Lava Limited v Avery

LEGISLATION CITED : Civil Procedure Act 2005 s 98(1), s 98(2)

Gomba Holdings UK Limited & Others v Minories Finance Limited & Others (No2) [1993] Ch 171 CASES CITED : Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 National Australia Bank Ltd v Landy Chen-Conway [2008] NSWSC 485 Wentworth v Rogers (No5) (1986) 6 NSWLR 534

PARTIES : Lava Limited Leanne Maree Avery

COUNSEL : M. Condon (Plaintiff/Cross-defendant) R. Alkadamani (Defendant/Cross-claimant)

SOLICITORS : S. Rogers (Plaintiff/Cross-defendant) R. Commins (Defendant/Cross-claimant)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

JUDGMENT on costs 1 HIS HONOUR: When judgment was delivered on 18 March 2009 in these proceedings, costs were reserved. The plaintiff sought an order that the defendant pay its costs on an indemnity basis. The principal foundation for the plaintiff's submission was its entitlement to costs on an indemnity basis pursuant to the Loan Agreement and the terms of the Mortgage. 2 Clause 6.1 of the Loan Agreement (exhibit C) upon which the plaintiff relies is as follows: " Costs The Borrower shall pay the Lender all legal fees (including solicitor and own client fees) and disbursements incurred in relation to the preparation of this Agreement and the Securities and exercise or enforcement by the Lender of its rights under this Agreement and any Securities." 3 Clause 21.2 of the Mortgage (exhibit 1) upon which the plaintiff relies is as follows: " Indemnity The Mortgagor indemnifies and keeps indemnified the Mortgagee, any Receiver, any attorney appointed under this Mortgage and any employee, officer, agent or contractor of the Mortgagee, any Receiver or attorney appointed under this Mortgage, against any liability or loss arising from, and any costs, charges, expenses and liabilities incurred in relation to: (a) the payment, omission to make payment or delay in making payment of an amount referred to in clause 21.1;

(c) all actions, proceedings, costs, claims and demands in relation to the Mortgaged Land including, but not limited to, those arising from the use or occupation of or presence of any person on the Mortgaged Land,

and in each case, including but not limited to, legal costs and expenses on a full indemnity basis or solicitor and own client basis, whichever is the higher."

4 As the defendant is in default under the terms of the Mortgage, clause 21.2 of the Mortgage provides a contractual entitlement to costs on an indemnity basis or in the alternative on a solicitor and client basis (whichever is the higher). 5 In Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87, the Court of Appeal considered the principles relating to a mortgagee's contractual entitlement to costs ordered otherwise than on an ordinary basis.

