National Australia Bank Limited v Lavin - [2011] NSWSC 440 - NSWSC 2011 case summary — Zoe

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National Australia Bank Limited v Lavin

[2011] NSWSC 440

Supreme Court of NSW|2011-05-10|Before: Schmidt J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2011-05-10

Before

Schmidt J

Source

Original judgment source is linked above.

Judgment (15 paragraphs)

[1]

Judgment 1By notice of motion filed in April 2011, the second and third defendants, Mr Cunningham and Ms Toppi, sought: "1 A Declaration that the Plaintiff is not entitled to refuse to discharge the mortgage over the Second and third Defendant's property unless they provide security for future legal costs; 2 An order the Plaintiff provide an itemised bill of costs for the legal fees claimed; 3 The Plaintiff account to the second and third defendants for the whereabouts of the assets the subject of the Luxe Studio Leasing Facilities. 4 An order the Plaintiff provide a discharge of mortgage in register able form upon the Defendant providing sufficient funds to discharge the Overdraft facility, the Bill facility, the second and third defendant's credit cards, the outstanding balance of the leasing facility and reasonable legal costs of the proceedings between the Plaintiff and the second and third defendant. 5 Costs; 6 Such further or other order as the Court thinks fit."

[2]

The statement of claim 2By statement of claim filed in June 2010, the plaintiff Bank sought judgment for possession of three properties situated at Darlinghurst and Potts Point, as well as leave to issue writs of possession and judgment for the sum of $7,889,621.11, together with interest from 2 June 2010, as well as costs. 3The first defendant Ms Lavin, was the proprietor of the Darlinghurst property, as well as one of the Potts Point properties, over which the Bank had registered mortgages. Mr Cunningham and Ms Toppi are the proprietors of the other Potts Point property, situated at Wylde St, over which the Bank also has a registered mortgage. 4The Bank claimed that it had provided an overdraft facility to the sixth defendant, as well as a bill facility. By a guarantee and indemnity of October 2008, the first, second, third, fourth and fifth defendants agreed to pay the plaintiff any amounts which the sixth defendant failed to pay, up to $7,768,000, plus costs, expenses, liabilities, taxes, bank fees, charges and interest. The mortgages secured the first, second and third defendants' obligations under the guarantee. 5Receivers and managers were appointed to the fifth and sixth defendants in November 2009, by order of the Court, after the sixth defendant went into default under the overdraft and bill facilities. In January 2010, the Bank served a notice and demand on the sixth defendant, seeking immediate repayment of the sum $7,869,695.37 then owing under the facilities. The demand was not met. 6In March 2010, the Bank made demand on the first, second, third, fourth and fifth defendants to pay the sum of $7,992,765.19, then owing under the guarantee. The demand was not met. On 16 March 2010, default notices were served on these defendants, demanding payment within 31 days of the sum of $8,030,849.51 in respect of the guarantee. The demand was not met and the default not rectified. There was a further demand made in April, which was also not met. The Bank claimed that the first, second, third, fourth and fifth defendants were indebted to it under the guarantee in the sum of $7,889.621.11. 7The proceedings have been resolved against all defendants, except Mr Cunningham and Ms Toppi. Mr Cunningham and Ms Toppi intend to use a portion of the settlement of the sale of their property to repay what is owed to the Bank under their guarantee. It is common ground that there will be a significant surplus from the sale. They then intend to bring proceedings against both the Bank and a receiver it appointed. It is common ground that such proceedings may not be brought against the Bank, until the guarantee is satisfied. What now remains in dispute is what sum, if any, must be paid into Court out of the proceeds of the sale, in respect of the costs of those proposed proceedings.

[9]

