New South Wales Supreme Court CITATION : Pangas v Permanent Trustee Australia Limited [2000] NSWSC 140 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2362/99 HEARING DATE(S) : 6/10/1999 JUDGMENT DATE : 10 March 2000 Peter Jonathan Pangas (First Plaintiff) Wendy Robynne Palmer (Second Plaintiff) PARTIES : Bryan Wardley Jackson (Third Plaintiff) Permanent Trustee Australia Limited (First Defendant) Jason Christopher Pangas (Second Defendant) JUDGMENT OF : Santow J G M Johnston (Third Plaintiff) COUNSEL : P B Walsh (First Defendant) C Cominos (Second Defendant) Miller Goddard (Third Plaintiff) SOLICITORS : Sunman & Walker (First Defendant) Conway MacCallum (Second Defendant) CATCHWORDS : PROCEDURE — Mortgagee's costs on an indemnity basis — Construction of relevant provisions — Widest or narrower basis of determining indemnity costs — Need for mortgagee reasonably to particularise basis for charging legal costs — Approach using referee to appraise mortgagee's costs not to be so precise as to add disproportionately to costs — Costs of present proceedings to await result of referee's appraisal. Legal Profession Regulations 1994 (NSW) para 22A LEGISLATION CITED : Supreme Court Act s76 Supreme Court Rules Part 52A r32, r37; Pt 72 r2 AGC (Advances) Limited v West (1986) 5 NSWLR 301 Elders Trustee and Executor Co Limited v Eaglestar Nominees Limited (1986) 4 BPR 9205 Gomba Holdings UK Limited v Minories Finance Limited (No. 2) [1993] Ch 171 CASES CITED : Project Research Pty Ltd v Permanent Trustee of Australia Ltd (Hodgson J, 14 December 1990 in Butterworths Property Services (1990) 5 BPR 11,225) Sandtara Pty Limited v Australian European Finance Corporation Limited (1990) 20 NSWLR 82 Re Shanah an (1941) 58 WN 132 Smits v Buckworth (SCNSW No 3869/96, unreported) DECISION : Mortgagee's costs to be further particularised and then appraised by referee. IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 2362/99 PETER JONATHAN PANGAS First Plaintiff WENDY ROBYNNE PALMER Second Plaintiff BRYAN WARDLEY JACKSON Third Plaintiff PERMANENT TRUSTEE AUSTRALIA LIMITED First Defendant JASON CHRISTOPHER PANGAS Second Defendant JUDGMENT 10 March 2000 introduction The Central Issue 1 The issue before me concerns the right of a mortgagor (the Third Plaintiff) to have accounts taken as between mortgagor and mortgagee as to costs and expenses purportedly incurred by the mortgagee (the First Defendant) pursuant to its mortgage, including legal costs and disbursements. Associated with that question is the basis for such accounting having regard to the relevant provisions of the mortgage. 2 This is the residual issue after the parties reached agreement regarding the distribution of the proceeds of sale of the property, with $23,000 agreed to be held back in an interest bearing deposit. That was the sum anticipated to cover further costs not ascertained as at the date of consent orders made by me on 6 October 1999 giving effect to the agreement. There are the other costs in respect of which an accounting is sought, as revealed in Annexure "E" to the affidavit of the Plaintiffs' solicitor John Russell Miller dated 14 May 1999. A copy of that document is attached to the Third Plaintiff's submissions dated 22 October 1999. 3 Specifically, the Third Plaintiff who is the now husband of Robynne Lynette Jackson (the mother of the First and Second Plaintiffs and divorced wife of the late Peter Kenneth Pangas) as former registered proprietor of the mortgaged property at 15 - 17 Hunter Street, Sydney seeks an accounting by the First Defendant, Permanent Trustee Australia Limited, as mortgagee. That accounting is in relation to certain items described in clause 2.3 which is in these terms [emphasis added]: " Clause 2.3 — Costs 'The mortgagor will pay to the mortgagee upon demand all monies (including any tax, other than Australian income tax, and legal costs, charges and expenses on a full indemnity basis , including those of any lawyer employed by the mortgagee) which the mortgagee ….. is liable to pay and all administrative costs which the mortgagee incurs: ….. (b) in or incidental to the exercise or attempted or contemplated exercise of any power or preservation of any rights, including expenses incurred in retaining consultants to evaluate matters of material concern to the mortgagee.'" 4 That clause should be read with the following other provisions of the mortgage which I quote below [emphasis added]: " Clause 8 — Order 'Subject to any law which applies notwithstanding any agreement to the contrary, all monies received by any receiver, any attorney or the mortgagee under or by virtue of this mortgage or any collateral security will be applied in the manner and order determined by the mortgagee or, if the mortgagee does not make any such determination, in the following order: (a) first, all costs, charges and expenses of the mortgagee or any receiver or attorney which are incurred in or are incidental to the exercise or performance or attempted exercise or performance of any power or otherwise in relation to this mortgage or any collateral security; (my emphasis) (b) any other outgoings which the receiver, attorney or mortgagee may think fit to pay ; ….. (e) fifth, to the mortgagee towards satisfaction of the "secured monies". Clause 1.1 — Definitions 'Secured Monies' means all monies which the Mortgagor or any borrower (whether a loan or with any other person) is or at any time may become actually or contingently liable to pay or for the account of the mortgagee for any reason whatsoever. It includes monies at any time owing by way of principal, interest, fees, costs, guarantee, indemnities, charges, duties or expenses or payment of liquidated or unliquidated damages under or in connection with, or as a result of any breach of or default under or in connection with any Transaction document or any other document or agreement." 