RISTIC v GREATER BUILDING SOCIETY LTD

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41042/2001 CLD 10306/2000

MASON P SANTOW JA CAMPBELL AJA

LJUBISA RISTIC v GREATER BUILDING SOCIETY LTD JUDGMENT

1 MASON P: The appellant is the registered proprietor of residential premises at Valentine. The property was unencumbered in 1997.

The loan transactions 2 On 16 September 1997 the appellant signed the documentation relating to a $10,000 loan from the respondent. He declined the suggestion that he get independent legal advice and the documents were explained to him by Mr Browne, the branch manager at the respondent's Warners Bay branch. The documents included a Regulated Home Loan Contract and a Mortgage in registrable form. The advance was repayable at the rate of $114 per month during an initial "discount rate period" and thereafter at the rate of $115 per month. Repayments were duly made for a time. 3 On 15 March 1998 the appellant saw Mr Browne again (this time at the Charlestown branch) and he requested a further loan of $10,000. The written application was promptly approved and on 16 March 1998 the appellant returned. Mr Browne told him that the documents to be signed were the same as those that applied to the existing loan except that he did not have to sign another Mortgage, as that was still in place. Again Mr Browne recommended that the appellant obtain independent legal advice, but the appellant told him "I don't need any advice". Notwithstanding, Mr Browne then explained in some detail the effect of the amended transaction (Blue 21ff). The documentation which the appellant signed included a further Regulated Home Loan Contract in which the amount of credit was shown as $19,687.75. The new repayment regime was $223 per month during the discount rate period and thereafter $226 per month. 4 Mr Browne's evidence was accepted by the trial judge in preference to that of the appellant who had said that he had only been given explanations of a very desultory nature. 5 Mr Browne's explanation on both occasions drew attention to the Default Administration Fee provided for in the respective Loan Contracts (see Blue 15, 25). In July 1998 the respondent exercised its contractual right to vary the rate of this fee by increasing it, as from 1 September 1998, to $20 per month where the borrower was in default for an amount less than two repayments and otherwise to $50.

Defaults leading to proceedings for possession 6 Subsequently the appellant began to default in his repayments. His default occurred because, on the dates when a transfer was to be made from his savings account to his loan account, there were insufficient funds to enable the transfer to be made. By the end of 1998 he was $829.53 in arrears. When Default Administration Fees were added, the extent of his default came to $1076.53. 7 In December 1998 the appellant contacted an accounts controller employed by the respondent to tell him that he was proposing to sell his house. At a meeting in late January 1999 agreement was reached that the arrears would be capitalised and arrangements were put in place designed to avoid the problem that had led to default in the past. Unfortunately the defaults continued. 8 On about 3 December 1999 the respondent served a formal Default Notice pursuant to s80 of the Consumer Credit Code (Blue 261). It gave notice of defaults in the payments due between June and November 1999 and also notified the borrower that he was in default in that he had not paid the $50 Default Administration Fees debited to the account in consequence of these substantive breaches. The Notice called upon the borrower to remedy these breaches within 30 days. It did not purport to call up the balance of the capital sum. 9 The breaches were not remedied. 10 In February 2000 the respondent commenced proceedings by Statement of Claim for possession in the Common Law Division. No money judgment was sought, but merely orders for possession, leave to issue a writ of possession and costs. The appellant filed a Defence denying the allegations of default under the mortgage. 11 This Court was informed that the proceedings came on for trial before Sperling J but that they had to be adjourned (with adverse costs orders against the appellant) when the appellant amended the Defence to raise broader issues, including defences arising under the Contracts Review Act 1980 (the Act) and the assertion that the Loan Contract and Mortgage were penal in certain respects. The appellant also filed a Cross Claim repeating the various defences as well as claiming that the respondent had breached a duty of care. The relief sought in the Cross Claim included damages, declarations and orders pursuant to s7 of the Act. It did not include relief against forfeiture or the taking of accounts as between mortgagor and mortgagee. 12 The proceedings were heard by Newman AJ, who gave judgment for possession plus costs and judgment for the cross defendant on the Cross Claim plus costs. In his reasons (Greater Building Society Ltd v Ljubisa Ristic [2001] NSWSC 1052) his Honour records that there was no dispute that as at the date of trial the appellant was in default under the Mortgage. The defaults included non-payment of monies due and failure to obtain consent prior to the creation of a further security interest over the property. 13 As at 30 September 2001 the balance of the loan account had become $92,937.90, including arrears totalling $74,416.50. Of this sum, only $380 represented moneys then due under the Loan Contract. The balance was made up of: Default Administration Fees $1742.00 Solicitor's costs and enforcement costs $72,294.50

