SETTING ASIDE A DEFAULT JUDGMENT IN RELATION TO SOLICITORS’ COSTS: INTEREST SET ASIDE, PRINCIPAL SUM REMAINS A DEBT

In RS v LS & LMP [2018] EWHC 449 (Fam)  Mrs Justice Roberts considered an application to set aside a default judgment obtained in relation to a solicitor’s costs. There are issues in relation to a failure to serve the response pack; delay and whether the entire judgment should be set aside.

(What is interesting is the total absence of any express reference to the Denton criteria. There are numerous cases where the courts have held that an application to set aside judgment is subject to the Denton criteria, see, for example Redbourn Group Ltd -v- Fairgate Development Limited [2017] EWHC 1223 (TCC))

KEY POINTS

  • Failure to serve a response form with the claim form  is not determinative in an application to have judgment set aside. It is an issue the court can take into account. The judgment is still regular.
  • On occasion the courts can overlook some delay when there is an application to have judgment set aside.
  • In the current case there was dispute about the principal sum owed but there was a dispute in relation to contractual interest. Judgment was set aside in part with the judgment debtor being allowed to dispute the claim for interest.

THE CASE

The applicant (LS) had instructed a firm of solicitors in matrimonial proceedings. She withdrew her instruction in 2014.  They issued proceedings claim for the work done and a considerable sum in relation to contractual interests, totalling £107,361.07. The claim form was given to LS and a default judgment entered thereafter.

THE APPLICATION

LS sought to have the judgment set aside, arguing that there had been a subsequent agreement that the solicitors would not claim interest.  LS also asserted that a Response Pack had not been served with the claim form.

THE JUDGMENT

The judge reviewed the facts and history of the case in detail. She then considered the law.

C. The Law
    1. Part 12 of the Civil Procedure Rules 1998 governs the position concerning default judgments. By way of her procedural defence, LS submits that the requirements of CPR r 12.3 have not been met in this case. The rule provides as follows:-
Conditions to be satisfied

12.3 – (1) The claimant may obtain judgment in default of an acknowledgement of service only if –

(a) the defendant has not filed an acknowledgement of service or a defence to the claim (or any part of the claim); and

(b) the relevant time for doing so has expired.”

    1. CPR r 7.8(1) places a requirement on a claimant to serve on a respondent the means with which to formally acknowledge service. The requirements are mandatory and are spelled out in these terms:-
“Form for defence etc. must be served with particulars of claim
7.8 – (1) When particulars of claim are served on a defendant, whether they are contained in the claim form, served with it or served subsequently, they must be accompanied by –

(a) a form for defending the claim;

(b) a form for admitting the claim; and

(c) a form for acknowledging service.

    1. These forms together are known as “a response pack”. A failure to serve a response pack with the particulars of claim is a technical error which does not justify a strike out although it can be a reason to set aside a judgment obtained in default of an acknowledgement of service, as is the case here, under CPR r 13.3(1)(b). That rule provides as follows:-
“Cases where the court may set aside or vary judgment entered under Part 12
13.3-(1) In any other case, the court may set aside or vary a judgment entered under Part 12 if –

(a) the defendant has a real prospect of successfully defending the claim; or

(b) it appears to the court that there is some other good reason why-

(i) the judgment should be set aside or varied; or

(ii) the defendant should be allowed to defend the claim.

(2) In considering whether to set aside or vary a judgment entered under Part 12, the matters to which the court must have regard include whether the person seeking to set aside the judgment made an application to do so promptly.

(Rule 3.1(3) provides that the court may attach conditions when it makes an order.)