5 The issues upon which the parties are in contention can be summarised as follows: A. Is the meaning of the words in clause 2.3 "on a full indemnity basis" such as to entitle the mortgagee to recovery of: (a) such costs as would correspond to a contractual entitlement to the indemnity basis of taxation (see Part 52A r37 Supreme Court Rules), and if so (b) should this be (i) on the widest basis of assessment set out in Pt 52A r37(a) namely that the mortgagee should have "all costs incurred ….. except to the extent that it appears that they were incurred in breach of that person's duty in that capacity" or (ii) such charges and expenses other than those which were unreasonably (or improperly) incurred or were of an unreasonable amount (the narrower basis); B. Is the First Defendant as mortgagee entitled to provide no greater substantiation of the basis and reasonableness of the costs, in particular legal costs, as were provided in the relevant accounts, being Annexure "E" of the affidavit of John Russell Miller of 14 May 1999; C. Having regard to the answer to (b) above, is the mortgagor (the Third Plaintiff) entitled to require the relevant legal costs, totalling $115,867.50 as set out in Annexure "E", or such items thereof as are not sufficiently substantiated, to be referred to an assessor, acting as referee and for the assessor to be provided with such substantiation by way of a fully itemised bill complying with paragraph 22A of the Legal Profession Regulations 1994 (NSW) or with the principles enunciated in Smits v Buckworth (SCNSW No 3869/96, unreported), together with the relevant files and any cost agreements. OVERVIEW OF FACTS 6 The following chronology is not disputed and sets out the salient facts: "23-12-1993 Judgment of Justice Santow delivered in relation to enforcement proceedings. 03-03-1994 Orders of Justice Santow made. 20-05-1994 Mortgage of 15 - 17 Hunter Street, Sydney to First Defendant by P K Pangas and Peterken Pty Ltd. 22-10-1997 Justice Bryson ordered sale of 15 Hunter Street, Sydney subject to the First Defendant's mortgage in proceedings to enforce the orders of Justice Santow. 20-03-1998 15 Hunter Street sold to Third Plaintiff subject to First Defendant's mortgage. 28-07 1998 Second Defendant as mortgagee in possession sold 15 & 17 Hunter Street, Sydney for $3,500,000. 26-06 1998 Peter Kenneth Pangas died. 08-09-1998 Sale completed. First Defendant received $2,567,247.35 in respect of its mortgage securing a debt of $2,200,000 plus interest and costs. The First Defendant has received $367,247.35 for interest and costs. The Third Plaintiff as Registered Proprietor of 15 Hunter Street seeks an accounting with a referral to a referee to take such accounts and report upon which of the costs and expenses purportedly incurred were reasonably and properly incurred. 30-11-1998 Messrs Minter Ellison advised the solicitor for the Plaintiffs that the liquidator of Peterken Pty Ltd (in liquidation) the registered proprietor of 17 Hunter Street, Sydney that it did not seek any interest in the proceeds of sale. (annexure C4 to the affidavit of J R Miller sworn 14 May 1999)." 7 Adding to the above chronology I should simply note that the second mortgagees are in fact the First and Second Plaintiffs (being the children of the Third Plaintiff's now wife) and the mortgagee is Jason Christopher Pangas, the Third Defendant, representing the Estate of Peter Kenneth Pangas, late father of the Second Defendant and of the First and Second Plaintiffs and former husband of Robynne Lynette Jackson. I should add that Peter Kenneth Pangas died on 26 June 1998. The other circumstances of the relevant mortgages, their enforcement, and the agreed distribution of proceeds are not presently relevant. Orders as to the agreed distribution were made on 6 October 1999. resolution of issues between the parties 8 The gravamen of the Third Plaintiff's complaint is that the First Defendant has not provided any document or other evidence that costs and expenses have been incurred "in or incidental to the exercise of any power ….." as required by clause 2.3(b) of the relevant mortgage document, nor has it provided any document or other evidence that the costs and expenses charge have been "actually incurred" by the mortgagee. 9 I should deal with that complaint at the outset. The matter can readily be dealt with by an affidavit being provided by a responsible officer of the First Defendant identifying the relevant power from the broad powers contained in the mortgage under which the particular items of costs and expenses were incurred and verifying that the costs and expenses charges have been "actually incurred". 10 However, it is correct to say that the Third Plaintiff's primary complaint relates to the costs and disbursements charged by the First Defendant's solicitors, the accounts of which being included in Annexure "E". 11 The Third Plaintiff also seeks an accounting as to interest charges but I would be satisfied as to the latter being dealt with in the affidavit above, setting out details of the interest charged and the basis of calculation. 