Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Franks v Moribund Pty Limited (formerly Equitiloan Securities Pty Ltd) (in liquidation) [2011] NSWCA 216 Hearing dates: 20 July 2011 Decision date: 20 July 2011 Before: Hodgson JA at [1], [43]; McColl JA at [41]; Campbell JA at [42] Decision: Appeal dismissed with costs. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: PROCEDURE - Undertaking to the court - Application to enforce - Construction of undertaking - Relevance of surrounding circumstances. Cases Cited: Bentley v Gaisford [1977] QB 627 (CA) Equititrust Ltd & Anor v Franks [2009] NSWCA 128 Franks v Equitiloan Securities Pty Ltd [2008] NSWSC 33 Franks v Equitiloan Securities Pty Ltd (No 2) [2008] NSWSC 456 Franks v Equitiloan Securities Pty Ltd [2010] NSWSC 693 Goodwin v Duggan (1996) 41 NSWLR 158 Kirkpatrick v Kotis [2004] NSWSC 1265; (2004) 62 NSWLR 567 NRMA v Whitlam [2007] NSWCA 81 Total Oil Products (Australia) Pty Limited v Robinson [1970] 1 NSWR 701 Texts Cited: O'Donovan & Phillips, Modern Contract of Guarantee par 5.420 Category: Principal judgment Parties: appellant: Phillip Maurice FRANKS first respondent: MORIBUND PTY LTD (formerly Equitiloan Securities Pty Ltd) (in liquidation) second respondent: EQUITITRUST LIMITED (formerly Equitiloan Limited) Representation: appellant: M W Sneddon/ C E Alexander second respondent: J Hogan-Doran appellant: DTA Lawyers second respondent: Tucker & Cowen Solicitors File Number(s): 2010/236989 Decision under appeal Citation: Franks v Equitiloan Securities Pty Ltd [2010] NSWSC 693 Date of Decision: 2010-06-24 00:00:00 Before: Pembroke J File Number(s): 2000/00037510 Judgment 1HODGSON JA: On 24 June 2010, Pembroke J gave his decision on an application brought in proceedings which had been commenced in October 2000 by a company Windy Dropdown Pty Limited (WDD) against the first respondent (Moribund), then named Equitiloan Securities Pty Limited. By that application the appellant, Mr Franks, to whom the relevant rights of WDD had been assigned in 2005, sought to enforce an undertaking to the Court given in the proceedings on 13 November 2000 by the second respondent (Equititrust), then named Equitiloan Limited, at a time when Equititrust was joined as a second defendant in the proceedings. 2By that decision the primary judge dismissed with costs an Amended Notice of Motion that had been filed in court that day, and ordered Mr Franks to pay to Equititrust on an indemnity basis costs thrown away and wasted by the abandonment of the original Notice of Motion: see Franks v Equitiloan Securities Pty Ltd [2010] NSWSC 693. Mr Franks appeals from that decision. 3The proceedings arose out of a development in Curl Curl carried out by WDD, which was financed by a loan from Moribund and secured by a mortgage. The financing agreement relevant to the proceedings was one made in March 1999, under which a loan of $6.25 million was repayable to Moribund on 26 March 2000. The agreed interest was 10.25 per cent, and interest was payable in the event of default at a rate of 16.25 per cent. 4Also in about March 1999 a Profit Share Agreement was made whereby WDD agreed that Equititrust should have a share in the profit of the project. 526 March 2000 passed without repayment of the loan. 6In October 2000, WDD advised Moribund that it wished to discharge the mortgage and requested the preparation of the Discharge of Mortgage and a payout figure. In the absence of a response, WDD commenced these proceedings on 26 October 2000, seeking redemption of the mortgage. 7On 27 October 2000, Moribund served on WDD a Notice of Default asserting default inter alia in failing to repay the mortgage on 26 March 2000. Moribund asserted that the amount outstanding under the mortgage was a little over $5 million, including interest at the default rate from 26 March 2000, this amounting to $252,090 more than interest at the lower rate. 8In order to obtain a discharge, WDD then arranged to pay this amount under protest; and it amended its claim in the proceedings to being a claim against Moribund for the additional interest overpaid, and a claim against Equititrust for an amount which WDD had paid to Equititrust under the Profit Share Agreement. 9In connection with these developments, on 13 November 2000 the following orders were made and undertakings given in the proceedings: 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. 10The amount claimed by Moribund was then paid to it on 17 November 2000, and the discharge of the mortgage was obtained. 11After the lots arising from the development had been sold, Equititrust put on a cross-claim in the proceedings against WDD, claiming $722,880 under the profit share agreement. 