When the distinction between debt and damages can make all the difference

Among the most common causes of action for recovery of money are a claim for debt and a claim of damages. These are distinct causes of action with their own elements. The decision of the Victorian Court of Appeal in Yang v Finder Earth Pty Ltd[1] illustrates how the way in which a cause of action is pled can affect a party’s procedural rights and serves as a reminder of the importance of clear and thoughtful pleading when formulating claims.

The facts

The applicant, Mr Yang, was defendant in a County Court proceeding. The plaintiffs in their statement of claim alleged an agreement between the parties whereby one of the plaintiffs, Ms Luo, lent $700,000 to Mr Yang. It was a term of the agreement that Mr Yang was to use the money solely in establishing a business for the purposes of obtaining an investment-based migrant visa for Ms Luo. Pursuant to the terms of the agreement, Mr Yang guaranteed and indemnified Ms Luo for the money she lent and for ‘any further loss and damage she sustained’ in connection with the agreement.

Following the striking out of Mr Yang’s defence pursuant to a self-executing order, the plaintiffs entered default judgment for $700,000 plus interest and costs. Mr Yang applied to set aside the default judgment, arguing that it should not have been entered for the lump sum on the basis it ought properly have been pursued as a claim for damages rather than for debt.

The primary judge refused Mr Yang’s application. It was this refusal that was the subject of Mr Yang’s appeal.

The issue on appeal

The rules of the County Court and of other courts entitle a party with a claim to enter default judgment. This will often occur where a defendant has not entered an appearance or has failed to file a defence or had its defence struck out. The manner in which that judgment is entered will depend on whether the judgment relates to a claim for debt or a claim for damages. (A separate mechanism exists for actions for recovery of land.) If the former, the party can in accordance with the rules enter judgment for the amount sought; with the latter, judgment is merely interlocutory and the rules expressly provide that the quantum of damages must be later ‘assessed’.

In the claim against Mr Yang, the County Court statement of claim relevantly contained the following:

  • An allegation that, ‘by reason of … conduct alleged, Luo has suffered loss and damage being: (a) a loss of $700,000; and (b) [etc]’.

  • An item in the prayer for relief against Mr Yang and/or a company of which he was sole director for ‘$700,000 owing to [Ms Luo] under the [agreement]’.

  • An item in the prayer for relief against Mr Yang in his capacity as guarantor for ‘an order for such loss and damage owing pursuant to the [guarantee and indemnity]’.

  • An item in the prayer for relief against Mr Yang in his personal capacity (and without reference to the guarantee and indemnity) for damages.

On appeal, Mr Yang maintained that the claim as pleaded in the County Court was not a claim for recovery of debt under the guarantee and indemnity but rather a claim for damages arising from Mr Yang’s alleged misapplication of the loan.

The plaintiffs, as respondents, argued that the judge had correctly identified the essential character of the pleaded allegation as being a claim for debt, and that although there were gaps in the pleadings the judge was entitled to have regard to other paragraphs in the pleadings in construing the nature of the claim.

The Court’s decision

In a joint decision, Maxwell P, Tate and Emerton JJA allowed the appeal. The Court of Appeal considered that the foundation for Ms Luo’s claim was the guarantee and indemnity but that the money which she had sought to recover was the ‘loss and damage’ she claimed to have suffered as a result of misapplication of the loan. The statement of claim being a claim for damages rather than for debt, the Court held that the respondent as plaintiffs were not entitled to enter judgment in the manner they did.

The Court held:

‘It was, of course, alleged that those sums included the $700,000 but … it would be a matter for assessment to determine whether she had in fact lost that amount, or some other amount, as a result of the misapplication of the funds’.[2]

The Court also considered that:

‘[T]he critical point is that the allegations are all expressed in the language of “loss and damage suffered by reason of the defendants’ conduct”. Far from Luo alleging that Yang is indebted to her under the terms of the guarantee and indemnity, she claims to recover from him loss and damage which she has suffered “by reason of the conduct”, being the misapplication of the loan funds’.[3]

The position would have been different, the Court observed, had the pleadings mentioned a debt arising under the guarantee by reason of default under the loan agreement. But this had not been pleaded; ‘loss and damage’ had been sought instead.

Although not necessarily ruling on the elements that ought be pleaded in order to establish a claim for debt, the Court noted the submission advanced on behalf of Mr Yang that certain allegations of fact were missing from the pleadings which might have established a claim for debt, namely:

  • an event of default which rendered the loan amounts repayable;

  • demand for repayment, and demand for performance of the guarantee and indemnity; and

  • failure to comply with the demands.

The Court also noted that ‘the prayer for relief would have been expected to state, clearly, that Luo was claiming the amount of $700,000 as a debt due under the guarantee and indemnity’.[4]

Conclusion

The decision in Yang v Finder Earth Pty Ltd contains some useful pointers for how appropriately to plead certain common causes of action. It also bears a stern reminder for those preparing pleadings, with the Court stating:

‘The case is … instructive for those preparing statements of claim. If for any reason the contingency of judgment in default is to be anticipated, the pleader must take care to ensure that any claim for the recovery of a debt is clearly pleaded as such. As in every case, care must be taken to ensure that all of the material facts necessary to establish the cause(s) of action are pleaded’.[5]


[1]: [2019] VSCA 22.

[2]: Ibid [28].

[3]: Ibid [29].

[4]: Ibid [26].

[5]: Ibid [7].