District Court New South Wales Medium Neutral Citation: James v Commonwealth Bank of Australia [2015] NSWDC 68 Decision date: 06 March 2015 Jurisdiction: Civil Before: Cogswell SC DCJ Decision: The Notice of Motion is dismissed and the judgment entered on 31 October 2014 is stayed up to and including 20 March 2014. Catchwords: CIVIL LAW - application to set aside judgment - failure to file a defence - failure to appear in court - reasonable explanations for failures - whether applicant able to demonstrate defence on the merits - claimed defence on the merits fails pursuant to terms of guarantee - "pay now litigate later" clause - legislative provisions afford no protection - set-off defence not available under clause - indemnity costs Legislation Cited: Conveyancing Act 1919 (NSW), s 111A Corporations Act 2001 (Cth), s 420A Uniform Civil Procedure Rules 2005 (NSW), r 51.44 Cases Cited: GE Capital Australia v Davis (2002) 180 FLR 250; [2002] NSWSC 1146 Category: Principal judgment Parties: David Anthony James (Applicant) Commonwealth Bank of Australia (Respondent) Representation: Counsel: J Baird (Applicant) M Rose (Respondent) File Number(s): 2014/00150542 Judgment 1. A bank lent money to a company. The loan was secured by a mortgage over real estate. One of the directors guaranteed the liability of his company to the bank. The company defaulted in its obligation to repay the loan. The bank sold the real estate but the sale price fell short of the amount of the loan. The bank therefore had recourse to the director and sued him in the District Court for the amount of the shortfall. An overworked solicitor acting for the director overlooked filing a defence or appearing on an application by the bank for judgment. Judgment was entered against the director. The director has now applied to set aside that judgment. 2. The director's name is David Anthony James. The bank is the Commonwealth Bank of Australia. Both parties have been very competently represented by counsel who presented their arguments clearly and succinctly. Mr J Baird appears for Mr James the director and Mr M L Rose appears for the Commonwealth Bank. 3. It is common ground that Mr James had responsibility to demonstrate three things before I should grant him the order he seeks. The first was not in issue and that is that there was no appearance on his behalf at the important time when the judgment was entered. 4. The second agreed requirement is that there is a reasonable explanation for the the fact that he did not appear, thereby exposing himself to the judgment which occurred. Mr Baird read an affidavit by his client's former solicitor. That solicitor referred to his "extensive workload and court matters" at the relevant time. He acknowledged that important documents relating to the case "may have been forwarded to this office and directly handed to my junior solicitor when I was not in the office". He "expected that my assistant would have read and dealt with my emails and advised me of any email that required my attendance". He acknowledged that due to "the oversight, I failed to appear at the hearing of the notice of motion filed by the plaintiff". 5. Mr Rose submitted that the explanation was not impressive. He was right in the sense that it described behaviour that was not impressive. However, he took the matter no further when I pointed out that the solicitor's behaviour should not be sheeted home to the solicitor's client. In my opinion, there is a reasonable explanation for Mr James not appearing and filing a defence at the relevant time. 6. The argument this morning and this afternoon therefore centred on the third requirement that Mr James has to meet. It is common ground that that requirement is that he must demonstrate a defence on the merits. In support of that, Mr Baird read affidavits from his client that broadly asserted that the sale of the property had been at a significant undervalue. The affidavit annexed various documents which constituted evidence which arguably support that proposition. In compliance with a Court's expectation that a person seeking relief from such a judgment should expressly show their colours, so to speak, Mr Baird made available a proposed amended defence and a proposed statement of cross-claim. (I should add that it is an amended defence because a defence had been earlier filed on 8 September 2014. It was despite that defence that the bank had obtained the summary judgment against Mr James from which he is seeking relief today.) 7. It is clear to me that the proposed amended defence raises an arguable case. It pleads against the Commonwealth Bank duties derived from statute, common law and equity regarding the sale of the property. It claims that the bank breached the duties and that Mr James "has suffered loss and damage as a result of the said breaches of duty". It then particularises the damage and, as Mr Baird pointed out, there is a range but the minimum amount would be sufficient to extinguish any debt owed to the bank. The proposed amended defence is supported, as I said, by a proposed statement of cross-claim which pleads the same duties and breaches and loss and damage, by reference to the amount referred to in the proposed amended defence. At this stage, it appears clear that Mr James raises a defence on the merits. It is, as Mr Baird points out, an