JUDGMENT No. 9Q.7,.86 7 Seeeee CATCHWORDS Practice and Procedure - Costs - covenant in a mortgage deed provided for the payment of costs as between solicitor and client - costs on solicitor and client basis discussed. Federal Court of Australia Act 1976 s.43 DATE: 12 FEBRUARY 1988 CORAM: GUMMOW J. PLACE: SYDNEY Elders Trustee & Executor Co. Ltd. v E.G. Reeves Pty. Ltd. & Ors G ° AES r/ <A ED ~ < y REC EN . "A \ 4 e wo S~~ IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) No. G419 of 1986 BETWEEN: ELDERS TRUSTEE & EXECUTOR COMPANY LIMITED Applicant AND: E.G. REEVES PTY LIMITED First Respondent EDWARD GEORGE REEVES Second Respondent DAPHNE JOAN REEVES Third Respondent JUDGE: GUMMOW J. DATE: 12 FEBRUARY 1987 PLACE: SYDNEY MINUTES OR ORDER THE COURT ORDERS THAT: (1) The first respondent have judgment on the cross-claim for $697,902.06. Note that the first respondent will seek judgment upon the cross-claim for such further sum as may be found in its favour upon the taking of the account herein provided for. (2) The applicant pay the second and third respondents their costs of the proceedings (including any reserved costs) but limited to such items as are allowable ona party and party basis and are not included in the items allowed on the taking of the account herein provided for. ". (3) (4) (5) (6) NOTE: 2. There be taken before the Registrar an account of all items of costs and expenses of the first respondent in the present proceedings, No. G419 of 1986, (including the cross-claim) up to the date of these orders, such account to be taken as between solicitor and client, which is to be understood as being on a common fund basis and as not including items unreasonably incurred or for costs and expenses of an unreasonable amount. Direct that the proceedings be re-listed before me for further directions after the Registrar has certified the results of the account. Direct that the taking of the account stand over to the Registrar for directions at a time and place to be fixed by him and communicated to the parties. The parties have liberty to apply to the Court on 7 days' written notice. Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules. te IN THE FEDERAL COURT OF AUSTRALIA } NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) No. G419 of 1986 BETWEEN: ELDERS TRUSTEE & EXECUTOR COMPANY LIMITED Applicant AND: E.G. REEVES PTY LIMITED First Respondent EDWARD GEORGE REEVES Second Respondent DAPHNE JOAN REEVES Third Respondent JUDGE: GUMMOW J. DATE: 12 FEBRUARY 1987 PLACE: SYDNEY REASONS FOR JUDGMENT Much of the previous history of these proceedings is set out 1n part in the judgments delivered on 29 September 1987 and 3 November 1987. On 3 November 1987, orders were made dismissing the application and standing over all questions of costs. There remained the question of the disposition of the cross-claim by the first respondent against the applicant. The first respondent seeks, on the cross-claim, to recover (as mortgagee) from the applicant (as mortgagor) moneys claimed as due and owing under the personal covenants 1n a mortgage registered under the provisions of the New South Wales Real Property Act 1900, as dealing No. V560106. The mortgage was a second mortgage over the "Booka" property. That property has been sold in exercise of the power of sale under the first 2. mortgage, hence the reliance by the first respondent upon the personal covenants. In the principal proceedings, the applicant sought, inter alia, orders that mortgage No. V560106 be declared void ab initio, that the first respondent be ordered to take no further steps to recover any moneys, the subject of that mortgage, and that an instrument be executed with the effect of discharging the mortgage. The basis on which these claims were put, and their unsuccessful fate, are dealt with 1n the judgment delivered on 29 September 1987. Mortgage No. 560106 imports the terms in the Registrar General's standard form Memorandum 9860000. Clause 5 of that Memorandum provides as follows: In addition to all costs and expenses which the mortgagor may be liable at law or in equity to pay in respect of this security, or otherwise in relation thereto, the mortgagor will upon demand pay all costs and expenses, including costs as between solicitor and client, incurred by the mortgagee in consequence or on account of any default on the part of the mortgagor hereunder or incurred by the mortgagee for the preservation of or in any manner in reference to this security, all of which costs and expenses shall from the time of payment or expenditure thereof respectively until repaid to the mortgagee by the mortgagor be deemed principal moneys covered by this security, and shall carry interest at such higher rate as may be shown in the schedule to the mortgage. There is agreement between the parties as to the quantum of the