Procedure - Costs - Recovery action by mortgagee - Bank awarded costs of appeal to be taxed - Whether costs order overrode contractual right to costs under mortgage

Abigroup Limited v Sandtara Pty Ltd [2002] NSWCA 45

1 JUDGMENT OF THE COURT: On a number of occasions this Court has had to consider different aspects of litigation between the present parties. This has arisen, essentially, from the enforcement by the respondent (the "bank") of its rights under two mortgage securities in its favour, pursuant to which the applicants, Mr and Mrs Rayner, had borrowed moneys from the bank. The applicants were in default of their obligations under the mortgages. These various hearings have not gone well for Mr and Mrs Rayner. Because of the financial situation in which they find themselves they have not been legally represented. This has led to a number of procedural difficulties and misconceptions of substance on the part of the applicants.

2 The present application purports to be by way of a motion to this Court to vary orders made on 7 December 2001. Those orders were made by the Full Court when judgment was delivered dismissing an appeal by Mr and Mrs Rayner from a decision of a Master of the Court that summary judgment be entered against them in favour of the bank. On 7 December 2001 orders were made inter alia that the appeal be dismissed, the applicants pay the costs of the appeal and the costs of the motion for judgment to be taxed, and that there be liberty to apply generally.

3 The applicants now move that these orders, insofar as they relate to costs, be varied. They ask that the costs be now fixed by this Court in a sum which we are asked to determine. And they move that the bank be ordered to pay to them, within 14 days, the total of the sums "appropriated by the respondent as and by way of legal costs relating to this action", included related interest and other charges. Interest is also claimed on the amount to be repaid from 12 February 2003. The sums appropriated were quantified at $41,996. Alternatively, such other relief is sought as this Court may consider appropriate.

4 There are issues as to the procedural aptness of this application but we prefer to turn immediately to the substance.

5 The basic concern of the applicants is that, by the orders made on 7 December 2001, they were ordered to pay the bank's costs; but these were to be taxed. They have not been taxed. No Bill has been lodged by the respondent for taxation. After some delay following 7 December 2001, in part because of a further application to this Court and to the High Court, the bank obtained possession of the secured property and sold the property by mortgagee sale, settlement occurring on 12 February 2003. The sale price of the secured property was $240,000 of which it appears some $201,286.49 was applied in reduction of the debit balances in the applicants' home loan account and residential investment loan account with the bank.

6 While the costs, which were the subject of this Court's order on 7 December 2001, have not been taxed, it is the applicants' contention that the costs actually incurred by the bank in respect of the appeal and the motion for judgment have in fact been debited by the respondent to one or other of the two accounts, so that, without undergoing the process of taxation the bank has recovered the legal costs it had actually incurred by debiting them to the applicants' accounts. The outstanding debit balances of those accounts have since been cleared from the proceeds of the sale of the secured house.

7 From the affidavit of Mr Rayner sworn 8 September 2003 and filed in support of this application, and from the oral and written submissions of the applicants, it appears that the applicants regard the order of 7 December 2001 as commanding the bank to tax its costs, a command they contend the bank has ignored. It is submitted the bank is in contempt. Further, the applicant's appear to regard the order of 7 December 2001 as conditioning and determining exclusively the entitlement of the bank in respect of its costs. Hence, until the amount of the costs has been determined on taxation, it is contended the bank has no entitlement to recover any of its legal costs, the subject of the order, from the applicants.

8 It further appears that the applicants may also mistakenly understand the order made on 7 December 2001 as extending to all its legal costs in respect of proceedings to enforce the mortgages and therefore requiring the bank to tax all such legal costs, and not merely the costs of the appeal (including the motion for judgment). This would explain the quantification of the claim for repayment at $41,996, as that appears to represent the total of the legal costs debited to the applicants' accounts, where they are described as "Loan Enforcement Expense". If that is so the claim would appear to be in respect of very much more than the costs the subject of the orders of 7 December 2001, which are only in respect of the appeal decided that day (including the costs of the motion for judgment). The claimed amount appears to include costs in respect of the action, including the proceedings before the Master, and other consequential proceedings before this Court and the High Court. The orders made in respect of the costs of those other proceedings are not before this Court, nor is it clear from what is before us, in many cases, which costs relate to which proceedings.

