Supreme Court New South Wales Medium Neutral Citation: Manly Property Holdings Pty Ltd v Lisker Pty Ltd & Anor (No. 2) [2018] NSWSC 61 Hearing dates: 5 December 2017 Date of orders: 05 February 2018 Decision date: 05 February 2018 Jurisdiction: Equity Before: Slattery J Decision: Cross defendant has validly deducted its costs of defending the cross claim on payment out of its mortgage at settlement. Cross claimant ordered to pay cross defendant's costs of the cross claim on the ordinary basis. Parties directed to bring in short minutes of order to provide for payment to the plaintiff to resolve the issue of any resultant over payment to the cross defendant. Catchwords: COSTS – party/party – exceptions to general rule that costs follow the event - costs of cross-claim against cross-defendant – defendant/cross-claimant does not need to pursue cross-claim as defendant/cross-claimant fails on defence against plaintiff's claim – what is the appropriate order for costs on the cross-claim – is the cross-defendant able to indemnify itself for its costs of the cross-claim under the terms of its mortgage with the plaintiff. Legislation Cited: Civil Procedure Act 2005, s 98 Conveyancing Act 1919, s 94 Corporations Act 2001, s 420A Uniform Civil Procedure Rules 2005, r 42.1. Cases Cited: Break Fast Investments Pty Ltd v Giannopoulos (No. 6) [2012] NSWSC 286 Manly Property Holdings Holdings Pty Ltd v Lisker Pty Ltd & Anor [2017] NSWSC 1395 Parker – Tweedale v Dunbar Bank PLC (No. 2) [1991] Ch 26 Category: Costs Parties: Plaintiff/First Cross-Defendant: Manly Property Holdings Pty Ltd (ACN 161 624 826) First Defendant/Cross-Claimant: Lisker Pty Ltd (ACN 001 695 441) Second Cross-Defendant: Bank of Queensland Limited (ABN 32 009 656 740) Second Defendant: Steyne Developments Pty Ltd Third Cross-defendant: Grindon Pty Limited (ACN 114 995 881) as trustee for the Ekins Family Superannuation Fund Fourth Cross-defendant: David Stuart Gordon Ekins Fifth Cross-defendant: Paul Brendan Hannan Sixth Cross-defendant: Belinda Jane Hannan Seventh Cross-defendant: Merran Grace Cooper Eighth Cross-defendant: Kenny Jackman Ninth Cross-defendant: David Nicholas Foodey Tenth Cross-defendant: Robert John Collister Edwards Eleventh Cross-defendant: Craig Oswald Haskins Twelfth Cross-defendant: George Athol Murray Clapham and Lisa Jane Clapham as trustees for the Clapham Family Superannuation Fund Thirteenth Cross-defendant: George Athol Murray Clapham Fourteenth Cross-defendant: Lisa Jane Clapham Representation: Counsel: Plaintiff/First Cross-defendant: M. Ashhurst SC; L. Corbett First Defendant/Cross-claimant: C.D. Freeman Second Cross-defendant: M. Izzo; M. O'Brien Solicitors Plaintiff/First Cross-defendant: Bruno Cara, Cara Marasco & Co Solicitors First Defendant/Cross-claimant: Amber Michelle Bernauer, Wood Marshall Williams Second Defendant: Michael Mazzone, Diamond Conway Lawyers Second Cross-defendant: Amelia Heather Kelly, DLA Piper Third to Fifteenth Cross-defendants: Kristen Farmer, TressCox Lawyers (submitting appearance filed) File Number(s): 2017/286834 Publication restriction: No Judgment 1. This is the Court's second judgment in these proceedings. It should be read with the Court's first judgment and assumes a reading of that first judgment: Manly Property Holdings Holdings Pty Ltd v Lisker Pty Ltd & Anor [2017] NSWSC 1395. Events, matters and persons are referred to in both judgments in the same way. 2. In the first judgment the Court ordered the parties to bring in short minutes of order to give effect to the Court's reasons. 3. The Court made supplementary orders on 3 November 2017 to the following effect: "1. Declare that the Plaintiff is "unable to transfer unencumbered title to both of the Excluded Lots" within the meaning of cl. 39.1 of the Contract for Sale of Land between the Plaintiff and First Defendant dated 1 May 2013 as amended by the Deed of Variation dated 7 January 2015 (the Contract); 2. Order that upon the Plaintiff tendering to the First Defendant the sum of $1,500,000.00, the Defendant must provide to the Plaintiff in registrable form a discharge of mortgage AI 74786 and withdrawal of caveat AK 792226X registered on the title of the property known as 46 Victoria Parade, Manly NSW, contained within folio identifiers 1-6/SP10040 and CP/SP10040 (the Property); 3. Order that the Defendants pay the Plaintiff's costs of the Claim; and 4. Order that the Cross-Claimants pay the Cross-Defendants costs of the Cross-Claim." 