Gray v O'Donnell [2009] NSWSC 1392 | Case summary

JUDGMENT 1 HIS HONOUR: In this matter, the Court must deal with an application for special orders for costs after it issued judgment in the substantive appeal from the Local Court on 8 April 2009: Gray v O'Donnell [2009] NSWSC 259 ("the first judgment"). These reasons for judgment should be read in conjunction with the first judgment. It is unnecessary to recite all of the facts, but a short summary is appropriate. 2 Mr and Mrs Gray lent $25,000 to their daughter and son-in-law (Mr and Mrs O'Donnell), which loan was secured by a mortgage over their home. The loan was said to be "repayable at call", and the terms of the loan provided that Mr and Mrs O'Donnell would repay the principal sum (together with interest), or so much of it that was unpaid, to Mr and Mrs Gray "on demand in writing". 3 Mr and Mrs O'Donnell separated. Mr and Mrs Gray demanded repayment of the loan and interest. Mrs O'Donnell (Mr and Mrs Gray's daughter) conceded that the money was due, while Mr O'Donnell defended the action on the basis that the limitation period for suit had expired. 4 The Local Court initially dismissed the proceedings and issued judgment for Mr O'Donnell. On appeal, the Court, in the first judgment, quashed the judgment of the Local Court and, in accordance with the request in the summons, remitted the matter back to the Local Court for determination in accordance with law. The ground upon which this Court overturned the judgment of the Local Court was not a ground initially raised by Mr and Mrs Gray in the appeal. Mrs O'Donnell did not dispute orders sought in the appeal. 5 This Court also issued orders requiring the defendants, jointly and severally, to pay the plaintiffs' costs of the proceedings in this Court and granted an indemnity certificate pursuant to the Suitors' Fund Act 1951. The Court granted liberty to the parties to apply for any special or additional order as to costs. Pursuant to that special leave, Mr and Mrs Gray seek indemnity costs and Mrs O'Donnell seeks an order that Mr O'Donnell pay her costs. Not surprisingly, given the relative amounts involved, more attention seems to have been paid to the submissions on costs, than was paid to the substantive proceedings. 6 The Local Court, in dealing with the matter after it was remitted, issued judgment for Mr and Mrs Gray, for the amount owed and interest, and ordered the first defendant (Mr O'Donnell) to pay the costs of Mr and Mrs Gray and the costs of Mrs O'Donnell in the Local Court. Mr and Mrs Gray and Mrs O'Donnell each rely on the affidavit of Mr Solari of 4 August 2009, which evidences offers that were made and the terms of the contract (which, for present purposes, includes the mortgage and memorandum thereto) and asserts that Mr O'Donnell unreasonably defended the proceedings and/or is required to pay solicitor/client costs by virtue of the terms of the contract. Principles 7 The power to award costs is now subject to statutory provision: s 98 of the Civil Procedure Act 2005. While costs are in the discretion of the Court, that discretion must be exercised judicially. Ordinarily, costs will follow the event and will be on a party/party basis. Costs are not intended to be a punishment, but are intended to compensate a party for the reasonable costs of prosecuting or defending an action. 8 Further, where a party has made an offer of compromise and the litigation achieves a result that is better for the offeror than the compromise, the offeror is ordinarily entitled to indemnity costs. However, ultimately, provided that the discretion is exercised judicially and is not capricious or arbitrary, costs are within the discretion of the Court. 9 Moreover, s 60 of the Civil Procedure Act makes proportionality of costs, to the importance and complexity of the subject matter in dispute in the proceedings, a factor that the Court must consider. As already stated, in my view, an indemnity costs order for the proceedings in the Supreme Court would be wholly out of proportion with the subject matter in dispute between the parties, and the time and expense taken in dealing with the issue of costs has been wholly out of proportion with the substantive proceedings. I make no comment, nor could I, as to the exercise of discretion by the Local Court in relation to the substantive proceedings before it. The exercise of that discretion involved fundamentally different issues. Mrs O'Donnell's Costs 10 As earlier stated, Mrs O'Donnell limited her role to "protecting her position". It is unclear why an appearance and costs were necessary at all in the proceedings in this Court. Mrs O'Donnell admitted the loan and the debt. It was her conduct, seemingly unknown to Mr O'Donnell, upon which Mr and Mrs Gray (and Mrs O'Donnell) relied, as a matter of fact, in asserting a new loan existed that was not time barred. 11 In this Court, if Mr and Mrs Gray were successful, then the matter would return to the Local Court to be finalised. If Mr O'Donnell were successful, then the debt would have been unenforceable. 