9 These and other issues would have required further examination had there been substance in the essential case of the applicants. For reasons which follow, however, it is not necessary to pursue those issues further. Instead the case for the applicants can be adequately examined in respect of the costs of the appeal the subject of the orders of 7 December 2001. The applicants' case is at its clearest and strongest in respect of these costs.

10 When the application was argued only incomplete statements relating to the two accounts of the applicants with the bank were before the Court on affidavit. Further, there were not complete fee notes or accounts in respect of the bank's legal fees before the Court. As has been indicated, it is not clear which of the legal costs incurred by the bank relate to the appeal. The applicants had written to the bank and to its solicitors on more than one occasion seeking copies of the missing statements and details of the legal costs. They received some assistance about the legal costs in response but insufficient to overcome the problems identified. Some correspondence appeared to have been ignored by the bank. One letter was returned to the applicants through the mail endorsed "not at this address", although the address was that of the head office of the bank in this State. The applicants had also sought from the bank, on more than one occasion, an explanation why the bank had not complied with the orders of the Court. This was directed to the failure of the bank to have its costs taxed pursuant to the order of 7 December 2001. It appears that no explanation was offered to the applicants by the bank. The bank's solicitors did write, however, on 1 April 2003 to Mr Rayner. The essence of this letter was conveyed by the words "As far as Ms Woods (the bank's officer handling the matter) and the bank is concerned, the matter is at an end."

11 No further light was thrown on these matters when this application was argued. No information was advanced on affidavit by the bank and counsel who appeared for the bank advised that he had no instructions about the material factual matters. It remained unclear whether the bank had, in whole or part, been reimbursed the amount of its legal costs to which the order of 7 December 2001 related from the proceeds of the sale of the secured property. These difficulties were compounded by the position taken by the bank at the hearing. Counsel for the bank invited the Court to make declarations, the essence of which was:

1. that on the taxing of the bank's costs, both in the original proceedings and in the appeal proceedings, Mr and Mrs Rayner are entitled to raise objections on the grounds that items claimed were unreasonable in amount or were unreasonably incurred, with any doubts in these respects to be resolved in favour of the bank, and

2. subject to 1, save to the extent that orders were made that the bank's costs be taxed and paid on a party and party basis, the bank's bills of costs are to be taxed on an indemnity basis and the applicants be ordered to pay all the costs incurred so that, subject to those exceptions, the bank will be completely indemnified by Mr and Mrs Rayner.

12 It was apparent that the bank then contemplated that it would act to have its costs taxed. It also appeared that it intended to tax at least its costs of the original action as well as the appeal costs to which the order of 7 December 2001 related. Even so, counsel was not in a position to clarify what, if any, legal costs within the scope of either the order of 7 December 2001, or of the proposed declaration, had in fact been recovered by the bank from the proceeds of the sale of the secured property.

13 Further, although the bank's position was less than clear, it appeared that the bank contended that the terms of the proposed declarations, in particular that taxation be on an indemnity basis (except for items already the subject of a specific party and party order and items the applicants could satisfy the taxing officer were unreasonable in amount or unreasonably incurred) reflected the effect of the orders made on 7 December 2001. The orders made no reference to such matters. As these issues were explored with counsel by the Court, reliance was also placed on the bank's contractual entitlement pursuant to the mortgages to justify the terms of the proposed declarations. The mortgages were not then before the Court.

14 The position was entirely unsatisfactory. The bank was invited to take measures to clarify the factual position. A substantial affidavit of a senior officer of the bank was filed on 9 October 2003. Liberty was also given for further written submissions from both parties. Further submissions form both parties have now been received. The affidavit purports to provide the relevant statements relating to both the residential investment loan account and the home loan account of the applicants, as well as the fee notes and tax invoices in respect of most of the legal fees which the bank has incurred in relation to the enforcement of the bank's rights under the mortgages. There are also accounts and tax invoices relating to other expenses incurred in respect of the enforcement of the bank's rights under the mortgages. The affidavit also identified and detailed further items of expense, said to relate to the enforcement of the bank's rights arising under the mortgages, for which no accounts or invoices were provided. These include items for legal fees. By a further affidavit sworn 27 October 2003, further accounts or invoices relating to these items have now been provided. A relevant effect of all of this is to confirm that the legal costs of the bank in respect of the appeal and the motion for judgment, which were the subject of the order made by this Court on 7 December 2001, as well it seems as all legal fees and other expenses incurred by the bank in relation to the enforcement of its rights under the mortgages, were in fact debited to the accounts of the applicants as they were paid by the bank. Hence, the bank appears now to have been fully reimbursed in respect of these costs out of the proceeds of the sale of the secured property.

