Sanelli v Sanelli & Anor [2010] VSC 78

2 Under rule 63.15, the second defendant as withdrawing party must pay the costs of plaintiff, unless the Court otherwise orders. Costs would usually follow the event and be paid on a party and party basis. But the plaintiff seeks indemnity costs. It does so on the ground that the second defendant did not have a case, and defended this case in wilful disregard of known (or apparent) facts and established law. The plaintiff states the defence was "unsustainable, yet [the second defendant] has proceeded with its spurious defences, irrelevant discovery, court applications and interminable correspondence."[2]

3 The second defendant contended there should be no order for costs because "The Plaintiff's approach throughout the whole of these proceedings has been characterised by obstructionism, delay and obfuscation."[3] The second defendant says this conduct denied or at least impaired it from gaining the facts in order to form a considered view about the merits of the plaintiff's case and it could only finally do so when the plaintiff filed her witness statement on 11 January 2010.

4 Alternatively, the plaintiff seeks indemnity costs as a consequence of a Calderbank letter[4] that it sent on 6 March 2009. In effect, it offered to bear its own costs if the second defendant would agree to the moneys in court being paid to the plaintiff. The second defendant says the plaintiff's conduct of the litigation, as already described, made it not unreasonable for the second defendant to reject the Calderbank offer.

5 The case concerned the equitable doctrine of exoneration. To understand the factual and legal ingredients of the case requires first a reference to an earlier case in this Court.

6 In July 2007, Acee Victoria Pty Ltd (the second defendant in the present case) brought proceedings against Sanfol Pty Ltd and its two directors Giuseppe Sanelli (the first defendant in the present case, being the plaintiff's husband) and Theologus Foullas. Acee claimed moneys due by Sanfol under a loan agreement, guaranteed by the two directors. There was default under the agreement. The claim was for $288,896 and interest. Acee obtained default judgment against all three defendants on 14 September 2007 and issued a warrant of seizure and sale of Giuseppe Sanelli's interest in property at 35 Wallis Avenue, Ivanhoe East. The warrant was registered on title, although it is doubtful that a warrant confers an interest in land.[5]

7 Acting on evidence that the plaintiff and her husband had made a contract to sell the Ivanhoe East property, Acee applied and obtained an order from Hargrave J on 14 August 2008 that required the net proceeds of sale (after the discharge of any mortgage, agent's commission and fees) to be paid into court forthwith. The sum of $568,784 was paid in on 20 August 2008. His Honour's order also acknowledged the claimed rights of Carolina Sanelli to the moneys, and recorded that any proceedings by her be issued by 22 August 2008.

8 The plaintiff then commenced these proceedings. She and her husband were registered as joint proprietors of the Ivanhoe East property. In about May 2006 they gave a registered mortgage to Westpac Banking Corporation. As originally formulated, her case was that the mortgage was procured in circumstances making its enforcement unconscionable because she had reposed trust and confidence in her husband, did not know and understand the nature and effect of the mortgage, took no benefit from the security which was for the benefit of the first defendant. She alleged that it was unconscionable to enforce the security against her or her interest in the property. To any lawyer, this looked like a case based on Yerkey v Jones as revisited by the High Court in Garcia v National Australia Bank.[6] But it was not a case against the mortgagee bank. The plaintiff alleged that in June 2008, the mortgaged land was sold to others for $1.351 million and settled on 15 August 2008. Westpac received $746,567.64 from the settlement proceeds, and the residue was paid into court under the order of Hargrave J.

9 The plaintiff's case as against Acee in this proceeding was that:

(a) none of the moneys paid to Westpac in discharge of the mortgage should have been recoverable from the plaintiff's half share in the net proceeds of the sale of the their East Ivanhoe property upon settlement;

(b) the interest of her husband should have been charged solely with the payment of the moneys paid to Westpac upon settlement of the sale of the property;

(c) at settlement, she was entitled to be paid all of the net balance of the settlement moneys; and

(d) she is entitled to all of the moneys which have been paid into court.

10 At the initial directions hearing before Vickery J on 28 August 2008, a note of the plaintiff's proposed directions mentioned that the case derives from Garcia "and invokes the equitable doctrine of exoneration". The Court added Westpac as a party to the proceeding. The plaintiff amended its statement of claim on 1 September 2008 pleading the joinder of Westpac "simply for comity of action, so that the bank is bound by the declaration sought in the prayers for relief."