moneys otherwise due and owing on the cross-claim. On 4 February 1988, the amount in question was $696,743.58, with interest accruing at a daily rate of $144.81. However, the parties are in dispute as to what, if any, money should be added for costs "as between solicitor and client", operation of clause 5 of Memorandum Q860000, to the amount mentioned. On 11 December 1987, I granted leave to the to the first respondent to reopen 1ts case on the cross-claim on the issue of the meaning of clause 5 and its effect upon the quantum of liability of the applicant to the first respondent. Argument on the reopened cross-claim was then heard on 4 February 1988. The first respondent relies upon Order 35 Rule 1 of the Federal Court Rules and seeks judgment now on the cross-claim for a sum representing $696,743.58 increased at the daily rate of $144.81 until judgment, and 1t seeks to preserve 1ts position as to the further amount which in 1ts submission is to be added to the amount of the judgment by virtue of the Operation of clause 5. The first respondent seeks to protect its position in this way by the adoption by the Court of a course similar to that followed by the New South Wales Supreme Court in A.G.C. (Advances) Ltd. v West [1984] 5 NSWLR 301 at 307. As I understand the submissions made, there is no opposition to such a course, provided that clause 5 is construed in a manner favourable to the first respondent. The applicant denies that on its proper construction, the clause catches the costs and expenses claimed by the first respondent. The first respondent seeks a direction that pursuant to Rules 2 and 9 of Order 39 of the Federal Court Rules, the Registrar take an account of the costs and expenses of the first respondent of proceedings G419 of 1986, such account to be taken on a solicitor and client basis, but not so as to include items unreasonably incurred or for costs and expenses of an unreasonable amount. The first respondent then will 4. seek entry of judgment in its favour for the further sum when it has been found due on the taking of the account. Finally, an order is sought that the second and third respondents have their costs of the proceedings, upon the usual party and party basis, but only in respect of such items as are not included pursuant to the account taken by the Registrar. There was some debate before me as to the background at general law against which the terms of clause 5 are to be understood. Accordingly, I should briefly deal with this aspect of the matter. It 1S appropriate first to consider the position with a redemption suit. In such a suit, the mortgagor seeks the intervention of equity to relieve him from the consequences of failure to perform the obligation to pay principal and interest in the manner and at the time or times specified in the mortgage. Because the mortgagor seeks equity, he must be prepared to do equity. Accordingly, on the taking of accounts between mortgagor and mortgagee in such a suit, the mortgage is treated as security not only for principal and interest, but also for all costs and expenses reasonably and properly incurred by the mortgagee for the protection and preservation of his security. The result is that all costs and expenses reasonably incurred for the purpose of preserving the security are added to the amount secured and payment of those costs is made a condition of redemption. In Daniell's Chancery Practice, 7th Ed, Vol. l, p. 996, it is said that: In these cases, the costs given to a mortgagee are scarcely in the nature of costs in the cause; they are rather sums that the mortgagee has a right to be paid before the relief asked for against him can be granted. The authorities which establish these propositions were reviewed by Fullagar J. in Perry v Rolfe [1948] VLR 297. That decision also indicates that these rules have no immediate application to land under Torrens Title (as in the present case), given the particular nature of a registered mortgage of such land; see also English Scottish & Australian Bank Ltd. v Phillips (1937) 57 CLR 302 at 321-322. The scale on which these costs and expenses are assessed on a redemption suit is a matter of some uncertainty. In Cotterell v Stratton (1872) LR 8 Ch App 295 at 302, Lord Selborne LC described the right of a mortgagee in a suit for redemption as analogous to the right of a trustee to receive out of the trust estate his proper costs incident to the execution of the trust. That right of a trustee was, at the time Lord Selborne spoke, one to recover costs on a common fund basis: Daniell (supra) pp. 987-1009, Halsbury's "Laws of England", 4th Ed, Vol 37, paras. 