Secure Funding Pty Limited v Stark Secure Funding Pty Limited v Conway

Judgment 1On 5 September 2013, I delivered judgment ([2013] NSWSC 1257) in respect of applications by Mrs Jennifer Stark and Mr John Stark and Mr Rex Conway, by which they sought orders under rule 36.16 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") to set aside a default judgment granting possession of certain properties and to stay certain proceedings pending the determination of other proceedings brought by Staway Pty Limited (recs and mgrs apptd) (in liq) ("Staway") against Secure Funding Pty Limited ("Secure") in the Commercial List of this Court. I dismissed the application for a stay of the orders for possession and noted that, in the ordinary course, costs would follow the event. The parties have subsequently provided written submissions in respect of the question of costs. 2Mr and Mrs Stark and Mr Conway rely on an affidavit of their solicitor, Mr Graeme Veitch, dated 13 September 2013, which relates to an application now brought by Mr and Mrs Stark and Mr Conway in the Common Law Division to set aside the judgments for possession of Mr and Mrs Stark's property in proceedings number 2012/266739 in the Common Law Division and Mr Conway's properties in proceedings 2013/62391 also in the Common Law Division. That affidavit indicates that Mr Veitch previously considered that the best way to prevent the sale of Mr and Mrs Stark's home was to commence proposed proceedings in the Commercial List of this Court (as has been done) and seek a stay of enforcement of the possession proceedings against Mr and Mrs Stark until determination of the Commercial List proceedings, and that he had intended to adopt a similar approach in respect of the possession proceedings against Mr Conway. Mr Veitch indicates that Mr and Mrs Stark and Mr Conway will now seek leave to defend the possession proceedings against Mr and Mrs Stark and Mr Conway and to have those proceedings and the Commercial List proceedings consolidated. Draft Defences which Mr and Mrs Stark and Mr Conway seek to file in the respective Common Law proceedings in turn refer to matters that are also raised in the Commercial List proceedings; plead that Secure's conduct contravened, relevantly, s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) and/or s 21 of Schedule 2 to the Competition and Consumer Act 2010; and seek orders under s 12GM(2) of the ASIC Act and/or s 237 of the Australian Consumer Law dismissing the possession proceedings against Mr and Mrs Stark and Mr Conway respectively and relieving Mr and Mrs Stark and Mr Conway of their respective obligations under the loans. Relevant provisions 3Section 98(1) of the Civil Procedure Act relevantly provides: "Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis." 4UCPR r 42.1 provides that, if an order is made as to costs, the Court is to order that costs follow the event unless it appears to the Court that some other order should be made as to the whole or any part of the costs. UCPR r 42.2 states the general rule that costs payable to a person under an order of the Court or these rules are to be assessed on the ordinary basis. UCPR 42.5 provides that, if the Court determines that costs are to be paid on an indemnity basis, all costs (other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount) are to be allowed. Whether an order for costs of the application before me should be made against Mr and Mrs Stark and Mr Conway on an indemnity basis 5Secure's primary position is that Mr and Mrs Stark and Mr Conway should pay its costs of the application for the stay of possession heard before me on an indemnity basis under UCPR r 42.5. Secure relies, in support of that application, on clause 24 of the respective mortgages given by Mr and Mrs Stark and Mr Conway which provides that: "24. When we [Secure] ask, you [Mr and Mrs Stark and Mr Conway respectively] must pay us the reasonable costs we reasonably incur in enforcing this mortgage after you are in default (including): (a) in preserving or maintaining property - such as by paying insurance, rates and taxes for the property; and (b) unless it is prevented by law (such as the National Credit Code), in relation to our staff and facilities. This clause applies to costs we incur before or after taking action under clause 21 or clause 23. (It appears that another clause, clause 25, applies if the National Credit Code is not applicable; Secure does not seek to rely on that clause.)" Clause 41 of the mortgages in turn define "costs" as including "charges and expenses; and costs, charges and expenses in connection with the advisors (in the case of legal advisers) on a full indemnity basis". 