KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. v. MURRAY & ANOR. MURRAY & ANOR. v. KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. [2005] NSWCA 87

CATCHWORDS: COSTS - court's discretion as to costs - mortgage agreement - entitlement to indemnity costs - whether provision in mortgage subject to court's discretion as to costs - whether provision in mortgage extends to costs of defending cross-claim

Contracts Review Act 1980 (NSW) Supreme Court Act 1970 (NSW) LEGISLATION CITED: Supreme Court Rules 1970 (NSW) Supreme Court Act 1981 (UK)

AGC (Advances) Limited v West (1984) 5 NSWLR 301 ANZ Banking Group (NZ) Limited v Gibson [1986] 1 NZLR 556 Gomba Holdings (UK) Limited & Others v Minories Finance Limited & Others (No.2) [1993] Ch 171 Inglis and Anor v Commonwealth Trading Bank of Australia (1973) 47 ALJR 234 CASES CITED: Leda Holdings Pty Limited v Oraka Pty Limited [1999] FCA 444 Quadrascan Graphics Pty Limited v Crosfield Electronics ANZ Pty Limited (Carr J, Federal Court of Australia, unreported, 18 May 1995) Re Adelphi Hotel (Brighton) Limited [1953] 2 All ER 498 Sandtara Pty Limited & Others v Australian European Finance Corporation Ltd & Others (1990) 20 NSWLR 82

CA 40495/04 Kyabram Property Investments Pty. Limited and Banksia Securities Limited (Appellants) Wendy Jill Murray and Robert Ormiston Murray (Respondents) PARTIES: CA 40504/04 Wendy Jill Murray and Robert Ormiston Murray (Appellants) Kyabram Property Investments Pty. Limited and Banksia Securities Limited (Respondents)

P. Bolster (Kyabram and Banksia) COUNSEL: R.W. Evans (Mrs. and Mr. Murray)

Kell Moore Solicitors (Albury) - (Kyabram and Banksia) SOLICITORS: McKells Solicitors - (Mr. and Mrs. Murray)

LOWER COURT JURISDICTION: Supreme Court - Common Law Division

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40495/2004 CA 40504/2004 CL 12184/2001

BEAZLEY JA HODGSON JA IPP JA

24 March 2005 KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. v. MURRAY & ANOR. (No. 2) MURRAY & ANOR. v. KYABRAM PROPERTY INVESTMENTS PTY. LIMITED & ANOR. (No. 2)

Judgment 1 BEAZLEY JA: On 13 July 2001, the first appellant, Kyabram Property Investments Pty. Limited (Kyabram) commenced proceedings against the first respondent (Mrs. Murray) alleging default under a mortgage secured over two pieces of property known as "Boala" and "West Garawan" and claiming an order for possession of the parcels of land and "an order for its costs". 2 The pleadings evolved over a period of time and the claim was finally crystallised in a Further Amended Statement of Claim filed on 7 August 2002, in which the second appellant (Banksia) was added as a plaintiff and the second respondent (Mr. Murray) was added as a defendant. Kyabram's claim remained essentially the same save that, in addition to seeking an order for possession, it also sought judgment against both respondents in a claimed money sum, being the amount alleged to be due under the mortgage. Banksia sought the same relief in respect of a separate mortgage entered into with Mrs. Murray. Both appellants sought an order for "costs". I will refer to the proceedings brought by both Kyabram and Banksia as the proceedings on the Statement of Claim. 3 On 24 October 2001, Mrs. Murray filed her Defence to the original Statement of Claim. In addition, she filed a Cross-Claim alleging that the mortgage with Kyabram had been entered into in circumstances that were unconscionable or alternatively, that the mortgage was unjust in the circumstances relating to it at the time it was made, in contravention of s.7 of the Contracts Review Act 1980. 4 Mrs. Murray filed a Defence in response to the Further Amended Statement of Claim and continued to rely upon her Cross-Claim. Mr. Murray filed a Defence to the Further Amended Statement of Claim and also relied upon the matters pleaded in the Cross-Claim and sought the same relief claimed in that pleading. 5 The proceedings were heard by Shaw J in the Common Law Division and his Honour gave judgment on 19 April 2004 in which he found that the transaction was unconscionable, unfair or unjust and was therefore contrary to law. His Honour made the following observations in relation to costs at [61]: "I am not, as at present (sic) advised, of the view that any of the costs orders to be made in these proceedings should be made on an indemnity basis. I do not find that there has been any misconduct or improper behaviour either in the conduct of the litigation or in the transaction itself. Although some of the agreements in question refer to costs being on that basis, this is subject to the Court otherwise ordering. Questions also arise as to a possible apportionment of costs between the [appellants] and [respondents] which can be dealt with by agreement or determination by the Court." 6 The parties brought in Short Minutes of Order that were filed in the Registry on 3 June 2004. The orders, insofar as they relate to costs, were Orders 13, 14 and 15. Those orders lack a little precision and the basis upon which they were made is uncertain, but, as I understand them, their effect was:

