Commonwealth Bank of Australia v Segal

Background

1. In 1994 Dr Segal and Mr Barel purchased a property at North Bondi (the Property) as tenants in common in equal shares. Their intention was to build two houses on the Property and subdivide it so that each owner would have a single lot with a house on it. To this end they borrowed funds from the Commonwealth Bank of Australia (the Bank), which were secured by registered mortgage over the Property (the Mortgage).
2. The Mortgage contained the following terms: 3 SECURED MONEYS Secured Moneys means and includes all moneys, liabilities and amounts falling within any one or more of the following descriptions: (a) all moneys (including moneys advanced by way of loan for fixed term or provided by way of overdraft) now or in the future to become owing or payable to the Mortgagee by the Debtor and the Mortgagor or either of them, either alone or on joint or partnership account or on any other account whatsoever whether as principal or surety; … (e) all moneys with which the Mortgagee shall be at liberty to debit and charge the account of the Debtor and the Mortgagor or either of them under the covenants, conditions or provisions contained in the Mortgage; 9.3 Costs, Charges and Expenses The Mortgagee may from time to time without further authority than the Mortgage, debit and charge the account of the Debtor or the Mortgagor with all costs, charges and expenses, legal or otherwise (including premiums for insurance, solicitor and client as well as party and party costs, duties, taxes and other moneys paid or payable by the Mortgagee or any attorney of the Mortgagor) which the Mortgagee shall pay, incur, sustain or be put to in connection with: (a) any account of the Debtor or the Mortgagor; (b) the Mortgaged Property or any part thereof; (c) the Mortgage; (d) the preparation, completion or release of the Mortgage, including the release in whole or in part of the Mortgage; or (e) the exercise or attempted exercise of any right, power, authority, discretion or remedy conferred on the Mortgagee or on any attorney of the Mortgagor under or by virtue of the Mortgage or by statute.
3. Mr Barel constructed a house on his portion of the Property and lived there for some years. Dr Segal commenced the construction of his house but did not complete it.
4. In 2010 Mr Barel commenced proceedings against Dr Segal in the Equity Division of this Court for an order for partition of the Property pursuant to s 66G of the Conveyancing Act 1919 (NSW). Pembroke J ordered that trustees be appointed pursuant to s 66G to partition the Property and performed an account between the parties: Barel v Segal (No 2) [2012] NSWSC 1054; and Barel v Segal (No 3) [2012] NSWSC 1319. Dr Segal appealed against Pembroke J's orders. The Court of Appeal allowed the appeal in part and ordered that trustees be appointed to sell the Property but confirmed the account taken by Pembroke J: Segal v Barel [2013] NSWCA 92.
5. In 2011 the Bank commenced the present proceedings against Dr Segal and Mr Barel, claiming possession of the Property and judgment relating to amounts outstanding under facilities granted to the defendants by the Bank which were secured over the Property.
6. On 21 November 2013 Dr Segal purchased the Property at an auction conducted by the court-appointed trustees (the Trustees). On settlement the Bank's mortgage was discharged from the proceeds of sale of the Property. The surplus proceeds were held by the Trustees and the Bank. Once the mortgage was discharged, the Bank discontinued the present proceedings (against Dr Segal and Mr Barel).
7. On 27 May 2014 Dr Segal filed a cross claim against the Bank in the present proceedings which included a claim for damages as a result of the Bank's application of the proceeds of sale. The Bank retained $150,000 of the surplus proceeds of sale of the Property on account of defending this cross claim in a fund (the Common Fund) from which it reserved the right to draw down monies in payment of its costs and expenses.
8. In 2014 Dr Segal commenced proceedings against the Trustees in the Equity Division of this Court relating to disputes regarding the condition of the Property on sale and the Trustees' claim for interest for late completion. Dr Segal's claims were dismissed with costs: Segal v Osborne [2016] NSWSC 941 (Darke J).
