CITIBANK v PIRROTTA & ORS No. SCGRG-93-2261, SCGRG-93-2260, SCGRG-94-1928 Judgment No. S6603 [1998] SASC 6603

The form of mortgage contains an agreement which expressly makes provision for the mortgagee's costs "as between solicitor and client to be paid by the mortgagor". The mortgagee contends that it should be entitled to recover the whole of the amount in respect of which the mortgagee would otherwise be out of pocket by reason of the proceedings.

It is apparent from the reported cases that some confusion has developed as to the meaning of the term "as between solicitor and client" when applied to legal costs. (See Ricks v White (1995) 2 QdR 302 at 306).

Morgan and Davey's Costs in Chancery (1865) at pp1-2 identifies the various modes of taxation which may be undertaken when a taxation of costs as between solicitor and client is proposed. The long-standing practice associated with solicitor and client taxations has given rise to principles which have "hardened into law" and have become part of the law of South Australia (see the judgment of Philp J in Re Price Deceased, Union Trustee Co of Australia Ltd v McCorrie (1941) St R Qd 205 at 209). Those principles must now be applied to the mortgage agreement.

The order of the trial judge now under appeal in each action provides that the mortgagors shall pay to the mortgagee "its costs of action to be taxed as between solicitor and client".

In delivering reasons for his decision on the costs question, the trial judge made the following observation with respect to submissions made by the mortgagee's counsel -

"Mr Hoile for Citibank has put the argument that Citibank is entitled to solicitor and client costs on an indemnity or common fund basis, that is, all such costs as might have been reasonably incurred by Citibank...."

"...it seems to me that if the draftsman of the document uses the expression "solicitor and client", it would be wrong to substitute another formula. It would be wrong to substitute the words "solicitor and own client", or to add the words "reasonably incurred". If the parties have solemnly agreed upon a formulation which includes the words "solicitor and client", they must receive their costs on that formula, whatever that may mean in the context of the particular case."

1. The points raised on these appeals appear to be associated with confusion as to terminology.

In South Australia, the bases of taxation have not been codified; this fact distinguishes South Australian practice from current English practice. Arising out of early chancery practice, the rule in Giles v Randall (1915) 1 KB 290 (see below) continues to be recognised in this State as providing three modes of taxation as between solicitor and client (including one in circumstances where a common fund provides the purse). In EMI Records v Wallace Ltd (1982) 2 All ER 980 at 983-984 Sir Robert Magarey Vice Chancellor noted a code of rules involving four main bases for taxation - including that which is known under the English rules as "the common fund basis"; he also identified a further basis (not mentioned in the English rules) and called the "indemnity" basis. The precise meaning of that lastmentioned basis of taxation is far from clear. Against that background, the Vice Chancellor refers to the "ungodly jumble" created by the codified English rules (prior to their revision in 1986). Within the context of that discussion Sir Robert (in 1982) saw the "common fund" basis as being little more than a party and party taxation conducted on a more generous scale.

In New South Wales (where there is codification of the rules as to taxation of costs) the solicitor and client basis and the indemnity basis have apparently been confused (see Quick on Costs (1996) par4.4).

It is as well that this confusion in terminology be recognised before the submissions of counsel are examined.

2. An entitlement to solicitor and client costs does not exclude considerations of reasonableness even although the taxing officer will have regard to the nature of the taxation when exercising a discretion - which undoubtedly exists - to decide what may be unreasonable and subject to disallowance.

3. When it is the intention of the Court that its order for costs should reflect the terms of the mortgage contract, it may be necessary for an order to be moulded so that in the result it corresponds with the parties' clear intention based on the whole of the mortgage contract.

The adoption of phraseology extracted from the mortgage document has no particular utility in an order of the Court if upon a fair reading the order does not reflect the essence of the mortgage agreement as to costs.

On some occasions the court may find it necessary to give special directions when it appears that an order simply expressed for solicitor and client costs is insufficient to provide the taxing officer with sufficient guidance. (see Daniell Chancery Practice Vol II 8th ed at 1079). In the absence of such directions the taxing officer will be bound by general principles whose application depend upon the purse (or source) from which the costs will be paid in accordance with Giles v Randall (1915) 1 KB 290 (see below).

