Boman Irani Pty Ltd & Ors v St George Bank Ltd [2008] VSCA 246

Court of Appeal (Vic)|2008-12-04|Before: WARREN CJ, NEAVE JA and HARGRAVE AJA

ILLEGALITY- PUBLIC POLICY- Loan documents required borrower and guarantors to pay bank's legal costs on an indemnity basis - Costs agreement between bank and its solicitors provided for rebates by reference to annual volume of fees charged - Whether bank required to give credit for rebates when received - Whether arrangements contrary to public policy - Bank required to give credit for rebates - Attempt by bank to recover legal costs without giving credit for rebates contrary to public policy - Hamilton v Haw [1962] VicRp 32; [1962] VR 215 considered and applied- Rule 63.53 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) considered

1 I have read the draft judgment of Hargrave AJA. For the reasons stated by his Honour, I would dismiss the appeal.

2 I have had the considerable benefit of reading in draft the reasons for judgment of Hargrave AJA. I agree with his Honour that the arrangements between St George Bank Limited on the one hand, and Pinnacle Investments Pty Ltd and the guarantors on the other, were contrary to public policy under the principle in Hamilton v Haw.[1] These arrangements contemplated the exaction from Pinnacle and/or the guarantors of legal costs which were not ultimately incurred by St George because it was entitled to a 'volume rebate' from its solicitors.

3 However, as his Honour has said, the appellants must fail, because the trial judge found that St George was obliged to give credit to Pinnacle and the guarantors for the proportion of the volume rebates it received from its solicitors, which were referable to the particular transaction.

4 I agree with Hargrave AJA that the Court's reasons for judgment should be referred to the relevant authorities.

5 The various proceedings giving rise to this appeal had a tortuous history. The proceedings arose out of finance facilities provided by the respondent, St George Bank Limited, ("the bank") to Pinnacle Investments Pty Ltd. Pinnacle is a company associated with the interests of Dr Boman Irani. The obligations of Pinnacle to the bank were guaranteed by Dr Irani, his wife Dr Kermani and companies associated with them ("the guarantors"). Default was made under the finance facilities and the bank sought to realise its securities and to call upon the guarantee.

6 In the first proceeding the guarantors made a number of claims against the bank. The bank counterclaimed seeking declarations that it was entitled to enforce its securities for Pinnacle's debt. The first proceeding gave rise to a number of hearings and judgments.[2]

7 All of the claims raised by the guarantors in the first proceeding were dismissed. The bank was successful in its counterclaim.[3] The Court declared that the bank was entitled to enforce its securities.

8 After the publication of the reasons for judgment in the first proceeding, the bank sought to amend its counterclaim to seek judgment against the guarantors for the total money sum owed to it under the various finance facilities. This application was opposed. During the course of argument, senior counsel for the guarantors proffered an undertaking on behalf of the guarantors that, should the bank subsequently commence proceedings to recover a monetary sum due under the guarantees, they would "not raise any Anshun estoppel or related point as a defence to such action." Further, the trial judge was of the view that it would be unfair to permit the bank to make a monetary claim at such a late stage of the proceeding. In reaching his decision to dismiss the application to amend, the judge took into account a number of factors, including the fact that, after realisation of the securities, it may never be necessary for the bank to seek judgment for a money sum.[4]

9 The issue of costs was the subject of argument at the conclusion of the first proceeding. The bank sought its costs of the proceeding on an indemnity basis, relying upon the express terms of the facility documents and guarantees. The trial judge did not accede to this request, and ordered that the bank receive party and party costs of the first proceeding. However, the trial judge did not shut the bank out from pursuing a contractual claim for recovery of indemnity costs, should that become necessary following the sale of the securities. His Honour concluded:

If the New South Wales Court of Appeal's analysis in Abigroup Ltd v Sandtara Pty Ltd[5] is correct, [the bank] can pursue contractual recovery of any entitlement to indemnity under the provisions of the guarantees.[6]

10 Under the terms of the guarantee, the guarantors undertook to pay to the bank any money which Pinnacle was actually or contingently liable to pay to the bank or which the bank was entitled to debit to Pinnacle's account. The transaction documents under which Pinnacle obtained finance from the bank included, in numerous places, an obligation upon Pinnacle to pay to the bank, on a full indemnity basis, all legal costs incurred by the bank, or by any receiver or agent appointed by the bank under any security for the facilities, in connection with the facilities or any default thereunder. It is clear from the terms of the facility documents that Pinnacle's liability was to "indemnify" the bank in respect of its own liability for legal costs.