746, 748. This was not at large, there being excluded costs incurred by inequitable conduct of the trustee: Turner v Hancock (1882) 20 Ch D 303. More modern rules, e.g. New South Wales Supreme Court Rules, Part 52 Rule 31, now provide specifically for the award of costs on a trustee basis. At the time Lord Selborne spoke, and thereafter, what is clear is that the reference to trustee's costs was not a reference to party and party costs. However, in Halsbury''s "Laws of England", 4th Ed, Vol. 32, para. 1036, it is stated that the costs of foreclosure o redemption are taxed as between party and party and added the mortgagee's security. But the authorities cited in supr of this proposition appear to be cases where what was inv 6. was not an action for foreclosure or a suit for redemption, but enforcement proceedings, such as, for example, the obtaining from the Court of an order for sale, e.g. In re Queen's Hotel Company, Cardiff, Limited [1900] 1 Ch 792, Re Adelphi Hotel (Brighton) Limited [1953] 1 WLR 955. In such cases, the mortgagor was not seeking any equitable relief from the Court, rather the mortgagor was suffering the enforcement of the security by the mortgagee, and the doctrinal basis for adding costs on a solicitor and client or common fund basis to the security, as explained by Fullagar J in Perry v Rolfe (supra) did not arise. Costs were party and party costs in the cause. Nevertheless, it should be pointed out that costs and expenses of mortgagees have been added to the security in foreclosure suits by the mortgagee. The jurisdiction here appears not to be based upon the maxim that he who seeks equity must do equity, for the mortgagor, unlike the position with a redemption suit, does not come seeking equity; the moving party is the mortgagee. Rather, the jurisdiction is based upon an implication read by equity into the contract between mortgagor and mortgagee: Cotterell v Stratton (supra at 302), National Provincial Bank of England v Games (1886) 31 Ch D 582 at 592. Indeed, in these authorities the treatment of costs and expenses in redemption suits is also put on this foundation. Whether the question arises in a foreclosure suit or a suit for redemption, the result is the addition of the costs and expenses to the amount of the security, and no more; i particular, in the absence of an express covenant, there is obligation on the mortgagor to the mortgagee to pay cost 7. this character, being an obligation enforceable by an action to recover the amount as a debt, and there is no implied contract to this effect: Ex parte Fewings; In re Sneyd (1883) 25 Ch D 338 at 346; Sinfield v Sweet [1967] 3 All ER 479. It was in this setting that mortgagees provided by express covenant for the payment by the mortgagor of various descriptions of costs and expenses, no doubt with the object of strengthening the position of the mortgagee beyond that which he otherwise would occupy under the various general law principles which I have described. Clause 5 1s such a provision, in that the first respondent seeks to add the moneys to which the clause attaches to the debt which it sues to recover on the cross-claim, and it does so rather than rely upon its non-contractual claim to a court order in its favour for costs, no doubt expecting those to be awarded only on a party and party basis. The meaning of any express provision 1s a question for interpretation in the particular case. In Elders Trustee & Executor Co. Ltd. v Eagle Star Nominees Ltd. (Supreme Court of New South Wales, McLelland J, 17/11/86 unrep.) an obligation to pay "all costs, charges, expenses and payments which the Mortgagee or the Receiver .. . pays or is liable to pay or sustains in connection with the exercise or attempted exercise of any right, power authority or remedy conferred under or by virtue of this security or by statute" was construed as applying only to costs, charges, expenses or payments properly incurred in the sense of incurred "reasonably and in good faith". McLelland J. pointed out that the right of a trustee at general law was similarly limited and that the trustee' 8. right of indemnity was in some respects analogous to that of a mortgagee, citing Cotterell v Stratton (supra) and Turner v Hancock (supra). His Honour also referred to the view expressed by Street J. in Re Shanahan (1941) 58 WN (NSW) 132 at 136, that a clause in a mortgage requiring the mortgagor to pay "all costs and expenses incurred by the mortgagee" would not cover "costs which had been unjustifiably or vexatiously incurred by the mortgagees so as to impose an unwarrantable burden on the mortgagors". In In re Adelphi Hotel (Brighton) Limited (supra), a covenant by a mortgagor to pay "all costs, charges and expenses incurred or paid by the bank in relation to the negotiation for and preparation, completion, realisation and enforcement of" the security, was construed as referring to no more than party and party costs in respect of action for enforcement of the security; the covenant was not interpreted as providing for costs on any