arguable case which in the normal course would be litigated in the Court and findings of fact made. 8. Mr Rose's response, however, is that the defence raised by Mr James is no more than a set-off and a defence by way of set-off is something which Mr James has contracted himself out of by reference to the terms of the guarantee. Mr Rose points out that the proposed amended defence does not put in issue the guarantee given by Mr James to his client. He refers to cl 2.1 by which Mr James guarantees the company's payment if the company did not pay on time. More significantly, he refers to cl 11(a) in the guarantee which is preceded by a heading, "Your rights are suspended". That part of cl 11 reads as follows - "11. As long as any of the guaranteed money remains unpaid, you may not, without our consent: (a) reduce your liability under this guarantee and indemnity by claiming that you or the debtor or any other person has a right of set-off or counterclaim against us (except to the extent you have a right of set-off granted by law which we cannot exclude by agreement)" Mr Rose refers to that clause as being one commonly found in guarantees. The effect of it is that the guarantor is obliged to pay the amount claimed to be the shortfall in the debt owed by the principal debtor and engage in any disputed matters which relate to any set-off after the payment has been made. It is commonly referred to, he said, as a "pay now, litigate later" clause. Mr Rose argues that Mr James' proposed defence is no more than a set-off. 1. To the extent that it may be argued that such a clause may be against public policy, he refers to the judgment of Bryson J when his Honour was sitting in the Equity Division in GE Capital Australia v Davis (2002) 180 FLR 250; [2002] NSWSC 1146. At [97] his Honour said as follows - "The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off." The clause in the guarantee between Mr James and the Commonwealth Bank fits just that description, argues Mr Rose. 1. Mr Baird responds that there are in fact two triable issues in this case. There is the issue which I referred to before as to the claimed shortfall in the sale below the true value of the property. I should add, in fairness, that the bank has put on evidence that in undertaking the sale it engaged in an entirely orthodox and proper sale campaign, as argued by Mr Rose. In other words, it would be a live issue in the proceedings. 2. Mr Baird said the second triable issue is the impact of a piece of legislation, namely s 111A of the Conveyancing Act 1919. In terms, that provision compels a mortgagee, such as the bank in this case, "in exercising a power of sale in respect of mortgaged...land," to "take reasonable care to ensure that the land" is sold for not less than its marketable value or the best price that may reasonably be obtained in the circumstances. That provision and a provision of the Corporations Act 2001, namely s 420A, are statutory sources for the obligations or duties which Mr James claims in his defence and cross-claim the bank has breached. 3. Mr Rose argues that the Corporations Act provision or its equivalent was considered by Bryson J in Davis and that his Honour clearly expressed the view at [45] that there was "nothing in the terms of s 420A, or elsewhere in the Corporations Act, which indicates that it was enacted for the protection of persons who do not have interests in the property of the corporation, such as guarantors who incur obligations by reference to the obligations of the corporation." Mr Rose argues that the Conveyancing Act provision is in similar terms and should be interpreted in a similar way as conferring no right on guarantors such as Mr James. 4. Mr Baird responds that s 111A of the Conveyancing Act is more extensive than s 420A of the Corporations Act. The Conveyancing Act provision contains a subsection which provides that the "section has effect despite any stipulation to the contrary". An example of a stipulation to the contrary would be cl 11(a) of the guarantee. That is an attractive argument but, to my mind, it does not succeed. Assuming that Mr Baird is right, it does not alter the fact that the defence which his client maintains is still one of a set-off. 5. All that s 111A comprises - relevantly to this case - is one of the sources of obligations claimed to be of the bank to act in a particular kind of way. Other sources are, as I said, common law by way of implied terms and equity. It still remains the case that Mr James has no pleaded defence other than the set-off that he claims he is entitled to. 6. To my mind therefore, the provisions of cl 11 of the guarantee in this case have the effect that he must postpone any litigation concerning his indebtedness to the bank related to a set-off until he has paid the debt which the bank claims it is owed by the company. 7. It follows, in my opinion, that cl 11 of the guarantee also serves to defeat Mr James' claimed defence on the merits, which in my opinion is not available to him. I would therefore refuse him the relief which he is seeking. 