11 The bank proceeded to realise its securities. Having done so, it alleged that a debt was still outstanding. That debt was comprised of the balance of unpaid legal costs on any indemnity basis. The bank's legal costs of the first proceeding and the enforcement of its securities had been very substantial. Some, but not all, of these costs had been recovered from the realisation of the securities. The bank wished to claim the balance from the guarantors. Accordingly, the bank commenced a second proceeding against the guarantors seeking judgment for the unpaid balance of its costs. Dr Kermani was not sued in the second proceeding. Her guarantee was limited to recourse to certain securities provided by her, which securities had been realised by the bank and the proceeds applied in reduction of Pinnacle's debt. Accordingly, references to "the guarantors" in the balance of this judgment do not include Dr Kermani.

12 The defence filed in the second proceeding sought to re-agitate many of the issues decided against the guarantors in the earlier proceeding. In May 2006 Dodds-Streeton J (as she then was) heard an application by the bank for summary judgment and an application by the guarantors for an order that the proceeding be stayed. Her Honour delivered reasons on 12 May 2006.[7] In substance she found in favour of the bank save on the issue of the quantum of its claim. No appeal is brought against this decision.

13 On 4 August 2006 Dodds-Streeton J made a declaration that the guarantors were liable to the bank under the guarantee for an amount to be assessed. She dismissed the guarantors' summons seeking a stay of the proceeding and made various costs orders. She referred the proceeding to another judge for further directions. That judge made discovery orders and fixed the trial of the proceeding on quantum. It was ordered that the trial be on affidavit, with provision made for the parties to give notice requiring the attendance of any person for cross-examination.

14 The bank made discovery of the bills of costs received by it from its solicitors, which it had paid and debited to Pinnacle's account. The bills were in a redacted form. The bank did not discover any costs agreements made between it and its solicitors.

15 The trial on the issue of quantum began on 9 October 2006. The bank relied upon affidavits of a bank officer, Alan Bateson. Mr Bateson exhibited a certificate of indebtedness under clause 9.4 of the guarantee, which provides:

9.4 St George's statement of money owing conclusive evidence

Except in the case of manifest error, a written statement, certificate or determination by St. George setting out the amount of money owing or any determination of an amount to be paid under this agreement or any component part, shall be conclusive evidence of the amount owing or the determination and will be binding on the Guarantor.[8]

16 In his certificate, Mr Bateson certified that the sum of $263,094.93 was owing as at 13 September 2006.

17 A notice requiring Mr Bateson to attend for cross-examination was given, but was subsequently withdrawn.

18 On the first day of the quantum hearing, the guarantors made complaints concerning the bank's discovery. They applied for an order directing the bank to "justify the calculation" in the certificate of indebtedness. The judge refused this application. The guarantors also complained that the bills of costs from the bank's solicitors which had been discovered had been redacted. The judge ordered that unredacted copies of the bills be provided and adjourned the trial until 12 October 2006.

19 At the adjourned hearing, the guarantors sought to rely upon further affidavit material. The affidavits raised issues as to reconciliation of the unredacted bills of costs with the relevant bank statements and, most importantly, as to the existence of any costs agreement relevant to the bills of costs. The bank sought and obtained an adjournment to answer the new affidavit material.

20 Further affidavits were sworn on both sides as a result of which it emerged that there were relevant costs agreements and that those agreements entitled the bank to a rebate of fees from the bank's solicitors on a sliding scale based upon total annual fees for all matters, save for some immaterial exceptions. Initially, an employee of the bank's solicitors swore an affidavit stating that there was no relevant costs agreement. However, this was later corrected by an affidavit sworn by a partner of the bank's solicitors on 25 October 2006.

21 The evidence disclosed the existence of a separate costs agreement between the bank and its solicitors for each year in which legal costs debited to Pinnacle's account were incurred by the bank. In summary, in each year, the bank wrote to a number of legal firms in Australia seeking written proposals for the provision of legal services to the bank in the coming year. In each invitation, the bank requested the tendering firms to specify the percentage rebate that the firm was prepared to give the bank in respect of fees in certain billing ranges. The costs agreement for the first relevant year related to the period 1 November 2002 to 30 September 2003. In its written proposal to the bank for that period, the solicitors who acted for the bank in connection with the Pinnacle account and its enforcement set out the rebate percentages which they were prepared to refund to the bank in the specified billing ranges and concluded:

As at the time of preparing this letter we have not had the opportunity to review the issue of the rebate of legal fees paid by third parties (ie the borrower or customer). In submitting this Request for Proposal we assume St. George will take responsibility for making any disclosures that it is lawfully required to make to third parties to notify that person or entity that St. George is to receive a rebate from fees paid by that third party.

22 This statement does not appear in the proposals made by the bank's solicitors for subsequent costs agreements. The reasons for this were not explored in the evidence.