11 A defence was filed by the first defendant, saying amongst other things that Acee was entitled to the fruits of its judgment; there was no claim against Acee; the plaintiff's claim was not "justiciable"and had been waived by her in allowing the sale; and was precluded by an estoppel.

12 Thereafter, on 12 November 2008, the plaintiff filed a notice of discontinuance against the third defendant. Although Westpac filed an appearance, it notified all parties that it did not intend to take any active part in the proceeding. Thus, as at about November 2008 the real fight over the money was between the plaintiff and Acee, the second defendant. It was akin to an interpleader.

13 The solicitor for Acee, Mr Trevorah has sworn a comprehensive affidavit giving a detailed explanation of the conduct of the whole of the litigation. Ignoring argumentative content, I accept it as a conscientious account. I will not rehearse its contents. Its gravamen is that Acee was pursuing discovery as against the plaintiff and Westpac to ascertain (as matters outside its knowledge) all the facts concerning the procuration of the Westpac loan; her interest in the Ivanhoe East home before the Westpac dealing; the sources of funds to buy the property in the first place including the disposal and encumbering of other properties owned by the Sanellis; banking records; and the distribution of money from Sanfol and another company run by her husband, and how that money was applied and for whose benefit. All this was sought, it was said, to enable Acee to make an informed decision about the merits or sustainability of the claimed equity.

14 A judicial mediation occurred on 4 March 2009 which did not result in a settlement of the dispute. But the plaintiff did agree to file a supplementary affidavit of documents. Two days later the plaintiff served a Calderbank letter. It offered to settle on the basis that the sum paid into Court plus accrued interest be disbursed to the plaintiff; the proceeding be dismissed; and there be no order as to costs. The offer was expressed to be open for 14 days.

15 The offer lapsed. Mr Trevorah says that the offer was made at a time when Acee still did not have sufficient information to make a considered judgment about the equity claimed by the plaintiff.

16 In April 2009, the plaintiff gave further discovery and filed substantial further and better particulars of her statement of claim. Most pertinently, the particulars said that the plaintiff received no benefit from the mortgage funds. They say that the only benefit flowed either to her husband alone or for the use of Sanfol to fund a purchase of property in Glenroy. In evidence was a Westpac bank cheque dated 28 April 2006 for $733,312 payable to Acee, eventually discovered by Acee. The plaintiff seizes on this to say that Acee always knew the plaintiff did not get the benefit of the moneys.

17 As for the first defendant, he filed a supplementary affidavit of documents in late May 2009. But, Acee complained, that did not include the documents from a finance broker's file. Eventually, in June 2009 Mr Trevorah was able to attend the broker's office and inspect the files. He says he discovered that Sanfol had been involved in previous property developments. Mr Trevorah then went on the trail of seeking documents and information from the plaintiff and the first defendant as to whether the East Ivanhoe property had been used a security for funding any of these developments.

18 Then, on 21 May 2009 (about halfway through the life of this case) the plaintiff made a second amendment to her statement of claim. She removed the claim as apparently based on Garcia, and explicitly pleaded and confined herself to a case based on an equity of exoneration. In argument before me, the plaintiff's counsel submitted that in all pre-existing pleadings, although the expression or the conclusion "equity of exoneration" had not appeared, the necessary facts to support the equity were always pleaded, and that it was not necessary for the plaintiff to stipulate the description of her equity because that was an allegation of law and not a material fact. True, it may not be necessary, but in a case like this it would have given the case definitive content. For that reason, Rules of court permit a party to pleading a point or conclusion of law.[7]

19 As amended, the plaintiff pleaded that she signed the mortgage at the direction of her husband, she gained no benefit from the mortgage or the moneys advanced under it, and the mortgage and the moneys advanced were solely for the benefit of her husband's business affairs. From there followed the legal contention, as pleaded, that she was entitled to be exonerated in respect of her payment to discharge the mortgage and her husband's share of the moneys in court is charged in favour of her to the extent of her equity of exoneration and her charge has priority to the second defendant's rights.

20 The amended defence contained an array of defences. It alleged that the plaintiff benefited from the money advanced by Westpac. This unparticularised allegation was never attacked by the plaintiff. There were allegations of laches, acquiescence, estoppel, waiver, "unclean hands", and loss of priority as against Acee under the Transfer of Land Act.

