I delivered my reasons for judgment in this matter on 12 August 2022: JNN Investments Pty Ltd v Francis [2022] NSWSC 1063. I directed that the parties confer and bring in short minutes which would deal (inter alia) with the question of interest on the amount that I held was owing to the plaintiff.
[2]
Interest
When the matter was relisted for the purpose of making final orders, it became apparent that the parties had a different view about the date that interest should commence to run. The plaintiff submitted that interest ran from the date each of the items of expenditure was paid for by the plaintiff. The defendant submitted that interest commenced to run from the date of the entry into the mortgage on 25 May 2018.
The defendant's submission relied on cl 3 of Annexure "A" to the mortgage and cl 10 of the Partnership Agreement.
Clause 10 of the Partnership Agreement provided:
10. Any advance of money to the Partnership by any Partner in excess of the amounts provided for in this Agreement or subsequently agreed to as Additional Capital Contribution will, be deemed a debt due from the Partnership and not an increase in Capital Contribution of the Partner. This liability will be repaid with interest at rates and times to be determined by a majority of the Partners within the limits of what is required or permitted in the Act. This liability will not entitle the lending Partner to any increased share of the Partnership's profits nor to a greater voting power. Such debts may have preference or priority over any other payments to Partners as may be determined by a majority of the Partners.
Mr Cassimatis of counsel for the defendant relied on the words "at…times to be determined by a majority of the Partners." He submitted that the time was determined by the entry into the mortgage.
In my opinion, that approach does not take account of cl 5 of Memorandum Q860000 incorporated into the mortgage which provides:
5. In addition to all costs and expenses which the mortgagor may be liable at law or in equity to pay in respect of this security, or otherwise in relation thereto, the mortgagor will upon demand pay all costs and expenses, including costs as between solicitor and client incurred by the mortgagee in consequence or on account of any default on the part of the mortgagor hereunder or incurred by the mortgagee for the preservation of or in any manner in reference to this security, all of which costs and expenses shall from the time of payment or expenditure thereof respectively until repaid to the mortgagee by the mortgagor bs deemed principal moneys covered by this security, and shall carry interest at such higher rate as may be shown in the schedule to the mortgage.
Nor does it take into account the course of dealings between the parties. The Principal Sum referred to in cl 1 of Annexure "A" to the mortgage was derived from a type of balance sheet that was marked Annexure "B" to the mortgage. Thereafter, the parties worked on the basis of a spreadsheet with the additional amounts expended being added together with interest on a running basis. The spreadsheet most frequently referred to during the course of the proceedings was one forwarded by Mr Newton of the plaintiff to the defendant on 15 November 2019. Except for one or two items to which attention was drawn during cross-examination, the figures in that spreadsheet were not disputed by the defendant. That spreadsheet includes interest on the expenditure on a running basis.
However, even putting aside that course of dealing between the parties, if the mortgage was, as the defendant asserts, a compliance with cl 10 of the Partnership Agreement, the terms of the memorandum incorporated into that mortgage makes clear that the parties agreed that the costs and expenses "shall from the time of payment or expenditure thereof…carry interest at such higher rate as may be shown in the schedule to the mortgage". Clause 3 of Annexure "A" identified that interest at 5% per annum.
Accordingly, the plaintiff's submission as to the date at which interest should commence to run should be accepted. Mr Cassimatis accepted that, if the plaintiff's submission was accepted, the amount of interest of $40,258.52 was the correct figure to 7 September 2022, when orders were made.
[3]
Costs
The parties accepted that, whatever order was made for the payment of costs to the plaintiff, those costs should be paid on an indemnity basis. That was principally because of the provision of cl 5 of the memorandum which identified that the mortgagor was to pay "all costs and expenses, including costs as between solicitor and client".
The defendant submitted that the appropriate costs order was that each party should bear its and his own costs on the basis that, as Mr Cassimatis put it, "on a rough mathematical analysis… both parties were 50% victorious in the arguments that they ran". In my opinion, that considerably overstates the success of the defendant. The defendant was successful only in establishing that expenses which he had incurred on behalf of the partnership were entitled to be offset against the claim made by the plaintiff. The defendant was unsuccessful in having included in that sum the equipment leasing costs. The defendant was also unsuccessful on the two bases upon which he argued that the plaintiff was not entitled to make the demand, that is, unless and until a claim was made by the Australian Taxation Office, and not before 31 March 2023. The defendant was also unsuccessful in arguing that demand made for a higher sum than was owing was an invalid demand.