12On 28 June 2004, before the proceedings were heard, WDD went into voluntary administration. In September 2009, the administrators of WDD assigned to Mr Franks any claim or cause of action of WDD against Moribund in relation to the development. It appears that Mr Franks was then substituted as the plaintiff in the proceedings. 13The proceedings came on for hearing before Brereton J in 2007. On 1 February 2008, Brereton J ruled that WDD was not entitled to interest at the higher rate by reason of promissory estoppel, that Mr Franks was entitled against Moribund to $252,090 plus interest, and that Equititrust was entitled to judgment against WDD for $722,880: see Franks v Equitiloan Securities Pty Ltd [2008] NSWSC 33. He directed that the parties bring in short minutes to give effect to this decision. 14On 4 April 2008, Brereton J gave a further decision in which orders were made: see Franks v Equitiloan Securities Pty Ltd (No 2) [2008] NSWSC 456. In the course of that judgment, Brereton J made the following reference to the undertaking given on 13 November 2000: 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 claim 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 do 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. Accordingly: (1) I give judgment that the first defendant Equitiloan Securities pay to the plaintiff Mr Franks the sum of $427,869. 15Relevantly the orders then made by Brereton J were: 1. Judgment that Moribund pay to Mr Franks $427,869. 2. Declaration that WDD is liable to pay Equititrust $722,880. 3. Order that Moribund pay the costs of Mr Franks including those incurred by WDD with certain exceptions. 4. Order that WDD pay Equititrust the costs of the cross-claim. 16Equititrust and Moribund brought an appeal from that decision, challenging the decision on promissory estoppel, and also the refusal to permit a set-off between Moribund's debt to Mr Franks and WDD's debt to Equititrust. 17The Court of Appeal gave its decision on 24 July 2009: see Equititrust Ltd & Anor v Franks [2009] NSWCA 128. It determined that promissory estoppel did operate, but for a lesser period than determined by Brereton J, and that set-off was not available. Pursuant to that decision the Court of Appeal made the following orders: 1 Appeal allowed in part. 2 The judgment in the Equity Division is varied by substituting judgment for $274,797.58 in lieu of $427,869.00 with effect from 4 April 2008. 3 Order that $274,797.58 together with interest on that sum at the judgment rate from 4 April 2008, until the payment Into Court, and thereafter at the rate paid on funds in Court, be paid out of Court to the solicitors for the respondent, and that the balance, together with accrued interest, be paid out to the solicitors for the appellants. 4 Application for leave to appeal against the costs order of 4 April 2008 is dismissed. 5 No order as to the costs of the appeal including the costs of the application for a stay heard on 18 August 2008. 6. Appeal otherwise dismissed. 18On or about 19 August 2009, the amount of $274,797.58 was paid to Mr Franks from funds that had previously been paid into court. The difference between this amount and the amount ordered by Brereton J was the result of the Court of Appeal decision that the promissory estoppel operated for a lesser period than that determined by Brereton J. 19On 27 April 2010, the costs in favour of Mr Franks to be paid by Moribund were assessed at $235,362; and that amount was entered as a judgment of the District Court on 1 June 2010. 20The Amended Notice of Motion heard by the primary judge on 24 June 2010 sought the following order: 1 An order under sec 73 of the Civil Procedure Act 2005 (NSW); or alternatively a declaration that in the events as they happened, that the second defendant's undertaking given to the court on 13 November 2000 (as per para 3 of short minutes of order of 13 November 2000) includes an undertaking or obligation to pay the plaintiff's costs and expenses incurred in suing for and recovering " any amount which is found by [the] 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 under the Mortgage ". 21The primary judge determined that the relevant undertaking, namely, that in paragraph 4 of the order and undertakings of 13 November 2000, did not cover the costs of the proceedings incurred by Mr Franks. He said that the construction of an undertaking did not involve different principles from the construction of a contract, and that it involved consideration of what the words meant in the context in which they were given. He set out the background facts, and after some further discussion concluded as follows. 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. 