15 Significantly, by its further written submissions the bank no longer seeks the declarations for which its counsel contended when this matter was argued. Instead, it now seeks the dismissal of the applicants' application, together with an order that the applicants pay the costs of the bank incurred by reason of or connected with the application, except in so far as they are of an unreasonable amount or have been unreasonably incurred, so that, subject to those exceptions, the respondent will be completely indemnified for its costs.

16 The two mortgages were originally proved to the Court on the summary judgment application of the respondent. The present proceedings are on appeal from the decision on that application. For relevant purposes, the provisions of the mortgages are identical. By cl 7 of each mortgage the applicants covenanted inter alia to pay to the respondent on demand:

"all moneys ... which the mortgagees shall pay or be liable to pay for or in connection with: ... any right, power, authority or remedy conferred on the mortgagee under or by virtue of this mortgage or by statute or on account of default in performance or observance of any covenant herein contained; ... together with interest on all such moneys from the respective times of payment until repayment at the rate provided in the Schedule and all such moneys and interest shall be charged upon the mortgaged land and shall until repayment form part of the moneys hereby secured and bear interest accordingly."

By cl 9 of each mortgage the bank's rights and powers on default included the right to take possession of the mortgaged property and to sell it. There is no question that the applicants had been in default for the purposes of each mortgage.

17 By virtue of these provisions, it is now the contention of the bank that it is entitled as a matter of contract to recover, from the proceeds of the sale of the secured property, all moneys it has paid in respect of the enforcement of its rights under the mortgages following the default of the applicants, together with interest, and to do so independently of, and without regard to the order of 7 December 2001 allowing certain of its legal costs as taxed to be recovered from the applicants. The bank submits it is entitled to recover what it has paid in respect of those costs, together with interest, from the proceeds of the sale of the secured property. This it has done. Having recovered the relevant costs by this means, it submits is not necessary for it to have its costs taxed pursuant to the order, or to seek to enforce that order.

18 The record of the Court and the transcript of proceedings on 7 December 2001 reveals that, on the Court delivering its reserved decision, counsel for the bank simply moved inter alia that the appellants be ordered to pay the bank's costs of the appeal and of the motion for judgment. After hearing the applicants the Court made the orders set out earlier. There was no reference by either party or the Court to, and no attempt to rely on, the contractual obligations of the applicants, or the corresponding entitlement of the bank, in respect of costs and expenses incurred by the bank in the enforcement of its rights under the mortgages. No issue concerning these matters had been raised in the appeal.

19 Now that the factual basis from which this controversy arises has been sufficiently clarified, and now that the bank has fundamentally altered its position, the applicable legal principles may be considered.

20 It should first be made clear that the order for taxation made by the Court on 7 December 2001 has the effect that the costs of the appeal and the motion for judgment were to be taxed on a party and party basis. That is the normal basis on which costs are ordered and taxed as between parties to litigation in this Court, and that is the effect of any order expressed as the order was in this case. There are other bases upon which, in exceptional cases, costs may be ordered to be taxed. In particular, they may be ordered to be taxed on a solicitor and client basis or on an indemnity basis. For taxation to occur on either of these bases it is necessary that this be specifically ordered. In the absence of clear order to the contrary, costs are taxed on the normal party and party basis. The effect of the original submissions of counsel for the respondent appeared to be that the order made by this Court on 7 December 2001 should be interpreted and applied by the taxing officer according to the contractual entitlement of the respondent pursuant to cl 7(c) of each of the mortgages. This entirely misconceives the intention and effect of the order made by this Court, and the role of the taxing officer.

21 Further, insofar as the applicants treat the order made on 7 December 2001 as obliging the bank to tax its costs of the appeal, we would observe that this view misconceives the order. By its terms it obliged the applicants to pay the costs of the appeal etc, to be taxed. It is the applicants to whom the order is directed. It requires them to pay the costs. However, the amount of the costs they are required to pay is only the amount determined on a taxation of the costs. Therefore, if the bank seeks to recover its costs pursuant to this order, it must first have its costs taxed. If the bank does not seek to recover its costs of the appeal pursuant to the order made on 7 December 2001, then, the order does not oblige the bank to have its costs taxed.