1. But the parties cannot agree upon the ultimate burden of costs in the proceedings. The issue of costs is complicated by the fact that following upon the first judgment MPH completed the MPH-MOG contract and redeemed the BOQ mortgage as the first judgment contemplated (at [236]). At the time of that settlement on 9 November 2017 the BOQ deducted a sum of $122,501 ("BOQ's settlement deduction"), a sum representing BOQ's costs of defending Lisker's cross-claim, together with other expenses which BOQ claims it has incurred as mortgagee on MPH's account. 2. The issue of costs was argued on 5 December 2017. Mr M. Ashhurst SC and Mr L. Corbett continue to appear for the plaintiff, MPH. Mr C. Freeman continues to appear for Lisker. And Mr M. Izzo with Ms M. O'Brien continue to appear for BOQ. Outline of the Issues 1. The costs issues are conveniently analysed in these reasons in two parts: (1) costs as between MPH and BOQ; and (2) costs as between BOQ and Lisker. The Court made costs orders between Lisker and MPH on 3 November 2017. The costs of all other parties have been accounted for other than those as between MPH, BOQ and Lisker, which are dealt with here. 2. The matter is further complicated by the fact that during the hearing no pleadings were joined between BOQ and MPH so, to attempt to bring the remaining issues to a head, MPH filed a motion seeking declarations that BOQ was not entitled to make the BOQ settlement deduction in respect of legal costs incurred by BOQ in connection with Lisker's cross-claim and sought a direction that BOQ repay MPH the BOQ settlement deduction. 3. BOQ protested: that MPH was expanding the proceedings beyond the original pleadings and was seeking final relief inappropriately by way of a motion. 4. But the matter was argued. The Court indicated that it was desirable to bring all remaining issues between these parties to an end and to avoid the inevitable consequence of BOQ's submission: that MPH would have to commence separate proceedings to resolve its differences with BOQ, and possibly before another judge. In the way the matter was argued, these procedural disputes fell away. But two substantive disputes remained. 5. As between MPH and BOQ, MPH contended that the BOQ settlement deduction was not authorised under the terms of the BOQ mortgage to the extent that it included BOQ's costs on Lisker's cross-claim, but in order for settlement to proceed MPH had allowed the BOQ settlement deduction under protest, and now seeks its recovery under the motion. The central issue presented in this part of the case is whether to the BOQ mortgage authorises BOQ settlement deduction. 6. As between Lisker and BOQ the issues joined are not complicated by the BOQ mortgage. As between these parties the Court is merely invited to determine, in the events which have occurred, what discretionary costs order should be made under Civil Procedure Act 2005, s 98. 7. These reasons now consider these two issues. Issues Between MPH and BOQ 1. MPH's counsel, Mr Ashhurst SC addressed the issue of the validity of the BOQ settlement deduction, firstly at general law and secondly under the terms of the BOQ mortgage. The Court can decide the matter by reference to the terms of the BOQ mortgage. 2. It is therefore unnecessary to elaborate the arguments that derive from the general law that were put on behalf of MPH and BOQ, other than to perhaps briefly to record them. MPH argued that at general law the present case came within the well-established exception to the ordinary entitlement of the mortgagee to costs – that where a third party impugns the title to the mortgage, or the enforcement or exercise of some right or power accruing to the mortgagee thereunder, the mortgage's costs of the proceedings, even though they be reasonably and properly incurred, are not allowable: Parker – Tweedale v Dunbar Bank PLC (No. 2) [1991] Ch 26 and Break Fast Investments Pty Ltd v Giannopoulos (No. 6) [2012] NSWSC 286 . MPH argued that BOQ's costs in relation to these proceedings fell within this exception because a third party, namely Lisker, was impugning BOQ's power of enforcement, or the exercise of powers accruing to BOQ as mortgagee, and therefore, those costs should not be paid by the plaintiff. BOQ disputed this contention. But the terms of that dispute need not be examined, because the issue will be resolved by the terms of the BOQ mortgage in the events which have occurred. 