(i) The Murrays were to pay Banksia's costs of the proceedings on the Statement of Claim on an indemnity basis: see Order 13.

(ii) Kyabram was to pay the Murrays' costs of the Cross-Claim on a party/party basis: see Order 14.

(iii) The Murrays were to pay Kyabram's costs of the proceedings on the Statement of Claim on a party/party basis: see Order 15. 7 Kyabram appealed against the orders in favour of the Murrays on the Cross-Claim. The Murrays appealed against the orders in favour of Kyabram and Banksia on the Statement of Claim. 8 Relevantly, for the purposes of this judgment, the Murrays challenged the costs orders in favour of Banksia and Kyabram reflected in (i) and (iii) above, and Kyabram challenged the costs order in favour of the Murrays. Kyabram, now having succeeded on the claim, the cross-claim and the appeal, seeks its costs of all proceedings on an indemnity basis. Banksia seeks to maintain the indemnity costs order referred to in (i). 9 Kyabram and Banksia maintain that they are entitled to their costs on an indemnity basis, because of the provisions of their respective mortgages with the Murrays. The provision is in the same terms in each mortgage and is as follows: "14. In addition to all costs expenses and other moneys which the Mortgagor may be liable at law or in equity to pay in respect of or in relation to this Mortgage the Mortgagor will upon demand pay to the Mortgagee all moneys lent paid or advanced on account of the Mortgagor by the Mortgagee or which may be or become owing by the Mortgagor to the Mortgagee on any account whatsoever and all moneys paid or expenditure incurred by the Mortgagee for or in connection with the mortgaged premises or this Mortgage or any security collateral hereto or with their preparation or completion or on account of any default whatsoever hereunder or under any security collateral hereto or in or incidental to the exercise or attempted exercise of any right power authority or remedy conferred on the Mortgagee under or by virtue of this or any collateral security and the same shall be a charge upon the mortgaged premises and be deemed moneys hereby secured and bear interest accordingly and the expression 'costs' shall mean and include Solicitor and own client's costs as well as party and party costs and costs of and incidental to the preparation execution stamping and enforcement of this Mortgage and any Guarantee of this Mortgage. …" (emphasis added) 10 Before proceeding further, it should be noted that clause 14 does not refer to indemnity costs but to "Solicitor and own client costs". I will, therefore, treat the reference to indemnity costs in the parties' submissions as a reference to "Solicitor and own client costs". 11 The costs of an action in the Court are, pursuant to the provisions of s.76(1)(a) of the Supreme Court Act (the Act) "in the discretion of the Court". This provision is subject to the Act and the Rules of Court. Part 52A r.11 of the Supreme Court Rules provides that subject to Pt.52A costs follow the event except where it appears to the Court that some other order ought to be made. Conventionally, costs are awarded on a party/party basis, unless there is some reason for the Court to make a different order. 12 It is well established that a mortgagee may rely upon its contractual entitlement to costs so as to claim an order other than on a party/party basis. In Re Adelphi Hotel (Brighton) Limited [1953] 2 All ER 498, Vaisey J at 502 observed that the prima facie rule was that costs were awarded on a party/party basis unless some alternative basis was shown "either on some well-recognised principle, or under some contract plainly and unambiguously expressed". The New Zealand Court of Appeal applied the rule to the payment of a mortgagee's legal costs in a recovery action: ANZ Banking Group (NZ) Limited v. Gibson (Court of Appeal) [1986] 1 NZLR 556 at 566, 569. 13 The application of the principle is well recognised in Australia: see Inglis and Anor. v. Commonwealth Trading Bank of Australia (1973) 47 ALJR 234 at 235. In AGC (Advances) Limited v. West (1984) 5 NSWLR 301, Hodgson J stated (at 304-305) that at general law a mortgagee was entitled to party/party costs only but that the general law was subject to the precise terms of any provision of the mortgage. Cole J accepted this to be correct in Sandtara Pty. Limited & Others v. Australian European Finance Corporation Ltd. & Others (1990) 20 NSWLR 82, at 97. 14 AGC v. West and Sandtara were concerned with whether the terms of the mortgage agreement itself provided for costs on a specific basis. The question which arises here is more specific. It is whether the existence of a contractual provision entitling a mortgagee to the costs of litigation in relation to the enforcement of the mortgage governs the parties' entitlements, or whether such a provision is subject to a general discretion in the Court. This question was considered by the Court of Appeal in England in Gomba Holdings UK Limited & Others v. Minories Finance Limited & Others (No. 2) [1993] Ch 171. Scott LJ, delivering the Judgment of the Court, after reviewing the cases stated at 194: "In our opinion, the following principles emerge from the cases and dicta … (i) An order for the payment of costs of proceedings by one party to another party is always a discretionary order: s.51 of the Act of 1981. (ii) Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right. (iii) The power of the Court to disallow a mortgagee's costs sought to be added to the mortgage security is a power that does not derive from s.51 but from the power of courts of equity to fix the terms on which redemption will be allowed. (iv) A decision by a court to refuse costs, in whole or in part, to a mortgage litigant may be a decision in the exercise of the s.51 discretion or a decision in the exercise of the power to fix the terms on which redemption will be allowed or a decision as to the extent of a mortgagee's contractual right to add his costs to the security or a combination of two or more of these things. The pleadings in the case and the submissions made to the judge may indicate which of the decisions to which we have referred has been made. (v) a mortgagee is not, in our judgment, to be deprived of a contractual or equitable right to costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee's contractual or equitable rights and without any adjudication as to whether or not the mortgagee should be deprived of those costs."

