Midland Properties (NZ) Limited v Dawson

[2021] NZHC 295

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2019-409-724

[2021] NZHC 295

BETWEEN

MIDLAND PROPERTIES (NZ) LIMITED

Plaintiff

AND

ROBERT PETER JOHN DAWSON

Defendant

Hearing:

19 February 2021

Appearances:

A D Marsh for Plaintiff

D M Woodbridge for Defendant

Judgment:

26 February 2021

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 26 February 2021 at 3.15pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar 26 February 2021

MIDLAND PROPERTIES (NZ) LIMITED v DAWSON [2021] NZHC 295 [26 February 2021]

[1]                 The defendant seeks an order setting aside a judgment by default entered against him by the Registrar on 23 July 2020.

[2]                 The defendant says the judgment was irregularly obtained for two reasons. Firstly, the defendant claims judgment was entered for a sum in excess of the amount claimed in the statement of claim, contrary to r 15.7 of the High Court Rules 2016. Secondly, the defendant says r 15.4 required an affidavit verifying the statement of claim to be filed before a judgment by default could be entered because the proceedings were served by substituted service. As no  such  affidavit  was  filed,  the defendant says the plaintiff was not entitled to have judgment sealed.

[3]                 In the alternative, if the judgment was regularly obtained, the defendant relies on r 15.10 to have the judgment set aside.   He does so on the basis it would be        a miscarriage of justice if the defendant was not able to rely on the defences he says he has to the claim.

Background

[4]                 The statement of claim dated 19 December 2019 sought judgment against the defendant as alleged guarantor  of the lease obligations  of a company which  was  the tenant of a commercial building in Christchurch. The premises were leased under an Agreement to Lease which the defendant signed as guarantor, agreeing:

THE GUARANTOR (and if more than one jointly and severally), in consideration of the Landlord entering into this Agreement at the Guarantor’s request, agrees with the Landlord to guarantee to the Landlord the obligations of the Tenant and to sign the Lease as a guarantor.

[5]                 The Agreement to Lease was on the Auckland District Law Society Inc Fifth Edition form. The lease the defendant agreed to sign under the above clause as guarantor was “the current Auckland District Law Society Inc Deed of Lease form amended in accordance with the provisions of this Agreement”.

[6]                 The Agreement to Lease does not contain any amendments relevant to the guarantee obligations save that under the name of the guarantor it is stated:

Personal guarantor to be limited to a maximum of Two (2) years of the then current Rental and Outgoings + GST from the date that the Tenant is in default of any Rent and or Outgoings payments.

[7]                 The statement of claim records the appointment of liquidators to the tenant company on 14 May 2019 and that the liquidators disclaimed the lease in or about August 2019.

[8]                 As at 16 December 2019, the date of the statement of claim, it is alleged a total of $373,757.73 was due and owing as unpaid rental, outgoings and interest under the Agreement to Lease. It was this sum that was claimed in the prayer for relief, along with interest at the rate specified in the lease, solicitor/client costs pursuant to the lease, and “[s]uch further or other relief as the Court deems just”.

[9]                 On 10 March 2020, the plaintiff obtained an order for substituted service of the proceedings, which were served as required by the order later in March 2020.

[10]              In July 2020, an affidavit of service of the proceeding was filed and as the defendant had taken no steps, plaintiff’s counsel by memorandum sought the entry of judgment by default against the defendant.

[11]              In the memorandum seeking judgment, plaintiff’s counsel recorded that rental, outgoings and default interest had continued to accrue. The memorandum then stated:

5.While the original claim was filed on the basis of the specific amounts outstanding as at 19 December 2019, the prayer for relief also requested such further or other relief as the Court deems just, and the Court has the jurisdiction to make any further such orders anyway. Given that the rental and outgoings have continued to accrue up to 16 July 2020, it is respectfully submitted that judgment should be ordered on all sums outstanding as at that date together with interest and costs as calculated under the Lease.

[12]              The Registrar granted judgment by default against the defendant for a total of just over $820,000, including rental, outgoings and interest, plus solicitor/client costs and disbursements totalling $13,058.86.