9. On 23 February 2015 Dr Segal's cross claim was heard by Campbell J. On 29 May 2015 Campbell J published reasons for decision (Commonwealth Bank of Australia v Segal [2015] NSWSC 527 and made the following orders, at [65]: Mr Barel is re-joined to the proceedings as second cross defendant to this cross claim; Judgment for the first cross defendant against the cross claimant on the cross claim; The cross claimant is to pay the first cross defendants costs of and incidental to the cross claim forthwith and on the ordinary basis after they have been agreed or assessed; The cross claimant is to indemnify the second cross defendant against the costs of the first cross defendant against the cross claimant to the extent those costs are levied on the funds retained by first cross defendant to the detriment of the second cross defendant's contingent one- half share in those funds; The second cross defendant to pay his own costs of his application to be re-joined as a party to this cross claim.
10. As is apparent from his Honour's reasons, the purpose of the orders was to protect Mr Barel's interest in, or right to, his half share ($75,000) of the $150,000 of surplus proceeds which had been retained by the Bank on account of its costs of the cross claim. At the time of the orders made by Campbell J, it was not apparent how much of the $150,000 would be drawn down by the Bank in the exercise of its rights under the mortgage, which was why the indemnity was not quantified. Dr Segal filed a notice of appeal against these orders
11. Mr Barel's solicitors wrote to the Bank's solicitors on 30 June 2015 and 16 July 2015 to ascertain what amount remained in the Common Fund. The Bank's solicitors confirmed, by letter dated 20 July 2015 that the amount that remained was $17,314.96, which would be held in trust until Dr Segal's appeal had been determined.
12. By email dated 21 July 2015, Mr Barel's solicitor wrote to Dr Segal's solicitor in the following terms: "Further to our correspondence of yesterday. Please find attached copy of letter from Gadens for the CBA [Commonwealth Bank of Australia]. You will note that the CBA has expended $132,685.04 from the retained funds. Therefore, according to our calculations there is now a shortfall to our client and a detriment as per the Orders of Justice Campbell. Our view is that your client is to now make good the shortfall in the indemnity sum of $75,000 and to pay those sums directly to our client. We are instructed to allow your client until COB Friday 24 July 2015 to make good the indemnity in the sum of $75,000 to our client or to make suitable arrangements to do so. Failing this our client will seek to enforce the order thereafter. Please advise of your client's instructions."
13. Notwithstanding this request, Dr Segal has not paid $75,000, or any other amount, to Mr Barel (or into Court, notwithstanding a representation to that effect). Ms Arulrajah informed me that he had paid the amount of $75,000 into his solicitor's trust account for the purposes of the indemnity.
14. On 4 April 2016 Dr Segal discontinued his appeal against Campbell J's orders made on 29 May 2015 and was, accordingly, liable to pay the Bank's costs of the appeal.
15. On 1 June 2016, the Bank's solicitors wrote to Dr Segal's solicitors and Mr Barel's solicitors to provide them with information as to the amount remaining in the Common Fund (after the drawdowns by the Bank to that date). They informed them that $133,825.08 had been drawn from the Common Fund and that further invoices for work already performed would leave an estimated balance in the Common Fund of $2,978.06. The Bank's letter concluded by requesting a joint written direction as to how any balance in the Common Fund would be distributed. Its author noted that the Bank would not adjudicate between the parties as to which party had a greater entitlement to the balance of the Common Fund.
16. On 3 June 2016 Mr Barel filed a notice of motion seeking orders arising from the orders made by Campbell J on 29 May 2015.
17. By letter dated 27 June 2016 the Bank's solicitors wrote to Dr Segal's solicitors enclosing invoices relating to their legal costs, disbursements, counsel's fees and mediator's fees for defending the cross claim. In respect of the Bank's costs on the cross claim they confirmed total invoices of $134,480.13, of which $133,825 had been drawn from the Common Fund. In respect of the Bank's costs on the appeal, they confirmed that total invoices of $11,676.86 had been billed and a further $1,126.62 had been incurred but not yet billed, bringing the total costs on the appeal to $12,803.24. They confirmed that the Bank had incurred total costs of $1,650 in relation to Mr Barel's notice of motion. The letter concluded: "Total Costs In summary, the total costs incurred by our client as a consequence of the Cross Claim Proceedings and the Appeal Proceedings are approximately $148,933.61. We would expect to incur further costs of not less than $2,000 in respect of the hearing of the Notice of Motion."

