New South Wales Supreme Court CITATION : National Australia Bank Limited v Landy Chen-Conway & Anor [2008] NSWSC 485 HEARING DATE(S) : 08/05/08 JUDGMENT DATE : 21 May 2008 JURISDICTION : Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : The Court orders that the defendants pay the plaintiff's costs of the proceedings on an indemnity basis. CATCHWORDS : Practice and procedure - Costs - Contractual entitlement to costs on an indemnity basis - Mortgage agreement - Costs continue to be at the discretion of the Court - Indemnity costs limited to costs reasonably incurred Civil Procedure Act 2005 (NSW) LEGISLATION CITED : Farm Debt Mediation Act 1994 (NSW) Uniform Civil Procedure Rules 2005 (NSW) CATEGORY : Procedural and other rulings Adelphi Hotel (Brighton) Ltd, Re; District Bank Ltd v Adelphi Hotel (Brighton) Ltd [1953] 1 WLR 955; 2 All ER 498 AGC (Advances) Ltd v West; AGC (Advances) Ltd v Cranston & Ors (1984) 5 NSWLR 301 ANZ Banking Group (New Zealand) Ltd v Gibson [1981] 2 NZLR 513 Citibank Savings Ltd v Pirrotta (unreported, Full Court of the Supreme Court of South Australia, 1 April 1998, Judgment no. S6603) Elders Trustee and Executor Co Ltd v Eagle Star Nominees Ltd (1986) 4 BPR 9205 Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 Inglis v Commonwealth Trading Bank of Australia (1973) 47 ALJR 234 Jamieson v Gosigil Pty Ltd [1983] 2 Qd R 117 CASES CITED : Katsaounis v Belehris (1994) 179 LSJS 143 Kestrel, The (1866) LR1A&E 78 Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 Micarone v Perpetual Trustees Australia Ltd & Ors (No 2) [1999] SASC 533 MSW Property Pty Limited v Law Mortgages Queensland Pty Limited [2004] QCA 47 Prackert; Ex parte [1987] 2 Qd R 560 Queen's Hotel Co Cardiff Ltd; Re [1900] 1 Ch 792 Sandtara Pty Ltd v Australian European Finance Corporation Ltd (1990) 20 NSWLR 82 Shanahan, Re; Re A Solicitor's Bill of Costs (1941) 58 WN (NSW) 132 Westpac Banking Corporation v Daydream Island Pty Limited [1985] 2 Qd R 330 National Australia Bank Limited (Plaintiff) PARTIES : Landy Chen-Conway (First Defendant) David Conway (Second Defendant) FILE NUMBER(S) : SC 50174/07 COUNSEL : Mr J Stoljar (Plaintiff) Mr M Thompson (Defendants) SOLICITORS : Minter Ellison (Plaintiff) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Wednesday 21 May 2008 50174/07 National Australia Bank Limited v Landy Chen-Conway & Anor JUDGMENT Costs 1 The judgment in these proceedings was delivered 9 May 2008. Costs were reserved. The parties were granted leave to address written submissions on costs and the timetable was set for this. In the event only the plaintiff sought to avail itself of the opportunity to address submissions on costs. 2 The plaintiff seeks an order that the defendants pay its costs of the proceedings on an indemnity basis, pursuant to its contractual entitlement to costs on an indemnity basis contained in the Linden Memorandum. The relevant clauses of the Linden Memorandum are set out below. 3 As the plaintiff has contended the principles regulating the making of an order for costs pursuant to, and in accordance with, a mortgagee's contractual entitlement, were conveniently summarised in Micarone v Perpetual Trustees Australia Ltd & Ors (No 2) [1999] SASC 533 per Olsson, Debelle and Wicks JJ (at [32]): The general rule is that, in the absence of an agreement to the contrary, a mortgagee is entitled to costs on a party and party basis: The Kestrel (1866) LR1A&E 78; In r e Queen's Hotel (Cardiff) Ltd; In re, Veronon Tin Plate Company Ltd [1900] 1 Ch 792; Re Adelphi Hotel (Brighton) Ltd District Bank Ltd v Adelphi Hotel (Brighton) Ltd [1953] 1 WLR 955; Re Shanahan ; Re A Solicitor's Bill of Costs (1941) 58 WN (NSW) 132; Jamieson v Gosigil Pty Ltd [1983] 2 Qd R 117; AGC (Advances) Ltd v West; AGC (Advances) Ltd v Cranston (1984) 5 NSWLR 301; Katsaounis v Belehris (1994) 179 LSJS 143 at 155 - 156. The expression of a contrary intention must be "plainly and unambiguously expressed" to use the words of Vaisey J in Re Adelphi Hotel Co Ltd (above) at 961. Generally speaking, a contractual obligation to pay all costs is not construed to require payment of costs improperly or unreasonably incurred, such an obligation being open to objection on public policy grounds: Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 at 187 - 188. That difficulty does not exist in this case since the obligation to pay solicitor and own client costs is subject to conditions as to reasonableness: Citibank Savings Ltd v Pirrotta [1998] ANZ ConvR 442; Elders Trustee and Executor Co Ltd v Eagle Star Nominees Ltd (1986) 4 BPR 9205. To make good any objection upon taxation, the mortgagors should be required to satisfy the taxing officer of the unreasonableness of the item, doubts being resolved in favour of the mortgagee: Katsaounis v Belehris (above) at 157 approved in Citibank Savings Ltd v Pirrotta . The court will usually give effect to an express contractual obligation but, nevertheless, retains a discretion to award costs on some other basis : ANZ Banking Group (New Zealand) Ltd v Gibson [1981] 2 NZLR 513 at 524 - 525. (emphasis added). 4 The Linden Memorandum is incorporated in the Linden Mortgage. Clause 21.1(a) of the Linden Memorandum provides that the mortgagors (i.e. the defendants) must pay, among other things (1/1, p 9): "the Bank's reasonable costs and any receivers costs and remuneration, in arranging, administering ( including enforcing, attempting to enforce or taking any other action in connection with the Bank's or any receivers rights) and terminating this mortgage or any agreement covered by this mortgage." 5 "Costs" is defined in the Linden Memorandum as follows (1/1, p 18): Costs include charges and expenses; and costs, charges and expenses in connection with legal and other advisors on a full indemnity basis. 