Provident Capital Ltd v Bortolin Papa (No 2) [2011] NSWSC 1266

Supreme Court New South Wales

Medium Neutral Citation: Provident Capital Ltd v Bortolin Papa (No 2) [2011] NSWSC 1266 Hearing dates: 17/10/2011 Decision date: 27 October 2011 Jurisdiction: Common Law Before: Fullerton J Decision: See paragraph 28 Catchwords: COSTS - calculation of amount owing plus interest under varied agreements where original agreement was found unjust under the Contracts Review Act -whether general rule that costs of successful party are paid by unsuccessful party should be displaced - Bullock order Legislation Cited: Civil Procedure Act 2005 Contracts Review Act 1980 Cases Cited: Commonwealth of Australia v Gretton [2008] NSWCA 117 Provident Capital Ltd v Bortolin Papa (No 1) [2011] NSWSC 460 Gould v Vaggelas [1985] HCA 75; 157 CLR 215 Roads and Traffic Authority of NSW v Dederer [2007] HCA 42; 234 CLR 330 Tomanovic v Global Mortgage Equity Corp Pty Ltd (No 2) [2011] NSWCA 256 Category: Costs Parties: Provident Capital Ltd (Plaintiff/First Cross Defendant) Gina Giovanna Bortolin Papa (Defendant/Cross Claimant) George Caramanlis (Second Cross Defendant) Representation: BK Nolan (Provident Capital Ltd) G Segal (Bortolin Papa) G Curtin SC (Caramanlis) Tiernan Lawyers (Provident Capital Ltd) Rhodes Legal (Bortolin Papa) Colin Biggers & Paisley (Caramanlis) File Number(s): 2008/287567