The further evidence 23The Bank then put on two affidavits from its solicitor Mr Kang, to which Mr Cunningham and Ms Toppi's solicitor Mr Beazley responded. Both Mr Kang and Mr Beazley gave what is essentially expert evidence. Their expertise was not in question, but the basis on which their respective assumptions rested was. Neither solicitor was required for cross-examination. 24Of necessity, an assessment of reasonable costs, such as here in issue, must rest on assumptions. Unquestionably the assessment task would have been easier, had a draft claim been provided by Mr Cunningham and Ms Toppi, as the Bank had earlier requested. The failure to do so inevitably had an impact on the assessment task. 25For his part, Mr Kang was obviously well placed to make an assessment, given his experience, as well as his knowledge and understanding of what is likely to be involved in litigating the proposed proceedings, given that he has acted for both the Bank and the receiver in relation to matters which will be in issue. Mr Beazley also had relevant experience and his understanding rests on his particular knowledge of the case which is sought to be advanced. 26Mr Kang estimated the Bank's costs of a three day hearing of the proceedings which Mr Cunningham and Ms Toppi proposed to bring against it and the receiver was $206,830 - $342,090, including the possibility of an appeal. He was of the view that even if the Bank and the receiver continued having the same representation, the costs could be higher; but that if there was a need for the receiver to be separately represented, the costs would be even higher. Mr Kang also observed that unanticipated variables could further increase the costs incurred. 27Mr Beazley was of the view that in the ordinary course, the Bank would only be entitled to recover costs from Mr Cunningham and Ms Toppi on a party/party basis, not on a solicitor/client basis. He noted that the contractual arrangements between the Bank and receiver were not in evidence. It was not conceded that the Bank would be liable to meet the receiver's costs. Nor was it conceded that the Bank and the receiver would be entitled to security in respect of the costs of any appeal. 28Mr Beazley had regard to the fact that the Bank's solicitors were also presently acting for the receiver and that they had also acted on the sale of the mortgaged property. They had also acted for the Bank on the mediation conducted in these proceedings. It followed, in his view, that the facts, documents and events which might be in issue in the proposed proceedings were all matters within the knowledge of the Bank's officers, the receivers and their solicitors. 29On that basis, Mr Beazley took issue with Mr Kang's assessment of what might be involved by way of cost in discovery in the proposed proceedings, which would not involve third party documents. In his experience counsel would not be involved in discovery, where he envisaged the only dispute which might arise being in relation to legal professional privilege. Mr Beazley accepted Mr Kang's view as to the necessity to call expert evidence, and while he accepted that senior counsel would be engaged, took issue with the need to have affidavits settled by a partner, junior and senior counsel. He was also of the view that even if separately represented, there would be no necessity for three experts to be called. In this case the Court might appoint a single expert. In his view, even if the receiver was separately represented, the costs would not double, as Mr Kang assessed, given what would be necessary to be done in the Bank's case. Given the issues involved, three days preparation for the hearing was also in his view excessive. 30On Mr Beazley's assessment, the $150,000 offered by Mr Cunningham and Ms Toppi at the hearing would be more than sufficient to cover estimated costs. His estimate of the Bank's reasonable costs was $138,830 on a solicitor/client basis and $111,070, if it were accepted that the Bank had no obligation to indemnify the receiver.

[10]

Onus 31At the hearing, neither party led evidence as to what the Bank's reasonable costs of the foreshadowed proceedings might be, even though that was the issue brought to the Court to have determined. They disputed the question of onus in relation to that matter. 32While Mr Cunningham and Ms Toppi unquestionably had the onus to make out the case which they advanced, an evidentiary onus fell on the Bank to show the basis on which it had assessed that its reasonable costs would be $700,000. In the absence of such evidence, a conclusion that $700,000 did not reflect such an assessment was inevitable, given what was involved in the proposed proceedings by way of evidence and the three day hearing which it was agreed would be required to deal with those claims. 33The Bank claimed that it had no onus and that it was not until the defendants' outline of submissions were served the day before the hearing, out of time, that there was any clear and unequivocal challenge to the amount it had advised. Even then, no evidence was led to which it had to respond. This amounted to an ambush (see Maniotis v JH Lever & Co Pty Ltd [2006] FCAFC 7 at [72]). 34I am unable to accept the thrust of this submission. Clearly, it would have been preferable if the submissions had been served, within the timetable directed. Nevertheless, that the Bank was entitled to have its reasonable costs paid into court was common ground. What was in issue was whether the amount it required to be paid, reflected a reasonable assessment of its costs. The Bank was not contractually entitled to require payment into court of any amount which it arbitrarily selected. Having advised the figure of $700,000 on 30 March; being expressly asked that day, amongst other things, 'how is the $700,000 contingent liability derived at?'; having responded on 1 April, without providing any answer, that this reflected the Bank's reasonable costs was not apparent from any information it had provided. 35The Bank was then met with a motion which sought a declaration that the Bank was not entitled to refuse to discharge the mortgage unless provided with 'security for future legal costs'. In those circumstances, that it was not known to the Bank that its claim to be entitled to retain $700,000 out of the proceeds of the sale of the mortgaged property was in issue, until it received the defendants' submissions, may not be accepted. That was the question which brought the parties to Court. 36It was finally revealed that the $700,000 figure was one which the Bank's counsel had selected. It was not based on any analysis of what the actual costs of dealing with the foreshadowed litigation might be. Given the questions in issue in the foreshadowed litigation, which the parties were agreed would require three days to hear, with both identified expert and lay evidence to be called, that the sum of $700,000 was on its face a figure which can not have reflected a reasonable assessment by the Bank as to its costs, even if an appeal had to be pursued, was apparent. That is what led me to observe at the hearing that the assessment seemed too high and that if I came to the view that it was, a difficulty arose, because neither party had put on any evidence, upon which a reasonable figure might be assessed. 37In the circumstances it was evident that both parties had failed to approach the hearing of the motion adequately, having in mind what was in issue and having regard to the obligations imposed on them by the Civil Procedure Act 2005, particularly s 56. That section requires parties to assist the Court to achieve the overriding purpose of the legislation; the just, quick and cheap resolution of the real issues in the dispute. Those deficiencies have now been remedied. 38Had the matter rested as it did when I initially reserved my decision, I would not have been able to accept that the Bank was entitled to retain $700,000. That figure on its face was extravagant and could not have reflected a reasonable assessment of the costs of the foreshadowed litigation.

