Plaintiff v Defendant

Supreme Court of Victoria|2010-06-17|Before: J FORREST J

COSTS - Issue based orders - Solicitor/client costs order consequential on contractual indemnity.

INDEMNITY - Scope of indemnity - What costs and expenses form the subject of the indemnity.

2 On 17 May 2010 I heard further argument concerning the form of the orders, and questions pertaining to awards of interest and costs. Both Perpetual and Mr Schmidt filed affidavits in support of their respective positions. Subsequent to the hearing, further written submissions were filed by Perpetual and VHL. On 11 June, I heard further submissions from these two parties.

The appropriate orders on the claim and counterclaim

3 Counsel for Perpetual seeks judgment against Mr Schmidt for the primary sum together with interest. Perpetual also argues that conformably with Mr Schmidt's prayer for relief the mortgage should be discharged only after payment of the primary sum and interest.

4 Counsel for Mr Schmidt does not dispute that there ought to be an order for the primary sum, but contends that the mortgage and loan contract should be set aside conditional upon payment of the primary sum and interest - this approach, it is said, is consistent with the views of the High Court in Maguire v Makaronis.[1] In that case the Court held that the equity of the mortgagor was to have the whole transaction set aside and the parties reinstated to their original positions as far as was possible. In setting aside the mortgage the Court held that it was appropriate, in doing equity between the parties, to order that the principal and interest be repaid by the mortgagor to the mortgagee. Accordingly, it imposed a condition on the setting aside of the mortgage that the amount of principal and interest be repaid by a certain date and in default there be judgment for the mortgagee.

5 In Elkofairi v Permanent Trustee Co Ltd,[2] a case in which the New South Wales Court of Appeal found that a financier had acted unconscionably orders were made setting aside the mortgage conditional upon the payment of a sum, not related to the unconscionable conduct, to the financier. Santow JA described such a sum as an "unwarranted benefit" of the setting aside of the transaction.[3]

6 I do not accept that the form of the prayer for relief should, in a claim where equity must be done between the parties, limit the nature of the relief as contended by Perpetual. Given that I have found that the principal relief available to Mr Schmidt is the setting aside of the mortgage and the loan contract, it is, consistent with the approach taken in both Maguire and Elkofairi, inappropriate to make an order for judgment against Mr Schmidt unless he defaults in complying with the conditions of the order setting aside those two transactions.

7 Accordingly, orders should be made to that effect upon condition that in the event of default there be judgment for the primary amount and interest and that Perpetual have an order in its favour in relation to possession.

8 There remains the question of the amount of interest payable on the primary sum. Perpetual originally sought interest at the "statutory rate" which I take to be pursuant to s 60 of the Supreme Court Act. This provision however is applicable to a proceeding for "the recovery of debt or damages". As I have determined that Perpetual's right to repayment does not flow from any debt pursuant to the loan contract but rather as a result of doing equity between the parties s 60 has no application.

9 The parties were at odds as to the appropriate rate at which to calculate interest on the primary sum. It may be recalled that the Perpetual loan, in effect, replaced the Westpac loan. The rate of that loan in February 2004 was 7.22%. The variable rate of the Perpetual loan in May 2004 was 7.79%. No evidence was available as to increases or decreases in the Westpac loan rate. Perpetual set out in a schedule the various increases and decreases in its rate over time, rising as high as 11.19% and currently at 9.64%. On the Perpetual figures, the appropriate amount is $58,267.05 to 31 May. Mr Schmidt contends that the appropriate amount is to be calculated on 7.22% and at 17 June amounts to $37,417.25.

10 Consistent with what was said in Elkofairi,[4] it is inappropriate to rely upon the prescribed default rate under the impugned mortgage or loan contract and therefore the Perpetual figures, I think, should be put to one side. Interest rates have, as all of us know, been the subject of extensive fluctuations in recent years. It seems to me appropriate to allow the Westpac rate of 7.22% throughout the period, bearing in mind that the ultimate goal is do equity between the parties. Accordingly, I accept Mr Schmidt's calculations of interest of $37,417.

11 Counsel for Mr Schmidt also argues that such an allowance is, in any event, excessive and points to two separate periods of delay in the prosecution of the claim by Perpetual which should relieve Mr Schmidt of an obligation to pay interest for the whole period. The first relates to a delay of some 13 months as a result of an adjournment of the trial date from 8 August 2008 to its starting date of 29 September 2009. The second relates to a significant portion of the period between January 2006 and April 2009 during which time it was said that Perpetual was lax in providing discovery in a proper form and that some discount should be made for the delay caused by that failing.