21 I shall summarise the subsequent events. Acee pursued further discovery from the plaintiff. It subpoenaed the finance broker's file which showed, Acee says, that the plaintiff was not a passive player and there were other properties. Then the plaintiff obtained a speedy trial for 11 February 2010 because of her ill health. The parties agreed to a timetable for the Court Book index and witness statements, but the plaintiff was a month late for both, said not to be her fault. The plaintiff's witness statement was served on 11 January 2010 which strongly asserted that she was not involved in her husband's business affairs and had never allowed him to use any of her properties for business dealings. She explained how the East Ivanhoe home was financed. Mr Trevorah says this information was "entirely new and unexpected".

22 On 22 January 2010, Acee applied for an undoing of the trial date on the ground that the plaintiff's lateness with the Court Book and witness statement made proper preparation not possible. This was refused by an Associate Judge. Mr Trevorah then interviewed the first defendant, the husband. An affidavit of Christopher Dale sworn 17 February 2010 exhibits correspondence which shows Acee's solicitors trying to settle the matter, then sending their own Calderbank letter on 4 February offering the plaintiff all the money in Court and each party to bear their own costs. Acee then withdrew its defence the following day.

23 Much of the debate before me concerned the doctrine of exoneration. The plaintiff contended that the second defendant conducted itself at all times not realising or ignoring the contents of this doctrine and, as plaintiff's counsel put it, going on a discovery frolic into irrelevant matters trying to dig up a defence and pleading bad defences. For Acee, it was submitted the solicitors were just "doing their job" (or as I expressed it in argument, leaving no stone unturned) and thoroughly investigating the case for evidence of the Sanelli's intentions, that being a matter outside Acee's own sphere of knowledge.

24 What is the content of the doctrine? It was stated this way by Deane J in Farrugia v Official Receiver in Bankruptcy: [8]

Where the property of a married woman is mortgaged or charged in order to raise money for the benefit of the husband, it is presumed, in the absence of evidence showing an intention to the contrary, that, as between her husband and herself, she meant to charge the property merely as surety. In such a case, she is, as between her husband herself, in the position of surety and entitled both to be indemnified by the husband to throw the debt primarily on his estate to the exoneration of her own.

25 It is an equitable proprietary interest. It does not seek to set aside the discharge the mortgage as in a Garcia type unconscionability claim. It gives a wife a charge over her husband's property who is primarily liable for the debt, so the debt must be satisfied first (or entirely) out of the principal's (husband's) property or, where the property is co-owned, from his share of the property.[9] In Official Trustee in Bankruptcy v Citibank[10] Bryson J explained:

The doctrine of exoneration became established in an earlier age when a wife's property existed only in equity, and equity, in a number of special rules including this one, protected property interests of wives against the legal and social dominance of husbands. The legal and social contexts are now very different, but the doctrine of exoneration continues to exist to supply a presumption of the intention of parties as to who should be principal and who should be surety . . .

The doctrine serves to illustrate that the intention of a party may establish which is to stand as surety and which as principal even though both appear to incur substantially the same legal obligation.

Although contemporaneous agreements, arrangements and expression of intention are the usual sources of evidence about the intentions of parties on such a subject, there is no reason why their intentions may not be inferred from the circumstance in which they acted. Intentions, like other facts, may be proved from circumstances. Circumstances could conceivably furnish very clear proof of intention as to who was to be principal and who was to be surety, and the intended and actual application of funds raised when two persons incur a common liability would often have an important, even predominant part in the proof of the relevant intention.

26 In Parsons v McBain[11] the Federal Court affirmed the currency of the equity of exoneration, but recognised that a plaintiff may be denied a right of exoneration if she received a tangible benefit from the loan itself. So, the plaintiff submits, the defendant properly advised should have realised the decisive question in each case is to ask "Who got the money?" In this case, the plaintiff says from the outset it was clear that the plaintiff did not get the money. The mortgage funds of $733,214 were used by her husband to enable his company, Sanfol, to purchase a property in Glenroy, for which he had also obtained funds from Acee. For the plaintiff, the case is elementary: she had obviously not obtained the money or any benefit, therefore the equity of exoneration applied and the second defendant, presumed to know or ascertain the law, should never have defended this case.

27 This case does not call for an exegesis on the doctrine of exoneration. All that need be added is three qualifications. First, care need to be taken with the fetching question "Who got the money?" The wife may not have received the money, but it may be shown that the money for the wife's use and benefit.[12] But the benefit must come from the money and not to be too remote; the benefit must be tangible and not incapable of valuation; and it must not be a benefit to be expected anyway such as "bringing home money to put food on the table and clothe the children".[13] Secondly, there is a question whether receipt of a tangible benefit nevertheless does not destroy the equity, but only reduce it. Thirdly, as explained in the Citibank case, the doctrine creates a presumption only. Facts may exist to alter that. Intentions, like other facts, are to be inferred from circumstances and equity looks for, or infers, an intention as to who truly was intended to be principal and who would be surety. This third qualification was the basis of the Acee's justification for its investigative conduct of the proceeding and conversely, the basis of the plaintiff's complaint, now, that it was all for nothing.