3. The Terms of the BOQ Mortgage. BOQ's Real Property Mortgage General Conditions are recorded in dealing AJ453274E ("the General Conditions"). These General Conditions provide (in clause 1) with a series definitions of "costs", "mortgage", "property", "total amount owing" and "works" as follows; "costs includes charges and expenses. It also includes costs, charges and expenses in connection with advisers (in the case of legal advisers, on a full indemnity basis or solicitor and own client basis, whichever is higher). … mortgage means these General Conditions and the form to which these General Conditions are attached. … property means all of your rights, property and undertaking in each one or more of the following: (a) the land described in this mortgage; (b) each fixture, fitting, structure or improvement on the land or fixed to it; (c) any licence or entitlement in connection with the land; and (d) your estate and interest in the land. … total amount owing means, at any time, all money which one or more of you owe us, or will or may owe us in the future, including under this mortgage or an agreement covered by this mortgage. … Works means building work, excavation or earthworks on the property, work demolishing, removing or altering any part of the property, or any building or development work required by an authority in connection with the property." 1. Clause 4.1 of the General Conditions provides as follows: "4.1 For the purpose of securing to us payment of the total amount owing, you mortgage the property to us. You do this as beneficial owner unless you enter this mortgage as trustee of a trust. In that case, you mortgage: (a) the property comprising the trust fund of the trust as sole trustee of the trust; and (b) the balance of the property as beneficial owner." 1. The debate between these parties centred on the application of clause 19.2 and 19.4 of the General Conditions. Set out below are clauses 19.1 to 19.4 of the General Conditions: "19.1 When we ask, you must pay us any costs we reasonably incur in enforcing this mortgage after you are in default (including in preserving and maintaining the property such as by paying insurance, rates and taxes for the property and our costs). This applies to expenses we incur before or after taking action under clause 23. 19.2 You must pay us for: (a) our reasonable costs, and any receiver's costs and remuneration, in arranging, administering and terminating this mortgage or another agreement covered by this mortgage (including giving and considering consents, variations, discharges and releases, producing title documents, or enforcing, attempting to enforce or taking any other action in connection with our or any receiver's rights; and … 19.3 You must pay us these amounts when we ask. We can also debit any of these amounts to any account you have with us even if we do not expressly ask you to pay us. 19.4 You indemnify us against, and you must therefore pay us on demand for, liability, loss or costs (including consequential or economic loss) we suffer or incur: (a) if you default under this mortgage (in which case you will also be liable for any loss arising because we require repayment of the total amount owing earlier than its due date); (b) if you do not pay us the total amount owing; (c) in connection with any person exercising, or not exercising, rights under this mortgage; (d) in connection with the property, the monitoring of works or this mortgage; or (e) under any indemnity we give a controller or administrator appointed: (i) in respect of you; or (ii) over any of the property." 1. The Lisker – BOQ Correspondence. The nature of the issues being debated between Lisker and BOQ that led to Lisker launching the cross-claim, and which were then continued in the background, well illustrates the nature of BOQ's activity relevant to the terms of the mortgage. The chronology of relevant correspondence is in a relatively short compass. 2. On 14 August 2017 Wood Marshall Williams (WMW), acting for Lisker, wrote to Ms Kelly and Mr Swain of DLA Piper indicating that the WMW acted for Lisker and foreshadowed that it was Lisker's intention to acquire the securities and debt presently held by BOQ simultaneously with the sale of the Manly Property to the Leith Property Group. 3. This proposal occasioned immediate concern to BOQ. Mr Swain from DLA Piper wrote back on 21 August 2017 inviting a meeting of all principals and legal advisors and seeking an explanation from WMW what steps Lisker would be taking to satisfy Corporations Act 2001, s 420A so that MPH's equity of redemption was not sacrificed. 