Nichols Constructions Pty Limited v Elphick

1. [1]

   HER HONOUR: By amended notice of motion filed 6 July 2015, the defendant seeks orders firstly, that the default judgments entered on 3 February 2015 and 13 February 2015 be set aside pursuant to rule 36.15 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), or alternatively, UCPR 36.16; secondly, that she be granted leave to file and serve a defence within 14 days; and finally, that she be granted leave to file and serve a cross claim.

2. [2]

   The plaintiff is Nichols Constructions Pty Limited (“Nichols Constructions”). Les Nichols (“Mr Nichols”) is the principal of Nichols Constructions. The defendant is Vickie Maree Elphick (“Mrs Elphick”).

3. [3]

   Nichols Constructions relied upon two affidavits of its solicitor Gregory John Wilson sworn 14 May 2015 and 3 July 2015 and the affidavit of Mark Ashley Parker sworn 22 May 2015. Mrs Elphick relied upon her affidavits dated 16 April 2015 and 24 June 2015, two affidavits of her husband, Kenneth Ronald Elphick (“Mr Elphick”) dated 21 April 2015 and 1 May 2015 and finally the affidavit of her former solicitor Richard Anthony Licardy dated 21 April 2015. Mrs Elphick was cross examined.

Factual background

1. [4]

   By written loan agreement dated 17 December 2013, Mrs Elphick borrowed $4,200,000 from Nichols Constructions and purchased a property known as xxxx Street Cronulla NSW (“the property”). As security for the obligations under the loan agreement Mrs Elphick granted Nichols Constructions a registered first mortgage dated 17 December 2013 over the property (“the mortgage”).

2. [5]

   At the time of entering into the above arrangement, Mrs Elphick had no form of income. She is a housewife (T16.13). She was the sole shareholder of a company Point Corporation Pty Ltd (“Point Corp”). Mr Elphick was the sole director of Point Corp and can be described as the driving force of Point Corp. Point Corp was engaged by Nichols Constructions to work in conjunction with it to, firstly, promote and market lots for sale that had been subdivided (“the Laidley land”); and secondly, to project manage the construction of homes on the subdivided lots. Point Corp was to be paid commissions for the sale of the lots as well as construction costs of the improvements to be erected on the subdivided lots. In early 2014, problems arose such that the subdivided lots could not be sold and improvements could not be constructed on the land. This resulted in sales not being achieved and constructions not proceeding.

3. [6]

   Nichols Constructions’ position is that the loan agreement and mortgage expressly required interest payments of $28,000 per month commencing 16 January 2014. Mrs Elphick did not make any interest payments required by the loan agreement. The loan agreement and mortgage also expressly required capital repayments of $285,000 per month commencing April 2014. It appears to be common ground that Mrs Elphick did not make any payments other than the sum of approximately $35,000.

4. [7]

   It is convenient that I briefly refer to the pleading contained in the statement of claim.

The pleading in the statement of claim

1. [8]

   Paragraphs [3] to [10] of the statement of claim plead:

2. [9]

   In other words, Nichols Constructions bases its claim upon Mrs Elphick’s failure to pay pursuant to the obligations under her loan agreement. It should also be noted that the judgment sought in the statement of claim is for the monetary sum of $6,388,030 (relief claimed [1]).

Setting aside default judgment

1. [10]

   The power to set aside judgment is contained in UCPR 36.15 and 36.16. They relevantly read:

2. [11]

   The most recent Court of Appeal authority considering an application to set aside default judgment pursuant to UCPR 36.16, is Stankovic v Magee [2014] NSWCA 439. In Stankovic, Macfarlan JA (with Basten and Gleeson JJA agreeing) stated at [18]:

3. [12]

   Another consideration to be taken into account when determining whether default judgment should be set aside was expressed by Priestley JA in Cohen v McWilliam (1995) 128 FLR 263; (1995) 38 NSWLR 476 at 481 quoting from Davies v Pagett (1986) 10 FCR 226:

4. [13]

   I will consider whether firstly, Mrs Elphick has provided a satisfactory explanation for delay; secondly, whether she has a bona fide defence and an arguable or triable issue; thirdly, ss 56, 57 and 58 of the Civil Procedure Act 2005 (NSW); and fourthly, the interests of justice.

5. [14]

   The final issue to be determined is whether the default judgment for the monetary sum should be set aside on the basis of irregularity.

(a) Explanation for delay

1. [15]

   On 11 November 2014, a statement of claim was filed. On 22 November 2014, the statement of claim was served. On 24 November 2014, Mrs Elphick instructed Anthony Licardy, solicitor (“Mr Licardy”). On 17 December 2014, Mr Licardy informed the Nichols Constructions’ solicitors that the proceedings would be vigorously defended. On 24 December 2014, Mr Licardy advised the solicitors for Nichols Constructions that his client would not be able to file a defence and cross claim and sought an extension of time for Mrs Elphick to file her defence to 30 January 2015. The solicitor for Nichols Constructions agreed.