6Secure contends that it is entitled to indemnity costs under that clause. In Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87, the Court of Appeal noted that it was well established that a mortgagee may rely upon its contractual entitlement to costs so as to claim an order other than on a party/party basis and considered the interaction of a contractual entitlement of that kind with the Court's general discretion. Beazley JA (with whom Hodgson and Ipp JJA agreed) referred to the English Court of Appeal's decision in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 at 194, where Scott LJ had noted that, although an order for costs is discretionary, "the discretion should ordinarily be exercised so as to reflect that contractual right". In Kyabram, the Court of Appeal ordered costs only on a party/party basis, because that was the order that had been sought in the Statement of Claim in the proceedings. In Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 3) [2010] NSWSC 1139 at [22], [39], Nicholas J similarly referred to the decision in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) as authority that the Court's discretion would normally be exercised to give effect to the contractual entitlement and made an order for indemnity costs on that basis. McCallum J took the same approach in Westpac Banking Corporation v Mason [2011] NSWSC 1241 at [38]. 7Mr and Mrs Stark and Mr Conway accept that the Court's discretion as to costs may be exercised so as to conform with the parties' contractual arrangements, but contend that will only occur if the contract is "plainly and unambiguously expressed": Kyabram Property Investments Pty Ltd v Murray above at [12]. They contend that, in the present case, there is a tension between the obligation in clause 24 of the mortgages to pay "reasonable costs" that are "reasonably incur[r]ed" associated with the enforcement of the mortgage and the definition of "costs" which would require payment of such costs on an indemnity basis. 8Mr and Mrs Stark and Mr Conway also contend that it would not be consistent with the terms of the respective mortgages to shift to them the onus to prove that such costs were unreasonable, in circumstances where Secure's only contractual entitlement under the mortgages is to "reasonable costs" that are "reasonably incur[r]ed". They rely on Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd (No 2) [2012] NSWSC 517 where White J had to consider the relevance, in respect of an order for costs, of terms of a lease that provided for a lessee to pay "reasonable costs" payable or incurred by the lessor to remedy a default by the lessee and the lessor's "reasonable legal costs" relating to a default. His Honour observed at [44]-[46] that: "Clause 4.10.3 does not justify the making of a costs order on the indemnity basis. Where parties have contracted that costs be paid on a particular basis, it will usually be proper that the statutory discretion as to costs be exercised so as to approximate as closely as possible the parties' contract (Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 at 194; Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 at [12]; Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 2) [2011] NSWCA 171 at [36]). Under the current legislation (s 98 of the Civil Procedure Act and Pt 42 of the Uniform Civil Procedure Rules) costs the subject of an order under s 98 are to be assessed on one of two bases, either the ordinary basis or the indemnity basis. If costs are assessed on the ordinary basis, a costs assessor is to determine whether or not it was reasonable to carry out the work to which the costs relate, whether or not the work was carried out in a reasonable manner, and what is a fair and reasonable amount of costs for the work concerned (Legal Profession Act 2004, s 364(1)). That is what would be required in a determination of what reasonable legal costs were incurred by the lessor relating to a default by the lessee. If costs were ordered to be assessed on the indemnity basis, the lessor would be entitled to all its costs, other than those that appeared to have been unreasonably incurred, or appeared to be of unreasonable amount (r 42.5(b)). If costs were ordered on the indemnity basis and the costs assessor was in doubt as to whether a particular item of charge was reasonable, he or she would be obliged to allow it. However, under cl 4.10.3 of the lease, the lessor would be entitled only to those costs which were reasonable, not those costs which might be reasonable. It would not be in accordance with the lease to cast on the lessee the burden of proving that a charge was unreasonable. In other words, whilst contractual provisions may have the effect that costs should be ordered on the indemnity basis rather than the ordinary basis, whether that is so depends upon the terms of the particular contract. In the case of the present lease, an order for costs on the ordinary basis is in accordance with the contractual term." 9His Honour there referred to Macquarie International Health Clinic Pty Ltd v South Sydney West Area Health Service (No 3) above, where costs were ordered on an indemnity basis where a lease required the tenant to pay reasonable costs and also provided for those costs to be paid on a solicitor and own client basis, and observed that the Court of Appeal ordered costs on the indemnity basis for that reason. In that case, Hodgson JA (with whom Allsop P and Macfarlane JA agreed) noted that a provision for payment of solicitor and own client costs sufficiently closely approximated indemnity costs so as to justify an order for indemnity costs. In that case, the provision expressly included legal costs and expenses on a solicitor and own client basis within the term "reasonable costs, charges and expenses" so that those costs were nonetheless only recoverable where reasonable. Their Honours did not treat that matter as a factor excluding an award of indemnity costs. In the present case, the definition of "costs" similarly extends to costs of legal advisors "on a full indemnity basis". 