In my opinion, no basis is shown for declining to make a costs order on the basis that each party should bear its and his own costs. The only consideration is whether there should be reduction in the costs payable to the plaintiff by reason of the defendant's success on the issue of being able to offset the expenses he incurred.
The principles concerning apportionment of costs are set out in a number of authorities including Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38]; Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306 at [24]-[25]; Sydney Ferries v Morton (No 2) [2010] NSWCA 238 at [10]-[12]; Griffith v Australian Broadcasting Corporation (No 2) [2011] NSWCA 145 at [16]-[20]; and Sze Tu v Lowe (No 2) [2015] NSWCA 91 at [40]-[42]. They do not need to be repeated here except to note that where there is a mixed outcome in proceedings the matter ultimately depends on matters of impression and evaluation: Bostik at [38], Sze Tu v Lowe (No 2) at [40] and Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 (approved in Sydney Ferries v Morton (No 2) at [10]).
Mr Altan of counsel for the plaintiff submitted that different considerations apply in claims by mortgagees for breach of obligations under the mortgage. He submitted that whether or not there is an express provision in the mortgage for the mortgagee to recover all of its costs, such a right exists even when the mortgage does not contain such a clause. He submitted, moreover, that even where the mortgagee has been unsuccessful on one or more issue, that should not deprive the mortgagee of its costs.
In Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 Hodgson JA (with whom Handley and Stein JJA agreed) said:
[61] Even where there is no express provision in the mortgage, a mortgagee is generally entitled to all costs it incurs in ascertaining or defending its rights, in preserving the security or in recovering the mortgage debt: see Fisher & Lightwood's Law of Mortgage (Aust.Ed.) [40.3], National Provincial Bank of England v. Games (1886) 31 Ch.D. 582 at 592. A mortgagee does not lose the right to costs merely by making a bona fide claim beyond its entitlement, at least so long as that claim has some merit: Fisher & Lightwood [40.11], Cotterell v. Stratton (1872) 8 Ch.App. 295, Credland v. Potter (1874) 10 Ch.App. 8, Bird v. Wenn (1886) 33 Ch.D. 215, Kinnaird v. Trollope (1889) 42 Ch.D. 610.
[62] I think it is clear that costs incurred in resolving matters of accounting on which minds can reasonably differ are plainly recoverable by a mortgagee, on the general principles discussed in Fisher & Lightwood, and also pursuant to provisions such as those referred to in par.[58] above. It is perhaps not so clear in relation to a question of whether or not a mortgage, properly interpreted, does or does not include certain debts. In my opinion, costs incurred by a mortgagee in making a claim that the mortgage includes debts which the mortgage on its true construction does not include, even if this claim has some support in the text, are not necessarily incurred in the capacity of a mortgagee, or in respect of the mortgage, or in respect of something that the mortgagee is permitted to do under the mortgage. The more doubtful the question, and the more reasonable the claim, the readier the Court would be to find in the mortgagee's favour on this matter. On the whole, although I think the appellant's arguments were not entirely without merit, in my opinion the costs it incurred in seeking to have the mortgage extend to debts that it did not in fact cover are not properly regarded as costs incurred in the capacity of a mortgagee, or in respect of the mortgage, or in respect of something that the mortgagee is permitted to do under the mortgage.
In JKAM Investments Pty Ltd v Damien (No 2) [2022] NSWSC 763 Slattery J said:
[36] The mortgagee may be deprived of costs where the mortgagee's claim is unfounded (although bona fide) but a claim will not be classed as "unfounded", if it is fairly arguable: Credland v Potter (1874) LR 10 Ch App 8 and Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11 and ELG Tyler, PW Young and CE Croft, Fisher and Lightwood's Law of Mortgage (3rd Ed, 2014, LexisNexis Butterworths) ("Fisher and Lightwood") at [40.11].
[37] It is the duty of the mortgagee to pursue its remedies, so as not to incur unnecessary costs. Therefore the mortgagee, for example, must bear the costs of proceedings insofar as they are mistaken or useless. Where, for example, an action was not originally commenced as a foreclosure action but was later turned into a foreclosure action, the costs incurred before it assumed that form were ordered are to be borne by the mortgagee: Fisher and Lightwood at [40.13].
[38] There are other examples of wasted costs being born by the mortgagee. Costs incurred by an improper joinder of parties, whether as plaintiffs or defendants must be paid by the mortgagee: see Pearce v Watkins (1852) 64 ER 1132 and Fisher and Lightwood [40.13].