Section 51(1) of the Supreme Court Act 1981 (UK) ,which is in similar terms to s.76 of the Supreme Court Act 1975 (NSW) , provides that the costs of proceedings shall be in the discretion of the Court. 15 In this case senior counsel for Mr. and Mrs. Murray submitted that in the exercise of its discretion, the Court should not accede to the application that costs be on an indemnity basis because, in its claim, repeated through three versions of the Statement of Claim, Kyabram and Banksia sought an order for costs in terms which would conventionally be interpreted as costs on a party/party basis. It was submitted that had Kyabram and Banksia intended to claim costs under their contractual entitlement, they should have specified that in their pleadings. It was submitted that this was a matter of some significance, given that, because of the default under the mortgage, interest on such costs would also be at the default rate. The Murrays submitted that the failure of Kyabram and Banksia to claim costs other than as a conventional incident of the litigation prejudiced the Murrays in any consideration they might give to making an offer of compromise in the proceedings, because the full extent of the claim now made by Kyabram and Banksia had not been pleaded. 16 There is considerable force in this submission. When Kyabram and Banksia brought this matter to Court, it would be reasonable for the Murrays to assume that they were facing the entirety of their mortgagee's claim against them. On the face of the pleadings there was nothing to indicate that the claim for costs was other than the conventional claim for costs. If any other claim was being made, Kyabram and Banksia should, in my opinion, have specifically pleaded it in accordance with the requirement of Pt 15 r.13(1) of the Supreme Court Rules, which provides that a plaintiff shall plead specifically any matter which, if not pleaded specifically, may take the defendant by surprise. 17 The requirement is of no small moment. Costs of litigation are a heavy burden in any event. A costs order, if made in the terms of the contractual provision in this case, would be substantially more and would attract interest at the mortgage default rate. The Murrays were entitled to know what claim they were facing so that they could make informed decisions in respect of any step they might take in the litigation, including, but not limited to, making an offer of compromise. Accordingly, I would propose that costs, both at first instance and on the appeal, be on a party/party basis only and be the entirety of the costs to which Kyabram and Banksia are entitled