8. I refuse the orders sought in paras 1 and 2 of the amended notice of motion filed in Court today and I dismiss the notice of motion. HIS HONOUR: Now, what follows from that? BAIRD: Two matters, your Honour. No doubt, to deal with the motion, we will be seeking costs, with respect. Costs follow the event and I don't wish to be heard any further on that. I am instructed, your Honour, to seek a stay of your Honour's ruling and a stay of the judgment that was entered on 31 October 2014. The power for the Court to do so is to be found in UCPR rule 51.44. I take your Honour particularly to the notes in the practice as to how the practice ought to apply. At 51.44.10, it says, "It is usually...the trial judge." That's why it's proper to make this application now, your Honour just having delivered reasons. There is of course an inherent power in the Court of Appeal to grant stays. HIS HONOUR: No. Look, I understand. What sort of period are you looking for? BAIRD: I need enough time in order to be able to-- HIS HONOUR: To consider an appeal? BAIRD: --prepare and file the appeal. The normal period, your Honour, is 28 days. HIS HONOUR: Yes. BAIRD: That is because that is the period in respect of which one has the power to appeal. One must appeal from a District Court judgment within 28 days. So I'm seeking, your Honour, a stay for 28 days. I can, however, and I assume I have instructions to do so, to give the undertaking to apply expeditiously. We would hope that we would be able to file - I think I've got a file. I need leave, so it's not an appeal as a right, so I'm going to need to file a summons for leave to appeal. HIS HONOUR: Yes. BAIRD: I'd certainly hope to be able to do that within seven days. I might add, your Honour, that I will not be briefed on the appeal, that counsel will be appearing, but to put my stay application fairly, it is an application for 28 days. If your Honour were not minded to grant such an extended period, and I would submit that's the normal, I would like at least 14 days in order to be able to get senior counsel briefed and get an opinion and to put a proper summons for leave to appeal before the Court of Appeal, which will itself-- HIS HONOUR: You need my judgment as well. BAIRD: I need your judgment, your Honour, with respect, and on top of that of course any extension of that stay period would be a matter for the Court of Appeal. HIS HONOUR: Yes. Well, look. I'm inclined to grant a stay for a time being, Mr Rose, I think that's reasonable. There's a fair amount of money involved, relatively speaking. What do you say? ROSE: I oppose the stay, your Honour. HIS HONOUR: Yes, go on. ROSE: The reason is this, and this is part of a larger series of proceedings. Neither my learned friend and I are briefed in the bankruptcy proceedings, although they have been on foot for some time. There are two proceedings. One is a review of a registrar's decision, the other is a hearing of a sequestration order application. There is nothing, in my submission, unique about this judgment. Your Honour need not be satisfied there is an arguable appeal but in going to your Honour's discretion as to whether or not to grant a stay, your Honour would have regard to the merits of any appeal. Here where this is an interlocutory decision, one which would require leave, my submission is that there is no real basis for a stay ..(not transcribable).. HIS HONOUR: Look, I'm going to give a stay. It's not going to be four weeks, it's more likely to be two weeks. I think Mr Rose has a point about - I think he has to see what the grounds of appeal are and some assessment made and I think that has to be done fairly expeditiously because I've determined that summary judgment was appropriately entered and the bank is owed the money. Now, does it come back before me? BAIRD: No, your Honour. Once your Honour has made the stay and the conditions, and leaving aside the period and I heard what your Honour said about 14 days, then the procedure, if I may say and my friend will correct me, is that we have to file the summons for leave to appeal together with the supporting affidavit in the Court of Appeal. We have to file a notice of motion for the extension of the stay. One of the matters the Court of Appeal of course wants to see is the judgment. Sometimes, with respect, the written reasons for judgment are not always immediately available, which means that therefore a transcript or a note of the reasons has to be brought before the Court. 1. I direct that a transcript of my judgment be prepared and made available as soon as possible, preferably early next week. BAIRD: I'm very grateful for it. HIS HONOUR: I will review it, and I do it usually fairly quickly, with my associate and she will send it to both of you. BAIRD: The other undertaking of course that I'm instructed to give, as I think I indicated, is an undertaking to prosecute the appeal expeditiously and of course that undertaking is given and the Court of Appeal, I am absolutely certain will demand the same undertaking from counsel appearing in that aspect. HIS HONOUR: Yes. Thank you, Mr Baird. 1. I grant a stay of my judgment for 14 days from today. BAIRD: Sorry, it's not your Honour's judgment. It's the judgment entered on 31 October, pending the appeal of this judgment. HIS HONOUR: Thank you. BAIRD: Thank you. I apologise for interrupting. 1. I grant a stay of the judgment entered on 31 October 2014 up to and including Friday 20 March 2015. HIS HONOUR: Does that sound right? BAIRD: Yes, your Honour. 