[39] In the context of a mortgage, the application of the Beddoe principle [Beddoe, In re [1893] 1 Ch 547] in relation to the expenditure of legal costs was put in somewhat colourful terms by Sir Robert Megarry VC in EMI Records v Wallace [1988] 2 All ER 980 at 990 where his Lordship said:
"Where, on the other hand, the costs are to be paid not by the client to his own solicitor but by another party to the litigation, these provisions seem entirely inappropriate. It would be monstrous if the loser could complain of nothing that the winner had authorised. Confident of success (as many are, when moving for contempt), the winner may have authorised half a dozen conferences with three expert witnesses, went conferences with a single expert would plainly have been ample. He may have needlessly employed the most expensive experts, two of the most fashionable silks and a pair of juniors. He may throughout have insisted on his case being conducted by two of the senior partners in his solicitor's firm, instead of one. You may have done dozens of other things which to a greater or lesser extent were costs unreasonably incurred to an unreasonable amount. Some of these matters (such as the array of counsel) may be visible to the judge when he makes his order, so that he could insert some appropriate provision in his order; but much may lie concealed until disclosed on taxation."
[40] But it is always to be remembered that what is are (sic) reasonable costs is to be assessed against the particular facts of the case. What is reasonable in any one case may not be reasonable in another case involving a mortgage indemnity: Australian & New Zealand Banking Group Ltd v Pollard [2012] SASC 133 (at [7]).
…
[42] In common law mortgagees are entitled to costs incurred in the enforcement of a mortgage, and the taking of accounts and to all costs, charges and expenses reasonably and properly incurred: Fisher and Lightwood at [40.3]. The principal (sic) covers costs incurred by the mortgagee in ascertaining or defending its rights, in preserving the security, or in recovering the mortgage debt: Fisher and Lightwood at [40.3].
[43] The Court may exempt from a general costs order the cost of a particular issue on which the mortgagee has failed, although the remainder of the action was otherwise justified: Deeley v Loyd's Bank (No. 2) (1909) 53 Sol Jo 419 and Fisher and Lightwood at [40.13].
[44] The cost of litigation relating to the security needs to be closely scrutinised. At common law a mortgagee is not entitled to the costs of defending the mortgagee's title to the mortgage against persons other than the owner of the equity of redemption, as distinguished from defending the title to the estate: Fisher and Lightwood at [40.23]. This position may be altered by the terms of the mortgage and in the case of the JKAM mortgage, clauses 13 and 14, it is probably wider.
It was submitted that there was some inconsistency between what was said in Overton and what was said in JKAM Investments. I do not agree. Overton does not state any absolute rule entitling a mortgagee to its costs regardless of the claim made where the claim in unsuccessful.
In Overton, Hodgson JA at [62] appears to exempt from the right of a mortgagee to recover costs for the pursuit of amounts which the mortgage on its true construction does not include. In a similar way, Fisher & Lightwood's Law of Mortgage (Lexis Nexis, 3rd Australian Edition 2014) says at [40.13]:
It is the duty of the mortgagee so to pursue his remedies as not to incur unnecessary costs. Hence he must bear the cost of proceedings as far as they are mistaken or useless….
The court may except from the general costs the costs of a particular issue on which the mortgagee has failed, although the remainder of the action was justified: Deeley v Lloyds Bank (No 2) (1909) 53 Sol Jo 419.
Justice Slattery accepts those statements at [43] in JKAM Investments.
Moreover, r 42.25 of the Uniform Civil Procedure Rules 2005 (NSW) provides:
42.25 Costs of trustee or mortgagee
(1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be.
(2) The court may order that the person's costs not be so paid if -
(a) the trustee or mortgagee has acted unreasonably, or
(b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund.
The defendant raised the issue of the offset of expenses incurred by him from the outset of the trial in his opening written submissions. That was why the Referee was asked to calculate those expenses in addition to those claimed by JNN.
In the light of my findings at [55] to [58] of the principal judgment, JNN should not have pursued its claim that the defendant was not entitled to set-off against what was owing to JNN the amounts Mr Francis had expended. As those findings make clear, JNN's basis of calculating what was owing to it always accepted the offset. That was how the "Principal Sum" referred to in the mortgage was calculated. Mr Newton acknowledged a number of times in his evidence that the arrangement was that the parties were to make equal contributions. In all of those circumstances it was not reasonable for JNN to adopt the approach it took to the defendant's expenses.
The matter was significant in terms of what was found to be owing to JNN by the defendant. It was not, as the plaintiff says in its submissions a "small offset". I do not consider that the fact that each party was ordered to pay 50% of the Referee's costs is a relevant consideration. In those circumstances the defendant should pay 80% of the plaintiff's costs on an indemnity basis.
[4]
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: 06 October 2022