12 Mr McGirr, the solicitor for Mr Schmidt, and Ms Jaffe, Perpetual's solicitor, each filed affidavits relevant to the respective delays.[5]

13 I am satisfied that the adjournment of the trial from August 2008 to September 2009 was not occasioned by any fault on the part of Perpetual which should deprive it of its entitlement to interest. Whilst it is correct that during this period Perpetual issued third party proceedings against VHL, there were a number of other matters being agitated at that time, including an assertion by Mr Schmidt (ultimately not persisted with), that the loan contract and the mortgage had not been signed by him. I also note that at the time of the adjournment (which was made by consent), the court was advised that it was sought to enable the parties to pursue settlement discussions.

14 I am also not satisfied that Perpetual's conduct was such that it should be shut out from recovering interest in relation to the period between January 2006 and April 2009.

15 On this point, whilst it is true that there were protracted discussions between Perpetual's solicitors and Mr Schmidt's solicitors concerning discovery, (and, I suspect, that Perpetual's response was less than optimal), these exchanges occurred in the context of the proceeding being prepared for trial. For instance, on 7 February 2007 Master Daly dismissed Perpetual's summons of final judgment. On 26 April 2007 Williams J set down an interlocutory timetable for the proceeding which, on 30 August 2007, was set down for trial on 27 August 2008. As far as I can tell, there was nothing in the discovery process itself which caused any delay in the fixing for trial.

16 In summary, I am not persuaded that there has been any conduct on the part of Perpetual or its solicitors, which should result in any variation as to the calculation of the amount of interest.

17 In the result I am satisfied that it is appropriate to make an award for interest of $37,147 - which with the primary sum of $85,269, produces a total sum of $122,416 to be paid by Mr Schmidt as a condition of setting aside the mortgage and the loan agreement.

18 I was initially attracted to the making of one order in favour of Mr Schmidt on a proportionate basis reflecting the relative success of Mr Schmidt and Perpetual in the particular claims agitated in the course of the trial. This is consistent with the approach endorsed by the Court of Appeal in a number of recent decisions:[6] the aim being to do justice between the parties on the question of costs and also to ensure that the task of the Associate Justice or his delegate in the taxing of the costs is simplified as far as is practicable. However, after considering the submissions of the parties I accept that it is not possible, in the circumstances of this case, to make one such order. However, as will be seen, I have, to a limited extent, adopted that approach in formulating the appropriate orders.

19 Although the loan contract and the mortgage have been set aside, Perpetual has established an entitlement to a fixed sum which could not have been obtained without this proceeding. There was no issue in the course of the trial about its entitlement to such a sum as was made clear in the opening of Mr Schmidt's case by his counsel; but, as I understand the position, no such concession had been made previously. In those circumstances Perpetual is entitled to its costs in relation to establishing the monies owed under the loan contract and the mortgage and default in payment, but no more. So that there is no confusion about Perpetual's entitlement to its trial costs in this regard, it is confined to an order for its costs of the first day, 29 September 2009, the day upon which it led evidence from Ms Holloway.

20 Perpetual seeks an order for all of its costs against Mr Schmidt "at least for the period prior to 14 November 2008". This was the date upon which the counterclaim by Mr Schmidt against Perpetual was filed and sought a variation of the loan contracted mortgage. However the conduct of Perpetual and VHLA was in issue before the counterclaim was filed, as was made clear by a letter from Mr Schmidt's solicitors on 31 May 2006 to Perpetual's solicitors,[7] and in subsequent correspondence between the lawyers. There is no reason to order that all costs be paid. Rather, the costs should be confined as I have indicated.

21 I also reject Perpetual's argument that it is entitled to indemnity costs as such costs flow from the common provisions of the mortgage which will be set aside. Its costs will be paid on a party/party basis.

22 Mr Schmidt initially sought costs on a solicitor/client basis. As I indicated in discussion with counsel, such an application, it seemed to me, was hopeless and ultimately it was not persisted with. Mr Schmidt is however entitled to an order for costs on his counterclaim which should reflect the degree of success he has enjoyed on that claim.

23 Although it is true, as counsel for Perpetual pointed out, that the evidence relating to negligence overlapped with that of unconscionable conduct, no additional evidence was led in relation to that issue or any other issue on which Mr Schmidt failed over and above those on which he succeeded; accordingly there is no need for any discount on that basis. On the other hand, there was clearly a reasonable amount of research and legal argument on the part of Perpetual directed to questions of negligence, ostensible authority and, to a lesser extent, misleading and deceptive conduct - the issues upon which Mr Schmidt failed.