The "SOL COST" items relate to costs paid or payable to the firm of solicitors retained by the mortgagee in the instant proceedings. 14 The running account shows that, since commencement of the proceedings there had been "SOL COST" items of $981.90 (29 February 2000), $1119.20 (30 March 2000), $924 (28 April 2000), $1337.45 (7 June 2000), $2839.40 (28 June 2000), $2462.88 (2 August 2000), $59 (2 August 2000), $3538.76 (29 August 2000), $772.14 (29 September 2000), $1819.74 (1 November 2000), $2287.30 (6 December 2000), $1210.38 (4 January 2001) $4849.08 (8 February 2001), $5220.25 (7 March 2001), $13,006.99 (5 April 2001), $9216.88 (10 May 2001), $8511.86 (4 June 2001), $2976.60 (4 June 2001), $7668.97 (3 August 2001) and $545.82 (6 September 2001) as well as an item for "ENFOR COST" of $1062 (1 February 2000).

Issues on appeal 15 The appellant seeks leave to appeal and he challenges the orders made on both the Statement of Claim and Cross Claim. He submits that Newman AJ erred in that he should have found that:

1. the Default Administration Fee was a penalty at common law in light of the provision in the Mortgage for indemnity in relation to the mortgagee's enforcement expenses; 2) the matters referred to in (1) meant that the Loan Contract was unjust within the meaning of the Act; and 3) the right of indemnity under cl 26.5 of the Mortgage rendered the contract unjust within the meaning of the Act. 16 The appellant also submitted that the trial judge had failed to address his arguments on the second and third matters and that, for this reason alone, the decision to refuse relief under the Act was vitiated. He sought a new trial although he accepted (somewhat reluctantly) that this Court had power in the circumstances to make whatever orders should have been made below.

Contract and Mortgage documentation 17 Before addressing the grounds of appeal it is necessary to set out the relevant terms of the contractual documents. As will appear, the principal attack on the judgment proceeded on misconceived premises as to the extent of the mortgagee's rights to recoup expenses upon default. As will appear, cl 26.5 has no bearing on the issues that truly arise in this appeal. 18 In the Regulated Home Loan Contracts the presently relevant terms are: 3. FEES AND CHARGES 3.1 You must pay to us or as we direct the following fees and charges (which are authorised by this contract ): 3.1.1 government charges and you must pay them when they are debited to your loan account ; and 3.1.2 the credit fees and charges set out in the Schedule which are payable at the times specified in the Schedule . 3.2 We can debit these fees and charges to your loan account …. 4. WHAT YOU OWE US Once we debit an amount to your loan account (if it is not already owed), you owe us that amount. 8. IF YOU ARE IN DEFAULT When are you in default? 8.1 You are in default if: 8.1.1 you do not pay on or before its due date for payment any amount payable under this contract ; or 8.1.2 you are in breach of any other provision of this contract ; or … What can happen then? 8.2 If you are in default, then subject to any law ( including requirements as to notice) the loan account balance plus any amounts charged, accrued or payable but not yet debited to your loan account automatically become due and payable. 8.3 Enforcement expenses may become payable under this contract or any security (or both) in the event of a breach. 8.4. You must pay us all reasonable enforcement expenses we reasonably incur arising from any default under this contract or under any security . We can debit these amounts to your loan account . 8.5 If enforcement expenses are debited to your loan account they will become due and payable at the time they are debited. 8.6 Enforcement expenses include , in the case of any security, costs incurred in preserving or maintaining property subject to the security such as paying insurance, rates or taxes for the property after a default where they are authorised by the security . If the property the subject of a security can be insured, you must ensure insurance over that property is taken and maintained for at least the minimum insurable value . If you do not, we may take out that insurance and any premium we pay will be an enforcement expense. 12. INCONSISTENCY 12.1 The Schedule, Standard Terms and Conditions and any security given by you set out the entire agreement between you and us. They override any representations made by us before you entered into the contract . 12.2 If there is any conflict or inconsistency between the Schedule, Standard Terms and Conditions and any security , those documents will prevail in that order to the extent of the inconsistency.