22Mr Frank relies on the following grounds of appeal: 1 The trial judge erred in holding that the undertaking of the second respondent, given to the Court on 13 November 2000, did not extend to include the costs and expenses of the appellant in proceedings SC 2000/00037510. 2 In construing the undertaking, the trial judge erred by failing to take into account the surrounding circumstances in which the undertaking was given. 3 In construing the undertaking, the trial judge erred by taking into account events that occurred after the undertaking had been given, namely the costs argument before Brereton J on 4 April 2008. 4 In construing the undertaking, the trial judge erred by drawing an inference from the ex tempore judgment of Brereton J on 4 April 2008 (being decision number [2008] NSWSC 456) and the existence of an appeal from that decision (being decision number [2009] NSWCA 129) because: a. This was not a permissible approach to construing the undertaking; and b. It was not open to the trial judge to draw the inference. 5 The trial judge erred in concluding that the costs of the appellant in proceedings SC 2000/00037510 did not derive from the mortgage and had no direct relation to it. 6 The trial judge ought to have held that the undertaking given to the Court by the second respondent on 13 November 2000, properly construed, in the events as they happened (and taking into account the surrounding circumstances at the time it was given) did extend to include the costs and expenses incurred in recovering the subject matter of the undertaking. 23Mr Sneddon for Mr Franks submitted that the primary judge erred in a number of respects. 1. In reaching his view as to the construction of the undertaking without first considering the surrounding circumstances. 2. In acting on the basis that Mr Franks sought costs against Equititrust in the proceedings before Brereton J, when he had not done so. 3. In holding that Mr Franks' costs and expenses incurred in recovering moneys improperly demanded by Moribund "do not derive from the mortgage and have no direct relationship to it," when, in fact, they were intrinsically interwoven. 4. In taking into account events that occurred after giving the undertaking. 24Mr Sneddon submitted that the undertaking should be construed in the context of surrounding circumstances, without first considering whether there was any ambiguity, referring to Kirkpatrick v Kotis [2004] NSWSC 1265; (2004) 62 NSWLR 567 at [45] and [57]. 25He submitted that, amongst the surrounding circumstances, were the circumstances asserted on behalf of Moribund and Equititrust that Moribund was a bare trustee under a solicitors' mortgage lending scheme, that such schemes were phased out from September 1999, that thereafter Moribund had no longer any role or purpose, and that it had minimal assets; so that the commercial reality at the time of the undertakings was that Moribund had minimal assets and no ability to repay overpaid interest or costs incurred in proceedings for recovery of such interest. 26He submitted that the undertaking was of the nature of a guarantee of repayment of overpaid interest, or an indemnity against loss by reason of failure to repay; and accordingly it should be understood to extend to costs reasonably incurred by WDD in seeking such repayment. In support of that submission, Mr Sneddon referred to NRMA v Whitlam [2007] NSWCA 81 at [74] to [77]. 27Mr Sneddon referred to a statement in O'Donovan & Phillips, Modern Contract of Guarantee par 5.420, to the effect that a guarantor may be liable for the creditor's costs of suing the principal where the guarantee imposed an obligation on the creditor to sue the principal before proceeding against the guarantor. He submitted that the undertaking imposed an obligation on WDD to sue Moribund to judgment before taking proceedings against Equititrust, so that according to the principle stated in O'Donovan & Phillips, Equititrust was liable to pay WDD the costs of obtaining judgment against Moribund. 28Mr Sneddon submitted that the undertaking should be interpreted so that it was of substance, and not hollow and inadequate as it would be on the primary judge's construction, in accordance with the approach taken in Bentley v Gaisford [1977] QB 627 (CA). 29Mr Sneddon also relied on a statement in Total Oil Products (Australia) Pty Limited v Robinson [1970] 1 NSWR 701 at 703 to 705, to the effect that a party who undertakes an obligation must do what is reasonable, from a business point of view, to perform that obligation. 