24 I think that an appropriate order is for Mr Schmidt to have 85% of his costs of the counterclaim on a party/party basis.

25 Perpetual argued that Mr Schmidt's costs should be paid by VHL as it was appropriate to make a Sanderson order. The principles behind making such an order were addressed by the Court of Appeal in State of Victoria v Horvath (No 2).[8] Nettle JA summarised those principles in Berrigan Shire Council v Ballerini (No. 2)[9] as follows:

"In short, an order will not ordinarily be made unless:

(a) the plaintiff's claim against the two defendants are interdependent or essentially alternative claims; and

(b) it is reasonable for the plaintiff to have joined the successful defendant and the conduct of the unsuccessful defendant has been such as to make the order just."

This case, however, does not evoke Sanderson principles, as VHL was the third party to the proceeding not a co-defendant, and it is that joinder of the defendant that brings the principle into play. Mr Schmidt is entitled to an order as against Perpetual.

Costs of the parties associated with the application to further amend Mr Schmidt's statement of claim

26 The hearings on 6 October and 10 November, were taken up with an application and argument directed towards amendments to add VHL as a defendant to Mr Schmidt's counterclaim. Ultimately I refused that application.[10] Mr Schmidt does not oppose an order being made in favour of Perpetual and VHL in respect of costs thrown away by reason of that application. Such an order ought to be made.

Appropriate orders on the claim for indemnity by Perpetual against VHL

27 The rights asserted by Perpetual against VHL arise out of Clause 10.1 of the M.O.A: VHLA was obliged to indemnify and agreed to keep indemnified Perpetual:[11]

"in respect of all claims, losses (whether consequential or otherwise), damages, demand and expenses which Perpetual may suffer or incur as a result of

(a) ...

(b) any representation or warranty made by VHLA under this agreement being incorrect when made or deemed to be repeated" (emphasis added).

28 I concluded[12] that VHLA had breached the obligations contained in warranties in Clause 8.1(i) and (j) of the M.O.A and was therefore liable to indemnify Perpetual in accordance with the terms of the indemnity. These warranties read as follows:-

(i) the Borrower's application for a Loan Approval has been fully investigated by the Mortgage Manager, the Mortgage Manager has no knowledge of and does not or should not suspect any fraud in connection with the application, the application complies with the Parameters and the Mortgage Manager is satisfied that all statements and information contained in that application and all documents provided with that application are true and may be relied on by the Trustee and the Programme Manager;

(j) each Application and Settlement Statement delivered by the Mortgage Manager in respect of the Trust Mortgage is complete and correct in all respects and any person who certifies such a Settlement Statement to be true and correct on behalf of the Mortgage Manager has the full authority to make that certification;

...

29 I was much assisted in resolving these issues by the helpful written and oral submissions made by counsel for Perpetual and VHL.

30 It was accepted by VHL that it was bound by the provisions of the MOA entered into by its predecessor VHLA with Perpetual.

31 Perpetual contends that it is entitled, to be indemnified in respect of all amounts owed by Mr Schmidt and now not recoverable from him. These fall into two categories. Firstly, in relation to its "enforcement expenses" and other associated costs incurred as a result of Mr Schmidt's default under the mortgage which are shown in a document entitled "True Loan Balance". Included in this document are amounts such as overlimit fees, accounts maintenance fees and "enforcement expenses", being its legal costs associated with Mr Schmidt's claim - all of which Perpetual argued could properly be debited to Mr Schmidt pursuant to the provisions of his loan contract if enforceable against him. These amounts totalled $255,551.

32 The second category is the principal and interest that it would also have been entitled to recover from Mr Schmidt had the loan contract and mortgage been enforceable. The amount of the principal is not in dispute - $104,731. In relation to interest, Perpetual argued that the general conditions of the loan contract, which provided for a default rate of interest, calculated daily and debited on the first business day of each month, compounding, would have been applicable to Mr Schmidt's loan contract.[13] Based upon the default rate of 2% above the variable rate Perpetual argued that it would, to date, have been entitled to $196,498.99 less any allowance of interest to be credited to it by Mr Schmidt.

33 VHLA did not contest Perpetual's entitlement, under the indemnity, to the following amounts - principal of $104,731, account maintenance fees and overlimit fees amounting to $4,820.

34 What was left in issue was the extent of the indemnity as it effected quantification of the amount of interest and the amount of costs recoverable by Perpetual.

