Permanent Custodians Ltd v Nadrak Pty Ltd SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL MEAGHER JA, GILES and SANTOW AJJA 6 November 1996 [1996] NSWCA 426 Waiver of interest under mortgage — alternatively estoppel against claiming interest — no appeal against finding of estoppel, so appeal in relation to interest failed. No point of principle. Discretion as to costs - Pt 52 r 65 mortgagee's costs out of property unless acted unreasonably - found acted unreasonably and should pay costs on indemnity basis - no grounds to interfere with exercise of discretion. Discharge of mortgage - mortgagee demanded too much - alleged delayed discharge and caused loss to mortgagor by payment of interest at higher rate than if refinanced - whether mortgagee owed duty to mortgagor - unnecessary to decide because mortgagor refused to pay proper amount so any breach of duty did not cause loss. Giles AJA. Permanent Custodians Ltd (Permanent) lent $2,080,000 to Nadrak Pty Ltd (Nadrak) repayable on 15 April 1993. Payment was secured by a mortgage dated 8 March 1990 registered Y273349 given by Kendan (NSW) Pty Ltd (Kendan). The amount to be paid on discharge of the mortgage was disputed. By a summons filed in the Equity Division on 29 November 1993 Nadrak and Kendan claimed a declaration as to the proper amount due and unpaid from Nadrak to Permanent, an order that upon payment of the proper amount Permanent discharge the mortgage, and damages. On 8 December 1993 an arrangement was put into effect by which Nadrak and Kendan paid to Permanent the amount demanded by it and received a discharge of the mortgage (but not a release of the personal covenants under the mortgage), and $127,327.20 part of the amount paid was retained by Permanent charged with repayment of any money found to be repayable in the proceedings. Theproceedings were heard by Bryson J on 3 and 4 March 1994, and his Honour delivered reasons on 16 March 1994. There was an appeal and a cross-appeal, and hereafter I refer to Permanent as the appellant and to Nadrak and Kendan as the respondents. The argument before Bryson J dealt with three money amounts and the respondents" damages claim. The first money amount was $27,733.32, which the appellant conceded was a sum which it had claimed without any basis. The second money amount was $13,050.04. The respondents contended that on 22 May 1991 they paid $69,198.66 on account of interest. The appellant contended that the payment was only of $55,448.62. His Honour found that the larger payment had been made. The third money amount was $27,733.32, comprising four amounts of penalty interest each of $6,933.33. The respondents contended that the penalty interest had been waived and that there was an estoppel precluding its recovery. The appellant contended that there was no waiver or if there was it was ineffective. His Honour held that there had been an effective waiver. The remaining money amounts making up the $127,327.20 appear to have been conceded by the respondents, so his Honour held that the respondents were entitled to what he described as 'credits' of a total of $69,316.68 and 2 UNREPORTED JUDGMENTS implicitly that the respondents were not entitled to 'credits' for the balance of the $127,327.20. The claim for damages seems to have been put forward as a claim for damages for delay in obtaining redemption of the mortgage, but it was held that there was no basis for liability for such damages. The proceedings were back before Bryson J on 29 April 1994, it seems with further evidence and a claim by the appellant to an additional $85,743.84 for penalty interest (or possibly that sum represented the part of the $127,327.20 to which the respondents were not entitled plus the amounts of penalty interest, because the difference is $27,733.32). His Honour was not satisfied, in the absence of evidence of earlier dealings which might produce net debits or net credits, that the appellant was entitled to any additional sum. He said — However, plaintiffs" counsel has told me to the effect that after many appearances the plaintiffs wish to have the litigation come to an end and they will accept that the defendant is entitled now to $85,743.84, which is, as it would seem, the sum now held out of the fund of $127,327.20 provided for in the order of 8 December 1993. In the result, therefore, his Honour ordered that $85,743.84, being part of the $127,327.20, be 'freed and discharged from any claim of the plaintiffs.' Had the earlier entitlement to 'credits' totalling $69,316.68 been given effect the appellant would have been left with $58,010.52. It received $27,733.32 more but, if the $85,743.84 did reflect a greater claim, did not receive the balance of that sum, presumably because the parties were not looking beyond the fund and the fund was exhausted. Finally in this history, on 29 April 1994 the respondents applied for an order for the costs of the proceedings on an indemnity basis, and for reasons which he gave Bryson J made that order. The appellant appealed in relation to the 'credit' of $27,733.32 and the order for indemnity costs. The respondents cross-appealed in relation to the denial of damages. Dealing first with the $27,733.32, the four amounts of penalty interest were for the months ending 21 December 1990, 21 January 1991, 21 February 1991 and 21 March 1991. By a letter dated 14 May 1991 the appellant's mortgage manager wrote to the respondents" solicitors summarising 'the interest arrears position' for inter alia the loan secured by the mortgage. Relevantly, the letter stated that interest due as at 14 May 1990 (clearly enough and found to be an error for 1991) was $55,448.62, added to that an amount described as penalty interest of $13,850.04, and said that the total interest due was $69,298.66. This is the larger sum which his Honour found to have been paid. In the ensuing period to 25 June 1992 there appears to have been discussion over arrears claimed by the appellant. In a letter dated 25 June 1992 from the respondents" solicitors to the appellant's solicitors, the former said — We