In proceedings between mortgagee and mortgagor upon the mortgage, the terms of any costs order in favour of a successful mortgagee should ordinarily reflect the terms of any special bargain contained in the mortgage contract. However, the mortgagee will be limited to party and party costs unless the mortgage contract plainly and unambiguously provides for taxation on some other basis (see Gomba Holdings (UK) Ltd v Minories Finance Ltd (1993) Ch 171 at 191 and 186; Jamieson v Gosigil Pty Ltd (1983) 2 QdR 117 at 121). I have dealt with the "ordinary" situation in discussing the principle but there will be special occasions where policy considerations may call in question the enforceability of a particular contractual provision (see Gomba Holdings at 187). No such special considerations apply in the present case.

The general principle as I have stated it is not in dispute upon this appeal (nor was it in issue before the trial Judge). The question at issue concerns the meaning of the mortgage instruments and whether, consistent with principle, the form of mortgage contains such a clear statement in the mortgagee's favour as to enlarge the mortgagee's entitlement beyond party and party costs. If the mortgagee is so entitled to an enlargement then an issue arises as to how the order should be expressed and as to what is encompassed by "solicitor and client" costs.

The concept of solicitor and client costs is derived from Chancery practice of the 18th century. The origins of the practice are reviewed by the Court of Appeal in Andrews v Barnes (1888) 39 ChD 133 at 138-141. The Court of Chancery exercised a wide discretion not only as to the circumstances under which costs were awarded but also as to "the measure and fullness of the costs." According to Lord Justice Mellish in Mordue v Palmer (1870) 6 LR Ch App 22 at 32: "The Common Law Courts have no power to give costs between solicitor and client...". The Chancery practice involved a consideration of taxation of costs on the basis of three categories by reference to the source or purse having the liability for such costs namely (a) the purse of the defeated litigant, (b) a purse in which all parties have an interest and (c) the purse of a client who has retained a solicitor. In each case the court, in the course of taxation, will be concerned to protect the relevant purse from overcaution, mistake, improvidence and negligence. However this concern must be worked out in the different environments of taxation created by the different categories of funds which may have responsibility for the costs.

In Giles v Randall (1915) 1 KB 290 Buckley LJ said at 295:

"There are three modes of taxation as between solicitor and client. The first is where a client is taxing his own solicitor's bill of costs, commonly called taxation as between solicitor and own client. The second is where the costs are to be paid out of a common fund in which the client and others are interested. This case does not come within either of those two classes. The third is where the costs are payable by one party to another or out of a fund in which the party entitled to the costs has no interest. The present case falls within this last mentioned class. The plaintiff was to have her costs as between solicitor and client to be paid by the defendant. A practice has grown up, which I must say I regret, of differentiating between taxation of costs as between solicitor and client and as between solicitor and own client. In the former case the taxation is substantially a party and party taxation on a more generous scale. In the latter case there is an ascertainment and allowance of the charges properly payable by the client to his solicitor. That distinction is too firmly established for this Court to interfere with it, though it may be a matter proper to be considered by the Rule Committee. I have no doubt that litigants who stipulate for and by agreement are to receive costs as between solicitor and client often intend to get an indemnity in respect of costs." (emphasis added).

In the same case Pickford LJ noted the practice - but with some regret. At pp297-298 of the report His Lordship said-