23 It is unnecessary to disclose the relevant billing ranges or percentage rebates agreed to between the bank and its solicitors. It is sufficient to note that the rebates were substantial.

24 The quantum hearing resumed on 30 October 2006. An expert gave evidence on behalf of the guarantors as to the period required to calculate any rebates of fees paid by the bank's solicitors to the bank. The quantum hearing was adjourned until 12 December 2006. The judge directed that counsel and the expert retained on behalf of the guarantors have access to the costs agreements on a confidential basis and that, prior to the adjourned hearing, a statement of any manifest errors relied upon by the guarantors be filed and served. No statement of manifest errors was filed or served prior to the adjourned hearing because of a concern about breaching the confidentiality order in respect of the costs agreement. However, an unsworn affidavit of the expert retained by the guarantors was filed and served.

25 It is necessary to consider the submissions made at the adjourned quantum hearing on 12 December 2006. This is because the bank contends that issues which are sought to be raised on appeal were not the subject of argument before the trial judge on that day or in written submissions filed thereafter.

26 At the adjourned hearing on 12 December 2006 the guarantors' expert, Mr Abrahams, was called to give evidence and adopted the unsworn affidavit with one correction. The bank relied upon a further affidavit of Mr Bateson which, amongst other things, produced a new certificate specifying the amount outstanding as at 30 November 2006 at $252,574.88, stating that this amount had been calculated excluding the costs of the proceeding and taking into account certain errors of calculation underlying the first certificate.

27 Before the trial judge, the appellants submitted that the certificate of indebtedness relied upon by the bank contained manifest errors because no allowance was made for the annual volume rebate of fees which the bank's solicitors had repaid to the bank in accordance with the relevant costs agreements between the solicitors and the bank. The trial judge accepted that this was so. The trial judge's reasons for his conclusion that the bank was required to credit the volume rebates received by it from its solicitors were stated succinctly:

Manifest error: failure to account for rebates

An affidavit sworn by a partner of the Bank's solicitors...revealed that as part of the "panel arrangements" which the Bank's solicitors have with the Bank those solicitors are "required to pay to the Bank a rebate of fees paid by the Bank, calculated by a sliding scale". Copies of the relevant documents and a summary of the total rebates paid were produced as confidential exhibits to that affidavit.
Before me the Bank did not accept that the defendants were entitled to have the rebates taken into account in assessing the amount due. It was argued on behalf of the Bank that the arrangements were referrable to the total fees paid by the Bank to the firm in any given year, were not in any relevant sense referrable to particular customers, and were what was described as "counter payments" paid by the solicitors so as to secure for themselves the benefit of being on the Bank's panel.
I reject this approach. The Bank alleges in this proceeding that the terms of the finance facilities provided to Pinnacle require Pinnacle to pay on demand all costs and expenses incurred by the Bank including legal costs on a full indemnity basis: statement of claim, para 4. It is then alleged that by the guarantee the defendants irrevocably guaranteed due payment and performance of the facilities and indemnified the Bank in respect of non-payment and non-performance: statement of claim, para 5. I do not consider that costs or expenses "incurred" by the Bank include costs and expenses which have been repaid to it. Nor, in my view can guarantors be required to pay to the Bank by way of "indemnity" legal costs and expenses which have been repaid by the solicitors' firm. Accordingly, my conclusion is that the calculation of the amount outstanding must give appropriately calculated credits for the rebates. [9]

28 The bank has not appealed against the trial judge's reasons in this regard. Nor is there any cross-appeal or notice of cross-contention filed. However, in the course of argument on appeal, counsel for the bank maintained the bank's position that it was not obliged to credit Pinnacle's account with the amount of volume rebates received by it which are referrable to the legal costs incurred in connection with Pinnacle's facilities and their enforcement.

29 It was submitted on behalf of the guarantors to the trial judge that the bank's claim under the guarantee should be dismissed because, in the absence of the ability to rely upon the certificate of indebtedness, there was no other evidence before the Court as to the quantum of the debt. The trial judge rejected this approach, and ordered that the question of quantification be referred to a master for determination without reliance upon the certificate of indebtedness.[10] The grounds of appeal challenging this course were abandoned at the commencement of argument on the appeal.

30 Further, counsel for the guarantors submitted to the trial judge that, because the amount claimed by the bank was constituted by legal costs incurred by it, the bank's claim should be dismissed because it was based upon an illegal agreement between the bank and its solicitors to share income from a legal practice, in contravention of s 317 of the Legal Practice Act 1996 (Vic) and s 2.2.9 of the Legal Profession Act 2004 (Vic). The trial judge rejected the appellants' submissions in this regard.[11] The grounds of appeal challenging this aspect of the trial judge's decision were abandoned in argument.