higher scale, in the absence of express indication to that effect. Other covenants have been drawn in more specific terms. The precedent in Butterworths' "The Encyclopaedia of Forms & Precedents", 4th Ed, Vol. 14, p. 129, identifies the costs, charges and expenses as being those "ascertained as between solicitor and own client". "The Australian Encyclopaedia of Forms & Precedents", 2nd Ed, Vol. 9, p. 178, specifies "all costs and expenses (including those as between solicitor and client)". In Central Mortgage & Housing Corp. v Johnson (1971) 20 DLR (3d) 622, an express covenant to pay "legal costs, as between solicitor and client" was given effect according to its terms and was held not to be qualified in its 9. Operation by the terms of certain local legislation. In this Court, the matter of costs 1s governed by the general terms of s.43 of the Federal Court of Australia Act 1976. Pursuant to that provision, the Court may, in an appropriate case, order that costs be paid on a "solicitor and client" basis: Australian Transport Insurance Pty. Ltd. v Graeme Phillips Road Transport Insurance Pty. Ltd. (1986) 71 ALR 287. The difficulty is that the expression "costs ona 'solicitor and client' basis" is, in the absence of further provision in the Rules of Court, not one of fixed meaning. In Giles v Randall [1915] 1 KB 290 at 295, Buckley LJ (as he then was) said that he had no doubt that litigants who stipulate for and by agreement are to receive costs "as between solicitor and client" often intend to get an indemnity in respect of costs. Nevertheless, his Lordship went on to distinguish, in accordance with the practice in the English Supreme Court at that time, between three modes of taxation as between solicitor and client. The first was where a client taxed the bill of his own solicitor, commonly called taxation "as between solicitor and own client". The second was where costs were to be paid out of a common fund in which the client and others were interested. The third was where the costs were payable by one party to another or were payable out of a fund in which the party entitled to the costs had no interest. Where the mortgage instrument is a standard form, the approach of the Courts has been to incline in matters of interpretation in favour of the mortgagor. This tendency is manifest in A.G.C. (Advances) Ltd. v West [1984] 5 NSWLR 301. 10. In that case, provision in a mortgage providing that all legal costs should be assessed "on a solicitor and client basis" was interpreted as permitting costs on a common fund basis (as understood under the Rules of the New South Wales Supreme Court) rather than on a solicitor and own client basis. It may be noted from what was said in that judgment at p. 303 that what 1s described in Division 5 of Part 52 of the New South Wales Supreme Court Rules as a taxation on a "Solicitor and client basis" appears to correspond with what was identified by Buckley LJ in Giles v Randall (supra) as taxation as between "solicitor and own client" ; see also Halsbury''s "Laws of England", 4th Ed, Vol. 37, para. 747 which draws' the distinction between taxation on this basis and taxation on the common fund basis, indicating that that expression previously was taken also as identifying "taxation as between solicitor and client". The present case is not simply one in which the mortgage instrument is a form prepared by the mortgagor. Memorandum Q860000 is in general use and is deemed to be included in the Registrar-General's Mortage Form RP25 unless expressly negatived. The expression in Clause 5 thereof "including costs between solicitor and client" plainly extends beyond party and party costs. The question 1s which of the distinct shades of meaning of the expression "costs between solicitor and client" is to be treated as the proper meaning of the expression in its present setting. The matter is made easier by the first respondent's acknowledgment in submissions on 4 February 1988, that it did ll. not advance any meaning of the term which embraced costs and expenses not incurred reasonably and in good faith (within the meaning discussed by McLelland J. in Elders Trustee & Executor Co. Ltd. v Eagle Star Nominees Ltd. (supra)) and that it did not seek an account including items unreasonably incurred or for costs and expenses of an unreasonable amount. This acknowledgment was in my view correctly made. It treats the expression in the present mortgage "as between solicitor and client" as in substance identifying a common fund basis as explained in A.G.C. (Advances) Ltd. v West (Supra). This is less than what, at any rate under the New South Wales Supreme Court Rules, would be allowable on a taxation between solicitor and own client. It appears there that costs may be allowed even though they are of an unreasonable amount, and even though they may have