On Friday, 27 September 2019, the plaintiff, Omaya Investments Pty Limited, terminated its retainer of the defendant, Project Lawyers Pty Limited ("the solicitors"), who until then had been conducting certain proceedings in the Land and Environment Court. The plaintiff ("the client") disputes the memoranda of fees claimed by the solicitors upon termination of the retainer. The solicitors claim a lien over their file to secure payment of their fees, and have declined to transfer their file to new solicitors and to allow counsel to be briefed. But the client wants to engage other lawyers quickly, as the Land and Environment Court proceedings are all to continue soon.
Attempts were made to resolve the impasse. But when those attempts were unsuccessful, the client commenced these proceedings in the duty list on 10 October 2019. The client had offered in negotiations to enter into a deed to provide security for the solicitors' unpaid costs by way of an equitable charge over unencumbered real estate held by a third party in the northern suburb of Neutral Bay ("the Neutral Bay property"). The solicitors had declined to accept that form of security on the basis that such an interest was potentially defeasible in a number of ways that meant it was a less than satisfactory security in substitution for their existing lien.
The client now seeks production of the file from the solicitors under the power conferred on the Court by the Legal Profession Uniform Law (NSW), s 472. The principles governing the operation of s 472 are well-established. On the application of a client, the Court may order the solicitors to give the client a bill of costs and to give to the client the client's documents in the solicitors' possession "on any conditions that the Supreme Court may determine": s472(1). The security ordered in lieu of payment should, objectively speaking, constitute "something of monetary value which would ensure the satisfaction of the possessory lien. Like should be replaced with like": Bechara t/as Bechara & Co v Atie [2005] NSWCA 268, (at [64]); see also Gigi Entertainment Pty Limited v Basil John Macree [2011] NSWSC 856.
Omaya Investments Pty Ltd v Project Lawyers [2019] NSWSC 1394 | Case summary | Zoe
This is an appropriate case for the exercise of the jurisdiction. The documents are urgently required for the Land and Environment Court proceedings, which are to resume on 30 October 2019. It is not in issue that, subject to clarification of the quantum of the final memoranda of fees, the client is up-to-date in paying the solicitors' legal costs and disbursements. The bulk of the unpaid invoices are not due until 11 and 14 October 2019 respectively. And open offers of substitute security have been made by the client. A dispute about the reasonableness of the solicitors' fees and charges is likely. The final amount of fees due (said to be in the order of $520,000) will potentially take some time to assess. The client has paid very substantial amounts of fees (over $1 million) over the last 18 months to the solicitors.
This was the position when the proceedings were filed on 10 October 2019. But by the time the matter was heard in the duty list on 11 October 2019, the client was offering first mortgage security over the Neutral Bay property, the registered proprietor of which is a corporate entity, 11 MR Developments Pty Limited, which the Court understands is controlled by the principals of the client. The proposed first mortgage would therefore be a third party mortgage, securing the client's liability to the solicitors through the provision of this security by this third-party corporate entity. The solicitors did not dispute that first mortgage security was an adequate substitute for their lien. They took issue with some of the terms and conditions of the proposed first mortgage.
Before the matter was argued the parties at least had a brief opportunity to exchange some limited information about the Neutral Bay property. As a result of this limited investigation period, the solicitors proceeded with the proposal to accept a first mortgage over this property. From this, the Court infers that the solicitors were reasonably satisfied as to the security value of this piece of real estate in Neutral Bay.
At the time of the argument in Court, it was acknowledged that the solicitors held $30,000 of the client's funds in their trust account. By agreement, the client authorised the transfer of these funds to meet indisputable disbursements, such as filing fees, daily court hearing fees and transcript fees.
Some urgency attended the hearing on the afternoon of 11 October 2019. The client wanted to deliver documents to solicitors and counsel for conferences that afternoon. The Court indicated: that it would make orders for the substitute security by way of first mortgage; but that it would reserve for further consideration issues concerning the final form of the mortgage. Those orders were made and the documents were delivered to counsel that afternoon.
The solicitors have proposed a number of amendments to the form of the first mortgage offered by the client. The proceedings have come down to a contest about the reasonableness of the provisions that the solicitors are stipulating should be included in this first mortgage. The solicitors submit that these terms are necessary for inclusion in the mortgage for the protection of their interests. The client contends that they are neither necessary nor reasonable.