19 The Schedule includes a definition of Default Administration Fee as follows: This fee will be debited to your loan account immediately before the end of the last day of each month when you are in default of a payment obligation under this contract . It is payable when it is debited to your loan account . this fee will be $6.00 where you are in default of an amount that is less than 2 repayments and otherwise will be $20.00.

(As indicated, the amounts were varied in July 1998.) 20 The Mortgage incorporates standard terms embodied in a registered Memorandum. They are expressed in "plain English". Those relevant to the proceedings are: 10. Other securities 10.1 If we consent to another security over the property and if we ask, then you must get an agreement acceptable to us regarding the priority between this mortgage and the other security . 10.2 If you do not get our consent and any agreement we ask for, we: 10.2.1 need not make funds available under any agreement covered by this mortgage ; and 10.2.2 may exercise any other rights that arise because you do not so, such as the right to take possession of the property or to sell it. 10.3 You must ensure that the amount secured under any other security over the property is not increased without our consent. You must not agree to vary the terms of any other security over the property without our consent. 10.4 You must comply on time with any obligation in connection with any other security over the property . … What can happen if you are in default? 24. When are you in default? 24.1 You are in default if: 24.1.1 you do not pay the amount owing on time; or 24.1.2 you do something you agree not to do, or you don't do something you agree to do, under this mortgage or in agreement covered by this mortgage ; or … 25. What can happen then? 25.1 If you are in default, then subject to any law ( including requirements as to notice) the amount owing becomes immediately due for payment and we can enforce this mortgage. In addition, we may do one or more of the following as well as anything else the law allows us to do as mortgagee: 25.1.1 sue you for the amount owing ; and 25.1.2 take possession of the property …. …. 26. Enforcement expenses …. 26.3 Clauses 26.4 and 26.5 apply to the extent that this mortgage secures the performance of obligations under an agreement covered by this mortgage to which a Consumer Credit Code does not apply. …. 26.5 You indemnify us for all money we spend, losses we suffer, or costs we incur (including where we incur legal costs, our costs on a full indemnity basis) as a result of: 26.5.1 your defaulting under this mortgage; and 26.5.2 us doing what we are entitled to do under the mortgage if you default. The indemnity in this clause 26.5 continues even if we release the property from this mortgage. 39. Consumer Credit Code …. 39.2 If: 39.2.1 that Code would otherwise make a provision of this mortgage, a provision of an agreement covered by this mortgage , illegal, void or unenforceable; or 39.2.2 a provision of this mortgage or as a consequence of a provision of this mortgage, a provision of an agreement covered by this mortgage , would otherwise contravene a requirement of that Code or impose an obligation or liability which is prohibited by that Code, this mortgage is to be read as if that provision were varied to the extent necessary for it or an agreement covered by this mortgage to comply with that Code or, if necessary, omitted. 45. Meaning of words agreement covered by this mortgage means: • an agreement or other arrangement (including a deed) under which one or more of you incurs or owes obligations to us or under which we have rights against you, including any such agreement or arrangement which all of you acknowledge in writing to be an agreement covered by this mortgage ; and • each variation of it …. amount owing means, at any time, all money which one or more of you owe us, or will or may owe us in the future, including under this mortgage or an agreement covered by this mortgage …. Construing the loan agreement and mortgage together 21 Much of the appellant's initial attack on the enforceability of the Loan Contracts and Mortgage depended upon the submission that cl 26.5 of the Mortgage is free-standing and duplicative of rights conferred under the Loan Contracts in relation to the Default Administration Fee and recovery of enforcement expenses. This was the springboard for both the common law penalty and statutory unjustness arguments. 22 In brief, the appellant contended that the right in the Loan Contract to exact the monthly Default Administration Fee cannot stand together with the right in the Mortgage to full indemnity of costs, including legal costs. At times, the appellant argued that the former right was penal in light of the latter. At other times, the latter right seemed to be invoked as the basis for rendering the Loan Contract invalid and/or unjust (at least in part). 