"Logically costs as between solicitor and client can only mean one thing, namely, such costs as are properly chargeable between a solicitor and his client and as are properly payable by the client to his solicitor. It seems to me that it is irrelevant to inquire from what source the payment is to come or by whom the payment is to be made; the costs ought to be measured in the same way whether the client has made a bargain that he shall receive those costs from some one else or not. But a different rule of practice prevails, and the taxing Master must according to that practice look in each case to the source from which the payment is to come. In Daniell's Chancery Practice, 8th ed., p.1078, it is said, dealing with taxation of costs as between solicitor and client, that "a distinction is made" first, where such costs are payable out of a fund belonging to other parties; secondly, where such costs are payable out of a common fund in which the party entitled to costs has only a limited interest; and thirdly, where such costs are payable out of a fund belonging exclusively to such party himself. These distinctions however are not made in the order directing the taxation, but only when the order is acted upon by the taxing officer; and if it is intended that the party whose costs are to be paid out of a general fund should be fully indemnified against all expenses, or against any expenses not strictly costs of action, care must be taken to have it so expressed in the ordinary order; as the direction that the costs are to be taxed as between solicitor and client will not, in such a case, be sufficient." The distinction has been in existence for a long time, and we cannot now disregard it. It is frequently provided against by inserting words in the order giving an indemnity against all costs, or stating that there shall be no taxation of certain items, such as counsel's fees......."

It seems to me abundantly clear from the authorities which I have quoted (including the text book references) that a taxation as between solicitor and own client is but one species (or mode) of taxation contemplated by the practice under the rubric of "solicitor and client taxations." As pointed out in Daniell's Chancery Practice (8th ed) at 1078 (with a cross-reference to Seton), the specific mode of taxation will depend upon the purse from which the costs are to be paid; in the absence of specific direction the taxing officer will have regard to the nature of the purse from which the costs are to be paid when considering whether a particular claim is reasonable.

Dealing with the specific direction which might be given, Seton Judgments and Orders (1912 7th Ed) Vol 1 at 244 observes that sometimes orders for solicitor and client costs include the words "and consequential thereon" or "relating thereto" so as to give a wider range to the taxation. Where the costs are payable out of a party's own fund both of these expressions may be used. In acting upon these words the taxing officer will exercise a discretion according to the circumstances as to the extent of the allowance in the particular case.

Clearly, the taxation required in the present case does not concern a common fund purse although that was suggested during the course of argument. This is a case of a taxation in which the mortgagee will wish to tax its bill as if payable from its own purse and then seek recovery from the mortgagor of the amount so allowed. Whether that course is appropriate will depend upon the mortgage agreement.

In my opinion the provisions of the mortgage now stand to be construed in light of the principles which I have discussed. Many of the cases cited in argument concern specific rules of court (whether in South Australia or elsewhere) but I have put these aside.

The actions giving rise to these appeals arise out of a loan made by the appellant Citibank; the repayment of the borrower's debt was guaranteed (inter alia) by the respondents Mr and Mrs Nicholson and Mr and Mrs Pirrotta who each supported their guarantee of the debt with mortgage security over their respective house properties.

Upon the borrower's default, the appellant bank as mortgagee (in Action 2261/93) sought to enforce its mortgage security against Nicholsons by seeking an order in this court for possession and sale. Nicholsons defended the proceedings but by counterclaim alleged that the mortgage was unenforceable. Likewise, in another action (No.2260/93) the bank also sought orders for possession and sale against the Pirrottas. However, the parties have agreed that those proceedings would abide the result in action 2261/93. Further proceedings (action No.1928/94) were instituted against the Bank by the Pirrottas who also alleged that their mortgage should not be enforced. Actions 2260 of 1993 and 1928 of 1994 were tried together and the mortgagee was eventually successful. However Nicholson and Pirrotta brought further parties into the proceedings alleging firstly, that the guarantees had been obtained by misrepresentation (made by representatives of the borrower) and secondly, that a solicitor had failed to properly explain the effect of the guarantees. The claims against the solicitor (Ballantyne) and her firm Olson & Co. were upheld but the orders for costs against them have not yet been finally worked out. Ballantyne and Olson & Co. were represented upon the appeals by counsel who adopted the argument of the mortgagors, namely that the mortgagee should be limited to party and party costs.

In awarding costs as between solicitor and client to the appellant mortgagee the trial judge had regard to the mortgage terms and used in his order the specific language of an extract from the mortgage. It is undisputed that the transaction is governed by South Australian law. The trial judge said:

"I think one may take it as clear law that the entitlement of the mortgagee to costs in proceedings of this kind, insofar as it involves the exercise of the Court's discretion, includes its contractual right to costs.