been unreasonably incurred, provided this has happened with the approval of the client: see New South Wales Supreme Court Rules, Part 52, Rule 33. I would not have construed Clause 5 as having such a meaning. In my view, the appropriate order would be for the taking of an account of the costs and expenses of the present proceedings on a_ solicitor and client basis, that being understood to be on a common fund basis and as not including 1tems unreasonably incurred for costs and expenses of an unreasonable amount. I turn now to consider whether clause 5 of the memorandum Q860000 has any application in the present proceedings. The applicant (mortgagor) denied it had such an application. In my view, the costs and expenses of the 12. proceedings of the first respondent in the principal proceedings plainly were incurred by the first respondent for the preservation of the subject security. I have already indicated the nature of the relief sought in the Application, and the resistance by the mortgagee to an attempt by the mortgagor to achieve the annihilation of the mortgage must fairly be described as involving expenditure incurred "for the preservation of" the security within the meaning of Clause 5. Further, the costs and expenses would have been incurred "in any manner in reference to" the security. Turning to the cross-claim, the costs and expenses of the first respondent thereon are costs and expenses incurred by the first respondent in consequence, or on account, of default by the applicant under the mortgage instrument, and thus also fall within the terms of Clause 5. It follows that the first respondent is entitled to have the account which it seeks. I agree that the matter is appropriately one for reference to the Registrar. I should indicate that in the first instance, and subject to further directions by the Registrar, the matter may be conducted by the preparation by the first respondent of an itemised list of its claims for costs and expenses. The list should include the date which it is alleged each item was paid. It should be exhibited to and verified by affidavit. The affidavit and exhibits should then be filed and served on the applicant. Before the matter then comes back before the Registrar, an effort should be made between the solicitors for the parties to isolate those particular areas of disagreement between them. The Registrar should certify the sum found on the 13. accounting. Questions may arise as to the time or times at which the items of costs and expenses so allowed by the Registrar are to be deemed to have become principal moneys within the terms of the mortgage instrument and to have carried interest, as provided for in clause 5. Those questions, if not agreed between the parties, should then come back to the Court for further consideration of the appropriate course to be followed. I will direct the account only in respect of costs and expenses up to today's date. Costs and expenses of the account itself may be agreed between the parties, and in lieu thereof will require further consideration by the Court. Accordingly, the orders and directions I propose to make are as follows: (1) Order that the first respondent have judgment on the cross-claim for $697,902.06. (2) Note that the first respondent will seek judgment upon the cross-claim for such further sum as may be found in its favour upon the taking of the account herein provided for. (3) Order that the applicant pay the second and third respondents their costs of the proceedings (including any reserved costs) but limited to such items as are allowable on a party and party basis and are not included in the items allowed on the taking of the account herein provided for. (4) Order that there be taken before the Registrar an account of all items of costs and expenses of the first respondent in the present proceedings, 14, G419 of 1986, (including the cross-claim) up to the date of these orders, such account to be taken as between solicitor and client, which is to be understood as being on a common fund basis and as not including items unreasonably incurred or for costs and expenses of an unreasonable amount. (5) Direct that the proceedings be re-listed before me for further directions after the Registrar has certified the results of the account. (6) Direct that the taking of the account stand over to the Registrar for directions at a time and place to be fixed by him and communicated to the parties. (7) Liberty to apply to the Court on 7 days' written notice. I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Gummow. Associate: Mah fate Date: IR Felorvary S98 €. Counsel for the Applicant: Mr. R.N. Talbot instructed by Messrs. Madgwicks Counsel for the Respondent: Mr. B.R. McClintock instructed by Messrs. Cutler, Hughes & Harris Date of hearing: 4 February 1988 Date of Judgment: 12 February 1988