Federal Court of Australia

O’Shannassy v Sarina (Appeal) [2024] FCA 880

ORDERS

THE COURT ORDERS THAT:

1.    The applicant be granted leave to appeal.

2.    The appeal be dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

STEWART J:

Introduction

1    Is a defamation claim in respect of which there has been a final positive curial determination of liability but not an assessment of damages at the time the defendant became bankrupt a provable debt in their bankruptcy? That is the question raised by this application for leave to appeal, and the appeal in the event that leave is granted. It arises in the following way.

2    The respondents to the appeal commenced proceedings in what was then called the Federal Circuit Court of Australia against the applicant for leave to appeal (whom I shall refer to as the appellant for convenience) in which they claimed damages for the tort of defamation. After a five-day trial, the trial judge dismissed the claim by ordering, in order 1, “Judgment for the respondent”: Sarina v O’Shannassy (No 5) [2020] FCCA 2911.

3    The present respondents appealed against that dismissal. On 19 November 2021, Justice Rares, exercising the appellate jurisdiction of the Court, allowed the appeal: Sarina v O’Shannassy [2021] FCA 1649. That was on the basis that the pleaded defamation had been established and the defences to it failed, and that the respondents “are entitled to have some recompense in damages” (at [100]). However, his Honour concluded that the Court on appeal was not in a position to assess the damages and that the matter should therefore be remitted to the Circuit Court for the assessment of damages (at [93]).

4    Justice Rares relevantly made the following orders:

1.    The appeal be allowed.

2.    Order 1 made by the Federal Circuit Court of Australia on 30 October 2020 be set aside and in lieu thereof order that:

1.    There be judgment for the applicants.

…

6.    The matter be remitted for the assessment of the appellants’ damages to the Federal Circuit and Family Court of Australia (Division 2) pursuant to s 28(1)(f) of the Federal Court of Australia Act 1976 (Cth) and be heard by a judge other than the [trial] judge.

5    Pursuant to order 6 of Rares J, the matter was remitted to the Federal Circuit and Family Court of Australia (Division 2) to a judge (the primary judge) for the assessment of damages.

6    On 29 April 2022, before there had been any assessment of damages, the appellant filed a debtor’s petition and was declared bankrupt. A trustee was appointed.

7    The appellant sought from the primary judge a determination that the respondents’ claim was a “provable debt” within the meaning of s 82 of the Bankruptcy Act 1966 (Cth).

8    If the claim is a provable debt there are two significant consequences, both to the appellant’s benefit. First, the proceeding before the primary judge would be stayed under s 58(3)(b) of the Act. Secondly, and more significantly, the appellant’s discharge from bankruptcy in due course would operate to release him from the claim (s 153(1) of the Act). That is to say, the claim would have to be assessed by the trustee and paid from the insolvent estate to the extent that there were funds available for a distribution. If the claim is not a provable debt, it may be pursued by the respondents during the bankruptcy and after discharge from bankruptcy: Coventry v Charter Pacific Corp Ltd [2005] HCA 67; 227 CLR 234 at [6].

9    On 9 February 2024, the primary judge delivered reasons in which he held that by reason of s 82(2) of the Act, the remitted matter was not a debt provable in bankruptcy: Sarina v O’Shannassy (No 7) [2024] FedCFamC2G 102 at [13]. That was on the basis that damages for defamation are uncertain and depend on an assessment of the loss suffered and so are unliquidated.

10    In consequence of that conclusion, on 23 February 2024 the primary judge made orders programming the matter for the determination of the “quantum of damages”. The parties before me accept that it is a necessary implication of those orders that the appellant’s application that the proceeding be permanently stayed on the basis that the debt is a provable debt in bankruptcy was dismissed. That is in effect the order that is sought to be appealed against, although formally the programming orders are the subject of the proposed appeal because no order dismissing the application for a stay, or declaring that the claim is a provable debt, was made.

11    For the reasons that follow, I have concluded that the appellant should be granted leave to appeal but the appeal should be dismissed with costs.