31 An issue arises as to whether, at the hearing on 12 December or in later written submissions considered by the trial judge, the guarantors relied upon a further argument based upon illegality or public policy. This involves a comparison of the submissions in fact made to the trial judge with the arguments advanced on appeal. I will deal with this issue when considering those arguments.

32 In December 2007 the account was taken by a master. The account certified by the master included substantial credits to reflect an appropriate proportion of the fee rebates received by the bank which were referrable to the legal costs debited by the bank to Pinnacle's account. We were informed by senior counsel for the guarantors that the amount exceeded $80,000. The bank did not contest this.

33 The guarantors then appealed against the determination by the master on the taking of accounts. That appeal was dismissed by the trial judge.[12] The argument relied upon on the hearing of the appeal from the master did not involve any attack upon the master's calculations. Rather, senior counsel having been brought into the matter, a new point was relied upon. As the appeal from the master was a hearing de novo and the guarantors did not seek to rely upon any new material than had been relied upon before the master, this new point was entertained by the trial judge. In summary, it was submitted on behalf of the guarantors that the bank, having obtained an order for party and party costs in the earlier proceeding, could not proceed to recover under its contractual entitlement to be paid indemnity costs until the process of taxation of the party and party costs had taken place pursuant to Order 63 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) and until interest in accordance with s 101 of the Supreme Court Act 1986 (Vic) had been calculated.[13] The trial judge found against the guarantors in this regard, and dismissed the appeal from the master's decision determining the amount due under the guarantee.[14]

34 For reasons which were not explained, Dr Irani has not appealed to this Court. The appeal is brought by the corporate guarantors only. Further, at the commencement of the appeal hearing, the Court was informed that one of the appellants, Thirteenth Corp Pty Ltd, had been placed in liquidation and the liquidator had given no instructions to prosecute the appeal on its behalf. However, for convenience and consistency, I will nevertheless refer to the remaining appellants as "the guarantors".

35 On appeal, the guarantors raise three issues. First, they contend that the bank's claim should be dismissed on grounds of illegality or public policy ("the illegality grounds"). Second, the guarantors contend that the master's determination of the quantum of the amount due under the guarantee should be set aside, and the determination of any residual contractual entitlement of the bank to be paid its legal costs of enforcement of its securities should be deferred until after taxation of the bank's party and party costs awarded in its favour in the earlier proceeding ("the deferral ground"). Third, the guarantors seek to raise a new issue, not raised before the trial judge, that the bank should be refused relief on discretionary grounds ("the discretionary ground").

36 As appears above, during the course of argument on appeal, senior counsel for the guarantors abandoned the contention that the costs agreements were illegal agreements to share legal fees. On appeal, the guarantors raise the following contentions based on illegality or public policy. As I have said, there is an issue as to whether one or more of these contentions was advanced below and, if not, whether it is procedurally fair to allow the guarantors to raise them on appeal.

37 The guarantors contend that the Court should infer that the bank intended at all relevant times, and adopted a "deliberate policy", to conceal the volume rebate provisions of the costs agreements. It was submitted that the bank intended to rely upon the combined effect of those provisions, and the standard form of indemnity costs provisions contained in its facility agreements and related security documents ("transaction documents"), to exact payment from its customers and guarantors of legal costs which, after the rebates were taken into account, exceeded the costs which the bank had incurred in connection with the facilities and their enforcement.

38 It was submitted that such an inference was inescapable on the facts. Reliance was placed upon the warning given to the bank by its solicitors in 2002 that the volume rebate provisions may require a disclosure to customers and other third parties who may be liable to the bank to indemnify it in respect of its legal costs; the fact that this warning was deleted from subsequent proposals from those solicitors; the bank's failure to disclose the volume rebate provisions of the costs agreements to Pinnacle or the guarantors; the fact that the bank did not discover the costs agreements until a specific order was made that it do so; the fact that the bank persists in its contention that it is not obliged to give credit for the volume rebates in fact received by it; and the fact that the indemnity costs provisions relied upon by the bank were, on their face, obviously standard form provisions contained in its transaction documents.

39 In these circumstances, it was submitted on behalf of the guarantors that the evidence justified a finding that the bank engaged in the tort of deceit, misleading or deceptive conduct (or unconscionable conduct) in contravention of the Trade Practices Act 1974 (Cth) or, at the very least, intentional sharp practice which was contrary to public policy.

