Lum v M V Developments

Supreme Court of NSW|2016-09-07|Before: Darke J, Mr J

Introduction

The plaintiffs in these proceedings seek orders for specific performance of contracts entered into on 29 June 2012 with the first defendant for the purchase of certain residential property in Lane Cove. There is no longer any dispute that orders for specific performance should be made in favour of the plaintiffs. The proceedings have also resolved between the plaintiffs and the second and third defendants, each of whom had lodged caveats in respect of the relevant properties.
There is an outstanding issue of costs as between the plaintiffs and the first defendant. Directions were made for the provision of written submissions and the matter was listed before the Court on 12 August 2016. Due to time pressures in the list on that day, it was agreed that the issue would be dealt with on the papers. In addition to comprehensive written submissions, the Court was provided with a Court Book which contains relevant documents.
In brief, the plaintiffs seek orders that their costs be paid by the first defendant or the liquidators of the first defendant, in a fixed sum, and on the indemnity basis. They also seek to set-off against those costs the outstanding balance of the purchase price payable under the contracts for sale. Only $49,500 of the purchase price remains unpaid under each contract.
The first defendant and its liquidators accept that the plaintiffs are entitled to orders for costs in their favour against the first defendant. They resist any orders against the liquidators personally, or orders for a fixed sum, or orders on the indemnity basis. They also resist the claimed set-off.
For the reasons which follow, it is my opinion that the appropriate order for costs pursuant to s 98 of the Civil Procedure Act 2005 (NSW) is that the costs of each plaintiff up to 2 May 2016 be paid by the liquidators of the first defendant on the ordinary basis, and the costs of each plaintiff thereafter be paid by the liquidators of the first defendant on the indemnity basis.

Procedural history

The proceedings were commenced on 10 September 2015. At that stage, the first defendant was the only defendant. The proceedings were commenced following the service on about 25 August 2015 by the first defendant (then under administration) of lapsing notices in respect of the caveats the plaintiffs had lodged claiming interests pursuant to the contracts for sale. The service of the lapsing notices was procured by the liquidators, then acting as the administrators of the first defendant.
On 17 September 2015 I heard and determined an application for orders extending the operation of the caveats. Such orders were opposed by the first defendant (which had gone into liquidation on 31 August 2015, between the time of service of the lapsing notices and the commencement of the proceedings) on the basis that the plaintiffs' claims for specific performance would be defeated by a defence of impossibility. It was contended that there was no practical possibility of the first defendant being in a position to discharge the mortgages and procure removal of the other caveats over the properties. I concluded that, whilst the first defendant might ultimately have a good defence to the specific performance suits, the plaintiffs' claims had substance and the balance of convenience favoured extending the operation of the caveats. Orders to that effect were made. The first defendant was ordered to pay the costs of the application.
The plaintiffs subsequently filed an Amended Summons joining the second and third defendants as parties. As mentioned earlier, the proceeding as between the plaintiffs and the second and third defendants have resolved. Consent orders were made by the Court on 8 April 2016 (dealing with the position of the third defendant) and on 29 April 2016 (dealing with the position of the second defendant). Amongst the orders made were orders to the effect that the plaintiffs and the second and third defendants pay their own costs in relation to the relief sought in paragraphs 19A to 19J of the Further Amended Summons.
On 10 June 2016 the first defendant filed a submitting appearance (save as to costs) in relation to the claims made by the plaintiffs.

Should the liquidators be ordered to pay the plaintiffs' costs, and if so, should any of the costs be paid on the indemnity basis?