[11]

An order must be made in favour of Mr Cunningham and Ms Toppi 39While I accept that the Bank must be properly criticised for the approach it adopted to the question of its estimation of its reasonable costs of the proposed proceedings, I am not able to accept Mr Cunningham and Ms Toppi's primary position, that as the result of its conduct, the Bank is not entitled to have any money paid into Court in respect of the contingent liability which has arisen, particularly given their failure to provide even a draft pleading. 40The Bank relied on the terms of its mortgage and the decision of Young J in Estoril Investments Pty Limited v Westpac Banking Corporation (1993) 6 BPR 13146 where his Honour considered the impact of an all moneys mortgage as here in issue (see at 131,58). Reliance was placed by Mr Cunningham and Ms Toppi on the observations of Hodgson JA in Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27, with whom Handley and Stein JJA agreed : "60 Turning to the question of costs, the Supreme Court Rule raises two questions: first, are the relevant costs incurred "in the capacity of a ... mortgagee"?; and if so, did the mortgagee act unreasonably? Under the mortgage itself, there are questions similar to the first question, namely whether the costs are "in respect of the mortgage" or in respect of something that the mortgagee is permitted to do under the mortgage. 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. 63 Another relevant matter is that the mortgagee failed to give a payout figure which bears any reasonable relationship to the amount truly required to pay out the mortgage. Where a dispute has arisen or is reasonably anticipated, a mortgagee is entitled to require not merely payment of the amount secured by the mortgage but also payment or security for the probable costs of any contest: see Bank of New South Wales v. O'Connor (1889) 14 App.Cas. 273; Project Research Pty. Limited v. Permanent Trustee of Australia Limited (1990) 5 BPR 11,225. If the mortgagee does not specify a payout figure which bears some reasonable relationship to the amount truly owing and anticipated costs, then this may amount to unreasonable conduct or misconduct which disentitles the mortgagee to costs subsequently incurred in determining the rights of the parties: see Cotterell v. Stratton (1872) LR 8 Ch.App. 295, In Re Watts (1882) 22 Ch.D. 5, Rourke v. Robinson [1911] 1 Ch. 480, Webb v. Crosse [1912] 1 Ch. 323, Charles v. Jones (1885) 35 Ch.D. 544, and Heath v. Chinn (1908) 98 LT 855. Furthermore, where the mortgagee does not require payment or security for the probable costs of any contest, and a question later arises as to whether the mortgagor's tender was sufficient to entitle the mortgagor to redemption, the mortgagee cannot then claim that the tender was insufficient because it did not include provision for those costs: I know of no direct authority for that proposition, but in my opinion it follows from the principles I have discussed." 41In my view, the Bank's unsupported assertion that its costs, and those of the receiver for which it was responsible, would be $700,000 was not a basis upon which it would be concluded that this represented a reasonable estimate of future costs, with the result that it was not entitled to have any such sum set aside on a contingent basis. There is, however, now evidence before the Court, on which the question of what the contingent liability is may be resolved. In my view, that evidence may not be ignored. 42The result of my assessment of that evidence is that while they fail in their primary application, Mr Cunningham and Ms Toppi must have an order in their favour on their motion.