Judgment 1HER HONOUR : On 23 May 2011 I gave judgment the effect of which was that Provident was unsuccessful in the proceedings it brought against Mrs Bortolin Papa for the recovery of monies advanced under two loan agreements and in obtaining an order for possession of the property that secured the loans and that Mrs Bortolin Papa succeeded in her cross claim against Provident ( Provident Capital Ltd v Bortolin Papa (No 1) [2011] NSWSC 460). 2The precise relief sought under the cross claim was an order that the loan agreements not be enforced (and the mortgage not be enforced) other than in relation to an amount advanced by Provident to discharge an existing mortgage over the secured property when the first loan agreement was entered into with interest on that amount to be calculated at the rate nominated in the mortgage. 3Mrs Bortolin Papa also sought an order that she be permitted a period of 90 days from the determination of the cross claim in her favour to enable her to discharge her obligation to repay the amount owed to Provident and retain possession of the secured property in which she currently resides. There was no opposition to that course. Argument as to the terms of the final orders was also stood over as was the issue of costs. 4In the same judgment I dismissed the cross claim Mrs Bortolin Papa brought against Mr Caramanlis for damages for breach of his duty to advise her in relation to the loan agreements, her obligations under those agreements, and the legal effect of the Borrowers Declarations which Provident required her to execute as a part of the loan documentation. I stood over the issue of costs on that cross claim to afford all parties the opportunity to review the judgment before receipt of submissions. 5The matter was re-listed for argument on 17 October 2011. 6At the further hearing Ms Nolan acknowledged Provident's liability to pay Mrs Bortolin Papa's costs of the proceedings and the costs of her cross claim. Leaving to one side whether I am persuaded that Mrs Bortolin Papa should have the benefit of a Bullock order requiring Provident to meet any order for Mrs Bortolin Papa to pay Mr Caramanlis' costs, the amount owing to Provident and how it should be calculated remained in issue between Provident and Mrs Bortolin Papa. 7Ms Nolan submitted that the loan agreements should be varied to reduce the amount of the advance to an amount equal to the funds committed to discharge the existing mortgage but that the remaining terms of the loan agreements should be enforced. Mr Segal submitted that Provident ought not be permitted to recover interest calculated by reference to loan agreements which were found by me to be unjust under the Contracts Review Act 1980 . He also submitted tha t the specific relief sought in the cross claim, namely that the agreements not be enforced otherwise than in respect of the amount advanced to permit discharge of the existing mortgage, should be construed as seeking relief from enforcement of the remaining provisions of the loan agreement, in particular the formula by which the amount owing should be calculated, inclusive of interest. 8The formula that Provident contended was calculated by reference to the adjusted loan advance of $184,401 (the amount committed to discharge the existing mortgage) which, together with various fees and charges expressly provided for in the loan agreements as payable by the borrower, resulted in an adjusted loan balance of $196,306.67 as at the date of settlement upon which interest accrued. After making appropriate allowance for the interest that was paid between 5 May 2007 and 5 September 2008 in the amount of $71,016.90 (calculated at 10.99% under the agreements up until 4 April 2008 and thereafter at the penalty rate of 16.99%), the amount Provident claimed as owing as at 17 October 2011 is $288,181.86. 9According to the formula advanced by Mr Segal, the adjusted loan balance at the date of settlement was $187,664.97. He submitted that the establishment fees, Provident's legal fees and expenses, stamp duty and interest to the date of settlement are obligations imposed under the loan agreements which ought not be enforced. Mr Segal then submitted that interest should be calculated in accordance with the Memorandum of Mortgage which provides that where there is no related agreement (in this case no loan agreement), the mortgagor's obligation is to pay interest on the secured monies at the rate applicable from time to time under s 101 of the Civil Procedure Act 2005. The secured money is relevantly defined as "money which the mortgagee lends to the mortgagor" which in this case, so it was submitted, is the adjusted loan balance of $187,644.97. Clause 4 of the Memorandum of Mortgage provides for the use to which the mortgagee may apply the monies it receives as follows: 4. Mortgagee's Use of Money The Mortgagee may use any money that it receives concerning the secured money to reduce the secured money in any way the Mortgagee determines, whether by reducing: 4.0.1. the principal amount of any secured money; or 4.0.2. the interest payable on any secured money; or 4.0.3. any expense or loss incurred by the Mortgagee relating to any secured money; or in any other way. 10Mr Segal submitted that because Mrs Bortolin Papa paid in excess of the interest that was due to Provident, the only use to which the monies could have been applied (after allowing for interest on the initial advance) was in reduction of the principal, such that her obligation was to pay interest only upon so much of the principal that remained outstanding from time to time. By this calculation, the amount said to be owing to Provident as at 17 October 2011 was $126,422.56. In the alternative, an amount of $135,797.56 was proffered. This was arrived at by applying the discount rate of 10.99% under the agreement but otherwise calculating the amount owed in accordance with the Memorandum of Mortgage. 11In [204] of the judgment I concluded that the loan agreements were unjust for the reasons set out in [187] - [203] and [205] - [208] and that Mrs Bortolin Papa was entitled to relief under the Contracts Review Act . In that discussion I identified a range of factors which, in combination, satisfied me that such a finding was appropriate. A factor which carried particular weight was the failure on Provident's part to make any inquiries as to Mrs Bortolin Papa's capacity to fulfill her obligations as borrower under the loan agreements. I note that Mr O'Sullivan gave evidence that were Provident to have known Mrs Bortolin Papa's actual situation it would not have contracted with her given her limited financial circumstances and the fact that she had no interest in the business into which the funds were to be committed. 12I also accepted, contrary to Mrs Bortolin Papa's evidence, that she was aware of the amount she was borrowing for her son, and the amount of the monthly interest instalments, and that she knew that her house was at risk if he was unable to make those payments. I was also satisfied that she gained no financial or other benefit under the loan agreements and was, in a practical sense, "a silent and compliant dupe" who was manipulated by her son for his own selfish ends. 13Section 7(1) of the Contracts Review Act provides for a range of discretionary relief designed to avoid, as far as practicable, an unjust result after a finding that a contract was unjust in the circumstances in which it was made. I am satisfied that to enforce the terms of the loan agreements, save only in relation to the amount advanced (the position for which Provident contends) would be an unjust result which could and should be avoided. On the other hand, I am not persuaded that Mrs Bortolin Papa should be relieved entirely of the impact of the terms under which she contracted. Importantly, although Mrs Bortolin Papa made none of the monthly repayments between May 2007 and the date of default, each being drawn from her son's business, Provident's calculation credits her with these amounts in full. 14I propose to calculate the amount owing referable to Provident's calculation of the initial loan balance at $196,306.67 which, I note, is calculated in accordance with the operating provisions of the loan agreement which accrue as part of the loan. In doing so I take into account her evidence that she was motivated to assist her son and to refinance her existing arrangement with Bendigo Bank to this end. Although there was no evidence or argument directed to whether she would have been exposed to similar fees and charges were she to have refinanced with another lender, I do not regard the contractual terms in the loan agreements as unusually onerous. 15In accordance with s 7(1)(a) of the Contracts Review Act , I will not enforce clause 4.7 of the loan agreement which would allow for the application of the penalty rate of 16.99% on an accrual basis, or clause 4.1 which would allow for the calculation of interest on a compound basis from the date of default. I adopt the alternate basis upon which Mr Segal proposed that interest be calculated, namely at 10.99% per annum, being the ordinary rate under the loan agreements. I do not consider it to be productive of an unjust result were interest at that rate to be calculated referable to the initial loan advance less the amount of interest actually paid. 16In addition, Provident is not permitted to enforce clause 14.3 of the agreement or to seek to recover any early repayment fee as referred to in Ms Nolan's submissions at paragraph 6(k). 17Accordingly, the amount owing under the loan agreement will need to be calculated for the purpose of final orders as follows: repayment of the initial loan amount of $196,306.67 with interest on that amount for 1657 days (that is, from 5/04/2007 to 27/10/2011) at 10.99%, less the amount of $71.016.90 already paid.