The ground of appeal

12    The ground of appeal as set out in the draft notice of appeal is that the primary judge erred in determining that a judgment made prior to a sequestration order against the appellant’s estate for an amount to be assessed in a defamation proceeding was not a liability occurring before sequestration and therefore a provable debt in that estate pursuant to s 82 of the Act. The submissions on behalf of the appellant in support of that ground can conveniently be summarised as follows:

(1)    The word “demand” in s 82(2) does not encompass a claim, such as the present, for which liability has been determined, because the cause of action merged in the judgment of Rares J on liability.

(2)    Alternatively, as in the case of an order for liability for costs still to be assessed, an order for liability on a tortious claim made before the intervention of bankruptcy is a provable debt incurred “by reason of an obligation incurred before the date of the bankruptcy”.

13    In written submissions, the appellant submits that s 82(6) of the Act acknowledges that some claims are incapable of determination and therefore cannot be the subject of proof, whereas the calculation of defamation damages does not fall into that category. In response to that submission, the respondents raise an “alternative argument” that the relevant debt in this matter “cannot be fairly estimated” and is therefore not a provable debt as provided for by s 82(6). That point had not been advanced below and is not the subject of a notice of contention. Be that as it may, on the view I take of the matter it is not necessary for me to deal with the point.

Consideration

Introduction

14    The corpus of provable debts is set out in s 82(1) of the Act and further elucidated or expanded in subss (1A) and (8). The claims (using “claims” as a neutral word in relation to the issues to be decided) identified in subss (2), (3), (3AA), (3AB), (3A), (3B) and (6) are subtracted from that corpus of provable debts: see Coventry at [21]. As stated there, “[s]ub-section (2) which is at the centre of this appeal is, therefore, an exception to an otherwise broadly drawn definition of debts provable in bankruptcy.”

15    The following are the presently relevant provisions:

82     Debts provable in bankruptcy

(1)    Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

…

(2)    Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.

16    The appellant’s case is that the respondents’ claims are “liabilities” that are “contingent” on their extent being assessed. On that basis, the appellant submits that the claims come within subs (1). That much is common ground. The real question is whether the claims are excluded by subs (2).

Submission 1: no “demand” as the claim merged in the liability judgment

17    The appellant’s first principal submission, with reference to Ryan v Davies Bros Ltd [1921] HCA 53; 29 CLR 527 at 533, is that the right of action for the original wrong has merged in the judgment, and a new, higher and different obligation has been created by the judgment. He submits that since that occurred prior to the intervention of bankruptcy, the claim on the judgment is a provable debt within s 82(1) and it is not a “demand” within s 82(2).

18    In Tomlinson v Ramsey Food Processing Pty Ltd [2015] HCA 28; 256 CLR 507 (at [20]) it was explained that an exercise of judicial power involves, as a general rule, a decision settling for the future, as between defined persons or classes of persons, a question as to the existence of a right or obligation, so that an exercise of the power creates a new charter by reference to which that question is in future to be decided as between those persons or classes of persons. It was said that in that way a final judgment “quells” the controversy between those persons; the rights and obligations in controversy, as between those persons, cease to have an independent existence: they “merge” in that final judgment. Such a merger is treated in Australia as “equating to ‘res judicata’ in the strict sense.”

19    The key difference between this case and the leading cases on merger is that the judgment of Rares J is not a judgment that finally determined all the issues in dispute between the parties; it did not in that sense finally quell the controversy. The controversy between the parties which is the subject of the litigation below, and the first appeal to this Court, includes not only the respondents’ right to damages, which was determined by Rares J, but also the quantification of those damages. The “judgment” on liability entered by Rares J did not quell the controversy, but only part of it.

20    Whether or not a judgment on liability with quantum still to be assessed results in a merger of the cause of action with the judgment is a question of some nicety. The debate centres on whether such a judgment is final in the requisite sense because one of the recognised requirements for merger, also termed a plea of former recovery, is that the judgment is a final judgment capable of supporting an action: Keane PA, Spencer Bower and Handley: res judicata (6th ed, LexisNexis, 2024) at [19.03] and [20.08].