40 It was submitted on behalf of the bank that this case had not been raised below and that it was too late to do so for the first time on appeal.[15] This was especially so in circumstances where the guarantors were raising a case based upon dishonesty, breach of statute or immoral conduct on the part of the bank. It was submitted that, had these matters been raised at trial, the bank's case would have been conducted differently. For example, it could have led evidence that it acted honestly upon legal advice that it was entitled to retain the whole of the volume rebates for itself as constituting payments by the solicitors to secure for themselves the benefit of being on the bank's panel of solicitors. It was submitted that, in these circumstances, the only fair inference which the Court could draw was that the bank, acting honestly, made a mistake in failing to credit Pinnacle's account with an appropriate proportion of the fee rebates received by the bank.

41 In order to determine whether the guarantors should be entitled to raise this issue on appeal, it is necessary to consider the pleadings and the conduct of the trial.

42 As matters stood on 12 December 2006, no allegation was made against the bank in the defence and counterclaim that it had acted illegally or contrary to public policy. Arguments based on such contentions were first raised, without any prior notice, at the hearing on 12 December 2006. On that day, the evidence on the quantum hearing before the trial judge was completed. Counsel then acting for the guarantors made submissions first. After making submissions that there was manifest error in the certificate of indebtedness because no credit was given in respect of the volume rebates received by the bank, counsel for the guarantors stated that he wished to submit that the bank's claim should be dismissed on grounds of illegality or public policy. At this point, it became apparent that no notice of these arguments had been given to the bank. Notwithstanding this, the trial judge allowed counsel for the guarantors to develop his submissions. In summary, it was submitted that the costs agreements were illegal agreements between the bank and its solicitors to share income from a legal practice and that, accordingly, the whole of those agreements were unenforceable against third parties such as the guarantors. It followed that the bank's claim for indemnity costs, being based upon the illegal costs agreements, should be dismissed and the bank should be limited to claiming costs under the applicable practitioner remuneration order or scale of costs,[16] or alternatively legal costs which are of a reasonable amount on a solicitor and client taxation.[17]

43 In the course of his submissions to the trial judge, counsel for the guarantors made reference to a decision of the Full Court of this Court in Hamilton v Haw.[18] In that case, there was an agreement between a solicitor and a debt collector. The agreement provided that the solicitor would be entitled to charge the debt collector:

the following professional charges and no more:

(i) 10s. for each default summons in courts of petty sessions in respect of which service was effected;

(ii) 2s. for each default summons issued but not served;

(iii) 2s. for each warrant of distress;

(iv) 25 per cent of scale costs on all other matters.[19]

44 Warrants of distress were issued by the solicitor on behalf of the debt collector. In each of those warrants, the solicitor claimed, purportedly on behalf of the client of the debt collector: (1) scale professional costs of 10s. 6d. in respect of the warrant of distress; and (2) the scale costs awarded at the time judgment was recovered. Accordingly, in those cases where full recovery was obtained, the judgment debtor paid legal costs which were significantly more than the debt collector was liable to pay to the solicitor. The overpayment comprised two elements:

(a) 8s. 6d. in respect of the costs of the warrants of distress, because the solicitor was only entitled to payment of 2s. for each warrant of distress; and

(b) 75 per cent of the scale costs of obtaining the judgment, because the solicitor was only entitled to 25 per cent of those costs.

45 The solicitor recovered moneys on behalf of the debt collectors. The debt collectors sued the solicitor to recover the moneys received by him. The solicitor raised a defence based upon illegal sharing with an unqualified person of receipts from a legal practice. At first instance, this illegality defence was successful. On appeal, the Full Court took a different view.[20] However, the Full Court took the view that other illegality had been brought to its notice and raised that illegality of its own motion.[21]

46 The Full Court reasoned as follows. When the evidence was viewed as a whole, the arrangements between the debt collector and the solicitor contemplated that the excess costs which were recovered from judgment debtors, being costs which the debt collectors were not obliged to pay to the solicitor, could not be recovered from the solicitor because the costs agreement was tainted with illegality or was contrary to public policy. Accordingly, that part of the claim comprising 75 per cent of the scale costs awarded at the time of judgment against judgment debtors and 8s. 6d. in respect of scale costs of the warrants of distress was dismissed.

47 As to the overpayment of the costs in respect of the warrants of distress, Adam J (with whom the other members of the Court agreed) stated:

As appears from the learned judge's finding read with the evidence upon which it was based the agreement between the parties contemplated that the [solicitor] would issue warrants of distress to include the scale amount of 10s. 6d. professional fees, regardless of the fact that the professional fees claimable by the solicitor did not exceed 2s., and that as between the [debt collectors and the solicitor] the debt collectors were to have for their own use and benefit the excessive costs exacted from the judgment debtors.