35 Perpetual argued that the purpose of the indemnity was to ensure that any loss occasioned by the default of a VHLA client was reimbursed. It was said that the true loan balance demonstrated the amount owing by Mr Schmidt if the mortgage and loan contract were enforceable. Accordingly, it contended, it was entitled to be indemnified for enforcement fees (its entire legal costs) and interest at the default rate as provided by the loan contract (2% above the variable, compounding).

36 VHL contends that to construe the indemnity in the way argued for by Perpetual would, in effect, be to treat it as a guarantee of Mr Schmidt's indebtedness as calculated under the true loan balance. Counsel made the point that if it was intended to provide such a guarantee, it could have been set out in the MOA. He argued that the indemnity contained in the MOA was, to paraphrase his argument, a standalone document and needed to be interpreted accordingly, bearing in mind those matters that may have been within the contemplation of the parties. He accepted that the indemnity covered both costs and interest. However, consistent with authority, he argued that the costs should be limited to party/party costs (and at worst solicitor/client costs) and not solicitor/own client costs as claimed by Perpetual and reflected as "enforcement expenses". He also argued that to permit Perpetual to recover interest at the default rate, rather than the simple interest, was outside the scope of the term of the indemnity. Such a claim, he contended was akin to a Hungerfords v Walker[14] damages claim which was not made in the course of the trial.

37 In my view, the arguments of VHL on both of these points should be accepted for the following reasons.

38 First, in relation to costs, in this Court, the approach in recent decisions has been to treat the terms of the indemnity, or guarantee, as informing the manner in which an order for costs should be made, rather than it being mandated by the contractual provision.[15] The position was set out by Vickery J in Taree Pty Ltd v Bob Jane Corporation Pty Ltd:[16]

Nevertheless, even where a contractual term for the payment of costs on a basis other than the usual party and party basis exists and is expressed in plain and unambiguous language, the Court continues to have a discretion in relation to making orders for the payment of such costs. In Kyabram, the mortgage agreement expressly stated that the mortgagee should be liable to pay costs on a solicitor/own client basis. Nevertheless, the Court held that, even where such an agreement exists, the order for costs continues to be at the discretion of the Court.

39 This approach was also adopted by Whelan J in Reading Entertainment Australia v Burstone Victoria (No. 2)[17] where Whelan J ordered legal costs on an indemnity basis where the contract of indemnity referred to "all costs, expenses and fees calculated on a full indemnity basis, incurred by the lender in acting in or about recovery".

40 The terms of the indemnity are patently relevant to determining the basis upon which the order should be made. Party/party costs are notoriously incapable of providing cover for costs and expenses incurred in litigation.[18] Whilst the terms of the indemnity do not refer to any specific mode of assessment of legal costs, in my view, it is sufficiently clear that it was intended to provide sufficient cover for Perpetual's losses and expenses properly attributable to VHLA's conduct. In those circumstances, party/party costs would not provide sufficient indemnity (as contemplated by the parties) and an appropriate award is on a solicitor/client basis.[19] The fact that the third party notice simply sought "costs" is, I think, of no consequence.

41 By awarding costs on a solicitor/client basis, VHL retains the ability to question or challenge the quantification of Perpetual's claim for costs and where it does so, Perpetual carries the onus. This, it seems to me, is a more desirable basis than on a solicitor/own client costs in which VHL's only basis for challenge, as I understand the position, is to demonstrate unreasonability. This is consistent with the form of indemnity as to costs that, I believe, the parties would have contemplated.

42 The second issue is that of a determination of the appropriate amount of interest recoverable by Perpetual on the sum of $104,731.

43 In Citicorp Australia Limited v Hendry,[20] Clarke J said as follows:

Secondly, there is a basic principle of the law relating to indemnity that it protects the parties to be indemnified against the loss suffered and nothing more. This principle is articulated in clear terms in those cases dealing with that class of contract of insurance which is regarded as an indemnity. In those cases the insured is restricted to the amount of loss actually proved notwithstanding the amount of the cover. Likewise, in this case it is necessary to determine the measure of the actual loss suffered by the creditors. This cannot be done, in my opinion, by reference to a formula which gives use to an irrecoverable penalty in respect of which the creditor has no continuing just claim, but can only be determined by assessment of the actual loss (references omitted).

44 It is, of course, well understood that a contract of indemnity is to be construed strictly in favour of the indemnifier and where there is any doubt or ambiguity, it is to be determined in favour of the indemnifier, rather than the holder of the indemnity.[21] The contest here, as I have said, is between the residential variable rate calculated on a simple interest basis and the default rate under Mr Schmidt's mortgage calculated on a compound rate with a 2% uplift.