    1. Thus, the court has a discretion which must be exercised in accordance with the overriding objective set out in Part 1 of the CPR and that discretion is unconditional. Its purpose is to avoid an injustice. It is now established law that a failure to serve a response pack with particulars of claim may, in appropriate circumstances, constitute “some other good reason” for the court to exercise its discretion and set aside a judgment obtained in default of an acknowledgement of service. The need to act promptly following service of a claim and the merits of the proposed defence must also be factored into the court’s approach. Subject only to any assessment as to whether LS was properly served with the debt recovery proceedings on 12 January 2016, the judgment which LMP has obtained against LS is not per se an irregular judgment which engages in the court a mandatory obligation to set it aside: the conditions in CPR r 12.3(1) are satisfied and those in r.12.3(3) do not feature in this case.
    2. Thus I turn to consider individually the three factors set out above.
(a) Failure to serve a response pack
    1. This is an issue of fact. LS contends no such pack accompanied the documents which Mr Roberts, the trainee solicitor, served on her outside court on 12 January 2016. She relies on his omission as significant because of her status as a litigant in person who was vulnerable because of her health and the ongoing stress of these proceedings. She returned to Moscow within three days of service. Her return flight to Moscow was pre-booked and she had no English solicitors then on record as acting for her. She has shown me the clip of documents which she received on that date. With the passage of time Mr Jordan cannot now be sure what he served on 12 January 2016. The contemporaneous documentation which he prepared on the day of service (which is likely to be more reliable evidence) suggests that there was no response pack included with the claim form and the Particulars of Claim. When completing the formal Certificate of Service later the same day, Mr Roberts certified as true that those were the two documents he had served and no more. I appreciate that Mr Seeber recalls having included a response pack with the documents which were sent down to London some four days earlier by special delivery. Mr Roberts does not recall removing anything from the clip before effecting service. However, Mr Seeber’s recollection is qualified. He makes it plain in his witness statement that this is his best recollection and not his clear recollection. From a distance of over eighteen months and in the context of what was probably a busy commercial practice, I do not criticise Mr Seeber at all for not having an independent recollection of what he placed in the envelope or package on that particular day. No doubt, the despatch of those documents was one small aspect of a full day’s work attending to many similar cases.
    2. I have had occasion in the past in this litigation to consider the reliability of LS’s evidence to the court. During the currency of this long-running litigation there have been adverse findings against each of LS and RS in relation to their past dealings with various matrimonial assets. I remind myself now, as I did then, that people may inadvertently fail to recollect accurately an event or series of events; they may deliberately mislead in order to bolster a case which they seek to advance; they may have a genuine subjective belief in the representations they make to a court regardless of the effect of the passage of time on memory. In this instance, I am prepared to believe LS. I accept that the clip of documents she produced consisting of the claim form and the Particulars of Claim with its various appendices was all she was handed by Mr Roberts on 12 January 2016. That finding is not an end to the matter because the absence of a response pack merely opens the door to the exercise of the court’s discretion. It can potentially constitute “some other good reason” for the court to set aside a default judgment obtained in the absence of an acknowledgement of service: see Erol v Global Fashion Links Ltd [2014] EWHC 4687. It is clear that the requirements of r. 7.8(1) are not incorporated as a specific condition for the purposes of r.12.3(1): see Rajval Construction Ltd v Bestville Properties Ltd [2010] EWCA Civ 1621.
(b) Delay: the need to act promptly following service of a claim
    1. The application by LS to set aside the judgment entered on 28 January 2016 was deemed to have been made on 8 June 2017. In this context, I bear in mind that delay has to be considered both in terms of LS’s action (or inaction) following service of the claim on 12 January 2016 and her action (or inaction) following her discovery that judgment had been entered on 28 January 2016.
(i) As to the former, at the time when she was served with LMP’s claim form, her application for permission to appeal my distribution order remained extant. She lodged her appeal on 30 September 2015. It was not disposed of until over a year later when, on 16 January 2017, Lewison LJ refused permission on paper. Immediately on receipt of the order refusing permission to appeal, I listed the matter for further directions. My order is dated 19 January 2017. It gave rise to the substantive hearing on 8 June 2017.