21    It has long been recognised that where damages are the gist of the cause of action, liability cannot relevantly be divorced from the damages as a separate and independent matter: Electricity Commission of New South Wales v Lapthorne [1971] HCA 11; 124 CLR 177 at 184 per Barwick CJ, McTiernan J agreeing. It was held that a judgment on liability for damages to be assessed is not a final judgment. Also, a judgment or order that determines that there is a liability with quantum still to be assessed is not a judgment debt as a judgment debt can only arise where the judgment itself quantifies the sum which the judgment debtor owes to their judgment creditor: Thomas v Bunn [1991] 1 AC 362 (HL) at 380. Spencer Bower cites these cases as authority for the proposition that a judgment for liability without the final assessment of damages does not satisfy the finality requirement for merger: Spencer Bower at [20.08] referring back to [5.08]. It was also decided in Hahn v Conley [1971] HCA 56; 126 CLR 276 at 278 (Barwick CJ) and 296 (Walsh J) and Burns v Lipman [1975] HCA 2; 132 CLR 157 at 159 (Barwick CJ, Stephen, Mason and Jacobs JJ) that a judgment on liability with damages to be assessed is not a final judgment.

22    Also cited in Spencer Bower (at [20.08]) are Marston v Phillips (1863) 9 LT 289 and Goldrei, Foucard & Son v Sinclair and Russian Chamber of Commerce in London [1918] 1 KB 180 (CA) at 191 which support the proposition that a judgment for damages to be assessed is not final before the assessment. In Henderson v Henderson (1844) 6 QB 288 at 298, Lord Denman CJ held that a judgment for unliquidated damages in respect of an action in tort is not a debt “till the Court has adjudged to the plaintiff his damages: but, when so adjusted, they are recoverable as a debt”.

23    Although Electricity Commission is authority for the proposition cited above, ie that where damages are the gist of the cause of action liability cannot relevantly be divorced from the damages as a separate and independent matter, it should be noted that the Court (at 184-186 per Barwick CJ, McTiernan J agreeing) distinguished Hall v Busst [1960] HCA 84; 104 CLR 206 as having dealt with a claim for damages for breach of contract, among other reasons. In Hall v Busst, Dixon CJ (at 218) said that in such an action an order for damages to be assessed is “final” in the sense that word bears in the context of s 35 of the Judiciary Act 1903 (Cth) (in the terms it then was) as to whether leave to appeal was required.

24    That raises the question whether an order for liability with damages to be assessed, whether in a contract, tort or statutory claim, is a “final” judgment for the purpose of merger (cf the question of leave to appeal). Even though the value of consistency in the law may favour the question of finality to be the same for all purposes, as to which see Warramunda Village Inc v Pryde [2002] FCA 250; 116 FCR 58 at [70] per Finkelstein J, the reality is that the question of finality is different even for issue and cause of action (or “claim”: Clayton v Bant [2020] HCA 44; 272 CLR 1 at [28], [67]) estoppels, on the one hand, and ‘strict’ res judicata, merger or former recovery on the other. Finality for the purpose of whether leave to appeal is required (as already discussed) or for the enforcement of a foreign judgment may also be different: Henley v Soper (1828) 8 B&C 16. See Spencer Bower at [5.02].