4. But Lisker kept pressing its point. It was putting to BOQ that if the bank did not provide it with a redemption figure Lisker would initiate proceedings to facilitate its acquisition of the securities and would seek costs against BOQ. But on 6 September 2017 Ms Kelly and Mr Swain from DLA Piper replied to Mr Wood of WMW raising BOQ's concern about cutting MPH out of the process, saying "there is a live issue as to whether your client has the legal ability to repay the prior mortgage without reference to the borrower". 5. BOQ expressed the same concern on subsequent occasions. On 28 September 2017 DLA Piper wrote to WMW expressing doubts that what was then being proposed by Lisker, which included a transfer and assignment to Steyne Developments, was within the purview of Conveyancing Act, s 94. But importantly DLA Piper expressed the view that given that the current Court procedures would "determine the ongoing status of your client as a second mortgagee, we consider that it is appropriate to await the outcome of the proceedings before taking any further steps in relation to the assignment of the loans and security held by the bank in respect of the borrower". BOQ then copied MPH in on this correspondence. 6. Yet again in letter sent on 29 September 2017 BOQ declined to finalise matters between itself and Lisker in view of the forthcoming proceedings (paragraph 8) and "for transparency" copied MPH in on its correspondence with Lisker. 7. But Lisker continued to correspond, seeking a payout figure as the proceedings approached and on 3 October 2017 went as far as offering bank cheques to BOQ. But by 4 October 2017 BOQ was indicating that, partly as a result of directions from the Court, that it would wait on the sidelines until the proceedings were resolved. 8. BOQ's correspondence throughout paid close and proper regard to the interests of the mortgagor, MPH. And in the result its judgment in not proceeding to transact with Lisker was vindicated by the Court's judgment. 9. Analysis. Mr Ashhurst SC on behalf of MPH says none of the BOQ's costs on the cross-claim fall within the BOQ's right to indemnify itself in respect of expenses incurred in relation to the mortgage. But in my view, BOQ's General Conditions are wide enough for it to be able to indemnify itself fully in respect of the costs it incurred on the cross-claim. The arguments Mr Izzo put to this effect were persuasive. 10. In fielding Lisker's various demands on the cross-claim, BOQ was in every sense "administering" the BOQ mortgage, within General Conditions, clause 19.2(a). A strong feature of BOQ's correspondence throughout the whole period was its desire to balance the interests of its own mortgagor against the various demands Lisker was making under Conveyancing Act, s 94. The primary Macquarie Dictionary definition of "administer" is "to manage, (affairs), a government, etc"; "have charge of the execution of". Protecting the mortgagor's interests is a function central to the good administration of any mortgage. MPH is therefore able under clause 19.2(a) to pay BOQ's reasonable costs of such administration. Under the authority of clause 19.3, those costs should be paid on demand when requested and they can also be debited as part of the BOQ deduction settlement. 11. But BOQ's costs in relation to Lisker's cross-claim also come within clause 19.4(d). They are costs incurred "in connection with the property". In my view, the words "in connection with" in clause 19.4(d) should also be read distributively to introduce the words after the comma, thus "[in connection with] the monitoring of works or this mortgage". The idea of this part of clause 19.4(d) is to capture BOQ's costs of "monitoring". The act of monitoring may apply to "works" or "this mortgage". Unless clause 19.4(d) was there, there might be argument about BOQ's supervisory costs in relation to the mortgage. In my opinion, the intent of s 19.4(d) is to capture those costs as part of BOQ's indemnity. 12. What is "monitoring" in clause 19.4(d)? The Macquarie Dictionary definition of the verb "monitor" has various related meanings, the most apposite of which is "to check, observe, or record, the operation of (a machine etc) without interfering with the operation" and "to supervise, observe critically". The idea of monitoring is to check for compliance and to preserve the proper operation of the thing being monitored. In my view that is exactly what Ms Kelly and Mr Swain through DLA Piper were doing on behalf of BOQ and doing it with the exercise of sound judgment. 