New South Wales Supreme Court CITATION : Franks v Equitiloan Securities Pty Ltd [2010] NSWSC 693 HEARING DATE(S) : 24/06/10 JURISDICTION : Equity JUDGMENT OF : Pembroke J EX TEMPORE JUDGMENT DATE : 24 June 2010 DECISION : See judgment paragraph 24 CATCHWORDS : CONSTRUCTION - undertaking to court - context and surrounding circumstances LEGISLATION CITED : Civil Procedure Act 2005 CATEGORY : Principal judgment Bryant & Anor v Keith Harris & Co Ltd & Ors (1980) 33 ALR 437 Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 CASES CITED : Franks v Equitiloan Securities Pty Ltd (No 2) [2008] NSWSC 456 Owston Nominees No 2 Pty Ltd v Branir Pty Ltd (2003) 129 FCR 558 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Reardon Smith Line Ltd v Hansen-Tangen (1976) 1 WLR 989 Phillip Maurice Franks - Plaintiff PARTIES : Equitiloan Securities Pty Ltd - First Defendant Equitiloan Limited - Second Defendant FILE NUMBER(S) : SC 2000/00037510 COUNSEL : M W Sneddon with C Alexander for the plaintiff J Hogan-Doran with B Kaplan for the defendant SOLICITORS : DTA Lawyers - Plaintiff Tucker & Cowen - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION PEMBROKE J THURSDAY 24 JUNE 2010 00/27510 - PHILLIP MAURICE FRANKS v EQUITILOAN SECURITIES PTY LIMITED EX TEMPORE JUDGMENT - On amended notice of motion and costs 1 HIS HONOUR: This is an application brought pursuant to an amended notice of motion dated 18 June 2010. I will grant leave to amend the original notice of motion. That leave is neither opposed nor consented to by the respondent. 2 The applicant on the notice of motion is the plaintiff in the proceedings. The original notice of motion sought orders that the second defendant be found guilty of contempt for failure to comply with an undertaking given on 13 November 2000. The underlying dispute between the parties relates to the meaning and the content of that undertaking. 3 The amended notice of motion was not brought into existence until 18 June 2010. The original notice of motion was filed on 27 April 2010. I am prepared to make an order granting leave to file the amended notice of motion on the basis that, arguably, an issue as to the proper construction and meaning of an undertaking given to the Court comes within s 73(1)(a) of the Civil Procedure Act. I regard the argument as weak, but it is necessary for me in any event to consider the substance of the applicant's submissions. 4 The terms of the undertaking given on 13 November 2000 were as follows: 1. Defendant pay Plaintiff's costs up to and including 25 October 2000 and Plaintiff to pay costs thereafter. 2. Equitiloan Limited be joined as Second Defendant to the proceedings. 3. Note the undertaking given to the Court by the Second Defendant that, upon tender by the Plaintiff to the Defendants of the amount due under mortgage 5353835W and Floating Charge number 666712 (together "the Mortgage") it will join with the First Defendant in doing all such things and executing all such documents as are necessary to cause the Mortgage to be discharged. 4. Note the undertaking given to the Court by the Second Defendant that it will pay to the Plaintiff any amount which is found by a Court to have been paid by the Plaintiff to the Defendants (or either of them) in excess of the amount found to be due by the Court in respect of the Mortgage. 5. Order that the oral application for relief by reference to para. 7C of the Amended Summons is dismissed. 5 It is obvious that there are several discrete elements in the language of the undertaking set out in paragraph 4. The first is that it is directed only to any amount which is found by a Court to have been paid by the plaintiff to the defendants or either of them. The second discrete element is that any such amount so found must have been an amount in excess of the amount found to be due by that Court under the mortgage. 6 To my mind it is immediately apparent that on the proper construction of the undertaking, having regard to its language and syntax, and the structure that the parties have chosen, and taking into account the discrete elements that it contains, it cannot be made to apply so as to cover the costs of the proceedings incurred by the plaintiff. 7 It is well accepted that the construction of an undertaking given to a Court will inevitably involve consideration of the surrounding circumstances, including the context in which the undertaking was given, and will require reference to the issues in the underlying proceedings and the competing allegations of the parties. The parties did not disagree about the applicable principles: Owston Nominees No 2 Pty Ltd v Branir Pty Ltd (2003) 129 FCR 558 at 569 per Allsop J; Bryant & Anor v Keith Harris & Co Ltd & Ors (1980) 33 ALR 437 at 449-450 per Lockhart J. 8 There is no separate principle that requires any additional leniency or generosity in construing an undertaking compared to that which would apply in the construction of a contract. The question is, what do the words mean, and if there is any ambiguity about the words, or even perhaps if there is no patent ambiguity, what was the context in which those words were made, so as to elucidate their meaning - conformably with the language chosen by the parties in the circumstances which prevailed at the time: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 462. See also Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350; Reardon Smith Line Ltd v Hansen-Tangen (1976) 1 WLR 989 at 995-996 per Lord Wilberforce. 