25    There is some intermediate appellate court authority which may appear to decide that a judgment for liability with damages to be assessed results in merger. In National Australia Bank Ltd v Maher (No 2) [1999] VSCA 189; 3 VR 589, the Victorian Court of Appeal considered an order for “judgment … for damages to be assessed” as final and not interlocutory, although it may have seemed “anomalous” (at [18]) (see also Camberwell City Council v Camberwell Shopping Centre Pty Ltd [1994] 1 VR 163 at 174 per Marks and Gobbo JJ, to which the Court referred). The Court (Callaway JA with whom Winneke P and Batt JA agreed) went on to observe (at [20]) that “it would follow that the respondent’s cause or causes of action merged in the judgment given in her favour against the appellant for damages to be assessed, because that was a final judgment at least as to liability”. In Major Engineering Pty Ltd v Timelink Pacific Pty Ltd [2007] VSCA 228, the Court (at [8] per Nettle JA, Buchanan and Neave JJA agreeing) took the view that Electricity Commission (and other decisions) had not expressly overruled Hall v Busst.

26    Notably, nowhere in Major Engineering did the Court reference the obiter in Maher as to merger at the liability stage. The ratio of the Court’s approval of Maher should be read as being limited to whether leave to appeal was necessary. Further, the Court acknowledged that, per Electricity Commission, finality could not be assumed for judgments in cases where damages are the gist (at [6], [10]), ie the instant case. In any event, the obiter in Maher appears to have been premised on finality of judgment for leave to appeal being a proxy for finality in terms of strict res judicata. To the extent that Maher and related authorities endorse such an analysis, subsequent intermediate appellate courts have nevertheless expressed some doubt: eg Durolek v Pier (WA) Pty Ltd (No 2) [2019] WASCA 138 at [77]. The predominant weight of appellate authority in this Court, addressing finality for leave to appeal, has taken the view that it is “too well-established to be doubted” that a liability judgment “prior to, and separate from, any consideration of further questions (including as to relief) is ‘an interlocutory judgment’”: Monash Health v Singh [2023] FCAFC 166 at [27]-[44] per Katzmann, Snaden and Raper JJ and the cases cited there; see also Warramunda Village Inc v Pryde at [69].

27    Ultimately, the many judgments in different courts on the question of finality for the purpose of determining whether leave to appeal is required are of little assistance in the present case. As discussed above, there may be multiple substantive and procedural conceptions of finality as that relates to a judgment or order. Merger requires finality in the sense that there is nothing in the controversy between the parties still to be determined; the controversy has been quelled: Tomlinson at [20]. For that reason, judgment in favour of the claimant with damages to be assessed in a tort case does not have the effect of merging the cause of action in the judgment. It gives rise to an estoppel, but not merger: see Tomlinson at [22]. It seems to me that the same must apply in respect of a breach of contract or statutory claim for damages. As to the latter, a claim for statutory damages or compensation is a demand “in the nature of unliquidated damages” within the meaning of s 82(2) of the Act: Australian Consumer and Competition Commission v Kritharas; Re Kritharas [2000] FCA 1442; 105 FCR 444 at [24] and [38] per Katz J; Director General, Department of Services, Technology & Administration v Veall (No 6) [2012] NSWSC 1118 at [34] per Davies J; Coventry at [6]. Resolution of the present case, however, does not require any decision in respect of contractual or statutory damages or compensation claims.

28    Davey v Vrsecky (Trustee), in the matter of Dessmann [2023] FCA 1274 is not authority against a conclusion that there is no merger in the present circumstances. The part of the Magistrate’s order in the primary proceedings requiring “compensation” still to be assessed concerned only costs – the compensation in the nature of damages had already been assessed and ordered in a fixed amount (at [29]). On that basis the case came within the principle in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; 234 CLR 52 (at [65]-[67) (discussed further below), as was recognised in Davey at [28]. Davey (at [25]-[28]) should therefore not be understood as ratio to the effect that a judgment on liability for damages or compensation to be assessed (other than for costs) results in merger, or that such an order does not fall within s 82(2) because the value of the damages or compensation is to be determined under s 82(4). Rather, the assessment of unliquidated damages claims that are excluded from s 82(2), being for breach of contract, promise or trust, takes place under s 82(4).