[13]              Relying on the sealed order,  the plaintiff obtained a charging order over       a property in the defendant’s name. That order prompted this application to set aside the judgment by default.

[14]              The defendant acknowledges receiving the papers served via substituted service but says he overlooked responding to them given the fallout from the liquidation of the tenant company.

Principles applicable to setting aside a default judgment

[15]Rule 15.10 of the High Court Rules 2016 provides:

Any judgment obtained by default under rule 15.7, 15.8, or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.

[16]              Judgment in this case was entered under r 15.7. The assessment of whether there has been a miscarriage of justice is traditionally approached by asking whether the judgment has been regularly obtained or not.1 The distinction between a regularly and irregularly obtained judgment is critical because “where a judgment has been irregularly obtained, there will almost always be a miscarriage of justice such that the judgment should be set aside without considering the merits”.2

[17]              In EA v Rennie Cox Lawyers, the Court of Appeal considered whether there is a residual discretion not to  set  aside  a  default  judgment  that  has  been  irregularly obtained. The Court noted the longstanding practice of setting aside irregularly obtained judgments as a matter of course and said:3

[16]   There are sound reasons for this approach and we see no justification to depart from it … A default judgment that has been irregularly obtained without compliance with the procedural requirements is a judgment to which the plaintiff was not entitled and which ought not to have been entered on the court record. Justice can almost inevitably be said to have miscarried in these circumstances.

1      Andrew Beck and others (eds) McGechan on Procedure (online ed, Thomson Reuters) at [HR15.10.03].

2      EA v Rennie Cox Lawyers [2018] NZCA 33, [2018] 3 NZLR 202 at [20].

3      At [15]-[16], citing Equiticorp Finance Group Ltd v Chea h [1989] 3 NZLR 1 (CA) at [8].

[18]              As to whether there was a discretion not to set aside an irregularly obtained judgment, the Court said:4

While a default judgment wrongfully obtained in breach of the rules will almost always result in a miscarriage of justice requiring the judgment to be set aside, the rule is not inflexible.

[19]              The Court then held that the Rule that an irregularly obtained judgment will be set aside:5

… is not an inflexible rule that must be applied in every case, regardless of the circumstances. There may be cases where the irregularity in obtaining  the judgment was so minor and inconsequential that it could not have caused prejudice and there is no arguable defence. If the Court can safely conclude that there is no risk of a miscarriage of justice, it might properly decide to decline to set aside the judgment.

[20]              It is fair to say that Mr Marsh, counsel for the plaintiff, rested his submissions on this last proposition.

Was judgment obtained irregularly?

[21]              The two irregularities relied on here are non-compliance with r 15.4, which provides:

15.4     Affidavits to be filed

Before judgment by default can be sealed, there must be filed –

…

(b) if the statement of claim and notice  of  proceeding  have  not been  served personally on the defendant or on a solicitor accepting service on the defendant’s behalf, an affidavit verifying the statement of claim.

and non-compliance with r 15.7, which provides:

15.7     Liquidated demand

(1)If the relief claimed by the plaintiff is payment of a liquidated demand in money and the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, the

4 At [18].

5 At [20].

plaintiff may seal judgment in accordance with this rule for a sum not exceeding the sum claimed in the statement of claim and—

(a)interest (if any) payable as of right calculated up to the date of judgment (if interest has been specifically claimed in the statement of claim); and

(b)costs and disbursements as fixed by the Registrar.

…

Rule 15.7

[22]              The statement of claim sought judgment for $373,757.73 excluding interest and costs. Judgment was entered for $766,853.45 excluding interest and costs.

[23]              The defendant says the plaintiff’s reliance on the reference in the statement of claim to the Court granting “[s]uch further or other relief as [it] deems just” is misplaced. I agree.

[24]              A defendant served with the proceeding is entitled to know the consequences of failing to take steps. The notice of proceeding advises the defendant that if they do not file a defence “the plaintiff may at once proceed to judgment on the plaintiff’s claim” which is set out in the statement of claim.