1. I note Mr Baird's undertaking given on behalf of his client to prosecute any appeal expeditiously. HIS HONOUR: Anything else I need to deal with? Costs? ROSE: Yes, your Honour. HIS HONOUR: I should order the applicant to pay the respondent's costs? BAIRD: Costs follow the event, your Honour. I don't think I'd be prepared to oppose that. HIS HONOUR: Yes. ROSE: No, my application will be for indemnity costs pursuant to the terms of the guarantee. BAIRD: I'd be opposing that, your Honour. HIS HONOUR: What? BAIRD: I'd be opposing indemnity costs, your Honour. It was an arguable point and fairly argued, with respect. ROSE: Yes, and that's the usual course. HIS HONOUR: No, but you're saying it's in the terms of the guarantee? ROSE: Quite, yes. HIS HONOUR: Where? ROSE: If I take your Honour to tab 15? HIS HONOUR: 15? ROSE: My apologies, your Honour, tab 7 of vol 1. HIS HONOUR: Seven, yes. ROSE: Clause 5.1, "You must pay us reasonable costs in enforcing, attempting to enforce, or taking any other action in connection with our rights." I've just read the relevant section. There's a number of bases under which costs are claimed under the guarantee. The other half of that, your Honour, is on p 12 at cl 28, the second definition, the italicised word "costs" includes relevantly, in the case of legal advisers, on a full indemnity basis or solicitor and client basis, whichever is higher. Your Honour, I have authorities which support the proposition I advance, which is that where your Honour has a discretion to exercise, the Court should ordinarily give effect to a contractual entitlement to costs. HIS HONOUR: Mr Baird? BAIRD: Your Honour, I'd simply put that in accordance with the practice note, that what a Court would be doing in awarding an indemnity costs would be looking at the issue of the reasonableness or otherwise of the arguments that were advanced on the application. In my respectful submission, there's been nothing improper in either the bringing of the application nor the argument before Court today and in the ordinary event, costs would be on a party/party basis and the matter of the interpretation of cl 5 and cl 28, which I've not considered before this instance, your Honour, doesn't mean that there's anything that would attract the normal principles of indemnity costs in this Court, your Honour. HIS HONOUR: Well, except you've agreed to, your client has. ROSE: Your Honour, to the extent I can show my learned friend an extract upon which I rely and simply highlight-- HIS HONOUR: Is that in a case? ROSE: They're my own notes. My apologies, your Honour, I don't have a copy of the case. The case is here. In Westpac Banking Corporation v Mason. Might I hand this up just as an aide-mémoire, nothing more. HIS HONOUR: Yes. ROSE: I apologise for my highlights. HIS HONOUR: Yes. So the burden is on you, Mr Baird, to convince me that the discretionary should be exercised differently. BAIRD: Where is it in cl 5.1 that - I see it, "Attempting to enforce or taking any other action in connection with our rights." I put that this is not enforcing the guarantee, this is resisting an application to be let in to defend it. I can't put it any higher than that, your Honour. 1. I order that costs be paid by the applicant to the respondent on an indemnity basis. I am not satisfied that my discretion should be exercised other than what appears to me to be an entitlement of the bank under the guarantee. HIS HONOUR: Anything else, gentlemen? ROSE: Your Honour, this is a minor matter. My friend and I caught each other's eye when your Honour was giving reasons. I think there was a reference to Mr Miller and I think your Honour-- HIS HONOUR: You? ROSE: Yes. HIS HONOUR: Yes, sorry, Mr Rose. For some reason I've got-- ROSE: It was in the-- HIS HONOUR: It's M L Rose and so-- ROSE: It's my handwriting, your Honour, nothing more. HIS HONOUR: It's all right. BAIRD: The very last thing is that the orders today, they need to be engrossed urgently to your Honour. If I might have-- HIS HONOUR: All right. My associate and I will disappear and I will sign it. BAIRD: I'm grateful. ROSE: Your Honour, sorry, my instructing solicitor is reminding me of one final matter. My learned friend and I both know equally little about it, I suppose. There was a notice to produce returnable today in this matter. BAIRD: I know nothing of it. ROSE: I know that there was a notice to produce. I did not come to Court prepared to argue on it, although there is a notice to produce returnable today in this proceeding. It wasn't mentioned before the registrar and I must confess that I didn't raise it. HIS HONOUR: So what do you want me to do, if anything? Very little, I hope, at a quarter past 4 on Friday. ROSE: Very, very little, your Honour. I should mention it and say perhaps that the notice to produce be-- BAIRD: Well, you can't. The judgment is substantive. There's no proceedings on foot in which to issue a notice to produce. ROSE: No, it's purely because there was a notice to produce to my client and he didn't want it to hang. BAIRD: It wasn't called on. ROSE: Yes. We'll leave it at that. HIS HONOUR: So I don't have to make any direction or order? ROSE: My learned friend hasn't called on it, no. HIS HONOUR: Thank you, gentlemen, for your assistance. ********** Amendments 11 May 2015 - catchwords amended only 24 June 2015 - amended case name on coversheet DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 June 2015