2. [16]

   On 31 January 2015, (the day after the defence was due to filed), Mr Licardy advised the solicitors for Nichols Constructions that contracts of sale for the property had been exchanged on 4 December 2014 and settlement was to take place on 12 February 2015. However, no sale eventuated.

3. [17]

   On 3 February 2015 (three days after the extension to file the defence had expired), default judgment was entered in relation to possession of the property. On 5 March 2015, a writ of possession was issued. Arrangements were made to take possession of the property on 21 April 2015.

4. [18]

   On 13 February 2015, default judgment was entered that Mrs Elphick pay to Nichols Constructions the monetary sum of $6,388,030. Nichols Constructions has sought and obtained default judgment for the incorrect amount. The judgment sum overstated the amount of the debt. The correct amount is either $5,195,000 or $5,321,000. I shall refer to this error later in this judgment.

5. [19]

   On 14 February 2015, Mr Licardy wrote to the solicitors for Nichols Constructions and advised:

6. [20]

   On 16 April 2015, on an ex parte application, Mrs Elphick sought and obtained a stay of the writ of possession and was granted leave to file a notice of motion to extend the stay, which was to be returnable on 23 April 2015. The application was supported by an affidavit of Mrs Elphick dated 16 April 2015.

7. [21]

   On 21 April 2015, Mrs Elphick filed the notice of motion to set aside default judgment, and served an affidavit of Mr Licardy dated 21 April 2015 together with an affidavit of Mr Elphick dated 21 April 2015.

8. [22]

   On 23 April 2015, orders were made for Mrs Elphick to serve evidence in reply and the matter was listed for hearing on 7 May 2015.

9. [23]

   On 1 May 2015, Mrs Elphick served a further affidavit of Mr Elphick. The hearing date of 7 May 2015 was vacated, orders were made for Mrs Elphick to serve her evidence by 14 May 2015 and the matter was listed for directions on 28 May 2015.

10. [24]

    On 14 May 2015, Mr Licardy advised Mrs Elphick that he was no longer representing her. On 28 May 2015, Mrs Elphick’s new solicitors filed a notice of appearance and the matter was transferred into the possession list for directions on 14 June 2015.

11. [25]

    On 14 June 2015, Mrs Elphick sought leave to serve further evidence. Leave was granted to serve further evidence and any proposed defence she intended to rely on by 23 June 2015. On or about 24 June 2015, Mrs Elphick served further evidence and a proposed defence (“the proposed defence”).

12. [26]

    The delay between the first default judgment being entered (3 February 2015) and the filing of the notice of motion to set aside the default judgment (21 April 2015) is about seven weeks. Nichols Constructions has not referred to any prejudice it has suffered caused by the delay. Since the motion was filed, Mrs Elphick has served affidavits in support of her motion in a timely manner. In these circumstances, it is my view that Mrs Elphick has provided a satisfactory explanation for her delay.

(b) Whether there is a bona fide defence and an arguable or triable issue

1. [27]

   Counsel for Mrs Elphick submitted that the proposed defence gives rise to an arguable or triable issue such that if the Court accepts that Mrs Elphick asserts it bona fide, Mrs Elphick, prima facie, has a defence. Senior counsel for Nichols Constructions disagreed.

2. [28]

   Both parties have identified issues they say are raised in the defence, but some have been expressed in slightly different terms. The most contentious one is the pleading contained in paragraph 6 of the proposed defence. It pleads:

3. [29]

   In other words, did Mrs Elphick’s obligation to repay the amount owing under the loan agreement only arise if and when the subdivided lots were sold and contracts for the construction of dwellings on those sold lots were entered into, such that as the amounts identified in the spreadsheet attached to the loan agreement were achieved, and Point Corp received commissions from the successful sale of the subdivided lots and the construction of improvements? This depends whether there was an oral term and if so, whether it formed part of the loan agreement.

4. [30]

   Mr Elphick deposed (Affs, 21 April 2015, 1 May 2015) that in discussions prior to the loan agreement being entered into he said to Mr Nichols:

5. [31]

   Whether these conversations took place is in dispute. Mr Nichols denies Mr Elphick ever having said words to the effect that the obligation to make interest and principal payments in accordance with the loan agreement and the mortgage were dependent upon successful sales and construction of houses.

6. [32]

   There are three documents that are central to these proceedings. They are the loan agreement, the spreadsheet (attached to the loan agreement) and the mortgage. It is necessary to briefly refer to the relevant portions of these documents.

7. [33]

   The loan agreement is between Mrs Elphick as mortgagor, Nichols Constructions Pty Ltd as mortgagee and Mr Elphick as guarantor.