These reasons now deal with each of the matters in issue. The Court need not set out the full detail of each of the terms in dispute: a general description will be sufficient to identify the nature of the dispute for its resolution in each case. The parties will then be in a position to prepare a final form of mortgage and bring in orders that identify it.
Loss of value - an event of default. One of the events of default under the mortgage occurs if "the value of the Property falls below" a particular nominated amount. The solicitors seek to nominate an amount of $1 million in this clause. The client seeks to nominate an amount of $600,000. The parties cannot agree and the Court is asked to determine what the nominated amount should be.
The client says that $600,000 is the maximum figure that should be placed in this clause. The client submits that this is appropriate because the total amount of the fees in dispute is about $520,000. The solicitors say that, when all the potential liabilities of the client in relation to a cost assessment are taken into account, the figure of $1 million is necessary in this clause.
There is merit in the solicitors' argument on this issue. It is important from the solicitors' perspective that, should the value of the property unexpectedly fall below the amount sought to be recovered under the mortgage, an event of default be triggered so that the solicitors can limit the losses they may potentially suffer from a fall in the security value of the property. The trigger for such an event of default should be set at a realistic level which takes account of the potential liabilities that might arise under the mortgage, including in relation to its enforcement.
The client's liability under the mortgage may exceed the nominal amount of the fees by a substantial sum. A combination of the costs assessment, interest, the costs of review proceedings and the like, together with costs of enforcement and the exigencies of a mortgagee sale could potentially push the liability of the client well above the invoiced amount of $520,000. But in the Court's judgment, $600,000 is too low and $1 million is too high for this figure. The Court determines $850,000 as an appropriate figure to be inserted into this clause to anticipate the potential cost of such additional contingencies.
Additional events of default - undertakings. The solicitors claim that it should be an additional event of default if "the mortgagor…breaches any undertaking… or any condition imposed by the mortgagee". The client says this is far too wide. To the extent it would apply to undertakings given to the Court, then the Court's remedies should already suffice. And if "undertaking" is meant merely to encompass the other covenants of the mortgage, then the existing provisions of the mortgage are already sufficient to capture all such breaches as events of default. This provision need not be inserted in the mortgage.
Additional events of default - voidness or illegality. The solicitors seek to insert a provision that would make it an event of default if any provision of the mortgage "became or…is alleged or claimed by the mortgage or… to have become… void, voidable, illegal, invalid, unenforceable or otherwise of limited or reduced force". The client answers this by saying that clause 11.5 of the mortgage would sever any such provision, so the enforceability of the balance of the mortgage would not be impaired by such an allegation of invalidity.
But the solicitors say that should the mortgage fail as a security there should still be a personal obligation created by the default. There is merit in this, which is not fully answered by the severance argument. The mortgage will be permitted to include this provision.
Timing and the definition of "secured money". The solicitors seek to add into the definition of "secured money" a provision which means that if the solicitors' outstanding invoices have not been assessed or reviewed by 12 January 2020, in accordance with the mechanism contemplated by the mortgage, then the "secured money" will be defined from that date as the "full amount of the outstanding invoices".
The client objects to the inclusion of this provision. Its objection is sound. Through no fault of either party, the cost assessment may not be completed by 12 January 2020. Factors such as the availability of cost assessors, enquiries by a cost assessor in relation to particular charges, the need for review of a cost assessment, or unavoidable delay in obtaining documents from third parties, may lead in substance to the client having an obligation to pay the full amount due on the invoices and then to seek it back from the solicitors the difference between the amount found to be due on the assessment and the amount of the invoice. The insertion of such a provision means that on an event of default after 12 January 2020 the full amount would be payable.
But a reasonable substitute security for a lien would not include such a requirement. The first mortgage is adequate security and no less secure than a possessory lien over the solicitors' file in this case. Had the lien persisted, and the first mortgage not been introduced as a substitute security, such a provision would not have operated to the disadvantage of the client. When fixing a reasonable substitute for the solicitors' lien, I see no good reason why that provision should be inserted now.