13. MPH's counter arguments upon the construction clauses 19.2 and 19.4 in my view are not tenable. Mr Ashhurst SC argued that there was no right of deduction in respect of the clause 19.4(d) indemnity. But in my view clause 19.3 can apply both to clause 19.2 and 19.4. 14. Mr Ashhurst SC submitted that, "in connection with" should not be read distributively within clause 19.4(d). But in my view, in the manner indicated above, that is a quite acceptable reading. Issues Between Lisker and BOQ 1. Lisker's cross-claim against BOQ failed. Prima facie costs should follow the event, unless it appears to the Court that some other order should be made as to the whole or part of any costs: Uniform Civil Procedure Rules 2005 ("UCPR"), r 42.1. 2. Lisker's claim against BOQ depended upon Lisker being successful against MPH. If MPH succeeded against Lisker; as it did, then Lisker's cross-claim was always going to fail. Lisker's cross-summons was occasioned because of BOQ's resistance to Lisker's claim under Conveyancing Act 1919, s 94 and that as a third mortgagee it was entitled to pay out BOQ, and assign BOQ's mortgage to itself without MPH having an opportunity to redeem the BOQ mortgage. But as the Court found in the first judgment, MPH did have that prior right to redeem and so Lisker's cross-claim fell away. 3. It seems to the Court that Lisker's whole claim against BOQ depended upon being able to defeat MPH. Lisker's failure to do that has resulted in the failure of Lisker's cross-claim against BOQ. That seems to be a classic case for Lisker to pay BOQ's costs: BOQ's presence in the proceedings is wholly explained by Lisker's cross-claim, upon which Lisker cannot proceed because of its failure on other issues in the proceedings. There is no sensible basis, in my view, for any other order than that Lisker pay BOQ's costs of the cross-claim. 4. Lisker advanced submissions as to why costs should not follow the event. Mr Freeman submitted that as BOQ was not opposing the cross-claim for substantive relief in any event. But this is not persuasive. Correspondence between Lisker and BOQ certainly indicates some degree of consensus as to what should happen between them in the event that Lisker were to pay out BOQ. But BOQ always declined to agree upon the relief on the cross-claim without proper regard being paid to the separate interests of MPH. Such consensus as there was between Lisker and BOQ could not finalise the Lisker cross-claim on its own and was incomplete in respect of the issues joined between MPH and Lisker. 5. Finally, Mr Freeman pointed out with some force: that the definition of "costs" in the BOQ Mortgage includes costs "on a full indemnity basis or on a solicitor/client basis, whichever is the higher"; and that this had been the basis on which the BOQ settlement deduction had taken place. Mr Freeman submitted that Lisker was not bound to pay costs on the Lisker cross-claim on the same basis as BOQ had calculated the BOQ settlement deduction. That is undoubtedly correct. Lisker is not a party to the BOQ mortgage. 6. Lisker conducted the cross-claim reasonably. Nothing in Lisker's conduct of the cross-claim against BOQ would attract an order for indemnity costs against Lisker. There is no evidence that BOQ served any offers of compromise on Lisker which would attract an order for indemnity costs. The Court will therefore order that Lisker pay BOQ's costs of the Lisker cross-claim on the ordinary basis. 7. As between Lisker and BOQ, Lisker should pay BOQ's costs of the cross-claim on the ordinary basis, not the indemnity basis. But once BOQ receives those costs it will to the extent of those costs be doubly compensated, because of the BOQ settlement deduction. In those circumstances it will be liable in restitution to refund the quantum of those costs (on the ordinary basis) to MPH but it will remain fully compensated on the indemnity basis because it will be able to retain the part of the BOQ settlement deduction representing the difference between its costs on the ordinary basis and costs on the indemnity basis. 