6 Beazley JA (with whom Hodgson and Ipp JA agreed) said at [12-13]: "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." 7 The terms of Clause 6.1 of the Loan Agreement as to costs are not plain and unambiguous, whereas the terms of clause 21.2 of the Mortgage, in my opinion, are. There could be no misapprehension that upon default the mortgagor's liability for legal costs was otherwise than on an ordinary basis, namely upon an indemnity basis or a solicitor and client basis. 8 The costs of an action are, however, pursuant to s 98(1) of the Civil Procedure Act 2005 (CPA) a matter of discretion. The Court may order that costs are to be awarded on an ordinary basis or an indemnity basis: s 98(2) of the CPA. 9 In Kyabram the Court exercised its discretion and awarded costs on a party/party (ordinary) basis even though the mortgage expressly provided that the mortgagor should be liable to pay costs on a solicitor/own client (indemnity) basis. The basis for that decision was that the claim for solicitor/own client costs had not been pleaded in the statement of claim. As was said by Beazley JA at [16-17]: "16 …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." 10 In the present case the plaintiff claims in the statement of claim; "An order that the defendant pay the plaintiff's costs of and incidental to the proceedings." 11 The plaintiff's pleading does no more than indicate that the claim for costs is on an ordinary basis. 12 Counsel for the plaintiff in submissions cited National Australia Bank Ltd v Landy Chen-Conway [2008] NSWSC 485 where Einstein J had awarded costs to the mortgagee on an indemnity basis. In that case, however, the relief sought expressly included costs on a solicitor and client (or indemnity) basis. 13 When this matter of distinction was drawn to the attention of the plaintiff's counsel, the Court was referred to the affidavit of Donald Gibson sworn 4 June 2008 and filed on 11 June 2008 in which Mr Gibson relevantly states at [3]: "As at the date of swearing this my affidavit the amount owing to the Plaintiff in respect of the Defendant's default of her obligations under the Loan Agreement and the Mortgage amounts to NZ$1,786,264.94 comprising the following: … (iii) NZ$50,794.47 being costs pursuant to clause 21.2 of the Memorandum of Mortgage ." (emphasis added) 14 The plaintiff argued that from June 2008 the defendant could not be mistaken as to the basis upon which the plaintiff sought an order for costs. Alternatively, the plaintiff sought leave to amend the statement of claim. A further contention for the plaintiff in the exercise of the discretion was that the defendant withdrew her defence on the first day of the hearing. Notification of withdrawal of the defence and cross-claim was not provided until the Monday prior to the hearing. 15 Counsel for the defendant contended that if the defence had not been withdrawn, costs, absent the mortgage, would have been awarded on a party and party basis. The defendant should have been commended for taking steps, it was argued, to avoid a hearing on the merits. 16 In an affidavit sworn 16 March 2009 the defendant stated at [4]; "…I accept that there is uncertainty as to the outcome of this defence, and accordingly I have determined that the best course of action is to pay out the Lava Limited mortgage to remove the uncertainty of litigation." 17 The defendant in the amended defence had admitted that the secured moneys were advanced but pleaded, shortly stated, that the plaintiff should be taken to have exercised an option to acquire five million shares in a New Zealand listed company, Plus SMS Holdings Limited, at a price of $NZ1,750,000, which the defendant was entitled to treat as a set-off against the secured moneys. The defendant in the cross-claim sought a declaration that the secured moneys had been repaid and orders for the discharge of the mortgage and delivery of the certificate of title. 18 Whilst weakness in a defendant's case will not ordinarily give rise by itself to an award of indemnity costs: see, for example, Wentworth v Rogers (No 5) (1986) 6 NSWLR 534 per Kirby P at 542, the withdrawal of a defence and cross-claim at a late stage in the proceedings is a factor, in my opinion, which may be taken into account in the exercise of the discretion. 19 The Court of Appeal, it should be mentioned, in Kyabram referred at [14] favourably to the decision of the Court of Appeal in England in Gomba Holdings UK Limited & Others v Minories Finance Limited & Others (No 2) [1993] Ch 171 in which the subject of a general discretion as to costs in cases where mortgagees had a contractual right to costs was considered. When delivering the judgment of the Court in Gomba Holdings, Scott LJ relevantly stated at 194 that "Where there is a contractual right to the costs, the discretion should ordinarily be exercised to reflect that contractual right." 20 In considering the exercise of discretion, I have regard to the following in combination: (i) Clause 21.2 of the Mortgage plainly and unambiguously provides for a contractual entitlement to costs otherwise than on an ordinary basis namely on an indemnity basis; (ii) Where there is a contractual right to costs, the discretion should ordinarily be exercised so as to reflect that contractual right; (iii) The claim for costs in the statement of claim was not pleaded in accordance with the contractual basis. The defendant would not have known that the plaintiff's claim for costs was more than upon an ordinary basis; (iv) It would have been evident, however, to the defendant from paragraph 3 of Donald Gibson's affidavit that the claim for costs was founded upon the plaintiff's contractual entitlement as specific reference was made to Clause 21.2 of the Mortgage. The defendant could not have been taken by surprise that a successful plaintiff would seek costs on an indemnity basis; and (v) The late withdrawal of the defence and cross-claim. 21 I have concluded that the proper order is that the defendant pays the plaintiff's costs on an indemnity basis from 12 June 2008.

(i) The Court orders that the defendant pays the plaintiff's costs of the proceedings on an ordinary basis up to and including 11 June 2008.

(ii) The Court orders that the defendant pays the plaintiff's costs of the proceedings on an indemnity basis from 12 June 2008. **********

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