10It seems to me that, consistent with the decision in Macquarie International Health Clinic Pty Ltd v South Sydney West Area Health Service (No 3) above, and subject to a further matter to which I refer below, an order that Secure's costs be paid on an indemnity basis would have been appropriate in this case. Such an order should not have the result that costs unreasonably incurred were recoverable since UCPR r 42.5(b) does not include, within the concept of indemnity costs, costs that are unreasonably incurred or appear to be of an unreasonable amount. To the extent that any reversal of onus arises from such an order, in respect of legal costs in an assessment, that is the proper result of the terms of the mortgage which, subject to the issue noted below, presently binds the parties. 11Mr and Mrs Stark and Mr Conway also submit that Secure's claim to indemnity costs is based upon the terms of the mortgages and that they now seek to put those terms in issue, by notices of motion that they have filed in each of the Common Law proceedings seeking orders setting aside the default judgments obtained by Secure. As I noted above, that application had not been made at the time the application before me was brought and I determined that application on the basis that no such application was brought by Mr and Mrs Stark and Mr Conway. The draft Defences which Mr and Mrs Stark and Mr Conway seek leave to file seek orders relieving them from their respective obligations under the loans associated with the mortgages. 12Mr and Mrs Stark contend that Secure's entitlement to indemnity costs should abide the outcome of the application to set aside the default judgments and, if that application is successful, the determination of the issue whether the respective loan agreements and mortgages are enforceable. They point out that a similar approach was adopted in somewhat analogous circumstances by Adamson J in Westpac Banking Corporation v Parker [2012] NSWSC 514 at [45]-[46]. In that case, Adamson J made an order that the costs of a motion be costs in the cause, and did not reflect the provisions relating to costs in the mortgage in that order, where it was possible that the plaintiffs would succeed on their arguments as to unconscionability at a final hearing. It seems to me that, for the same reason, an order for costs should not presently be made on the indemnity basis, where the right to such an order depends on the mortgages, which may be set aside if Mr and Mrs Stark and Mr Conway are successful in their pending applications. Whether an order for costs of the application before me should be made against Mr and Mrs Stark and Mr Conway on an ordinary basis 13Secure submits that, if the Court is not minded to award costs on an indemnity basis, Mr and Mrs Stark and Mr Conway should pay its costs on an ordinary basis. Secure was successful in resisting the application for a stay of the orders for possession before me and, in my view, no reason is shown for the Court to depart from the ordinary rule reflected in UCPR r 42.1 that costs follow the event. This approach reflects the fact that costs orders are compensatory in nature to reflect the vindication of the successful claim or defence thereof: Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534; (1990) 97 ALR 45; Nu Line Construction Group Pty Ltd v Fowler [2012] NSWSC 816 at [8]. 14In reaching this conclusion, I recognise that, as Mr Veitch's affidavit makes clear, a further application has now been brought by Mr and Mrs Stark and Mr Conway to set aside the default judgments in the Common Law proceedings on a different basis to that argued before me, namely that Mr and Mrs Stark and Mr Conway now move to set aside the default judgments. The success of that application on that different basis would not affect the fact that Mr and Mrs Stark were unsuccessful in the application before me, on the basis on which the application before me was brought. The success of that application on a different basis is not, in my view, be a matter that assists Mr and Mrs Stark and Mr Conway in avoiding an order for costs against them in respect of the application brought before me in which they were not successful. 15In the result, it seem to me that an order for costs should presently be made on the ordinary basis and not an indemnity basis, where the mortgages may be set aside if Mr and Mrs Stark and Mr Conway are successful in their applications. I will grant liberty to Secure to apply, on 3 days notice and specifying the relief sought, with the intent that it should be able to apply for this order to be amended to provide for its costs on an indemnity basis if the default judgments against Mr and Mrs Stark or Mr Conway is ultimately not set aside and they are not granted leave to defend the proceedings or are ultimately unsuccessful in their applications to set aside the relevant mortgages. It will be a matter for Secure to determine whether to incur the costs of an assessment on an ordinary basis or to defer commencing an assessment until that position is known. 16For these reasons, I order that: 1 Mr and Mrs Stark and Mr Conway pay the costs of and incidental to the respective applications determined in my judgment delivered on 5 September 2013 on an ordinary basis. 2 The Plaintiff have liberty to apply on 3 days notice specifying the relief sought.