22 We turn now to the question whether there is any interrelationship between the order that the applicants pay the bank's costs to be taxed, and the bank's contractual entitlement to recover moneys paid on account of legal costs in respect of the enforcement of its rights under the mortgages. A related question is the measure or extent of the contractual entitlement of the bank to recover its costs of the appeal.

23 The decision of the Court of Appeal in Gomba Holdings UK Ltd & Ors v Minories Finance Ltd & Ors (No 2) [1992] 4 All ER 588 provides an extensive and helpful analysis of the issues and authorities touching these and related issues. The reasons were given by Scott LJ who identified three issues which it is material to distinguish and which are relevant in the present case. At 598 Scott LJ said:

"There are, in our opinion, three interlocking and overlapping issues. First, there is an issue of construction. What level of recovery, or retention of costs and expenses actually incurred do the mortgage deeds ... permit? Second, there is the issue of the manner in which the defendants' entitlement is to be quantified in relation to (a) litigation costs and (b) non-litigation costs. Third, there is the issue as to the extent to which, if at all, the court's powers as to costs under s 51(1) of the Supreme Court Act 1981 and the Rules of O 62 can curtail the recovery, or retention to which the defendants are contractually entitled."

It will be appreciated, of course, that the references there were to the English Statute and Rules. Although there are differences of detail, the effect of s 37 of the Supreme Court Act 1937 (WA) and the provisions of O 66 of the Rules of this Court do not differ in any relevant material respect from the general effect of the provisions considered by Scott LJ. In particular, by s 37 of the Supreme Court Act costs of and incidental to all proceedings in this Court are in the discretion of the Court. That is the essential effect of the English provisions considered by Scott LJ. It must be borne in mind that this provision applies to what Scott LJ described as litigation costs, not to non-litigation costs. As Scott LJ said at 605:

"This discretionary power does not extend to non-litigation costs. Nor, in our opinion, does it affect the contractual or equitable right of a mortgagee to retain his costs out of the mortgaged property."

24 In an extensive review of relevant authorities Scott LJ referred, in particular, to Bank of Baroda v Panessar [1987] Ch 335 at 355, ANZ Banking Group (NZ) Ltd v Gibson [1981] 2 NZLR 513, Re Shanahan (1941) 58 WN (NSW) 132 at 134, and to Mansfield v Robinson [1928] 2 KB 353.

25 Having considered these and other authorities the Court of Appeal identified a number of principles, at 607 which emerged from the cases to which reference had been made. These included:

"(i) An order for the payment of costs of proceedings by one party to another is always a discretionary order ....

(ii) Where there is a contractual right to the costs, the discretion should ordinarily be exercised as to reflect that contractual right.

(iii) The power of the court to disallow a mortgagee's costs sought to be added to the mortgage security is a power that does not derive from s 51 [s 37 of the WA Act] but from the power of courts of equity to fix the terms on which redemption will be allowed.

(iv) A decision by a court to refuse costs, in whole or in part, to a mortgagee litigant may be a decision in the exercise of the s 51 discretion or a decision in the exercise of the power to fix the terms on which redemption will be allowed or a decision as to the extent of a mortgagee's contractual right to add his costs to the security or a combination of two or more of these things. The pleadings in the case and the submissions made to the judge may indicate which of the decisions to which we have referred has been made.

(v) A mortgagee is not, in our judgment, to be deprived of a contractual or equitable right to add costs to the security merely by reason of an order for payment of costs made without reference to the mortgagee's contractual or equitable rights and without any adjudication as to whether or not the mortgagee should be deprived of those costs."

26 The reasoning in Gomba Holdings has commended itself to Wheeler J in Rumball & Ors v Mortimore [1999] WASC 66 and to Owen J in Rumball & Ors v Mortimore [2000] WASC 126 and we consider it should be applied to the present application.

27 With respect to the principle numbered above as (iv), in the present case a review of the transcript of the proceedings on 7 December 2001 indicates that on the delivery of the reserved decision of the Court, counsel simply moved that the appellant pay the costs of the appeal and the costs of the motion for judgment. Neither the transcript, nor the issues considered and decided by the Court on that occasion, provides any foundation for the view that the Court was doing anything other than exercising its discretion as to the costs of the appeal. In particular, there was nothing before the Court in respect of the terms on which the redemption of the mortgages would be allowed, nor was the existence or the extent of the mortgagee's contractual rights in respect of costs pursuant to the securities raised. There were no submissions touching any of those matters. In the circumstances it appears clear that the Court did no more than exercise its ordinary discretion as to the costs of the appeal.