Had the contract been one by which the [solicitor] was legally bound to the [debt collectors] to issue distress warrants to include costs beyond those legally recoverable, and to pay such costs over to the [debt collectors], such an agreement would I consider have been illegal as one requiring the commission of a fraud on a third party. It may well be that, on the evidence accepted by the learned judge, the only reasonable conclusion was that the agreement between the [solicitor and debt collectors] went this far, although the learned judge does not appear to have made an express finding that as part of the agreement the [solicitor] was bound to make such excessive demands for professional costs. Be this as it may I would think it sufficient to taint the agreement with illegality that it contemplated the improper exaction of excessive costs from judgment debtors and bound the [solicitor] to pay these over, if recovered, to the [debt collectors].

Contracts are illegal if they involve the commission of a tort, or if they are contrary to public policy. Under either heading I consider it clear that this agreement was illegal.[22]

48 As to the claim for excess professional costs recovered by the solicitor, Adam J concluded:

I find more difficulty in dealing with item (b). It is difficult to draw a distinction between the accountability of the [solicitor] to the [debt collectors] for costs awarded by the court in giving judgment and collected by the [solicitor] without the necessity of issuing a warrant of distress, and the like costs recovered by the [solicitor] under warrants of distress.

The learned judge, as already mentioned, found no illegality in the agreement that the [solicitor] should pay to the [debt collectors] costs awarded by the courts although the costs so awarded were scale costs and in excess of those properly claimable having regard to the [solicitor's] entitlement to costs. This conclusion was reached on the footing that there was no illegality unless the agreement involved a sharing of profits contrary to s. 49 Legal Profession Practice Act, and that such agreement did not, for the reasons which he gave, so offend. He did not proceed to consider whether, in any case this agreement was not illegal on the ground that it contemplated, if it did not require, that the [solicitor] should obtain by court order costs in excess of those properly claimable having regard to the reduced professional costs payable to the [solicitor] under the agreement.

For the same reasons as I consider that the agreement in relation to the costs of distress warrants was tainted by illegality, I consider that the agreement in relation to the costs recovered by the [solicitor] as costs payable under the court's orders was tainted with illegality.[23]

49 Adam J expressed the conclusion of the Court in the following way:

In the result, I have reached the conclusion not only that the agreement between the parties for the payment by the [solicitor] to the [debt collectors] of the full scale costs awarded by the courts and collected by the [solicitor] was an illegal agreement, but also that the agreement in so far as it required the [solicitor] to pay over to the [debt collectors] these same costs if and when collected by him under warrants of distress was tainted with the like illegality and were irrecoverable from the [solicitor].[24]

50 Parts of these passages were drawn the trial judge's attention by counsel for the guarantors. However, the submission was not squarely made that the trial judge should find that the bank and its solicitors intended to deceive customers and third parties, such as Pinnacle and the guarantors. Indeed, the reference by Adam J to the costs agreements possibly being illegal because they required the commission of a fraud on a third party was not read to the Court. It appears that counsel for the guarantors limited his submissions to the fact that, viewed as a whole, the costs agreements in this case, like in Hamilton v Haw, "contemplated the improper exaction of excessive costs".

51 It was submitted on behalf of the bank that counsel for the guarantors at the trial relied upon Hamilton v Haw for the sole purpose of supporting an argument based upon illegal sharing of the receipts of an illegal practice and that, for this purpose, counsel for the guarantors sought to distinguish the facts in Hamilton v Haw. I do not accept that submission. Counsel for the guarantors placed express reliance upon the actual decision in Hamilton v Haw and sought to have the trial judge apply it to the facts of this case. The trial judge certainly understood this to be the case. Having dismissed the argument based upon illegal sharing of the receipts of a legal practice, the trial judge stated:

The defendants also submitted that the arrangements here contemplated the improper exaction of costs from third parties just as was found to have been the case by the Full Court in Hamilton.[25]

52 However, I accept the bank's submission that, before the trial judge, no submission was made on behalf of the guarantors that the evidence justified a finding that the bank engaged in the tort of deceit, conduct in contravention of the Trade Practices Act 1974 (Cth) or that the conduct of the bank constituted intentional sharp practice which was contrary to public policy. Nor was any such case pleaded or particularised. In these circumstances, I would not allow the guarantors to raise these grounds on appeal. However, the submission that the relevant arrangements between the bank and its solicitors on the one hand, and the bank, Pinnacle and the guarantors on the other, contemplated the improper exaction of excessive costs was put before the trial judge and considered by him.