note that you are awaiting instructions from your client as to the amount of the arrears and that you will let us know as soon as these instructions are received. We confirm that we have retained monies in our trust account on behalf of the mortgagor towards payment of the arrears as soon as they are agreed and that our client is anxious to have this matter finalised. The reply came by a fax of the same date, the cover sheet of which said that it conveyed 'the update (sic) itemised statement of account, as requested.' Thestatement included debits of $6,933.33 as at each of the above dates, followed immediately by credits on the same dates with the narrations 'Waive Penalty URJ Permanent Custodians Ltd v Nadrak Pty Ltd (Giles AJA) 3 Interest.' Later debits of penalty interest in the same document did not have corresponding credits. The amount outstanding as at 21 May 1991 was said to be $69,315.28, and there was recorded as an amount paid on 22 May 1991 the $69,298.66 earlier mentioned. The notice of appeal relevantly appealed from the decision of Bryson J insofar as he determined that the appellant had waived the obligation to pay the penalty interest and that the waiver was irrevocable by the appellant in December 1993. The appellant first demanded payment of the four amounts of penalty interest in September 1993, and I take the reference to December 1993 to be a reference to that month. The appellant submitted that there had not been an effective waiver for two reasons, first because what had happened did not amount to a waiver at all, and secondly because the provisions of the mortgage, specifically cl 10.17(a) and more particularly cl 10.02(c)(iii), denied effect to any waiver which might have occurred. The difficulty encountered by the appellant is that there was no appeal against the alternative basis for his Honour's decision to which I will shortly come, that there was an estoppel precluding recovery of the penalty interest. It was submitted that the notice of appeal was wide enough to encompass that part of his Honour's decision, but when his Honour specifically identified the estoppel as an additional basis for his decision, having dealt extensively with the question ofwaiver, I am unable so to read it. Application was made to amend the notice of appeal to include an appeal against his Honour's decision in relation to estoppel, but leave was refused. What his Honour said in relation to estoppel was this — The plaintiffs" counsel also contended that the defendant is estopped from asserting that those four instalments of penalty interest are payable in that the letter of 14 May 1991 constituted a representation that the total interest then due was $69,298.66, the plaintiffs acted on that representation by paying that sum, and the plaintiffs have incurred detriment as a result of paying that sum and not a greater sum, in that they later sold a hotel business and cannot now, if the penalty interest is paid, bring any amounts so paid into account for the assessment of income tax as there is no longer income of a business in relation to which it was incurred against which it can be set off as a deductible loss. In my view this is correct, and this estoppel furnishes an additional basis for my decision. In the absence of an appeal against this basis for his Honour's decision, a basis which was clearly enough open to his Honour and which is not precluded by the provisions of the mortgage to which I have referred, this aspect of the appeal cannot succeed. Going then to indemnity costs, Bryson J recognised that Pt 52 r 65 of the Rules provides that a mortgagee party to proceedings is entitled to his costs out of the mortgaged property unless the Court otherwise orders, and that the Court may otherwise order only where the mortgagee has acted unreasonably. He was of the view that the appellant had acted unreasonably in the conduct of the litigation and therefore ought to pay the respondents" costs, and further of the view that the appellant should pay those costs 'on a basis which recognises the costs actuallyimposed on the plaintiffs by the defence to the proceedings which was incapable of being supported on oath by any knowledge on the defendant's part.' It is apparent from a number of observations in the course of his reasons that his Honour was unimpressed by the conduct of the appellant. It was submitted that his Honour was unduly influenced in his decision as to costs by the inability of the appellant to file a verified account, and that undue significance was given 4 UNREPORTED JUDGMENTS to that inability, first because the appellant suffered from deficiencies in records and secondly because in the manner in which the proceedings were conducted his Honour was required to deal with a limited number of disputed items and the appellant was not called upon to give an account of every transaction. There must be some doubt as to the last aspect of the submission, given what his Honour said about an absence of evidence of earlier dealings which might produce net debits or net credits, but for present purposes I put that aside. It seems to me that the submission does not adequately recognise the basis on which his Honour exercised his discretion as to costs. His Honour said that he did not regard the appellant's inability to bring forward a verified account as wilful defiance of the Court's authority and its requirement for an account to be produced. On the contrary, he saw that deficiencies in the appellant's records and more particularly the records of its mortgage managers left it 'without having knowledge or the means of knowledge whether or not its position was right.' What was seen by his Honour as significant was that, even accepting that a mortgagee may be unable to produce a verified account, the appellant did not disclose that that was its position. Orders were made that it produce a verified account, which it did not comply with. His Honour observed that "The defendant has brazened out all endeavours of the plaintiffs and of the Court to obtain its verified account, and I