6 It is apparent that the relevant power in the Linden Memorandum extends to "enforcing" the Linden Mortgage, which was the very purpose of these proceedings (indeed as the plaintiff pointed out, the defendants' case was that the proceedings comprised an enforcement of the Linden Mortgage otherwise then in compliance with the Farm Debt Mediation Act 1994. 7 In MSW Property Pty Limited v Law Mortgages Queensland Pty Limited [2004] QCA 47 McPherson, Gerard JJA and Fryberg J observed that the defendant had sought an order that the plaintiff pay costs on an indemnity basis pursuant to a provision in the mortgage which required the mortgagor to pay on an indemnity basis all costs and expenses incurred by the mortgagee. The Court held (at [4]): Provisions in this general form are capable of affecting the discretion as to costs, or even of conferring a right to the costs of enforcement of a mortgage. See Westpac Banking Corporation v Daydream Island Pty Limited [1985] 2 Qd R 330, 332; and Ex parte Prackert [1987] 2 Qd R 560, 562-570; but in those cases the relevant clause in the mortgage expressly provided for payment of costs incurred in enforcing the mortgage on default or in preservation of a security. Here cl 22.15(a) speaks only of costs and expenses incurred or paid by the mortgagee in respect of the "transaction documents" which is a much narrower conception, and appears to be confined to their creation rather than enforcement or to the security they gave rise to. 8 The NSW Court of Appeal has also dealt with this question in Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87. Beazley JA [with whom Hodgson and Ipp JJA agreed] set out the following principles (at [12]–[13], original emphasis): i. It is 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. In Re Adelphi Hotel (Brighton) Ltd [1953] 2 All ER 498 , Vaisey J at 502 observed that the prima facie rule was that costs were awarded on a party/party basis unless some alternative basis was shown "either on some well-recognised principle, or under some contract plainly and unambiguously expressed ". The New Zealand Court of Appeal applied the rule to the payment of a mortgagee's legal costs in a recovery action: ANZ Banking Group (NZ) Ltd v Gibson (Court of Appeal) [1986] 1 NZLR 556 at 566 , 569. ii. The application of the principle is well recognised in Australia: see Inglis and Anor v Commonwealth Trading Bank of Australia (1973) 47 ALJR 234 at 235. In AGC (Advances) Ltd v West (1984) 5 NSWLR 301 , Hodgson J stated (at 304–305) that at general law a mortgagee was entitled to party/party costs only but that the general law was subject to the precise terms of any provision of the mortgage. Cole J accepted this to be correct in Sandtara Pty Ltd & Others v Australian European Finance Corporation Ltd & Others (1990) 20 NSWLR 82 , at 97. 9 In Kyabram, the mortgage agreement expressly stated that the mortgagee should be liable to pay costs on a solicitor/own client basis. The Court held [at 14] that, even where such an agreement exists, the order for costs continues to be at the discretion of the Court. 10 The Court ultimately exercised its discretion to deny indemnity costs on the basis that the mortgagor had only claimed for 'costs' on its statement of claim, which would be conventionally interpreted as costs on a party/party basis. In this case, in contrast, the plaintiff has expressly sought relief including costs on a solicitor and client (or indemnity) basis. 11 It is significant to note that under the Linden Memorandum the entitlement to pay costs on an indemnity basis is qualified by a condition that the costs be reasonable. 12 As the plaintiff points out this is consistent with the approach to assessment contemplated by Rule 42.5(b) of the Uniform Civil Procedure Rules. In effect, if the defendants are able on an assessment to establish that any of the costs claimed pursuant to the orders sought by the plaintiff are unreasonable, such costs will be disallowed. This affords the defendants a measure of protection even if costs are ordered on an indemnity basis. 13 Further the Guarantee provides that the defendants should pay the plaintiff's costs on a solicitor/client basis. Relevantly, clause 8.1 of the Guarantee is in the following terms: 8.1 You must pay the Bank on demand all the costs, expenses and liabilities the Bank incurs: a) in connection with this guarantee and indemnity or any other security or document related to it given to the Bank by you or the customer; or b) in the actual or attempted exercise or enforcement by the Bank of a power or a remedy under this guarantee and indemnity or any of those other securities or documents. These include administration costs, the Bank's legal fees and expenses on a solicitor and client basis, and all amounts paid by the Bank or by an Receiver appointed by the Bank under any securities given by the customer to the Bank, or paid by the Bank to such receiver under or by virtue of any indemnity given by the Bank to such a Receiver, or for which the Bank or such a Receiver becomes liable, in or in connection with or in relation to the exercise of any of the powers conferred on them under such securities. 14 On its face the foregoing contractual provision affords a contractual entitlement to costs on a solicitor and client basis in addition or in the alternative to costs on an indemnity basis. 15 The plaintiff has additionally drawn the attention of the Court to section 98(1)(c) of the Civil Procedure Act 2005 (NSW) which seems to contemplate that costs will ordinarily at least only be ordered on the "ordinary basis" or on an indemnity basis. 16 For that reason the plaintiff I accept that the proper order is that the defendants pay the plaintiff's costs of the proceedings on an indemnity basis. Order 17 The court orders that the defendants pay the plaintiff's costs of the proceedings on an indemnity basis. *********** 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.