The amount of the indemnity

1. It is common ground that, at the time the Bank held surplus funds of $150,000 from the proceeds of sale of the Property, Mr Barel and Dr Segal were entitled to $75,000 each, subject to the Bank's rights under the mortgage. None of the funds drawn down from that amount relate to costs incurred by the Bank by reason of Mr Barel's conduct, with the limited exception of a small amount spent by the Bank in relation to the present motion, of which Mr Barel is the applicant. This motion has been brought about by Dr Segal's refusal to make recompense to Mr Barel and therefore these costs, too, were incurred because of his conduct.
2. The evidence establishes that the Common Fund is all but exhausted and will be completely exhausted when invoices are rendered to the Bank by its solicitors in the amounts referred to above. Accordingly, Dr Segal has had the benefit of the whole of Mr Barel's $75,000. At the time Campbell J made order (4) for indemnity, it was not known how much of the $150,000 would in fact be drawn down by the Bank for its costs. However, it is now known and established that the whole of it has been, or will shortly be.
3. Ms Arulrajah, who appeared on behalf of Dr Segal, informed me at the hearing of the notice of motion that she had informed Campbell J in June 2016 that Dr Segal would pay into court the amount of $75,000 by 21 June 2016. Notwithstanding that statement, Dr Segal has not paid the money into Court, but has insisted that he has no obligation to pay Mr Barel $75,000 unless and until the Bank's costs have been assessed. Ms Arulrajah contended that Dr Segal would not be able to work out how much is owing to Mr Barel until he obtained a bill of costs. She submitted that, under cl 9.3 of the Mortgage, the Bank was entitled only to draw down "party party costs", which meant assessed costs. She referred to Mr Rental Australia Pty Ltd v IRD Services Pty Ltd (No. 2) [2016] NSWSC 918 at [19] where Meagher JA construed a provision which referred to "reasonable costs and expenses and outgoings" and contended that cl 9.3 ought be read in a similar way.
4. The question whether an assessment of costs will result in the Bank being required to repay any amount to Dr Segal is a point that does not need to be decided since it is irrelevant to Mr Barel's right to be indemnified and the quantum to be paid under the indemnity. Under cl 9.3 of the Mortgage the Bank had a right to draw on the surplus funds to pay the invoices rendered by its solicitors arising from litigation in connection with Dr Segal's account with the Bank, the Mortgage or the Property. The words in cl 9.3, "all costs, charges and expenses, legal or otherwise", are of very wide import. Such amounts are not limited to party party costs (although such costs are referred to in the clause). The costs incurred by the Bank which were invoiced by its solicitors all fall within the terms of cl 9.3. They were referable to the cross claim and to the appeal (as the evidence set out above established). The decision in Mr Rental Australia Pty Ltd v IRD Services Pty Ltd (No. 2) turned on the wording of the clause, which was materially different (and more confined) from the wording of cl 9.3.
5. Once the Bank had drawn down more than $75,000 (being Dr Segal's share), the drawdowns thereafter were to the benefit of Dr Segal and to the detriment of Mr Barel. As Campbell J found, Mr Barel was entitled to be indemnified by Dr Segal for any such amounts.
6. Now that the whole of the fund has effectively been exhausted, Dr Segal's liability to Mr Barel under the indemnity can be quantified. Had Dr Segal paid the $75,000 into Court, as he represented would occur in June 2016, an order for payment out to Mr Barel could be made. However, as this did not occur, it is appropriate that he be ordered to pay the sum of $75,000 to Mr Barel.