23 The discussion which ensued between Bench and Bar disclosed that these submissions were misconceived because they ignore the provisions in the interrelated documents that render the Mortgage subject to the Loan Contract in the case of inconsistency. In particular: (i) Cl 12.2 of the Loan Contract gives that document primacy over the Mortgage in the event of any conflict or inconsistency; (ii) Cl 8.4 of the Loan Contract entitles the lender to recover no more than reasonable enforcement expenses reasonably incurred arising from any default under the Contract or under the Mortgage; 24 This meant that the defaulting borrower has contractual protection against unreasonable enforcement costs, whether unreasonableness stems from inapt enforcement activity or excessive legal or other costs. 25 The respondent accepts this and also accepts that that it would therefore be open to the borrower to raise the unreasonableness of particular items of enforcement costs whether at common law if sued in debt, or in equity if seeking redemption or relief against forfeiture or a taking of accounts as between mortgagor and mortgagee. 26 The present case did not involve any such proceedings. The mortgagee was seeking possession only. The mortgagor's defaults by non-payment of some arrears and by entry into a second mortgage without consent were undisputed. The default notice requirements under the Consumer Credit Code had been complied with. The mortgagor had not sought redemption, relief against forfeiture or the taking of an account. 27 Even more to the point, the appellant had not suggested at trial that the solicitor costs and disbursements had been unreasonably or improperly incurred in the tortuous litigation and protracted enforcement proceedings. 28 In the upshot, the appellant's main argument on appeal became the submission that it was penal at common law and unjust within the Act for the Default Administration Fee of $50 per month to be levied on top of the actual (presumptively reasonable) enforcement expenses debited to the loan account in accordance with cl 8.4 of the Loan Contracts. 29 This argument was advanced against the background of acceptance of the finding that the Default Administration Fee "represents an estimate by the plaintiff of the administrative cost of dealing with a matter of default" (J32. See Orange 11). Indeed, the appellant embraces this finding and seeks to treat it as setting the outer limit of what is reasonable. 30 The appellant's counsel sought to adapt his submissions to the changed contractual landscape stemming from a proper understanding of the limits of cl 8.4 of the Loan Contracts and the interaction between the Loan Contracts and the Mortgage. The modified attack on the judgment had two broad strands. 31 It was initially submitted that the Loan Contract (as secured by the Mortgage) was penal and/or unjust because it provided the lender/mortgagee with an oppressive and disproportionate remedy consequent upon a minimal default on the part of the appellant. Here the appellant pointed to the small arrears in loan repayments compared to the vast sums incurred in enforcement proceedings. The problem with this approach is that the unreasonableness of those enforcement costs was not put in issue at trial and cannot be attacked on appeal. In expressing it this way, I am recognising the limits of appellate review; and not inferring that any such attack might have been successful. The respondent says that it would have advanced additional material at trial if the point had been taken. There is indeed a good deal of material indicating that the appellant has been the prime author of his own misfortune in his approach to what became disproportionately expensive litigation in the Supreme Court. 32 In any event, I reiterate that quantification of the precise amount of "reasonable enforcement expenses" is not relevant to the present case. The legal expenses incurred by the mortgagee in ultimately successful proceedings were very considerable, whether or not they were as extensive as charged by the solicitors and debited to the loan account. 33 Counsel for the appellant recognised that in determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made (Act, s9(4)). Accordingly, he did not press the comparison between the small arrears and the large enforcement costs save as illustrative of the type of penal or unjust outcome that the Loan Contracts were capable of generating according to their terms. 34 At trial, the respondent had argued that the Default Administration Fee was not a penalty because it represented a genuine estimate of the cost to the lender of administering an account in default. Newman AJ accepted this argument (J32) and concluded that the Fee was not a penalty. 35 The appellant embraced this conclusion and sought to use it as the springboard for his penalty/unjustness arguments. The Fee (levied under cl 3.1.2 of the Loan Contracts) was said to have been intended to cover all likely costs of administering and enforcing an account in default, including court expenses and legal costs; and thus it covered the same field as addressed by cl 8.4 the Loan Contract which also enabled the lender to add enforcement expenses to the loan account. The penal and unjust nature of the Loan Contracts were thus exposed, because the lender was double-dipping. 