12 The Local Court has already provided for Mrs O'Donnell's costs before it. On this appeal, no order could have been made, in the substantive hearing, other than one which dismissed the appeal, or which remitted the matter back to the Local Court. In those circumstances, Mrs O'Donnell had no position to protect. She could not have been prejudiced by any order in this Court. Her appearance, other than by submitting appearance, was wholly unnecessary and it is inappropriate to burden Mr O'Donnell with her costs. Her application is rejected on that basis and on that previously mentioned basis of lack of proportionality. Indemnity costs for Mr and Mrs Gray 13 There are two aspects to the application by Mr and Mrs Gray for indemnity costs. The first basis upon which indemnity costs are sought is the terms of the mortgage itself. The mortgage, as an interest in land, lapsed with the sale of the property to which it attached. That which remained was a loan, unsecured by any interest in land, on account of which a personal debt accrued. In the peculiar circumstances of this intra-family loan, I consider that the exercise of the discretion of the Court to require the payment of solicitor/client costs to be inappropriate. 14 Nice questions arise, given the terms of s 98(1)(c) of the Civil Procedure Act, as to whether solicitor/client costs (as distinct from indemnity costs) may be ordered. Even if the Court were to enforce strictly the terms of the contract and mortgage, the Court would be required to order solicitor/client costs. Solicitor/client costs have not been sought. Indemnity costs have been sought. While there may not be much practical difference between solicitor/client costs and indemnity costs, there is a difference in principle and there may be differences in fact (the difference being one of burden of proof as to costs being reasonable or unreasonable: see EMI Records Ltd v Wallace [1983] 1 Ch 59 at 72, 73; Bouras v Grandelis [2005] NSWCA 463; (2005) NSWLR 214 at [117] per Santow JA). An award of indemnity costs would not be enforcing the contract. 15 Secondly, Mr and Mrs Gray seek indemnity costs on the basis of offers of compromise made during the course of this dispute. On 10 July 2007, an offer of compromise was made proposing that each defendant pay $21,000 plus both pay costs. This is almost double the principal owing, but, because it included interest, was, it is said, an offer of compromise. However, it was so close to a total capitulation that, in my view, it should not form the basis of an indemnity costs order, especially in the circumstances, already mentioned, of the disproportion of costs to the substantive judgment. 16 A further offer, on 20 November 2008, was made, being a Calderbank offer, proposing a resolution of the matter by the payment of $12,500 by each of the defendants, inclusive of costs. On 5 December 2008, a Calderbank offer was made for the settlement of the proceedings for the payment of $21,000, in total, plus costs. 17 The offer of 5 December 2008 seems to have required a greater payment than the offer made on 20 November 2008, except in the unlikely event that the costs of the Local Court and the costs thus far in the Supreme Court were, at that time, less than $4,000. The offer made on 20 November 2008 was open for just over two weeks, which, in the circumstances of these proceedings, was not a reasonable period, and was rendered inoperative at a time that, on its face, it was supposed to be open (i.e. the offer of 20 November was expressed to be open for 28 days, but was overtaken by the offer of 5 December). Further, each of those offers was made after judgment had issued in the Local Court and after the substantive submissions in this Court had been filed. 18 At that time, nothing in the grounds of appeal or in the written submissions would have given Mr O'Donnell any basis for accepting the offer. Submissions were filed by the plaintiffs on 11 September 2008 and by the first defendant on 30 October 2008 and, on 28 October 2008, Registrar Bradford made orders for the filing of written submissions for the plaintiffs' reply by 11 November 2008. The written submissions of the second defendant (filed 21 November 2008) were late and the plaintiffs submissions in reply (filed 20 January 2009) were over two months' late. 19 Nevertheless, the offers were made and were for an amount less than was the ultimate result of the proceedings. But they were made at a time when all of the preparation and submissions had already occurred and been written. In the circumstances, I consider it appropriate to order indemnity costs only for the day of hearing, being 27 February 2009, and for 8 April 2009 (the date judgment issued) and for 31 July 2009 (the date initially set down for the argument on costs), and not otherwise. Costs of the Proceedings on Costs 20 Pursuant to the leave granted by the Court, Mr and Mrs Gray sought to have the matter re-listed to seek indemnity costs. For that purpose, the matter was listed on 31 July 2009. On that date, the first defendant was prepared to argue the issue of costs, but neither the plaintiff nor the second defendant was in that position. As a consequence of the need for an adjournment, the matter has proceeded to written submissions and further hearing dates wholly out of proportion to the amounts in issue. 21 The indemnity costs order will apply to 8 April 2009 and 31 July 2009. Any proceedings, and/or preparation and matters incidental thereto, beyond 31 July 2009 will be the subject, and should be the subject, to quite different consideration. 22 The first defendant ought be compensated for the costs of proceedings beyond that which were reasonably necessary to obtain the orders that were sought. The first defendant's costs beyond 31 July 2009 will be paid. Conclusions 23 The Court makes the following orders:

Gray v O'Donnell

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Judgment (16 paragraphs)

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