28 I think enough has been said by this Court about the legal principles concerning indemnity costs. I need only refer to the recent decisions of Robson J in GT Corp Pty Ltd v Amare Safety Pty Ltd [14] and Vink v Tuckwell (No 3)[15] which in a field of unfettered discretion, identify some of the categories in which a Court might make the order. And I would add reference to two New South Wales decisions of Rosniak v GIO[16] and Hypek Electronics Pty Ltd v Mead.[17]

29 An order for indemnity costs is a departure from the Court's usual course and special circumstances must be shown. In my experience, applications for such orders are increasing in modern litigation but overall they are difficult to obtain, certainly in borderline cases. Great care must be taken in reaching a conclusion at the urging of a victorious litigant that the losing litigant somehow conducted itself delinquently as litigant so as to attract an indemnity order, as if it were an expression of the Court's admonition. Such an order may be made where proceedings are commenced or continued in wilful disregard of known facts or clearly established law[18], or where there is undue prolongation of a case by groundless claims, or conduct of proceedings for an ulterior motive, or where a litigant acts dishonestly in the litigation or flouts or abuses rights and privileges. They tend to be cases where a Court might think that a litigant properly advised had no hope of success and therefore must be taken to have proceeded for some illicit motive or chosen to wilfully disregard the law. That would require a strong finding to sustain a judicially exercised discretion.

30 In this case, the first of the categories above - wilful disregard of the law - was sought to be invoked here. An example is Maclaw[19] where there was simply no jurisdiction in this Court to bring a case that was exclusively within the jurisdiction of VCAT yet, despite warnings about cost penalties, the plaintiff still attempted to keep a "toe hold" on the proceedings. But apart from such pathological cases, I would think in most cases this category would be will be very difficult to demonstrate. Some law may be "clearly established", or thought to be so in some minds, but the problem as always is in its application or the possible presence of facts to make the clearly established law inapplicable. If the facts are obscure or uniquely within the knowledge of the other party, or a forensic investigation of collateral facts is called for, then it is only to be expected that a litigant will wish to make use of pre-trial procedures. Added to that is the consideration that if a plaintiff regards the law as clearly established and the facts as incontrovertible, then before the accumulation of costs and the attraction of a right of discovery this Court can be moved for summary judgment. Otherwise, if there is irrelevant or overreaching discovery, a Court will not allow it.

31 In Luxmore Pty Ltd v Hydedale Pty Ltd[20] the Court of Appeal said that, on a costs question, judges should not be required to give elaborate reasons averting to every matter debated in argument and parties should assume every matter addressed in argument had been considered. There was much material and much debate.

32 In my view, putting to one side the Calderbank offer, the conduct of this litigation by Acee does not call for an indemnity costs order.

33 The content of the doctrine of exoneration may be clear enough but it has to be said that it was not until 21 May 2009 (about halfway in the 18 month life of this case) that the plaintiff's case was amended definitively to plead the equity. Before then, the most that can be said is that to an incisive mind not too concerned about pleadings there was a latent pleading of the equity. But the plaintiff must have been sufficiently concerned about the clarity of its pleading to be moved to take the (proper) step and amend the composition of its case to put it on a distinct footing.

34 I accept the submission that Acee was entitled to pursue discovery to see if facts existed to raise the equity in the first place. Discovery is all it had to investigate the facts. I am not willing to conclude that discovery was aimless here or designed to harass or inflict tactical delay. As already stated, the doctrine creates a presumption but it recognises that circumstances and dealings and arrangements "behind the scenes" or within the relationship could conceivably furnish proof of an actual intention as between husband and wife in the Westpac loan that she was to be more than a surety. To expect Acee to capitulate just because it was plain that the Wespac funds were paid to Acee and on the face of it the plaintiff got no benefit is, I think, unrealistic and unreasonable. Moreover I do not see as "wilful" disregard of the law to investigate the presence of facts to ascertain or infer the presence of a different intent. I think I can add that experience has it that creditors and their lawyers view unconscionability claims in commercial dealings with initial disquiet and feel impelled to fully investigate the claimant's personal circumstances and other banking and property dealings before conceding a financial loss from a joint mortgage security given by a husband and wife and accepted in good faith.