[25]              In this case, the statement of claim did not plead that rent continued to accrue or ask for judgment for such sum as had accrued by the time the claim was determined. If the statement of claim had contained such an additional claim, then the further rent that accrued may have been a liquidated amount by virtue of r 15.7(5)(a). The statement of claim sought judgment for a fixed sum (plus interest and costs), as had accrued to 16 December 2019 and no more.

[26]              McGechan on Procedure under the heading “Judgment strictly in terms of claim” says:6

Judgment must be entered strictly in terms of the statement of claim, although the words “not exceeding the sum claimed ...” permit a judgment to be sealed for a lesser sum.

6      Beck and others, above n 1, at [HR15.7.05].

[27]              Rule 15.7(3) permits  a  Judge  or  a  Registrar  to  authorise  the  sealing  of  a judgment for a liquidated sum under r 15.7(1) “if satisfied that the relief claimed by the plaintiff falls within this rule”.

[28]              The addition of “[s]uch further or other relief as the Court deems just” or similar words in the prayer for relief is commented on in McGechan on Procedure under the heading “Inclusion of claim for general relief”. The authors state:7

It is still permissible to include a claim for general relief; but it is pointless. A plaintiff who contemplates the possibility of relief wider than that specifically claimed, should enlarge the specific claims. The wider class need not be pursued if found unwarranted. The position of a plaintiff who does not envisage pursuing claims wider than those specifically stated, is not improved by a claim for general relief beyond that which would prevail in any event under r 5.31.

[29]              A plaintiff is only entitled to ask for judgment by default for the amount claimed. As submitted by Mr Woodbridge, counsel for the defendant, a claim for general relief is not a claim for a liquidated sum under r 15.7.

[30]              The sealing of a judgment going beyond the plaintiff’s pleading is an example of an irregularly obtained judgment.8 The plaintiff here has gone beyond the sum claimed in the statement of claim. I therefore conclude the judgment was irregularly obtained under r 15.7.

Rule 15.4

[31]              If r 15.4(b) applies then r 15.4 is in mandatory terms: “Before judgment by default can be sealed there must be filed … an affidavit verifying the statement of claim.” No such affidavit was filed. The affidavit must be filed before judgment by default can be sealed. Counsel for the plaintiff has sought to file an affidavit after the sealing of judgment but, given the clear wording of r 15.4, I am unable to conclude that an affidavit filed after sealing meets the requirements of r 15.4.  In any event,  Mr Marsh did not suggest the affidavit would satisfy r 15.4(b).

7      At [HR5.31.05].

8      See Richmond v Heskett Holdings Ltd (1995) 8 PRNZ 533 (HC).

[32]              A further point relied on by the defendant, on which I only need to comment briefly, is the claim there is non-compliance with r 15.7 concerning costs.

[33]              The plaintiff sealed costs on a solicitor/client basis. The memorandum of counsel contained a list of solicitor’s fee notes, counsel’s fee notes and details of disbursements.

[34]              The defendant’s counsel, referring to Sim’s Court Practice 4 says: “If the plaintiff  is  claiming  indemnity  costs  from  the  defendant   under   a   contract,  the contractual entitlement will have to be established along with the reasonableness of the costs incurred”.9

[35]              If this had been the sole ground of challenge, I doubt it would warrant saying the judgment was irregular. This is because the quantum of costs claimed for the commencement of the proceeding, the obtaining of substituted service and the entry of judgment can be assessed against scale costs. Given the conclusions I have already reached, it is not necessary for me to make further observations on this point.

Variation rather than setting aside?

[36]              Mr Marsh’s alternative argument was that if I held the judgment was irregular because the amount for which judgment was entered was not saved by “[s]uch further or other relief as the Court deems just” in the prayer for relief, then the judgment should only be set aside to the extent that judgment was entered for more than the pleaded amount.