Putting it another way, the discretion as to costs should "ordinarily be exercised so as to reflect that contractual right.

Indeed, [counsel for the appellant bank] advanced his argument as to costs solely on the footing that the contractual right which he argued was given to his client by reason of the Memorandum of Common Provisions decided the question in favour of his argument."

In the terms of each mortgage the mortgagors covenant with the mortgagee that "subject to any provisions to the contrary in this mortgage or the agreement the mortgagor will pay to the mortgagee the monies hereby secured at the time.....set out in this mortgage....and if no times are provided the mortgagor will repay the same to the mortgagee upon demand".

An interpretation clause within the mortgage provides that:

"In this memorandum and elsewhere in this mortgage unless the contrary intention is indicated by the context...

(J) Monies Hereby Secured includes all, or any of the following:

(vi) the amount of any costs, charges, expenses and liabilities of any description incurred by the Mortgagee.

(A) in or about the negotiation, preparation, execution, registration or stamping of this Mortgage, any Collateral Security or any Agreement;

(B) under this Mortgage or any document executed by the Mortgagor pursuant to this Mortgage, any Collateral Security or any Agreement;

(C) in the exercise or enforcement or attempted exercise or enforcement of any power or remedy which the Mortgagee has or is entitled to for any reason against the Mortgagor or in respect of the Mortgaged Property; including but not limited to the amount of any costs, charges expenses and liabilities not previously mentioned in this paragraph but incurred by the Mortgagee and the amount of any administration fee charged by the Mortgagee for follow up, recovery collection or enforcement action in relation to any moneys overdue in respect of this Mortgage, any Collateral Security, any Agreement or the Mortgaged Property and also the amount of any charges and disbursements for legal advice and assistance to the Mortgagee as between solicitor and client;". (emphasis added).

The mortgage also contains a series of warranties by the mortgagor including the following-

"1. The mortgagor warrants to the mortgagee that.....

(c) this Mortgage constitutes and will constitute legal, valid and binding obligations enforceable against him in accordance with its terms;"

"10.3The Mortgagor will indemnify the Mortgagee against any loss, damage, cost, claim, proceeding and expense suffered by the Mortgagee as a result of a breach of any of the warranties contained in this Mortgage, any Collateral Security or the Agreement."

In my opinion this lastmentioned clause provides an important pointer as to the intention of the parties with respect to the construction of clJvi(c). In view of the extent of the indemnity for costs contained in cl.10.3 it would be curious if clJ(6) should be less than comprehensive in its ambit. The mortgagors were unsuccessful at trial upon a case where the mortgagors' assertions flew in the face of the abovementioned warranty by the mortgagors in each instance that the mortgage was "enforceable against the mortgagor in accordance with its terms." I consider that clJ(6) should be construed upon a footing consistent with the spirit of cl.10.3.

The mortgage refers to "solicitor and client" costs in clJ(6) but this should be read in the light of cl.10.3. When viewed as a whole the language of the mortgage clearly indicates that it is intended by the parties that the mortgagee should not be out of pocket in consequence of the mortgage transaction. The mortgagee should be entitled to all of its costs charges and expenses provided that it was reasonable to incur such items and provided that they are reasonable in amount. To make good any objection upon taxation the mortgagors should be required to satisfy the taxing officer of the unreasonableness contended for; doubts should be resolved in favour of the mortgagee (see Katsaounis v Belehris (1994) 179 LSJS 143 at 157 per Debelle J).

The phrase "solicitor and client costs" standing alone in an order in the present case is likely to lead to a further dispute upon taxation as to the meaning of the order. In my opinion the taxation should proceed as one between "solicitor and own client" in order to reflect the intention of the mortgage. I consider that it would be desirable to spell out in the order the species of solicitor and client taxation which is required.

Accordingly, I propose that the mortgagee's appeals be allowed and that the costs order made by the trial judge be varied so as to require the mortgagors to pay to the mortgagee "its costs of action to be taxed as between solicitor and own client".

I agree with the orders proposed by Williams J and I agree with his Honour's reasons.

I agree with the orders proposed by Williams J for the reasons he has given.