The plaintiffs submit that the conduct of the liquidators was unreasonable in various respects. The criticisms are described in the letter from the plaintiffs' solicitors of 24 May 2016. Emphasis is placed upon the conduct of the liquidators in issuing the lapsing notices and in stating on 2 September 2015 that they intended to ignore the contracts for sale and sell the properties to third parties. The letter of 24 May 2016 included the following: By issuing the lapsing notices and asserting that they would ignore the contracts and sell the properties to other parties, your clients forced our clients to commence the Proceedings in order to protect their interests in the properties. All costs in these proceedings have stemmed from those unreasonable acts and (as explained below) from the subsequent unreasonable conduct of the proceedings by your clients.
The plaintiffs further submit that in any event it is appropriate that the liquidators pay the costs because the proceedings were brought about by the liquidators' action in issuing the lapsing notices. Reference was made to the decision of Rein J in AMC Commercial Cleaning (NSW) Pty Limited v Coade (No 2) [2013] NSWSC 332 in which his Honour ordered that a liquidator pay the costs of a party where the liquidator's actions forced the party to come to Court to obtain monies which on their face were due to it. Rein J held that in those circumstances the liquidator, who had "initiated" the proceedings, ought not be treated as a defendant with the protection against costs orders generally available in that class of case (see at [7] and [10]).
The plaintiffs seek costs on the indemnity basis due to the conduct complained of, as well as the failure of the liquidators to accept Calderbank offers made on 2 May 2016 and 24 May 2016. Those offers were to the effect that the plaintiffs would accept $99,000 in total for their costs, with such amount to be set-off against the total amount of unpaid purchase price of $99,000.
I have considered the evidence in relation to the issuing of the lapsing notices and the conduct of the liquidators in the period leading up to the commencement of the proceedings. It is clear that the issuing of the lapsing notices, coupled with the expressed attitude of the liquidators, caused the plaintiffs to commence the proceedings.
The plaintiffs were each purchasers who had paid all bar $49,500 of the contract price for their respective properties. Their caveats claimed proprietary interests pursuant to such contracts. Prima facie, the plaintiffs' claims had substance. The issuing of lapsing notices meant that unless the plaintiffs came to Court and obtained an order extending the operation of their caveats, the caveats would lapse. On 2 September 2015 the plaintiffs sought the withdrawal of the lapsing notices. The liquidators promptly responded that they maintained their position. In letters sent to the plaintiffs' solicitors on 2 September 2015 in relation to each contract, the solicitors for the liquidators stated, inter alia: We are instructed that the registered mortgagee has indicated to our clients that it will not be in a position to discharge its mortgage at settlement of the sale of the Property, unless it is provided with the full purchase price (including the deposit) in clear funds at settlement. Ta Lee Investment Pty Limited has also indicated that it will not provide a withdrawal of its caveat at settlement unless the full purchase price (including the deposit) is paid at settlement. The other caveators will potentially take the same position. Our clients are therefore not in a position to settle the Contract without the full purchase price being made available (including the missing deposit) at settlement. Our clients hereby put your client on notice that they intend to ignore the Contract and proceed to market the Property for sale after 7 days from the date of this letter.
In my opinion the position thus taken by the liquidators was unreasonable (see Adsett v Berlouis (1992) 37 FCR 201 at 211-2; Mead v Watson [2005] NSWCA at [147]).
I cannot discern any reasonable basis for the liquidators to ignore the contracts and proceed to sell the properties. Moreover, having considered the explanation put forward by the liquidators, I do not see how the issuing of lapsing notices at that time could reasonably be seen as likely to bring any benefit to the first defendant or its creditors. The plaintiffs apparently had caveatable interests, regardless of whether there were other claimants with a higher priority. Whilst the first defendant may not have been in a position to complete the plaintiffs' contracts immediately or in the short term, it should have been appreciated that circumstances may change (as they ultimately did). It was not necessary for the lapsing notices to issue at that time. However, issuing and maintaining the lapsing notices inevitably exposed the first defendant to litigation in which the prospects of having the caveats lapse should have been seen as remote.