[37]              Mr Marsh relied on the fact that r 15.10 contemplates that a judgment may be varied as well as set aside. Ultimately, he submitted there could not be a miscarriage of justice if the judgment entered was varied to the amount in the statement of claim. Mr Marsh recognised that to succeed on this argument, he had to establish non-compliance with r 15.4 was “so minor and inconsequential that it could not have caused prejudice” and, secondly, that the defendant did not have an arguable defence to the amount as pleaded.

9      Matthew Casey and others (eds) Sim’s Court Practice (online ed, LexisNexis) at [HCR15.7.4].

[38] Accordingly, while Mr Marsh recognised that the application was to set aside the judgment in its entirety, he submitted that varying the judgment in the way he sought was consistent with the exception to the normal rule that an irregular judgment be set aside noted at [19]. Along with submitting that non-compliance with r 15.4 was minor, Mr Marsh submitted the defendant had no defence to the judgment for the pleaded quantum.

[39]              This approach did not appeal to the Court of Appeal in Rennie Cox. In that case, counsel for the plaintiff acknowledged the manner in which the judgment had been obtained could be criticised but submitted such did not result in a miscarriage of justice because the evidence available showed the defendant had no arguable defence to the claim.10

[40]              I accept Mr Marsh’s submission that the outcome in Rennie Cox was influenced by the improper conduct leading to the entry of judgment, which is a factor absent here.

[41]              However, at the end of the day, I have reached the view that it is not appropriate to vary the judgment. I have reached that view for the following reasons.

[42]              Firstly, an application to set aside a judgment on the grounds it was irregularly obtained should not be converted to, in effect, a plaintiff’s summary judgment application. Mr Marsh’s approach would mean that judgment would not be set aside if, on the material put before the Court in relation to the application to set aside, the Court was satisfied the defendant had no defence.

[43]In Rennie Cox, referring to an irregularly obtained judgment the Court said:11

Given that in the normal course the merits would not have been considered by this stage, it seems wrong in principle that a defendant should have to demonstrate arguable defences before being restored to their rightful position. Otherwise, the defendant would be disadvantaged by the wrongful entry of judgment.

10     EA v Rennie Cox Lawyers, above n 2, at [9].

11     EA v Rennie Cox, above n 2, at [17].

[44]              Ultimately, in this case, the contest between counsel was whether the discretion not to set aside an irregularly obtained judgment recognised in Rennie Cox was as submitted by Mr Woodbridge, an exceptional/residual discretion that would only apply to the most minor defects and Mr Marsh’s submission that the discretion meant in any case where a judgment had been irregularly obtained judgment would not be set aside if it appeared the defendant had no defence.

[45]              I am satisfied that Mr Marsh’s approach would mean there was little difference between an application to set aside a judgment irregularly obtained, and one that was regularly obtained – both applications would ultimately come down to whether there was a reasonably arguable defence. I accept Mr Marsh submitted non-compliance with r 15.4 was minor but, taken to its logical conclusion, Mr Marsh’s submission would see irregularly obtained judgments remaining in force if it appeared the defendant had no defence.

[46]              As to the non-compliance with r 15.4, Mr Marsh filed an affidavit on behalf of the plaintiff shortly before the hearing of this application in the terms that would have been filed had the need for the affidavit been appreciated at the appropriate time. This affidavit was not filed to suggest that non-compliance with r 15.4 could be cured after the event, but to show the irregularity was minor as there was in fact no difficulty in satisfying the rule’s requirements.

[47]              Mr Marsh did not suggest there was not an irregularity in respect of this issue but submitted it was an issue where there was no prejudice to the defendant. Had the absence of a r 15.4 affidavit been the only ground of challenge to the judgment, it is debatable whether it would still have been set aside. However, Mr Marsh recognised that, to rely on the Rennie Cox exception to the rule that irregular judgments are set aside, there also had to be no defence.

[48]              Before turning to the possible defences, I note that I do not read this aspect of the exception as an invitation by the Court of Appeal to review the merits of the plaintiff’s claim as if the plaintiff had sought summary judgment and thereby determine whether there was a defence or not.

Is there a reasonably arguable defence?