Costs of the Cross-Claim 18 Kyabram and Banksia claim that the costs to which they are entitled on the Cross-Claim are also governed by clause 14 of the mortgage so that they are entitled to those costs on an indemnity basis. I would not accept that claim for the same discretionary reasons relating to the costs of the Statement of Claim. There is, in any event, a question whether clause 14 of the mortgage includes the costs of the cross-claim. 19 The specific terms of clause 14 are those I have emphasised in [9]. It is convenient to repeat them here: "…the Mortgagor will upon demand pay to the Mortgagee … all expenditure incurred by the Mortgagee for or in connection with this Mortgage … or on account of any default … or incidental to the exercise of any right or remedy conferred on the Mortgagee under or by virtue of this [Mortgage]." 20 The question which arises is whether the phrase "the Mortgagor will upon demand pay to the Mortgagee all expenditure incurred by the Mortgagee for or in connection with this Mortgage" is wide enough to include the costs of the defence to the Cross-Claim. 21 A similar question arose for consideration in Leda Holdings Pty. Limited v. Oraka Pty. Limited [1999] FCA 444 where Burchett J at [16] considered the provisions of a lease in which a lessor was entitled to costs on an indemnity basis incurred in connection with an event of default or the tenants non-compliance with its obligations under the lease, including legal costs and expenses. The tenant had brought proceedings against the lessor alleging a contravention of s.52 of the Trade Practices Act. That claim ultimately failed and the lessors were held to be entitled to succeed in enforcement proceedings they had brought against the tenant. In dealing with the lessor's claim for costs on an indemnity basis of the Trade Practices proceedings in accordance with the provisions of their lease, Burchett J held that that action did not fall within the costs provisions in the lease. A similar decision had been made in Quadrascan Graphics Pty. Limited v. Crosfield Electronics ANZ Pty Limited (Carr J, Federal Court of Australia, unreported, 18 May 1995). 22 In this case, the provisions of clause 14 are wider than those contained in the lease to which consideration was given in Leda Holdings. However, when the clause is read as a whole, the phrase "expenditure incurred … for or in connection with the mortgage", does not naturally extend to the costs of defending a claim that the mortgage has been entered into unconscionably or that it was unjust in the circumstances in which it was made. Accordingly, for that reason also, I would refuse to allow costs of the Cross-Claim, either at first instance or on the appeal, on an indemnity basis. Accordingly, I make the following Orders:

The first respondent, Wendy Jill Murray, is to pay the costs of the appellant, Kyabram Investments Pty. Limited, of the proceedings at first instance on the Statement of Claim up until 7 August 2002.

The respondents, Wendy Jill Murray and Robert Ormiston Murray, are to pay the costs of the appellant, Kyabram Investments Pty. Limited, of the proceedings at first instance on the Statement of Claim from 8 August 2002.

The first respondent, Wendy Jill Murray, is to pay the costs of the appellant, Kyabram Property Investments Pty. Limited, of the proceedings at first instance on the Cross-Claim until 28 September 2002.

The first and second respondents, Wendy Jill Murray and Robert Ormiston Murray, are to pay the costs of the appellant, Kyabram Property Investments Pty. Limited, on the Cross Claim from 29 September 2002.

The respondents, Wendy Jill Murray and Robert Ormiston Murray, are to pay the costs of the appeal of the appellant, Kyabram Property Investments Pty. Limited, in appeal No. 40495/04.

All costs are to be assessed and paid on a party/party basis. 24 Appeal No. 40504/2004

1. Set aside Order 13 made in proceedings No. 12184/2001 on 31 May 2004.

2. The appellants, Wendy Jill Murray and Robert Ormiston Murray, are to pay the costs of the proceedings of the second respondent at first instance, Banksia Securities Pty. Limited, on a party/party basis.

3. The appellants, Wendy Jill Murray and Robert Ormiston Murray, are to pay the costs of the appeal of the respondents, Kyabram Property Investments Pty. Limited and Banksia Securities Pty. Limited, on a party/party basis. 25 HODGSON JA: I agree with Beazley JA. 26 IPP JA: I agree with Beazley JA. **********

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