45 I accept the proposition advanced by counsel for VHL that it did not give a guarantee to Perpetual over Mr Schmidt's loan. If that had occurred with specific reference to the manner in which such loss was to be calculated (for example, by reference to the true loan balance), then Perpetual's contention would be close to irresistible. However, it does not seem to me that the actual loss should be calculated on the basis of a windfall produced by Mr Schmidt's default. Rather, it is more properly reflected by the variable rate calculated on a simple interest basis which would have been paid by Perpetual's non-delinquent borrowers. This is its true measure of its loss, not the formula it used to calculate its entitlement in the event of default.

46 Accordingly, Perpetual is entitled to the sum of $72,078, (being the relevant amount on Perpetual's calculations).

47 Counsel for Mr Schmidt requested that the order include a provision for the setting off of costs orders. This was not opposed by counsel for Perpetual.

48 Given my conclusions, I propose subject to hearing from counsel to make the following orders:

(1) The loan contract between the plaintiff and the defendant made on or about 20 May 2004 and the mortgage Registered Number AC8729721X be set aside on the condition that the defendant pay the plaintiff the sum of $122,416 (being the primary sum of $85,209, together with interest in the sum of $37,417.00), interest to continue to accrue from 17 June 2010 at the rate of 7.22% per day until the sum of $122,416 is paid.

(2) That the defendant pay the plaintiff's costs limited to those costs referable to establishing that monies were owed under the loan contract and the mortgage and that the defendant was in default in respect of payment under the loan contract; such costs to include its costs of the first day of the trial on 29 September 2009, but no more in relation to the trial.

(3) That the plaintiff pay 85% of the defendant's costs of the counterclaim.

(4) In default of payment not being made on or before 1 September 2010 of the amount set out in paragraph (1), judgment shall be entered for the plaintiff for possession of the land being Unit 20 on Strata Plan 0223531 and being the whole of the land contained in Certificate of Title Volume 9625 Folio 589 and known as 8 Robin Court Carrum in the State of Victoria.

(5) The third party indemnify the plaintiff in the sums of (a) $104,731;

(b) interest of $72,078; (c) other expenses of $4,820.

(6) The third party indemnify the plaintiff for its costs incurred in respect of its claim, the counterclaim and the third party proceedings on a solicitor/client basis less any costs recoverable by the plaintiff from the defendant as set out in paragraph (2) of this order.

(7) The costs order made in favour of the defendant be set off against that made in favour of the plaintiff (as against the defendant).

(8) All orders for costs to be taxed in default of agreement.

I certify that this and the 15134 preceding pages are a true copy of the reasons for Judgment of J. Forrest of the Supreme Court of Victoria delivered on 17 June 2010.

[2] (2002) NSWCA 413 [80] - [85].

[3] Ibid [98] - [102]; See also Westpac Banking Corporation v Paterson [2001] FCA 1630; (2001) 187 ALR 168 [39] - [41].

[6] Tayles v Davis (No 2) [2010] VSCA 107, McFadzean v CFMEU (No 2) [2007] VSCA 289; Investec Bank (Australia) Limited v Glodale Pty Ltd and ors [2009] VSCA 113; Spotless Group Pty Ltd v Premier Building and Consulting Group Pty Ltd [2008] VSCA 115.

[7] Affidavit of Robert McGirr [10.1].

[11] The full text of the indemnity is set out at [16] of my earlier ruling - [2009] VSC 508.

[13] Clauses 21.1, 10.2, 11.1 and 11.3 of the General Condition.

[15] See Permanent Trustee Co Ltd v Gulf Import & Export Co (No. 2) [2008] VSC 307, Reading Entertainment Australia Pty Ltd v Burstone Vic (No. 2) [2005] VSC 137, Taree Pty Ltd & Ors v Bob Jane Corporation Pty Ltd & Anor [2008] VSC 228.

[16] [2008] VSC 228, [40]. See also Kyabram Property Investments Pty Ltd v Murray (2005) NSWCA 87 [14].

[18] See Spencer v Dowling [1996] VSC 51; (1997) 2 VR 127, 147, 163.

[19] See Schleimer v Brisbane Stevedoring Pty Ltd (1969) QdR 46, 59.

[21] Andar Transport Pty Ltd v Brambles Limited [2004] HCA 28; (2004) 217 CLR 424, [23], [29], National Roads and Motorists Association v Whitlam [2007] NSWCA 81 [66]-[68].

At a glance

Court

Decision date

Before

Source

Judgment (90 paragraphs)

Parties

Cases Cited (6)