30I accept that the undertaking must be interpreted having regard to the circumstances as they existed at the time it was given, although perhaps one should add also as they existed to the knowledge of both parties. I accept also that, while subsequent events may be relevant as to how the undertaking works, they are not relevant to its construction as such. 31However, I do not read the judgment of the primary judge as contravening these principles. I accept that the primary judge erred to the extent that he asserted that Mr Franks had sought costs against Equititrust, but I do not think this materially affected his judgment. 32However, since the question is the interpretation of a written document in the light of circumstances that are not in dispute, it is appropriate in my view that this Court reach its own view. For reasons I will give, in my opinion the conclusion of the primary judge was correct. 33I accept (1) that it is relevant to the construction of the undertaking that, apparently to the knowledge of both parties, Moribund was a bare trustee, no longer had any role or purpose, and had minimal assets; and (2) that the undertaking should be construed so as if possible to give it sensible commercial efficacy. I also accept that guarantees of payment of a debt may extend to costs incurred in the recovery of that debt, although generally that would be limited to costs incurred after the debt has arisen. 34However, the undertaking in this case was not an undertaking to pay any amount then actually owing by Moribund to WDD or, indeed, any amount owing at any time prior to the Court making a finding. It was an undertaking to pay an amount only if and when such an amount was determined by a judgment. It did not give rise to any present obligation to pay any money until judgment was given, nearly eight years later, on 4 April 2008. 35In my opinion, the statement in O'Donovan & Phillips relied on by Mr Sneddon only applies where there is a guarantee engaging with an obligation to pay money, being an obligation which cannot be enforced against the guarantor until the creditor has sued the principal debtor, and where costs are incurred after the guarantee's engagement with that obligation has arisen. 36In this case, even if one can assimilate the undertaking to a guarantee, the undertaking did not engage with any obligation to pay unless and until a court finding was made, and only then did it engage with an amount equal to the amount of the judgment. In my opinion, the only costs and expenses that could possibly be carried by the undertaking would be costs and expenses reasonably incurred after the Court had made its finding, in order to actually obtain the payment promised by the undertaking. 37It is true that on this construction the undertaking does not deliver to WDD or to Mr Franks full protection against the impecuniosity of Moribund. However, in my opinion, this is the clear effect of the terms of the undertaking, understood in their context. 38The parties presumably at the time were aware that costs would be incurred in getting to the stage of the making of a court finding, and notwithstanding that, the undertaking did not address that situation. 39I would make the additional comment that, as things later turned out, a construction of the undertaking as giving rise to no liability unless and until a court finding is made is, in fact, favourable to WDD and to Mr Franks. Had the undertaking given rise to a present obligation of Equititrust to pay to WDD the amount of WDD's actual overpayment to Moribund, then there would have been a debt of Equititrust to WDD against which WDD's liability to Equititrust for $720,880 could have been set off: see Court of Appeal judgment at [47], Goodwin v Duggan (1996) 41 NSWLR 158 at 166-167. The subsequent transfer of this debt to Mr Franks would not in my view have defeated this set-off; and I do not think Mr Franks could have avoided this consequence by not seeking judgment in the proceedings against Equititrust, but merely seeking to enforce the undertaking in some separate proceeding taken on the undertaking. 40That last comment does not affect my reasons, which depend solely on my view as to the correct construction of the undertaking; and for the reasons I have given, in my opinion the appeal should be dismissed with costs. 41McCOLL JA: I agree with Justice Hodgson. 42CAMPBELL JA: Subject to one matter on which I would prefer to reserve my opinion, I agree with Hodgson JA. That matter is whether costs incurred in obtaining payment of the amount to which the undertaking related would themselves be required to be paid under the undertaking. That matter does not affect the outcome of the case and I otherwise agree with his Honour's reasons and order. 43HODGSON JA: The order of the Court is: appeal dismissed with costs. 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. 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. Decision last updated: 28 July 2011