12 The amounts referred to in Annexure "E" as legal fees total $115,867.50. There is a challenge from the Third Plaintiff as to whether the legal fees "were reasonably and properly incurred" implicitly on the narrower basis of assessment. The Third Plaintiff's contention is that this can be best dealt with by referring the matter to a referee, pursuant to Pt 72 r2 Supreme Court Rules to enquire into and report upon which of the costs and expenses including in particular legal costs and disbursements, were "reasonably and properly incurred"; it can be anticipated that the referee chosen would be an experienced cost assessor. 13 The First Defendant resists that course, at least so far as legal costs and disbursements are concerned, contending that it should be indemnified on the widest basis of assessment set out in Pt 52A r37(a) Supreme Court Rules. That is the mortgagee should have "all costs incurred ….. except to the extent that it appears that they were incurred in breach of that person's duty in that capacity". In the alternative, the First Defendant contends that it is contractually entitled at least to recovery of such costs on an indemnity basis and thus is entitled to recover all of its costs, charges and expenses other than those which were improperly or unreasonably incurred or of an unreasonable amount. 14 While the First Defendant's primary submission is that the enquiry sought by the Third Plaintiff is not appropriate in its terms as failing to correspond with the mortgagee's contractual entitlement, the First Defendant proposes an alternative procedure for any challenge to the amounts sought to be recovered, though still on the widest basis of assessment. 15 The procedure proposed by the First Defendant is set out in the following draft orders and directions which I quote below: "1) Direct that within 14 days the first defendant make available for inspection by the third plaintiff the files of Messrs Sunman and Walker solicitors relating to the bills of costs, the subject of the present proceedings together with any costs agreement between Messrs Sunman and Walker and the first defendant. 2) Direct that within a further 21 days the third plaintiff notify the first defendant in writing of its objections, if any, to the bills of costs. 3) Order that an account be taken between the first defendant and the third plaintiff as to any of the items in the bills of costs to which the third plaintiff shall have served a written objection. 4) Order that for the purpose of taking such accounts, such person as the parties may agree, or in default of agreement, as the court may appoint, be appointed as referee pursuant to part 72 Rule 2. 5) Direct that for the purpose of taking accounts the referee shall: (a) Allow the first defendant its legal costs, charges and expenses and other outgoings on a full indemnity basis such basis not to be less favourable than that allowed by Part 52A r37(a) of the Supreme Court Rules. (b) Resolve any doubts in favour of the first defendant. 6) Direct that the first defendant file and serve its response to the third plaintiff's objections within such time as the referee shall allow. 7) Direct that within such further time, as the referee shall allow the third plaintiff and the first defendant file and serve their written submissions. 8) Direct that the referee report to the Court his findings by ." 16 The principal difference between the Third Plaintiff and the First Defendant is therefore the basis for assessing on an indemnity basis (widest or narrower basis) and whether the relevant accounts as already rendered should suffice for consideration by the referee or need to be prepared as for a formal assessment of costs. 17 There is no difference between the parties as to the nature of the Court's discretion, which is now an inherent jurisdiction to quantify costs which are recoverable having regard to the relevant provisions of the Supreme Court Rules and the Supreme Court Act. Thus s76 of the Supreme Court Act empowers the Courts to deal with costs, whilst Pt 52A r32 relates to costs on a party and party basis, r37 relates to costs on an indemnity basis, r38 relates to the directing of costs for assessment in an account and r42 relates to the entitlement of the mortgagee to costs out of the mortgaged property. 18 Those rules give the Court a discretion within these parameters in relation to litigation costs in proceedings between the mortgagor and a mortgagee. 19 The First Defendant places particular emphasis on the proposition that where there is a contractual right to recover costs and expenses, the discretion of the Court should ordinarily be exercised so as to reflect that contractual right: see Re Shanahan (1941) 58 WN 132 at 134, AGC (Advances) Limited v West (1986) 5 NSWLR 301, Elders Trustee and Executor Co Limited v Eaglestar Nominees Limited (1986) 4 BPR 9205, Sandtara Pty Limited v Australian European Finance Corporation Limited (1990) 20 NSWLR 82 and Gomba Holdings UK Limited v Minories Finance Limited (No. 2) [1993] Ch 171. 20 In resolving these contentions, I should start by noting that the description of the costs actually incurred in Annexure "E" is of varying specificity. In some cases, there is a statement of the hours and the work; see, for example, the account at page 12 dated 24 February 1998. Generally that degree of detail is provided in the other accounts. However, some accounts such as, for example, the smaller account of 9 February 1995 while itemising what was done in general terms as with the other accounts, does not state the number of hours and thus does not allow any calculation of hours or hourly rate; see, for example, the account of 13 October 1997 appearing at page 5. 