[12]

The amount to be retained 43Both parties have led evidence from their solicitors, on which an assessment of what the Bank's reasonable costs of the foreshowed litigation might be, can rest. 44The issues which would lie between the parties were identified in the defence, as earlier outlined. Breach of the Bank and the receiver's obligations are raised. It was also common ground that the issues raised meant that both the Bank and the receiver it had appointed, would have to be parties to the proceedings, which would take three days to hear. They are presently represented by the same solicitor, as they have been in the past. 45Mr Beazley's approach was criticised by the Bank as retreating from some common ground earlier achieved in the cases advanced. There seems to me some basis for that criticism. It was also submitted that Mr Beazley's affidavit revealed that other issues not foreshadowed in the defence might arise in the proposed proceedings and that this would increase the costs involved. It was not suggested, however, by either party that the result of the issues so identified, would increase the length of the estimated hearing. Given the nature of the claims foreshadowed in the defence and the allegedly further issues alluded to by Mr Beazley, I am of the view that they could all reasonably be encompassed in a three day hearing and that they are unlikely to have a significant impact on costs. I have also taken into account that Mr Kang's estimates of costs seem to me somewhat generous, albeit not generally unreasonable. 46I accept that it was reasonable for the Bank's assessment to reflect its costs on an indemnity basis, given a mortgagee's usual contractual entitlement to its costs (see for example Kyabram Property Investments v Murray [2005] NSWCA 87 at [12]). The terms of the mortgage have been admitted in the pleadings. It has not been sought to be established that this is a contractual right which the Bank does not have in this case. Had that been shown, the result would have been a conclusion that the Bank's assessment, in this respect, was not reasonable, but that was not attempted. 47I have reached a similar conclusion in relation to the question of the Bank's obligation to bear the receiver's costs. Mr Kang's assessment rested on his understanding that the Bank was contractually bound to meet the costs of the receiver it had appointed. That this is a usual commercial basis for such an appointment, may well be accepted. It explains their common legal representation. It has not been sought to be established that his understanding was wrong. 48It also follows, however, that unless some conflict emerges, it is likely that the current common representation of the Bank and the receiver will continue. There is nothing on the material which the parties have put forward, which suggests that such a conflict is likely to emerge. Additionally, account must be taken of the fact that ordinarily, notwithstanding a contractual obligation to indemnity the receiver as to costs, in circumstances such as those which have here arisen, the receiver is an agent of the mortgagor, not the Bank (see ss 115 and 115A of the Conveyancing Act 1919 , for example). That, too, supports the view that it is likely that the current common representation of the Bank and the receiver will remain on foot. 49In his affidavit, Mr Kang said that 'it is not clear to me whether the receivers would have to be separately represented. I have assumed that they will.' In my view it is likely that the current common representation of the Bank and the receiver will continue and in the absence of any basis for an assumption that this will not be the case, an assessment of reasonable costs must reflect the likely continuation of the same representation. 50There is a disagreement between the parties' solicitors as to the detail of the costs likely to be involved in the proposed proceedings. Mr Kang's assessment has regard to identified issues which Mr Cunningham and Ms Toppi wish to agitate against the Bank and the receiver. The assessment was also criticised by Mr Beazley as unnecessarily involving solicitors and counsel. There is some basis for that criticism, it seems to me, but having in mind the view to which I have come, that the work which will be undertaken will be for both the Bank and the receiver, I think that the assessment, overall, may be accepted as reasonable. I have come to the same view in relation to preparation. 51I do not accept the view that the Bank is not entitled to have account taken of the possibility of an appeal. Whoever fails at first instance could potentially pursue that course, thereby generating further costs for the Bank, for which in my view some accommodation must be made by way of contingency. 52For the reasons given, I have concluded that the Bank's reasonable costs must be assessed at $343,000.

National Australia Bank Limited v Lavin

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Judgment (15 paragraphs)

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