9 The background facts are as follows: a company known as Windy Drop Down Pty Limited agreed to borrow $5.1 million from Equitiloan Securities for the purposes of a property development. On 26 March 1999 Windy Drop Down and Equititrust, a separate but related entity to Equitiloan, entered into a profit-sharing agreement in relation to the development. 10 On 23 March 2000 Equitiloan transferred to itself and Equititrust the mortgage and the related credit facility together with fixed and floating charge. There were reasons for this to occur, which related to the introduction of the Managed Investments Act 1998, the phasing out of the solicitors mortgage lending scheme of Equitiloan, and the fact that Equitiloan no longer had any role or purpose and had minimal assets. 11 In May 2000 Windy Drop Down, Equitiloan and Equititrust began to dispute their respective entitlements under the transaction documents. On 26 October 2000 Windy Drop Down instituted proceedings for redemption of the mortgage. Brereton J heard the principal proceedings, and in the course of his judgment, exhibited a close understanding of the difference between Equitiloan and Equititrust in relation to the transactions, and the circumstances which necessitated the undertaking that was given on 13 November 2000 by Equititrust. 12 The substance of the proceedings involved a claim by Windy Drop Down for restitution, first from Equitiloan of the amount paid as interest at the default rate, and second from Equititrust for the amount which Windy Drop Down had paid to it under the profit-sharing agreement. There was a third aspect to the proceedings which consisted of a cross claim by Equititrust. 13 It was in that context that on 13 November 2000 the undertaking was given which is now in issue. The result at which Brereton J arrived was that there should be judgment that Equitiloan pay to the plaintiff the sum of $252,090 plus interest, which represented the amount paid by way of default interest in excess of the amount found to be due by the Court under the mortgage. Brereton J also gave judgment on the cross claim in favour of Equititrust. 14 On 4 April 2008 Brereton J gave judgment on the costs of the proceedings in Franks v Equitiloan Securities Pty Ltd (No 2) [2008] NSWSC 456. In the originating process before him, namely the further amended statement of claim dated 12 March 2003, the plaintiff sought costs of the proceedings against both Equitiloan and Equititrust. In the course of his reasons Brereton J explained the purpose of the undertaking. He also explained that it was not the purpose of the undertaking to effect a transfer of primary liability to give restitution from the first defendant to the second defendant, but to ensure that recourse could if necessary be had to Equititrust. He said in paragraphs [5], [6] and [7]: 5. On 13 November 2000, when Equititrust was joined as a defendant, it gave an undertaking to the Court that it would pay to the plaintiff any amount which was found by the Court to have been paid by the plaintiff to the defendants or either of them in excess of the amount found by the Court to be due under the mortgage. That undertaking was given in the context of, first, a partial transfer of the mortgage by Equitiloan Securities to itself and Equititrust; secondly, the refusal of Windy Dropdown's application for an order requiring the discharge of the mortgage without payment of the full amount claimed; and thirdly, as it seems to me, in order to protect and preserve the position of Windy Dropdown in circumstances where there was a partial transfer of the mortgage and the funds might be paid by the first defendant to the second defendant and the ability of Windy Dropdown to recover any overpayment complicated in that way. 6. In my view, the purpose of the undertaking was to ensure that the transfer of the mortgage and the application – as between the defendants – of the funds received upon its discharge would not defeat any equity of the plaintiff to recover them. It was not the purpose of the undertaking to effect a transfer of primary liability to give restitution from the first defendant to the second defendant, but to ensure that recourse could, if necessary, be had to Equititrust. 