21 Sometimes, disbursements are set out relating, for example, to counsel's fees with some particularity; see the account of 10 February 1998 at page 9. Elsewhere, it is not clear why counsel's fees were incurred; see, for example, the account of 24 February 1998 at page 12. 22 In approaching the matter, I consider that broadly speaking a mortgagee with a contractual entitlement to be reimbursed "on a full indemnity basis", but where the mortgage does not enable the mortgagee to create a prima facie position as to the costs involved by a certificate, the proper approach is this. First, the context of the reference to "on a full indemnity basis" does not justify the highest and most generous basis of including "all costs incurred ….. except to the extent that it appears that they were incurred in breach of the person's duty in that capacity". Rather, the enquiry should be, as with indemnity costs generally, that all costs, charges and expenses save those which were unreasonably incurred or were of an unreasonable amount should be recoverable, provided that they were incurred by the mortgagee and paid. "Unreasonably incurred" would also include improper incurrence. 23 That leads to the question, how far should the mortgagee be required to go in substantiating that such costs were not in that sense unreasonably incurred or of an unreasonable amount. In my view, it would be unreasonable to require the mortgagee to provide the full degree of detail required on an assessment of costs. On the other hand, the degree of substantiation provided by the First Defendant falls somewhat short of what I would consider minimally necessary. 24 In the case of the legal costs and disbursements, in those cases where the number of hours and the hourly rate cannot be calculated, that should be provided. In any other case where the First Defendant has failed to provide sufficient particularity for the nature of the work to be at least generally appreciated, that deficiency should be rectified. But it should be for the Third Plaintiff, preferably co-operatively with the First Defendant, to identify those cases. Indeed I would strongly urge that both parties approach the matter in a co-operative spirit. 25 Furthermore, the First Defendant should be required to produce to an agreed referee or, failing agreement, a Court appointed one, with experience in assessment of bills, the relevant files and any costs agreements, with such additional specificity to the bills as I have earlier required, with the Third Plaintiff identifying which bills it challenges. 26 The referee can then in economic fashion be required in relation to those bills challenged to form a broad assessment as to whether in the referee's opinion it would appear that any of the challenged bills were unreasonably incurred or were of an unreasonable amount and similarly with the disbursements. In those cases, the referee should by way of broad appraisal or assessment only, indicate the overall adjustments that should be made to the bill so that it satisfies the indemnity basis of taxation, doing so as a matter of broad impression rather than with absolute precision. Otherwise the costs of the process will be uneconomic, relative to the amounts involved. 27 It will be apparent from the approach that I have set out, that I do not consider it appropriate for the referee to perform the task of appraising the bills with the degree of precision and devotion of time as would apply to a formal assessment. I do so, because in a case of a mortgagee seeking to recover costs under the mortgage provisions that I have quoted, such an approach would add unnecessarily to costs and is to neither party's advantage. 28 Finally, as to the costs of assessment, I consider that these are best dealt with when the referee returns his report as then it will be possible to gauge the extent to which the costs were in fact unreasonable. However, taking a broad brush approach, ordinarily I would expect that the mortgagee would be entitled to recover the costs of the referee's assessment, unless it should emerge that the costs were as a whole excessive, in which case the matter may need further consideration. Such an approach is not out of line with that taken in the somewhat different circumstances of Project Research Pty Ltd v Permanent Trustee of Australia Ltd (Hodgson J, 14 December 1990 in Butterworths Property Services (1990) 5 BPR 11,225). Hodgson J held that where a mortgagor reasonably anticipates proceedings in the nature of accounts, the mortgagee is entitled to anticipate costs of such proceedings out of the security. If a mortgagee bona fide and on reasonable grounds provides a discharge figure to the mortgagor which the mortgagor proposes to pay under protest, it is open to the mortgagee to require, in addition to the stipulated payment, a reasonable sum to cover the costs of foreshadowed litigation. ORDERS AND COSTS 29 As to costs of the present proceedings, I consider, subject to hearing from the parties, that the appropriate order is to reserve costs and to deal with costs once the referee has reported. If it should for example transpire that the mortgagee's costs were not broadly in line with the Referee's that would warrant a cost order favouring the Third Plaintiff. 30 I direct the parties to submit orders giving effect to this judgment as soon as possible. ********** Last Modified: 09/25/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.