28 That being so, it cannot be said that the order for costs to be taxed which was made by the Court on 7 December 2001 was intended to, or had the effect of, determining or limiting the contractual rights of the bank under the mortgages. Nor did it in any way determine the terms on which redemption of the mortgages would be allowed. It follows, by virtue of the principle identified above as (v), that despite the order made on 7 December 2001, the bank has not been deprived of any contractual or equitable right it may have in respect of its costs, whether the costs of the appeal itself, or more generally in respect of the enforcement of its rights under the mortgages on the applicants' default.

29 For these reasons, the fundamental proposition of the applicants fails. The application must be dismissed. This may well surprise the applicants. It is very understandable that they should take the order of the Court of 7 December 2001 to be a determination, as between themselves and the bank, of their liability in respect of the bank's legal costs of the appeal. Unfortunately for them, for the reasons given, the position is not as they may understand it.

30 In Gomba Holdings the terms of the contractual entitlement under the mortgage there being considered were held, at 601, to entitle the defendant to recover its legal costs on an indemnity basis save for any that were incurred in bad faith, or were unreasonably incurred, or were unreasonable in amount. The contractual provisions there being considered varied as between the securities but were in generally similar terms. One provision, that was said to be representative, provided for the mortgagor to pay "all costs, charges and expenses howsoever incurred by the bank ... on a full indemnity basis".

31 The bank in its final form of submissions seeks orders in respect of the costs of this application, and directions to the taxing officer, which purport to reflect that aspect of the decision reached in Gomba Holdings. The relevant provisions of the mortgages in this case have been set out earlier. They are quite different in form from those considered in Gomba Holdings. This aspect of the construction of the mortgages is not directly raised by the merits of this application. The applicants are concerned to have a different question determined, namely, whether the order of the court that the costs of the appeal be taxed precludes, in the absence of taxation, the recovery of any legal costs in respect of the appeal by the means adopted by the bank in this case. It is only incidentally that this issue of construction is now raised by the unusual costs order the bank seeks in the event that it is successful on the merits of the application.

32 In these circumstances, and for the further reasons given later, it is unnecessary to determine the measure of the contractual entitlements of the bank in this respect on this application. In our view, it is not appropriate to deal with that question. It should be left until, if ever, it is properly raised for decision in duly constituted proceedings.

33 The normal position is that costs should follow the event and, as indicated earlier, an order in respect of costs in favour of the bank ought normally reflect the contractual entitlement of the bank under the mortgages. Nevertheless, there appear to be matters which warrant a departure from the result suggested by those principles in the particular circumstances of this case.

34 The materials before us disclose what appears to be an unfortunate and unnecessary attitude on the part of the bank to the efforts of the applicants to learn, relevantly, what legal costs in respect of the appeal had been deducted by the bank from the proceeds of the sale of the secured property. Further, there was a persistent failure by the bank to explain on what basis it had not proceeded to tax its costs pursuant to the order of the Court. The dispute between the applicants and the bank has a long and difficult history but that does not appear to justify the position taken by the bank in these respects as revealed in what is before us. These proceedings may well have been avoided, or differently directed, had the bank adopted a more appropriate attitude to the applicants' requests and correspondence.

35 Further, the position adopted by the bank when the matter came on for hearing was surprising, and misleading. At that point, the bank was contemplating that it would have its costs of the appeal taxed, and other costs, but on a basis not justified by the orders made by this Court. The factual basis for its position was quite obscure. The bank's correspondence with the applicants and its submissions to the Court added a measure of confusion to that obscurity. It is only quite recently, pursuant to invitation of the Court, that the bank has acted to clarify the factual basis on which it sought to resist the application and advance its own position. As indicated earlier, it is only by its written submissions of 1 October 2003 that it has fundamentally changed its position as to the nature of its entitlements and the orders that ought to be made. This has added to the costs of the hearing.

36 In these circumstances, it is our view that as a matter of discretion a departure from the ordinary principles is appropriate. The appropriate order, in our view, is that each party should bear its own costs of and in relation to this application. This order is made in knowledge of the bank's contractual entitlements in respect of legal costs pursuant to the mortgages, on which specific reliance has been placed by the bank in respect of the costs of this application, and is made with the intention of depriving the bank of those entitlements in so far as they relate to the costs of this application.