now see the explanation of that in its inability to put forward any account.' He concluded that notwithstanding its undisclosed inability to know whether its position was right the appellant 'insisted on retaining as much money as was paid both to the defendant and into the holding fund before releasing the security' and that it defended a position of which it had no knowledge, and he said — The litigation has represented the defendant's exploiting its strength as mortgagee and its opportunity of withholding the security property until the amount dictated by it was set aside, and its position of defending the litigation has been maintained long after that amount was set aside, to the point where the plaintiffs have capitulated, as I mentioned earlier, without a real demonstration of what is the justice of the matter. Inherent in this is that the proceedings were brought about and prolonged by unreasonable conduct on the appellant's part, and the submission put by the appellant does not really touch that as a basis for his Honour's exercise of discretion. It was an exercise of discretion. It was, albeit in the context of Pt 52 r 65 of the Rules, an exercise of discretion as to costs. The difficulties of an appellate court interfering with such an exercise of discretion are well known, and in my opinion no reason has been shown for us to interfere with it. Finally I go to the damages. His Honour found that the appellant required payment in excess of the correct amount and withheld discharge of the mortgage because the sum it demanded was unpaid. He observed that there was not theauthority which might be expected for a mortgagee's liability in such circumstances, and then addressed two out of apparently a number of bases on which such a liability might be found which had been put to him. As to liability in contract, he said that there was no express covenant to grant a discharge of the mortgage in any circumstances, and that there was no necessity for implication of a term in the mortgage to the effect that any particular time constraints would be observed in granting a discharge or in taking steps preparatory to granting a discharge. Addressing liability in tort, he said that there was ready forseeability of loss and the class of persons protected was narrowly and clearly defined, but that the extensive contractual and equitable regulation of the relationship of URJ Permanent Custodians Ltd v Nadrak Pty Ltd (Meagher JA) 5 mortgagor and mortgagee meant that there were 'overwhelming considerations of policy against introducing a duty of care under the Common Law into this already complex relationship.' On appeal it was submitted that it should be found that a mortgagee owes to a mortgagor a duty to provide on request a pay-out figure and co-operate in the discharge of the mortgage as an implied term of the contractual relationship, and additionally or alternatively a duty to provide a pay-out figure in good faith as an equitable gloss on the relationship. It would be important to seek specific statement of the duties asserted, in order to consider whether or not they should be found to exist. But I do not think it necessary to go into whether a duty or duties existed. Assuming either duty, there could only be liability in damages if breach of the duty caused loss to the respondents. The loss suggested was that the mortgage could have been re-financed at a lesser interest rate, so that there was payment inthe period from 15 April 1993 to 8 December 1993 of more money by way of interest than should have been paid. That can only be so if it be found that, had a pay-out figure been provided in good faith at or about 15 April 1993 or had a pay-out figure been provided at or about that date in conjunction with co-operation in discharge of the mortgage, the mortgage would have been discharged. It is as plain as can be that the respondents maintained that the pay-out figure was less than that demanded by the appellant by $127,327.20, or at least some figure which can be taken from that after taking account of interest from 15 April 1993, and maintained that they would not pay out the mortgage unless the appellant took and accepted the lesser sum. I say that this is as plain as can be notwithstanding that Bryson J observed that the appellant's demand for an excessive payment and withholding of discharge because the amount it demanded was not paid caused delay and loss to the respondents. That simply can not be so on the evidence of the letters passing between the solicitors. When his Honour found that more than the respondents were prepared to pay was properly payable, it must follow that any breach of a duty of the kind postulated, and I say nothing one way or the other about whether such a duty existed, cannot have led to loss. Thus the claim to damages must fail. It follows that the unhappy end to this unhappy saga is that both the appeal and the cross-appeal should be dismissed with costs. Meagher JA. I agree. Santow AJA. I agree. NEWLINDS: Could I make an application to vary the usual order for costs, which would be that simply that the appellant and the cross-appellant pay their costs of the respective applications? The vast amount of the time certainly in preparation, perhaps not in hearing, in relation to this matter has concerned the appeal — Meagher JA. That's a matter for the taxing master. NEWLINDS: It is, but my application was going to be that perhaps that there be an order that my client have two thirds or a half of the costs of the appeal. MEAGHER JA: I don't think we can do that. You can represent to the taxing master exactly what happened in court. You can say X minutes was spent on the appeal, Y minutes on the cross-appeal. He can evaluate all that. The order of the Court will be the orders proposed by Giles AJA, both appeal and cross-appeal dismissed with costs. 6 UNREPORTED JUDGMENTS Orders accordingly. Counsel for the appellant: VR Gray Solicitors for the appellant: Landerer and Company Counsel for the respondent: C R Newlinds Solicitors for the respondent: Hegarty and Elmgreen