29    There is another way of looking at the problem in this case. This area of the law, like many others, is concerned with substance rather than form: Clayton v Bant at [34]. That raises the question, what, as a matter of substance, did Rares J do in pronouncing “judgment for the applicants” in relation to liability? It was decided in Electricity Commission (at 181) under the particular statutory provision in question that a trial judge cannot direct judgment to be entered for a plaintiff in an action for negligence unless damages have been assessed or agreed, and that “[i]f a trial judge determined liability prior to the assessment of the consequential damages, the finding of liability cannot rise even to the level of a verdict until the damages are assessed whereupon of course the statute would authorize the direction to enter judgment.”

30    Neither side of the present case submits that the pronouncing of “judgment for the applicants” by Rares J when only liability had been determined was not competent, but the respondents submit that its substantive effect is declaratory, ie it finally declares that the appellant is liable to them for defamation but it did not determine the quantum of that liability. I accept that submission. Such a “judgment” is not coercive or executory. No process by which it can be enforced is available. It is in substance the same as a declaration that the appellant is liable to the respondents on the pleaded claim with damages to be assessed. It is doubtful that declaratory relief can give rise to merger: Zavarco plc v Nasir [2021] EWCA Civ 1217; [2022] Ch 105 at [37]-[41] (judgment on the further appeal by the UK Supreme Court is currently reserved); Mensink v Registrar of the Federal Court of Australia [2022] FCAFC 102; 294 FCR 101 at [52]. The creation of a new charter of rights by merger has been said to require “an exercise of judicial power [that] is recorded in a conclusive, binding and enforceable judgment or order of the court” (emphasis added): Attwells v Jackson Lalic Lawyers Pty Ltd [2016] HCA 16; 259 CLR 1 at [109]. The “judgment” by Rares J is not enforceable in that sense.

31    My conclusion is therefore that the judgment of Rares J, for want of the requisite quality of finality, did not result in a merger of the cause of action for damages for defamation in the judgment.

32    However, even if it did, the respondents’ claims following the judgment of Rares J are still “demands” within the meaning of s 82(2) of the Act. That is because any demand referred to in subs (2) must be a “debt” or “liability” within the meaning of those words as used in subs (1). That follows from the relationship between those two subsections, subs (2) describing a carve-out of subs (1). The demand on the judgment is therefore still a demand “in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust”.

33    The point is also illustrated by taking the case of an ultimate judgment in a money sum that remains unsatisfied at the time of bankruptcy. The claim on such a judgment (in which the original cause of action has undoubtedly merged) is a debt or liability within the meaning of subs (1): Barodawala v Perinparajah [2022] VSCA 198; 68 VR 329 at [76] per Kyrou and Walker JJA citing Foots at [67]. The reason that a claim on such a judgment is not within subs (2), and is therefore a provable claim in the bankruptcy, is because it is not for an unliquidated amount; it is for a certain and determined amount.

34    Taking now the present case of a “judgment” that establishes a liability that still has to be quantified, the claim on the judgment is just as much a “demand”. The difference is that it is for an unliquidated amount. The demand on the judgment, being in effect a demand for the quantification of the determined liability and then payment of that amount, is, however, not a demand that arises by reason of a contract, promise or breach of trust. By the operation of subs (2) it is therefore excluded from subs (1) and is not a provable debt.

35    Given the inevitability that a “demand” must be a “debt” or a “liability” within the meaning of those terms as used in subs (1), as explained, the appellant’s submission that the claim on the judgment is not by ordinary use of language readily described as a “demand” is not to the point. But in any event, I reject the submission. To make a claim on a judgment on liability is readily described as a demand, as it is to make a claim on a judgment sounding in a fixed sum of money. The fact that the liability has been finally determined by a court does not in any way detract from the claim on the judgment being a demand.

Submission 2: like an order for costs, the liability order created a new debt

36    Turning now to the appellant’s second principal submission, the appellant relies on Foots in support of the submission that, like a costs order still to be assessed or taxed, a judgment on liability with the quantum to be assessed is not “in the nature of a demand for unliquidated damages” within subs (2) and is therefore not excluded from being a provable debt under subs (1).