7. In the substantive proceedings, I concluded (at[84]) that the hclaim for restitution of the overpaid interest was brought and lay against the first defendant Equitiloan Securities, which was the real lender to Windy Dropdown and which received the benefit of the overpayment. That means that it was Equitiloan Securities that was primarily liable, at the suit of Windy Dropdown or its assignee, to give restitution. The fact that Equititrust chose to expose itself to liability to make that payment also, in order to avoid the consequences which might otherwise have arisen on 11 November 2000, is no reason for diminishing Equitiloan Securities' obligation to so, let alone to give judgment jointly and severally against Equititrust as well as Equitiloan Securities, when the plaintiff does not seek that outcome – although, if Equitiloan Securities were not to pay, some ancillary procedure might be appropriate to enforce the undertaking against Equititrust, as in effect a guarantor. 15 Of course the question in issue on this application is not strictly what Brereton J thought was the purpose of the undertaking, but what were the facts and circumstances at the time the undertaking was given on 13 November 2000 which facilitates a proper understanding and construction of the language used in the undertaking. However, having had the benefit of submissions and evidence on this application, I have no reason to disagree with Brereton J's explanation of the purpose of the undertaking. 16 In the costs judgment, Brereton J ordered that Equitiloan pay the plaintiff's costs of the proceedings, with certain exceptions. In doing so he chose to refuse the relief sought in the further amended statement of claim in relation to the claim for costs against Equititrust. There was an appeal to the Court of Appeal but there was no application for leave to appeal from that costs order. 17 The plaintiff sought to rely on the concluding words in paragraph 7 of the judgment of Brereton J but the "ancillary procedure" to which he referred rises no higher than the content of the undertaking. They do not indicate that some wider, ungrammatical and strained construction of the undertaking should be adopted. 18 It is apparent to me from a reading of the judgment of Brereton J given on 4 April 2008 that he was cognisant of the difference between Equitiloan and Equititrust, cognisant of the language of the undertaking given on 13 November 2000, and fully aware of the purpose and provenance of that undertaking. He made costs orders having regard to all of the causes of action and all of those considerations and differences. He chose to make no costs order against Equititrust. 19 I am fully aware that the underlying issue posed for determination on this application is not the meaning of Brereton J's judgment, but the meaning of the undertaking given on 13 November 2000. In one sense it is unnecessary for me to have given such careful consideration to Brereton J's reasoning. That is because, on the bare question of construction, it seems to me to be beyond argument that the undertaking cannot be made to do the work which the plaintiff contends. 20 As I have said, the undertaking by its terms applies only to an amount which, firstly has been paid by the plaintiff to Equititrust or Equitiloan or either of them, and secondly only to such an amount that is in excess of the amount found to be due under the mortgage. 21 The plaintiff's costs which are sought to be covered by this undertaking, satisfy neither of those criteria. They were not paid by the plaintiff to Equitiloan or Equititrust. Nor do they represent an amount in excess of the amount found to be due under the mortgage. They do not derive from the mortgage and have no direct relation to it. The plaintiff's submissions, made ad misericordiam, that the worth to the plaintiff of the undertaking would be illusory if I did not construe the undertaking as contended, were an exercise in false reasoning. The undertaking simply cannot be made to do what the plaintiff seeks to achieve. For those reasons I propose to dismiss the application. 22 Submissions have been made to me about costs, having regard to the abandonment by the plaintiff of the notice of motion filed on 27 April seeking contempt orders. Courts are naturally pleased to see the refinement of issues by parties, which may include the excision of claims so as to focus on the issues which are bona fide in dispute. However, this matter is in a different category. The original notice of motion which sought contempt orders was in my view inappropriate. It never had any prospect of success and did not comply with the formal requirements of the rules. But worse, it sought to construct, from an undertaking which I regard as unambiguous, a basis for making claims for contempt. 23 While I compliment counsel for having recognised that the contempt application was ill-founded, I am not prepared in the exercise of my discretion to depart from the course which I foreshadowed, which is to order that the costs thrown away and wasted by the abandonment of the original notice of motion should be paid to the second defendant on an indemnity basis. 24 Otherwise I make orders that the amended notice of motion filed in Court today be dismissed with costs, subject to the particular indemnity costs order that I have made. oOo DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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