(ii) As to the latter, LS has explained in her witness statement that she was unaware of the existence of the default judgment until 1 June 2017 when she received by email a copy of LMP’s application for joinder in these proceedings. The default judgment appears to have been sent to an address in Moscow [Property A] in which she had not lived for over a year. I deemed the set aside application to have been made at the hearing and thus within seven days of her date of knowledge as to the existence of the judgment debt.
    1. It seems to me that the particular facts of this case lend some support to LS’s submission to the court that she believed there was in place some form of general moratorium in relation to the implementation/enforcement of my distribution order (including the costs order) which was the subject of that pending appeal. When she was served in the precincts of the court on 12 January 2016, she was attending a hearing before me at which both she and RS were litigants in person. That hearing related to applications for enforcement of the order for sale in relation to Property R in Moscow amongst other issues. As both parties will doubtless recall, the hearing (which I believe had been listed for two days) was ineffective because of her pending appeal which in the early stages had been held up by the absence of a proper appeal bundle. I seem to recall LS telling me on that occasion that she was lodging an appeal bundle that very day. In any event, I had made it clear to both parties that, with an application for permission to appeal pending, I could not deal with an application for enforcement of the order which was the subject of the appeal.
    2. She had, of course, responded within a matter of days to DWF’s letter before action, denying that this ‘debt’ in respect of unpaid costs and interest was hers (see her email dated 9 November 2015). I accept that she did not enter a formal acknowledgement of service or file a defence to the claim but there is no doubt that throughout 2015, LMP was aware of what her case was because they were fully engaged in responding to the professional complaint which was being processed by the Legal Ombudsman. She was resident in Moscow for part of that period and it is accepted that there was no further correspondence by email or any other means between DWF and LS prior to that firm entering judgment on 28 January 2016.
    3. I accept that she only became aware that judgment had been entered against her in the week before the hearing in June 2017. She made her application to set aside the judgment promptly at that hearing and I recorded it ‘deemed’ for the purposes of future case management. As I say, the fact that it has taken another five months and more to list the hearing of that application is not delay of her making.
    4. During the course of submissions, Mr Ilyas, who appears for LMP, took me to various authorities which deal with the issue of delay: see, for example, Erol v Global Fashion Links (referred to above) and Henriksen v Pires [2011] EWCA Civ 1720, 2011 WL 6329340.
    5. In Dubai Financial Group LLC v National Private Air Transport Services Co Ltd [2016] EWCA Civ 71, a defendant who had not been served with a response pack made an application to set aside a default judgment some 15 months after it had been entered. As its title suggests, this was litigation concerning two substantial corporate entities involving a commercial claim in excess of US$10 million. The claimant secured an order permitting it to serve its Claim Form outside the jurisdiction on Saudi Arabia. The claim form, without a response pack, was served locally in Saudi Arabia on one of the company’s representatives. No acknowledgement of service was received. In July 2013, the judge at first instance made an order retrospectively validating service in this manner under CPR r 6.15(2). He ordered that judgment in default be entered although the defendant was not aware that this step had been taken until a year later in July 2014.
    6. The application to set aside the default judgment was issued in October 2014 and came before Flaux J in December 2014. The defendant relied principally on the failure by the claimant to effect valid service of the claim form outside the jurisdiction. The judge found that there had been valid service pursuant to r 6.15 and that, in these circumstances, the default judgment was not irregular. Further, the defendant had no arguable defence to the claim. He therefore refused to set aside the default judgment although he reduced the sum owed.
    7. The defendant appealed. The Court of Appeal allowed the appeal and set aside the default judgment largely on the basis that it considered the defendant should be entitled to enter a formal defence based on the merits.
    8. Whilst I fully appreciate that the need to act promptly is an important consideration, each case must turn on its own facts. In some cases the courts have been prepared to countenance significant delay where the interests of justice so require: see Barons Bridging Finance plc v Nnadiekwe QBD (Comm) September 6 2012 (unreported). In that case a judge of the Division set aside a default judgment obtained some years earlier on the basis that (i) there was a serious conflict of evidence between the parties, and (ii) the case had remained ‘live’ for some time after judgment had been entered.