The form of the order

1. As set out above, Mr Barel sought a variation of Campbell J's order under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 36.16. I do not consider this to be the appropriate rule since I am not varying Campbell J's order, but rather giving effect to it in light of what has occurred since it was made, which enables the amount to be quantified: cf. Short v Crawley (No. 45) [2013] NSWSC 1541 at [33] and [79] per White J (in the context of a gross sum costs order when an order for costs had already been made). In my view the present applications falls within the following situation described by McLelland J in Phillips v Walsh (1990) 20 NSWLR 206 at 209-210 as follows: ". . . subsequent to a final order application may be made for the purpose of dealing with a matter involved in, or arising in the course of, working out that order; for example, by making more specific provision for its implementation or by modifying its operation to take account of some subsequent change of circumstance or by enforcing it."
2. In substance, Mr Barel seeks in his notice of motion a supplemental order that makes more specific provision for the enforcement of the indemnity ordered by Campbell J. The principles of finality on which Dr Segal relied are not engaged. The power to make such orders is within the inherent jurisdiction of the Court: s 23 of the Supreme Court Act 1970 (NSW). Accordingly, the restrictions in UCPR r 36.16 do not apply. Further, UCPR 36.16(4) preserves the Court's other powers.
3. I am satisfied that Mr Barel has established his entitlement to an order that Dr Segal pay him the amount of $75,000. As he is to be ordered to pay a money sum, the order will be expressed in the form of a judgment.

The claim for interest

1. Ms Gleeson, who appeared on behalf of Mr Barel, sought interest on the sum of $75,000 from 20 July 2015 on the basis that, by that date, it was clear that there would be a substantial shortfall by reason of the quantum of the drawdowns by that date which would permit the indemnity ordered by Campbell J to be quantified at its maximum amount of $75,000.
2. Although Ms Gleeson sought an order for interest under s 101 of the Civil Procedure Act 2005 (NSW), which provides for interest after judgment. She drew my attention to amendments to s 101 which came into effect in November 2015 regarding the power to order interest on costs. I do not consider that the power to order interest on costs is relevant. That the monies were drawn down in payment of costs orders is not to the point as far as Mr Barel is concerned: all that matters for present purposes is that he was kept from his money. The reason Mr Barel was entitled to an indemnity from Dr Segal is that he was entitled to $75,000, either from the Common Fund, or, to the extent that the sum had been drawn down by the Bank for Dr Segal's benefit (in payment of the Bank's costs incurred as a result of his proceedings), from Dr Segal. The claim which led to the order for indemnity was restitutionary. Since Mr Barel has been deprived of the benefit of his money, it is appropriate to make an order for interest: Falkner v Bourke (1990) 19 NSWLR 574 at 576 per Priestley JA.
3. However, if (contrary to the view I have expressed above) the provisions in s 101 relating to interests on costs apply to the present case, I consider that this is an appropriate case (for the reasons set out above in the previous paragraph) to award interest as Mr Barel has been deprived of his $75,000 for the relevant period: cf. Perisher Blue Pty Ltd v Nair-Smith (No. 2) [2015] NSWCA 268 at [86]-[87].
4. The date from which interest ought run is not clear. Once a dollar more than $75,000 was drawn down by the Bank from the Common Fund of $150,000 Mr Barel suffered detriment in that he was kept from his money. However, I infer that it is only in recent times (since the last correspondence) that the fund has been exhausted. Ms Gleeson submitted that it would be appropriate for interest to run from 20 July 2015, being the date at which it was known that $132,685.04 had been drawn down. Such an order would deprive Mr Barel of interest on that part of his $75,000 which had been drawn down before that date, but give him interest on that part which had not yet been drawn down. In the circumstances, I consider it would be appropriate to fix the date as Ms Gleeson suggested, which corresponds substantially with the date of Mr Barel's request to Dr Segal. The appropriate rate is 6%, being the prescribed rate for pre-judgment interest for the relevant period, which gives rise to a (rounded) amount for pre-judgment interest of $4,500.

Costs

1. The parties accepted that if I were to make the order sought by Mr Barel it would be appropriate for costs to follow the event.

Orders

1. I make the following orders and notations: 1. Judgment for the second cross-defendant (applicant) against the cross-claimant (respondent) in the sum of $79,500. 2. Order the cross-claimant to pay the second cross-defendant's (applicant's) costs of the notice of motion. 3. I note that order (1) is intended to implement order (4) made by Campbell J on 29 May 2015 as follows: The cross claimant is to indemnify the second cross defendant against the costs of the first cross defendant against the cross claimant to the extent those costs are levied on the funds retained by first cross defendant to the detriment of the second cross defendant's contingent one- half share in those funds.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 July 2016