[49]              The defendant argued that if I did not accept that the judgment was irregularly obtained, the judgment should nonetheless  be set  aside  because the defendant  had a reasonably arguable defence.

[50]              Given I have concluded that the judgment was not regularly obtained, I do not need to consider this alternative basis for setting aside, but I examine the defences relied on to test Mr Marsh’s submission that the defendant has no arguable defence.

[51]              The defendant submits the disclaimer of the lease by the liquidators of the tenant brought his obligation as guarantor to an end. An authority for that proposition can be found in Stubbs Investments Ltd v Thorpe.12

[52]              The defendant submits his obligations did not extend to the provision of an indemnity. Under the Agreement to Lease, the defendant agreed to “sign the Lease referred to in the Agreement to Lease, Lease as a guarantor”. The obligations the defendant, as guarantor, would be bound by when signing the Lease as a guarantor, are those set out in the Fourth Schedule to the ADLS Deed of Lease form. Under the rule in Walsh v Lonsdale, the defendant is treated as if he had signed the lease he agreed to sign.13 The Fourth Schedule expressly provides that the guarantor “[i]ndemnifies the Landlord against any loss the Landlord might suffer should the lease be lawfully disclaimed or abandoned by any liquidator, receiver or other person”.

[53]              Accordingly, there is a reasonable argument that by committing to execute the ADLS Deed of Lease form as a guarantor, the defendant accepted the obligations attaching to a guarantor under that form of lease, whether they are expressed to be an indemnity or otherwise.

12 Stubbs Investments Ltd v Thorpe [1991] 1 NZLR 310 (HC). But note Henry Holderness (ed) Commercial Law in New Zealand (online ed, LexisNexis) at [25.6.17] which suggests Stubbs is not good law  in  New  Zealand  and  that, by virtue of s 269(4) of  the Companies Act  1993,     a guarantor’s liability survives disclaimer. See in particular Drake City Ltd v Tasman-Jones [2016] NZHC 899, [2019] NZAR 637.

13     See Chambers v Chatfield [2016] NZHC 1871, (2016) 18 NZCPR 1, citing Walsh v Lonsdale

(1882) 21 Ch D 9 (Ch).

[54]              Counsel for the defendant says the lease was not produced to the guarantor at the time the Agreement to Lease was executed. I do not see great merit in that point. The form of obligation to which the guarantor was committing was incorporated by reference. This was a commercial lease. The obligation was on the defendant to familiarise himself with the obligations he was agreeing to take on.

[55]              The defendant’s final arguable defence was that the disclaimer of the lease meant the plaintiff landlord had an obligation to mitigate its loss and it is not clear whether it has done so. The plaintiff filed evidence setting out its endeavours to sell or re-let the premises. However, the evidence is not sufficient to completely answer the failure to mitigate point. If there has been a failure to mitigate, its effect on the quantum of the plaintiff’s claim, including the quantum as expressly pleaded, cannot be assessed. Accordingly, I am not satisfied that the possibility of a mitigation defence can be discounted.

Conclusion

[56]              I am satisfied this is not a case where the Court should decline to set aside an irregularly obtained judgment in reliance on the residual discretion identified in Rennie Cox. When judgment was entered, the plaintiff placed a charging order on  the defendant’s property. The property has been sold and the terms upon which the charging order was released mean the sale proceeds will continue to be held even if the judgment is set aside. This is a further factor that, in my view, stands against the Court refusing to set aside the judgment.

[57]              The plaintiff will need to amend its statement of claim to address the quantum issue. Such is to be complied with within 15 working days. At the same time, the plaintiff may wish to amend the claim to rely on the indemnity once counsel has had a chance to consider the effect of the disclaimer on the defendant’s obligations as Guarantor only.   The defendant is to file his defence to the amended claim within     a further 15 working days.

[58]Costs are reserved.

Associate Judge Lester

Solicitors:

Evans Henderson Woodbridge, Marton Kearneys, Christchurch

Copy to counsel:
A Marsh, Barrister, Christchurch