In any event, this is a case, like AMC Commercial Cleaning (NSW) Pty Limited v Coade (No 2) (supra), where the actions of the liquidators have forced the commencement of litigation and where the liquidators may hence be properly regarded as the instigators of the litigation. They are not in my view to be treated as true defendants.
The stated attitude of the liquidators, together with the lapsing notices, effectively forced the plaintiffs to commence the proceedings. To do otherwise would risk losing any proprietary interest they had, leaving them with only personal claims against the insolvent first defendant. Moreover, a caveator seeking to extend the operation of caveat is ordinarily required to seek final relief in vindication of the claimed interest in the property. In this case that meant the prosecution by the plaintiffs of their claims for specific performance.
Even after the plaintiffs succeeded in obtaining orders extending the operation of the caveats, the liquidators continued to resist the plaintiffs' claims for specific performance. I do not think that this resistance was unreasonable, but it must be seen in the context of litigation effectively brought about by their own actions. I do not accept the contention that specific performance proceedings would have been commenced and carried on by the plaintiffs even if the lapsing notices had not been issued. If the liquidators had not issued the lapsing notices the current position is likely to have been reached without any need for the plaintiffs to resort to litigation.
Once the registered mortgagees had been paid out, and the plaintiffs had reached accommodations with the second and third defendants, there was no reason for the liquidators to further resist the plaintiffs' claims. That was the situation from 29 April 2016.
The plaintiffs' Calderbank offer made on 2 May 2016 referred to the plaintiffs having incurred costs in excess of $200,000 on a solicitor and client basis by that time. There is no reason to doubt that, having regard to the affidavit sworn by the plaintiffs' solicitor, Mr Frawley. The offer embodied a real element of compromise; the plaintiffs stated they were prepared to accept a total of $99,000 in costs, albeit to be set-off against the remaining liability of $99,000 under the contracts.
The offer was open for acceptance for a period of only seven days. The liquidators, by their solicitor's letter of 9 May 2016, complained that the period was unreasonably short in the circumstances, but nonetheless gave detailed reasons as to why it was not reasonable to accept the offer. These reasons were, first, that the consent orders made on 8 April 2016 and 29 April 2016 concerning the second and third defendants did not envisage that the plaintiffs might not (due to the operation of a set-off) pay any money to the first defendant on completion of the contracts, and, second, that the first defendant ought not in any event be subject to an adverse costs order. The liquidators advanced a counter-offer which included the making of no order as to costs.
The plaintiffs' solicitors letter of 24 May 2016 put forward an explanation as to why it was unreasonable not to accept the offer of 2 May 2016, and why acceptance of the offer would be a beneficial outcome for both the liquidators and the creditors of the first defendant. I consider such explanation to be sound. In particular, I agree that the orders made on 8 April 2016 and 29 April 2016 do not restrict the terms upon which the first defendant could agree to complete the contracts with the plaintiffs. Further, given that the litigation was effectively brought about by the liquidators' own conduct, acceptance of the offer ought to have been seen as beneficial for both the liquidators and the creditors of the first defendant. I have concluded that in the circumstances it was unreasonable of the liquidators to reject the plaintiffs' Calderbank offer of 2 May 2016.
It follows from the above that the plaintiffs' costs of the proceedings should be paid by the liquidators. I am not, however, satisfied that these costs should be paid on the indemnity basis for the period to 2 May 2016. Although I have concluded that the position taken by the liquidators in forcing the commencement of these proceedings was unreasonable (to an extent that a personal costs order is warranted), I am not satisfied that their conduct was so egregious or unreasonable as to warrant payment on the indemnity basis of costs incurred prior to the plaintiffs' Calderbank offer. The plaintiffs' costs should be paid by the liquidators on the ordinary basis up to 2 May 2016, and thereafter on the indemnity basis.