8. [34]

   Clauses 6 and 7 of the loan agreement provide:

9. [35]

   The loan is for a two year period.

10. [36]

    The schedule (referred to above) is as follows:

The spreadsheet (referred to at 4 in the schedule above)

1. [37]

   Although the spreadsheet is referred to under the heading “Rate of Interest”, this spreadsheet refers to principal payments only.

2. [38]

   Up until and including March 2014, the schedule shows that no construction costs are payable and the payment of principal is nil during those months. From April 2014 to the end of the mortgage (16 December 2015), the schedule shows that there are specified construction units and principal amount that are repayable (only January 2014 to April 2014 are reproduced in the schedule above). These entries in the spreadsheet provide some support for the alleged terms in the oral term.

The mortgage

1. [39]

   Senior counsel for Nichols Constructions submitted that clause 6 of the mortgage conditions provides for the payment of principal and interest, and is unqualified.

2. [40]

   Clause 6 of the mortgage relevantly reads:

3. [41]

   The schedule, annexure A, to the mortgage relevantly reads:

4. [42]

   This schedule shows that in addition to principal and interest payments, Mrs Elphick has to repay an additional sum of $684,000.

5. [43]

   Senior counsel for Nichols Constructions referred to Equuscorp Pty Ltd v Glengallan Investments (2004) 218 CLR 471; [2004] HCA 55 where the plurality held at [33] - [36] [citations omitted]:

6. [44]

   Senior counsel for Nichols Constructions submitted that the oral term is inconsistent with the express terms of the loan agreement and mortgage, that do not make the repayment obligations conditional in any way, and further that an analysis of the relevant provisions of the written agreements demonstrates that they are not subject to any conditions such as is pleaded in paragraph 6(b) of the proposed defence.

7. [45]

   According to senior counsel for Nichols Constructions, if the oral term is not an express term of the contract, then it cannot be an implied term because it does not satisfy the tests for implication of an ad hoc term. Nichols Constructions asserted that the first and most obvious problem is that the implied term would be inconsistent with the express terms of the contract: see Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5 at [38] per Gleeson CJ (Gaudron, McHugh, Gummow and Hayne JJ agreeing); and that the requirements for implication of an ad hoc term are well settled: see Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337, Mason J at 347.

8. [46]

   Finally, senior counsel for Nichols Constructions asserts that the implication would radically subvert the allocation of risk, which Mrs Elphick accepted, and that it is not reasonable to introduce a term which would impose the risk of the borrower being unable to repay the loan on the lender. He submitted that such a term would subvert commerce, as borrowers not lenders should assume the risk that they will be unable to repay the loan.

9. [47]

   I am prepared to accept Nichols Constructions’ proposition in relation to the construction of the terms of the mortgage that parties are bound by written loan agreements. But where there is ambiguity, the Court may look to where the language of a contract is ambiguous or susceptible of more than one meaning, and objective evidence of the surrounding circumstances known to both parties is admissible to assist in the interpretation of the contract: see Codelfa.

10. [48]

    However, my task is not to embark on a hearing of the full merits of the case. My task is to determine that the defence as asserted is bona fide and that there is an arguable or triable issue. If I am wrong and paragraph [6] is not arguable, the oral term is also relevant to the next claim, namely whether the loan agreement is unjust pursuant to the Contracts Review Act 1980 (NSW). As the Contracts Review Act claim also involves the same documents, I consider paragraph [6] of the proposed defence should proceed to trial.

Contracts Review Act

1. [49]

   It is alleged that the loan agreement is unjust within the meaning of s 7 of the Contracts Review Act and s 76 of the National Credit Code for the reasons set out in [18] of the proposed defence. They are that the loan was, otherwise, a pure asset loan; that while Mrs Elphick only received $4,200,000, she was obliged to repay $4,684,000 plus interest; and if she defaulted, interest was at 12% compounded under the mortgage and she had no income of her own. She is a housewife.

2. [50]

   In Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 at [51] Brereton J noted that the relevant questions when considering whether a contract is unjust are:

3. [51]

   I have referred to Riz in order to point out whether or not a contract is unjust in the circumstances in which it was made, involves the exercise of judicial discretion. This will involve the consideration of the facts and circumstances in which the contract was made.

4. [52]

   Section 9 of the Contracts Review Act sets out the matters to be considered by the Court in determining whether a contract is unjust or not, some of which apply to Mrs Elphick: see paragraph [49] of this judgment.

5. [53]

   There is some support for Mrs Elphick’s claim that there was an oral term and that payments of principal were not due until April 2014 in the entries of the spreadsheet, incorporated in the loan agreement. In my view, the Contracts Review Act raises triable issues.