36 This, however reveals the appellant's submission to be circular, because it assumes a harsh and untenable construction of cl 8.4. 37 The first enquiry is to construe the Loan Contract according to the normal canons of interpretation, including the rule requiring a contract to be read as a whole and the prescription against capricious, unjust and penal results (Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109). Even without this guidepost, it is clear in my view that clauses 3.1.2 and 8.4 of the Loan Contract occupy discrete fields. The former (as regards the Default Administration Fee) deals with indirect, internal administration costs: the latter deals with direct, external expenses of enforcement proceedings. These include legal expenses because there is no obligation on the mortgagee to confined itself to in-house lawyers and agents. There is nothing unusual or inherently unjust about cl 8.4. It is possible to conceive of circumstances where there would be an overlap, revealed by the details of particular items of claimed "enforcement expenses", but that would depend on evidence and, if such duplication revealed itself the expenses would probably be ruled "unreasonable". 38 Next, it was submitted that the Loan Contract was unjust because it contains no facility requiring the mortgagee to refer its solicitor's legal expenses to independent taxation or assessment. Such a facility was available under the Legal Profession Act 1987 as it stood before 1993. In 1993 the system of taxation of costs was replaced by one involving cost assessors. One related amendment was the redefinition of "client" in s184: this had the consequence that non-clients, ie persons in the position of the present appellant, lost the right to have their mortgagee's solicitor's costs taxed or modified by court-appointed officers or assessors (see generally Jiwira Pty Ltd v Phillips Fox (unreported, SCNSW, Simpson J, 24 November 1997)). 39 Legal costs incurred in relation to advice or litigation are the primary obligation of the client on whose behalf they are incurred. The terms of the retainer will affect the scope of work that the solicitor may perform and charge for and there may be statutory protections as well. 40 The client may seek indemnity against a third party with respect to such costs, relying upon a rule of Court (cf Pt 52A r42), an order for costs made by a court against another party to litigation or a contractual right to indemnity such as found in the Loan Contract and Mortgage. The terms of the rule, court order and contract will determine the scope of the entitlement to recoupment and set the framework within which disputation about quantum will be resolved. 41 The rights of the client as against the solicitor will not necessarily be coterminous with the rights of the client as against the third party. Different contracts are involved and different statutory regimes may apply. To give one example pertinent to this case, a contractual right such as cl 8.4 of the Loan Contract may restrict the mortgagee's right of recoupment as against the mortgagor to reasonable expenses, even though the mortgagee might have to pay its solicitor in full under its contract of retainer. 42 The point sought to be raised by the appellant concerns the mechanisms available to the mortgagor to ensure that overcharging of the client mortgagee by the solicitor does not enure to the disadvantage of the third party mortgagor who is liable to recoup. But merely because Parliament in 1993 withdrew from mortgagors a facility for taxation or formal assessment does not leave the appellant at the mercy of the solicitor or the mortgagee. Under cl 8.4, enforcement costs must be reasonable as far as the mortgagor is concerned, or else they are irrecoverable - whether or not the mortgagee is bound to pay them. If they are unreasonably incurred or excessive in amount the mortgagor can defend any action to recover them or raise objections on the taking of accounts as between mortgagor and mortgagee in a redemption suit. There may be additional remedies (cf s99 of the Consumer Credit Code). 43 The absence of the facility of third-party taxation of costs or cost assessment could not be a matter of unjustness as between mortgagor and mortgagee. The right was always statutory (In re Carew (1844) 8 Beav 150, 50 ER 60). If the statutory regime of assessment is withdrawn by Parliament, then this cannot in itself be regarded as a relevant injustice, a fortiori because any agreement to give the facility directly to the mortgagor would have been nugatory. The mortgagor has adequate remedies for challenging the unreasonableness of the solicitor's expenses which the mortgagee might seek to debit to the account. 44 I have not found it necessary to address the argument about absence of reasons in light of my conclusions as to the primacy of the Loan Contracts and the irrelevancy of cl 26.5 of the Mortgage. 45 I would grant leave to appeal, but dismiss the appeal with costs. 46 SANTOW JA: I agree. 47 CAMPBELL AJA: I agree. **********

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