53 The trial judge rejected the submission that the arrangements contemplated the improper exaction of costs from third parties. The trial judge's reasons were simply expressed as follows:

The defendants also submitted that the arrangements here contemplated the improper exaction of costs from third parties just as was found to have been the case by the Full Court in Hamilton. I do not think that is so. The arrangements here do not, in themselves, concern third parties at all. It is only where for some reason a third party becomes liable to indemnify the client that the arrangement has any potential effect on a third party. It is not like the arrangement in Hamilton concerning the warrants which were themselves expressly directed to, and made demands upon, third parties. In the course of this proceeding the existence of the rebate arrangements has been revealed and I have held that the indemnifying parties are entitled to a credit for the rebates payable under the arrangements.[26]

54 It was submitted on behalf of the guarantors that the trial judge was in error in finding that the relevant arrangements "do not, in themselves, concern third parties at all." It was submitted that the arrangements, when implemented, had an immediate, albeit deferred, effect upon third parties who were liable to indemnify the bank for its legal costs. I accept that this is so. However, this is of no assistance to the appellants because, as the trial judge held, the existence of the rebate arrangements was revealed during the course of the proceeding and, as a result, the judge ordered that the guarantors were entitled to a credit for the rebates payable under the arrangements. In this circumstance, there was in fact no wrongful exaction of excessive costs from the guarantors.

55 Further, as a result of the rejection of the bank's submissions that the guarantors were not entitled to credits in respect of the rebates payable under the arrangements, the trial judge ordered that the bank pay the whole of the guarantors' costs of and incidental to the trial on the issue of quantum from 23 June 2006 until 3 October 2007 when formal orders were made that an account be taken by a master pursuant to Order 52. The costs order was made on a party and party basis and not on an indemnity basis as claimed by the guarantors before the trial judge. No appeal is pursued in respect of this basis for awarding costs.

56 In my view, when taken as a whole the relevant arrangements did contemplate the improper exaction of excessive legal costs from the bank's customers, their guarantors and other third parties liable to indemnify the bank in respect of its legal costs. The fact that the bank may have acted in the honest belief that it was entitled to be paid all of its legal costs without any credit in respect of the volume rebates attributable to legal costs debited to Pinnacle's account is not to the point. Viewed objectively, the conduct of the bank in seeking to retain the volume rebates for itself was wrongful and unjust. If the guarantors had paid all of the legal costs demanded of them, I can see no good reason why they could not have recovered the excessive costs from the bank as moneys paid by mistake on principles of unjust enrichment.[27]

57 In summary, although the bank sought to wrongfully exact excessive legal costs from Pinnacle and the guarantors, it did not do so. The trial judge found that the bank was obliged to give credit to Pinnacle and the guarantors for the relevant proportion of the volume rebates received by it. This aspect of the trial judge's decision is not challenged on appeal. Accordingly, although the trial judge did not accept it, the effect of his decision is to give full recognition to the submission before him that recovery of all of the legal costs claimed by the bank would be against public policy because such recovery would include the wrongful exaction of excessive costs, as explained in Hamilton v Haw. This is the commercial effect of the trial judge's decision at the quantum hearing, when he found that the certificate of indebtedness contained a manifest error because it did not give credit for the volume rebates and ordered that an account be taken of the amount due after appropriate allowance was made for those rebates.

58 For the above reasons, the grounds of appeal based upon illegality and public policy fail. However, notwithstanding my conclusion on this issue, I would express my strong disapproval of the bank's conduct in seeking to wrongfully exact excessive costs from Pinnacle and the guarantors, and in continuing to maintain (including before this Court on appeal, but without filing any notice of cross-appeal or cross-contention) that it was entitled to do so. Further, on the evidence in this case, and taking into account the bank's continued submission that it was not obliged to give credit for the volume rebates received by it, the inference is open that the bank has for some years been wrongfully exacting excessive costs from borrowers, their guarantors and other third parties who are liable to indemnify the bank in respect of legal costs. The issue is not limited to this case, or even to this state. It appears that the bank has adopted a similar approach throughout the country. Having regard to the way in which the trial of this case was conducted, no inference can be drawn in this case that the bank acted otherwise than honestly in seeking to exact excessive costs, in the belief that it had a proper entitlement to do so.

59 In my view, it is incumbent upon the bank, and other banks and financiers which have similar arrangements in place to those considered in this case, to ensure that they establish a system which ensures that customers, their guarantors and other third parties who are liable to indemnify them for their legal costs are given the appropriate credits forthwith upon the receipt of any volume rebate or like discount. In some cases, this may involve the relevant bank or financier repaying money to the person who has been charged excessive costs; for example, in a case where the person responsible no longer maintains an account with the bank or financier which can be credited.

60 Having regard to the likelihood that the bank's conduct in this case is of a kind which may be widespread in the banking and financial community, I would refer the Court's reasons for judgment in this case to the Australian Securities and Investments Commission to take such action as it considers appropriate.