37    In Foots, before Mr Foots became bankrupt the trial judge gave judgment against him in favour of a cross-claimant in a certain sum but made no order at that time with respect to the costs of the proceeding. Then, after Mr Foots became bankrupt, the trial judge ordered that he pay the cross-claimant’s costs. The costs order was made against Mr Foots’ contention that the claim for costs was a provable debt within s 82(1) of the Act because it arose “by reason of an obligation incurred before the date of the bankruptcy” being the judgment on the merits.

38    On appeal, the High Court rejected the submission that Mr Foots’ exposure to an adverse costs order arose from an “obligation” incurred prior to his bankruptcy because no such obligation arose until the costs order was made (at [35]). The risk of an adverse costs order, even following the judgment against Mr Foots on the cross-claim, was not a contingent liability within the meaning of s 82(1) as there was no certainty that the Court in question would make such an order (at [36]). The order for costs itself is the source of the legal liability (at [36]). The Court concluded that since the costs order was made only after bankruptcy had intervened, and Mr Foots’ liability to meet that order did not arise from an obligation incurred before bankruptcy, the claim for a costs order was not a provable debt (at [67]).

39    Counsel for the appellant before me relies on the following obiter statements in the majority judgment in the High Court (at [67], per Gleeson CJ, Gummow, Hayne and Crennan JJ, Kirby J dissenting):

Had the costs order made by [the trial judge] been made and taxed before the appellant’s bankruptcy ensued, it would have been a provable debt. Even if the order had not been taxed before bankruptcy, it would nonetheless have been provable as a debt incurred “by reason of an obligation incurred before the date of the bankruptcy”; namely the antecedent making of the costs order.

40    It is apparent that in those statements attention was being addressed to the question when the relevant obligation was incurred, and more particularly whether it occurred prior to bankruptcy. The obiter statement in the second sentence is not directed to the question whether an as yet untaxed costs order comes within the description of a demand “in the nature of unliquidated damages” within the meaning of s 82(2).

41    As Murphy J explained in Polis v Zombar [2019] FCA 69; 134 ACSR 486 at [35]:

The distinction between liquidated and unliquidated claims was classically described by Odgers in Pleading and Practice, 12th ed, 1939, p 47–8 in the following terms, approved in Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138 at 142 … (Knox CJ and Starke J):

… whenever the amount to which the plaintiff is entitled (if he is entitled to anything) can be ascertained by calculation or fixed by any scale of charges, or other positive data, it is said to be liquidated or “made clear”. But an action in which the amount to be recovered depends upon all the circumstances of the case, and no one can say positively beforehand whether the plaintiff will recover a farthing, or 40 shillings, or £100, is an action for unliquidated damages.

42    It is on that basis that a claim on an untaxed order for costs has been held not to be a claim in the nature of unliquidated damages – although the amount may not have been calculated at the time of the order, the amount is capable of ascertainment with reference to a scale of charges or other positive data: Pekar v Jess (Trustee) [2022] FCA 1367 at [48] per Hespe J. To that can be added the observation that the quantification of a costs order entails only the determination of what charges that were actually incurred, and which are therefore quantified or certain, were reasonably incurred with reference to the relevant scale. That is a quite different exercise to the determination of damages in a case in which damages is the gist of the claim. It is well recognised that an unquantified costs order is treated quite differently to an unquantified order for liability, and that such different treatment may be regarded as anomalous: Thomas v Bunn at 380; Minister Administering the Environmental Protection and Assessment Act 1979 v Carson (1994) 35 NSWLR 342 at 352-353 per Kirby P and 358 per Young AJA.

43    For that reason, I do not consider that an unquantified costs order is relevantly analogous to an order for liability on a tort claim with damages to be assessed, ie an order as in the present case.

Disposition

44    As can be seen from the above, there is some complexity and importance to the question to be determined. For that reason, I am satisfied that leave to appeal should be granted. However, for the reasons given, the appeal should be dismissed with costs.

Associate:

Dated:    8 August 2024