for each of the respondent’s fee earners and also the rates chargeable for various indirect expenses. Each of the retainer letters also had attached to it a copy of the relevant provisions of Schedule 2 to the Supreme Court Civil Rules and the costs scales under those Rules.
Mr Mark Hamilton, the Managing Partner of the respondent, had deposed in an affidavit sworn on 5 July 2016 that invoices were generally sent monthly to Ms Prater with the first invoice sent in relation to the Tagara matter being dated 31 December 2014. Mr Hamilton had annexed to his affidavit copies of the sixteen outstanding invoices. These itemised invoices listed the date on which the work was undertaken and by whom, described the work and the sum charged. They had been sent to PK at Ms Prater’s home address. Each invoice stipulated that payment was required in fourteen days.
Ms Prater had acknowledged to the magistrate that she had not contacted the respondent upon receipt of any of the invoices to enquire why she was being charged given her assertion that it had been agreed that the work would be done on a pro bono basis. Ms Prater also acknowledged that on 27 April 2015 she had made a payment of $2,000 to the respondent although she said that she understood that this payment related to the “submitting of documents”. The magistrate nevertheless found that this payment indicated that Ms Prater expected that she would be required to make some payment towards the cost of the litigation.
The magistrate stated that she was mindful that it was not her task to compare the affidavits and make findings of fact. However, she needed to be satisfied that the proposed ground of defence was arguable and has some merit. She found that the overwhelming evidence supported a finding contrary to the contention by Ms Prater that the respondent had been acting pro bono. Thus, she was not satisfied that the proposed defence was arguable on the merits. She then turned to consider the argument by Ms Prater that GHL had been negligent.
The magistrate noted that Ms Prater had attempted to articulate a claim for damages and negligence against GHL without any legal assistance. The proposed claim, or intended counter-claim, related to the conduct by GHL of the claim made by PK against Tagara. PK had been retained by Tagara to undertake certain work and to supply materials but had not been paid. The proposed claim was based on the contention that despite being instructed to do so GHL had not placed a lien on the property of Tagara or utilised the adjudication process under the Building and Construction Industry Security of Payment Act 2009. The appellants claimed to be entitled to damages in excess of $240,000.
After referring to the affidavit sworn by Mr Hamilton the magistrate found that any purported claim for damages in negligence may be very difficult to sustain as it would require a finding that if GHL had acted as a reasonably competent solicitor it was more likely than not that PK would have received the asserted financial benefits from its dispute with Tagara. Ms Prater had deposed in an affidavit to the fact that “Tagara Builders went into liquidation owing close to $30 million in June 2015”. The magistrate indicated that it was difficult to imagine how the placing of a lien on property (if PK had the ability to do so) would have improved the financial outcome for PK. The magistrate also noted the possibility that if payments had been made by Tagara to either of the appellants they may have been captured by the preference provisions under the Corporations Act 2001.
The magistrate indicated that without a full understanding of the matter it was impossible for her to determine whether any proposed counter-claim had merit. Even if the appellants were able to establish negligence or breach of contract on the part of GHL it would be necessary for the appellants to establish that this had caused them to suffer loss and damage. The magistrate also noted that if GHL had taken additional steps against Tagara, such as placing liens on property, that may have simply served to increase the fees incurred by the appellants without any benefit to them given the financial position of Tagara. For these several reasons the magistrate found that the proposed defence based upon a counter-claim alleging negligence against GHL was not arguable on the merits.
The magistrate observed that the Magistrates Court does not have jurisdiction to adjudicate upon the reasonableness of a solicitors’ fees. Clause 37 of Schedule 3 to the Legal Practitioners Act 1981 empowered the Supreme Court to adjudicate legal costs. While an application for an adjudication of costs must be made within six months it was possible for that time to be extended by the Supreme Court. I note that such an application has not been made to this Court.
The magistrate observed that Mr Hamilton had deposed in his affidavit to certain reductions or discounts in invoices rendered, but nevertheless stated that “a cursory review of the invoices indicate that the defendants’ claim that they have been overcharged may have merit”. For that reason the magistrate indicated that if the appellants had otherwise established that they had a reasonable excuse for not filing a defence she would have granted the application to set aside the default judgment but only as to quantum not as to liability. She would have adjourned the action to enable the adjudication process to take place in the Supreme Court.
Ms Prater’s contentions on appeal
Ms Prater appeared personally on behalf of herself and PK at the hearing of the appeal. The notice of appeal stated that the orders she was seeking were:
Set aside judgment and have case on overcharging appealed. Claim against Grope Hamilton of neglect/damages of $281,000.
The grounds of appeal stated by Ms Prater were:
Civil proceeding – claims & liability application – please refer to AMCC1-153631 reasons for ruling
At a directions hearing conducted on 23 November 2016 a judge of this Court pointed out to Ms Prater that her notice of appeal was open to attack on the basis that it did not disclose any grounds of appeal. The judge suggested that she should consider filing an amended notice of appeal that identified the grounds of appeal. His Honour explained that it was necessary for Ms Prater to identify the errors of fact and errors of law that she contended had been made by the magistrate and to indicate why she claimed that the decision was wrong. Prior to the hearing of the appeal my associate contacted Ms Prater on a number of occasions to establish whether she intended to file an amended notice of appeal and an outline of argument. Unfortunately, that did not occur.
Mr Hamilton suggested in his written submissions that the orders sought by Ms Prater in the notice of appeal may be read in the context of an email message sent to his firm by Ms Prater on 4 November 2016 on behalf of PK. She stated in that message that she would be pursuing civil proceedings in the Supreme Court against GHL seeking damages of $281,000 in compensation for the damage caused to her mental health, her family and financial position due to neglect by GH.