Should a fixed sum order be made?

The plaintiffs seek a gross sum costs order pursuant to s 98(4)(c) of the Civil Procedure Act. Five reasons are advanced in support of such an order. These are: 1. that the manner in which the liquidators have conducted the proceedings has unnecessarily and significantly contributed to their cost; 2. that such orders would avoid the expense and delay involved in a contested costs assessment, where there is every reason to believe the parties will be unable to agree upon an amount of costs; 3. that the plaintiffs have adduced evidence to enable the Court to have confidence that the amount of costs sought is appropriate; 4. that the making of fixed costs orders is consistent with the overriding purpose referred to in s 56 of the Civil Procedure Act; and 5. that the first defendant is impecunious and the plaintiffs are unlikely to recover costs if they are awarded against the first defendant and assessed in the ordinary course.
Three of those matters have not been made out. First, I am not persuaded that the conduct of the proceedings by the liquidators unnecessarily contributed to the plaintiffs' costs to any significant degree. The particular complaints about the service of excessive evidence, and taking an obstructive approach to requests for documents and Notices to Produce issued by the plaintiffs, have not in my view been established.
Secondly, whilst it is true that the liquidators did not accept the plaintiffs' offers in respect of costs made in May 2016, I do not think that it follows that the liquidators, faced with a costs order against them personally, would be unwilling to agree upon a reasonable amount for such costs.
Thirdly, the impecuniosity of the first defendant falls away as a factor given that the plaintiffs will obtain orders for costs against the liquidators personally.
I do agree that the evidence of Mr Frawley provides a basis upon which an amount of costs could be calculated for the purposes of a gross sum costs order. However, the question is whether it is appropriate in the circumstances, having regard to the overriding purpose referred to in s 56 of the Civil Procedure Act, to make such an order rather than allow the usual process to occur.
Despite the finality that a gross sum costs order would bring, I am not satisfied that it would be preferable in this case. The costs claimed are considerable. The plaintiffs and the liquidators can be expected, through their respective solicitors, to seek agreement as to quantum. There is no reason to think that the participants (involving experienced solicitors and liquidators) will be unreasonable about the matter. A process of costs assessment undertaken by an experienced assessor, and able to be resorted to if necessary, is likely to facilitate a just outcome in these circumstances.

Set-off

The plaintiffs submitted that, if a fixed sum costs order is made, it should be set-off against the amount to be paid to the first defendant under the contracts for sale.
This issue does not arise in circumstances where no fixed sum costs order is to be made and where the costs order is to be made against the liquidators.

Specific performance

The plaintiffs provided a draft form of order that includes declarations and orders concerning the contracts for sale and the performance of such contracts. Declarations and orders essentially as sought by the plaintiffs should be made.

Conclusion

The orders of the Court are: 1. Declare that the contact for the sale of the land contained in Folio Identifier 49/SP85782 and situated at 49/3-9 Finlayson Street, Lane Cove, NSW (Lot 49), between the first plaintiff as purchaser and the first defendant as vendor, dated 29 June 2012 (the Lot 49 Contract), is valid and enforceable. 2. Declare that the contract for the sale of the land contained in Folio Identifier 50/SP85782 and situated at 50/3-9 Finlayson Street, Lane Cove, NSW (Lot 50), between the second plaintiff as purchaser and the first defendant as vendor, dated 29 June 2012 (the Lot 50 Contract), is valid and enforceable. 3. Order that the Lot 49 Contract be specifically performed and carried into effect forthwith. 4. Order that the Lot 50 Contract be specifically performed and carried into effect forthwith. 5. Order that the Lot 49 Contract and the Lot 50 Contract be completed on or before 21 September 2016. 6. Declare that the balance of the purchase price in respect of the Lot 49 Contract and the Lot 50 Contract, being $49,500 each, is due and payable on the date appointed for completion of those contracts in accordance with Order 5 of the these Orders. 7. Order that the costs of the plaintiffs up to 2 May 2016 be paid by the liquidators of the first defendant on the ordinary basis, and the costs of the plaintiffs thereafter be paid by the liquidators of the first defendant on the indemnity basis.

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: 07 September 2016

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