35 I agree that some of the other defences as pleaded were dubious and, I detect, more a product of a disbelieving defendant. I think in modern litigation plaintiffs are no longer disarmed by a panoply of high sounding defences. But I do not think they compounded problems, and I venture to think they would have fallen away if the equity was established or defeated and they did not unduly enlarge the discovery or pleadings exercise.

36 Nothing focuses the mind like a trial. I think it is fair to say that having taken discovery and third party subpoenas as far as it could, then speaking to the plaintiff's husband Guiseppe Sanelli, and then seeing the plaintiff's vivid witness statement, it can be accepted that Acee's advisors could say that having exhausted finally all measures, Acee had no facts to contest the plaintiff's case. But I cannot conclude that it should have realised that at the outset and then wilfully disregarded the law.

37 I am also of the view that there is no justification, for the purposes of Rule 63.15, to deny the plaintiff her party/party costs. She has succeeded in the proceeding. Costs should follow the event. Acee submitted that expense could have been saved if the plaintiff, asserting an equity, adopted an "open book policy" and was far more giving or less troublesome with discovery so as to enable Acee to ascertain the facts and be in an informed position sooner. I detect some impatience had set in the plaintiff because of Acee's persistence and correspondence but I see no real basis for saying the plaintiff had obstructed matters.

38 The question here is whether Acee's rejection of the Calderbank offer was unreasonable in all the circumstances: see Hazeltene's Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2)[21] and more recently, Telstra Super Pty Ltd v Finch (No 2).[22] If the refusal was unreasonable, that is, of itself a proper ground for the award of indemnity costs or solicitor-client costs. What is unreasonable is a matter of impression and judgment. That usually requires a consideration of matters such as the stage at which the offer was made, the extent of compromise, and the offeree's prospects of success at the time.

39 The plaintiff's offer was by letter dated 6 March 2009. It was made after mediation and at a time when the plaintiff had agreed to make further discovery. But, 2 months later, on 21 May 2009, the plaintiff amended its statement of claim. To put the timing in context, the matter was ready for trial in September 2009.

40 The plaintiff submits the offer was "indisputably eminently sensible." Care must be taken with judgments in hindsight. Faithful to my reasoning on the principal question concerning indemnity costs, in my judgment, I do not think there is an injustice in declining to order indemnity costs on the Calderbank letter. The writ was filed in August 2008. The wheels of discovery had started turning by year's end. Then a little over 2 month's later the Calderbank offer came. In May 2009, the claim was amended. I have accepted that Acee could not be expected to shrug its shoulders and capitulate; that it was entitled to investigate facts. Maybe by about September last year, it could have made an informed decision without waiting for the plaintiff's witness statement. But I accept the submission that, as at March 2009, it was by no means clear that Acee's lawyers had all the relevant objective material to enable a litigator to give definite advice, or at least could say to their client that they had exhausted all means to dutifully investigate the case.

41 Subject to any exceptions or any ancillary orders, I propose to order that further to the orders made by the Court on 11 February 2010, the second defendant shall pay the plaintiff's costs of this proceeding including any reserved costs.

[2] See affidavit of C A Dale, sworn 10 February 2010, para 24.

[3] Affidavit of P D Trevorah, sworn 16 February 2010, para 4.

[4] Calderbank v Calderbank [1976] Fam 93.

[5] See Capital Finance Aust v O'Bryan Group Pty Ltd [2003] VSC 355.

[6] [1998] HCA 48; (1998) 194 CLR 395.

[8] [1982] FCA 52; (1982) 43 ALR 700 at 702; [1982] FCA 52; (1982) 58 FLR 474 at 476.

[9] See Young and others, On Equity (Law Book Co 2009) , p 856ff esp [12.610].

[10] (1995) 38 NSWLR 116 at 129G ff.

[11] (2001) FCA 376 at [18] - [24].

[12] See Tyler and ors, Fisher & Lightwood's Law of Mortgage (2nd Aust ed) p 682.

[14] [2008] VSC 296.

[15] [2008] VSC 316.

[16] (1997) 41 NSWLR 608 at 615B.

[17] (2004) NSWLR 169 at 178ff.

[18] See Maclaw No 469 Pty Ltd v Ilana Accessories Pty Ltd [2000] VSC 563.

[20] (2008) VR 481 at [12].

[21] [2005] VSCA 298; (2005) 13 VR 435.

[22] [2010] VSCA 25.