Ms Prater also referred in her email message of 4 November 2016 to part of a sentence in the reasons of the magistrate that stated “acting in a manner consistent with that of a reasonable competent solicitor it is more likely than not that the defendants would have received a financial benefit from its dispute with Tagara”. Ms Prater has not included the opening words of the relevant sentence which stated “It is apparent that any purported claim for damages in negligence may be very difficult to sustain as it requires a finding that had the plaintiff acted in a manner consistent …”. Thus, the magistrate was not stating that if GHL had acted as a reasonably competent solicitor it was likely that Ms Prater and PK would succeed in their claim against Tagara. The magistrate was simply stating that to succeed in an action against the respondent the appellants would need to prove that this had not occurred.
Ms Prater had also stated in her email message dated 4 November 2016 that the claim for $47,618.17 “will be reviewed with the cost of a junior/paralegal charges” and then referred to the name of a solicitor employed at GHL. The message concluded by quoting the remark of the magistrate that “the defendants’ claim that they have been overcharged may have merit”.
As Ms Prater was not represented and as Mr Hamilton did not object to the obvious deficiencies in the notice of appeal, I attempted to clarify the grounds of appeal. I took Ms Prater to each element of the magistrate’s reasons and invited her to submit why she contended that the magistrate had erred. I will refer to her various contentions below.
The respondent’s submissions
Mr Hamilton submitted that there was no obvious error of law or of fact in the reasons of the magistrate. Her Honour had applied the correct test and her exercise of discretion was compelling and clearly correct. She was correct to find that the defendants did not have a reasonable excuse for failing to file a defence or for not taking earlier steps to set aside the default judgment. Mr Hamilton also submitted that the magistrate was clearly correct in finding that PK did not have an arguable claim in negligence against GH. Mr Hamilton further submitted that the parties and the court were “somewhat hamstrung” by the magistrate’s failure to indicate how and in what way her “cursory review of the invoices” indicated that the claim by Ms Prater and PK that they may have been overcharged may have merit. Mr Hamilton submitted that the court could consider the further evidence provided in an affidavit in relation to the costs charged in the invoices. He contended that there was no basis for concluding that material overcharging had occurred. He also submitted that it was probable that GHL had in fact charged less than it was permitted to do under the retainer agreement.
Consideration

Ms Prater sought to explain that her failure to file a defence and the delay from 9 November 2015 until 1 July 2016 in seeking to set aside the default judgment and obtaining permission to file a defence as being caused by her mental health issues. During the course of her submissions she referred to the fact that she had been an inpatient at Glenside in November 2014. The magistrate took that fact into account but also noted that there was no medical evidence to support the contention by Ms Prater that her condition had not significantly improved until about February 2016. The magistrate also noted the apparently active involvement of Ms Prater in instructing GHL during the course of the proceedings against Mr Nicholas.
Ms Prater stated during the course of the appeal hearing that medical evidence relating to her mental health was in evidence before the magistrate. That was disputed by Mr Hamilton. Inspection of the Magistrates Court file revealed that medical notes prepared at Glenside Hospital dated 26 and 27 November 2014 had been annexed to an affidavit sworn by Ms Prater on 29 July 2016. This was one of the two affidavits that the magistrate ordered to be struck from the file due to its scandalous content. The magistrate had explained to Ms Prater that she would be permitted to file further compliant affidavits should she consider that necessary. Ms Prater did not do so and nor has she sought permission to file a further affidavit as fresh evidence in the appeal so that the medical notes might be properly before the court.
Even if that material were to be received as fresh evidence it would not assist Ms Prater as the medical notes simply show that she was treated at Glenside Hospital as an inpatient over two days in November 2014. That adds nothing to the facts taken into account by the magistrate.
I do not consider that the magistrate erred in finding that no reasonable excuse had been advanced by Ms Prater and PK for failing to file a defence and not taking earlier action to set aside the default judgment. Because it was necessary for Ms Prater to satisfy both limbs of r 87 the finding made by the magistrate was sufficient to dismiss her application. However, I will also consider the further matters decided by the magistrate in relation to the question of whether there was an arguable defence on the merits.
While Ms Prater maintained her contention that GHL had agreed to act pro bono for her and PK, she was unable to point to any admissible evidence that supported her position. The action of Ms Prater in signing three separate instruction forms which contained a clear acknowledgement of her liability to pay fees combined with her failure to make any protest about the subsequent rendering of sixteen invoices seeking payment leaves me in no doubt that the magistrate correctly concluded that the work was not being done by GHL on a pro bono basis.
During submissions Ms Prater claimed to have received information through a personal connection about the financial difficulties of Tagara before that fact became public. She asserted that she had then instructed GHL to place a lien over property of Tagara and that GHL had been negligent in not doing so. There was no evidence before the magistrate or this Court to support that assertion. I consider that the magistrate correctly found that if Ms Prater or PK had received payment in priority over other unsecured creditors that may potentially have been treated as a preference under the Corporations Act. There also was no evidence to show that Ms Prater or PK had a proper basis to place a lien nor was there any evidence about a property to which a lien might properly have been attached. Nothing was put to me in argument by Ms Prater that in any way suggested that the magistrate erred in finding that any proposed counterclaim based on negligence had no possibility of success.
I have found in the concurrent judgment published in Grope Hamilton Lawyers (Reg’d) v Prater and Prater Kitchens Pty Ltd that GHL were entitled to transfer $30,000 from their trust account to their firm account in partial satisfaction of the claim for $47,618.47.
Conclusion
I dismiss the appeals by Ms Prater and by PK against the order made by the magistrate dismissing the application to set aside the default judgment entered against Ms Prater and PK in the Magistrates Court on 9 November 2015. I will hear the parties as to costs.