61 The deferral ground has been summarised above. For convenience I will repeat that summary.

62 In summary, it was submitted on behalf of the guarantors that the bank, having obtained an order for party and party costs in the earlier proceeding, could not proceed to recover under its contractual entitlement to be paid indemnity costs until the process of taxation of the party and party costs had taken place pursuant to Order 63 of the Rules and until interest in accordance with s 101 of the Supreme Court Act 1986 had been calculated. The trial judge found against the guarantors in this regard, and dismissed the appeal from the master's decision determining the amount due under the guarantee.

63 I reject the submissions made on behalf of the guarantors in support of the deferral ground. The trial judge summarised the submissions and dismissed them in his reasons for judgment.[28] I respectfully adopt the trial judge's treatment of this issue. I would only add, for the sake of completeness and clarity, that r 63.53 gives the taxing master a discretion to make an order that a party entitled to the benefit of a costs order must file a summons seeking to have the costs which the are the subject of that order taxed. In the circumstances of this case, the taxing master was correct in refusing to exercise his discretion to order that the bank make an application to tax its costs of the earlier proceeding.

64 Accordingly, the deferral ground of appeal fails.

65 The guarantors contend that the bank's conduct in seeking to exact excessive costs should in any event have led the trial judge, in the exercise of his discretion as to costs, to dismiss the bank's claim and to limit the bank to the benefit of the party and party costs order made by him in 2005 in the earlier proceeding.

66 It was submitted on behalf of the guarantors that the trial judge had a discretion to refuse the bank's claim because that claim was wholly comprised of legal costs payable under the indemnity provisions of the relevant transaction documents. It was submitted that, in all the circumstances of the case, it would be contrary to public policy to allow the bank to rely upon those indemnity provisions. Reliance was placed upon the decision of McDonald J in Commonwealth Bank of Australia v Aspenview Productions Pty Ltd & Ors,[29] in which the authorities concerning the availability of the court's discretion to refuse to enforce contractual provisions requiring the payment of indemnity costs were considered.[30] Particular reliance was placed upon the statement of Richardson J in ANZ Banking Group (New Zealand) Ltd v Gibson that the "contractual obligation is enforceable unless contrary to public policy".[31]

67 I do not accept this submission. The orders made by the trial judge reflect a reduction to take account of the volume rebates received by the bank. They have the effect of refusing to enforce the relevant contractual obligation to the extent that it is contrary to public policy. Notwithstanding the bank's conduct in maintaining that it was not required to give credit for the appropriate proportion of the volume rebates received by it, I can see no error by the trial judge in the relevant sense.[32] It was open to the trial judge to exercise his discretion to allow the bank to enforce its contractual indemnity and recover its true liability for legal costs. As I have said, the bank was ordered to pay the costs of its unsuccessful contentions in this regard.

68 For the above reasons, the discretionary ground of appeal fails.

69 The appeal should be dismissed and the parties invited to make submissions as to costs.

[2] Irani v St George Bank Ltd [2004] VSC 260; Irani v St George Bank Limited (No 2) [2005] VSC 403; Irani v St George Bank Limited (No 3) [2005] VSC 456; Irani & Ors v St George Bank Limited [2007] VSCA 33.

[3] Irani v St George Bank Limited (No 2) [2005] VSC 403.

[4] Irani v St George Bank Limited (No 3) [2005] VSC 456, [6] - [16].

[6] Irani v St George Bank Limited (No 3) [2005] VSC 456, [22].

[7] St George Bank Ltd v Boman Irani & Ors [2006] VSC 217.

[9] St George Bank Limited v Irani & Ors (No. 2) [2007] VSC 116, [27] - [29].

[12] St George Bank Limited v Irani & Ors [2008] VSC 98.

[15] Reliance was placed upon Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1, 7; Whisprun Pty Ltd v Dixon [2003] HCA 48.

[16] Reliance was placed upon Legal Practice Act 1996 (Vic), s 93.

[17] Reference was made to Rule 63.61(1) Supreme (General Civil Procedure) Rules 2005 (Vic).

[25] St George Bank Limited v Irani & Ors (No 2) [2007] VSC 116 [44].

[27] David Securities Pty Ltd & Ors v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353, 379.

[28] St George Bank Limited v Irani & Ors [2008] VSC 98, [11] - [25].

[32] House v R [1936] HCA 40; (1936) 55 CLR 499, 504-5.

Legal Practice Act 1996(Vic)

Court (General Civil Procedure) Rules 2005

(General Civil Procedure) Rules 2005

Legal Practice Act 1996(Vic)

Court (General Civil Procedure) Rules 2005

(General Civil Procedure) Rules 2005

At a glance

Court

Decision date

Before

Source

Judgment (103 paragraphs)

Parties

Legislation Cited (14)

Cases Cited (3)