(c) The merits of LS’s proposed defence
    1. The issue at the heart of the current dispute is the proper construction and legal efficacy of the ‘new contractual arrangements’ which were put in place in March 2014 to govern the future professional relationship between LS and LMP. There is no doubt that the original contractual terms were modified with the parties agreeing to move forward on the basis of a fixed fee agreement or arrangement. That much is agreed. The issue is the extent to which LMP’s entitlement to charge interest pursuant to its May 2013 retainer was carried across into, or incorporated within, the new retainer agreed in March 2014. The point is not academic. A very significant element of the six figure sum now claimed pursuant to the default judgment is interest. LS relies on a specific or express waiver of the interest clause. She bases that defence on representations made or assurances given to her by the firm both at the beginning of 2014 whilst she was in ongoing discussions with LMP and in July 2014 at the conclusion of the substantive distribution hearing. Those representations have not, as yet, been set out in any formally pleaded case and thus LMP has not yet had an opportunity to respond.
    2. The issue which I have to determine in relation to the application before me is whether, against this background and chronology, LS should be denied the opportunity to put forward a defence.
D. Conclusion
    1. The impact, financially and otherwise, of denying LS the opportunity to challenge the claim for interest advanced by LMP is potentially serious. Enforcement of a judgment debt of a sum in excess of £100,000 would have far reaching consequences in terms of her future financial security. If the debt is found to be properly due and owing, then those consequences will have to be absorbed by LS to the extent that LMP chooses to enforce its debt inclusive of interest. However, if the court were to find that the new contractual arrangements agreed in March 2014 did not provide for interest and/or that the terms of the original retainer in respect of interest had been modified or waived, LS could potentially suffer a serious injustice if the judgment is allowed to stand. If LS can persuade the court that there were indeed specific discussions in or around January to March 2014 about a waiver of the interest provisions in the original retainer, she may well succeed in resisting the claim in relation to interest. It will all depend upon the court’s assessment of the evidence which is presented. In this context, it may well be said that she has at least a realistic prospect of satisfying the ‘real prospects of success’ test for the purposes of setting aside at least part of the default judgment. That is not to anticipate or prejudge the weight which a court will attach to her evidence or the evidence relied on by LMP. I make it clear that I have not yet heard specific evidence on the point. Because of the manner in which LS’s case has developed in its presentation whilst she has been conducting these proceedings in person, LMP has not yet had a proper opportunity to respond to the case which she seeks to advance by way of a formal Defence to the claim. She, in turn, must realise that, should she fail in that defence, there may well be further cost consequences which will follow.
    2. However, even if I am wrong about her ‘real prospects of success’ for the purposes of CPR r.13.3(1)(a), I am persuaded that this is a case where there is indeed a good reason why she should be allowed the opportunity to defend the claim, at least insofar as it relates to interest. This case has a long, complex and protracted history. Whilst I have considered the issue of delay, on balance I do not consider that a sufficient basis for denying LS the relief which she seeks, at least in part.
    3. Having considered matters carefully, I have reached a clear conclusion that the default judgment in the sum of £107,361.07 should be set aside for the purposes of enabling LS to defend the claim in relation to the interest element of the debt. It seems to me, however, that she has no arguable defence to the principal sum of £69,906 which was the sum outstanding in respect of her costs at the conclusion of the distribution hearing. Whilst she is entitled to look to RS for an indemnity in respect of that sum, my costs order does not, and cannot, displace the contractual liability which she has to pay that sum to LMP in respect of the professional services they provided. Subject to the enforcement of that debt, LS herself has accepted that liability (see paragraph 26 of my judgment). Mr Ilyas confirmed his instructions that LMP will not seek to enforce any judgment in that sum until the conclusion of the three day hearing in March next year (2018). That was a generous concession, albeit a realistic one.
    4. By way of conclusion to this application I propose to make an order in the following terms:-
(i) The existing judgment debt in the sum of £107,361.07 will be varied and replaced with a judgment in favour of LMP in respect of a reduced sum of £69,906;
(ii) Pursuant to CPR r.40.8A, there will be a stay of execution in relation to that judgment debt until 9 March 2018 subject to any further directions made by the court at the conclusion of that hearing