But the solicitors are concerned that if such a provision is not included, the client will not have any incentive to proceed with the costs assessment. Discipline over the progress of the costs assessment can be imposed in other ways. Each party will be required to provide to the Court an undertaking to cooperate with the other party and the cost assessor in the expeditious conduct of the costs assessment contemplated by the first mortgage ("the expedition undertaking"). These proceedings can be kept on foot for the limited purposes of seeing the Court's supervision through to the end of the costs assessment. Liberty to apply will be granted. The terms of the mortgage can include a provision that an event of default will occur if there is a finding by the Court of a breach of the expedition undertaking. The parties can bring in short minutes order to give effect to this part of the Court's reasons and should redraft the mortgage accordingly.
Unregistered mortgage. The solicitors propose the insertion of a number of provisions which would only apply "at any time during which the mortgage is not registered". But the Court has already on 11 October made interim orders for the registration of the mortgage, subject to the settlement of its more detailed terms as a result of these reasons. There will be no scope for the operation of a clause relating to a period when the mortgage is unregistered. This proposed clause should not be included.
Rights on default. The solicitors propose the insertion of a number of provisions which would expressly set out the mortgagee's rights on default. Looking down the list, most of these rights are already included in Real Property Act 1900, ss 57 and 58. Some of them may not be. Rather than requiring an unnecessary audit of additional rights on default additional to those set out in the Real Property Act, this full list of express rights can be included in the final form of mortgage. None of the express rights on default proposed to be added appear to be oppressive or unreasonable. Most of them are commonly seen in commercial mortgages and many are found in Real Property Act, Part 7, Division 3. Little harm is done and less cost will be incurred by the inclusion of these express rights on default, as they are without further time consuming analysis.
Indemnity Clause. The solicitors propose the insertion of a number of provisions in which the mortgagor would indemnify the mortgagee against claims, demands and losses arising from a number of identified events. Most of the events triggering the indemnity clause are events that could give rise to losses on the part of the solicitors and should be included. For example, the solicitors as first mortgagee should be indemnified against a failure to pay land tax or other imposts levied on the Neutral Bay property and should indemnify the mortgagee arising from claims by tenants. But I see no need to include an indemnity: in relation to the mortgagee's exercise, or non-exercise, of its own powers; in relation to the mortgagee assuming obligations in relation to the Neutral Bay property (the obligations either arise or they do not); or in relation to provisions that only apply to strata schemes.
Finally, if they wish, the parties can put submissions as to costs. But before they incur the further costs of doing so, the Court might observe for their benefit that this is a case where the appropriate costs outcome may not unreasonably be that each party bear its own costs of the proceedings. Plainly, some urgent action was required and it was reasonable of the solicitors to commence proceedings. But the form of security ultimately offered by the client was a form security that eliminated all argument for the purposes of speeding up the outcome. The offer was partly responsive to criticisms that came back quickly from the solicitors to the originally proposed security. But the Court has not concluded adversely to the client that the security originally offered would not have been acceptable. That remains an undetermined question. And when it comes to the argument about the terms of the mortgage that occupied most of the parties' time in the courtroom, the result was one of mixed success on both sides.
If the parties wish to argue further about costs they can contend for whatever costs result they wish, as the appropriate costs order is an open question. The Court will make directions for costs submissions to be made. But each party should be mindful that any party that puts costs in issue, and fails to move the result beyond the one that has been foreshadowed here, may be the subject of an application for the costs of this additional argument.
Each party has had some success in relation to the terms in contention for the proposed first mortgage over the Neutral Bay property. For the reasons given, the Court will therefore make the following orders and directions:
1. Direct the parties to bring in short minutes order to give effect to these reasons, noting that if the parties cannot agree upon an appropriate form of the expedition undertaking then the Court will settle its text.
2. Direct the parties, if required, to exchange submissions of no more than three pages in relation to the costs of these proceedings by Friday, 18 October 2019.
3. Direct the parties, if required, to exchange submissions in reply of no more than two pages in relation to the costs of these proceedings by Wednesday, 23 October 2019.
4. Note the Court intends, if required, to deal with costs in chambers upon receipt of the submissions. But if the parties agree upon costs they can submit consent orders to the Court which will be dealt with in chambers.
5. Grant liberty to apply.
6. The proceedings will otherwise be adjourned to the Registrar's list at 9am on 9 March 2020.
7. If the parties do not wish to take advantage of the liberty to apply and there is no residual matter to be dealt with on 9 March 2020, then the proceedings may be dismissed on that occasion.
[2]
Amendments
15 October 2019 - [27] Orders (6) and (7), date "7 March" changed to "9 March 2020"
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Decision last updated: 15 October 2019