Frustration

1. [54]

   It is pleaded in the proposed defence at [20] to [26] that if there has there been intervening conduct, being the conduct of Nichols Constructions in respect of the subdivision, such that the loan agreement is frustrated.

2. [55]

   Nichols Constructions complains that this pleading of frustration does not identify the precise allegations of fact relied upon. Nichols Constructions submitted that if it is accepted that there was no oral or implied term that repayment was conditional on the success of Mr Elphick’s commercial expectations then there is no basis to find that any conduct alleged constituted a “change in circumstances that led to performance becoming more onerous must render the contrite ‘radically different’ or ‘fundamentally different’ from anything contemplated by the parties”: see MSU Management Pty Ltd, Re; Urusoglu v MSU Management Pty Ltd [2011] NSWSC 54, Ward J at [345] applying Codelfa.

3. [56]

   I note that Nichols Constructions’ contentions are based on the acceptance that there was no oral or implied term. I do not think this defence is based upon whether there was the same implied term referred to earlier in this judgment. In my view, it is a triable issue.

Notices

1. [57]

   There are defences based on the alleged failure to serve notices of default under clause 13(a) of the loan agreement, under s 57(2)(b) of the Real Property Act 1900 (NSW) or under s 88 of the National Credit Code (paragraphs 8, 10, 13 to 17). The requirement to serve a s 57(2)(b) notice only comes into play when the property is to be sold. That event is yet to occur so the failure to serve the s 57(2)(b) notice is not an arguable defence.

National Credit Code notice

1. [58]

   So far as the National Credit Code notice is concerned, it is also alleged that Nichols Constructions has failed to comply with the National Credit Code (and, hence, the express terms of the loan agreement) in that it has failed to give to Mrs Elphick notices that comply with the National Credit Code.

2. [59]

   On the issue of the service of the National Credit Code, Mrs Elphick gave conflicting evidence. Mrs Elphick gave evidence that during 2014, either she or her husband collected mail from their post box at the Cronulla post office. She agreed that it looked like her husband’s signature on an Australia post document under the heading “Delivery information signed for by K Elphick”.

3. [60]

   Initially, Mrs Elphick gave the following evidence (T38.44-50, T39.29-40.17, T40.45-47):

4. [61]

   Even though I found Mrs Elphick’s evidence on whether or not she had been served with the notice under the National Credit Code unconvincing, this does not mean that I have reached a conclusion that her defence is not bona fide. Rather, I have reached the conclusion that her claim that she did not receive the notice is not a good one.

5. [62]

   Nichols Constructions referred to Bank of Queensland v Dutta [2010] NSWSC 574. Whether or not Dutta is applicable to these proceedings is a matter that can be argued at trial.

Sections 56, 57 and 58 - Civil Procedure Act

1. [63]

   The application of these principles is subject to the provisions of the Civil Procedure Act. I refer to ss 56, 57 and 58 of the Civil Procedure Act but it is not necessary to reproduce them here. Mrs Elphick has filed affidavits, been cross examined and has not been tardy in her application to set aside the default judgment.

2. [64]

   It is my view that Mrs Elphick has shown that her defence is bona fide and it raises triable issues.

Dictates of justice

1. [65]

   Finally, after taking into account the short delay between the entering of the default judgments and the application to set them aside, that Mrs Elphick has a bona fide defence and has shown that she has triable issues and that no prejudice has been caused to Nichols Constructions by that delay, it is my view that Mrs Elphick should be allowed a proper opportunity to have the defence argued on its merits.

2. [66]

   While currently there is no draft cross claim, it will include the relief sought should Mrs Elphick be successful. This relief may involve keeping the possession of the property on terms. In my view, both default judgments should be set aside. The default judgments entered 3 February 2015 and 13 February 2015 are set aside. Mrs Elphick is to file a defence and cross claim within 14 days.

Irregularity

1. [67]

   So far as the default judgment for the monetary sum is concerned, it has been entered in the wrong amount. It is an irregularity pursuant to UCPR 36.15(1).

2. [68]

   Mr Wilson, the solicitor acting for Nichols Constructions, deposed (Aff, 14 May 2015 [21] and [22]):

3. [69]

   Mr Wilson (Aff, 3 July 2015 [7] to [38]) provides a further explanation of how these amounts of $5,195,000 and $5,321,000 are arrived at. While it is not necessary to reproduce this explanation here, it is quite an involved exercise and one that requires that Mrs Elphick be afforded an opportunity to respond. Counsel for Mrs Elphick has also set out what is said to be deficiencies in the affidavit seeking default judgment so far as it relates to the monetary sum. These are of a technical nature and as I have already decided to set aside the default judgment this irregularity is yet another reason why default judgment for the monetary sum should be set aside.

4. [70]

   The parties are to seek instructions in relation to mediation and inform the Registrar at the directions hearing.

5. [71]

   Costs are reserved.