8. The Court made directions for the parties to isolate whether or not they had any remaining differences about the quantum of the BOQ settlement deduction to the extent it was concerned with items other than BOQ's costs on the Lisker cross-claim. The Court is not currently aware whether BOQ accounting to MPH on that account is still a matter in issue. If it is, the Court will give leave to MPH to amend its motion in such form as is necessary for it to seek an account and to claim restitution so that all these issues can be resolved once and for all between MPH and BOQ. The parties should examine this issue and bring the matter back on the next date appointed for directions. 9. These reasons have not resolved the issue of the costs of the hearing on 5 December. But the parties should confer with a view to seeking if that issue can be resolved. Summary of Conclusions 1. The Court's conclusions in this matter are as follows. The BOQ has made out its case that the amounts it deducted on settlement of the Manly property were properly deducted at least so far as they concerned the costs the Lisker cross-claim in these proceedings. The Court will make directions for BOQ and MPH to ascertain whether or not there is any continuing dispute between them about the amounts deducted on settlement that are not related to the costs of these proceedings. 2. The principal reason that the Court concludes the BOQ is entitled to make the deduction of its costs or settlement is clauses 19.2, 19.3 and 19.4 of the Lisker Mortgage terms. These provisions are wide enough for the BOQ to justify the making of the deduction of its costs of these proceedings on settlement. MPH resisted the proposition that the BOQ had the authority to use clauses 19.4(d) and 19.5 to achieve the deduction. But in my view, deduction on that basis is permissible. It is not necessary for the Court to have resort to the powers of a mortgagee at general law. The express powers of the BOQ's mortgage are sufficient to authorise these deductions. 3. As between Lisker and the BOQ, the Court does not accept Lisker's characterisation that its cross-claim against BOQ just fell away and did not need to be decided, attracting the principles of the assessment of costs with respect to unresolved proceedings. Rather, this is a case in which although the Court has not dismissed Lisker's cross-claim against the BOQ, it should now do so and should do so with costs. As Mr Izzo pointed out on behalf of the BOQ, the Court's conclusion recorded at [232] - [234] of the principal judgment make clear that Lisker's cross-claim against the BOQ should fail, because the failure of its defence of MPH's claim meant that it had no consequential relief to seek against the party it had joined into the proceedings, the BOQ. Ordinarily in this situation a party such as Lisker who brought the BOQ into the proceedings should pay the BOQ's costs. This case reflects the usual situation and the Court will so order. 4. But Mr Freeman points out on behalf of Lisker that it was not a party to a mortgage with the BOQ and should only be required to pay the BOQ's costs on the ordinary basis, not the indemnity basis. That submission is persuasive. Lisker did not engage in any unreasonable conduct in the proceedings that would attract an indemnity costs order. Therefore the Court will order Lisker to pay the BOQ's costs of the cross-claim on the ordinary basis. 5. But when Lisker pays BOQ its party/party costs, BOQ will have received double payment in respect of its party/party costs. That would be an unjust result. MPH suggested the Court does not have power to order the BOQ to repay the quantum of its party/party costs on the cross claim to MPH. This may be so. But it seems to the Court that one solution, apart from allowing MPH to amend its motion and claim restitution, may simply be to order in the Court's power under Civil Procedure Act 2005, s 98 that Lisker pay those costs directly to MPH. Lisker and MPH were in contest. This may be the appropriate order to make final adjustments between these parties rather than BOQ having to repay anything. The parties should now be able to resolve this, but the Court will if they cannot. Orders 1. Accordingly, the Court makes the following orders and directions: 1. Dismiss Lisker's cross-claim against BOQ. 2. Order Lisker to pay the BOQ's costs of Lisker's cross-claim against the BOQ on the ordinary basis. 3. That the parties otherwise bring in short minutes of order to give effect to these reasons. 4. List the proceedings for directions on 5 March 2018 at 9.30am. ********** 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: 06 February 2018